In a 2-1 opinion yesterday, the Second Circuit affirmed the bench trial findings of Judge Cote that Apple orchestrated a price fixing conspiracy with book publishers to collectively raise the $9.99 per-book price that Amazon was charging and that publishers believed was damaging to their business in the long term. Apple signed contracts with the publishers for its own e-bookstore under an “agency model” (in which the publishers set the price and Apple would take a cut), and those contracts included a “most-favored nations” clause requiring the publishers to price the books in Apple’s store at the lowest offered anywhere else. The Second Circuit agreed with Judge Cote that the intended effect of these terms was to compel the publishers to act together to challenge Amazon’s flat, $9.99 pricing:
Apple offered each Big Six publisher a proposed Contract that would be attractive only if the publishers acted collectively. Under Apple’s proposed agency model, the publishers stood to make less money per sale than under their wholesale agreements with Amazon, but the Publisher Defendants were willing to stomach this loss because the model allowed them to sell new releases and bestsellers for more than $9.99. Because of the MFN Clause, however, each new release and bestseller sold in the iBookstore would cost only $9.99 as long as Amazon continued to sell ebooks at that price. So in order to receive the perceived benefit of Apple’s proposed Contracts, the Publisher Defendants had to switch Amazon to an agency model as well — something no individual publisher had sufficient leverage to do on its own. Thus, each Publisher Defendant would be able to accomplish the shift to agency — and therefore have an incentive to sign Apple’s proposed Contracts — only if it acted in tandem with its competitors. By the very act of signing a Contract with Apple containing an MFN Clause, then, each of the Publisher Defendants signaled a clear commitment to move against Amazon, thereby facilitating their collective action. As the district court explained, the MFNs “stiffened the spines” of the Publisher Defendants.
In dissent, Judge Jacobs found that Apple’s conduct was the only way to enter the market, given Amazon’s monopolistic position and willingness to sell e-books at a loss:
Apple was weighing its entry into the retail e-book market, and the agency structure was the only way Apple would enter the market. Nobody has proposed–before or since Apple’s entry–any “less restrictive means” by which Apple could have achieved the same competitive benefits. Apple’s challenged conduct broke Amazon’s monopoly, immediately deconcentrated the e-book retail market, added a platform for reading e-books, and removed barriers to entry by others. And removal of a barrier to entry reduces for the long term a market’s vulnerability to monopolization. These effects sound in the basic goals of antitrust law.
Our prior posts on the case are here.