Apple: Stories from the GCR Archives

DOJ joins states in e-books probe

Originally published 10 September 2010

The Department of Justice’s Antitrust Division has begun to ask questions of companies active in the electronic book market as part of a federal enquiry into competition in the industry, GCR has learned.

According to sources familiar with the matter, division lawyers have begun looking into whether pricing arrangements between e-book reader manufacturers and book publishers should be allowed under the country’s
antitrust laws.

The investigation, which is in its very early stages, appears to follow up on two existing state antitrust investigations that have been made public over the past months.

In early August, Connecticut Attorney General Richard Blumenthal announced that his office was investigating an agreement that set similar or identical prices for e-books sold for use on the country’s two most widely-used e-book readers, Amazon’s Kindle and Apple’s iPad.

Blumenthal’s office said at the time that the agreement appeared to deter book publishers, including Macmillan, Penguin and several others, from offering discounts to Apple and Amazon competitors because those discounts would go to books on the Kindle and iPad as well.

The Texas attorney general’s office has also been investigating similar conduct. Sources say both of those investigations appear to have been brought about independently of the federal agencies.

However, according to sources familiar with the investigation, the Antitrust Division has over the past three months sent requests for information to the companies targeted by the state investigations, asking for information about the e-books industry. According to a source, the DOJ has asked companies for documents and other information mirroring what state enforcers have requested.

The DOJ and the Connecticut attorney general’s office declined to comment. A spokesperson for the Texas attorney general could not be reached for comment.

Charles Goldsmith, a spokesman for publisher Pearson, which owns Penguin Books, says that the company “doesn’t comment on ongoing investigations or reported investigations”.

Although the direction of the investigation remains unclear, sources say it appears to involve vertical restraints on competition, such as a floor on the price of e-books that would limit companies’ ability to compete with one another.

If the DOJ does pursue the case as a resale price maintenance case, it would likely be the first such matter taken on by a federal enforcer since the US Supreme Court’s Leegin decision in 2007. That decision changed resale price maintenance from a per se violation of the antitrust laws to a behaviour that should be reviewed on a rule-of-reason basis to determine its legality.

Christine Varney, the assistant attorney general in charge of the Antitrust Division, has publicly supported enforcers bringing cases that will build case law surrounding the rule-of-reason standard as described in Leegin. In an October 2009 speech, Varney discussed the potential ways enforcers could build cases against companies involved in pricing agreements, including those driven by both manufacturers and retailers.

The Federal Trade Commission typically investigates resale price maintenance cases. However, a source inside the federal government tells GCR that the FTC agreed to clear the e-books matter to the DOJ early this summer.

DOJ files e-book lawsuit

By Katy Oglethorpe

Originally published 11 April 2012

The DOJ’s Antitrust Division today filed a complaint against Apple and five publishers, accusing them of colluding to fix the price of e-books.

Apple, along with publishers Macmillan, Penguin, Simon & Schuster, Hachette and HarperCollins, are all implicated in a complaint filed at the District Court of New York today. Settlement agreements with Hachette, HarperCollins and Simon & Schuster were announced shortly after the suit was made public.

The DOJ says the companies “shared the same goal of restraining retail price competition in the sale of e-books” and, to do so, established a so-called “agency model” that gave them the ability to collectively raise e-book prices.

Acting assistant attorney general Sharis Pozen said at a press conference today: “I want to stress that agreements between companies that are reached unilaterally are legal and appropriate. However, let me be clear, when companies get together and conspire to enter into agreements that eliminate price competition, it crosses the line. This kind of agreement is illegal and anticompetitive. That’s when the Antitrust Division will take action, as we have done today.”

The alleged behaviour was a response to Amazon’s entry into the market in November 2007. The company sold e-books for its Kindle e-reader at $9.99, a figure that undercut previous e-book prices and substantially increased the retail market for e-books.

As early as September 2008, the publishers allegedly met to devise schemes designed to limit Amazon’s ability to discount e-books, fearing that lower e-book prices might ultimately lead to lower prices for printed books. In late 2009, reads the complaint, the conspiring publishers were joined by Apple.

Apple was at this point on the verge of launching its iPad, a tablet computer that doubles as an e-book reader. According to the DOJ, Apple considered that Amazon’s prices had “reduced retailer margins on e-books to levels that [it] found unattractive.”

According to the DOJ, Apple and the publishers reached an agreement whereby retail price competition would cease, retail e-book prices would increase significantly and Apple would be guaranteed a 30% “commission” on each e-book it sold.

The defendants allegedly replaced the traditional wholesale model, where retailers can decide prices, with an agency model where publishers would have direct control over prices, and would be able to impose identical pricing levels. According to the DOJ, over three days in January 2010 each publisher entered into functionally identical contracts with Apple that would go into effect simultaneously in April 2010 and would “change the industry permanently.”

The companies are said to have been fully aware of the anticompetitive implications of adopting an agency model, taking steps such as “double deleting” emails to avoid leaving a paper trail.

The complaint quotes late chief executive Steve Jobs as saying: “We’ll go to [an] agency model where you set the price, and we’ll get our 30%; and, yes, the customer pays a little more, but that’s what you want anyway.”

As a result of this behaviour, says the division, the retailers lost their ability to compete on price and customers were ultimately forced to pay more for e-books.

Amazon has said that it was forced to increase its prices by signing agreements with book publishers. Under its previous model, Amazon agreed a purchase price for each book and could then sell at its own price, which allowed it to keep its prices low.

Pozen said the investigation was a “global enforcement effort” after collaborating closely with the European Commission (EC). “Never before have we seen this kind of cooperation on a civil antitrust enforcement matter,” she said. “I am grateful and proud of what we have been able to accomplish thus far.”

In a statement today, EC Competition Commissioner Joaquín Almunia says DG Comp has received proposals of possible commitments from Apple and four publishers: Simon & Schuster, HarperCollins, Hachette Livre and Verlagsgruppe Georg von Holtzbrinck.

Almunia said: “I welcome the fact that these five companies are making proposals to reach an early resolution of the case so promptly after we opened proceedings in December 2011. We are currently engaged in fruitful discussions with them, without prejudice to the outcome of these talks. We will assess any final proposals of commitments and we will test them with third parties in order to check whether they are sufficient to preserve competition for the benefit of consumers in this fast-growing market.”

Under their settlement with the DOJ, Hachette, HarperCollins and Simon & Schuster will be required to grant retailers the freedom to reduce the prices of their e-book titles. The companies have agreed to immediately terminate their contracts with Apple, and to notify the DOJ before forming or modifying a joint venture between themselves and another publisher related to e-books. Each settling defendant must also designate an antitrust compliance officer.

Hachette’s press release says the company does not admit liability.

“Hachette’s unilateral adoption of agency was designed to facilitate entry by a new retail competitor and to increase the diversity and health of retailer booksellers, and we took these actions knowing that Hachette itself would make less money than before the adoption of agency,” the release states. “Although we remain confident that we did not violate the antitrust laws, we faced the prospect of lengthy and costly litigation with government plaintiffs with virtually unlimited resources. Hachette has decided that the costs, uncertainties and distractions of this litigation would be too disruptive to our business.”

The company says that two years ago Amazon had an effective monopoly on the sale of e-books and e-readers, and was “selling products below cost in an effort to exclude competitors.” Today, it says, consumers have multiple sources to choose from and the price of dedicated e-readers has “fallen dramatically”.

“In the wake of this settlement, we believe the DOJ and the state attorney generals have a responsibility to consumers to ensure that the market for e-books remains diverse and competitive, and that we don’t return to the days of monopoly, with one company controlling what and how people read e-books,” it says.

In a statement, MacMillan chief executive John Sargent said the company also rejected allegations of collusion. He says the company considered accepting a settlement but eventually considered the terms “too onerous”.

“It is always better if possible to settle these matters before a case is brought,” he said. “The costs of continuing – in time, distraction and expense – are truly daunting. But the terms the DOJ demanded were too onerous.”

Attorney General Eric Holder told reporters: “Today’s action sends a clear message that the department’s Antitrust Division continues to be open for business . . . we will not hesitate to do what is necessary to protect American consumers.”

Apple fires back at DOJ e-book lawsuit

By Ron Knox

Originally published on 24 May 2012

US computer maker Apple has shot back at a DOJ antitrust lawsuit, saying the government’s “fundamentally flawed” case against it props up a monopoly while attacking competition in the electronic books market.

In a filing in the District Court in Southern New York yesterday, Apple said the Antitrust Division’s lawsuit mischaracterised its bilateral agreements with book publishers as a conspiracy to fix prices, rather than as a way to expand the e-book market that, prior to Apple’s entry, was dominated by Amazon and its Kindle e-reader.

“The government starts from the false premise that an e-books ‘market’ was characterized by ‘robust price competition’ prior to Apple’s entry,” the company says in its response to the government’s lawsuit. “This ignores a simple and incontrovertible fact: before 2010, there was no real competition; there was only Amazon.”

The division sued the company and five of the country’s largest book publishers in April, claiming they used a series of meetings to conspire to raise and fix the price of e-books sold through Apple’s iBooks Store. The government also accused Apple and the publishers of using “most favoured nation” clauses in their contracts to ensure no other e-book retailer could sell their books for a lower price than Apple.

But in its response to the lawsuit, Apple says that prior to its agreements with publishers and the launching of the iBooks Store, Amazon sold nine out of every 10 e-books in the US, and the company had the power to sell whatever books at whatever price it wanted.

Apple’s entry into the market in 2010 spurred growth in the number and variety of e-books available to consumers, and improved the experience of reading e-books with its iPad tablet, the company says.

“These inconvenient facts are ignored in the complaint,” the company says.

The DOJ’s lawsuit claims that, prior to Apple’s entry into the e-books market, Amazon sold most electronic book titles, including new releases, for $9.99. But after Apple announced the iBooks Store, publishers HarperCollins, Hachette, Simon & Schuster, Macmillan and Penguin allegedly conspired with Apple to create a new model for the pricing of e-books that would give the publishers more control over the price at which they sold their books.

The complaint alleges that Apple and the publishers agreed on a new “agency model” pricing structure in which the publishers pay Apple a 30% fee on the books they sell through the iBooks Store, and are not constrained by Amazon’s lower price point.

The lawsuit claims that the agreements were all struck within days of one another, and the publishers then turned to Amazon and threatened to withhold its books unless it switched to the agency model as well.

After the new sales model took effect, e-book prices rose considerably to $12 or more per book, the government claims.

Apple’s response to the government’s complaint is the first to be filed with Judge Denise Cote in the Manhattan court. Apple, Macmillan and Penguin have vowed to fight the government’s antitrust lawsuit. The other publishers named in the suit have reached settlement agreements with the government.

The companies face two related lawsuits as well – one filed by state attorneys general and a private antitrust action.

Apple & DOJ fire final shots before trial

By Ron Knox

Originally published 16 May 2013

Apple says the US government’s allegations that it conspired with publishers to fix the price of e-books contain more “smoke and mirrors than the smoking gun the law requires”, according to the company’s final court statement before it goes to trial next month.

Apple’s rejection of the DOJ’s allegations is included in a statement filed in federal court in Manhattan. Apple and the government both filed statements on Tuesday, two weeks before a federal judge will decide whether the DOJ’s Antitrust Division has done enough to prove that Apple was the hub of a conspiracy to raise the price of e-books.

In the court filing, Apple said that to prove a per se price-fixing conspiracy – in this case, a hub-and-spoke cartel led by Apple – the government must show explicit evidence that requires no inferences to establish its case, and it has failed to do so. “The evidentiary record the parties submitted proves that Apple did not conspire with any publisher to raise prices in the e-book industry,” the company says.

Rather than prove the conspiracy, Apple says, prosecutors have cherry-picked quotes taken out of context, ignored inconvenient facts and filled factual holes with speculation.

“Without these sleights of hand, the case against Apple collapses,” the company says.

At the core of the government’s case is whether Apple signed contracts with five of the country’s largest publishers to intentionally facilitate an industry-­wide price-fixing conspiracy, or whether Apple entered into the contracts independently, without any knowledge of, or role in, any wider price-fixing plot.

In its filing, Apple says Supreme Court and appeals court precedent demands that the court examine the possibility that the conduct the government views as per se illegal under the antitrust laws were actually in the company’s independent economic interests.

“The evidence is overwhelming – not just possible – that Apple acted for its own valid business reasons and not to ‘raise consumer prices market-wide’,” the company says.

The Antitrust Division sued Apple and five publishing houses, accusing them of conspiring to create a new model for selling electronic books as a way to increase the cost of the books and leverage other e-book retailers – namely Amazon – into ending discounts that were cutting into the publishers’ profits.

To do that, the government alleges, the companies agreed to implement an “agency model” for pricing e-books, in which Apple and the publishers would set price floors for the books, and Apple would take 30% of every book sold through its iBooks Store, which was just entering the market. The contracts included “most favoured nation” (MFN) clauses to ensure rival retailers were not allowed to sell books at lower prices.

In its final statement before trial begins, the division says Apple was intentional in its actions in meetings with all six major US publishers, where the publishers suggested implementing an agency model in which they, not retailers, would have the final say on e-book prices.

Once the agency model was agreed upon, the government says, Apple agreed on including the MFN clauses in the contracts to effectively end price competition with Amazon.

Throughout the negotiations, prosecutors say, Apple was aware that the publishers may be uncomfortable with the new pricing model and, accordingly, it “kept each publisher defendant aware that it was orchestrating and coordinating a common approach for all of them”, including assuring them that they were getting the same deal as their competitors.

“Stripped of the glitz surrounding e-books and Apple, this is an unremarkable and obvious price-fixing case appropriate for per se condemnation,” the government says in the court filing.

But Apple says its decision to enter the e-books market added necessary competition to the market, and its MFN agreements with publishers were intended to keep prices low.

“Plaintiffs’ outlandish suggestion that Apple ‘could have remained out of the market’ and ‘this would have been the wiser choice’ highlights how misguided their case is against Apple.”

The trial will begin on 3 June and will be conducted without a jury. Attorneys general from several US states, led by Texas and Connecticut, will join the government prosecution team, led by the division’s head of litigation, Mark Ryan.

Court’s view of conspiracy may decide Apple’s fate in e-book trial

By Pallavi Guniganti

Originally published 3 June 2013

The DOJ has a clear mission in the e-books antitrust trial beginning in federal court in Manhattan today: to prove that in an alleged price-fixing conspiracy among e-book publishers, Apple was the ringmaster.

The DOJ’s Antitrust Division claims that Apple was the hub in a ‘hub-and-spoke’ conspiracy that led to a new agency model for e-book sales in which publishers sold their e-books directly to consumers, and Apple, in return for processing sales through the iBooks Store, received a 30% cut of the price.

The division alleges a common understanding among the publishers that they would sign on to Apple’s agency model, which included an MFN clause. According to this provision, the price for any e-book sold in Apple’s iBooks Store would be no higher than the price for that e-book at any other online shop.

All of the publishers have now settled with the division, as well as the state attorneys general and private plaintiffs involved in the case. All of the publishers maintained – and continue to maintain – that their actions did not violate the antitrust laws.

Approving the DOJ’s settlement with some of those publishers last September, federal district judge Denise Cote said the government’s evidence appeared to indicate a “straightforward price-fixing case” among the publishers and Apple. She suggested the government’s filings provided “a sufficient factual foundation as to the existence of a conspiracy to raise, fix and stabilize the retail price for newly released and bestselling trade e-books”, ending price competition among trade e-books retailers and limiting it among the publisher defendants, such that economic studies to support the allegations
were unnecessary.

Now Apple argues that any conspiracy was among only the publishers, saying the agreements were made directly between competitors to fix prices and Apple was dealing individually with each e-book retailer, not connecting them to one another. The company relies heavily on evidence that it engaged in hard-fought negotiations, reached through compromise and discussion, and thus could not have been facilitating a single industry-wide agreement.

But if the government has sufficient evidence to the contrary, Apple may not be able to fall back on the kind of legal claims that have helped other defendants avoid antitrust liability.

The Supreme Court has said that even price fixing by agreement between competitors is governed by the rule of reason, rather than being per se illegal, if competitors reasonably could have believed that the challenged conduct would promote “enterprise and productivity”.

In particular, when the Supreme Court deems a practice to be new, the court has been reluctant to condemn it categorically. As the court said in an intellectual property case regarding the licensing of music rights, Broadcast Music Inc v CBS , “it is only after considerable experience with certain business relationships that courts classify them as per se violations.”

Recent decisions have reiterated this idea. In its 2007 Leegin decision, the court held: “Resort to per se rules is confined to restraints, like those mentioned, ‘that would always or almost always tend to restrict competition and decrease output’.” Leegin also required courts to judge all vertical price restraints by the rule of reason, which is why the DOJ must argue that Apple was part of a horizontal price-fixing conspiracy among the publishers to reach the per se standard.

Last December, antitrust scholar and federal appellate judge Richard Posner, writing for the Seventh Circuit, dismissed a per se price-fixing lawsuit because “we have never seen or heard of an antitrust case quite like this . . . it is a bad idea to subject a novel way of doing business (or an old way in a new and previously unexamined context, which may be a better description of this case) to per se treatment under antitrust law.”

However, the DOJ argues that the publishers’ conspiracy was per se illegal, and that the part Apple played was as well. As plaintiffs, the DOJ and states are obliged to present evidence that proves that Apple and the publishers consciously committed to a scheme designed to raise e-book prices.

At a pretrial conference on 23 May, Judge Cote repeatedly remarked that if the government proved through direct evidence that Apple participated in a conspiracy to raise prices, “that’s the end of the story.” Based on the documentary evidence already entered in the case, she declared: “I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in, and facilitated, a conspiracy to raise prices of e-books.”

Apple wants to prove that its entry was pro-competitive, and while the DOJ’s experts will argue that it wasn’t Apple’s entry that quadrupled output (represented by e-book sales), or caused competitors to improve the quality of their e-readers to match Apple’s innovations in colours and graphics, the occurrence of these changes will be difficult to dispute.

However, if Judge Cote has decided that the correct legal standard is per se, then even if Apple proves that prices did not actually rise in the relevant market, that evidence will not win its case – the intent to fix prices suffices.

The trial is scheduled to continue over the next two weeks.

Apple e-books agreements violated US antitrust law

By Pallavi Guniganti

Originally published 10 July 2013

The judge in the Apple e-books trial ruled today that Apple violated US antitrust law, finding that the company knowingly and intentionally participated in, and facilitated, a horizontal conspiracy to eliminate retail price competition and to raise the retail prices of e-books.

Assistant attorney general William Baer of the DOJ’s Antitrust Division, which brought the case against Apple, says: “This result is a victory for millions of consumers who choose to read books electronically. After carefully weighing the evidence, the court agreed with the Justice Department and 33 state attorneys general that executives at the highest levels of Apple orchestrated a conspiracy with five major publishers – Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster – to raise e-book prices.”

Baer adds: “This decision by the court is a critical step in undoing the harm caused by Apple’s illegal actions,” but the DOJ notes that Judge Denise Cote has not yet scheduled a hearing to address the parties’ proposed remedies. If the remedies parallel those obtained in settlements with the publishers, the states that joined the case will request monetary relief – while the DOJ requests injunctive relief, such as limitations on the type of contracts that Apple can make with publishers.

Rebecca Haw, an antitrust professor at Vanderbilt Law School, says: “The government had a very solid case against Apple – complete with the ‘smoke-filled rooms’ often required to prove Section 1 liability. The problem is not agency pricing per se, but rather the means that Apple and the publishers engaged in to achieve it as the model for the industry.”

The fact-intensive decision retells the DOJ’s story about contacts among Apple and the publishers, and includes the government’s detailed depiction of calls between the publishers’ chief executives as the opinion’s only appendix.

Haw says that while some high-tech distribution and pricing patterns have ambiguous competitive effects that do not easily fit old legal precedent to these novel industries, Apple’s case is not that type of situation.

“Despite the rather complicated scheme, this is legally very simple: competitors agreed, using Apple as a willing ringleader, to reduce competition among themselves,” she says.

Judge Cote said the agreements are “not properly viewed as either a vertical price restraint or solely through the lens of traditional ‘hub and spoke’ conspiracies.” The leading cases on “hub-and-spoke”, such as Toys R Us v FTC, assume market dominance, which Apple lacked as a new entrant to the e-books market. The company argued that hub-and-spoke therefore was an inappropriate lens through which to view its conduct.

However, Judge Cote held that “the fact that Apple was not a dominant player in the relevant market in no way diminishes the instructive value of the traditional hub and spoke conspiracy cases here.”

Chris Sagers, an antitrust professor at Cleveland State University, says: “The more you read the facts, the more perfectly this case fits Toys R Us.”

Of the 160-page decision, Sagers says: “The reason it’s so meticulous and long is that she is laying the basis for an appeal-proof judgment.” He says that though Apple will probably argue that Judge Cote should not have applied a per se standard, the Second Circuit Court of Appeals is unlikely to reverse her decision even on that legal point, much less on her extensive factual findings.

Judge Cote devoted some pages of the decision to the rule-of-reason standard, but said that if it were necessary to analyse the evidence under that standard, the plaintiffs would still prevail because Apple had not shown that the execution of the agreements had any pro-competitive effects.

With the relevant market defined as trade e-books in the US (general interest fiction and non-fiction e-books), Judge Cote said that the agreements eliminated retail price competition, and she deemed the technological advances Apple cited to be “phenomena that are independent of the agreements and therefore do not demonstrate any procompetitive effects flowing from the agreements.”

A footnote dismisses Apple’s expert testimony that the prices of e-books generally decreased on average in the years following the introduction of the iBooks Store, as not having offered “any scientifically sound analysis of the cause for this purported price decline or seek to control for the factors that may have led to it.”

The case has been closely watched for many reasons, including its implications for the legal status of MFN clauses in contracts. The DOJ has attacked such clauses in some healthcare antitrust matters, and made Apple’s requirement that it be able to match all other retailers’ prices a part of the government’s case against the company.

Judge Cote said Apple had used an MFN clause in one of its music agreements, but under a wholesale model. “Apple’s use of an MFN for a retail price was a unique feature of its e-book agency agreements,” allowing it to avoid retail price competition with Amazon and other e-book sellers, and to ensure that its competitors would be forced to adopt the agency model.

The decision does not deem any one feature of the agreements – not the agency model, the MFN clauses or the price caps – to be impermissible. “The issue is not whether an entity executed an agency agreement or used an MFN, but whether it conspired to raise prices,” and Apple did so.

Judge Cote foreshadowed today’s decision at a pretrial conference in May, saying that she had already begun drafting her opinion and that she believed the DOJ would be able to prove its allegations.

Apple issued an official statement: “Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations. When we introduced the iBooks Store in 2010, we gave customers more choice, injecting much-needed innovation and competition into the market, breaking Amazon’s monopolistic grip on the publishing industry. We’ve done nothing wrong and we will appeal the judge’s decision.”

Apple appeals against e-books judgment

By Harry Phillips

Originally published 4 October 2013

Apple filed an appeal yesterday to overturn a judgment saying the tech giant had violated federal antitrust law through its agreements with e-book publishers.

Lawyers working for the tech group filed the notice with the Second Circuit Court of Appeals yesterday. In it, they asked the court to overturn a ruling that Apple conspired to eliminate price competition and raise the retail price of e-books, and cancel a permanent injunction the lower court imposed on Apple to stamp out the disputed practices.

Judge Denise Cote of the District Court for the Southern District of New York found that Apple had violated the antitrust laws after a trial in July and entered the company’s official punishment last month.

In the 160-page decision, the court sided with the DOJ’s Antitrust Division and 33 state attorneys general who accused Apple executives of orchestrating a conspiracy with five major publishers – Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster – to raise e-book prices.

Five other publishers had already agreed to pay tens of millions of dollars to settle DOJ charges related to the conspiracy. Apple, though, opted to fight the charges in court.

Judge Cote’s fact-rich report focused mostly on Apple’s alleged role masterminding a conspiracy in which publishers agreed to raise the price of e-books and force lower-priced retailer Amazon to do the same. The case had been closely watched for its implications for the legal status of most-favoured nation clauses (MFNs) that Apple had in contracts with publishers, but the judgment steered clear of saying too much about the permissibility of MFNs.

Counsel to Apple either declined or did not respond to requests for comment. Some observers, though, speculate that the appeal may make an issue of certain comments made by Judge Cote during the course of the trial that could be taken to imply she had prejudged the issues.

Antitrust professor Chris Sagers, at Cleveland State University, said: “Just before trial, apparently as an observation to encourage settlement, [Judge Cote] said she thought the government would likely be able to prove an illegal conspiracy. The defendants might argue that this showed some inappropriate bias on her part,” he says.

Sagers, however, does not think the Second Circuit will take this too seriously as the case is very similar to the Seventh Circuit’s Toys R Us case and the Supreme Court’s Interstate Circuit decision, both of which held naked, hub-and-spoke price conspiracies to be per se illegal.

Apple is also seeking to overturn remedies imposed on it after losing the court battle in July. Since September, Apple is barred from entering into agreements with e-book retailers that would restrict their ability to set prices and offer discounts, mirroring similar provisions in the publishers’ settlements.

Judge Cote refused requests from the DOJ to limit the kind of deals Apple could make on other content, including music.

Apple targets e-books judge in appeal

By Pallavi Guniganti

Originally published 26 February 2014

Apple’s opening brief to the Court of Appeals for the Second Circuit largely repeats the legal arguments from its trial last year in a Manhattan federal court, but now pointed at Judge Denise Cote’s decisions throughout the case that led to her holding that the tech giant participated in e-book publishers’ efforts to raise retail prices.

The company found to have been the ringleader of a price-fixing conspiracy says that it never knew of such a compact among publishers, and that its own agreements were all made legally in pursuit of its independent business interests.

The litany of the district court’s alleged errors began in September 2012 when an order approving the publishers’ settlements with the DOJ for their part in the antitrust violations refers to restoring retail price competition and returning prices to their competitive level. Although Apple does not explicitly say this indicates that the court had prejudged the facts in the case, it goes on to criticise the court’s statements in a pretrial conference.

There, “without having reviewed all the direct testimony or heard from a single witness, and after excluding critical expert evidence, the district court announced that it ‘believe[d] that the government [would] be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books, and that the circumstantial evidence . . . [would] confirm that’.”

As part of an appeal, the brief cannot relitigate the basic facts of the case as found by the district court, but it can and does attack any adverse inferences and legal conclusions drawn based on those facts.

Apple says the finding that the company “made a conscious commitment to join a scheme with the publisher defendants” is the flawed bedrock of the court’s entire decision. The iPad maker insists that it merely offered the e-book publishers a new business opportunity and a sympathetic ear for their grumbles about Amazon’s tactics.

The lower court’s opinion says that the court must consider the totality of the evidence, and that the agreements in that context show that provisions such as the MFN clause, legal in isolation, actually had unlawful effects such as eliminating retail price competition.

Apple counters that there was no real price competition before its entry because Amazon dominated the market and set “a uniform loss-leader price for the publishers’ most important titles, suppressing inter-brand competition.”

The prioritising of inter-brand competition over retailers’ intra-brand price competition is the legacy of Leegin, and Apple refers repeatedly to that and a few other binding Supreme Court precedents that it says the district court’s opinion did not respect.

“Discussions between Apple and the publishers about price do not transform market entry via lawful agreements into unlawful price fixing,” the company states. It also calls into question whether the publishers were just consciously paralleling each other’s business decisions, rather than having arranged among themselves to act in concert.

In addition to differing on the importance of retail price competition, Apple is at odds with the district court’s view that independent lawful interests are irrelevant to liability under Section 1 of the Sherman Act, so long as there was concerted action. The company repeatedly says it had independent business reasons for its agreements with the publishers that had nothing to do with any horizontal price-fixing conspiracy among those competitors.

Apple describes the district court’s application of both per se and rule-of-reason analysis as “legally incorrect”, arguing that the per se rule has no place in a case against a new entrant that was contracting vertically, not with its
own rivals.

As for the alternative standard, the company deems the court’s one paragraph concluding that Apple’s conduct also violated antitrust law under the rule of reason, to be insufficient for the “careful and complete analysis of the competitive effects of the challenged restraint” that it says is required. Even if the analysis had been lengthier, Apple says it still would have been erroneous because it did not put the initial burden on plaintiffs to show damage to competition.

Apple’s brief touches on the monitorship, but that disputed provision of the injunction is the subject of a separate Second Circuit appeal, so the few remaining pages are allotted to reviving a pretrial fight over the exclusion of economist Michelle Burtis’s expert testimony about the price-reducing effects of Apple’s entry into the e-books market.

The conduct of the trial added insult to that injury, Apple says, when the court asked the plaintiff’s expert for his opinion on whether the average price in the relevant market would have fallen further without Apple’s agency agreements. Apple says this “clear double standard was an abuse of discretion”, because Burtis was not allowed to testify about how the agency agreements drove the falling prices.

The brief abides for over 60 pages by the legal fiction that the district court, not an individual judge, took various actions. However, it ends by saying that if Apple is granted a new trial rather than an outright reversal of the judgment and injunction, the proceeding should be “before a different district judge”, not remanded to Judge Cote.

Under Second Circuit rules, the government may set a deadline for its brief three months from Apple’s filing.

Amazon and Leegin take centre stage at e-books hearing

By Harry Phillips

Originally published 16 December 2014

A government prosecutor faced tough questions yesterday from a federal appellate judge over whether the DOJ’s Antitrust Division was right to take an enforcement action that may have helped a monopolist and punished a dynamic competitor in the emerging market for e-books.

At an appeals court hearing Monday, Judge Dennis Jacobs questioned whether the government should have condemned Apple and five publishers for per se price fixing when they hatched a plan to “break the hold” of “monopolist” Amazon, which at the time controlled 90% of the e-books market.

It is like “the mice getting together to put a bell on the cat”, Judge Jacobs told deputy solicitor general Malcolm Stewart.

Jacobs and two other judges on the Court of Appeals for the Second Circuit may have the final say on a case that has divided the opinions of antitrust observers.

For some, including prosecutors and New York district court judge Denise Cote, Apple’s entry into the e-books market in 2010 was eased by a conspiracy that raised the price of popular titles.

Others, though, see Apple’s entry into the e-books market as a catalyst for competition, leading to an expansion in retail choice and output, and a dip in the average price of electronic books, even if some titles were initially more expensive.

In response to Jacobs, Stewart said there was a distinction between the conspiracy at the heart of the e-books case and market entry, which the government typically favours. Apple and the publishers plotted to erode Amazon’s market power by forcing it to raise its prices, making it less attractive to customers, Stewart said, instead of creating a superior product to win Amazon’s business.

But at times Judge Jacobs did not seem convinced. In a long and lively exchange, he questioned whether “it is the position of the US government” that new entry in a market dominated by one monopolist is a good thing. He also frequently referred to Amazon’s practice of pricing e-books below-cost at $9.99 – the very price publishers Simon & Schuster, Harper Collins, Hachette, McMillan and Penguin conspired to push up – as “predatory pricing”.

Apple was found to have facilitated a price-fixing conspiracy among the publishers after a three-week trial last spring. According to a fact-rich decision by Judge Cote, the Silicon Valley company launched its e-book platform, iBooks Store, by striking distribution deals with the publishers that together forced Amazon to raise its prices.

Arguing for Apple, Gibson, Dunn & Crutcher partner Theodore Boutrous slammed Judge Cote’s decision for “roll[ing] back the clock” on 30 years of Supreme Court case law by finding Apple in violation of the Sherman Act on a strict per se standard.

For three decades, Boutrous said, the Supreme Court has told other courts to exercise caution in deciding that agreements, especially “undoubtedly vertical” deals like the agency agreements between Apple and publishers, unreasonably restrain trade.

Boutrous frequently cited the Leegin opinion. According to Leegin, he said, a vertical agreement should be judged under the rule of reason even when it is found to have facilitated price fixing.

Apple is not arguing that Leegin grants “blanket immunity” to companies that facilitate cartels among competitors, Boutrous said, but rather that courts should subject such cases to the rule of reason, weighing the anticompetitive effects against the pro-competitive benefits.

Several times during the hour or so of argument, talk turned to case law and whether any courts since Leegin have considered a vertical business partner that facilitated agreements among competitors in another market. Both Boutrous and Stewart said their opponent fails to cite cases to support his position.

Judge Jacobs pondered aloud whether the absence of controlling case law in itself might be an argument for viewing Apple’s role under the rule of reason – a suggestion Boutrous greeted with enthusiasm.

In a session that often quibbled over facts of the case, one point that got little airtime was Judge Cote’s finding that, even judged under the rule of reason, Apple’s conduct violated the antitrust laws. At the end of Boutrous’s rebuttal, Judge Raymond Lohier asked him what the appropriate remedy would be if the panel decided, as Apple urges, that the rule of reason should have applied.

The answer could be worth a lot to Apple since its settlement with a class of e-books purchasers hinges on the Second Circuit’s next move. The company will pay consumers between zero and $450 million, depending on whether the appeals court overturns, remands or upholds Judge Cote’s decision.

Boutrous’s answer is therefore unsurprising: the court should find Apple did not violate antitrust law under the rule of reason, he said.

The panel, which also included Judge Debra Ann Livingston, could rule on the appeal at any time.

US Second Circuit splits on DOJ win in Apple e-books appeal

By Pallavi Guniganti

Originally published 30 June 2015

A US appeals court ruled 2-1 today in favour of the DOJ in its long-running case against technology company Apple for organising a scheme to fix the price of e-books, but even the majority did not fully agree on the law and one judge filed a harsh dissent.

The Court of Appeals for the Second Circuit affirmed New York federal judge Denise Cote’s 2013 ruling that Apple illegally orchestrated a conspiracy among the publishers to raise e-book prices, and said the injunction she imposed was appropriate to prevent future anticompetitive harms.

In a 117-page opinion written by Judge Debra Livingston, the majority of the three-judge panel agreed with Judge Cote’s ruling that Apple’s entry into the e-book market created an opportunity for publishers to force Amazon, which had sold e-books sometimes for less than it had paid to license them, to raise its retail prices.

The DOJ’s Antitrust Division alleged – and the trial court found – that Apple had been the hub of a conspiracy in which the publishers communicated through the tech company to set a minimum price of $12.99 for new bestselling e-books and to demand that e-book sellers operate as agents of the publishers, making a 30% cut on each sale, rather than as traditional retailers.

The publishers opted to settle with the government rather than go to trial, but Apple insisted that it had done nothing wrong.

“We disagree,” Judge Livingston wrote. “At the start, Apple’s benign portrayal of its contracts with the publisher defendants is not persuasive – not because those contracts themselves were independently unlawful, but because, in context, they provide strong evidence that Apple consciously orchestrated a conspiracy among the publisher defendants.”

Judge Raymond Lohier joined in this opinion except where it discusses how Apple would have violated Section 1 of the Sherman Act even under a rule-of-reason analysis. He said he would affirm solely on the basis that the publishers’ horizontal agreement via Apple was per se illegal.

However, Judge Dennis Jacobs – as may have been expected from his questioning at oral argument in the case – strongly disagreed with the majority.

He conceded Judge Cote’s findings of fact, but said she erred in holding that a vertical enabler of a horizontal price-fixing conspiracy is judged under the per se standard, and that even if assessed under the rule of reason, that Apple’s conduct was anticompetitive.

Because Amazon overwhelmingly dominated the e-book market, Judge Jacobs wrote, it was necessary for Apple to devise a new model that would allow it to compete.

The majority opinion called this justification for Apple’s conduct a “startling conclusion” that wrongly reads Supreme Court precedent, particularly Leegin, to say that the per se standard never can apply to the vertical organiser of a price-fixing conspiracy.

Judge Livingston derided “the dissent’s armchair analysis” as assuming the number of retailers was the most important aspect of e-book competition.

Antitrust Division chief Bill Baer said in a statement: “We are gratified by the court’s decision. The decision confirms that it is unlawful for a company to knowingly participate in a price-fixing conspiracy, whatever its specific role in the conspiracy or reason for joining it.”

Apple could seek further review by the entire Second Circuit or by the US Supreme Court. It reiterated in a statement today that it “did nothing wrong back in 2010” and is assessing next steps.

“Apple did not conspire to fix e-book pricing and this ruling does nothing to change the facts. We are disappointed the court does not recognize the innovation and choice the iBooks Store brought for consumers. While we want to put this behind us, the case is about principles and values,” the company said.

Apple e-books case ends with Supreme Court denial

By Pallavi Guniganti

Originally published 8 March 2016

The US Supreme Court has refused to hear Apple’s appeal in the e-books litigation brought by the DOJ, despite the iPad maker’s argument that its agreements with publishers were necessary to compete with Amazon.

In an orders list issued yesterday, Apple v United States was among the petitions for certiorari that the Supreme Court denied. The company had asked the Supreme Court to review a decision by the Court of Appeals for the Second Circuit, which last year upheld the 2013 ruling of trial judge Denise Cote that Apple had committed a per se violation of Section 1 of the Sherman Act.

Apple sought to overturn these decisions on the grounds that vertical relationships – such as its agreements with the publishers on supplying it with e-books – are almost never deemed per se illegal, particularly when defendants are new entrants to the relevant market.

The company insisted that its tactics were necessary to break Amazon’s near-monopoly on e-books. Apple had coordinated with all major publishers simultaneously, sold under an agency model where it took a percentage of the price set by publishers, and demanded a “most favoured nation” (MFN) clause that blocked retail competitors to sell at lower prices.

The Supreme Court accepts fewer than 100 cases for argument out of the thousands of petitions it receives each year.

“Apple’s liability for knowingly conspiring with book publishers to raise the prices of e-books is settled once and for all,” said assistant attorney general Bill Baer, who heads the DOJ’s Antitrust Division. “The outstanding work of the DOJ team – working with our steadfast state attorney general partners – exposed this cynical misconduct by Apple and its book publisher co-­conspirators, and ensured that justice was done.”

The US investigation of Apple’s contracts with publishers began shortly after the 2010 launch of the iPad tablet and iBooks Store, as both the DOJ’s Antitrust Division and state attorneys general questioned whether the agreements had been reached independently or in illegal combination. Other jurisdictions, including the EU, also probed the deals.

Private plaintiffs filed a class action lawsuit against Apple and five publishers in August 2011, which the publishers settled but that Apple fought until August 2014 after it lost its trial with the DOJ.

In an unusual arrangement, the amount of damages Apple would pay to consumers depended on the results of its appeals. Having lost its petition for Supreme Court review, the company now must pay the maximum amount agreed upon – more than $400 million.

The DOJ sued Hachette Book Group, HarperCollins Publishers, Macmillan, Penguin Group, Simon & Schuster and Apple in August 2012. The publishers gradually settled with the Antitrust Division before trial began in June 2013.

On the facts determined by Judge Cote at trial in the District Court for the Southern District of New York, the publishers were unhappy with Amazon’s low prices for e-books, which they believed were cannibalising the more profitable sales of hardcovers.

Apple promised to let the publishers set e-book prices, of which Apple would take a 30% cut – but only if they guaranteed that other retailers would not undercut the company’s prices.

Amazon originally complained to the FTC, noting that the publishers had simultaneously demanded that the online retailer also adopt an agency model that would give them control of e-book pricing. The average e-book price of the publishers’ new bestsellers increased by more than 40%.

At trial, Apple argued that it never intended to conspire to raise prices, but Judge Cote ruled that it had been the ringleader of a horizontal price-fixing conspiracy between e-book publishers. A 2-1 majority of the Second Circuit backed Cote’s ruling last year.

The remedy ordered by Judge Cote, which she refused to delay pending appeals, required Apple to stagger its contract negotiations with publishers; avoid simultaneous agreements in the future; remove the MFN clauses that affected how its competitors could price e-books; and to be monitored for its development of antitrust compliance programme.

Despite a contentious start with monitor Michael Bromwich, he ended his watch on the company last year saying Apple and its executives had made significant progress.

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