Tuesday, May 16, 2006

How Apple beat the Beatles

Unless you’ve avoided the Internets for the past week or two, you’ve doubtless heard that Apple Computer prevailed over Apple Corps in the trademark dispute between the two companies. The decision, by High Court judge Edward Mann, says that the 1991 agreement between “Corps” and “Computer” (as Mann refers to the two companies to avoid confusion) anticipated uses like the way Apple Computer displays the “apple” logo in the iTunes Music Store, and grants permission to Apple Computer to use it that way. You may see the historical irony here: Apple Computer lost its long legal battle against Microsoft for copying the Mac’s look-and-feel in Windows because Apple had unwisely signed an agreement granting Microsoft much broader human interface rights than Apple Computer’s executives realized. Now it appears that Apple Computer is on the winning side of a similar dispute: when licensing the “apple” logo and name in 1991, Computer gained rights beyond those that Corps now wants to grant—at least, without further payments. Judge Mann rejected many arguments from both companies. In the end, he found that the key to resolving the dispute was section 4.3 of the agreement signed on 1991.10.09. That section says, in its entirety (ignore the inaccurate plural “Apple Computers”):
4.3 The parties acknowledge that certain goods and services within the Apple Computer Field of Use are capable of delivering content within the Apple Corps Field of Use. In such case, even though Apple Corps shall have the exclusive right to use or authorize others to use the Apple Corps Marks on or in connection with content within subsection 1.3(i) or (ii), Apple Computers shall have the exclusive right to use or authorize others to use the Apple Computer Marks on or in connection with goods or services within subsection 1.2 (such as software, hardware or broadcasting services) used to reproduce, run, play or otherwise deliver such content provided it shall not use or authorize others to use the Apple Computer Marks on or in connection with physical media delivering pre-recorded content within subsection 1.3(i) or (ii) (such as a compact disc of the Rolling Stones music).
Apple Corps argued that the plain English meaning of “on or in connection with” means that iTunes Music Store content falls within Apple Corps’ delineated use of apple-logo trademarks, overcoming the problem of “physical media” by referring back to subsection 1.3’s language that said the medium for music could be “tangible” or “intangible,”and yet still be covered by this agreement. Apple Computer argued that the agreement is about trademarks, and that the wording must be interpreted narrowly as the application of a trademark would be. Judge Mann rejected both arguments, but wound up closer to Computer’s position than Corps’.
Looking at English trademark rulings for guidance, Judge Mann quoted a 2003 decision that says, “The essence of a trade mark has always been that it is a badge of origin,” and “The basic purpose of a trade mark is the same in any national economic system. The purpose is as a guarantee of commercial origin.” In essence, after thinking carefully about the language and its application, Judge Mann decided that Apple Computer is not acting like a record label—it does not own the tracks it sells (not even the iTunes Originals), it does not sell them on physical media, and the iTunes Music Store always prominently displays the trademarks and copyright notices of the entities that actually own the music. While Apple Corps maintains its trademark rights to musical recordings, including those transmitted in intangible form (like via radio broadcast), Apple Computer “does have the right… to use its mark in connection with the service which sells content without automatically being in breach of the TMA [trademark agreement], and to be able to avoid being in breach providing that it is acting fairly and reasonably.”
Apple Corps argued that the apple logo in iTunes’ faux-LCD display was a prohibited use of an Apple-shaped trademark “associated” with musical works, but Judge Mann disagreed. He also said that items like the iTunes Originals were no more than the digital equivalent of in-store exclusive promotional discs, and their existence didn’t make Apple a “record label” any more than Best Buy would be a record label if it sold exclusive discs with some albums. In all cases, Judge Mann found that the uses of apple-shaped logos were associated with the iTunes Music Store, not with individual musical works, and that the 1991 agreement gave Apple the right to use apple-themed logos and names with data transmission services like the iTunes Music Store, even if they were transmitting music. He concluded, “In the circumstances I find that no breach of the TMA has been demonstrated. The action therefore fails.”
Both sides quickly spun the decision: Apple Computer CEO Steve Jobs invited the Beatles (the owners of Apple Corps) to put their music on the iTunes Music Store, and Apple Corps confirmed it would appeal the ruling, just as Apple Computer would have done had it come out the other way. The story was too juicy for the international press to even consider passing up, and it quickly moved on Reuters, AP, Bloomberg, and MarketWatch, not to mention the Mac press and the business and technology magazines.
It’s one of the few victories for Apple Computer in a story that’s now lasted 25 years. Apple Corps has always had an extremely capable and persistent legal department. In 1981, when people started to think that this garage-based fruit computer thing might stick around for a while (Apple Computer went public on 1980.12.12), Apple Corps came knocking in Cupertino with a simple legal formulation: “Hey, we own the trademark to ‘Apple’ for music, and you make products that make sound. You owe us money.” Apple Computer was flush with cash and did not want a protracted transatlantic legal battle, so co-founder Steve Jobs paid the Corps a nominal fee, and signed an agreement promising that Apple Computer wouldn’t make music products. (Remember this when awestruck fangeeks assert that Jobs always saw the iPod coming.)
We’ve mentioned the rest many times before: when Apple started adding true music and recording capabilities to its computers in the late 1980s, Apple Corps reportedly demanded $3 million in licensing fees for a new agreement that would allow Apple Computer to keep the name “apple.” Apple’s legal department, feeling its wild oats, decided instead to refuse and to sue in Europe to have Apple Corps’ trademarks invalidated. It’s not nice to mess with the Beatles—Apple Corps sued Apple Computer in London for $300 million. Apple Computer eventually settled for $26 million, after having spent another $11 million in legal fees.
The result, however, was the 1991 agreement that was recently at bar. Apple Computer clearly screwed up: the very first iTunes Music Store advertisements used the URL “applemusic.com,” and there’s no way Apple Corps could ignore that. Companies are required by law to defend their trademarks or lose them. If Apple doesn’t care that non-affiliated Web sites use the trademark “iPod” in their names, then someday, a company making a competing digital music player can call it their iPod, like “FredMusic’s iPod” as opposed to the “Apple iPod.” When Apple goes to court, FredMusic could say, “Apple didn’t care if other companies used ‘iPod’ on Web sites and in other material, so they have no right to go after us now.”
Despite however many stories you read about big bad corporate Apple going after “little guys” like iPod Garage, a Web site that changed its name to iProng this week, this is why Apple has to demand that third parties not use its trademarks without permission. That’s why Apple Corps couldn’t ignore the “applemusic.com” URL, either. But as the history shows, except for that one URL, this is not about trademark confusion. No one looks at the Apple logos in iTunes or on the iPod and wonders if the Beatles are behind it.
No, this was about Apple Corps getting a lot of money out of Apple Computer. That’s why Apple Corps’ legal team kept leaking one-sided claptrap to Fox News gossip columnist Roger Friedman (MDJ 2004.08.17). Friedman got a lot of ink by reporting in 2003 not only that Apple Corps would sue Apple Computer if the latter purchased Universal Music Group (remember that rumor - floated by Universal Music Group people to raise their profile?), but that the Beatles would win and “be the biggest profit takers.”
Friedman also reported in September 2003 that Apple Corps had filed suit against Apple, quoting a “Beatles legal insider” who portrayed the idea of Apple Computer even defending itself as ridiculous: “It’s OK with us if they want to go this route. It’s just more money for us.” Eleven months later, when Apple Computer had unthinkably not caved and given Apple Corps all the money it wanted, the Corps’ legal team was again spoon-feeding Friedman information, including details of the 1991 agreement that had remained a closely-guarded secret until the trial started in 2005. Once again, Friedman spun the worst possible picture for Apple Computer: “Paul McCartney could wind up owning the Apple iTunes store along with Yoko Ono, Ringo Starr, and Olivia Harrison.” That was never true, but Friedman quoted section 4.3 of the agreement and the Apple Corps interpretation of it—the one that Judge Mann just ruled was incorrect.There was only one point to all of this: to create a public and Wall Street perception that Apple Computer could not possibly win against the Apple Corps juggernaut, so that the press and analysts would pressure Apple Computer to settle immediately, at any cost, to avoid the risk of losing the iPod business. The Corps knew full well that it didn’t have a slam-dunk case, so it tried to convince the world that it did in the hopes that Computer would turn tail and run. It didn’t work this time—the Corps signed away more rights in 1991 for their $26 million than they wish they had.There are still appeals and negotiations to be worked out, and another settlement is still possible, although no one with half a brain should speculate on how likely that might be. But for the first time in a quarter-century, Apple Corps took Apple Computer to court demanding millions of dollars and walked away with nothing. (In fact, should the ruling withstand appeal, Apple Computer will recover several million dollars worth of legal fees from Apple Corps.) Apple Computer blew its response in 1991, but walked away with the agreement that led to last week’s victory in the High Court of London—a victory that, according to Corps’ puppet Roger Friedman, was unprecedented and quite literally impossible even to imagine.


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