By Joe Palazzolo
A federal appeals court on Tuesday upheld a 2013 decision
finding Apple Inc. liable for conspiring with publishers to raise
the price of e-books.
The 2-1 ruling Tuesday by the Second U.S. Circuit Court of
Appeals in Manhattan follows three years of litigation, millions of
dollars in legal fees and a bold decision by Apple to challenge the
U.S. Department of Justice to a trial, even after all the
publishers with which it was accused of colluding had settled their
cases.
The iPhone maker is expected to pay $450 million, most of it to
e-book consumers, as part of a November agreement with private
plaintiffs and 33 states that joined the Justice Department's 2012
lawsuit accusing Apple of violating civil antitrust law. The deal
hinged on the outcome of the appeal. The penalty amounts to less
than 3% of the Cupertino, Calif.-based company's profit in the
quarter that ended in December.
"We conclude that the district court correctly decided that
Apple orchestrated a conspiracy among the publishers to raise
e-book prices," wrote Second Circuit Judge Debra Ann Livingston.
The conspiracy "unreasonably restrained trade" in violation of the
Sherman Act, the federal antitrust law, the judge wrote.
The case laid bare Apple's efforts to gain a foothold in a
market that Amazon.com Inc. commanded in 2010 with between 80% and
90% of all e-book sales.
At the time, publishers were dissatisfied with Amazon's
aggressive discounts. Apple's agreements ceded the power to set
prices to the publishers, in what's known as an agency model. But
there was an exception: If another retailer were selling an e-book
at a lower price, the publisher would have to match that price in
Apple's bookstore.
With a new outlet for their e-books, the publishers had the
leverage they needed to reclaim some pricing power from Amazon,
Justice Department lawyers said. Change was inevitable: The
publishers couldn't afford to sell their e-books in Apple's store
at Amazon's discounted prices of $9.99 for most best sellers.
Prices on many e-books increased immediately. Lawyers for Apple
said the company unwittingly facilitated the push against Amazon by
the publishers.
But the Second Circuit majority said the evidence showed the
technology company knew what it was doing.
"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 consumers facing higher e-book prices," Judge
Livingston wrote in a decision joined by Judge Raymond J. Lohier
Jr.
Apple could ask the Second Circuit to rehear the case or ask the
U.S. Supreme Court to review it.
"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," Apple said in a statement. "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," the company continued.
Judge Dennis Jacobs, writing in dissent, said that the trial
judge who found Apple liable for price-fixing in 2013 viewed the
case through the wrong legal lens. He said antitrust law couldn't
hold Apple plainly responsible for a conspiracy among publishers on
a different rung of the supply chain.
"On the only horizontal plane that matters to Apple's e-book
business, Apple was in competition and never in collusion," he
wrote. "So it does not do to deem Apple's conduct anticompetitive
just because the publishers' horizontal conspiracy was found to be
illegal."
Lagardere SCA's Hachette Book Group, CBS Corp.'s Simon &
Schuster Inc. and News Corp.'s HarperCollins Publishers LLC agreed
to settle with the Justice Department the day it filed its
complaint in 2012. Penguin and Macmillan settled with the
government soon after. Together, the publishers agreed to pay about
$170 million in damages to e-book buyers. News Corp. also owns The
Wall Street Journal.
Spokespeople for HarperCollins, Penguin Random House and Simon
& Schuster declined to comment. Representatives of Hachette and
Macmillan didn't immediately respond to requests for comment.
"The decision confirms that it is unlawful for a company to
knowingly participate in a price-fixing conspiracy, whatever its
specific role in the conspiracy or reason for joining it," said
Bill Baer, the assistant attorney general in charge of the Justice
Department's Antitrust Division.
With its appeal pending, Apple bridled under the watch of a
monitor, Michael Bromwich, who was appointed by U.S. District Judge
Denise Cote to keep tabs on Apple's efforts to set up new policies
to prevent antitrust violations. In a May ruling, the Second
Circuit declined Apple's request to shake him off.
The Second Circuit had to step in and clarify Mr. Bromwich's
role in a February 2014 ruling, after Apple accused him of
overstepping his mandate. Mr. Bromwich, a former Justice Department
inspector general who charges $1,000 an hour, said in a court
filing that the company stonewalled him, offering "far less access"
than he received in his previous three stints as a corporate
monitor.
Brent Kendall contributed to this article.
Write to Joe Palazzolo at joe.palazzolo@wsj.com
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