Apple loses antitrust appeal by Alex Shephard

Yesterday, 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: