2015: a Year of Big Plaintiff Wins in Antitrust and Privacy Cases
| Jurisdiction | United States,Federal |
| Author | By Thomas N. Dahdouh |
| Publication year | 2016 |
| Citation | Vol. 25 No. 1 |
By Thomas N. Dahdouh1
The year 2015 will go down as a year of big plaintiff wins in federal antitrust and privacy decisions, particularly notable for those cases brought by government law enforcement officials. With only one loss in the lineup,2 these victories suggest that active enforcement of the antitrust and privacy laws is alive and well in the federal courts. These wins stand in stark relief to the dire forecasts of some that federal courts are too tilted to the defense side.3
This Article summarizes eleven major court holdings and attempts to put each decision in context. The cases are generally arranged by area of law, beginning with two Sherman Act Section 1 cases, following with a hybrid Sherman Act Section 1/Section 2 case, then describing two new Sherman Act Section 2 matters, discussing one state-action immunity case, continuing with three major merger challenges, and finally ending with two important privacy cases.
In this decision, the Second Circuit affirmed the lower court and found that Apple orchestrated a conspiracy among book publishers that had the effect of raising the prices of ebooks.5 Writing for the majority of the three judge panel, Judge Livingston found the agreement both per se unlawful and unlawful under a full rule of reason analysis.6 Concurring Judge Lohier joined in the opinion only insofar as it found the agreement to be per se unlawful.7 Finally, Circuit Judge Dennis Jacobs dissented.8 As a result, the lower court's decision was upheld, but only on a per se theory.
The background facts in this lawsuit are amazing and worth a close review. In 2007, Amazon released the new Kindle ebook reader.9 When pricing ebooks for sale on the Kindle, Amazon placed certain NewYork Times bestsellers and new releases at $9.99, the same or slightly lower than the wholesale price for which it paid book publishers.10 According to the district judge and the majority of the Second Circuit panel, this was a classic "loss-leading" strategy designed to propel interest in and adoption of the new Kindle.11
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According to the court, book publishers did not like this low price and were fearful that $9.99 would become the permanent price-point as ebooks caught on, driving down the prices they could charge for print books.12 In the face of this perceived threat, the Big Six publishers (Simon and Schuster, HarperCollins, Random House, Macmillan, the Penguin Group, and Hachette)13 started to get together on a regular basis, meeting at dinner events to discuss "common challenges."14 Many of the publishers began to withhold their books from Amazon for a period of time after a book's first print release—a practice known as "windowing."15 By late 2009, four of the Big Six had announced such plans.16 However, the publishers worried that piracy and other issues would make windowing an unsustainable long-term strategy.17
Then along came Apple, seeking to launch an iBookstore business with the pending release of its iPad in 2010.18 Apple began negotiating with each of the Big Six. Importantly for the publishers, Apple's team expressed the belief that Amazon's price point was not ingrained in consumers' minds and that Apple could sell new releases and bestsellers at higher prices, between $12.99 and $14.99.19 In return for higher retail prices, Apple requested the publishers to decrease their wholesale prices and allow Apple to make a small profit on each sale.20
The Big Six began to keep each other apprised about negotiations with the Apple team.21 Apple quickly realized that the Big Six saw an advantage in using Apple to increase their leverage on Amazon.22 Acting on this realization, Apple ditched the wholesale pricing strategy in favor of one where it acted as an agent for the book publisher and received a commission on every sale.23 This gave the publisher, rather than the retailer, more control over pricing, although Apple did set price caps.24 However, according to the district court, Apple did not want any price competition with Amazon, and so hit upon a requirement that book publishers who sold to Apple had to switch over all their ebook retailers, including Amazon, to an agency model.25 Or as Apple's team told the publishers: '"all publishers' would need to move 'all retailers' to an agency model."26
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Apple's strategy continued to evolve, and soon Apple's in-house counsel suggested replacing the explicit agency requirement with a "Most Favored Nations" ("MFN") clause.27 Under the MFN clause, the publisher could not charge a higher price on Apple's iBookstore than other retailers charged.28 According to the court, the MFN clause would place sufficient pressure on the Big Six to move Amazon to an agency model—without an explicit reference to Amazon or any other retailer in the Apple contracts.29
The MFN clause also gave each of the publishers a stake in Apple's quest for a critical mass of publishers to join the iBookstore because "[w]hile no one Publisher could effect an industry-wide shift in prices or change the public's perception of a book's value, if they moved together they could."30
In the final negotiations, the book publishers pushed back against Apple's proposed price caps. Apple relented because, as Steve Jobs famously wrote in an email, Apple could "live with" more lenient pricing provided Amazon was also moved to an agency model.31 Apple's testimony at trial made it clear that the company knew it was effectively forcing the book publishers to move to an agency model, and that its representatives orchestrated efforts to convince holdout book publishers to go along.32 Apple even kept the book publishers apprised about which other publishers were on board.33
When Steve Jobs presented the iPad in 2010, he also announced the iBookstore, including pricing.34 After the presentation, Jobs was asked why someone should purchase an ebook from Apple for $14.99 as opposed to $9.99 with Amazon or Barnes & Noble, and Jobs confidently replied, "[t]hat won't be the case . . . the price will be the same. . . .[P]ublishers will actually withhold their [e]books from Amazon . . . because they are not happy with the price."35 Soon after the announcement, book publishers turned up the heat on Amazon and got it to agree to an agency model.36 The publishers informed Apple of their progress.37
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The trial court found that the evidence showed an agreement between the Big Six and Apple to raise ebook prices, and that the agreement's effects even bled over to hardcover books.38 Under the Apple contract, publishers were incentivized to raise hardcover prices so they could charge higher ebook prices.
On appeal, Apple argued that it could be charged only with "unwittingly facilitating" the publishers' joint conduct.39 Of course, it is a dark moment in the land of antitrust defense when counsel is forced to argue that a client is an "unwitting" participant, and the majority soundly rejected this claim and found that Apple was a conscious participant in the conspiracy.40 For the majority, the most salient factor was that Apple had to be conscious of the conspiracy's effect on its rival, Amazon.41 Indeed, Apple telegraphed its knowledge through its first iteration of the proposed contract—namely, the requirement that the Big Six move "all retailers" over to the agency model: If Apple had no idea that the Big Six were collectively moving against Amazon, why did it reference competing ebook retailers in its initial proposed contracts? Finally, the court found that the evidence supported the notion that Apple was the conscious orchestrator of the agreement—indeed, the linchpin.42 Without Apple's participation, the conspiracy could have broken down, as previous collective efforts to move against Amazon had faltered. By bringing each of the Big Six under a contract with Apple, Apple ensured that the key problems of previous collective efforts—the difficulty in detecting and punishing cheating—would not be repeated, ensuring the success of the conspiracy.
Also on appeal, Apple argued that the contract terms in the final version of the contract, including the MFN clause, are generally lawful and viewed as procompetitive, and thus that Apple could not be condemned for seeking such clauses.43 The court, however, disagreed, finding that in certain circumstances an MFN clause can actually "facilitate anticompetitive horizontal coordination by reduc[ing] [a company's] incentive to deviate from a coordinated horizontal arrangement."44 In other words, what is often designed to provide a buyer protection against being overcharged, i.e. a price ceiling, can become a price floor if utilized by a monopolist or a cartel. This is exactly why the Supreme Court has repeatedly emphasized that the per se bar against price-fixing extends to collective efforts to tamper with any significant facet of horizontal competition. For example, in Catalano, Inc. v. Target Sales, Inc.,45 the Supreme Court had no problem condemning as per se unlawful the fixing of credit terms by a group of competitors.46
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The majority easily dispatched Apple's argument that per se condemnation was inappropriate because of the Supreme Court's decision in EMI.47 In BMI, the Court examined a music licensing regime in which copyright owners banded together to negotiate blanket licenses allowing licensees to perform any licensed work for a flat fee.48 Although the scheme was per se price fixing, the Court upheld it under a rule of reason analysis.49 For the Apple court, the salient distinguishing factor in BMI was that the resulting product— widespread, easy licensing of music—would have been impossible without fixing the prices charged for the licenses.50 In other words, restraining competition was the only way to ensure that the product was available at all. In contrast, the court found that Apple...
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