Earlier today, World of Apple was the first site by many hours (to my knowledge) to report that Apple had prevailed in its Motion to Dismiss Psystar’s Counterclaims. It is my belief that I reported this development within minutes of the Order being entered into the Court Docket. I would like to thank Edible Apple for its acknowledgment of our part in breaking this story. I really appreciated that nod. At the time I reported this news, I had promised some further commentary.

First, here are some basics for persons unfamiliar with legal proceedings. Apple had initially sued Psystar for copyright infringement; inducing others to commit copyright infringement; breach of contract; inducing others to commit breach of contract; trademark infringement; trade dress infringement; trademark dilution; and violations of state and common law unfair competition acts. Psystar responded with thirty-seven affirmative defenses to these claims and brought a countersuit against Apple. Psystar’s countersuit alleged violations of Sections 1 and 2 of the Sherman Antitrust Act and Section 3 of the Clayton Antitrust Act as well as California-specific business codes and state common law on unfair and anti-competitive business practices. So essentially there were two lawsuits going on at one time with Apple being both the Plaintiff and Counter-Defendant, and Psystar being both the Defendant and Counter-Plaintiff.

Apple moved to dismiss Psystar’s counterclaims for reasons previously discussed here. I had predicted that Apple would lose its motion, not because I thought it was without merit, but rather that motions to dismiss are rarely granted unless the arguments are particularly compelling. Although I found Apple’s arguments to be strong, I am not an attorney, so I predicted the usual outcome of losing on a motion to dismiss since every presumption is given in favour of the non-moving party. I made a foolish bet on this prediction with Alex Brooks that I will now have to live up to, but I ask him to have mercy and let me fulfill my end of the bargain over the weekend. [Editors note - I’m ensuring dizzle keeps her end of the deal]

The Court Order Granting Apple’s Motion to Dismiss comprised nineteen pages of very lucid commentary. I understand the issues and legal concepts much more now having read those nineteen pages than I did reading the hundreds of pages of materials submitted and/or referred to by both parties. As I said before, I like this Judge. He is very clear and to the point. Following is an abbreviated summary of the Court’s opinions by category.

Legal Standards for Granting a Motion to Dismiss

Psystar’s counsel had argued that the existence of the various alleged markets was an issue of fact and not an issue of law. Some explanation is needed here. Generally speaking, the judge is present to make decisions on issues of law, while the jury is present to make decisions on issues of fact. Therefore, Psystar was claiming that Apple’s arguments, even if valid, simply were not grounds for dismissal since they were not solely issues of law but also contained disputed issues of fact. Apple obviously disagreed. My earlier statement, “It [the Motion to Dismiss] appears to hinge on Apple’s arguments on the legal standards required to prevail,” turned out to be quite correct.

Judge Alsup found that Psystar merely made conclusory and unsupported allegations of law and inferences drawn therefrom without plausible factual grounding. The case of Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1964–65 (May 21, 2007) factored heavily in the Court’s reasoning.

The alleged Mac OS market

The dispute between the parties in the counterclaims concerned whether the Macintosh OS is a single-product market, or whether there are other operating systems, such as Windows, that are also part of the relevant market. Psystar’s success absolutely depended on their being able to demonstrate this single-product market theory, and they argued that this was a factual determination for a jury. The Court noted:

The definition of antitrust “relevant market” is typically a factual rather than a legal inquiry, but certain legal principles govern the definition.… Whether products are part of the same or different markets under antitrust law depends on whether consumers view those products as reasonable substitutes for each other and would switch among them in response to changes in relative prices.

Citing Newcal Industries, Inc. v. Ikon Office Solutions, 513 F.3d 1038, 1044 n.3 (9th Cir. 2008).

Now I understand much more clearly why Psystar focused so heavily on the idea that a small but significant non-transitory increase in price (SSNIP) would not reduce Apple’s consumer base to any significant degree. At first blush, this seems quite strong in Psystar’s favour. Many Mac users would pay even more for the product without considering switching to Windows. However, the Newcal case dealt with a derivative, not a primary, market. Basically, in that case, there were two competing manufacturers of copying equipment. The issue was not with the primary sale of the copiers but with the sale of parts and supplies. It is completely inapplicable to Psystar’s claim. As an example, if this present case was about Apple requiring only Apple-branded RAM and Apple-branded hard drives, then perhaps there would be a precedent, but not in a case alleging a single-product primary market. The Court recognized that Psystar did cite one case which could lend support to their allegation; however, that case had later been implicitly over-ruled and was no longer valid case law.

The Court also noted:

Single-brand markets are, at a minimum, extremely rare. “Even where brand loyalty is intense, courts reject the argument that a single branded product constitutes a relevant market.”

Citing Green County Food Market, Inc. v. Bottling Group, 371 F.3d as75, 1282 (10th Cir. 2004).

Thus:

[Psystar’s] pleadings, however, fail to allege facts plausibly supporting the counterinuitive claim that Apple’s operating system is so unique that if suffers no actual or potential competitors.

In reading the decision, I sensed a hint at this point where the Judge seemed to be telling Psystar that if they could provide a factual basis for their SSNIP claim, rather than simply making conclusory statements of law, an amended counterclaim might survive dismissal. I suspect that Psystar will scour the Apple fanboy sites for hyperbolic statements of loyalty to the death for the cause of Apple and Dear Leader. However, a little more digging will find just as many current Apple users who would certainly consider a switch if the prices were higher. Ah, but would they switch to Windows? Probably not, but this points to the big pink elephant in the middle of the room that seems to have been ignored thus far. Apple is losing some consumers daily, and a large reason is due to price. To whom? Linux. The price can’t be defeated; it is free. There is no way with free alternatives readily accessible to the typical Macintosh consumer that Psystar can make the argument that there isn’t a reasonably equivalent substitute without Rudy Pedraza crossing his fingers behind his back. The Court noted what I had previously said: It is possible that this willingness to pay a higher price is due to additional perks to the purchaser that aren’t so easily quantifiable, such as customer service, the coolness factor, and other such intangibles.

Judge Alsup pointed to the same admission noted by Apple in Psystar’s own pleadings that the Mac OS performs the same functions as other operating systems; operating systems which Psystar itself also sells as alternatives to OS X. I am also somewhat self-pleased (I beg the reader’s indugence) that the Court also noted the same foot-shooting argument that I had detected. Apple’s aggressive ad campaign against Vista doesn’t prove that Vista isn’t a competitor; the whole purpose of the campaign is to prevail against a very real competitor.

In short, Judge Alsup agreed with Apple that Psystar’s arguments on this point were internally contradictory and circular.

The alleged Mac OS capable hardware market and the alleged Apple-Labeled hardware submarket

As per the Court, Psystar’s Federal causes of action in this regard are absolutely dependent on the existence of separate markets with improper tying practices between the two. Additionally the alleged violations of the Sherman and Clayton Acts depend upon the existence of the submarket claimed by Psystar. Although Psystar did not use the terminology of “aftermarket,” the Court used the term “aftermarket” as functionally equivalent to “submarket,” presumably in an effort to give Psystar the benefit of the doubt, and acknowledged that Newcal did allow for the potential of a distinct single-brand aftermarket. However, here is where things get very interesting. Enter stage right: The End-User Licensing Agreement (EULA).

The Court noted that Newcal specifically excluded single-brand aftermarkets that were created by fully disclosed contractual agreement. Citing Newcal at page 1048, the Court noted:

“…the law prohibits an antitrust claimant from resting on market power that arises solely from contractual rights that customers knowingly and voluntarily gave to the defendant.”

In a related case to Newcal, Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992), the aftermarket customers did not have full knowledge of the consequences of the agreement tied to the initial purchase so is thus distinguishable from the present controversy. Again, quoting Judge Alsup:

“…here Apple asks its customers to purchase Mac OS knowing that it is to be used only with Apple computers. It is certainly entitled to do so.… Psystar also asks the Court to create a non-existent market. This order declines to do so.”

The Court distinguished this case from current litigation cited by Psystar against Apple concerning the iPhone in which customers were required to sign a two-year contract with AT&T but were not told that Apple and AT&T had entered into a five-year exclusivity agreement, effectively tying the customer to AT&T for five years instead of the disclosed, and agreed-upon, two years. Obviously that is not the case here. The purchaser of the Mac OS makes his purchase with full knowledge of the limitation.

The Court lastly dealt with Psystar’s reliance upon United States v. Microsoft Corp., 253 F.3d 34 (C.A.D.C. 2001). Judge Alsup acknowledged that portions of that case do support Psystar’s contentions but that other portions flatly contradict them. Further, the Judge noted the age of the case and his doubts on its continued applicability in the face of rapidly changing technology. Additionally, the Court also noted that the case was completely factually distinct as it did not deal with a single brand/product market but the stifling of existing competitors in the browser market.

California State Claims

The Court noted that the Cartwright Act is patterned after the Federal Sherman Act and that the failures noted above would also apply here. There are some differences in the laws, but Psystar did not allege any that would survive the aforementioned deficiencies; such as inter-firm agreements rather than unilateral conduct. Further, the relevant markets would still have to be established, which the Court has opined that Psystar has filed to do.

Since I am more familiar with Court filings and Orders than the average layperson, I chuckled at the Court’s final comment where others might have paid it no attention:

The remaining cases Psystar cites are similarly unenlightening.

(bold emphasis mine) That was a subtle stinger aimed directly at Psystar “creative” use of case law.

Conclusion

It is very important to note that Apple did not prevail in one important area. Apple requested that Psystar’s counterclaims be dismissed “with prejudice.” That would mean that Psystar would have no opportunity to raise them again in modified form. Instead, the Court dismissed the counterclaims without prejudice, giving Psystar twenty days from November 18, 2008 to move for leave to amend its counterclaims and to explain how the amendment would cure the problems described in the order. I have not reviewed the Local Rules for this Court on the procedures for calculation of time, so I am hesitant to set a date certain when this is due. It is safe to assume that the deadline is approximately December 8, 2008.

I believe that Psystar will try again. They have to. If they completely lose their counterclaims, they have very little chance of winning this case. In my lay opinion, their affirmative defenses are very weak. Another real possibility is that settlement discussions will take place during this twenty-day window with Apple making a business decision to pay some “go away” money, and if I were Rudy Pedraza, I would take it and run. Psystar has much more to lose by proceeding, and right now both parties are in an uncertain position creating an atmosphere ripe for settlement. Apple knows that it is possible that Psystar may file amended counterclaims that pass muster with the Court. I have seen it happen in cases I have worked on in which a court strongly criticizes a party’s arguments and later allows them in amended form. Psystar knows that the Court is likely to dismiss any amended counterclaims. If Pedraza waits, and the Court does rule against Psystar again, Apple has very little motivation to settle and a lot of motivation to make an example out of Psystar.

I have noted some Apple web writers asking if this Order could be appealed. As the writers in question appear to be somewhat unsophisticated in legal terminology, I believe what they are asking is whether or not Psystar can file what is known as an interlocutory appeal. At this point, I confess that is beyond my ken, and I will inquire with lawyers that I know. Until that time, the Wikipedia link does provide some information on guidance formulated by the Supreme Court for allowable interlocutory appeals. Right now, however, the Order is definitely NOT ripe for an interlocutory appeal—assuming for sake of argument that this order is within the scope of qualifications for such an appeal—as the dismissal is without prejudice. The question would not arise until such time as the Court dismisses the counterclaims with prejudice, if it ever does.

Another motivation for Psystar to settle might exist if my prior musings are correct. Basically I argued that if Apple were to lose, all they would have to do is cease selling Mac OS X separately and that “market” would evaporate. They could charge slightly more for the computer which would include the OS and free upgrades for the life of the machine as long as it meets the technical specifications. If this is a real possibility (and frankly I have no idea if it is even feasible on the accounting side of things), unless Psystar is counting on some large monetary judgment, their victory would be meaningless. Further I see no basis for any large monetary judgment, Psystar has continued their business up until this point, what quantifiable damages do they have? If their main goal is the intangible prize of being allowed to install OS X on non-Apple hardware, and my solution is feasible, the only ones who will have anything to show for the effort is their attorneys.


Here is a downloadable copy of the Order for the reader’s review.

Made minor grammar corrections after publication.