Nothing breeds lawsuits like success. And for Apple, the New Year is bringing a rash of them. Earlier this week, Apple disclosed in filings with the Securities and Exchange Commission that an iPod customer, Melanie Tucker, has filed a suit against the company, claiming that Apple violates antitrust laws by not allowing music bought on iTunes to be played on non-Apple music players.
Tucker is seeking class-action status and asking the U.S. District Court for Northern California to force Apple to make iTunes purchases compatible with devices other than the iPod and to pay damages to anyone who bought an iPod or iTunes track after April 28, 2003.
On New Year's Eve, another iPod buyer, Stacie Somers, filed a similar suit, also seeking class-action status. Somers is claiming that Apple illegally restrains competition by not making its music compatible with Microsoft's Windows Media Audio (WMA) format. Like Tucker, Somers alleges that by making iTunes music incompatible with non-iPod players, Apple violates antitrust laws.
Somers' suit contends that Apple could license WMA for 3 cents per iPod -- or a mere $800,000, a figure based on 2005 iPod sales.
Apple 'Refuses' To License WMA
Somers specifically claims that Apple's digital music preferences violate the Clayton Act, Cartwright Act, California's Unfair Competition Law, the Sherman Antitrust Act, and other antitrust laws.
The suit notes that most online music vendors, including AOL, Best Buy, MusicMatch, Napster, Yahoo, and Virgin Digital, sell music in the WMA format, but Apple "refuses" to do so and "refuses" to make its AAC files compatible with media players other than the iPod.
The suit even alleges that Apple intentionally cripples WMA-playback capabilities in the iPod. "Apple's crippleware operating system software prevents the iPod Shuffle from playing WMA files," according to the complaint.
"There is no appropriate or legitimate business justification" for Apple's actions, the suit contends.
Valid Business Judgment
The allegation that Apple is doing wrong by not supporting Microsoft's DRM might strike some observers as absurd. If Apple did support Microsoft DRM, some might argue, then Microsoft would have a monopoly of its own in the online music business.
By declining to give Microsoft such leverage, Apple arguably is exercising its valid business judgment as to how to conduct its affairs. Under the business judgment rule, courts are reluctant to interfere in a company's decision-making, in the absence of intent to restrict trade.
Indeed, Apple can argue that consumers have more of a choice because they can choose an iPod with Apple's AAC file format or another device with Microsoft's. In addition, the suits' allegations might be somewhat blunted by the fact that Apple now offers tracks from EMI in DRM-free versions.
Unlike other suits that complain about tying iPods to iTunes, "this is the first time Apple has been charged with trying to muscle Microsoft out of the market," Fortune's Philip Elmer-DeWitt wrote.