Intention is at the heart of the latest lawsuit facing Apple: Did the tech giant use software security updates as a ploy to prevent songs bought from other sources from being played on an iPod — and vice versa — as the class action lawsuit representing eight million consumers claims?
The billion-dollar antitrust case being argued in an Oakland, Calif., court claims that the digital rights management (DRM) technology called FairPlay drove up the prices of iPods between 2006 and 2009. FairPlay is no longer used in Apple’s music store, but plaintiffs say it unfairly locked consumers into Apple’s ecosystem. The lawsuit seeks $350 million in damages, a figure that could triple if Apple is found guilty of violating U.S. antitrust law.
But the courts are unlikely to find in Apple’s actions a disguised intention to protect a monopoly, according to Wharton and Princeton experts.
“The case hinges on a single concept — duty to deal,” said Eric K. Clemons, Wharton professor of operations and information management. Under antimonopoly law, the “duty to deal” provision determines when a company needs to provide services to its own competitors and whether refusing to do so constitutes anticompetitive monopoly behavior. Clemons noted that “Apple is probably safe on the current definition of duty to deal.”
“If your only reason is anticompetitive, then you have a duty to continue to deal.” –Eric K. Clemons
According to Andrea Matwyshyn, a law professor at Princeton University and a former senior policy advisor at the Federal Trade Commission, the key question in the case is, “Were the updates really motivated … by [better] security, or was there perhaps some other anticompetitive intent that lurked underneath?”
Clemons and Matwyshyn discussed the main aspects of the Apple antitrust case on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
Close-up on Duty to Deal
Clemons explained the duty-to-deal concept with an example: Before the advent of radio stations, there were no radio listeners, and therefore there was no radio advertising and no programming. In the absence of programming, there were no listeners, completing the circle. In the 1920s, RCA (formerly the Radio Corp. of America) launched the first radio station with commercials and also made radios. “Imagine that RCA gave out radios free with no tuner, where the only station you could pick up was RCA,” he said. “That indeed launches the industry. Did RCA have a duty to make more expensive technology to support other stations? Of course it did not.”
The duty-to-deal concept has become more complicated over time, said Clemons, citing another example. In Aspen, Colo., the owner of a large resort with three mountains and the owner of a smaller resort with one mountain sold combined tickets. At some point, the bigger operator planned to take over his smaller rival by refusing to deal with him. “The decision the courts reached was that [the larger operator’s] only reason to renege was anticompetitive,” said Clemons. “If your only reason is anticompetitive, then you have a duty to continue to deal.”
Clemons cited other expert views, which hold that a firm has a duty to deal if it owes its current dominant position to others that cooperate with it, and then chooses to terminate that cooperation for purely anticompetitive reasons. “Apple didn’t reach its dominant position by working with other software providers … and [then] terminating an existing agreement,” said Clemons. “It’s a very aggressive reading of duty to deal to come after Apple and say it should have provided services to competitors.”
Between a Rock and a Hard Place?
Matwyshyn predicted that the court would apply “the rule of reason” to consider Apple’s justification for the updates vs. iPod users’ allegation that the change was “driven by an undesirable, consumer-harming [and] anticompetitive motivation.” She said the court would determine whether Apple’s conduct was “intended as anticompetitive behavior” or whether it had “a legitimate business justification rooted in trying to provide superior services to consumers in line with reasonable business conduct.”
Clemons said that if Apple can argue credibly that it was obligated by music owners to enforce digital rights management (DMR) — one of the arguments the company has made — and that hackers could somehow render that DMR software inoperable, “then it was between a rock and a hard place.” In those circumstances, Apple “did not violate any agreements [that could be called] anticompetitive,” he noted.
“Having a monopoly position by accident is legal. Defending it is not.” –Eric K. Clemons
Defending an Historical Accident
According to Matwyshyn, antitrust litigations typically also consider if the circumstances involve “a historical accident.” She said Apple might have grounds to argue that it was one of the first — perhaps, even the first — mover in the a la carte song model for the music business. That would be an incidence that made way for the “special dynamic” between Apple and the recording industry, she added.
Clemons agreed with Matwyshyn’s reasoning, and noted that “having a monopoly position by accident is legal. Defending it is not. Duty to deal doesn’t obligate Apple to enable its competitors, but if the actions it took with its re-releases were solely intended to protect a monopoly position — no matter how legally obtained — that probably is legally actionable.”
The significance of a videotape of Apple’s late founder, Steve Jobs, played in the hearings could also cut either way, the experts noted. On the tape, which was filmed six months before Jobs died in October 2011, the Apple CEO discussed the potential of hacking and Apple’s reasons for the security updates. Matwyshyn said that the video represents a “procedural hitch,” pointing to the inability to cross-examine and present evidence from a deceased person.
Would Apple’s long history of antitrust battles with competitors influence the court? According to Matwyshyn, there is “an overarching concern about the big picture of Apple’s behavior” in relation to its conduct in other cases, including one related to employee mobility “that was maybe perceived to be anticompetitive.” However, the judge and the jury in the latest case must ensure that those concerns are “appropriately overlaid onto these particular issues in this particular product and this particular business conduct.”
The nearly decade-old antitrust case got new life last week after Barbara Bennett, a business consultant from Massachusetts, offered to serve as the named plaintiff representing the iPod users. Bennett, who said Apple’s policies have made it hard to listen to the tango and Hungarian music she favors, stepped in after reading that the case was floundering for lack of credible plaintiffs. One plaintiff withdrew and another was eliminated by the judge when it appeared that she had not bought an iPod during the period covered by the case.