On Monday, December 15, Apple will finally get their crack at overturning its 2013 e-book price-fixing judgment, with oral arguments scheduled before the Second Circuit Court of Appeals. What are the core arguments that will be pressed before the Second Circuit? What is at stake? And, can Apple succeed in overturning the judgment against them? Here is a short primer:
What is This Case About?
If you’ve lost track, you’re probably not alone—there’s been a lot of legal wrangling over the last 18 months. But Monday’s hearing is the main event: this is Apple’s appeal of Judge Denise Cote’s 2013 liability finding, in which the company was found to have conspired with five major publishers (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) to artificially inflate e-book prices.
The 2012 suit alleged that five of the then Big Six publishers, threatened by Amazon’s $9.99 e-book prices, colluded with Apple to simultaneously move the industry to an “agency” model in which the publishers would take control of consumer e-book pricing in conjunction with the 2010 launch of the iPad and the iBookstore.
The five Publisher Defendants settled the charges against them and avoided trial. They admitted no wrongdoing, but refunded $166 million to e-book consumers, and submitted to two years of Department of Justice sanctions. Apple, however, fought the charges, and, on July 10, 2013, after a two-week trial, Cote found Apple had violated Section 1 of the Sherman Act.
"Apple is liable here for facilitating and encouraging the Publisher Defendants’ collective, illegal restraint of trade," Cote held. "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.”
What is Apple’s Appeal Argument?
Apple’s appeal essentially boils down to this: Judge Denise Cote botched the case.
The key argument Apple will make to the Second Circuit is that case law limits the inferences a judge can make from evidence submitted in antitrust cases, and that Judge Cote relied on too many inferences from too much ambiguous evidence and thus erred in finding Apple liable for a "per se" case of price-fixing. In a recent letter to the Second Circuit, Apple attorneys reiterated that argument, pointing to a recently decided case in another circuit they believe bolsters their contention that case law limits the inferences a judge can make.
In Apple’s version of events, the company did “nothing more” than “[hear] out” the publishers’ complaints about Amazon and convey its “openness to pricing above $9.99.” Nothing in the evidence, they stress, definitively shows otherwise.
Did Apple exploit the publishers’ desire to blunt Amazon’s pricing? Sure—but at no time, Apple attorneys insist, did Apple knowingly join a conspiracy—it was simply trying to enter the e-book market under “rational” business terms. And its entry into the e-book market ultimately had "pro-competitive" effects, helping to dent Amazon's 90% share of the e-book market.
“That Apple used the leverage created by market dynamics and the publishers’ well-publicized antipathy toward Amazon to enter the market is quintessential competition,” Apple argued in a July appeal brief, “not conspiracy.”
There are other points of contention in Apple’s appeal (such as whether Cote’s final order exceeded her authority and her handling of evidence). But make no mistake: a good outcome for Apple hinges on whether the Second Circuit agrees that Cote improperly inferred too much from evidence that Apple says is all “highly ambiguous, at best.”
DoJ: Judge Cote Nailed It
Attorneys for the U.S. Department of Justice counter that Apple did considerably more than “hear out” the publishers—and that Judge Cote got the case exactly right. In the DoJ’s appeal filing, U.S attorneys point out that the evidence against Apple was “overwhelming.” And, despite Apple’s dispute over “isolated pieces of evidence,” the judge “articulated the proper standard, and correctly applied it.”
U.S. attorneys claim they only needed to show there was “sufficient evidence” to enable “a reasonable fact finder to infer that the conspiratorial explanation is more likely than not.” And the volumes of evidence presented in the case, they say, shows that the alleged conspiracy was “more than merely plausible,” but made perfect economic sense: Apple wanted a retail platform for e-books on its new device, the iPad, but did not want to compete with Amazon on price. And the publishers wanted to end Amazon’s low prices, which they believed “devalued” their product.
In her decision, Cote conceded that the evidence was “equivocal” on whether Apple desired higher e-book prices, and acknowledged that Apple had “independent business reasons” for creating an e-bookstore on the agency model. But the “totality of the evidence,” she held, led “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.”
Cote also dispatched with Apple's claim that its entry into the e-book market was pro-competitive. "The pro-competitive effects to which Apple has pointed, including its launch of the iBookstore, the technical novelties of the iPad, and the evolution of digital publishing more generally, are phenomena that are independent of the [agency agreements]," she ruled.
In fact, the agency deals eliminated the ability of retailers to compete on price, relieved Apple of the need to compete on price, and allowed the Publisher Defendants to raise the prices for their e-books, she observed.
"The [agency deals] did not promote competition," she thus concluded, "but destroyed it."
Can Apple Win?
Lawyers say it will be an uphill battle for Apple. Look at it this way: to win, Apple must lead the Second Circuit to a completely opposite finding than the slam-dunk verdict Judge Cote came to, based on the same evidence, and a single, brief oral argument (each side is allotted just 20 minutes).
Apple’s appeal is also somewhat unusual in that it leans surprisingly hard on Cote's reading of the evidence. Appeals generally hinge on legal and procedural errors. But in this case, Apple claims that Cote so abused her discretion that her conclusions are reviewable for “clear error.” Cleveland State University law professor Christopher Sagers, who has followed the case closely, told PW it is “definitely not impossible” that Apple could win. But, in his opinion, Cote’s reading of the evidence is sound, and some key parts of Apple's arguments, because they revolve around findings of fact, could be deemed unreviewable.
Still, Apple is right that there is no smoking gun in the evidence, and in both the live and submitted testimony, many witnesses were cagey and had, shall we say, striking lapses of memory.
What there is, however, is a lot of evidence: over eight million pages were produced in discovery. And one must question whether a judge of Cote’s experience could really blow a case as badly as Apple claims happened here. It’s not out of the question. But is it likely? Denise Cote is a well-regarded senior judge with a 20-year record.
What’s at Stake?
Apple, meanwhile, is betting $400 million in consumer refunds that Cote's verdict will be reversed. On November 17, Cote approved a deal that would settle money damages arising from the case. Under terms of the deal, which Cote called “unusual,” Apple will pay $400 million to consumers if her liability finding is upheld. It will pay $50 million if the liability finding is remanded for further proceedings. And if Cote is reversed, Apple will pay nothing.
But even after the decision by the circuit court, the case could drag on. The settlement agreement allows the parties to appeal all the way to the Supreme Court an the full appeal process could take years.