Category Archives: Antitrust

Ninth Circuit: Apple did not engage in copyright misuse by restricting OS X to Apple hardware

Apple Inc. v. Psystar Corp., — F.3d —, 2011 WL 4470623 (9th Cir. September 28, 2011) [PDF]

Back in 2008, Apple sued Psystar for copyright infringement arising from Psystar’s manufacture and distribution of computers preloaded with copies of Mac OS X. Psystar lost at the trial court level, with the judge rejecting its argument that Apple engaged in anti-competitive, “copyright misuse” by requiring in its OS X software license agreement that the operating system be used only on Apple hardware. Psystar sought review of this ruling. On appeal, the Ninth Circuit affirmed.

Copyright misuse is a defense (not an independent cause of action) that one sued for infringement can raise. Courts will find that a plaintiff has engaged in copyright misuse if the enforcement of the plaintiff’s copyright will restrain the development of competing products. In this case, Psystar claimed that Apple’s enforcement of its software license restrained the development of competing hardware.

The court rejected that argument because Apple’s enforcement of its software license agreement, requiring that the software be used only on Apple hardware, did not restrict Psystar from developing its own software. The court found that:

Apple’s [software license agreement] does not restrict competitor’s [sic.] to develop their own software, nor does it preclude customers from using non-Apple components with Apple computers. Instead, Apple’s [software license agreement] merely restricts the use of Apple’s own software to its own hardware. . . . Psystar produces its own computer hardware and it is free to develop its own computer software.

This case solidifies Apple’s approach to enforcing a controlled, closed ecosystem for the distribution of software used for Macs and iDevices. Now that a federal court has found that Apple is not playing unfairly by keeping its users from loading Apple software onto non-Apple hardware, the company can likewise maintain the technological controls that ensure only approved applications are used in connection with the operating systems. Marketplaces for third-party hardware running Apple software would greatly lower the entry barrier for hackers and enthusiasts to play outside of the rules. But this decision from the Ninth Circuit keeps those rules firmly in place.

Open source withstands antitrust scrutiny

The U.S. Court of Appeals for the Seventh Circuit has issued an opinion in which Judge Easterbrook declares, “[t]he GPL and open-source have nothing to fear from the antitrust laws.” The case is called Wallace v. IBM., No. 06-2454. [Download a copy of the opinion.] Internet Cases covered the lower court’s decision from last December here.

Plaintiff Wallace filed an antitrust suit against IBM, Red Hat and Novell, arguing that those companies had conspired to eliminate competition in the operating system market by making Linux available at an “unbeatable” price (free) under the General Public License (“GPL”). The U.S. District Court for the Southern District of Indiana dismissed the case, finding the plaintiff had suffered no antitrust injury. The Seventh Circuit affirmed.

“Although antitrust law serves the interests of consumers rather than producers, the Supreme Court has permitted producers to initiate predatory-pricing litigation,” Judge Easterbrook wrote in the November 9 decision. “This does not assist Wallace, however, because his legal theory is faulty substantively.”

Perhaps most significantly, Wallace had not contended that software available under the GPL would lead to mononpoly prices in the future. The court observed the anomalous thinking behind any conclusion that it would, “when the GPL keeps price low forever and precludes the reduction of output that is essential to monopoly.”

And the opinion provided a number of modern day examples to dispel any thoughts of a GPL monopoly, by observing the market domination of proprietary operating systems like Windows, OS X and Solaris even when Linux is available for free. It also obseverd, quite astutely, that Photoshop is preferred in the market to Gimp, and Lexis and Westlaw are preferred to free legal sources such as the court’s own website.

Calling the defendants “conspirators” in violation of the Sherman Act didn’t advance the plaintiff’s case either. Instead of being a restraint on trade, the court held that the GPL serves to foster creativity, by enabling the free distribution and building of new derivative works.

Wallace v. IBM, No. 06-2454 (7th Cir., November 9, 2006).

Suit over drop in search engine placement dismissed

(This case came out a couple of weeks ago and has been written about quite a bit, but here’s my take on it anyway.)

Plaintiff Kinderstart.com LLC, the operator of an online directory and search engine for information about the care of young children, filed suit against Google after a “cataclysmic fall” in the number of visitors that the Kinderstart site received. It claimed that Google wrongfully blocked search results for Kinderstart, and intentionally lowered the site’s number in Google’s PageRank system. In an unpublished and noncitable opinion, the United States District Court for the Northern District of California dismissed Kinderstart’s complaint, and granted leave to amend.

Kinderstart alleged a number of causes of action, including violation of the First Amendment right to free speech and unlawful monopolistic behavior in violation of the Sherman Act. The court held that Kinderstart failed to allege facts sufficient to entitle it to relief.

In dismissing the First Amendment claim, the court held that Google is not a state actor. Although the Ninth Circuit employs a number of tests to determine whether state action exists, Google did not meet any of those tests. Kinderstart did not show that Google performed a public function, nor did it show that Google was involved in any joint action with the government. The complaint did not sufficiently allege that Google was in any way compelled or coerced by the government, or that there was any nexus or entwinement between Google’s actions and the government’s actions. No facts in the complaint pointed to any “symbiotic relationship” – a necessary element in a special Ninth Circuit test for state action – between Google’s conduct and the financial success of any governmental entity.

The court also rejected Kinderstart’s First Amendment argument that by making the search engine “freely available to anyone with an Internet connection,” Google had created a private space dedicated to public use in which the alleged restrictions violated free speech. On this point, Kinderstart’s own allegations of Google’s vast monetization – to the tune of $3.1 billion in 2005 – contradicted assertions that the sole function of Google is to promote open and free communication.

Another of Kinderstart’s claims was that by blocking links to the Kinderstart site in its search results, Google had engaged in anticompetitive behavior that is prohibited under Section 2 of the Sherman Act (15 U.S.C. §2). To succeed on this claim, Kinderstart would have had to allege a specific intent on Google’s part to destroy competition, conduct directed toward accomplishing that purpose, a dangerous possibility of succeeding at destroying competition, and resulting antitrust injury.

The court held that Kinderstart failed to allege enough facts to support this claim. There was no sufficient allegation that Google had denied access to an essential facility or refused to deal. Kinderstart did not explain how Google’s alleged conduct demonstrated the required intent for a Sherman Act violation. Moreover, noting that there generally is “no duty to aid competitors,” the court concluded that Google’s alleged removal of a competing search engine from its results was merely legitimate competitive action.

Kinderstart.com, LLC v. Google, Inc., No. 06-2057, (N.D. Cal., July 17, 2006) (Not selected for official publication).

Court dismisses antitrust suit over GPL

Plaintiff failed to allege antitrust injury resulting from Free Software Foundation’s use of GPL for Linux.

Plaintiff Wallace filed an antitrust lawsuit against the Free Software Foundation (“FSF”), claiming that FSF was conspiring with the likes of IBM, Red Hat, and Novell to fix the price of the intellectual property in the Linux operating system. Specifically, Wallace alleged that making the software available for free under the General Public License (“GPL”) has an anticompetitive effect, in that developers may be unwilling to create better products, knowing that they will not be rewarded financially for their efforts.

FSF moved to dismiss the complaint, and the court granted the motion. It held that although the allegations set forth a violation of Section 1 of the Sherman Act, the complaint could not survive because Wallace had not sufficiently alleged that he suffered an antitrust injury.

Wallace’s only allegations in this regard were, essentially, that he was unwilling to enter a market where he would have to compete with the free software distributed under the GPL. He had not alleged any injury to himself as a consumer, nor had he alleged injury to the software market as a whole. Because the complaint lacked this essential element of antitrust injury, the court dismissed the action.

Wallace v. Free Software Foundation, Inc., No. 05-618, 2005 WL 3239208 (S.D. Ind., November 28, 2005) (Not selected for official publication).

[Text of opinion]

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Court declines expanding reach of antitrust laws to cover DSL and telephone services

The U.S. District Court for the Southern District of New York has granted defendant Verizon’s motion to dismiss in the case of Greco v. Verizon Commumications, Inc., holding that the effect of the antitrust laws should not be expanded to prohibit Verizon from refusing to provide DSL service to customers of competing local telephone providers.

Upset that Verizon offered its DSL service only to customers who also purchased its local phone service, Plaintiff Greco filed a class action antitrust lawsuit. Greco claimed, among other things, that this conduct of Verizon violated §2 of the Sherman Act by monopolizing local phone service. Verizon moved to dismiss, and the court granted the motion.

At issue was whether the court should extend the reach of the antitrust laws to force a “telecommunications monopolist” such as Verizon to deal with certain customers. The analysis relied heavily on a previous case involving Verizon, the 2004 Supreme Court decision of Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, (540 U.S. 398, 406 (2004) (“Trinko” ).

The Trinko case had dealt with the question of whether Verizon had violated §2 of the Sherman Act where it had allegedly discouraged customers from dealing with its rivals through various means. In that case, the court declined to apply §2, “because of the uncertain virtue of forced sharing and the difficulty of identifying and remedying anticompetitive conduct by a single firm.” The Trinko court considered four factors, which the court also considered in the present case: (1) the costs versus benefits of antitrust intervention; for example, whether judicial intervention would risk distorting investment, (2) whether the requested relief would require a court to assume a role for which it is “ill-suited,” i.e., to thrust it into the role of a “central planner,” (3) whether remediation would require “continuing supervision of a highly detailed decree,” and (4) whether there exists a “regulatory structure designed to deter and remedy anticompetitive harm.”

In declining to expand the reach of the antitrust laws in the present case, the court focused on how daunting it would be to figure the amount of damages to which the plaintiff would be entitled. For example, the court would have to consider such details as what amounts had been spent on running wires to a customer’s home (including securing rights of way, digging trenches or placing poles, and running wire underground or along poles), and how such costs should bee allocated among unbundled services. The court noted that such allocation of costs is a highly complex and hotly contested issue, and that it was thus ill-suited to redress the alleged injuries.

Greco v. Verizon Comm., Inc. (2005 WL 659200 (S.D.N.Y., March 22, 2005)