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Apple Signals It Will Seek Supreme Court Reversal on E-Book Decision

Earlier this month, Apple signaled its intention to petition for writ of certiorari after the Second Circuit upheld Judge Cote’s decision to apply per se liability in analyzing the firm’s conduct with respect to e-books in United States v. Apple Inc.  We have previously reported on the decisions below where both the Second Circuit and the Southern District of New York concluded that per se liability applies because, even though Apple’s contracts with publishers were vertical agreements (and thus would usually require the rule of reason analysis per the Supreme Court’s Leegin decision), Apple’s organization of competing e-book publishers to raise e-book prices created a horizontal agreement.

In response to the Circuit’s decision, Apple has applied to the Supreme Court for an extension of time in which to file a petition for writ of certiorari.  In so doing, Apple previews two primary arguments it will make in its petition: (1) Apple’s actions were purposefully crafted to allow it a “[d]ynamic, disruptive entry into [a] . . . stagnant market[]” and thus had significant procompetitive justifications, and (2) the Second Circuit’s decision creates a circuit split with the Third Circuit’s Toledo Mack decision, which applied the rule of reason rather than per se liability when “a manufacturer entered into vertical agreements with its dealers to keep them from competing with each other on price.”

In essence, Apple argued that in order for any competitor to enter the e-book distribution market, that competitor would need to contend with Amazon’s market dominance (holding nearly 90% of the e-books market) and Amazon’s use of its market dominance to price certain e-books below cost.  Thus, Apple contends that in order for it to enter the e-book market and disrupt Amazon’s monopoly-like hold, Apple negotiated vertical agreements with e-book publishers to ensure its market entrance would be successful.  According to Apple, its market entrance has been a success both for its sales and for consumers: “Millions now read e-books purchased on the iBookstore; Amazon’s share of the e-books retail market has decreased to 60%; total e-book output and consumption has increased dramatically; and, in the medium term, e-book retail prices have fallen.”

As for the circuit split between the Apple decision and the Toledo Mack decision, Apple contends that the Second Circuit’s decision is “on the wrong side of it.”  In Toledo Mack, Apple argues, the Third Circuit properly followed the Supreme Court’s decision in Leegin that the rule of reason applies when “a manufacturer enter[s] into vertical agreements with its dealers to keep them from competing with each other on price.”  In Leegin, however, the Supreme Court declined to address the so-called “hub and spoke” conspiracy theory that was asserted by the plaintiffs in Toledo Mack and Apple.

In a “hub and spoke” conspiracy, where a vertical agreement is used to facilitate a horizontal cartel, some argue it should be evaluated under the per se rule rather than rule of reason.  While Toledo Mack did reject the application of per se liability to a “hub and spoke” conspiracy, other circuits have adopted such reasoning, including the Second Circuit in the Apple decision.  If certiorari is granted in Apple’s case, the Supreme Court may provide much needed clarity on this issue.

Something to look out for in Apple’s forthcoming cert petition:  Will it explain how courts are supposed to know when the facts qualify as a “disruptive entry” scenario that takes a seeming hub-and-spokes conspiracy outside of per se condemnation?