Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Apple seeks reversal of judgment in e-books price fixing case, (Feb 26, 2014)

By Linda O’Brien, J.D., LL.M.

“The district court’s ruling that Apple in the very act of launching its iPad device, inventing the iBooks Store, and entering the e-books market, violated the Sherman Act is a radical departure from antitrust law, and policy,” according to a brief filed by Apple in the U.S. Court of Appeals in New York City yesterday. Apple is appealing the district court’s finding that Apple engaged in a conspiracy with major publishers to fix the price of electronic books (or e-books) and the grant of an injunction requiring the modification of its publisher agreements (U.S. v. Apple Inc., February 25, 2014).

In an action by the U.S. Department of Justice and a number of state attorney generals, Apple was found to have engaged in a conspiracy among the major publishers to fix retail prices for e-books. Under the terms of the final judgment, Apple was required to modify its existing agreements with the major e-book publishers and to appoint an external monitor to oversee its internal antitrust compliance policies.

Liability for conspiracy. In its brief, Apple contends that the district court erred in finding its negotiation and execution of lawful agency agreements with the publishers, which Apple pursued its independent business interests, was a price-fixing conspiracy in violation of the Sherman Act. The district court decision was based on a fundamentally incorrect theory of antitrust law, Apple argued. While recognized the lawfulness of Apple’s agency agreement and negotiations, the court found that Apple engaged in conspiracy in its first exploratory meetings with the publishers.

In Monsanto Co. v. Spray-Rite Serv. Corp., 452 U.S. 752 (1984), the Supreme Court held that Section 1 of the Sherman Act did not bar vertical market players from discussing pricing and recognized the legitimate reasons for such discussions. The Supreme Court has also squarely rejected the district court’s assumption that actions resulting in some price increases are ipso facto anti-competitive in Leegin Creative Leather Prods. Inc. v. PSKS, Inc., 551 U.S. 877 (2007). Apple denies having knowledge that the publishers were engaged in a conspiracy at any time and states that the district court’s own findings showed Apple offered an attractive retail business model to the publishers that was in Apple’s independent business interests.

Per se rule and rule of reason application. The district court’s application of the per se rule and the rule of reason were incorrect, Apple contended. The application of the per se rule is confined to restraints that are manifestly anti-competitive and “lack any redeeming value.” Apple’s entry into the e-book market through vertical distribution agreements was pro-competitive by promoting competition in a highly concentrated market, delivering higher output, lowering prices, and accelerating innovation. The district court’s rule-of-reason analysis was also incorrect since it impermissibly relieved the plaintiffs of their burden of proving the anticompetitive effects as a whole in the relevant market. The court instead focused solely on the prices and output of the publishers and ignored the benefits to the market as a whole from Apple’s entry in the e-book market.

Expert testimony. Apple also argued that the district court improperly and prejudicially excluded unrebutted expert testimony on the price-reducing effects of Apple’s entry into the market and the terms of its agency agreements. The testimony of Apple’s expert was critical in establishing that Apple’s entry and the agreements provided incentives to independent publishers to enter the market and promoted competition that led to decreased prices. The court also applied a double standard by soliciting testimony on the same issue from the plaintiffs’ expert who had not conducted an analysis on what would have happened to market prices if Apple had not entered it.

Injunction. Finally, Apple raised the argument that the grant of the injunction was an improper and unnecessary restriction of Apple’s business activities and the monitorship provision exceeded the court’s authority. The injunction, which required Apple to modify its agreements with the publishers, was unduly punitive, overbroad, and should be vacated on its own terms. The publisher agreements have already been renegotiated and were subject to consent decrees as part of the publishers’ settlements. Additionally, the injunction regulates Apple’s App Store which is unrelated to the conduct at issue or proof at trial. The monitorship was also legally inappropriate where the alleged conduct related only to specific events in the e-book market and is not provided for in the Sherman Act’s detailed remedial scheme.

Attorneys: Cynthia E. Richman (Gibson, Dunn & Crutcher LLP) for Apple Inc.

Companies: Apple Inc.

News: Antitrust AntitrustDivisionNews