United States v. Apple, Inc.

Rule of Law:

A vertically-related entity that organizes a horizontal price-fixing conspiracy among its suppliers or distributors has committed a per se violation of Section 1 of the Sherman Act. The nature of the restraint (horizontal price-fixing) determines the standard of review, not the vertical position of the organizer.

Facts:

• In 2007, Amazon launched the Kindle e-reader and began selling popular ebooks, such as new releases and bestsellers, for a uniform price of $9.99, which was often below the wholesale price it paid to publishers.
• The six largest U.S. trade book publishers (the "Publisher Defendants") viewed Amazon's pricing as a serious threat to their business model, fearing it devalued books and cannibalized their more profitable hardcover sales.
• Executives from the Publisher Defendants communicated with each other about strategies to force Amazon to raise prices, including collectively withholding new books, a practice known as "windowing."
• In late 2009, as Apple prepared to launch the iPad and its own "iBookstore," it saw an opportunity to enter the ebook market by aligning with the publishers' goal of raising prices.
• Apple negotiated with the Publisher Defendants, proposing a shift from a "wholesale model" to an "agency model," where publishers would set the retail prices and Apple would receive a 30% commission.
• Apple's proposed contracts included a Most-Favored-Nation (MFN) clause, which contractually required that no other retailer could sell an ebook for a lower price than it was sold for in the iBookstore.
• Apple assured publishers it would only launch if a "critical mass" of them signed on, kept them informed of each other's commitment status, and actively facilitated communications between them to create a united front against Amazon.
• After five of the six major publishers signed these agency agreements with Apple, they collectively used their leverage to force Amazon to abandon its wholesale model, leading to an immediate and significant increase in the retail prices of their ebooks.

Procedural Posture:

• The U.S. Department of Justice and 33 states and territories sued Apple and five major publishing companies in the U.S. District Court for the Southern District of New York.
• The complaint alleged that the defendants conspired to raise retail prices for ebooks in violation of Section 1 of the Sherman Antitrust Act.
• All five Publisher Defendants settled with the government and entered into consent decrees before trial.
• Apple proceeded to a three-week bench trial on the issue of liability.
• The district court found Apple liable, concluding that it had orchestrated a horizontal price-fixing conspiracy which constituted a per se violation of the Sherman Act and, alternatively, an unreasonable restraint of trade under the rule of reason.
• The district court entered a final judgment and issued an injunctive order against Apple.
• Apple appealed the district court's liability finding and portions of the injunctive order to the U.S. Court of Appeals for the Second Circuit.