What's at the core of Apple Records vs. Apple Ipod?

What's at the core of Apple Records vs. Apple Ipod?

by Alice Graves, December 2009

This suit is something the Flower Children of the sixties probably never expected. For the third time since 1981, Apple Computer is being sued by the Beatles' Apple Corps for trademark infringement.

To briefly distinguish between trademarks and service-marks, a trademark is a picture, symbol or word that identifies a product. A service-mark identifies a service. Everyone knows NBC's colorful peacock feather trademark. CBS is recognizable by the open eye. And the distinctive green Granny Smith marked the Fab Four's Apple Records label. In the world of service-marks, think of the Rock of Gibraltar, which is the service-mark of Prudential insurance. And Apple Computers sells computers and computer services.

For many years, but not in recent years, the name Apple was associated with the Beatles and their record company. Apple Records was founded in 1968 by the Beatles as a tax shelter. The label still releases compilations by the Beatles, such as The Beatles Anthology. The holding company, Apple Corps, Ltd., is still in existence.

Then along came Apple computers. In 1978, Apple Corps sued Apple Computer for trademark violations. In 1981, Apple Computer settled for $80,000 and a promise to stay out of the music business.

In 1991, Apple Corps sued Apple Computer again, alleging that by adding sound to 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 third lawsuit was filed in July 2003. Apple Corps alleges that the iTunes online music store violates the 1991 agreement. The looming question up for courtroom debate is whether iTunes Music Store sells physical music materials, such as CDs.

iTunes sells songs in digital format that can only be played on an Apple iPod. The songs are downloaded, so the only physical material involved is the software. One legal analyst commented that the use of software to distribute music seems to be within Apple Computers' rights under the 1991 agreement. After all, Apple is not selling CDs.

In most trademark disputes, liability is often limited to profits derived from violations. In this case, Apple's online iTunes is barely profitable. From every 99 cents Apple gets from a single download, 65 cents goes straight to the record label. Another 25 cents goes to distribution costs. So Apple only makes a few paltry cents on each download, surely no great profit. But Apple persists because it is selling iPods. Each $499 iPod nets around $175 in profit.

There is lots of speculation about the outcome of this latest dispute. Some analysts believe it may bring the biggest settlement anywhere in legal history outside of a class action suit. After all, Apple has tied its future to the iPod and tightly bundled it with iTunes. Some predict the suit could result in Apple Corps becoming a major share holder in Apple Computer, possibly with Paul McCartney as a board member.

Another possibility is that the court will order Apple Computer to remove its trademark from iTunes and iPods and set up a new company to sell them. Apple is already preparing for that.

For anyone who has ever searched for "Hey Jude" or any other Beatles hit in the iTunes catalog, don't expect to find it. That's because Apple Corps is wary about the effect of technology on royalties. But who knows? Maybe the rights to those songs will become available as part of the settlement, particularly if Sir Paul sits on Apple's board.

Interestingly, the judge hearing this case has confessed to being an iPod user. So far, neither party has asked him to step down. In the meantime, we'll just have to wait and see which port this legal yellow submarine anchors in.