Apple 2.0

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The Apple e-book case is headed for the 2nd Circuit

July 10, 2013: 1:30 PM ET

Apple's appeal of the trial judge's verdict will hinge on the last 38 pages of her decision.

Screen Shot 2013-07-10 at 12.56.44 PM

Click to read the opinion.

FORTUNE -- The first 122 pages of the 160-page ruling against Apple (AAPL) that U.S. District Judge Denise Cote handed down on Wednesday could have been written before the trial began.

In fact, most of them probably were.

Judge Cote was familiar with the case from having supervised the proceedings by which the five so-called Publisher Defendants settled without admitting guilt.

And when the judge who would decide the non-jury case on her own announced -- even before the trial that Apple insisted on began -- that she believed the government would prove that the company conspired to raise the price of e-books, she also let slip that she'd already begun writing her decision.

It's only in the last 38 pages that she addresses -- and dismisses one by one -- Apple's defenses.

Apple has announced that it will appeal her decision. And if it's to prevail in the 2nd Circuit Court of Appeals or -- if it comes to that -- the Supreme Court, it will be on the strength or weakness of her responses to the six major arguments Apple raised in its defense.

Let's take them one at a time.

  • Monsanto: Apple argued at trial that the Supreme Court's decision in Monsanto v. Spray-Rite entitled it to a favorable verdict if the evidence was ambiguous or did not "tend to exclude" the possibility that Apple acted in a manner consistent with its lawful business interests. Judge Cote was unpersuaded. "Apple misreads Monsanto and its progeny," she wrote, quoting from the Department of Justice's brief. "It also perceives ambiguity where none exists."
  • Apple's intent: Apple argued that it never intended to conspire with the publishers to raise the prices of e-books. It merely hoped to enter the e-book market with a superior e-book reader. If the publishers raised prices or used Apple's agreements as a tool to force the industry to change its business model, that was on them, not Apple. Again, Judge Cote would have none of it. "Apple's entirely appropriate or even admirable motives," she wrote, "do not preclude a finding that Apple also intentionally engaged with the Publisher Defendants in a scheme to raise e-book prices."
  • Windowing: A third defense was that there was no actual price "increase" because if it weren't for Apple's entry into the market, the publishers would have withheld their e-books entirely. "This creative argument fails for several reasons," Judge Cote wrote. Chief among them is that the so-called windowing of e-books was relatively rare -- only 37 e-book titles were ever withheld from the market -- and there was no evidence that it was going to become widespread.
  • The evidence: The judge makes a strong argument that despite Apple's efforts to tell a competing narrative, the preponderance of the evidence suggests that its executives were aware that the publishers were engaged in what might be construed as an illegal conspiracy. But in at least one instance she goes too far. She writes that 'When Jobs told his biographer ... the Publisher Defendants "went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books,'" Jobs was referring to the fact that Sargent was in Seattle that very day to deliver Macmillan's ultimatum to Amazon.' That's her opinion, not a fact proven at trial.
  • Per se liability: This may be the weakest part of the judge's ruling. Apple had argued that because Apple was a vertical, not a horizontal, player in the alleged conspiracy, it's not a per se antitrust case (unlawful on the face of it) but one subject to the higher legal hurdles of the so-called rule of reason. "While vertical restraints are subject to review under the rule of reason," she wrote, "Apple directly participated in a horizontal price-fixing conspiracy. As a result, its conduct is per se unlawful." That begs the question; if Apple is a vertical player, how can it directly participate in a horizontal conspiracy?
  • Avoiding a dangerous precedent: Finally, Apple had warned the court that finding against it would have a chilling effect across a broad swath of high-tech industry. The judge acknowledges that the antitrust laws are blunt instruments and that "Providing new entrants with the ability to access markets has long been a mainstay of our economy and any court should be wary of discouraging such access." Yet she proceeded to do just that.

It's only in this, the final section of her opinion, that Judge Cote addresses the elephant in her courtroom: Amazon (AMZN), which before Apple arrived controlled 80% to 90% of the e-book market and was selling the most popular titles below cost.

"If Apple is suggesting that Amazon was engaging in illegal, monopolistic practices, and that Apple's combination with the Publisher Defendants to deprive a monopolist of some of its market power is pro-competitive and healthy for our economy, it is wrong," she writes. "Another company's alleged violation of antitrust laws is not an excuse for engaging in your own violations of law."

Perhaps. But it does raise a question that begs for an answer even more loudly now than before her verdict: Why the Justice Department chose to prosecute the new entrant in the e-book market, and not the monopolist.

If it's any comfort to Apple investors, many antitrust cases -- if not most -- are decided in the appeals courts.

Link: U.S.A. v. Apple: Opinion and Order.

Court drawing by Elizabeth Williams. 

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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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