United States v. Apple, Inc.

791 F.3d 290 (2nd Cir. 2015)

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Nature of the Case

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Facts

Amazon released the Kindle. It needed content to satisfy the growing use of Kindles. Amazon decided to sell all new and initial releases as a single price- $9.99. This was, for the most part, a loss-leading strategy' designed to encourage consumers to adopt the Kindle by discounting new releases and New York Times bestsellers and selling other ebooks without the discount. Publishers saw Amazon's $9.99 pricing strategy as a threat to their established way of doing business. The executives at all the Publishers recognized that their problem was a collective one. On a fairly regular basis, roughly once a quarter, the CEOs of the [Big Six] held dinners in the private dining rooms of New York restaurants, without counsel or assistants present, in order to discuss the common challenges they faced. A big topic of discussion was a strategy to eliminate the discounted wholesale price for ebooks and possibly creating an alternative ebook platform. They all withhold new and bestselling books from Amazon until the hardcover version had spent several months in stores, a practice known as 'windowing.' D had plans to release a new tablet computer, the iPad. D was looking for content to populate their new device with and entered directly into negotiations with six of the major book publishing companies in the United States. D also knew everything the Publishers were doing to try and respond to Amazon’s strategy. D created a response for them that helped them fix the Amazon problem simply by signing up with D’s program. The Publishers, of course, dealt behind the scenes with each other discussing everything that was said and done in D meetings. D's most valuable bargaining chip came from the fact that the Publishers were desperate 'for an alternative to Amazon's pricing policies and excited about . . . the prospect that D's entry into the ebook market would give them leverage in their negotiations with Amazon.' In an agency relationship, the publisher sets the price that consumers will pay for each ebook. Then, rather than the retailer paying the publisher for each ebook that it sells, the publisher pays the retailer a fixed percentage of each sale. D profited on every sale. But if the prices were too high, D could be left with a brand new marketplace brimming with titles, but devoid of customers. D created a second requirement: Publishers must switch all of their other ebook retailers - including Amazon - to an agency pricing model. The result would be that D would not need to compete with Amazon on price, and publishers would be able to eliminate Amazon's $9.99 pricing. D recommended three price caps: $14.99, $12.99 and $9.99 based on the retail hardcover prices of the books. D also included MFN pricing on all books that would require the publisher to offer any ebook in D's iBookstore for no more than what the same ebook was offered elsewhere, such as from Amazon. With all the fees included the publishers may less money than from the Amazon deal but they sacrificed short-term revenue, to gain long-term stability by acquiring more control over pricing and, accordingly, the ability to protect their hardcover sales. D worked to make sure that the shift to agency occurred. If a deal was struck D got quick and successful entry into the ebook market and eliminated retail price competition with Amazon and the Publishers had a weapon to use against Amazon. During the negotiation period, D kept the Publishers apprised about who was in and how many were on board. The Publishers also kept in close communication. During the final moments between January 19 and 21, they called one another 34 times, with 27 calls exchanged on January 21 alone. In two months, D announced that five of those companies - Hachette, Harpercollins, Macmillan, Penguin, and Simon & Schuster (Publishers) - had agreed to sell ebooks on the iPad under arrangements whereby the Publishers had the authority to set prices, and could set the prices of new releases and New York Times bestsellers as high as $19.99 and $14.99, respectively. Jobs announced the iBookstore as part of his presentation introducing the iPad. When asked after the presentation why someone should purchase an ebook from Apple for $14.99 as opposed to $9.99 with Amazon or Barnes & Noble, Jobs confidently replied, 'that won't be the case . . . the price will be the same. . . . Publishers will actually withhold their [e]books from Amazon . . . because they are not happy with the price.' Each of these agreements resulted in the Publishers receiving less per ebook sold via D as opposed to Amazon ($9.99). The Publishers informed Amazon that they planned on changing the terms of their agreements with it to an agency model. Amazon was told switch its ebook sales agreement to an agency model or suffer a seven-month delay in its receipt of new releases. D knew all the details of the talks between Amazon and the Publishers. Amazon caved and was willing to negotiate agency terms. D was secretly in the background and directly involved with the Amazon Macmillan negotiations. The other publishers who had joined the iBookstore quickly followed Macmillan's lead. D closely monitored the negotiations with Amazon. The iBookstore price caps quickly became the benchmark for ebook versions of new releases and New York Times bestsellers. After a few months, everyone had taken control over pricing from Amazon and had raised the prices on many of their ebooks, most notably new releases and bestsellers. Ps allege that D, in launching the iBookstore, had conspired with the Publishers to raise prices across the ebook market in violation of § 1 of the Sherman Antitrust Act, 15 U.S.C. § 1 et seq. and state antitrust laws. The Publishers settled and signed consent decrees. The district court concluded that, in order to induce the Publishers to participate in the iBookstore and to avoid the necessity of itself competing with Amazon over the retail price of ebooks, D orchestrated a conspiracy among the Publishers to raise the price of ebooks -, particularly new releases and New York Times bestsellers. The district court found that the agreement constituted a per se violation of the Sherman Act and unreasonably restrained trade under the rule of reason. The court issued an injunctive order that, prevents D from entering into agreements with the Publishers that restrict its ability to set, alter, or reduce the price of ebooks, and requires D to apply the same terms and conditions to ebook applications sold on its devices as it does to other applications. D appealed. D characterizes its Contracts with the Publishers as a series of parallel but independent vertical agreements. D argues that the district court impermissibly inferred its involvement in a horizontal price-fixing conspiracy from the Contracts themselves. D argues that, even if it did orchestrate a horizontal price-fixing conspiracy, its conduct should not be subject to per se condemnation and proper application of the rule of reason reveals that its conduct was not unlawful.