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iPhone Class Action Defense Cases–In re Apple & AT&TM: California Federal Court Denies Motions To Dismiss Antitrust Class Action And To Compel Individual Arbitration Of Class Action Claims

Class Action Complaint Adequately Alleged Antitrust and Consumer Protection Law Violations Arising out of Marketing and Sale of iPhones, and Class Action Waiver in AT&T Arbitration Agreement was Unconscionable thereby Requiring Denial of Motion to Dismiss Class Action Claims and Compel Arbitration of Individual Claims, California Federal Court Holds

Plaintiffs filed a class action against Apple and AT&T Mobility (ATTM) alleging violations of federal antitrust laws and other consumer protection statutes arising out of the sale of iPhones; the class action complaint alleged that “consumers were offered iPhones only if they signed a two-year service agreement with AT&T Mobility” and that “unknown to consumers, the companies had agreed to technologically restrict voice and data service in the aftermarket for continued voice and data services, i.e., after the initial two-year service period expired.” In re Apple & AT&TM Antitrust Litig., ___ F.R.D. ___ (N.D. Cal. October 1, 2008) [Slip Opn., at 1]. According to plaintiffs’ class action, ATTM entered into a written agreement with Apple to serve as the exclusive provider of wire and data services to iPhone customers for a period of five years, i.e., through 2012. Id., at 2. Under this agreement, until 2012 “iPhone purchasers who want voice and data services must sign a two-year service contract with ATTM.” Id. The Revised Amended Consolidated Class Action Complaint alleged inter alia violations of Section 2 of the Sherman Antitrust Act and breach of warranty under the Magnuson-Moss Warranty Act, id.; an itemized list of the 10 claims for relief may be found at page 5 of the opinion. ATTM’s defense attorneys filed a motion to dismiss the class action and compel arbitration pursuant to the Federal Arbitration Act (FAA), and Apple’s defense attorneys filed a motion to dismiss the class action complaint. Id., at 5-6. The district court denied the motions.

By way of background, the district court explained at page 1: “In the cellular telephone market, it has become a common practice for an equipment manufacturer and a voice and data supply company to join together to introduce a new cellular telephone to the market. Often, to obtain a particular model of telephone at a given price from a given manufacturer, purchasers must sign a contract with the joined service provider for voice and data services of a stated period of time. This case concerns such an arrangement between Apple, Inc. and AT&T Mobility upon the introduction to the market of the iPhone.” But according to the class action complaint, purchasers were not told that iPhone use would be restricted to the AT&T network even after the two-year service period expired. In re Apple, at 1. The class action further alleged (1) Apple and ATTM share revenue arising from iPhone use, (2) iPhone purchasers must use ATTM as their provider for 5 years “despite initially being required to agree to only a two-year contract,” (3) Apple agreed to enforce ATTM’s exclusivity agreement by “locking” iPhones, (4) Apple controlled all modifications to and software for iPhones, (5) ATTM charges an early termination fee even though it does not subsidize iPhone purchases, (6) Apple and ATTM agreed to take prevent people from unlocking iPhones, and (7) Apple agreed to delay developing a CDMA version of the iPhone. Id., at 3. Finally, the class action alleged that, after it was learned that people had successfully unlocked iPhones, Apple issued an “upgrade” of the iPhone’s operating software that was intended to disable iPhones that had been unlocked or on which users had downloaded software that had not been approved by Apple, and that Apple thereafter denied warranty claims on disabled or damaged iPhones on the ground that customers “had breached their warranty agreements by unlocking their phones or by downloading unapproved TPAs.” Id., at 4. The district court was presented with the question of whether these allegations sufficiently alleged claims for relief for violations of the Sherman Act and Magnuson-Moss Warranty Act. Id. The federal court held that class action allegations survived defendants’ motion to dismiss.

Preliminarily, the district court addressed ATTM’s motion to dismiss the class action claims against it and to compel the plaintiffs to arbitrate their individual Sherman Act, Magnuson-Moss Warranty Act, and consumer protection claims against the company. In re Apple, at 6. Plaintiffs did not dispute signing an arbitration agreement with ATTM, but they argued that the class action waiver rendered the arbitration clause unconscionable and therefore unenforceable under California, Washington, and New York law. Id. Based on its analysis of the laws of California, Washington and New York, the district court agreed that the class action waivers rendered the arbitration agreements unenforceable and so denied ATTM’s motion to dismiss the class action claims and compel arbitration on plaintiffs’ individual claims. See id., at 7-10. The federal court also rejected ATTM’s argument that state laws which invalidate the arbitration agreement are preempted by the FAA, id., at 11. “ATTM’s preemption argument is that invalidation of ATTM’s allegedly conscionable Arbitration Agreement here could only be because it is an arbitration agreement. ATTM contends that invalidation of the Agreement under these circumstances would violate the FAA’s mandate that such agreements only be invalidated on bases that generally exist “for the revocation of any contract.” Id. (citing 9 U.S.C. § 2).

The district court then turned to Apple’s motion to dismiss the class action complaint. We do not here discuss each of the 10 claims for relief; interested readers may find a link to the entire opinion below. With respect to the class action’s Sherman Act claims, plaintiffs alleged two markets were at issue: “(1) an aftermarket in iPhone voice and data services and (2) an aftermarket in applications for the iPhone.” In re Apple, at 12. Apple argued that “there is no relevant aftermarket for iPhone voice and data services,” id., at 14; the district court rejected this argument, see id., at 14-15. Apple also argued that “there is no relevant aftermarket for iPhone applications,” id., at 16; but the district court rejected this argument, as well, see id. Apple argued further that the class action complaint contains “no legally cognizable claim of market power in the alleged voice and data services aftermarket,” id., at 17, and “no legally cognizable claim of market power or monopolization in the alleged iPhone applications aftermarket,” id., at 18. The district court easily rejected each of these claims, too. See id., at 17-19.

However, with respect to the class action’s unfair business practice claims, the district court granted in part Apple’s motion to dismiss. Specifically, defense attorneys argued that “Plaintiffs lack standing to bring consumer protection claims in the forty states where no named Plaintiff resides.” In re Apple, at 23. The district court agreed, and limited the scope of the class action’s unfair and deceptive practices act claims to violations of California, New York and Washington. As so limited, the district court granted Apple’s motion to dismiss the consumer protection violation claims but with leave to amend facts consistent with the court’s order. See id., at 25-28.

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