High-tech giant Apple, Inc., told the Supreme Court this week that it will ask the Justices to overturn a federal appeals court ruling that it had engaged in illegal “marketplace vigilantism” in mounting a challenge to Amazon’s domination of the e-book trade. Justice Ruth Bader Ginsburg gave Apple until October 28 to file its opening papers.
In a two-to-one ruling on June 30, the U.S. Court of Appeals for the Second Circuit ruled that Apple violated the Sherman Antitrust Act by orchestrating a price-fixing deal with five major book publishers as a way to draw customers to e-books via Apple’s famous iPad tablet technology and to allow the publishers to make more money on e-book sales. Apple’s entry into that market five years ago helped cut Amazon’s share from ninety percent to about sixty percent, but the Second Circuit majority found that did not enhance competition in a legal way. Amazon’s e-books are available through its Kindle electronic reader.
In notifying the Supreme Court on Wednesday that it would contest the appeals court’s ruling, Apple said the appeal will focus on the question of what standard is to be used to judge the legality of a “hubs-and-spokes” economic arrangement — that is, a top-down agreement that results in a pact among suppliers who compete with each other at their level to agree on the prices they will charge for similar products that each produces.
The majority of the Second Circuit ruled that such an arrangement is to be judged by the “per se” standard — that is, once it is shown that there was such a deal factually, it is treated as almost always illegal because it presumably always will harm competition. The alternative to that is “rule of reason” analysis, which takes into account a wider range of economic and legal factors before any violation can be found.
Apple’s lawyers told the Court that the Second Circuit ruling conflicts directly with a rejection of the “per se” approach in a hubs-and-spokes case by the U.S. Court of Appeals for the Third Circuit in 2008. The lawyers also contended that the Second Circuit ruling contradicts the Supreme Court’s 2007 decision in Leegin Creative Leather Products Inc. v. PSKS Inc., which the lawyers interpret as decreeing that top-down economic arrangements to set prices are to be judged by “rule of reason” analysis, not by a “per se” standard.
Apple entered the e-book business with its iPad, the filing said, to become a new player in that trade and to “disrupt a competitor’s monopoly” — the ninety-percent share that Amazon had at the time, in 2010.
“This case,” Apple’s lawyers said, “presents issues of surpassing importance to the United States economy. Dynamic, disruptive entry into new or stagnant markets — the lifeblood of American economic growth — often requires the very type of vertical contracting and conduct that the Second Circuit’s rule would condemn as a per se Sherman Act violation.”
Apple’s petition challenging the Second Circuit’s ruling would have been due late this month, but its principal lawyer handling the forthcoming petition, former U.S. Solicitor General Seth P. Waxman, said he has a number of other legal commitments in the next several weeks. The request for a thirty-day extension to file was granted on Thursday by Justice Ginsburg.
It is possible, if the usual filing schedules are followed in this case, that Apple’s case could be ready for the Justices’ consideration during the current Court term, which begins on October 5 and runs through next June. All of the papers would have to be in by January for that to be likely.
Apple was sued in the antitrust case by the Justice Department, thirty-one states, Puerto Rico, and Washington, D.C., contending that the iPad developer violated antitrust law by enticing publishers with whom it does not compete to join in a conspiracy to restrain the trade in e-books, helping Apple enter the market and allowing the publishers to get a higher price for each e-book via iPad than was available from Amazon on Kindle.
Besides facing that case, Apple also was sued in a class-action lawsuit, which resulted in a settlement agreement last year that potentially could cost Apple as much as $460 million, most of which would be paid to consumers of e-books who bought access to those products through Apple’s iBookstore.
That settlement, however, depends upon Apple ultimately being found to have violated the Sherman Act, in the other lawsuit. Thus, if the Supreme Court agrees to hear Apple’s planned appeal in that case, it could postpone — and maybe undercut — the $450 million settlement.
The antitrust lawsuit was decided against Apple by a federal trial judge in New York City, who issued a broad injunction forbidding future price-fixing agreements between Apple and publishers. That order was upheld by the Second Circuit, in a ruling mostly written by Circuit Judge Debra Ann Livingston, partly joined by Circuit Judge Raymond J. Lohier.
Circuit Judge Dennis Jacobs dissented, arguing that Apple did not violate the antitrust law when judged by either a “per se” standard or a “rule of reason” analysis.
Judge Livingston focused mainly on a “per se” analysis, but also concluded briefly that Apple acted illegally under a “rule of reason” analysis. Judge Lohier joined only in the “per se” part of the ruling.
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