31 May 2012

A Wormy Answer in Wormyfruit

Apple has answered the government's complaint in Wormyfruit. US v Apple, Inc., et al., No. 12cv2826 (S.D.N.Y.) (Doc. 54, 22 May 2012) (PDF). I'm shocked — shocked — that what passes for "publishing journalism" has almost completely ignored the Answer, and certainly hasn't read it. Leaving aside the procedural problems with the Answer (sufficient to piss off the judge, but probably just short of rendering it inadequate), the underlying logic of the Answer is fairly clear:

"We din't do nothin' wrong, and you can't prove it anyway. But if you can prove it, the Big Brazilian River was worse, so anything we did was justified and you should be ashamed of yourself for not going after only the biggest bully instead of Our Gang. Nyah, nyah, nyah."

To say the least, I find this approach... unpersuasive. But then, I've actually read both the Complaint and the Answer; Apple's lawyers are clearly hoping for cut-and-paste "journalism" from those who have not.

As an example of what I mean, consider ¶ 6. The Complaint alleges:

Apple facilitated the Publisher Defendants' collective effort to end retail price competition by coordinating their transition to an agency model across all retailers. Apple clearly understood that its participation in thise scheme would result in higher prices to consumers. As Apple CEO Steve Jobs described his company's strategy for negotiating with the Publisher Defendants, "We'll go to [an] agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway." Apple was perfectly willing to help the Publisher Defendants obtain their objective of higher prices for consumers by ending Amazon's "$9.99" price program as long as Apple was guaranteed its 30 percent margin and could avoid retail price competition from Amazon.

(brackets in original) Apple's Answer bloviates:

Apple denies the allegations of paragraph 6. Apple did not agree to, nor did it “facilitate,” the transition of other retailers to an agency model. The Government’s selective citation to hearsay from a small portion of Apple’s former CEO’s biography is irrelevant and has no place in this litigation. In an agency model, the “principal,” in this case the publisher, decides the price of its product in the retail marketplace. If that principal believes a particular product is worth more or less than others are charging, it is free under our economic and legal system to offer that higher or lower price. And it is perfectly legal for a principal and agent to discuss the pricing decisions of the principal. There is no allegation that Apple ever had any communications or agreements, directly or indirectly, with its competitor, Amazon, on any of the issues raised in the complaint.

Procedurally — and substantively — all that matters to Apple's Answer is that first sentence: the denial of all allegations of ¶ 6. What I find interesting is how the remainder of the screed both misstates the legal principles at issue and ignores the substance of the paragraph, leaving the kind of gap between the specific denials and the general denial that says perhaps more about the strength and substance of the denial than was intended.9

  • The absence of participation in a formal agreement is not a legal denial of collusion to reach such an agreement... and the complaint does not allege that an actual agreement was reached concerning "other retailers" in any event. It alleges an "effort to end retail price competition by coordinating their transition to an agency model across all retailers" — that is, that this lawsuit was filed before the entire scheme was successfully implemented.
  • An Answer is the wrong place entirely to object that a statement is "hearsay"... and, sadly, this particular objection neither denies the truthfulness or accuracy of the statement nor notes that, since the speaker is deceased and the report of the speaker's statement bears considerable indicia of reliability, the hearsay would be admissible evidence anyway.
  • Further, that "hearsay" statement is highly relevant because, if accepted as evidence, it could lead a jury to believe that Apple was aware of the publishers' intent to collude and raise consumer prices. It is far from "irrelevant;" it is, instead, an admission against interest, because it implies that the "agency model" works if, and only if, it is fairly standard — that is, it implies knowledge that collusion is a necessary element of the "agency model".
  • It's rather fascinating that this answer invokes "agent" and "principal" without noting several critical aspects of agency law: That the agent has a duty of loyalty to the principal; that the agent is charged with constructive knowledge of the principal's purpose in engaging in a transaction, and thereby "facilitates" the principal's purpose (whether or not lawful, and whether or not consistent with neo-Austrian economic theory); that discussions between the agent and principal concerning "the pricing decisions of the principal" mean that when an agent becomes aware of an improper purpose of the principal,10 the agent is liable as if it was a principal. It is rather revealing that the publishers themselves, in all of the rhetoric they've engaged in from the start over the RPMA, have carefully avoided referring to themselves as "principals"!
  • It's rather interesting that the last sentence of this paragraph tries, rather ineptly, to bring the "Amazon is the real bad guy here" argument back in by "denying" something that was never alleged. This is a rather pathetic attempt to rewrite the story of Apple's knowing vertical participation as a necessary element in implementing a horizontal conspiracy among the publishers as a denial that Apple was itself engaged in a horizontal conspiracy without vertical elements. It also throws the publishers under the steamroller by implicitly admitting that, if the government can demonstrate horizontal collusion among the publishers (see note 10), the antitrust case has been made and it's then just a matter of fashioning an appropriate remedy.

Perhaps the most enlightening portion of Apple's Answer, though, appears at the end. Paragraphs 97 through 99 each deny that the per se rule of antitrust law applies "to [Apple]'s conduct," and assert that the Rule of Reason applies instead.11 As noted previously, that's wrong as a matter of law: If any aspect of an antitrust conspiracy under the Sherman Act is a per se violation, all necessary elements to implement that conspiracy are also judged as per se violations. Apple's objection to the market definition probably has some validity to it, but this would be a Pyrrhic victory: Just about any alternative would be worse, and would probably draw Apple in as an active participant in the "conspiracy" (rather than a "mere agent"). It's also interesting that Apple denies in its Answer to ¶ 104 that "any of the requested relief is properly awarded"... explicitly including the Government's demand to strike MFN clauses that inherently eliminate price competition (¶ 104(d) of the Complaint).

Overall, this Answer gets a C. Not a C#, or a C++. It reflects the real problem with being in a conspiracy: The self-interest of the individual conspirators often leads them to betray each other. It is entirely possible that, after years of litigation, Apple will be able to limit some of the monetary remedies as they apply directly to Apple (although, in an interdependent retail supply system, anything it saves there will be eaten up in lost profits). However, if Apple is only an "agent", it will only do as well as its "principal(s)"... and is breaching its duty of loyalty to its principal(s)12 with the specific nature of its Answer.

  1. This is an excellent example of a lawsuit as a storytelling contest. It's rather ironic that, in a lawsuit that primarily (or at least perceptively) concerns trade fiction perhaps more than anything else, the BigLaw attorneys representing Apple seem so deaf to the storytelling issues, and in particular to the story between the lines, while simultaneously engaging in a long (procedurally improper) epistle at the opening of their Answer. It is not, however, surprising: Antitrust law and litigation tend to attract lawyers with political science, business/management, and economics degrees. Admittedly, there aren't a lot of us with backgrounds in literature (and particularly in politically oriented literature and literary theory) who also have the quantitative-methods backgrounds to play with intellectual property and antitrust law... but that's an explanation, not an excuse.
  2. Here is a point on which procedure boxes Apple in a bit. For the purposes of its own Answer, Apple must assume the truth of every allegation in the complaint for which it has no knowledge when considering the specific allegations. For example, ¶ 8 of the Complaint alleges that once Apple was on board, the publishers uniformly imposed the same terms on other retailers and thereby eliminated price competition; ¶ 8 of Apple's Answer denies knowledge of that (which, given AmazonFail 3.21, is a rather noncredible denial). This is why one must read a Complaint (and an Answer) as a whole, and not paragraph by paragraph: Apple's inability to directly deny, instead of deny on the basis of lack of knowledge, means that it is charged with knowledge of the publishers' conspiracy (if later proven).

    Those of us with relatively long memories and a taste for obscure side issues may recall the only real, effective antitrust efforts engaged in by the DoJ during the Reagan Administration: Consent decrees obtained over military component and parts pricesetting. The very defense being raised by Apple was roundly rejected by the courts in the few instances that this went through litigation. One must remember that knowingly benefitting from price collusion is, all by itself, an antitrust violation... a concept that Apple's Answer leaves very much between the lines.

  3. This is a practical, rather than a legal, defense. In practice, a well-funded defendant can delay and obfuscate any case based on the Rule of Reason sufficiently to get to the next change in which party controls the White House and Department of Justice — and that matters regardless of whether the Government is a party in the suit. Further, in practice (and with the current membership of the Supreme Court) Rule of Reason cases get much more restricted remedies when they are successful... even though the law, when read cold, does not require such restrictions.

    Frankly, the MFN components of the RPMA come dangerously close to creating an indirect horizontal conspiracy at the retailer level anyway. That, however, is a matter for discovery... and a few law journal articles in the aftermath.

  4. See, e.g., Rest. (3d) Agency § 8.01 ("An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship."); cf., e.g., id. §§ 5.04, 7.01. That is, if Apple claims it is a "mere agent", it has breached its duties to its principal(s) by throwing them under the bus with its Answer... because the Answer and the Complaint are "matters connected with the agency relationship."