Apple loses case on its e-book selling tactics
on Mar 7, 2016 at 1:01 pm
Apple Inc., the giant technology firm famous for its hand-held electronic devices, on Monday wound up as the loser in the Supreme Court in becoming a leading rival to Amazon Inc. in the e-book market. Without comment and without a noted dissent, the Justices left intact a lower court ruling that Apple had engaged in an illegal conspiracy under federal antitrust law, costing it about $450 million in the form of credits to customers who bought e-books via Apple’s iBookstores platform.
In an earlier settlement of another part of the case, five major book publishers put up $166 million in the form of credits to customers who bought books either for use on Apple’s iPad or on Amazon’s Kindle reader. The theory of that settlement was that the pricing conspiracy among Apple and the publishers had pushed up Amazon’s prices, too.
With the denial, the Court did not itself rule explicitly on the finding that Apple and the publishers had acted illegally, signaling only that the Court was not persuaded by Apple that there was a significant issue of antitrust law at stake. Apple had wanted the Court to create a new legal opportunity for a company to enter a market for the first time, by setting up a top-down business model that resulted in sharper competition for a firm already dominating that market. The company noted that, after it got into the e-book trade, Amazon’s share dropped from nearly ninety percent to about sixty percent.
At issue before the Court was the outcome of a pair of antitrust lawsuits — one filed by the Justice Department, the other by thirty-three states and territories plus consumers — claiming that Apple and the five big book publishers worked out a plan that would raise the price of books put out by the publishers for reading on digital devices, to help the publishers overcome what they called the artificially low prices that Amazon had insisted upon when it was virtually the only source of e-book purchases. The plot also allegedly helped Apple directly, by putting it into the e-book market for the first time, allowing it quickly to challenge Amazon’s major share.
The technical legal issue in the case was whether, under the Sherman Antitrust Act, a top-down arrangement that Apple made with the book-publishing companies should be treated as automatically illegal (that is, it was illegal per se) or whether it should be judged by the more tolerant “rule of reason” analysis, which does not always condemn the practice at issue but tests whether it had a positive or negative impact on competition in the market at issue.
The Second Circuit’s majority applied the per se approach, thus condemning the plot as a Sherman Act restraint-of-trade. Apple took the issue on to the Supreme Court, arguing that its top-down arrangement with the publishers was a unique approach, providing an answer to a monopolist’s existing domination of a market by a feisty new entrant capable of mounting a competitive thrust.
Before the Court had formally acted on the Apple petition, the company had gone ahead and reached a settlement, which the Second Circuit upheld last month. Under that deal, Apple’s creation of $450 million in credits to e-book buyers, who could use the credits to buy new e-books, was at least partly dependent upon how the company’s appeal to the Supreme Court came out. If it had been able to overturn the damages verdict, it would have been obliged to pay nothing in the form of credits. If Apple had won a right to a new trial, it apparently faced the prospect of having to create only $70 million in e-book purchase credits for customers.
The Justice Department and the challenging states, territories, and consumers had strongly urged the Court to bypass the case.
When the Court examined Apple’s appeal at last Friday’s private Conference, they also had been scheduled to look at another major legal controversy involving the company. That other case, Samsung Electronics v. Apple, grows out of a long-running battle between Samsung and Apple over the Apple’s right to have patents on the designs of its smartphones. The Court on Monday took no action on the Samsung case.
[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the petitioners in Samsung Electronics v. Apple. The author of this post, however, is not affiliated with the firm.]