A Judge hearing Apple's appeal in its iBooks price fixing conviction in the ebook market questioned that conviction and the very premise of the U.S. Department of Justice's (DOJ) case against the company.
During a hearing on Monday, Judge Dennis Jacobs took an openly critical stance in his questioning of DOJ attorneys—one of the other two judges also appeared doubtful of the case, while the third apparently seemed to take a stance more in line with the District Court judge who convicted Apple.
The first thing to keep in mind is that interpreting questions from a judge at the appellate level or higher is risky business. A judge might be hounding one side or another because they disagree with that side in some way, but judges have also been known to press an attorney—or be openly critical—because they're wanting to make sure that side's argument hold water, are thorough, or just to play devil's advocate.
But several mainstream reports (Fortune, AFP, and AP) have covered Monday's hearing in Apple's appeal by declaring that Judge Jacobs was hostile to the DOJ's attorney. That hostility went so far as to question why the DOJ was hassling a new entrant to the ebook market (Apple), when a "monopolist" (Amazon) was maintaining that monopoly with "predatory pricing."
"What we're talking about is a new entrant who is breaking the hold of a market by a monopolist who is maintaining its hold by what is arguably predatory pricing," Judge Jacobs said, according to a report from the AFP.
The Wrong Defendant
Amazon created a market for ebooks from nothing, releasing the first Kindle ebook reader and getting publishers to release Kindle editions of some of their books for the device. As it sought to grow that market—and lock out would-be competitors—Amazon routinely dumped best sellers below cost. It was that practice that earned Amazon 90 percent of the ebook market and allowed the company to maintain that share.
This strikes precisely at my criticism of this case from day one. Judge Denise Cote, the District Court judge who convicted Apple, appeared to disregard that particular elephant in the room, while at the same time, dismissing any Apple testimony as "lacking credibility" when that testimony contradicted the DOJ's case.
Judge Jacobs's criticism extended to the case the DOJ brought against the publishers who settled—Apple and the publishers were sued for antitrust violations together, but only Apple went to trial.
"All those people who got together, it's like the mice saying they want to put a bell on the cat," Judge Jacobs said.
The AP's report added this from Judge Jacobs: "These people got together to defeat a monopoly. When a monopolist is maintaining a monopoly through low-cost pricing, the erosion of that monopoly will cause prices to rise."
Malcolm Stewart, the deputy Solicitor General for the US Justice Department, defended the DOJ's position by arguing Amazon's practice of dumping books wasn't predatory, but rather good for consumers. This, despite, you know, all of the antitrust case law on the books.
According to the AP, Judge Raymond J. Lohier Jr., another member of the three-judge panel, asked Mr. Stewart how Apple and publishers could have broken Amazon's monopoly—that word again—without violating antitrust law. Mr. Stewart reportedly said they could have filed a lawsuit of their own or dumped books, too (my characterization of his argument).
Which kind of sounds like he's saying Apple got sued by the DOJ because Apple didn't sue Amazon. It remains to be seen how the appellate judges take that argument.
Image made with help from Shutterstock.
Next: Wrong Standards, Laughing at the Judge, and the Power of Words
Wrong Standards, Laughing at the Judge, and the Power of Words
Philip Elmer-Dewitt (PED) has been covering this case in-person for Fortune since the beginning. He was on hand for Monday's hearing, and he noted that Malcolm Stewart tried to compare Apple to a drug delivery driver. In this analogy, the publishers were jonesing for a fix from Amazon's chokehold on the market, and Apple was carrying illegal narcotics (a price-fixing scheme) to them.
Judge Dennis Jacobs dismissed this argument with a joke, saying, that the narcotics industry was one of the few "industries in which the law does not look with favor on new entrants."
It's seldom good when an appeals court judge makes fun of your argument.
PED also noted that two of the judges—Jacobs and Lohier—felt that Judge Denise Cote used the wrong standard when considering the case. The technical wording for it is that she used the "per se illegal" standard, which essentially means that Apple should be considered guilty for price fixing, the end. Instead, they suggested Judge Cote should have used the "rule of reason" standard, which means pulling your head out of your nether regions and looking at the case from a logical standpoint.
i.e. Amazon was a predatory monopolist, and Apple was a new entrant to the market bringing competition, which in the long run is far, far better for consumers.
What Are Words For?
As I noted in the top of this piece, it's dangerous predicting an appellate or Supreme Court decision based on questioning from the judges. It seems a better-than-average chance, though, that Monday's shellacking of the DOJ's attorney by Judge Jacobs coupled with less-vociferous, but still doubtful questioning from Judge Lohier are good signs for Apple.
Even more important are the uses of "monopoly" and "predatory pricing" to describe Amazon. Price fixing is usually—but not always—illegal. One of those exceptions, as laid out in a friend-of-the-court brief Judge Cote ignored, is when a market is controlled by a monopolist. In such a case, the DOJ's own guidelines allow for horizontal price fixing if it will, "create efficiencies in the operation of a market."
It was always difficult to understand why the DOJ brought this case against Apple, let alone how Apple was convicted. Monday's 80-minute hearing suggest at least two of three judges hearing the appeal are just as mystified.
But even if that's the case and the District Court overturns Apple's conviction, the third judge—Debra Ann Livingstone—could still play a major role. She could write a dissent that bolsters any appeal from the DOJ, or she could even convince the other two judges they're wrong.
A lot of research and considered thinking goes on behind the scenes on any appellate decision, and this case is expected to take another six months before the three-member panel released its decision.