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

Filing 253

PRETRIAL MEMORANDUM. Document filed by Apple, Inc..(Snyder, Orin)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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UNITED STATES OF AMERICA,
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Plaintiff,
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v.
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APPLE INC., et al.,
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Defendants.
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THE STATE OF TEXAS,
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THE STATE OF CONNECTICUT, et al.,
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Plaintiffs,
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v.
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PENGUIN GROUP (USA) INC., et al.,
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Defendants.
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12 Civ. 2826 (DLC)

12 Civ. 03394 (DLC)

APPLE INC.’S PRE-TRIAL MEMORANDUM OF LAW

TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT .................................................................................................... 1
STATEMENT OF FACTS ............................................................................................................. 6
ARGUMENT ................................................................................................................................ 18
I.

Plaintiffs Cannot Prove The Existence Of A Conspiracy .................................................... 19
A.

Apple Was Neither Involved In Nor Aware Of The Alleged Conspiracy
Among The Publishers ............................................................................................... 21

B.

Plaintiffs’ Evidence Does Not Tend To Exclude The Possibility Of
Independent Action ..................................................................................................... 22
1.

The Procompetitive Nature Of Apple’s Market Entry Requires Plaintiffs
To Provide “Strong” Evidence Of A Conspiracy .............................................. 23

2.

Apple’s Conduct Was Driven By Its Independent Business Interests ............... 24

3.

Plaintiffs’ Evidence Fails The “Stringent Standards” In Monsanto .................. 27
(a)

Price Tiers/Caps ........................................................................................ 28

(b)

Negotiation Approach ............................................................................... 28

(c)

MFNs ........................................................................................................ 29

(d)

Communications ....................................................................................... 30

4.

Statements Attributed To Steve Jobs Do Not Support Plaintiffs’ Theory ......... 31

5.

Evidence Of Amazon’s Voluntary Move To Agency Renders Plaintiffs’
Theory A Chronological Fiction ........................................................................ 33

CONCLUSION ............................................................................................................................. 40
APPENDIX A ................................................................................................................................. 1

i

TABLE OF AUTHORITIES
Page(s)
Cases
AD/SAT v. Associated Press,
181 F.3d 216 (2d Cir. 1999) ............................................................................................... 23, 26
Albrecht v. Herald Co.,
390 U.S. 145 (1968) .................................................................................................................. 20
Am. Chiropractic Ass’n v. Trigon Healthcare, Inc.,
367 F.3d 212 (4th Cir. 2004) .................................................................................................... 22
Blue Cross & Blue Shield United of Wisc. v. Marshfield Clinic,
65 F.3d 1406 (7th Cir. 1995) .................................................................................................... 29
Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp.,
509 U.S. 209 (1993) .................................................................................................................. 38
Burlington Coat Factory Warehouse Corp. v. Esprit de Corp.,
769 F.2d 919 (2d Cir. 1985) ........................................................................................... 6, 26, 27
Bus. Elecs. Corp. v. Sharp Elecs. Corp.,
485 U.S. 717 (1988) .................................................................................................................. 20
Cal. Dental Ass’n v. FTC,
526 U.S. 756 (1999) .................................................................................................................. 37
Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc.,
996 F.2d 537 (2d Cir. 1993) ............................................................................................... 20, 38
Comfort Traine Air Conditioning Co. v. Trane Co.,
592 F.2d 1373 (5th Cir. 1979) .................................................................................................. 27
Cont’l T.V., Inc. v. GTE Sylvania, Inc.,
433 U.S. 36 (1977) .................................................................................................................... 20
Dr. Miles Med. Co. v. John D. Park & Sons, Co.,
220 U.S. 373 (1911) .................................................................................................................. 20
Euromodas, Inc. v. Zanella, Ltd.,
368 F.3d 11 (1st Cir. 2004) ................................................................................................. 24, 33
Fed. Broad. Sys., Inc. v. Am. Broad. Co.,
167 F.2d 349 (2d Cir. 1948) ..................................................................................................... 31

ii

Gatt Commc’ns v. PMC Assocs., L.L.C.,
711 F.3d 68 (2d Cir. 2013) ....................................................................................................... 38
Geneva Pharms. Tech. Corp. v. Barr Labs., Inc.,
386 F.3d 485 (2d Cir. 2004) ..................................................................................................... 21
H.L. Hayden Co. v. Siemens Med. Sys., Inc.,
879 F.2d 1005 (2d Cir. 1989) ................................................................................................... 24
In re Baby Food Antitrust Litig.,
166 F.3d 112 (3d Cir. 1999) ..................................................................................................... 22
In re Elevator Antitrust Litig.,
502 F.3d 47 (2d Cir. 2007) ....................................................................................................... 29
In re Flat Glass Antitrust Litig.,
385 F.3d 350 (3d Cir. 2004) ..................................................................................................... 24
In re Ins. Brokerage Antitrust Litig.,
618 F.3d 300 (3d Cir. 2010) ............................................................................................... 24, 31
In re Publ’n Paper Antitrust Litig.,
690 F.3d 51 (2d Cir. 2012) ................................................................................................... 6, 23
In re Sulfuric Acid Antitrust Litig.,
703 F.3d 1004 (7th Cir. 2012) ............................................................................................ 36, 37
In re Travel Agent Comm’n Antitrust Litig.,
583 F.3d 896 (6th Cir. 2009) .................................................................................................... 23
Int’l Distrib. Ctrs., Inc. v. Walsh Trucking Co.,
812 F.2d 786 (2d Cir. 1987) ..................................................................................................... 27
Interstate Circuit v. United States,
306 U.S. 208 (1939) ............................................................................................................ 21, 22
Israel Travel Advisory Serv., Inc. v. Israel Identity Tours, Inc.,
61 F.3d 1250 (7th Cir. 1995) .................................................................................................... 40
Jefferson Parish Hosp. Dist. No. 2 v. Hyde,
466 U.S. 2 (1984) ...................................................................................................................... 40
K.M.B. Warehouse Distribs. v. Walker Mfg. Co.,
61 F.3d 123 (2d Cir. 1995) ....................................................................................................... 38
Leegin Creative Leather Prods., Inc. v. PSKS, Inc.,
551 U.S. 877 (2007) ................................................................................ 6, 20, 22, 24, 36, 37, 39

iii

Lovett v. Gen. Motors Corp.,
998 F.2d 575 (8th Cir. 1993) .................................................................................................... 27
Major League Baseball Props. v. Salvino, Inc.,
542 F.3d 290 (2d Cir. 2008) ......................................................................................... 36, 37, 38
Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574 (1986) ........................................................................................................ 6, 23, 24
Mayor & City Council of Balt., Md. v. Citigroup, Inc.,
709 F.3d 129 (2d Cir. 2013) ......................................................................................... 22, 24, 26
Monsanto Co. v. Spray-Rite Serv. Corp.,
465 U.S. 752 (1984) .................................................................... 6, 20, 22, 23, 24, 26, 27, 30, 33
State Oil Co. v. Khan,
522 U.S. 3 (1997) ...................................................................................................................... 36
Texaco v. Dagher,
547 U.S. 1 (2006) ...................................................................................................................... 37
Todorov v. DCH Healthcare Auth.,
921 F.2d 1438 (11th Cir. 1991) ................................................................................................ 27
Toys “R” Us, Inc. v. FTC,
221 F.3d 928 (7th Cir. 2000) .................................................................................................... 22
United Air Lines, Inc. v. Austin Travel Corp.,
867 F.2d 737 (2d Cir. 1989) ..................................................................................................... 26
United States v. Arnold, Schwinn & Co.,
388 U.S. 365 (1967) .................................................................................................................. 20
United States v. Gen. Elec. Co.,
272 U.S. 476 (1926) .................................................................................................................. 20
United States v. Microsoft Corp.,
253 F.3d 34 (D.C. Cir. 2001) .................................................................................................... 36
Valuepest.com of Charlotte, Inc. v. Bayer Corp.,
561 F.3d 282 (4th Cir. 2009) .................................................................................................... 20
Virgin Atl. Airways Ltd. v. British Airways PLC,
257 F.3d 256 (2d Cir. 2001) ..................................................................................................... 20
White v. R.M. Packer Co.,
635 F.3d 571 (1st Cir. 2011) ..................................................................................................... 26

iv

Statutes
15 U.S.C. § 1 ........................................................................................................................... 19, 23
Other Authorities
P. Areeda & H. Hovenkamp, Antitrust Law (3d ed. 2010) ..................................................... 22, 24
Press Release, Amazon.com, Kindle Device Unit Sales Accelerate Each Month in Second
Quarter; New $189 Price Results in Tipping Point for Growth (July 19, 2010) ...................... 40
U.S. Dep’t of Justice, Statement by Assistant Attorney General R. Hewitt Pate Regarding the
Closing of the Orbitz Investigation (July 31, 2003) ................................................................. 39

v

PRELIMINARY STATEMENT
Apple did not conspire to fix e-book prices. The evidence proves that Apple acted
independently, to further its own legitimate business goals, in negotiating agency agreements
with the publishers to enter the e-book market. Plaintiffs can no longer rely on mere allegations,
faulty assumptions, and unfounded conclusions. That time has passed. Plaintiffs must produce
evidence at trial that Apple consciously conspired with the publishers. But plaintiffs fall well
short of their burden; indeed, the evidence contradicts their key allegations against Apple.
1. Plaintiffs’ complaints allege a longstanding conspiracy among five book publishers,
dating back to 2008, to raise e-book prices. Plaintiffs have never alleged that Apple participated
in or knew of any meetings or conversations that allegedly formed the basis of the purported
conspiracy—indeed, Apple is not even named as a defendant in the States’ first two conspiracy
counts. Instead, plaintiffs allege that Apple “facilitated” some other conspiracy with the five
publishers over a handful of weeks by negotiating agency agreements with them that allowed
Apple to enter the e-book business. The evidence refutes this theory.
Plaintiffs alleged a narrative that has now proven false: that the five publishers, after
public announcement of the Apple agency agreements in late January 2010, were required by a
single term in the agency agreements to move together to “force” Amazon to adopt agency and
raise its prices. First, the Apple agency agreements required no such thing. They set forth the
terms of Apple’s business relationship with each publisher; they placed no constraints on how a
publisher should deal with other retailers, including Amazon. Second, the chronology advanced
by plaintiffs is a fiction. The agency agreements that Apple signed with the publishers in late
January 2010 followed several weeks of difficult business negotiations. Unbeknownst to Apple,
Barnes & Noble, at the same time, was pursuing agency agreements with the very same

1

publishers and had been doing so for months. And even Amazon, the alleged victim of the
conspiracy, had been discussing a shift to agency after learning of Apple’s negotiations, but
before Apple and the publishers entered into a single agreement.
2. Agency was a logical model for a new entrant to the e-books business in 2009. The
market was roiled by a public conflict between the publishers and Amazon. Amazon at the time
sold 9 out of every 10 e-books, and many publishers publicly disagreed with Amazon’s uniform,
below-cost pricing strategy for New York Times bestsellers. In December 2009, before Apple
had contacted a single publisher, some publishers publicly announced and implemented plans to
delay the release of e-book new releases on Amazon (a strategy known as “windowing”) to
address Amazon’s pricing strategy. This tumult in the industry inspired the second largest eretailer, Barnes & Noble, to push for agency agreements with the publishers. And Amazon used
an agency-like model for small publishers and self-published authors. In other words, Apple did
not introduce agency to the e-book industry; it was simply the first to reach an agency agreement
with the industry’s largest publishers.
3. In their effort to brand Apple’s legitimate agency agreements an illegal conspiracy,
plaintiffs distort both the intent and effect of the retail-price “Most Favored Nation” clause
(“MFN”) in Apple’s agency agreements. Plaintiffs falsely characterize the MFN as “a key
commitment mechanism” that Apple designed to compel the publishers to move Amazon to an
agency model. Plaintiffs’ after-the-fact characterization of the MFN is simply wrong.
Apple’s clear intent in creating the MFN was to advance its independent and
procompetitive business objective: to enter the market and offer competitive prices. The MFN
gave Apple the contractual right to lower prices on the Apple bookstore to match lower prices
offered by competing retailers for a limited set of new releases. The agency agreements

2

contained no provision addressing the business model of Amazon or other retailers. There is no
evidence that Apple created the MFN to incentivize the publishers through some process to
convince Amazon to change its business model. The very point of the MFN was to enable Apple
to be competitive with Amazon and other retailers regardless of their business model or strategy.
Indeed, the evidence shows that Apple told the publishers that they were free to remain on a
wholesale model with other retailers, even as the publishers sold e-books on Apple’s bookstore
under an agency arrangement.
4. The linchpin of plaintiffs’ conspiracy claim against Apple is that the MFN actually
forced publishers to band together to require Amazon to agree to an agency relationship.
Plaintiffs claim that Amazon “had no choice but to accept the agency model” and “capitulated”
in late January 2010 when confronted by a united front of publishers, supposedly led by
Macmillan. Compl. ¶ 84. The evidence contradicts this narrative as well.
Earlier in January, Amazon had started its own parallel discussions with the publishers
about a shift to agency before Apple signed a single agency agreement. Amazon learned that
Apple was negotiating agency terms with major publishers to open an e-bookstore on its rumored
new tablet device. These agreements would give Apple access to all “new release” e-books,
including those that the publishers were already starting to window on Amazon. The potential
entry of Apple, with its full access to new releases and its game-changing color e-reader (what
would be the iPad), posed the first meaningful competition to Amazon’s dominant e-book retail
position. Amazon faced a choice: continue to use wholesale arrangements and be windowed by
the publishers, use its considerable economic power to retaliate, or move to agency.
Amazon quickly made the rational business decision to move to an agency model for the
five publishers that signed deals with Apple, but Amazon staged a PR stunt to blame its decision

3

on Macmillan, the smallest publisher. Agency would give Amazon access to all new releases,
enabling it to compete with Apple on those titles, and turn losses into a 30% margin. This model
was familiar to Amazon. An email written by an Amazon executive on January 31, 2010,
reveals that Amazon discussed as early as 2009 the possibility of moving from a wholesale
model to one involving a 70/30 revenue split similar to that proposed by Apple. This same email
shows that Amazon was privately pleased with the result of its negotiations, even as it publicly
blamed Macmillan for its move to agency. Amazon’s decision to discuss agency deals was a
reaction to Apple’s potential entry (a procompetitive event) and the publishers’ windowing of ebooks. It had nothing to do with the Apple MFN. Amazon went on to negotiate aggressively to
obtain its own favorable agency terms from the publishers, including its own MFN.
5. Plaintiffs and their experts critically do not dispute that Apple pursued the key
contract terms in its agency agreements (including the MFN and price caps) for its independent
business reasons. For example, Apple insisted on price caps, over the strong objection of each
publisher, to ensure that digital books on Apple’s bookstore cost less than their physical
counterparts. The price caps constrained the ability of the publishers to raise prices, as plaintiffs
admit; they did not set a uniform price for all publishers. Plaintiffs’ own experts admit that these
contract terms made business sense for Apple, independent of any alleged conspiracy, as a new
entrant into an uncertain market. Apple’s terms reflected Apple’s digital business principles it
had consistently implemented when successfully entering (or creating) other digital content
markets, including its revolutionary iTunes Store and App Store. These core business principles,
and not a conspiracy with publishers, drove Apple’s negotiating strategy and contract terms.
6. The difficult negotiations between Apple and each publisher contradict plaintiffs’
conspiracy story as well. The arms-length and individual negotiations show that the interests of

4

Apple and each publisher diverged sharply (and in different ways) on the very terms that are the
basis of the claims against Apple. Each publisher fought to eliminate the MFN and price cap
provisions that plaintiffs allege were the centerpieces of the alleged conspiracy.
7. The United States’ Complaint alleges that Apple’s entry “increase[ed] the retail prices
of trade e-books.” Compl. ¶ 102(a). That allegation is demonstrably false. Average prices for
trade e-books have fallen, and output, whether measured in the number of sales, the number of
titles, or the types and quality of e-books offered, has increased substantially. These facts are
undisputed.
Apple also fundamentally transformed the e-reading experience, leaving rudimentary,
black-and-white, and expensive single-purpose e-readers (e.g., the Kindle) in the dust. The ebook world changed dramatically when Apple launched its iBookstore on the iPad in April 2010.
At the time, 400,000 e-book titles were available to the consuming public; today, readers can
download more than 1.7 million e-books. Apple has also created or spurred a number of the
most important e-reading hardware and software innovations, such as full-color, interactive, and
vivid digital e-books.
It is not surprising that plaintiffs seek to run from the fact that every critical indicator of
market health—lower price, higher output, more selection, higher quality, lower concentration—
signals that the trade e-books market has been thriving since Apple’s entry and consumers have
been reaping the benefits.
*

*

*

Plaintiffs have no case against Apple. Lacking direct evidence that Apple conspired,
plaintiffs string together a chain of unreasonable inferences, drawn from a patchwork of
ambiguous evidence.

5

The Supreme Court has held, however, that under the teaching of Monsanto Co. v. SprayRite Service Corp., 465 U.S. 752 (1984), “antitrust law limits the range of permissible inferences
from ambiguous evidence in a § 1 case.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475
U.S. 574, 588 (1986). Plaintiffs are required to meet the “stringent standards in Monsanto.”
Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 903 (2007). Specifically,
plaintiffs must adduce “evidence that tends to exclude the possibility” that Apple acted
independently. Monsanto, 465 U.S. at 768. And where the challenged conduct—here, Apple’s
entry into the e-books market—is inherently procompetitive and supported by “uncontradicted
evidence” of an independent business justification, plaintiffs’ case fails the Monsanto test.
Burlington Coat Factory Warehouse Corp. v. Esprit de Corp., 769 F.2d 919, 924 (2d Cir. 1985);
see also In re Publ’n Paper Antitrust Litig., 690 F.3d 51, 63 (2d Cir. 2012).
A finding of liability against Apple under section 1 would represent an unprecedented
expansion of the antitrust laws to condemn unilateral and procompetitive conduct. No case in
the history of the antitrust laws has imposed liability on (1) a new entrant; (2) facing a dominant
player with a 90% market share; (3) that entered into separate, vertical agreements; (4) motivated
by legitimate and independent business objectives; (5) enabling entry into a market for an
emerging technology; (6) where average prices fell and output continued to grow following
entry. Ruling against Apple would create a dangerous precedent and risk deterring new entry
into concentrated markets and punishing innovation.

The antitrust laws should promote

competition, not condemn it. Judgment should be entered in favor of Apple.
STATEMENT OF FACTS1
Apple is a leading technology company that has globally revolutionized mobile
A full and detailed statement of Apple’s Proposed Findings of Fact (“Apple Fact” or “AF”), with
citations to the evidentiary record, is submitted under separate cover.
1

6

communication and media devices, personal computers, and software. AF ¶¶ 4–7. Today, Apple
manufactures and markets the innovative iPhone, iPad, Mac, and iPod—the most innovative
products of this generation. AF ¶ 4. Apple also distributes digital content through its digital
content stores, including the iTunes Store, App Store, and iBookstore.

AF ¶ 6.

Apple’s

innovative products and content stores have fundamentally transformed how consumers
purchase, discover, and enjoy media. AF ¶¶ 3, 8, 13.
Apple entered the e-book business in April 2010 when it opened the iBookstore and
released the iPad. AF ¶ 3. Apple had sold some e-books as individual apps before that time, but
it did not believe that any of its devices—the iPod, iPhone, or Mac—were optimal e-readers. AF
¶¶ 26, 29. The iPad changed that.
Apple was not the first to market. Sony had launched the first mass market e-reading
device in September 2006. AF ¶ 2. Amazon followed with the Kindle in November 2007;
Barnes & Noble released the NOOK in November 2009. AF ¶¶ 2, 24. Apple did not believe any
of these devices offered a superior consumer experience to physical books; they merely took the
printed word and digitalized it. AF ¶¶ 2–3. From Apple’s perspective, there was still a very real
opportunity to do something different. AF ¶¶ 30–31.
I.

Apple Considers Creating A Bookstore
Apple’s decision to launch the e-bookstore was made independent of any publisher. AF

¶ 32. Eddy Cue, an Apple senior executive, had pushed Apple’s CEO, Steve Jobs, and others at
Apple to develop an e-bookstore throughout 2009. AF ¶¶ 30, 32. He believed there was a
significant opportunity for Apple in the e-book market given the size of the potential market and
the promise of the iPad as an e-reader. AF ¶ 30. Mr. Cue, and ultimately Mr. Jobs, believed that
an Apple e-bookstore and e-reading software, designed to take advantage of the extraordinary

7

capabilities of the new iPad, would provide a much better e-reading and purchasing experience
than the basic devices then available to consumers. AF ¶ 31.
Mr. Jobs authorized Mr. Cue to move forward with an effort to launch an e-bookstore in
November 2009. AF ¶¶ 32, 35. But there was a catch. Mr. Jobs gave Mr. Cue a deadline of
January 27, 2010, the date of the iPad launch. AF ¶ 33. Mr. Cue had less than two months to
secure a broad and attractive selection of digital books. AF ¶ 34. To make things even more
challenging, Mr. Cue had no experience in the book business and no personal or business
relationships with any of the publisher CEOs. AF ¶ 73.
II.

The E-Book Market In Turmoil
Apple walked into a market in turmoil in December 2009. AF ¶¶ 43–49. There was

growing tension throughout 2009 between the major book publishers and Amazon, the leading
retailer of books. AF ¶¶ 39, 43–52. Amazon dominated the e-book market; it accounted for 80–
90% of all e-books sold.2 AF ¶ 39. Amazon was selling many of the digital versions of New
York Times bestsellers at $9.99—well below the prevailing wholesale prices; Amazon was
purchasing books at wholesale for $12 to $15, meaning it was losing $2 to $5 per title. AF ¶¶ 38,
43.
Amazon’s dominance and pricing strategy caused significant concerns in the book
publishing business. AF ¶ 44. These concerns were no secret. AF ¶ 51. The New York Times,
the Wall Street Journal, and other media outlets reported that the publishers were concerned that
Amazon’s uniform, below-cost pricing of certain e-books: (1) devalued books by treating them
as homogeneous products; (2) undermined sales of more expensive hardcover editions; (3)
threatened the variety and quality of literary works; (4) impeded growth, innovation, and
Plaintiffs define “trade e-books” as “general interest fiction and non-fiction” e-books, which include
the e-book versions of New York Times best sellers and hardcover new releases. AF ¶ 37.
2

8

competition; and (5) barred entry and free competition in a new and evolving market. AF ¶ 44.
Publishers took a variety of different steps to address the problem posed by Amazon in
2009.

First, certain publishers eliminated digital wholesale discounts.

AF ¶ 58.

Second,

Hachette, Macmillan, HarperCollins, and Simon & Schuster announced plans in the fall of 2009
to “window,” or delay the release of e-books after hardcover releases. AF ¶¶ 59–66. Initially
each announced plans to window a specific, hotly anticipated book. AF ¶¶ 62–65. Later each
publicly announced plans in December 2009 to implement a broader windowing strategy. AF
¶¶ 62–63, 65. Third, leading publishers and retailers discussed agency as a model to sell e-books
in the second half of 2009. AF ¶ 67. Barnes & Noble discussed the possibility of using agency
with several publishers. AF ¶ 68. HarperCollins and Hachette independently weighed a shift to
agency before Apple began any discussions with any publisher. AF ¶¶ 69, 81.
III.

Apple’s Initial Discussions With The Six Largest Book Publishers
On December 9, 2009, Hachette, HarperCollins and Simon & Schuster announced plans

to expand their windowing efforts of e-books, and the New York Times published a story on their
unhappiness with Amazon. It was against that backdrop that Mr. Cue had his first conversations
with any publisher, on the very next day, about Apple’s interest in entering the e-book market.
Mr. Cue talked separately to Mr. Dohle of Random House and Mr. Murray of HarperCollins.
Both publishing executives voiced concerns about the state of the market. AF ¶ 70.
The next week, Mr. Cue and his colleagues traveled to New York City to meet separately
with the CEOs of the six largest trade e-book publishers—Hachette, HarperCollins, Macmillan,
Penguin, Simon & Schuster, and Random House—to explore the idea of an Apple e-bookstore.
AF ¶ 71. Mr. Cue emphasized to each publisher that Apple could be a transforming new entrant
into e-book retailing, with a highly innovative reader, a proven track record of success, and an

9

enormous customer base. AF ¶¶ 78–79. Mr. Cue also made clear that Apple would not accept
windowing, would not operate an e-bookstore at a loss, would need lower wholesale prices, and
would need a broad selection of e-books. AF ¶ 78. The initial response was enthusiastic; rumors
that Apple would launch an exciting multi-purpose tablet device were rampant. AF ¶ 79. And
the publishers believed that Apple—given its history of hardware innovation and digital content
success—was uniquely situated to enter the market. AF ¶ 79.
There was no discussion of specific contract terms by either side at this first set of
meetings with the publishers. AF ¶ 74. Apple believed it would ultimately negotiate wholesale
agreements with the publishers, but quickly realized that it would be unable to do so without
sustaining heavy losses in order to be competitive. AF ¶ 86.
Hachette and HarperCollins mentioned agency as a possible model for Apple in their first
meetings with Apple in December 2009. AF ¶ 81. Apple was no stranger to the agency model—
it operated its App Store on agency. AF ¶ 14. And after some discussion, Apple decided agency
would also be a good model for e-books. AF ¶ 87.
Apple told each publisher that it was Apple’s policy to give all content providers the
same basic terms within a content store. AF ¶¶ 148. Apple also explained that it would not
launch an e-bookstore without a sufficient number of the major publishers signed, because it
needed a large enough e-book selection to attract consumers. AF ¶ 147. And any agency
agreements needed to be in place by late January so Mr. Jobs could announce the new ebookstore as part of the iPad launch. AF ¶¶ 33.
On January 4 and 6, 2010, Mr. Cue wrote to each of the six book publisher CEOs he had
met with in December 2009. AF ¶ 95. He outlined his thinking about the terms of a potential
agency deal for the sale of e-books through Apple’s platform: a 70/30 agency commission split,

10

price tiers and caps, a prohibition on windowing, the requirement that e-book prices would be
lower than print book prices, and Mr. Cue’s idea, at that time, that Apple would only sign a deal
with a publisher that sold all of its e-books under an agency model. AF ¶¶ 89–95.
After further thought and discussion, Mr. Cue realized that obligating a publisher to have
all of its e-book retailers on the agency model was impractical and would not address Apple’s
underlying concern that Apple’s pricing on new release titles be fully competitive with other
retailers. AF ¶ 97. Agency required Apple to give up the right to set prices, and powerful
retailers like Amazon and Barnes & Noble could negotiate with publishers for more stringent
price caps, rebates, or coupons to lower their prices below what Apple offered. AF ¶ 97.
Therefore, Apple abandoned the idea of only signing with publishers whose retailers were on
agency. No such term was included in the initial draft agreement sent to the publishers for
negotiation or in any subsequent draft. AF ¶¶ 100–01.
IV.

Apple’s Initial Draft Agency Agreements
Apple began drafting a proposed agency agreement in January 2010. AF ¶ 96. In the

days after the initial set of meetings with the publishers, Apple’s counsel had developed a retail
price MFN provision. AF ¶ 98. The purpose of that MFN was to ensure that Apple would offer
competitive prices in its e-bookstore.

AF ¶¶ 98–99.

The MFN gave Apple the limited

contractual right to lower the price of new release e-books on its bookstore to match the lowest
available price in the market. AF ¶ 99. It was not designed to incentivize the publishers to
change Amazon’s business model. AF ¶ 104. The very point of the MFN was to enable Apple
to offer competitive prices regardless of the model used by other retailers. AF ¶¶ 98–99.
Apple separately e-mailed its draft agency agreement to each of the six major publishers’
CEOs on January 11, 2010. AF ¶ 96. The draft agreement contained Apple’s core terms: (1)

11

agency with a 30% commission to Apple; (2) a requirement that all books be made available for
sale at the same time as their hardcover new release; (3) price tiers and caps setting maximum ebook prices; and (4) a new-release retail MFN. AF ¶ 96. The agency agreements contained no
provisions that address, much less dictate, how individual publishers should structure their
business relationships with other retailers. AF ¶ 100.
Apple was ultimately indifferent as to whether publishers’ agreements with other retailers
used agency, wholesale, or any other model. AF ¶ 101. Apple made clear during negotiations in
mid-January that a publisher was free to remain on a wholesale model with other retailers and
sell e-books in Apple’s bookstore through an agency arrangement. AF ¶¶ 99–104.
V.

The Agency Agreement Negotiations
Apple and each of the six publishers engaged in arms-length, individual negotiations over

the terms of Apple’s proposed contracts. AF ¶¶ 108, 154. These negotiations were often
contentious. AF ¶ 108. For different reasons and to different degrees, the publishers fought
against: the MFN (AF ¶¶ 110, 119, 123, 127, 138); price tiers (AF ¶¶ 110, 118, 121, 125, 128);
the anti-windowing provision (AF ¶¶ 110, 117); and Apple’s 30% commission, AF ¶¶ 110, 122,
126, 130, 137.
By January 25, 2010—two days before the iPad and e-bookstore launch—Apple had
signed agency agreements with four major publishers:

Hachette, Macmillan, Penguin, and

Simon & Schuster. AF ¶ 132. Random House decided not to sign. AF ¶ 134. HarperCollins
did not sign until January 26, 2010, and only did so after it, in consultation with its parent
company News Corp, decided that signing an agency agreement with Apple was important to
News Corp’s overall content-based relationship with Apple and was in News Corp’s best
interests overall. AF ¶ 143. In January 2010, immediately after signing its first five agency

12

agreements for the iBookstore, Apple began negotiating and signing agency deals with smaller
and independent publishers, including Hyperion, Perseus, and Workman containing the same
core terms as the original contracts with the first five publishers. AF ¶ 166. None of these
smaller publishers ever signed agency deals with Amazon. AF ¶ 168.
VI.

Amazon’s Decision To Move To Agency
Amazon was no stranger to agency in January 2010. It had used an agency-like revenue-

sharing model for its Kindle Direct Publishing platform since late 2007. AF ¶ 175. Amazon also
discussed the possibility of a 70/30 revenue e-book model for larger publishers in spring 2009.
AF ¶ 202.
Unbeknownst to Apple, Madeline McIntosh, Random House’s COO and a former
Amazon employee, had dinner with Laura Porco, an Amazon executive and old colleague, on
January 18, 2010. AF ¶ 174. Ms. McIntosh told Ms. Porco that Apple was proposing an agency
model for e-books. AF ¶ 174. She also shared her belief that at least some publishers would
continue to window e-books sold under a wholesale model. AF ¶ 174. Also unbeknownst to
Apple, Barnes & Noble, the second largest e-retailer to Amazon, was involved in parallel
discussions with the publishers about moving to an agency arrangement for selling books on the
Barnes & Noble platform. AF ¶ 225.
On January 20, two days after Ms. Porco’s dinner, Amazon announced changes to the
Kindle Direct Publishing platform in a widely reported event in New York City. AF ¶ 175. This
platform had long allowed small publishers and independent authors to sell their books directly
to consumers on the Kindle, setting the price at a 35/65 split in favor of Amazon. Amazon
changed their terms to ones strikingly similar to Apple’s agency proposal: price tiers and caps, a
retail price MFN, and a 30% commission for Amazon. AF ¶ 175.

13

Around the same time in mid-January, Amazon met with representatives of each of the
five publisher defendants and raised the subject of agency at several of these meetings, signaling
that it might be open to it. AF ¶ 176. At that point, Apple was still negotiating with each
publisher over the terms of the agency agreement, including the MFN, and no publisher had
agreed in principle to, let alone signed, any agreement with Apple. AF ¶¶ 119, 121, 127, 129,
132. Apple was not informed of these Amazon meetings.
By January 22, Simon & Schuster and HarperCollins proposed an agency relationship
with Amazon for e-book sales. AF ¶¶ 177, 179. Amazon indicated to Simon & Schuster that it
would consider using agency for the first 90 days after an e-book’s release if Simon & Schuster
would go back to wholesale thereafter. AF ¶ 177. HarperCollins proposed that Amazon either
stay on a wholesale model with all new e-books windowed for the first six months or move to
agency. HarperCollins indicated that it would prefer to do an exclusive agency deal with
Amazon, and not do a deal with a new content partner, meaning Apple. AF ¶ 179. Amazon told
HarperCollins that it was undertaking an analysis of the agency model and that it would respond
in a couple of weeks. AF ¶ 179.
Amazon knew that the e-book market was on the cusp of some dramatic changes.
Apple’s device promised to transform the digital reading experience. Apple was also negotiating
agreements that would ensure that it would have immediate access to all new-release e-books.
AF ¶¶ 89, 117. Amazon would potentially have neither. AF ¶ 199. Amazon thus confronted a
choice between a wholesale model that was increasingly subject to windowing and an agency
model that would ensure immediate access to all titles. AF ¶¶ 196, 199.
Days after the launch of the iPad and the demonstration of Apple’s new e-book platform,
Macmillan executives met with Amazon in Seattle.

14

AF ¶ 188.

Macmillan proposed that

Amazon stay on wholesale with windowing or agree to an agency model. When the Macmillan
executives left, they learned that Amazon had removed all the “buy buttons” for Macmillan
books on its site. After heavy publicity on both sides about the dispute, on or before January 31,
Amazon announced a business decision to go to agency with Macmillan. AF ¶ 191.
Amazon publicly claimed it had no choice but to “capitulate” to the agency terms forced
on them by Macmillan (AF ¶ 223), but it privately told a very different story. In a January 31,
2010 e-mail exchange, Ms. McIntosh reminded Ms. Porco of their discussions nine months
earlier (when they worked together at Amazon) about proposing a 70/30 profit-share model to
the major publishers. At the time, they did not believe Amazon could convince the publishers to
“go for it unless the share was like 90/10.” AF ¶¶ 191, 202. Ms. Porco found the situation
“hysterical” and joked that Amazon had used “Jedi Mind Tricks” to get the publishers to do what
was in Amazon’s best interests while publicly playing the victim. AF ¶ 192. Another Amazon
executive led Ms. McIntosh to believe that Amazon created the controversy for publicity. AF
¶ 224.
Amazon signed an agency agreement with Macmillan on February 5, 2010. AF ¶ 204.
Amazon then engaged in simultaneous negotiations with Hachette, HarperCollins, MacMillan,
and Simon & Schuster. AF ¶ 204. It felt it had the upper hand in the negotiations and could
dictate what it characterized as “onerous” terms on the publishers.

AF ¶ 200.

Amazon

eventually signed agreements with all of the other publisher defendants by late May 2010. AF
¶ 204. Those agreements feature many of the core terms of Apple’s agency agreements—a 30%
agency commission, pricing tiers and caps, and a prohibition against windowing—and in some
respects, they go even further. AF ¶¶ 205–15. Several of Amazon’s retail-price MFNs cover all
e-books, not just new releases. AF ¶ 210. Internal Amazon documents reflect that Amazon

15

sought an MFN for the same reason that Apple did: to ensure that its customers would have
access to the lowest possible prices for e-books and to “level the playing field.” AF ¶ 207.
VII.

The Trade E-Books Market After Apple’s Entry
Pricing. As demonstrated in Appendix A-5, the average price in the relevant market

alleged by Plaintiffs (trade e-books) has dropped since agency. AF ¶ 268. Before agency, the
average retail price for an e-book was $7.97; after agency (from April 2010 to March 2012, the
latest date for which market-wide data were available) the average price for an e-book was
$7.34. AF ¶ 269. The great bulk of e-books continue to be priced post-agency at or below
$9.99. AF ¶ 271.
Output. Output has exploded. In Q2 2010, consumers purchased approximately 18
million e-books from Amazon, Apple, Barnes & Noble, Books-A-Million, Google, Kobo, and
Sony. AF ¶ 279. Less than two years later in Q1 2012, consumers purchased approximately 100
million e-books, an increase of over 447% from Q2 2010. AF ¶ 279. The increase is 615% if
free e-books are included. AF ¶ 279. Consumers have downloaded 230 million e-books from
Apple’s iBookstore, including 70 million paid e-books. AF ¶ 279. The charts attached at
Appendix A-6 and A-7 hereto demonstrate these facts.
Innovation. Apple’s entry dynamically and fundamentally transformed the e-reading
experience by innovating e-reading software, enabling self-publishing, and growing the breadth
and reach of the e-books market. AF ¶¶ 252–57. In combination, the iPad, the iBookstore, and
the iBooks App made e-reading a richer, diversified, and more interactive experience. AF
¶¶ 252–56. For example, the e-reading experience is no longer limited to plain black-and-white
text. AF ¶¶ 253–55. Instead, iPad and iBooks introduced color, audio, video, and other dynamic
features and functionality that allow users to interact with the content, not just consume it. AF

16

¶¶ 253–55.
Apple has also transformed self-publishing: iBooks Author, Apple’s authoring and
publishing software tool launched in January 2012, allows a layperson to create e-books by
designing templates and layouts; adding text, graphics, photographs, audio or movies; and
inserting interactive elements, such as 3D graphics. AF ¶¶ 171, 257. The iPad has also spurred
the introduction of cost-effective, multipurpose e-reader devices into the market; together, these
devices have encouraged less-frequent readers to purchase e-books and have also enhanced the
user experience considerably. AF ¶ 259.
Apple’s entry into the market has expanded the breadth and reach of e-books. AF
¶¶ 259–60. When the iBookstore was first launched in April 2010, the initial catalog consisted
of 60,000 titles; today, it features 1.5 million titles and many new e-book categories. AF ¶ 260.
VIII. The Admissions Of Plaintiffs’ Experts
Plaintiffs’ case rests on their contentions that Apple forced Amazon’s move to the agency
model, that this alleged coercion resulted from a conspiracy with the publishers, and that
consumers were harmed as a result. But plaintiffs’ experts have made admissions that strike at
the foundations of plaintiffs’ case.
Apple’s Independent Business Justification. Professors Gilbert and Baker, experts for
the DOJ and States respectively, have both testified to the independent business justifications
that exist for Apple’s conduct. Both acknowledge the independent interest that Apple had in
seeking agency, negotiating simultaneously and pursuing a critical mass of publishers, imposing
price caps, requiring MFNs, and obtaining a 30% commission. AF ¶ 291.
Amazon’s Adoption of Agency. Professor Gilbert admits that there could have been
factors other than the Apple MFN that led Amazon to adopt agency (AF ¶ 292), and that he

17

simply does not “have enough facts to say what actually could have happened.” AF ¶ 292. He
also acknowledges that with or without an MFN in Apple’s agency agreements, it would have
been rational for Amazon to be concerned about a scenario in which Apple could sell all newrelease e-books under an agency model while faced with publishers’ publicly announced plans to
window books from retailers remaining on an agency model. AF ¶ 292. Professor Gilbert
admits further that he has no basis to contradict Apple’s testimony that it was indifferent to
whether Amazon stayed on a wholesale model or moved to agency. AF ¶ 292.
Market Entry. Professor Gilbert admits that actual entry by a new firm often changes the
structure of markets and can upset traditional patterns of market conditions. AF ¶ 293. He also
acknowledges it is not “reasonable for a firm to enter an industry with the expectation of losing
money.” AF ¶ 293. Professors Baker and Gilbert do not contest Apple’s testimony that it would
not have entered the market absent the agency agreements. AF ¶¶ 292, 293.
Prices and Output. Professors Gilbert and Ashenfelter (another expert for the States)
admit they cannot dispute that average prices for all trade e-books—plaintiffs’ alleged relevant
market—fell since Apple’s entry. AF ¶ 294. They also admit they have no basis to refute the
evidence e-book sales continued to increase substantially after Apple’s entry.
ARGUMENT
The foundational element of any section 1 claim is a finding of an agreement to restrain
trade. There is simply no evidence to support a finding that Apple reached an agreement with
two or more publishers to increase prices or otherwise restrain trade in the e-book market. There
is also no evidence to support plaintiffs’ allegation that Apple participated in an illegal
conspiracy. At all times, Apple acted in its independent and legitimate business interest when it
negotiated to enter the e-book business. This is why plaintiffs focus so much of their attention

18

on the relationship among the five defendant-publishers, and attempt to shoehorn Apple into the
alleged conspiracy based upon impermissible inferences drawn from Apple’s lawful conduct.
The foundation for plaintiffs’ alleged conspiracy is a series of meetings among five book
publishers dating back to 2008 in which Apple had no involvement—and plaintiffs do not
contend otherwise. Apple is not alleged to have participated in any meeting between two or
more publishers—indeed, the States do not even name Apple as a defendant in two of their three
conspiracy counts, in which they name only the publishers.

See States’ Second Amended

Compl. Counts 1 & 2. Instead, their theory is that Apple nonetheless facilitated some other
conspiracy when it negotiated agency agreements with the publishers in January 2010. The key
to plaintiffs’ case against Apple is a single term in those agreements—a retail MFN.
Plaintiffs contend that the retail MFN forced Amazon to abandon the wholesale model
for e-books and ultimately raise its prices. Although the MFN is a well-known contract term for
keeping prices down by requiring price competition (Compl. ¶¶ 66, 78), plaintiffs nevertheless
allege that Apple repurposed the MFN as a “key commitment mechanism” (Compl. ¶ 78) to
force the publishers to collectively demand agency from Amazon, in order to raise prices. This
claim is contradicted by the evidence. It is founded upon a lengthy string of implausible and
legally impermissible inferences. Apple’s agency agreements do not support an inference of
conspiracy. Plaintiffs cannot meet their burden.
I.

Plaintiffs Cannot Prove The Existence Of A Conspiracy
Section 1 of the Sherman Act provides that “[e]very contract, combination in the form of

trust or otherwise, or conspiracy, in restraint of trade ... is declared to be illegal.” 3 15 U.S.C. § 1.

Plaintiffs also bring claims under state law. States’ Second Amended Compl. ¶¶ 129–98. These
claims parallel the section 1 claim in this case as state courts “overwhelmingly look to federal antitrust
decisions to construe their own antitrust statutes.” In re Digital Music Antitrust Litig., 592 F. Supp. 2d
3

19

“Thus, according to the statute,” plaintiffs “must first establish a combination or some form of
concerted action.” Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d
537, 542 (2d Cir. 1993) (emphasis added). If plaintiffs cannot prove that Apple participated in a
conspiracy, then their section 1 claims “must fail.” Virgin Atl. Airways Ltd. v. British Airways
PLC, 257 F.3d 256, 263 (2d Cir. 2001).
Plaintiffs do not argue that Apple’s individual agreements with the publishers violate the
Sherman Act—nor could they.4

Rather, they allege that Apple participated in a separate,

horizontal conspiracy5 among all of the publishers.
To prevail on their claims, plaintiffs must introduce “direct or circumstantial evidence
that reasonably tends to prove that [Apple] had a conscious commitment to a common scheme”
with the publishers “designed to achieve [the] unlawful objective” of raising prices throughout
the e-book market. Monsanto, 465 U.S. at 764 (quotation marks omitted) (emphasis added).

435, 447–50 & nn. 19–21 (S.D.N.Y. 2008) (collecting authorities), rev’d on other grounds by Starr v.
Sony BMG Music Entm’t, 592 F.3d 314, 327 (2d Cir. 2010).
4
The Supreme Court has held that “genuine contracts of agency” are not “violations of the Anti-Trust
Act” (per se or otherwise) as a “matter of principle.” United States v. Gen. Elec. Co., 272 U.S. 476, 488
(1926); see also Valuepest.com of Charlotte, Inc. v. Bayer Corp., 561 F.3d 282, 294 (4th Cir. 2009)
(upholding lawfulness of genuine agency agreements).
5
Plaintiffs have good reason not to challenge Apple’s distribution relationship with the publishers:
The Supreme Court is increasingly hostile to section 1 claims based on vertical relationships. The Court
has recognized that vertically related firms have “legitimate reasons to exchange information” on pricing
(Monsanto, 465 U.S. at 762), and that vertical business relationships are likely to have procompetitive
benefits that promote the purpose of the antitrust laws, see, e.g., Bus. Elecs. Corp. v. Sharp Elecs. Corp.,
485 U.S. 717, 724 (1988) (vertical nonprice restraints “ha[ve] real potential to stimulate interbrand
competition, the primary concern of antitrust law”) (quotation marks omitted). The Court has “rejected
the approach of reliance on rules governing horizontal restraints when defining rules applicable to vertical
ones,” and no longer treats “vertical agreements a manufacturer makes with its distributors as analogous
to a horizontal combination among competing distributors.” Leegin, 551 U.S. at 888. And the Court has
even overruled its own precedents three times to reduce scrutiny on vertical relationships. Cont’l T.V.,
Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 59 (1977) (holding that vertical non-price restrictions are subject
to the rule of reason, overruling United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967)); State Oil
Co. v. Kahn, 522 U.S. 3, 7 (1997) (holding that vertical agreements setting maximum prices are subject to
the rule of reason, overruling Albrecht v. Herald Co., 390 U.S. 145 (1968)); Leegin, 551 U.S. at 907
(holding that all “[v]ertical price restraints are to be judged according to the rule of reason,” overruling
Dr. Miles Med. Co. v. John D. Park & Sons, Co., 220 U.S. 373 (1911)).

20

Plaintiffs also bear the burden of proving that Apple had a culpable intent, as the “lack of intent
by one party ... precludes a conspiracy to [restrain trade].” Geneva Pharms. Tech. Corp. v. Barr
Labs., Inc., 386 F.3d 485, 507 (2d Cir. 2004).
A.

Apple Was Neither Involved In Nor Aware Of The Alleged Conspiracy
Among The Publishers

Plaintiffs do not allege, nor could they, that Apple had any involvement in the alleged
conspiracy dating back to 2008 or the summer of 2009, in which the publishers supposedly
conspired to force Amazon to raise its e-book prices so that the publishers could charge more for
their hardcover books. Apple did not attend the alleged meetings, and plaintiffs do not allege
that Apple, or the possibility of Apple entering the e-book market, was ever discussed in the
meetings among the publishers. AF ¶ 150.
Apple’s only interactions with the publishers occurred over a few weeks in which Apple
individually approached the publishers, developed terms, presented proposed agreements, and
negotiated against each publisher for the very terms that plaintiffs allege form the basis of
Apple’s role in the conspiracy. AF ¶¶ 70–132. The idea of an e-bookstore was not even
seriously discussed at Apple before November 2009. AF ¶ 32. Apple began communicating
with the publishers on December 9 and 10, 2009, and sent them an initial informal proposal
between January 4 and 6, 2010. From January 11 until January 25, when the agreements with
the four major publishers were finalized, Apple and the publishers engaged in difficult and
contentious negotiations with the publishers. AF ¶¶ 70–132. And the largest publisher did not
agree to the terms. AF ¶ 134.
This case bears no resemblance to the traditional “hub and spoke” case in which an
antitrust defendant is alleged to have organized or joined a conspiracy. In both Interstate Circuit
v. United States, 306 U.S. 208 (1939), and Toys “R” Us, Inc. v. FTC, 221 F.3d 928 (7th Cir.

21

2000), the “hub” of the conspiracy was the party that allegedly implemented and enforced the
plan. There was no doubt in either case that the “hub” defendant was aware of the purported
scheme—the only question was whether the horizontal defendants agreed to it. See Interstate
Circuit, 306 U.S. at 222 (noting that the defendant organized and implemented the plan); Toys
“R” Us, 221 F.3d at 933 (noting that the defendant communicated messages from manufacturer
to competing manufacturer and “served as the central clearinghouse for complaints about
breaches in the agreement”). Plaintiffs do not allege that Apple participated in or knew of a
single one of the meetings or conversations that allegedly formed the basis of the purported
conspiracy. The paucity of evidence supporting plaintiffs’ theory makes clear that it bears no
resemblance to the conspiracies in cases like Interstate Circuit and Toys “R” Us. Accord 14B P.
Areeda & H. Hovenkamp, Antitrust Law ¶ 1426d & n.47 (3d ed. 2010) (cautioning against
application of Interstate Circuit and Toys “R” Us “to an altogether different set of facts”).
B.

Plaintiffs’ Evidence Does Not Tend To Exclude The Possibility Of
Independent Action

“Direct evidence is extremely rare in antitrust cases.” Am. Chiropractic Ass’n v. Trigon
Healthcare, Inc., 367 F.3d 212, 226 (4th Cir. 2004). Direct evidence in a section 1 conspiracy
must be evidence that “is explicit and requires no inferences to establish the proposition or
conclusion being asserted.” In re Baby Food Antitrust Litig., 166 F.3d 112, 118 (3d Cir. 1999).
For example, direct evidence might consist of “a recorded phone call in which two competitors
agreed to fix prices at a certain level.” Mayor & City Council of Balt., Md. v. Citigroup, Inc.,
709 F.3d 129, 136 (2d Cir. 2013). Plaintiffs have no such evidence against Apple.
Plaintiffs must therefore present circumstantial evidence given the lack of a “smoking
gun.”

Citigroup, 709 F.3d at 136.

To establish a conspiracy by circumstantial evidence,

however, plaintiffs must meet the “stringent standards in Monsanto.” Leegin, 551 U.S. at 903.

22

In Monsanto, the Supreme Court held that antitrust law “limits the range of permissible
inferences from ambiguous evidence in a § 1 case.” Matsushita, 475 U.S. at 588.
Under this standard, conduct that is “as consistent with permissible competition as with
illegal conspiracy does not, standing alone, support an inference of antitrust conspiracy.”
Matsushita, 475 U.S. at 588; accord AD/SAT v. Associated Press, 181 F.3d 216, 235 (2d Cir.
1999); In re Travel Agent Comm’n Antitrust Litig., 583 F.3d 896, 909 (6th Cir. 2009) (conspiracy
cannot be based on evidence “which is as consistent with permissible competition as with illegal
conspiracy”). Rather, a section 1 plaintiff “must present evidence that ‘tends to exclude the
possibility’ that the alleged conspirators acted independently.” Matsushita, 475 U.S. at 588
(quoting Monsanto, 465 U.S. at 764) (emphasis added). Just last year, the Second Circuit
confirmed the continuing force of Monsanto’s “tends to exclude” standard, holding that
Monsanto requires “strong” evidence where plaintiffs’ theory is implausible and the challenged
conduct can reasonably be perceived as procompetitive. Publ’n Paper, 690 F.3d at 63.
1.

The Procompetitive Nature Of Apple’s Market Entry Requires Plaintiffs
To Provide “Strong” Evidence Of A Conspiracy

Strong evidence is required because Apple’s conduct—entering a new and concentrated
market—is quintessentially procompetitive. The challenged activities present an exhaustive
array of actions that limit the inferences that can be drawn by the Court in a section 1 case: (1) a
new entrant; (2) facing a dominant market player with 90% market share (AF ¶ 39); (3) who
entered into separate, vertical agreements (AF ¶¶ 132, 143); (4) motivated by legitimate and
independent business objectives (AF ¶ 145); (5) enabling entry into a market for an emerging
technology (AF ¶¶ 31, 33); and (6) where average prices fell and output continued to grow, AF
¶¶ 268–70, 279–80.
New entrants are the competitive force that drives the economy, which makes “market

23

entry for new firms and brands” a special category of conduct that requires circumspect
treatment under the antitrust laws. Leegin, 551 U.S. at 891; see also In re Sulfuric Acid Antitrust
Litig., 703 F.3d 1004, 1110–12 (7th Cir. 2012). Restricted inferences in antitrust cases avoid
“deter[ring] or penaliz[ing] perfectly legitimate conduct” and creating “irrational dislocation in
the market.” Monsanto, 465 U.S. at 763–64; see also In re Flat Glass Antitrust Litig., 385 F.3d
350, 357 (3d Cir. 2004) (a “higher threshold is imposed in antitrust cases to avoid deterring
innocent conduct that reflects enhanced, rather than restrained, competition”).
2.

Apple’s Conduct Was Driven By Its Independent Business Interests

When “[t]he most natural inference from the evidence” is that the defendant had a
“legitimate, independent reason” for its actions, no inference of conspiracy is possible under the
Supreme Court’s case law. Euromodas, Inc. v. Zanella, Ltd., 368 F.3d 11, 20 (1st Cir. 2004)
(citing Matsushita, 475 U.S. at 588); see also 14A Areeda, supra, ¶ 1413a (“no conspiracy can
be inferred from parallel behavior when” an alleged conspirator “had an ‘independent’ or ‘good
business reason’ for the challenged act”). “Motivation to enter a conspiracy is never enough to
establish a traditional conspiracy.” 14A Areeda, supra, ¶ 1411; see Citigroup, 709 F.3d at 139;
In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 322 (3d Cir. 2010).
The evidence overwhelmingly shows that Apple acted independently in pursuit of its own
business interests, which precludes any inference of a conspiracy.
First, Apple was motivated by its independent desire to enter and successfully compete in
the e-books market. AF ¶¶ 82–85; see H.L. Hayden Co. v. Siemens Med. Sys., Inc., 879 F.2d
1005, 1014 (2d Cir. 1989); see also Burlington, 769 F.2d at 924.
Apple was confronted by an uncertain and unsettled market when it sought to enter. AF
¶¶ 82–83. The dominant retailer, Amazon, was using its position aggressively. AF ¶¶ 39, 43,
80. The content owners (the publishers) were deeply unhappy with the state of the market. AF
24

¶¶ 44, 50–51. Some were taking steps to address Amazon’s power by seeking to window ebooks and taking other actions. AF ¶¶ 58–66. Apple thus had sound business reasons to eschew
the wholesale model: (1) it would not enter the market if it had to suffer indefinite losses to
compete (AF ¶ 78); (2) it wanted to be able offer consumers e-books on the same day and date as
physical books (AF ¶ 75); (3) the publishers were moving toward long-term windowing of ebooks under the wholesale model (AF ¶¶ 77); and (4) windowing would fundamentally damage
the e-book market, AF ¶ 75.
Apple decided to use the agency model to enter the e-book market. AF ¶ 87. The agency
model, coupled with price caps and an MFN, seemed a logical fit. The model satisfied Apple’s
independent business goals: (1) a substantial amount of content available to customers, (2) at a
lower price than its physical counterpart (via the price caps), and (3) competitive with the lowest
price offered for the same e-book anywhere else in the market (via the MFN). AF ¶¶ 87–93.
No witness disputes, and plaintiffs do not challenge, Apple’s legitimate business
motivations. Plaintiffs’ experts do not contest that Apple’s challenged conduct was justified by
Apple’s business interests even if no conspiracy existed. AF ¶ 291. For example, plaintiffs’
expert, Professor Gilbert, admitted that he could not point to a single act that was plausibly
against Apple’s self-interest in the absence of a conspiracy. AF ¶ 291. His only testimony was
that Apple’s conduct was also plausibly consistent with a conspiracy.
Thus, on the single most important question in a section 1 case—“What motivated the
defendant’s actions?”—plaintiffs concede the truth of Apple’s testimony.
So far as Apple is aware, no defendant has ever been found to have participated in a
conspiracy where plaintiffs’ expert did not dispute that the defendant acted at all times in its
independent economic interest. When antitrust plaintiffs’ experts fail to contest critical facts,

25

plaintiffs lose. See, e.g. White v. R.M. Packer Co., 635 F.3d 571, 581, 585–86 (1st Cir. 2011)
(plaintiff’s “antitrust claims fail” where “[p]laintiff’s own expert stated that ‘no unambiguous
conclusion can be gleaned from defendants’ pattern of parallel pricing’” and results of analysis
were “mixed”); see also United Air Lines, Inc. v. Austin Travel Corp., 867 F.2d 737, 739 (2d Cir.
1989) (summary judgment appropriate where “expert conceded that there was no reasonable or
realistic possibility that [counterclaimant] could achieve a monopoly”).
Plaintiffs expect Apple to prove the negative, but that is not the law. Plaintiffs believe
they can establish a conspiracy simply by showing that Apple’s sound business decisions may
also be plausibly consistent with a conspiracy. That theory has been soundly rejected by the
Second Circuit in Citigroup, AD/SAT, and a host of other cases.6
Second, the MFN—the alleged contractual “mechanism” of the purported conspiracy—
was independently and fiercely resisted by the publishers. The publishers’ negotiations with
Apple were often contentious because Apple’s e-book pricing interests sharply diverged with
each of the publishers’ interests for different reasons and to different degrees. AF ¶¶ 108, 115–
40. Significantly, the publishers opposed the MFN, price tiers, the anti-windowing provision,
and Apple’s 30% commission. AF ¶ 110.
Third, Amazon and Barnes & Noble insisted on the same core contract terms when they
adopted agency. AF ¶¶ 204–16, 225–36. The MFN made independent business sense for any

See, e.g., Citigroup, 709 F.3d at 138 (dismissing conspiracy allegations where defendants’ conduct
“made perfect business sense” and was “not just a rational business decision, but the only rational
business decision”); AD/SAT, 181 F.3d at 235 (concluding summary judgment was warranted because
each defendant’s conduct was “as consistent with the defendant’s legitimate, independent business
interest as with an illegal combination in restraint of trade”); H.L. Hayden, 879 F.2d at 1014 (affirming
grant of summary judgment where the defendant presented evidence that it terminated business relations
with plaintiff for “independent business reasons”); Burlington, 769 F.2d at 924 (affirming grant of
summary judgment and concluding that plaintiff failed to meet Monsanto’s test where “uncontradicted
evidence” showed defendant had an independent business justification). Similar decisions from this
Court and other courts are listed in Appendix A.
6

26

retailer operating under agency.
Amazon had been exploring the agency model even before Apple initiated its first contact
with the publishers. AF ¶ 202. For example, Amazon used an agency-like model for selfpublished e-book sales in its “Kindle Digital Text Platform.” AF ¶ 175. It is implausible for
plaintiffs to claim—as they must in order to prove a conspiracy—that no reasonable firm would
have acted as Apple did when in fact the two biggest players in the market (Amazon and Barnes
& Noble) took exactly the same actions in pursuit of their own independent economic interests.
Plaintiffs’ evidence of Apple’s conduct “cannot stand against overwhelming evidence
that the challenged action was taken unilaterally for sound business reasons.” Comfort Traine
Air Conditioning Co. v. Trane Co., 592 F.2d 1373, 1384 (5th Cir. 1979); see also Lovett v. Gen.
Motors Corp., 998 F.2d 575, 579, 581 (8th Cir. 1993) (overturning a jury verdict where the
defendant acted independently to meet its “legitimate business goals”); Int’l Distrib. Ctrs., Inc. v.
Walsh Trucking Co., 812 F.2d 786, 794 (2d Cir. 1987) (same).
3.

Plaintiffs’ Evidence Fails The “Stringent Standards” In Monsanto

Apple’s “substantial evidence supporting [a] plausible and legitimate explanation of [its]
conduct”—an explanation that plaintiffs do not contest—places a heavy burden on plaintiffs.
Burlington, 769 F.2d at 923. They “may not rest on conclusory assertions of conspiracy” and
instead must come forward with strong additional evidence of the defendant’s conspiratorial
activities. H.L. Hayden, 879 F.2d at 1014 (citing Burlington, 769 F.2d at 923); see also Todorov
v. DCH Healthcare Auth., 921 F.2d 1438, 1456 (11th Cir. 1991) (“when the defendant puts forth
a plausible, procompetitive justification for his actions, … the plaintiff must produce more
probative evidence that the law has been violated”).
Plaintiffs cannot satisfy this requirement. They hang their circumstantial case on five
pegs, none of which tends to exclude the possibility that Apple acted independently.
27

(a)

Price Tiers/Caps

Plaintiffs cite the fact that Apple’s agency agreements included tiers of e-books, with
maximum prices for categories of books. Compl. ¶¶ 7, 68. But the price caps do not prove a
conspiracy; indeed, they prove the opposite. As Apple’s witnesses explain, and as plaintiffs
admitted in a Request for Admission, the caps were fiercely resisted by the publishers because
they kept prices down by limiting the publishers’ discretion to set prices. AF ¶¶ 92–93, 106–07;
DX-415. The caps functioned just as Apple described, not as some sort of implicit signaling
device. Plaintiffs have never argued that they would have preferred an agency agreement that
gave the publishers unfettered control over e-book prices.
Apple wanted the caps because it believed that some publishers’ pricing expectations for
e-books were high. AF ¶ 90. In fact, plaintiffs’ experts agree that Apple implemented the price
tiers to keep e-book prices low. AF ¶ 291. And Amazon itself imposed price caps in its own
agency agreements with the publishers. AF ¶¶ 212–13.
(b)

Negotiation Approach

All five publishers negotiated and signed similar agency agreements with Apple within a
relatively short period. Compl. ¶ 74. Plaintiffs emphasize the publishers’ sudden shift from a
wholesale model to agency, and Apple’s core set of terms, as a cause for suspicion. Compl. ¶ 38.
Yet courts have recognized that a change in market conditions can make it necessary for a firm
to change its business model. See Citigroup, 709 F.3d at 138 (defendants’ en masse exit from
market in reaction to market conditions was “not just a rational business decision, but the only
rational business decision”); Travel Agent Comm’n, 583 F.3d at 898, 908 (conduct was based on
defendants’ “reasonable, independent economic interest” where the market had “changed
fundamentally since 1983 due to technological advances”).
Apple made it very clear at the outset that it had a very small window in which to
28

complete agreements. It drafted a standard agreement that could be used as a model, not only for
these six major publishers but for every publisher and even independent authors. That is an
approach Apple has taken in the content businesses it has entered over the last decade. The
evidence that Apple acted in a similar way with each of its publisher partners proves nothing,
because “[s]imilar contract terms can reflect similar bargaining power and commercial goals.”
In re Elevator Antitrust Litig., 502 F.3d 47, 51 (2d Cir. 2007). The Third Circuit has rejected a
section 1 case based on precisely the same type of strained inference. In re Ins. Brokerage, 618
F.3d at 327 (“one cannot plausibly infer” a hub-and-spoke conspiracy from the mere fact that
several insurers entered similar commission agreements with an insurance broker).
(c)

MFNs

Apple insisted on an MFN for new releases in its agency agreements. Compl. ¶¶ 65–66.
Apple did not intend or design the MFN to compel the publishers to force Amazon to move to
agency. AF ¶ 104. Instead, the MFN ensured that Apple would be able to offer competitive
prices even if it did not have control over those prices. AF ¶¶ 97–99, 103, 237. Courts have
recognized that the use of MFNs to bargain for low prices “is the sort of conduct that the antitrust
laws seek to encourage.” Blue Cross & Blue Shield United of Wisc. v. Marshfield Clinic, 65 F.3d
1406, 1415 (7th Cir. 1995); see also id. (“‘Most favored nations’ clauses are standard devices by
which buyers try to bargain for low prices, by getting the seller to agree to treat them as
favorably as any of their other customers.... It is not price-fixing.”).
Plaintiffs suggest that Apple incentivized the publishers to seek the agency model from
Amazon. That theory is flawed for two reasons. First, the plaintiffs ignore the incentives of
Amazon to embrace agency as a model after Apple’s entry. Indeed, the plaintiffs own experts
acknowledge that there were a number of other factors that ultimately led Amazon to decide to
negotiate agency agreements with the five major publishers in early 2010. Second, plaintiffs’
29

keystone allegation—that Apple’s MFN provided an irresistible incentive to the publishers to
jointly force Amazon onto agency—is false. Professor Klein established that, as a matter of
economics, the impact of the MFN on the publishers’ existing incentives was insignificant. AF
¶ 292. Plaintiffs’ experts did not even bother to try to measure the effect of the MFN on the
publishers’ incentives.

Their experts studiously avoid this readily verifiable economic

conclusion: Professor Baker chose not to quantify the incentives created by the MFN (AF
¶ 292), and Professor Gilbert did quantify it, but not in his expert opinion, AF ¶ 292.
It would have been commercial suicide for Apple to enter the e-books market without a
MFN. AF ¶¶ 97–99. Professor Baker testified that without an MFN, the publishers had a strong
incentive to charge higher prices on Apple’s e-bookstore than existed on Amazon’s e-bookstore.
AF ¶ 293. Again, this is why the top two e-retailers, Amazon and Barnes & Noble, insisted on
similar MFN provisions when they negotiated their agency agreements with the publishers.
(d)

Communications

Apple’s communications with the publishers during contract negotiations do not support
an inference of a conspiracy. See, e.g., Compl. ¶¶ 59, 61, 64. The Supreme Court recognizes
that “the fact that a manufacturer and its distributors are in constant communication about prices
and marketing strategy does not alone show that the distributors are not making independent
pricing decisions. A manufacturer and its distributors have legitimate reasons to exchange
information about the prices and the reception of their products in the market.” Monsanto, 465
U.S. at 762. The Court’s statement applies precisely to this case: Apple was a new player in the
emerging e-books market in 2010. That Apple was talking to all of the major publishers at the
same times was hardly a cause for suspicion. Indeed, it was to be expected.
The publishers confirmed that Apple never spoke to more than one publisher at a time,
never shared any other publisher’s position on terms, and required each publisher to sign a
30

confidentiality agreement. AF ¶ 149.
Plaintiffs nevertheless point out that Apple negotiated with each publisher at the same
time. Compl. ¶ 83. Of course it did: Apple faced a tight deadline to launch the iBookstore in
time for the announcement of the release of the iPad. But no conspiracy can be inferred from
parallel commercial conduct where “time [is] of the essence.” Fed. Broad. Sys., Inc. v. Am.
Broad. Co., 167 F.2d 349, 352 (2d Cir. 1948).
Apple told each publisher that it was offering the same basic terms to every other
publisher, and that it would open the iBookstore only if it could reach agreements with several of
the publishers. AF ¶ 147. This is a standard negotiation tactic that incentivized each publisher to
come on board with Apple. See Ins. Brokerage, 618 F.3d at 329–30 (such sharing “could be a
powerful tool for a broker attempting to negotiate a more favorable agreement with a particular
insurer-partner”). The evidence shows that far from being willing co-conspirators, the publishers
fought Apple’s proposed terms tooth-and-nail. AF ¶¶ 108–44.
4.

Statements Attributed To Steve Jobs Do Not Support Plaintiffs’ Theory

Plaintiffs fare no better with Steve Jobs’s remarks, which further establish that Apple
acted to protect its independent interests and did not conspire to force Amazon to raise its prices.
First, the e-mail correspondence with James Murdoch (Compl. ¶ 71) reflects two
executives wrestling with the realities of the e-books business and alternative strategies for
dealing with an obvious problem facing the publishers. Mr. Jobs and Mr. Murdoch confirmed
the obvious: that Apple’s $12.99 and $14.99 prices were indeed caps—not actual prices—and
that HarperCollins was free to price at a tier anywhere below the caps. AF ¶ 244. Mr. Jobs
never once said anything about how Amazon can, should, or will price its books in the future.
Indeed, he recognized the uncertainties of the market in flux when he said that Amazon is
“selling these books at $9.99, and who knows, maybe they are right.” AF ¶ 245 (emphasis
31

added). This is no smoking gun. Instead, this e-mail shows a new entrant with no market power
proposing an alternative business model to HarperCollins, and candidly recognizing that Apple
has no power to predict or influence other retailers.
Second, the Isaacson biography (Compl. ¶¶ 6, 56) describes the condition of the e-book
business before Apple entered the scene—disgruntled publishers windowing their e-books in
protest against Amazon’s pricing strategies. AF ¶¶ 246–47. The biography correctly explained
that Apple proposed an agency model that gave the publishers the ability to set the price of
certain e-books above $9.99 if they chose. AF ¶ 247. The statement attributed to Mr. Jobs in the
biography makes clear that Apple was not a part of any conspiracy to force Amazon to adopt an
agency model or higher prices: It states that Apple insisted on an MFN so that if “anybody else
is selling the books cheaper than we are,” then “Apple has the right to sell them at the lower
price too.” AF ¶ 247. This shows that Mr. Jobs understood that Amazon may well have decided
to stay on a wholesale model with $9.99 prices, and it protected Apple against just such an event.
Third, the clip of Mr. Jobs’s comments to Mr. Mossberg (Compl. ¶ 77), is incomplete and
edited. But Mr. Jobs’s telling Mr. Mossberg that prices of e-books on the iBookstore would be
the same as Apple’s competitors simply confirms the evidence that the MFN was intended to
ensure that e-books on the Apple platform were available at the lowest price that the consumer
could find them on any other platform. When Mr. Jobs told Mr. Mossberg that the price would
be the same, he could not say what the price would actually be, but he knew that because of the
MFN, Apple’s price would be the same as the lowest price offered on Amazon or anywhere else.
It is striking to compare Mr. Jobs’s statements with the way Amazon’s internal
documents described the MFN contained in its own agency agreements. For example, Mr. Jobs
said that the prices would all be the same for the Ted Kennedy biography. AF ¶ 249. Similarly,

32

Amazon’s executives stated that, through its MFN, Amazon could be assured that its “e-books
[would] be available at the same price anywhere that a consumer may see them.” AF ¶ 206.
Steve Jobs and Amazon both understood that once the publishers were given pricing authority
under an agency model, price caps and an MFN were necessary in order for the retailers to
remain competitive.
5.

Evidence Of Amazon’s Voluntary Move To Agency Renders Plaintiffs’
Theory A Chronological Fiction

Apple bears no burden to disprove plaintiffs’ speculative theory. See Euromodas, 368
F.3d at 18. As discussed above, plaintiffs’ evidence does not “tend[] to exclude the possibility
that [the defendants] were acting independently,” and plaintiffs’ claims against Apple therefore
fail. Monsanto, 465 U.S. at 764. Nevertheless, Apple submits separate evidence disproving
plaintiffs’ false assumptions and unproven allegations.
The evidence proves that plaintiffs’ theory is a chronological fiction. Plaintiffs’ story is
that Apple “facilitated” an ongoing, long-term conspiracy when it negotiated its agency
agreements with the publishers. Plaintiffs contend that Apple’s MFN forced the publishers to
confront Amazon en masse and demand it adopt the agency model. According to plaintiffs,
Amazon “capitulated” and “had no choice but to accept the agency model.” Compl. ¶ 84. The
evidence does not support this story.
First, Amazon engaged in parallel discussions with the publishers regarding agency in
January 2010 while contentious publisher negotiations were ongoing. AF ¶ 176–89. Before
completion of the first Apple agreement, Amazon learned that Apple was negotiating its agency
terms with the major publishers to open a competing e-bookstore on its rumored and hotly
anticipated new tablet. AF ¶ 174. Immediately, Amazon independently and voluntarily entered
into its own private discussions with the publishers. AF ¶ 176. Agency was familiar to Amazon;

33

on January 20, 2010, Amazon announced a revision to its self-publication program which
provided agency-like terms, a 30 percent commission, a price cap, and a retail-price MFN—
terms strikingly similar to those challenged by plaintiffs in this case. AF ¶ 175.
There was no Apple MFN in place at the time Amazon commenced discussions with the
publishers. AF ¶¶ 176–89. Nor was there any reason to know that there would be. It was hardly
a foregone conclusion that Apple would reach an agreement with the publishers at that point,
much less one with an MFN. Apple’s negotiations with the publishers were difficult and at times
contentious, with publishers strongly resisting Apple’s proposed MFN. AF ¶¶ 119, 123, 127,
138.

Nor can the negotiations be labeled a confrontation en masse when, for example,

HarperCollins tried to strike an exclusive deal with Amazon in these negotiations. AF ¶ 179.
Amazon understood—from its own, independent and parallel discussions with publishers,
no less—that it had to contend with Apple entering the e-books market with an eagerly
anticipated tablet device (the iPad) that would have first-to-market, ready access to all new
releases. AF ¶ 199. At the same time, Amazon would be operating under a wholesale model
that was increasingly subject to windowing. AF ¶ 199. Amazon’s response was to make the
rational decision to adopt agency, and use its considerable bargaining power to negotiate
favorable terms, including a longer time period than Apple’s agreements—hardly an act of a
party being forced into an unfavorable agreement. AF ¶ 200. Agency would (and did) permit
Amazon to compete with Apple by giving it access to all new releases and a 30% commission—
a term it had already contemplated the year before. AF ¶ 202. The only “coercive” force in play
was the prospect of increased competition, which the antitrust laws were designed to foster.
Second, Amazon hardly “capitulated” to the collective will of the publishers. Instead, it
insisted on terms that were more favorable than those contained in the Apple agency agreements.

34

Amazon demanded and received not only a 30% agency commission, pricing tiers and caps, and
a prohibition against windowing, but also a retail-price MFN that covers all e-books, not (as in
Apple’s case) just new releases. AF ¶¶ 204–16. Plaintiffs do not—and cannot—explain how
Amazon, a party that was allegedly “forced” to agency, nevertheless obtained terms equal to or
better than those of Apple, the alleged co-conspirator.
Finally, Amazon itself does not support plaintiffs’ theory. Amazon’s contemporaneous
documents reveal that Amazon’s move to agency had absolutely nothing to do with Apple’s
MFN. AF ¶¶ 190–95. Amazon was aware that the market was changing and that agency could
very well emerge as the model preferred by publishers over the traditional wholesale model,
which had prevailed for physical books. Ultimately, Amazon recognized that it faced a choice
between wholesale with windowing and agency. AF ¶ 199–200. And given that choice, it had
been able to “Jedi Mind Trick” the publishers (AF ¶¶ 192–93) into agency terms that were
acceptable to it. Amazon explained in negotiations with an independent publisher that it, not the
major publishers, had the stronger bargaining position and could extract onerous terms from
those publishers, such as its own MFN. AF ¶¶ 200, 210. Amazon itself did not believe it
“capitulated” or was forced to do anything; there is no reason why this Court should disagree.
II.

Plaintiffs Cannot Demonstrate An Unreasonable Restraint Of Trade
In no circumstance can plaintiffs show an unreasonable restraint of trade.
A.

The Rule Of Reason, Not The Per Se Rule, Applies Here

Plaintiffs’ insistence that this is a straightforward “price-fixing” case subject to the per se
rule is simply incorrect. Apple did not agree with any competitor to “fix” prices or require any
publisher to charge a particular price. To the contrary, Apple has placed a ceiling on new release

35

e-book prices, a category of conduct that is subject to the rule of reason.7 State Oil Co. v. Khan,
522 U.S. 3, 22 (1997).8 The Supreme Court has stated that “a departure from the rule-of-reason
standard must be based upon demonstrable economic effect rather than upon formalistic line
drawing.” Leegin, 551 U.S. at 887 (quotation marks and ellipsis omitted). The per se rule is
reserved for practices that have “manifestly anticompetitive” effects and that “lack ... any
redeeming virtue.” Id. at 886 (quotation marks and ellipsis omitted).
It is not “immediately obvious” (Major League Baseball Props., Inc. v. Salvino, Inc., 542
F.3d 290, 316 (2d Cir. 2008)), that entry into a market via the agency model, MFNs, and price
caps is manifestly anticompetitive. Agency is perfectly lawful, while price caps and MFNs are
subject to the rule of reason.9 Put succinctly, “[i]t is a bad idea to subject a novel way of doing
business (or an old way in a new and previously unexamined context ...) to per se treatment
under antitrust law.” In re Sulfuric Acid, 703 F.3d at 1011; see also United States v. Microsoft
Corp., 253 F.3d 34, 93 (D.C. Cir. 2001) (per se rule inapplicable in dynamic markets as trade
restraints “in such markets may produce efficiencies that courts have not previously encountered
and thus the Supreme Court had not factored into the per se rule as originally conceived”).
Nor can it seriously be contended that Apple’s entry with the iBookstore lacked any
redeeming virtue. Entry has brought competition to a market previously dominated by a single
(Amazon Kindle) brand. AF ¶ 287. Entry has brought millions of consumers into the market.
AF ¶ 279. Entry has brought innovations and improvements in the quality of the e-reading
experience. AF ¶¶ 253–55. Entry has brought the market higher output, with hundreds of

The price caps are imposed within a principal-agent relationship that is not a “contract, combination,
or conspiracy” under section 1, however. See footnote 3, supra.
8
When price caps are allegedly used to effectuate per se unlawful arrangements, the rule of reason
must still be employed. Khan, 522 U.S. at 17.
9
See Khan, 522 U.S. at 22; Blue Cross, 65 F.3d at 1415 (MFNs are “not price fixing”).
7

36

millions of e-books bought (or downloaded for free) from the iBookstore alone. AF ¶ 279.
These (and more) benefits stem from entry, which is a consequence of the challenged agency
contract provisions. Plaintiffs have not shown—and their experts have not disputed—that Apple
would not have entered absent agency. Prof. Baker, for example, assumed that Apple would not
have entered the market without agency when he constructed his but-for world. AF ¶ 293. To
wield the per se rule and automatically condemn entry—an act that is “essential to a dynamic
economy” (Leegin, 551 U.S. at 891)—would be little short of perverse. See In re Sulfuric Acid,
703 F.3d at 1010–11. This Court must therefore reject a per se analysis in this case.10
B.

Under The Rule Of Reason, Plaintiffs Cannot Establish A Section 1 Violation

Plaintiffs cannot show that Apple, a company concededly lacking any market power in
the relevant market (AF ¶ 294), unreasonably restrained trade. Gatt Commc’ns v. PMC Assocs.,
L.L.C., 711 F.3d 68, 73 n.8 (2d Cir. 2013) (generally describing rule of reason, including
importance of market power factor). “In its design and function the rule distinguishes between
restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating
competition that are in the consumer’s best interest.” Leegin, 551 U.S. at 886.
In this case, the agency model undeniably stimulated competition. The “antitrust laws
are designed primarily to protect interbrand competition, from which lower prices can later
result.” Leegin, 551 U.S. at 895. Vigorous interbrand competition spurred by Apple’s entry on
agency led Amazon, which continued to use the wholesale model to sell Random House and
independent publisher titles (adding up to more than half the market), to lose considerable
Nor is “quick look” analysis appropriate, which the Supreme Court has “applied … to business
activities that are so plainly anticompetitive that courts need undertake only a cursory examination before
imposing antitrust liability.” Texaco Inc. v. Dagher, 547 U.S. 1, 7 n.3 (2006). But “[i]f an arrangement
‘might plausibly be thought to have a net procompetitive effect, or possibly no effect at all on
competition,’ more than a ‘quick look’ is required.” Major League Baseball, 542 F.3d at 318 (quoting
Cal. Dental Ass’n v. FTC, 526 U.S. 756, 771 (1999)). Thus, “for the same reasons that per se liability is
unwarranted here,” Apple cannot be held liable under the quick look doctrine. Texaco, 547 U.S. at 7 n.3.
10

37

market share in favor of agency distributors, as consumers voted with their wallets. AF ¶ 287.
Consumers benefitted from this competition as Amazon vied for independent publishers on the
wholesale model while Apple signed them up under agency terms, and while both enlisted an
army of new self-publishers in the market on attractive agency terms (in Amazon’s case, under
the Kindle Digital program). AF ¶¶ 175, 257. All this and more stimulated continued explosive
growth in titles, catalogues, and sales. AF ¶¶ 279–80.
Plaintiffs thus necessarily fail to carry their initial burden under the rule of reason, which
entails “showing that the challenged action has had an actual adverse effect on competition as a
whole in the relevant market.” Capital Imaging, 996 F.2d at 543 (emphasis added); see also
K.M.B. Warehouse Distribs., Inc. v. Walker Mfg. Co., 61 F.3d 123, 127 (2d Cir. 1995) (same);
Major League Baseball, 542 F.3d at 317 (same); Gatt Commc’ns, 711 F.3d at 73 n.5 (under rule
of reason, freedom of consumers to buy other brands could alone be fatal to claim alleging bidrigging of single brand absent restraint of competition in relevant market generally). Here,
plaintiffs ignore competition as a whole in the relevant market, which, on their own definition,
includes all publishers, not just the defendant publishers, and all trade e-book titles, not just the
defendants’ New York Times bestsellers and hardcover new releases. The latter titles are just
10% of the defendant publishers’ sales in the relevant market. AF ¶ 270.
Apple’s entry and the adoption of the agency model affected every corner of the market,
not just this small fraction. For example, new publishers and especially self-publishers flooded
into the market, attracted by agency terms. AF ¶ 285. Plaintiffs’ experts have failed to prove
that growth slowed here. AF ¶¶ 281–82; see Brooke Grp. Ltd. v. Brown & Williamson Tobacco
Corp., 509 U.S. 209, 233 (1993) (that output allegedly “expanded at a slower rate than it
[otherwise] would have” is a “counter factual proposition” that “is difficult to prove in the best of

38

circumstances”). Market growth continued at a torrential flow. AF ¶¶ 279–80, 285–90.
Given this vast expansion of output, it is not surprising that price dropped in the relevant
market after agency. AF ¶ 268. Six out of seven of the witnesses designated as experts in this
case affirm that average market prices were lower after agency than before (the seventh offers
nothing more than self-serving speculation). AF ¶¶ 268–72, 295. Plaintiffs’ core allegation in
this case—that “Defendants’ agreement and conspiracy has had and will continue to have” the
effect of “[i]ncreasing the retail prices of trade e-books” (Compl. ¶102a)—is simply untrue. If
plaintiffs’ new plan is to concede this fact while claiming that prices would have fallen even
more but-for agency, they are equally out of luck. Despite having the most comprehensive
database of e-book market statistics ever assembled, they (and their experts) have no shred of
admissible empirical evidence that even remotely substantiates such speculation.11 AF ¶ 295; In
re Sulfuric Acid, 703 F.3d at 1012 (“The plaintiffs’ claim that the price would have been even
lower without the [challenged price-raising] agreements is doubtful, as we have said, because
without the agreements the [defendants] might not have entered the U.S. market”).
Plaintiffs argue that the average prices of the defendant publishers’ new release titles rose
after agency, but “prices can be increased in the course of promoting procompetitive effects.”
Leegin, 551 U.S. at 895–96. And as noted above, these titles were only a fraction of the relevant
market, as confirmed by the overall fall in market prices. At all times, consumers had access to
ample and ever-increasing numbers of substitute products in the relevant market at prices of
$9.99 or less. AF ¶ 271. Just months after the introduction of agency, Amazon announced that
“over 510,000 of [its 630,000] books are $9.99 or less, including 75 New York Times Best
The DOJ has not hesitated in the past to conclude that an “overall decrease” in market prices is
“inconsistent” with an “MFN causing significantly higher” prices, even while acknowledging that “many
factors could have influenced this [market price] decrease.” U.S. Dep’t of Justice, Statement by Assistant
Attorney General R. Hewitt Pate Regarding the Closing of the Orbitz Investigation 2–3 (July 31, 2003),
available at http://www.justice.gov/atr/public/press_releases/2003/201208.pdf.
11

39

Sellers.”12 Apple too offered over 75% of its catalog at the same prices. AF ¶ 271.
Unsurprisingly, Plaintiffs seek to flee from the reality that every critical indicator of
market health—lower price, higher output, more selection, higher quality, lower concentration—
signals that the trade e-books market has been thriving since agency and consumers have been
reaping the benefits. AF ¶ 290. But when contracts are challenged under the rule of reason and
there is “no showing that the market as a whole has been affected at all by the contract[s],”
section 1 has not been violated. Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 31
(1984).
*

*

*

“It is an abuse of the antitrust laws to invoke them to stifle nascent competition.” Israel
Travel Advisory Serv., Inc. v. Israel Identity Tours, Inc., 61 F.3d 1250, 1256 (7th Cir. 1995). A
finding that Apple’s conduct violates the rule of reason, despite Apple’s expansion of retail
competition and the explosion in market growth that it brought about, would permit plaintiffs to
do just that. This court should avoid such a perverse and erroneous result.
CONCLUSION
The Court should order judgment for Apple.

12

Press Release, Amazon.com, Kindle Device Unit Sales Accelerate Each Month in Second Quarter;
New $189 Price Results in Tipping Point for Growth (July 19, 2010), available at http://phx.corporateir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1449176&highlight=.

40

APPENDIX A
Cases holding that evidence of the defendant’s independent business interest precludes a
finding of conspiracy:

Court of Appeals Cases
Am. Chiropractic Ass’n Inc. v. Trigon Healthcare Inc., 367 F.3d 212, 226–27 (4th Cir. 2004)
 Finding no conspiracy where evidence in record showed actions were “appropriate
and reasonable” and independent;
Ferguson v. Greater Pocatello Chamber of Commerce, 848 F.2d 976, 981–82 (9th Cir. 1988)
 Affirming summary judgment where defendants “presented evidence of facially valid
institutional and business reasons for its decision”;
Houser v. Fox Theatres Mgmt. Corp., 845 F.2d 1225, 1232–33 (3d Cir. 1988)
 Affirming summary judgment where defendants’ actions were in their own economic
interests;
In re Travel Agent Comm’n Antitrust Litig., 583 F.2d 896, 908 (6th Cir. 2009)
 Dismissing conspiracy allegations where “each defendant had a reasonable,
independent economic interest” in its actions;
Kreuzer v. Am. Acad. of Periodontology, 735 F.2d 1479, 1488 (D.C. Cir. 1984)
 Holding that if a defendant “offer[s] an innocent explanation of the questioned
conduct” and it “is plausible and more logical than a theory of concerted action, then
a conspiracy may not be found”;
Merck-Medco Managed Care, LLC v. Rite Aid Corp., 201 F.3d 436, 1999 WL 691840, at *15
(4th Cir. 1999) (per curiam)
 Affirming grant of summary judgment where evidence was equally consistent with
decisions that “were independent or were made for legitimate business reasons”;
Miles Distribs. Inc. v. Specialty Constr. Brands, Inc., 476 F.3d 442, 450 (7th Cir. 2007)
 Affirming grant of summary judgment where defendants’ actions were “as consistent
with permissible competition as with a conspiracy”;
Todorov v. DCH Healthcare Auth., 921 F.2d 1438, 1457–58 (11th Cir. 1991)
 Affirming summary judgment where “record amply supports the procompetitive
reasons” defendant offered for its actions;
Wallace v. Bank of Bartlett, 55 F.3d 1166, 1169–70 (6th Cir. 1995)
 Affirming grant of summary judgment where defendants’ conduct was based on

A-1

“legitimate interest” and where “[p]laintiff’s expert evidence [was] equally consistent
with independent action as it [was] with conspiracy”;

Williamson Oil Co. v. Philip Morris USA, 346 F.3d 1287, 1306–07 (11th Cir. 2003)
 Affirming grant of summary judgment where defendants’ conduct was “readily
explained as economically rational, self-interested responses” and where plaintiffs
conceded that defendants’ conduct “was an exceptionally competitive move”.

S.D.N.Y. Cases
Alpha Lyracom Space Commc’ns, Inc. v. Comsat Corp., 968 F. Supp. 876, 894 (S.D.N.Y.
1996)
 Finding no conspiracy despite parallel refusals and evidence that a joint venture met
on numerous occasions where defendant presented “ample evidence” of independent
business reasons;
Kramer v. Pollock-Krasner Found., 890 F. Supp. 250, 256 (S.D.N.Y. 1995)
 Finding no conspiracy where challenged actions “could equally have been prompted
by lawful, independent goals”;
Reading Int’l, Inc. v. Oaktree Capital Mgmt. LLC, 2007 U.S. Dist. LEXIS 504, at *36
(S.D.N.Y. Jan. 9, 2007)
 Finding no conspiracy where evidence showed defendants exercised “their
independent business judgment”;
Reborn Enters. Inc. v. Fine Child, Inc., 590 F. Supp. 1423, 1442 (S.D.N.Y. 1984)
 “[I]f the decision ... was solely based on legitimate business reasons ... then plaintiff’s
claim must be dismissed” (quotation marks and brackets omitted);
Sample, Inc. v. Pendleton Woolen Mills, Inc., 704 F. Supp. 498, 501–03 (S.D.N.Y. 1989)
 Finding no conspiracy where defendant’s actions were consistent with “legitimate
business concerns”;
U.S. Info Sys. v. IBEW Local Union No. 3, 2007 U.S. Dist. LEXIS 56229, at *49–50
(S.D.N.Y. Aug. 3, 2007)
 Finding no conspiracy where defendants’ conduct was equally consistent with own
self-interest.

A-2

Other District Court Cases

Balaklaw v. Lovell, 822 F. Supp. 892, 902 (N.D.N.Y. 1993)
 Finding no conspiracy where defendants “had a legitimate, business reason” for its
conduct;
Breakdown Servs., Ltd. v. Now Casting, Inc., 550 F. Supp. 2d 1123, 1137 (C.D. Cal. 2007)
 Finding no conspiracy where defendant “set forth a plausible and justifiable reason
for its conduct that is consistent with proper business practice”;
Flash Elecs., Inc. v. Universal Music & Video Distrib. Corp., 2009 WL 7266571, at *1, *10–
14 (E.D.N.Y. Oct. 19, 2009) (Report and Recommendation), adopted in full, 2010 WL
5390176 (E.D.N.Y. Dec. 22, 2010)
 Finding no conspiracy where defendants had “legitimate business reasons” for its
conduct;
Friedman v. Del. Cnty. Mem’l Hosp., 672 F. Supp. 171, 188 (E.D. Pa. 1987)
 Finding no conspiracy where defendant “had legitimate business justifications” for its
conduct;
In re Graphics Processing Units Antitrust Litig., 527 F. Supp. 2d 1011, 1022 (N.D. Cal.
2007)
 Dismissing antitrust conspiracy allegations where defendants “ha[d] its own
independent reasons” for its actions;
LaFlamme v. Societe Air Fr., 702 F. Supp. 2d 136, 152 (E.D.N.Y. 2010)
 Dismissing antitrust conspiracy allegations where change in market conditions
plausibly “instigated independent decisions by defendants” to perform challenged
action;
Maxim Integrated Prods., Inc. v. Analog Devices, Inc., 1994 WL 514024, at *2 (N.D. Cal.
Sept. 7, 1994), rev’d in part on other grounds, 79 F.3d 1153 (9th Cir. 1996) (unpublished)
 Finding no conspiracy where defendants “had sound, legitimate business reasons” for
its conduct;
Ralph C. Wilson Indus., Inc. v. Am. Broad. Cos., 598 F. Supp. 694, 708 (N.D. Cal. 1984)
 Finding no conspiracy where defendants “submitted overwhelming evidence that
their ... practices were undertaken in the exercise of their independent and sound
business judgment”;
Temple v. Circuit City Stores, Inc., 2007 WL 2790154, at *7 (E.D.N.Y. Sept. 25, 2007)
 Dismissing antitrust conspiracy allegations where plaintiff alleged defendants acted
“for business reasons” and to “protect their own profits” (internal brackets omitted);
Tominaga v. Shepherd, 682 F. Supp. 1489, 1496 (C.D. Cal. 1988)

A-3



Finding no conspiracy where defendant “raised [a] plausible business justification”
for its conduct;

Wright v. S. Mono Hosp. Dist., 631 F. Supp. 1294, 1321 (E.D. Cal. 1986)
 Finding no conspiracy where defendants “c[a]me forth with more than sufficient
evidence to establish that their acts benefitted their self interests while at the same
time advancing legitimate business decisions”.
101494504.41

A-4