By Joe Palazzolo
When Apple Inc. entered the electronic-books market in 2010,
founder Steve Jobs described its pricing agreements with publishers
as an "Aikido move" against competitor Amazon.com Inc. A federal
judge called them something else: price-fixing.
On Monday, the Second U.S. Circuit Court of Appeals is scheduled
to consider whether the deals amounted to a deft market maneuver or
an illegal conspiracy.
The ruling that follows in the coming months could have
ramifications far beyond the publishing industry by revealing "what
kind of proof shows a conspiracy between manufacturers and a
powerful distributor," said Harry First, a law professor at New
York University. "This is a broad problem that many industries
face. It's not just Apple," he said.
The appeal follows a three-week bench trial last year in which
U.S. District Judge Denise Cote in Manhattan concluded that Apple
conspired with five major publishers to drive up the cost of
e-books.
If the iPhone maker loses the appeal, it would have to pay $450
million, most of it to e-book consumers, as part of a settlement
with private plaintiffs and 33 states that joined the Justice
Department's 2012 lawsuit against the company.
The Cupertino, Calif., company declined to comment.
Amazon and the Justice Department declined to comment.
The appeal will revisit Apple's efforts to gain a foothold in
market that Amazon then commanded with between 80% and 90% of all
e-book sales.
At the time, publishers were dissatisfied with Amazon's
aggressive discounts over which they had no control. Apple's
agreements ceded the power to set prices to the publishers, some of
whom had suggested the arrangement in meetings with Apple
officials, according to evidence presented during the trial.
A key provision of the contracts required the publishers to give
Apple's store the best deal that they gave anyone on e-books. That
assured the publishers would force Amazon to change its business
model, otherwise they would suffer heavy losses matching Amazon's
discounted prices--$9.99 for most best sellers--in Apple's e-book
store, prosecutors said.
Prices on many e-books increased immediately.
"Understanding that no one publisher could risk acting alone in
an attempt to take pricing power away from Amazon, Apple created a
mechanism and environment that enabled them to act together in a
matter of weeks to eliminate all retail price competition for their
e-books," Judge Cote wrote in a July 2013 decision.
NYU's Mr. First said the appeals court's view of the
price-matching provision, in particular, could have far-reaching
consequences.
So-called most-favored-nation clauses are common in industries
ranging from health care to television to financial services. Such
clauses, like those in the Apple agreements, guarantee the
recipient the lowest prices or rates charged to any buyer.
In theory, such arrangements encourage competition and lower
prices for consumers, but in practice they sometimes establish a
minimum price, according to antitrust lawyers and government
officials.
The Second Circuit's ruling could clarify when such clauses
cross the line.
More often than not, antitrust cases target collusion among
competitors on the same rung of distribution--for example, the
recent prosecution of manufacturers of the liquid crystal displays
for allegedly conspiring to inflate prices.
The Apple case tests a different government theory: that a
distributor can facilitate a price-fixing conspiracy among
competitors on a separate level of the supply chain.
Apple acknowledged that company executives met with publishers
individually and discussed their frustrations with Amazon's
discounts and their desire to increase prices. But lawyers for the
company argued in briefs filed in the appeals court that Judge Cote
stretched the law to penalize benign conduct.
"Discussions between Apple and the publishers about price do not
transform market entry via lawful agreements into unlawful
price-fixing, " wrote Theodore J. Boutrous Jr., a lawyer for Apple
who will argue before the Second Circuit.
Apple lawyers argued that Judge Cote focused only on the
negative aspects of Apple's entry into the market, but that she was
obligated to consider that it increased competition by diminishing
Amazon's power. Some new e-book prices increased, but average
prices across the market decreased, and the number of available
titles increased dramatically, Apple's lawyers said.
"Antitrust laws are intended to foster competition, not keep
prices down at any cost," Mr. Boutrous wrote.
Justice Department lawyers said in their appellate brief that
Apple overstated the "purported benefits" of its entry into the
market.
"The iBookstore did not improve retail competition;
post-conspiracy, there was less competition, not more," wrote
Finnuala K. Tessier, an attorney in the department's antitrust
division.
A Justice Department deputy solicitor general, Malcolm Stewart,
is expected to argue the government's case.
Write to Joe Palazzolo at joe.palazzolo@wsj.com
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