Washington, D.C. associate Adam Kunz authored an article for the Federal Civil Enforcement Newsletter titled, “The Ringmaster’s Whip: The Role of Apple’s MFN in the E-books case.”

The Department of Justice (DOJ) recently was victorious in its battle with Apple, Inc. and five publishers over allegations of an industry-wide price-fixing scheme in the e-book market.  After months of negotiation and litigation, Judge Denise Cote of the U.S. District Court for the Southern District of New York announced a final judgment on September 5, 2013, entering injunctive relief against Apple.

The DOJ’s main allegation was that Apple had conspired with five e-book publishers to bring about an industry-wide price-fixing conspiracy in the e-book market.  The DOJ further alleged that, with Apple as “ringleader,” the defendants coordinated retail sales through the mutual adoption of an agency model that raised the price of e-books in an effort to curb the dominance of the biggest e-book supplier, Amazon.  The DOJ argued that Apple was able to force a shift in the industry away from a wholesale system to an across-the-board adoption of an agency model through the use of a unique "most favored nation" (MFN) clause. Under the DOJ's reading of the Seventh Circuit's Toys "R" Us decision, the DOJ argued that this was a per se violation of Section 1 of the Sherman Act. 

Adam discusses how the court found that, under Apple's arrangement, a publisher could theoretically simply have given to Apple the same prices it had given to Amazon: an e-book sold on Apple’s iBookstore could have been $9.99 just as it would have been on Amazon. In setting that price, the publisher would have obeyed the terms of the Apple MFN, offering to Apple no better price than one offered to another carrier. However, the publisher would have suffered a financial setback on the individual e-book: under Apple’s agency model, the publisher would have had to pay Apple – the publisher’s “agent” – a 30% commission for Apple’s sale in the iBookstore. The publisher would have incurred no such loss under the pre-existing wholesale arrangement with Amazon. Each publisher, then, had only two options. It could avoid the agency agreement with Apple altogether and continue under a wholesale model, which the court noted, none of the publishers liked. Or, the publisher could accept Apple’s arrangement – an agency model, with the MFN and pricing tiers – and thereby force an agency model upon Amazon and other retailers, ensuring that the publisher both complied with Apple’s MFN and did not sustain a loss through Apple’s agency agreement. This, the court concluded, was a per se violation of Sherman Section 1. 

Adam concludes that from the outset, the MFN was the core issue of the Apple e-books controversy; DOJ brought the MFN to the front and center in its initial complaint.  Ultimately, the court accepted DOJ’s argument, relying on the TRU decision that Apple was at the center of a per se horizontal conspiracy among e-book publishers.  In so doing, the court took the view that the MFN was not just a key facet of the Apple arrangement, but the “ringmaster’s whip” that Apple used to ensure acceptance and compliance with its arrangement.

To view the entire article in the Federal Civil Enforcement Newsletter, click here.

Source: Federal Civil Enforcement Newsletter