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ANTITRUST ENFORCEMENT IN THE DEVELOPING

E-BOOK MARKET: APPLE, AMAZON, AND THE

FUTURE OF THE PUBLISHING INDUSTRY

Zachary C. Flood

†

In United States v. Apple, Inc., a panel of the United States Court of

Appeals for the Second Circuit considered whether Apple orchestrated a

conspiracy with major book publishing firms to raise the price of e-books in

violation of Section One of the Sherman Act.

Apple negotiated with book

publishers to secure content deals for its planned e-book application and

platform in the lead up to its introduction of the iPad in 2010. The

publishers, eager to break up Amazon’s dominance over the e-book market

and to raise retail e-book prices, welcomed the negotiations with Apple as

a means to achieve both. Reviewing the collusive nature of the negotiations,

the Second Circuit held that Apple violated the Sherman Act by using its

talks and resulting contracts with each of the publishing firms to effectuate

a horizontal price-fixing agreement.

Critically, the court also found that

Apple’s conduct was per se illegal under the Sherman Act, and thus did not

require proof that the agreement actually harmed competition.

The Apple decision is the latest chapter in an ongoing saga over the

proper application of the per se rule in antitrust law. Over the past half-

century—inspired by influential shifts in economic thinking—courts have

reigned in their application of the per se rule to vertical restraints.

Courts

increasingly review these restraints under what is known as the rule of

reason, a probing analysis of a given agreement’s procompetitive and

DOI: http://dx.doi.org/10.15779/Z38V865

† J.D. Candidate, 2016, University of California, Berkeley, School of Law.

1. United States v. Apple, Inc. (Apple II), 791 F.3d 290, 340 (2d Cir. 2015). Section

One of the Sherman Act, 15 U.S.C. § 1, serves as one of the primary antitrust enforcement

statutes.

2. Id. at 339.

3. Id. at 321.

4. See P

HILLIP AREEDA, LOUIS KAPLOW & AARON S. EDLIN, ANTITRUST

ANALYSIS ¶ 407 (7th ed. 2013). A vertical restraint is a limitation on competition between

firms at different levels within a given market, such as a limit on maximum retail price

imposed by a manufacturer on a local seller. By contrast, a horizontal restraint is a

limitation on competition between firms at the same level within a given market—

horizontal competitors—such as an agreement establishing a maximum retail price

between two local sellers.

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anticompetitive potential. At the heart of this shift in approach is the

increasingly popular view that certain vertical agreements may lead to

procompetitive effects, and thus should not be condemned without a more

nuanced exploration of their effects on consumer welfare. The Apple court

considered whether Apple’s conduct qualified for this more lenient form of

analysis, ultimately concluding that it did not.

The conduct at issue in Apple also represents a fascinating opportunity

to explore the use of the per se rule in the context of a rapidly changing and

ever-more important digital content market. The facts of this case illustrate

the challenges that established firms—like the publishers here—can face

during times of disruptive change. The court’s decision makes clear that

conduct in these changing markets is not exempt from the normal

application of the antitrust laws.

This Note considers the Second Circuit’s decision to apply the per se

rule to Apple’s conduct and explores how antitrust law has impacted the

publishing industry. Part I explains the history of the per se rule and the

reasons why courts have abandoned it for certain types of restraints. Part II

provides background to the case, detailing the agreements between Apple

and the publishers. Part III summarizes the Second Circuit’s decision. In

Part IV, the Note discusses three discrete ideas in separate Sections. The

first Section discusses the Second Circuit’s decision to apply the per se rule

despite the presence of vertical restraints. This Section concludes that this

was the proper decision given the nature of the agreement between Apple

and the publishers, and the economic and administrative rationales

associated with the per se rule. The next Section discusses—and rejects—

Apple’s proposed “Facilitating Market Entry” Exception to the per se rule.

Finally, the last Section considers how antitrust law and the Apple decision

could affect the future of the rapidly changing publishing industry.

I. THE HISTORY OF THE PER SE RULE AND THE RULE

OF REASON

Section One of the Sherman Act (“the Act”) bans every “contract,

combination . . . or conspiracy, in restraint of trade or commerce.”

Early

on, the Supreme Court struggled with Section One’s expansive language.

The Court initially held that the Act banned literally all restraints on trade,

rejecting a more limited reading that would condemn only unreasonable

restraints because it believed that judges lacked the expertise and reliable

5. Sherman Act § 1, 15 U.S.C. § 1 (2004).

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standards necessary for evaluating reasonableness.

Eventually, however, the

Court adopted the view that the Act banned only unreasonable restraints,

as measured under a rule of reason.

The Court later elaborated that the

application of the rule of reason required a searching analysis of the given

restraint and its context to determine whether, on balance, it “merely

regulates and perhaps thereby promotes competition or whether it is such

as may suppress or even destroy competition.”

Despite the adoption of the rule of reason as the baseline mode of

Section One analysis, courts began applying a rule of per se illegality to

certain types of restraints with clear anticompetitive potential throughout

the early part of the twentieth century.

Among the categories of restraints

held to be illegal per se during this period were horizontal price-fixing;

vertical agreements to set minimum prices,

maximum prices,

and non-

price restraints;

division of markets;

group boycotts;

and tying

arrangements.

The underlying judicial perception was that, on balance,

these types of restraints were so overwhelmingly likely to yield

anticompetitive versus procompetitive results that individual cases did not

merit an in-depth rule of reason analysis. Instead, courts deemed these

restraints to be per se anticompetitive.

Beginning in the 1970s, however, the immensely influential brand of

conservative economic theory known as the Chicago School called into

question the widespread use of the per se rule.

This new economic

6. See United States v. Trans-Missouri Freight Ass’n, 166 U.S. 290, 331–32 (1897)

(“[I]t is exceedingly difficult to formulate even the terms of the rule itself which should

govern in the matter . . . .”).

7. Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 60 (1911).

8. Bd. of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918) (“To

determine that question the court must ordinarily consider the facts peculiar to the business

to which the restraint is applied; its condition before and after the restraint was imposed;

the nature of the restraint and its effect, actual or probable.”)

9. See, e.g., United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223–24 (1940)

(establishing the per se illegality of price-fixing).

10. Id. at 210.

11. See generally Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373

(1911), overruled by Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

12. Albrecht v. Herald Co., 390 U.S. 145 (1968), overruled by State Oil Co. v. Khan,

522 U.S. 3 (1997).

13. United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967), overruled by Cont’l

T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977).

14. United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th Cir. 1898), aff'd as

modified, 175 U.S. 211 (1899).

15. Fashion Originators’ Guild of Am. v. Fed. Trade Comm’n, 312 U.S. 457, 688 (1941).

16. Int’l Salt Co. v. United States, 332 U.S. 392, 395 (1947).

17. See A

REEDA & KAPLOW, supra note 4, at ¶ 400.

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thinking challenged the assumptions about the economic effects of certain

types of arrangements that courts had previously deemed per se illegal.

These new economic perspectives had a profound impact on the way many

courts and commentators viewed vertical restraints.

During this period, Chicago School antitrust scholars began identifying

a variety of situations in which they believed vertical restraints had the

potential to benefit consumer welfare. Two observations in particular led to

significant changes in the way courts approach vertical agreements. First,

agreements between manufacturers and retailers that reduce price,

territorial, or other forms of competition between retailers could increase

overall output by allowing retailers to invest in promoting the

manufacturer’s product.

For example, a reduction in price competition

between two local retailers as regards a given product might increase both

of their overall sales by allowing each of them to focus on their marketing

and salesmanship of that product, without fear that their competitor would

charge lower prices and free-ride off their promotional investment. Second,

a manufacturer’s efforts to set maximum retail prices may increase sales and

output by limiting dealer markups, constraining the dealer’s ability to

leverage its market power.

The first insight eventually led the Supreme Court to its initial decision

to backpedal on the application of the per se rule. In Continental T.V., Inc.

v. GTE Sylvania Inc., the Court held that the effects of vertical non-price

restraints imposed by a manufacturer on a retail distributor were sufficiently

ambiguous to warrant analysis under the rule of reason, overruling its prior

decision in United States v. Arnold Schwinn & Co.

In an effort to revive its

struggling television sales, Sylvania abandoned its wholesale distribution

model and began selling directly to local retailers on a franchise model.

part of the arrangement, Sylvania imposed geographic restraints on retailers,

limiting where they could sell their products.

In holding that these

restraints should be analyzed under the rule of reason, the Court focused on

the complex potential for vertical restraints to boost interbrand competition

(competition between manufacturers) at the relative expense of intrabrand

18. Id.

19. Id. at ¶ 409.

20. Id. at ¶ 408. Though this second insight is not discussed here, it eventually led

the Supreme Court to reverse course on the application of the per se rule in cases of

vertically imposed restrictions on maximum retail price. See State Oil Co. v. Khan, 522

U.S. 3 (1997).

21. Cont’l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 59 (1977).

22. Id. at 38.

23. Id.

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competition (competition between retailers in the sale of a given product).

The Court determined the “redeeming virtues” of increased interbrand

competition were enough to dispel the notion that such restraints lacked

any redeeming value such that they should be proscribed per se.

Twenty years later, the Supreme Court invoked similar reasoning to

reverse course on the use of the per se rule in the context of vertical restraints

on minimum retail price, or price floors. In Leegin v. PSKS, the Court held

in a 5-4 decision that a manufacturer’s use of retail price maintenance

(RPM) to set minimum prices for its services held enough procompetitive

potential to justify rule of reason, rather than per se, scrutiny.

Once again,

the Court highlighted economic literature suggesting that, absent such price

floors, “the retail services that enhance interbrand competition might be

underprovided.”

Justice Breyer dissented. Enumerating the arguments for

and against the competitive impact of minimum RPM, Breyer sharpened

his inquiry on the per se rule’s costs and benefits—the tradeoff between

foreclosing some potentially beneficial conduct on the one hand, and

promoting efficient enforcement activity and smooth judicial

administration on the other.

Breyer conceded that it was a difficult

decision, but ultimately fell back on stare decisis and Congress’s lack of

intervention in the longstanding application of the per se rule, breaking

from the majority’s decision to apply the rule of reason to vertical

restraints.

While the Supreme Court has marched back the application of the per

se rule in the context of vertical restraints, the rule continues to play an

important role in other areas of antitrust law. Most prominently, the per se

rule is thoroughly entrenched in the realm of horizontal agreements

between competitors to fix prices or to divide markets.

Still, even among

24. Id. at 51–56.

25. Id. at 51–59. The Court further noted the view of some economic theorists,

particularly Robert Bork, that manufacturers have a natural incentive to maintain as much

intrabrand competition as is consistent with the efficient distribution of their product.

However, the Court also highlighted the lack of consensus on this point. Id. at 56.

26. Leegin Creative Leather Prods., Inc. v. PSKS, 551 U.S. 877, 904 (2007).

27. Id. at 890.

28. Id. at 914–17 (Breyer, J., dissenting).

29. Id. at 919–20.

30. See Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643, 647 (1980) (describing a

horizontal agreement to fix prices as the “archetypal” per se violation); Verizon Commc’ns

Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 408 (2004) (referring to

horizontal price-fixing as the “supreme evil” of antitrust law); Palmer v. BRG of Ga., Inc.,

498 U.S. 46, 49–50 (1990) (per curium) (finding scheme to divide national market for bar

review materials per se illegal).

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this category of restraints, the Court has made exceptions where it has found

compelling reasons to presume a given horizontal restraint might yield

procompetitive benefits.

For example, in the definitive case of Broadcast Music Inc. v. Columbia

Broadcast System, Inc. (“BMI”), the Court held that BMI—one of the two

main performing rights organizations in charge of licensing musical

performance rights and collecting royalties under a blanket license fee—

though a literal horizontal combination engaging in price-fixing, was

entitled to escape per se condemnation under Section One.

The Court

concluded that certain market failures within the music licensing market

made BMI’s creation of a blanket license with a set price an innovative and

potentially efficient development.

The Court has characterized this and

other analogous decisions as situations in which “restraints on competition

are essential if the product is to be available at all.”

Notwithstanding these exceptions, the Court has generally drawn a

dividing line between horizontal and vertical restraints, applying per se

treatment to the former, and rule of reason treatment to the latter. But what

if the conspiracy at issue involves agreements between both horizontally and

vertically situated actors? This situation arises in so-called “hub-and-spoke”

conspiracies in which many horizontal actors coordinate their activity

through their interactions with a vertically situated actor.

For example,

where a number of manufacturers decide to fix prices, they can then insist

that a vertically situated retailer adopt a vertical restraint imposing a high

price floor on each of them, thereby granting each manufacturer assurance

that the others will be bound to that price floor. The Apple case grapples

with what standard to apply where vertical restraints are used as part of

horizontal conspiracies.

31. BMI, 441 U.S. 1, 21–24 (1979). For another landmark case in which the Court

rejected application of the per se rule to horizontal price-fixing, see National Collegiate

Athletic Ass’n v. Bd. of Regents of Univ. of Okla., 468 U.S. 85 (1984).

32. Specifically, the Court focused on the transaction costs inherent in requiring

consumers to negotiate individual licenses with each artist, and the difficulties artists in

turn faced in policing unlicensed use of their works. BMI, 441 U.S. at 35 n.30.

33. Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 203 (2010).

34. See, e.g., In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d 1186,

1192 (9th Cir. 2015) (“[T]he line between horizontal and vertical restraints can blur. One

conspiracy can involve both direct competitors and actors up and down the supply chain,

and hence consist of both horizontal and vertical agreements.”).

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II. U.S. V. APPLE: FACTS AND PROCEDURAL HISTORY

On January 27, 2010, Apple, Inc. (“Apple”) unveiled the iPad, a tablet

device that marked a significant advance in consumer electronics. As part of

the iPad’s elaborate launch presentation, Apple showed off the iBookstore,

its new online marketplace for e-books. During his presentation, Apple’s

CEO Steve Jobs used the iBookstore app to make a live purchase of the

New York Times bestselling book True Compass. The list price for Jobs’s

purchase was $14.99, a price 50% greater than that charged by e-book

pioneer and then-dominant retail player Amazon, Inc. Following the

presentation, when a reporter asked Jobs how Apple would be able to

compete with Amazon with prices 50 percent higher, Jobs confidently

responded that they would not have to; that book publishers would force

Amazon to raise its prices, and—infamously—that “the price will be the

same.”

A. APPLE SEES AN OPPORTUNITY WHEN AMAZON AND

PUBLISHERS FIGHT

Amazon, Inc. (“Amazon”) established itself as the dominant force in the

e-book market through the early introduction of its Kindle e-book reader

in November 2007, and its associated online e-book marketplace. Though

Amazon controlled an estimated ninety percent of the e-book market at the

beginning of 2010,

it found itself in a contentious relationship with the

book publishing industry; specifically, the “Big Six” publishing firms.

The

publishers were against Amazon’s practice of pricing its e-books—even new

releases and bestsellers—at what the publishers saw as an unreasonably low

$9.99. They feared that Amazon’s pricing practices were eroding

consumers’ value perception of their offerings and undercutting demand for

their more profitable new release, hardcover, print offerings.

The publishers pursued a variety of strategies to get Amazon to increase

its retail e-book prices. Prior to 2010, the publishers sold e-books to

Amazon wholesale, charging Amazon a fixed fee for every e-book it sold.

When publishers raised the wholesale price they charged Amazon above

$9.99, to nearly $13, Amazon reacted by maintaining its retail pricing and

pursing a loss-leader strategy, incurring a loss on each e-book it sold in order

35. Apple II, 791 F.3d 290, 308 (2015).

36. Id. at 299.

37. The “Big Six” firms at the time consisted of: Hachette, HarperCollins,

Macmillan, Penguin, Random House, and Simon & Schuster. Id. at 298.

38. Id. at 299.

39. Id.

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to incentivize consumers to invest in the Kindle platform.

Various

publishers subsequently experimented with “windowing” their releases in

order to move Amazon on its pricing, refusing to sell e-book versions of

their new releases to Amazon for a set period following the release of initial

hardcover editions.

As the publishers realized, however, windowing was a

desperate and counter-productive strategy because it harmed customers,

promoted piracy, and hurt long-term sales.

Ultimately, while each of the Big Six hoped to move Amazon to increase

the price of its e-books, they suffered from a collective action problem. Each

of the Big Six was hesitant to challenge Amazon individually. As the

dominant retailer of both e-books and—more importantly—physical books,

Amazon possessed enormous power to retaliate against any individual

publisher that took a hard line over e-book pricing by disrupting that

publisher’s physical book sales.

In the lead up to the iPad’s launch, Eddy Cue, Apple’s Senior Vice

President of Internet Software and Services and the director of Apple’s

digital content stores, saw an opportunity to develop a proprietary e-book

marketplace for the iPad. He recognized the publishers’ disdain for

Amazon’s pricing model and their unsuccessful attempts to change it, and

anticipated that the Big Six would eagerly help facilitate Apple’s entry into

the e-book distribution market in order to gain negotiating leverage over

Amazon. In Cue’s own words to Jobs, “[t]he book publishers would do

almost anything for [Apple] to get into the ebook business.”

B. THE AGREEMENT BETWEEN APPLE AND THE PUBLISHERS

Two months before the iPad’s release, Apple reached out to the Big Six

about providing content for its proposed iBookstore. Cue and the publishers

negotiated at break-neck speed in order to come to an agreement in time to

announce the iBookstore at the iPad launch event.

Ultimately, Apple

agreed to a series of terms with five of the Big Six that all but guaranteed an

increase in e-book prices.

First, the parties agreed that Apple would distribute e-books under an

“agency”—as opposed to a wholesale—model.

Under this agreement,

40. Id.

41. Id. at 300–01.

42. Id. at 301.

43. Id. at 300.

44. Id. at 301.

45. Id. at 301–03.

46. Random House was the lone holdout. Id. at 308.

47. Id. at 302–04.

2016] E-BOOK ANTITRUST ENFORCEMENT 887

publishers would set retail prices themselves and Apple would collect thirty

percent of all e-book sales revenue. However, Apple feared that publishers

would set prices too high, infuriating customers and embarrassing the

iBookstore. Consequently, Apple included “price-ceilings” of $9.99,

$12.99, and $14.99 for certain types of releases.

Second, each of the five

publishers agreed to a Most Favored Nation (MFN) clause with Apple that

required publishers to set iBookstore retail prices no higher than those

charged by any other e-book retailer.

C. THE EFFECT OF THE AGREEMENT

Combined, the agency pricing and MFN terms meant that publishers

would be forced to sell e-books at $9.99 on the iBookstore in order to match

Amazon’s retail price, and would make less than $7 on each of those sales,

significantly less than the $13 they earned from each of their wholesale e-

book sales with Amazon. Thus, the only way the deal made economic sense

for each publisher was if they demanded a shift toward higher retail pricing

from Amazon, which they had previously been too afraid to do, for fear of

retribution.

Critically, throughout the negotiations, Apple and the publishers freely

shared information regarding their progress on these terms.

With each of

the five publishers aware that the others were similarly entering into deals

that would force them to confront Amazon, the final deal with Apple solved

the publishers’ collective action problem and forced them all to work

together toward moving Amazon toward an agency model and raising retail

prices for e-books.

In the months that followed, that is exactly what happened. The

publishers, led by Macmillan, each began negotiations with Amazon

designed to force it to switch to an agency model, sharing information with

each other as they did so.

Unable to stand up to five of the Big Six,

Amazon ultimately relented, switching to an agency model with all five by

June 2010. In short time, retail prices of e-books rose to the cap levels

provided for in each of the publishers’ deals with Apple.

Notably, during

the period following the price increase the five publishers saw an estimated

14.5% decline in their sales of e-books.

48. Id. at 304–05.

49. Id.

50. Id. at 305–08.

51. Id. 309–10.

52. Id. at 310.

53. Id.

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D. PROCEDURAL HISTORY

On April 11, 2012, the Department of Justice and various State

Attorneys General filed two civil antitrust cases against Apple and the five

Publisher Defendants.

By August 12, 2013, all of the Publisher

Defendants had settled, entering into materially similar consent decrees

with the Department of Justice curtailing their ability to set, alter, or reduce

a retailer like Amazon’s ability to set or reduce the price of any e-book.

Refusing to settle, Apple instead opted for a bench trial on the issues of

liability and injunctive relief.

After a three week trial, on March 22, 2013

the District Court held that Apple had engaged in a per se violation of

Section One of the Sherman Act and various congruent state laws by

facilitating and engaging in a horizontal conspiracy to fix the retail price of

e-books.

The court also expressed its view that Apple would still be liable

were its behavior subject to a more economics-intensive rule of reason

analysis.

Following the ruling on Apple’s liability, the District Court issued a

final injunctive order forbidding the company from enforcing its MFN

clauses with publishers or otherwise retaliating against them for agreeing to

distribution agreements with other retailers, and modifying the terms of its

agency agreements with the publishers.

Following the issuance of the

order, Apple and two of the Publisher Defendants—Macmillan and Simon

& Schuster—filed an appeal.

III. THE SECOND CIRCUIT’S DECISION

In its appeal before the Second Circuit, Apple contended that its

conduct should not be analyzed under the per se rule. First, Apple argued

that its contracts with publishers were purely vertical and thus outside of the

per se rule’s reach.

Second, Apple argued that its conduct warranted

analysis under the rule of reason because of the procompetitive effects on

54. United States v. Apple Inc. (Apple I), 952 F.Supp.2d 638, 645 (S.D.N.Y. 2013).

55. Apple II, 791 F.3d at 322.

56. Id.

57. Id. (citing Apple I, 952 F.Supp.2d at 694).

58. Id. at 312.

59. Id.

60. Id. at 297.

61. Appellant Apple Inc.’s Opening Brief, Apple v. United States, 731 F.3d 290 (2d

Cir. 2015) (2014 WL 3556301), 48–49 (hereinafter Apple’s Opening Brief).

2016] E-BOOK ANTITRUST ENFORCEMENT 889

“enterprise and productivity” realized by its entry into the e-book retail

market.

A. WHETHER APPLE’S RELEVANT CONDUCT WAS HORIZONTAL

VERTICAL

Apple’s opening argument against the application of the per se rule was

that its relations with the publishers consisted of “vertical agreements that

in no way set prices or otherwise limited competition among the

(horizontal) publishers.”

Judge Jacobs, dissenting from the Second Circuit

panel’s decision, focused on this distinction and on specific language in

Leegin

that he believed mandated rule of reason treatment for such vertical

facilitation.

The majority, however, rejected this distinction in light of

other Supreme Court precedent setting forth per se liability for vertically

situated players who participate in and facilitate horizontal price-fixing

conspiracies—so-called “hub-and-spoke” conspiracies.

In rejecting the

dissent’s focus on the isolated language in Leegin, the majority noted

Leegin’s susceptibility to multiple interpretations and the general rule

against reading decisions to overrule precedent sub silentio.

The majority

concluded that the relevant agreement for the purposes of Section One was

not the contract Apple signed with each publisher, but Apple’s active

agreement to further the horizontal price-fixing conspiracy.

It was Apple’s

willing participation in this horizontal scheme that mattered to the court,

not its vertical market position.

B. WHETHER APPLE’S ENTRY JUSTIFIED RULE OF REASON

TREATMENT

Apple alternatively contended that its conduct deserved rule of reason

treatment because it promoted “enterprise and productivity” by introducing

competition into a monopolistic market and fostering technological

62. Id. at 50–52. Apple borrowed the language “enterprise and productivity” from

Seventh Circuit cases built on the legacy of BMI. See, e.g., In re Sulfuric Acid Antitrust

Litig., 703 F.3d 1004, 1011 (7th Cir. 2012).

63. Apple’s Opening Brief, supra note 61, at 49 (emphasis in original).

64. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 893 (2007)

(“To the extent a vertical agreement setting minimum resale prices is entered upon to

facilitate either type of cartel, it, too, would need to be held unlawful under the rule of

reason.”).

65. Apple II, 791 F.3d at 346.

66. Id. at 322–25.

67. Id. at 324.

68. Id. at 325.

69. Id. at 322.

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innovation. It argued that the theoretical underpinnings of the per se rule

made it appropriate only in cases where conduct “lacked any redeeming

virtue.”

Apple then highlighted how its entry had disrupted Amazon’s

total dominance in the e-book retail market, and how the market had since

experienced robust growth.

Additionally, it touted the technological

advances the iPad brought as an e-book device over Amazon’s Kindle,

including its ability to display color illustrations and photographs on a

backlit screen.

According to Apple, these tangible benefits justified an

exception to the application of the per se rule analogous to the one the

Supreme Court applied in BMI.

The Second Circuit majority thoroughly rejected this perspective.

Quickly dismissing Apple’s “technological innovation” argument, the court

pointed out that the iPad’s technological advances were wholly unrelated to

Apple’s agreements with the publishers and that the device was irreversibly

destined for release regardless of whether Apple secured e-book content

deals.

The Second Circuit then directed its attention to Apple’s novel “market

entry” argument. It noted that this argument, at base, was “that higher

prices enable more competitors to enter a market,” a theory categorically

inconsistent with antitrust precedent.

As regards Apple’s disruption of

Amazon’s e-book monopoly, the court opined that “if Apple could not turn

a profit by selling new releases and bestsellers at $9.99, or if it could not

make the iBookstore and iPad so attractive that consumers would pay more

than $9.99 to buy and read those ebooks on its platform, then there was no

place for its platform in the ebook retail market.”

Furthermore, focusing on the district court record, the court found

insufficient support for Apple’s underlying premise that Amazon’s low

prices acted as a barrier to either its own entry or that of other e-book

retailers.

Significantly, the majority and dissent sparred over the proper

way to frame Amazon’s role in the e-book market. The majority found that

Amazon pursued a legitimate loss-leadership strategy in selling e-books

below wholesale prices, but the dissent argued that characterization was

70. Apple’s Opening Brief, supra note 61, at 51.

71. Id.

72. Id. at 52.

73. Id.

74. Apple II, 791 F.3d at 335.

75. Id. at 330.

76. Id. at 331.

77. Id. at 332–33.

2016] E-BOOK ANTITRUST ENFORCEMENT 891

unsupported by the facts or the record.

While the majority believed

Amazon’s conduct was permissible, they nevertheless concluded that—even

if Amazon had abused its monopoly—“the Sherman Act does not authorize

horizontal price conspiracies as a form of marketplace vigilantism to

eliminate perceived ruinous competition or other competitive evils.”

IV. DISCUSSION

This Part will explore specific legal aspects of the Apple decision as well

as its implications for the publishing industry. The first Section considers

whether the Second Circuit correctly applied the per se rule to Apple’s deals

with the publishers. The second Section explores the merits of Apple’s

proposed “market entry” exception to the rule in this situation and in

general. Finally, the third Section discusses the implications the ruling may

have for the publishing industry, and how that industry may react in the

face of ongoing disruption.

A. THE SECOND CIRCUIT CORRECTLY APPLIED EXISTING

ANTITRUST LAW AND PRINCIPLES IN UPHOLDING APPLE’S PER

SE LIABILITY

The Second Circuit properly interpreted antitrust case law in holding

Apple per se liable for its anticompetitive conduct in the e-books market.

The majority’s decision to apply the per se rule ultimately turned on its view

that Apple’s conduct during its negotiations with the publishers made it a

core participant in the publishers’ horizontal conspiracy and not a complicit

vertical bystander in a hub-and-spoke scheme. In reaching this result, the

Second Circuit drew the critical, yet admittedly subtle, distinction between

a vertically orientated actor’s adoption of restraints to merely facilitate a

horizontal price-fixing conspiracy, and that actor’s direct participation in the

horizontal price-fixing conspiracy.

In Leegin, the Supreme Court acknowledged the potential of vertical

agreements to facilitate horizontal conspiracies among competitors while

overturning the application of the per se rule to vertical minimum price

restraints.

The Court specifically recognized that retailers might collude

to decrease output or reduce competition and then “compel a manufacturer

78. Id. at 344. Properly characterizing Amazon’s role in the contemporary e-book

market is critical to understanding the potential long-term impact of Apple’s entry. This

issue will be discussed further, below.

79. Id. at 332 (internal quotation marks omitted).

80. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 893 (2007).

892 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 31:AR

to aid the unlawful arrangement with resale price maintenance.”

The

Leegin Court then concluded that “[t]o the extent a vertical agreement

setting minimum resale prices is entered upon to facilitate either type of

cartel, it [] would need to be held unlawful under the rule of reason.”

Judge

Jacob’s dissent in Apple seized upon this language as transparent guidance

from the high court that Apple’s conduct deserved rule of reason analysis.

In support of this position, he noted that the Third Circuit had also read

Leegin to demand rule of reason treatment for vertical restraints alleged to

have been adopted in order to facilitate a horizontal price-fixing

agreement.

The Second Circuit majority instead characterized this language in

Leegin as isolated to situations in which horizontal conspirators impose

vertical restraints on non-conspirators.

The critical factor, in the majority’s

view, was whether the vertically situated player was a knowing participant

in the underlying horizontal conspiracy. If not, then a given vertical

facilitating practice was entitled to the benefit of the doubt—in the form of

rule of reason treatment—because “it may be difficult to distinguish such

facilitating practices from procompetitive vertical retail price agreements.”

In contrast, where a vertical player knowingly participates in and organizes

a hub-and-spoke conspiracy, the majority concluded that the adopted

restraint does not deserve the same benefit of the doubt.

The majority’s interpretation of Leegin makes intuitive sense given the

assumptions underlying the differential treatment of horizontal and vertical

restraints. One enduring justification for the per se treatment of horizontal

restraints is that the parties to such agreements, as direct competitors, have

an overwhelming incentive to engage in anticompetitive collusion. Vertical

restraints instead entail agreements between upstream and downstream

players in the same product market where incentives can align to promote

interbrand competition. Had the publishers colluded solely among

themselves, and then demanded the resulting agency agreement and MFN

81. Id.

82. Id.

83. Apple II, 791 F.3d at 346.

84. Id. In Toledo Mack, the Third Circuit read Leegin to mandate that, “rule of reason

analysis applies even when, as in this case, the plaintiff alleges that the purpose of the

vertical agreement between a manufacturer and its dealers is to support illegal horizontal

agreements between multiple dealers.” Toledo Mack Sales & Serv., Inc. v. Mack Trucks,

Inc., 530 F.3d 204, 225 (3d Cir. 2008).

85. Apple II, 791 F.3d at 324–25.

86. Id. at 325.

87. Id.

2016] E-BOOK ANTITRUST ENFORCEMENT 893

clause from Apple, the Second Circuit readily implied that the decision

might have been different.

But the majority believed that Apple had

agreed to participate in, and had in fact organized, the horizontal price-

fixing agreement here in exchange for quick and favorable concessions from

the publishers on other terms in their content deals.

Once the court

concluded that Apple was actively involved in the horizontal conspiracy,

itself subject to per se condemnation, it would make little sense to provide

the company the benefit of the doubt simply because it helped effectuate its

role through vertical contracts.

The Second Circuit’s decision thus suggests that the critical inquiry in

whether to assign per se liability to a vertically situated actor will be whether

the evidence establishes that it played a culpable role in an underlying

horizontal conspiracy by organizing it or knowingly agreeing to further its

ends. Where a group of horizontal actors “compels” the vertical actor to

facilitate its agreement, Leegin directs rule of reason treatment.

Where a

vertical player instead knowingly participates in or organizes such a

horizontal conspiracy, per se treatment attaches—not directly to its

facilitating agreements, but to its underlying agreement to use them to

further the conspiracy. Going forward, this distinction will turn on a

necessarily uncertain line between identifying what facilitation by vertical

actors is “compelled” and what stems from active participation in the

underlying horizontal conspiracy. At base, however, this inquiry simply

entails determining whether the vertical and horizontal actors agreed to

effectuate horizontal price-fixing, which is both a core element in antitrust

cases, and a standard that courts should find workable going forward.

B. ANTITRUST LAW SHOULD NOT RECOGNIZE A “FACILITATING

MARKET ENTRY” EXCEPTION TO THE PER SE RULE AGAINST

HORIZONTAL PRICE FIXING

Apple’s additional argument for why it deserved rule of reason treatment

invoked a well-known line of cases, exemplified by BMI, in which courts

have held that otherwise illegal horizontal restraints possessed enough

88. Id. at 323 (“[T]he relevant ‘agreement in restraint of trade’ in this case is not

Apple’s vertical Contracts with the Publisher Defendants (which might well, if challenged,

have to be evaluated under the rule of reason); it is the horizontal agreement that Apple

organized among the Publisher Defendants to raise ebook prices.”).

89. Id. at 334 (“[T]he district court’s fact-finding illustrates that Apple organized the

Publisher Defendants’ price-fixing conspiracy . . . because it was a convenient bargaining

chip.”).

90. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 893 (2007).

894 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 31:AR

procompetitive potential to justify application of the rule of reason.

Specifically, Apple argued that its agreements with the publishers should

escape per se condemnation because its entry into the retail e-book business

added serious competition to a market overwhelmingly dominated by

Amazon. Given that the per se rule was designed to proscribe conduct that

“lacked any redeeming virtue,” Apple insisted its behavior could not be

squared with the rule.

However, Apple’s argument does not fit into the archetype of cases like

BMI, which the Second Circuit properly noted were marked by joint

ventures that were necessary if a given market was to exist at all. After all,

the e-book market existed before Apple’s entry, even if in a concentrated

form. Thus, in order to accept Apple’s argument, a court would need to find

a novel exception to the application of the per se rule: a tall order given the

important judicial efficiency concerns justifying that rule.

The implications of Apple’s reasoning are breathtaking. The apparent

result would be that the existence of a monopolist in a given market would

suspend the normal application of the antitrust laws as regards potential

entrants and their conduct in other markets. As a preliminary matter, this

raises serious concerns relating to judicial administrability, as a move to the

rule of reason in such situations would mandate that courts grapple with

economic judgments about the relative merit of competition in one market

versus another. It would also raise tensions with existing monopolization

precedent under Sherman Act Section Two, which recognizes the

legitimacy of certain monopolies and condemns only the inappropriate use

of monopoly power.

Finally, even where market entry might counteract

monopolistic abuses, Apple’s argument would essentially require that courts

endorse vigilantism.

91. Apple’s Opening Brief, supra note 61, at 50.

92. Id.

93. For a discussion of this justification, see Leegin, 551 U.S. at 914–17 (Breyer, J.

dissenting).

94. See Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398,

407 (2004). Writing for the majority in Trinko, Justice Scalia noted:

The mere possession of monopoly power, and the concomitant charging

of monopoly prices, is not only not unlawful; it is an important element

of the free-market system. The opportunity to charge monopoly prices—

at least for a short period—is what attracts “business acumen” in the first

place; it induces risk taking that produces innovation and economic

growth. To safeguard the incentive to innovate, the possession of

monopoly power will not be found unlawful unless it is accompanied by

an element of anticompetitive conduct.

Id.

2016] E-BOOK ANTITRUST ENFORCEMENT 895

A market entry exception makes little economic or administrative sense.

Where courts have moved away from applying the per se rule to vertical

restraints, they have generally done so in the belief that some ways of

reducing intrabrand competition can have beneficial effects on interbrand

competition.

By contrast, Apple’s position would have the court sacrifice

interbrand competition between the publishers for more interbrand

competition between e-book retailers. This tradeoff between increasing

interbrand competition in one market and reducing it in another would

seem to apply in any situation in which Apple’s proposed market-entry

exception would apply. Wherever an entrant’s antitrust violations would be

warranted by the presence of a monopolist in a given market, those

violations—in order to actually promote market entry—would occur in

markets upstream or downstream to the monopolized one.

Further, if rule of reason analysis were to apply to these situations, how

would a court evaluate whether a potential procompetitive effect on a

downstream market outweighs the anticompetitive effect on an upstream

one? The Supreme Court, recognizing the difficulty of such balancing and

the important policy judgments it would entail, has previously characterized

such an undertaking as outside the competency of the courts and more

properly assigned to the legislature.

Thus, a divergence from per se

treatment on account of market entry would force courts to engage in a

balancing analysis the Supreme Court has determined courts are

categorically unqualified to handle. This alone is a compelling justification

for maintaining per se treatment in this context.

Additionally, applying a market entry exception to the situation here

would be difficult to reconcile with existing monopolization precedent.

Illegal monopolization under Sherman Act Section Two requires more than

the mere possession of market power; it requires exclusionary acts used to

95. See, e.g., Cont’l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977).

96. See United States v. Topco Assocs., Inc., 405 U.S. 596, 611–12 (1972). The Court

in Topco noted:

If a decision is to be made to sacrifice competition in one portion of the

economy for greater competition in another portion this [] is a decision

that must be made by Congress and not by private forces or by the courts.

Private forces are too keenly aware of their own interests in making such

decisions and courts are ill-equipped and ill-situated for such

decisionmaking. To analyze, interpret, and evaluate the myriad of

competing interests and the endless data that would surely be brought to

bear on such decisions, and to make the delicate judgment on the relative

values to society of competitive areas of the economy, the judgment of

the elected representatives of the people is required.

Id.

896 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 31:AR

achieve or maintain that market power.

Absent conduct that qualifies as

exclusionary, the Supreme Court has repeatedly emphasized that the

Sherman Act, and the competitive principles it was designed to reinforce,

should not condemn monopoly status alone.

Specifically, the Court has

noted that the acquisition of a monopoly through legitimate competition

serves as a valuable reward to those competitors who achieve market

dominance through “growth or development as a consequence of a superior

product, business acumen, or historic accident.”

Allowing an entrant to

avoid the full force of the antitrust laws simply based on the existence of a

monopoly in a given market would seem to undercut the view that obtaining

a monopoly can serve as a due reward for successful competitors.

Accordingly, excluding conduct from per se condemnation based on market

entry seems rational only to the extent that entry targets those illicit

monopolies that run afoul of the Sherman Act.

Even where market entry might disrupt an illicit monopoly, creating an

exception to per se treatment on this basis would essentially endorse

competitive vigilantism. Such an exception is contrary to applicable

precedent. The Supreme Court has rejected arguments that the illegal

conduct of others ever justifies antitrust violations.

100

C. APPLE’S IMPLICATIONS FOR ANTITRUST LAW AS APPLIED TO

THE

PUBLISHING INDUSTRY

The Second Circuit’s decision no doubt came as a great disappointment

to many in the publishing world who view Amazon as a destructive force.

Some commentators were also stunned by the Department of Justice’s initial

decision to pursue charges against Apple and the struggling publishers on

behalf of Amazon.

101

To many, Amazon represents an existential threat to

not just established publishers, but also the very foundations of literary

creativity. They see the major publishing houses as integral to supporting a

vibrant creative infrastructure, and worry that Amazon’s power over the

publishers will erode that infrastructure. This Section examines how the

97. Trinko, 540 U.S. 398 at 407.

98. Id.

99. Id.

100. See, e.g., Fashion Originators’ Guild of Am. v. Fed. Trade Comm’n, 312 U.S. 457,

458 (1941) (noting that illegal conduct by others “would not justify petitioners in

combining together to regulate and restrain interstate commerce in violation of federal

law”).

101. See Keith Gessen, The War of the Words, V

ANITY FAIR (Nov. 30, 2014),

http://www.vanityfair.com/news/business/2014/12/amazon-hachette-ebook-publishing

[https://perma.cc/WED9-SDSG]; see also Charles Schumer, Memo to DOJ: Drop the Apple

E-Books Suit, W

ALL ST. J. (July 17, 2012), http://www.wsj.com/articles/SB1000142405

2702303740704577527211023581798 [https://perma.cc/7FY7-3XHB].

2016] E-BOOK ANTITRUST ENFORCEMENT 897

antitrust laws have influenced the current state of the publishing industry,

limiting the ways in which publishers interact with each other and Amazon,

as well as how antitrust laws might shape the publishing industry’s future.

1. The Publishers’ Lack of Bargaining Power or Legal Remedies

Ultimately, the publishers colluded because they individually lacked the

bargaining power necessary to compel Amazon to raise e-book prices. But

the publishers could have legally achieved the same result, by either

adopting agency pricing deals with Amazon so that they could set retail

prices themselves, or simply raising the wholesale price they charged

Amazon such that Amazon had no choice but to increase its retail prices. If

Amazon had simply been an e-book retailer, individual publishers may have

risked its wrath and held firm on their pricing demands. But Amazon held

tremendous leverage over the publishers because it also served as the

dominant physical bookseller.

The publishers also lacked a clear legal recourse. Amazon’s aggressive

leveraging of its market power in its dealings with the publishers was not a

violation of the antitrust laws. The offense of monopolization under

Sherman Act Section Two, as discussed above, requires that a monopolist

engage in exclusionary acts to obtain, protect, or expand its market power.

For the purposes of this analysis, the focus is generally on the monopolist’s

market power in the relevant horizontal market. This means that Amazon’s

exclusionary acts would have to have been targeted toward existing or

potential horizontal competitors in the retail e-book market, rather than

upstream suppliers like the publishers.

102

Thus, under current law, only

Amazon’s exclusion of a potential entrant, like Apple here, could form the

basis for a Section Two claim.

But a Section Two claim is highly unlikely to succeed. The strongest

grounds for a claim that Amazon violated Section Two would have been

that the company engaged in “predatory pricing,” artificially deflating the

sales price of its e-books in order to squeeze its current competitors and

dissuade new ones from entering the retail e-book business. A firm engages

in predatory pricing when it (1) sets its prices below an appropriate measure

102. Amazon was technically a monopsony—a buyer with market power. Notably, the

Supreme Court has never found an illegal monopsony under Sherman Act Section Two.

The closest any company has come to being labeled an illegal monopsony was in

Weyerhaeuser, where the relevant inquiry was whether defendant had engaged in “predatory

bidding” by artificially driving up the cost of upstream inputs in order to deny them to its

competitors. Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312,

318–319 (2007). The publishers would have little grounds to make such a claim here, as e-

books are nonrivalrous goods and Amazon was actually driving prices down, not up.

898 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 31:AR

of its costs, and (2) possesses a dangerous probability of recouping its short-

term losses by eventually leveraging its resulting market power.

103

In this

case, any claim that Amazon was engaging in predatory pricing to exclude

entrants into the e-book market would run into significant obstacles in the

form of alternative explanations for Amazon’s behavior, and the difficulty

of showing that such a scheme could have ever succeeded.

First, Amazon could argue that its pricing strategy represented a

legitimate investment in its e-book sales platform and the Kindle. This

complicates the determination of what the appropriate measure of cost is,

as Amazon could frame the approximately three dollar per unit loss it took

on sales of bestselling e-books as a way to incentivize consumers to purchase

the Kindle and try out the e-book experience. Amazon had a strong

incentive to price e-books below cost in order to drive sales of the Kindle

and to draw new users to its platform.

More definitively, it would be difficult to demonstrate that Amazon ever

had a reasonable chance of recouping its losses because of e-books’ status as

digital goods. In evaluating whether a company has a dangerous probability

of recoupment for the purposes of Section Two, one important variable is

the ease with which a new competitor could subsequently enter the

market.

104

Courts require a dangerous probability of recoupment so as not

to condemn legitimate competitive discounting or unsuccessful attempts at

predation, which simply benefit consumers who enjoy lower prices.

105

Where entry barriers are insignificant, new competitors will enter the

market and punish the predator’s subsequent monopoly pricing. Here, the

ease with which Apple launched the iBookstore illustrates the relatively

insignificant barriers to entry in the retail e-book market. If Amazon

“succeeded” in establishing a complete monopoly in retail e-book sales and

then raised its prices to recoup its losses, little would stop companies with

existing mobile software platforms from entering the market and

undercutting Amazon’s profits with lower priced e-books. Indeed, the

greatest obstacle to entering the retail e-book market would likely be

negotiating content deals with publishers; a group that one would expect to

103. For the purposes of the Sherman Act Section Two, predatory pricing requires a

“dangerous probability” of recoupment. See Brooke Grp. Ltd. v. Brown & Williamson

Tobacco Corp., 509 U.S. 209, 224 (1993). Under the Robinson-Patman Act, by contrast,

only a “reasonable prospect” of recoupment need be shown. Id.

104. See id. at 226.

105. See, e.g., Brooke Grp., 509 U.S. at 224 (noting that “unsuccessful predation is in

general a boon to consumers”); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

475 U.S. 574, 594 (1986) (“[C]utting prices in order to increase business often is the very

essence of competition.”).

2016] E-BOOK ANTITRUST ENFORCEMENT 899

be ever more willing to ease Apple or another competitor’s entry in order to

thwart Amazon.

106

2. The Effect on Consumers

In the end, the Second Circuit’s Apple decision benefitted a company

with tremendous power—Amazon—and harmed smaller players in a

struggling industry. Apple therefore begs the question of whether the

antitrust laws fostered the right result from a consumer welfare perspective.

In order to properly assess the result the court reached in Apple, it is

important to take into account: the state of the publishing industry prior to

Apple’s entry; the publishers’ underlying motivations in raising e-book

prices; whether those motivations align with consumer interests; and

whether Amazon’s conduct actually represents a threat to consumers.

Any potential alignment between the publishers’ and consumers’

interests is merely speculative. As discussed above, Amazon’s pricing

behavior cannot be condemned as a traditional “predatory pricing” scheme,

and thus could not be pigeonholed into existing monopolization precedent.

This reflects the reality that Amazon’s aggressively low priced e-books were

almost surely a boon to consumers, at least in the short-term. The

underlying concern of many in the publishing industry, however, centers on

how Amazon’s pricing might change the literary landscape in the long-

term.

107

The thrust of this concern is that Amazon’s disruption of the

publishing industry could hurt a precariously balanced creative ecosystem.

The theory here is that what could be labeled “inefficiencies” in the

publishing industry actually support a wide creative class of authors, which

yield long term benefits to readers and to society as a whole.

108

The

traditional publisher model involves providing authors advances against

106. Significantly, here the publishers’ apparent concern was not that Amazon would

eventually raise prices above competitive levels, but that it would keep prices low

indefinitely, forever devaluing the book in the consumer’s mind.

107. In the words of Hachette CEO David Young: “The big concern—and it’s a

massive concern—is the $9.99 pricing point. If it’s allowed to take hold in the consumer’s

mind that a book is worth ten bucks, to my mind it’s game over for this business.” Ken

Auletta, Publish or Perish, N

EW YORKER (Apr. 26, 2010), http://www.newyorker.com/

magazine/2010/04/26/publish-or-perish [https://perma.cc/AP7T-H6HD]. The co-owner

of the small publisher Melville House, Dennis Johnson, likewise expressed his fear that

Amazon’s low prices had “successfully fostered the idea that a book is a thing of minimal

value” in consumers’ minds—“It’s a widget.” George Packer, Cheap Words, N

EW YORKER (Feb

17, 2015), http://www.newyorker.com/magazine/2014/02/17/cheap-words [https://perma

.cc/TQ59-VUDM].

108. See Auletta, Publish or Perish, supra note 107 (“Good publishers find and cultivate

writers, some of whom do not initially have much commercial promise. . . . The system is

inefficient, but it supports a class of professional writers, which might not otherwise exist.”).

900 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 31:AR

future royalties to underwrite their research and writing.

109

Seventy percent

of these advances will never be earned back in full through royalties.

110

small number of books will end up selling well, subsidizing the initial

investment in advances to a variety of authors, and insulating those authors

from the vagaries of the market. The worry is that Amazon’s pricing

pressure threatens to disrupt this equilibrium by squeezing margins to the

point where advances are assigned to only those works most likely to earn

them back through robust sales, such as those by already-prominent

authors.

Even assuming that the traditional publishing model provides these

structural creative benefits, it is hard to see how they would fit within the

normal scope of antitrust analysis. Consider the analogous situation of a

horizontal price-fixing conspiracy among manufacturers that increase profit

margins to the point where they are able to provide more jobs, at higher

wages, than they otherwise would be able to.

111

While courts weigh the

procompetitive and anticompetitive effects of a restraint whenever they

engage in rule of reason analysis, at some point the likely effects must

become too speculative to merit consideration. Courts cannot parse every

possible attenuated effect of a restraint. The antitrust laws themselves

promote a particular vision of free-market competition that is itself assumed

to order markets in a desirable manner.

That antitrust law vindicated Amazon’s interests here may also reflect

Amazon’s unique characteristics. Amazon wields its market power in

surprising ways—making it an interesting case study. The company now

controls a sprawling universe of online retail, cloud services, streaming

video, music, and, of course, physical and electronic books. Its success is due

in no small part to its relentless discounting.

112

Despite its apparent power

to raise prices in many goods, it seems not to. As a result, even as it has

grown into a powerful force in the American economy, Amazon has

generally earned relatively paltry overall profits.

113

Furthermore, within the

109. See Ken Auletta, Paper Trail, NEW YORKER (Jun. 25, 2012), http://www

.newyorker.com/magazine/2012/06/25/paper-trail-2 [https://perma.cc/82TR-FBL4].

110. See Auletta, Publish or Perish, supra note 107.

111. This example assumes increased margins find their way to workers and not

investors. In the publishing industry, commentators have widely differing views on whether

profits have ever been sufficiently channeled toward authors.

112. Amazon even markets itself as “Earth’s most consumer-centric company.” See

Packer, supra note 107.

113. See Farhad Manjoo, How Amazon’s Long Game Yielded a Retail Juggernaut, N.Y.

TIMES (Nov. 18, 2015), http://www.nytimes.com/2015/11/19/technology/how-amazons

-long-game-yielded-a-retail-juggernaut.html [https://perma.cc/6P78-NKKC].

2016] E-BOOK ANTITRUST ENFORCEMENT 901

company, more profitable divisions such as its cloud storage business

actually subsidize investment in other, less profitable ones.

114

If the goal of antitrust law was merely to promote competition between

firms in a given market, it may actually be preferable for a monopolist like

Amazon to charge a price higher than the market would normally support.

Such a “supracompetitive” price is the carrot that incentivizes other firms to

enter, eventually hastening the monopolist’s downfall. What is to be done

with a company that continuously accumulates market power but refuses to

leverage it against consumers? Does this even pose a problem? A cynical

long-view perspective is that such a company will continue to make

investments that allow it to operate so efficiently, or take advantage of

platform effects so successfully, that no entrant would ever be able to

undercut its prices. Once a company has achieved that level of dominance,

the company may then raise prices without fear that new firms would

attempt to enter the market.

3. Implications for the Publishing Industry

The conflict between Amazon and the publishers reflects a familiar

trend. As digital technologies stir an established content market—like

music and television before e-books—conflict between newly ascendant

digital players like Amazon and traditional gatekeepers is almost inevitable.

And Amazon’s preexisting market power in physical books only exacerbated

the tension between Amazon and publishers. The publishing industry is

likely to face ongoing changes as it acclimates to both the new normal of

Amazon’s physical dominance, and the rise of the e-book.

One seemingly inevitable result of Amazon’s dominance and the

disruptive emergence of the e-book market is greater consolidation in the

publishing industry. Since the initial district court decision in United States

v. Apple, the trend toward consolidation in the publishing world has only

accelerated. In 2013, Penguin and Random House—two of the former “Big

Six” publishers—merged to form Penguin Random House, creating by far

114. Deutsche Bank estimates that Amazon’s cloud service could soon be worth $160

billion as a stand-alone company. Id. That division maintains a net operating margin of 25

percent, compared to 3.5 percent for Amazon’s North American retail business. Id. For

more details on Amazon’s business model, see Andrea M. Hall, Standing the Test of Time:

Likelihood of Confusion in Multi Time Machine v. Amazon, 31 B

ERKELEY TECH. L.J. 815,

826–29 (2016).

902 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 31:AR

the largest publishing house in the world.

115

The merger was widely seen as

a bid to increase bargaining power with Amazon.

116

This sort of consolidation poses its own threats to competition and

creative output at the publisher level. Large publishing houses generally

maintain many “imprint” subsidiary publishing brands united under the

larger corporate umbrella. Predictably, the large firms restrict their imprints

from bidding against each other for manuscripts, which means that mergers

effectively reduce the relative bargaining power of authors by winnowing

competition for manuscripts.

117

In this way consolidation can pass along the

pressure publishers feel from Amazon to authors, with the potential to

disrupt the creative ecosystem.

While the publishers consolidate and authors are left with ever fewer

traditional suitors, Amazon itself has pursued a strategy that represents an

existential threat to the publishers: disintermediation.

118

Amazon

Publishing, created after the Kindle’s release, offers an increasingly popular

self-publishing tool for those who either fail to secure deals with publishers

or who covet the opportunity to earn up to seventy percent of their work’s

royalties.

119

But Amazon has experienced a rocky start in promoting the self-

publishing model thus far. Established authors have proven surprisingly

loyal to their publishers and new authors may be drawn towards the aura of

prestige surrounding certain traditional publishing house brands.

120

Amazon’s early failures with this model have been attributed both to tension

between Amazon and other physical retailers, as well as a lack of

institutional knowledge on Amazon’s part—the industry frequently casts

Amazon as a data-driven company out of its element in a business built on

relationships.

121

Nevertheless, Amazon’s efforts in this area continue.

115. See Jeremy Greenfield, Penguin Random House Merger Deal Closed, New Publishing

Giant Emerges, D

IGITAL BOOK WORLD (July 1, 2013), http://www.digitalbookworld

.com/2013/penguin-random-house-merger-deal-closed-new-publishing-giant-emerges

[https://perma.cc/6C8K-T3AF].

116. See Packer, supra note 107.

117. See Boris Kachka, Book Publisher’s Big Gamble, N.Y.

TIMES (July 9, 2013), http://www

.nytimes.com/2013/07/10/opinion/book-publishings-big-gamble.html [https://perma.cc/

H9KT-CDK5].

118. Disintermediation refers to any process by which a firm bypasses an intermediary

between itself and end consumers. Amazon has taken steps toward working directly with

authors, cutting the traditional publishers out of the process. See Packer, supra note 107.

119. See Packer, supra note 107.

120. See id. Notably, MacKenzie Bezos, the wife of Amazon CEO Jeff Bezos,

published her 2014 novel Traps with Knopf, a respected imprint that is now a subsidiary

of Penguin Random House. Id.

121. Id.

2016] E-BOOK ANTITRUST ENFORCEMENT 903

The Second Circuit’s decision represents a win for Amazon’s—and

consumers’—interests. However, focusing solely on the legal result obscures

how Apple and the publishers ultimately achieved their objectives of raising

prices and breaking Amazon’s hold on the e-book retail market. After the

expiration of the waiting period imposed as part of their settlement with the

Justice Department, the five publishing houses that had reached deals with

Apple eventually had to negotiate new deals with Amazon. This led to a

highly publicized standoff during the negotiations between Amazon and

Hachette—the first of the publishers to renegotiate.

122

In the deals that

followed, every publisher insisted upon and received the power to set prices

under the agency model.

123

Since those deals were negotiated, e-book prices

have risen, and—perhaps not coincidently—growth in e-book sales has

begun to level off.

124

Furthermore, Amazon now faces considerable

competition in the retail e-book market from both Apple and Google.

On March 7, 2016 the Supreme Court denied Apple’s cert petition.

125

Notably, the $450 million the company has agreed to pay out as a result of

the case represents a small sum compared to its latest quarterly profits of

almost $11.1 billion.

126

V. CONCLUSION

The Second Circuit’s decision in Apple is a well-reasoned application of

existing antitrust precedent and principles. Apple’s justifications for why its

conduct deserved rule of reason, as opposed to per se analysis, do not make

sense given either the facts of the case or established antitrust approaches.

Once the court determined that Apple had knowingly participated in the

publishers’ horizontal pricing fixing conspiracy, the fact that Apple used

vertical contracts in order to effectuate that conspiracy should not save it

122. See Davey Alba, Amazon Resolves Dispute With Top-Five Publisher Hachette Over

Book Sales, W

IRED (Nov. 13, 2014), http://www.wsj.com/articles/amazon-hachette-end

-publishing-dispute-1415898013 [https://perma.cc/VN8E-N7UC].

123. See Alison Griswold, Amazon to Publishers: Set Your Own E-Book Prices! Amazon

to Customers: Not Our Fault!, S

LATE (Apr. 14, 2015), http://www.slate.com/blogs/

moneybox/2015/04/14/what_the_amazon_harpercollins_deal_means_for_e_book_pricing

_and_publishing.html [https://perma.cc/F5V2-MNVW].

124. See Jeffrey A. Trachtenberg, E-Book Sales Fall After New Amazon Contracts, W

ALL

ST. J. (Sept. 3, 2015), http://www.wsj.com/articles/e-book-sales-weaken-amid-higher

-prices-1441307826 [https://perma.cc/95HX-CW2R].

125. See Adam Liptak & Vindu Goel, Supreme Court Declines to Hear Apple’s Appeal in

E-Book Pricing Case, N.Y.

TIMES (Mar. 7, 2016), http://www.nytimes.com/2016/03/08/

technology/apple-supreme-court-ebook-prices.html [https://perma.cc/3FNW-Y22W].

126. See Colin Lecher, Apple Will Pay $450 Million After Losing Ebooks Price-fixing

Appeal, T

HE VERGE (June 30, 2015), http://www.theverge.com/2015/6/30/8870061/

apple-450-million-ebooks-price-fixing-appeal [https://perma.cc/HNP7-792S].

904 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 31:AR

from the application of the per se rule. Rule of reason treatment represents

an unnecessary benefit of the doubt in such situations.

The court likewise properly rejected the invitation to recognize a market

entry exception to the per se rule. Such a rule would require courts to make

sweeping decisions about the relative value of competition in different

markets, would fly in the face of monopolization precedent, and essentially

endorse antitrust vigilantism.

In the end, the circumstances surrounding the Apple decision also

provide an insight into the current state of the publishing industry and how

antitrust law might affect its future. The industry is currently in the midst

of an ongoing transformation driven by technology and embodied by

Amazon—a highly disruptive force. Antitrust law will not insulate the

publishers from this change, nor will it ignore their collusion. While

publishers ultimately succeeded in raising e-book prices and slowing the

pace of change, the future of the publishing business is far from clear. In the

words of Jeff Bezos, Amazon’s CEO: “Amazon is not happening to

bookselling. The future is happening to bookselling.”

127

127. See Packer, supra note 107.