At a lively hearing on December 15, the Second Circuit heard Apple’s appeal of the 2013 decision that found the company liable for fixing e-book prices. And while Apple still faces a long legal battle to clear its name, at least one judge on the three-judge panel expressed serious reservations about the case.
Arguing for the government, U.S. Deputy Solicitor General Malcolm Stewart told the court that Judge Denise Cote was right to find that Apple had colluded with five major publishers in a "per se" case of price-fixing in the e-book market—that is, a violation that precludes further examination of the conspiracy’s intent, or "actual effect" on the market. But Stewart quickly ran into tough questioning, primarily from Judge Dennis Jacobs.
Does it not matter that the publishers were seeking to break the grip of a "monopolist?" Jacobs asked, suggesting that the publishers' actions were like that of “mice that decided to put a bell on the cat.”
In a particularly loaded question, Jacobs acknowledged that prices rose following the agency deals—but isn’t that what you would expect when you break a "monopolist" that relied on "predatory" pricing? Jacobs also questioned whether the government had noticed that Amazon had come to dominate 90% of the e-book market, and whether the government found that kind of dominance acceptable?
Stewart at times struggled to keep up. At one point he compared Apple’s role in the conspiracy to someone who drives drug dealers to drug deals. But Judge Raymond Lohier Jr. quickly dispatched with that analogy, noting that such behavior may be "obvious" in a criminal context, but not so in antitrust cases. Jacobs then elicited laughter when he noted that the government had an interest in dissuading "new entrants" in the drug trade.
Stewart did make his points, however. He said that despite Amazon's market share, the government viewed Amazon’s $9.99 prices to be “good for the consumer,” and none of Amazon’s actions were alleged to be violations of law. If Amazon was alleged to be a monopolist or engaged in predatory pricing, as Jacobs' questions suggested, the publishers could have filed a complaint—they did not. Instead, Stewart said, they chose to enter into “a scheme” with Apple to “remove price competition” from the e-book market, and force Amazon to raise prices.
This was not “innovation,” Stewart said, but a strategy that revolved around making a competitor's product "less attractive to consumers.”
As expected from the filings, Apple attorney Theodore Boutros began the day by arguing that Judge Denise Cote erred in finding Apple liable for its role in a “per se” case of price-fixing. Rather, Boutros argued, Cote was bound by precedent to have applied the more stringent “rule of reason” framework, which would have taken into account what Boutros called Apple’s “pro-competitive” effect on the e-book market.
Apple's entry into the e-book market ended the dominance of a “monopolist,” Boutros argued, saved Barnes & Noble from going out of the e-book business, lowered “average” e-book prices, and helped “explode” e-book output. And, it did so through means all held to be legal (agency agreements, simultaneous negotiations, and a most-favored nations clause).
Specifically, Boutros asked the court to reverse Cote’s finding of liability against Apple, saying he believed Apple had proven its innocence. But failing that, if the case is remanded for analysis under the rule of reason standard, he asked that the analysis be done by a different judge.
“A more extensive analysis,” Lohier added, acknowledging that, in her 2013 opinion against Apple, Judge Cote wrote that she also would have found Apple liable under the rule of reason.
"If it were necessary to analyze this evidence under the rule of reason," Cote wrote in her 160-page opinion, "the Plaintiffs would also prevail," explaining that the evidence in the case was overwhelming, and that the pro-competitive effects Apple claimed were in fact “independent” of its agency agreements.
In another part of the appeal, lawyers for Simon & Schuster and Macmillan argued that Judge Cote’s final order against Apple should be reversed. That order, attorneys argued, essentially rewrote their consent decrees, extending their agreed upon two-year "cooling off" periods by requiring Apple to maintain discounting power for up to four years.
S&S’s DoJ sanctions expired last month, and Macmillan’s sanctions end Friday, December 19.
S&S attorneys argued that the order vesting Apple with special discounting power for an extended period could hamper them in negotiations with other retailers. But the judges did not appear to see the harm that the publishers faced, although Judge Jacobs did question the efficacy of the order. Surprisingly, the fact that S&S has already cut a new deal with Amazon, (which CBS CEO Les Moonves praised as a good deal) did not come up.
The court reserved judgment, and no timetable was given for a decision. But some observers saw the court's pointed questions as a sign that the tide may be about to turn in the case.
"It's encouraging," said attorney and RoyaltyShare founder Bob Kohn, who has filed his own challenges to the DoJ's action, and was at the hearing.
"At least one of the judges recognized not only how obvious it was that Amazon was engaging in predatory pricing," Kohn told PW, "but also suggested that the so-called horizontal conspiracy may have been a justified, pro-competitive response to Amazon's 90% monopoly."