In SCOTUS petition, Apple claims 2nd Circuit used wrong antitrust standard

October 29, 2015

(Reuters) – The e-books antitrust scheme alleged by the Justice Department against Apple and five major book publishers was what’s known in antitrust lingo as a hub-and-spoke conspiracy, in which a central player supposedly enables industry competitors to fix their prices. Now Apple is asking the U.S. Supreme Court to clarify what standard of review should apply to the conduct of that central player: Is its alleged participation a per se violation of antitrust law, as price-fixing amongst competitors is deemed to be? Or should courts be required to evaluate the enabler’s actions under the more forgiving “rule of reason” standard, which takes into account the potentially pre-consumer consequences of restraints on trade?

In case you’ve forgotten the background of the government’s case, book publishers supposedly believed their best shot at breaking Amazon’s control over the e-books market was to work with Apple on an alternative distribution model that let them set their own prices for e-books. They all entered nearly identical agreements with Apple. Then after the government investigated those agreements and found substantial evidence of industry collusion to bust Amazon’s monopoly, the publishers all entered consent decrees.

Price-fixing conspiracies among competitors are so obviously anticompetitive that they are considered a per se violation of the Sherman Act. But Apple’s conduct as the supposed enabler of the price-fixing scheme presents a more complicated question of antitrust law. Apple, after all, isn’t a book publisher and doesn’t compete directly with publishers. In the e-books sales chain, it sits on a different level than publishers.

U.S. District Judge Denise Cote and a divided 2nd U.S. Circuit Court of Appeals nevertheless held Apple liable for a per se violation of antitrust law, rejecting the company’s arguments that it wasn’t part of a horizontal price-fixing conspiracy and its conduct actually promoted competition in the e-books market.

The company’s new petition for certiorari contends the lower courts should not have used the per se standard in its case. According to Apple, under the Supreme Court’s 2007 decision in Leegin v. PSKS, Apple’s conduct should have been subject to rule-of-reason review, not per se analysis. (Leegin, as you may recall, held that so-called vertical price restraints between a manufacturer and distributor are subject to the rule of reason.) Though the 2nd Circuit majority said Leegin did not address hub-and-spoke cases, Apple said dissenting judge Dennis Jacobs correctly read Leegin precedent when he concluded that rule-of-reason analysis should have applied.

Jacobs was also right, according to Apple, to find the 2nd Circuit majority’s holding is at odds with the 3rd Circuit’s 2008 decision in Toledo Mack Sales v. Mack Truck. In that case, an Ohio Mack dealer claimed Mack Truck conspired with other dealers to keep truck prices artificially high. The 3rd Circuit, citing Leegin, said the scheme should be analyzed under the rule of reason even though Mack Trucks’ involvement at the center of the hub was supposedly to support illegal price-fixing by the other dealers.

Apple’s cert petition argues that if the Justice Department’s case against the company had been tried in the 3rd Circuit, the company would have been entitled to rule-of-reason review. It called on the Supreme Court to step in to resolve the split. “This court should grant the petition, confirm that vertical activity, undertaken for bona fide, potentially pro-competitive purposes, is not transformed into per se illegal conduct merely because it also has been found to facilitate horizontal collusion, and overturn the court of appeals’ erroneous application of the per se rule,” the petition said.

Apple’s fallback argument is that the 2nd Circuit ignored the Supreme Court’s directive to use per se analysis only in cases classic antitrust conspiracies. The e-books situation, according Apple, was anything but. “No court had ever considered the constellation of contract terms at issue here, let alone conclusively determined their effects on competition in this market,” the petition said. “Given that the courts have never addressed the unique combination of business arrangements present here or the resulting complex economic analysis that is required, this is decidedly not an appropriate case in which to forgo inquiry into real-world competitive effects.”

Interestingly, Apple’s counsel of record on the cert petition, which was filed Wednesday, is Seth Waxman of Wilmer Cutler Pickering Hale & Dorr. Wilmer frequently represents Apple and Waxman, of course, is one of the country’s leading Supreme Court advocates. But so are the lawyers at Gibson Dunn & Crutcher, which represented Apple at trial before Judge Cote and at the 2nd Circuit. In fact, Gibson partner Theodore Olson actually argued and won Leegin, the Supreme Court case at the heart of Apple’s argument that it was entitled to rule of reason analysis.

Gibson Dunn is still on Apple’s papers as co-counsel.

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