Summations

The Apple e-book antitrust case: The closing arguments

June 21, 2013: 10:54 AM ET

It's as if Apple and the U.S. government were talking about two different cases.

Chart: Prof. Gilbert. Click to enlarge.

Chart: Prof. Richard Gilbert. Click to enlarge.

FORTUNE -- "At some level, this is an old fashioned price fixing case," Mark Ryan told the court as he presented the government's closing arguments in U.S.A. v. Apple -- the e-book antitrust case that ended Thursday with summations from both sides.

Ryan started, as he put it, at the end of the story -- with the chart above showing the rise in e-book prices after five of the Big Six book publishers put their e-books on Apple's (AAPL) iBookstore.

"There are two competing narratives in this case," Ryan told the court. "One is that what's reflected on this chart is the product of normal market forces -- free and independent competition. The other narrative is that it was a result of collusion."

"This is not a normal civil case," Apple's lead counsel countered. In his closing argument, Orin Snyder started at the beginning, in 2009, when the e-book market that Apple began exploring in mid-December was anything but normal, free and independent.

"The e-book business was in a state of turmoil and fundamental structural change," he told the court. Amazon (AMZN) was selling nine out of every ten e-books, and it was paying up to $13 for the most popular titles and selling them for $9.99. The publishers, for their part, were in open revolt against Amazon's loss-leader pricing scheme. They were raising the wholesale prices they charged Amazon, exploring alternative business models and refusing to sell Amazon digital rights to some of their bestselling titles -- books by Stephen King, Ted Kennedy and Sarah Palin. The threat of holding back e-books was, Amazon CEO Jeff Bezos told his lieutenants that summer, "an absolute declaration of war."

"Apple's entry," Snyder told the court, "simply crystallized market forces and structural changes that were well underway before Apple met with a single publisher."

It was as if the two sides were talking about two different cases.

And in a reversal of their opening arguments, where the DOJ argued the facts and Apple the law, this time the DOJ began and ended with the law, and Apple hewed more closely to the facts in evidence.

HORIZONTAL AND VERTICAL: For the government, U.S.A. v. Apple was simply a continuation of the horizontal price-fixing conspiracy among the book publishers that had already been settled. This trial was a mopping up operation to capture the "ringmaster" that had provided the conspirators with the mechanism to accomplish their goal and repeated assurances that they were not acting alone.

Steve Jobs as Rockefeller.

Steve Jobs as J.D. Rockefeller.

Ryan harkened back to the Sherman Act of 1890 -- designed to rein in John D. Rockefeller -- and a 1939 Supreme Court decision that said acceptance of an invitation to join an illegal plan was sufficient to establish an unlawful conspiracy.

If there were a horizontal conspiracy amongst the publishers, Snyder countered for the defense, there was no evidence that his client knew anything about it. Apple was simply trying to find a way to start a digital bookstore that could compete with Amazon and make a profit.

Synder cited more recent Supreme Court decisions that, to ensure an efficient marketplace, limit the inferences that can be drawn from the actions of a vertical player such as Apple. "There must be evidence," the Supreme Court ruled in 1984, "that tends to exclude the possibility that [the defendants] were acting independently" -- which is what Snyder insists Apple was doing.

"The government," Snyder told U.S. District Judge Denise Cote, "has repeatedly tried to turn standard, normal, lawful business activity for a potential new entrant like Apple into concerted unlawful action."

"If Apple is found liable for negotiating deals in this perfectly ordinary-course-of-business fashion," he added, "that precedent will send shudders through the business community."

THE CALENDARS: Both lawyers relied heavily in their presentations on PowerPoint calendars projected on a jumbo screen. Ryan marked Dec. 15 and 16 -- when Eddy Cue and two other Apple executives first met with the Big Six book publishers -- as the start of the conspiracy, and he traced the dates when through phone calls, e-mails and face-to-face meetings the plot was hatched and refined.

Source: Gibson, Dunn for Apple.

Source: Gibson, Dunn for Apple.

Snyder emphasized the gaps in the calendar -- in some cases nearly three weeks -- in which there was no communication between Cue and his alleged co-conspirators. "There is no such thing as conspiracy by telepathy," he said.

Snyder used his slides to remind Judge Cote how contentious and disorganized Apple's negotiations had been. "The publishers opposed the very deal terms that [the government] claimed to be the linchpin of the conspiracy," he said.

"The fact that it might be hard to hammer out the details of a conspiracy is no defense to a conspiracy," Ryan countered. "There can be some dispute among the cartel members. You can pick up the paper some day... and see Venezuela and Saudi Arabia debating in OPEC meetings what the price of oil should be."

TOYS "R" US: Both lawyers cited Toys "R" Us v. FTC, the case that introduced the "ringmaster" language into U.S. antitrust law.

The only way Toys "R" Us could persuade 10 toy manufacturers to boycott Costco, Wal-Mart and the other big box discounters, Ryan said, was to assure them that their competitors were going along with the scheme. "That's the Toys "R" Us holding," he said. "That's the difference between a free market and a rigged market."

To call Apple a ringmaster when it's coming in on the "tail end of an alleged horizontal conspiracy," is bizarre and totally unwarranted, Snyder argued. "In every other case... it's the dominant market player with commanding market power organizing the horizontal players, punishing them, brutalizing them, in a manifestly anticompetitive way that lacks any redeeming virtue." By contrast, Ryan asserted, Apple's actions were manifestly pro-competitive.

"Because you're a new entrant, you can fix prices?" Ryan countered.. "Where is that provision cited in the law of our country?"

CREDIBILITY: Snyder relied heavily on the testimony of Apple senior VP Eddy Cue, with whom Judge Cote seemed to have established a rapport and whose front-row view of the negotiations provided the defense with its central narrative.

Source: DOJ. Click to enlarge.

Source: DOJ. Click to enlarge.

Ryan worked hard to attack Cue's credibility, devoting several slides to points where he thought Cue had been caught in a lie. One slide quoted Cue describing the state of a key contract clause as of Jan. 4 three different ways: "developed," "developing" and not yet "come up with." Asked which statement was correct, Cue had answered "all of them."

If that shook Judge Cote's faith in Cue, she gave no sign.

THE JAN. 20 DINNER: As his co-counsel had during the trial, the DOJ's Ryan asked the judge to consider the circumstantial evidence surrounding a dinner Cue had with Macmillan CEO John Sargent on Jan. 20, 2010, during which the DOJ repeatedly asserted ("Isn't it a fact...") -- and all the participants denied -- that Apple and Macmillan made a secret pact to force Amazon to change its pricing scheme.

"Arguments with question marks to which witnesses say 'no,'" Snyder remarked acidly, "does not constitute evidence."

THE JUDGE'S QUESTIONS: Both lawyers were interrupted repeatedly by Judge Cote, who will decide the non-jury trial, and her questions are perhaps the best evidence of where she thinks the case now stands.

Most of her questions to Apple's lawyer had to do with the horizontal conspiracy among the publishers, whose settlements she had presided over. The question that gave him the hardest time was this one: "Do you agree that Apple should be found liable if it acted with intent to change the industry's pricing model and thereby remove the $9.99 price point established by Amazon?"

No, said Snyder, but to explain his answer he had to make a lengthy detour into anti-trust case law and engage the judge in colloquy about "per se" rules -- which have a low bar -- and the "rule of reason," where the burden of proof is higher.

Screen Shot 2013-06-21 at 11.31.47 AMThe judge's questions for the government's lawyer were somewhat more argumentative, and her last two seemed to get to the heart of Apple's defense.

How, she asked, would he answer Apple's argument that it didn't actually raise prices because if it hadn't been for Apple's entry into the market, the e-books the publishers were withholding from Amazon wouldn't have been available at any price?

Ryan pointed out that only 37 e-book titles had ever been withheld, and there was no evidence in trial that the number was going to grow substantially.

And why, Judge Cote asked, if Barnes & Noble (BKS) looked at the same market conditions Apple did and came up with essentially the same contract terms, was he arguing that Apple did something illegal and not Barnes & Noble?

The government's lawyer answered that with a comment that could apply equally well to the question many outside observers -- including the president of the Authors Guild and at least one U.S. Senator -- had asked about Amazon, the 800-pound gorilla in the courtroom:

"It's not a defense for Apple to say, 'why didn't you sue somebody else?'"

With that, and a statement from a representative for the 33 states seeking monetary damages from Apple, the trial ended.

According to a spokesperson for the Southern District of New York, a judge in a case like this can take, on average, two months to deliver a verdict.

Links:

Court drawings: Illustrations by Elizabeth Williams

PED talks about the case: The Mac Observer's Apple Context Machine Podcast

See also:

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