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From Antitrust Law Daily, June 30, 2015

Apple loses appeal of liability finding in e-books price fixing case

By Linda O’Brien, J.D., LL.M.

The federal district court in New York City correctly determined that Apple Inc. orchestrated a conspiracy among five major publishing companies to raise the prices of electronic books and that the conspiracy unreasonably restrained trade, the U.S. Court of Appeals in New York City has ruled. Thus, the appeals court affirmed the district court’s judgment and order, preventing Apple from signing agreements with those publishers that restrict its ability to set or alter electronic book prices (U.S. v. Apple Inc., June 30, 2015, Livingston, D.).

In November 2009, Apple, Inc. was set to release a new tablet computer, the iPad, and saw an opportunity to sell electronic books (“e-books”) on the device. Apple entered into functionally-identical agreements with five publishers— Hachette Book Group Inc., HarperCollins Publishers L.L.C., Simon & Schuster Inc., Penguin Group (USA) Inc., and Holtzbrinck Publishers, LLC — to distribute e-books through its “iBookstore.”

As a result of the negotiations, the industry moved to a new sales model for e-books known as the “agency model,” under which publishers sold titles to consumers directly at prices set by the publishers with retailers serving as the publishers’ “agents” and receiving a percentage of each sale as commission. The agency agreements that Apple and the publishers executed also included a price parity provision, or Most-Favored-Nation clause (MFN). The MFN permitted Apple to match the lowest retail price listed on any competitor’s e-bookstore and imposed a penalty upon a publisher if it did not force other retailers to switch to the agency model.

In April 2012, the U.S. Department of Justice Antitrust Division and 33 state attorneys general brought actions against Apple and the five publishers for conspiring to fix the sales prices of e-books, in violation of Section 1 of the Sherman Act and state antitrust laws. All five of the publishers settled the federal and state charges and signed consent decrees with the U.S. Department of Justice (DOJ).

In July 2013, following a bench trial, the district court determined that, in order to induce the publishers to participate in the iBookstore and to avoid competition over the retail price of books, Apple orchestrated a conspiracy among the publishers to raise the price of e-books. In September 2013, the district court entered a final judgment on the liability finding and issued an injunction preventing Apple from signing agreements with those publishers that restrict its ability to set, alter, or reduce the price of e-books and requires Apple to apply the same terms and conditions to e-book applications sold on its devices as it does to other applications. Apple appealed. Simon & Schuster, Inc. and Holtzbrinck Publishers, LLC joined the appeal, arguing that the portion of the injunction relating to Apple’s pricing authority unlawfully modified their consent decrees.

Liability finding. The appellate court found that the district court correctly decided that Apple orchestrated a conspiracy among the publishers to raise e-book prices and that the conspiracy unreasonably restrained trade. Apple contended that the contracts with the publishers were fully consistent with its independent business interests and those agreements provided only ambiguous evidence of a conspiracy. The appellate court disagreed, noting that, in context, the contracts provided strong evidence that Apple consciously orchestrated a conspiracy among the publishers.

In addition to the contracts, ample additional evidence established that the publishers’ shift to an agency model with other retailers was the result of express collusion and that Apple played a key role in organizing the collusion. Apple offered each publisher a contract that would be attractive only if the publishers acted collectively to shift to the agency model, which Apple knew would result in higher consumer e-book prices. By signing contracts containing an MFN clause, each publisher signaled a clear commitment to organize against other retailers to take control of consumer e-book prices, thereby facilitating their collective action, in the appellate court’s view.

Unreasonable restraint of trade. To succeed on an antitrust claim, a plaintiff must prove that the common scheme designed by conspirators constituted an unreasonable restraint of trade either per se or under the rule of reason, the appellate court explained. The district court found that the agreements between Apple and the publishers were unlawful under the per se rule or, in the alternative, the agreements were still unlawful if a rule of reason analysis was required.

Apple’s argument that its conduct must be subject to a rule of reason analysis because it merely involved multiple independent, vertical agreements with the publishers was rejected. The appellate court noted that the relevant restraint of trade in the case was not Apple’s vertical contracts with the publishers; rather it was the horizontal agreement that Apple organized among the publishers to raise e-book prices.

Apple’s contention that, even if it orchestrated a horizontal price fixing conspiracy, its conduct had procompetitive justifications and should not be condemned per se was also rejected. The appellate court noted that there was no productive relationship between any of the participants in the conspiracy that Apple joined or Apple could not claim that the creation of an e-book market was only possible if the publishers coordinated with one another on price. Moreover, there is well established precedent that per se condemnation is not limited to agreements that literally set or restrict prices. The conspiracy among Apple and the publishers was formed for the purpose and with the effect of raising e-book prices and therefore “comfortably qualifies as a horizontal price fixing conspiracy.”

Rule of reason analysis. The appellate court also noted the same evidence supporting its determination that per se condemnation appropriately disposed of Apple’s appeal also supported a “quick look” inquiry under the rule of reason. Apple’s defense that its agreements with the publishers was procompetitive by raising prices and enabling Apple and other e-book retailers to enter the market was no justification for a horizontal price fixing conspiracy. Apple had no entitlement to enter the market on its preferred terms even if it could not have profited in the e-book market without the price fixing conspiracy. The district court’s fact finding illustrated that Apple organized the price fixing conspiracy, not as a precondition to market entry, but as a “convenient bargaining chip” to induce the publishers to enter into the agreements.

Injunctive order. Additionally, the injunction is properly calibrated to protect the public from future anticompetitve harms, according to the appellate court. Apple relinquished its authority to set prices as part of its conspiracy with the publishers. By allowing the restrictions on Apple’s ability to give up its pricing authority to expire at different times for each publisher, the injunctive order ensured that Apple and the publishers would not be able to use the same strategy as part of a new conspiracy. The provision requiring e-book application in Apple’s App Store to receive the same terms and conditions as other applications furthers that goal.

Finally, the publishers’ argument that the district court injunctive order modified their consent decrees was rejected. Federal Rule of Civil Procedure 60(b) establishes the grounds for seeking relief from a final judgment, order, or proceeding. The consent decrees prohibited the publishers from restricting any retailer’s authority to set prices. The injunctive order did not alter the terms of those decrees; instead provided relief against a different party by limiting Apple’s authority to negotiate away its ability to set prices in agreements with the publishers. The fact that the order also had the effect of preventing the publishers from restricting Apple’s pricing authority did not render it relief from a final judgment that required a motion under Rule 60(b), the appellate court concluded.

Dissent. In a dissenting opinion, Circuit Judge Jacobs maintained that a vertical agreement designed to facilitate a horizontal cartel would need to be held unlawful under the rule of reason and that Apple should have been considered as a competitor on the distinct horizontal plane of retailers where Apple competed. Apple was entitled to enter the e-book retail market on its own terms, even if its conduct generated only minor competitive restraints in the process, according to the dissent.

The case is No. 13-3741-cv.

Attorneys: Malcolm L. Stewart for U.S. Department of Justice. Greg Abbott, Office of the Attorney General of Texas, and George Jepsen, Office of the Attorney General of Connecticut, for plaintiff States. Theodore J. Boutros (Gibson, Dunn & Crutcher, LLP) for Apple, Inc. Eamon P. Joyce (Sidley Austin LLP) for Holtzbrinck Publishers, LLC. Gregory Silbert (Gotshal & Manges LLP) for Simon & Schuster, Inc.

Companies: Apple Inc.; Simon & Schuster, Inc.; Holtzbrinck Publishers, LLC

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