On July 10, 2013, the US District Court for the Southern District of New York issued its decision in U.S. v. Apple Inc., holding that Apple Inc. violated Section 1 of the Sherman act by conspiring with book publishers to raise e-book prices and eliminate price competition between e-book retailers.

Before 2010, book publishers sold e-books to retailers through a wholesale model, under which the publishers set the wholesale price (usually 50% of the list price of the hardback book) and the retailer was free to set the price to customers. Amazon.com, Inc., the largest e-book retailer, frequently set the e-book price at $9.99, often several dollars below the wholesale price. In 2009, Amazon sold approximately 90% of all e-books.

The court determined that the publishers were concerned about Amazon's low retail e-book price because it:

The book publishers allegedly worked together to force Amazon to raise its retail prices, including by holding off selling e-books of newly released titles (referred to as windowing), but their attempts were unsuccessful.

In advance of launching its iPad, Apple entered into discussions with the six largest book publishers (Hachette Book Group (USA), HarperCollins Publishers L.L.C., Holtzbrinck Publishers LLC, d/b/a Macmillan, Penguin Group (USA) Inc., Simon & Schuster Inc. and Random House LLC) to provide e-books for its iBookstore. According to the court's opinion, Apple and the e-book publishers shared a common goal: both wanted to raise the retail prices for e-books above Amazon's $9.99. At the beginning of its negotiations with the big six publishers, Apple understood that the publishers were unhappy with the current state of the e-book market.

According to the court's opinion, the evidence showed that Apple understood that its success in selling e-books at a price above Amazon's depended on, among other things:

Before launching its iPad, Apple entered into agency agreements with five of the big six publishers (and much later with the sixth and largest, Random House). Under these agreements, Apple would act as the publishers' agent, selling e-books in the iBookstore for a 30% commission. The publishers would set the prices of the e-books, subject to certain price caps that vary according to the price of the book and the book's status (for example, whether the book is a new release or a New York Times bestseller). These agreements included a most favored nations (MFN) clause that:

During negotiations, the evidence showed that:

After the five publishers entered into the agency agreement with Apple, they pressured Amazon and other e-book distributors to move to the agency model.

The Department of Justice (DOJ) and certain states filed suit against the five publishers and Apple, alleging that they colluded to:

Following a bench trial, Judge Denise Cote of the Southern District of New York found that Apple facilitated and participated with the five publishers in a horizontal conspiracy to raise e-book prices and eliminate price competition between e-book retailers, a per se violation of Section 1 of the Sherman Act. Judge Cote found abundant direct and circumstantial evidence that Apple participated in and facilitated that conspiracy and that Apple could not have acted independently to achieve the results at issue. These results required the coordinated and conscious effort of the publishers and Apple to change the business model for the distribution of e-books, impose that new model on Amazon against its will and cause a significant price increase in e-books.

Apple argued that its actions furthered its legitimate business interests, in particular:

However, Judge Cote held that, while none of these actions are inherently illegal, taken as a whole the evidence pointed to a conscious commitment to engage in illegal conduct. When examining the final agreements in the context of the six weeks of negotiations leading up to the contracts, Judge Cote found that it was clear that:

Apple also argued that it should not be found liable because the publishers used Apple to force an industry change to the agency model and raise the price of e-books. However, Judge Cote found that while Apple was motivated by having a large number of books available for the debut of the iPad, Apple also intentionally engaged with the publishers in a scheme to raise e-book prices. Apple deliberately appealed to the publishers' desire to raise prices and offered them a way to reach that objective. Due to the threat of retaliation from Amazon, the publishers could not act alone to raise prices. Knowing this risk, Apple created a way for all the publishers to act together in a few weeks to eliminate all retail price competition for their e-books.

Additionally, Apple argued that the contentious negotiations (particularly over the price caps) proved that there was no meeting of the minds to raise prices and therefore no conspiracy. However, Judge Cote stated that a conspiracy can still exist even though some key provisions may be heavily negotiated. The negotiations over the price caps were in the context of the overall agreement to raise prices above the $9.99 industry norm. Judge Cote also discounted Apple's alternative characterization of the evidence (finding several of Apple's witnesses uncredible) and its assertion that, but for the agency model, the publishers would have withheld their e-books from the market (their way of objecting the $9.99 price point), depriving consumers of the e-books altogether.

Lastly, Apple objected to Judge Cote's use of the per se analysis, stating:

Judge Cote stated that, while vertical restraints are subject to the rule of reason, Apple both facilitated and directly participated in a horizontal price-fixing conspiracy. Therefore, its conduct is per se unlawful. The agreement between Apple and the publishers was at its core a horizontal price restraint and is not properly viewed either as a vertical price restraint or only as a hub-and-spoke conspiracy. Judge Cote did find that Apple met every necessary component of a hub:

The DOJ stated that the court has not yet set a hearing to address the proposed remedies.

As Judge Cote points out, taken separately, much of Apple's conduct was not illegal. For example, while most favored nation clauses are generally procompetitive, using them to enforce an agreed upon retail price between competitors is not (see Practice Note, Most Favored Nation Clauses). Therefore counsel must understand how a business strategy as a whole will affect competition, rather than analyzing each individual step in the strategy alone.

Additionally, basic antitrust compliance warns that companies should:

The case against Apple is a good reminder to enact or refresh antitrust compliance training for employees. For a Toolkit of resources to aid counsel in implementing an antitrust compliance program, see Antitrust Compliance Toolkit.