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E-book Conspiracy: Apple’s Agreement with Publishers Violates Antitrust Laws

United States v. Apple By Elise Young – Edited by Gillian Kassner United States v. Apple, No. 1:12-cv-2826 (DLC) (S.D.N.Y. July 10, 2013) Slip Opinion hosted by [caption id="attachment_3543" align="alignleft" width="150"] Photo By: Antony Bennison - CC BY 2.0[/caption] On July 10, 2013, the Southern District of New York held that Apple conspired to raise e-book prices by playing a central role in “facilitating and executing [a] conspiracy” among five major book publishers to “eliminate retail price competition” in the e-book market. Apple, at 9. The court ruled that Apple was per se liable for violating Section 1 of the Sherman Act, finding “overwhelming evidence that the Publisher Defendants joined with each other in a horizontal price-fixing conspiracy” in which “Apple was a knowing and active member.” Id. at 113. Ars Technica provides an overview of the facts behind the case. Forbes criticizes the decision, arguing that it is another example of the Department of Justice’s misuse of Antitrust law to the detriment of consumers. The Wall Street Journal features an analysis of the decision and the next steps. In late 2009, Apple began meeting with the “Big Six” of United States publishing — Hachette, HarperCollins, Macmillan, Penguin, Simon & Schuster, and Random House — to negotiate a deal for its upcoming iBookstore that would be launched with the iPad in early 2010. Apple, at 9–10. Judge Cote stated that Apple knew the Big Six wanted to raise e-book prices from the $9.99 charged by Amazon and knew that the publishers “were already acting collectively to place pressure on Amazon to abandon its pricing strategy.” Id. at 10. Apple agreed to an agency-pricing model, as opposed to a wholesale model, in which the publishers could determine book prices and Apple would receive a 30% commission. Id. at 39. The prices were capped at $12.99 or $14.99 for books that were selling at $9.99 on Id. at 12. Included in the agreement with Apple was a “Most-Favored Nation clause” (“MFN”) which guaranteed that Apple could match the lowest price listed on competitor’s e-bookstores, and also imposed penalties on the publishers if they did not change their pricing agreements to the agency model with Apple’s competitors. Id. After signing the agreement, the publishers began pressuring Amazon to switch to the agency model and were eventually succesful. Id. at 55. As a consequence, e-book prices rose substantially and among all five participating publishers. Id. at 12. 20130720 Apple Antitrust                       Plaintiff’s Proposed Findings of Fact and Conclusions of Law at 3, United States v. Apple, No. 1:12-cv-2826 (DLC) (S.D.N.Y. May 14, 2013), Proposed Findings of Fact hosted by To prove a violation, the United States had to show that (1) the parties acted together and (2) that this action “constituted an unreasonable restraint of trade.” Id. at 105 (emphasis added). In holding that the United States met this burden, Judge Cote emphasized the common motivation of the publishers to raise e-book prices, and the key role Apple played, stating that “[t]his price-fixing conspiracy would not have succeeded without the active facilitation and encouragement of Apple.” Id. at 114–15. The court found that through the combined action of Apple and the publishers, and the leverage provided by the MFN, the industry was able to switch Amazon to the agency model and thus raise e-book prices. Id. at 119. Judge Cote dismissed Apple’s arguments, among others, that the agreements increased competition, Apple, at 121, that they acted independently of the publishers, Id. at 129–130, and that they lacked the requisite intent. Id. at 136. The judge also noted that Apple — a vertical player in this case and thus normally subject to the less strict “rule of reason” category of analysis — could still be analyzed under the per se category because Apple directly participated in the horizontal price-fixing conspiracy. Id. at 152–53. Apple plans to appeal the decision. In the meantime, the impact of the broader litigation has already been felt: e-book prices dropped last year after the publishers settled with the DOJ, as CNET notes. While it is difficult to predict how this decision will impact antitrust law or Apple’s case in particular, it does highlight the major changes occurring in publishing and the increasing importance of e-books to that market. Elise Young is a 3L at Harvard Law School. When not involved with JOLT, she bakes cookies, builds computers, and argues heatedly about extremely interesting and old legal cases.