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High Court asked to consider per se illegality of Apple’s conduct in e-book market

The U.S. Supreme Court has been asked to weigh in on the appropriate standard for analyzing vertical agreements that facilitate horizontal collusion. Apple Inc. is questioning the application of per se scrutiny to its agreements with publishers in the e-book market after the company launched its iPad and iBookstore in 2010. Apple filed a petition for certiorari with the Court on October 28, seeking review of a decision of the U.S. Court of Appeals in New York City, upholding a finding that Apple orchestrated a price fixing conspiracy among major publishing companies to raise the prices e-books. The appellate court rejected Apple’s contentions that its conduct should not be subject to per se condemnation (Apple Inc. v. U.S., Dkt. 15-565).

The Department of Justice Antitrust Division and 33 state attorneys general brought an action in 2012 against Apple and five publishers for conspiring to fix the sales prices of e-books. The publishers settled the federal and state charges and signed consent decrees. A bench trial against Apple followed, and the company was found liable for violating the antitrust laws.

On appeal, Apple contended that its functionally-identical agreements with the publishers to distribute e-books through its iBookstore were fully consistent with its independent business interests and that those agreements provided only ambiguous evidence of a conspiracy. The divided appellate court rejected Apple’s argument that its conduct had to be subject to a rule of reason analysis because it merely involved multiple independent, vertical agreements with the publishers. The appellate court focused on the horizontal agreement that Apple organized among the publishers to raise e-book prices.

Apple’s contention that, even if it orchestrated a horizontal price fixing conspiracy, its conduct had procompetitive justifications and should not be condemned per se also was rejected. The appellate court noted that there was no productive relationship between any of the participants in the conspiracy that Apple joined and Apple could not claim that the creation of an e-book market was only possible if the publishers coordinated with one another on price.

Apple suggests that rule of reason analysis is appropriate because the vertical agreements with e-book publishers “included commonplace provisions that are often procompetitive and unquestionably served Apple’s legitimate business objectives in offering consumers a new e-books platform.” According to Apple, the panel majority declined to follow the Supreme Court’s 2007 decision in Leegin Creative Leather Prods. Inc. v. PSKS, Inc., which instructed that such vertical conduct must be analyzed under the rule of reason.

Uncertainty over how to assess vertical agreements. “The Second Circuit’s approach creates intolerable uncertainty over how courts will assess vertical conduct accused of having horizontal effects,” Apple argues. The Court was asked to “grant the petition, confirm that vertical activity, undertaken for bona fide, potentially procompetitive purposes, is not transformed into per se illegal conduct merely because it also has been found to facilitate collusion, and overturn the court of appeals’ erroneous application of the per se rule.”

Question presented. Apple asks specifically whether vertical conduct by a disruptive market entrant, aimed at securing suppliers for a new retail platform, should be condemned as per se illegal under Section 1 of the Sherman Act, rather than analyzed under the rule of reason, because such vertical activity also had the alleged effect of facilitating horizontal collusion among the suppliers.

Attorneys: Seth P. Waxman (Wilmer Cutler Pickering Hale and Dorr LLP) for Apple Inc.

Companies: Apple Inc.