Case Study: U.S. v. Apple, Inc., et al.

In business, healthy competition is generally regarded as a good thing. Sometimes, however, when a business is attempting to dominate a market, it can go beyond healthy, permissible competitive activity and into the realm of an antitrust violation. Here is a closer look at what an antitrust violation is.

What is an Antitrust Violation?

For those not familiar with antitrust law in the United States, the Sherman Antitrust Act covers two general types of antitrust violations: agreements between businesses that unreasonably restrain competition and the willful acquisition or maintenance of improper monopoly power by a business. Legislative history shows that the law was adopted mainly to prevent businesses from colluding or overpowering a market to the point where they could charge injurious prices or otherwise harm the public.

To some, market domination may seem like the intended and expected result of a successful business enterprise, and to a large extent, this is true. Some activities, however, are still not allowed. The line between appropriate and inappropriate behavior is what suits like the Apple e-book litigation are meant to resolve.

Apple eBooks Decision

In U.S. v. Apple, Inc., et al., 12 Civ. 2826 (July 10, 2013), the Southern District of New York issued an opinion and order finding that Apple had violated the Sherman Act through various horizontal price-fixing activities performed in connection with the company’s 2010 release of the iPad.

At the time of the iPad release, the e-book market was led by Amazon.com and its revolutionary e-reader device, the Kindle. Behind the scenes, Amazon.com had agreements with publishers that followed the “wholesale model” of pricing, which allowed the company to set its own prices. Amazon.com used this power to generally price books at $9.99 each.

In many cases, this led to losses. Some have argued that Amazon.com was using the e-book as a loss leader, however, to drive consumers to their retail platform for the purpose of making other purchases on Amazon.com. While publishers might not have considered this arrangement ideal, they were still paid prices at or above $9.99 for the rights to sell various books, so they did not share in Amazon.com’s losses.

When Apple came along with the iPad and its e-reader capabilities which directly competed with the Kindle, however, the publisher defendants saw the opportunity to make a change.

The publishers and Apple negotiated to replace the wholesale model with the “agency model,” which allowed publishers to retain the authority to set prices themselves. Apple, however, also obtained a most favored nations clause (“MFN”) that allowed it to match any lower price charged by another retail outlet. As a result, the publishers were pressured to switch all retailers (including Amazon.com) over to the agency model to retain control over prices, which they ultimately did. As a result, prices went up across the board at different retailers.

Why is that an Antitrust Violation?

The agency model, most favored nations clauses, and other features of the agreements between Apple and the publishers are permissible — by themselves.

But when negotiations between a retailer and the six biggest publishers that control 90 percent of The New York Times bestseller list lead to all of the aforementioned agreement features, and retail prices go up by double-digit percentages, the businesses in question have crossed the line.

Reportedly, Apple will file an appeal of the final judgment in this case, so there may be further clarification on these issues. Stay tuned.