Second Circuit opinion in USA v. Apple

1

133741cv(L)UnitedStatesv.Apple,Inc.

UNITEDSTATESCOURTOFAPPEALS1FORTHESECONDCIRCUIT 2

3AugustTerm20144

5(Argued:December15,2014 Decided:June30,2015)6

7Nos.133741cv,133748cv,133783cv,133857cv,133864cv,133867cv8

910

11UNITEDSTATESOFAMERICA,STATEOFTEXAS,STATEOFCONNECTICUT,STATEOF12ALABAMA,STATEOFALASKA,STATEOFARIZONA,STATEOFARKANSAS,STATEOF13COLORADO,STATEOFDELAWARE,STATEOFIDAHO,STATEOFILLINOIS,STATEOF14INDIANA,STATEOFIOWA,STATEOFKANSAS,STATEOFLOUISIANA,STATEOF15

MARYLAND,COMMONWEALTHOFMASSACHUSETTS,STATEOFMICHIGAN,STATEOF16MISSOURI,STATEOFNEBRASKA,STATEOFNEWMEXICO,STATEOFNEWYORK,STATE17OFNORTHDAKOTA,STATEOFOHIO,COMMONWEALTHOFPENNSYLVANIA,STATEOF18

SOUTHDAKOTA,STATEOFTENNESSEE,STATEOFUTAH,STATEOFVERMONT,19COMMONWEALTHOFVIRGINIA,STATEOFWESTVIRGINIA,STATEOFWISCONSIN,20

COMMONWEALTHOFPUERTORICO,ANDDISTRICTOFCOLUMBIA,2122

PlaintiffsAppellees,2324

v.2526

APPLE,INC.,SIMON&SCHUSTER,INC.,VERLAGSGRUPPEGEORGVONHOLTZBRINCK27GMBH,HOLTZBRINCKPUBLISHERS,LLC,DBAMACMILLAN,SIMON&SCHUSTER28

DIGITALSALES,INC.,2930

DefendantsAppellants,31 32

Case 13-3741, Document 373-1, 06/30/2015, 1543162, Page1 of 117

2

HACHETTEBOOKGROUP,INC.,HARPERCOLLINSPUBLISHERSL.L.C.,THEPENGUIN1GROUP,ADIVISIONOFPEARSONPLC,PENGUINGROUP(USA),INC.,2

3Defendants.4

56

7Before: JACOBS,LIVINGSTON,andLOHIER,CircuitJudges.89 Defendants Apple, Macmillan, and Simon & Schuster appeal from a10judgmentof theUnited StatesDistrictCourt for the SouthernDistrict ofNew11York (Cote, J.), entered on September 5, 2013. After a bench trial, thedistrict12courtconcludedthatAppleviolated1oftheShermanAntitrustAct,15U.S.C.131etseq.,byorchestratingaconspiracyamongfivemajorpublishingcompaniesto14raisetheretailpricesofdigitalbooks,knownasebooks.Thecourtthenissued15an injunctive order,which, inter alia,preventsApple from signing agreements16withthosefivepublishersthatrestrictitsabilitytoset,alter,orreducetheprice17ofebooks,andrequiresAppletoapplythesametermsandconditionstoebook18applicationssoldonitsdevicesasitdoestootherapplications.Weconcludethat19thedistrictcourtcorrectlydecidedthatAppleorchestratedaconspiracyamong20thepublisherstoraiseebookprices,thattheconspiracyunreasonablyrestrained21trade inviolationof1oftheShermanAct,andthatthe injunction isproperly22calibratedtoprotectthepublicfromfutureanticompetitiveharms. Inaddition,23werejecttheargumentthattheportionoftheinjunctiveorderpreventingApple24fromagreeing torestrict itspricingauthoritymodifiesMacmillanandSimon&25Schusters consentdecrees or should be judicially estopped. Accordingly, the26judgmentofthedistrictcourtisAFFIRMED.2728RaymondJ.Lohier(CircuitJudge)filesaseparateconcurringopinion, joining in29thejudgmentandinthemajorityopinionexceptforPartII.B.2.3031DennisJacobs(CircuitJudge)filesaseparatedissentingopinion.3233FORPLAINTIFFSAPPELLEES: MALCOLM L. STEWART, Deputy Solicitor34

General, U.S. Department of Justice,35Washington,DC,WilliamJ.Baer,Assistant36


3

Attorney General, Mark W. Ryan, Daniel1McCuaig, Kristen C. Limarzi, Robert B.2Nicholson, David Seidman, Finnuala K.3Tessier,LawrenceB.Buterman,Attorneys,4U.S. Department of Justice Antitrust5Division, Washington, DC, for the United6States.7

8 George Jepsen, Attorney General of9

Connecticut, W. Joseph Nielsen,Assistant10Attorney General, Office of Attorney11GeneralofConnecticut,Hartford,CT,Greg12Abbott,AttorneyGeneral ofTexas,Daniel13T.Hodge,FirstAssistantAttorneyGeneral14of Texas, John Scott, Deputy Attorney15General of Texas, Jonathan F. Mitchell,16Solicitor General of Texas, Andrew17Oldham,DeputySolicitorGeneralofTexas,18JohnT.Prudhomme,KimvanWinkle,Eric19Lipman, Assistant Attorneys General,20OfficeofAttorneyGeneralofTexas,Austin,21TX,forPlaintiffStates.22

23 EricT.Schneiderman,AttorneyGeneralof24

the State of New York, Won S. Chin,25Assistant Solicitor General, Office of26AttorneyGeneralofNewYork,NewYork,27NY,fortheStateofNewYork.28

29FORDEFENDANTSAPPELLANTS: THEODORE J. BOUTROS, JR., Daniel G.30

Swanson,BlaineH.Evanson,Gibson,Dunn31&CrutcherLLP,LosAngeles,CA,Cynthia32E.Richman,Gibson,Dunn&CrutcherLLP,33Washington, DC, Orin S. Snyder, Gibson,34Dunn&CrutcherLLP,NewYork,NY, for35Apple,Inc.36


4

1 EAMONP. JOYCE, JoelM.Mitnick,MarkD.2

Taticchi,SidleyAustinLLP,NewYork,NY,3for Verlagsgruppe Georg von Holtzbrinck4GmbH, Holtzbrinck Publishers, LLC, d/b/a5Macmillan.6

7 GREGORY SILBERT, Yehuda L. Buchweitz,8

Weil, JamesW.Quinn,Gotshal&Manges9LLP,NewYork,NY, forSimon&Schuster,10Inc.andSimon&SchusterDigitalSales,Inc.11

12DEBRAANNLIVINGSTON,CircuitJudge:13

Since the invention of the printing press, the distribution of books has14

involveda fundamentallyconsistentprocess:composeamanuscript,printand15

binditintophysicalvolumes,andthenshipandsellthevolumestothepublic.16

In late 2007,Amazon.com, Inc. (Amazon) introduced theKindle, a portable17

devicethatcarriesdigitalcopiesofbooks,knownasebooks. Thisinnovation18

had the potential to change the centuriesold process for producing books by19

eliminating the need to print, bind, ship, and store them. Amazon began to20

popularize thenewway toread,andencouragedconsumers tobuy theKindle21

byofferingdesirablebooksnewreleasesandNewYorkTimesbestsellersfor22

$9.99.Publishingcompanies,whichhavetraditionallystoodatthecenterofthe23


5

multibillion dollar bookproducing industry, saw Amazons ebooks, and1

particularlyits$9.99pricing,asathreattotheirwayofdoingbusiness.2

ByNovember2009,Apple,Inc.(Apple)hadplanstoreleaseanewtablet3

computer, the iPad. Executives at the company saw an opportunity to sell4

ebooksontheiPadbycreatingavirtualmarketplaceonthedevice,whichcame5

tobeknownastheiBookstore.Workingwithinatighttimeframe,Applewent6

directly into negotiations with six of the major publishing companies in the7

United States. In twomonths, it announced that five of those companies8

Hachette, Harpercollins, Macmillan, Penguin, and Simon & Schuster9

(collectively, the PublisherDefendants) had agreed to sell ebooks on the10

iPadunderarrangementswherebythepublishershadtheauthoritytosetprices,11

andcouldsetthepricesofnewreleasesandNewYorkTimesbestsellersashighas12

$19.99and$14.99,respectively.Eachoftheseagreements,byvirtueofitsterms,13

resultedineachPublisherDefendantreceiving lessperebooksoldviaAppleas14

opposedtoAmazon,evengiventhehigherconsumerprices.Justafewmonths15

aftertheiBookstoreopened,however,everyoneofthePublisherDefendantshad16

takencontroloverpricing fromAmazonandhadraised thepricesonmanyof17

theirebooks,mostnotablynewreleasesandbestsellers.18


6

TheUnitedStatesDepartmentofJustice(DOJorJusticeDepartment)1

and 33 states and territories (collectively, Plaintiffs) filed suit in theUnited2

StatesDistrictCourtfortheSouthernDistrictofNewYork,allegingthatApple,3

in launching the iBookstore, had conspired with the Publisher Defendants to4

raise prices across the nascent ebook market. This agreement, they argued,5

violated1oftheShermanAntitrustAct,15U.S.C.1etseq.(ShermanAct),6

and state antitrust laws. All five Publisher Defendants settled and signed7

consent decrees, which prohibited them, for a period, from restricting ebook8

retailersability to setprices. Then,aftera threeweekbench trial, thedistrict9

court (Cote, J.) concluded that, inorder to induce thePublisherDefendants to10

participateintheiBookstoreandtoavoidthenecessityofitselfcompetingwith11

Amazonovertheretailpriceofebooks,Appleorchestratedaconspiracyamong12

thePublisherDefendantstoraisethepriceofebooksparticularlynewreleases13

andNewYorkTimesbestsellers. UnitedStatesv.Apple Inc.,952F.Supp.2d638,14

647(S.D.N.Y.2013).Thedistrictcourtfoundthattheagreementconstitutedaper15

seviolationof theShermanActand, in thealternative,unreasonablyrestrained16

tradeundertheruleofreason.Seeid.at694.OnSeptember5,2013,thedistrict17

court entered final judgment on the liability finding and issued an injunctive18


7

order that, inter alia, preventsApple from entering into agreements with the1

PublisherDefendants that restrict itsability to set,alter,or reduce thepriceof2

ebooks, and requiresApple to apply the same terms and conditions to ebook3

applicationssoldonitsdevicesasitdoestootherapplications.4

On appeal,Apple contends that thedistrict courts liability findingwas5

erroneousandthattheprovisionsoftheinjunctionrelatedtoitspricingauthority6

and ebook applications are not necessary to protect the public. Two of the7

PublisherDefendantsMacmillan and Simon& Schuster join the appeal,8

arguing that theportion of the injunction related toApplespricing authority9

either unlawfully modifies their consent decrees or should be judicially10

estopped.WeconcludethatthedistrictcourtsdecisionthatAppleorchestrated11

ahorizontalconspiracyamongthePublisherDefendantstoraiseebookpricesis12

amply supported and wellreasoned, and that the agreement unreasonably13

restrainedtradeinviolationof1oftheShermanAct.Wealsoconcludethatthe14

district courts injunction is lawful and consistent with preventing future15

anticompetitiveharms.16

Significantly, the dissent agrees that Apple intentionally organized a17

conspiracyamongthePublisherDefendantstoraiseebookprices.Nonetheless,18


8

it contends thatApplewas entitled todo so because the conspiracyhelped it1

become an ebook retailer. In arriving at this startling conclusion based in2

largemeasure on an argument thatApple itself did not assert the dissent3

makestwofundamentalerrors.Thefirstistoinsistthattheverticalorganizerof4

a horizontal pricefixing conspiracymay escape application of the per se rule.5

This conclusion is based on amisreading of SupremeCourtprecedent,which6

establishes precisely the opposite. The dissent fails to apprehend that the7

ShermanActoutlawsagreements thatunreasonablyrestrain tradeand therefore8

requires evaluating thenatureof the restraint, rather than the identityof each9

partywhojoinsintoimposeit,indeterminingwhethertheperseruleisproperly10

invoked. Finally(andmostfundamentally)thedissentsconclusionrestsonan11

erroneouspremise: thatonewhoorganizesahorizontalpricefixingconspiracy12

thesupremeevilofantitrust,VerizonCommcnsInc.v.LawOfficesofCurtisV.13

Trinko, LLP, 540U.S. 398, 408 (2004) among those competing at adifferent14

levelof themarkethassomehowdone lessdamage tocompetition than itsco15

conspirators.16

Thedissentsseconderroristoassume,ineffect,thatApplewasentitledto17

enter the ebook retailmarket on its own terms, even if these terms could be18


9

achieved only via its orchestration of and entry into a pricefixing agreement1

withthePublisherDefendants.ThedissenttellsastoryofAppleorganizingthis2

pricefixing conspiracy to rescue ebook retailers from a monopolist with3

insurmountableretailpower.Butthistaleisnotspunfromanyfactualfindings4

of the district court. And the dissents armchair analysis wrongly treats the5

number of ebook retailers at any moment in the emergence of a new and6

transformative technology for book distribution as the sine qua non of7

competitioninthemarketfortradeebooks.8

Morefundamentally,thedissentstheorythatthepresenceofastrong9

competitorjustifiesahorizontalpricefixingconspiracyendorsesaconceptof10

marketplace vigilantism that is wholly foreign to the antitrust laws. By11

organizing apricefixing conspiracy,Apple found an easypath to opening its12

iBookstore,butitdidsobyensuringthatmarketwideebookpriceswouldriseto13

a level that it,and thePublisherDefendants,had jointlyagreedupon. Plainly,14

competition is not served by permitting a market entrant to eliminate price15

competitionasaconditionofentry,anditiscoldcomforttoconsumersthatthey16

gained a new ebook retailer at the expense of passing control over all ebook17

prices to a cartel of book publishers publishers who, with Apples help,18


10

collectivelyagreedonanewpricingmodelpreciselytoraisethepriceofebooks1

andthusprotecttheirprofitmarginsandtheirveryexistenceinthemarketplace2

inthefaceoftheadmittedlystrongheadwindscreatedbythenewtechnology.3

Becausewe conclude that thedistrict courtdidnot err indeciding that4

Appleviolated1of theShermanAct,andbecausewealsoconclude that the5

district courts injunction was lawful and consistent with preventing future6

anticompetitiveharms,weaffirm.7

BACKGROUND8

I.FactualBackground19

We begin not with Kindles and iPads, but with printed trade books,10

whicharegeneral interest fictionandnonfictionbooks intended forabroad11

readership.Apple,952F.Supp.2dat648n.4.IntheUnitedStates,thesixlargest12

publishersof tradebooks,known in thepublishingworldas theBigSix,are13

Hachette, HarperCollins, Macmillan, Penguin, Random House, and Simon &14

1Thefactualbackgroundpresentedhereisdrawnfromthedistrictcourtsfactual

findingsor fromundisputedmaterial in the recordbefore thedistrictcourt. BecausethisCourtreviewsthedistrictcourtsfactualfindingsforclearerror,wemustassesswhetheritsviewof theevidence isplausible in lightof theentire record. Cosmev.Henderson, 287F.3d 152, 158 (2dCir. 2002). In light of thisobligation, thedissent iswrongtosuggestthatcitationstotherecordareinappropriateormisleading.Whenafactcomesfromthedistrictcourtsopinion,wecitethatopinion;whenonecomesfromtherecord,wecitethejointappendix(J.A.).


11

Schuster.Together,theBigSixpublishmanyofthebiggestnamesinfictionand1

nonfiction;during2010,theirtitlesaccountedforover90%oftheNewYorkTimes2

bestsellersintheUnitedStates.Id.at648n.5.3

For decades, trade book publishers operated under a fairly consistent4

business model. When a new book was ready for release to the public, the5

publisherwould sell hardcover copies to retailers at a wholesale price and6

recommendresaletoconsumersatamarkup,knownasthelistprice.Afterthe7

hardcoverspentenoughtimeontheshelvesoftenayearpublisherswould8

release a paperback copy at lower list and wholesale prices. In theory,9

devotedreaderswouldpaythehigherhardcoverpricetoreadthebookwhenit10

firstcameout,whilemorecasualfanswouldwaitforthepaperback.11

A. AmazonsKindle12

OnNovember19,2007,AmazonreleasedtheKindle:aportableelectronic13

device thatallowsconsumers topurchase,download,andreadebooks. At the14

time,therewasonlyoneotherereaderavailableintheemergingebookmarket,15

andAmazonsKindlequicklygainedtraction. In2007,ebookrevenueinNorth16

Americawasonly$70million,a tinyamountrelative to theapproximately$3017

billionmarket forphysical tradebooks. Themarketwasgrowing,however; in18


12

2008ebookrevenuewasroughly$140millionand,bythetimeBarnes&Noble,1

Inc. (Barnes&Noble) launched itsNook ereader inNovember 2009,Amazon2

wasresponsiblefor90%ofallebooksales.Apple,952F.Supp.2dat64849.3

Amazon followedawholesalebusinessmodel similar to theoneused4

with print books: publishers recommended a digital list price and received a5

wholesaleprice foreachebook thatAmazonsold. Inexchange,Amazoncould6

sellthepublishersebooksontheKindleanddeterminetheretailprice.Atleast7

earlyon,publisherstendedtorecommendadigitallistpricethatwasabout20%8

lower than theprint listprice toreflectthe fact that,withanebook, there isno9

costforprinting,storing,packaging,shipping,orreturningthebooks.10

WhereAmazondeparted from thepublishers traditionalbusinessmodel11

was in the sale of new releases andNew York Times bestsellers. Rather than12

sellingmoreexpensiveversionsofthesebooksuponinitialrelease(aspublishers13

encouraged byproducinghardcover books beforepaperback copies),Amazon14

set theKindleprice at one, stable figure $9.99. At thisprice,Amazonwas15

sellingcertainnewreleasesandbestsellersatapricethatroughlymatched,16

orwasslightly lowerthan,thewholesaleprice itpaidtothepublishers. Apple,17

952F.Supp.2dat649. DavidNaggar,aVicePresident inchargeofAmazons18


13

Kindle content, described this as a classic lossleading strategy designed to1

encourageconsumerstoadopttheKindlebydiscountingnewreleasesandNew2

YorkTimesbestsellersandsellingotherebookswithout thediscount. J.A.1485.3

Thedistrictcourtalsoreferredtothisasaloss leader[]strategy,Apple,952F.4

Supp. 2d at 650, 657, 708, and explained that Amazon believed [the $9.99]5

pricingwouldhavelongtermbenefitsforitsconsumers,id.at649.Contraryto6

thedissentsportrayaloftheopinion,thedistrictcourtdidnotfindthatAmazon7

used the$9.99pricepoint toassure[] itsdomination in theebookmarket,or8

that its pricing strategy acted as a barrier to entry for other retailers.9

DissentingOp.at67. Indeed, inNovember2009 justa fewmonthsbefore10

Apples launch of the iBookstore Barnes&Noble entered the ebook retail11

marketbylaunchingtheNook,Apple,952F.Supp.2dat649n.6,andasearlyas12

2007 Google Inc. (Google) had been planning to enter the market using a13

wholesalemodel,id.at686.14

B. ThePublishersReactions15

Despite thesmallnumberofebooksalescompared to theoverallmarket16

for trade books, top executives in the Big Six saw Amazons $9.99 pricing17

strategyasathreattotheirestablishedwayofdoingbusiness.Thoseexecutives18


14

included:HachetteandHachetteLivreChiefExecutiveOfficers(CEOs)David1

YoungandArnaudNourry;HarperCollinsCEOBrianMurray;MacmillanCEO2

JohnSargent;PenguinUSACEODavidShanks;RandomHouseChiefOperating3

OfficerMadelineMcIntosh;andSimon&SchusterPresidentandCEOCarolyn4

Reidy. In theshort term, thesemembersof theBigSix thought thatAmazons5

lowerpriced ebooks wouldmake itmore difficult for them to sell hardcover6

copiesofnewreleases,whichwereoftenpriced,asthedistrictcourtnoted,at7

thirtydollarsormore,Apple,952F.Supp.2dat649,aswellasNewYorkTimes8

bestsellers.Furtherdowntheroad,thepublishersfearedthatconsumerswould9

become accustomed to the uniform $9.99 price point for these ebooks,10

permanentlydrivingdownthepricetheycouldchargeforprintversionsofthe11

books. Moreover, ifAmazonbecamepowerfulenough, itcoulddemand lower12

wholesale prices from the Big Six or allow authors to publish directly with13

Amazon,cuttingoutthepublishersentirely.AsHachettesYoungputit,theidea14

of the wretched $9.99 price point becoming a de facto standard for ebooks15

sickenedhim.J.A.289.16

The executives of the Big Six also recognized that their problemwas a17

collectiveone.Thus,anAugust2009Penguinstrategyreport(concludedonlya18


15

fewmonthsbeforeApplecommenceditseffortstolaunchtheiBookstore)noted1

that[c]ompetitionfortheattentionofreaderswillbemostintensefromdigital2

companieswhoseobjectivemaybeto[cutout]traditionalpublishersaltogether..3

. . Itwill not be possible for any individual publisher tomount an effective4

response,becauseofboththeresourcesnecessaryandtheriskofretribution,so5

the industryneeds todevelopacommonstrategy. J.A.287. Similarly,Reidy6

fromSimon&Schusteropined inSeptember2009 that thepublishershadno7

chanceofsuccessingettingAmazontochangeitspricingpracticesunlessthey8

actedwithacriticalmass,andexpressedtheneedtogathermoretroopsand9

ammunitionbefore implementingamoveagainstAmazon. J.A.290 (internal10

quotationmarksomitted).11

Conveniently, the Big Six operated in a closeknit industry and had no12

qualms communicating about the need to act together. As the district court13

found(basedonthePublisherDefendantsowntestimony),[o]nafairlyregular14

basis, roughly once a quarter, the CEOs of the [Big Six] held dinners in the15

private dining rooms of New York restaurants, without counsel or assistants16

present, inorder todiscuss the common challenges they faced. Apple,952F.17

Supp.2dat651. Becausetheydidnotcompetewitheachotheronprice,but18


16

overauthorsandagents, thepublishersfeltnohesitation in freelydiscussing1

Amazons prices with each other and their joint strategies for raising those2

prices.Id.Thosestrategiesincludedeliminatingthediscountedwholesaleprice3

forebooksandpossiblycreatinganalternativeebookplatform.4

The most significant attack that the publishers considered and then5

undertook,however,was towithholdnewandbestsellingbooks fromAmazon6

untilthehardcoverversionhadspentseveralmonthsinstores,apracticeknown7

aswindowing.MembersoftheBigSixbothkeptoneanotherabreastoftheir8

planstowindow,andactivelypushedotherstowardthestrategy.2ByDecember9

2009, theWallStreet JournalandNewYorkTimeswerereporting that fourof the10

BigSixhadannouncedplanstodelayebookreleasesuntilaftertheprintrelease,11

and the twoholdoutsPenguin andRandomHouse facedpressure from12

theirpeers.13

2Citing one example, the district court referenced a fall 2009 email inwhich

HachettesYoung informed his colleagueNourry of Simon& Schusterswindowingplans, advising [c]ompletely confidentially, Carolyn [Reidy] has told me that they[Simon&Schuster]aredelayingthenewStephenKing,withhisfullsupport,butwillnotbeannouncing thisuntil thedayafterLaborDay. Apple,952F.Supp.2dat652(firstandsecondalterationsinoriginal)(internalquotationmarksomitted).Thedistrictcourt went on to observe that Young, [u]nderstanding the impropriety of thisexchange of confidential informationwith a competitor, . . . advisedNourry that itwouldbeprudentforyoutodoubledeletethisfromyouremailfileswhenyoureturntoyouroffice.Id.


17

Ultimately,however,thepublishersviewedeventhisstrategytosavetheir1

businessmodelasselfdestructive. Employeesinsidethepublishingcompanies2

noted that windowing encouraged piracy, punished ebook consumers, and3

harmedlongtermsales.OneauthorwrotetoSargentinDecember2009thatthe4

oldmodelhas to change and that itwouldbebetter to embrace ebooks,5

publishthematthesametimeasthehardcovers,andpraytoGodtheybothsell6

likecrazy.J.A.325.Sargentagreed,butexpressedthehopethatebookscould7

eventuallybesoldforbetween$12.95and$14.95. Thequestionis,hemused,8

howtogetthere?J.A.325.9

C. ApplesEntryintotheebookMarket10

Apple is one of theworldsmost innovative and successful technology11

companies. Its hardware sells worldwide and supports major software12

marketplaces like iTunes and the App Store. But in 2009, Apple lacked a13

dedicated marketplace for ebooks or a hardware device that could offer an14

outstandingreadingexperience. Thependingreleaseof the iPad,whichApple15

intended to announce on January 27, 2010, promised to solve that hardware16

deficiency.17


18

EddyCue,ApplesSeniorVicePresidentofInternetSoftwareandServices1

and the director ofApples digital content stores, saw the opportunity for an2

ebookmarketplaceon the iPad. ByFebruary2009,Cueand twocolleagues3

KevinSaulandKeithMoererhadresearchedtheebookmarketandconcluded4

thatitwaspoisedforrapidexpansionin2010andbeyond.WhileAmazonhad5

anestimated90%marketshare in tradeebooks,Cuebelieved thatApplecould6

becomeapowerfulplayerinthemarketinlargepartbecauseconsumerswould7

beable todomany taskson the iPad,andwouldnotwant tocarryaseparate8

Kindle for reading alone. In an email to Apples thenCEO, Steve Jobs, he9

discussedthepossibilityofAmazonsellingebooksthroughanapplicationonthe10

iPad,but felt thatitwouldbeveryeasy for [Apple] tocompetewithand . . .11

trounce Amazon by opening up our own ebook store because [t]he book12

publisherswoulddoalmostanythingfor[Apple]togetintotheebookbusiness.13

J.A.282.14

JobsapprovedCuesplanforanebookmarketplacewhichcametobe15

knownastheiBookstoreinNovember2009. AlthoughtheiPadwouldgoto16

market with or without the iBookstore,Apple hoped to announce the ebook17

marketplaceattheJanuary27,2010iPadlaunchtoensuremaximumconsumer18


19

exposure andaddanotherdramatic component to the event. Apple, 952F.1

Supp.2dat655.ThisleftCueandhisteamonlytwomonthsamidsttheholiday2

season both to create a businessmodel for the iBookstore and to assemble a3

group of publishers to participate. Cue also had personal reasons to work4

quickly.HeknewthatJobswasseriouslyill,andthat,bymakingtheiBookstore5

asuccess,hecouldhelpJobsachievealongstandinggoalofcreatingadevicethat6

providesasuperiorreadingexperience.7

Operating under a tight timeframe, Cue, Saul, and Moerer streamlined8

their efforts by focusing on the Big Six publishers. They began by arming9

themselveswithsomeimportantinformationaboutthestateofaffairswithinthe10

publishing industry. Inparticular, they learned that thepublishers feared that11

Amazonspricingmodelcouldchangetheirindustry,thatseveralpublishershad12

engaged in simultaneous windowing efforts to thwartAmazon, and that the13

industryasawholewasinastateofturmoil.Appleunderstood,asthedistrict14

courtput it,that thePublisherswanted topressureAmazon toraise the$9.9915

pricepoint forebooks, that thePublishersweresearching forways todo that,16

andthattheywerewillingtocoordinatetheireffortstoachievethatgoal.Id.at17

656.Foritspart,asthedistrictcourtfound,Applewaswillingtosellebooksat18


20

higherprices,buthaddecidedthatitwouldnotopentheiBookstoreifitcould1

notmakemoneyonthestoreandcompeteeffectivelywithAmazon.Id.2

D. ApplesNegotiationswiththePublishers3

1. InitialMeetings4

ApplehelditsfirstmeetingswitheachoftheBigSixbetweenDecember155

and16.ThemeetingsquicklyconfirmedCuessuspicionsabouttheindustry.As6

he wrote to Jobs after speaking with three of the publishers, [c]learly, the7

biggest issue isnewreleasepricingandAmazon isdefinitelynot likedmuch8

becauseofsellingbelowcostforNYTBestSellers.J.A.32627.Manypublishers9

alsoemphasized that theywere searching fora strategy to regain controlover10

pricing.AppleinformedeachoftheBigSixthatitwasnegotiatingwiththeother11

majorpublishers,that ithopedtobeginsellingebookswithinthenext90days,12

and that it was seeking a critical mass of participants in the iBookstore and13

would launch only if successful in reaching this goal. Apple informed the14

publishersthatitdidnotbelievetheiBookstorewouldsucceedunlesspublishers15

agreedbothnottowindowbooksandtosellebooksatadiscountrelativetotheir16

physicalcounterparts.ApplenotedthatebookpricesintheiBookstoreneededto17

becomparable to thoseon theKindle,expressing theview,asReidy recorded,18


21

thatitcouldnottolerateamarketwheretheproductissoldsignificantlymore1

cheaply elsewhere. Apple, 952 F. Supp. 2d at 657 (internal quotation marks2

omitted). Most importantly for the publishers, however, Cues team also3

expressedApplesbelief thatAmazons $9.99pricepointwasnot ingrained in4

consumersminds,and thatApplecould sellnew releasesandNewYorkTimes5

bestsellersforsomewherebetween$12.99and$14.99.Inreturn,Applerequested6

that thepublishersdecrease theirwholesaleprices so that the company could7

makeasmallprofitoneachsale.8

These meetings spurred a flurry of communications reporting on the9

[t]errificnews[,]asReidyputitinanemailtoLeslieMoonves,hersuperiorat10

parentcompanyCBSCorporation (CBS), thatApplewasnot interested ina11

low price point for digital books and didnt want Amazons $9.95 [sic] to12

continue. Apple, 952 F. Supp. 2d at 658 (first alteration in original) (internal13

quotation marks omitted). Significantly, these communications included14

numerousexchangesbetweenexecutivesatdifferentBigSixpublisherswho,the15

districtcourtfound,hashedovertheirmeetingswithApplewithoneanother.16

Id.ThedistrictcourtfoundthatthefrequenttelephonecallsamongthePublisher17


22

Defendantsduring theperiod of theirnegotiationswithApple represented a1

departurefromtheordinarypatternofcallsamongthem.Id.at655n.14.2

2. TheAgencyModel3

Meanwhile,Cue,Moerer, and Saul returned toApples headquarters to4

developabusinessmodelfortheiBookstore.Althoughtheteamwasoptimistic5

about the initial meetings, they remained concerned about whether the6

publisherswouldreducewholesalepricesonnewreleasesandbestsellersbya7

largeenoughmargintoallowAppletooffercompetitivepricesandstillmakea8

profit. One strategy that the teamconsideredwas toaskpublishers fora25%9

wholesale discount on all of these titles, so if a physical book sold at $1210

wholesale (thegoing rate for themajorityofNewYorkTimesbestsellers)Apple11

couldpurchasetheebookversionfor$9andofferitontheiBookstoreatasmall12

markup. But Cue was aware that some publishers had increased Amazons13

digitalwholesalepricesin2009inanunsuccessfulefforttoconvinceAmazonto14

changeitspricing.Id.at650;J.A.1771.Cuefeltitwouldbedifficulttonegotiate15

wholesalepricesdownfarenoughfor[Apple]togenerallycompeteprofitably16

withAmazonsbelowcostpricingonthemostpopularebooks.J.A.1772.As17

Cue saw it,Applesmostvaluablebargainingchipcame from the fact that the18


23

publishersweredesperateforanalternative toAmazonspricingpoliciesand1

excitedabout...theprospectthat[Apples]entry[intotheebookmarket]would2

givethemleverageintheirnegotiationswithAmazon.Apple,952F.Supp.2dat3

659.4

It was at this point that Cues team, recognizing its opportunity,5

abandoned thewholesalebusinessmodel foranew,agencymodel.3 Unlikea6

wholesale model, in an agency relationship the publisher sets the price that7

consumerswillpay for each ebook. Then, rather than the retailerpaying the8

publisher for each ebook that it sells, the publisher pays the retailer a fixed9

percentage of each sale. In essence, the retailer receives a commission for10

distributingthepublishersebooks.UnderthesystemAppledevised,publishers11

wouldhave the freedomtosetebookprices in the iBookstore,andwouldkeep12

70%ofeachsale.Theremaining30%wouldgotoAppleasacommission.13

This switch to an agency model obviated Apples concerns about14

negotiatingwholesalepriceswiththeBigSixwhileensuringthatAppleprofited15

oneverysale.Itdidnot,however,solveallofthecompanysproblems.Because16

theagencymodelhandedthepublisherscontroloverpricing,itcreatedtherisk17

3 Notably, the possibility of an agency arrangement was first mentioned byHachetteandHarperCollinsasawaytofixAmazonpricing.J.A.346.


24

that theBig Sixwould sell ebooks in the iBookstore at far higher prices than1

Kindles$9.99offering. If thepriceswere toohigh,Applecouldbe leftwitha2

brandnewmarketplacebrimmingwithtitles,butdevoidofcustomers.3

Tosolvethispricingproblem,Cuesteaminitiallydevisedtwostrategies.4

First, they realized that they could maintain realistic prices by establishing5

price caps fordifferent typesofbooks. J.A.359. Of course, these capswould6

needtobehigherthanAmazons$9.99pricepoint,orApplewouldfacethesame7

difficultpricenegotiations that it sought toavoidby switchingaway from the8

wholesalemodel.ButatthispointApplewasnotcontenttoopenitsiBookstore9

offeringpriceshigherthanthecompetition.Forasthedistrictcourtfound,ifthe10

PublisherDefendantswantedtoendAmazons$9.99pricing,Applesimilarly11

desired that there be no price competition at the retail level. Apple, 952 F.12

Supp.2dat647.13

Applenextconcluded,then,asthedistrictcourtfound,that[t]oensure14

thatthe iBookstorewouldbecompetitiveathigherprices,Apple . . .neededto15

eliminate all retail price competition. Id. at 659. Thus, rather than simply16

agreeingtopricecapsaboveAmazons$9.99pricepoint,Applecreatedasecond17

requirement: publishers must switch all of their other ebook retailers 18


25

includingAmazon to an agency pricingmodel. The resultwould be that1

ApplewouldnotneedtocompetewithAmazononprice,andpublisherswould2

beabletoeliminateAmazons$9.99pricing.Or,asCuewouldlaterdescribethe3

plantoexecutivesatSimon&Schuster,Macmillan,andRandomHouse,theplan4

solve[d] [the]Amazon issuebyallowing thepublishers towrestcontrolover5

pricingfromAmazon.4Id.at661(internalquotationmarksomitted).6

OnJanuary4and5,Applesentessentiallyidenticalemailstoeachmember7

of theBigSix toexplain itsagencymodelproposal. Eachemaildescribed the8

commission split betweenApple and the publishers and recommended three9

price caps: $14.99 for hardcover books with list prices above $35; $12.99 for10

hardcoverbookswith listpricesbelow$35;and$9.99 forallother tradebooks.11

Theemailsalsoexplained that,tosellebooksat realisticprices . . .all [other]12

resellersofnewtitlesneedtobein[the]agencymodelaswell.J.A.360.Or,as13

CuetoldReidy,allpublisherswouldneedtomoveallretailerstoanagency14

model.J.A.2060.15

4Cuetestifiedattrialthathisreferencetosolv[ing]theAmazonissuedenotedtheproposaltopriceebooksintheiBookstoreabove$9.99,andwasnotareferencetoraisingpricesacrosstheindustryorwrestingcontroloverpricingfromAmazon.Inthisandother respects, thedistrict court foundCues testimony tobenot credibleadeterminationthat,onthisrecord,isinnomannererroneous,muchlessclearlyso.Id.at661n.19. As thedistrictcourtput it,Applespitch to thePublisherswas frombeginningtoendavisionforanewindustrywidepriceschedule.Id.


26

3. TheMostFavoredNationClause1

Cuesthoughtsontheagencymodelcontinuedtoevolveaftertheemails2

on January 4 and 5. Most significantly, Saul Cues inhouse counsel 3

devisedanalternativetoexplicitlyrequiringpublisherstoswitchotherretailers4

toagency. Thisalternative involved theuseofamostfavorednationclause5

(MFN Clause or MFN). In general, an MFN Clause is a contractual6

provision thatrequiresoneparty togive theother thebest terms that itmakes7

available to any competitor. In the context ofApples negotiations, theMFN8

Clausemandatedthat,[i]f,foranyparticularNewReleaseinhardcoverformat,9

the...CustomerPrice[intheiBookstore]atanytimeisorbecomeshigherthan10

a customer price offered by any other reseller ... , then [the] Publisher shall11

designateanew, lowerCustomerPrice [in the iBookstore] tomeet such lower12

[customer price]. J.A. 559. Put differently, the MFN would require the13

publisher toofferany ebook inApples iBookstore fornomore thanwhat the14

sameebookwasofferedelsewhere,suchasfromAmazon.15

On January11,Applesenteachof theBigSixaproposedeBookAgency16

DistributionAgreement (theContracts). Asdescribed in the January4and517

emails, theseContractswouldsplit theproceeds fromeachebooksalebetween18


27

thepublisherandApple,withthepublisherreceiving70%,andwouldsetprice1

capsonebooksat$14.99,$12.99,and$9.99dependingon thebookshardcover2

price. But unlike the initial emails, theContracts containedMFNClauses in3

place of the requirement thatpublishersmove all other retailers to an agency4

model.ApplethenassuredeachmemberoftheBigSixthatitwasbeingoffered5

thesametermsastheothers.6

The Big Six understood the economic incentives that the MFN Clause7

created. Suppose a new hardcover release sells at a list price of $25, and a8

wholesalepriceof$12.50. WithAmazon,thepublishershadbeenreceivingthe9

wholesaleprice(oraslightlylowerdigitalwholesaleprice)foreveryebookcopy10

ofthevolumesoldonKindle,evenifAmazonultimatelysoldtheebookforless11

thanthatwholesaleprice.UnderApplesinitialagencymodelwithpricecaps12

but noMFNClause the publishers already stood tomake less money per13

ebookwithApple.BecauseApplecappedtheebookpriceofa$25hardcoverat14

$12.99andtook30%ofthatprice,publisherscouldonlyexpecttomake$8.75per15

sale. Butwhat thepublishers sacrificed in shortterm revenue, theyhoped to16

gain in longterm stability by acquiring more control over pricing and,17

accordingly,theabilitytoprotecttheirhardcoversales.18


28

The MFN Clause changed the situation by making it imperative, not1

merely desirable, that the publishers wrest control over pricing from ebook2

retailersgenerally.UndertheMFN,ifAmazonstayedatawholesalemodeland3

continued to sellebooksat$9.99, thepublisherswouldbe forced to sell in the4

iBookstore,too,atthatsame$9.99pricepoint.Theresultwouldbetheworstof5

both worlds: lower shortterm revenue and no control over pricing. The6

publishersrecognizedthat,asapracticalmatter,thismeantthattheMFNClause7

wouldforcethemtomoveAmazontoanagencyrelationship. AsReidyput it,8

hercompanywouldneedtomoveallitsotherebookretailerstoagencyunless9

wewanted tomake even lessmoney in this growingmarket. Apple, 952 F.10

Supp.2dat666(internalquotationmarksomitted).Thissituationalsogaveeach11

ofthepublishersastakeinApplesquesttohaveacriticalmassofpublishersjoin12

theiBookstorebecause,[w]hilenoonePublishercouldeffectanindustrywide13

shiftinpricesorchangethepublicsperceptionofabooksvalue,iftheymoved14

togethertheycould.Id.at665;seealsoJ.A.1981.15

Apple understood this dynamic as well. As the district court found,16

Appledidnot change its thinkingwhen it replaced the explicit requirement17

that the publishers move other retailers to an agency model with the MFN.18


29

Indeed,inthefollowingweeks,Appleassiduouslyworkedtomakesurethatthe1

shift to agency occurred. Apple, 952 F. Supp. 2d at 663. But Apple also2

understoodthat,asCuebluntlyputit,anydecentMFNforcesthemodelaway3

fromwholesaleandtoagency.Id.(internalquotationmarksomitted).Orasthe4

districtcourtfound,theMFNprotectedApplefromretailpricecompetitionasit5

punishedaPublisherifitfailedtoimposeagencytermsonotheretailers.Id.at6

665.7

Thus, the terms of the negotiation between Apple and the publishers8

became clear:Applewantedquickand successful entry into the ebookmarket9

and toeliminateretailpricecompetitionwithAmazon. Inexchange, itoffered10

the publishers an opportunity to confront Amazon as one of an organized11

group...unitedinanefforttoeradicatethe$9.99pricepoint.Id.at664.Both12

sides needed a critical mass of publishers to achieve their goals. The MFN13

played a pivotal role in this quid pro quo by stiffen[ing] the spines of the14

[publishers] toensure that theywoulddemandnew termsfromAmazon,and15

protectingApplefromretailpricecompetition.Id.at665.16

17

18


30

4. FinalNegotiations1

TheproposedContractssparkedintensenegotiationsasCuesteamraced2

toassembleenoughpublishers toannounce the iBookstoreby January27. The3

publishers first volley was to push back on Apples price caps, which they4

recognizedwouldbecome thestandardacross the industry forpricing.5 J.A.5

571.InasetofmeetingsbetweenJanuary13and14,themajorityoftheBigSix6

expressedageneralwillingnesstoadoptanagencymodel,butrefusedtodoso7

with the price limits Apple demanded. Cue responded by asking Jobs for8

permission tocreateamore lenientpricecap system. Under thisnew regime,9

NewYorkTimesbestsellerscouldsellfor$14.99ifthehardcoverwaslistedabove10

$30,and for$12.99 if listedbelow thatprice. As fornewreleases,a$12.99cap11

wouldapply tohardcoverspricedbetween$25and$27.50;a$14.99capwould12

applytohardcoverssellingforupto$30;and,ifthehardcoversoldforover$30,13

publisherscouldsell theebook forbetween$16.99and$19.99. Jobsresponded14

thathecouldlivewiththepricingaslongas[thepublishers]moveAmazon15

totheagen[cy]modeltoo.J.A.499.16

5AsoneHarperCollinsexecutiveput it, theupshotofmoving to theagency

model and adopting price capswas that Applewould control price and that pricewould be standard across the industry. Apple, 952 F. Supp. 2d at 670 (internalquotationmarksomitted).


31

Cueproposed thisnewpricing regime to theBigSixon January16and,1

withonly11daysremainingbeforetheiPadlaunch,turnedupthepressure.In2

eachemailconveyingthenewprices,Cueremindedthepublishersthat, ifthey3

didnotagreetotheiBookstorebythe27th,othercompanies,includingAmazon4

andBarnes&Noble,would certainlybuild theirownbook store apps for the5

iPad. Correspondence fromwithin thepublishing companies also shows that6

Cuepromoted theproposalas thebestchance forpublishers tochallenge the7

9.99pricepoint,andemphasizedthatApplewouldnotmoveforwardwiththe8

store [unless]5of the6 [majorpublishers]signed theagreement. J.A.52223.9

AsCuesaidat trial,heattempted toassure [thepublishers] that theywerent10

going to be alone, so that [he] would take the fear awa[y] of the Amazon11

retribution that they were all afraid of. J.A. 2068 (internal quotation marks12

omitted).TheAppleteamremindedthePublishers,asthedistrictcourtfound,13

that this was a rare opportunity for them to achieve control over pricing.14

Apple,952F.Supp.2dat664.15

By January22, twopublishersSimon&SchusterandHachettehad16

verballycommittedtojointheiBookstore,whileathird,Penguin,hadagreedto17

Applestermsinprinciple. Asfortheothers,Cuewasfrustratedthattheykept18


32

chickening out because of the dramatic business change thatApple was1

proposing.J.A.547.Tomakemattersworse,[p]ressreportsonJanuary18and2

19alertedthepublishingworldandAmazontothePublishersnegotiationswith3

Apple,Apple, 952 F. Supp. 2d at 67071, andAmazon learned fromRandom4

House that itwas facingpressure fromotherpublishers . . . tomove to [the]5

agencymodel becauseApple hadmade it clear that unless all of the Big Six6

participated, they wouldnt bother with building a bookstore, J.A. 1520.7

Representatives from Amazon descended on New York for a set of long8

scheduled meetings with the publishers. As the district court found, [i]n9

separateconversationsonJanuary20andoverthenextfewdays,thePublisher10

Defendants all told Amazon that they wanted to change to an agency11

distributionmodelwithAmazon.Apple,952F.Supp.2dat672.12

Macmillan, however, presented an issue for Apple. The district court13

found that at a January 20 lunch between John Sargent andAmazon, Sargent14

announcedthatMacmillanwasplanningtoofferAmazontheoptiontochoose15

eitheranagency[orwholesale]model. Id. ButatdinnerwithCuethatnight,16

according to the district court, Cue made sure that Sargent understood the17

consequencesoftheMFN,explainingthatMacmillanhadnochoicebuttomove18


33

Amazon to an agency model if it wanted to sign an agency agreement with1

Apple.6 Id. The next day, Sargent emailed Cue to express his continued2

reservations about switching Macmillans other retailers to an agency3

relationship.4

With the iPad launch fast approaching,Cue enlisted the help of others.5

Cuehad received an email from Simon& SchustersCarolynReidy,whohad6

alreadyverballycommittedtoApplestermsandwhomCuewouldlatercallthe7

realleaderofthebookindustry,momentsafterhearingfromSargent.J.A.621.8

Cue then spoke with Reidy for twenty minutes before reaching out to Brian9

Murray, who, as the district court found, was fully supportive of the10

requirementthatalletailersbemovedtoanagencymodel.Apple,952F.Supp.11

2d at 673 n.39. After the discussions,Cue asked Sargent to speakwith both12

ReidyandMurray.Sargentcomplied,andspoketobothMurrayandReidyby13

telephoneforeightandfifteenminutes,respectively.Id.at673.Minuteslater,14

SargentcalledtheAmazonrepresentativetoinformhimthatMacmillanplanned15

to sign an agreement that required the company to conduct business with16

6AlthoughCuedenieddiscussing theMFN thatnight, thedistrictcourt foundthis testimony not credible in light of Cues deposition testimony and hiscontemporaneous email to Jobs that Sargent had legal concerns over the pricematching.Apple,952F.Supp.2dat672n.38(internalquotationmarksomitted).Thisdeterminationwasnotclearlyerroneous.


34

Amazonthroughanagencymodel. Id. ByJanuary23,Macmillanhadverbally1

agreedtojointheiBookstore.2

Cue followed a similar strategy with Penguin. While Penguins CEO3

DavidShanksagreed toApples termson January22,he informedCue thathe4

wouldjointheiBookstoreonlyiffourotherpublishersagreedtoparticipate.By5

January 25,Apple had signatures from threepublishers butPenguinwas still6

noncommittal.CuecalledShanks,andthetwospokefortwentyminutes.Less7

than an hour [later], Shanks called Reidy to discuss Penguins status in its8

negotiationswithApple.Id.at675.PenguinsignedtheContractthatafternoon.9

HarperCollinswas the fifth, and final,publisher to agree inprinciple to10

Applesproposal.Murray,itsCEO,remainedunhappyoverthesizeofApples11

commissionandtheexistenceofpricecaps.Id.at673n.39.Unabletonegotiate12

successfullywithMurray,CueaskedJobstocontactJamesMurdoch,theCEOof13

thepublishersparentcompany,andtellhimwehave3signedso there isno14

leapoffaithhere.Id.at675(internalquotationmarksomitted).Afteraseriesof15

emails,JobssummarizedApplespositiontoMurdoch:16

[W]e simplydont think the ebookmarket can be successfulwith17pricinghigherthan$12.99or$14.99.Heck,Amazonissellingthese18booksat$9.99,andwhoknows,maybe theyare rightandwewill19fail even at $12.99. But were willing to try at the prices weve20


35

proposed....AsIseeit,[HarperCollins]hasthefollowingchoices:1(1)Throwinwith[A]ppleandseeifwecanallmakeagoofthisto2create a realmainstream ebooksmarket at $12.99 and $14.99. (2)3KeepgoingwithAmazonat$9.99.Youwillmakeabitmoremoney4intheshortterm,butinthemediumtermAmazonwilltellyouthey5willbepayingyou70%of$9.99. Theyhaveshareholders too. (3)6HoldbackyourbooksfromAmazon.Withoutawayforcustomers7tobuyyourebooks,theywillstealthem.89

Id.at677.CuealsoemailedMurraytoinformhimthatfourotherpublishershad10

signed their agreements. Murray then called executives atbothHachette and11

MacmillanbeforeagreeingtoApplesterms.12

As the district court found, during the period in January duringwhich13

AppleconcludeditsagreementswiththePublisherDefendants,Applekeptthe14

Publisher Defendants apprised about who was in and how many were on15

board.7Id.at673.ThePublisherDefendantsalsokeptinclosecommunication.16

As thedistrict courtnoted, [i]n the criticalnegotiationperiod, over the three17

daysbetween January19and21,Murray,Reidy,Shanks,Young,andSargeant18

calledoneanother34times,with27callsexchangedonJanuary21alone.Id.at19

674.20

7 Indeed, on the morning of January 21, Apples initial deadline for the

publishers to commit to agency, Simon & Schusters Reidy emailed Cue to get anupdateonyourprogressinherdinguscats.J.A.543.


36

By the January 27 iPad launch, five of the Big Six Hachette,1

HarperCollins, Macmillan, Penguin, and Simon & Schuster had agreed to2

participate in the iBookstore. The lone holdout,RandomHouse,did not join3

because its executives believed itwould fare betterunder awholesalepricing4

modelandwereunwillingtomakeacompleteswitchtoagencypricing. Steve5

Jobsannouncedthe iBookstoreaspartofhispresentation introducingthe iPad.6

Whenaskedafterthepresentationwhysomeoneshouldpurchaseanebookfrom7

Apple for $14.99 as opposed to $9.99 withAmazon or Barnes & Noble, Jobs8

confidentlyreplied,[t]hatwontbethecase . . .thepricewillbethesame. . . .9

[P]ublisherswillactuallywithholdtheir[e]booksfromAmazon...becausethey10

are not happy with the price.8 A day later, Jobs told his biographer the11

publisherspositionwithAmazon:[y]ouregoingtosignanagencycontractor12

were not going to give you the books. J.A. 891 (internal quotation marks13

omitted).14

15

16

8On January 29, Simon& Schusters general counselwrote toReidy that she

[could not] believe that Jobs made [this] statement, which she considered[i]ncrediblystupid.J.A.638.


37

E. NegotiationswithAmazon1

Jobssboastprovedtobeprophetic.WhilethePublisherDefendantswere2

signingApplesContracts,theywerealsoinformingAmazonthattheyplanned3

onchangingthetermsoftheiragreementswithittoanagencymodel.However,4

theirmoveagainstAmazonbeganinearnestonJanuary28,thedayaftertheiPad5

launch.Thatafternoon,JohnSargentflewtoSeattletodeliveranultimatumon6

behalfofMacmillan:thatAmazonwouldswitchitsebooksalesagreementwith7

Macmillan to an agencymodelor suffer a sevenmonthdelay in its receiptof8

Macmillans new releases.9 Amazon responded by removing the option to9

purchaseMacmillansprintandebooktitlesfromitswebsite.10

Sargent,as thedistrictcourt found,had informedCueofhis intention to11

confrontAmazonbeforeeverleavingforSeattle.10Apple,952F.Supp.2dat678.12

Onhisreturn,heemailedCuetoinformhimaboutAmazonsdecisiontoremove13

9As thedistrictcourt found,[s]evenmonthswasnorandomperiod itwasthenumberofmonths forwhich titlesweredesignatedNewRelease titlesunder theAppleAgreement and restrained by theAppleprice caps andMFN. Apple, 952 F.Supp.2dat679.

10Attrial,CueclaimedhehadnoadvanceknowledgeofSargentsplantogotoSeattle,butthedistrictcourtfoundthistestimonytobeincredible.SargenthademailedCueabouthis tripdaysbefore themeeting tookplace. Moreover,on January28, theday of themeeting, Jobs toldhisbiographer that thePublisherDefendants went toAmazonandsaid, Youregoingtosignanagencycontractorwerenotgoingtogiveyouthebooks. Apple,952F.Supp.2dat678n.47. ThedistrictcourtsassessmentofCuescredibilitywasnotclearlyerroneous.


38

Macmillanebooks fromKindle,addinganote to say thathewanted tomake1

sure you are in the loop. J.A. 640. Sargent also wrote a public letter to2

Macmillansauthorsandagents,describingtheAmazonnegotiations.Hachettes3

ArnaudNourryemailedtheCEOofMacmillansparentcompanytoexpresshis4

personal support forMacmillansactionsand toensure [him] that [hewas]5

not going to find [his] company alone in the battle. J.A. 643. A Penguin6

executivewrotetoexpresssimilarsupportforMacmillansposition.7

ThedistrictcourtfoundthatwhileAmazonwasopposedtoadoptionof8

theagencymodelanddidnotwanttocedepricingauthoritytothePublishers,9

itknewthatitcouldnotprevailinthispositionagainstfiveoftheBigSix.Apple,10

952 F. Supp. 2d at 671, 680. WhenAmazon toldMacmillan that itwould be11

willingtonegotiateagencyterms,SargentsentCueanemailtitledURGENT!!12

thatread:HiEddy,Iamgonnaneedtofigureoutourfinalagencytermsofsale13

tonight. Canyoucallmeplease? J.A.642. CueandSargentspokethatnight14

and, while Cue denied at trial that the conversation concerned Macmillans15

negotiations with Amazon, the district court found that his denial was not16


39

credible.11 Apple, 952 F. Supp. 2d at 681 n.52. By February 5,Amazon had1

agreedtoagencytermswithMacmillan.2

The other publishers who had joined the iBookstore quickly followed3

Macmillanslead.OnFebruary11,ReidywrotetotheheadofCBSthatSimon&4

SchusterwasbeginningagencynegotiationswithAmazon. She informedhim5

thatshewas trying todelaynegotiationsbecause itwasimperative . . . that6

theotherpublisherswithwhomApplehasannounceddealspushforresolution7

ontheirtermchangesatthesametime,thusnot leavingusouttherealone.8

J.A. 701. Each of the PublisherDefendants then informedAmazon that they9

wereunder tightdeadlines tonegotiatenewagencyagreements,andkeptone10

anotherinformedaboutthedetailsoftheirnegotiations.AsDavidNaggar,one11

ofAmazonsnegotiators,testified,wheneverAmazonwouldmakeaconcession12

onanimportantdealpoint,itwouldcomebacktousfromanotherpublisher13

askingforthesamethingorproposingsimilarlanguage.J.A.1491.14

Onceagain,ApplecloselymonitoredthenegotiationswithAmazon. The15

Publisher Defendants would inform Cue when they had completed agency16

agreements, and his team monitored price changes on the Kindle. When17

11Asthedistrictcourtnoted,MacmillanhadexecuteditsContractwithAppleaweek earlier, so that the only final agency terms still under discussion were withAmazon.Apple,952F.Supp.2dat681n.52.


40

Penguin languished behind the others, Cue informed Jobs that Apple was1

changing a bunch of Penguin titles to 9.99 in the iBookstore because they2

didnt get theirAmazon deal done. Apple, 952 F. Supp. 2d at 682 (internal3

quotationmarksomitted).ByMarch2010,Macmillan,HarperCollins,Hachette,4

andSimon&SchusterhadcompletedagencyagreementswithAmazon. When5

PenguincompleteditsdealinJune,thecompanysexecutiveproudlyannounced6

to Cue that [t]he playing field is now level. Id. (internal quotation marks7

omitted).128

F. EffectonEbookPrices9

AsApple and the Publisher Defendants expected, the iBookstore price10

capsquicklybecamethebenchmarkforebookversionsofnewreleasesandNew11

YorkTimesbestsellers.InthefivemonthsfollowingthelaunchoftheiBookstore,12

thepublisherswho joined themarketplaceandswitchedAmazon toanagency13

modelpriced85.7%ofnewreleasesonKindleand92.1%ofnewreleasesonthe14

iBookstoreat,orjustbelow,thepricecaps.Apple,952F.Supp.2dat682.Prices15

forNew York Times bestsellers took a similar leap as publishers began to sell16

12 Eventually, the Publisher Defendants negotiated agency agreements with

Barnes&Noble,andlaterGoogle.RandomHousealsoadoptedtheagencymodel,andjoinedtheiBookstore,inearly2011.


41

96.8% of their bestsellers on Kindle and 99.4% of their bestsellers on the1

iBookstoreat,or justbelow, theAppleprice caps. Id. During that same time2

period, Random House, which had not switched to an agency model, saw3

virtually no change in the prices for its new releases or New York Times4

bestsellers.5

TheApplepricecapsalsohadarippleeffecton therestof thePublisher6

Defendants catalogues. Recognizing thatApplesprice capswere tied to the7

priceofhardcoverbooks,manyofthesepublishersincreasedthepricesoftheir8

newly released hardcover books to shift the ebook version into a higher price9

category. Id. at 683. Furthermore, because the Publisher Defendants who10

switchedtotheagencymodelexpectedtomakelessmoneypersalethanunder11

thewholesalemodel,theyalsoincreasedthepricesontheirebooksthatwerenot12

newreleasesorbestsellerstomakeupfortheexpectedlossofrevenue.13Based13

ondata from February 2010 just before thePublisherDefendants switched14

AmazontoagencypricingtoFebruary2011,anexpertretainedbytheJustice15

Department observed that the weighted average price of the Publisher16

Defendants new releases increased by 24.2%, while bestsellers increased by17

13The fivePublisherDefendants accounted for 48.8% of all retail trade ebooksalesintheUnitedStatesduringthefirstquarterof2010.


42

40.4%,andotherebooksincreasedby27.5%,foratotalweightedaverageebook1

priceincreaseof23.9%.14Indeed,evenApplesexpertagreed,notingthat,overa2

twoyear period, the Publisher Defendants increased their average prices for3

hardcovers,newreleases,andotherebooks.4

Increasingpricesreduceddemand for thePublisherDefendantsebooks.5

According tooneofPlaintiffsexperts, thepublisherswho switched toagency6

sold77,307fewerebooksoveratwoweekperiodaftertheswitchtoagencythan7

inacomparabletwoweekperiodbeforetheswitch,whichamountedtoselling8

12.9%fewerunits.Id.at684.AnotherexpertreliedondatafromRandomHouse9

toestimatehowmanyebooksthePublisherDefendantswhoswitchedAmazon10

to agency would have sold had they stayed with the wholesale model, and11

concludedthattheagencyswitchandpriceincreasesledto14.5%fewersales.Id.12

Significantly, these changes tookplaceagainst thebackdropofa rapidly13

changingebookmarket.AmazonintroducedtheKindleinNovember2007,just14

over two years beforeApple launched the iPad in January 2010. During that15

shortperiod,Appleestimated that themarketgrew from$70million inebook16

14 A weighted average price controls for the fact that different ebooks sell in

differentquantitiesbydividing the totalprice thatconsumerspaid forebooksby thetotalnumberofebookssold.


43

salesin2007to$280millionin2009,andthecompanyprojectedthosefiguresto1

grow significantly in following years. Apples expert witnesses argued that2

overallebooksalescontinued togrow in the twoyearsafter thecreationof the3

iBookstore and that the average ebook price fell during those years. But as4

Plaintiffs experts pointed out, the ebookmarket had been expanding rapidly5

even before Apples entry and average prices had been falling as lowerend6

publishersenteredthemarketandlargernumbersofoldbooksbecameavailable7

indigitalform.Applesexpertsdidnotpresentanyanalysisthatattemptedto8

control for themany changes that theebookmarketwas experiencingduring9

these early years of its growth, Apple, 952 F. Supp. 2d at 685, nor did they10

estimatehowthemarketwouldhavegrownbutforApplesagreementwiththe11

PublisherDefendants to switch to an agencymodel and raise prices. To the12

contrary,theundisputedfactthatthePublisherDefendantsraisedpricesontheir13

ebooks,whichaccountedforroughly50%ofthetradeebookmarketinthefirst14

quarterof2010,necessitatedafindingthattheactionstakenbyAppleandthe15

PublisherDefendantsledtoanincreaseinthepriceofebooks.Id.16

Finally, in response to the dissents claim that Apples conduct17

deconcentrat[ed]...theebookretailmarketandthuswasprocompetitive,18


44

DissentingOp.at31,itisworthnotingthatthedistrictcourtseconomicanalysis1

and the parties submissions at trial focused entirely on the price and sales2

figures for tradeebooks. This isbecausebothpartiesagreed that the relevant3

market inthiscase isthetradeebooksmarket,nottheereadermarketorthe4

ebooks systemmarket. UnitedStatesv.Apple, Inc.,889F.Supp.2d623,6425

(S.D.N.Y. 2012);Apple, 952F. Supp. 2d at 694n.60. Thedistrict courtdidnot6

analyze the state of competition between ebook retailers or determine that7

Amazonspricingpolicyacted,asthedissentaccuses,asabarrier[]toentryfor8

otherpotentialretailers.DissentingOp.at24,30.9

II.ProceduralHistory10

OnApril 11, 2012, Plaintiffs filed a pair of civil antitrust actions in the11

United States District Court for the Southern District of New York. The12

complaints alleged that Apple and the Publisher Defendants Hachette,13

HarperCollins,Macmillan,Penguin,andSimon&Schusterconspiredtoraise,14

fix,andstabilizetheretailpricefornewlyreleasedandbestsellingtradeebooks15

inviolationof1oftheShermanActandvariousstatelaws.Thelitigationthen16

proceededalongtwoseparatetrajectories,oneforthePublisherDefendantsand17

theotherforApple.18


45

A. PublisherDefendants1

Hachette,HarperCollins,andSimon&SchusteragreedtosettlewithDOJ2

bysigningconsentdecreesonthesamedaythattheJusticeDepartmentfiledits3

complaint. Pursuant to theTunneyAct,15U.S.C.16etseq.,at least60days4

prior to theeffectivedateofaconsent judgment, theUnitedStatesmust filea5

competitive impact statement, which includes, inter alia, the nature and6

purposeoftheproceeding,adescriptionofthepracticesoreventsgivingrise7

to the allegedviolationof the antitrust laws, and an explanationof the relief8

obtainedbytheconsentjudgmentandtheanticipatedeffectsoncompetitionof9

such relief. Id.16(b). Incompliancewith these requirements,DOJ issueda10

competitiveimpactstatementthatoutlinedtheremediesitplannedtoimposeon11

Hachette, HarperCollins, and Simon & Schuster. Two of those proposed12

remediesrequiredthat,fortwoyears,thethreepublishersnotrestrict,limit,or13

impedeanEbookRetailersabilitytoset,alter,orreducetheRetailPriceofany14

Ebookor toofferpricediscountsor anyother formofpromotions, and that15

theynotenterintoanyagreementwithretailersthatlimitsuchpractices.J.A.16

112627.17


46

After the 60day commentperiod, the JusticeDepartmentmoved in the1

district court for a decision that the entry of the judgment is in the public2

interest,15U.S.C.16(e),andforapprovaloftheconsentdecree.Indefenseof3

thetwoyearlimitationsprovisions,DOJexplainedthatthePublisherDefendants4

hadused retailprice restrictions to effectuat[e] the conspiracy and that two5

yearswassufficienttoallowmovementinthemarketplaceawayfromcollusive6

conditions without alter[ing] the ultimate development of the competitive7

landscapeinthestillevolvingebooksindustry.J.A.105455.OnSeptember5,8

2012,thedistrictcourtapprovedtheconsentdecreeandfoundthetwoyearban9

on retailprice restrictions wholly appropriate given the SettlingDefendants10

allegedabuseof suchprovisions . . . , theGovernments recognition that such11

termsarenotintrinsicallyunlawful,andthenascentstateofcompetitioninthee12

booksindustry.J.A.1088.13

The remainingPublisherDefendants,Penguin andMacmillan, settled in14

quick succession. OnDecember 18, 2012,Penguin agreed to a consentdecree15

with essentially the same terms that Hachette, HarperCollins, and Simon &16

Schusterreceived.Afewmonthslater,inFebruary2013,Macmillanalsoagreed17

to settle. The terms of Macmillans consent decree contained slight18


47

modifications.Ratherthandelayingtheprohibitiononretaildiscountsuntilthe1

courtapprovedthedecree,DOJrequiredMacmillantobegincompliancewithin2

threedaysofsigningthedecree.Inexchange,theJusticeDepartmentagreedto3

backdate thebeginningof the limitationsperiod toDecember18,2012and to4

reduceitslengthfromtwoyearsto23months,explainingthat[c]onsumersare5

betterservedbybringingmoreimmediateretailpricecompetitiontothemarket6

andthata23monthcoolingoffperiodissufficienttorestorecompetition.J.A.7

116263.ThedistrictcourtapprovedPenguinsconsentdecreeonMay17,2013,8

andMacmillansonAugust12,2013.9

B. Apple10

UnlikethePublisherDefendants,Appleoptedtotakethecasetotrial.Fact11

and expert discovery concluded on March 22, 2013 and, after filing pretrial12

motions, theparties agreed to abench trialonApples liability and injunctive13

relief, tobe followedby a separate trialondamageson the state claims if the14

statesprevailed.15

On July 10, 2013, after conducting a threeweek bench trial, the district16

courtconcludedthatApplehadviolated1oftheShermanActandvariousstate17

antitrustlaws.Inbrief,thecourtfoundthatAppleorchestrat[ed]aconspiracy18


48

amongthePublisherDefendantstoeliminateretailpricecompetition[inthee1

bookmarket]inordertoraisetheretailpricesofebooks.Apple,952F.Supp.2d2

at 697. Because this conspiracy consisted of a group of competitors the3

PublisherDefendantsassembledbyAppleto increaseprices, itconstituteda4

horizontalpricefixing conspiracyandwas aper seviolationof theSherman5

Act.Id.at694.Itconcluded,moreover,thateveniftheagreementtoraiseprices6

andeliminateretailpricecompetitionwereanalyzedundertheruleofreason,it7

wouldstillconstituteanunreasonablerestraintoftradeinviolationof1.Id.In8

thedistrict courtsview,Plaintiffs expertspersuasivelydemonstrated that the9

agreementfacilitatedanacrosstheboardprice increase inebookssoldbythe10

PublisherDefendants and a correspondingdrop in sales. Id. Apple, on the11

otherhand,failedtoshowthattheexecutionoftheAgreements,asopposedto12

the launch of the iPad and evolution of digital publishing more generally13

(whichwereindependentoftheAgreements),hadanyprocompetitiveeffects.14

Id.15

After thedistrict court issued its liabilitydecision, theparties submitted16

briefingoninjunctiverelief.Thecourtconductedahearingontheissueand,on17

September5,2013,issuedafinalinjunctiveorderagainstAppleandenteredfinal18


49

judgment. The injunctive order consists of four categories of relief:1

(1)Prohibited Conduct, which prevents Apple from enforcing MFNs with2

ebook publishers, retaliating against publishers for signing agreements with3

otherretailers,oragreeingwithanyofthePublisherDefendantstorestrict,limit,4

or impedeApples ability to set ebook retail prices; (2) Required Conduct,5

which,amongother things, forcesApple tomodify itsagencyagreementswith6

thePublisherDefendantsand to treatebookapps sold in the iTunes store like7

anyotherapp sold there; (3)AntitrustCompliance,which requiresApple to8

improveitsinternalsystemforpreventingantitrustviolations;and(4)External9

Compliance Monitor[ing], which allows the court to appoint an external10

monitortoensureApplescompliancewiththeinjunctiveorder.11

After theentryof thedistrictcourts injunctiveorder,Apple,Macmillan,12

andSimon&Schuster filed thisappeal. Thepartieshavenotyetconducteda13

trialtoassessthedamagesstemmingfromthestateantitrustclaims.14


50

DISCUSSION1

Toholdadefendant liableforviolating1oftheShermanAct,adistrict2

courtmust find a combination or some form of concerted action between at3

least two legallydistinct economic entities that constituted an unreasonable4

restraintoftrade.CapitalImagingAssocs.v.MohawkValleyMed.Assocs.,996F.2d5

537,542(2dCir.1993);see15U.S.C.1.Onappeal,Applechallengesnumerous6

aspectsof thedistrictcourts1analysisandalsocontends that the injunctive7

order that thedistrict court imposedon the company isunlawful. Macmillan8

andSimon&Schusterhave joinedAppleschallenge to the injunction,arguing9

that it impermissibly interfereswith theirconsentdecreesand isbarredby the10

doctrine of judicial estoppel. We conclude that the district courts liability11

determinationwassoundanditsinjunctiveorderlawful.Wethereforeaffirmthe12

judgmentofthedistrictcourt.13

I.StandardofReview14

Followingabenchtrial,thisCourtreviewsthedistrictcourtsfindingsof15

fact for clearerrorand itsconclusionsof lawandmixedquestionsdenovo.16

Connorsv.Conn.Gen.LifeIns.Co.,272F.3d127,135(2dCir.2001);seeFed.R.Civ.17

P.52(a). Thedistrictcourtsevidentiaryrulingsand its fashioningofequitable18


51

reliefarereviewedforabuseofdiscretion.SeeZeregaAve.RealtyCorp.v.Hornbeck1

OffshoreTransp.,LLC, 571F.3d 206, 21213 (2dCir. 2009) (evidentiary rulings);2

Abrahamsonv.Bd.ofEduc.OftheWappingersFallsCent.Sch.Dist.,374F.3d66,763

(2dCir.2004)(equitablerelief).4

II.ApplesLiabilityUnder15

This appeal requires us to address the important distinction between6

horizontal agreements to set prices, which involve coordination between7

competitorsatthesamelevelof[a]marketstructure,andverticalagreements8

onpricing,whicharecreatedbetweenpartiesatdifferent levelsof [a]market9

structure. AndersonNews,L.L.C.v.Am.Media, Inc.,680F.3d162,182 (2dCir.10

2012) (internal quotationmarks omitted). Under 1 of the ShermanAct, the11

formerare,withlimitedexceptions,perseunlawful,whilethelatterareunlawful12

only if an assessment of market effects, known as a ruleofreason analysis,13

reveals that theyunreasonablyrestrain trade. SeeLeeginCreativeLeatherProds.,14

Inc.v.PSKS,Inc.,551U.S.877,893(2007).15

Althoughthisdistinctionissharpintheory,determiningtheorientationof16

anagreementcanbedifficultasamatteroffactandturnsonmorethansimply17

identifyingwhethertheparticipantsareatthesamelevelofthemarketstructure.18


52

For instance, courts have long recognized the existence of hubandspoke1

conspiracies inwhichanentityatone levelof themarketstructure, thehub,2

coordinatesanagreementamongcompetitorsatadifferent level, thespokes.3

HowardHessDentalLabs.Inc.v.DentsplyIntl,Inc.,602F.3d237,255(3dCir.2010);4

see also Toys RUs, Inc. v. FTC, 221 F.3d 928, 93234 (7thCir. 2000). These5

arrangements consist of both vertical agreements between the hub and each6

spokeandahorizontalagreementamong the spokestoadhere to the [hubs]7

terms,oftenbecausethespokeswouldnothavegonealongwith[thevertical8

agreements]excepton theunderstanding that theother [spokes]wereagreeing9

to thesame thing. VIPhillipE.Areeda&HerbertHovenkamp,AntitrustLaw10

1402c (3ded.2010) (citingPepsiCo, Inc.v.CocaColaCo.,315F.3d101 (2dCir.11

2002));seealsoAm.BarAssn,AntitrustLawDevelopments2426(6thed.2007);XII12

Areeda&Hovenkamp,supra,2004c.1513

ApplecharacterizesitsContractswiththePublisherDefendantsasaseries14

ofparallelbutindependentverticalagreements,acharacterizationthatformsthe15

basis for its twoprimaryargumentsagainst thedistrictcourtsdecision. First,16

15 In this sense, the hubandspokemetaphor is somewhat inaccurate theplaintiff must also prove the existence of a rim to the wheel in the form of anagreementamong thehorizontal competitors. SeeDicksonv.MicrosoftCorp.,309F.3d193,20304(4thCir.2002).


53

Applearguesthatthedistrictcourt impermissibly inferred its involvement ina1

horizontalpricefixing conspiracy from theContracts themselves. Because (in2

Applesview) theContractswerevertical, lawful, and inApples independent3

economic interest, the mere fact that Apple agreed to the same terms with4

multiple publishers cannot establish that Apple consciously organized a5

conspiracy among the Publisher Defendants to raise consumerfacing ebook6

prices even if the effect of itsContractswas to raise those prices. Second,7

Applearguesthat,evenifitdidorchestrateahorizontalpricefixingconspiracy,8

itsconductshouldnotbesubject toper secondemnation. According toApple,9

properapplicationoftheruleofreasonrevealsthatitsconductwasnotunlawful.10

Forthereasonssetforthbelow,werejectthesearguments.Onthisrecord,11

the district court did not err in determining that Apple orchestrated an12

agreement with and among the Publisher Defendants, in characterizing this13

agreement as a horizontal price fixingconspiracy, or in holding that the14

conspiracyunreasonablyrestrainedtradeinviolationof1oftheShermanAct.15

A. TheConspiracywiththePublisherDefendants16

Section 1 of the Sherman Act bans restraints on trade effected by a17

contract,combination,orconspiracy.BellAtl.Corp.v.Twombly,550U.S.544,55318


54

(2007)(internalquotationmarksomitted).ThefirstcrucialquestioninaSection1

1 case is thereforewhether the challenged conduct stem[s] from independent2

decision or from an agreement, tacit or express. Starr v. Sony BMGMusic3

Entmt,592F.3d314,321 (2dCir.2010) (alteration inoriginal) (quotingTheatre4

Enters.,Inc.v.ParamountFilmDistrib.Corp.,346U.S.537,540(1954)).5

Identifyingtheexistenceandnatureofaconspiracyrequiresdetermining6

whethertheevidencereasonablytendstoprovethatthe[defendant]andothers7

had a conscious commitment to a common scheme designed to achieve an8

unlawful objective. Monsanto Co. v. SprayRite Serv. Corp., 465 U.S. 752, 7649

(1984) (internal quotation marks omitted). Parallel action is not, by itself,10

sufficient to prove the existence of a conspiracy; such behavior could be the11

result of coincidence, independent responses to common stimuli, or mere12

interdependence unaided by an advance understanding among the parties.13

Twombly,550U.S.at556n.4(internalquotationmarksomitted).Indeed,parallel14

behavior that does not result from an agreement is not unlawful even if it is15

anticompetitive.SeeInreTextMessagingAntitrustLitig.,782F.3d867,87379(7th16

Cir. 2015); In re FlatGlassAntitrust Litig., 385 F.3d 350, 36061 (3dCir. 2004).17

Accordingly, to prove an antitrust conspiracy, a plaintiff must show the18


55

existenceofadditionalcircumstances,often referred toas plus factors,which,1

when viewed in conjunctionwith the parallel acts, can serve to allow a fact2

findertoinferaconspiracy.ApexOilCo.v.DiMauro,822F.2d246,253(2dCir.3

1987).4

Theseadditionalcircumstancescan,ofcourse,consistofdirectevidence5

that thedefendants entered into an agreement like a recordedphone call in6

whichtwocompetitorsagreedtofixprices. Mayor&CityCouncilofBaltimore,7

Md.v.Citigroup, Inc., 709F.3d 129,136 (2dCir.2013). Butplaintiffsmayalso8

presentcircumstantialfactssupportingthe inferencethataconspiracyexisted.9

Id.Circumstancesthatmayraiseaninferenceofconspiracyincludeacommon10

motive toconspire,evidence that shows that theparallelactswereagainst the11

apparent individual economic selfinterest of the alleged conspirators, and12

evidence of a high level of interfirm communications. Id. (internal quotation13

marksomitted).Parallelconductalonemaysupportaninferenceofconspiracy,14

moreover, if it consistsofcomplexandhistoricallyunprecedentedchanges in15

pricingstructuremadeattheverysametimebymultiplecompetitors,andmade16

fornootherdiscerniblereason.Id.at137(internalquotationmarksomitted). 17


56

Because of the risk of condemning parallel conduct that results from1

independent action and not from an actualunlawful agreement, the Supreme2

Courthascautionedagainstdrawingan inferenceofconspiracy fromevidence3

thatisequallyconsistentwithindependentconductaswithillegalconspiracy4

or,astheCourthascalledit,ambiguousevidence.MatsushitaElec.Indus.Co.v.5

ZenithRadioCorp.,475U.S.574,597n.21 (1986). Thus,a findingofconspiracy6

requiresevidencethattendstoexcludethepossibilitythatthedefendantwas7

actingindependently. Monsanto,465U.S.at764. Thisrequirement,however,8

[does] not mean that the plaintiff must disprove all nonconspiratorial9

explanations for the defendants conduct; rather, the evidence need only be10

sufficient to allow a reasonable fact finder to infer that the conspiratorial11

explanationismorelikelythannot. InrePublnPaperAntitrustLitig.,690F.3d12

51, 63 (2d Cir. 2012) (quoting Phillip E. Areeda & Herbert Hovenkamp,13

FundamentalsofAntitrustLaw14.03(b),at1425(4thed.2011));accordMatsushita,14

475U.S.at588(requiringthattheinferenceofconspiracyisreasonableinlight15

of the competing inferences of independent action); In reHigh Fructose Corn16

SyrupAntitrustLitig.,295F.3d651,65556(7thCir.2002).17


57

Appleportrays itsContractswith thePublisherDefendantsas,atworst,1

unwittinglyfacilitat[ing]theirjointconduct.AppleBr.at23.AllAppledid,it2

claims, was attempt to enter the market on profitable terms by offering3

contractualprovisions an agencymodel, theMFNClause, and tieredprice4

caps which ensured the company a small profit on each ebook sale and5

insulated it from retailprice competition. Thishad the effect of raisingprices6

because it created an incentive for the Publisher Defendants to demand that7

Amazon adopt an agency model and to seize control over consumerfacing8

ebookpricesindustrywide.ButalthoughAppleknewthatitscontractualterms9

wouldenticethePublisherDefendants(whowantedtodoawaywithAmazons10

$9.99pricing)toseekcontroloverpricesfromAmazonandotherebookretailers,11

Apples success in capitalizing on the Publisher Defendants preexisting12

incentives, it contends,does not suggest that it joined a conspiracy among the13

PublisherDefendants to raise prices. In sum,Apples basic argument is that14

becauseitsContractswiththePublisherDefendantswerefullyconsistentwithits15

independent business interests, those agreements provide only ambiguous16

evidence of a 1 conspiracy, and the district court therefore erred under17

MatsushitaandMonsantoininferringsuchaconspiracy.18


58

Wedisagree. At thestart,Applesbenignportrayalof itsContractswith1

the Publisher Defendants is not persuasive not because those Contracts2

themselveswere independentlyunlawful,butbecause, incontext, theyprovide3

strong evidence thatApple consciously orchestrated a conspiracy among the4

PublisherDefendants. Asexplainedbelow,andasthedistrictcourtconcluded,5

Appleunderstood that itsproposedContractswere attractive to thePublisher6

DefendantsonlyiftheycollectivelyshiftedtheirrelationshipswithAmazontoan7

agency model whichApple knew would result in higher consumerfacing8

ebook prices. In addition to these Contracts, moreover, ample additional9

evidence identified by the district court established both that the Publisher10

DefendantsshiftingtoanagencymodelwithAmazonwastheresultofexpress11

collusion among them and that Apple consciously played a key role in12

organizingthatcollusion.ThedistrictcourtdidnoterrinconcludingthatApple13

wasmorethananinnocentbystander.14

AppleofferedeachBigSixpublisheraproposedContract thatwouldbe15

attractive only if the publishers acted collectively. Under Apples proposed16

agencymodel,thepublishersstoodtomakelessmoneypersalethanundertheir17

wholesaleagreementswithAmazon,butthePublisherDefendantswerewilling18


59

to stomach this lossbecause themodelallowed them to sellnew releases and1

bestsellersformorethan$9.99.BecauseoftheMFNClause,however,eachnew2

release and bestseller sold in the iBookstorewould cost only $9.99 as long as3

Amazon continued to sell ebooks at that price. So in order to receive the4

perceivedbenefitofApplesproposedContracts, thePublisherDefendantshad5

to switch Amazon to an agency model as well something no individual6

publisher had sufficient leverage to do on its own. Thus, each Publisher7

Defendantwouldbeabletoaccomplishtheshifttoagencyandthereforehave8

anincentivetosignApplesproposedContractsonlyifitactedintandemwith9

itscompetitors. SeeStarr,592F.3dat324;FlatGlass,385F.3dat36061;seealso10

J.A.1974(notingthattheagreementswouldnotfixthepublishersproblemsif11

theycouldnotmoveAmazontoanagencymodel).Bytheveryactofsigninga12

Contract withApple containing an MFN Clause, then, each of the Publisher13

Defendants signaled a clear commitment to move against Amazon, thereby14

facilitating their collective action. As the district court explained, the MFNs15

stiffenedthespinesofthePublisherDefendants.Apple,952F.Supp.2dat665.16

As a sophisticated negotiator,Apple was fully aware that its proposed17

Contracts would entice a critical mass of publishers only if these publishers18


60

perceivedanopportunitycollectively toshiftAmazon toagency.16 In fact, this1

was the very purpose of theMFN,whichApples Sauldevised as an elegant2

alternative to aprovision thatwouldhave explicitly required thepublishers to3

adoptanagencymodelwithotherretailers.AsCueputit,theMFNforce[d]the4

model fromwholesale to agency. J.A. 865. Indeed, theMFNs capacity for5

forcing collective action by thepublisherswaspreciselywhat enabled Jobs to6

predictwithconfidencethatthepricewillbethesameontheiBookstoreand7

theKindlewhenhe announced the launchof the iPad the same, Jobs said,8

because thepublisherswouldmakeAmazon sign . . . agency contract[s]by9

threateningtowithholdtheirebooks.J.A.891.Applewasalsofullyawarethat10

oncethePublisherDefendantsseizedcontroloverconsumerfacingebookprices,11

those prices would rise. It knew from the outset that the publishers hated12

Amazons $9.99pricepoint, and itputprice caps in its agreementsbecause it13

specificallyanticipatedthatoncethepublishersgainedcontroloverprices,they14

16Applesargumentonappeal that itdidnothave sufficientmarketpower to

coordinatethePublisherDefendantsisbesidethepoint.Marketpowermayaffordonemeansbywhichacompanycancoerceotherstocomplywithitswishes,butbruteforceis not the only way to foster an agreement. Here, both Apple and the PublisherDefendants understood that Apple was in a position to solve the publishersAmazonproblembyhelpingthemeliminatewhattheysawasamortalthreattotheirbusinessesnamely,the$9.99pricepoint.


61

wouldpushthemhigherthan$9.99,higherthanAppleitselfdeemedrealistic.1

Apple,952F.Supp.2dat692(internalquotationmarksomitted).2

Onappeal,ApplenonethelessdefendstheContractsthatitproposedtothe3

publishersasanaikidomovethatshrewdlyleveragedmarketconditionstoits4

ownadvantage. AppleBr.at17. [A]ikidomoveornot, theattractivenessof5

Apples offer to the Publisher Defendants hinged on whether it could6

successfullyhelporganizethemtoforceAmazontoanagencymodelandthento7

usetheirnewfoundcollectivecontroltoraiseebookprices.TheSupremeCourt8

has defined an agreement for Sherman Act 1 purposes as a conscious9

commitment toacommon schemedesigned toachieveanunlawfulobjective.10

Monsanto,465U.S.at764(internalquotationmarksomitted).Plainly,thisuseof11

the promise of higher prices as a bargaining chip to induce the Publisher12

DefendantstoparticipateintheiBookstoreconstitutedaconsciouscommitment13

to thegoalofraisingebookprices. Antitrust lawhasneverrequired identical14

motivesamongconspiratorswhentheirindependentreasonsforjoiningtogether15

leadtocollusiveaction.SpectatorsCommcnNetworkInc.v.ColonialCountryClub,16

253F.3d215,220(5thCir.2001)(emphasisadded).Putdifferently,independent17

reasonscanalsobeinterdependent,andthefactthatApplesconductwasin18


62

itsowneconomicinterestinnowayunderminestheinferencethatitenteredan1

agreement to raise ebook prices. VI Areeda & Hovenkamp, supra, 1413a2

(internalquotationmarksomitted).3

NorwasthePublisherDefendantsjointactionagainstAmazonaresultof4

paralleldecisionmaking. Aswehaveexplained, conduct resulting solely from5

competitors independentbusinessdecisionsandnot fromanyagreement6

isnotunlawfulunder1oftheShermanAct,evenifitisanticompetitive.See7

TextMessaging, 782 F.3d at 87379. But to generate apermissible inference of8

agreement,aplaintiffneedonlypresentsufficientevidencethatsuchagreement9

wasmore likely thannot. On thisrecord, thedistrictcourthadamplebasis to10

conclude that it was not equally likely that the nearsimultaneous signing of11

ApplesContracts bymultiple publisherswhich led to all of the Publisher12

DefendantsmovingagainstAmazon resulted from theparties independent13

decisions,asopposedtoameetingof[the]minds. Monsanto,465U.S.at765;14

seeToys RUs, 221F.3dat93536 (holding that exclusivedealingagreements15

betweena retailerandmanufacturers thatwerecontrary to themanufacturers16

individualselfinterestbutconsistentwiththeircollectiveinterestsupportedthe17

inferenceofahorizontalconspiracyinwhichtheretailerparticipated);VIAreeda18


63

& Hovenkamp, supra, 1425a, d ([A] conspiracy may be inferred if a1

defendantsactionwouldhavebeencontrarytoitsselfinterestintheabsenceof2

advance agreement. Id. 1425a). That the Publisher Defendants were in3

constant communi

Documents

Second Circuit opinion in USA v. Apple