By Joe Palazzolo
The U.S. government on Monday faced aggressive questioning from
judges reviewing a finding last year that Apple Inc. conspired with
publishers to raise the price of electronic books as it prepared to
enter the market in 2010.
Amazon.com Inc., though not a party in the case, cast a long
shadow over the arguments in Manhattan-based Second U.S. Circuit
Court of Appeals. The company held 80% to 90% of the market before
the iPhone maker decided to get into the book business, and at
least one of the three judges on the appellate panel suggested that
Apple's negotiations with publishers spurred competition by
"breaking the hold of a monopolist."
"It's like all the mice getting together to put a bell on the
cat," said Judge Dennis Jacobs.
Antitrust officials believed Amazon's aggressive
discounting--$9.99 for most best sellers--benefited consumers, said
Malcolm Stewart, one of the Justice Department's top appellate
lawyers. A spokeswoman for Amazon declined to comment.
Most antitrust cases target horizontal agreements--collusion
among competitors on the same rung of distribution. But the ruling
by the Second Circuit expected in the coming months could provide
fresh antitrust guidance for retailers brokering contracts with
manufacturers, known in antitrust parlance as vertical
agreements.
The Justice Department sued Apple in 2012, alleging civil
antitrust violations. After a three-week trial, U.S. District Judge
Denise Cote in Manhattan ruled last year that Apple helped
publishers fed up with Amazon's discounts, over which they had no
control, change the market landscape. Apple's agreements handed
publishers power to set their own prices, an arrangement some of
the publishers had suggested in meetings with Apple executives,
according to evidence presented during the trial.
If the Cupertino, Calif.-based company loses, it would pay $450
million, most of it to e-book consumers, as part of a settlement
with private plaintiffs and 33 states that joined the Justice
Department's lawsuit against the company. The publishers also
reached a settlement with authorities, paying a total of about $160
million.
A key provision of the Apple contacts required publishers to
give Apple's store the best deal that they gave anyone on e-books.
That, in turn, ensured publishers would force Amazon to change its
business model, otherwise they would suffer heavy losses matching
Amazon's discounted prices in Apple's e-book store, according to
Judge Cote. Prices on many e-books increased immediately.
One question facing the appeals court is whether Judge Cote was
obligated to weigh more carefully the economic impact of Apple's
entry into the market. Theodore J. Boutrous Jr., a lawyer for
Apple, said Apple increased competition by diminishing Amazon's
power. Some new e-book prices increased, but average prices across
the market decreased, and the number of available titles increased
dramatically.
Judge Raymond J. Lohier Jr. asked Mr. Stewart how Apple could
have broken Amazon's monopoly without violating antitrust laws, as
the Justice Department interprets them.
Apple could have tried to persuade publishers to sell at a lower
wholesale price, Mr. Stewart said. Or the company could have filed
a complaint against Amazon with antitrust authorities, he
offered.
"Are you saying the Justice Department didn't notice that there
was a new industry dominated by a monopolist?" Judge Jacobs
asked.
"We noticed a $9.99 price point, but we regarded it as good for
consumers," Mr. Stewart said.
Judge Debra Ann Livingston, who was on the appeals panel with
Judge Jacobs and Judge Lohier, found evidence of coordination among
the publishers "particularly compelling." But she asked Mr. Stewart
how Apple's contracts were legal on their face but also the
linchpin of an illegal conspiracy.
Mr. Stewart said the agreements offered by Apple made sense only
if most of the major publishers signed them. If the others didn't
agree to the same terms with Apple, a publisher acting alone
couldn't have forced Amazon off its loss-leader strategy, he
said.
Write to Joe Palazzolo at joe.palazzolo@wsj.com
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