Apple Fails to Overturn E-Book Price-Fixing Ruling on Appeal

The 2nd Circuit rules that Apple must suffer condemnation for conspiring with book publishers.

On Tuesday, the 2nd U.S. Circuit Court of Appeals affirmed a ruling that Apple conspired with publishers to eliminate retail price competition in e-books. The 117-page opinion delves into the nuances of antitrust law and comes as the computer giant sets its sights on entering the music streaming market.

In April 2012, the Justice Department and state attorneys general brought legal action after Apple introduced the iPad, launched the iBookstore and came to deals with the biggest book publishers including CBS Corp.'s Simon & Schuster Inc., News Corp.'s HarperCollins Publishers Inc., Penguin, Lagardere SCA's Hachette Book Group, and Pearson and Macmillan.

When Apple entered the e-book market, Amazon.com was the dominant player, though publishers were unhappy that Amazon was selling e-books for $9.99 in the Kindle store. Amazon set the price point under a "wholesale model" while Apple coordinated a move to an "agency" model where publishers could set higher prices and it would take a commission. By employing "most favored nation" contractual clauses, Apple acted as the "hub" in a hub-and-spoke conspiracy, according to the Justice Department.

The lawsuit, and the resulting ruling by U.S. District Judge Denise Cote, was controversial in antitrust circles. The ruling also had some potential in becoming a guidepost in dealmaking surrounding content delivery. In July 2014, Apple came to a settlement to pay as much as $450 million to resolve the e-book litigation, but it was contingent on what the 2nd Circuit would say on appeal. The judge also appointed an antitrust monitor for Apple, which resulted in a separate opinion last month from the 2nd Circuit affirming the minder to Apple's dismay.

Today, Circuit Judge Debra Ann Livingston issued an opinion (read here in full) that discusses Apple's role as the facilitator of horizontal agreements among the publishers to set prices. Part of the trickiness is that horizontal agreements are per se unlawful under the Sherman Act, while vertical ones like what Apple arguably did with each of the publishers require more analysis to determine whether they unreasonably restrain trade.

Livingston accepts the existence of a "hub-and-spoke" conspiracy, though, and analyzes the contracts that Apple made with those publishers.

"All Apple did, it claims, was attempt to enter the market on profitable terms by offering contractual provisions — an agency model, the MFN Clause, and tiered price caps — which ensured the company a small profit on each e-book sale and insulated it from retail price competition," she writes. "This had the effect of raising prices because it created an incentive for the Publisher Defendants to demand that Amazon adopt an agency model and to seize control over consumer‐facing e-book prices industry‐wide."

Apple might have known about what would happen, it further argued, but it hardly could be blamed for a conspiracy if everyone was merely following their independent business interests.

"We disagree," Livingston responds. "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. … Apple understood that its proposed Contracts were attractive to the Publisher Defendants only if they collectively shifted their relationships with Amazon to an agency model — which Apple knew would result in higher consumer‐facing e-book prices."

Later in her opinion, Livingston attempts to soothe industry fears about the finding that a company can be held liable for adopting otherwise lawful contract terms. She says the 2nd Circuit is "breaking no new ground" in finding that most favored nation clauses can be misused to anticompetitive ends. It all depends on context.

The opinion then moves to a discussion of why Apple must suffer "per se condemnation" under antitrust law for coordinating those horizontal agreements, and even if more is required, Livingston finds Apple's attempts to justify its market moves as unavailing.

Circuit Judge Dennis Jacobs offers a dissent that accepts the finding of facts regarding Apple's behavior toward e-books, but puts it in a more flattering light. After Apple entered the market, Amazon's share decreased from 90 to 60 percent over the next two years. "The restrictive market conditions Apple faced and the pro-competitive results of Apple’s conduct make its vertical dealings categorically reasonable," he writes, citing among other things the cutting-edge functions and applications of the iPad. "How else could the competitive benefits have been realized in this market?"

But just because Amazon was dominant doesn't let Apple off the hook, responds Livingston. She interprets Jacobs' theory to mean that "marketplace vigilantism" is warranted to eliminate "competitive evils," and opines, "Whatever its merit in the abstract, that preference for collusion over dominance is wholly foreign to antitrust law."

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