iPhone Purchasers’ Monopoly Claims Withstand Apple’s Motion to Dismiss

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Last week, the federal district court in San Jose, California, denied Apple, Inc.’s motion to dismiss antitrust claims brought by nine consumers from California, Washington, and New York who purchased the iPhone. The court ruled that the consumers sufficiently alleged Sherman Act, Sec. 2 claims against Apple and AT&T Mobility, LLC (ATTM)—the exclusive cellular phone service provider to iPhone customers. The plaintiffs seek to represent a nationwide class.

Each plaintiff purchased one or more iPhones and each executed a two-year contract with ATTM. Unbeknownst to the purchasers, Apple and ATTM had entered into a five-year agreement, under which ATTM would serve as the only authorized provider of wireless voice and data services for iPhones in the United States. As a result, customers allegedly would be forced to renew with ATTM, despite initially being required to agree to only a two-year contract.

The complaining consumers also alleged that Apple issued an “upgraded” version of the iPhone operating software to retaliate against purchasers who installed unapproved third-party applications or used the SIM cards of wireless providers other than ATTM.

Apple attempted to disclaim warranty liability for any damage to consumers’ iPhones as a result of installing the new software. The iPhones of some consumers who installed the software were purportedly damaged. Based on this conduct, the consumers alleged violations of the Magnuson-Moss Warranty Act (MMWA).

Relevant Market, Market Power

The court ruled that the iPhone purchasers sufficiently alleged two relevant markets: (1) an aftermarket in iPhone voice and data services and (2) an aftermarket in applications for the iPhone. A legally cognizable aftermarket in a single brand’s products can exist, even if that market is created by a contractual relationship, as long as the aftermarket was “wholly dependent” on the primary market, according to the court. The consumers alleged aftermarkets that would not have existed without the primary market for iPhones. Thus, they were “wholly derivative from and dependant on the primary market.”

The consumers alleged that they were locked into using the provider after the expiration of their initial two-year service contracts by the undisclosed agreement between ATTM and Apple. Apple unsuccessfully argued that there was no aftermarket for iPhone applications because (1) Apple did not sell or make any add-on applications and (2) the array of differing applications for the iPhone could not possibly make up a single relevant market.

The iPhone purchasers also sufficiently alleged market power and monopolization in these aftermarkets. A claim of market power could not arise solely from contractual rights that consumers knowingly and voluntarily gave to the defendant. However, there was a dispute as to whether the consumers knowingly placed Apple in a monopoly position. Such a dispute was better suited for resolution at a later stage of the litigation, in the court’s view.

Arbitration Agreements

An arbitration agreement did not require the iPhone consumers to arbitrate their antitrust, Magnuson-Moss Warranty Act, and consumer protection claims, the court ruled. The nine named plaintiffs were residents of California, Washington, and New York, and they successfully argued that the arbitration agreement was procedurally and substantively unconscionable and therefore unenforceable under California, Washington, and New York law.

The customers did not see the arbitration agreement until they purchased their new iPhone, connected to the Internet, and then were presented with the terms of service.

Moreover, the Federal Arbitration Act did not preempt application of state unconscionability law to the Arbitration Agreement. Application of general state unconscionability laws to the arbitration agreement neither conflicted with an express federal law, nor stood as an obstacle to the accomplishment of a federal objective to encourage arbitration, according to the court.

Magnuson-Moss Warranty Act Claim

The iPhone purchasers could proceed with claims under the MMWA against Apple for unlawful conditioning of the iPhone warranty on consumers’ use, in connection with the iPhone, of products and services “approved” by Apple. Apple allegedly refused to honor the warranties of customers who used iPhone applications and cellular service not approved by Apple.

The fact that Apple issued a press release in advance of releasing the “upgraded” version of the iPhone operating software that disclaimed warranty liability for damage resulting from installation of the new version was “of no moment to the permissibility of Plaintiffs’ claims” because such a later disclaimer ran afoul of the MMWA's single document rule. The MMWA requires warrantors to disclose warranty terms in a single document, the court explained.

The October 1, 2008, decision, In re Apple & AT&TM Antitrust Litigation, No. C 07-05152 JW, will appear in CCH Trade Regulation Reporter.