Apple eBooks Case: Supreme Court Refuses to Defend Permissionless Innovation

WASHINGTON D.C. — Today, the Supreme Court declined to review a Second Circuit decision that held Apple violated the antitrust laws by fixing ebook prices when, in preparing to launch its own iBookstore, it negotiated a deal with publishers that would allow them to set prices above Amazon’s one-size-fits-all $9.99 price. The appeals court reached its decision by applying the strict per se rule, which ignores any procompetitive justifications of a challenged business practice. The dissent had argued that Apple “was unwilling to [enter the ebook market] on terms that would incur a loss on e-book sales (as would happen if it met Amazon’s below-cost price),” and thus that Apple’s agreement with major publishers actually benefitted consumers by facilitating competition in the ebooks market, even if it meant higher prices for some ebooks.

The Supreme Court’s refusal to hear the case means the 2013 verdict against Apple, resulting in a $450 million dollar class-action settlement, will stand. The case began in 2010 when Apple negotiated with five major publishers, adopting an agency pricing model in which the publishers set a book’s price and gave a sales commission to Apple. This pricing model is distinct from Amazon’s previously dominant model, where t was allowed to unilaterally set e-book prices — often for below cost as a loss leader strategy to encourage sales of its own Kindle reader and promote the overall Amazon platform. The Justice Department claimed that Apple’s agency model amounted to antitrust conspiracy — and the Second Circuit agreed. Meanwhile, Apple’s entry reduced Amazon’s share of the ebooks market from 90% to 60%.

“The question here wasn’t actually whether Apple should win, but whether Apple should even be allowed to argue that its arrangement could benefit consumers,” said TechFreedom President Berin Szoka. “Apple made a strong case that its deal with publishers was critical to allowing it compete with Amazon. The Supreme Court might or might not have found those arguments convincing, but it should have at least weighed them under antitrust’s flexible rule of reason. By letting the rigid per se deal stand as the controlling legal standard, the Court has ensured that antitrust law in general will put obsolete legal precedents from the pre-digital era above consumer welfare.”

“Business model innovation is no less essential for progress than technological innovation,” concluded Szoka. “Indeed, the two usually go hand in hand. And new business models are usually essential to unseating the first mover in new markets like ebook publishing, especially when the first mover sets artificially low prices. Categorically banning deals that attempt to rebalance pricing power between distributors and publishers in multi-sided markets likely means strangling competition in its crib. Unfortunately, the real costs of today’s decision will go unseen: without an opportunity to defend new business models, innovative companies like Apple will be less likely to attempt to disrupt the dominance of entrenched incumbents. Consumers will simply never know how much today’s decision cost them.”

Read more about the argument for reversing the Second Circuit and applying a rule of reason to novel business arrangements in the amicus brief filed by the International Center for Law & Economics and eleven leading antitrust scholars. Truth on the Market, a blog dedicated to law and economics, held a blog symposium on the case last month.

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We are available for comment at media@techfreedom.org. See our other work on competition:

• Our response to the FTC’s policy statement defining its Unfair Methods of Competition Authority
• Our statement on the FCC’s Notice of Proposed Rulemaking on set-top boxes
• Comments urging the FCC to approve the Charter-TWC merger without conditions

About TechFreedom:

TechFreedom is a non-profit, non-partisan technology policy think tank. We work to chart a path forward for policymakers towards a bright future where technology enhances freedom, and freedom enhances technology.

Originally published at techfreedom.org.