United States: Court Finds That Apple’s E-Book Market Entry Plan Violates The Sherman Act

Last Updated: August 9 2013
Article by Barbara T. Sicalides

After a three-week bench trial, the court has ruled that Apple violated Section 1 of the Sherman Act. The complaint was filed by the Department of Justice, Antitrust Division (DOJ) against Apple and five book publishers. Before trial began all of the publisher defendants settled, leaving Apple alone to defend against the DOJ's allegations. The court held that Apple "orchestrated" a conspiracy among e-book publishers to eliminate retail price competition in order to raise e-book prices, and that without Apple's participation, the conspiracy would not have succeeded.

The Facts

The evidence of conspiracy among the publishers was strong. The five publishers named as conspirators are among the six largest publishers of general-interest fiction and non-fiction books in the United States. The publishers were concerned that Amazon would start to demand even lower wholesale prices for e-books and might even decide to compete directly with publishers by negotiating directly with authors and literary agents for rights.

The evidence is indisputable that several times each year the CEOs of the publishers attended dinners in private dining rooms of New York restaurants, without counsel. Remarkably, the publishers contended that they were free to discuss pricing because they did not compete on price but instead competed only for authors and agents. The CEOs met for the purpose of discussing the common challenges they faced, including Amazon's pricing policies. E-mails contained striking evidence supporting the publishers' conspiracy – one describing a conversation between competitors: "it would be prudent for you to double delete this from your e-mail files when you return to your office" and one sent from one publisher to a competing publisher: "Well done for the Palin book ... and welcome to the Club!"

When the time came for Apple to launch the iPad and its iBookstore, like most companies launching new products, Apple devised a plan. For the launch, Apple wanted to reach arrangements with a number of the largest publishers and to sell e-books at prices lower than that of hardcopies. In its initial discussions with the publishers, Apple assumed that it would enter the business as an e-book retailer under the wholesale model. Apple, however, was unwilling to sell e-books as a loss leader, like Amazon. At the suggestion of some of the publishers, Apple decided to purchase its e-books under an "agency model," where the publishers would set the prices of e-books sold and Apple would take a 30 percent commission as the selling agent.

The court found that when Apple met with each of the publishers it was well aware that the publishers wanted to raise e-book prices above the $9.99 prevailing price charged by Amazon for many e-book versions of bestselling and new books. Apple also knew that publishers were already acting in concert to place pressure on Amazon to abandon its pricing strategy.

Apple's Agreements with the Publishers

The publishers entered into virtually identical agency agreements with Apple. The Apple agreements contained three key features to assure Apple that it would make desirable margins at prices that would be competitive with other Internet retailers and to assure the publishers that they would be able to take pricing control from Amazon and other retailers and to raise e-book retail prices above $9.99: (1) naming Apple as each publisher's agent rather than selling to Apple on a wholesale basis; (2) a Most Favored Nation clause (MFN) that required each publisher to guarantee that no other retailer could set prices lower than Apple, even if the publishers did not control the other retailer's resale price; and (3) virtually identical pricing tiers (setting maximum prices) for e-books based on the list price of each e-book's hardcopy edition.

The MFN, proposed by Apple, protected Apple by requiring the publishers to designate a new lower retail price to match the lower price at which an Apple competitor is selling a title. According to the court, when Apple decided to demand the MFN, it dropped from its draft the explicit requirement that had appeared in its term sheet that all Internet retailers be switched from wholesale to an agency model. Under the wholesale model the publishers were paid based on a percentage of a physical book's list price, but under the agency model, the publisher was paid a percentage of the actual price at which the e-book is resold. Therefore, unless the publishers converted all of their e-tailers to the agency model and raised e-book prices in all of those e-bookstores, Apple would be selling its e-books at its competitors' lower prices and would, therefore, pay lower prices to the publishers. From the publishers' perspective, HarperCollins acknowledged that "[t]he Apple agency model deal means that we will have to shift to an agency model with Amazon" to "strengthen our control over pricing."

The DOJ alleged that Apple and the publishers knew that their agreements would force other retailers off the wholesale model, eliminate retail price competition for e-books, and allow publishers to raise e-book prices. Apple, however, argued that the price tiers were necessary to prevent the publishers from pricing the e-books too high. Regardless of Apple's intentions, after the agreements went into effect, the publishers almost uniformly set e-book prices at the maximum price levels established in the agreements.

The Court's Opinion

The trial court's interpretation of the publishers' or Apple's documents and testimony reflects its view that neither was credible. Although the evidence of wrongdoing by the publishers seems clear, the evidence against Apple was far less compelling. Indeed, the court was troubled by a number of Apple's activities or writings that could just as easily have reflected perfectly reasonable and lawful business conduct. For example, the court found nefarious the fact that Apple advised the publishers that it would be meeting with other publishers and that it needed a certain critical mass of publishers to make the iBookstore launch successful. But, clearly any publisher considering a new partnership would want and need to understand the scope of the newly proposed product. That was particularly important here where the publishers had no preexisting relationship with Apple, the e-book business was new to Apple, and it was possible that Amazon would be unhappy about the publishers' relationships with Apple regardless of the form of that relationship.

The court concluded that Apple and the publishers shared the same goal – ending price competition at the retail level. The court also found that Apple used one publisher to communicate with and convince other publishers to agree Apple's proposed structure and that Apple kept the publishers informed about the status of its negotiations with other publishers.

The court would not give Apple the benefit of the doubt. It routinely drew negative inferences from ambiguous evidence, even when the evidence was clearly subject to different interpretations and Apple offered an innocent or even procompetitive explanation for the evidence. For example, the court clearly believed that the price increases following Apple's agreements were evidence of Apple's participation in a conspiracy with the publishers. Also, the court was influenced by the damning evidence of conspiracy among the publishers and determined that because Apple was essential to the publishers' plan, Apple was part of the conspiracy along with the publishers.

Importantly, the court made clear that the agency model and the way in which Apple negotiated the publisher agreements were lawful. Further, the court recognized that MFNs, price tiers, and price caps are not illegal. The court, however, concluded that Apple made a conscious commitment to enter into a price-fixing conspiracy with the publishers.

On August 2, the DOJ and 33 state attorneys general submitted their proposed remedy to the court for consideration. The proposal would require Apple to terminate its existing agreements with the publisher defendants and would bar it from entering new e-book distribution contracts that would restrain Apple from competing on price. Under the DOJ's proposed remedy, Apple would be prohibited from entering into agreements with suppliers of e-books, music, movies, television shows or other content that are likely to increase the prices at which Apple's competitor retailers may sell that content. Most interesting, however, is the DOJ's request that Apple for two years allow other e-book retailers like Amazon and Barnes & Noble to provide links from their e-book apps to their e-bookstores, allowing consumers who purchase and read e-books on their iPads and iPhones easily to compare Apple's prices with those of its competitors.

The Lessons of the Apple E-Book Case

In a genuine agency relationship, the reseller and the supplier are considered the same person. As a single person, they are unable to reach an agreement or to conspire. Accordingly, the supplier is able to set the retail or resale price without triggering price-fixing concerns under federal or state antitrust laws. Genuine agency arrangements therefore can be used by suppliers to control the resale prices of their products without fear of conspiracy claims.1 Thus, where it makes business sense to use agency, it is one method of avoiding the state patchwork of laws determining whether resale price agreements are subject to the rule of reason or per se analysis.

The problem here was not the agency agreements or any of their features (MFN, price tiers), but that the court perceived that the agreements were reached as part of an overall plan, hatched by the publishers and Apple, to raise retail prices.

Why the court reached that conclusion is the real counseling question and how do firms avoid an agency or a court seeing their conduct similarly? One answer to the question is that the evidence of conspiracy among the publishers was irrefutable and tainted the court's view of Apple. It was difficult to avoid the taint because the iBookstore launch was the vehicle for implementing the conspiracy.

When clients want to affect resale prices, whether by unilateral resale price policies, resale price agreements, unilateral minimum advertised pricing policies, minimum advertised price agreements, or agency relationships, it is critical that the clients do all that they can to avoid even the appearance of involvement with any sort of horizontal discussions. For example, if a manufacturer wants to implement a resale price policy after distributors suggest the idea, the manufacturer must make clear, in writing to the distributors, that it will evaluate independently the value and goals of such a policy, independently decide whether to implement such a policy, and, to the extent possible, independently enforce the policy. During the implementation and enforcement of the policy, the manufacturer must also continually reinforce to the distributors that it will not be pressured by them into enforcing the policy against another competing distributor and that its enforcement decisions must be made unilaterally. Any manufacturer employees involved with the policy must be trained about the danger of horizontal and vertical communications and the way they should handle such communications. And, last but not least, counsel must understand the manufacturer's market, the number of competing suppliers, whether any of the competing suppliers have resale price-related restraints, and the validity of the proposed policy's procompetitive business justifications.

Another answer to the question is that the DOJ had not only direct (and circumstantial) evidence of the publishers' conspiracy, but some of that evidence was also inflammatory. Internal documents should neither recommend that the recipient(s) "double delete" them after reading, nor describe a competitor as a member of "the club." Certain employee conduct must be absolutely or nearly absolutely forbidden. For example, regular dinners with competitors raise intolerably high antitrust risks for the individuals attending the meetings as well as for the firms they represent. Similarly, the number of phone calls among the publishers at key points in the Apple agency agreement negotiations was remarkable. Without knowledge of the content of most of those calls, the court found the frequency and pattern of them to be convincing evidence of conspiracy. Regardless of the employees' position, communications with competitors without a witness or attorney present or without contemporaneous notes explaining the lawful purpose of the communication are risky and should be prohibited and/or reported to counsel promptly. Although Apple's communications with the publishers appear to have been far less inflammatory and were reasonably explained because, as the court noted, Apple was aware of the publishers' goal to raise prices and its relationship with the publishers was the vehicle by which the publishers intended to achieve that goal, Apple was in a very difficult defensive posture.

There is no easy solution for this sort of problem, but it is imperative that firms embarking on strategies aimed at affecting resale price, to the extent possible, distance themselves from potential or apparent horizontal activities at any point in the distribution chain.


1 A transaction will more likely be regarded as a sale rather than a consignment/agency relationship if the putative agent: (1) takes title to the goods at the time they are received; (2) is responsible for payment immediately upon delivery to it; (3) has the power to set resale prices; (4) must make substantial changes in the products; (5) must bear the risk of loss; or (6) pays taxes on the goods as part of inventory.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Barbara T. Sicalides
Similar Articles
Relevancy Powered by MondaqAI
Patterson Belknap Webb & Tyler LLP
Sheppard Mullin Richter & Hampton
Patterson Belknap Webb & Tyler LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Patterson Belknap Webb & Tyler LLP
Sheppard Mullin Richter & Hampton
Patterson Belknap Webb & Tyler LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions