13 July 2013

The Privilege to Act Against Monopolies

Earlier this week, Judge Denise Cote of the United States District Court for the Southern District of New York gave the judiciary (and the legal profession as a whole) a lesson in opinion-writing with her decision on liability in the Apple e-book antitrust matter. As Professor Grimmelmann noted, "The U.S. v. Apple opinion is a masterpiece of narrative: it has a story to tell and it weaves the evidence together to tell it." The interesting — indeed, essential — story, though, is not the obvious one. Just like 1984 is much more than a depiction of a surveillance state, the story Judge Cote tells is about much more than the impropriety of the misleadingly misnamed "agency model". However, determining what that story is requires actually reading the bloody opinion — a task at which much of the media (and especially the revisionist "analysis" offered by the WSJ) arrogantly and ignorantly failed to even attempt.

The first narrative aspect of Judge Cote's 160-page opinion is that it is — as is increasingly the default in publishing these days — the first in a series. It does not state the consequences against Apple: It only confirms that there will be consequences against Apple (and, indirectly, confirms the consequences against the settling publisher-defendants). The opinion does not pretend to be the last word on the controversy; indeed, it even explicitly states that there will be further proceedings before Judge Cote. Apple's promise to appeal is (procedurally) premature, as Judge Cote's opinion is not a final and appealable judgment.1

That said, the finding on liability is rather routine. The summary of the factual findings is well over half of the opinion. The analysis of the basis for liability is, frankly, basic regurgitation of blackletter antitrust law from the early weeks of a basic antitrust-law course; it is almost entirely uncontroversial among any but the most extreme ideologues-masquerading-as-economists. The non-routine aspects of the opinion are less than ten percent of its length and concern two formal defenses to liability raised by Apple: "independent business interests" (125–35) and "dangerous precedent" (155–58). The former defense is deceptively simple: That Apple was entitled to engage in ordinary business activities to advance its own interests — in this case, establishing a substantial (and hopefully dominant, although Apple has carefully avoided emphasizing that it doesn't want to compete with Amazon so much as replace it) position in the expanding market for e-books.2 Of course, this assumes that the ordinary business activities in question were, in fact, lawful… and the evidence demonstrated that they were not.

The latter defense is a bit more difficult to explain, although Judge Cote cuts rather directly to its core in rejecting it, and it is worth quoting her in full:

Finally, Apple warns that a ruling against Apple would set a dangerous precedent. It predicts that a finding that it violated the antitrust laws will deter entry into concentrated markets and punish innovation. It contends that its conduct was pro-competitive and created a healthier market. Censuring Apple for entering a tumultuous new market, in Apple’s view, will have a “chilling and confounding… effect not only on commerce but specifically on content markets throughout this country.”

It is certainly true that our nation’s antitrust laws should be applied with care. Courts must be sensitive to the unique features of any market and the ambiguities of commercial conduct to avoid chilling lawful competition. Providing new entrants with the ability to access markets has long been a mainstay of our economy and any court should be wary of discouraging such access or interfering with the natural evolution of markets. As the Second Circuit observed, “[a]ntitrust law is not intended to be as available as an over-the-counter cold remedy, because were its heavy power brought into play too readily it would not safeguard competition, but destroy it.”

It is not entirely clear to what Apple is alluding, however, when it describes its pro-competitive behavior and creation of healthy competition. If it is alluding to the Launch of the iPad, a revolutionary device that has encouraged innovation and competition, then its conduct can fairly be described as pro-competitive. But, this case has been only incidentally about the iPad. The iBookstore was not an essential feature of the iPad, and the iPad Launch would have occurred without any iBookstore. It was the pre-existing, remarkable features of the iPad that made the iBookstore an obvious addition to the device.

If Apple is alluding to the fact that Amazon’s Kindle bookstore was the dominant e-retailer for books in 2009, and that the arrival of the iBookstore created another e-retailer, that is true. But, as this Opinion explains, Apple demanded, as a precondition of its entry into the market, that it would not have to compete with Amazon on price. Thus, from the consumer’s perspective — a not unimportant perspective in the field of antitrust — the arrival of the iBookstore brought less price competition and higher prices.

If Apple is suggesting that Amazon was engaging in illegal, monopolistic practices, and that Apple’s combination with the Publisher Defendants to deprive a monopolist of some of its market power is pro-competitive and healthy for our economy, it is wrong. This trial has not been the occasion to decide whether Amazon’s choice to sell NYT Bestsellers or other New Releases as loss leaders was an unfair trade practice or in any other way a violation of law. If it was, however, the remedy for illegal conduct is a complaint lodged with the proper law enforcement offices or a civil suit or both. Another company’s alleged violation of antitrust laws is not an excuse for engaging in your own violations of law. Nor is suspicion that that may be occurring a defense to the claims litigated at this trial.

If Apple is suggesting that an adverse ruling necessarily implies that agency agreements, pricing tiers with caps, MFN clauses, or simultaneous negotiations with suppliers are improper, it is wrong. As explained above, the Plaintiffs have not argued and this Court has not found that any of these or other such components of Apple’s entry into the market were wrongful, either alone or in combination. What was wrongful was the use of those components to facilitate a conspiracy with the Publisher Defendants.

It is doubtful that Apple is suggesting that the only way it could have entered the e-book market was to agree with the Publisher Defendants to raise e-book prices. Apple, often through expert negotiations conducted by Cue, has entered many new content markets. It did not attempt to argue or show at trial that the price of admission to new markets must be or is participation in illegal price-fixing schemes.

While a Court must take seriously a prediction that its decision will harm our nation’s economy, particularly when made by skilled counsel on behalf of an esteemed company, it is difficult to see how competition will be stifled by the ruling in this Opinion. This Opinion’s findings arise from the specific events that unfolded in the trade e-book market as 2009 became 2010. It does not seek to paint with a broader brush.

In the end, it is essential to remember that the antitrust laws were enacted for “the protection of competition, not competitors.” The question in this case has always been a narrow one: whether Apple participated in a price-fixing scheme in violation of this country’s antitrust laws. Apple is liable here for facilitating and encouraging the Publisher Defendants’ collective, illegal restraint of trade. Through their conspiracy they forced Amazon (and other resellers) to relinquish retail pricing authority and then they raised retail e-book prices. Those higher prices were not the result of regular market forces but of a scheme in which Apple was a full participant.

Slip op. at 155–58 (boldface emphasis added, citations and footnotes omitted, typography corrected).

It's that boldfaced passage that exposes what is really at issue in this case: The rule of law. The position taken by Apple (and by the publishers) is that they are entitled to use any means necessary — explicitly including antitrust violations — in furtherance of their own economic advantage. That is, Apple is asserting that private actors, including competitors, have full privilege to assume the powers ordinarily reserved to the government by antitrust law in confronting what those private actors perceive as "abuse of a dominant market position." This is the economic equivalent of destroying the village in order to save it, because the very subject matter at issue — artistic and cultural expression — requires both government and private-actor protection to thrive. Ironically, though, this particular dispute is also an inevitable consequence of the rise of neoconservative ideology beginning in the late 1970s, because the private actors (through their actions, if not their words) have given government enforcement of antitrust law an emphatic vote of no confidence, and taken the law into their own hands. The Reagan-era evisceration of both the government culture of serious antitrust scrutiny and of antitrust law itself is exposing the wisdom hiding behind another conservative's aphorism that democracy is the very worst form of government… except for all the others. The almost-explicit assumption Mr Churchill made is that government is necessary; nongovernmental accretions of power are no more trustworthy, in the end, than are governmental accretions of power. Anyone who grew up in a company town (such as 1960s Seattle) understands that!

In the end, then, Judge Cote held that a competitor (or prospective competitor) has two choices in dealing with perceived antitrust violations: Report them to the government, expecting the government to actually do something; or be a better, lawful, competitor oneself. Violating competition law in the name of enhancing competition, however, is not an acceptable option — at least not in her courtroom. The privilege to act against monopolies belongs to the government and the market as a whole, not to individual market participants.

  1. Yes, it is theoretically possible that the Second Circuit Court of Appeals could choose to hear an interlocutory appeal on the liability order under 28 U.S.C. § 1292(b)… but if, and only if, the order

    involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state in writing in such order. The Court of Appeals which would have jurisdiction of an appeal of such action may thereupon, in its discretion, permit an appeal to be taken from such order, if application is made to it within ten days after the entry of the order: Provided, however, That application for an appeal hereunder shall not stay proceedings in the district court unless the district judge or the Court of Appeals or a judge thereof shall so order.

    (emphasis added) Judge Cote's opinion, however, is so strongly based on factual findings — and, in particular, credibility findings — that there is no controlling question of law for which she has not ensured that any ground for difference of opinion is either insubstantial… or covered in the alternative. For example, her analysis of the per se nature of Apple's antitrust violation is backstopped with analysis reaching the same conclusion under the irrational "Rule of Reason." In short, the promises to appeal are public posturing of no legal significance; but then, I've come to expect that from both the parties and the lawyers involved on the defense side in this matter.

  2. Ironically, this entire lawsuit has avoided confronting a different antitrust problem: Tying arrangements. It's not just that Apple wanted to sell e-books to the public (or, conversely, that Amazon wanted to sell e-books to the public); it's that each vendor wants to sell hardware-and-account-tied access to electronic texts. This bears more than a little resemblance to the "you must use Xerox™ paper and Xerox™ toner that you buy from Xerox™ (or a captive dealer) in your Xerox™ photocopier" requirements of the 1970s that were rejected as antitrust violations themselves. The purported refutation is VHS v. Betamax... but that involved actual physical incompatibility (just try shoving a VHS tape in a Betamax machine and see what happens, even if you put that tape into a Betamax cassette!) at a level substantially deeper than mere packaging of the identical content. It's not a particularly easy question, but the fact that both Apple and Amazon have only popularized data formats developed by others seriously undercuts any claims that it's truly new, independently innovative technology that is at issue… and not use of technological locks not related to the underlying uses to inhibit otherwise-legitimate competition.
  3. The disturbing subtext that Judge Cote specifically mentions, but for good and sufficient rhetorical reasons moves past rather quickly, is the protection of competition versus protection of competitors problem of Brown Shoe. Had she engaged with this issue, the trial would necessarily have required intervention by individual authors, because publishers are inherently both monopolists and monopsonists₀ in an area in which one part of the supply chain (the authors) has been granted a statutory and legitimate monopoly called "copyright." Too, this would be an intractable political problem for a very simple reason: Publishers are a lot more central to a free society than buggy-whip manufacturers ever were.