Somers v. Apple, Inc.
|03 September 2013
|No. 11-16896,D.C. No. 5:07-cv-06507-JW,11-16896
|STACIE SOMERS, On Behalf of Herself and All Others Similarly Situated, Plaintiff-Appellant, v. APPLE, INC., Defendant-Appellee.
|United States Courts of Appeals. United States Court of Appeals (9th Circuit)
Appeal from the United States District Court
for the Northern District of California
and Milan D. Smith, Jr., Circuit Judges.
Opinion by Judge Milan D. Smith, Jr.
The panel affirmed the district court's dismissal of a putative class action against Apple, Inc., alleging antitrust violations in connection with Apple's iPod and iTunes Music Store.
The panel held that the plaintiff waived review of the district court's order denying certification of a class of indirect purchasers of the iPod because she abandoned her underlying individual claim under § 2 of the Sherman Act based on inflated iPod prices.
The panel also held that the plaintiff failed to allege sufficient facts to state antitrust claims for damages and injunctive relief. The plaintiff alleged that Apple encoded iTunes Music Store music files with its proprietary Digital Rights Management (DRM), called FairPlay, which rendered the music files and the iPod compatible only with each other. She alleged that through certain software updates, Apple excluded competitors and obtained a monopoly in the portable digital media player and music download markets, which inflated Apple's music prices and deflated the value of the iPod.
The panel held that a monopolization claim for damages based on the theory of diminution in iPod value was barred by Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), becausethe plaintiff was an indirect purchaser of the iPod. In addition, she lacked standing to bring this claim because she alleged that she purchased her iPod after Apple's purported anti-competitive conduct began. The panel concluded that because Apple used FairPlay from the beginning, when it first launched the iTunes Music Store, its use of subsequent software updates only served to maintain the status quo at the time of purchase, and therefore could not plausibly be the basis for diminishing the value of the iPod.
The panel held that the plaintiff failed to state a monopolization claim for damages based on overcharged music downloads because she failed to plead sufficient facts to state a plausible antitrust injury. The panel concluded that the fact that Apple continuously charged the same price for its music irrespective of the absence or presence of a competitor rendered implausible the plaintiff's assertion that Apple's software updates affected music prices.
Finally, the panel held that the plaintiff failed to state a claim for injunctive relief in the form of DRM-free music files because her alleged inability to play her music freely, on non-iPods, was not an "antitrust injury" that affected competition.
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, California, for Plaintiff-Appellant.
Craig E. Stewart (argued), Robert A. Mittelstaedt, and David C. Kiernan, Jones Day, San Francisco, California, for Defendant-Appellee.
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 Somersfailed to allege sufficient facts to state antitrust claims for damages and injunctive relief. Accordingly, we affirm.
In January 2001, Apple introduced a software program called iTunes for personal computers. 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 iTScould 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.
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 (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.
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 ¶...
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