Antitrust Class Claims Apple|Stacked Deck on iPhone Apps


     SAN FRANCISCO (CN) – Apple bills iPhone purchasers for voice and data services even after they cancel them, and stifles competition and increases prices for software apps by charging developers an annual “application” fee, consumers say in a federal antitrust class action.



     Lead plaintiff Eric Terrell accuses Apple of “unlawful anticompetitive activities,” and claims that consumers did not contractually consent to Apple and AT&T’s 5-year exclusivity agreement.
     AT&T Mobility LLC, referred to in the complaint as ATTM, is not a party to the lawsuit.
     “Apple launched its iPhone on or about June 29, 2007,” the complaint states. “Prior to launch, Apple entered into a secret five-year contract with ATTM that established ATTM as the exclusive provider of cell phone voice and data services for iPhone customers through some time in 2012 (‘Exclusivity Agreement’). As part of the contract, Apple shared in ATTM’s revenues and profits with respect to the first generation of iPhones launched. The plaintiffs and other class members who purchased iPhones did not agree to use ATTM for five years. Apple’s undisclosed five-year exclusivity agreement with ATTM, however, effectively locked iPhone users into using ATTM for five years, contrary to those users’ knowledge, wishes and expectations.
     “To enforce ATTM’s exclusivity, Apple, among other things, programmed and installed software locks on each iPhone it sold that prevented the purchaser from switching to another carrier that competed with ATTM in the cell phone voice and data services industry. Under an exemption to the Digital Millennium Copyright Act of 1998, 17 U.S.C. § 1201, el seq. (2008) (the ‘DMCA’), cell phone consumers have an absolute legal right to modify their phones to use the network carrier of choice. Apple prevented iPhone customers from exercising their legal right by locking the iPhones and refusing to give customers the software codes necessary to unlock them.”
     The complaint adds: “Prior to plaintiffs’ purchases of their iPhones and voice and data service, Apple had not disclosed-much less obtained plaintiffs’ contractual consent to-the fact that (a) plaintiffs’ iPhones were locked to only work with ATTM SIM cards, or (b) that the unlock codes would be provided to them on request.
     “On information and belief, ATTM provides unlock codes for cell phones other than the iPhone if requested by a customer. …
     “In the United States, as a general rule, only GSM [Global System for Mobile Communications] phones use SIM cards. The removable SIM card allows phones to be instantly activated, interchanged, swapped out and upgraded, all without carrier intervention. The SIM card itself is tied to the network rather than the actual phone. Phones that are SIM card-enabled generally can be used with any GSM carrier.”
     Terrell says mobile carriers customarily allow customers to unlock SIM cards to avoid roaming fees during international travel.
     He says Apple is an exception, enforcing its exclusivity agreement with AT&T by installing locks on SIM cards and refusing to disclose unlock codes so customers can change their cards or switch carriers.
     Terrell says Apple also uses program locks to prevent customers from using third-party Apps, unless the developers of those Apps paid a fee through iTunes, or handed over 30 percent of their revenue.
     “In March 2008, Apple released a ‘software development kit’ (‘SDK’) for the stated purpose of enabling independent software developers to design applications for use on the iPhone,” the complaint states. “For an annual fee of $99, the SDK allows developers to submit applications to be distributed through Apple’s application market, the ‘iTunes App Store.’ If the application is not made available for free in the App Store, Apple collects 30 percent of the sale price for each application and the developer receiving the remaining 70 percent. On information and belief, throughout the class period, Apple refused to ‘approve’ any application by a developer who did not pay the annual fee, or agree to Apple’s apportionment scheme. Apple also unlawfully discouraged iPhone customers from downloading competing applications software (hereafter ‘Third Part Apps’) by telling customers it would void and refuse to honor the iPhone warranty of any customer who downloaded third party apps.
     “iPhone consumers were not provided a means to download third party apps that were not approved by Apple for sale on the App Store.”
     Savvy users cracked locking codes using software available on the Internet, Terrell says. Apple claimed its locks helped prevent fraud.
     The Librarian of Congress announced the first 3-year exemption to the DMCA in late 2006, allowing users to circumvent locking codes, Terrell says. He says that exemption was extended in 2009, and put into effect in July 2010.
     “Because Apple was unable to enforce its SIM card program locks through legal means, it engaged in a scheme to enforce them unlawfully as to the iPhone,” the complaint states.
     Terrell says that in early 2007 Apple announced its exclusive agreement with AT&T, roughly 1 month after the Librarian of Congress made its first ruling.
     “Through these actions, Apple has unlawfully stifled competition, reduced output and consumer choice, and artificially increased prices in the aftermarkets for iPhone voice and data services for iPhone software applications,” the complaint states.
     Terrell says that even though AT&T and Apple no longer share revenues, they still enforce the terms of the agreement.
     Terrell, an Oakland attorney, seeks damages and equitable relief for unlawful monopolization of the applications aftermarket, and conspiracy to monopolize the iPhone voice and data services aftermarket.
     Terrell’s law firm did not respond to a request for comment.
     Apple is the only defendant. It did not respond to a request for an interview.

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