World of Apple

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.

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.

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.

After considering the Proposed Case Management Report previously filed by the parties, the Court has entered its Scheduling Order. At first glance, it appears that nearly everything requested by the parties was granted. The important dates are as follows:

11/14/08: Last day for initial Rule 26 Disclosure exchange.

11/30/08: Last day to seek leave to add any new parties or amend pleadings. I note this date is interesting if Apple’s Motion to Dismiss is denied, this leaves scant time to file an Answer and be certain that no amendments are needed.

1/31/09: Last day to complete JAMS mediation.

6/26/09: Last day for designation of expert testimony and disclosure of full expert reports. The parties then have fourteen calendar days to disclose any rebuttal expert testimony with full reports. Lastly, the parties will then have seven calendar days to disclosure any reply reports. The deadline for all expert discovery is fourteen calendar days after the deadline for reply reports. Within twenty-eight calender days of 6/26/09, each party must serve a list of issues on which it will proffer expert opinion in its case-in-chief.

8/20/09: Last day to file dispositive motions. No hearings will be had on any dispositive motions more than thirty-five days after this deadline.

10/26/09: Final Pre-Trial Conference

11/9/09: Jury Trial Commences. The precise date may change to a few days up to a few weeks later than this date at the Final Pre-Trial Conference.

This Order is one of the clearest I have read. Though not related to this case specifically, I was impressed with the Court’s statement in Paragraph 8 that the Court will definitely hear oral argument on non-discovery motions if the written request states that a lawyer of four or fewer years out of law school will be arguing the motion as the Court believes that young lawyers need more opportunities for appearance to gain needed experience. That is really awesome.

On Thursday, oral arguments on Apple’s Motion to Dismiss Psystar’s Counterclaims were heard by Judge Alsup. Macworld has a summary of the hearing, to which I refer the interested reader. Two very interesting things occurred, though I am hungry for more details from persons actually present. Before discussing these two points, following is a history of the pertinent filings to date.

7/3/08: Apple filed its Complaint for Copyright Infringement, Induced Copyright Infringement, Breach of Contract, Trademark Infringement, Trade Dress Infringement and Unfair Competition.

8/28/08: After being granted two extensions by Apple, Psystar filed its Answer and Affirmative Defenses and Counterclaims for Violations of the Sherman, Clayton, and Cartwright Acts, and State and Common Unfair Competition Law.

9/30/08: After being granted one extension by Psystar, Apple filed its Motion to Dismiss Psystar’s Counterclaims; Memorandum of Points and Authorities in Support Thereof.

Note to reader: A motion to dismiss is considered a responsive pleading. Apple is not required to answer Psystar’s Counterclaims until a ruling is issued on this Motion. If the Motion is granted in full, no answer will be needed. If it is denied or granted only in part, then Apple will have a certain amount of time, usually designated by the Court in its Order, to answer Psystar’s Counterclaims.

10/16/08: Psystar filed its Opposition to Apple’s Motion to Dismiss its Counterclaims.

10/23/08: Apple filed its Reply Brief in Support of its Motion to Dismiss Psystar’s Counterclaims.

Note to reader: You may have noticed that Apple had two opportunities to argue its position on dismissing Psystar’s Counterclaims, and Psystar only received one opportunity to respond. This is typical Federal Procedure: Motion>Reply to Motion>Response to Reply to Motion. Any further filings would require leave of Court.

11/6/08: Oral Argument on Apple’s Motion to Dismiss Psystar’s Counterclaims took place. The parties were told to expect a ruling within the next two weeks.

Note to reader: Federal court practice is significantly different from state court practice in that appearances before the judge to argue motions prior to trial are rare. More often than not, the court will make its decisions based upon the written filings alone. Motions to dismiss and motions for summary judgment are the ones most often granted oral argument as their effects are potentially case-dispositive.

Now I will repeat what I have said multiple times before: Apple will not prevail on its Motion to Dismiss, and the Apple web will completely blow the significance of Apple’s loss out of proportion. I believe that Apple will not prevail simply on sheer statistics, and the philosophy that courts do not like to take cases out of the hands of the jury. This opinion is not based at all on the strengths of the legal arguments in the filings. I am not an attorney and thus not qualified to analyze the legal arguments to that extent. In my lay opinion, both parties put up a strong fight. The burden to prevail on a motion to dismiss is quite high and narrow—in this instance Apple must show that Psystar has not put forth a legally plausible claim. Apple could very well prevail on the very same arguments in a motion for summary judgment. In fact, that is what I expect. I also expect complete exaggeration from many sites in the face of an unfavourable ruling being presented as a death blow to Apple’s substantive arguments. That would not be the case. It would be irresponsible to claim otherwise, and I will call out by name those who do so.

Returning to the Macworld article, the two interesting points that I gleaned were an encouragingly favourable (to Apple) comment made by Judge Alsup and the discovery of possible grounds for Judge Alsup’s recusal.

Favourable Comment from the Bench

Alsup questioned Springer when the attorney cited the passion that Mac users have for the platform, noting that Ford truck owners might feel the same way about their pickup trucks in regards to ones from Chevrolet. “You wouldn’t say they have a monopoly,” the judge said.

Judge Alsup compltely blew Springer’s vacuous argument out of the water. It is ludicrous to claim that a passionate customer base is proof of a single market monolopy, and in fact, I find it to be another case of Psystar shooting itself in the foot by making Apple’s case that Psystar’s actions could potentially tarnish a peculiarly high level of respect that Apple enjoys. If Apple prevails, Springer’s own argument could be used as the basis for an argument for a higher damages award.

Potential Grounds for Recusal of Judge Alsup

One of the Townsend and Townsend and Crew attorneys representing Apple, Megan Chung, is a former law clerk of Alsup’s—a fact that Psystar’s attorneys just became aware of. Alsup gave Psystar until Monday at noon to file a motion asking the judge to recuse himself from the case.

This is somewhat common. If there is found any potential for bias, a party may move for recusal. Actual bias does not have to be proven.

My Prediction

I predict that Psystar will file a motion for recusal. Why? Judge Alsup has shown that he sees through Psystar’s smokescreen, and rolling the dice for another judge may result in one more sympathetic to Psystar. They may wish to take the risk. Please keep in mind that this prediction is made without consideration or knowledge of an attorney’s ethical obligations in moving for recusal. It might be that such tactical considerations would be considered improper by the Code of Professional Conduct, and I am positive that Springer will conduct himself within those parameters.

Of course, all of this is my lay opinion from the tantalizingly few facts that I know from Thursday’s hearing. I also predict that someone in the Apple web will weave some nefarious plot out of the newly discovered potential conflict.

As an aside, the main presenter at my Mac Users Group is a professional computer technician who has heard of credible cases in which packing popcorn has come out of Psystar machines when opened up for service. Now that’s a sign of quality. Not.

In follow-up to my article of yesterday correcting misinformation reported by some sites regarding the Case Management Scheduling Report, there is another issue being discussed that also desperately needs a heavy dose of reality. There is no shortage of articles and comments bemoaning that this case is going to be “dragged out” for a year. Once again, this perception stems from naivete on legal issues. A trial date a year out from the Case Management Scheduling Report is not unusual nor is it “dragging out” the case.

Here are a few examples that will help to explain.

Depositions. This case is not the only matter that either law firm is working on. It is incredibly difficult to schedule depositions that are amenable to everyone’s schedule, including the deponent’s.

Other Discovery. “Discovery” is the process by which parties obtain information from each other. These will often take the form of Requests to Produce Documents or Things, Interrogatories, and Requests for Admissions. Once propounded, the party has thirty days to respond. Realistically speaking, extensions are commonplace professional courtesy, so it is not at all difficult to see how basic discovery between the parties can easily take many months. Throw in the near certain expectation of disputes over objections to discovery with corresponding Motions to Compel and the like, the time needed expands rapidly.

Experts. Experts need time to review all the information obtained in discovery. Like the attorneys, this will not be the only thing they are working on.

Dispositive and other Pre-Trial Motions. These are quite time intensive to prepare. The other party then gets a certain time frame to respond (usually twenty days). The moving party may also be given the opportunity to reply to the response (usually five days). Then the Court has to consider the arguments. It is not unusual for a Court to take a month to render a decision on very important motions. Like the attorneys and the experts, this is not the only case the Court is working on.

Counterclaim. This is not one suit, it is two lawsuits. Apple is suing Psystar, and Psystar is counter-suing Apple. Unless Apple’s Motion to Dismiss is granted, which is highly unlikely in my opinion, these two cases are being litigated simultaneously. While obviously the cases are inseparably related, there are claims and defenses unique to each one.

Hopefully, with just these few examples, which could be multiplied five-fold, the reader can see that a one-year scheduling request is not dragging the case out, but is simply, like most everything else that has been sensationalized in this case, normal. Once again, I implore the Apple web, step back and wait until it is reasonably certain that there is a proper understanding of the process before making extravagant statements.

I have some sound advice to the Apple web. Please do not write on legal issues if you know absolutely nothing about legal issues. For instance, MacNN and AppleInsider claimed that the recent filings, such as the proposed Case Management Scheduling Report, indicate that ADR is likely to be unsuccessful. AppleInsider went so far as to state:

Last month, it was reported that Apple and Psystar had agreed to pursue a mediated settlement to their legal dispute, a move which now seemingly been aborted.

This is, bluntly, false. Folks, please, this is very basic legal procedure. The Federal Rules of Civil Procedure are available online. I specifically direct the reader to Rules 16 and 26. The filing of a Case Management Scheduling Report is required by the Rules. Absolutely nothing should be read into this except the fact that the respective attorneys are properly following the Rules. That’s it.

corrected one grammar mistake since initial posting

Justia has the complete docket and copies of the pleadings filed as of October 30, 2008 freely available. On October 30, 2008, Apple filed a Case Management Statement and Proposed Case Management Order. I hope I can preemptively stop the myths and misinformation that might be spread over the significance of this filing.

1. There is no significance that this was filed by Apple. The Plaintiff has the responsibility to file this document which is mandatory in Federal Court cases.

2. The purpose of this filing is to let the Court know of certain terms and conditions that have been agreed to by the parties and to suggest certain critical dates. The Court is not bound to accept any of these terms or dates but will take them into consideration in issuing its Case Management Order.

3. The parties have requested a November 2009 trial date and anticipate the trial to last ten days.

Other points of interest include the following:

• The parties have agreed that the standard ten allowed depositions can be increased to fifteen, not including expert depositions.
• Fact discovery cut-off is requested for June 2009. Discovery responses are not filed with the Court, so we should not expect to find out tantalizing bits of information via that route.
• Expert discovery cut-off is requested for August 2009.
• The final date for hearing dispositive motions is requested for September 2009.

Out of all of these dates, I am most interested in the dispositive motion cut-off date. For those who are not familiar with this term, a dispositive motion is one which will adjudicate the case in part or in full prior to trial. A classic example that is filed in nearly every case by both sides are Motions for Summary Judgment. A Motion for Summary Judgment argues that there are certain issues of fact about which there is no dispute and thus the case should be decided in part or in full strictly upon issues of law by the Judge. Cases are very rarely adjudicated through Final Summary Judgment on all issues for the reason I have stated before: Courts hate to remove cases from the hands of the jury and will give every benefit of the doubt to the non-moving party. Partial Summary Judgment Orders, however, are much more common, and I would be surprised if that were not the case in this suit.

Note: I am aware that not all filings are pleadings, but it is common, even if incorrect, for them to be referred to in that manner.