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, United States v. Apple Inc.

United States District Court, S.D. New York

January 16, 2014

APPLE INC., et al., Defendants. THE STATE OF TEXAS, et al., Plaintiffs,

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For the plaintiff the United States: Mark W. Ryan, Lawrence E. Buterman, Daniel McCuaig, United States Department of Justice, Antitrust Division, Washington, DC.

For State of Texas, Liaison Counsel for Plaintiff States: Gabriel Gervey, Eric Lipman, David Ashton, Office of the Attorney General of Texas, Austin, TX.

For State of Connecticut, Liaison Counsel for Plaintiff States: W. Joseph Nielsen, Gary M. Becker, Office of the Attorney General of Connecticut, Hartford, CT.

For the defendant Apple, Inc.: Theodore J. Boutrous, Jr., Daniel G. Swanson, Gibson, Dunn & Crutcher, LLP, Los Angeles, CA; Cynthia Richman, Gibson, Dunn & Crutcher, LLP, Washington, DC.

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DENISE COTE, United States District Judge.

On December 14, 2013, defendant Apple, Inc. (" Apple" ) filed a motion by order to

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show cause for a stay of one aspect of the injunctive relief granted by this Court's Final Judgment of September 5, 2013 (" Judgment" ). The motion is addressed to the External Compliance Monitor (" Monitor" ) position created in the Judgment.

Apple originally premised its motion for a stay of the monitorship on several arguments that it is no longer pursuing. By the time Apple filed its reply brief and presented its oral argument on the motion, Apple's motion for a stay was premised on an application to disqualify the Monitor, along with its contention that it would be irreparably harmed if the Court denied that application. It contends that the millions of dollars in fees that it expects to be paying the Monitor over the course of the next two years, and the Monitor's desire to interview company executives and Board members constitutes irreparable harm. On Monday, January 13, during oral argument on this motion, the Court advised Apple that it would be denying its application and would be filing an Opinion shortly to explain its reasons. This Opinion, together with the Court's observations at the January 13 conference, contains those reasons.

In brief, many of the arguments which Apple once made (and is no longer pursuing) have been waived or are moot. In addition, Apple has access to a dispute resolution mechanism which has and will be in place to ensure that the Monitor does not exceed the bounds of the Injunction. Finally, there has been no showing that the Monitor should be disqualified or that Apple will suffer irreparable harm. For these and all of the other reasons stated herein, Apple's request for a stay is denied.


On July 10, 2013, following a bench trial, this Court found that Apple had violated Section 1 of the Sherman Act by participating fulsomely in a price fixing conspiracy with various book publishers, in which Apple facilitated and encouraged the publishers to collectively raise e-book prices in an illegal restraint of trade. United States v. Apple Inc., 12 Civ. 2826 (DLC), 952 F.Supp.2d 638, 2013 WL 3454986 (S.D.N.Y. July 10, 2013) (" Trial Opinion" ). The Court issued a Final Judgment and Order Entering Permanent Injunction (" Injunction" ) on September 5. Among other things, the Injunction created the position of Monitor. See Injunction § VI.

To put Apple's stay motion in context, it is helpful to lay out the factual circumstances surrounding the adoption of the Monitor provision in the Injunction, the terms of Injunction that concern the Monitor, the process by which a Monitor was chosen, the interactions between the Monitor and Apple in the months following the Monitor's appointment, and the procedural history associated with the filing of this motion for a stay.

I. The Adoption of the External Monitor Provision in the Injunction and Apple's Involvement in the Injunction Drafting Process

On the day the Trial Opinion was filed, the Court issued a scheduling Order requiring the plaintiffs to submit a proposed injunction (" Proposed Injunction" ) by July 19, and for Apple to submit any submissions related to the Proposed Injunction by August 2. Pursuant to that Order, the plaintiffs submitted on July 19 their Proposed Injunction, which provided inter alia, for the creation of an " External Monitor" position. As described in the Proposed Injunction, the External Monitor would for a period of ten years " have the power and authority to monitor Apple's compliance with the terms of this Final Judgment, to review and evaluate Apple's existing internal antitrust compliance policies and procedures, and to recommend to

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Apple changes to address any deficiencies in those policies and procedures."

Apple submitted its memorandum of law setting forth its objections to the Proposed Injunction on August 2. In that filing, Apple did not object to the Court's authority -- constitutional or otherwise -- to appoint an External Monitor according to the terms set forth in the Proposed Injunction. Instead, Apple objected, in sum, that the Court should not impose an External Monitor because " [e]xternal monitorships can be extremely costly and burdensome, and in a case like this would have few benefits." Apple acknowledged that the Government could properly obtain injunctive relief in an antitrust case not only to cure the ill effects of past illegal conduct, but also to " 'assure the public freedom from its continuance.'" (quoting United States v. Glaxo Grp., 410 U.S. 52, 64, 93 S.Ct. 861, 35 L.Ed.2d 104 (1973) (citation omitted)). It emphasized, however, its view that several provisions in the Proposed Injunction were punitive, vague or unnecessary.

A conference was held on August 9 to discuss, among other things, Apple's motion to stay all further proceedings against it as well as the terms of any injunction. After the request for a stay was denied, the Court addressed the schedule for remaining proceedings, the terms of the Proposed Injunction, and Apple's objections to it. Before addressing the particular terms of the Proposed Injunction, the Court described in detail the legal standard it would apply.

As of the date of the conference, Apple had been on notice of the plaintiffs' proposal for an External Monitor for two weeks. The Court had hoped that Apple would submit evidence of antitrust compliance reform which would render the appointment of an External Monitor unnecessary. As the Court said at the conference:

My preference would be to appoint no external compliance monitor. I would prefer that Apple adopt a vigorous in-house antitrust enforcement program and convince the plaintiffs, and this Court, that there is no need for a monitor.

The Court emphasized the narrow scope of its aim, explaining that

I don't want to do more than necessary here. I want to protect the market, protect the consumer, encourage price competition, and . . . allow this market to develop and change and prosper in ways we all can't imagine today. And that goes for Apple as well.

Disappointingly, Apple made little showing at or before the August 9 conference that it had taken to heart the seriousness of the price fixing conspiracy it orchestrated. Nor did Apple provide the Court with any evidence that it was seriously reforming its internal antitrust compliance policies to prevent a repeat of its violation. Apple's submissions failed to demonstrate that it took seriously the burden that its participation in the price fixing conspiracy imposed on consumers and on the resources of the federal and state governments that were compelled to bring Apple and the publishers into federal court to put an end to that harm. Instead, as the Court noted at the August 9 conference, " [a]ll I have [from] Apple's submission is a very cryptic reference to the fact that it enhanced some compliance program it adopted at some point during this litigation." [1] The Court explained that it

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would have appreciated a presentation by Apple that a monitor is unnecessary. At this point, it has made no such showing. There is no admission of wrongdoing. There is no contrition. There is no showing of any awareness of illegality or the danger of collusion by publisher defendants to raise eBook prices. There is no showing of institutional reforms to ensure that its executives will never engage again in such willful and blatant violations of the law.

(Emphasis added.)

After hearing the Court's comments on their disputes regarding several provisions in the Proposed Injunction, the parties agreed to confer with each other further regarding its terms. On August 23, Apple and the plaintiffs each filed a revised proposed injunction in anticipation of a conference to be held on August 27. In a supporting submission, Apple acknowledged the Court's expressed preference that Apple itself adopt a " vigorous in-house antitrust enforcement program." In its letter to the Court, it explained that it had hired, since the underlying activities which formed the basis of the litigation, two seasoned antitrust lawyers with extensive experience at both the Department of Justice (" DOJ" ) and the Federal Trade Commission (" FTC" ), that it had improved its compliance programs, and that the lessons it had learned from this lawsuit would be incorporated into advising its employees. An attachment to the letter added, inter alia, that Apple intended to establish an annual formal antitrust compliance training program, publish a revised compliance guide, and institute regular auditing by an " Antitrust Compliance Director." In light of these steps, Apple argued that the appointment of an External Monitor was " unreasonable and unjustified" and would be punitive. Apple made no argument that the appointment of an External Monitor would be beyond the Court's power.

On August 27, the Court held another conference to finalize the terms of an injunction. The Court made a set of proposals regarding several sections of the parties' most recent drafts of an injunction. When it came to a discussion of the appointment of an External Monitor, the Court cited legal authority for the appointment of an External Monitor, and described the legal standards that governed such an appointment as well as the limitations on the role of an External Monitor. The Court also observed that the trial had demonstrated a " blatant and aggressive disregard at Apple for the requirements of the law." The Court noted that " Apple executives used their considerable skills to orchestrate a price-fixing scheme that significantly raised the prices of E-Books" and that " [t]his conduct included Apple lawyers and its highest-level executives." It then noted that, even after the Court's August 9 admonition that Apple should provide evidence of a robust internal antitrust compliance program so that the Court would not be forced to impose an External Monitor, Apple had failed to make such a showing. The Court explained that:

Apple has been given several opportunities to demonstrate to the Court that it has taken the lessons of this litigation seriously. I am disappointed to say that it had not taken advantage of those opportunities.

The Court also described how it had invited a presentation by Apple that a monitor was unnecessary at the August 2 conference, but that Apple still had made no such presentation:

I invited and expected a detailed and persuasive presentation of the steps Apple was committed to take to ensure that the government need never again expend its resources to bring Apple into

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court for violations of the Country's antitrust laws. Apple's August 19 letter to the government is its most detailed response in this regard and it is inadequate.

Consequently, the Court explained that:

[A]lthough I have been reluctant to appoint a monitor for several reasons . . . I believe based on the record before me now that I should. I believe that a monitor with a carefully defined role can help ensure that competition is restored and preserved.

In deciding to make the creation of an Monitor position a part of the Injunction, the Court tailored the Monitor's role narrowly -- departing from the more expansive monitorship the Department of Justice had proposed -- and reduced the presumptive term from five years to two.[2] As the Court explained at the August 27 conference:

I am giving the monitor a somewhat different function than that proposed by the plaintiffs. The monitor will not be charged with assessing Apple's compliance generally with the terms of the final judgment. This could be a very expensive and intrusive undertaking. The monitor, however will have two other important tasks . . . . The monitor will evaluate Apple's internal antitrust compliance policies . . . [and] will evaluate Apple's antitrust training program.

The Court finally noted its hope that Apple's professed commitment to reforming its antitrust compliance policies and maintaining a culture of respect for the antitrust laws of this country was genuine:

I am hopeful that Apple will bring its culture of excellence and exceptionalism to this task . . . . But, even if it chooses not to create a model program, it must create a meaningful training program, one that is comprehensive and effective. To ensure that it does so, I will use a monitor. . . . Apple could, of course, think of this training and any improvements to its policies and procedures as mere window dressing, the price it must pay to appear to comply with the injunction. I trust, however, that it will make a sincere commitment to reform its culture.

After the Court described each of its proposed revisions to the parties' drafts, there was a break in the conference so that the parties could reflect on the proposals and address the Court again. The Court noted that all of the parties' previously expressed objections were preserved. After that break, Apple made a number of requests regarding other provisions in the proposed injunction, but it did not take issue with any of the Court's remarks concerning the rationale for the appointment of a Monitor or with the Court's proposals for the tasks to be undertaken by such a person.

On September 5, DOJ provided the Court with a revised proposed injunction, " the form of which has been agreed to by the parties." While the letter noted that Apple was reserving all of its appellate rights, Apple did not separately raise with the Court any additional objection about the substance or wording of the revised proposed injunction. Among other things, it made no objection to the description of the tasks assigned to the Monitor or to the description of his compensation.

II. The Terms of the External Monitor Component of the Injunction

On September 5, the Court entered the Injunction which included the Monitor

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component. The appointment of the Monitor was for a period of two years, subject to one year extensions by the Court if the Court deemed such extensions necessary. Injunction § VI.A.

Under the terms of the Injunction, the Monitor has two main tasks. Reviewing and producing recommendations and reports about: 1) Apple's antitrust compliance policies and procedures; and 2) Apple's antitrust training program. The Injunction provided that the Monitor would submit a written report to Apple, the plaintiffs, and the Court 180 days after the Monitor's appointment assessing Apple's antitrust compliance policies, procedures and training. Id. § VI.C. The Monitor was directed to provide additional reports at six month intervals thereafter, and Apple was provided with a mechanism to object to any report.

The Injunction provided for the setting of the Monitor's compensation, as approved by DOJ. Section VI.I provided that

The compensation of the [Monitor] and any persons hired to assist the [Monitor] shall be on reasonable and customary terms commensurate with the individuals' experience and responsibilities and consistent with reasonable expense guidelines.

The Injunction also required Apple to assist the Monitor in the discharge of his or her responsibilities. Section VI.G provided that " Apple shall assist the External Compliance Monitor in performance of the responsibilities set forth in [the Injunction]," and that " Apple shall take no action to interfere with or to impede the [Monitor's] accomplishment of its responsibilities." Id. § VI.G. It allowed the Monitor " on reasonable notice to Apple" to interview " any" Apple personnel, and permitted Apple personnel to have counsel present. It also gave the Monitor the right to inspect and copy " any" documents. Id.

Finally, the Injunction set forth a process to govern the resolution of any of Apple's objections to the Monitor's conduct. Section IV.H of the Injunction provided that prior to bringing any objection to the Court:

Any objections by Apple to actions by the External Compliance Monitor in fulfillment of the External Compliance Monitor's responsibilities must be conveyed in writing to the United States and the Representative Plaintiff States within ten calendar days after the action giving rise to the objection.

Id. at VI.H.

III. The Selection of a Monitor

On September 27, the Court issued an Order providing a process for the plaintiffs to propose candidates for the position of External Monitor, requiring prompt service of notice of the proposed candidates on Apple, and allowing for Apple to have the opportunity to object to the candidates proposed. On September 30, the plaintiffs submitted the names of two candidates to the Court to serve as the Monitor.[3] In that letter, the plaintiffs suggested that the Court conduct in person interviews with the candidates. One of the proposed candidates was Michael Bromwich (" Bromwich" ). The plaintiffs suggested that Bromwich be assisted by antitrust specialist Bernard Nigro (" Nigro" ).

On October 7, Apple submitted a letter objecting to both of the candidates. Its objection to Bromwich was brief, and essentially confined to the argument that Nigro was an antitrust specialist and that a dual-monitor structure was unnecessary.

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Apple, however, made a lengthy objection to the other candidate.[4] Apple did not object to the Court conducting in-person interviews in aid of selection of a Monitor. Indeed, the Injunction made Apple responsible for reasonable expenses incurred by the candidates for any interview by the Court. Id. at § VI.A. Following interviews with both of the Monitor candidates by the Court, the Court appointed Michael Bromwich as Monitor on October 16.

IV. The Monitor's Interactions with Apple

The record shows that Apple's relationship with the Monitor began on a hopeful and collaborative note, but promptly deteriorated on the basis of a number of disagreements. Two of these disagreements concerned the Monitor's requests to interview members of Apple's Board and certain Apple executives, and the Monitor's fee schedule. To put Apple's objections to the Monitor's conduct into context, it will be helpful to lay out in some detail the Monitor's interactions with Apple as set out in the record the parties have submitted to the Court in connection with Apple's application for a stay.

1. The Monitor's Initial Efforts to Schedule Preliminary Interviews with Apple Executives and Board Members

On October 17, the day after the Monitor was appointed, Apple's Kyle Andeer, a Senior Director for Competition Law & Policy and for Commercial & Retail Law (" Andeer" ), seized the initiative and wrote to the Monitor to suggest an early call or visit. He explained that he was committed to working with the Monitor to develop a " best of class" antitrust compliance program for iTunes, and that Apple was already hard at work developing that program in consultation with Keven Arquit (" Arquit" ) and Matt Reilly (" Reilly" ), two Simpson Thacher partners.

The Monitor had his first meeting with Apple in New York on October 22. Present at the meeting were Andeer, Gibson Dunn's Theodore J. Boutrous, Jr. (" Boutrous" ),[5] and Simpson Thacher's Arquit and Reilly. The Monitor addressed his staffing and approach to monitoring. He acknowledged that his authority was limited to the scope of the Judgment and that he wanted to use the initial ninety day period to understand the company's oversight structure for antitrust compliance, its existing policies and procedures, the role of the Board's Audit and Finance Committee's in compliance matters, among other things. The Monitor requested preliminary meetings or interviews with members of the Board of Directors and senior management the week of November 18 -- just shy of a month away -- and described documents that he believed were relevant that he would like to see.

The Monitor received the first push-back from Apple in response to this initial request for interviews. Apple placed the Monitor on notice of its objection to his meeting with members of its Board or company executives. Apple's representative explained, inter alia, that its Board members and senior executives were very busy and that there was " a lot of anger" about the case within Apple. He added that Apple's senior executives did not expect to have to deal with the Monitor. He also informed the Monitor that the Board would be meeting during the week of October 28 and would not be meeting again for another six months. Apple assured the Monitor, however, that the company was

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committed to ensuring that it had an effective and robust ...

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