Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca2-13-03748/USCOURTS-ca2-13-03748-2/pdf.json

Nature of Suit Code: 410
Nature of Suit: Antitrust
Cause of Action: 

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DENNIS JACOBS, Circuit Judge, dissenting:

I respectfully dissent.

This appeal is taken by Apple Inc. from a judgment in the United States

District Court for the Southern District of New York (Cote, J.), awarding an

antitrust injunction in favor of the United States, 31 states, the District of

Columbia, and the Commonwealth of Puerto Rico. The plaintiffs’ claims are

premised on Apple’s conduct as a prospective retailer of e-books. I vote to

reverse. 

* * *

I have no quarrel with the district court’s conscientious findings of fact; I

affirmatively rely on them, and cite them throughout. The 156 pages of findings

track communications and interactions that happened over the 48-day course of

events, detail by detail. See United States v. Apple Inc., 952 F. Supp. 2d 638, 655-

81 (S.D.N.Y. 2013) (“Apple I”). All that is needed to decide the case, however, are

the schematic facts that show the architecture of the horizontal and vertical

arrangements and the dynamics of the competitive forces. They are set out in a

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nutshell in the following paragraphs, and at somewhat greater length in the

Background section of this opinion.

As Apple was preparing the launch of its first iPad tablet in 2009, the

company recognized that the device could support e-books, and gave

consideration to including an e-book retail platform. However, Amazon had

preceded Apple in the market, had established a 90 percent ascendency in sales

of e-books, and was effectively excluding new entrants by offering bestsellers at a

price ($9.99) that for many books was below the prices Amazon was paying

publishers.

Although Apple was positioned to enter the retail market, it was unwilling

to do so on terms that would incur a loss on e-book sales (as would happen if it

met Amazon’s below-cost price), or that would impair its brand and likely fail (as

would happen if it charged more than Amazon). So, as a condition to its entry as

a competing buyer for the publishers’ wares, Apple insisted that the publishers

agree to a distribution model that would lower that barrier to retail entry.

The new distribution model was implemented by several terms in Apple’s

contracts with publishers: agency pricing, tiered price caps, and a most-favorednation clause. It is conceded that none of those terms is, standing alone, illegal. 

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Apple also encouraged publishers to implement agency pricing in their contracts

with other retailers. Although publishers were unhappy about Amazon’s belowcost price for e-books (which eroded the publishers’ hardcover sales) no one

publisher alone could counter Amazon. In short order, five of the country’s six

largest publishers agreed to Apple’s terms and jointly pressured Amazon to

adopt agency pricing. The publishers thereby prevailed in what the district court

found to be a horizontal price-fixing conspiracy. The barrier to entry thus

removed, Apple entered the retail market as a formidable competitor. In the

deconcentrated market, Amazon’s 90 percent market share is now 60 percent.

(I acknowledge that, in adducing facts found by the district court, this

opinion unavoidably casts imputations on Amazon. Fairness requires

acknowledgment that Amazon has not appeared in this litigation and has not

had a full opportunity to dispute the district court’s findings or characterizations. 

Moreover, the fact of Amazon’s monopoly alone would not support an inference

that Amazon’s behavior was in any way unlawful.)

The Department of Justice, 31 states, the District of Columbia, and the

Commonwealth of Puerto Rico sued Apple and the five publishers for conspiracy

in unreasonable restraint of trade, in violation of § 1 of the Sherman Antitrust

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Act, 15 U.S.C. § 1. The publishers settled, and Apple proceeded to a bench trial. 

The district court ruled that Apple’s conduct as a vertical enabler of the

publishers’ horizontal price conspiracy constituted a violation per se of § 1, and

that (in any event) Apple’s conduct would also violate § 1 under the rule of

reason. On this appeal, a majority affirms only on the ground of liability per se. 

See Op. of Judge Lohier, ante, at 1. Since I would reverse, I consider as well the

rule of reason. Judge Livingston’s opinion argues (for herself alone) that the

judgment could be affirmed on that alternative ground.

The district court committed three decisive errors:

• The district court ruled (and the majority affirms) that a vertical enabler of

a horizontal price-fixing conspiracy is in per se violation of the antitrust

laws. However, the Supreme Court teaches that a vertical agreement

designed to facilitate a horizontal cartel “would need to be held unlawful

under the rule of reason.” Leegin Creative Leather Prods., Inc. v. PSKS, Inc.,

551 U.S. 877, 893 (2007) (emphasis added). (POINT I)

• The district court’s alternative ruling under the rule of reason was predetermined by its (erroneous) per se ruling. Thus the district court assessed

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impacts on competition without recognizing that Apple’s role as a vertical

player differentiated it from the publishers. The court should instead have

considered Apple as a competitor on the distinct horizontal plane of

retailers, where Apple competed with Amazon (and smaller players such

as Barnes & Noble). (POINT II)

• Apple’s conduct, assessed under the rule of reason on the horizontal plane

of retail competition, was unambiguously and overwhelmingly procompetitive. Apple was a major potential competitor in a market

dominated by a 90 percent monopoly, and was justifiably unwilling to

enter a market on terms that would assure a loss on sales or exact a toll on

its reputation. In that connection, the district court erroneously deemed

the monopolist’s $9.99 price as categorically good for competition because

it was lower than cost, and because e-book prices rose after the monopoly

was broken. (POINT III)

A further and pervasive error (by the district court and by my colleagues on this

appeal) is the implicit assumption that competition should be genteel, lawyerdesigned, and fair under sporting rules, and that antitrust law is offended by

gloves-off competition.

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BACKGROUND

From the 2007 inception of the U.S. retail market for e-books through 2009,

Amazon “dominated the e-book retail market, selling nearly 90% of all e-books.” 

Apple I, 952 F. Supp. 2d at 649. It assured its domination by charging its retail

customers $9.99 for new releases and bestsellers, below the wholesale price that

Amazon was paying to publishers. Id. at 649-50, 708. The popular media

reported that Amazon “takes a loss on the sale of the most popular e-books.” Id.

at 652. That pricing deterred potential retail competitors from entering the

relevant market--“trade e-books in the United States” --because an entrant 1

“would run the risk of losing money if it tried or was forced to match Amazon’s

pricing to remain competitive.” Id. at 658. 

Amazon’s below-cost pricing was also a threat to publishers, because at a

$9.99 price point, e-books cannibalized sales of (more profitable) hardcover

editions. Id. at 649. Although the major publishers believed Amazon’s belowcost pricing was “predatory,” id. at 653, each publisher understood that it was

powerless to take on Amazon, id. at 650. Publishers feared that Amazon might

 The parties did not dispute this market definition. Apple I, 952 F. Supp. 1

2d at 694 n.60.

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“compete directly with publishers by negotiating directly with authors and

literary agents for rights,” id. at 649, and might “retaliate” against insubordinate

publishers “by removing the ‘buy buttons’ on the Amazon site that allow

customers to purchase books . . . or by eliminating [a publisher’s] products from

its site altogether,” id. at 679. One publisher, Macmillan, suffered such retaliation

when Amazon removed the “buy buttons” for print and e-book versions of

Macmillan titles. Id.

Amazon’s 90 percent market share constituted a monopoly under antitrust

law. See, e.g., Am. Tobacco Co. v. United States, 328 U.S. 781, 797 (1946)

(characterizing as “a substantial monopoly” a market share of “over 80% of the

field”); 3B Areeda & Hovenkamp, Antitrust Law ¶ 801 (3d ed. 2008). Amazon’s

below-cost pricing was a barrier to entry by Apple in 2009, when it contemplated

entry into the e-book retail market via the iPad. Apple I, 952 F. Supp. 2d at 654, 2

 While the district court did not use the label “barrier to entry,” its 2

findings of fact made the point clearly. In finding that a new entrant to e-book

retail in 2009 “would run the risk of losing money if it tried or was forced to

match Amazon’s pricing to remain competitive,” Apple I, 952 F. Supp. 2d at 658,

the district court left no doubt that the effect of Amazon’s below-cost pricing

regime was to “impede entry and protect existing market power”--the basic

operation of a barrier to entry, 2B Areeda & Hovenkamp, supra, ¶ 420c, at 78.

The majority disputes whether there was any barrier to entry under

Amazon’s below-cost pricing regime, because at least one competitor attempted

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658. Apple nevertheless undertook to develop an e-book retail platform in time

for the iPad’s launch, scheduled for January 27, 2010. Id. at 654-55. However,

“Apple did not have to open an e-bookstore when it launched the iPad”; and it

was willing to enter the market only on the condition that its e-book retail

business would be profitable, such that Apple could “compete effectively with

Amazon” without adopting a loss-leadership and below-cost pricing strategy. 

Id. at 656-59.

Apple opened extensive negotiations with publishers to determine how if

at all it could enter the e-book retail market. Id. at 655-57. Apple met with the

leaders of the six largest publishing houses in the United States: Hachette,

HarperCollins, Macmillan, Penguin, Random House, and Simon & Schuster. Id.

at 647, 655. At the outset, Apple understood that the publishers were unhappy

with Amazon’s below-cost pricing of e-books; so Apple knew that the publishers

to join the market. See Op. of Judge Livingston, ante, at 13 (for the Court), 100. 

Even if that entrant had any chance of success (nobody contends that it sold a

meaningful number of e-books, or made any money, or reduced Amazon’s

mammoth market share to less than 90 percent), that fact need not imply ease of

entry because “a barrier may protect a market incumbent without completely

excluding entry.” 2B Areeda & Hovenkamp, supra, ¶ 420a, at 73.

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“were willing to coordinate their efforts” to combat the $9.99 price point. Id. at

656.

After some weeks, Apple and several publishers devised a new model for

e-book distribution. Amazon had been paying a wholesale price for each e-book,

and reselling (often at a loss) for a retail price of its choosing. Apple’s

distribution contracts would adopt an agency system: publishers would set the

retail prices of e-books sold through Apple’s platform and Apple would take a

fixed-percent commission on each sale. Id. at 659. However, the agency model

would expose Apple (or any retailer) to risk, because publishers might protect

hardcover sales by setting retail prices for e-books so high that Apple would

appear out of touch with consumers aware of Amazon’s $9.99 price. Id. Apple’s

solution was twofold. First, the proposed agency contract included a most

favored nation (“MFN”) clause, under which publishers must price their new

releases in Apple’s store at or below the lowest price offered by any other e-book

retailer. Id. at 662. The district court found that the MFN clause “effectively

forced” each publisher that signed Apple’s agency contract to move its other

retailers onto the agency model. Id. at 664. That is because, once Apple’s cost

was set as a percentage of the retail price, the publishers would suffer if Apple

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matched Amazon’s $9.99 retail price. Second, the proposed contract included

maximum prices for various categories of e-books. Id. at 661-62. The district

court found that these tiered price caps had the effect of setting anchor prices

across the e-book industry. Id. at 670. Nonetheless, as the district court

observed, these terms are not inherently illegal, and “entirely lawful contracts

may include an MFN, price caps, or pricing tiers.” Id. at 698.

As Apple negotiated with publishers to sign the agency contract, it told

each major publisher that all signing publishers would receive the same terms. 

Id. at 667. In the end, five of the six largest publishers signed Apple’s agency

contract. Id. at 673. (Only Random House, the country’s largest, did not. Id.) As

the district court found, the five signatories represented “over 48% of all e-books

in the United States” when they signed Apple’s agency contract. Id. at 648. 

Apple unveiled its e-book retail platform--the “iBookstore”--at the first public

demonstration of the iPad on January 27, 2010. Id. at 678-79.

After the publishers signed on to Apple’s agency contract, they had to

focus on Amazon’s adoption of the agency model because otherwise (as

explained above) the MFN clause would allow Apple to match Amazon’s price

for bestsellers, and pay the publishers no more than a percentage commission on

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$9.99. However, “the [p]ublishers feared retaliation from Amazon unless they

acted in unison,” id. at 670, and “needed reassurance that they would not be

alone,” id. at 674. An Apple executive liaised with each of the five signatory

publishers, to encourage a “united front” in their negotiations with Amazon, and

to keep the publishers “apprised about who was in and how many were on

board.” Id. at 673. The publishers also communicated directly with each other. 

Id. at 674-77. When Amazon realized that the five publishers were acting in

concert, it acceded and signed the agency contracts. Id. at 680-82.

Those are the findings on which Apple was adjudged to have committed

an antitrust violation. The putative violation amounted to: (a) embedding the

agency model (complete with MFN clauses and price caps) in Apple’s own

contracts with publishers and (b) encouraging the publishers to coordinate

horizontally in their efforts to push the industry-wide adoption of the agency

model. Apple and the publishers shared the motive to increase the publishers’

pricing power in order to deprive Amazon of its monopoly. They succeeded: as

the district court noted earlier in this litigation, “Amazon’s market share in ebooks decreased from 90 to 60 percent in the two years following the

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introduction of agency pricing.” United States v. Apple, Inc., 889 F. Supp. 2d 623,

640 (S.D.N.Y. 2012).

* * *

The foregoing Background accepts and relies upon the district court’s

findings of fact. One cannot say the same of Judge Livingston’s opinion, which

supports its legal conclusions and its market analysis with novel findings made

now on appeal, i.e., remand by other means. A few examples:

• The notion that Amazon’s below-cost pricing was loss-leadership

“designed to encourage consumers to adopt the Kindle,” Op. of Judge

Livingston, ante, at 13 (for the Court), is a novelty, supported by neither

the fact findings nor the record. At any rate, the effect of e-book pricing

outside of the relevant market is irrelevant.

• The majority asserts that Amazon’s below-cost pricing was limited to only

“a small loss” on only “a small percentage of its sales.” Id. at 85 (for the

Court). These observations are apparently drawn from a submission by

Amazon, downplaying the anti-competitive effects of its monopolyprotective pricing. The district court did not rely on these statistics,

presumably because they are misleading and self-serving: they ignore that

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the minority of titles comprising new releases and bestsellers naturally

have an outsize impact on the industry. Accordingly, the district court

found that the below-cost pricing had consequences on the market, namely

that a new entrant “would run the risk of losing money if it tried or was

forced to match Amazon’s pricing to remain competitive.” Apple I, 952

F. Supp. 2d at 658.

• I can find no record support for the narrative that Amazon’s market share

was eroding before Apple’s entry, that the iPad “promised to introduce

more competition with or without Apple’s iBookstore,” and that the

publishers thereby enjoyed increased negotiating leverage. Op. of Judge

Livingston, ante, at 103-04. Similarly, the assertion that Barnes & Noble

disrupted Amazon’s dominance in the e-book market, see id. at 103, is

supported neither by the district court’s findings nor by the record.

By contrast, my antitrust analysis relies on the findings made by the

district court, and incorporates no others, in order (a) to avoid factual disputes

with my colleagues, (b) to defer to the district court’s thorough fact findings in

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arriving at my legal conclusions, and (c) to respect the limited role of appellate

courts.

DISCUSSION

I

The district court’s principal legal error, from which other errors flow, is its

conclusion that Apple violated § 1 under the per se rule. Having found that the

publishers’ coordinated strategy was a horizontal price-fixing conspiracy, and

that Apple had facilitated that conspiracy in its vertical relationship with the

publishers, see Apple I, 952 F. Supp. 2d at 691, the district court drew the legal

conclusion that these facts established a per se violation of the Sherman Act by

Apple. This appeal turns on whether purely vertical participation in and

facilitation of a horizontal price-fixing conspiracy gives rise to per se liability.

Section 1 of the Sherman Act “outlaw[s] only unreasonable restraints”; so a

court weighing an alleged violation “presumptively applies rule of reason

analysis, under which antitrust plaintiffs must demonstrate that a particular

contract or combination is in fact unreasonable and anticompetitive before it will

be found unlawful.” Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006) (quoting State Oil

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Co. v. Khan, 522 U.S. 3, 10 (1997)). The exception, liability per se, is reserved for

those categories of behavior so definitively and universally anti-competitive that

a court’s consideration of market forces and reasonableness would be pointless. 

Id. Traditionally, restraints that are per se unlawful take the form of horizontal

agreements “raising, depressing, fixing, pegging, or stabilizing the price of a

commodity.” United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223 (1940).

Among modern cases, the per se rule takes aim exclusively at horizontal

agreements, because “competition among the manufacturers of the same

[product] . . . is the primary concern of antitrust law.” Continental T.V., Inc. v.

GTE Sylvania Inc., 433 U.S. 36, 52 n.19 (1977). Accordingly, the trend of antitrust

law has been a steady constriction of the per se rule in the context of vertical

relationships. See, e.g., Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551

U.S. 877, 901 (2007) (holding that vertical agreements for minimum prices are not

per se violations); State Oil Co., 522 U.S. at 7 (holding that vertical agreements for

maximum prices are not per se violations); Continental T.V., 433 U.S. at 59

(holding that vertical non-price restraints are not per se violations); White Motor

Co. v. United States, 372 U.S. 253, 261-64 (1963) (holding that vertical territorial

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restraints are not per se violations). The cases have “continued to temper, limit, or

overrule once strict prohibitions on vertical restraints.” Leegin, 551 U.S. at 901.

A vertical relationship that facilitates a horizontal price conspiracy does

not amount to a per se violation. In another age, the Supreme Court treated such

a hub-and-spokes conspiracy as a per se violation. See Interstate Circuit, Inc. v.

Paramount Pictures Distrib. Co., 306 U.S. 208, 226-27 (1939). But the per se rule

has been in steady retreat.

The most recent and explicit signal is given in Leegin, which explains that

“the Sherman Act’s prohibition on ‘restraints of trade’ evolves to meet the

dynamics of present economic conditions,” such that “the boundaries of the

doctrine of per se illegality should not be immovable.” 551 U.S. at 899-900

(alterations omitted). Leegin held that a manufacturer did not commit a per se

violation of § 1 when it agreed with several retailers on a minimum price that the

retailers could charge--a holding that overruled a century-old principle

articulated in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373

(1911). See Leegin, 551 U.S. at 881. Leegin reasoned that Dr. Miles had “treated

vertical agreements a manufacturer makes with its distributors as analogous to a

horizontal combination among competing distributors,” but that, “[i]n later cases,

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. . . the Court rejected the approach of reliance on rules governing horizontal

restraints when defining rules applicable to vertical ones.” Leegin, 551 U.S. at

888. Dr. Miles was held to be inconsistent with “[o]ur recent cases[,] [which]

formulate antitrust principles in accordance with the appreciated differences in

economic effect between vertical and horizontal agreements, differences the Dr.

Miles Court failed to consider.” Id.

Although the express holding of Leegin does not extend beyond the

overruling of Dr. Miles, the Court’s analysis reinforces the doctrinal shift that

subjects an ever-broader category of vertical agreements to review under the rule

of reason. The Court first stated the subsisting scope of per se liability:

A horizontal cartel among competing manufacturers or

competing retailers that decreases output or reduces

competition in order to increase price is, and ought to be, per se

unlawful. 

Leegin, 551 U.S. at 893. The Court then rejected per se liability for hub-andspokes agreements, in wording that prescribes rule-of-reason review of vertical

dealings that facilitate per se unlawful horizontal agreements (the type of

agreement that the district court found Apple had undertaken): 

To the extent a vertical agreement setting minimum resale

prices is entered upon to facilitate either type of cartel [among

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manufacturers or among retailers], it, too, would need to be held

unlawful under the rule of reason.

Id. (emphasis added). After Leegin, we cannot apply the per se rule to a vertical

facilitator of a horizontal price-fixing conspiracy; such an actor must be held

liable, if at all, “under the rule of reason.” Id.

Leegin is animated by the “appreciated differences in economic effect

between vertical and horizontal agreements.” Id. at 888. Since every challenged

restraint is thus classified as either horizontal or vertical, one may draw certain

reliable inferences: vertical agreements are not presumptively subject to per se

liability; the vertical nature of the agreement is its salient feature; the influence of

a vertical arrangement on a horizontal cartel (on another plane of competition)

does not render the vertical arrangement per se unlawful.

Our only sister circuit to have considered this wording from Leegin arrived

at the conclusion I draw. In Toledo Mack Sales & Service, Inc. v. Mack Trucks,

Inc., 530 F.3d 204, 225 (3d Cir. 2008), a manufacturer used its contracts with

distributors to facilitate and enforce a horizontal conspiracy (among the

distributors) that was itself illegal per se. See id. at 210. The Third Circuit held

that Leegin’s instruction--that the vertical arrangement “would need to be held

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unlawful under the rule of reason”--prescribed the rule of reason as the proper

analysis for whether the vertical conduct violated § 1. See id. at 225.

Taking the opposite tack, the majority opinion on this appeal insists that a

vertical facilitator of a horizontal conspiracy is liable per se, even after Leegin. In

support of that argument, the majority cites seven cases that pre-date Leegin.3

Op. of Judge Livingston, ante, at 73-77 (for the Court). The majority cites only

one post-Leegin case that considers this question: namely, the Third Circuit’s

analysis of a conspiracy that involved both vertical and horizontal relationships,

concluding that the horizontal relationships violated § 1 per se and that pursuant

 The cases are cited by the majority in this order: Klor’s, Inc. v. Broadway- 3

Hale Stores, Inc., 359 U.S. 207 (1959); United States v. General Motors Corp., 384

U.S. 127 (1966); Toys “R” Us, Inc. v. FTC, 221 F.3d 928 (7th Cir. 2000); Denny’s

Marina, Inc. v. Renfro Productions, Inc., 8 F.3d 1217 (7th Cir. 1993); United States

v. MMR Corp., 907 F.2d 489 (5th Cir. 1990); Business Electronics Corp. v. Sharp

Electronics Corp., 485 U.S. 717 (1988); NYNEX Corp. v. Discon, Inc., 525 U.S. 128

(1998).

Just as unhelpfully, the majority cites dicta from a Sixth Circuit case

affirming the dismissal of a lawsuit that alleged a hub-and-spokes conspiracy. 

See Total Benefits Planning Agency, Inc. v. Anthem Blue Cross & Blue Shield, 552

F.3d 430 (6th Cir. 2008). The majority cites the case as if its holding supports the

continued legitimacy of the hub-and-spokes theory after Leegin, a flawed

interpretation given the Sixth Circuit’s disposition on the hub-and-spokes claim. 

Id. at 435 (holding that plaintiffs inadequately alleged a horizontal conspiracy and

that, after Leegin, “all vertical price restraints are to be judged under the rule-ofreason standard” (emphasis added)).

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to Leegin the vertical relationships “would have to be analyzed under the

traditional rule of reason.” In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 318 4

(3d Cir. 2010).

The majority’s holding in this case therefore creates a circuit split, and puts

us on the wrong side of it.

“[H]orizontal agreements as a class deserve stricter scrutiny than . . .

vertical agreements,” because horizontal agreements “pose the most significant

dangers of competitive harm.” 11 Areeda & Hovenkamp, supra, ¶ 1902a, at 232. 

Horizontal price conspiracies are illegal per se because motives of horizontal

 The Third Circuit analyzed a network of restraints, including a 4

conspiracy among insurance brokers, a conspiracy among insurers, and

agreements that connected the brokers and insurers. The court explained

Leegin’s impact this way:

Under the Supreme Court’s jurisprudence, virtually all

vertical agreements now receive a traditional rule-of-reason

analysis. See Leegin, 551 U.S. 877. In the factual context of

this case, a horizontal agreement means . . . an agreement

among either the brokers or the insurers in the global

conspiracy. Agreements between brokers and insurers, on the

other hand, are vertical and would have to be analyzed under

the traditional rule of reason.

In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 318-19 (3d Cir. 2010) (internal

citation and footnote omitted).

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players are aligned and dominant and create irresistible temptations. See, e.g.,

Adam Smith, The Wealth of Nations 207 (Collier 1902) (1776) (“People of the

same trade seldom meet together . . . , but the conversation ends in a conspiracy

against the public, or in some contrivance to raise prices.”).

Collusion among competitors does not describe Apple’s conduct or

account for its motive. Apple’s conduct had no element of collusion with a

horizontal rival. Its own rival in competition was (and presumably is) Amazon;

and that competition takes place on a horizontal plane distinct from the plane of

the horizontal conspiracy among the publishers. All Apple’s energy--all it did

that has been condemned in this case--was directed to weakening its competitive

rival, and pushing it aside to make room for Apple’s entry. On the only

horizontal plane that matters to Apple’s e-book business, Apple was in

competition and never in collusion. So it does not do to deem Apple’s conduct

anti-competitive just because the publishers’ horizontal conspiracy was found to

be illegal per se.

“[V]ertical agreements are a customary and even indispensable part of the

market system” and so do not represent the same presumptive threat to

competition. 11 Areeda & Hovenkamp, supra, ¶ 1902d, at 240. Even a vertical

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agreement designed to decrease competition among competitors does not pose

the threat to market competition that is posed by a horizontal agreement, for two

reasons: (1) market forces (such as countervailing measures by competitors) are

categorically more effective in countering anti-competitive vertical agreements,

and (2) vertical agreements are so fundamental to the operation of the market

that uncertainty about the legality of vertical arrangements would impose vast

costs on markets. Id. at 240-41. Such market realities are driving the evolution of

antitrust law, which has “rejected the approach of reliance on rules governing

horizontal restraints when defining rules applicable to vertical ones.” Leegin, 551

U.S. at 888. 

The present case illustrates why per se treatment is not given to vertical

agreements that facilitate horizontal conspiracies. Assuming (as is uncontested

on appeal) that the publishers violated § 1 per se through their coordination,

Apple’s promotion of that horizontal conspiracy was limited to vertical dealings.

The per se rule is inapplicable here for another independent reason: The per

se rule does not apply to arrangements with which the courts are not already

well-experienced. Leegin, 551 U.S. at 887. As the government conceded at oral

argument, no court has previously considered a restraint of this kind. Several

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features make it sui generis: (a) a vertical relationship (b) facilitating a horizontal

conspiracy (c) to overcome barriers to entry in a market dominated by a single

firm (d) in an industry created by an emergent technology. 

As I undertake to show in my analysis under the rule of reason, below, the

restrictive market conditions Apple faced and the pro-competitive results of

Apple’s conduct make its vertical dealings categorically reasonable. Even if one

tests that conclusion under the rule of reason, the analysis is sufficiently complex

and yields such substantial pro-competitive results that per se liability is an

abdication of the duty to distinguish reasonable restraints from those that are

unreasonable.

II

Having concluded first that Apple’s conduct was anti-competitive per se,

corollary errors followed when the district court turned to the rule of reason. 

Once a court finds that a party acted unreasonably per se in a set of transactions,

an epiphany is required for the court to conclude that the same party acted

reasonably doing the same acts in the same role at the same time. The influence

arising from the district court’s per se accusation of wrongdoing infected all

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analysis that followed. Once Apple was deemed to have joined a conspiracy that

was illegal per se, its goal, motive, and conduct seemingly needed (and got) no

additional scrutiny--legal or moral or economic.

Having confirmed Apple’s per se liability by conflating the horizontal plane

of competition among publishers with the horizontal plane of competition among

retailers, the district court committed the same error in its rule of reason analysis. 

Thus the district court (as explained below) overstated the anti-competitive

nature of Apple’s vertical dealings and overlooked the pro-competitive effects on

retail competition--the horizontal plane on which Apple does e-book business. 

“The district court did not analyze the state of competition between ebook

retailers,” as the majority concedes. Op. of Judge Livingston, ante, at 44 (for the

Court) (emphasis omitted). Exactly.

Judge Livingston’s opinion succumbs to the same fallacy by declaring the

majority’s own per se analysis so overwhelming that full rule-of-reason scrutiny

requires no more than a “quick look.” Quick-look analysis is an appropriate tool

only when “an observer with even a rudimentary understanding of economics

could conclude that the arrangements in question would have an anticompetitive

effect.” Cal. Dental Ass’n v. FTC, 526 U.S. 756, 770 (1999). Quick-look analysis is

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not a tool for cutting corners. Judge Livingston’s opinion justifies quick-look

analysis by referring to e-book price increases that form the majority’s earlier

argument for the application of the per se rule, see Op. of Judge Livingston, ante,

at 93--price increases that, at any rate, are the expected result when monopolistic

below-cost pricing dissipates.

In form and substance, Judge Livingston’s analysis demonstrates that

when one starts with a finding of unreasonableness per se, the rule of reason

analysis is tainted. It is called confirmation bias. The characterization of Apple’s

conduct as “vigilantism” is telling. Op. of Judge Livingston, ante, at 9 (for the

Court), 98. Use of that word either assumes the conclusion that the conduct is

illegal, or else confuses it with self-help (which used to be a virtue).

III

On this appeal, we have reached no majority as to the rule of reason. Judge

Livingston writes for herself alone that, as an alternative to the per se rule, she

would also affirm under the rule of reason; without a second judge supporting

this conclusion, it is dicta, because our affirmance is based on the per se theory

adopted by two judges. Unlike my colleagues, I must address the rule of reason,

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because my vote to reverse depends on my conclusion that this alternative theory

of liability is every bit as untenable as liability per se.

Analysis under the rule of reason--whether conducted in full or by an

untainted quick look--compels the conclusion that Apple did not violate § 1 of the

Sherman Act. The issue is decided by comparing (a) the restrictive effect of

Apple’s dealings with (b) the pro-competitive result of deconcentrating a market

that had been dominated by a monopolist and insulated from competition

through below-cost pricing. 

Under the rule of reason, the initial burden rests with the plaintiffs “to

demonstrate the defendants’ challenged behavior had an actual adverse effect on

competition as a whole in the relevant market.” Geneva Pharms. Tech. Corp. v.

Barr Labs. Inc., 386 F.3d 485, 506-07 (2d Cir. 2004) (internal quotation marks

omitted). Upon plaintiffs’ showing of such an effect, “the burden shifts to the

defendants to offer evidence of the pro-competitive effects of their agreement,”

and then “the burden shifts back to the plaintiffs to prove that any legitimate

competitive benefits offered by defendants could have been achieved through

less restrictive means.” Id. The reasonableness of the restraint then boils down

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to whether the dominant effect of the agreement is to promote competition or

restrain it. Id.

Analysis begins with an accounting of anti-competitive effects. Apple’s

vertical conduct consisted of negotiating the terms of its own contracts. Of

course, every contract is a restraint of trade to some extent, see Nat’l Collegiate

Athletic Ass’n v. Bd. of Regents of Univ. of Okla., 468 U.S. 85, 98 (1984); so this

fact alone is neither here nor there. 

The agency agreement that Apple signed with each publisher was

innocuous: as the parties agree, each term--including the agency structure, MFN

clause, and price caps--is absolutely legal. The district court so found expressly:

The Plaintiffs do not argue, and this Court has not

found, that the agency model for distribution of content, or

any one of the clauses included in the Agreements, or any of

the identified negotiation tactics is inherently illegal. Indeed,

entirely lawful contracts may include an MFN, price caps, or

pricing tiers.

Apple I, 952 F. Supp. 2d at 698. The main restraint resulting from Apple’s

vertical conduct was the shifting of pricing power from e-book retailers to e-book

publishers. And this effect operated as a restraint only in the sense that Amazon

faced pressure to adopt an agency model and to charge prices set by the five

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publishers, which of course remained in competition with each other, and with 

the publishers who account for the remaining 52 percent of the industry.

The district court opinion and the plaintiffs’ briefs fixate on the idea that

Apple ended Amazon’s $9.99 price for most new releases and bestsellers, and

that consumers would have preferred a lower price. But the consumer’s nearterm preference for low prices is not an object of antitrust law. See Brooke Grp.

Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 237 (1993). The district

court charts the short-term price developments, treating the end of below-cost

pricing as anti-competitive and observing with disapproval the natural tendency

for prices to rise to competitive levels. The rule of reason promotes competition;

it can be safely assumed that if competition sharpens, prices will take care of

themselves.

As to the pro-competitive effects, the rule of reason must take account

primarily of the deconcentrating of the e-book retail market. The benefit of

increasing the number of firms in a market derives from the “inverse correlation

between concentration and competition.” Eleanor M. Fox, Economic

Concentration, Efficiencies and Competition: Social Goals and Political Choices,

in Industrial Concentration and the Market System 137, 149 (Eleanor M. Fox &

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James T. Halverson eds., 1979). As the district court found, Apple was weighing

its entry into the retail e-book market, and the agency structure was the only way

Apple would enter the market. Nobody has proposed--before or since Apple’s

entry--any “less restrictive means” by which Apple could have achieved the

same competitive benefits. See Geneva Pharms., 386 F.3d at 507 (plaintiffs’

burden to prove viable and less restrictive alternative). Apple’s challenged

conduct broke Amazon’s monopoly, immediately deconcentrated the e-book

retail market, added a platform for reading e-books, and removed barriers to

entry by others. And removal of a barrier to entry reduces for the long term a

market’s vulnerability to monopolization. These effects sound in the basic goals 5

of antitrust law. Even if only quick-look analysis were appropriate in this case,

these effects would vindicate Apple’s conduct. (Judge Livingston’s opinion

discounts this pro-competitive effect by noting the open question whether

“below-cost pricing is unlawfully anti-competitive,” thereby suggesting that

 Generally speaking, entry barriers permit monopolization and monopoly 5

power allows a firm to erect entry barriers. See, e.g., Port Dock & Stone Corp. v.

Oldcastle Ne., Inc., 507 F.3d 117, 125 (2d Cir. 2007); United States v. Microsoft

Corp., 253 F.3d 34, 82 (D.C. Cir. 2001) (en banc); see also Mobil Oil Corp. v. Fed.

Power Comm’n, 417 U.S. 283, 302 n.23 (1974). Each is less likely to arise when the

other is absent from a market.

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Apple’s dismantling of the entry barrier could be pro-competitive only if the

barrier was itself a Sherman Act violation. Op. of Judge Livingston, ante, at 97. 

But it is no matter whether the insuperable barrier that Apple tore down had

been raised lawfully or not.)

Another pro-competitive effect is the encouragement of innovation, a

hallmark and benefit of competition. Apple began retailing e-books in

conjunction with its release of the iPad, a device that integrated cutting-edge

functions and applications, just one of which was the capacity for users to buy

and read e-books. It is impossible to know the likely course of innovation, and

pro-competitive effects of innovation cannot be measured; nevertheless, the

encouragement of innovation must be afforded considerable weight under the

rule of reason. See generally 2B Areeda & Hovenkamp, supra, ¶ 407. Apple’s

business is not the technology of the clothespin.

The restraint of Apple’s vertical conduct was no more than a slight offset to

the competitive benefits that now pervade the relevant market. 

6

 Amazons’s below-cost prices also threatened the market for hard-copy 6

books, see Apple I, 952 F. Supp. 2d at 649, and thus the royalties of authors, who

may well consider that they have some role in this industry.

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How else could the competitive benefits have been realized in this market? 

In the course of this litigation, three theories have been offered for how Apple

could have entered the e-book market on less restrictive terms. Each theory

misapprehends the market or the law, or both. The absence of alternative means

bespeaks the reasonableness of the measures Apple took.

Theory 1: Apple could have competed with Amazon on Amazon’s terms, using

wholesale contracts and below-cost pricing. This was never an option. The district

court found as fact that: a new entrant into the e-book retail market “would run

the risk of losing money if it tried or was forced to match Amazon’s pricing to

remain competitive,” Apple I, 952 F. Supp. 2d at 658; Apple was “not willing” to

engage in below-cost pricing, id. at 657; and Apple could have avoided this

money-losing price structure simply by forgoing entry to the market, see id. at

659. Even if Apple had been willing to adopt below-cost pricing, the result at

best would have been duopoly, and the hardening of the existing barrier to entry. 

Antitrust law disfavors a durable duopoly nearly as much as monopoly itself. 

See 6 Areeda & Hovenkamp, supra, ¶ 1429.

Theory 2: Apple could have entered the e-book retail market using the wholesale

model and charged higher prices than Amazon’s. The district court foreclosed this

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theory as well; it found that Apple refused to impair its brand by charging “what

it considered unrealistically high prices.” Apple I, 952 F. Supp. 2d at 659. Even if

Apple had been willing to tarnish its brand by offering bad value for money, the

notion that customers would actually have bought e-books from Apple at the

higher price defies the law of demand. Higher prices may stimulate sales of

certain wines and perfumes--not e-books.

7

Nor could Apple justify higher prices for the e-books by competing on the

basis of its new hardware, the iPad, because there is inter-operability among

platforms. And if Apple had attempted to pursue this hardware-based

competition by programming its iPad to run the iBookstore but to reject

Amazon’s Kindle application, Apple might have been exposed to an entirely

different antitrust peril. See United States v. Microsoft Corp., 253 F.3d 34, 50-80

(D.C. Cir. 2001) (en banc); Google Android, No. 40099 (Eur. Comm’n Apr. 15,

2015) (antitrust proceedings brought by European Commissioner for

 In economic terms, e-books are subject to the law of demand and 7

therefore have negative price elasticity of demand. See generally N. Gregory

Mankiw, Principles of Economics 67 (6th ed. 2012). E-books are neither Veblen

goods nor Giffen goods, nor do they have perfectly inelastic demand. See id. at

92-93, 453-54, 835; Laurie Simon Bagwell & B. Douglas Bernheim, Veblen Effects

in a Theory of Conspicuous Consumption, 86 Am. Econ. Rev. 349 (1996).

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Competition against Google for favoring Google’s own applications on mobile

devices that use Google’s operating system).

Theory 3: Apple could have asked the Department of Justice to act against

Amazon’s monopoly. Counsel for the United States actually proposed this at oral

argument. At the same time, however, he conceded that the Department of

Justice had already “noticed” Amazon’s e-book pricing and had chosen not to

challenge it because the government “regarded it as good for consumers.” Any

request from Apple would therefore have been futile. True, Apple could not

have known that the Antitrust Division would have adopted the position that

below-cost pricing is not a concern of antitrust policy: who could have guessed

that the government would adopt a policy that is primitive as a matter of

antitrust doctrine and illiterate as a matter of economics? Nevertheless, hindsight

reveals that government antitrust enforcement against Amazon was not an

option.

More fundamentally, litigation is not a market alternative. This observation

has especial force in markets that are undergoing rapid technological advance,

where the competitive half-life of a product is considerably more brief than the

span of antitrust litigation. A requirement that potential market entrants litigate

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instead of enter the market on restrictive (but legal and reasonable) terms, would

license monopoly for the duration.

* * *

Apple took steps to compete with a monopolist and open the market to

more entrants, generating only minor competitive restraints in the process. Its

conduct was eminently reasonable; no one has suggested a viable alternative. 

“What could be more perverse than an antitrust doctrine that discouraged new

entry into highly concentrated markets?” In re Text Messaging Antitrust Litig.,

782 F.3d 867, 874 (7th Cir. 2015). 

Application of the rule of reason easily absolves Apple of antitrust liability. 

That is why at oral argument the government analogized this case to a drug

conspiracy, in which every player is a criminal--at every level, on every axis,

whether big or small, whether new entrant or recidivist. The government found

the analogy useful--and necessary--because in an all-criminal industry there is no

justification or harbor under a rule of reason.

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IV

Because I see no antitrust violation, I need not consider Apple’s separate

challenge to the injunction itself. My colleagues, for their own good reasons, do

not reach that challenge either. Yet the injunction and its shortcomings bear

upon the institutional interest of the courts; and Apple’s challenge deserves some

response. In my view, the injunction warps the role of a neutral, court-appointed 

referee into that of an adversary party, with predictable consequences.

The monitor is an arm of the district court, and owes loyalty in that

direction only. See Fed. R. Civ. P. 53(a). But the injunction redirects the loyalty

of the monitor to Apple’s chief adversary in the litigation, the Department of

Justice. Under the injunction, the DOJ recommends the monitor (Injunction

¶ VI(A)), approves the monitor’s fees (id. ¶ VI(I)), and mediates disputes

between the monitor and Apple (id. ¶¶ VI(E), (H)). Thus the injunction first

creates a neutral fact-finding office, and then gives an adversary the ability to

decide who holds the office, how much he gets paid (out of the other side’s

pocket), and how broadly he may reach and inquire. Reciprocally, the monitor is

directed to inform the government if he “discovers or receives evidence that

suggests” further antitrust violations, whether or not related to this litigation. 

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(Id. ¶ VI(F).) This is a device that must misfire.

As events have happened (and were seemingly fore-ordained) the monitor

has reason to look to the DOJ with gratitude and loyalty. The DOJ recommended

Michael Bromwich as monitor, and the district court appointed him. United

States v. Apple Inc., --- F.3d ----, 2015 WL 3405534, at *2 (2d Cir. May 28, 2015). 

Without a meaningful cap on his fee, Bromwich proposed that defendant Apple

compensate him at $1,265 per hour--an eye-popping rate for service as an agent

of a court. Id. at *3. (Because Bromwich lacks antitrust expertise, he proposed to

add an actual antitrust lawyer to the team at $1,025 an hour. Id.) When Apple

challenged that tariff as unreasonable, Bromwich explained that the injunction

gave Apple no standing to object: “the fees and expenses to be paid to the

monitor and his team are not set by Apple; they are set by the monitor, with

approval reserved for the DOJ and the Plaintiff States.” Id. (quoting Bromwich). 

Bromwich was right, which is telling: the injunction contemplated no role for the

judge.

Once the Department of Justice selected him and approved his hourly fee,

Bromwich drew up his own mandate. Although the injunction contemplated

that the monitor would check sufficiency of an antitrust policy that Apple was to

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prepare in 90 days (and Apple’s compliance with it), Bromwich started his

inquiry immediately on his appointment; he multiplied interviews, document

inspections, and discontents; he demanded to interview Apple executives

without the presence of Apple’s chosen counsel; and he took aim at the

competitive culture of the corporation generally--a culture that is obviously

aggressive, but just as obviously no business of the courts. See id. at *2-3, *7.

Having thus been selected by an adversary party, paid at a rate approved

by the adversary party, and directed to look to the adversary party for the

mediation of disputes, Bromwich was (in every respect important to a lawyer)

retained and run by the adversary. Apple had an unenviable choice: it could

accept scrutiny by a lawyer whose incentives were corrupted by the injunction

that created his office, or attack the fee and the widening scope of inquiry,

thereby sharpening the confrontations created by the mechanics of the injunction

A magistrate judge has cut Bromwich’s hourly fee. Id. at *6 n.4. And a

panel of this Court has construed narrowly the scope of the monitor’s inquiries. 

Id. at *4. But the structural defect of the injunction remains: allowing an arm of

the court to serve as agent of an adversary party. It would take strong stuff for a

lawyer to transcend the worldly incentives of this injunction: unlimited work at

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the (now cut) rate of $1,000 an hour, paid by a solvent party that may expect

retaliation for protesting, in order to perform a monitorship subject to extension

by the court for reasons that will be influenced by input from the monitor

himself.

An injunction that thus blurs the lines of the adversary system does no

good for the reputation of the courts.

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