United States v. Apple Inc.
952 F.Supp.2d 638 (2013)
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Rule of Law:
A vertical actor violates Section 1 of the Sherman Act when it knowingly participates in and facilitates a horizontal price-fixing conspiracy among its suppliers. Such conduct constitutes a per se unlawful restraint of trade.
Facts:
- In 2009, Amazon dominated the e-book market, selling many new releases and bestsellers for $9.99 under a 'wholesale' model, where it bought books from publishers and set its own retail price.
- Five major publishers—Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster (the 'Publisher Defendants')—were deeply unhappy with Amazon's $9.99 price point, fearing it devalued their products and cannibalized hardcover sales.
- Throughout 2009, the Publisher Defendants frequently communicated and coordinated strategies to combat Amazon's pricing, such as delaying e-book releases ('windowing'), but feared acting alone due to potential retaliation from Amazon.
- In late 2009, Apple, preparing to launch the iPad and its own iBookstore, identified the publishers' frustration with Amazon as a key strategic opportunity.
- In December 2009, Apple's executive Eddy Cue met with the publishers, assuring them Apple was willing to sell e-books at higher prices, such as $12.99 and $14.99.
- Apple proposed an 'agency model' where publishers would set the retail price and Apple would take a 30% commission, and included a Most-Favored-Nation (MFN) clause in its draft agreements.
- The MFN clause guaranteed Apple could match any competitor's lower price, which created a strong financial penalty for any publisher that did not force all other retailers, including Amazon, onto the same agency model.
- In January 2010, Apple facilitated the publishers' collective action, assuring them they would not be acting alone, leading five of them to sign the agency agreements just before the iPad launch.
- Immediately after signing with Apple, the Publisher Defendants collectively confronted Amazon and other retailers, demanding they switch to the agency model or face withholding of new e-book titles, thereby forcing them to adopt the new model.
- Upon the launch of the iBookstore in April 2010, the publishers raised their e-book prices across all retail platforms, often to the price caps specified in the Apple agreements, resulting in a significant, industry-wide price increase for consumers.
Procedural Posture:
- The United States Department of Justice (DOJ) and thirty-three states and territories sued Apple Inc. and five major publishing companies in the U.S. District Court for the Southern District of New York, a federal trial court.
- The plaintiffs alleged that the defendants conspired to raise e-book prices in violation of Section 1 of the Sherman Antitrust Act and various state laws.
- All five Publisher Defendants settled with the plaintiffs prior to trial.
- The case against Apple proceeded to a bench trial (a trial before a judge without a jury) to determine liability and the scope of any injunctive relief.
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Issue:
Does a company violate Section 1 of the Sherman Act by orchestrating an agreement among its suppliers to eliminate retail price competition and raise consumer prices, even if that company is a new entrant into the market?
Opinions:
Majority - Cote
Yes. Apple violated Section 1 of the Sherman Act by knowingly participating in and facilitating a horizontal price-fixing conspiracy among the Publisher Defendants. The court found compelling direct and circumstantial evidence that the Publisher Defendants conspired to eliminate retail price competition and raise e-book prices, and that Apple was a knowing and active member of that conspiracy. Apple played a central role by providing the publishers with the 'vision, the format, the timetable, and the coordination' they needed to succeed where their previous individual efforts had failed. The court identified the Most-Favored-Nation (MFN) clause in Apple's agency agreements as a key instrument that protected Apple from price competition while simultaneously forcing the publishers to impose the agency model on Amazon and other retailers. The court rejected Apple's argument that it was acting in its own independent business interest, finding that Apple's conduct could not be explained away as lawful, unilateral action. This 'hub-and-spoke' conspiracy was deemed a per se violation of the Sherman Act, but the court noted it would also fail under a rule of reason analysis as it had no pro-competitive effects and demonstrably harmed competition by raising prices for consumers.
Analysis:
This decision clarifies that a vertical actor, even a new market entrant, can be liable as a 'hub' in a 'hub-and-spoke' conspiracy for facilitating a horizontal price-fixing agreement among its suppliers (the 'spokes'). The case establishes that using otherwise lawful contract terms, such as an agency model or an MFN clause, can be illegal if their purpose and effect is to orchestrate an anticompetitive scheme. It serves as a significant precedent for platform-based businesses, warning that they cannot organize collusion among content providers or sellers on their platform. The ruling reinforces that antitrust laws protect the competitive process itself, and eliminating retail price competition is a core violation, regardless of the asserted pro-competitive justifications for market entry.
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