Apple Conspired To Fix e-Book Prices, Federal Judge Finds

Cote's ruling came in an action brought by the U.S. Justice Department and 33 states and U.S. territories. It relates to, and references, State of Texas, et al. v. Penguin Group (USA) et al. , 12 Civ. 3394 (DLC).

In addition to Penguin, the other publishers, all of whom settled in the year running up to trial, are Hachette, HarperCollins, Macmillan and Simon & Schuster.

In a statement, assistant attorney general William Baer called the decision “a victory for millions of consumers who choose to read books electronically.”

“Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations,” said an Apple spokesman.

“When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon's monopolistic grip on the publishing industry,” the spokesman said. “We've done nothing wrong and we will appeal the judge's decision.”

Cote recounted strategies employed by the publisher defendants to combat the Amazon price structure from January 2009 until December 2010 as Apple was developing iBooks and planning to open the iBookstore.

Apple first met with publishers on Dec. 15 and 16, 2009, in New York and discussed moving to the agency model that included use of most favored nation clauses ' an arrangement that enabled the publishers to force Amazon, then dominating the market for e-books with its Kindle reader, to switch from its wholesale model to the agency model. The publishers were able to make Google do the same in late January 2010 just as Apple was launching the iPad and the iBookstore.

“Apple seized the moment and brilliantly played its hand,” said Cote. “It provided the Publisher Defendants with the vision, the format, the timetable, and the coordination they needed to raise e-book prices.”

Key to the judge's ruling were documents Cote said make it “difficult for either Apple or the Publisher defendants to deny they worked together to achieve the twin aims of eliminating retail price competition and raising the prices for trade e-books.”

Leading the charge for Apple in talks with the publishers was Eddie Cue, Apple's senior vice president of Internet software and services, who initiated discussions with publishers and was an important witness at trial.

“As Cue admitted at trial, raising e-book prices was simply 'all part of' the bargain in creating the iBookstore,” Cote said.

Jobs' e-Books Plan

Cote said Apple chairman Steve Jobs, who died in October 2011, was “frank in explaining how the scheme worked” when he spoke to his biographer Walter Isaacson the day after the launch in January 2010.

Jobs described the plan as an “a[i]-kido move to eliminate price competition with Amazon.”

“Amazon screwed it up,” Jobs said. “It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that ' they thought it would trash their ability to sell hardcover books at $28.”

Sudden Price Increase

Cote said Apple at trial had “struggled mightily to reinterpret Jobs's statements in a way that will eliminate their bite. Its efforts have proven fruitless.”

When the iBookstore opened in April 2010, Cote said, there was “a sudden and uniform price increase” for e-books. The same was later true for Random House, a holdout that eventually adopted the agency model in January 2011. The judge again quoted Cue, this time in an e-mail. “When we get Random House, it will be over for everyone,” he wrote.

Cote said the plaintiffs carried their burden in showing that Apple committed a “per se” violation of Section 1 of the Sherman Act.

“There is overwhelming evidence that the Publisher Defendants joined with each other in a horizontal price-fixing conspiracy,” she wrote, adding later, “Apple not only willingly joined the conspiracy but forcefully facilitated it.”

She said Apple offered a shifting defense of its actions, abandoning several arguments over the course of the trial, including the contention it was unaware the publishers would use their new pricing authority to raise prices.

The judge rejected Apple's argument that the rapid-fire negotiations with the publishers were contentious, especially on price caps, evidence there was no meeting of the minds to forge a conspiracy.

“The fact that provisions, even key provisions, in the Agreements were the focus of hard-fought negotiations does not preclude a finding of liability,” she said.

Reaction

Ankur Kappor, a partner at Constantine Cannon who specializes in antitrust counseling and litigation who is not involved in the Apple case, says the case wasn't complicated “although the magnitude of the industry and the players makes it a landmark case however you look at it.”

Kappor says this is one of only a “handful of cases where a company has been found liable by participating in an alleged conspiracy not among its competitors in the same level of distribution, but a conspiracy with its suppliers.”

The significant question on appeal, Kappor says, will be the degree to which there was agreement. “There was a conspiracy to raise prices, but the question is: Did Apple share that same goal ' did they agree with the publishers to screw consumers by raising prices? I don't see evidence of that.”

But David Balto, another antitrust attorney not involved in the litigation, says Apple has a steep hill to climb at the Second Circuit.

“Apple was using its muscle to stifle competition and raise costs for the consumer,” says Balto, a former trial attorney with the U.S. Justice Department and policy director for the Federal Trade Commission now in private practice in Washington DC. “This case sends a clarion call to e-commerce companies that they have to fight hard in the marketplace and not take the easy road by arranging treaties with their rivals.”'

Mark Hamblett writes for the New York Law Journal , an ALM affiliate of Internet Law & Strategy . He can be reached at [email protected].

Apple violated antitrust laws when it orchestrated a conspiracy to fix e-book prices with five major publishers, Southern District Judge Denise Cote ruled on July 10.

Following a June bench trial in which Cote heard testimony about a quickly assembled plan by Apple to plunge into the e-book market by combining with publishers fed up with the $9.99 price charged by Amazon, the judge said in United States v. Apple, et al. , 12 Civ. 2826 (DLC), that “the evidence is overwhelming that Apple knew of the unlawful aims of the conspiracy and joined the conspiracy with the specific intent to help it succeed.”

The decision, which Apple said it would challenge at the U.S. Court of Appeals for the Second Circuit, sets up a hearing on injunctive relief and damages, which is expected to include the government's request for a multi-year ban on most-favored-nation clauses ' whereby publishers were allowed to match a competitor's decision to drop prices but Apple still retained its 30% cut.

Cote's ruling came in an action brought by the U.S. Justice Department and 33 states and U.S. territories. It relates to, and references, State of Texas, et al. v. Penguin Group (USA) et al. , 12 Civ. 3394 (DLC).

In addition to Penguin, the other publishers, all of whom settled in the year running up to trial, are Hachette, HarperCollins, Macmillan and Simon & Schuster.

In a statement, assistant attorney general William Baer called the decision “a victory for millions of consumers who choose to read books electronically.”

“Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations,” said an Apple spokesman.

“When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon's monopolistic grip on the publishing industry,” the spokesman said. “We've done nothing wrong and we will appeal the judge's decision.”

Cote recounted strategies employed by the publisher defendants to combat the Amazon price structure from January 2009 until December 2010 as Apple was developing iBooks and planning to open the iBookstore.

Apple first met with publishers on Dec. 15 and 16, 2009, in New York and discussed moving to the agency model that included use of most favored nation clauses ' an arrangement that enabled the publishers to force Amazon, then dominating the market for e-books with its Kindle reader, to switch from its wholesale model to the agency model. The publishers were able to make Google do the same in late January 2010 just as Apple was launching the iPad and the iBookstore.

“Apple seized the moment and brilliantly played its hand,” said Cote. “It provided the Publisher Defendants with the vision, the format, the timetable, and the coordination they needed to raise e-book prices.”

Key to the judge's ruling were documents Cote said make it “difficult for either Apple or the Publisher defendants to deny they worked together to achieve the twin aims of eliminating retail price competition and raising the prices for trade e-books.”

Leading the charge for Apple in talks with the publishers was Eddie Cue, Apple's senior vice president of Internet software and services, who initiated discussions with publishers and was an important witness at trial.

“As Cue admitted at trial, raising e-book prices was simply 'all part of' the bargain in creating the iBookstore,” Cote said.

Jobs' e-Books Plan

Cote said Apple chairman Steve Jobs, who died in October 2011, was “frank in explaining how the scheme worked” when he spoke to his biographer Walter Isaacson the day after the launch in January 2010.

Jobs described the plan as an “a[i]-kido move to eliminate price competition with Amazon.”

“Amazon screwed it up,” Jobs said. “It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that ' they thought it would trash their ability to sell hardcover books at $28.”

Sudden Price Increase

Cote said Apple at trial had “struggled mightily to reinterpret Jobs's statements in a way that will eliminate their bite. Its efforts have proven fruitless.”

When the iBookstore opened in April 2010, Cote said, there was “a sudden and uniform price increase” for e-books. The same was later true for Random House, a holdout that eventually adopted the agency model in January 2011. The judge again quoted Cue, this time in an e-mail. “When we get Random House, it will be over for everyone,” he wrote.

Cote said the plaintiffs carried their burden in showing that Apple committed a “per se” violation of Section 1 of the Sherman Act.

“There is overwhelming evidence that the Publisher Defendants joined with each other in a horizontal price-fixing conspiracy,” she wrote, adding later, “Apple not only willingly joined the conspiracy but forcefully facilitated it.”

She said Apple offered a shifting defense of its actions, abandoning several arguments over the course of the trial, including the contention it was unaware the publishers would use their new pricing authority to raise prices.

The judge rejected Apple's argument that the rapid-fire negotiations with the publishers were contentious, especially on price caps, evidence there was no meeting of the minds to forge a conspiracy.

“The fact that provisions, even key provisions, in the Agreements were the focus of hard-fought negotiations does not preclude a finding of liability,” she said.

Reaction

Ankur Kappor, a partner at Constantine Cannon who specializes in antitrust counseling and litigation who is not involved in the Apple case, says the case wasn't complicated “although the magnitude of the industry and the players makes it a landmark case however you look at it.”

Kappor says this is one of only a “handful of cases where a company has been found liable by participating in an alleged conspiracy not among its competitors in the same level of distribution, but a conspiracy with its suppliers.”

The significant question on appeal, Kappor says, will be the degree to which there was agreement. “There was a conspiracy to raise prices, but the question is: Did Apple share that same goal ' did they agree with the publishers to screw consumers by raising prices? I don't see evidence of that.”

But David Balto, another antitrust attorney not involved in the litigation, says Apple has a steep hill to climb at the Second Circuit.

“Apple was using its muscle to stifle competition and raise costs for the consumer,” says Balto, a former trial attorney with the U.S. Justice Department and policy director for the Federal Trade Commission now in private practice in Washington DC. “This case sends a clarion call to e-commerce companies that they have to fight hard in the marketplace and not take the easy road by arranging treaties with their rivals.”'

Mark Hamblett writes for the New York Law Journal , an ALM affiliate of Internet Law & Strategy . He can be reached at [email protected].