Apple Antitrust Settlement Payment Upheld on Appeal

July 6, 2015

ebookOn a 2-1 vote, the U.S. Court of Appeals for the Second Circuit upheld the antitrust ruling against Apple, Inc.  In that case, the trial court determined that Apple’s electronic book pricing system violated antitrust laws.  The trial court approved a negotiated settlement of $450 million to be paid by Apple.  In the current case, the Second Circuit upheld the trial court’s actions.

Attorneys general from 33 states and the U.S. Department of Justice initiated the case against Apple based on its e-book pricing strategy.  In order to combat Amazon’s dominant position in the e-book market, Apple negotiated an alternative pricing structure with five book publishing companies.

The e-book distribution framework developed by Apple resulted in higher prices to consumers for e-books.  At the time of Apple’s initiative, Amazon was generally charging $9.99 per e-book.  The Apple pricing structure resulted in e-book prices generally in the $12.99 to $14.99 range.

Government authorities alleged that Apple had improperly colluded with book publishers to raise e-book prices and to sustain the higher prices.  The trial court concluded that improper collusion had occurred.  The parties negotiated a settlement in which Apple would pay approximately $450 million to resolve the dispute.  The trial court approved the settlement, and Apple appealed the trial court’s finding of antitrust violations.

In a split ruling, the majority of the Second Circuit panel agreed with the trial court’s finding that collusion in violation of antitrust laws had occurred.  The majority determined that Apple had improperly entered into agreements with the publishers to raise the e-book prices and to keep those prices at the higher level.

The dissent in the Second Circuit ruling took the position that the actions by Apple enhanced competition in the e-book market.  The dissent noted that at the time of Apple’s entry into the e-book market, Amazon controlled 90 percent of that market, operating a virtual monopoly in that market.  According to the Second Circuit dissent, Apple’s actions were necessary in order to establish competition in the e-book marketplace.

This case has important implications for markets associated with digital content in addition to e-books.  The ability of Apple and other online distributors to collaborate with content providers to set prices and develop sales strategies and systems may be affected by the determinations involving unlawful collusion made by the courts in this case.

This ruling may well bring to a close an important chapter in the history of electronic publishing.  The marketplace for e-books and other forms of electronic publishing is extremely dynamic, and shows no sign of becoming more static.  This case illustrates how quickly market strategies in electronic publishing are evolving.

The case also highlights the challenges of enforcing antitrust rules in the digital environment.  Pricing models and commercial collaborations with regard to creation, distribution, and use of digital content now frequently push the limits of that which is permissible under traditional antitrust and competition law provisions.  This case emphasizes the extent to which those collaborations will be subject to scrutiny by the authorities.