Clickwrap License Thwarts Hackintosh Bid to Force its Way into Apple

By Edward Dailey.

February 2009 IP Update

Amicro-economy thrives among thousands of hackers seeking to tinker with, unlock, open, modify, or exploit Apple, Inc.’s trove of Macs, iPods, iPhones, operating systems, applications software, and the iTunes store. Some of this is innovative, some is a ripoff, some is “just business.”

Apple clearly enjoys the attention because it builds the Apple mystique. It also builds business. In 2007, for example, Apple held off thousands of hackers who had developed applications for the iPhone. Apple allowed demand to build to a fever pitch and then opened applications development in 2008. The result has been a windfall for Apple.

Just as clearly, however, Apple has no intention of suffering hackers. Enter Psystar Corporation, a shadowy PC-clone maker which sells a $555 iMac clone by installing Apple’s Leopard operating system on a generic PC box. Even though Psystar’s sales seem to be minuscule, Apple is determined to quash its upstart competitor. In July 2008, Apple filed a complaint against Psystar alleging copyright infringement, Digital Millennium Copyright Act violations, trademark violations, and breach of Apple’s clickwrap agreement.

Apple’s clickwrap end-user license agreement for use of the copyrighted Leopard operating system restricts its use to Apple computers. Apple codes Leopard with digital restrictions that disable the OS when the OS recognizes a clone, a status colorfully referred to as “kernel panic.” It seems, however, that Psystar circumvented many of the restrictions and modified Leopard to run on Psystar’s “OpenComputer.” Apple’s lawsuit is aimed at stopping further sales or use of Leopard on the OpenComputer.

In response to Apple’s complaint, Psystar launched a broad-based antitrustcounterclaim. First, Psystar claimed that Apple has abused its monopoly in the Mac OS market by engaging in “exclusive dealing” which bars competitors from using the Leopard operating system. Psystar argued also that Apple has improperly tied licensed use of its Leopard OS to sales of Apple computers.

Psystar grounded its counterclaim in the oft-cited but infrequently applied Kodak copier antitrust decision, Eastman Kodak Co. v Image Technical Services, 504 U.S. 451 (1992). Kodak, a minor player in the office copier machine market, had restricted repair and replacement parts for its machines to those supplied exclusively by Kodak. Even though Kodak had no significant power in the market for office copiers or that for copier repair, the Supreme Court nevertheless concluded that Kodak could be found to have exercised unwarranted market power in the derivative market for parts used in Kodak copiers.

Kodak is a problematic decision that appears to contradict the fundamental market-power tenet for antitrust claims. Generally, it has been limited to derivative market disputes which read on Kodak, that is, where customers are “locked in” to a derivative arrangement without prior notice or agreement. See Digital Equipment Corp. Uniq Digital Technologies, Inc., 73 F.3d 756, 762-63 (7th Cir. 1996). So, when Psystar raised Kodak, the federal trial court in San Francisco was not impressed.

Psystar first attempted to paint Apple as a monopolist under the Sherman Act, or as a player with sufficient market power to enforce a tying or exclusive dealing arrangement under the Clayton Act. Apple seized on Psystar’s argument, countering that there was no basis for the claim that a company with less than 10% of the operating system market is a monopolist or exercises market power.

Further, Apple argued that, as a matter of law, a company’s own products rarely qualify as a relevant market for antitrust analysis. By definition, a market is composed of products with reasonable interchangeability. Brown Shoe Co. v U.S., 370 U.S. 294,325 (1962). And that market, of course, is one that includes Microsoft’s Windows OS and Unix as products interchangeable with Apple’s OS. In the market so defined, Apple is anything but a monopolist.

In its order granting Apple’s motion to dismiss the antitrust counterclaims, the trial court agreed and found it was simply counterintuitive to argue that Apple’s Leopard OS is so unique that it has no significant actual or potential competitors. See Order at 9A. Accordingly, Psystar’s counterclaim failed to allege a viable relevant market on which to ground its monopoly-based claims.

Left then to challenge Apple’s OS license agreement restriction under a derivative market analysis, Psystar faced yet another federal court that would not extendKodak. The trial court flatly rejected any attempt to characterize the market for Apple computers as a derivative submarket or aftermarket for antitrust purposes. The court applied a commonly cited Digital Equipment rule that limits a Kodakderivative-market claim to cases where customers are unknowingly “locked in” to the derivative product.

Here, Apple’s clickwrap license agreement clearly discloses the restriction to use on Apple computers. In contrast to Kodak customers who were unaware of the replacement and repair parts restriction and had no opportunity to seek alternative products, Apple customers knowingly agree to a restraint on their derivative market rights before they purchase Leopard. They are free to agree to the restriction; accordingly, no derivative market tying claim can be raised.

While we might be hard pressed to demonstrate that any significant number of consumers understands or meaningfully agrees to any clickwrap license, Apple’s front end disclosure of the restriction is the critical factor for avoidance of Kodak.This is underscored by the trial court’s reference to another Apple antirust lawsuit,In re Apple and AT&TM Antitrust Litigation, CV 07-5152 JW, DN 144 (N.D.Cal. 2008). There, the federal court permitted a Kodak derivative challenge to go forward because the five-year term of an exclusive iPhone service arrangement with AT&T was not fully disclosed to iPhone purchasers.

At end, although its antitrust challenge is a non-starter, Psystar has not been deterred. It filed an amended counterclaim against Apple on February 12th, claiming that Apple has abused, not monopoly power, but its copyright through the clickwrap license agreement. By limiting use of the Leopard to Apple machines, Apple is alleged now to have leveraged its copyright for purposes not granted by the copyright act. The new counterclaim does not specify how this claim differs from Psystar’s flawed antitrust claims, so it seems it will soon face another motion to dismiss. Stay tuned.