World of Apple

I last wrote about the case of Smith, et al v. Apple back in August in the following entries:

• In Brief: Alabama Woman Sues Over Alleged iPhone 3G Defects
• In Brief: Amended Complaint Filed in Alabama iPhone Case
• A Possible Hurdle for the Alabama 3G iPhone Suit

Since that time, on October 10, 2008, Apple moved to Dismiss Plaintiffs’ Amended Complaint for Failure to State a Claim. Basically, Apple alleges that the Plaintiffs failed to comply with a necessary condition precedent to bringing a lawsuit on the alleged grounds under Alabama law: they failed to contact Apple to allow Apple the chance to repair or replace the iPhones if necessary. Apple also alleges that a case for unjust enrichment is barred under the terms of its One Year Warranty.

The Plaintiffs responded on October 21, 2008, relying heavily on the much-publicized problems that some users were having with their devices resulting in Apple already providing multiple corrective updates and that Apple and/or its distributors leaked information that additional corrective updates were forthcoming which would remedy the problems in full. Thus, they claim that Apple had sufficient notice to satisfy the spirit of the Alabama requirement. They further claim that they cannot be denied unjust enrichment relief as they were unaware of the One Year Warranty and its terms.

On October 24, 2008, the Court noted that the parties are in dispute as to the existence and/or knowledge of this warranty and gave the parties seven days to attempt to come to an agreement on that issue. If the parties could not agree, the Court stated that it would rule upon Apple’s Motion without assuming the existence and/or delivery of the alleged warranty.

On November 4, 2008, the Court issued its Opinion and Order as two separate filings. The Court’s Opinion noted that the existence and/or delivery of the warranty remains a contested issue. The Court granted Apple’s Motion to Dismiss as to the warranty claims and denied the Motion as to the unjust enrichment claim. While this may seem confusing, the granted portion was based not upon the existence of the disputed warranty issued by Apple but upon the Alabama Commercial Code which legislates that providing actual notice is an absolute condition precedent to any claim of breach of warranty. The Court noted that the Code provides that the seller must be notified within a reasonable amount of time after discovery of the problem or else be barred from any remedy. [emphasis in original] The Court rejected the Plaintiffs’ argument of general notice and opined in some detail as to its reasoning that notice was required as to these specific devices purchased by these specific people.

In its separate Order of the same date, Counts I and II of the Plaintiff’s complaints were officially dismissed with prejudice (meaning that they are adjudicated in finality, unless appealed, if possible) and that the Plaintiffs’ claim of unjust enrichment remained as there were factual disputes between the parties as to the existence and/or delivery of the alleged One Year Warranty provided by Apple. The Court noted that this dismissal with prejudice does not affect the rights of any members of the putative class.

On November 19, 2008, Apple responded to the remaining claim and various factual allegations in the Plaintiffs’ Amended Complaint. The crux of Apple’s Answer is its denial that the iPhone 3G is defective. As far as the request for class-action status, Apple denied that class treatment is warranted in this instance and that any members of this purported class have not been damaged or entitled to relief. Apple repeated its assertion of the existence of its One Year Warranty which would bar the claim of unjust enrichment. Apple also asserted nineteen affirmative defenses. At first, I was going to repeat them all here but decided to wait for reader input as I am learning that not all tech geeks are also legal geeks who like to read court filings for fun. Let me know if those additional details are something you would be interested in.

The last filing was entered on November 20, 2008 and comprised an Order from Judge Acker reminding the parties of certain local rules and asking for notification if this case should be evaluated for ADR (alternative dispute resolution).

I will post additional updates regarding this case as they become available.

In a very interesting turn of events, on November 26, 2008, Apple filed a Notice of Motion and Motion for Leave to File Amended Complaint stating in part:

“Through this motion, Apple seeks leave to file its Amended Complaint … attached hereto as Exhibit A, adds a Digital Millennium Copyright Act claim, additional factual allegations related to Apple’s previously asserted claims and Doe defendants. The DMCA claim is based on new information that Apple has learned since the filing of its original complaint. Apple’s Amended Complaint is timely, does not cause any prejudice to Psystar and should be permitted.”

So what does this possibly mean? It could be confirmation of my long-standing theory that the Psystar principals are merely patsies for some larger interests who wish to be spared the publicity of going against Apple but would benefit from a victory in this case. Under my theory those interests would be the as-yet unidentified “Does 1–10″ that Apple wishes to add as co-defendants. The plot thickens indeed.

It is likely that the Court will grant this motion. The parties themselves had already previously agreed to a date of January 19, 2008 to amend the pleadings. Psystar has indicated to Apple’s counsel that it opposes this filing.

I note that the proposed Amended Complaint is six pages longer than the initial Complaint. I have verified that this addition is not comprised by exhibits but rather the Complaint itself.

Doe Defendants 1–10

The Amended Complaint reveals tantalizingly little about these unidentified parties. Here is the extent of the information pled:

18. On information and belief, persons other than Psystar are involved in Psystar’s unlawful and improper activites described in this Amended Complaint. The true names or capacities, whether individual, corporate, or otherwise, of these persons are unknown to Apple. Consequently they are referred to herein as John Does 1 through 10 (collectively the “John Doe Defendants”). On information and belief, the John Doe Defendants are various individuals and/or corporations who have infringed Apple’s intellectual property rights, breached or induced the breach of Apple’s license agreements and violated state and common law unfair competition laws. Apple will seek leave to amend this complaint to show the unknown John Doe Defendants’ true name and capacities when they are ascertained.

If I am right, some backers of Psystar are sweating right now, and if they are paying the bills, I would not be surprised to see some push for a nominal settlement. For another take on the possible identity of these “Doe” defendants please see: Has Psystar Ruined the Hackintosh for Everyone?

Additional Allegations in Amended Complaint

Paragraph 12 is expanded to include Psystar’s OpenPro, and Psystar’s practice of offering Leopard updates at its site that are either exact copies or modified versions of Apple’s copyrighted software. From this point on, the paragraph numbers do not match as Apple has added two additional paragraphs prior to the paragraph previously numbered as 14 and later moves around and adds other paragraphs. These first additional paragraphs mention Psystar’s plans to release additional computers using unauthorized copies of Leopard, including laptops, as well as Psystar’s practice of distributing a restore disk and providing support for customers to install Mac OS X software in an unauthorized manner.

In its General Allegations, Apple quotes more extensively from the EULA including the Transfer and Termination provisions. In the First Claim for Relief, allegations of additional copyright infringement, including unauthorized derivative works, are added. The Third Claim for Relief points out that Apple had taken measures to protect their copyright, and the defendant has illegally circumvented these measures. The Fourth Claim for Relief sets forth with more specificity Psystar’s alleged infringements. The Fifth Claim for Relief includes a new allegation that Psystar has admitted it was aware of the existence of the EULA. The Seventh Claim for Relief contains additional information on Psystar’s alleged harm to Apple’s trade dress and reputation. In the Eighth Claim for Relief, as in earlier claims not here noted, Apple makes a specific allegation that Apple’s Trade Dress is non-functional. The import of that allegation is beyond my ken. An Eleventh Claim for Relief was added alleging violations of Common Law Unfair Competition.

Many of the allegations contain strengthened wording of “intentional, willful and in conscious disregard of Apple’s rights.”

Apple’s Prayer for Relief contains a request for a preliminary injunction which was noticeably absent from the first Complaint which only sought a permanent injunction. It is my opinion that the Court may very well grant a preliminary injunction until the case is resolved. Apple can easily argue that Psystar’s business does not solely rely upon its disputed sales of non-Apple hardware loaded with OS X as Psystar also sells computers loaded with Windows and Linux.

The above listing of changes is not intended to be all-encompassing. It is the product of my first review of the documents for the most important highlights. As I have time to examine the filings more closely, I will provide additional information. I remind the reader that my opinions are lay-opinions as I am not an attorney, and if authoritative opinions are desired, a competent licensed attorney should be consulted.

Copies of the filings can be downloaded below:

• Motion for Leave to Amend
• Proposed Amended Complaint

Update: I added a link to an article with a differing theory on the potential identity of the as-yet unnamed defendants and made minor grammatical changes.

In new court documents only revealed this week it is shown that a federal judge ordered Mark Papermaster to halt work at Apple because he could cause “irreparable harm” to former employer IBM.

Although the ruling was made by Judge Kenneth Karas on November 7 the decision was only made public earlier this week.

In the ruling Judge Karas wrote “Because Mr. Papermaster has been inculcated with some of IBM’s most sensitive and closely-guarded technical and strategic secrets, it is no great leap for the Court to find that Plaintiff has met its burden of showing a likelihood of irreparable harm.”

The judge also touched on Papermaster’s point that Apple and IBM are no longer competitors, Karas noted that although Papermaster would not be designing chips for Apple he would no doubt have to call upon is superior experience that he received from IBM.

“It is likely that Mr. Papermaster inevitably will draw upon his experience and expertise in microprocessors and the ‘Power’ architecture, which he gained from his many years at IBM, and which Apple found so impressive, to make sure that the iPod and iPhone are fitted with the best possible microprocessor technology and at a lower cost,” adding; “Indeed, any claim that he would merely use general engineering skills is belied by Apple’s focus on Mr. Papermaster’s ’spot on’ knowledge of semiconductors and microprocessor design,” he added.

Karas ruled that the case would run on a fast track, “The Court has ordered that an expedited discovery schedule be arranged and that the trial take place as soon as practicable after discovery is completed,” he said.

As previously reported by many in the Apple web, the New York Judge in the IBM v. Papermaster suit ordered IBM to post a three-million dollar bond to cover any potential damages that Papermaster may suffer if IBM fails to prove that the injunction was appropriate. Specifically, as reported by Edible Apple:

In the on-going saga between I.B.M and Mark Papermaster over his decision to work for Apple, a Ditrict Judge in New York has recently ordered that I.B.M post a 3 million dollar bond in the event that it’s later decided that the preliminary injunction initiated by I.B.M was without merit.

Late last week, IBM posted the appropriate bond. Also of interest, just like Psystar (but hopefully with actual merit, unlike Psystar), Papermaster countersued IBM right back. Papermaster alleges:

• The employment agreement signed by Papermaster precludes him from working for any direct or business enterprise competitor with IBM. Papermaster argues that Apple fails on both counts; it is not a direct competitor and it is not a business enterprise company, but rather a consumer products company.
• The agreement is overly broad as its prohibition lasts for one year which is unreasonably long in the fast-paced world of technology.
• The agreement provides that it shall be governed by the laws of New York, but Papermaster actually works in Texas and would work for Apple in California and those two states are not friendly to such agreements.
• Papermaster signed an agreement with Apple that he would not disclose any of IBM’s secrets. (Yes, I do see the irony.)

(via MacWorld and MacOSKen show 11/19/08)

A Hearing is set for February 9, 2009.

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.

In docket number 33 entered today:

ORDER GRANTING MOTION TO DISMISS COUNTERCLAIMS by Judge Alsup granting 16 Motion to Dismiss (whalc2, COURT STAFF) (Filed on 11/18/2008) (Entered: 11/18/2008)

The Order is 19 pages long. I will analyze the Order and extract interesting portions in a separate post.

After being tantalized by the scant information given by The Mac Observer regarding the courtroom arguments on Apple’s Motion to Dismiss Pystar’s Counterclaims, I contacted the court reporter and purchased a copy of the transcript. I cannot ethically make this available online as it would be cheating the court reporter out of their main means of income. It would be like being a lousy tipper.

So I will give the World of Apple readers some additional details not yet reported on the Apple web that I have seen. In order to properly discuss the Hearing, a refresher is needed on the basic claims at issue, at least to the extent that a layperson can discuss them. I remind the readers that I am not an attorney and anything I say must be taken in that context. The Mac Observer has had the assistance of an attorney who wishes to remain anonymous who has opined that Apple’s chances of prevailing on its Motion are good. I respectfully disagree but more on that later.

An abbreviated summary of Psystar’s Counterclaims

Psystar is alleging 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.

From the Wikipedia article linked above on the Sherman Act:

Around the world, what U.S. lawmakers and attorneys call “Antitrust” is more commonly known as “competition law.” The purpose of the act was to oppose the combination of entities that could potentially harm competition, such as monopolies or cartels. Its reference to trusts today is anachronism [sic]. At the time of its passage, the trust was synonymous with monopolistic practice, because the trust was a popular way for monopolists to hold their businesses, and a way for cartel participants to create enforceable agreements.

The Sherman Act was not specifically intended to prevent the dominance of an industry by a specific company, despite misconceptions to the contrary. According to Senator George Hoar, an author of the bill, any company that “got the whole business because nobody could do it as well as he could” would not be in violation of the act. The law attempts to prevent the artificial raising of prices by restriction of trade or supply. In other words, innocent monopoly, or monopoly achieved solely by merit, is perfectly legal, but acts by a monopolist to artificially preserve his status, or nefarious dealings to create a monopoly, are not.

Emphasis added. While Wikipedia is certainly not the most scholarly of sources, this is intended to be a discussion for the layperson, so it will serve for that purpose.

From the Wikipedia article linked above on the Clayton Act:

Second, Clayton-3 is notable as well. At the time of its passage, the legislature that enacted the Sherman act was largely concerned with horizontal restraints. For many years, enforcement of antitrust law using Sherman-1 focused on horizontal agreements. The clear focus of Clayton-3 is vertical agreements. This clarifies that both horizontal and vertical agreements are within the scope of federal antitrust law.

Under Sherman, Psystar is alleging illegal tying of the Mac OS to Apple-labeled hardware and attempts to maintain a monolopy in the Apple-labeled hardware submarket.

Under Clayton, Psystar is alleging an illegal requirement for consumers to deal with Apple exclusively with regards to these products.

Edited to add: These two claims do have some overlap.

There are other allegations under California and common law, but the main issues appear to be these two Federal acts. The reader will note that I italicized the word “submarket.” A great deal of this case is a disagreement on the existence and definition of market terminology. Psystar is alleging that there are two markets at issue: the Mac OS market and the Mac OS capable hardware market (which itself contains a submarket consisted of Apple-labeled hardware). Note: I originally had the hardware market and sub-markets reversed which I corrected.

The alleged Mac OS market

Psystar alleges that Apple has a monolopy on this market as the exclusive manufacturer and/or licensor of the product. It further claims that no other operating systems are an effective substitute and/or reasonably interchangeable. Lastly, they claim that there are near insurmountable barriers for a new entrant to compete against the Mac OS with another operating system.

I note (as does Apple’s attorney) that Psystar is engaging in obvious cognitive dissonance. As they admit, their own business, which is “devoted” to providing “choice” to customers, offers multiple operating systems thereby acknowledging by their actions that the operating systems are competing against each other. As to the last prong of the claim, it is my personal opinion that it is a ridiculous demand for entitlement. Apple, Microsoft, and many other companies started from scratch and made their way. Demanding that the law cobble existing businesses so that an upstart can gain market at their expense seems patently unjust in my opinion. It appears that Alan Greenspan shared a similar sentiment (from the Sherman Wikipedia article linked above):

Alan Greenspan, in his essay entitled Antitrust condemns the Sherman Act as stifling innovation and harming society. “No one will ever know what new products, processes, machines, and cost-saving mergers failed to come into existence, killed by the Sherman Act before they were born. No one can ever compute the price that all of us have paid for that Act which, by inducing less effective use of capital, has kept our standard of living lower than would otherwise have been possible.”

The alleged Mac OS capable hardware market

Psystar alleges that there are companies that desire to manufacture hardware capable of running the Mac OS and that it is technologically possible for them to do so. This is undoubtedly true. Edited to add: I am not stating that the theory of a separate market is undoubtedly true, in fact, I believe that position is untenable.

The alleged Apple-Labeled hardware submarket

Psystar alleges that Apple’s conduct in excluding other manufacturers from producing systems with the ability to run the Mac OS is improper tying and as such Apple holds monopoly power in this alleged submarket.

In support of all their claims, Psystar cleverly uses Apple’s own advertising campaigns against them in an attempt to show that Apple recognizes the separate markets that Psystar is claiming. While clever, I don’t find this particularly persuasive as commercials are by definition one-sided promotions of a product with differentiation from its competitors. The very fact that differentiation is made in Apple’s advertisements appears to prove the opposite of Psystar’s claims, i.e. Apple recognizes that Microsoft is its direct competitor and that consumers will choose between the two products, even if only between operating systems.

Psystar also points to the much-debated and hotly contested price differences between Apple hardware and that of other manufacturers. However, they appear to once again defeat their own point by noting that despite the fact that the Apple systems cost more, Apple enjoys a particularly devoted consumer base. On its face, I would see this as proof that there is more to value and cost than the price tag and that Psystar is improperly limiting what constitutes valuation. To my disappointment, Apple’s attorneys did not raise this point at the Hearing. I am sure there is some legal or strategic reason they did not, or perhaps they would disagree with my lay opinion of Psystar’s argument. Psystar further argues that Apple could charge even more (a small but significant non-transitory increase in price— SSNIP) and would not lose its consumer base. I fail to see how that helps Psystar, but again, these are legal subtleties.

The above of course is a very truncated summary of the allegations to give the reader a broad overview of the case. As mentioned previously, Justia has the filings online for free review. Psystar’s filing is docket entry 12.

An abbreviated summary of Apple’s Motion to Dismiss Psystar’s Counterclaims

The Table of Contents of Apple’s Motion provides the most concise summary possible:

III.A. All of [sic] Psystar’s Counterclaims Require The Definition Of Legally Plausible Relevant Markets.

III.B. Psystar’s Alleged Single-Product Relevant Markets Are Neither Legally Nor Factually Plausible.

III.B.1. Courts Repeatedly Reject Single Brand Markets.

III.B.2. The Allegations Contained In Psystar’s Counterclaims Disprove Its Contentions About Single Brand Markets.

III.C. Apple Is Not Obligated To Help Psystar Compete.

III.D. Psystar’s Cartwright Act Claims Should Be Dismissed.

III.E. Psystar’s California Unfair Competition Law Claims Should Be Dismissed.

As an aside, I am surprised that the inconsistent capitalization in III.A passed the proof-reading process at counsel’s offices. Apple cites to 59 cases in support of its Motion. I have printed all of them and have well over 1,000 pages of case law to review for future articles.

Apple relies heavily on alleged contradictory statements within Psystar’s Counterclaims, some of which I have already noted. I believe that their argument that Psystar’s very business model shows the existence of only one relevant competitive market, the personal computer market, is strong and makes common sense. Apple also notes that Psystar’s mission is to force Apple to provide assistance to its competitors.

The burden to prevail on a Motion to Dismiss is extraordinarily high. However, it is not so high that any possible scenario would survive dismissal, only plausible ones. It is possible that Steve Jobs is a space alien from Venus, but it is not plausible. This is where the heavy analysis of case law by a properly qualified attorney comes into play. Apple argues that Psystar has failed to meet the plausibility test required by case law and as evidenced by their own alleged contradictory statements. The issue of market power and its necessity in the proper definition of markets is also argued. Apple appeals to the Court that failing to dismiss the allegedly fatally flawed Counterclaims simply because there is a scintilla of possibility will result in protracted and expensive discovery.

Though I cannot yet claim to have a full grasp on the intricacies, it appears that the majority of the weight to prevail on its Motion rests on the success of its argument that courts repeatedly reject single-brand markets. Some persuasive quotes from other cases are provided. For example, citing United States v. E.I. DuPont de Nemours & Co., 351 U.S. 377, 76 S.Ct. 994 (1956):

[The] power that, let us say, automobile or soft-drink manufacturers have over their trademarked products is not the power that makes an illegal monopoly. Illegal power must be appraised in terms of the competitive market for the product.

Apple alleges that the above case upholds the proposition that reasonably interchangeable products that serve the same use are in the same market. In my opinion, this is strong. All one has to do is spend an hour on the Internet obersving the OS wars between Apple and Microsoft devotees to see that as far as the law should be concerned, there are reasonably interchangeable products existing in the marketplace.

In response to Psystar’s allegations regarding SSNIP, Apple notes that Psystar appears to have pulled a bait and switch since the additional market they are trying to establish is the Mac OS market, yet they did not mention the price of the Mac OS but rather the hardware.

Again, I urge the reader to view the actual filing which appears as docket entry 16 and to keep in mind that my summary is done as a layperson and not an attorney. A properly licensed attorney may very well summarize the issues much differently.

An abbreviated summary of Psystar’s Opposition to Apple’s Motion to Dismiss

Psystar cites 39 cases in its support. The contents of the Opposition address Apple’s allegations point by point. The main thrust of its arguments are that Apple has misconstrued the legal standard for a Motion to Dismiss and that Courts have upheld single-product market definitions.

As I noted in an earlier article:

One of the most interesting portions of Psystar’s Opposition is its attempt to use language found in U.S. v. Microsoft Corp., 87 F.Supp.2d 30 (D.D.C. 2000) as follows (see page 10 of Psystar’s filing):

As far as I understand their arguments as a non-attorney, Psystar is using that statement to support its allegations that the Macintosh is not part of the general PC market but is rather its own market. I am convinced that this will come back promptly to bite Psystar in the rear. This comment of the District Court in the Microsoft case dealt specifically with switchers in 2000, prior to Apple’s switch to Intel chips. The fact is that due to Apple’s switch to Intel chips—the very switch which makes possible the emulation that Psystar is relying upon— this observation is largely moot. Further, since 2000, Linux has become much more user-friendly with many people finding Ubuntu to be a viable alternative to both Windows and OSX.

Apple’s attorneys did argue that very point at the Hearing. The reader may find Psystar’s Opposition as docket entry 25.

An abbreviated summary of Apple’s Reply to Psystar’s Opposition

A Reply cannot bring up entirely new arguments, so as should be expected, Apple’s Reply is focused solely on Psystar’s last filing. Apple alleges that Psystar has relied upon case law that has been abrogated and that other case law cited by Psystar is inapplicable as it deals with aftermarkets. Apple continues to allege that Psystar’s own filings implicitly make Apple’s case. In this instance, Apple alleges that Psystar has tacitly admitted that Apple does not have to help a competitor. Obviously, Apple also defends its interpretation of the legal standard to prevail on a Motion to Dismiss.

An abbreviated summary of the Hearing on Apple’s Motion to Dismiss

First off, I like this Judge. He is a no-nonsense shooter. After noting that both parties failed to file Initial Disclosures on time, he read them the “Iron Curtain” act, basically reminding them that untimely disclosure can preclude the use of the untimely submission. Both attorneys seemed suitably chastised. The transcript was relatively short at 34 pages.

Apple’s attorney, James G. Gilliland, spoke first. Here is the heart of his argument:

There’s no dispute here, I think that the counterclaims, their success depends upon Psystar’s ability to allege and prove a single brand relevant product market. Specifically, they claim that the relevant market is the market for the Macintosh operating system. However, we think, on the face of the counterclaims, they need to be dismissed for two reasons. First, the counterclaims themselves contradict the allegation that there is a single brand relevant market. Second, the only time when there can be such a market, the aftermarket context, does not exist in this case.

And:

We submit under “Twombly”, Your Honor, its simply not plausible to admit that operating systems all serve the same purpose. To admit that they are all sold by Psystar on the same computer, to the same customers, through the same line of commerce, and then to claim they are not in the same relevant market.

One entertaining quote from Gilliland is when he encourages the Court to watch the submitted DVD of Apple television advertisements as “some of them are very cool to watch.” Gilliland also made the arguments that I had already noted above in my commentary within the abbreviated summaries.

Psystar was represented by Colby B. Springer who spoke immediately after Gilliland.

Springer argued through case law that there has been relevant case law defining a single-product market that would be applicable in this case and that there is no “bright line rule” on this issue. He argued that Apple’s arguments failed to address the submarket issue as opposed to an aftermarket. The heart of Springer’s position was as follows:

…Again important here with respect to defining the market, is that issues of factual disagreement, and there are clearly issues of factual disagreement here with respect to what constitutes the relevant market, issues of factual disagreement are not appropriate for a 12(B)(6) Dismissal, especially in light of the fact this was a jury question [in other cases].

Judge Alsup had a humourous moment as well when he asked Springer how to pronounce Psystar and then inquired “What happened to the P?”

Judge Alsup then questioned Springer on various issues including how Psystar was able to get the Mac OS to run on a non-Apple computer. Springer represented that “they [Psystar] have also developed their own code that allows it to operate on a non-Apple-labeled computer system.” Now readers, correct me if I am wrong, but isn’t this almost nearly false? Wasn’t this code developed by the OSx86 Project who are not too happy with Psystar either?

It is during this questioning period that Judge Alsup made the comment reported by The Mac Observer:

There are people that like a Ford pickup truck that wouldn’t be caught dead in a Chevy. I don’t think that anybody is going to say Ford and Chevy—that anybody has a monopoly on the pickup truck market.

Springer countered by quoting Apple’s own promotional blurbs about the virtues and superiority of OS X.

Gilliland was allowed a brief response. He pointed out to the Court that Psystar’s reliance on SSNIP is entirely pointed towards hardware, which undermines their case, since Mac OS X upgrades sell for a similar price as Windows upgrades.

After that portion was done, the issue of possible recusal was discussed. As I suspected, this was not as potentially major of an issue as some articles seemed to imply. One of Apple’s attorneys, Megan Chung, was a law clerk for Judge Alsup approximately four years ago. Judge Alsup made it quite clear that he did not believe that this was significant enough to warrant recusal unless Springer had some case law that he was not aware of. The deadline to file a Motion for Recusal has come and gone; thus, Judge Alsup remains on the case. He promised a decision within two weeks of the Hearing.

My Impressions

The Judge seemed very fair with perhaps a slight inclination in Apple’s favour. By inclination I do not mean bias but rather that he was persuaded by the arguments. This is difficult to tell by simply reading a transcript. The attorneys were very professional and get along with each other which unfortunately is not always the case. Though I am admittedly biased, I do think that Gilliland performed slightly better than Springer which would be in line with my opinion of the filings. I believe that Psystar’s Counterclaim was very cleverly argued, and I gave it grudging respect. However, from that point on, I have found their arguments weakening. This is my lay opinion, and I will be the first to admit that my Apple fangirlism may be colouring my view unawares.

However, I stand by my prior repeated comments. I do not believe that Apple will win this Motion (and that many website will make a huge deal out of this non-event). Every benefit of the doubt is given to the non-moving party in a Motion to Dismiss, and it would be easy for the Judge to find disputed issues of fact in this matter. It appears to hinge on Apple’s arguments on the legal standards required to prevail.

Edited 11/15/08: I neglected to add that while Judge Alsup was chastising the parties for failing to timely exchange disclosures that Springer informed the Judge “the reason we discussed among ourselves postponing until the end of the month was because we thought there might be guidance as to whether there were or were not antitrust issues in the case.” The Judge then inquired if that meant that Psystar’s case will evaporate if the antitrust issues are dismissed to which Springer replied strongly that they would still have their own affirmative defenses.

Another bit of trivia, also present at the Hearing besides the above-mentioned counsel and their supporting staff were Dan Cooperman as General Counsel of Apple and Carlene Claus (phonetic) as Litigation Director as well as Rudy Pedraza, CEO of Psystar Corporation.

Minor grammar and style corrections were also made.

The fight between Mark Papermaster and IBM continued this week with the former IBM employee filing a counter lawsuit against IBM.

Papermaster’s lawyers filed their answer to IBM’s original lawsuit on Wednesday as well as filing counter claims. As is common in such cases the filed papers admitted only solid facts and denied everything else.

In particular Papermaster’s lawyers claim that IBM’s non-competition agreement is unreasonably broad as well as arguing that the agreement doesn’t apply in Texas – where Papermaster has lived and worked for 17 years – or California where Apple is based.

A status conference is schedueld for November 18 at 10 am in the U.S. District Court, Southern District of New York, White Plains.

Read the filings so far (PDF):

• IBM’s original complaint
• Papermaster’s answer to IBM’s suit
• Judge’s Order for Papermaster to halt work at Apple
• Papermaster’s Filings

Amid uncertainty Apple has removed an executive biography from its website for Mark Papermaster the latest executive to join Apple’s team. The Senior Vice President of Devices Hardware Engineering was hired from IBM and has been the centre of a lawsuit from the company.

Following his employment at Apple, IBM sued Papermaster under allegations that he could give out critical trade secrets belonging to IBM. In response Papermaster filed papers that read, “Until this litigation effort by IBM, aside from the divested IBM personal computer business and a single sale several years ago of Apple’s Xserve product to a university, I do not recall a single instance of Apple being described as a competitor of IBM during my entire tenure at IBM.”

Last Friday IBM was granted an injunction to prevent Papermaster from working at Apple for the near future, CNet points out that a Google Cache of the bio is still available.

During Thursday’s (11/6/08) hearing on Apple’s Motion to Dismiss Psystar’s Counterclaims, Psystar learned that a lawyer at the firm representing Apple had previously clerked for Judge Alsup. The Court gave Psystar until noon on Monday, November 11, 2008, to file a Motion for Recusal. I have checked the docket, and it appears that no such motion has been filed. Even though Psystar was given the opportunity to move for recusal, it is conceivable that this could become a later issue in the event of an appeal if Psystar could credibly claim that it had no reasonable basis to believe that the Judge was biased at the time of the deadline, but further proceedings demonstrated such bias. It would be a high burden to overcome, but these are the types of issues that crop up in appeals.