Last week, the Second Circuit Court of Appeals, by a 2–1 margin, affirmed Judge Denise Cote’s 2013 finding that Apple orchestrated a 2010 conspiracy with five major publishers to fix e-book prices. Here is a quick look at what the court said, and what the decision means for the long-running case.
For Apple, the appeals court decision is a stinging defeat. Writing for the majority, Judge Debra Ann Livingston declared Cote’s 2013 ruling to be “amply supported and well reasoned.” Indeed, the decision broadly upheld Cote’s findings of fact, as well as her reading of antitrust law: specifically Cote’s holding that Apple had engaged in a per se case of price fixing—that is, a case in which the restraint imposed on competition is so obviously outside the law that it is condemned without examination of other market factors.
“Apple organized the Publisher Defendants’ price-fixing conspiracy not because it was a necessary precondition to market entry, but because it was a convenient bargaining chip,” the court concluded. “By aligning its interests with those of the Publisher Defendant and offering them a way to raise prices across the e-book market, [Apple] could gain quick entry into the market on extremely favorable terms, including the elimination of retail price competition from Amazon. But the offer to orchestrate a horizontal conspiracy to raise prices is not a legitimate way to sweeten a deal.”
At oral arguments last December, Judge Dennis Jacobs’s questions suggested that he found Cote’s 2013 decision to be jiggery-pokery, or, perhaps, pure applesauce. And accordingly, his dissent strongly disagrees with the majority.
Jacobs argued that since Apple is a customer of the publishers, not a competitor, its "vertical" agreements with the publishers cannot be seen as part of a per se "horizontal" conspiracy. “On the only horizontal plane that matters to Apple’s e-book business,” he wrote, “Apple was in competition and never in collusion.” When viewed through the more stringent “rule of reason” framework, Jacobs holds that Apple’s conduct was justified, and the net effect of its scheme decisively pro-competitive. “Apple took steps to compete with a monopolist,” he concluded, referring to Amazon’s 90% market share. “Its conduct was eminently reasonable.”
Notably, Jacobs does not contest Cote’s findings of fact (including that the publishers illegally colluded). And despite repeatedly referring to Amazon as a monopolist, he conceded that the record does not establish any unlawful actions by Amazon. This was just bare-knuckle business, he suggested, a clash of corporate titans—Amazon’s behavior was legal; Apple’s response was legal. And the publishers? They settled.
In her written opinion, Livingston called Jacobs’s take on the case “startling” and sharply rebutted him. “Plainly, competition is not served by permitting a market entrant to eliminate price competition as a condition of entry,” she wrote. “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.”
Under a settlement with 33 states and consumer class plaintiffs approved last July, this decision sets the stage for Apple to pay out $400 million in refunds to consumers, as well as another $50 million in fees and penalties. But don’t expect refunds to come soon. Apple officials said they were considering their options, which include seeking an en banc hearing before the full Second Circuit and an appeal to the Supreme Court.
Christopher Sagers, a law professor at Cleveland State University and a close observer of the case, said he believes Apple will appeal to the Supreme Court, if, for no other reason, than that it would put off paying the $400 million settlement. But he believes it is unlikely the high court will take the case. “It’s a fact case, and I can’t imagine what the circuit split will be,” he said. “Apple’s lawyers will reprise their arguments that it’s not just a fact case, and that there is authority from other circuits in conflict. But the case for that is [extremely weak].”
RoyaltyShare founder Bob Kohn, an attorney and an appellant in the case, said that if the high court takes the case, he believes Apple will prevail. “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,” he said.
For publishers, the decision is good and bad news. The bad news is that the latest decision reinforces that they illegally colluded to fix e-book prices. At this point, even if Apple is exonerated by the Supreme Court, the publishers will not be cleared.
But so what? With new Amazon sales deals in place, their consent decrees and DOJ sanctions expired, and some form of agency pricing now in effect, exoneration means little. What would mean more to publishers is $400 million of Apple’s fortune in their customers’ e-book accounts.