US Department Of Justice v. Apple Inc.

United States District Court for the Southern District of New York, 10 July 2013

In a civil antitrust suit, the district court ruled that Apple had conspired with five book publishers to increase the price of e-books for consumers, in a case that sees vertical pricing conduct subject to the per se rule.

On 10 July 2013, a United States District Court for the Southern District of New York found Apple liable for price-fixing e-books in the United States. The district court must now rule on the appropriate scope of an injunction sought by the Department of Justice. This article will explore the background of the e-book market, the legal allegations, the applicable antitrust laws, the district court's findings and its aftermath.

Background on the US ebook market

E-books are electronically formatted versions of printed books, designed to be read on an electronic device. It was not until 2004 when Phillips, Sony and ELink collaborated on Sony's LIBRIé that e-readers became commercially viable. Refinements in Sony's e-reader products and the eventual release of competitive products, like Amazon's Kindle in 2007, Kindle 2 in 2009, and Barnes & Noble's Nook in 2009, sharply increased consumer demand for electronic content.

Prior to Apple's entry into the ebook market in the US, book publishers used a traditional 'wholesale model' of retailing ebooks, whereby book publishers sold e-books (as well as hard cover and paperback books) to retailers at wholesale prices. Retailers would, in turn, sell e-books to consumers at retail prices. Because book publishers transferred title and risk of loss to the retailers, the retailers legally 'owned' the e-books and were thus free to set retail prices to consumers. Amazon, by far the largest online e-book retailer in the US, began to severely discount retail prices of e-books, setting retail prices far below wholesale prices. Amazon's strategy was obvious: lowering the price of e-books fostered greater demand for its highly profitable Kindle products. The book publishers, however, were unhappy with the declining retail prices of e-books and tried unsuccessfully to encourage Amazon to raise its below-cost pricing. Enter Apple.

Apple considered entering the ebook market through its new online bookstore called iBooks that was to be offered in conjunction with the launch of Apple's iPad in January of 2010. As a new entrant, Apple intended to transform the consumer's e-reading experience through product innovations, including changes to e-reading software, enabling consumer selfpublication, colour viewing, audio and video capabilities, and significantly expanding the e-book market through its extensive distribution network. Apple, however, took a dim view of the wholesale model and in its place proposed to the book publishers an alternative 'agency model.' Under the agency model, book publishers would retain title and risk of loss to all e-books (i.e., the book publishers retained legal ownership of the e-books) and Apple would sell the e-books as their agent. Under the agency model, the book publishers, not Apple, would set retail prices and pay Apple a 30% agency commission. In its agency contracts, Apple required a retail most-favoured-nation provision ensuring that Apple could match the lowest retail price listed on any competitor's e-bookstore. Apple eventually entered into separate agency agreements with some, but not all, e-book book publishers. During this same period, some ebook publishers also entered into...