Antitrust and Unfair Competition Law

Northern District of California Certifies California Class in Grace v. Apple

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Matthew S. Weiler
Bleichmar Fonti & Auld, LLP

Background and Summary

Grace is a class action brought by owners of iPhone 4 and iPhone 4S concerning the FaceTime feature. Plaintiffs allege that Apple misled iPhone users about being able to use FaceTime on their iPhone 4 and 4S models, and that Apple deliberately disabled “FaceTime” for these iPhones. Grace, et al. v. Apple, Inc., 17-cv-00551-LHK, 2018 WL 4468825, at *1-*2 (N.D. Cal. Sept. 18, 2018). Specifically, Apple effectively disabled FaceTime for iPhone users with the iOS 6 operating system, requiring iPhone 4 and 4S users who wanted to continue to use FaceTime to upgrade to iOS 7, resulting in lost functionality, or purchase a new iPhone. Apple took these measures to save money on fees it was paying to a third party to enable users to use FaceTime and implemented these changes, that Plaintiffs characterized as a decision to “break” FaceTime for the iPhone 4 and 4S models, on April 16, 2014.Id. at *3.

On July 28, 2017, Judge Koh sustained Plaintiffs’ complaint, finding that Plaintiffs had Article III standing under California’s Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200, et seq. (the “UCL”) and trespass to chattels. Grace, et al. v. Apple, Inc., 17-cv-00551-LHK, 2017 WL 3232464 (N.D. Cal., July 29, 2017).

Plaintiffs sought to certify a class of “[a]ll owners of Apple iPhone 4 or Apple iPhone 4S devices in the United States who on April 16, 2014, had iOS 6 or earlier operating systems on their iPhone 4 or iPhone 4S devices,” or in the alternative “[a]ll owners of Apple iPhone 4 or Apple iPhone 4S devices in California who on April 16, 2014, had iOS 6 or earlier operating systems on their iPhone 4 or iPhone 4S devices.”

Apple opposed Plaintiffs’ motion for class certification making several arguments that resulted in noteworthy analysis from Judge Koh. First, Apple argued that Plaintiffs trespass to chattels and UCL claims could not meet Rule 23(b)(3)’s “predominance” element because the claims required individualized inquiries and could not meet the evidentiary standard under Comcast Corp. v. Behrend, 569 U.S. 27, 35 (2013), of showing “damages are susceptible of measurement across the entire class for purposes of Rule 23(b)(3).” Second, Apple argued that Rule 23(a)(3) typicality could not be demonstrated because the proposed class representative’s experiences were not typical of the class because of his personal use of the FaceTime feature, including his “jailbreaking” of one device. Third, Apple argued that Plaintiffs’ proposed nationwide class is barred under California’s choice of law test.

Judge Koh granted Plaintiffs’ motion for class certification, in part, and certified a California class excluding “jailbroken” iPhones.

Predominance: iPhone Wholesale Data Is a Reasonable Proxy to Show Lost Value

The most significant aspect of Judge Koh’s decision is that under Comcast Plaintiffs are not required to perfectly match economic data with their theory of liability, as long as their analysis is based on competent economic analysis that provides the best “feasible” proxy for market value. This decision is consistent with Ninth Circuit authority that holds, with respect to “average retail prices,” that “a precise average is unnecessary for class certification,” and “[a]t this stage, the question is only whether [an expert] has presented a workable method.” Lambert v. Nutraceutical Corp., 870 F.3d 1170, 1183–84 (9th Cir. 2017), cert. granted, 138 S. Ct. 2675 (2018).

Plaintiffs argued that predominance was met because they were challenging a uniform policy Apple made to “break” FaceTime: “Plaintiffs’ damages model bases class members’ damages on the diminution in the resale market value of affected iPhone 4 and iPhone 4S devices, which eliminates the need to base damages on class members’ personal experiences with the FaceTime Break (e.g. length of time without FaceTime access).” Id. at *10.

Apple contended individualized issues needed to be resolved to show class members suffered cognizable harm for their trespass to chattels and UCL causes of action, and because there was no uniformity in how class members use FaceTime or their iPhones, this showing could not be met.

For all causes of action, Judge Koh accepted Plaintiffs’ theory of harm, that they were injured in the diminution of value in their devices due to the decision to “break” the FaceTime feature.

With respect to trespass to chattels, Judge Koh ruled that because Plaintiffs’ theory was based on the diminution in value of the iPhone from the “break,” not on any length of deprivation, common impact could be shown by measuring the economic impact on each user’s iPhone: “Apple’s argument misconstrues Plaintiffs’ theory of liability. Plaintiffs are not arguing that Apple’s trespass deprived them ‘of the use of personal property for a substantial time’ but rather proceed under the alternative theory that the FaceTime Break “‘impaired the condition, quality, or value’ of their iPhones.” Id. at *10.

Judge Koh found that predominance existed with respect to the “unfairness” prong of the UCL because Plaintiffs relied on re-sale data from an electronics retailer to demonstrate that the value of all class members’ iPhones dropped after the “break.” Judge Koh’s analysis again emphasized that Plaintiffs were not seeking to recover based on their own individual experiences with their iPhones, but were seeking recovery for the diminished value of their property that was caused by the “break:” “Plaintiffs seek to measure how much this problem diminished the monetary value of class members’ iPhones’ by comparing Best Buy’s resale prices for the iPhone 4 and iPhone 4S before and after the FaceTime Break. This means Plaintiffs can measure class members’ harm through the devices’ decreased market value instead of a case-by-case determination of when class members upgraded to iOS 7 and what performance issues they experienced thereafter.” Id. at *11.

Judge Koh carefully scrutinized the opinion of Plaintiffs’ expert, Dr. Hastings, on the market value of the impacted iPhones. Plaintiffs’ expert used multivariable regression analysis to isolate the price impact of the “break” on iPhone wholesale resale data from millions of Best Buy sales, controlling for other variables that would affect the re-sale value, and found that there was a nearly 13% diminishment in the re-sale price. Id. at *12-*13.

Defendants sought to exclude Dr. Hastings’ analysis under Comcast because Dr. Hastings’ damages model did not match Plaintiffs’ theory of liability; in Apple’s view, Dr. Hastings erroneously relied on wholesale data rather than retail trade-in data and thus the model did not measure “only those damages attributable” to Plaintiffs’ theory of liability. Judge Koh concluded that this was a “close case,” but accepted Dr. Hastings’ conclusion that looking to wholesale data was the “only feasible way” to measure open market value, even if “it is possible that Plaintiffs’ model’s reliance on an indirect market measure has inflated class members’ damages.” Id. at *14. Judge Koh noted that “the Ninth Circuit has made clear that class certification does not require damages models based on flawless price averages.” Id. at *15. Defendants’ arguments ultimately went to the weight of Dr. Hastings’ opinions, and not its admissibility.

Judge Koh then rejected Apple’s additional arguments concerning predominance, ruling that Dr. Hastings’ opinion should not be excluded because he did not account for “jailbroken” or otherwise compromised iPhones because they accounted for less than 5% of iPhones, and that Plaintiffs’ diminution in value theory was consistent with the restitution remedy provided for by the UCL. Id. at *15-*16.

Typicality: Plaintiff’s Individual Use of FaceTime Not Relevant to the Value of the iPhone

Apple challenged typicality by showing one named plaintiff did not use FaceTime very much, and that his FaceTime usage was not shown to be interrupted substantially. Judge Koh rejected these arguments, rejecting Apple’s position that “71 days without FaceTime is ‘a mere momentary or theoretical deprivation’” and noting “Apple’s argument about deprivation length is only relevant if Plaintiffs base their injury on a deprivation theory of harm. However, Plaintiffs are instead proceeding under an impaired value theory, which means that Apple’s argument is beside the point.” *8.

Apple also attacked typicality by reference to evidence that one class representative had “jailbroken” one of his iPhones, a modification of the base programming designed to improve performance. Judge Koh agreed that “Potter’s claims based on his jailbroken 32 GB iPhone 4 are not typical of the class” because “[o]nly a small fraction of iPhone owners jailbreak their devices and one of the main reasons to jailbreak an iPhone is to alter its performance and functionality relative to a normal iPhone, i.e. to make it significantly different.” Id. Judge Koh sua sponte exercised her authority to exclude “jailbroken” iPhones from the Class Definition.

Nationwide Class: Choice of Law Rules Require Application of State’s Law where Harm is Felt, Not where Wrong Originated

Plaintiffs sought certification of a national class under California law because Apple made the decision to “break” FaceTime in California and attempted to apply California law nationally as the place of the wrongful activity. Apple demonstrated that state law varied with respect to trespass of chattels and consumer protection statutes; Apple’s position was that a conflicts analysis required that the states where the harm was felt should apply their law.

Judge Koh, applying California choice of law principles, concluded that “because the place of the wrong was the state in which each class member was exposed to the FaceTime Break each class member’s claims should be governed by the law of the state in which they were exposed to the FaceTime Break. Consequently, the Court will not certify a nationwide class because doing so would require application of all 50 states’ laws.” Id. at *23.

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