July 1, 2015

Apple loses antitrust appeal


DOJ-Apple-imageYesterday, a Federal Appeals Court located in New York City delivered a 2-1 decision upholding Judge Denise Cote‘s verdict that Apple committed antitrust violations by conspiring to fix ebook prices with five major publishers. The five publishers—every member of what was referred to at the time as the Big 6 minus Random House—all settled before the case went to court; Apple went it alone and lost.

The decision was expected, but it’s still a blow to Apple, which has loudly protested the decision in many ways since it was handed down—Apple will now be forced to pay $450 million to affected consumers in a class action suit. Observers are divided as to whether or not Apple will keep fighting. Still, the fight may not be over yet. Observers are divided as to whether or not Apple will continue the Appeals process by petitioning the Supreme Court. I personally expect Apple to go down this route, though there’s no guarantee that the Supreme Court will actually take the case. (Seriously, I’ll take any bet within reason that this happens.)

The majority opinion forcefully backs up Cote’s initial ruling—in many ways it feels like a rehash of Cote’s decision:

“We conclude that the district court correctly decided that Apple orchestrated a conspiracy among the publishers to raise ebook prices, that the conspiracy unreasonably restrained trade in violation of § 1 of the Sherman Act, and that the injunction is properly 23 calibrated to protect the public from future anticompetitive harms.  In addition, we reject the argument that the portion of the injunctive order preventing Apple from agreeing to restrict its pricing authority modifies Macmillan and Simon & 26 Schuster’s consent decrees or should be judicially estopped….

The district court did not err in determining that Apple orchestrated an agreement with and among the Publisher Defendants, in characterizing this agreement as a horizontal price fixing‐conspiracy, or in holding that the conspiracy unreasonably restrained trade in violation of § 1 of the Sherman Act….

Plainly, competition is not served by permitting a market entrant to eliminate price competition as a condition of entry, and it is cold comfort to consumers that they gained a new ebook retailer at the expense of passing control over all ebook prices to a cartel of book publishers—publishers who, with Apple’s help, collectively agreed on a new pricing model precisely to raise the price of ebooks and thus protect their profit margins and their very existence in the marketplace in the face of the admittedly strong headwinds created by the new technology.

The Publisher Defendants took by collusion what they could not win by competition. And Apple used the publishers’ frustration with Amazon’s $9.99 pricing as a bargaining chip in its negotiations and structured its Contracts to coordinate their push to raise prices throughout the industry. A coordinated effort to raise prices across the relevant market was present in every chapter of this story.”

The dissent is more interesting, for a number of reasons, not least because Apple may see it as an open window to a (admittedly small) chance of a successful Supreme Court appeal.

Judge Dennis Roberts, who wrote the dissent, essentially argues that the court needs to consider the context surrounding the conspiracy; the court has consistently contended that this was a per se violation of antitrust law, which means that the context is irrelevant—violation of the law is violation of the law, period. Roberts, however, takes Apple’s view—that context matters in this instance. Here’s Roberts on that context: 

“As Apple was preparing the launch of its first iPad tablet in 2009, the company recognized that the device could support e-books, and gave consideration to including an e-book retail platform. However, Amazon had preceded Apple in the market, had established a 90 percent ascendency in sales of e-books, and was effectively excluding new entrants by offering bestsellers at aprice ($9.99) that for many books was below the prices Amazon was paying publishers. Although Apple was positioned to enter the retail market, it was unwilling to do so on terms that would incur a loss on e-book sales (as would happen if it met Amazon’s below-cost price), or that would impair its brand and likely fail (as would happen if it charged more than Amazon). So, as a condition to its entry as a competing buyer for the publishers’ wares, Apple insisted that the publishers agree to a distribution model that would lower that barrier to retail entry.”

In a parenthetical indicating that Amazon is not on trial and “has not had a full opportunity to dispute the district court’s findings or characterizations,” Roberts notes Amazon’s “monopoly” on the ebook market—presumably in 2009—though he also acknowledges “the fact of Amazon’s monopoly alone would not support an inference that Amazon’s behavior was in any way unlawful.” (Say what you will about Roberts’s dissent, but he’s consistent in not applying per se logic.) Nevertheless, he later writes that “Amazon’s 90 percent market share constituted a monopoly under antitrust law.”

Roberts then goes on to attack the reasoning of the decision, arguing that it makes three crucial errors:

  • “The district court ruled (and the majority affirms) that a vertical enabler of a horizontal price-fixing conspiracy is in per se violation of the antitrust laws. However, the Supreme Court teaches that a vertical agreement designed to facilitate a horizontal cartel “would need to be held unlawful under the rule of reason.””
  • “The district court’s alternative ruling under the rule of reason was pre-determined by its (erroneous) per se ruling. Thus the district court assessed impacts on competition without recognizing that Apple’s role as a verticalplayer differentiated it from the publishers. The court should instead have considered Apple as a competitor on the distinct horizontal plane of retailers, where Apple competed with Amazon (and smaller players such as Barnes & Noble).”
  • “Apple’s conduct, assessed under the rule of reason on the horizontal plane of retail competition, was unambiguously and overwhelmingly pro-competitive. Apple was a major potential competitor in a market dominated by a 90 percent monopoly, and was justifiably unwilling to enter a market on terms that would assure a loss on sales or exact a toll on its reputation. In that connection, the district court erroneously deemed the monopolist’s $9.99 price as categorically good for competition because it was lower than cost, and because e-book prices rose after the monopoly was broken.”

And then Roberts lays down my favorite objection: “A further and pervasive error (by the district court and by my colleagues on this appeal) is the implicit assumption that competition should be genteel, lawyer-designed, and fair under sporting rules, and that antitrust law is offended by gloves-off competition.” Throughout Roberts forcefully makes the case that 1. Amazon had a monopoly on ebook sales in 2009 2. It protected that monopoly by adopting a loss-leading pricing strategy so that 3. A new entrant to the marketplace would be forced to lower prices and lose a ton of money to compete for marketshare—but not profit. In other words, what Apple and the publishing industry have been saying for almost a decade.

Later, Roberts takes on the majority’s reliance on Amazon for its facts about Amazon and provides something of a history lesson, writing:

“The majority asserts that Amazon’s below-cost pricing was limited to only“a small loss” on only “a small percentage of its sales.” Id. at 85 (for theCourt). These observations are apparently drawn from a submission by Amazon, downplaying the anti-competitive effects of its monopoly-protective pricing. The district court did not rely on these statistics,presumably because they are misleading and self-serving: they ignore that the minority of titles comprising new releases and bestsellers naturally have an outsize impact on the industry….

I can find no record support for the narrative that Amazon’s market share was eroding before Apple’s entry, that the iPad “promised to introduce more competition with or without Apple’s iBookstore,” and that the publishers thereby enjoyed increased negotiating leverage. Op. of Judge Livingston, ante, at 103-04. Similarly, the assertion that Barnes & Noble disrupted Amazon’s dominance in the e-book market, see id. at 103, is supported neither by the district court’s findings nor by the record.”

As for the per se argument—that Apple was engaged in anticompetitive behavior—Roberts has this to say:

“Collusion among competitors does not describe Apple’s conduct or account for its motive. Apple’s conduct had no element of collusion with a horizontal rival. Its own rival in competition was (and presumably is) Amazon;and that competition takes place on a horizontal plane distinct from the plane of the horizontal conspiracy among the publishers. All Apple’s energy–all it did that has been condemned in this case–was directed to weakening its competitive rival, and pushing it aside to make room for Apple’s entry. On the only horizontal plane that matters to Apple’s e-book business, Apple was in competition and never in collusion. So it does not do to deem Apple’s conduct anti-competitive just because the publishers’ horizontal conspiracy was found to be illegal per se.”
Perhaps most importantly, Roberts believes that Apple and the publishers were justified—or at least lawful—when they decided to collude:
“Apple’s conduct, assessed under the rule of reason on the horizontal plane of retail competition, was unambiguously and overwhelmingly pro-competitive. Apple was a major potential competitor in a market dominated by a 90 percent monopoly, and was justifiably unwilling to enter a market on terms that would assure a loss on sales or exact a toll on its reputation. In that connection, the district court erroneously deemed the monopolist’s $9.99 price as categorically good for competition because it was lower than cost, and because e-book prices rose after the monopoly was broken.”
Roberts’s dissent is the decision Apple hoped for all along—it takes the realities that Apple and the publishers were encountering into account. They just hoped it wouldn’t be a dissent. Nevertheless, it is a path forward and there are elements in it that may be appealing to some of the Supreme Court justices. What Apple does now, is anyone’s guess. But they are still defiant. Yesterday, they released this statement:

“Apple did not conspire to fix ebook pricing, and we will continue to fight those allegations on appeal. We did nothing wrong and we believe a fair assessment of the facts will show it. The iBooks Store has been good for consumers and the publishing industry as a whole, from well-known authors to first-time novelists. As we wait for the court to hear our appeal, we have agreed to a settlement which is contingent on the outcome of the appeal. If we are vindicated by the appeals court, no settlement will be paid.”

Apple doesn’t seem to be backing down. We’ll see if the Supreme Court takes up the case.


Alex Shephard is the director of digital media for Melville House, and a former bookseller.