So I struggled with whether or not to tell you the latest from the PS3 class action litigation, particularly because of what I'd have to write about it. I don't like to kick anyone when he's down. But I have gotten emails asking me what's been happening since the plaintiffs filed an amended complaint back in March, and while the judge has yet to render a ruling on Sony's motion to dismiss it, we do have the transcript [PDF] of the oral argument at the July hearing on it. The court has lifted the sealing, so I'll show it to you.

And nice as I try to be, I think the only appropriate reaction to reading it has to be to offer what I hope is a constructive suggestion: that Sony should try to be more like Apple when it comes to dealing with customers.

Sony is rather coldly relying on the wording in the express warranty and other legal technicalities to try to escape this litigation, and they may even succeed, but can you imagine Apple in a similar situation, with its record of moving heaven and earth to keep customers happy? Jobs used to send unhappy customers personal emails sometimes, for heaven's sake, and free replacement products.

Sony, in contrast, sold customers Playstation 3s and then removed significant functionality, with no refund, no apology, and now the lawyers argue that they had every right to do so, because the terms of the license said that there could be changes in the product going forward. I don't think any of us would buy a product that was advertised as offering both network gaming and the ability to use the game station as a Linux computer and imagine that the terms of use meant that either of those might someday just disappear. This snip from the transcript will give you a taste, as Sony's lawyer argues that the express warranty was only for a year:

THE COURT: Why don't I hear from the defense on the warranties issue, and then we'll come back to the other claims.

MS. SACKS: Your Honor, I think Counsel misspoke, because he made a statement that the Other OS was represented as a feature on the box. That is absolutely not so. It's never been pled. I'm assuming it was just a misstatement.

THE COURT: There are, however, some promotional materials, if I recall correctly, that, while it doesn't necessarily say specifically "the Other OS feature," it does suggest that the device can be used as a computer, and not simply a game console, right?

MS. SACKS: Yes, your Honor. There were some articles that came out. There was a press release that came out in advance of the release that mentioned it, among many other things; but when you talk about a core feature, I think it's very illuminating that it's not on the box. And so somebody couldn't have walked in, not having reviewed anything else, and said,

"Oh, I'm buying this because it offers this feature."

I'd like to turn for a moment to this idea of the ten-year market cycle. I'm looking at the statement that's attributed to Kaz Harai. It's at paragraph 122. And I think what's really important to focus on is: He's talking about a console; he's talking about hardware. Specifically, he said,

"Therefore, the PlayStation 3 is going to be a console that's going to be with you again for ten years. We're not going to ask the consumers to suddenly buy another

PlayStation console in five years' time."

Another statement was attributed to him at paragraph 123:

"Last time I checked, Microsoft never had a console that's been on the market for more than four or five years."

Another statement attributed to a Sony executive that's way back in spring 2009 -- so, long after anyone did their purchase -- he describes the platforms; the Playstation 3 console platform. Similarly, 2011 -- February 2011 -- again, long after anyone purchased, the description is:

"We provide hardware that will stand the test of time."

Very clearly, this discussion is about the PlayStation console as a product.

THE COURT: But is it so clear that on a motion to dismiss, you can find that that's the only possible reading of it?

I mean, you may well win the day when you make your motion for summary judgment, but at this stage of the game, is it really something that I can determine, if you can give any plausible reading to that statement that it is suggesting that the functionality of this PS3 for a ten-year period is going to be maintained? If you can read that -

And even if I was to find I don't think that's what it means, but perhaps I can see how someone could read into the "ten-year" comment that it applies to the functionality will be maintained for that period, don't I have to let it go to the next stage, at the very least?

MS. SACKS: Your Honor the difficulty with that is that we're talking about this, first, in the context of an express-warranty claim. And, as your Honor previously said, to stay an express warranty, there has to be an explicit affirmation of fact that is material, and it is reasonably relied upon.

Now, two of the five named plaintiffs concede they never heard about this "ten-year."

The other three claim that they saw it somewhere, and at the same time, they also looked at Sony's website prepurchase.

So what's very, very prominently displayed on Sony's website? The express warranty for one year.

How can you say that it was reasonable for someone to assume this was a guarantee of continued product performance - not just product, but software performance -- when, in fact, the actual written statement that is being provided to people -- and it is displayed to them when they're doing their prepurchase research -- says exactly the contrary?

Another part of the reasonableness of it is that they state in here that no other consoles have ever been around this

long. This is just the PS3's platform.

Counsel said that this would be the time the product would be available.

So what basically we have to accept, if you're going to accept this precept, is that if, for any reason, any aspect of the PS3 or any software associated with it fails before ten years, it's a defect; it's a breach of that express warranty.

How can you get there, when you have the actual statement that was made to consumers?

The other part of it is that when this research was being done on the website, the other thing sort of prominently displayed are the terms of service with regard to the PSN and the system software license agreement.

THE COURT: Which they claim is contract of adhesion.

MS. SACKS: Well, I'm interested in the dichotomy here. In one instance, it's the things that establish direct privity. It's a contract, so that there's a relationship there; but on the other hand, it's a contract of adhesion, and it's not enforceable because nobody saw it until after they made the purchase, although, of course, we know if people are reviewing the website, especially to the degree that the plaintiffs allege they did, that those statements -- those contracts -- are right there.

And both the systems software license agreement and the terms of service made clear that they can be disrupted, changed, altered, terminated at any time. And that's reserved.

So again, you can't take this statement about a ten-year market cycle, standing in complete isolation. You have to look at the context of it....

Now we've got that one-year warranty here. And so there's -- it's just impossible for somebody to say that it was reasonable to expect that this would continue to last forever; or ten years, in this instance.

And if I can just go on a tangent for one second about the ten years -- Counsel mentioned "puffery." I would submit to the Court that a statement that we expect our product to have a ten-year market cycle is the epitome of corporate puffery. It's a statement of expectation in the future. It's not a promise of how something is actually going to perform.

Corporate puffery is not actionable. It's certainly not something that will support the fraudulent prong of the UCL. And you have to really think: Did anybody hear that or see that, and think that meant that the PS3 that I buy is going to be here, doing everything, for ten years?

I can speak for myself. I desperately wanted a Playstation 3 back then, more to run Linux on it than to play games, but I wanted both. I couldn't afford it at the time. It seemed a luxury I couldn't justify. But if I had plunked down the $600, and then was told down the road I would have to choose between the two essential (to me) functions of my game station/computer, I would have been absolutely furious, and I'd never buy another Sony product as long as I lived. If corporate executives can tell you things about the product as a selling feature and then take them away after they have your money, and then argue in court that it was just "puffery"... well, the courts might let them, because the courts have a pro-corporate bent these days, but my wallet is my own, and if a company treats me like a slick second-hand car dealer, I'm going to watch out from that day forward. I'd rather deal with a company trying to delight me and make sure I'm happy. Wouldn't you?

Chairman, president and CEO Howard Stringer is quoted in the San Francisco Chronicle as saying that the company expected 2011 to be a good year for Sony, until all the disasters hit:

Sony expected an annual operating profit of at least $2 billion, its best in three years. A batch of new products was headed for store shelves, including its first tablets, a compact 24-megapixel camera, and a portable PlayStation console.

Sony was also preparing to create a global network that would connect the company's movies, music and video games to all its televisions, tablets, PCs and phones - an iTunes-like digital platform. "I honestly and truly thought I was going to have a year to remember," he said over breakfast in his 14th-floor apartment on New York's Upper East Side. "And I did, but in the wrong way.

In fact, the Chronicle touches on Sony and Apple:

No product haunts Sony more than Apple's iPod. Before Apple introduced it in 2001, followed by the iTunes Music Store in 2003, Sony was working with other companies on devices that would download music, Stringer says. "Steve Jobs figured it out. We figured it out. We didn't execute. The music guys didn't want to see the CD go away."

I just read the Steve Jobs bio, Steve Jobs by Walter Isaacson, and it touches on why Apple was able to execute and Sony didn't, and the issue was quite simple: Apple understood that Napster, the original one, showed that the CD had become obsolete, as Jobs explained on page 403 of the biography:

"Piracy and online downloads had already deconstructed the album," recalled Jobs. "You couldn't compete with piracy unless you sold the songs individually."

At the heart of the problem was a chasm between the people who loved technology and those who loved artistry. Jobs loved both, as he had demonstrated at Pixar and Apple, and he was thus positioned to bridge the gap. He later explained:

When I went to Pixar, I became aware of a great divide. Tech companies don't understand creativity. They don't appreciate intuitive thinking, like the ability of an A&R guy at a music label to listen to a hundred artists and have a feel for which five might be successful. And they think that creative people just sit around on couches all day and are undisciplined, because they've not seen how driven and disciplined the creative folks at places like Pixar are. On the other hand, the music companies are completely clueless about technology. They think they can just go out and hire a few tech folks. But that would be like Apple trying to hire people to produce music. We'd get second-rate A&R people, just like the music companies ended up with second-rate tech people. I'm one of the few people who understands how producing technology requires intuition and creativity, and how producing something artistic takes real discipline.

Jobs was convinced that most people don't want to do anything illegal. If he could get the music industry to see iTunes as a solution to piracy, they would see it as beneficial to their interests. But the key was that Apple listened to what customers wanted and persuaded the music industry to go along; Sony listened to the music guys, what *they* wanted, so it didn't have an iTunes alternative that people wanted, and that has made all the difference.

It's pretty much the same problem in the class action. Games are artistic and they are technology. And people want a computer so they can do more than just compute. Instead of caring about what customers wanted, Sony thought about what *it* wanted. You just can't read the oral argument transcript and not come away with the feeling that it might be kind of hazardous to buy Sony products without having the terms explained to you in detail by your lawyer first, and that's not the message any company should be sending.

By the way, if you are curious what I thought of the Steve Jobs bio, I can state it simply. It confirms the closed nature of Apple, of course, but it explains that it was all about the artistry. Jobs felt that control led to better products, to a kind of technology art. And it seems to me Isaacson misses the essence, of Jobs himself, even while stating it. Jobs's son Reed understood his dad more profoundly than the author, and while Isaacson includes Reed's words, he missed their importance. Perhaps we could call it the Exceptionals' Curse, that less exceptional folks have difficulty understanding those with unusual ability in a certain area, so they tend to focus on what they *do* understand, the human foibles and flaws, two of the least important things when considering such exceptionally skilled people. In fact, Isaacson seems to be almost mocking in his treatment of Jobs' artistry, focusing on things no artist would care about and misunderstanding the importance to an artist of getting things just right.

I'll let Gustave Flaubert explain it, as he tried to do when criticized for being too particular -- an artist who sometimes took all day to finish a single sentence to his liking:

This concern with external beauty that you reproach me for is a method for me. When I discover a disagreeable assonance or a repetition in one of my sentences, I can be sure that I'm floundering around in something false. By dint of searching, I find the right expression, which was the only one all along, and at the same time the harmonious one. The word is never lacking when one is in possession of the idea.

--GF, March 1876

Hollywood, and Sony, might want to think about delighting customers as a business model.

Now that I think of it, so might Microsoft. They think Apple's edge is marketing, but it's not, and incidentally even Apple's marketing was different, because it expressed more than just "buy our product". Here's a video, from years ago, Steve Jobs explaining that to him branding, or marketing, is about values, about letting people know what you stand for, and what Apple wanted people to know was that what Apple stood for was that they believed that people with passion could change the world for the better.

I'm guessing even if Microsoft folk see the video, they still won't understand what he was saying, flat-footedly challenged as they are about values. I hope Sony will, though, and I hope they do something nice for their aggrieved customers, to show that Sony does care.

It's never too late to decide to be nice.

[ Update: The judge has granted [PDF] Sony's motion to dismiss, finding no wrongdoing. I guess that for Linux users, buying anything from Sony requires reading the fine print or having your lawyer do so before you buy. If you ever buy anything from Sony again as long as you live, a company where executives describe their products but their words are, to them, legally just "puffery".]

Here is the transcript as text:

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Pages 1 - 60

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

BEFORE THE HONORABLE RICHARD SEEBORG

In re: SONY PS3 "OTHER OS"
LITIGATION

C 10-01811 RS

San Francisco, CA
Thursday
July 21, 2011
1:54 p.m.

TRANSCRIPT OF PROCEEDINGS

For Plaintiffs:
Pearson Simon Warshaw & Penny LLP
[address, phone, fax]
BY: DANIEL L. WARSHAW

For Plaintiffs: Finkelstein Thompson LLP
[address, phone, fax]
BY: ROSEMARY M. RIVAS

(Appearances continued on next page)

Reported by: Lydia Zinn, CSR #9223, RPR, CRR
Official Reporter, USDC

APPEARANCES(Continued)

For Defendants
DLA Piper, LLP
[address, phone, fax]
BY: LUANNE SACKS

For Defendants
DLA Piper LLP US
[address, phone, fax]
BY: JOSEPH EDWARD COLLINS

(2)

THE CLERK: C.10-1811, In Re: Sony PS3 "Other OS" Litigation.

Counsel, please state your appearances.

MS. SACKS: Good afternoon, your Honor. Luanne Sacks and Joe Collins, of DLA Piper, on behalf of Sony Computer.

MR. QUADRA: Good afternoon, your Honor. James Quadra, on behalf of the plaintiffs.

THE COURT: Good afternoon. MS. RIVAS: Good afternoon. Rosemary Rivas, on behalf of the plaintiffs.

THE COURT: Good afternoon.

MR. WARSHAW: Good afternoon, your Honor. Daniel Warshaw, Pearson Simon Warshaw, appearing for plaintiffs.

THE COURT: Good afternoon.

MS. COLL: Good afternoon. Rebecca Coll, for plaintiffs.

THE COURT: Good afternoon.

This matter's on calendar for Defendants' Motion to Dismiss the First Amended Consolidated Class Action Complaint.

I have spent sometime with the papers that you've all submitted. What I'd like to do is -- let me start with focusing on the implied -- express and implied warranty claims, and then we'll proceed to discuss the other claims.

And why don't I start with the plaintiffs first; with

(3)

Mr. Quadra, or whoever else is proposing to address this.

MR. QUADRA: Sure, your Honor.

THE COURT: I suppose I can start with my first question, which is -

MR. QUADRA: Sure.

THE COURT: -- the big difference between the last complaint and this one, in terms of an item that is being presented as a basis for these claims, particularly the express warranty claim, is the statements by Mr. -- I think his name is "Harai" -- about the life cycle, if you will, of the PS3.

And I suppose my question is: Aren't you expecting that statement to carry an awful lot of water here, in terms of providing any kind of warranty that the Other OS function is going to be maintained in seeming perpetuity, and in no way will be affected going forward; at least, with respect to this ten-year period that you're identifying? It's a very general statement about the market cycle of a product. And to transform that into the flagship of your warranty claim seems to be expecting a lot out of that statement.

MR. QUADRA: Well, your Honor, let me at least clarify one point. Our allegation is not that it is a market-cycle statement; that, in fact, it refers to the life of the product, itself.

When it was first made, that specific statement in its entirety, which I believe -- the defense counsel sort of

(4)

cut part of the quote -- goes on to say that they're not envisioning putting out a new product, because they purposely make their products to last this period of time.

THE COURT: But the fact that they will not be putting out a new product is very different than saying,

"We are warranting that all of the functionality of the existing product will be maintained for ten years."

I mean, that's essentially what I see you saying I should read that statement to mean; and I think that's a very tall order.

MR. QUADRA: I understand the Court's concern.

What I'm trying to say, first, is that it's -- it's not a product cycle; it's a life cycle. It's based on the PS2, as they then claimed, lasting that long. And in this particular case, it's also coupled with the representations that the product, itself, would last -- would last that long.

And later on, actually, after the product was then marketed, they then reiterated that statement. As recently as, I think, 2011, they talk about the fact that the product lasts ten years. And so, coupled with the representations regarding what the product features are going to be -- those express statements -- that's our position; that -

THE COURT: Yes, but you're now saying that I should take that statement, and interpret that statement to say -- and

(5)

I know we're at the pleading stage, so, you know, all inferences go to you; but I'm supposed to interpret that fairly basic statement as saying,

"We are warranting that the OS feature will be maintained for ten years, and that consumers will be able to upgrade all other aspects of this product, and get the benefit of that. And all of that is what we're warranting to."

MR. QUADRA: Correct.

THE COURT: That's an awfully tall order.

MR. QUADRA: I understand the Court doesn't -- and we had the same -- similar issues last time when we addressed them to you.

Our position is that the case law supports the notion that the express statements made regarding the product, its functionality, its features, coupled with the fact that management at Sony was saying, "This product will last you ten years, and it will be an evolving product. It will be a computer that gets updated through firmware," is clearly conveying to consumers something they can rely on as a warranty.

THE COURT: Well, and let me just make sure that I am clear on this. You're saying "statements made." Is there any statement made before these particular plaintiffs purchased

(6)

their product, other than this ten-year statement by Mr. Harai? Is there anything else?

MR. QUADRA: Regarding the temporal issue, you're saying?

THE COURT: Pardon me?

MR. QUADRA: Regarding the time? The time that the product would be available? The life cycle?

THE COURT: Well, I'll broaden the question. Anything about the OS feature and its continued maintenance, and how the OS feature would interact in any respect with respect to the other functionality of the PS3. What are the other -- where are the statements?

MR. QUADRA: All right. As we pled in the complaint here -- I mean, in the complaint, your Honor, there are numerous statements made.

The statements are not specific regarding a time. It's not specific about the OS -- Other OS system; but there is, both on the box it references the OS system; websites that Sony put out that inform the consumer about the OS system. And -- and it's touting it as a primary feature of this product, and saying -- later on, you know, it's saying before the sale that it was a huge factor in this particular product that was a computer; that it would have updates to its software. So there were plenty of statements regarding the importance of this feature prior to the sale.

(7)

Now, if you're asking, "Did they say, 'We will never take it off'" in those particular words, no; but then again, that's not what a reasonable consumer would believe. If you - if I sell you a car, I'm not going to have to tell you that I'm going to take out the GPS. If I sell you OfficeSuite, I'm not going to tell you, "I may take out Excel."

I think it's a reasonable conclusion of a consumer that is informed by all of these aspects of sale: By the website; by the packaging.

THE COURT: But for how long? For how long?

MR. QUADRA: For the life the product. The product -- this is hardware, basically. And you're not expecting it to last for perpetuity. That is not the case.

The case is that it has a life cycle -- the product, itself. And to expect that within that life cycle, I'm going to remove an important feature is unreasonable for a consumer.

THE COURT: But again, you're not removing anything. They're upgrading. And, in the process, If you want the upgrade, as I understand it, it will then have a deleterious effect on this other feature.

They're not removing the other feature. You can maintain the other feature if you elect not to have the upgrade, right?

MR. QUADRA: Well, if you get the upgrade, 3.21, what you have to do is decide: Do I give up some features for

(8)

others? And that's deleting it. That's taking it away. You get -

THE COURT: If you elect to take the upgrade.

MR. QUADRA: It's not much of an election.

If I had, at the purchase price, been told, "Two or three years from now" -- I'm buying this because of the combined package being sold to me. It's got Blu-ray; game-playing capacity; and I can go on use it as a computer.

If I buy that, and it's priced with those features, and instead, you tell me,

"No. You know what I'm going to do? I'm going to sell it to you with those features now. I make no promises it's going to keep them. So tomorrow, after you give me $600, I can take it away from you" -

-- they wouldn't have been able to sell it. That's why they didn't make those representations. That's why they didn't disclose. And there's an omission of a fact that's crucial here: That the consumer could rely on the validity of thee statements to last the lifetime of this product; but they didn't do that. They didn't say that.

In fact, they made statements subsequent to the sale of the PS3.

(Reporter requests clarification)

(9)

MR. QUADRA: They made statements in which they reassured consumers when they put out the Slim that it didn't have this feature -- "Be reassured we're not going to take this away" -- confirming that they understood that consumers who had purchased it would have been worried about that, because they relied on it.

THE COURT: Is it your position that they were obliged, through some warranty concept, to keep access to the network always available? I mean, what are the aspects of the features of this product that you say they have to maintain? And isn't that critical, also, for your argument?

I mean, in order for you to say that somehow they have breached the warranty when they offer this upgrade, implicit in that is that they have an obligation also to maintain the access to the network; to all these other features. They have to maintain those, too, right?

MR. QUADRA: Correct, your Honor.

I think that the crucial features are identified in many of the representations made prior to the sale, and in the box, itself. I think access to the PSN network is a crucial feature that they did taut. Blu-ray -- being able to play those DVDs -- is important; and the game-playing capacity; and then to be able to do it on the PSN network.

But more importantly, you did raise the issue about these upgrades, these updates. Those are represented to be

(10)

upgrades. Firmware.

To say that there's nothing in the disclosure that they claim is a contract regarding the service and use of this product, that says that firmware can be used to make this kind of forced choice, and take away any of those features -- it is to upgrade. So the only reasonable conclusion, reading that, is going to be you're going to do something that improves the functionality; not deletes from it.

So again, I think the representations made, both prior to and during the sale, and subsequent, support both an express and an implied warranty, your Honor; but I understand the Court has concerns. Let me brief them.

THE COURT: Well, let's talk now about the implied warranty claim and, again, the privity issue that we had discussed before.

You had my prior ruling, obviously, with respect to those claims. What is it now, other than, you know, reasonable minds can differ, and you disagree with what my prior order reflected with respect to the implied warranty, how is it - why should I look at it differently this time, in terms of your first consolidated complaint, on the implied-warranty issue, other than to say, "Well, you were just wrong the first time"?

MR. QUADRA: I'll beg not to say that. How's that?

THE COURT: Well, it won't offend me.

MR. QUADRA: But what we say -- I think we've pled

(11)

more specifically, pursuant to what the Court did rule, to try to address your concerns. We pled specifically what is a novel issue that I think, simply by the fact that it's novel, should survive this, and allow us discovery to put it forth in more specific terms and various -- you know, as we present the case; but in particular, I think the issue here is that now Sony has admitted that they call the documents that -- a contract, at the beginning of this process: The warranty, the licensing agreement, the terms of service and use. And in those, they - they basically continue. They form a contract with the user.

And then it is required, if they want to be part of the PSN network, to then continue to deal not with a retail outfit; not with Best Buy or whomever they bought it from if they didn't buy it directly from Sony, which they could have; but with Sony directly. So they have a continuing relationship where they're directly addressing Sony on these issues.

THE COURT: The distinction your counterparts draw is they say, "Well" -- and this is -- I think U. S. Roofing is perhaps the case involved in this proposition. You know, that's all well and good when the direct relationship -- even if the purchase is not from, say, the manufacturer, if, presale, there is some contemplation of a transaction with the manufacturer, some ongoing relationship; but when you're already at the point that the product has been purchased, and then, down the line, there is some point in time where the

(12)

manufacturer gets back in the picture because you're doing some acquisition of ongoing services and the like, that's not what the case law says is the privity-establishing contact that you need.

So they draw this presale/post-sale distinction. And they read the case law as saying,

"If it's not presale, it's not going to get you where you need to go."

MR. QUADRA: To address that issue briefly, your Honor, because I don't want to take too much time on the warranty, because we have so much more to talk about, but U. S. Roofing and Cardinal Health stand for the proposition of a continuum. It begins in sale process, and it continues.

I would point out presale conduct by Sony was to taut not only the Other OS system, but the PSN network. And that then, prior to the sale, envisioned the continuing relationship and privity.

It isn't something that magically happens a year after. Oh, they now put out the PSN network, and we're going to have direct contact with them. It's contemplated presale and at the time of sale. And the date after you buy this product, people are on the PSN network having a direct relationship with Sony.

THE COURT: On the proposition that you presented a moment ago, about, well, you know, give us some discovery.

(13)

It's a novel concept, and we need to be able to flesh it out - if there is isn't support for that novel theory, isn't the appropriate approach that I make my ruling; you seek review; and on review, if a novel concept not otherwise existing is embraced -- okay? But is it -- is it for the District Court to decide: Well, while I can't find any support for it, it's an interesting possible approach, so I'll give them a chance to go forward? I mean, is it -

MR. QUADRA: Well, actually, we cited a case, your Honor. I don't remember the exact name of it. I could look it up in our brief; but it actually stands for the proposition that a novel theory does -- should survive a motion to dismiss, and stay in this court, and allow us discovery; but I agree with you if it was completely made out of, you know, the air, that would be different.

This is not. "Novel" meaning an interpretation of U. S. Roofing and Cardinal Health. It varies maybe a little bit from the facts, but the basic premise is the same; that there's this continuum, and that there is this ongoing relationship that was -- everybody knew they were going to enter even before they bought the product.

THE COURT: Why don't I hear from the defense on the warranties issue, and then we'll come back to the other claims.

MS. SACKS: Your Honor, I think Counsel misspoke, because he made a statement that the Other OS was represented

(14)

as a feature on the box. That is absolutely not so. It's never been pled. I'm assuming it was just a misstatement.

THE COURT: There are, however, some promotional materials, if I recall correctly, that, while it doesn't necessarily say specifically "the Other OS feature," it does suggest that the device can be used as a computer, and not simply a game console, right?

MS. SACKS: Yes, your Honor. There were some articles that came out. There was a press release that came out in advance of the release that mentioned it, among many other things; but when you talk about a core feature, I think it's very illuminating that it's not on the box. And so somebody couldn't have walked in, not having reviewed anything else, and said,

"Oh, I'm buying this because it offers this feature."

I'd like to turn for a moment to this idea of the ten-year market cycle. I'm looking at the statement that's attributed to Kaz Harai. It's at paragraph 122. And I think what's really important to focus on is: He's talking about a console; he's talking about hardware. Specifically, he said,

"Therefore, the PlayStation 3 is going to be a console that's going to be with you again for ten years. We're not going to ask the consumers to suddenly buy another

(15)

PlayStation console in five years' time."

Another statement was attributed to him at paragraph 123:

"Last time I checked, Microsoft never had a console that's been on the market for more than four or five years."

Another statement attributed to a Sony executive that's way back in spring 2009 -- so, long after anyone did their purchase -- he describes the platforms; the Playstation 3 console platform. Similarly, 2011 -- February 2011 -- again, long after anyone purchased, the description is:

"We provide hardware that will stand the test of time."

Very clearly, this discussion is about the PlayStation console as a product.

THE COURT: But is it so clear that on a motion to dismiss, you can find that that's the only possible reading of it?

I mean, you may well win the day when you make your motion for summary judgment, but at this stage of the game, is it really something that I can determine, if you can give any plausible reading to that statement that it is suggesting that the functionality of this PS3 for a ten-year period is going to be maintained? If you can read that -

And even if I was to find I don't think that's what

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it means, but perhaps I can see how someone could read into the "ten-year" comment that it applies to the functionality will be maintained for that period, don't I have to let it go to the next stage, at the very least?

MS. SACKS: Your Honor the difficulty with that is that we're talking about this, first, in the context of an express-warranty claim. And, as your Honor previously said, to stay an express warranty, there has to be an explicit affirmation of fact that is material, and it is reasonably relied upon.

Now, two of the five named plaintiffs concede they never heard about this "ten-year."

The other three claim that they saw it somewhere, and at the same time, they also looked at Sony's website prepurchase.

So what's very, very prominently displayed on Sony's website? The express warranty for one year.

How can you say that it was reasonable for someone to assume this was a guarantee of continued product performance - not just product, but software performance -- when, in fact, the actual written statement that is being provided to people -- and it is displayed to them when they're doing their prepurchase research -- says exactly the contrary?

Another part of the reasonableness of it is that they state in here that no other consoles have ever been around this

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long. This is just the PS3's platform.

Counsel said that this would be the time the product would be available.

So what basically we have to accept, if you're going to accept this precept, is that if, for any reason, any aspect of the PS3 or any software associated with it fails before ten years, it's a defect; it's a breach of that express warranty.

How can you get there, when you have the actual statement that was made to consumers?

The other part of it is that when this research was being done on the website, the other thing sort of prominently displayed are the terms of service with regard to the PSN and the system software license agreement.

THE COURT: Which they claim is contract of adhesion.

MS. SACKS: Well, I'm interested in the dichotomy here. In one instance, it's the things that establish direct privity. It's a contract, so that there's a relationship there; but on the other hand, it's a contract of adhesion, and it's not enforceable because nobody saw it until after they made the purchase, although, of course, we know if people are reviewing the website, especially to the degree that the plaintiffs allege they did, that those statements -- those contracts -- are right there.

And both the systems software license agreement and the terms of service made clear that they can be disrupted,

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changed, altered, terminated at any time. And that's reserved.

So again, you can't take this statement about a ten-year market cycle, standing in complete isolation. You have to look at the context of it.

The other thing is materiality. And if, in fact, this statement was so material to the purchase decisions by three of the plaintiffs, why is it that the first time we heard about it as a representation that they relied upon was more than a year into this lawsuit?

I have to remember it was not alleged in their original complaints prior to consolidation. It was not alleged in the first consolidated complaint. It only suddenly came up when your Honor demanded that plaintiffs produce some aspect of a temporal statement.

THE COURT: Well, but isn't that always the way it is? I mean, you start out with a complaint that perhaps doesn't have the level of detail that you think it does, but the Court determines that it doesn't. And so you replea. So the idea that there was something that is now added by virtue of the response to my order that dismisses the complaint, to then say,

"Well, not only is that the not going to be sufficient, but we think it indicates that you don't really mean it" -

-- is a bit harsh.

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MS. SACKS: Your Honor, if the original complaints that we referenced had been vague, had been nonspecific about the representations that the plaintiffs originally relied upon, I might agree with you; but in fact, they alleged everything else. They alleged all of the functions, all of the features that supposedly induced these people to buy it; but now we're hearing for the first time that this ten-year promise was truly material to their purchase.

What suddenly prompted that lightbulb to go on?

Obviously, it may be that somebody forgot it, but to suddenly have three individuals who say that this was material, none of whomever said it before, is a little striking.

THE COURT: But, even were I to agree with that, I'm not sure at the pleading stage that that determination can be made.

MS. SACKS: This does highlight a problem, though, your Honor. If this is going to be the basis of an express warranty, what do we do with all of the people who never saw it, like two plaintiffs here: Mr. Baker and Mr. Stovell? We're going to start talking about plat certification issues again.

THE COURT: Well, that's for another day.

MS. SACKS: Well, it is, except that, if this is really something that people believed was the promise about the life of the unit, why wouldn't purchasers have heard it

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ubiquitously?

THE COURT: Well, but my point is that if, indeed, that is the basis for the claim going forward, the class would be defined in a way that addresses your concern, because perhaps it's those who -- the class consists of those who have seen and relied upon -- can present an undertaking that they did, in fact, see and rely on it. I'm not suggesting that that's how the class would be defined, but you understand my point.

I mean, to the extent that you're saying there are certain people who would be outside of the contours of the claim, that's something that can be addressed in the class-certification process.

MS. SACKS: Essentially, your Honor, we would be eviscerating completely the manufacturer's express warranty; the written warranty that came with these products that said one year, which also disclaimed implied warranties, which we'll talk about in just a second; but when you're sitting there, and people are handed that, they have it in advance, available to them in the course of their research.

How can they say that they reasonably relied on a statement in an interview? It's not something that came with the purchase. It really turns express warranty on its head.

THE COURT: Why don't we now move to implied warranties?

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MS. SACKS: We talked a little bit about the idea that the -- it seems like the terms of service, the systems software license agreement, and that written express warranty -- they're good for the goose, but not good for the gander. They're good to create some kind of direct privity relationship, but they're not enforceable.

And the idea that somehow, based on things that the plaintiffs say they didn't see and didn't rely upon, creates this type of direct-dealing relationship that is demanded, creates privity with regard to the purchase of the product, just runs afoul of the law.

You know, you have to think about the setting of U. S. Roofing. There was money that exchanged hands before the purchase between the two people who then were alleged to be in privity. This would turn the entire law of warranties with regard to consumer products on it head.

The reason for a privity relationship that's required is because you're buying a product from a retailer who -- all they did was sell it. So they'd only have that liability.

You get to the manufacturer. That's where you come up with an express warranty, if something was made; but suddenly, we're melding them all together. So from now on, every time somebody buys a washer at Circuit City, it's going to have an implied warranty also from the manufacturer of that washer. And it's just -- there's no basis for it.

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THE COURT: But in this day and age, as plaintiffs suggest, the nature of product purchase could be that, virtually simultaneously with the purchase, you go and you load it on.

So let's assume you buy some computer-related game, or whatever else. And you load it on to your system. And you're almost immediately in contact with the manufacturer for ongoing services.

Do you really think that the dividing line is the moment that that transaction has occurred?

If you don't have this prior contact, if you will, with the manufacturer, then implied warranty is out the window, because there's no privity?

I mean, in other words, is privity as severely delineated as the moment of purchase is what we have to look at; and U. S. Roofing only gets you to that point? And if you're beyond the moment of purchase, you don't have privity? No implied warranty?

MS. SACKS: I would say yes, your Honor.

THE COURT: Okay.

MS. SACKS: I mean, otherwise, what's the point of having it in the language of an implied warranty requirement?

THE COURT: But you understand my point? It's that the nature of the transactions are changing now, and that the classic, old-style transaction of buying a toaster and, you

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know, you take it home, and you plug it in -- you're not going to have any kind of immediate service connection with a manufacturer; but if you have some software that you're buying, you may -- in the process of downloading it, you're already getting involved with the upgrades and all the rest of it. It's a slightly different world.

MS. SACKS: One of the problems, your Honor, is - and I don't mean to go outside the record, but I think this is undisputed. Roughly 40 percent of the PS3 purchasers never went onto the PSN; never got that direct dealing. And so they don't have an implied warranty, but the people who went onto the system do. And when they went onto the system, they were presented, before they could access it, with the system software license agreement. And it told everybody what the nature of the relationship was.

So to simply say that you go online and you -- you have some interaction begs the question of what that interaction is.

Do you have any other questions on implied warranty?

THE COURT: No. I think why don't we now move to the -

MS. SACKS: If I may add one thing that I'm sorry I forgot -

THE COURT: Yes.

MS. SACKS: We were talking before about the

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obligation to keep the PSN available forever.

THE COURT: Yes.

MS. SACKS: The Leong case.

THE COURT: It was a question I asked.

MS. SACKS: The Leong case, which we've cited in our papers, goes directly to that. That's a clickwrap agreement. It came after the purchase. It told people that if you didn't conform with the terms of service, that you could be terminated.

The notion that any service provider has some unending requirement to provide a service that it's providing as a license -- I mean, this is not something that people bought. This is something that was provided to them under specific, strict terms. And, unless they told them,

"By the way, the PSN's going to be here forever" -

-- they had no expectation that it would. And, in fact, as we know, as a result of the massive hacking event of Sony's servers, the PSN was down for weeks, because it couldn't otherwise, you know -

THE COURT: Is that, by itself, from your perspective, a defect in plaintiffs' claims?

I mean, in other words, the very fact -- is an essential premise of any claim that the Other OS feature has been somehow impacted -- would only be viable if there was some

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obligation to keep the other functions going: The PSN?

In other words, if you can say your position is we can shut off the PSN, then, to some extent, there's nothing that someone who's focused on the OS feature is really harmed by. In other words, they can continue to operate the OS feature; they just can't get the upgrades.

Well, if they don't have a right to the upgrades, they don't even have a right to the access to the PSN system, then how do they have a claim that somehow, by virtue of the upgrade being there, they're somehow impacted, if you can follow my question?

MS. SACKS: Yes, your Honor. And that's what the system software license agreement tells everybody; that we can provide update to you. And those could be security patches. Those could change features or functions. They can alter things; but I think if we go back to the allegations of the most recent complaint, you'll probably recall that there are paragraphs and paragraphs and paragraphs about all of these people -- typically, governmental agencies; the U.S. Air Force -- that purchased the PS3 solely to use it as an operating system computer, and never bothered to go on the PSN, and didn't buy games, and didn't buy movies.

Well, the release of this firmware update that people were choosing between having the PSN access or having the Other OS access -- those folks who were using the OS in that

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capacity were in no way injured at all. They bought the product for that purpose. They still have it for that purpose. And we know two of the plaintiffs are still using the Other OS. Sony is still supporting the Other OS function, which just - since I'm at that point, I'll loop around, and then I'll finish.

You know, this new idea that plaintiffs have that the reason for the release of the Other OS update was to save money -- your Honor, it just doesn't make any sense. If the idea is that we don't want to incur the continued costs of supporting a function, we would just stop supporting the function. That's the easy and cheap way to do it.

We wouldn't go through the expense of creating/engineering and the ability for people to either have the function that plaintiffs say made us a lot of money - access to the PSN -- or continue to have access to this function that costs us a lot of money, and doesn't reap any rewards for us. We'd just stop.

THE COURT: Do you think that supports the notion that it's a security motivation?

MS. SACKS: Absolutely, your Honor. And I think all we have to do is read the newspaper. I mean, Sony was the victim of the largest hack ever. 75 million people's data was taken.

THE COURT: I think I have those cases also, so yes.

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Case3:10-cv-01811-RS Document180 Filed07/25/11 Page28 of 61 28 Okay.

MS. SACKS: Thank you, your Honor.

THE COURT: Let's go to the other claims.

MR. QUADRA: Just a couple -- could I address a couple of those?

THE COURT: Yes. Go ahead.

MR. QUADRA: In Cardinal Health, the Court held that although direct dealings between a purchaser and manufacturer after the purchase are generally insufficient to create an exception to the privity requirement, whereas here, the essential -- here, the essentially -- they essentially adopt the benefit and the initial sales negotiations, and there are numerous direct dealings between the parties, the requisite privity can be established. And that's the basis for our novel, you know, claim. At the time of purchase, people were thinking we're going to use the PSN. We're going to have continuing relationships with them.

And, aside from the fact that Counsel doesn't like our pleadings, much of what she said lies outside of the pleadings. It's fact disputes that are for a later date.

THE COURT: Well, but when you just told me about the motivation of various purchasers, I'm not sure that's in part of this -

MR. QUADRA: Yeah.

THE COURT: -- as it's currently constituted.

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MR. QUADRA: Well, I think our complaint sets forth that there was this continuum that begins with the purchase, and continues into the sales.

What Counsel is saying is only --

THE COURT: No, no. My point is you were just telling me that particular purchasers have particular notions of what's going to happen.

Well, that may well be, but I don't think, with respect to the particular class members -- for example, the representative plaintiffs -- I have that in here, about what their intention was, and all of the rest. I'll go back and look at it.

MR. QUADRA: Well, your Honor, to use the Other OS system, to continue to use it, you had to be on the PSN initially. So there was this understanding that they were going to be part of it.

And -- and what I'm saying is when plaintiffs' counsel sits here and says, "40 percent of this," and "We've been hacked" -- this -- these are outside of the pleading.

And their arguments regarding our facts and the credibility of those facts -- that's not for today.

THE COURT: All right. We have -

MR. QUADRA: I think -

THE COURT: Pardon?

MR. QUADRA: Yeah. One more point is just -- in

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February of '07, just because of the importance of the future, which I think carries on to these other issues, Phil Harrison, from Sony, tells Newsweek that the Other OS feature is a powerful feature of this product. So, to the extent -- and there are numerous representations to that effect.

To the extent that Counsel's trying to diminish the importance of this feature, it just does not comport with the facts as pled in the complaint.

THE COURT: But doesn't diminish -- the feature can remain.

Your point is that it's not just that the OS feature is a valuable aspect of this product. You're -- critical to your claim is: You want it all.

In other words, it's not only a critical part of the product; but every other functionality has to be able to operate with it.

So simply establishing that the OS feature to some people is of importance doesn't really get you very far.

MR. QUADRA: Well, it does, your Honor, because I think that the Other OS feature -- people could buy a cheap computer and put Linux on it, potentially, right?

THE COURT: Sure.

MR. QUADRA: I mean it wasn't -- it was the combination of all of these factors that made it a particularly important feature for this product. And the product had all of

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these aspects to it.

I mean, it isn't like the -- the PS3 is the only hardware you can load a Linux on.

THE COURT: Some of this now may segue into your other claims -

MR. QUADRA: Right, right.

THE COURT: -- because what you've just said doesn't necessarily address the warranty claims.

Now, there may be arguments that you're going to make with respect to whether or not it's unfair practice to characterize a product as doing these things, when it doesn't do all of these things, or whatever; but in terms of the warranty claims, what you've just said is a bit amorphous, if you're trying to see how it actually does or does not make out a viable warranty claim.

MR. QUADRA: I was addressing Counsel's, sort of, trying to parcel out the word "console" versus "computer."

THE COURT: Okay.

MR. QUADRA: And in that setting, I think the console encompassed the computer in this product.

THE COURT: Okay. Now, as I understand it, there are -- you've got a CLRA claim; an FAA claim; a Magnuson-Moss Warranty claim, which I don't think -- I would suggest we don't need to really talk about it. It will rise or fall, I think we all agree, on the viability of the underlying warranty claims.

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17500, false advertising.

1700 -- 17200 UCL claim.

And then unjust enrichment, which, I think, in response to my order where I was skeptical as to whether or not that was an independent claim, you've now come back and kind of, as I understand it, refined it to pertain to one of your plaintiffs, and also refined the class that would be impacted. And you told me,

"Well, for that defined group, an unjust-enrichment claim is appropriate."

So I don't know what order you want to discuss these things, but I would invite you to address them.

MR. QUADRA: Sure, your Honor.

The Computer Fraud and Abuse Act -- let's start there. That's a claim that the Court found was viable to continue.

THE COURT: Well, I want to make sure that that's not -- you don't read too much into my order.

My order was -- in part, I didn't quite know what type of claim you were formulating. And I wanted to see it fleshed out further. I didn't say that you've survived the motion for summary -- to dismiss on the FAA claim. I think I made it clear that I was going to look at it again in the context of all of the claims.

So go ahead.

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MR. QUADRA: So starting there, your Honor, I think -- where I think Sony is incorrect is in looking at it from the wrong perspective. I think that the claim is clear; that what it says is that there is -- it's a violation Computer Fraud and Abuse Act to damage a product without authorization.

And here our position is -- and we spell it out in the complaint -- that there was no true authorization to do anything to the system to take away any valuable feature; that, in fact, 3.21 -- that upgrade was not an upgrade. It was, as my co-counsel said, a Hobson's choice, where you were forced to give up an important feature or another important feature. And therefore, it was not a true choice, and therefore, not authorized. It was forced upon the consumers.

And in that case, we have we cited the Apple case, where there was no authorization, and yet phones were destroyed when they were being kept; and also the Cisco case, where a password was demanded from an employee, and that was found to not be true authorization, because it violated policy.

So here, again, the promises regarding what was going to happen with the upgrades was that it would fix problems; that it would make the computer and the part of it in the console evolve.

If you look at the language of the warranty agreement, if you look at the language of the terms of use, if you look at the licensing agreement, the language is not

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specific. And it does not disclose -- and it is an omission, if that's what they're relying on -- to say that that allowed for a feature to be discontinued.

And so our position is that the Computer Fraud and Abuse Act clearly demands that they not do that; that they can't reach into a product and damage it, without authorization. They lacked that authorization. That's what we're pleading. Again, this is the pleading stage. And therefore, we should be able to then do discovery on this if we need to, but there's -- there's -- our facts, as alleged, fit this model.

THE COURT: The CLRA claim?

MR. QUADRA: Well, before we go there, your Honor, if I could touch on the unlawful prong of 17200, because we have a claim there, that one is a claim that borrows, as the Court is aware, from any other violation of statute. And therefore, if the Court concludes that the Computer Fraud and Abuse Act survives, then that claim of 17200 should, by definition, survive as well.

And I would -

THE COURT: All right, but you also use other prongs of this statute.

MR. QUADRA: Correct. And so if we can move to those, if the Court prefers in that order, there's the unfair prong. And, as the Court is aware, that prong is loose in its

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definition on purpose. The statute reads so it can actually prevent all kinds of new potential schemes that might arise.

And there's a great quote from the Supreme Court, "in the minds of men," and all that. I was told by Counsel that if I say "chicanery" now, I get $20, so I just used it.

The unfair prong, I think, fits this description, your Honor, of what -- the events here. What we have is sale of product that is touted to be a computer. It is priced as a computer. It's -- or above the other consoles in the market.

It is touted to have the ability, and, in fact, Sony goes out of its way -- and it was mentioned about the Government creating -- using it to create supercomputers. That was a way of promoting it.

And, in fact, even the people who were not going to use it were going to be suitably impressed by the fact that they were buying not only a console, a computer, and therefore, that could be used for games that were going to be at a higher level -- they were clearly marketing it that way.

Now they're saying,

"Well, by the way, we have this right to take it away that is buried in documents that have to be okayed and clicked on after you purchase it."

And there was no reasonable basis that they can say a reasonable consumer needed to hunt those documents or be aware

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of them.

THE COURT: Let's assume for a moment that I don't go with you on the warranty claims.

And I agree with you that this unfair prong of 17200 is broad, but if there is no viable warranty claim that can be brought, how can the manufacturer be subject to essentially a -- well, this is really an unfair collection of representations. They don't violate a warranty, but they're just somehow unfair.

Doesn't that eviscerate the idea that you either have a warranty claim, or you don't?

I mean, because -- or another way to phrase it is: The really actionable claim that can be brought relative to a product and its functionality or lack thereof is either a warranty claim, or not?

MR. QUADRA: No, no, your Honor, because I think when we talk about warranties, we're looking at potential defects or breakdowns of -- of the machine. That's the context that Counsel wants to look at it.

We were talking of a warranty regarding express promises or implied promises regarding keeping a product, which -- that functionality, which is different.

If you look at the unfair prong, though, the one thing that I think highlights the issue that you're raising is that the unfair prong does not require reliance, which is

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different than the fraudulent prong.

And because the unfair prong does not require reliance, it is much like the Computer Fraud and Abuse Act claim, wherein, if you reach without my authorization into this product, and force this choice on me which is not truly a choice, that's unfair. To take away something you promise to give me is unfair, without having disclosed -- and we say it's an omission; that they had the alleged, purported authority to reach in. And we're saying you didn't. You didn't disclose that, and so that's unfair.

And I don't think it negates warranty law.

What it says is you cannot act in a way that essentially, you know, a reasonable consumer will be basically misled, when combined with an omission, and take this away from me. And that is unfair. That's the classic definition of what a new scheme or a new thought or a new way of marketing that is inappropriate would fall within this provision.

And Court has to remember, as set forth in Tobacco II, the fraudulent prong, the Supreme Court said, does require a reliance. It has a reliance requirement. And they, in a footnote, spell it out. Other forms of unfair business practices do not. Unfairness is one of them. It does not require reliance.

And, of course, a warranty does talk about privity and communications. Here, you don't need that, so it's

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different.

And then I -- quickly, on the 17200, the fraudulent prong, where I do think there is, obviously, a reliance requirement, there is, though, a relaxed reliance requirement since Tobacco II. The Supreme Court said you don't have to go out and find out what every class member thought. And we've laid out in our complaint what reliance our class representatives had, which is exactly what we were supposed to do under Tobacco II.

Now, one aspect of it is whether we've pled to the Court's satisfaction 9(b). We reserve the right, and respectfully disagree that that's required; but we did try to address the Court's concerns, and had a specific section on 9(b) where we tried to address who, what, where, when, how.

We also had, in our parties section, where we talked about the individuals, what their reliance specifically was.

And throughout the complaint we talked about the different aspects that we believe meet clearly 9(b). So we have pled it with the sufficient heightened pleading particularity required. And it goes to both reliance and the heightened pleading.

And then the fraudulent prong, though -- one has to remember that it goes to the "likely to mislead." And there, again, it's the statements that Sony made regarding this product prior to sale and continued to make after sale that

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clearly led everybody to believe, when, after launch, because people were still buying it, that, in fact, it was a key feature that they would maintain during the life of this product.

They said it as late as when they marketed the Slim -- "We're going to keep this up. Don't worry" -- again, giving credence to the fact that they knew a reasonable consumer with just this standard would have believed that it would have survived during the life of the product.

Then they -- it's a -- this claim is attacked on the notion that somehow there's no standing, because we can't seek restitution from Sony, since the money may have been paid - not always, because sometimes you can buy directly from Sony - to a third party.

Again, that is not correct. That's not a correct statement of the law.

The cases relied in the opening brief by Sony actually have been overruled.

And we asked the Court to look at Clayworth, which is a California Supreme Court case, and Shersher, which is another case, and McAfee, which is a Northern District case, that spell out clearly that consumers have the right to go, when they're subject to a fraudulent-prong claim, seek restitution directly from the manufacturer, even if they purchased the product through a third-party retailer. And that's because it's

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obvious. I mean, basically, Sony profited from those sales. Okay? The money was paid to someone else, but ultimately, in the chain of commerce, they were profiting from the sales to the consumers. And therefore, 17200 spells out -- and the law that follows it -- that you can directly sue and seek restitution from Sony.

There was one issue that goes in conjunction with that that we wanted to at least address from the Court's last ruling was -- I think there was some confusion regarding whether injunctive relief could be sought in a case where there's no, quote, "money damages."

Well, under unfair-business law, that is the case. You can, in fact -- standing is defined whether you were - there was loss of money or -- but that doesn't mean you have to seek those damages or seek that restitution. Injunctive relief, after you get past standing, is a stand-alone remedy that you can seek. And we've cited the cases for that, your Honor, Kwikset in particular, was an issue in which -

(Reporter requests clarification)

MR. QUADRA: And Kwikset specifically spells out that injunctive relief is a stand-alone remedy that can be sought. And we seek restitution and injunctive relief here; but certainly our injunctive-relief claim can withstand challenge here.

That brings us a bit into the Consumer Legal Remedies

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Act case, your Honor. Again, the 9(b) requirements are also met there. The Court asked us there, and we met them there as well. The same sections apply to those specific allegations.

And then when you look at the -- much is made about a statute of limitations, and when the injury occurred. I think Rubio, which we cite for the Court, and Mass. Mutual specifically spell out that, in fact, the statute begins to run upon discovery of the harm. That would have been, obviously, when the feature was removed.

The fact that that works in combination with potentially true statements made at the time about the fact that the -- the product contained this feature, but then, in conjunction with the alleged -- the alleged right that supposedly Sony keeps to remove it that is not readily disclosed -- that's an omission. And so it fits into the omission model of the Consumer Legal Remedies Act cases.

And there, it's like a -- and also, it fits into the Gerber case, which is a Northern District case, your Honor, Ninth Circuit. The issue there is that Sony makes -- makes a point of saying that somehow consumers were supposed to go on the website prior to purchasing, and somehow search there, and find the documents that would somehow disclose the right that they could come in and remove a feature.

Now, if you look at those documents, I don't think any reasonable consumer could be held to the standard to

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understand that that's what Sony actually meant, because I don't think it actually says that; but more importantly, there's no duty to do so.

If they're making representations that lead reasonably a consumer to believe that this will last through a lifetime of the product, then there is no duty to go beyond that.

If you look at the Gerber case, where it says you don't have to try to look on the side of the box to see if that says, in the ingredients, something different than what is touted on the front of the box. And that was a product for kids that had supposedly natural juice or fruit in it. And somehow, if you looked at the side of the box at the small print, you would figure out that it didn't necessarily match the claims made.

Same concept here, your Honor. They're making claims about this product. They're making the consumer believe that it's going to last during the life of the product. And instead, they somehow say they have, buried on their website - you can go take a quick look; a prepurchase look -- at buried language that somehow gives them the right to take it away. There's no duty to find that or look for it.

And this temporal issue, your Honor -- it is true they we had put in ten years, but we also believe -- and I think it's stated in the complaint -- that a reasonable

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consumer could simply believe it was going to be for the life of this product under this provision -- the Consumer Legal Remedies Act -- irrespective of those claims, because when you buy a product, and they tout this important feature, there's no reasonable consumer who is going to think, after they say that that's a reason for the pricing, that somehow, that's going to be taken away tomorrow or the day after or a week after; they can just take it away after you're paying for it. No reasonable consumer is going to believe that. And therefore, that's our allegation. At the pleading stage, we have a right to go forward and try to investigate and prove those claims.

Also, they talk about puffery. And our view, as we cited in the Consumer Advocates v. Echostar case, statements that can be confirmed through discovery are not puffery. So to the extent Sony is now trying to state that the statements made by senior officials from the company regarding this product or its feature were puffery, well, that's a question of fact we're going to have to go down the road and prove, because I think, through discovery, we can ascertain and prove to the Court that those are provable issues, rather than puffery, which you can't prove. It's an exaggerated statement.

There's also an unconscionability provision that we're citing there, your Honor. And that goes to something the Court already alluded to, which is it's a contract of adhesion. And the fact that it was buried in their documents that you

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click on later, and the fact that actually the language is difficult to even decipher all goes to the unconscionability argument.

And if the Court has any questions, we can try to address those.

And then on the, I think, 17500, which is the false-advertising claim, your Honor, I would say it's basically, as the Court is aware, the same law as under 17200, so I won't spend time on that; but I would want to raise the issue of -- on the motion to dismiss the class allegations. That is basically, as far as we see, a rehash of the motion to strike, which the Court did deny.

THE COURT: You don't need to address that.

MR. QUADRA: Okay.

THE COURT: I will obviously go through each of these arguments, but the one that I'm not going to revisit is, if you -- put it this way. If you survive on the motion to dismiss, I do think that the class issues are for another day. And so that portion of my prior order will not be revisited.

MR. QUADRA: All right, your Honor. The one thing that was raised there was ascertainability. And I think this is easily a self-identifying class. They know who they are.

THE COURT: Okay. Let me hear from Ms. Sacks.

MS. SACKS: Your Honor, if I may start with the CFAA claim.

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THE COURT: All right.

MS. SACKS: The authorization is not just the contractual authorization of the systems software license agreement. The authorization was the person by person clicking on saying, "Yes, I accept." And they knew -- as is pled in the complaint, they knew exactly what was going to happen when they clicked, which makes the Apple case completely inapposite.

The issue in the Apple case was they told you this download was going to do one thing. They didn't tell you it was going to brick your phone. So they had to no idea what the actual consequence was going to be.

Here, we told people,

"If you do this download, you will no longer be able to access the Other OS."

We also told them what would happen if they didn't do it.

Now, plaintiff seems to think -

THE COURT: Their argument is that effectively, at that point, their hand is being forced, in a way; that any click-through, if you will, is no longer the function of voluntary authorization; but rather, their hand is being forced.

MS. SACKS: But your Honor, that's not what the CFAA requires. The law here in the Ninth Circuit is very clear on this. Authorization in the context of a Consumer Fraud and

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Abuse Act simply means with permission; and it doesn't mean why the person was asking for that permission.

In the -

THE COURT: Well, they would say it's with coerced permission. And you say that's not good enough?

MS. SACKS: Absolutely, your Honor. If I accept it, then there was not an unauthorized intrusion on my computer. That might be something for some other claims, but not for the CFAA.

The allegations of the CFAA -- I'm sorry. The requirements of the CFAA are very specific. And the courts say that authorization depends on actions by the one with power to grant it. Here, that would be the PS3 owner. In the LVRC case, it was the employer.

The Court notes that the defendant's state of mind - i.e., his intent; the reason he's asking for this access - does not determine whether authorization has been granted.

So this notion that we told people we were doing it for security reasons, and, in fact, we were doing it to save money, is not something that has any place -- any role -- in the CFAA.

And that's important, because if you look at the LVRC case the issues that were raised there by the employer said,

"Look. You know, this person was my employee. And all of a sudden at one

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moment, he had a different motivation in accessing this. He went from being loyal to being disloyal. And I never authorized him to have access as a disloyal employee."

And the Court said,

"That is just not good enough."

The important part of the CFAA is it is a technical statute. It requires a physical intrusion. And there is no physical intrusion here that the user didn't know about.

THE COURT: Okay. Actually, why don't you move on to the -- well, in whatever order you want. You know, 17200 and the CLRA are the two that I would ask you to focus on.

MS. SACKS: Certainly.

With regard to the UCL claim, because that's a pretty quick one to get through, Daugherty makes clear that you can't end-run the requirements of an express warranty, in effect. You can't make an unfair claim under the UCL if you have an express warranty that tells people how long they can expect that product to work.

And as Daugherty says the only thing a reasonable consumer could reasonably expect was that the product would function for as long as it was expressly warranted to function.

Now we've got that one-year warranty here. And so there's -- it's just impossible for somebody to say that it was reasonable to expect that this would continue to last forever;

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or ten years, in this instance.

And if I can just go on a tangent for one second about the ten years -- Counsel mentioned "puffery." I would submit to the Court that a statement that we expect our product to have a ten-year market cycle is the epitome of corporate puffery. It's a statement of expectation in the future. It's not a promise of how something is actually going to perform.

Corporate puffery is not actionable. It's certainly not something that will support the fraudulent prong of the UCL. And you have to really think: Did anybody hear that or see that, and think that meant that the PS3 that I buy is going to be here, doing everything, for ten years?

I'd submit that if that's the kind of warranty they were giving, this would have been a 5,099 product instead of a 599 product.

THE COURT: But don't you think, at the very least, it's fair to say that when this product is made available in the marketplace, the suggestion is, in a very general sense, you're going to be able to use this to play games, to access the network, and, in fact, it can even be used as a computer. I mean, that sort of general message is out there, isn't it?

MS. SACKS: I don't disagree, your Honor. It's out there; but it's -- how long is it out there? At this point in time, every manufacturer of a consumer electronic product just took on liability that it never intended to. We can go back to

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the Sealey case, where the Court said that you can't change the entire relationship between a manufacturer and a purchaser after the fact, because the manufacturer priced that product with the expectation that its obligations would be limited to its express warranty.

And so the societal costs of suddenly adding nine years onto the life of every PS3, without any consideration back -- I mean, if the plaintiffs wanted to have a longer warranty, they could have bought an extended warranty. That's why they're offered. When they're sitting there at Circuit City and they're buying this product, the Circuit City person says,

"Well, you know, it only has a one-year warranty. Do you want to buy our Circuit City warranty?"

How, then, could they reasonably suspect that it's ten years?

THE COURT: But the warranty notion really goes to, in a sense, you know, the mechanical operation of the device. Is it going to work in a certain way? Is it -- you know. Whereas the unfairness part of UCL kind of goes to -- it goes to expectations of the purchaser. And is there a -- not that we're warranting it's going to do this, that, or the other thing, but that the suggestion is out there that this product is going to be able to perform a certain collection of things

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that you think it can do. And then -- lo and behold -- at a certain point, they pull the rug out from under.

Isn't there some room for the UCL claim to cover an area where it may not be covered directly by a warranty?

But what troubles me is that I do think it is not quite as simple as saying.

"If there's no warranty claim there, UCL has no place in the equation."

And I'm not sure you get there.

MS. SACKS: To reference a decision by Judge Fogel, Barenblat -- the second Barenblat decision -- Judge Fogel concluded that you couldn't state a UCL claim where the product conformed to the express written warranty, simply because the fact that it failed at some point after doesn't constitute a substantial injury to consumers of the type that -

THE COURT: Of course, we're not talking about the product failing. That's really not the question here.

The question here is: The rules of the road are being changed by the manufacturer down the line.

Not -- the device -- there's no dispute the device continues to operate in various ways. So it's not -- that case, I think, probably arises in a different context of, you know, a truly failed device. And so I don't remember it. I have to go back and look at it.

MS. SACKS: The facts, your Honor, were that Apple

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had represented that this -- I think it was a notebook computer -- would have two gigs of memory available. And over time, for whatever reason, it didn't have two gigs available.

So what is the difference between that, and ours?

They're saying that it came out. It had the Other OS feature at the time it came out. And at some point after the expiration of the express warranty, it didn't have the Other OS feature.

There's no logical reason in law to draw the distinction between something not failing -- I'm sorry - something not working because it has a technical problem, and something not working because it has been technologically changed; but if I could go on for just one second about the 17200 claim, Counsel was talking about injunctive relief. And the question here is whether or not you're seeking an injunction or whether you're seeking restitution. Under Daugherty, you can't do it. You can't end-run this issue.

Well, we also talk about an injunction. What is the continuing threat of harm that's being remedied here?

The Other OS has already been -- if -- if someone downloaded it, it's gone. If they didn't, they're continuing to use the other features. So the idea that you could get injunctive relief here for this just doesn't fit the -- the facts.

Then, moving on to the unjust-enrichment claim, this

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is the claim with regard to just the subset.

THE COURT: Mr. Baker, yeah. Actually, I don't think I need any argument on that.

MS. SACKS: Okay. All right.

THE COURT: And false advertising is more or less --

MS. SACKS: It's covered.

THE COURT: -- covered, so --

MS. SACKS: So the CLRA claim --

THE COURT: Okay. Yes.

MS. SACKS: The problem is that the CLRA Claim 5, 7, and 9 -- those aspects of the statute are affirmative misrepresentations, or the failure to disclose a fact that you were duty bound to disclose. And none of the things that the plaintiffs have talked about establish either an affirmative misrepresentation or a duty to disclose at the time of sale.

And I heard Counsel comment on the fact that when people bought it, it performed as it was supposed to. And that's what the CLRA goes to. It's not this idea that at some point later on, something isn't there. It's a sale-type statute.

Now, the unconscionability argument, which also comes out of the CLRA -- again, I think it's the goose-and-gander issue.

If you're going to rely on the terms of service, and you're going to rely on the systems software license agreement

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as something creating privity, then you can't suddenly walk away from them.

And what is it about the language in either of those agreements that is so shocking to the conscience? It's a license agreement. Anybody who buys any kind of software, anybody who goes on to the Internet and downloads, whether it's software protection; whatever it is, it comes with a license, and it tells you: Here's the terms under which I'll let you use it.

THE COURT: Well, that's true; but it doesn't necessarily mean that it's not a contract of adhesion.

MS. SACKS: But we're jumping to the next step. Just because it's a contract of adhesion doesn't mean it's unconscionable. Everything is a contract of adhesion these days, because somebody hands you a contract and says,

"Do you want to sign this, or not?" -

-- other than in a commercial context; but the important part here that Counsel acknowledged is the PS3 wasn't the only ball in the game. He could have gown out and bought a computer and run it -

THE COURT: Counsel points out that some of those arguments are a bit beyond the pleadings. I mean, the marketplace and how competitive it was or wasn't is not really part of what's before me.

MS. SACKS: Well, what the complaint doesn't include

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is an allegation that the plaintiffs were forced to buy this product. And that was acknowledged by Judge Fogel in the Barenblat decision also, that post-sale terms -- in that case, it was the warranty; express written warranty -- don't become unconscionable just because somebody decided to buy a product. As Judge Fogel said,

"If you get it home and you look at the express warranty and you don't like it, you return it. You get your money back."

That doesn't make the warranty unconscionable. To say that people can accept a warranty at the time that it's delivered, and continue to use the product, and then whenever they see fit, say, "Oh, I don't like this warranty term," takes away the whole notion of the ability to project your costs, your business expenses from a manufacturer.

And it's so one-sided, you know. They're talking about the warranty being one sided from Sony's perspective. Well, how about the idea that somebody can just say, "All bets are off?"

So -- and I want to keep moving on, because I know that you've got a lot to cover. We did CFAA. If I can just look over my notes for one minute.

If I covered this already, I apologize. Sometimes I think I said it when I wrote it down; but under the fraudulent prong, under the CLRA, all of these things have to have been

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untrue at the time they were stated.

And so in order to get to any of those claims, you would have to accept the proposition that in 2006, when SCEA was first releasing this product which plaintiffs say it invested millions and millions of dollars in -- this Other OS feature, as well as other features of it -- it intended at some point down the road to disable/take away/remove that feature. And there's just no allegation in the complaint.

And it's so beyond the pale, that it makes no sense. They've already sunk the money into the research and development at the time that they released the products. People have already bought the products. What would be the motivation for a manufacturer, who, as they've talked about - this is a long line of products: The PlayStation; the PlayStation 2; the PlayStation 3. What would be the motivation to go out there and say all of these great things about a feature, knowing that you were going to take it away?

I think I've covered everything, your Honor.

THE COURT: Very well.

MS. SACKS: That's it. Thank you.

THE COURT: Very well. Thank you.

Anything further? Very short.

MR. QUADRA: Okay, your Honor. On the 17200 issue that Counsel just raised, I don't think they can have it both ways. They're saying they reserve the right to take it away.

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We're arguing that, in conjunction with the statements regarding the sale and that omission, is both fraudulent and unfair.

THE COURT: Why don't you, though, address the last point that Counsel made, about the temporal aspect of this? Isn't it critical that at the time of sale, this nefarious scheme, if you will, from your perspective, to do this -- I'm putting a lot of characterization in this. The bait-and-switch sort of thing, that's got to be in the plan, the get-go, for these claims to survive?

MR. QUADRA: No.

I think, your Honor, if you look at the Consumer Legal Remedies Act cases and the 17200 cases, if you combine what -- and Gerber says this.

"An arguably true statement combined with an omission creates sufficient grounds for a cause of action."

That's in the Gerber case.

THE COURT: Well, that doesn't go to the -- that may well be, but that doesn't really go to the temporal aspect of it.

MR. QUADRA: Well, the temporal aspect of it, if your Honor's saying -- I mean, if you're talking about -

THE COURT: Are the statements and representations and, if you go to omissions -- doesn't it all have to happen at

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the time that these transactions occurred that the device is purchased?

MR. QUADRA: Correct. And more -

THE COURT: They have to know that they're going to take -- from your perspective, take the Other OS feature away, or impact it in a negative fashion down the line?

MR. QUADRA: I think that simply preserving the right, allegedly, to take it away is sufficient. In other words, they're saying,

"Look. Here's the product. Here's the product. Here's the product. It's great. It can do this."

-- implying: Look. Ten years, you're going to have it.

And the language, your Honor -

THE COURT: You don't think they have had to formulate the plan at that point to change the rules down the line?

MR. QUADRA: No. In fact, 17200 fraudulent prong does not require intent. It's just likely to deceive.

And those cases don't talk about intent at all. They talk about: Will the consumer be misled by ultimately what happens?

And here there's no disclosure of that. And what I think I heard Counsel say is it couldn't have taken it away

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during the first year.

So now they're saying,

"Well, but if it's after the first year, then I can take it away."

Well, they didn't disclose that. They didn't say that. And she's saying the warranty was one year.

In Rubio, there's the case where they disclose a certain rate of interest. And then they popped it up later. And that was found to be actionable, your Honor; whether they had a plan or not to do it -- irrelevant. It's about misleading the public.

And I would say that Daugherty -- I think we have to make that clear, your Honor. That case addressed fixing a defect, as the Court has raised; completely different than reaching into a product and removing a feature.

And I have to remind the Court that the people who clicked and said "No" to the update lost the use of Blu-ray; lost the use of some games. That was clearly a huge feature in this product, yet they were denied that. I mean, clearly, that was a way of pushing them to do this.

And then in February of 2011, they made these statements where -- and we're putting in paragraph 125 -- where they said the ten-year life cycle -- they say "life cycle"; not "product cycle"; "life cycle," or "marketing cycle" -- is a commitment; a commitment we've made with every PlayStation

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consumer to date. It's a commitment, they're saying. They're not just throwing it out there. They clarified that as it applied all of that to the PS2, to the PS3.

So I think, your Honor -

THE COURT: See, I have to tell you -- and I'm not saying this necessarily is dispositive for purposes of your motion, because, as I said at the outset, if you -- if there's is any plausible interpretation, then the inferences go to you; but that statement, to me, says,

"We're not going to come out with a new model, such that you're going to feel like you bought something obsolete two years from now. This is going to be our product for ten years."

I don't think it -- I think the obvious reading does not connote a representation that functionality of the device will remain unchanged. And that's what you're suggesting it means. And I don't think that's the meaning of it, but I have to --

MR. QUADRA: But a reasonable consumer.

THE COURT: Well, I have to decide that question, but --

MR. QUADRA: And then finally, your Honor, one thing on the computer fraud. I would ask the Court to look at Cisco Systems, because in that case, there was an employee who

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was basically forced to give up his password. So he knew he was giving it up, yet ultimately, that was found to be actionable, because it was a violation of the policies of the company.

Same here. It's a choice under duress, which is not a choice under the Computer Fraud Act. It's not authorization.

THE COURT: All right. Thank you. I'll take the matter under submission, and do my homework, and give you an order.

(At 3:07 p.m. the proceedings were adjourned)

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