Beatles judge finds iTunes nothing to get hung about

Is your hard drive equivalent to a compact disc? The Beatles said yes, Steve Jobs said no.

And in the end, a judge ruled in favor of Apple Computer. The long and winding road to Apple Computer's victory Monday over Apple Corps, the record label launched by The Beatles, hinged on a U.K. judge's interpretation of a 1991 agreement that forbade the computer company from distributing music on physical media, such as tapes or CDs, according to legal experts.

With Justice Anthony Mann's ruling, which is likely to be challenged on appeal, Apple Computer can continue to operate its iTunes Music Store in the U.K. using its name and logo.

In 1991, the two Apples amended a 10-year-old agreement following a lawsuit that spelled out how each company would be allowed to use its trademarks. Apple Computer paid Apple Corps $27 million and agreed not to enter the music distribution business under the Apple Computer name and logo.

However, Apple Corps said it believed Apple Computer has been doing just that with the iTunes Music Store, and filed suit in 2003. Music fans can purchase and download songs to their PCs through iTunes.

The Beatles have been one of the most prominent holdouts from the shift to digital distribution of music, is booming in part because of iTunes and Apple Computer's iPod device.

Since Apple Computer occasionally offers exclusive albums or songs for a short period of time, it is also associating itself and its logo with the content, which was prohibited by the companies' 1991 agreement, lawyers for Apple Corps argued. "Thus it would be acceptable for Computer to use its mark on a service delivering music content provided that the mark was not also (in the circumstances) used on or in connection with the content itself," Justice Mann said in his ruling.

In addition, Apple Corps believed the agreement covered "physical media delivering pre-recorded content," content that was distributed through "tangible or intangible" means. The iTunes Music Store delivers content intangibly by way of the Internet, and the hard drive or flash memory on a PC, Mac or iPod is the physical media, according to Apple Corps.

The judge disagreed, upholding Apple Computer's argument that it wasn't violating the 1991 agreement because it was not the original source of the content available on iTunes. "For Computer to cross into Corps' territory with its mark it would have to have indicated, by its use of the mark, that Computer was the source or origin of the music," the judge wrote. "It did not do so and has never done so...The ownership of the rights is always attributed to the correct person within (iTunes) and in the track information on any downloaded track."

Hard drives are storage media, to be sure, but they have nothing to do with the delivery of the content available on iTunes, the judge wrote. "It would require a serious distortion of fairly plain notions to say that files delivered by (iTunes) and stored somehow in digital form, and/or the hard disk which stores them, amount to 'physical media' which 'deliver' pre-recorded content."

Physical media as defined by the companies' 1991 agreement were the delivery methods of the time, such as CDs or tapes, the judge wrote. If Apple Computer were selling SD (secure digital) cards on iTunes, that would be different, but the mere sale of data isn't the same thing, according to the ruling.

As for whether the Apple Computer logo on iTunes and in advertisements creates a connection between Apple Computer and the content in violation of the agreement, the judge ruled that the average person can distinguish the difference between a record label and the store in which the music is purchased.

Similar, but different Apples
"A user would be familiar with the notion of buying recordings of creative works from a retailer, and would be capable of not seeing any other association between retailer and the music other than that arising out of the sale itself. That is what happens in shops," the judge wrote.

In 1991, when the two companies drafted the agreement in question, they couldn't have foreseen the growth of the Internet and the digital music explosion, which is in part what makes technology litigation so difficult, said Karol Kepchar, an intellectual-property attorney with Akin Gump in Washington, D.C. "Clearly they didn't anticipate this type of convergence," she said.

In the end, the two companies have similar logos and both are involved in the music business, but they are different enough for consumers to distinguish between Apple the record label and Apple the music store, Kepchar said. "I think this is a sound way of looking at this."

The ruling is a strict conservative interpretation of U.K. trademark law, and a U.S. court might have ruled differently, said Gregory Rutchik, a lawyer with Liner Yankelevitz Sunshine and Regenstrif in San Francisco. A U.S. court, he noted, might have felt that the average person these days considers Apple Computer to be as much of a digital-music company as a personal-computer vendor. Still, "it's a legitimate distinction" to separate the store from the content source, he said.

The decision is a big victory for Apple Computer, which had to pay Apple Corps to settle the dispute in previous years, said Michael Gartenberg, an analyst with Jupiter Media. Legal analysts had expected Apple Computer to have to pay up once again, but Mann agreed with Apple Computer that there's a difference between the sale of a CD and the sale of data that happens to be music, he said.

Apple Corps is expected to appeal the decision. If it's upheld on appeal, Apple Computer and the Beatles might finally come together.

"We are glad to put this disagreement behind us," Apple Computer CEO Steve Jobs said in a statement. "We have always loved the Beatles, and hopefully we can now work together to get them on the iTunes Music Store."