Thoughts On Apple’s E-book Appeal

on December 21, 2014

On Monday, December 15, 2014, Apple’s appeal of the e-book anti-trust case was heard. Here are some of my thoughts on the matter.

Drug Dealer Analogy

Deputy Solicitor General Malcolm Stewart…called in to defend the antitrust ruling…tried several times Monday to compare Apple to a driver who carries a narcotics dealer to a drug pick up.

The point of his analogy…was that, if Apple knew book publishers were engaged in an unlawful conspiracy to fix the price of e-books and was prepared to facilitate that conspiracy, it was as guilty as they were.

Judge Dennis Jacobs would have none it. Narcotics trafficking, he pointed out, was one of the very few “industries in which the law does not look with favor on new entrants.”

The packed courtroom erupted in laughter. ((All quotes — unless otherwise indicated — are taken from the article entitled: “They laughed at the DOJ’s e-book antitrust case against Apple” by  Philip Elmer-DeWitt @philiped DECEMBER 15, 2014))

The “Drug Dealer” analogy illustrates how differently the two opposing sides see this case. The Department of Justice sees Apple as the ringleader who galvanized the Book Publishers into performing an illegal act. Apple sees itself not as the driver of a getaway car filled with drug dealers but, as a bus driver who should not be held accountable for the subsequent illicit actions of that buses’ passengers.

But Apple’s protestations of innocence go much further than this since they don’t believe that either they or the Book Publishers were committing a crime. Apple contends that, in challenging Amazon’s book selling monopoly, they were performing a public good. Going back to the Department of Justice’s analogy, Apple doesn’t think they were driving a getaway car or a bus. Apple thinks they were driving a fire truck on its way to put out the monopoly fire caused by Amazon. In Apple’s view, their actions should have been applauded by the Department of Justice, not condemned.

Per Se

The appeal is likely to turn on an obscure legal point: Did the district court judge commit a reversible error when she found Apple guilty “per se” of a horizontal price fixing conspiracy?

From the admittedly skewed perspective of this recovering attorney, “per se” is anything but obscure.

A quick example might be helpful. If you were driving down the road and the truck in the next lane exploded, you would need to prove negligence in order to collect damages. But if the truck were carrying dynamite, the truck would be considered inherently dangerous. No proof of negligence would be required by a plaintiff. The truck would be considered — by virtue of carrying a dangerous cargo like dynamite — negligent per se.

In the Apple e-book anti-trust case, Judge Cote treated Apple like a truck filled with dynamite. The Department of Justice was not required to prove Apple was in violation of anti-trust law. Illegality was assumed.

The key legal question was whether the Apple’s conduct as a new entrant in the e-book market should have been viewed as “per se illegal”—in which case it could be simply presumed to be anticompetitive—or whether it should have been judged under a more demanding “rule of reason” analysis, in which case the fact finder (which here was Judge Cote) had to undertake a much more searching investigation of all the circumstances in order to decide whether the conduct was pro-competitive (i.e., benefitted consumers) or anticompetitive.

I know about one one-thousandth as much anti-trust law as does Judge Cote but, even so, I could never shake the feeling that it was a mistake for her to apply the “per se” standard to Apple. And I’m not the only one who felt that way. Apple obviously disagreed with the Judge’s stance and they had relevant case law from the Supreme Court to back up their position.

Apple argues that vertical price-fixing agreements — for example, between an e-book distributor and e-book publishers — are not per se unlawful. At trial and in its appellate brief it invoked the Supreme Court’s ruling in Leegin Creative Leather Prods v. PSKS that vertical price restraints must be weighed by the more forgiving “rule of reason. ((”Why Apple’s e-book appeal is a big deal by Philip Elmer-DeWitt @philiped DECEMBER 14, 2014))

Justice scale on blue background

Why Not Amazon?

When the Department of Justice charged Apple with conspiring to fix the price of e-books, the case was widely seen in both Silicon Valley and New York publishing circles as an error of enforcement.

Why was Apple, a giant in its own right but a new entrant in the e-book market, being prosecuted and not that other giant, Amazon?

Amazon, after all, had an 80% to 90% share of the e-book market — a monopoly by almost anybody’s standard — and was selling the publishers’ most important titles below cost. ((Book News: Apple Enters A New Round In E-Book Price-Fixing Fight DECEMBER 15, 2014))

This case has always been confounding to the majority of those who study anti-trust law. Instead of pursuing Amazon, the monopolist, the Department of Justice pursued Apple, the new entrant. Some of the members of the Appeals Court also viewed this as odd.

At times Judge Jacobs came close to suggesting that the government had prosecuted the wrong company. At the very least, he said, a horizontal initiative “used to break the hold of a monopolist” ought not be found to be illegal per se. He likened any collusive conduct on the publishers’ part to “mice getting together to go put a bell on the cat.”

Prices

This case has always been about prices. The Department of Justice views high prices as anti-consumer — and therefore in violation of anti-trust laws — and low prices as a public good. The problem with this approach is that it is both bad economics and bad policy.

Bad Economics

Economists know there is no such thing as a “fair” price but non-economists don’t see it that way at all. Most consumers view high prices are always bad and low prices are always good.

Take, for example, the price of oil. When prices go up, people are outraged, oil companies are castigated in the popular press and governments hold hearings. When prices go up, it’s viewed as an evil conspiracy led by evil conspirators and it’s darn well got to be stopped.

And when prices go down? Nary a whisper is heard from consumers, conspiracy theorists or government regulators. When prices go down, it’s due to supply and demand — just economics doing its thing. Economic theory seemingly never works when prices go up but always works perfectly when prices go down.

The government’s anti-trust enforcers seem to view the economics in the Apple e-book case in the very same simplistic way as most consumers view oil prices. High prices are bad. Low prices are good. End of story. After Apple entered the e-book market, book prices went up. To the Department Of Justice’s way of thinking, what more did one need in order to prove that Apple and the Book Publishers were anti-competitive co-conspirators?

Turns out, one needs to know more. A lot more.

The judges appeared to give weight to this suggestion, and to accept (Apple’s) contention that a brief price spike, which damned Apple and the publishers before Judge Cote, should not result in an automatic finding of illegal price-fixing. Instead, (Apple) said the price spike was limited only to the five publishers, and that the overall effect of Apple’s entry to the ebook market dramatically benefited consumers since many more players were willing to enter the market.

Bad Policy

In addition to being bad economics, the government’s position on pricing was also bad policy. The Department of Justice saw itself as the protector of consumers. If consumers were hurt by Apple’s actions then, in their view, Apple was in violation of anti-trust law.

But the purpose of anti-trust law is to provide more competition, not lower prices, and that’s exactly what Apple was doing. By focusing on prices instead of competition, the Department of Justice completely lost sight of its mission.

Of Course Prices Went Up

I have always viewed the Department Of Justice’s stance on pricing to be non-sensical. OF COURSE PRICES WENT UP. Amazon was selling some books below cost and AT A LOSS. This is a classic way to monopolize a market and is often characterized as predatory pricing. When Apple entered the market, Book Publishers added contractual clauses that caused Amazon to lose its ability to sell books at a loss. Rising prices were not an indication that Apple was gaining an anti-competitive advantage, they were an indication that Amazon was losing an anti-competitive advantage.

When Apple tried to point this out to Judge Cote she would have none of it. She quite clearly stated the wrongdoing of Amazon did not exonerate Apple. And in a sense, she was quite right. For example, If the guy in the car next to you is driving 30 miles per hour over the speed limit, that does not excuse you from getting a ticket if you are driving a mere 15 miles per hour over the speed limit. The wrongdoing of others does not excuse your own wrongdoing.

What Judge Cote stoutly ignored was context. Apple’s actions were not occurring in a vacuum — they were occurring in response to Amazon’s actions. Using my speeding analogy, Apple may well have been speeding but, in their view, they did not deserve a ticket because they were acting like a fire truck, rushing to put out the monopoly fire initiated by Amazon.

Judges Jacobs and Lohier seemed quite concerned that Judge Cote had used the wrong standard, but Jacobs’s qualms clearly went much further—seeming to question the government’s judgment in ever having brought the case. His problem was that Apple was a new entrant that was bringing competition to a market that had been, until then, dominated by a “monopolist,” Amazon. Judge Jacobs also repeatedly referred to Amazon’s $9.99 pricing policy, whereby it sold books at below the wholesale acquisition cost, as “predatory pricing,” and seemed to suggest that Amazon was obviously using it as a means of maintaining its monopoly dominance.”

Conclusion

If Apple loses at the Appellate level, there is no doubt in my mind that they will appeal the case to the Supreme Court. If the Supreme Court accepts the matter, the case will live on.

And if Apple wins? I very much doubt if the Appellate court will dismiss the case outright. It is far more likely that they will remand the case to a lower court in order to have a portion of it re-litigated. Once again, the case will live on (and on and one and on…).

If Apple wins its appeal, the most interesting question to me will be whether the Appellate Court remands the case to Judge Cote or to a different Judge altogether. Common sense would tell you that it’s a bad idea for an Appellate Court to chastise a Judge and then ask that Judge to be objective when re-trying that same case again. But we in the legal profession do not see ourselves as subject to those emotions so readily exhibited by ordinary people. In fact, we sometimes do not see ourselves as people at all.

There is no shortage of lawyers in Washington, DC. In fact, there may be more lawyers than people. ~ Supreme Court Justice Sandra Day O’Connor ((Excerpt From: Robert Byrne. “The 2,548 Wittiest Things Anybody Ever Said.” iBooks. https://itun.es/us/h_yeB.l))

If the Appellate Court were to remand the case Judge Cote, they would be saying that she made a mistake in law. If they remand the case to a different Judge, that would be highly unusual. And highly suggestive, as well.