Apple Corps v. Apple Computer

1978 – 2006

Background:

Apple, is the largest company in the world based on market value, selling millions of personal computing devices from mp3 players to desktop computers. Apple’s brand is highly regarded with millions of people electing to pay a premium for its products. That is why it should be no surprise that Apple’s brand is ranked number one in the world with a value (104.3 $bil) of almost 2x the size of its closest competitor Microsoft (56.7 $bil). Apple Corps is a multimedia corporation, who was founded in London in 1968 by members of the Beatles to replace their earlier company Beatles Ltd. and to form a conglomerate. The main division of Apple Corps is Apple Records which was launched in the same year. These two companies were the main participants of a legal battle that lasted from 1978 until 8 May 2006 when the High Court of Justice in England ruled in favor of Apple (known as Apple Computer at the time).

The legal confrontation started in 1978 when Apple Corps, the holding company of Apple Records, filed a lawsuit against Apple Computer for trademark infringement. This was settled 3 years later in 1981 for a sum, that some estimated to be $250million however it turned out that the amount was only for $80,000. The agreement the two companies settled upon was that Apple Computer would never enter into the music business and in return Apple Corps would never enter into the computer business.

In 1991, Apple Corps sued Apple Computer again, alleging that by adding sound to its computers, the computer company was in violation of the 1981 agreement. This time Apple Computer paid $26.5 million. The computer giant agreed that although it may be involved in digital music, it would not package, sell or distribute any physical music materials, such as CDs.

The climax of this dispute came after Apple unveiled iTunes in September 2003. Apple Corps once again sued Apple Computer for breach of contract. This case was heard in the High Court of London in 2006 in front of single judge, who eventually ruled in favor of Apple Computer. Apple Corps alleged the online iTunes music store violated the contractual agreement that the two companies had where Apple Computer would not enter into the music business. The main question that the court had to decide was whether Apple’s iTunes online music store distributed physical copies of music, such as CDs.

iTunes distribution format is strictly digital, it sells music that can be played on digital devices such as personal computers and iPods. The songs are downloaded to the digital device so the only physical material is the software itself. According to legal zoom liability for trademark infringement is weighed against an alleged infringer’s profits derived from trademark violations. In the case of Apple, they were practically making nothing off the sell of music. Each song that was sold for 99 cents, 65 cents of that 99 cents went to the actual owner of the song, where as 25 cents went to pay for distribution cost and the rest was left for Apple as profit. Where Apple really made its money was in the selling of the hardware that allowed its customers to listen to the digital music, it sold its iPods for $499 at the time reaping in a $175 profit.

Analysis:

The main area of contention in this case is if the action of Apple Computer selling digital music was in violation of the original agreement between the two parties. The plaintiff in this case (Apple Records) argued that digital music should be regarded as a form of physical music distribution. The defendant (Apple Computer) argued that in no way, should digital sales of music be categorized under the umbrella of the previous agreement. What makes the result of this case surprising is the fact that Apple Records presumably had a pretty strong case.

1. Apple Records was an established brand with qualifying brand recognition for protection
2. Apple Records was using their mark in commerce
3. Apple Computer was trademarked in 1976, years after Apple Records trademark
4. Apple Computer, use of the mark potentially diluted Apple Records mark

As stated before Apple records was created by the Beatles, who at the time were one of the biggest bands of their day. Any business ventures that they entered in would automatically garner the recognition that would be required to claim that the mark was famous. Apple Computers was founded in 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne, almost a decade after the formation of Apple Corps, which clearly makes them the junior user of the mark in this case. Based on the points I expressed above it would seem easy for Apple Records to sue for Trademark infringement in the form of dilution from blurring. Apple Computer use of the mark, while selling music, may not have any immediate actionable harm. However their use of the mark could be said to have , reduced the ability of Apple Corps to distinguish itself from competitors in the music space. One can see that if an average consumer wanted to purchase music from Apple Corps, but came across Apple Computer iTunes music store, the consumer would have to waste additional time and resources and a increase search cost would be imposed on that consumer. Being that the concern of trademark law is to ensure that consumers are not confused as to the source of products, it would seem only right that the case would have been ruled in the Plaintiffs favor.

We can also examine the one major defense that Apple Computer had at its disposal to defend itself in this case. If we consider digital music and physical distribution of music as two different industries then Apple Computer actions are totally defendable. Trademark law was never intended to protect against others using the mark in different industries. Trademarks are not the property of the company but only a means of differentiating in a crowded market. Apple Corps at the time had very little brand recognition in digital music sales, thus its the argument above where Apple Corps could argue that it had an established brand, can no longer be applied. Apple Computer Could also argue about the jurisdiction of the agreement. At the time the United States of America was not a member of the Madrid Protocol and did not adhere to its regulations. The original agreement was agreed upon in England and its a perfectly reasonable possibility that Apple Computer could have ignored the agreement based on jurisdiction alone.

Conclusion:

This case is a clear example of subjective relativism. This dispute between the two Apples can be explained by this theory, in the sense that there is not a clear discernible right or wrong. It depends on how this case is viewed, who is viewing it, and what side the viewer is on.

I believe it was Apple Corps’ lack of foresight which caused them to lose. This ruling caught everyone at the time off guard it was widely thought that Apple Computer would lose this battle even Apple Computer was preparing for the fallout if they lost, and was setting up a subsidiary business with a different name that did not include the Apple trademark to sell music and iPods. Its easy to say in hindsight that the judge was right for ruling in Apple Computer favor. This line of thought would be contrary to common wisdom at the time. However I believe that it is a judge’s job to look at the case and judge in an absolute way. Apple Computer was well with in its right to sale music digitally because it was not part of the agreement and Apple Corps can not add items to the original agreement with each new break through in technology.

I honestly don’t see how Apple Corps could of avoided this situation. No one is capable of predicting the future and litigation that is passed now will be irrelevant in years to come. This is because of the break neck pace that technology evolves. Apple was clearly lucky here. If this did not work in its favor who knows what brand they would be selling their music and line of iPods under. This case was a clear example of how law lags behind technology. I am on Apple Computer side in this one. The only way to prevent situations like this from probably happening is by being more absolute in the contractual agreements you agree to. If Apple Corps agreed to have Apple not compete in any industry it is currently in, then something like this could have been avoided. I strongly believe that no company should be able to cry trademark infringement when another company elects to use such a widely used word such as Apple to serve as a trademark for its brand. If this were to happen, the authority for companies to corner off terms from the dictionary for their own financial gain, then we might as well figure a new language to speak because any word we uttered would be potentially trademark infringing.

References:

Arthur, C. (2006, May 8). Apple vs Apple: why didn’t Apple (the music one) win? We explain all…. theguardian.com. Retrieved April 17, 2014, from http://www.theguardian.com/technology/blog/2006/may/08/applevsapple

Graves, A. (2008, September 1). What’s at the core of Apple Records vs. Apple Ipod?. LegalZoom: Online Legal Document Services: LLC, Wills, Incorporation, Divorce & More. Retrieved April 17, 2014, from http://www.legalzoom.com/intellectual-property-rights/trademarks/whats-core

The World’s Biggest Public Companies. (2013, May 1). Forbes. Retrieved April 17, 2014, from http://www.forbes.com/global2000/list/#page:1_sort:6_direction:desc_search:_filter:All%20industries_filter:All%20countries_filter:All%20states

Sean

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