Apple’s appeal of its price-fixing case boils down to this: Judge Denise Cote blew it. In its appeal brief filed this week with the Second Circuit, Apple attorneys argue that federal judge Denise Cote relied on too many inferences from too much circumstantial evidence, and thus clearly erred in finding Apple was the ringmaster of a conspiracy with five publishers to artificially inflate e-book prices.
Generally, cases on appeal tend to hinge on legal and procedural errors, rather than re-litigating findings of fact. In its appeal, however, Apple leans surprisingly hard on the merits of Judge Cote's fact findings, which, Apple argues, meets the standard for review as an abuse of discretion. “Where the key evidence at trial ‘consisted primarily of documents and expert testimony,’ as in this case, the factual findings are subject to an extensive review...for clear error,” the Apple brief states.
The clearest error, Apple argues, is that Judge Cote inferred a conspiracy from the voluminous, but largely circumstantial evidence in the case. “The court’s mode of analysis defies modern Supreme Court jurisprudence,” Apple attorneys state, arguing that precedent “sharply limit[s] the inferences” courts may draw from “ambiguous” evidence. “The evidence from which the district court inferred a conspiracy was all, at best, highly ambiguous," the brief states, "and cannot support a finding of a conspiracy.”
Specifically, Apple attorneys point out four areas for review by the Second Circuit: whether the district court erred in finding that Apple’s entry constituted a price-fixing conspiracy; whether the district court erred in finding Apple "per se" liable for price-fixing; whether the court erred in its exclusion of “expert evidence of the pro-competitive effects” of Apple’s conduct; and whether judge Cote’s final order exceeds the court’s authority.
In essence, however, Apple’s appeal hopes boil down to this difficult task: its attorneys must lead the Second Circuit to a completely opposite finding than the slam dunk verdict Judge Cote came to, based on the same record, and a single, brief oral argument.
“The court repeatedly applied the wrong legal standards, which led it to jump to the false conclusions of a price-fixing conspiracy from Apple’s lawful, unilateral, and pro-competitive business activities,” Apple’s brief states. “This Court should reverse.”
As for the argument in its brief, it consists largely of points made in Apple’s closing argument, with a few new rhetorical flourishes. In short, Apple argues, again, that it was just trying to enter into the e-book market under rational business terms when it first met with publishers in December 2009. And given the deep dissatisfaction with Amazon, and the much publicized discord over Amazon’s $9.99 price, those discussions necessarily involved price.
“The court, despite recognizing the lawfulness of Apple’s agency agreements and negotiating tactics, found that Apple, by doing nothing more than hearing out the publishers’ complaints and conveying its openness to pricing above $9.99, joined an ongoing conspiracy,” the Apple brief notes. But “Apple had important and valid business reasons to discuss retail prices at its initial meetings with the publishers, as it explored how it could enter the market without losing money.”
Apple attorneys argue that the district court "was simply incorrect" in finding that Apple’s use of the agency model and an MFN "amounted to an agreement with the publishers" to end retail price competition for e-books.
"When Apple entered the market, there was no history of retail price competition," Apple attorneys stress. "Amazon dominated the market and was setting a uniform loss-leader price for the publishers’ most important titles, suppressing inter-brand competition. Injection of the agency model enabled Apple to enter and Barnes & Noble (which was facing unsustainable losses) to remain in the market.”
In her July 10, 2013 verdict, however, Judge Cote found the evidence showed Apple did more than just "hear out" the publishers’ Amazon complaints.
Rather than simply propose and negotiate agency agreements which ensure their own profit margins, which would have been perfectly legal, Apple instead devised a plan with the publishers to move all e-book retailers to agency terms as a condition of its launching the iBookstore. The resulting plan handed a measure of consumer price control to the publishers, allowing them to end the $9.99 prices they deplored, and it “leveled the field” for Apple, enabling the company overnight to compete on even terms with market-leading Amazon, which had pioneered the consumer e-book market with the Kindle in 2007.
“Apple is liable here for facilitating and encouraging the Publisher Defendants’ collective, illegal restraint of trade,” Cote found. “Through their conspiracy they forced Amazon (and other resellers) to relinquish retail pricing authority and then they raised retail e-book prices. Those higher prices were not the result of regular market forces but of a scheme in which Apple was a full participant.”
While Cote acknowledged Apple’s valid "independent business reasons for creating an e-bookstore and for adopting an agency model,” there was no “ambiguity in the evidentiary record that should require hesitation before finding Apple liable,” she held. “The totality of the evidence leads inextricably to the finding that Apple chose to join forces with the Publisher Defendants to raise e-book prices, and equipped them with the means to do so.”
So, how does Apple's appeal stack up? It's looking like a tough task, said Cleveland State University law professor Christopher Sagers, who has followed the case closely.
Regarding Judge Cote's "fact findings," Sagers says Apple's argument is weak. "I think her rulings on those points were correct, and I think much of Apple's argument on these points, even when they are couched as arguments of law, will seem to the appellate court to be unreviewable," he told PW.
Apple's most important argument, he said, and one that they make at length in the brief, is that the case should not be a per se case. "If Apple convinces the appellate court of that, it is possible that the court could remand the case for further litigation under the more permissive 'rule of reason' standard," he observed.
But even if the court finds that Cote erred in deeming this a per se case, the Second Circuit would likely still affirm, Sagers predicted. "Judge Cote in fact found that the conspiracy would also be illegal under the rule of reason," Sagers explained, noting there is "direct evidence of anti-competitive injury," such as the sudden rise in the price of the publisher defendants' e-books. "Apple stresses in its brief that Judge Cote's ruling on the rule of reason is only one paragraph long. But I think that is unlikely to matter."
Sagers said it is "definitely not impossible" that Apple could win. But, he says, it would be a surprise.
"The Second Circuit could conceivably reverse and hold that in fact there was no harm, on the facts. But that strikes me as essentially impossible. Or, perhaps, Apple could get a remand for rule of reason litigation in which the Justice Department decides to settle on more favorable terms, rather than continue litigating." That, however, also seems a long shot, Sagers observed. "The case has been a priority for the government and so far has been an unalloyed success," he noted. "The only possibilities for Apple that really end this in victory are awfully unlikely."