US antitrust case concerning price fixing of e-books
This article is about the 2012 e-book price-fixing case. For the 2016 case related to the FBI demand to unlock an iPhone, see FBI–Apple encryption dispute.
United States v. Apple Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013), was a US antitrust case in which the Court held that Apple Inc. conspired to raise the price of e-books in violation of the Sherman Act.
The suit, filed in April 2012, alleged that Apple Inc. and five book publishing companies conspired to raise and fix the price for e-books in violation of Section 1 of the Sherman Antitrust Act.[1] The publishers are Hachette Book Group, Inc., HarperCollins publishers, Macmillan publishers, Penguin Group, Inc., and Simon & Schuster, Inc. (collectively referred to as the Publisher Defendants). Only Apple proceeded to trial, while the Publisher Defendants settled the claims against them.
Background
The Publisher Defendants sold over 48% of all e-books in the U.S. in the first quarter of 2010. The Publisher Defendants along with Random House Publishing are the six largest publishers in the United States (collectively the publishers) and are often referred to as the "Big Six" in the publishing industry. In 2009 Amazon.com Inc. had nearly 90% of the e-books industry. Amazon charged $9.99 for certain new releases and bestselling e-books which helped make it the market leader in the sale of e-books and e-readers with its Kindle.[2]
Amazon's price point caused discontent among the publishers. The publishers believed that the low price point was a problem for their sales of more profitable hardcover books. Approximately every three months, the CEOs of the Big Six would meet in private dining rooms in New York restaurants "without counsel or assistant present, in order to discuss the common challenges they faced, including most prominently Amazon's pricing policies." The publishers used several different strategies to fight against Amazon's pricing point, including selling e-books for the same price as their printed version through a continued wholesale model and "windowing" new releases. Windowing is a tactic that would delay the release of books to their e-book form for a certain window of time.[2]
Apple planned to unveil the iPad on January 27, 2010, and ship the device in early April 2010. Apple also hoped to announce its new iBookstore at launch and include content in it from the major publishers.[2]
Facts
Beginning on December 8, 2009, Apple's senior VP of Internet Software and Services, Eddy Cue, contacted the publishers to set up meetings for the following week. During the meetings Cue suggested that Apple would sell the majority of e-books between $9.99 and $14.99, with new releases being $12.99 to $14.99. Apple also adopted the agency model which it used in its App Store for distribution of e-books. This let publishers control the price of the e-books with Apple receiving a 30% commission. Apple also set up price tiers for different books. Apple included a MFN clause in their contract with the publishers which allowed for Apple to sell e-book at its competitors' lowest price.[2]
Amazon learned about the coming deals between the publishers and Apple on January 18, 2010. In response, Amazon appealed directly to authors and encouraged disintermediation, the act of reducing intermediaries between producers and consumers (i.e. allowing for authors to directly sell to consumers). Authors could choose a "new 70 percent royalty option"[2] for e-books with a list price "between $2.99 and $9.99."[2] The Big Six publishers called each other over 100 times in the week before signing the agreement. Steve Jobs even emailed James Murdoch, HarperCollins' parent company News Corp's CEO, to persuade him to have HarperCollins join.
On the day of the launch, Jobs was asked by a reporter why people would pay $14.99 for a book in the iBookstore when they could purchase it for $9.99 from Amazon. In response Jobs stated that "The price will be the same... publishers are actually withholding their books from Amazon because they are not happy."[2] By stating this, Jobs acknowledged his understanding that the publishers would raise e-book prices and that Apple would not have to face any competition from Amazon on price.
Shortly after January 31, Amazon sent a letter to the Federal Trade Commission complaining about the simultaneous nature of the demands for agency model agreements from the publishers who had signed with Apple. By March, Amazon had completed agency agreements with four of the five publishers. During the negotiations over the agreements, the publishers would talk with each other and share information about what Amazon would concede with each. Apple was closely following all of this progress and Cue was in contact with the publishers. After Amazon's move to the agency model, there was "an average per unit e-book retail price increase of 14.2% for their new releases, 42.7% for their New York Times Bestsellers, and 18.6% across all of the Publisher Defendants' e-books."[2] The publishers also raised the price of some of their new release hardcover books so as to move the e-book versions into a correspondingly higher price tier. Amazon saw Random House (who for the moment had not joined Apple) e-book sales having an increase of 41%. Two studies showed that the publishers who moved to agency model sold over 10% fewer units at major retailers. In contrast, other publishers' sales increased 5.4% in the same period. In January 2011, Random House also moved to the agency model and raised the prices of its e-books, and then experienced a decline in its e-book sales. This allowed Random House to join the iBookstore.[2]
Decision
Sherman Act
Section 1 of the Sherman Act outlaws "every contract, combination..., or conspiracy, in restraint of trade or commerce among the several States." To show that there is violation of Section 1 of the Sherman Act proof of joint or concerted action is required as was shown in Monsanto Co. v. Spray-Rite Service Corp. The plaintiffs must show:
"a combination or some form of concerted action between at least two legally distinct economic entities" that
"constituted an unreasonable restraint of trade either per se or under the rule of reason."
In Monsanto,[3] the Court also described how "Circumstances must reveal a unity of purpose or a common design and understanding, or a meeting of minds in an unlawful arrangement."[3] Section 1 outlaws only unreasonable restraints of trade through either illegal per se agreements or the rule of reason. For illegal per se agreements plaintiffs must show that a contract or contracts are "unreasonable and anti-competitive before it will be found unlawful." Texaco Inc. v. Dagher. Under the rule of reason "the plaintiffs bear an initial burden to demonstrate the defendants' challenged behavior had an actual adverse effect on competition as a whole in the relevant market."[2]
Apple's arguments
Apple asserted that it is entitled to a verdict in its favor since the evidence does not "tend to exclude" the possibility that Apple acted in a manner consistent with its lawful business interests. This relies on the Supreme Court's decision in Monsanto v. Spray-Rite.[3] The defendant argued that it never intended to conspire to raise e-book prices. Apple argued that the plaintiffs have failed to show that the publishers actually "increased" e-book prices. This is because had Amazon not adopted the agency model, the publishers would have simply withheld e-books from Amazon. Apple also argued that their conduct must be analyzed under the rule of reason. Finally, Apple argued that should the plaintiffs win a verdict in their favor, this would set a dangerous precedent and will discourage business from entering other markets.[2]
Analysis of evidence
The Court found that a large amount of evidence shows that the Publisher Defendants joined with each other in a horizontal price-fixing conspiracy. There is sufficient evidence to show that Apple violated Section 1 of the Sherman Act by conspiring with the publishers to eliminate retail price competition and raise the price of e-books. The evidence shows that Apple was a knowing and active member of the conspiracy. The plaintiff has proven a per se violation of the Sherman Act.
Rulings
In July 2013, US District Court Judge Denise Cote found Apple guilty of conspiring to raise the retail price of e-books and scheduled a trial for 2014 to determine damages.[4] In June 2014, Apple settled the e-book antitrust case out of court with the States; however still appealed Judge Cote's initial ruling.[5] In June 2015, the 2nd US Circuit Court of Appeals, by a 2–1 vote, concurred with Judge Cote that Apple conspired to e-book price fixing and violated federal antitrust law.[6][7] Apple appealed the decision. In March 2016, the Supreme Court of the United States declined to hear Apple's appeal that it conspired to e-book price fixing therefore the previous court decision stands, which means Apple must pay $450 million.[8]
Significance
In this case, the court applied the per se doctrine to vertical pricing conduct which had not been the doctrine since Leegin Creative Leather Products, Inc. v. PSKS, Inc. Leegin suggested that vertical conduct be judged independently under the rule of reason even in the presence of both vertical and horizontal parties. This may lead to more stringent antitrust treatment to actors in vertical relationships.[original research?]
The Sherman Antitrust Act of 1890 is a United States antitrust law which prescribes the rule of free competition among those engaged in commerce. It was passed by Congress and is named for Senator John Sherman, its principal author.
In the United States, antitrust law is a collection of mostly federal laws that regulate the conduct and organization of businesses to promote competition and prevent unjustified monopolies. The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.
Price fixing is an anticompetitive agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.
The rule of reason is a legal doctrine used to interpret the Sherman Antitrust Act, one of the cornerstones of United States antitrust law. While some actions like price-fixing are considered illegal per se, other actions, such as possession of a monopoly, must be analyzed under the rule of reason and are only considered illegal when their effect is to unreasonablyrestrain trade. William Howard Taft, then Chief Judge of the Sixth Circuit Court of Appeals, first developed the doctrine in a ruling on Addyston Pipe and Steel Co. v. United States, which was affirmed in 1899 by the Supreme Court. The doctrine also played a major role in the 1911 Supreme Court case Standard Oil Company of New Jersey v. United States.
A civil conspiracy is a form of conspiracy involving an agreement between two or more parties to deprive a third party of legal rights or deceive a third party to obtain an illegal objective. A form of collusion, a conspiracy may also refer to a group of people who make an agreement to form a partnership in which each member becomes the agent or partner of every other member and engage in planning or agreeing to commit some act. It is not necessary that the conspirators be involved in all stages of planning or be aware of all details. Any voluntary agreement and some overt act by one conspirator in furtherance of the plan are the main elements necessary to prove a conspiracy.
The multinational technology corporation Apple Inc. has been a participant in various legal proceedings and claims since it began operation and, like its competitors and peers, engages in litigation in its normal course of business for a variety of reasons. In particular, Apple is known for and promotes itself as actively and aggressively enforcing its intellectual property interests. From the 1980s to the present, Apple has been plaintiff or defendant in civil actions in the United States and other countries. Some of these actions have determined significant case law for the information technology industry and many have captured the attention of the public and media. Apple's litigation generally involves intellectual property disputes, but the company has also been a party in lawsuits that include antitrust claims, consumer actions, commercial unfair trade practice suits, defamation claims, and corporate espionage, among other matters.
In United States antitrust law, monopolization is illegal monopoly behavior. The main categories of prohibited behavior include exclusive dealing, price discrimination, refusing to supply an essential facility, product tying and predatory pricing. Monopolization is a federal crime under Section 2 of the Sherman Antitrust Act of 1890. It has a specific legal meaning, which is parallel to the "abuse" of a dominant position in EU competition law, under TFEU article 102. It is also illegal in Australia under the Competition and Consumer Act 2010 (CCA). Section 2 of the Sherman Act states that any person "who shall monopolize. .. any part of the trade or commerce among the several states, or with foreign nations shall be deemed guilty of a felony." Section 2 also forbids "attempts to monopolize" and "conspiracies to monopolize". Generally this means that corporations may not act in ways that have been identified as contrary to precedent cases.
Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), is a US antitrust case in which the United States Supreme Court overruled Dr. Miles Medical Co. v. John D. Park & Sons Co.Dr Miles had ruled that vertical price restraints were illegal per se under Section 1 of the Sherman Antitrust Act. Leegin established that the legality of such restraints are to be judged based on the rule of reason.
The Antitrust Paradox is an influential 1978 book by Robert Bork that criticized the state of United States antitrust law in the 1970s. A second edition, updated to reflect substantial changes in the law, was published in 1993. Bork has credited Aaron Director as well as other economists from the University of Chicago as influences.
Kiefer-Stewart Co. v. Seagram & Sons, Inc., 340 U.S. 211 (1951), was a decision by the United States Supreme Court, which held that an agreement among competitors in interstate commerce to fix maximum resale prices of their products violates the Sherman Antitrust Act.
Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), is a United States Supreme Court case that involved issues concerning statutory standing in antitrust law.
Denise Louise Cote is a senior United States district judge of the United States District Court for the Southern District of New York.
Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975), was a U.S. Supreme Court decision. It stated that lawyers engage in "trade or commerce" and hence ended the legal profession's exemption from antitrust laws.
Pfizer Inc. v. Government of India, 434 U.S. 308 (1978), decision of the Supreme Court of the United States in which the Court held that foreign states are entitled to sue for treble damages in U.S. courts, and should be recognized as "persons" under the Clayton Act.
High-Tech Employee Antitrust Litigation is a 2010 United States Department of Justice (DOJ) antitrust action and a 2013 civil class action against several Silicon Valley companies for alleged "no cold call" agreements which restrained the recruitment of high-tech employees.
United States v. Parke, Davis & Co., 362 U.S. 29 (1960), was a 1960 decision of the United States Supreme Court limiting the so-called Colgate doctrine, which substantially insulates unilateral refusals to deal with price-cutters from the antitrust laws. The Parke, Davis & Co. case held that, when a company goes beyond "the limited dispensation" of Colgate by taking affirmative steps to induce adherence to its suggested prices, it puts together a combination among competitors to fix prices in violation of § 1 of the Sherman Act. In addition, the Court held that when a company abandons an illegal practice because it knows the US Government is investigating it and contemplating suit, it is an abuse of discretion for the trial court to hold the case that follows moot and dismiss it without granting relief sought against the illegal practice.
United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940), is a 1940 United States Supreme Court decision widely cited for the proposition that price-fixing is illegal per se. The Socony case was, at least until recently, the most widely cited case on price fixing.
United States v. United States Gypsum Co. was a patent–antitrust case in which the United States Supreme Court decided, first, in 1948, that a patent licensing program that fixed prices of many licensees and regimented an entire industry violated the antitrust laws, and then, decided in 1950, after a remand, that appropriate relief in such cases did not extend so far as to permit licensees enjoying a compulsory, reasonable–royalty license to challenge the validity of the licensed patents. The Court also ruled, in obiter dicta, that the United States had standing to challenge the validity of patents when a patentee relied on the patents to justify its fixing prices. It held in this case, however, that the defendants violated the antitrust laws irrespective of whether the patents were valid, which made the validity issue irrelevant.
A hub-and-spoke conspiracy is a legal construct or doctrine of United States antitrust and criminal law. In such a conspiracy, several parties ("spokes") enter into an unlawful agreement with a leading party ("hub"). The United States Court of Appeals for the First Circuit explained the concept in these terms:
In a "hub-and-spoke conspiracy," a central mastermind, or "hub," controls numerous "spokes," or secondary co-conspirators. These co-conspirators participate in independent transactions with the individual or group of individuals at the "hub" that collectively further a single, illegal enterprise.
United States v. Huck Mfg. Co., 382 U.S. 197 (1965), is the most recent patent-license price-fixing case to reach the United States Supreme Court. It was inconclusive, as the Court split 4–4 and affirmed the decision of the lower court without opinion.
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