Apple’s loss

Two years ago, on July 10, 2013, the United States and 33 states and territories won a bench trial against Apple for its role in a conspiracy to fix prices on electronic book (e-books). On June 30, 2015, two members of a three-judge Second Circuit panel upheld the judgment against Apple under section one of the Sherman Act. United States v. Apple, Inc., No. 13-3741-cv (2d Cir. June 30, 2015).

If the ruling stands, Apple must pay the states and private plaintiffs $450 million under a deal that it cut while its appeal pended, on July 10, 2014.

But much more than $450 million turns on the durability of a key holding by the Second Circuit majority — that per se liability attaches not only to “horizontal” competitors who conspire to fix prices to their customers but also to “vertical” orchestrators of the horizontal conspiracy.

In this post, I will lay out the background and talk about why the Second Circuit upheld the finding that Apple participated in the conspiracy. In a later post, I will flesh out the momentous battle between the majority judges and their dissenting colleague over per se liability. I will also explain why I believe the fight has such vast implications for antitrust law.

Beginnings

The case concerned events that culminated  during April 2010 with a sharp bump in e-book prices. The government plaintiffs alleged that Apple and five book publishers unlawfully agreed to raise e-book prices by ganging up on Amazon and forcing it to stop charging a below-cost price of $9.99 for e-book versions of the the publishers’ best-selling titles.

All of the publishers settled before trial.

The evidence at the trial showed that on the eve of its launch of the iPad, in late 2009 and early 2010, Apple used the terms of its contracts with HarperCollins, Simon & Schuster, Penguin Group, Hachette, and Macmillan for Apple’s new iBookstore service and a swarm of high-level phone calls and e-mails to link the publishers in a hub-and-spoke conspiracy. Apple occupied the center (the hub), the publishers sat at the ends of the spokes, and a rim connected the publishers to each other.

After 17 days of evidence and arguments, United States District Judge Denise Cote issued a 160-page opinion. She summed up the outcome as follows:

[T]he Plaintiffs have shown that Apple conspired to raise the retail price of e-books and that they are entitled to injunctive relief. A trial on damages will follow.

United States v. Apple Inc., 952 F. Supp. 2d 638, 645 (S.D.N.Y. 2013).

Settlement

In the meantime, some of the states and a class of people who bought e-books had brought actions against Apple for treble damages under federal and state antitrust laws. All of the cases ended up in front of Judge Cote.

In March 2014, her honor granted a motion to certify the claims of the private plaintiffs for treatment on a class-action basis. Within four months, both the state plaintiffs and the private plaintiffs entered into a settlement agreement with Apple.

The pact provides for payment of $450 million “[i]n the event the Final Liability Decision affirms the Liability Finding” and $70 million “[i]n the event the Final Liability Decision vacates and remands, or reverses and remands with instructions, for reconsideration, or for retrial of the Liability Finding”.

“Final Liability Decision” means “a final decision by the Second Circuit [or the Supreme Court] on the merits of the Liability Finding”. “Liability Finding” refers to “the holding of the Opinion and Order issued by the District Court on July 10, 2013 that Apple violated Section 1 of the Sherman Act”.

Affirmance on participation in conspiracy

The Second Circuit panel split 2-1 on the Liability Finding, with the majority affirming Judge Cote’s conclusion that Apple had indeed committed a section one violation.

Writing a 117-page opinion for herself and her colleague Raymond J. Lohier, Circuit Judge Debra Ann Livingston lays out how Apple’s Eddy Cue, Kevin Saul, and Keith Moerer worked with the book publishers to set up and implement a conspiracy to implement a regime in which the publishers could set the prices at which not only Apple but also Amazon sold the publishers’ titles as e-books.

Apple claimed innocence:

Because (in Apple’s view) the Contracts were vertical, lawful, and in Apple’s independent economic interest, the mere fact that Apple agreed to the same terms with multiple publishers cannot establish that Apple consciously organized a conspiracy among the Publisher Defendants to raise consumer‐facing ebook prices — even if the effect of its Contracts was to raise those prices.

United States v. Apple, slip op. at 53.

Judge Livingston found the argument unpersuasive in light of the evidence:

Apple understood that its proposed Contracts were attractive to the Publisher Defendants only if they collectively shifted their relationships with Amazon to an agency model [that gave the publishers the power to set retail prices for e-books of their titles ] — which Apple knew would result in higher consumer‐facing ebook prices. In addition to these Contracts, moreover, ample additional evidence identified by the district court established both that the Publisher Defendants’ shifting to an agency model with Amazon was the result of express collusion among them and that Apple consciously played a key role in organizing that collusion. The district court did not err in concluding that Apple was more than an innocent bystander.

Id. at 58. One of the two principal questions on appeal — whether Apple in fact orchestrated a hub-and-spoke conspiracy — thus went against the Cupertino crowd.

Looking ahead

That of course leaves the other major question.

The dissenting judge, Circuit Judge Dennis Jacobs, more or less accepted the majority’s conclusion regarding the “enabler” role that Apple played as a factual matter. But he objected to his colleague’s ruling on whether what Apple did violated section 1 of the Sherman Act.

And to that battle over per se liability I will turn in the next post.