During the opening moments of last week’s summations in Apple’s e-book price-fixing trial, Judge Denise Cote interjected with a question for Orin Snyder, Apple’s lead attorney. Did Apple dispute that the publishers had colluded? After some back and forth, Snyder resisted throwing the publishers under the bus. Yet he didn’t stand behind them, either.
Apple, Snyder said, was taking no position on the publishers’ conduct. But after more than a year of legal wrangling, settlements, and a mountain of evidence presented at trial, Judge Cote certainly does have a position—and she seems to believe something other than robust competition caused the prices of e-books to spike in spring of 2010. And whatever happened, it involved Apple.
The question for Cote, now, is whether she believes Apple was the “ringmaster” of a conspiracy, as the government has alleged. And the key to Apple’s fate will be whether its attorneys poked enough holes in the evidence to persuade Cote that the case before her is not a per se violation of the Sherman Antitrust Act—that is, such an obvious case of price-fixing that the law condemns it without consideration of any potential justifications (such as Amazon using below-cost e-books to discourage competition).
As Snyder pointed out in his summation, the burden of proof is on the government. But the burden of how the court sees the evidence is squarely on Apple. And, observers said, given the sheer volume of evidence presented, Apple’s is a heavy burden.
“I would say the chance that Judge Cote finds this agreement to be subject to anything other than the per se rule to be extremely unlikely,” said Christopher Sagers, law professor at Cleveland State University, who has followed the case closely. “I think it is extremely likely that she will find that Apple coordinated a naked, horizontal price-fixing conspiracy.”
That’s because the threshold for proving the sort of “hub and spoke” conspiracy alleged in this case is low, Sagers explained. Basically the government has only to show that there was “a conscious commitment to a common scheme designed to achieve an unlawful objective,” he pointed out.
In its closing argument, U.S. attorney Mark Ryan set the bar even lower: to prove its conspiracy, the government only had to show that “the defendants’ accepted an invitation,” Ryan argued. And that invitation was “I’ll fix your Amazon problem. Join me in moving your industry to agency and we’ll negotiate your prices.” Among the most compelling evidence presented in the case is the simplest: that e-book prices did indeed spike. Following the implementation of agency deals, 99% of the prices for the defendant publishers’ New York Times bestsellers went up, virtually overnight.
Why Apple Wins
But the case may not be so simple. Apple was ably represented, and its attorneys credibly argued that Apple was simply engaged in lawful business negotiations, and that the executives never knew of nor facilitated any contact between publishers. They were simply trying to enter the market under rational economic terms.
Specifically, Snyder suggested that the government’s contention that prices rose from $9.99 was a fallacy. In fact, 70% of New York Times bestsellers remained at $9.99 or lower, he argued. And Apple’s goal in negotiating agency agreements was not to raise prices but to ensure that e-books were available to consumers.
At the time Apple entered negotiations with publishers, Snyder argued, four of the big six publishers were committed to windowing a portion of their biggest bestselling e-book releases, such as Sarah Palin’s Going Rogue and Stephen King’s Under the Dome. Apple’s entry was pro-competitive, Snyder argued, because it promised to expand consumer access to digital titles that publishers otherwise would not have made available.
In addition, Apple may have succeeded in insulating itself from the publishers’ alleged conduct. Throughout the trial, Snyder sought to put some distance between Apple’s conduct and the conduct of the publishers—if there was a conspiracy, it wasn’t Apple’s. That may be enough to move Cote off a per se consideration and allow her to more deeply examine Apple’s entry into the e-book market.
Under the government’s theory, which Snyder dubbed a “truly misguided story,” Apple’s only choices were to adopt Amazon’s loss-leading model or stay out of the market altogether. “This can’t be the goal of the Sherman Act,” he concluded.
But, in fact, U.S. attorneys argued, those were Apple’s choices under the law. “Price is the central nervous system of our economy,” Ryan argued. “We do not allow competitors to gang up on low-cost competitors and we do so at great risk to our economy.” Who is to say how the market would have eventually solved the $9.99 problem? Ryan argued. “Free markets have a way of working things out,” he stressed. “And free markets have a way of serving consumers.”
Sagers agreed—but he does leave the door slightly open for Apple: “I always feel compelled to recognize that in the federal courts, nothing is impossible. Conceivably, Judge Cote might rule that the fact that Apple made it possible for itself to enter is relevant to whether the conspiracy was per se illegal or not.”
For publishers, meanwhile, the close of the Apple trial means the end of their long legal nightmare. The verdict in the Apple case carries no weight for the publishers accused of participating in the alleged conspiracy—although Cote is all but certain to address their conduct in her written decision. Even if Apple wins, Cote’s decision may not exonerate the publishers, who have all maintained their innocence.
Still, in the final analysis, despite a long period of legal difficulty, the publishers are poised to come out of this legal episode very well. The settlement monies—nearly $166 million in total (including Minnesota, and excluding legal fees)—will be issued almost entirely as credits to e-book consumers’ accounts, meaning those funds will flow back to the publishers, almost like a court-ordered promotion. More importantly, Amazon is now on the agency model. And next year, the publishers will come out from under the DoJ price sanctions and oversight.
At one point during the trial, U.S. attorney Mark Ryan suggested that Macmillan CEO John Sargent was proud of the deal he did with Apple, despite the trouble it has triggered. “Yes,” Sargent replied from the witness stand.
“You’re still proud today?” Ryan asked.
“Yes,” Sargent answered.