Though the courts have found Apple (NASDAQ:AAPL) guilty of anti-competitive practices based on its dealings with book publishers and the use of most-favored-nation clauses to influence them, not everyone agrees with the court’s decision, and Apple may have some grounds to appeal.
The story is that when Apple entered the e-book market in 2010, it made deals with five book publishers. The contracts used the agency model, meaning the publishers could set their own prices for books on Apple’s book store, but they also included a most-favored-nation clause, which is where the tension rises.
The most-favored-nation clause ensured that Apple would receive the lowest price for books that the publishers were offering to anyone else. This type of agreement is not uncommon and can be seen in business in a variety of industries, like insurance. However, in the case of Apple, the court decided that Apple had used these arrangements to sway publishers against Amazon (NASDAQ:AMZN).
At the time, Amazon was on top of the e-book market, taking in more than 80 percent of all e-book sales. Some of its success was likely the result of selling books below cost. Because the publishers had their most-favored-nation agreements with Apple in place, they would have had to sell books through Apple at the same price the books were going through Amazon. Instead, they forced Amazon into an agency model.
The new arrangements lead to book prices quickly jumping up. Where Amazon had once been selling popular, new books for $9.99, it started selling them at $12.99. The courts decided Apple knew what it was doing and had conspired to raise prices in the e-book market. U.S. District Judge Denise Cote wrote in her ruling that Apple’s most-favored-nation clause “eliminated any risk that Apple would ever have to compete on price when selling e-books, while as a practical matter forcing the publishers to adopt the agency model across the board.”
It is likely Apple will try to appeal the ruling, and it does have some supporters who believe there are weak points in the case that brought about the verdict against Apple.
For one, there may have been some bias against Apple in the trial. Before the trial, Judge Cote was heard saying, “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…” However, that is unlikely, as Judge Cote had access to much of the information on the case during the pre-trial phase and could have formed a draft opinion before the trial.
One weakness in the case against Apple may come from Apple’s involvement. Apple could be considered a vertical player in the price-fixing scheme, so it may be shaky to wrap it up into the conspiracy between several publishers, which would be horizontal players. The matter was addressed in the trial and Judge Cote said that Apple directly participated nonetheless. However, Apple may still have a chance to poke at this weaker point in the case against it.
The blow to Apple — and perhaps any company engaging in a most-favored-nation arrangement — could be heavy, and the odds aren’t looking very good for Apple to win in its appeal.
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