In a major decision, the Second Circuit Court of Appeals, by a 2-1 margin, has affirmed Judge Denise Cote's 2013 finding that Apple orchestrated a scheme to fix e-book prices.
“We conclude that the district court correctly decided that Apple orchestrated a conspiracy among the publishers to raise e-book prices, that the conspiracy unreasonably restrained trade in violation of the Sherman Act, and that the injunction is properly calibrated to protect the public from future anti-competitive harms,” wrote Debra Ann Livingston, for the court. “Accordingly, the judgment of the district court is affirmed.” Judge Dennis Jacobs, who made headlines with his tough questions at oral arguments, dissented.
In addition, the court also upheld Cote’s final injunction, rejecting an appeal by Macmillan and Simon & Schuster which argued that the final order illegally amended their consent decrees.
Upon first read, the decision appears to be a thorough endorsement of Cote’s verdict, which the Appeals Court says is “amply supported and well-reasoned.”
Apple's key argument on appeal was 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. A "per se" case means the government needed only to prove the price-fixing occurred, and the act is presumed to be anti-competitive, regardless of any pro-competitive effects in the market. In his dissent, Judge Dennis Jacobs agreed that Apple's case should not have been evaluated as a "per se" case.
"Apple took steps to compete with a monopolist and open the market to more entrants," he wrote. "Its conduct was eminently reasonable."
But the majority opinion strongly assailed Jacobs' view, calling it “startling,” and built on fundamental errors. The opinion noted that Jacobs conceded that Apple “intentionally organized a conspiracy among the Publisher Defendants to raise e-book prices,” but soundly rejected Jacobs' contention that such behavior was "reasonable" because it helped Apple enter a nascent market that was dominated by Amazon, and its $9.99 e-book prices.
“The dissent’s theory that the presence of a strong competitor justifies a horizontal price‐fixing conspiracy endorses a concept of marketplace vigilantism that is wholly foreign to the antitrust laws,” the opinion reads. "Plainly, competition is not served by permitting a market entrant to eliminate price competition as a condition of entry, and it is cold comfort to consumers that they gained a new e-book retailer at the expense of passing control over all e-books to a cartel of book publishers—publishers who, with Apple’s help, collectively agreed on a new pricing model precisely to raise the price of e-books and thus protect their profit margins and their very existence in the marketplace in the face of the admittedly strong headwinds created by the new technology."
The decision now paves the way for Apple to refund a hefty $400 million to consumers. Under the terms of Apple’s settlement with state and class action plaintiffs, approved last July, Apple would have paid just $50 million if the decision was remanded, and if reversed Apple would have paid nothing. The agreement also calls for separate payment of attorney fees and fines, up to $50 million, now that Apple’s liability has been upheld. However, don't expect those payments soon. The agreement also allows Apple to appeal the case all the way to the Supreme Court.
In a statement, Apple said it was assessing its options, which could include an en banc hearing of the entire Second Circuit, and/or an appeal to the Supreme Court. The company maintained its innocence. "We are disappointed the Court does not recognize the innovation and choice the iBooks Store brought for consumers,” the Apple statement read. “While we want to put this behind us, the case is about principles and values. We know we did nothing wrong back in 2010 and are assessing next steps."
The U.S. Department of Justice praised the decision. "The decision confirms that it is unlawful for a company to knowingly participate in a price-fixing conspiracy, whatever its specific role in the conspiracy or reason for joining it," its statement read. "Because Apple and the defendant publishers sought to eliminate price competition in the sale of e-books, consumers were forced to pay higher prices for many e-book titles."
Steve W. Berman, managing partner of Hagens Berman and lead attorney representing the consumer class, also praised the ruling. “The decision today agrees with our view, shared by one of the most respected district court jurists and appellate circuit courts in the United States,” he said in a statement, acknowledging that "class counsel took risk in agreeing to a settlement" in which Apple could end up paying nothing "because we believed that the evidence and the law supported our view that Apple’s conduct clearly violated the Sherman Act.”
New York State Attorney General Eric Schneiderman also praised the decision. "This victory takes us a major step toward recovering $400 million that Apple illegally overcharged E-book readers," he said, in a statement. "We will continue to work with our colleagues in other states to ensure that all companies compete fairly with the knowledge that no one is above the law.”
Attorney and RoyaltyShare founder Bob Kohn, an appellant in the case (and with whom Judge Dennis Jacobs agrees) told PW he believed Apple will ultimately prevail. "If Apple seeks review by the Supreme Court, and the high court takes the case, Apple is sure to win," Kohn asserted. "The Supreme Court has already cut back on the "per se" doctrine and may well entertain another opportunity to clarify that it does not apply in cases like this, where evidence of pro-competitive effects has been shown."
PW will update this story as reaction comes in.
Correction: Judge Debra Ann Livingston wrote the majority opinion, not Judge Raymond Lohier, who concurred.