United States v. Apple Inc.

• Decision Date: 10 July 2013
• Docket Number: Nos. 12 Civ. 2826(DLC), 12 Civ. 3394(DLC).,s. 12 Civ. 2826(DLC), 12 Civ. 3394(DLC).
• Citation: 952 F.Supp.2d 638
• Parties: UNITED STATES of America, Plaintiff, v. APPLE INC., et al., Defendants. The State of Texas, et al., Plaintiffs, v. Penguin Group (USA) Inc., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

952 F.Supp.2d 638

UNITED STATES of America, Plaintiff,
v.
APPLE INC., et al., Defendants.
The State of Texas, et al., Plaintiffs,
v.
Penguin Group (USA) Inc., et al., Defendants.

Nos. 12 Civ. 2826(DLC), 12 Civ. 3394(DLC).

United States District Court,
S.D. New York.

July 10, 2013.

[952 F.Supp.2d 643]

Mark W. Ryan, Lawrence E. Buterman, Daniel McCuaig, Stephen T. Fairchild, Nathan P. Sutton, Carrie Syme, Bill Jones, United States Department of Justice, Antitrust Division, Washington, DC, for Plaintiff the United States.

Gabriel Gervey, Eric Lipman, David Ashton, Office of the Attorney General of Texas, Austin, TX, for State of Texas, Liaison Counsel for Plaintiff States.

[952 F.Supp.2d 644]

W. Joseph Nielsen, Gary M. Becker, Office of the Attorney General of Connecticut, Hartford, CT, for State of Connecticut, Liaison Counsel for Plaintiff States.

Orin Snyder, Lisa H. Rubin, Gibson, Dunn & Crutcher, LLP, Howard E. Heiss, O'Melveny & Myers LLP, New York, NY, Daniel S. Floyd, Pro hac vice, Daniel G. Swanson, Pro hac vice, Gibson, Dunn & Crutcher, LLP, Los Angeles, CA, Cynthia Richman, Gibson, Dunn & Crutcher, LLP, Washington, DC, for Defendant Apple Inc.

OPINION & ORDER
DENISE COTE, District Judge.

Table of Contents

PROCEDURAL HISTORY	645
SUMMARY OF FINDINGS	647
BACKGROUND	648

A.	Development of the E-book Market	648
B.	Publishers' Discontent with the $9.99 Price Point	649
C.	January 2009–December 2009: Publisher Defendants Pursue Strategies to Combat Amazon Pricing	650
D.	Apple's Development of iBooks	654
E.	December 15 to 16, 2009: Apple's First New York Meetings with Publishers	655
F.	Apple Switches Gears and Presents An Agency Model with 30% Commission	658
G.	Apple's Term Sheet: All E-tailers to Agency and Pricing Caps	661
H.	Creation of the MFN Clause	662
I.	January 11: Apple Distributes Draft Agency Agreements	663

1.	MFN Negotiations	664
2.	30 Percent Commission Negotiations	666
3.	Price Tier Negotiations	667

J.	January 18–27: Publishers Initiate Agency Negotiations with Amazon	670
K.	January 21–26: Execution of Agreements	673
L.	January 27: The Launch of the iPad and iBookstore	678
M.	January 28 to 31: The Publisher Defendants Force Amazon to Adopt the Agency Distribution Model	679
N.	The Five Amazon Agency Agreements	681
O.	Prices after Agency	682
P.	Random House Adopts an Agency Model	685
Q.	The Publisher Defendants Require Google to Adopt an Agency Model	686
R.	Concluding Observations	686

DISCUSSION
687

A.	Legal Standard	687
B.	Analysis of the Evidence	691

APPLE'S ARGUMENTS
694

A.	The Monsanto Decision and Apple's Independent Business Interests	695
B.	Apple's Intent	699
C.	Windowing	701
D.	Characterization of the Evidence	702

1.	Initial Meetings with the Publishers	703
2.	Conspiracy by Telepathy	704
3.	Steve Jobs's Statements	705
4.	The Publishers Raised Prices, Not Apple	705

E.	Per Se Liability	706
F.	Avoiding a Dangerous Precedent	707

CONCLUSION
709

[952 F.Supp.2d 645]

This Opinion explains how and why the prices for many electronic books, or “e-books,” rose significantly in the United States in April 2010. Plaintiffs the United States of America (“DOJ”) and thirty-three states and U.S. territories (the “States”) (collectively, “Plaintiffs”), filed these antitrust suits on April 11, 2012, alleging that defendant Apple Inc. (“Apple”) and five book publishing companies conspired to raise, fix, and stabilize the retail price for newly released and bestselling trade e-books in violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1 (“Sherman Act”), and various state laws. These cases represent two of four related actions brought before this Court alleging the same e-books price-fixing conspiracy between Apple and the publishers.¹ The publishers are Hachette Book Group, Inc. (“Hachette”), HarperCollins Publishers LLC (“HarperCollins”), Holtzbrinck Publishers LLC d/b/a Macmillan (“Macmillan”), Penguin Group (USA), Inc. (“Penguin”), and Simon & Schuster, Inc. (“Simon & Schuster” or “S & S”) (collectively, “Publisher Defendants”).

Only Apple proceeded to trial; the Publisher Defendants have settled their claims with both the DOJ and the States. This Opinion presents the Court's findings of fact and conclusions of law following the bench trial that was held from June 3 to 20, 2013 to resolve the issue of Apple's liability and the scope of any injunctive relief. As described below, the Plaintiffs have shown that Apple conspired to raise the retail price of e-books and that they are entitled to injunctive relief. A trial on damages will follow.

PROCEDURAL HISTORY

Fact and expert discovery in these actions concluded on March 22, 2013. The parties' Joint Pretrial Order, proposed findings of fact and conclusions of law, and pretrial memoranda were submitted on April 26 and, following rulings on redactions, were filed on May 14.

At the time the trial was scheduled, the parties agreed that a bench trial would resolve claims for liability and injunctive relief. With the parties' consent, the trial was conducted in accordance with the Court's customary practices for non-jury proceedings, which includes taking direct testimony from witnesses under a party's control through affidavits submitted with the pretrial order. The parties also served with the Joint Pretrial Order copies of all exhibits and deposition testimony that they intended to offer as evidence in chief at trial.²

[952 F.Supp.2d 646]

At trial, the Plaintiffs called twelve fact witnesses and two expert economists. The Plaintiffs' fact witnesses included three Apple employees: Eddy Cue (“Cue”), Senior Vice President of Internet Software and Services at Apple; Keith Moerer (“Moerer”), a Director of iTunes at Apple; and Kevin Saul (“Saul”), Associate General Counsel at Apple, and the lead business lawyer supporting Apple's Internet and Software Services division. The Plaintiffs also called senior executives from each of the five Publisher Defendants: David Shanks (“Shanks”), CEO of Penguin; Carolyn Reidy (“Reidy”), President and CEO of Simon & Schuster; Brian Murray (“Murray”), CEO of HarperCollins; John Sargent (“Sargent”), CEO of Macmillan; and David Young (“Young”), Chairman and CEO of Hachette from 2006 through March 2013, who currently serves as Chairman of the Board of Directors of Hachette. The Plaintiffs called four additional fact witnesses: Russell Grandinetti (“Grandinetti”), Vice President—Kindle at non-party Amazon.com (“Amazon”); David Naggar (“Naggar”), Vice President of Kindle Content at Amazon; Laura Porco (“Porco”), Amazon's Director of Kindle Books from 2006 to 2011; and Thomas Turvey (“Turvey”), Director of Strategic Partnerships at non-party Google Inc. (“Google”). The Plaintiffs' expert witnesses were Dr. Richard Gilbert (“Gilbert”), Emeritus Professor of Economics and Professor of the Graduate School at the University of California, Berkeley, and a Senior Consultant (Affiliate) at Compass Lexecon, an economic consulting firm; and Dr. Orley Ashenfelter (“Ashenfelter”), the Joseph Douglas Green 1895 Professor of Economics at Princeton University.

Affidavits submitted by the Plaintiffs constituted the direct testimony of four of their fact witnesses—Grandinetti, Naggar, Porco, and Turvey—and both of their expert witnesses. Apple had intended to call seven of Plaintiffs' witnesses in its own case—Cue, Moerer, Murray, Reidy, Sargent, Saul, and Young. Thus, these witnesses' affidavits were also received during the Plaintiffs' case in chief. The Plaintiffs subpoenaed Shanks to testify at trial.³ Each of these witnesses appeared at trial and was cross-examined.

The Plaintiffs also offered excerpts from the depositions of John Makinson (“Makinson”), Chairman and CEO of the Penguin Group, the parent company of Penguin; Arnaud Nourry (“Nourry”), Chairman and CEO of Hachette Livre, the parent company of Hachette; and Maja Thomas (“Thomas”), Senior Vice–President at Hachette. Apple offered counter-designations as to Nourry and Thomas.

During the presentation of its defense, Apple presented affidavits constituting the direct testimony of three fact witnesses and three expert economists. Apple's fact witnesses were Robert McDonald (“McDonald”), the manager of Apple's U.S. iBookstore; Theresa Horner (“Horner”), Vice President of Digital Content for Barnesandnoble.com, a subsidiary of non-party Barnes & Noble, Inc. (“Barnes & Noble”); and Madeline McIntosh (“McIntosh”), Chief Operating Officer of non-party Random House, Inc. (“Random House”). Apple's

[952 F.Supp.2d 647]

expert witnesses were Dr. Benjamin Klein (“Klein”), Professor Emeritus of Economics at the University of California, Los Angeles, Senior Consultant at Compass Lexecon, and President of EAC Associates, Inc.; Dr. Michelle Burtis (“Burtis”), Ph.D., Senior Advisor at Cornerstone Research, Inc., an economic and financial consulting firm; and Dr. Kevin Murphy (“Murphy”), George J. Stigler Distinguished Service Professor of Economics at the University of Chicago, and Faculty Research Associate at the National Bureau of Economic Research. Each of these witnesses, except McIntosh, appeared at trial and was cross-examined. The Plaintiffs did not seek to cross-examine McIntosh.

As noted, the bench trial was held from June 3 to June 20, 2013, and this Opinion presents the Court's findings of fact and conclusions of law. The findings of fact appear principally in the following Background section, but also appear in the remaining sections of the Opinion.

SUMMARY OF FINDINGS

The Plaintiffs have shown that the Publisher Defendants conspired with each other to eliminate retail price competition in order to raise e-book prices, and that Apple played a central role in facilitating and executing that conspiracy. Without Apple's orchestration of this conspiracy, it would not have succeeded as it did in the Spring of 2010.

There is, at the end of the day, very little dispute about many of the most material facts in this case. Before Apple even met with the first Publisher Defendant in mid-December 2009, it knew that the “Big Six” of United States publishing—the...