Case 16.1, United States of America v. Apple, Inc.

1. What is the threshold question that must be answered by the Court in this case? How does the answer to that question affect the outcome of this case?

2. What is Apple's argument against liability?

3. How did Apple's MFN clause lead the Publisher Defendants to increase book prices?

4. Suppose Apple's MFN clause had the opposite effect and the Publisher Defendants decreased their prices. Would Apple still be in violation of Sherman, Section 1? Explain.

UNITED STATES OF AMERICA v. APPLE INC. 791 F.3d 290 (2d Cir. 2015) LIVINGSTON, Circuit Judge: Since the invention of the printing press, the distribution of books has involved a fundamentally consistent process: compose a manuscript, print and bind it into physical volumes, and then ship and sell the volumes to the public. In late 2007, Amazon.com Inc. ("Amazon") introduced the Kindle, a portable_device that carries digital copies of books, known as "ebooks."_This innovation had the potential to change the centuries-old process for producing books by eliminating the need to print, bind, ship, and store them. Amazon began to popularize the new way to read and encouraged consumers to buy the Kindle by offering desirable_books- new releases and New York Times bestsellers- for $9.99. Publishing companies, which have traditionally stood at the center of the multi-billion-dollar book-producing industry, saw Amazon's ebooks, and particularly its $9.99 pricing, as a threat to their way of doing business._ By November 2009, Apple Inc. ("Apple") had plans to release a new tablet computer, the iPad. Executives at the company saw an opportunity to sell_ebooks_on the iPad by creating a virtual marketplace on the device, which came to be known as the "iBookstore." Working within a tight timeframe, Apple went directly into negotiations with six of the major publishing companies in the United States. In two months, it announced that five of those companies-Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster_(collectively, the "Publisher page 479 Defendants")- had agreed to sell ebooks on the iPad under arrangements whereby the publishers had the authority to set prices and could set the prices of new releases and New York Times bestsellers as high as $19.99 and $14.99, respectively. Each of these agreements, by virtue of its terms, resulted in each Publisher Defendant receiving less per ebook sold via Apple as opposed to Amazon, even given the higher consumer prices. Just a few months after the iBookstore opened, however, every one of the Publisher Defendants had taken control over pricing from Amazon and had raised the prices on many of their ebooks, most notably new releases and bestsellers. - - The U.S. Department of Justice ("DOJ" or_"Justice Department") and 33 states and territories_(collectively, "Plaintiffs") filed suit in the U.S. District Court for the Southern District of New York, alleging that Apple, in launching the iBookstore, had conspired with the Publisher Defendants to raise prices across the nascent ebook market. This agreement, they argued, violated Section 1 of the Sherman Antitrust Act, 15 U.S.C. $ 1 et seq. ("Sherman Act"), and state antitrust laws._ _ _ _ * *Apple's Liability Under $ 1 Section 1 of the Sherman Act bans restraints on trade "effected by a contract, combination, or_conspiracy."_.. The first "crucial question in a Section 1 case + whether the challenged conduct 'stem s] from independent decision or from an agreement, tacit or express."_ _ Apple portrays its Contracts with the Publisher Defendants as, at worst, "unwittingly facilitating]" their joint conduct. All Apple did, it claims, was attempt to enter the market on profitable terms by offering contractual provisions- an agency model, the MFN Clause [the MEN would require the publisher to offer any ebook in Apple's iBookstore for no more than the price at which the same ebook was offered elsewhere, such as from Amazon.], and tiered price caps - which ensured the company a small profit on each ebook sale and insulated it from retail price competition. This had the effect of raising prices because it created an incentive for the Publisher Defendants to demand that Amazon adopt an agency model and to seize control over consumer-facing ebook prices industry-wide. But although Apple knew that its contractual terms would entice_the Publisher_Defendants_(who wanted to do away with Amazon's_$9.99 pricing) to seek control_over prices from Amazon and other_ebook retailers, Apple's success in capitalizing_on the_Publisher Defendants' preexisting incentives,_it contends,_does not suggest that it joined a conspiracy among the Publisher_Defendants to raise_prices. In sum, Apple's basic argument is that because its Contracts_with the Publisher Defendants were fully_consistent with its independent business_interests, those agreements provide only_"ambiguous" evidence of a $ 1 conspiracy, and the district court therefore erred . . . in inferring such a conspiracy. _ _ We_disagree. At the start, Apple's benign portrayal of its Contracts_with the Publisher_Defendants is not persuasive - not because_those_Contracts themselves were ndependently unlawful,_but because, in context, they provide_strong evidence that Apple_consciously_orchestrated a_conspiracy among the_Publisher Defendants. As explained below, and as the district court concluded, Apple understood that its proposed Contracts were attractive to the Publisher Defendants only if they collectively shifted their relationships with Amazon to an agency model- which Apple knew would result in higher consumer-facing ebook prices. In addition to these Contracts, moreover, ample additional evidence identified by the district court established both that the Publisher Defendants' shifting to an agency model with Amazon was the result of express collusion among them and that Apple consciously played a key role in organizing that collusion. The district court did not err in concluding that Apple was more than an innocent bystander. _ Apple offered each Big Six publisher a proposed Contract that would be attractive only if the publishers acted collectively. Under Apple's proposed agency model, the publishers stood to make less money per sale than under their wholesale agreements with Amazon, but the Publisher Defendants were willing to stomach this loss because the model allowed them to sell new releases_and_bestsellers for more than $9.99. Because of the MFN Clause, however, each new release and bestseller sold in the Bookstore would cost only $9.99 as long as Amazon continued to sell ebooks at that price. So in order to receive the perceived benefit of Apple's proposed Contracts, the Publisher_Defendants had to switch Amazon to an agency model as well-something no individual publisher had sufficient leverage to do on its own. Thus, each Publisher Defendant would be able to accomplish the shift to agency-and therefore have an incentive_to_sign Apple's proposed_Contracts-only if it acted in tandem with its competitors. . . . By the very act of signing a Contract with Apple containing an MFN Clause, then, each of the Publisher Defendants signaled a clear commitment to move against Amazon, thereby facilitating their_collective action. As the district court explained, the MENs "stiffened the spines" of the Publisher Defendants. . .._ _ As a sophisticated negotiator, Apple was fully aware that its proposed Contracts would entice a critical mass of publishers only if these publishers perceived an opportunity collectively to_shift Amazon_to agency. In fact, this was the very purpose of the MFN, which_[an Apple employee] devised as an elegant alternative to a page 480 provision that would have explicitly required the publishers to adopt an agency model with other retailers. As [another Apple employee] put it, the MFN "force[dj the model" from wholesale to agency. . . . Indeed, the MFN's capacity for forcing collective action by the publishers was precisely what enabled [Apple CEO Steve] Jobs to predict with confidence that "the price will be the same" on the iBookstore_and the Kindle when he announced the launch of the iPad-the same, Jobs said, because the publishers would make Amazon "sign . . . agency contract[s]"_by threatening to withhold their ebooks. . . . Apple was also fully aware that once the Publisher Defendants seized control over consumer-facing ebook prices, those prices would rise. It knew from the outset that the publishers hated Amazon's $9.99 price point, and it put price caps in_its_agreements because it specifically anticipated that once the publishers gained control over prices, they would push them higher_than $9.99, higher than Apple itself deemed "realistic._ _. - - * * Because we conclude that Apple violated $ 1_of the Sherman Act by orchestrating a horizontal conspiracy among the Publisher_Defendants to raise ebook prices, and that the injunctionelief ordered by the district court is appropriately designed to guard against future anticompetitive conduct, the judgment of the district court is AFFIRMED