On Monday, December 15, Apple appeared before the U.S. Court of Appeals for the Second Circuit to argue that the 2013 verdict holding it liable for fixing e-book prices should be reversed. And the lively hearing did not disappoint, as a panel of three judges aggressively questioned the Department of Justice’s case. What happens next? Below we look at the latest twist in the legal saga, as it enters a new phase.
The Hearing Went Well For Apple?
By all accounts, Apple had a good day in court, as the judges saved their toughest questions for the government. Judge Dennis Jacobs, especially, repeatedly implied that Apple’s (and the publishers’) actions may have been justified to break the hold of a “monopolist” that had engaged in “predatory” pricing (i.e., Amazon). U.S. Deputy Solicitor General Malcolm Stewart struggled to keep up as Jacobs peppered him with pointed questions about Amazon’s dominant market position. Attorney and RoyaltyShare founder Bob Kohn, (who is an appellee in the case as well) told PW he was heartened to hear a judge suggest “that Amazon was engaging in predatory pricing,” and that “the so-called horizontal conspiracy” may have been a justified, pro-competitive response to “Amazon’s 90% monopoly.”
Has the Tide Turned in Apple's Favor?
Not necessarily. “I suspect people may be reading too much into [Jacobs’s] questioning,” said Cleveland State law professor Christopher Sagers, who has been following the case, warning that it’s “hazardous” to predict judicial outcomes based on in-court questions.
But while it may be music to the publishing industry’s ears to hear a federal judge imply that Amazon is a monopolist, the legal question before the court is actually quite narrow: did District Court Judge Denise Cote err by finding that Apple had participated in a "per se" case of price-fixing?
In legal terms, a "per se" case means the government need only prove the price-fixing occurred, and the act is presumed to be anti-competitive. Apple, however, argued that Supreme Court precedent required Cote to apply a higher standard, the so-called rule of reason, which involves a market analysis. Had Cote done a proper analysis, Apple argued, she would have found that Apple’s entry into the e-book market was, in fact, “pro-competitive,” as it helped to end the dominance of a “monopolist,” saved Barnes & Noble, lowered “average” e-book prices, and increased e-book output.
OK, So What's the Problem?
For Apple, the biggest problem is the evidence. It is one thing for Jacobs to base his questions on an assumption that Amazon held a monopoly and was engaged in predatory pricing. But in the end, he and the rest of the panel must rule based on the evidence. And nothing in the trial record establishes Amazon as a monopolist, or as having engaged in predatory pricing.
It is not disputed that Amazon had a 90% e-book market share at the time—but having a 90% market share does not automatically make a company a monopolist. And the record shows that for most of the time in question, the Kindle simply had no real competition: there was Sony, hardly a bookselling powerhouse, and the Nook, which did not launch until two years after the Kindle. As to Amazon’s pricing practices, the record establishes only that Amazon was following a loss-leader strategy, and that the publishers’ prime concern was that Amazon’s $9.99 price for new releases and bestsellers was changing the perceived value of the book for consumers. At one point, Hachette CEO Arnaud Nourry told Amazon’s David Naggar that raising prices by $1 or $2 would solve the problem—does that sound like the proposal of one facing a monopolist engaged in predatory pricing?
Still, Apple has a point. There is no “smoking gun” pointing to a conspiracy. And there is plenty of evidence to suggest the e-book market became more “efficient” for consumers after Apple’s entry. Did Cote go too far in finding Apple's actions "per se" illegal? If the court thinks so, it could remand the case to Cote with instructions for an analysis under the rule of reason.
In Which Case, Apple Wins?
In which case, Apple probably loses, again. In her 160-page decision, Cote found the case to be a "per se" case of price-fixing, but had the rule of reason applied, she added, Apple still would have lost.
At the appeal hearing, Stewart suggested that even though Cote found it to be a "per se"case, her detailed opinion largely treated it as a rule of reason case. Of course, the Second Circuit could alter Cote’s calculus by sending the case back with detailed instructions, or it may want to see a more formal rule of reason analysis. And, in an extraordinary request, Apple asked the court to send the case to a different judge if it is remanded for a rule of reason analysis. Without a finding of bias or misconduct on Cote’s part, however, that is unlikely.
So, What Happens Now?
It could take six months or longer for the court to rule on Apple’s appeal. But if the case is remanded for an analysis under the rule of reason, we would almost surely see another appeal (by whichever party lost) before the Second Circuit, challenging Cote’s (or possibly another judge’s) "rule of reason" analysis. Which means another step on the way to the Supreme Court (where this is likely headed). Which means that the $400 million in consumer refunds riding on the case are a long way from happening.
Meanwhile, the publishing industry has largely moved on, and there is pretty much only legal precedent at stake. But in an interesting part of the hearing, lawyers for Simon & Schuster and Macmillan argued that Cote’s final order in Apple’s case illegally amended their consent decrees (which have now expired) by extending Apple’s discounting power from two years to four years. The publishers argued that vesting Apple with the power to discount hampers their negotiations with other retailers, which might also demand the right to discount. The judges, however, did not appear to see the harm facing the publishers, although Jacobs did question the efficacy of the order.
Surprisingly, the fact that S&S has already cut a new multiyear deal with Amazon did not come up. And last week, just days after the hearing, Macmillan announced that it too has struck a deal with Amazon. In a blog post, Macmillan CEO John Sargent noted that prices may fluctuate because of Apple’s court-ordered discounting power, even though Apple has maintained that it will not be a discount competitor.
But the most eye-catching line in Sargent’s post regards Amazon. Noting Amazon’s 64% share of Macmillan e-book sales, Sargent stressed the need for the company to find “broader channels to reach our readers.” But unlike Jacobs’s suggestions in court, Sargent attributed Amazon’s market share not to a monopoly and predatory pricing practices, but to “great innovation and prodigious amounts of risk and hard work.”
To borrow a line from Sargent's post, “irony prospers in the digital age.”