Apple 2.0

Covering the business that Steve Jobs built

The DOJ is arguing the facts. Apple is arguing the law.

June 4, 2013: 8:06 AM ET

The outlines of each side's case were clearly laid in Monday's opening arguments.

From Apple's slide deck. Click to enlarge.

From Apple's slide deck.

FORTUNE -- The first rule of law, goes the old lawyers joke, is that if the facts are against you, you argue the law. The second rule is that if the law is against you, you argue the facts.

Based on each side's opening arguments on the first day of U.S.A. v. Apple, it's clear that the Department of Justice is leaning heavily on the facts and Apple (AAPL) on the law.

The government has set out to prove, through a series of e-mail exchanges and telephone logs, that Apple served as the "ringmaster" of a conspiracy to raise the price of e-books -- a "per se" violation of the Sherman antitrust act.

Apple, drawing on more than a century of case law, hopes to show that what Apple did is the kind of activity the Sherman Act was designed to encourage and that subsequent Supreme Court decisions have explicitly protected.

From the DOJ's slide deck.

From the DOJ's slide deck. Click to enlarge.

If nothing else, you had to admire the legwork the government put into its case. Its investigators seemed to have vacuumed up every e-mail, every telephone call, every text message exchanged between Apple and the five so-called publisher defendants -- 834 exhibits in all. The DOJ logged over 100 phone calls between the publishers in a six-week period and displayed them in a bar graph (right) -- strong evidence, it said, that the competitors (who have since settled) were engaged in a "horizontal agreement" to fix e-book prices.

To tie Apple to that alleged conspiracy, the government followed every move of Eddy Cue, Apple's point man in the negotiations, and trotted out the by now familiar Steve Jobs quote from Walter Isaacson's biography:

"Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that — they thought it would trash their ability to sell hardcover books at $28. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon.

So we told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway.' But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books.'"

Click to enlarge.

Click to enlarge.

While the government was assembling these facts, Apple's attorneys were hitting the law books. Among the points lead counsel Orin Snyder made in his opening argument:

  • The agency model and the so-called most-favored nation clause Jobs was describing are widely used in business and have never been found illegal.
  • The Supreme Court has ruled that distributors have legitimate, pro-competitive reasons to discuss prices with manufacturers. (See excerpt, right.)
  • The Court is increasingly hostile to antitrust claims against parties with "vertical" relationships like Apple's to the publishers.
  • The Toys "R" Us case that the government cites when it calls Apple the "ringmaster" bears no relation to this one. Toys "R" Us was the dominant distributor and bullied toy manufacturers into boycotting its competitors. Apple was starting from scratch and gave the publishers something they wanted.
  • Although the government claims Apple is guilty of a "per se" (on the face of it) violation of the antitrust act, its evidence fails every test of the per se rules.
  • "No case in the history of the antitrust laws," Synder concluded, "has imposed liability on a new entrant facing a dominant player with a 90% market share." Especially when its entry seemed to have pro-competitive effects (see Apple's slide, above).

Given the nature of Apple's defense, it's not hard to see why Snyder objected so strenuously Monday to District Court Judge Denise Cote tentative conclusion, offered in open court two weeks ago, that seemed to stack the deck against his client:

"I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books, and that the circumstantial evidence in this case, including the terms of the agreements, will confirm that."

Judge Cote interrupted Snyder to defend her remarks. But given that Apple is arguing the law, not the facts, her final words on the subject offered little comfort:

"The deck is not stacked against Apple unless the evidence is stacked against Apple."

See also: The DOJ's antitrust case against Apple Inc. in 81 slides

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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