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Second Circuit Affirms Ruling Against Apple in E-book Price-Fixing Case

We have previously posted about United States v. Apple, Inc., a blockbuster trial that ended with Judge Denise Cote of the Southern District of New York concluding that Apple had conspired with five publishing companies to raise the price of e-books.  At oral argument before the Second Circuit, the panel hearing Apple’s appeal seemed particularly interested in whether the district court had erred in applying the relatively lenient per se standard rather than the rule of reason, under which the plaintiffs would have had to prove that the anti-competitive injury caused by Apple outweighed any pro-competitive benefits of its conduct.  Now, that panel has ruled 2-to-1 that Judge Cote was correct to apply the per se standard, and affirmed her conclusion that Apple violated Section 1 of the Sherman Act.

Writing for herself and Judge Raymond J. Lohier, Judge Debra Ann Livingston began by explaining that horizontal agreements to set prices, which involve coordination between competitors at the same level of a market structure, are generally per se unlawful under Section 1, whereas vertical agreements between parties at different levels are unlawful “only if an assessment of market effects, known as a rule-of-reason analysis, reveals that they unreasonably restrain trade.”  The majority noted that the distinction between horizontal and vertical agreements is not so sharp in practice, but concluded that Judge Cote did not err in her determination that Apple’s agreement with the publishers constituted a horizontal price-fixing conspiracy that unreasonably restrained trade in violation of Section 1.  In so holding, the majority rejected Apple’s argument that it could not be held liable because its contracts with the publishers were vertical and lawful.  The majority also reaffirmed the principle that even vertical agreements that seem lawful in the abstract can, viewed in context, evidence a horizontal cartel.

The majority next held that the per se rule applies, because the relevant agreement to be analyzed was not Apple’s vertical contracts with the publishers but rather the horizontal agreement that Apple organized among the publishers to raise e-book prices.  As such, the fact that the horizontal cartel was organized by Apple, a vertical market participant, was of no moment.  Writing only for herself, Judge Livingston also concluded that even if Apple was correct that the rule of reason is the appropriate standard, the horizontal agreement to raise prices that Apple orchestrated created an unreasonable restraint of trade.  Judge Livingston reached this conclusion using “quick look” review—an abbreviated rule-of-reason analysis that shifts the inquiry from the plaintiff’s burden of providing a market analysis to the defendant’s procompetitive justifications for its conduct—and found that Apple failed to substantiate the pro-competitive benefits it asserted.

In a brief concurrence, Judge Lohier explained his view that Judge Livingston’s rule of reason analysis is unnecessary because the per se rule “clearly applies to the central agreement in this case,” the publishers’ horizontal agreement to fix e-book prices.  He also wrote that while there is some “surface appeal” to Apple’s argument that the e-book market needed a competitor for Amazon, Apple’s answer to Amazon’s dominance—“helping rival corporations (the publishers) fix prices”—amounted to a Sherman Act violation.

Judge Dennis Jacobs began his dissent by stating his confidence in the lower court’s “conscientious” findings of fact.  But he explained that he would nevertheless reverse Judge Cote’s legal conclusions for three reasons:  (1) a vertical agreement designed to facilitate a horizontal cartel should be subject to the rule of reason under Supreme Court precedent; (2) the lower court’s alternative rule-of-reason analysis failed to consider Apple as a horizontal competitor of Amazon; and (3) Apple’s conduct was “unambiguously and overwhelmingly pro-competitive” because it reduced Amazon’s monopoly on the e-book market.  Applying the rule of reason, Judge Jacobs concluded that Apple’s conduct was reasonable and did not violate Section 1.

As we noted last August, Apple reached a damages settlement in the class action and parens patriae action that was contingent on the Second Circuit’s decision.  Because the Second Circuit has affirmed Judge Cote’s liability finding, the settlement requires Apple to pay $400 million to eligible consumers and $50 million in attorney’s fees.