Wednesday, September 9, 2015

Apple loses appeal in e-book antitrust case - Part 3

This is the third and final comment in a series on the Second Circuit’s June 30 decision in the Apple e-books antitrust case.

The Second Circuit's decision in the Apple e-book case contains a rather acrimonious exchange between Judge Debra Livingston (author of the majority opinion) and Judge Dennis Jacobs (the dissenting judge) - which is a bit unfortunate, as there is much to harvest from their debate. The judges directly address each other - and are unsparing in their disdain for the other's theory of the case. Livingston may have the better of the argument (and she in part writes for the majority), but there is much to value in Jacobs's dissent as well. This is the final comment in a series examining the Apple e-book case (Part I and Part 2 of the series examine the background and the majority theory of liability, respectively). This comment examines Judge Jacobs's dissent and the ideas behind it.

Let's first look at the rather broad zone of agreement between Jacobs and the majority of the panel. Jacobs has no illusions about Apple's bruising conduct - he accepts Apple's forceful role in moving e-book distribution towards commissioned agency pricing. But he doesn't view Apple's conduct (when considered together with the e-book publishers) as constituting per se price fixing. Rather, he believes that any agreement among Apple and the e-book publishers should be evaluated according to the Rule of Reason - and he would further find that application of the Rule, given the Amazon-imposed market structure for e-books prior to Apple's iPad introduction, compels discharging Apple of antitrust liability (recall the e-book publishers had settled with the government prior to the litigation, accepting that they at least engaged in questionable pricing behavior).
In Jacobs's view, the chief antitrust concern lies not with Apple, but rather with Amazon (he concedes Amazon was not before the court, and so could not refute any 'imputations' his opinion might cast). Prior to the entry of Apple's iPad (and the events examined in the case), Amazon held a 90 percent market share in the distribution of e-books. Amazon's current market share, Jacobs reports, is 60 percent. This fact alone suggests that the entry of the iPad had a sizable procompetitive effect, albeit coinciding with the overall increase in e-book prices.

An antitrust court may consider the procompetitive effects of a restraint only in the context of a Rule of Reason analysis - and so the first part of Jacobs's argument gives his justification for the use of the Rule of Reason (as opposed to applying the per se condemnation found by the majority). Where the majority sees horizontal features dominating the analysis (that is, the relationship among the e-book publishers), Jacobs is struck by Apple's vertical position vis-à-vis the publishers. Vertical enablers of a horizontal cartel, argues Jacobs, may be held unlawful only under the Rule of Reason. Moreover, Apple's interests in restructuring the terms of e-book distribution were distinct from those of the publishers; to a degree, Apple’s interests and those of the publishers were opposed. Sensitivity to these differences should have driven the court to apply a Rule of Reason analysis. And finally, Jacobs argues that the novelty and dynamism of e-book distribution justify the more nuanced analysis associated with the Rule of Reason.

Jacobs is more interesting, however, once he begins to apply the Rule of Reason to Apple's conduct (he describes Apple as engaging in "gloves-off competition"). But he is unsparing with regard to Amazon, Apple’s major rival in offering an e-book distribution platform (basing his facts on findings in another case). Jacobs sees Amazon as a monopolist that obtained its market share (90 percent) by engaging in below-cost pricing (the Kindle's $9.99 price point for the most desirable e-books). Jacobs characterizes Amazon's below-cost pricing as functioning as a market-barrier. If he's right, then Apple's moves to eliminate Amazon's $9.99 pricing necessarily promoted competition (and perhaps invites additional market entrants).

Jacobs separates Apple's orchestration of the price agreement among the e-book publishers from the price agreement itself. Apple, notwithstanding its role (and interest) in raising e-book prices (to bring a halt to Amazon's below-cost pricing policy), entered no agreement with its competitor (who is, of course, Amazon). And it was not party to the horizontal agreement among the otherwise competing e-book publishers. The divergence between Apple's interests (concededly aggressive) and those of the e-book publishers persuades Jacobs that Apple shouldn't be lumped into a unitary conspiracy with the indisputably guilty book publishers. Apple may have created conditions that made an e-book publisher cartel possible, but the launching of the cartel, in Jacobs’s view, was independent of Apple. Or so it seems.

Jacobs has little difficulty in absolving Apple of antitrust liability once he has access to the Rule of Reason. He sees little harm in the vertical restraints contractually imposed by Apple on the e-book publishers (the Most Favored Nation pricing provision and the price caps) and recognizes the considerable pro-competitive benefits accompanying Apple's dislodging Amazon's monopoly position. Even if Amazon had lawfully acquired its 90 percent market share (and this is likely the case), actions by Apple to reduce that share to 60 percent should be viewed as overwhelmingly procompetitive.

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