On December 15th, Apple and the United States continued their heavyweight battle with a round of oral argument in the Court of Appeals for the Second Circuit. It’s been a while since this feud started so I’ll briefly recap the claims of the combatants. The DOJ wrote in its Second Circuit brief, “In late 2009 and early 2010, Apple orchestrated and participated in a conspiracy with five major book publishers to take control of retail pricing for electronic books (e-books) and to raise prices to agreed-upon levels. The conspiracy was successful: retail e-book prices for the vast majority of the Publisher-Defendants’ new releases and bestsellers rose from $9.99 to $12.99 or $14.99. Consumers paid almost 20% more, on average, for all of the Publisher-Defendants’ e-books.” Apple offered a “no good deed goes unpunished” defense, contending that it did not join any conspiracy and, in fact, offered a pro-competitive, innovative alternate to the monopolistic stranglehold that Amazon.com had on the e-book market.
The DOJ prevailed in the trial court with Judge Denise Cote finding that Apple had helped orchestrate a horizontal, per se Sherman Act price-fixing violation by book publishers to raise prices. The district court found that “with Apple’s active encouragement and assistance, the Publisher Defendants agreed to work together to eliminate retail price competition and raise e-book prices, and again with Apple’s knowing and active participation, they brought their scheme to fruition.”
A very good summary of the battle on appeal can be found in a Publisher’s Weekly article here.
One of the issues on appeal was the sufficiency of the evidence: Did the district court make erroneous findings in concluding that Apple helped orchestrate a price-fixing cartel? I’m not going to predict the Court of Appeals’ answer to that question. It is, however, fairly difficult to overturn a district court’s findings of fact, especially when Judge Cote found the evidence “overwhelming,” and many of Apple’s key witnesses “unbelievable.” But I do want to comment on one aspect of the case that has puzzled me.
The DOJ charged Apple as a member of the e-book price-fixing cartel even though Apple was not an e-book publisher. Apple had a vertical relationship with the e-book publishers. Thus, the briefs and arguments in the case are sprinkled with references to the Toys “R” Us, Inc., v. FTC, 221 F.3d 928, 936 (7th Cir. 2000) decision and “hub and spoke” conspiracies. I’ve always wondered whether it was a mistake to charge Apple with being a member of a horizontal price-fixing cartel. If charges were merited at all, I would have charged Apple with aiding and abetting a price-fixing cartel. I base this on an experience I had when prosecuting a significant cartel case while I was with the Antitrust Division.
I led the prosecution of the international graphite electrodes cartel. It was an extremely effective cartel, raising prices over 70% in a five-year period. Graphite electrode manufacturers had tried before (like the e-book publishers) to reach a price-fixing agreement but could not—principally because the CEO of the U.S. company had a prescient fear of going to jail. But after Mitsubishi bought a 50% interest in the U.S. company, Mitsubishi employees helped organize the cartel through various means, including their connections with the Japanese graphite electrode producers. While Mitsubishi did not manufacture graphite electrodes, it did profit from the collusive price increases. While all other cartel members pleaded guilty, Mitsubishi went to trial.
We did not charge Mitsubishi with a Sherman Act violation because it did not manufacture graphite electrodes. In our view the simplest and most accurate way to explain to a jury why Mitsubishi was liable was to charge Mitsubishi assisted the cartel. We did not want to explain, even though it may have been relatively easy to do, why a company that did not make graphite electrodes was charged with fixing the price of graphite electrodes. Mitsubishi attended no price-fixing meetings and had no input into fixing the price of graphite electrodes. So, we charged Mitsubishi only with aiding and abetting. In legal theory, this is no different that being charged with a substantive offense. But in telling the story to a jury about why a non-manufacturer could be guilty of conspiring to fix prices of a product it did not make, we thought aiding and abetting was the more understandable and persuasive story. The indictment read, in part: [Read more…]