Somers ex rel. Herself v. Apple, Inc.

• Decision Date: 03 September 2013
• Docket Number: No. 11–16896.,11–16896.
• Citation: 729 F.3d 953
• Parties: Stacie SOMERS, on Behalf of Herself and All others Similarly Situated, Plaintiff–Appellant, v. APPLE, INC., Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

729 F.3d 953

Stacie SOMERS, on Behalf of Herself and All others Similarly Situated, Plaintiff–Appellant,

v.APPLE, INC., Defendant–Appellee.

No. 11–16896.

United States Court of Appeals,Ninth Circuit.

Argued and Submitted Feb. 11, 2013.

Filed Sept. 3, 2013.

Craig Briskin (argued) and Steven A. Skalet, Mehri & Skalet, PLLC, Washington, D.C.; Helen I. Zeldes, Alreen Haeggquist, and Aaron M. Olsen, Zeldes & Haeggquist, LLP, San Diego, CA, for Plaintiff–Appellant.

Craig E. Stewart (argued), Robert A. Mittelstaedt, and David C. Kiernan, Jones Day, San Francisco, CA, for Defendant–Appellee.

Appeal from the United States District Court for the Northern District of California, James Ware, District Judge, Presiding. D.C. No. 5:07–cv–06507–JW.

Before: DOROTHY W. NELSON, STEPHEN REINHARDT, and MILAN D. SMITH, JR., Circuit Judges.

M. SMITH, Circuit Judge:

Plaintiff–Appellant Stacie Somers (Somers) brought a putative class action against Defendant–Appellee Apple, Inc. (Apple), alleging federal and state antitrust claims. Somers seeks to represent a class of indirect purchasers of the iPod, Apple's portable digital media player (PDMP), and a class of direct purchasers of music downloaded from Apple's iTunes Music Store (iTS). She alleges that Apple encoded iTS music files with its proprietary Digital Rights Management (DRM), called FairPlay, which rendered iTS music and the iPod compatible only with each other. She further claims that through certain software updates, Apple excluded competitors and obtained a monopoly in the PDMP and music download markets, which inflated Apple's music prices and deflated the value of the iPod. Somers requests damages and injunctive relief in the form of DRM-free music files.

Somers moved to certify a class of indirect purchasers of the iPod under Federal Rule of Civil Procedure 23(b)(3), which the district court denied. After giving Somers two opportunities to amend her complaint, the district court also dismissed Somers' antitrust claims with prejudice under Federal Rule of Civil Procedure 12(b)(6). Somers appeals both rulings. We hold Somers waived review of the district court's class certification order. We further hold that Somers failed to allege sufficient facts to state antitrust claims for damages and injunctive relief. Accordingly, we affirm.

FACTS AND PRIOR PROCEEDING

A. Background ¹

In January 2001, Apple introduced a software program called iTunes for personalcomputers. iTunes enables computer users to organize and play digital music files, and upload or “sync” the files to a PDMP. The iTunes software is pre-installed on Apple computers, and is also available to non-Apple computer users by free download. In October 2001, Apple introduced the iPod, its first PDMP, which at the time, was capable of playing only unprotected audio downloads in MP3 format.

In April 2003, Apple launched iTS, an online music store accessible only through iTunes. iTS began selling digital music tracks from major record labels for 99 cents each. iTS music files were encrypted with Fairplay at the point of purchase through iTunes. DRM is designed to restrict a consumer's use and reproduction of digital files. Major record labels required that digital music files sold by Apple through iTunes be in a protected format, but did not require Apple to restrict music files for use only with Apple products. Both iTunes and the iPod were updated to be compatible with Fairplay encryption. As a result, music purchased from iTS could only be played on the iPod, and the iPod could only play music downloaded from iTS.

In November 2005, Somers purchased a 20GB iPod from a Target store, and thereafter, purchased music from iTS that was encoded with FairPlay.

B. Somers' iPod Overcharge Claim and Motion for Class Certification

In December 2007, Somers filed her complaint against Apple on behalf of a class of indirect purchasers of Apple products (Indirect Purchaser Action). In her original complaint, Somers asserted a claim for unlawful tying under section 1 of the Sherman Act, 15 U.S.C. § 1, and monopolization claims under section 2 of the Sherman Act, 15 U.S.C. § 2, along with related state law claims. Somers alleged that Apple's FairPlay and software updates rendered iTS music incompatible with non-iPod digital media players, thereby increasing iPod demand and enabling Apple to charge supracompetitive prices for the iPod. Somers sought damages for the alleged iPod overcharge on behalf of herself and other consumers who purchased their iPod from a reseller.

In February 2008, the district court related this action to a case making similar factual allegations and claims against Apple on behalf of direct purchasers of Apple products ( Apple iPod iTunes AntiTrust Litigation, No. C 05–00037 (Direct Purchaser Action)). In the Direct Purchaser Action, the district court concluded that the technological interoperability between the iPod and media sold through iTS did not constitute unlawful tying, and ordered the tying claim dismissed.

In February 2009, Somers moved to certify an injunctive and damage class of indirect purchasers of Apple's iPod under Rules 23(b)(2) and 23(b)(3), respectively.² The district court denied Somers' motion to certify a class of indirect purchasers of the iPod under Rule 23(b)(3), on the ground that Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977), prohibits indirect purchasers from recovering for violations of federal antitrust law. The district court further ruled that even though California has enacted statutes repealing the Illinois Brick rule of private actions under state antitrust laws, certification under Rule 23(b)(3) was still inappropriate because Somers had failed to establish a reliable measure for damages in an action on behalf of indirect purchasers. The district court deferred ruling on Somers' motion for certification of the Rule 23(b)(2) injunctive class in light of the pending Direct Purchaser Action.

In July 2010, Somers filed her First Amended Complaint (FAC). Somers dropped her tying claim and brought monopolization claims under section 2 of the Sherman Act, as well as a claim under California's Unfair Competition Law (UCL), Cal. Bus. & Prof.Code §§ 17200, et seq. Somers asserted a damage claim based on two new theories: (i) inflated prices for music downloads and (ii) deflated value of the iPod. The district court dismissed the FAC with leave to amend.

C. Second Amended Complaint

In January 2011, Somers filed the SAC, in which she dropped her damage claim based on the iPod diminution-in-value theory, and otherwise renewed her federal antitrust claims and UCL claim. In the SAC, Somers seeks to represent a class of individuals who purchased music files from iTS. Somers alleges that as a result of the FairPlay encryption, Apple achieved a monopoly in the PDMP and audio download markets. Specifically, Somers alleges that shortly after the release of iTS in April 2003, (i) Apple achieved and maintained a market share of over 70 percent of the audio download market and (ii) increased its market share of the PDMP market from 11 to 99 percent. Somers claims that Apple achieved a monopoly in both the PDMP and music downloads markets by 2004, at the latest.

Somers next alleges that Apple maintained and furthered its monopoly in these markets “through the use of software updates intended to prevent competitors from selling Audio Downloads that were compatible with iPods.” SAC ¶ 90. For example, in July 2004, Real Networks introduced a technology known as Harmony, which enabled songs purchased through its online stores to be compatible with iPods and other digital media players, thereby offering an alternative to iTS. Real Networks began selling its music as low as 49 cents per track, compared to the 99 cents per track charged by Apple. In October 2004, Apple responded by updating its iPod and iTunes software to prevent songs downloaded from Real Networks' music store from being played on iPods. Somers alleges that as a result of such software updates, Apple was able to thwart Real Networks' effort to compete in the audio download market, thereby enabling Apple to continue to charge supracompetitive prices for digital music. According to Somers, “[h]ad Apple not engaged in this anticompetitive action, it would have had to price Audio Downloads on price with Real Networks.” Id. ¶ 66.

Somers then alleges that Apple continually issued software updates from 2005 through 2009 to prevent competitors from entering and threatening its monopolies. Specifically, Somers claims that Apple issued software updates to iTunes to block and neutralize computer programs such as JHymn, QTFairUse, PlayFair, and Requiem, which enabled users to play their iTS music on non-Apple devices. Apple also introduced software updates to prevent syncing functionality with certain non-Apple media players.

In January 2008, Amazon became the first music store to sell music files without DRM restrictions. Amazon sold over half of the more than 2 million songs in its initial catalog for 89 cents each. In January 2009, Apple announced that it would begin selling most songs through iTS without FairPlay restrictions. When Apple introduced variable pricing in 2009, and offered top-sellers for $1.29, Amazon sold many of the same tracks for 99 cents. Apple sold a few songs for 69 cents. Consumers who had previously purchased their music through iTS could “upgrade” their files to a FairPlay-free format, but only by paying 30 cents per file. By the end of March 2009, all music sold through iTS was free of FairPlay encryption.

Somers asserts that as a result of Apple's software updates and “the technological link created by FairPlay, Apple was able to preserve its monopoly in both [the PDMP and audio download] markets, charge supracompetitive prices, and restrict consumer choices.” Id. ¶¶ 90, 94–95. Somers claims that Apple has maintained the restriction on DRM-encoded music purchased...