December 17, 2014

Apple’s appeal: Hey, did anyone in the government notice that Amazon owned 90% of the ebook market?

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Amazon's profile photo via Shutterstock

Amazon’s profile photo via Shutterstock

Remember that ol’ lawsuit between Apple and the Department of Justice? (If not, catch up here.) On Monday, there was a 90-minute hearing at the Second Circuit Court in Manhattan. And in that short period of time, they redirected the conversation to Amazon’s dominance in the ebook market, suggesting that Apple’s entrance into the market was good for consumers, and that this point should play a role in the court’s decision.

Just a reminder: Apple is appealing because the case didn’t go smoothly the first time around. The company called it a “fundamentally flawed endeavor that could discourage competition and harm consumers.” Judge Denise Cote ruled that Apple had violated antitrust laws by intending to set ebook prices through the agency model.

The publishers couldn’t afford to fight, but Apple could. On Monday, the company’s lawyer called attention to its competition, as if no one had thought to bring up Amazon before.

There’s evidence that Amazon brought about the whole lawsuit in February 2010, when the company submitted a “confidential white paper” to the Federal Trade Commission that suggested publishers shouldn’t set prices for their own ebooks. Since then, Amazon has benefitted considerably from the publishers’ settlement in the DoJ case. Most of the payout was issued in Amazon credit and, as Jeff John Roberts of Gigaom pointed out, “Amazon didn’t have to pay a cent.”

Publishers were trying to set prices along with other retailers like Apple  because Amazon owned 90% of the ebook market. Apple’s lawyer Theodore Boutros argued this week that this is a legitimate way to “come into a market dominated by a monopolist.”

According to Publishers Weekly, U.S. Deputy Solicitor Malcolm Stewart initially said Cote made the right call the first time around:

Stewart told the court that Judge Denise Cote was right to find that Apple had colluded with five major publishers in a “per se” case of price-fixing in the e-book market—that is, a violation that precludes further examination of the conspiracy’s intent, or “actual effect” on the market. But Stewart quickly ran into tough questioning….

In a particularly loaded question, [U.S. circuit judge Dennis] Jacobs acknowledged that prices rose following the agency deals—but isn’t that what you would expect when you break a “monopolist” that relied on “predatory” pricing? Jacobs also questioned whether the government had noticed that Amazon had come to dominate 90% of the e-book market, and whether the government found that kind of dominance acceptable?

Jacobs waxed poetic: “Would it not matter that all those people got together to defeat a monopolist? It’s like the mice that got together to put a bell on a cat.”

Stewart was a little less successful when he likened Amazon’s behavior to a drug dealer, driving someone like Apple to deal drugs. The government’s interest in protecting competition isn’t exactly obvious here. “When you’re dealing with the illegal drug industry, you’re looking at one of the few areas where the law doesn’t look favorably on new entrants,” circuit judge Debra Livingston commented.

Stewart tried another tack, according to Andrew Albanese at PW:

[Stewart] said that despite Amazon’s market share, the government viewed Amazon’s $9.99 prices to be “good for the consumer,” and none of Amazon’s actions were alleged to be violations of law. If Amazon was alleged to be a monopolist or engaged in predatory pricing, as Jacobs’ questions suggested, the publishers could have filed a complaint—they did not. Instead, Stewart said, they chose to enter into “a scheme” with Apple to “remove price competition” from the e-book market, and force Amazon to raise prices.

This was not “innovation,” Stewart said, but a strategy that revolved around making a competitor’s product “less attractive to consumers.”

Judge Cote thought the initial price-spike as Apple entered the ebook market made publishers and Apple guilty of price-fixing; these new judges “seemed to give weight” to Boutros’s suggestion that consumers benefitted overall from having more than one retailer in the ebook marketplace, according to Jeff John Roberts at Gigaom.

If the Second Circuit Court upholds Judge Cotes’s verdict, Apple has to pay consumers $400 million, and it will owe another $50 million in legal fees. Four of the Big Five publishers already began a similar kind of payout in early March, and the Apple case won’t mean anything financially for them. (It might lift their spirits after a couple of disheartening years.) If the court remands the verdict, Apple will only owe $70 million; if they reverse it, Apple owes nothing.

Roberts explains:

The major legal issue at stake turns turns on competing antitrust doctrines known as “per se” versus “rule of reason” — which specify how courts should assess situations in which companies are found to have colluded on a given business issue.

The appeals court, however, may be hard-pressed to reverse Judge Cote, who found in a 160-page decision that Apple was liable under either standard.

Back to the 90-minute hearing, which sounds like the most efficient court meeting ever: lawyers from Simon and Schuster and Macmillan had time to quibble with another part of Cote’s ruling. Publishers are supposed to “cool down” on their negotiations with Apple for five years, which means Apple gets to discount ebooks without any interference from publishers. Two years out, publishers are having a hard time negotiating with other ebook retailers during the “cool-off” period. They’d like the court to consider more reasonable terms.

Oh, and Apple still can’t get rid of meddling special monitor Michael Bromwich, who happens to be Cote’s old buddy (appointing him could be considered unethical) and costs them a lot of money (in the immortal words of Cote, “lawyers cost a lot of money”). They’d love for the court to reconsider that, too.

Will Amazon’s dominance in the ebook market actually change the judges’ minds? Will Apple owe $450 million, $70 million, or nothing (besides what we can guess are enormous legal fees, plus a check to Bromwich)? We’ll let you know the ruling from the Second Circuit Court when it arrives in the new year.

 

Kirsten Reach was an editor at Melville House.

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