The Second U.S. Circuit Court of Appeals in Manhattan on Thursday upheld Apple's conviction as an antitrust violator. In a 2-1 split decision, the court ruled that Apple was liable for orchestrating a conspiracy with book publishers to raise retail prices for books, a violation of the Sherman Act.
Apple was convicted for violating antitrust laws by orchestrating a conspiracy to fix prices in ebooks. Apple has appealed its conviction adamantly insisting it did nothing wrong, but the 2nd Circuit disagreed.
Writing for the majority (PDF courtesy of Ars Technica), Judge Debra Ann Livingston said, "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 anticompetitive harms."
The ruling means that Apple is subject to paying as much as $450 million in fines and damages, and that it will continue to be subject to Michael Bromwich as a court-appointed monitor.
For its part, Apple maintained its innocence and said it would continue to fight the case out of principal. In a statement, Apple said:
Apple did not conspire to fix e-book pricing and this ruling does nothing to change the facts. We are disappointed the Court does not recognize the innovation and choice the iBooks Store brought for consumers. While we want to put this behind us, the case is about principles and values. We know we did nothing wrong back in 2010 and are assessing next steps.
Next: The Dissent
Page 2 - The Dissent
One of the most interesting aspects of Thursday's ruling is the dissenting opinion (PDF courtesy of The Wall Street Journal) from Judge Dennis Jacobs. In a 38-page opinion, Judge Jacobs wrote that because Amazon had 90 percent of the ebook market when Apple launched its iBookstore, Apple's actions were necessary. Because of that, he argued, the majority opinion made three mistakes:
- The district court ruled (and the majority affirms) that a vertical enabler of a horizontal price-fixing conspiracy is in per se violation of the antitrust laws. However, the Supreme Court teaches that a vertical agreement designed to facilitate a horizontal cartel “would need to be held unlawful under the rule of reason.” (emphasis added [by Judge Jacobs]).
- The district court’s alternative ruling under the rule of reason was pre- determined by its (erroneous) per se ruling. Thus the district court assessed impacts on competition without recognizing that Apple’s role as a vertical player differentiated it from the publishers. The court should instead have considered Apple as a competitor on the distinct horizontal plane of retailers, where Apple competed with Amazon (and smaller players such as Barnes & Noble).
- 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. 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 e-book prices rose after the monopoly was broken.
Put Another Way
In other words, Amazon's monopoly control of the market acquired through dumping ebooks below cost made Apple's actions better for consumers because it introduced competition. For those keeping score at home, this has been my interpretation of this case throughout TMO's coverage, but the two judge majority specifically disagreed with such an interpretation.
Calling the dissenting opinion "startling," the majority judges wrote that, "The dissent’s conclusion rests on an erroneous premise: that one who organizes a horizontal price‐fixing conspiracy [...] among those competing at a different level of the market has somehow done less damage to competition than its coconspirators."
Furthermore, "The dissent’s second error is to assume, in effect, that Apple was entitled to enter the ebook retail market on its own terms, even if these terms could be achieved only via its orchestration of and entry into a price‐fixing agreement with the Publisher Defendants."
And thirdly, "The dissent’s theory—that the presence of a strong competitor justifies a horizontal price‐fixing conspiracy—endorses a concept of marketplace vigilantism that is wholly foreign to the antitrust laws."
To break this down even further, the dissenting judge said fine, Apple conspired to fix prices, but the market was controlled by a monopolist and antitrust law allows price fixing by new entrants in such circumstances. The majority opinion said, fine, the market was controlled by a monopolist, but antitrust law never allows for price fixing.
That's a very simplistic breakdown that lawyers will shake their heads at and maybe gnash their teeth, but for we layman, it's pretty close.
According to The Wall Street Journal, Apple could ask the 2nd Circuit to rehear the case, or it could appeal directly to the U.S. Supreme Court. While the defeat is a major setback for Apple, a split decision does give Apple a little more wiggle room for continued appeals.