Unites States of America v. Apple, Inc. et al

Filing 117

MEMORANDUM OF LAW in Support re: 116 MOTION to Stay re: 113 Memorandum & Opinion,,,, Pending Appeal.. Document filed by Bob Kohn. (Brower, Steven)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
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UNITED STATES OF AMERICA
Plaintiff,
v.
APPLE, INC.,
HACHETTE BOOK GROUP, INC.,
HARPERCOLLINS PUBLISHERS, L.L.C.
VERLAGSGRUPPE GEORG VON
HOLTZBRINK PUBLISHERS, LLC
d/b/a MACMILLAN,
THE PENGUIN GROUP,
A DIVISION OF PEARSON PLC,
PENGUIN GROUP (USA), INC. and
SIMON & SCHUSTER, INC.,
Defendants.

Civil Action No.12-CV-2826 (DLC)

MEMORANDOM IN SUPPORT OF BOB KOHN’S
MOTION TO STAY FINAL JUDGMENT PENDING APPEAL

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Table of Contents
INTRODUCTION ........................................................................................................................................ 1
ARGUMENT ................................................................................................................................................ 1
I.

WITHOUT A STAY OF EXECUTION OF THE FINAL JUDGEMENT, AN APPEAL
BECOMES MOOT AND HARM TO PUBLIC IRREPARABLE.................................................. 1
A. Standard of Review for Stay Pending Appeal in the Second Circuit ........................................ 1
B. Second Circuit Standard for Stay Pending Appeal is Fully Satisfied Here ............................... 2
1. Appeal Has a Sufficient Possibility of Success on Appeal ................................................. 2
2. Absent a Stay, E-Book Consumers and the Public Generally Will Suffer Irreparable
Harm ................................................................................................................................... 6
3. Because Staying the Final Judgment Would Not Harm Either Plaintiffs Nor Defendants,
the Balance of Equities Favors a Stay................................................................................. 7

II.

CONSIDERING THE PUBLIC INTEREST IN THE BALANCE, A STAY IS ESPECIALLY
FAVORED....................................................................................................................................... 8

CONCLUSION ........................................................................................................................................... 10

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Bob Kohn, on his own behalf and through his pro bono attorneys, respectfully submits
this memorandum in support of his motion for a stay of execution of judgment pending appeal of
the Court’s Opinion & Order filed September 6, 2012 for entry of Final Judgment.
INTRODUCTION
Movant submitted to the Department of Justice extensive comments 1 objecting to the
proposed Final Judgment and later was granted leave to participate as amicus curiae in these
proceedings. 2 With a Final Judgment now entered, 3 Movant has sought leave of this Court to
intervene for the sole purpose of seeking appellate review of such entry by the United States
Court of Appeal for the Second Circuit. At the same time, Movant moves for stay of execution
of the Final Judgment pending appeal.
ARGUMENT
I.

WITHOUT A STAY OF EXECUTION OF THE FINAL JUDGMENT, AN
APPEAL BECOMES MOOT AND THE CONSEQUENT HARM TO THE
PUBLIC BECOMES IRREPARABLE
A.

Standard of Review for Stay Pending Appeal in the Second Circuit

In the Second Circuit, the decision whether to stay a proceeding pending an appeal
requires consideration of three factors: (1) the likelihood of success on appeal, (2) whether
irreparable injury will be sustained absent a stay, and (3) whether a stay will injure the nonappellant or the public. In re World Trade Center Disaster Site Litig., 503 F.3d 167, 170 (2d Cir.
2007); Thapa v. Gonzalez, 460 F.3d 323, 334-35 (2d Cir. 2006); Mohammed v. Reno, 309 F.3d
95, 101 (2d Cir. 2002).

1

Comments of Bob Kohn, ATC-0143 (May 30, 2012).
Opinion & Order re: Amicus Curiae, No. 12-2826 (Docket No. 108) (August 28, 2012).
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Opinion & Order re: Final Judgment, No. 12-2826, (Docket No. 113) (September 5, 2012). Actual entry of Final
Judgment was imminent at the time of this writing.
2

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These interrelated factors are assessed on a sliding scale, and “more of one excuses less
of the other.” Mohammed, 309 F.3d 334. Thus, “the necessary level of degree of possibility of
success will vary according to the court’s assessment” of the other factors. Thapa, 460 F.3d at
334. Only “some possibility” of success on appeal is sufficient to justify a stay where “the
balance of hardships tips decidedly in favor” of the party seeking the stay. Id. at 336.
B.

Second Circuit Standard for Stay Pending Appeal is Fully Satisfied Here

The application of these three factors under the present circumstances supports the stay of
execution of the Final Judgment pending appeal. While very few consent judgments in Tunney
Act cases are overturned in their entirety on appeal, some are at least modified upon appeal, and
where an appeal presents an issue of first impression, as this one shall, that reason alone
demonstrates a possibility of success. At the same time, consumers of e-books and the public
generally will be substantially and irreparably injured in the absence of a stay. Once the Final
Judgment takes effect, and the government succeeds in “evaporating” the pro-competitive effects
of the Defendants’ conduct, the damage to the public will be irreversible. Should the appeal not
be successful, the Justice Department can readily extend existing monetary remedies for e-book
consumers harmed during the pendency of the appeal. This would not be the case should the
appeal result in the rejection of the Final Judgment. Accordingly, the balance of the equities
favors maintaining the status quo and Movant respectfully submits that a stay of this proceeding
pending appeal should be granted.
1.

Appeal Has a Sufficient Possibility of Success on Appeal

The first factor—the likelihood of success on appeal—weighs in favor of a stay pending
appeal. The Second Circuit avoided “setting too high a standard” for the “likelihood of success”

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factor, because “the trial judge is being asked to assess the likelihood that the ruling just made
will be rejected on appeal.” Mohammed, 309 F.3d at 101.
Movant is likely to prevail on appeal because the Court’s ruling conflicts with precedent
established by U.S. Supreme Court and the Second Circuit on the subject of literal price fixing
and the countervailing competitive virtues that have specifically justified horizontal pricing
fixing in connection with the exploitation of copyrighted works of authorship.
Movant, like millions of consumers, has a vital interest in competitive markets for ebooks and the e-book readers and systems that support them. That vital interest necessarily
includes an interest, not in what the government contends are low prices, but rather in efficient
prices for e-books. The purported public interest in “low” prices was fabricated by the Justice
Department with a now discredited citation. See, proposed Amicus Brief of Bob Kohn at 23
(Docket No. 97) and Amicus Brief of Bob Kohn at 2 (Docket No. 110). As Movant has pointed
out to this Court, the government’s position on this is contrary to the law of the Second Circuit
and the U.S. Supreme Court.
In its Opinion & Order dated September 5, 2012, the Court appeared to base its reply to
these arguments primarily upon Movant’s comments filed during the 60-day comment period,
not his amicus curiae brief (Docket No. 110), and not his proposed amicus curiae brief (Docket
No. 97). Movant, in its proposed amicus curiae brief, had set forth arguments which specifically
anticipated that the DOJ or the Court would narrowly interpret Broadcast Music v. CBS, 441
U.S. 1 (1979), pointing out how the Supreme Court, in FTC. v. Indiana Fed’n of Dentists, 476
U.S. 447, 459 (1986), extended the coverage of Broadcast Music beyond per se to the rule of
reason.

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Yet, in its Opinion & Order dated September 5, 2012, the Court failed to explain or even
cite Indiana Fed’n of Dentists. The DOJ, cleverly perhaps, specifically ignored the case, using a
subterfuge that would mask the case’s importance in extending the high court’s views expressed
in Broadcast Music. See Docket No. 111 at fn 3.
Moreover, the Court failed to address in its Opinion & Order the fact that the literal
horizontal price-fixing in Broadcast Music was sustained by the need to countervail the strong
monopsony in that case, a point made emphatically in Movant’s amicus curiae brief, and more
fully elucidated in his proposed amicus curiae brief.
Thus, Defendants conduct, as alleged, constituted a countervailing pro-competitive effect
that corrected the market failure existing in the e-book market at the time the alleged conduct
took place. That market failure manifested itself in an e-book market dominated by a seller of ebooks having 90% market share and a virtual monopsony in the market for acquiring e-book
distribution rights. These market failures were brought about, in part, by the predatory (i.e.,,
below marginal cost) pricing practices of the monopolist/monopsonist, facts supporting which
are in plain view in the Justice Department’s Complaint and Competitive Impact Statement.
The case law is replete with precedent demonstrating that horizontal price fixing will be
sustained under the rule of reason where there is a “countervailing procompetitive virtue—such
as for example, the creation of efficiencies in the operation of a market.” FTC v. Indiana Fed’n
of Dentists, 476 U.S. 447, 459 (1986) (citing Broadcast Music v. CBS, 441 U.S. 1 (1979)).
Movant intends to brief a similar line of cases that show a clear parallel trend in the realm
of group boycotts. Northwest Wholesale Stationers v. Pacific Stationery & Printing Co., 472
U.S. 284 (1985) (holding that the per se approach only applies if the boycott was “not justified
by plausible arguments that [it was] intended to enhance overall efficiency and make markets

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more competitive”). The Supreme Court more recently endorsed this same approach, approving
the Second Circuit’s decision to allow the defendants to justify the boycott before it would apply
the per se rule. NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 135 (1998). See also, Flash
Electronics, Inc. v Universal Music, 312 F.Supp. 379, 388 (E.D. New York, 2004) (holding “the
existence of the procompetitive effect is enough to take this case out of the category of a per se
unlawful group boycott and into the realm of rule of reason analysis); Bogan v. Hodgkins, 166
F.3d 509, 514 (2d Cir. 1999) (“Absent a showing that a presumption of anticompetitive effect is
appropriate, we apply the rule of reason”).
All of these cases, as applied to the circumstances at hand, point to the probability of
success upon appeal. Movant has also cited several important law review articles and economics
journals regarding the very trend the Justice Department, and now the District Court, has chosen
to ignore without citation, but which Movant hopes will be squarely addressed by the Court of
Appeals. See, John Cirace, CBS v. ASCAP: An Economic Analysis of a Political Problem, 47
FORDHAM L. REV. 277 (1978-79); Richard S. Wirtz, Rethinking Price-Fixing, 20 INDIANA L.
REV. 531, 627 (1987) (“After Broadcast Music and NCAA, the question is not whether
exceptions to the general prohibition against agreements among competitors will be recognized,
but rather when. Potentially pro-competitive collaboration among competitors is to be
encouraged, within limits, even if it involves agreement on prices” [emphasis added]); R.G.
Lipesy & Kevin Lancaster, The General Theory of Second Best, 24 REV. ECON. STUD. 11 (195657).(“The distorting effect of overconsumption could be made worse if, in cases of horizontal
price fixing, antitrust laws are used to decrease prices”). See also, Christopher R. Leshe,
Achieving Efficiency Through Collusion: A Market Failure Defense to Horizontal Price Fixing,
81 CALIFORNIA LAW REV. 243, 270.

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As Justice White stated at the outset of the Court's opinion in Broadcast Music:
We have never examined a practice like this one before; indeed, the Court of Appeals
recognized that "in dealing with performing rights in the music industry we confront
conditions both in copyright law and antitrust law which are sui generis.” (emphasis
added)
Broadcast Music, at 14 (quoting, CBS v. ASCAP, 562 F.2d 130, 132 (2d Cir. 1977)). The
observations by the U.S. Supreme Court and the Second Circuit in that case mirrors the
challenges confronted by the courts in the present proceeding. In dealing with the licensing of
digital rights in the book industry, the Court of Appeals for the Second Circuit will once again be
confronted with conditions both in copyright law and antitrust law which are sui generis.
Where, as here, an appeal “presents an issue of first impression” over which the “Court of
Appeals may disagree” with this Court, “that reason alone” demonstrates a possibility of
success.” Jock v. Sterling Jewelers, Inc. 738 F.Supp. 2d 445, 446 (S.D.N.Y 2010) (Rakoff, J).
2.

Absent a Stay, E-Book Consumers and the Public Generally Will
Suffer Irreparable Harm

A failure to enter a stay of execution of the Final Judgment pending appeal will
irreparably harm e-book consumers and the public generally. In the penultimate paragraph of its
Opinion & Order, the Court states:
“[T]he government alleges substantial ongoing harm as a result of the Settling
Defendants’ illegal activity. E-books consumers should not be forced to wait until after
until after the June 2013 trial to experience the significant benefits of the decree.”
The entire purpose of the appeal of this case is to ask the Court of Appeals to rule, in accordance
with Keyspan, that the factual foundation of the government’s decisions were such that its
conclusions about the proposed remedy were unreasonable. That is, consumers could never, as
a matter of law, have been harmed by the Defendants’ conduct.

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The Court is in no better position than the government or Movant to determine whether
the effect of the Final Judgment—which has a stated intent of reversing the effects of
Defendants’ conduct—will be harmful to consumers of e-books and the public generally. The
judicious thing to do under these circumstances is to preserve the status quo pending the appeal
of the very question that will determine the fate of consumer welfare.
In effect, should the Court not stay execution of the Final Judgment pending appeal,
Movant will forever effectively lose his ability to appeal for relief from the Final Judgment. The
Second Circuit has found irreparable harm where, absent a stay pending appeal, the appellant
stood to lose its ability to appeal. See, Country Squire Assocs., L.P. v. Rochester Community Sav.
Bank, 203 B.R. 182, 183 (2d Cir. BAP 1996) (holding that the prospect of a mooted appeal if
stay were denied “would be the ‘quintessential form of prejudice.’”); In re Advanced Mining
Sys., Inc. 173 B.R. 467, 468-69 (S.D.N.Y. 1994) (finding irreparable injury where, absent a stay,
the distribution of assets to creditors would moot any appeal and thus quintessentially prejudice
appellants).
Movant respectfully submits that the issues to be raised on its appeal constitute serious
and credible applications of U.S. Supreme Court and Second Circuit that must not be ignored if
the public interest is to be secured. Where the issues raised are important, “their presentation to
the Court of Appeals should not be foreclosed by this Court.” United States v. Thomson Corp.,
1997-1 Trade Cas. (CCH) ¶71,735, 1997 U.S. Dist. LEXIS 1893 at *15 (D.C.C. February 27,
1997).
3.

Because Staying the Final Judgment Would Not Harm Either
Plaintiffs Nor Defendants, the Balance of Equities Favors a Stay

Being that the government had already expressed its preference for the Court’s entry of
the Final Judgment without a hearing, the DOJ would no doubt prefer to dispense with an appeal
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of the judgment, too. Apart from the prospect of a reversal of the entry of judgment, the DOJ can
hardly complain that an appeal would constitute any cognizable harm to the government. An
appeal will not cause the government to direct resources from other cases, because it will need to
continue prosecuting its case against the non-settling defendants. By the same token an appeal
will in no way impede the government’s continued prosecution of its case against the nonsettling defendants.
Nor will an appeal harm or prejudice the rights of any of the Defendants. On the contrary,
should the appeal result in reversal of entry of the Final Judgment, the parties will have benefited
from the guidance provided by the Court of Appeal on the issues raised by Movant.
II.

CONSIDERING THE PUBLIC INTEREST IN THE BALANCE, A STAY IS
ESPECIALLY FAVORED
Movant has already addressed the fact that consumer welfare hangs in the balance of this

appeal. Staying the effect of the Final Judgment pending appeal is necessary to maintain the
status quo, so that consumers do not become victims of the Final Judgment.
In the parallel litigation with the plaintiff States, the settling parties have apparently
found a way to compensate consumers based on the assumption that Defendants’ alleged conduct
was harmful to consumers. If the Justice Department and the District Court is wrong, and the
Final Judgment is held to be an instrument of wrong to the public, no such means of
compensating consumers would be available.
Specifically, if the government is right and Movant is wrong, then some consumers of ebooks will be paying per few percent more for some e-books that would otherwise had been sold
at a lower price. Since the digital environments in which e-books are sold can actually count
those e-books and track who they are sold to, when they sold, and at what price, the government

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has a readily available precise way of calculating the harm to the respective consumers and can
implement a precise way to compensate such consumers for the precise harm.
But the reverse is not true. If Movant is right, and the government is wrong, than
consumers will pay below marginal cost for some e-books—a result which is harmful to
consumer welfare. Should the entry of Final Judgment be reversed, there would be no way to get
that money back from consumers who underpaid for the e-books.
Moreover, we know for a fact—which has not been disputed by the government—that
since the advent of the agency model, Amazon’s market share has dropped from 90% to
approximately 60%. While the government believes this fact is irrelevant to the factual
foundation of their conclusion regarding the Final Judgment, it is a consumer benefit that cannot
be disputed.
Yet, if a stay is not ordered, that Amazon may resume its below marginal cost
discounting of e-books, an undisputed, stated objective of the Final Judgment. Whether the
likelihood of Amazon being able to increase its market share, discourage new entrants, and drive
current competitors from the e-book business is high or low is not the point. Should, as a result
of the Final Judgment, Amazon’s market share return to 90%, the harm to consumers would be
extremely difficult for the government to reverse, short of the filing of a successful antitrust
action against Amazon for predatory pricing—an action, ironically, which would ask the Courts
to require Amazon to raise its e-book prices. It is also a remedy, as the government knows from
its experience with Microsoft, that is extremely costly, time-consuming, and virtually ineffective
as a means of providing relief to consumers.

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Accordingly, a stay would unequivocally be in the public interest. This is particularly true
when the appeal implicates federal public policy as expressed in the antitrust laws. Basic Inc. v.
Levinson, 485 U.S. 224, 234 (1988).
By contrast, there is no particular interest in whether the government can enter the
judgment as quickly as it might like.
Finally, it is important to note in this context that Defendants alleged conduct was a onetime event—move from retail to agency model. The government has not alleged and is not now
contending that the Defendants are continuing to engage in collusive activity. There is no
collusive activity occurring that needs to be enjoined at the present time.
CONCLUSION
Without a stay of entry of the Final Judgment, an appeal of the Judgment on the grounds
stated above will become moot. Stay of entry is essential to “ensure that the Final Judgment is
properly tested in the appellate crucible.” United States v. Thomson Corp., supra. Moreover, the
Court should grant the stay because Movant has demonstrated some possibility of success on a
substantial “issue of first impression” over which the “Court of Appeals may disagree” with this
Court. Thapa, 460 F.3d at 336; Jock, 738 F.Supp.2d at 446.
For all these reasons, the Court should grant this motion and stay the execution of the
Final Judgment pending the appeal of the Court’s Order dated September 6, 2012.

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Dated: September 7, 2012

Respectfully submitted,

_______________________
BOB KOHN
California Bar No. 100793
140 E. 28th St.
New York, NY 10016
Tel. [phone]; Fax. [phone]
eMail: [e-mail]
/s/ Steven Brower
By: _______________________
STEVEN BROWER [PRO HAC]
California Bar No. 93568
BUCHALTER NEMER
18400 Von Karman Ave., Suite 800
Irvine, California 92612-0514
Tel: [phone]
Fax: [phone]
Email: [e-mail]
Pro Bono Counsel to Bob Kohn

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