On June 30, 2015, the U.S. Court of Appeals for the Second Circuit ruled that Apple Inc. had violated the Sherman Antitrust Act by conspiring to fix prices for e-books with the six largest U.S. publishers. ((U.S. v. Apple, Inc., 791 F.3d 290 (2d Cir., 2015).)) The case was, at heart, a question of “whether the vertical organizer of a horizontal conspiracy” to fix prices may be condemned to have per se violated the Sherman Act. ((Id. at 325.)) Though the District Court and the Circuit Court both held in the affirmative, Apple has petitioned the U.S. Supreme Court for certiorari – such petition is currently pending. ((Lyle Denniston, Apple to appeal its e-book antitrust defeat, SCOTUSBlog (Sept. 19, 2015), http://www.scotusblog.com/2015/09/apple-to-appeal-its-e-book-antitrust-defeat/.)) This post will briefly explain the background of the case and the Second Circuit’s ruling, and a second post will opine on the correctness (or lack thereof) of the decision.
The facts of this case begin in 2007, far from Apple’s headquarters in Cupertino. That fall, far north of Silicon Valley in Seattle, Amazon launched its Kindle e-reader. ((Amazon Unveils Wireless Kindle E-Book Reader, The Washington Post (Nov. 19, 2007), http://www.washingtonpost.com/wp-dyn/content/article/2007/11/19/AR2007111900710.html.)) The first commercially successful entrant into a nascent but soon-to-be-booming market, by 2009 Amazon was responsible for nearly ninety percent of all e-book sales. ((U.S. v. Apple Inc., 952 F. Supp. 2d 638, 648-49 (S.D.N.Y., 2013).)) The six largest “trade” book publishing companies in the United States – Hachette, HarperCollins, Macmillan, Penguin, Simon & Schuster, and Random House (collectively known as the “Big Six”) – had, by 2009, become increasingly concerned about the confluence of the rising e-book market, Amazon’s dominance of it, and Amazon’s uniform $9.99 price point on e-books. ((Id.))
Apple entered the story late in 2009, when it approached the Big Six to negotiate e-book publishing contracts for its incipient new platform: the iPad. ((Apple Inc., 791 F.3d at 301-302.)) Apple was developing an “iBookstore” for the iPad to challenge Amazon grip on the e-book market. To the Big Six, Apple’s entry provided a means to leverage Amazon into charging higher prices on new releases and New York Times bestsellers, on which they were losing money due to Amazon’s uniform price point (which was often up to three times lower than the hardcover price). ((Id.))
After a series of negotiations with the individual publishers, Apple devised an “agency model” by which to sell e-books on its own platform. Under this plan, Apple’s contracts with the publishers would allow the publishers themselves to set the prices for e-books sold on the iBookstore, while entitling Apple to thirty percent commission. ((Id. at 303.)) The agency model would prove disastrous, however, if the publishers set prices higher than Amazon’s $9.99, as consumers would decline to abandon the cheaper alternative. ((Id.)) To solve this problem, Apple decided to include a “most favored nation” clause (“MFN”), combined with price caps, into the contracts offered to the publishers. ((Id. at 303-4.)) The MFN would require the publishers to sell e-books on Apple’s platform for no more than what the same e-book was offered elsewhere. ((Id. at 304; see also Steve Cernak & Tal Chaiken, Most Favored Nation Clauses, Practical Law Company (2013), http://www.schiffhardin.com/Templates/media/files/publications/PDF/Cernak_Chaiken_Most-Favored-Nation-Clauses_20130311.pdf.)) Importantly, it was, in the eyes of the District Court, the MFN that gave the Big Six the incentive to collectively renegotiate their contracts with Amazon to shift to a similar agency model, since otherwise the dreaded $9.99 price point would become the standard e-book price. ((Apple Inc., 952 F. Supp. 2d at 664.))
The Second Circuit rejected Apple’s arguments that it had not orchestrated a horizontal conspiracy among the publishers but instead had entered into a series of lawful vertical agreements and that, even if it had orchestrated such a conspiracy, its actions should give rise to “rule of reason” analysis instead of “per se” condemnation. ((Apple Inc., 791 F.3d at 314.)) The Second Circuit held that Apple had in fact orchestrated a horizontal conspiracy among the publishers by offering them contracts containing the MFN, which it understood “were attractive to the [publishers] 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.” ((Id. at 316 (emphasis in original).)) Having found that Apple orchestrated the conspiracy, the Second Circuit went on to hold that Apple’s actions were properly held per se illegal, rather than subjected to analysis under the “rule of reason” to determine their legality (I note that the court embarked on an awkwardly in depth analysis of Apple’s actions, their consequences, and the reasons for them in order to determine whether or not they were facially or “per se” illegal, but more on that in the next post). ((Id. at 321-29.))
This case is currently awaiting grant of certiorari in the Supreme Court. Should cert be granted, its future is decidedly less certain this week than it would have been last week, due to the passing of Justice Scalia, a staunch “Chicago School” adherent, sharp antitrust mind, and likely vote in favor of Apple. ((See Verizon Commc’ns v. Law Offices of Curtis V. Trinko. 540 U.S. 398 (2004); see also Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451 (1992) (Scalia, J., dissenting).)) The next post, therefore, may take one of two forms: if the Court grants certiorari, it will argue that the Court should reverse the Second Circuit, and find no antitrust violation after a rule of reason analysis; if the Court does not, then it will argue that the Second Circuit erred in its application of the law to this case.
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