John, Paul, George, Ringo...and Steve?


By Alex Salkever Steven P. Jobs loves the Beatles. He plays the Liverpool quartet's songs at Apple expositions, and the CEO of Apple Computer (AAPL) has even compared his own management team to the Fab Four. Alas, sometimes what you love takes you to court. For the third time since 1981, Apple faces a legal scrap with Apple Corps, the music- and copyright-management outfit originally formed by the Beatles.

The pending claim alleges that the iTunes online music store violates a previous agreement limiting the types of business Apple Computer may pursue under the Apple trademark. The case will be heard in London's High Court later this year. In the two previous cases, Apple Corps emerged as the clear victor, basically dictating terms to Apple Computer.

This time the outcome is far from a lock for Apple Corps. Make no mistake: There will be a settlement. No one benefits from pushing a case all the way through a full trial and appeals because the costs are prohibitive. But analyst predictions that the case could cost Apple Computer hundreds of millions of dollars in settlement payments, even the use of its own name on music products, are way out of line.

"FAIR READING." Why do I say this? Although the case is wending its way through British courts right now, a parallel suit was filed in a Northern California federal court at the same time. Both parties agreed on Sept. 21 to consolidate the two cases in Britain. A close reading of the California filing, which is similar to the British one, reveals an extremely complex case -- one that a London judge has already criticized for a lack of clarity. But some important language in the case appears to support Apple Computer's claim that it did not break previous trademark agreements or contracts.

First, a little history: In 1978, the Beatles and Apple Corps first sued Apple Computer for trademark violations. The parties settled, with Jobs & Co. coughing up $80,000 in 1981. Apple Computer also promised to stay out of the music business, in any way, shape, or form, and stick to computers.

In 1991, Apple Corps sued Apple Computer again. The suit alleged that Apple Computer violated the 1981 settlement by including musical digital interface (MIDI) software on its computers. Such software allows a computer to record electronic instruments. To resolve that case out of court, Apple paid $26.5 million and signed a settlement designed to establish ground rules regulating which outfit could do what with the Apple name.

In July, 2003, Apple Corps sued Apple Computer yet again. This suit, which is still pending, alleges that Apple's iTunes music service violated the 1991 agreement. Although that pact remains private, key portions of it are cited in public court papers. And one of those passages in the court document strongly implies that Apple Corps agreed to allow Apple to pursue digital music initiatives, but not package, sell, or distribute any physical music materials such as CDs.

TIGHT BUNDLE. "So long as there is not a use of the Apple Computer marks in distributing physical CDs, which [Apple Computer is] not doing, the use of software to distribute music seems to be within a fair reading of the contract," says Barry Felder, chief litigator at New York law firm Brown Raysman.

Beyond the legal merits of Apple Computer's position, the reality is that Apple Corps could claim only minimal damages for this particular trademark violation. In most trademark disputes, liability is limited to profits derived from the violations, and Apple's online iTunes Music Store is barely profitable. After paying record labels and music-publishing companies for the right to sell songs, then funding distribution, maintenance, and marketing costs, Apple derives just a few cents in operating profits from each 99-cent download. Apple would be lucky to have made $5 million in net profits from iTunes since inception.

A settlement could end up larger than $5 million, however. That's because Apple has tied its future to the iPod and tightly bundled it with iTunes. So should Apple Corps win in court, Apple Computer might have to pay a bit more to settle this case. But a very, very large settlement remains highly unlikely.

STRONG BRANDS. The worst-case scenario for Apple Computer is if the London court tells Apple to remove its trademark from music-related products. Such a decision could extend to the rest of the European Union (although it's unclear whether such a ruling would hold sway in the U.S.). But even if Apple is forced to cut the iPod and iTunes Music Store loose from the mother ship and sell them via a new company, it probably wouldn't matter much.

"The iPod and iTunes brand names are very, very strong," says Michael Gartenberg, an analyst with tech consultancy Jupiter Research. In fact, Apple has already taken a step in that direction by creating a new division exclusively for iPod design, production, and manufacturing.

This is one suit that appears to present a strong chance for an Apple Computer win. However, it's nearly impossible to predict judicial logic -- even if the judge owns an iPod, as the one hearing this case does. But if Apple Computer should lose this legal battle, it still has the artillery triumph in the digital-download war. Maybe it could finally ink a deal with Apple Corp that adds those much-missed Beatles songs to the iTunes Music Store. Salkever is Technology editor for BusinessWeek Online


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