In re Apple & at & Tm Antitrust Litigation

596 F.Supp.2d 1288

In re APPLE & AT & TM ANTITRUST LITIGATION.

No. C 07-05152 JW.

United States District Court, N.D. California, San Jose Division.

October 1, 2008.

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ORDER DENYING DEFENDANT AT & TM'S MOTION TO COMPEL ARBITRATION AND TO DISMISS; DENYING DEFENDANT AT & TM'S MOTION TO STAY DISCOVERY; GRANTING IN PART AND DENYING IN PART DEFENDANT APPLE'S MOTION TO DISMISS

JAMES WARE, District Judge.

I. INTRODUCTION

In the cellular telephone market, it has become a common practice for an equipment manufacturer and a voice and data supply company to join together to introduce a new cellular telephone to the market. Often, to obtain a particular model of telephone at a given price from a given manufacturer, purchasers must sign a contract with the joined service provider for voice and data services of a stated period of time. This case concerns such an arrangement between Apple, Inc. and AT & T Mobility upon the introduction to the market of the iPhone. Plaintiffs allege that consumers were offered iPhones only if they signed a two-year service agreement with AT & T Mobility. Plaintiffs allege, however, that unknown to consumers, the companies had agreed to technologically restrict voice and data service in the aftermarket for continued voice and data services, i.e., after the initial two-year service period expired. The question before the Court is whether if these allegations are true, the Complaint states a claim for a violation of the federal antitrust laws and other consumer protection laws. The Court finds that it does.

II. BACKGROUND

Plaintiffs¹ bring this putative class action against Apple, Inc. ("Apple") and AT & T Mobility, LLC ("ATTM") (collectively, "Defendants") alleging, inter alia, violations of Section 2 of the Sherman Antitrust Act ("Sherman Act"), 15 U.S.C. § 2 and breach of warranty under the Magnuson-Moss Warranty Act ("MMWA"), 15 U.S.C. §§ 2301-12. In a Revised Amended Consolidated Class Action Complaint filed on June 4, 2008, Plaintiffs allege as follows:

The Defendants and the iPhone

Defendant Apple is a California corporation with its principal place of business in Cupertino, California. (Revised Consolidated Amended Class Action Complaint ¶ 22, hereafter, "Complaint," Docket Item No. 109.) Apple markets and sells the iPhone, which it launched on June 29, 2007. (Id. ¶¶ 2, 22.) The iPhone is a wireless communication device that acts simultaneously as a mobile phone, iPod, and Internet communications device. (Id. ¶ 27.)

Defendant ATTM is a Delaware limited liability company with its principal place of business in Atlanta, Georgia. (Id. ¶ 23.) ATTM is a cellular phone service provider that markets and sells the iPhone and is the exclusive provider of wire and data services to iPhone customers, pursuant to a written agreement with Apple ("The Agreement"). (Id. ¶¶ 2, 23, 77.) Apple and ATTM entered into the Agreement prior to the commercial release of the iPhone, making ATTM the only authorized provider of wireless voice and data services for iPhones in the United States for five years. (Id. ¶¶ 2, 79.)

The Agreement

The Agreement, which lasts until 2012, provides that iPhone purchasers who want voice and data services must sign a two-year service contract with ATTM. (Complaint ¶ 30.) Although the Agreement itself is not public, some of its provisions have been revealed in the press. First, Apple and ATTM share revenue stemming from provision of voice and data services to iPhone users. (Id. ¶ 78.) Second, because of ATTM's position as exclusive provider of iPhone services for five years, customers will be forced to renew with ATTM, despite initially being required to agree to only a two-year contract. (Id. ¶ 79.) Third, Apple will enforce ATTM's exclusivity by installing SIM card program locks on all iPhones, while agreeing to never disclose the unlock codes to iPhone consumers who wish to replace the SIM cards for international travel or to lawfully cancel their ATTM contracts to switch to another carrier. (Id. ¶ 80.) Fourth, Apple is permitted to control the features, software, content, programming, and design of the iPhone. (Id. ¶ 81.) Fifth, contrary to standard industry practice, by which wireless providers subsidize the purchase of the cellular device in exchange for the consumer signing a contract with the provider conditioned on payment of a fee in the event of early termination, ATTM is not required to subsidize the consumer's purchase of the iPhone, but nonetheless charges a $175 early termination fee. (Id. ¶¶ 82-83.) Sixth, Apple and ATTM agreed to take action, legal or otherwise, to prevent users from circumventing SIM card locks to access the services of non-ATTM providers. (Id. ¶ 84.) Seventh, Apple agreed to restrain from developing a CDMA² version of the iPhone for an unspecified period of time, which would prevent the iPhone from being used on Verizon or Sprint's networks. (Id. ¶ 85).

Third-Party Applications and Software Update Version 1.1.1

Apple has created software programs for the iPhone known as "applications," such as ring tones, instant messaging, and Internet access, all of which can be downloaded by iPhone users. In addition, Apple has made agreements with some third-party software manufacturers by which Apple "approves" their applications, usually in exchange for a share of revenues resulting from sales of those applications. (Complaint ¶ 4.) Apple, however, has refused to approve any application in which it does not have a financial interest, and has told customers that it will not honor the warranties of any customer who has downloaded competing applications. (Id.) Nonetheless, some consumers were able to unlock their iPhones to install unapproved third-party applications ("TPAs"), as well as to use the SIM cards of wireless providers other than ATTM. (Id. ¶¶ 5, 89-93.)

On September 27, 2007, Apple issued an "upgraded" version of the iPhone operating software, known as Version 1.1.1. (Id. ¶¶ 5, 96.) Although issued as a software update, ostensibly intended to make several changes and improvements to the iPhone operating system, Version 1.1.1 was issued by Apple for the purpose of retaliating against consumers who had unlocked their iPhones or installed unapproved TPAs. (Id. ¶¶ 5, 96-98, 102.) Apple knew prior to release of Version 1.1.1 that the update would "brick" (render completely inoperable) or otherwise damage some iPhones that were unlocked or which contained unapproved TPAs. This knowledge is evident by a September 24, 2007 press release in which Apple stated that downloading Version 1.1.1 "will likely result in the modified iPhone becoming permanently inoperable when a future Apple-supplied iPhone software update is installed." (Id.) In the September 24 press release, Apple attempted to disclaim warranty liability for any damage to consumers' iPhones as a result of installing Version 1.1.1. (Id. ¶ 98.) The iPhones of some consumers who installed Version 1.1.1 were, in fact, damaged in the manner predicted by Apple. (Id.) Consumers whose iPhones were damaged as a result of installing Version 1.1.1 were then told that they had breached their warranty agreements by unlocking their phones or by downloading unapproved TPAs. (Id. ¶¶ 5, 104-106.)

The Plaintiffs

The nine named Plaintiffs in this nationwide class action are residents of California, Washington, and New York. (Id. ¶¶ 13-21.) Each Plaintiff purchased one or more iPhones and each executed a two-year contract for provision of voice and data services with ATTM. (Id. ¶ 31.) Prior to Plaintiffs' purchases of their iPhones and execution of their service contracts, Defendants did not disclose to them the existence of the five-year exclusivity provision in the Agreement, or that Plaintiffs would be locked into using ATTM after the expiration of their initial two-year service contracts (Id. ¶ 32); disclose that Plaintiffs' iPhones were locked to only work with ATTM SIM cards or that the unlock codes would not be provided to them upon request (Id. ¶ 33); nor disclose that Plaintiffs would incur excessive and unconscionable roaming fees for using the iPhone's data features while traveling internationally. (Id. ¶ 34.) Instead, Apple's website represented to Plaintiffs that "[y]ou can browse the Internet and send emails as often as you like without being charged extra." (Id. ¶ 35.)

On the basis of the allegations above, Plaintiffs allege 10 causes of action:

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                            Cause of Action Defendant
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1  Monopolization of the aftermarket for iPhone applications, in violation of
   Section 2 of the Sherman Act                                                     Apple
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2  Attempted Monopolization of the aftermarket for iPhone applications, in
   violation of Section 2 of the Sherman Act                                        Apple
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3  Monopolization of the aftermarket for iPhone voice and data services, in
   violation of Section 2 of the Sherman Act                                        Apple, ATTM
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4  Attempted monopolization of the aftermarket for iPhone voice and data
   services, in violation of Section 2 of the Sherman Act                           Apple, ATTM
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5  Conspiracy to monopolize the aftermarket for iPhone voice and data
   services, in violation of Section 2 of the

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