OAKLAND, Calif. (CN) — A federal judge told attorneys for Apple on Tuesday that its definition of “aftermarket” doesn’t stack up in an antitrust class action over its iPhone exclusivity deal with AT&T.
“Let me just say right off the bat that I don’t think the legal authorities support the golden-bullet approach you’re taking,” U.S. District Judge Yvonne Gonzalez Rogers told Apple’s attorneys during a hearing on their motion for summary judgment.
But Gonzalez Rogers told the plaintiffs’ attorney she didn’t buy all their arguments either.
Lead plaintiffs Zack Ward and Thomas Buchar sued Apple in 2012, claiming it conspired with AT&T to monopolize an aftermarket for voice and data services for the iPhone, in violation of the Sherman Act.
They said the companies hammered out a five-year exclusivity deal shortly before the iPhone was introduced in 2007 that required iPhone purchasers to use AT&T for five years, without customers’ knowledge, even though they signed two-year service contracts with the mobile carrier.
Ward says the AT&T service constitutes an economic aftermarket: the market that exists after an underlying product is purchased.
Aftermarket doctrine arises from the Supreme Court’s 1992 ruling in Eastman Kodak Company v. Image Technical Services, in which the court held that competition in a primary market does not preclude antitrust liability in derivative aftermarkets.
Gonzalez Rogers in April 2016 deferred ruling on Apple’s February 2016 motion for summary judgment on whether the plaintiffs had alleged an aftermarket. She granted the plaintiffs’ request to conduct discovery before a ruling was issued.
On Tuesday, Apple attorney Dan Wall told Gonzalez Rogers that buying an iPhone with a two-year service contract from AT&T is a “simultaneous purchase of intertwined products,” which does not constitute an aftermarket, an argument Apple has maintained throughout the case. He said both plaintiffs had signed up for AT&T services when they bought their iPhones and had the phones activated in the store.
The aftermarket concept is based on an initial purchase that creates a “lock-in” effect, Wall said. That purchase limits the buyer to certain products, such as printer cartridges for a specific printer, which reduces their purchasing choices. Competitors fall out of the market, creating the potential for the seller to exploit the buyer in later transactions, or in the aftermarket.
However, Wall said, there must be two separate transactions to constitute an aftermarket – an initial lock-in transaction followed by exploitation in a subsequent transaction. If the two transactions are simultaneous, the purchaser knows at the outset what he or she is agreeing to, he said.
“That’s why simultaneous, intertwined transactions are so important,” Wall said. “They knew exactly what price each month’s service was going to cost under a service plan. They had pricing guarantees for two years. You can’t come into an aftermarket case and complain, when you’re told what the pricing is going to be and agreed to it at the time you bought the phone.”
Gonzalez Rogers was not persuaded, finding lack of legal precedent for Apple’s argument.
“I think an important factor is that there isn’t one case that says if you have a simultaneous, intertwining purchase there is no submarket,” the judge said.
Plaintiffs’ attorney Mark Rifkin said in opposing summary judgment that the evidence suggests a sufficient number of consumers did not know they would be bound to AT&T as their carrier when they bought their iPhones.
Rifkin said that when Apple and AT&T entered into the exclusivity deal, AT&T had one of the worst consumer satisfaction ratings of the four major carriers. But its leave rate after it entered into the deal fell from the highest of the four carriers to the lowest, because its customers couldn’t get out of their contracts.
“That is compelling evidence that a sufficient number of consumers didn’t know when they bought their iPhones that they would be stuck with AT&T,” Rifkin said.
Gonzalez Rogers didn’t buy that argument either.
“What evidence do you have, or is that the only evidence you have, that consumers didn’t have this information or couldn’t access this information?” she asked. “The record is replete on this particular point that it was highly knowable and in fact known.”
Wall said that whether some consumers didn’t know that they would be bound to AT&T is immaterial in an antitrust case. He closed by reiterating his confidence in Apple’s simultaneous, intertwined transactions argument, despite Gonzalez Rogers’ doubts.
“That one I will take to the Ninth Circuit,” he said.
Wall is with Latham & Watkins in San Francisco; Rifkin with Wolf Haldenstein Adler Freeman & Herz in New York City.