By Marisa Kendall, From The Recorder

SAN FRANCISCO — Depending on who you ask, Apple Inc.’s 2006 iTunes update was either a “significant enhancement” that gave users “amazing new features,” or it was a ruse created solely to feed the company’s monopoly over the MP3 music industry.

That critical distinction lies at the center of a trial commencing this week in Oakland federal court. It’s a battle 10 years in the making, which pits Apple’s legal team of Jones Day and Boies, Schiller & Flexner against a class of iPod buyers represented by Robbins Geller Rudman & Dowd. Barring a last-minute settlement, which neither side seems to think is likely, opening arguments begin Tuesday before U.S. District Judge Yvonne Gonzalez Rogers.

Apple’s 2006 upgrade made it so new ­iPods would only play music purchased from the company’s iTunes music store. Plaintiffs lawyers say that change helped Apple maintain nearly complete control over the MP3 market, which drove up prices for iPod buyers. Now jurors must decide whether seizing market share was the upgrade’s main purpose or whether it also provided a real benefit to consumers—and is therefore protected from antitrust claims.

It’s a delicate question, and one Gonzalez Rogers has said left her “treading in uncertain waters.” On the one hand she’s tasked with holding Apple accountable for any illegal anticompetitive behavior, while on the other she must be cautious not to infringe upon the company’s right to develop new products.

Courts are still figuring out how to toe the line, said Jonathan Jacobson, an antitrust partner in Wilson Sonsini Goodrich & Rosati’s New York office.

“The entire issue is a struggle,” he said, and courts must find a balance between “bending over backwards to encourage innovation, but striking down tactics that use faux innovation purely as a pretext for eliminating rivals.”

Plaintiffs lawyers have estimated damages at $350 million, which would be tripled to $1 billion if they win at trial.

But their case has significant hurdles. Monopoly suits tend to be more difficult than the price-fixing class actions that dominate the antitrust sector, Jacobson said. If plaintiffs can prove a price-fixing conspiracy, it’s assumed the cartel hurt the market. Monopolies aren’t inherently illegal, however, so plaintiffs in the iTunes case must prove Apple’s behavior injured consumers.

“Plaintiffs will have to convince the jury if Apple had not made these software changes, a significant portion of consumers would have utilized a cheaper alternative,” said Robert Bunzel of Bartko, Zankel, Bunzel & Miller in San Francisco. “And that is ultimately a lot of what-ifs that have to be overcome.”

Plaintiffs have enlisted economist Roger Noll, a Stanford University professor who played a key role in O’Bannon v. NCAA, the summer’s highly publicized trial that granted college athletes the right to profit from television and video game contracts. Plaintiffs also will call several Apple executives, and plan to play a video deposition of Apple’s late co-founder and former CEO Steve Jobs. The trial is expected to last two weeks.

Bonny Sweeney of Robbins Geller, who has spent a decade working on the case, said she long figured it would need to be tried.

“Apple has always fought us very hard at every step of the litigation,” she said.

FINETUNING ITUNES

Apple launched the iTunes music store in 2003. By 2004, rival RealNetworks Inc. had found a way around Apple’s antipiracy encryptions, allowing iPod users to play RealNetworks’ music. Apple’s 2006 update shut down that interoperability.

Apple is adamant the update also was an improvement. iTunes 7 made more than 75 movies available for download, according to a 2006 company release, and offered “stunning new features” such as a tool that let users browse their digital libraries more easily.

The update also prevented the technical problems that had plagued iPod users who tried to play unauthorized RealNetworks songs, Apple senior director Augustin Farrugia said in a deposition.

The Apple iPod iTunes Antitrust Litigation, 05-0037, predates the 2006 software update but has morphed considerably over the years. U.S. District Judge James Ware, who presided over the case before retiring in 2012, dismissed part of the suit based on an earlier enhancement but allowed claims against the 2006 update to proceed, saying there was conflicting evidence as to whether the new software was an improvement.

For plaintiffs lawyers, the case now hinges on convincing the jury that the update had no consumer benefits.

“There’s evidence that we believe shows that the purported fix didn’t match the purported problem,” Sweeney said. “So we think Apple’s justifications are pretextual.”

In October, the court made public a handful of internal Apple emails that provide a glimpse at how company executives responded to competition in the MP3 music industry.

In an early 2004 email, Apple’s late CEO touted the company’s position as the “largest, most successful standard” in the MP3 market. “Let’s leverage this position now!!!!” Jobs wrote.

Apple executives sounded alarmed later that year when RealNetworks circumvented the iTunes protections, calling the company “aggressive” in internal emails and accusing it of “hacking” and “hijacking” Apple software, as they kept an eye on their competitor’s rising sales.

And around that time, iTunes Vice President Eduardo (Eddy) Cue told Jobs and other executives that record labels were worried Apple was growing too big, and were pushing the company to license its encryption model to RealNetworks. That seems to conflict with assertions from Apple lawyers that the update was needed to satisfy the labels’ concerns about piracy.

HITTING THE RIGHT NOTE

Established case law says redesigning a product in a way that benefits consumers is not an antitrust violation, even if the redesign hurts competitors.

The U.S. Court of Appeals for the Ninth Circuit added a nuance to that standard in 2010, ruling in Allied Orthopedic Appliances v. Tyco Healthcare Group that the court cannot determine an antitrust violation by weighing the benefits of a product redesign against the injuries it caused competitors. It must be a “yes or no” standard—was the redesign an improvement?

That precedent seemed to cause a headache for Gonzalez Rogers during a pretrial hearing last month, as she grappled with how to allow plaintiffs to present evidence that the update was not an improvement, but exclude evidence that would lead the jury to weigh the update’s merits against its effect on competitors. In the end, she said she’d instruct the jury to focus on whether Apple’s update provided a genuine product improvement.

“The task we’re asking the jury to engage in is tough for lawyers, much less for nonlawyers,” Gonzalez Rogers said, “because they have to slice that evidence so thinly to use it appropriately.”

For more on this story go to: http://www.therecorder.com/id=1202677579688/Lawyers-Prep-for-Battle-in-iPod-Antitrust-Class-Action#ixzz3KeTzX0tN