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Determining civil and criminal liability for the lost iPhone

Lauren Hirsch
Lauren Hirsch|April 23, 2010 9:00 PM
Editor's Note: One of the advantages of having an attorney on the TUAW team is the opportunity for this sort of deep-dive legal analysis. We asked Lauren to dig into the circumstances and statutes around the case of the mystery iPhone, and she obliged.

While Lauren is a real lawyer, she's not your lawyer, nor is she licensed in California, so please do not make decisions about what to do with found property in bars without consulting your own legal counsel.

Ever since Gizmodo put up those pictures and claimed to have Apple's next iPhone in hand, questions have been swirling about what the repercussions, if any, might be from a legal perspective. While the iPhone's peddler probably ought to be finding himself a lawyer, the more interesting question is this: is Gizmodo courthouse-bound? This question has gotten increasingly more interesting in light of the fact that as of today, CNET reports that Silicon Valley police are looking into the matter.

Let's break it down, with a lengthy look at just who might be wronged and how. Find the nearest leather chair, a bookcase of legal tomes, sew on your elbow patches, and get ready to look contemplative.

There are two entities to which Giz could be forced to answer: they are Apple, and the State of California, representing both civil and criminal liability respectively.
Let's dispatch the easier one first:

Is Gizmodo criminally liable?

My first thought was... probably not. While it doesn't take a genius to figure out that California must have some kind of law against receiving stolen property -- indeed, it does -- Gizmodo's story on first blush has a fair amount of resonance. Gizmodo has maintained that it didn't know the device was genuinely Apple's and not some clever fake until it got hands on it and took a close look. In order to be criminally liable, a person would need to know, or have reason to know, that the thing they're acquiring is the property of someone else. And one can't deny that the story is pretty fantastic: in no other case that I can think of has an Apple employee ever inadvertently lost such a high-profile device right before its release.

So I don't begrudge Giz one bit for being rather skeptical of the bona fides of this device prior to actually inspecting it; even if fake, any potential iPhone prototype would have to come with a story like the one they were being told. After all, this person wanted $5,000 (or more), and his narrative has to support that price. Once Gizmodo had inspected it and determined that it was genuine and therefore stolen, it appears not to have withheld the device from Apple. From a criminal perspective, once Giz was reasonably knowledgeable of the device's authenticity, the offer to quickly return it to Apple (as long as it's supported by evidence), seems to absolve the gadget blog of criminal liability.

So, that was my initial thought. Since then, having looked into several of the details, I'm not so sure. I'm Not A California Lawyer, but California appears to have a pretty robust "sniff test" for imposing liability under Cal. Pen. Code § 496(a). In other words, if the circumstances reasonably lead a person to believe the thing is not the lawful property of the seller when you attempt to buy it, that person's on notice.** And while Giz says it's reasonable that the device was a fake, it's also reasonable that it was not. Not only that, but Gizmodo's own story explains how they were able to plug the device into a computer and basically give it a good look-see before forking over the $5,000. I'm pretty sure they, as any good geek would, were able to ascertain pretty much immediately that this thing was real. It had unique device codes, it opened iTunes... And even though they say they weren't sure it wasn't a 3GS crammed into a new case, they knew that screen was higher resolution than prior models.

Frankly, with that extra information, I'm not so sure this passes California's sniff test.

And that's not all. Even assuming they didn't know it was real until after they bought it, they sat on it for a quite a while, taking pictures and dismantling it. That way, they could get their story and then turn the device over "right away." But they knew it was real at some point very soon after acquiring it. "But," you're saying, "as long as they intended to give it back all along, how can they be guilty?" To that, I say, "Would you like to find a nice car and go joyriding in it with me?" Didn't think so.

No, there's a definite chance that, depending on how Apple presses the case and what evidence Gizmodo has to their defense, Giz may have an issue. We'll certainly be keeping an eye on any investigation that police initiate. Frankly, Giz should just be happy that this thing didn't cross state lines. It certainly has a value over $5000, and that, my friends, would put it in federal crime-land.

Moving on...

Is Giz civilly liable to Apple?

This one is a little trickier. From a straight up property perspective, no. Let's assume you buy a car, even knowing it's stolen. The car's owner says, "Hey, that's my car." You give back the car. From the car owner's perspective, you have made him whole. There's nothing left to see here. Apple can't sue Giz for more than it lost.

But that's not quite the whole story.

Giz did post pictures of the phone, and dismantled it a bit. Apple's losses are possibly more than just the device itself. Having had its Shiny New Thing revealed may put it at a competitive disadvantage: it's now down the marketing revenue from revealing its own products at a highly-anticipated media event. It's now lost a few weeks to other manufacturers who will for certain attempt to copy the device's design and function. And it may even have lost valuable trade secrets.

Let's take the last one first -- trade secrets. California has adopted the Uniform Trade Secrets Act, and under that, a party can be civilly liable for revealing certain secrets. Damages can be calculated both in terms of actual loss to the company whose trade secrets were exposed, as well as from "unjust enrichment" to the disclosing party. The new iPhone is arguably a trade secret under the code because it is a "device that...[d]erives independent economic value, actual or potential, from not being generally known to the public." Cal. Civ. Code § 3426.1. But its internal workings are not necessarily trade secrets because anything you can learn about the device from reverse engineering, or generally taking it apart, are not protected secrets. Cal. Civ. Code § 3426.1(a). So there is an argument to be made as to whether or not the parts that Giz revealed were actual trade secrets by mere virtue of the fact that the device wasn't released yet. Because, after its release, nothing Giz revealed wouldn't be known to everybody and no trade secret at all.

Again, those were my initial thoughts. Upon more reflection, I really would have to say that this device itself constitutes a trade secret. All of its current value is derived from not being generally known to the public. Those button designs are new, and the fact that Apple was thinking about using them was a secret of a kind itself. The very fact that it's unreleased, whether or not we'd know all about it later, gives it trade secret protection. Once we assume for the purpose of argument that the device is a trade secret, Giz seems a bit pinned. The very instant Giz knew it was genuine, it also knew the device had been acquired by improper means. In other words, the phone was misappropriated because Gizmodo "knew or had reason to know that [Gizmodo's] knowledge of the trade secret was...derived from or through a person who had used improper means to acquire it." Cal. Civ. Code § 3426.1.

And that's not all. You may be wondering if Apple lost trade secret protection by having lost the darn thing in the first place. Well, possibly. But California's version of what a company must do to protect its trade secrets is slightly weaker than what's in the model code. Not only that, Giz purposely aimed to reveal those secrets, and did so, quite extensively. There's absolutely no doubt that the entirety of Gizmodo's purpose was a revelation. Of things you didn't know. That Apple knew, and kept secret for economic purposes.

So, I'm going to have to pretty much get on board with some measure of trade secret violation. A willful one at that, giving rise to double damages under Cal. Civ. Code § 3426.3. Damages that are for sure both to be calculated under unjust enrichment to Gizmodo, and actual loss to Apple.

As for civil damages other than those that accrue under trade secrets, Apple would have to go through the tricky process of proving an economic loss here. How much is six weeks of hype worth, and how many potential iPhone 3GS buyers are now going to wait for the next phone? Then again, how much hype has been generated by the whole imbroglio such that many more people are now aware that Apple has a new iPhone coming out? My guess is that outside of trade secret law, Apple isn't going to touch this one with a ten foot pole. Whatever jump the competition has gotten is limited by 20 pictures of a device that had been returned and whose features were mostly already guessed and anticipated by other devices already out. The form & function was already hinted at by the iPad.

My guess? Apple is mostly thrilled this happened. After all, what better way to lead in to a product announcement than a good, juicy leak that puts pictures of your device in every newspaper, blog, and television outlet the world over and leaves you in the position to go on the attack against an organization that spent their own money to put you there?

Which begs the question: Where my conspiracy theorists at?

**You want the cite, don't you? Sure you do. See, e.g., People v. Clausen 120 Cal. 381, 383 (Cal. 1898) (where the circumstances of the sale ought to make someone at least suspicious of the origin of the good); Castillo-Cruz v. Holder 581 F.3d 1154, 1161 (9th Cir. 2009) (where there is no requirement of an intent on the part of the recipient to deprive the owner of possession permanently).