Case Name: Butler v. Apple, Inc.
Case No.: 1-14-CV-262989

According to the allegations of the complaint, “[l]ike all iPhone devices, the iPhone 4S runs on [an] operating system called ‘iOS’.” (Complaint, ¶ 17.) “Each year, [defendant Apple, Inc. (‘Defendant’)] ha[s] released an updated version of the iOS operating system in conjunction with the release of a new updated version of the iPhone.” (Complaint, ¶ 18.) To address problems posed by fragmentation—where different versions of an operating system exist at any one time—Defendant send updated versions of iOS directly to owners of iPhones to download and use on those iPhones to create a greater uniformity of versions of iOS so as to allow for easier and more convenient development of apps for the iPhone. (See complaint, ¶¶ 19-21.) According to plaintiff Thomas J. Butler (“Plaintiff”), the newer versions of iOS, iOS 6.1.3 and iOS7, were not fully compatible with the iPhone 4s, making them incapable of connecting to the internet via Wi-Fi or Bluetooth. (See complaint, ¶¶ 26-40.) When iOS6.1.3 was released, most iPhones were still within the iPhone’s standard one year warranty, and pursuant to that warranty, Defendant replaced most of the iPhone 4S devices affected by that issue. (See complaint, ¶ 41.) However, for iPhone 4S devices that were not covered by any warranty, the free replacement was not an option, and instead were offered the ability to purchase a replacement iPhone 4S for $199. (Id.)

On March 28, 2014, Plaintiff filed a purported class action complaint against Defendant, asserting causes of action for: negligence; strict products liability; unfair competition; and, false advertising. The class, as defined by Plaintiff, is “All California residents who own an Apple iPhone 4s device that is no longer covered by warranty and who lost the ability to use the Wi-Fi and/or Bluetooth features on their iPhone 4s devices after their iPhones were updated to a version of the iOS operating system number iOS 7 or later.” (Complaint, ¶ 57.)

Defendant demurs to the first and second causes of action, asserting that they fail to state facts sufficient to constitute a cause of action as they are barred by the economic loss rule. Defendant demurs to the third and fourth causes of action on the ground that they have not pled facts sufficient to constitute a cause of action.

First and second causes of action: Economic Loss Rule

Defendant argues that Plaintiff’s negligence and strict liability claims are barred by the economic loss rule. (See Def.’s memorandum of points and authorities in support of demurrer to complaint (“Def,.’s memo”), p.2:21.) In Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, the California Supreme Court explained the economic loss rule:

Economic loss consists of “damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits—without any claim of personal injury or damages to other property.” (Jimenez v. Super. Ct. (T.M. Cobb Co.) (2002) 29 Cal.4th 473, 482.) Simply stated, the economic loss rule provides: “[W]here a purchaser’s expectations in a sale are frustrated because the product he bought is not working properly, his remedy is said to be in contract alone, for he has suffered only ‘economic’ losses. This doctrine hinges on a distinction drawn between transactions involving the sale of goods for commercial purposes where economic expectations are protected by commercial and contract law, and those involving the sale of defective products to individual consumers who are injured in a manner which has traditionally been remedied by resort to the law of torts.” [Citation.] The economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise. [Citation.] Quite simply, the economic loss rule “prevent[s] the law of contract and the law of tort from dissolving one into the other.” [Citation.]

In Jimenez v. Superior Court, supra, 29 Cal.4th 473, we set forth the rationale for the economic loss rule: “The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the ‘luck’ of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products.” [Citation.] “We concluded that the nature of this responsibility meant that a manufacturer could appropriately be held liable for physical injuries (including both personal injury and damage to property other than the product itself), regardless of the terms of any warranty.” [Citation.] “But the manufacturer could not be held liable for the level of performance of his products in the consumer’s business unless he agrees that the product was designed to meet the consumer’s demands.” [Citation.]” (Id. at p. 482.)

In Jimenez, we applied the economic loss rule in the strict liability context. We explained the principles surrounding the economic loss rule in that context: “[R]ecovery under the doctrine of strict liability is limited solely to ‘physical harm to person or property.’ [Citation.] Damages available under strict products liability do not include economic loss, which includes “damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits—without any claim of personal injury or damages to other property.”… In summary, the economic loss rule allows a plaintiff to recover in strict products liability in tort when a product defect causes damage to ‘other property,’ that is, property other than the product itself. The law of contractual warranty governs damage to the product itself.” (Jimenez v. Super. Ct., supra, 29 Cal.4th at pp. 482–483.) We have also applied the economic loss rule to negligence actions. [Citations.]

(Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 988-989.)

Here, the issue is whether iOS7, the alleged free update to the operating system for the iPhone 4s, is a separate product from an iPhone 4s such that is “property other than the product itself,” or whether it is a part of the iPhone 4s product.

The complaint alleges that the iPhone 4s cannot run without the iOS operating system; “the iPhone 4s runs on [an] operating system called ‘iOS’.’” The operating system similarly is not alleged to run independent of the iPhone hardware; on the contrary, the complaint alleges that “Defendants have released an updated version of the iOS operating system in conjunction with the release of a new updated version of the iPhone.” Updated versions of iOS are released directly to owners “over the air” to create a greater uniformity of iOS on the various models of the iPhone to make it more convenient to develop apps. Defendant convincingly argues that, as a matter of law, the complaint alleges facts demonstrating that the iOS operating system is not a sufficiently discrete element of the iPhone 4s as these allegations suggest that iOS is not “property other than the product itself.”

In opposition, Plaintiff argues that the version of iOS is not integral to the iPhone 4s’ ability to function as the iPhone 4s functioned on a prior version of the iOS for more than a year Plaintiff installed the newer version. (See Pl.’s opposition to demurrer (“Opposition”), p.9:8-14.) Alternatively, Plaintiff asserts that iOS 7 cannot be viewed as a “component” of the iPhone 4s because it was not a part of the iPhone 4s at the time of original sale. (Id. at p.9:15-27.)

In Progressive Ins. Co. v. Sacramento County Coach Showcase (D. Nev. 2008) 2008 U.S. Dist. LEXIS 103571 *1, a recreational vehicle (“RV”) caught fire due to the defective design, manufacture and warnings of the RV’s battery equalizer and its components. (Id. at pp. *2-*3.) The alleged manufacturer of the RV moved to dismiss the claims for negligence and strict liability, arguing that such claims were barred by the economic loss rule. (Id. at pp.*3-*4.) Although the court found that these claims would not be barred as to specific personal property such as clothing, kitchen supplies, jewelry, and bedding that were merely in the RV and destroyed by the fire, the court determined that “the economic loss doctrine bars both negligence and strict liability recovery for the damage the battery equalizer caused to the RV itself… [since] the battery equalizer… [was] an integral component of the RV.” (Id. at pp.*20-*21.)

As with the battery equalizer being an integral component of the RV, the operating system iOS is an integral component of the iPhone 4s. The iPhone cannot run without iOS, as the complaint so alleges. This is not disputed. However, Plaintiff argues that iOS 7 was not integral to the iPhone 4s as the product was able to operate using a prior version of iOS, and that iOS 7 was not a part of the product at the time of the original sale. Plaintiff’s argument, however, relies on its belief that an update to a product is a separate product. Here, if the battery were subject to recall, the new battery installed by the manufacturer would still nevertheless be “an integral component to the RV” despite that it was not installed “at the time of the original sale. Likewise, the update of the iOS operating system—iOS 7—is not a product that is “other than” the iPhone 4s itself. (See Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 988-989 (stating that “the economic loss rule allows a plaintiff to recover in strict products liability in tort when a product defect causes damage to ‘other property,’ that is, property other than the product itself”) (emphasis original); see also KB Home v. Super. Ct. (Consolidated Industries Corp.) (2003) 112 Cal.App.4th 1076, 1087 (stating “distinguishing between ‘other property’ and the defective product itself in a case involving component-to-component damage requires a determination whether the defective part is a sufficiently discrete element of the larger product that it is not reasonable to expect its failure invariably to damage other portions of the finished product”).) It is therefore clear that the first and second causes of action for negligence and strict products liability are barred by the economic loss rule. Moreover, in opposition, Plaintiff does not assert that the claims can be amended, nor suggest facts that demonstrate the manner in which the complaint might be amended. (See (See Goodman v. Kennedy (1976)18 Cal. 3d 335, 349 (stating that “Plaintiff must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading”), quoting Cooper v. Leslie Salt Co. (1969) 70 Cal.2d 627, 636; see also Hendy v. Losse (1991) 54 Cal. 3d 723, 742 (stating that “the burden is on the plaintiff… to demonstrate the manner in which the complaint might be amended”).) The demurrer to the first and second causes of action is SUSTAINED without leave to amend.

Third and fourth causes of action for violation of Business & Professions Code sections 17200 and 17500

The complaint alleges that Defendant issued a notification regarding the ability to update Plaintiff’s iPhone 4s, which stated:

This update features a beautiful new design and contains hundreds of new features, including Control Center, AirDrop, iTunes radio, and improvements to Notification Center, Multitasking, Camera, Photos, Safari, Siri and more.

(Complaint, ¶¶ 86, 92.)
The complaint alleges that this notification—and the omission from this notification that iOS 7 damages the iPhone 4s’ ability to connect to the internet via Wi-Fi or Bluetooth—form the bases for the third and fourth causes of action for violation of Business and Professions Code sections 17200 and 17500. (See complaint, ¶¶ 87-88, 94-96.) However, as Defendant argues, the complaint does not allege a duty on Defendant to disclose the purported omission. “Absent a duty to disclose, the failure to do so does not support a claim under the fraudulent prong of the UCL.” (Buller v. Sutter Health (2008) 160 Cal.App.4th 981, 987; see also McCann v. Lucky Money, Inc. (2005) 129 Cal.App.4th 1382, 1399 (stating that false advertising claim failed where defendant was not required to disclose the purported omission).) Accordingly, the demurrer to the fourth cause of action is SUSTAINED without leave.

However, the third cause of action for violation of section 17200 also alleges that Defendant’s business practice was also unfair.

“‘Unfairness’ under section 17200 has been described as violating established public policy or ‘is immoral, unethical, oppressive or unscrupulous and causes injury to consumers which outweighs its benefits.’” (Linear Technology Corp. v. Applied Materials, Inc. (2007) 152 Cal.App.4th 115, 134.) “Another division of the same appellate district, on the other hand, has defined ‘unfairness’ by a three-part test: ‘(1) the consumer injury must be substantial; (2) the injury must not be outweighed by any countervailing benefits to consumers or competition; and (3) it must be an injury that consumers themselves could not reasonably have avoided.’” (Id., quoting Camacho v. Automobile Club of Southern California (2006) 142 Cal.App.4th 1394, 1403; see also Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 252; see also Graham v. Bank of America, N.A. (2014) 226 Cal.App.4th 594, 613 (noting the Camacho line of cases, but noting that “[t]his court has consistently followed the Gregory v. Albertson’s, Inc., supra, 104 Cal.App.4th 845 line of cases and has held a plaintiff alleging an unfair business practice must show the ‘defendant’s conduct is tethered to an underlying constitutional, statutory or regulatory provision, or that it threatens an incipient violation of an antitrust law, or violates the policy or spirit of an antitrust law’”).) The Sixth District has stated that “[w]hether a practice is deceptive, fraudulent, or unfair is generally a question of fact which requires ‘consideration and weighing of evidence from both sides’ and which usually cannot be made on demurrer.” (Linear Technology Corp., supra, 152 Cal.App.4th at pp.134-135.) Here, the complaint alleges that Defendant’s business practice makes it more convenient for app developers to broaden the capabilities and uses of the iPhone. (See complaint, ¶¶ 19, 21.) This conduct by defendant might be a utility that outweighs the gravity of the harm to the alleged victim; however, it would be premature to state that, as a matter of law, that such alleged conduct is not “unfair.” Accordingly, the demurrer to the third cause of action as to the unfair conduct allegations is OVERRULED.