May 15 (Bloomberg) -- Steve Jobs asked technology blog Gizmodo.com to return a secret iPhone prototype that Apple Inc. says was stolen after a company engineer lost it in a bar, according to court documents released yesterday.
The lost iPhone is being investigated as a possible trade-secret theft, according to California state court documents made public after media organizations including Bloomberg News asked that they be unsealed. Apple reported the phone stolen in April.
The legal wrangling is over a product that, at $13 billion, accounted for more than 30 percent of 2009 sales for Apple, which closely guards details about unreleased products. An Apple lawyer said publicity about the “invaluable” prototype was “immensely damaging to Apple” because it would hinder iPhone sales, according to an April 23 affidavit by Detective Matthew Broad of the San Mateo County Sherriff’s Office.
“I want to get this phone back to you ASAP and I want to not hurt your sales when the products themselves deserve love,” Gizmodo editor Brian Lam said in an e-mail to Jobs, Apple’s chief executive officer. “But I have to get this story of the missing prototype out and how it was returned to Apple with some acknowledgment it is Apple’s.”
Lam sent the e-mail after Jobs contacted Gizmodo on about April 19 seeking return of the prototype after the blog dissected it and posted pictures and video detailing its features. Lam said he would return the phone only if Apple provided him with confirmation that it belonged to the company, according to Broad’s affidavit.
“Gizmodo lives and dies like many small companies do,” Lam said in his April 19 e-mail. “When we get a chance to break a story, we have to go with it or we perish.”
“By publishing details about the phone and its features, sales of current Apple products are hurt,” Broad said, recounting a conversation with Apple lawyer George Riley of O’Melveny & Myers LLP. “Riley could not provide an estimated loss, but he believed it was huge. I asked Riley what the value of the missing iPhone was. He stated that it was invaluable.”
Gizmodo posted a copy of a letter from Apple’s General Counsel Bruce Sewell, dated April 19, asking for return of “a device that belongs to Apple.” Gizmodo said it gave back the prototype to Cupertino, California-based Apple that day.
Sewell picked up the prototype at the home of Gizmodo editor Jason Chen, according to Broad.
Gizmodo, which is owned by Gawker Media, said it purchased the phone for $5,000 after it was found at Gourmet Haus Stadt, a German beer hall in the San Francisco suburb of Redwood City. The phone was lost on March 25 by Apple engineer Gray Powell, according to the affidavit.
Revealed by Roommate
Apple and law enforcement learned the identity of the man who sold the iPhone to Gizmodo, 21-year-old college student Brian Hogan, after his roommate contacted Apple, concerned that she might be implicated in the theft because Hogan had hooked up the prototype to her computer and it might be traced to her, Broad said in his affidavit.
The roommate, Katherine Martinson, said Hogan reached out to several publications and websites “in an attempt to start bidding for the iPhone prototype,” according to Broad. “Martinson said Hogan understood that he possessed a valuable piece of technology and that people would be interested in buying it.”
Martinson said she and other friends tried to talk Hogan out of selling the prototype, arguing it would ruin the career of the Apple engineer who lost it, Broad said in the affidavit. “Hogan’s response to her was that it ‘Sucks for him. He lost his phone. Shouldn’t have lost his phone.’”
Hogan was to receive a cash bonus from Gizmodo in July if and when Apple makes an official product announcement about the new iPhone, Martinson said, according to Broad’s affidavit.
Hogan’s lawyer, Jeffrey Bornstein, said his client continues to cooperate with authorities and has provided evidence to help them. In a phone interview yesterday, Bornstein repeated an earlier statement that while Hogan regrets he didn’t do more to return the phone to its owner, he believed that Gizmodo was compensating him so the blog could review the phone and that there was nothing wrong with sharing the phone with the press.
Apple has released a new iPhone every summer since its debut in June 2007. Charlie Wolf, an analyst at Needham & Co., expects Jobs to unveil a new model at Apple’s Worldwide Developers Conference on June 7 and to put it on sale starting in July.
Based on Apple’s claim that the iPhone prototype was stolen, the county’s computer crimes task force, the Rapid Enforcement Allied Computer Team, last month broke down the front door of Chen’s home and seized computers and other electronics, court filings show. Gawker Media is challenging the taking of Chen’s equipment, citing laws that protect online journalists from having newsroom equipment seized.
“The goal of the investigation is to find out every single person who came in contact with that phone from the moment it left the restaurant and ended up back in the hands of Apple, and to find out every person who handled it, what they knew and in the course of that if there was any crime committed,” Deputy District Attorney Steve Wagstaffe said in a May 13 phone interview.
Broad said in his affidavit seeking a judge’s permission to search Chen’s home that there was reason to believe a crime was committed.
‘Evidence of the Theft’
“I believe that evidence of the theft of the iPhone prototype, the vandalism of the iPhone prototype and the sale of its associated trade secrets will be found in” Chen’s home, Broad wrote in the document.
Chen’s lawyer, Thomas Nolan, didn’t immediately return a call seeking comment.
The search warrant affidavit indicates that the iPhone 4G prototype was disguised to look like an iPhone 3GS, the latest-generation model available in retail stores.
Apple fell $4.54 to $253.82 yesterday in Nasdaq Stock Market trading. The shares have more than doubled in the past year.
According to Broad’s statement, Hogan, with the help of another roommate, packed up his computer and other equipment and moved it out of his home before law enforcement officials arrived. Hogan and some of the equipment were discovered at his father’s home in Redwood City, according to Broad’s affidavit. A Hewlett-Packard Co. desktop computer belonging to Hogan was found at a nearby church, while two portable storage devices were located “in a bush” in Redwood City, according to a search warrant made public yesterday.
Judge Clifford V. Cretan in Redwood City ruled yesterday against the San Mateo County District Attorney’s office, which argued that unsealing the documents will reveal identities of potential witnesses and compromise the investigation. Media organizations argued they should have access to the documents based on constitutionally protected free-speech rights.
“It’s a great victory for the people’s right to know about the evidence and information that was available to law enforcement and the court when a search warrant was issued to search the house and seize the computer of a journalist,” Roger Myers, a lawyer for the media organizations, said in an interview after yesterday’s court hearing.
Media organizations sought to have the documents unsealed to determine whether the county had a legal basis for the warrant used to break into Chen’s home.
“Otherwise, there is no way for the public to serve as a check on the conduct of law enforcement officers, the prosecutors and the courts in this case,” the organizations argued in court filings.
No Special Influence
Chris Feasal, a San Mateo County deputy district attorney, said he’s disappointed with the ruling though he respects the judge’s decision. He declined to discuss the contents of the warrant documents or any names contained in them.
Apple had no special influence in the investigation or getting it started, he said.
“We are investigating it just as we are any other criminal investigation,” he said. “We are looking for evidence of criminal behavior.”
Feasal said he’s not sure whether release of the warrant documents will impede the investigation.
“We are just going to have to wait and see,” he said.
Myers represents the First Amendment Coalition, a San Rafael, California-based group, and six media organizations, including Bloomberg News, CBS Corp.’s CNet News and the Los Angeles Times.
Apple declined to comment, spokeswoman Amy Bessette said.
The case is In Re Sealed Search Warrant Records, 2010-0034, San Mateo County Superior Court (Redwood City, California).