Second Circuit Affirms Apple’s E-Book Antitrust Violations

The United States Court of Appeals for the Second Circuit affirmed a 2013 United States District Court decision that held that Apple “orchestrated” an illegal conspiracy with book publishers to raise prices on e-books. The Second Circuit held that the conspiracy “unreasonably restrained trade.” The three-judge panel reached a 2-1 split decision.

The Justice Department and state attorneys general initially brought the action against Apple in 2012. Apple’s decision to force a trial in the case has been framed in the media as a “bold decision.” In contrast, the book publishers named in the case settled with the Justice Department, states, and private plaintiffs shortly after the suit was brought.

The lawsuit charged that Apple conspired with five book publishers to raise e-book prices above Amazon’s established $9.99 standard for new releases. Apple’s business model allowed publishers to set the price of e-books while Apple received a percentage of each sale. The Justice Department asserted that this model, known as agency pricing, forced Amazon to raise prices. Apple was trying to appease publishers and force Amazon to adopt agency pricing. Amazon was the dominant force in the e-book market when Apple entered. At this time, publishers were unhappy with Amazon’s control over the price of each title.

In its ruling, the district court concluded that Apple knew that its entry into the market would drive up e-book prices. Additionally, the district court held that it is always a violation of the Sherman Antitrust Act to be a participant in a conspiracy that results in higher prices for consumers.

Apple appealed the district court’s ruling to the Second Circuit under the theory that the trial judge used the incorrect legal standard in evaluating the claims against Apple. The legal standard only required that the government prove that a conspiracy existed. There was no requirement that the government prove that the conspiracy harmed competition.

Apple remains defiant and continues to insist that its actions did not constitute wrongdoing. Apple denies that it conspired to fix e-book pricing and frames the case as one about “principles and values.” Apple claims that its agreements with publishers were no different than normal legal contracts. This attitude may signal that Apple is willing to attempt to appeal the Second Circuit’s decision to the Supreme Court.

The dissent in the Second Circuit opinion focused on Amazon’s decrease in dominance in the e-book market following Apple’s entry. The opinion described Amazon as a former monopolist in the e-book market. Specifically, the dissent noted that Amazon’s e-book market share dropped from ninety to sixty percent during Apple’s first two years in the e-book market. In stark contrast to the majority, the dissent claimed that Apple’s conduct enhanced competition.

The antitrust violation comes at an unfortunate time for Apple as it launches its new music streaming service, Apple Music. Two state attorneys general are currently investigating Apple’s agreements with record companies for this new service for anti-trust violations. The investigation is largely a result of concerns raised by Apple’s past dealings with book publishers. The officials leading the investigation of Apple’s new music service are the same officials that initiated the e-book antitrust case.