Apple defeats $1 billion iPod antitrust suit in three hours

Apple Inc. quickly dispensed with a $1 billion lawsuit by iPod users claiming software updates for the device were meant to block competitors, as a jury ruled for the company after only three hours of deliberations.

Changes to the player’s iTunes software were genuine improvements, jurors in Oakland, California said Tuesday, rather than attempts to prevent the use of music sold by rival companies from working on the iPod. The verdict in the 2005 case came after a two-week trial in federal court that featured Apple co-founder Steve Jobs’s e-mails and videotaped testimony he gave six months before he died of cancer, in 2011.

While iPod sales have fallen dramatically after the 2007 debut of the iPhone, iTunes software and services accounted for one-tenth of the company’s revenue in the 2014 fiscal year.

In the trial, Apple argued that the updates, which enhanced security and guarded against hacking, were in the works two years before competitor RealNetworks Inc. started selling digital music. Claims that Apple “blew up” the iPods of customers who bought music from RealNetworks, to force them to purchase another iPod, were concocted by consumer lawyers who don’t understand iTunes technology, Apple lawyers said.

The opposition failed to show that a single iPod user was cheated out of their downloaded music or suffered any harm as a result of the software changes, Apple attorney Bill Isaacson told the jury.

“We created iPod and iTunes to give our customers the world’s best way to listen to music,” Cupertino, California- based Apple said after the verdict. “Every time we’ve updated those products—and every Apple product over the years—we’ve done it to make the user experience even better.”

Antitrust laws

Juror Jerry Kaake said no evidence was produced showing that the software upgrades were intended to thwart RealNetworks, while Apple put on ample proof it was trying to enhance security, including a report from an outside security firm the iPod maker hired and the testimony of a company security executive.

“It could very well have been that Apple was specifically aiming to stop RealNetworks, but we didn’t see anything that said that,” Kaake, 65, a retired software engineer and one of eight jurors, said in a phone interview. “That smoking gun would have been nice.”

Based on the verdict, U.S. District Judge Yvonne Gonzalez Rogers ruled that that the plaintiffs failed to prove that Apple violated federal antitrust laws.

Patrick Coughlin, one of the consumer attorneys, vowed an appeal. He said the case became an uphill battle when the judge ruled that the jury could consider all the product improvements that Apple made to iTunes 7.0, not just the security enhancements, when deciding the case.

The consumer attorneys contended the security enhancements were no more than an underhanded way for Apple to ditch competitors from the dominant iPod music player.

Coughlin said that in a case involving Microsoft Corp., a judge had narrowed the focus of which product enhancements to consider. Microsoft was found to have violated antitrust law by bundling its Internet Explorer Web browser with the Windows 95 operating system without consideration of other product improvements, Coughlin said.

In the Apple case, the judge refused to narrow the focus of product improvements.

“We asked the court to do that and we lost that,” Coughlin said. “And that will be in our appeal.”

Coughlin’s law firm represented as many as 8 million iPod customers and 500 resellers in the class-action case. The consumer attorneys told the jury that Jobs and other top company executives who developed and marketed iTunes and the iPod took steps to block software created by a competitor that made songs from its service compatible with the device. The case was over versions of the iPod Classic, iPod Nano and iPod Touch purchased from 2006 to 2009.

The lawsuit was first filed in 2005, when Apple sold more than 22 million iPods. The company sold 14 million iPods in the fiscal year ended in September.

Apple’s revenue from iTunes, software and services rose 13 percent in the 2014 fiscal year, to $18 billion, according to a company regulatory filing. Apple’s total net sales for the year were $182.8 billion.

E-books case

The consumer lawyers’ failure to convince jurors that Jobs spearheaded anticompetitive conduct contrasts with a case the U.S. government won last year over allegations that Apple rigged the price of electronic books. In that antitrust lawsuit, a Manhattan judge concluded that the conspiracy to target e-book leader Amazon.com Inc. came from Jobs himself.

Jobs is also key to an antitrust lawsuit alleging that Apple, Google Inc. and other Silicon Valley giants conspired to not recruit each other’s workers. That case, in which the judge already has said that “Jobs was a, if not the, central figure in the alleged conspiracy,” is scheduled to go to trial in April in federal court in San Jose, California.

The digital music trial hit a snag when the consumer leading the lawsuit had to be disqualified as a representative for potential victims of Apple’s conduct because she didn’t purchase any of the iPods covered by the case. She was replaced by a different iPod owner.

Jurors heard testimony by experts who said the Apple software upgrades discouraged customers from switching to rival players, and made consumers less “price sensitive” to iPods. Apple could charge more for the devices as a result, they said.

iTunes 7.0

The introduction of iTunes 7.0, which blocked downloads by RealNetworks, raised the prices of consumer iPods by 7.45 percent, or $16.32, costing consumers $195 million, plaintiffs’ witnesses said at the trial. Apple overcharged resellers for iPods by 2.38 percent for a total of $149 million, they said. If the jury had awarded damages, they could have been tripled under federal antitrust law.

Apple contended that the iTunes upgrades gave users a more robust and stable product at a time when Apple was competing with illegal downloading schemes, trying to appease music studios that insisted their products be protected from piracy and facing hackers trying to break into iTunes software.

About 30 minutes of videotape clips recorded in April 2011 of Jobs answering questions about the lawsuit was shown at the end of the first week of trial. A thin, pale and graying Jobs said he didn’t recall drafting a press release in 2004 likening RealNetworks to a hacker after it released its Harmony software.

He flashed his famous grin when talking about efforts of people trying to hack iTunes.

“People have tried to hack iTunes for a long time,” he said.

In e-mails shown to the jury Jobs urged his top executives to take advantage of Apple’s dominance in digital music.

“In this balkanized world, the safest bet is the largest, most successful standard, and today we’re it,” Jobs wrote in an e-mail to another Apple executive in January 2004. The standard he was referring to was Apple’s digital music codex. “Let’s leverage this position now!!!!” he said.