The U.S. District Court for the Southern District of New York recently held that Apple violated Section 1 of the Sherman Act by agreeing with several major publishers to fix retail prices for electronic books. The takeaway for this case is that any potential agreement between competitors (even if non-competitors are involved) must be fully vetted by antitrust counsel before it is executed. The facts giving rise to the case of United States v. Apple Inc., 2013 WL 3454986 (July 10, 2013), were much ballyhooed in the news at the end of 2009 and beginning of 2010. At that time, Amazon was the primary seller of e-books, controlling roughly 90 percent of the retail e-book market for trade books (generally, non-textbooks).
Amazon maintained its stranglehold on the e-book market by pricing new releases at $9.99, taking a loss on some titles in order to sell more Kindle e-readers. Amazon's strategy was designed to increase the overall size of the nascent market, and its continued viability was predicated on the wholesale distribution of e-books from the publishers. As one of Amazon's main competitors, Apple sought entry into the e-book market with the launch of the iPad. Part of Apple's strategy to gain entry in the e-book market was the potential announcement of a new iBookstore. Apple, however, would only announce the iBookstore if it could release new book titles at the same time the hardcovers became available, and only if it would not have to take a loss on every title it sold.
To ensure the viability of the iBookstore, Apple decided to pursue agreements with the big six book publishers which would protect it from price competition with Amazon. The big six publishers are Hachette Book Group Inc., HarperCollins Publishers LLC, Holtzbrinck Publishers LLC dba Macmillan, Penguin Group (USA) Inc., Simon & Schuster Inc. and Random House Inc. Thinking that it had devised a clever strategy, Apple enticed all of the big six publishers, with the exception of Random House, to sign agreements which would limit price competition between Amazon and Apple.
First, Apple and the defendant publishers agreed to an agency contract whereby the publishers would retain authority to set prices. Second, under the agency agreement, each publisher would set prices for new releases and NYT Bestsellers according to an established formula. These much sought titles would be priced at either $12.99 or $14.99, above Amazon's pricing strategy of selling these books for $9.99. The coup de grace was that each publisher agreed not to release their best books to Amazon unless Amazon signed an agency agreement granting the publishers authority to set prices.
With the help of Apple, the publishers made a horizontal agreement to fix the prices of NYT Bestsellers at a maximum of $14.99. Without Apple, it is clear that Amazon would not have agreed to an agency model, and the retail prices for consumer e-books would probably still be at or around $9.99.
Executives from Apple and the defendant publishers exchanged hundreds of phone calls and dozens of emails. In their communications, they frequently discussed the strategies to be employed against Amazon and the ways in which they could agree to raise, fix and stabilize e-book prices. Apple could not escape the proverbial smoking gun in this case, for such agreements are per se violations of Section 1 of the Sherman Act. Despite the importance of this decision as a signal that the antitrust laws are alive and well in the United States, it confirms — rather than changes — existing standards.