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Second Bite at the Apple in AT & T Aftermarket Case?

On December 14, 2015 Judge Yvonne Gonzalez Rogers heard oral argument on a motion to dismiss filed by Apple in an antitrust action brought against the company in connection with its 2007 deal to sell iPhones exclusively to AT&T Mobility.  The next day, Judge Rogers denied Apple’s motion.  The lawsuit, one of several arising from the Apple-AT&T agreement, raises interesting questions about how to define a relevant product market using an “aftermarket” theory.  Ward v. Apple, Inc. was first filed in the Northern District of California in 2012.  The plaintiffs sought to represent a putative class of consumers who bought iPhones while the exclusivity agreement between Apple and AT&T was in effect.  This exclusivity agreement made AT&T the only authorized provider of voice and data services for the iPhone, and was enforced through the installation of a “software lock” that made it impossible for consumers to use their iPhones on a different network.  The agreement, entered into shortly before the iPhone’s debut in 2007, was set to last for five years, meaning the first purchasers of iPhones had unwittingly (according to the plaintiffs) agreed to use only AT&T’s voice and data services for the next five years if they wished to use their iPhones.  Crucially, Apple and AT&T shared the profits from the services contracts, a novel arrangement between a services provider and a phone manufacturer.  Plaintiffs allege that this agreement allowed Apple and AT&T to dominate the “iPhone Voice and Data Services Aftermarket” and charge supracompetitive prices in that market.

On September 15, 2015 Apple moved to dismiss plaintiffs’ complaint for failing to state a claim as a matter of law.  Apple argued that the plaintiffs could not allege that Apple exploited an “aftermarket” for iPhone voice and data services because Apple and AT&T were upfront about their exclusivity agreement.  Unlike the aftermarket theory the Supreme Court blessed in Kodak, Apple claimed that consumers were not deceitfully “locked in” to services; people who bought iPhones knew they would have to use AT&T’s service.  Also, the services “aftermarket” was not really an aftermarket at all because the product and the services were purchased simultaneously.  Moreover, Apple claimed that the plaintiffs failed to plead a relevant market because services for the iPhone do not constitute a product market unto itself.  AT&T always had to compete with Verizon, Sprint, and T-Mobile during the relevant time period, and AT&T was clearly not a monopolist of cell phone service generally.  As part of its motion to dismiss, Apple asked the court to take judicial notice of promotional material and news stories which spoke of Apple and AT&T’s exclusive arrangement.

Judge Rogers denied Apple’s motion to dismiss on the ground that “defendant’s argument relies on an accompanying request for judicial notice of certain evidence that is not appropriate for consideration on a motion to dismiss for failure to state a claim.  As the motion is inextricably linked to the overbroad request for judicial notice, the motion is denied.”  However, the court left the door open for Apple to obtain a speedy resolution, allowing Apple to file, no later than February 2, 2016, a “narrow motion for summary judgment solely on the issue of whether the complaint alleges a relevant market.”  This ruling seems to imply that Apple will get a second bite at the apple as the court will entertain arguments about whether services for a single smartphone can be a cognizable product market.