Apple Computer Inc. (“Apple”)’s use of technology that makes the company’s popular iPod and iTunes music store incompatible with other digital music players and online music stores might constitute illegal tying, a U.S. District Court judge has ruled in denying Apple’s motion to dismiss a host of antitrust claims against it.

Apple, like most legitimate online music merchants, formats music files sold via its iTunes online music store so that consumers cannot make unauthorized copies. The formatting technology is generally called Digital Rights Management (or “DRM”) technology, and Apple calls its format “FairPlay.” Apple’s FairPlay format also prevents purchasers from playing the songs on digital music players other than the iPod. Apple also rigs its iPods so that they cannot play music files using formats other than FairPlay, effectively making it impossible to play on an iPod music (and video) purchased from other online stores, according a complaint filed in U.S. District Court in San Jose last year. Tucker v. Apple Computer Inc., No. C-06-04457-JW (N.D. Cal. Filed July 21, 2006).

Plaintiff Melanie Tucker seeks to represent classes of iPod and iTunes purchasers. She claims that the restrictions Apple imposes on its customers allow the company to charge supracompetitive prices and make it virtually impossible for iPod or iTunes users to switch to a different technology. The complaint alleges that the arrangements constitute illegal tying (she alleges that iTunes music is tied to the iPod, and vice-versa), unlawful maintenance or acquisition of monopoly power in the digital music player market, attempted monopolization of online music and video markets, and related state law claims.

Apple moved to dismiss, making two basic arguments. First, Apple points out that nowhere in Tucker’s complaint does she allege that Apple forced her to buy an iPod or music from the iTunes store. Thus, Apple argues, Tucker’s tying claim fails because Apple did not condition the sale of one product on the other. Since Tucker bought both the iPod and the iTunes songs voluntarily, Apple argues, her tying claim is missing the essential element of coercion. Indeed, Apple argues, many people buy iPods without buying iTunes music, and vice-versa.

Second, Apple argues that the only real alternative to developing its FairPlay DRM was to license Microsoft’s format. Nothing in the antitrust laws requires Apple to use another company’s technology rather than develop its own, Apple argues. “Apple has no antitrust duty to do business with Microsoft,” Apple asserts in its moving papers. Apple cites the U.S. Supreme Court’s decision in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) as authority that a competitor’s refusal to do business with a rival, when there has been no history of cooperation between the two, does not violate Sherman Act Section 2.

In a ruling issued Dec. 20, 2006, U.S. District Judge James Ware rejected both arguments. First, Ware recognized that a plaintiff alleging a per-se illegal tying arrangement must show “some modicum of involuntariness or coercion” forcing the buyer to purchase a tied product that the buyer didn’t want or might have preferred to purchase elsewhere. Order Denying Defendant’s Motion to Dismiss, p. 7. However, Ware found that “there is no requirement that individual purchaser plaintiffs must allege coercion at the individual level, rather than at the market level” to state a tying claim. Thus, Tucker alleged a satisfactory tying claim by asserting merely that Apple used its leverage to force her to buy something she would not in a competitive market. Id.

The tying claim is not defeated simply because some purchasers bought an iPod without buying iTunes music, or vice-versa, Ware found. The judge cited Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451 (1992) as an example of a case in which the high court found a viable tying claim despite facts showing that some consumers purchased the tying and tied products separately.

The Court also rejected Apple’s argument that the complaint essentially seeks to force it to license Microsoft’s technology. There are many other ways in which Apple could make the iPod and iTunes content compatible with other competing products, Ware said: Apple could modify its software to make iTunes music and video compatible with other portable music players; it could allow other companies to sell music and videos on the iTunes platform; it could license the FairPlay technology; or it could use a different technology altogether to ensure that iTunes files are not illegally copied. “The Court finds that Plaintiff’s allegations are not reducible to the single contention that Apple should license Microsoft’s [formatting technology]”. Id. at 11.

The Court also found no significance in the lack of cooperative history between Apple and other online sellers of digital content or makers of portable digital devices. Cases like Trinko and Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), only highlight the prior history between rivals to shed light on one party’s later refusal to deal – that is, a prior profitable relationship may help show that a company’s later refusal to deal is motivated by “anticompetitive malice.” Id. at 13. In the Apple case, the court found that Tucker had sufficiently alleged that Apple had an anticompetitive motive when it designed its products to be incompatible with competing products: Apple wanted to charge supracompetitive prices. “The inference is that Apple deliberately foregoes iPod sales to prospective customers who have purchased digital media files from other vendors and want a digital media player on which they can place these files. By so doing, Plaintiff alleges that Apple has been able to charge iPod purchasers a supracompetitive price and has deterred iPod purchasers from even considering doing business with its music and video competitors.” Id. at 14. Apple’s proposed business rationales for these decisions are questions of fact and not appropriate for resolution at the motion-to-dismiss stage, the court found. Id.