United States v. Apple, Inc.

• Decision Date: 05 September 2012
• Docket Number: No. 12 Civ. 2826(DLC).,12 Civ. 2826(DLC).
• Citation: 889 F.Supp.2d 623
• Parties: UNITED STATES of America, Plaintiff, v. APPLE, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

889 F.Supp.2d 623

UNITED STATES of America, Plaintiff,

v.APPLE, INC., et al., Defendants.

No. 12 Civ. 2826(DLC).

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

Sept. 5, 2012.

Mark W. Ryan, Stephanie A. Fleming, Lawrence E. Buterman, Laura B. Collins, United States Department of Justice, Antitrust Division, Washington, DC, for Plaintiff the United States.

Daniel F. McInnis, David A. Donohoe, Allison Sheedy, Akin Gump Strauss Hauer & Feld, LLP, Washington, DC, for Defendants Penguin Group (USA), Inc. and The Penguin Group.

Richard Parker, O'Melveny & Myers LLP, Washington, D.C., Andrew J. Frackman, Edward N. Moss, O'Melveny & Myers LLP, New York, NY, Daniel S. Floyd, Daniel G. Swanson, Gibson Dunn & Crutcher LLP, Los Angeles, CA, for Defendant Apple, Inc.

Joel M. Mitnick, John J. Lavelle, Alexandra Shear, Sidley Austin LLP, New York, NY, for Defendant Holtzbrinck Publishers, LLC d/b/a MacMillan.

David N. Wynn, Arent Fox LLP, New York, NY, Deanne Ottaviano, Arent Fox LLP, Washington, DC, Stephen G. Larson, Arent Fox LLP, Los Angeles, CA, for amici curiae American Booksellers Association and Barnes & Noble, Inc.

Jan Friedman Levien, Paul D. Aiken, New York, NY, for amicus curiae The Authors Guild, Inc.

Bob Kohn, New York, NY, amicus curiae.

Steven Brower, Buchalter Nemer, Irvine, CA, for amicus curiae Bob Kohn.

OPINION & ORDER

DENISE COTE, District Judge:

Plaintiff the United States of America (the “Government”) brings this civil antitrust action against defendants Apple, Inc. (“Apple”); Hachette Book Group, Inc. (“Hachette”); HarperCollins Publishers L.L.C. (“HarperCollins”); Verlagsgruppe Georg Von Holtzbrinck GMBH and Holtzbrinck Publishers, LLC d/b/a MacMillan (collectively, “MacMillan”); The Penguin Group, a division of Pearson PLC and Penguin Group (USA), Inc. (collectively, “Penguin”); and Simon & Schuster, Inc. (“Simon & Schuster”). The Government has moved for entry of a proposed Final Judgment with respect to defendants Hachette, HarperCollins, and Simon & Schuster (the “Settling Defendants”), pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. § 16(b)-(h) (the “APPA” or “Tunney Act”). For the following reasons, the motion for entry of Final Judgment is granted.

BACKGROUND

I. Factual Allegations

Unless otherwise noted, the facts and allegations recounted below are taken from the Government's complaint (“Complaint”) and Competitive Impact Statement (“CIS”). Defendant Apple engages in a number of businesses, but as relevant here it sells the iPad tablet device and distributes “e-books” through its “iBookstore.” E-books are books that are sold to consumers in electronic form, and that can and must be read on an electronic device such as the iPad, the Barnes & Noble, Inc. (“Barnes & Noble”) Nook, or the Amazon.com, Inc. (“Amazon”) Kindle. Each of the other five defendants (the “Publisher Defendants”) publishes both e-books and print books. They represent five of the six largest publishers of “trade” books in the United States.¹ Broadly speaking, the Complaint alleges that the defendants conspired to raise, fix, and stabilize the retail price for newly-released and bestselling trade e-books, to end retail price competition among trade e-books retailers, and to limit retail price competition among the Publisher Defendants in violation of Section 1 of the Sherman Antitrust Act. 15 U.S.C. § 1.

In 2007, Amazon launched its Kindle device and quickly became the market leader in the sale of e-books. Amazon utilized a discount pricing strategy whereby it charged $9.99 for newly released and bestselling e-books. Even though the $9.99 retail price point was close to the wholesale price at which Amazon purchased many e-books, the Complaint alleges that Amazon's e-books business was “consistently profitable.” ² In order to compete with Amazon, other e-books retailers also adopted a $9.99 retail price for many titles.

The defendants' conspiracy to raise, fix, and stabilize e-books prices allegedly began no later than September 2008, when the Publisher Defendants' CEOs began to meet to discuss the growth of e-books and the role of Amazon in that growth. According to the Complaint, a central topic of discussion at these meetings was Amazon's discount pricing strategy, or what the CEOs termed “the $9.99 problem.”

The Publisher Defendants feared that the $9.99 price point would have a number of pernicious effects on their short- and long-term profits. In the short-term, they believed the price point was eating into sales of hardcover print books, which were often priced at thirty dollars or higher. Over the long-term, they feared that consumers would grow accustomed to purchasing e-books at $9.99, that Amazon and other retailers would start to demand lower wholesale prices for e-books, that the $9.99 price point would erode hardcover book prices, that the rapid growth in e-books would threaten the survival of brick-and-mortar bookstores (the Publisher Defendants' preferred distributors), and that Amazon and other e-books retailers might enter the publishing industry and compete with the Publisher Defendants directly.³ According to the Complaint, the Publisher Defendants determined that they needed to act collectively to force Amazon to abandon its discount pricing model.

In late 2009, the Publisher Defendants began discussions with Apple about the upcoming launch of Apple's iPad tablet device, scheduled to occur in January 2010, and whether Apple would sell e-books that could be read on the new device. Over the course of these discussions, the Publisher Defendants allegedly communicated competitively sensitive information to each other, and Apple allegedly helped transmit messages among them. According to the Government, the defendants soon realized that they shared an interest in limiting retail price competition for e-books. Apple did not want to compete with Amazon's $9.99 price point and the associated low margins on e-book sales; the Publisher Defendants did not want low e-books prices for the reasons addressed above. The defendants allegedly agreed, together, to switch to a new sales model for e-books known as the “agency model.”

Previously, the Publisher Defendants sold e-books using the “wholesale model,” meaning they sold titles to retailers at a wholesale price or discount off the price listed on the physical edition of the book or “list price.” Retailers were then free to sell titles to consumers at retail prices of their choosing. Under the agency model, by contrast, retailers never purchase titles from publishers; rather, publishers sell titles to consumers directly at prices set by the publishers with retailers serving as the publishers' “agents” and receiving a percentage of each sale as commission.

The Publisher Defendants signed functionally-identical agreements with Apple from January 24–26, 2010 (the “Agency Agreements”), just in time for Apple's January 27 media event announcing the iPad. The Agency Agreements shared three main features. Each agreement:

1. Established that the Publisher Defendant would sell e-books through Apple's iBookstore using the agency model, with Apple receiving a thirty percent commission on each sale;

2. Included a price-based “most-favored nation” (“MFN”) clause, according to which the price for any e-book sold in Apple's iBookstore would be no higher than the price for that e-book at any other e-book retail store; if an e-book was sold for less at a competing store, the price at the iBookstore would drop automatically to match it; and

3. Established pricing tiers—ostensibly price maximums but in reality actual prices—that tied the price of newly released and bestselling e-books to the price of their corresponding hardcover print editions; these pricing tiers resulted in prices of $12.99 or $14.99 for most newly released and bestselling e-books.

According to the Complaint, the above features were intended to operate in tandem. Together, they ensured that the Publisher Defendants would sell their e-books exclusively through the agency model and that prices for their newly released and bestselling e-books would rise to the levels specified by the pricing tiers.⁴ The Complaint further alleges that the Agency Agreements did not result from separate negotiations between Apple and each Publisher Defendant. Rather, the defendants agreed that each Publisher Defendant would sign an Agency Agreement with Apple only if a critical mass of other publishers did so.

By April 2010, when the iPad hit stores, the Publisher Defendants had reached agreements with all major e-books retailers to sell exclusively through the agency model. According to the Government, this effectively ended retail competition for the Publisher Defendants' e-books and resulted in higher prices: the average price for Publisher Defendants' e-books became fixed at the inflated levels specified in the Agency Agreements, and increased by over ten percent between the summer of 2009 and the summer of 2010.

The Government contends that the defendants' conspiracy and agreement constituted a per se violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, and that no allegations with respect to the relevant product market, geographic market, or market power are required. To the extent such allegations are necessary, however, the Complaint alleges that the relevant product market is trade e-books, the relevant geographic market is the United States, and the Publisher Defendants possess market power in the market for trade e-books.

II. The Proposed Final Judgment

The proposed Final Judgment imposes the following obligations on the Settling Defendants:

1. They must terminate their Agency Agreements with Apple within seven days after entry of the proposed Final Judgment. See Proposed Final Judgment § IV.A.

2. They must terminate those contracts with e-book retailers that contain either a) a restriction on the e-book retailer's ability to set the retail price of any e-book, or b) a “Price MFN,” as defined in...