By Mark Hamblett, From New York Law Journal

A finding that Apple engaged in a price-fixing conspiracy with five publishers as it broke into the ebooks market dominated by Amazon.com was upheld by a divided appeals court Tuesday.

The U.S. Court of Appeals for the Second Circuit affirmed the 2013 liability finding against the computer giant by Southern District Judge Denise Cote.

A majority of Second Circuit Judges Debra Ann Livingston and Raymond Lohier also endorsed the injunction issued by Cote that blocked Apple from the same kind of collusive practices it engaged in when it launched the iPad and iBookstore in 2010 and tried to break the stranglehold that Amazon.com had on the market.

Judge Dennis Jacobs dissented in United States v. Apple, Inc., 13-3741-cv, where Apple was found to have led a five-publisher conspiracy to take ebook prices above the $9.99-per-book model used by Amazon to sell ebooks for its Kindle.

The five publishers went to an “agency model” in 2010, whereby publishers, shepherded by Apple, set the price in the hope of raising ebook prices to a floor of $12.99. The conspiracy, which included most-favored-nation clauses assuring that publishers Hachette, HarperCollins, Simon & Schuster, Penguin and MacMillan would all get the same deal with Apple, and then pressure Amazon to adopt the agency model, was held by Cote to be a per se violation of the Sherman Act.

Livingston wrote the circuit’s opinion, which now clears the way for a settlement approved by Cote in November between Apple, attorneys general for 33 states and territories and class action counsel. Under the settlement, Apple will pay $450 million and another $50 million in attorney fees (NYLJ, Nov. 24, 2014).

New York Attorney General Eric Schneiderman said in a statement Tuesday: “The court’s decision shows that even the biggest, most powerful companies in the world must play by the same rules as everyone else.”

The five publishers quickly settled civil antitrust actions in 2012, leaving Apple to face trial before Cote. Following a three-week trial in 2013, Cote issued her liability ruling, saying “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” (NYLJ, July 11, 2013).

Cote followed with the injunction in September (NYLJ, Sept. 9, 2013), and appointed as compliance monitor Michael Bromwich, who quickly got under the skin of top Apple executives who claimed Bromwich was interfering in their business, exceeding his mandate and colluding with the Justice Department.

For his part, Bromwich accused Apple of adopting a “confrontational and obstructionist approach.” The company’s attempt to get rid of Bromwich was rejected by Cote in a decision affirmed pending the appeal last month by Jacobs, Lohier and Southern District Judge Jesse Furman (NYLJ, May 29).

“We conclude that the district court correctly decided that Apple orchestrated a conspiracy among the publishers to raise ebook prices, that the conspiracy unreasonably restrained trade in violation of §1 of the Sherman Act, and that the injunction is properly calibrated to protect the public from future competitive harms,” Livingston said Tuesday.

In November 2009, as Apple was about to launch the iPad tablet computer, it also began hurried negotiations with publishers. Two months later it announced it had agreed with five publishers to sell their books on the iPad, with the publishers having the power to set the prices for new releases and bestsellers at up to $14.99 and $19.99.

Under the agreements, Livingston said, each publisher received less per book sold through the iBookstore than it did selling through Amazon, but they were “willing to stomach this loss because the new model allowed them to sell new releases and best sellers for more than $9.99.” Apple, she said, “played a key role in organizing that collusion.”

“Just a few months after the iBookstore opened, however, every one of the publisher defendants had taken control over pricing from Amazon and had raised the prices on many of their ebooks, most notably new releases and bestsellers,” she said.

“Apple understood that its proposed contracts were attractive to the publisher defendants only if they collectively shifted their relationships with Amazon to an agency model­—which Apple knew would result in higher consumer-facing ebook prices.”

Jacobs, in dissent, argued that the agreements were not a horizontal price-fixing conspiracy and so, therefore, there can be no support for Cote’s ruling that the company committed a per se violation of the Sherman Act.

Instead, Jacobs said, the company had engaged in multiple, independent vertical agreements with the five publishers and therefore its conduct should be evaluated through “rule-of-reason” analysis, which requires a plaintiff show the actual adverse effect on competition from an agreement before the burden shifts to the defendant to show the agreement’s pro-competitive effects.

But Livingston said it didn’t matter that the conspiracy would still violate the Sherman Act under the rule-of-reason, and she cited United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).

“[H]orizontal agreements with the purpose and effect of raising prices are per se unreasonable because they pose a ‘threat to the central nervous system of the economy’; that threat is just as significant when a vertical market participant organizes the conspiracy,” she said, so “when the Supreme Court has applied the rule of reason to vertical agreements, it has explicitly distinguished situations in which a vertical player organizes a horizontal cartel.”

Nonetheless, Livingston said, “neither Apple nor the dissent has presented any particularly strong reason to think the conspiracy should be spared per se condemnation.”

Apple’s contention that the agreements with the publishers had procompetitive effects and enabled more competitors to enter the market, she said, “is no justification for a horizontal price-fixing conspiracy.”

A separate concurring opinion was issued by Lohier, who said, “In my view, Apple’s appeal rises, or falls on the application of the per se rule,” and he would affirm on that basis alone.

Lohier said there was “some surface appeal” to Apple’s argument that the ebook market needed more competition, “but more corporate bullying is not an appropriate antidote to corporate bullying.”

In a dissent that Livingston spent much of her time rebutting, Jacobs insisted that Cote had erred by finding a per se violation and he believed “Apple’s conduct, assessed under the rule of reason on the horizontal plane of retail competition, was unambiguously and overwhelmingly pro-competitive.”

“Apple was a major potential competitor in a market dominated by a 90 percent monopoly, and was justifiably unwilling to enter a market on terms that would assure a loss on sales or exact a toll on its reputation,” he said. “In that connection, the district court erroneously deemed the monopolist’s $9.99 price as categorically good for competition because it was lower than cost, and because ebook prices rose after the monopoly was broken.”

Jacobs said the district court and the majority also erred by making “the implicit assumption that competition should be genteel, lawyer-designed, and fair under sporting rules, and that antitrust law is offended by gloves-off competition.”

Theodore Boutrous, a partner at Gibson, Dunn & Crutcher, argued for Apple at the Second Circuit (NYLJ, December 16, 2014).

Justice Department attorney Malcolm Stewart argued for the government.

IMAGE: Apple iPad with e-book reader software Imagostock

For more on this story go to: http://www.newyorklawjournal.com/id=1202730957184/Split-Panel-Affirms-Apple-Conspired-to-Fix-Ebook-Prices#ixzz3eeKsGxfy