Antitrust lawyer: Apple ebook deals are illegal

Steve Jobs left behind a legal mess for Apple chief executive Tim Cook. Decisions the former CEO made when brokering ebook distribution deals haunt Apple, as a civil price-fixing case moves forward and the specter of a federal antitrust investigation approaches. Microsoft cofounder Bill Gates left Steve Ballmer in similar straights in early 2000. Look what happened to Microsoft since.

Apple is alleged to have colluded with major publishers to fix ebook prices, in violation of US antitrust law. There has been little analysis from legal experts on whether or not Apple is actually in danger of criminal complaint. I sat down with William Markham, a partner with San Diego-based law firm Maldonado & Markham, to understand the basics of the civil ebook case and possible federal criminal action. It seems like Apple may find itself a target of antitrust claims in short order, if Markham is right.

Markham has 15 years of experience in the fields of antitrust and real estate and commercial disputes, and has several successful high-profile antitrust cases ruled in his favor under his belt. We chatted earlier this week.

BetaNews: Before we start on Apple itself, could you explain the basic premise of price-fixing and how it relates to Apple's deals with the book publishers?

William Markham: Thanks very much. Price fixing is any concerted effort to raise, lower or otherwise manipulate the prices for a given good or service, but only if it is undertaken by two or more independent entities that directly compete with one another. At issue in the Apple case is an alleged instance of horizontal price-fixing: The publishers, who are direct competitors, have acted in concert with a major distributor, Apple, in order to raise or otherwise manipulate the prices of ebooks and printed books.

BN: Does the class-action complaint meet those standards to be considered an antitrust violation?

WM: It is very well done and easily meets the standard for stating actionable antitrust claims: It alleges specific facts of a conspiracy undertaken by the named defendants to frustrate and undermine competitive prices and distribution outlets for ebooks, causing customers to pay higher prices for ebooks and printed books while harming ebook sellers such as Amazon that wish to sell ebooks at lower prices.

BN: Why would either Apple or the book publishers do such a thing? Isn't that blatantly illegal?

WM: The book publishers had an obvious motive -- to preserve the profit margins on the sale of hardcover and paperback books, which were threatened by the much lower prices for ebooks that were offered by Amazon. To preserve these prices, the book publishers had to "discipline" Amazon by obliging it to raise the prices that it charged for ebooks. To enforce this threat upon Amazon, which is an enormous electronic retailer, the book publishers enlisted the aid of Apple, which agreed to offer ebooks on its iBook platform only at approximately $15 per ebook.

It is not overly difficult, however, to discern Apple’s motives for participating in the conspiracy, and the complaint alleges the matter clearly: Apple’s core business is selling computer hardware that uses proprietary software applications, such [as] iPhones, iPads, iPods, and Mac computers. Its business model relies on its ability to earn wide margins on its hardware products.

BN: So what we have here is Apple feeling threatened, and attempting to control the market as a result.

WM: Yes. Amazon poses a threat to Apple’s entire business model, its iPad line of products in particular, and its interest in making profits from selling ebooks. Indeed, Apple explicitly wants to make profits by inducing prospective customers to purchase iPads and commit themselves by contract to its closed world of available ebooks (iBooks), and Amazon stands between Apple and this profitable ambition.

But takes no rocket scientist or Nobel economist to discern Apple’s interest in undermining Amazon’s position as the preeminent seller of ebooks: Amazon makes these sales, which in turn have a network effect and induce ever more readers to purchase the Kindle readers and ebooks from Amazon while discouraging ever more customers from purchasing iPads and ebooks, iTunes and the data from Apple’s closed world of offerings.

BN: Sounds like a serious case. It also sounds like the class-action suitors may stand to benefit greatly if Apple is found to be in violation of the Sherman Act?

WM: The damages could be immense: What harm has befallen rival distributors and booksellers disfavored by the scheme and harmed by its anti-competitive character? How much more have readers paid for their books? Multiply this figure by three (treble damages), add attorney’s fees calculated according to the “lodestar” method, throw in the odd injunctive relief, and you have your possible if not probable result after an indignant jury is properly instructed by the court.

BN: So through iBooks, Apple is coming dangerously close to the next big tech antitrust case of our time, no?

WM: By this conspiracy they have apparently raised and fixed the prices of ebooks so as to preserve Apple’s sales of iPads, improve its share of sales of ebooks, allow the old publishers a few more years to exact profits that their own honest services can no longer produce, and harm the fortunes and progress of the new Wal-Mart of our era, Amazon, whose own practices likely deserve scrutiny, but not a price-fixing scheme so clumsy and blatant in its implementation that I am surprised the case has not yet settled.

BN: Is it a sure thing, though?

WM: There are a series of restrictive doctrines in federal court these days that make it increasingly more difficult for a private plaintiff to obtain redress under federal antitrust law. Apple has invoked one of these doctrines –- the Twombly pleading standard –- to argue that the class plaintiffs in the ebooks case have failed to allege a plausible conspiracy in which it participated. If this complaint fails to allege a plausible conspiracy, it is only because its authors apparently overlooked the fundamental maxim that anyone can write a decent, overly long brief, but only a talented advocate can write a convincing, spare one. Even so, the complaint is thorough, and the court should find that it states actionable claims under the Sherman Act.

BN: Any final thoughts on the case and your personal take?

WM: An avid reader, I used to love to browse for books in bookstores, but life is change, and people have changed the way that they look for, purchase, and even read books. Our laws say that you can compete vigorously and imaginatively for their custom, or fail to do so and fail to win it, but even venerable book publishers must not collude to raise the prices of their offerings, and if they do so they must pay treble damages and attorney’s fees.

It is a fascinating case -- a test for e-commerce and the future of antitrust law, and battle of two titans -- a brutal Wal-Mart-style retailer versus a brutal sweatshop producer that jealously covets everything it uses.

BN: Thank you for your time and insight.

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