New York Times

Supreme Court Declines to Hear Apple’s Appeal on E-Books

March 8, 2016

by Adam Liptak

WASHINGTON — The Supreme Court on Monday refused to review an appeals court’s determination that Apple had conspired with book publishers to raise the prices of digital books.

The court’s order, which following custom was issued without any accompanying explanation, puts into effect a $450 million settlement that Apple had agreed to pay if it lost the case. E-book buyers will receive $400 million in cash and credits and lawyers involved in the case will get $50 million.

The case arose from Apple’s 2010 entry into the e-book marketplace, which had been dominated by Amazon and its Kindle reader. Publishers frustrated with Amazon’s low prices welcomed the new retailer, its iPad device and its willingness to let them set their own prices, with Apple taking a cut of each sale.

Last year, a divided three-judge panel of the United States Court of Appeals for the Second Circuit, in New York, said the terms Apple had offered to five big publishers allowed them to engage in a price-fixing conspiracy.

In urging the Supreme Court to hear the case, Apple Inc. v. United States, No. 15-565, the company said its actions had promoted competition.

“Apple’s launch of the iBookstore as a platform for tens of millions of consumers to buy and read digital books on the iPad dramatically enhanced competition in the e-books market, benefiting authors, e-book publishers and retail consumers,” Apple said in its petition seeking a Supreme Court review. “Following Apple’s entry, output increased, overall prices decreased and a major new retailer began to compete in a market formerly dominated by a single firm.”

“If a new firm’s entry disrupts a monopoly and creates long-term competition, that is to be lauded, whether the previous prices were artificially high or artificially low,” the brief said.

The appeals court disagreed. “Competition is not served by permitting a market entrant to eliminate price competition as a condition of entry, and it is cold comfort to consumers that they gained a new e-book retailer at the expense of passing control over all e-book prices to a cartel of book publishers,” Judge Debra Ann Livingston wrote for the majority.

The Supreme Court’s refusal to hear the case is a victory for Amazon, which maintains a dominant position in e-book sales. The online retailer helped precipitate the case by complaining to the Justice Department about the actions of Apple and the publishers.

Amazon issued a brief statement on Monday, saying, “We are ready to distribute the court-mandated settlement funds to Kindle customers as soon as we’re instructed to move forward.”

Len Edgerly, a fan of both Amazon and Apple products who hosts a weekly podcast on e-books called the Kindle Chronicles, said that the outcome of the case “feels like a vindication to let the market decide the price for e-books.”

He said that he and his wife each received a couple of hundred dollars from the settlements paid earlier by book publishers in the case, and Apple’s payment to e-book buyers, expected later this year, will be roughly double that amount.

Apple declined to comment beyond the briefs it had filed in the case.

The case began in 2012, when the Justice Department accused Apple and five publishers of conspiring to raise e-book prices above Amazon’s standard of $9.99 for new titles. With encouragement from Apple, the publishers introduced an agency model of pricing, in which they set the sale price of e-books rather than allowing the seller to charge what it wished.

The five publishers settled the antitrust case, but Apple went to trial.

Judge Denise L. Cote of the United States District Court in Manhattanruled for the government, finding that the publishers had joined a price-fixing conspiracy and that Apple “was a knowing and active member of that conspiracy.”

Judge Cote relied in part on the words of Steven P. Jobs, the company’s co-founder, who died in 2011.

“I can live with this, as long as they move Amazon to the agent model too for new releases,” Mr. Jobs, who was then Apple’s chief executive, wrote to Eddy Cue, Apple’s senior vice president for Internet software and services. “If they don’t, I’m not sure we can be competitive.”

Judge Cote said that the company had no good explanation for that and other communications. “Apple has struggled mightily to reinterpret Jobs’s statements in a way that will eliminate their bite,” she wrote. “Its efforts have proven fruitless.”

Mike Shatzkin, chief executive of The Idea Logical Company, a consultancy to book publishers, predicted the resolution of the case would have little impact on the book publishing industry. While the move to agency pricing first helped smaller players like Barnes & Noble and its Nook e-readers, subsequent changes in book pricing contracts have once again bolstered Amazon.

“There are still real hard times ahead for the publishers because Amazon’s market share is so large that they are bound to take more and more margin from publishers,” he said.