UNITED STATES OF AMERICA, STATE OF TEXAS, STATE OF CONNECTICUT, STATE OF ALABAMA, STATE OF ALASKA, STATE OF ARIZONA, STATE OF ARKANSAS, STATE OF COLORADO, STATE OF DELAWARE, STATE OF IDAHO, STATE OF ILLINOIS, STATE OF INDIANA, STATE OF IOWA, STATE OF KANSAS, STATE OF LOUISIANA, STATE OF MARYLAND, COMMONWEALTH OF MASSACHUSETTS, STATE OF MICHIGAN, STATE OF MISSOURI, STATE OF NEBRASKA, STATE OF NEW MEXICO, STATE OF NEW YORK, STATE OF NORTH DAKOTA, STATE OF OHIO, COMMONWEALTH OF PENNSYLVANIA, STATE OF SOUTH DAKOTA, STATE OF TENNESSEE, STATE OF UTAH, STATE OF VERMONT, COMMONWEALTH OF VIRGINIA, STATE OF WEST VIRGINIA, STATE OF WISCONSIN, COMMONWEALTH OF PUERTO RICO, AND DISTRICT OF COLUMBIA, Plaintiffs-Appellees,
APPLE, INC., SIMON & SCHUSTER, INC., VERLAGSGRUPPE GEORG VON HOLTZBRINCK GMBH, HOLTZBRINCK PUBLISHERS, LLC, DBA MACMILLAN, SIMON & SCHUSTER DIGITAL SALES, INC., Defendants-Appellants, HACHETTE BOOK GROUP, INC., HARPERCOLLINS PUBLISHERS L.L.C., THE PENGUIN GROUP, A DIVISION OF PEARSON PLC, PENGUIN GROUP (USA), INC., Defendants
Argued, December 15, 2014
As corrected July 2, 2015.
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Defendants Apple, Macmillan, and Simon & Schuster appeal from a judgment of the United States District Court for the Southern District of New York (Cote, J.), entered on September 5, 2013. After a bench trial, the district court concluded that Apple violated § 1 of the Sherman Antitrust Act, 15 U.S.C. § 1 et seq., by orchestrating a conspiracy among five major publishing companies to raise the retail prices of digital books, known as " ebooks." The court then issued an injunctive order, which, inter alia, prevents Apple from signing agreements with those five publishers that restrict its ability to set, alter, or reduce the price of ebooks, and requires Apple to apply the same terms and conditions to ebook applications sold on its devices as it does to other applications. We conclude that the district court correctly decided that Apple orchestrated a conspiracy among the publishers to raise ebook prices, that the conspiracy unreasonably restrained trade in violation of § 1 of the Sherman Act, and that the injunction is properly calibrated to protect the public from future anticompetitive harms. In addition, we reject the argument that the portion of the injunctive order preventing Apple from agreeing to restrict its pricing authority modifies Macmillan and Simon & Schuster's consent decrees or should be judicially estopped. Accordingly, the judgment of the district court is AFFIRMED.
FOR PLAINTIFF-APPELLEE: MALCOLM L. STEWART, Deputy Solicitor General, U.S. Department of Justice, Washington, DC, William J. Baer, Assistant Attorney General, Mark W. Ryan, Daniel McCuaig, Kristen C. Limarzi, Robert B. Nicholson, David Seidman, Finnuala K. Tessier, Lawrence B. Buterman, Attorneys, U.S. Department of Justice Antitrust Division, Washington, DC, for the United States.
FOR PLAINTIFF-APPELLEE: George Jepsen, Attorney General of Connecticut, W. Joseph Nielsen, Assistant Attorney General, Office of Attorney General of Connecticut, Hartford, CT, Greg Abbott, Attorney General of Texas, Daniel T. Hodge, First Assistant Attorney General of Texas, John Scott, Deputy Attorney General of Texas, Jonathan F. Mitchell, Solicitor General of Texas, Andrew Oldham, Deputy Solicitor General of Texas, John T. Prud'homme, Kim van Winkle, Eric Lipman, Assistant Attorneys General, Office of Attorney General of Texas, Austin, TX, for Plaintiff-States.
FOR PLAINTIFF-APPELLEE: Eric T. Schneiderman, Attorney General of the State of New York, Won S. Chin, Assistant Solicitor General, Office of Attorney General of New York, New York, NY, for the State of New York.
FOR DEFENDANT-APPELLANT: THEODORE J. BOUTROS, JR., Daniel G. Swanson, Blaine H. Evanson, Gibson, Dunn & Crutcher LLP, Los Angeles, CA, Cynthia E. Richman, Gibson, Dunn & Crutcher LLP, Washington, DC, Orin S. Snyder, Gibson, Dunn & Crutcher LLP, New York, NY, for Apple, Inc.
FOR DEFENDANT-APPELLANT: EAMON P. JOYCE, Joel M. Mitnick, Mark D. Taticchi, Sidley Austin LLP, New York, NY, for Verlagsgruppe Georg von Holtzbrinck GmbH, Holtzbrinck Publishers, LLC, d/b/a Macmillan.
FOR DEFENDANT-APPELLANT: GREGORY SILBERT, Yehuda L. Buchweitz, James W. Quinn, Weil, Gotshal & Manges LLP, New York, NY, for Simon & Schuster, Inc. and Simon & Schuster Digital Sales, Inc.
Before: JACOBS, LIVINGSTON, and LOHIER, Circuit Judges. Raymond J. Lohier (Circuit Judge) files a separate concurring opinion, joining in the judgment and in the majority opinion except for Part II.B.2. Dennis Jacobs (Circuit Judge) files a separate dissenting opinion.
Debra Ann Livingston, Circuit Judge
Since the invention of the printing press, the distribution of books has involved a fundamentally consistent process: compose a manuscript, print and bind it into physical volumes, and then ship and sell the volumes to the public. In late 2007, Amazon.com, Inc. (" Amazon" ) introduced the Kindle, a portable device that carries digital copies of books, known as " ebooks." This innovation had the potential to change the centuries-old process for producing books by eliminating the need to print, bind, ship, and store them. Amazon began to popularize the new way to read, and encouraged consumers to buy the Kindle by offering desirable books -- new releases and New York Times bestsellers -- for $9.99. Publishing companies, which have traditionally stood at the center of the multi-billion dollar book-producing industry, saw Amazon's ebooks, and particularly its $9.99 pricing, as a threat to their way of doing business.
By November 2009, Apple, Inc. (" Apple" ) had plans to release a new tablet computer, the iPad. Executives at the company saw an opportunity to sell ebooks on the iPad by creating a virtual marketplace on the device, which came to be known as the " iBookstore." Working within a tight timeframe, Apple went directly into negotiations with six of the major publishing companies in the United States. In two months, it announced that five of those companies -- Hachette, Harpercollins, Macmillan, Penguin, and Simon & Schuster (collectively, the " Publisher Defendants" ) -- had agreed to sell ebooks on the iPad under arrangements whereby the publishers had the authority to set prices, and could set the prices of new releases and New York Times bestsellers as high as $19.99 and $14.99, respectively. Each of these agreements, by virtue of its terms, resulted in each Publisher Defendant receiving less per ebook sold via Apple as opposed to Amazon, even given the higher consumer prices. Just a few months after the iBookstore opened, however, every one of the Publisher Defendants had taken control over pricing from Amazon and had raised the prices on many of their ebooks, most notably new releases and bestsellers.
The United States Department of Justice (" DOJ" or " Justice Department" ) and 33 states and territories (collectively, " Plaintiffs" ) filed suit in the United States District Court for the Southern District of New York, alleging that Apple, in launching the iBookstore, had conspired with the Publisher Defendants to raise prices across the nascent ebook market. This agreement, they argued, violated § 1 of the Sherman Antitrust Act, 15 U.S.C. § 1 et seq. (" Sherman Act" ), and state antitrust laws. All five Publisher Defendants
settled and signed consent decrees, which prohibited them, for a period, from restricting ebook retailers' ability to set prices. Then, after a three-week bench trial, the district court (Cote, J. ) concluded that, in order to induce the Publisher Defendants to participate in the iBookstore and to avoid the necessity of itself competing with Amazon over the retail price of ebooks, Apple orchestrated a conspiracy among the Publisher Defendants to raise the price of ebooks -- particularly new releases and New York Times bestsellers. United States v. Apple Inc., 952 F.Supp.2d 638, 647 (S.D.N.Y. 2013). The district court found that the agreement constituted a per se violation of the Sherman Act and, in the alternative, unreasonably restrained trade under the rule of reason. See id. at 694. On September 5, 2013, the district court entered final judgment on the liability finding and issued an injunctive order that, inter alia, prevents Apple from entering into agreements with the Publisher Defendants that restrict its ability to set, alter, or reduce the price of ebooks, and requires Apple to apply the same terms and conditions to ebook applications sold on its devices as it does to other applications.
On appeal, Apple contends that the district court's liability finding was erroneous and that the provisions of the injunction related to its pricing authority and ebook applications are not necessary to protect the public. Two of the Publisher Defendants -- Macmillan and Simon & Schuster -- join the appeal, arguing that the portion of the injunction related to Apple's pricing authority either unlawfully modifies their consent decrees or should be judicially estopped. We conclude that the district court's decision that Apple orchestrated a horizontal conspiracy among the Publisher Defendants to raise ebook prices is amply supported and well-reasoned, and that the agreement unreasonably restrained trade in violation of § 1 of the Sherman Act. We also conclude that the district court's injunction is lawful and consistent with preventing future anticompetitive harms.
Significantly, the dissent agrees that Apple intentionally organized a conspiracy among the Publisher Defendants to raise ebook prices. Nonetheless, it contends that Apple was entitled to do so because the conspiracy helped it become an ebook retailer. In arriving at this startling conclusion -- based in large measure on an argument that Apple itself did not assert -- the dissent makes two fundamental errors. The first is to insist that the vertical organizer of a horizontal price-fixing conspiracy may escape application of the per se rule. This conclusion is based on a misreading of Supreme Court precedent, which establishes precisely the opposite. The dissent fails to apprehend that the Sherman Act outlaws agreements that unreasonably restrain trade and therefore requires evaluating the nature of the restraint, rather than the identity of each party who joins in to impose it, in determining whether the per se rule is properly invoked. Finally (and most fundamentally) the dissent's conclusion rests on an erroneous premise: that one who organizes a horizontal price-fixing conspiracy -- the " supreme evil of antitrust," Verizon Commc'ns Inc. v. Law Offices of Curtis
v. Trinko, LLP, 540 U.S. 398, 408 (2004), 124 S.Ct. 872, 157 L.Ed.2d 823 -- among those competing at a different level of the market has somehow done less damage to competition than its co-conspirators.
The dissent's second error is to assume, in effect, that Apple was entitled to enter the ebook retail market on its own terms, even if these terms could be achieved only via its orchestration of and entry into a price-fixing agreement with the Publisher Defendants. The dissent tells a story of
Apple organizing this price-fixing conspiracy to rescue ebook retailers from a monopolist with insurmountable retail power. But this tale is not spun from any factual findings of the district court. And the dissent's armchair analysis wrongly treats the number of ebook retailers at any moment in the emergence of a new and transformative technology for book distribution as the sine qua non of competition in the market for trade ebooks.
More fundamentally, the dissent's theory -- that the presence of a strong competitor justifies a horizontal price-fixing conspiracy -- endorses a concept of marketplace vigilantism that is wholly foreign to the antitrust laws. By organizing a price-fixing conspiracy, Apple found an easy path to opening its iBookstore, but it did so by ensuring that market-wide ebook prices would rise to a level that it, and the Publisher Defendants, had jointly agreed upon. Plainly, competition is not served by permitting a market entrant to eliminate price competition as a condition of entry, and it is cold comfort to consumers that they gained a new ebook retailer at the expense of passing control over all ebook prices to a cartel of book publishers -- publishers who, with Apple's help, collectively agreed on a new ...