DL Seminar | US v Apple: Competition in America

By Korica Simon, JD Student, Cornell Law School

On March 19, 2020, the Digital Life Seminar series welcomed Chris Sagers, Professor of Law at Cleveland-Marshall College of Law, to speak on the United States v. Apple case, dealing with anti-trust competition in the United States. In this case, the Department of Justice alleged that Apple and several publishing companies set up a price fixing scheme. Apple was found guilty of price fixing at the US District Court and at the 2nd US Circuit Court of Appeals. Apple then appealed the case to the Supreme Court. Before diving into the case, Sagers provided attendees some background information on anti-trust laws in the United States.

There are three main federal antitrust laws that companies must follow: The Sherman Antitrust Act, the Clayton Act, and the Federal Trade Commission Act. The Sherman Act prohibits acts that would unreasonably restrain trade, such as price fixing. The Act also prevents companies from monopolizing or attempting to monopolize. The Clayton Act prevents companies from engaging in mergers and acquisitions that would “substantially…lesson competition, or…tend to create a monopoly.” Such mergers could create an increase in prices due to the lack of competition, and as a result, consumers would be harmed. Lastly, the Federal Trade Commission Act is broad and prohibits “unfair methods of competition” and “unfair or deceptive acts of practices” in or affecting commerce.

In the United States v. Apple case, the DOJ accused Apple and five publisher companies of violating the Sherman Act by engaging in price fixing. In 2007, the Kindle was produced, and e-books started to become a new emerging business. Publishers started to sell e-books wholesale and discounted the e-books by 20% because they were cheaper to distribute than physical books. Amazon became involved in e-book sales and charged consumers a competitive low price of $9.99 for new and popular e-books. Amazon was able to sell e-books for this price because they were buying e-books wholesale from the publishers at roughly the same price. So, Amazon wasn’t making a huge profit from these sales.

The publishers had a lot of concerns about Amazon selling these books for such a low price and felt this would threaten their business model and could lead to them eventually going out of business. As a result, the publishers met in private to discuss what could be done to remedy this issue. They believed that if any of them acted alone, Amazon would retaliate against them, so they wanted to act as a collective to come up with a solution. Apple caught wind of this discomfort and approached the publishers with a new deal.

In 2010, Apple and the publishers agreed that Apple would buy e-books wholesale from the publishers and sell them for a price of $9.99-$14.99 for the majority of e-books, or $12.99-$14.99 for new releases. The publishers could set the price of the e-books within those ranges and Apple would receive a 30% commission from the e-book sales. The publishers promised Apple that they would not let competitors sell their books for lower than what Apple would sell them for, therefore making Apple more competitive.

In his talk, Sagers observed how controversial this suit was for many people. To Sagers and other antitrust lawyers, this case seemed straightforward. If the facts the government alleges were proven, the government would win this case. But people from all political backgrounds found common ground in that they all wanted Amazon to lose this case. They felt as though Amazon was a predatory company so, should the government win this case, it would only result in a win for Amazon.

Sagers also pointed out who interesting it was to see people be vehemently against Amazon because most people would say an American value is celebrating competition in the economic market. Consumers want the best deal for the greatest price, and they want to encourage constant advances. Sagers found that Americans probably aren’t as invested in competition as we think. For a lot of people, it’s hard to see a smaller company lose to a big giant corporation, just because the “smaller” company isn’t able to compete on the same level. Perhaps what people were reacting to in this case, is a belief that “smaller” companies should be protected by our economic system even if that means less innovation and higher costs.

In this case, Sagers tended to side with Amazon, as he feels more competition means more innovation and better products. And he believes things will work out naturally. And this is perhaps true. Afterall, print books are still outselling e-books by a wide margin, and now audiobooks are competing with e-books as more people are turning to audiobooks to make it through their commute. Sagers also doesn’t believe that we should let companies fight back against bigger corporations through violating the antitrust laws. And he made it a point to clear misconceptions about these publisher companies. They aren’t small companies without leverage, but rather leaders in this industry.

This case leaves us with the question of what kind of competition do we want. Is it most important to us to have the cheapest product possible or is it important to protect smaller companies even if that means paying higher prices for goods and sacrificing innovations? And does our current antitrust laws adequately address these issues?

In the end, Sagers was right. This was a straightforward case and the Supreme Court declined to hear Apple’s appeal. Meaning the 2nd US Circuit Court of Appeals ruling stood. Apple was guilty of price fixing and violating antitrust law.