Suing Apple for Keeping Products from Consumers

On March 8, the front page of the Wall Street Journal carried a weird story. It was weird because it involved what is arguably America’s favorite company, Apple, and a significant action by the U.S. Justice Department, but there were no official sources. As far as one could tell, the story was based entirely on anonymous leaks and unofficial interviews. I didn’t realize that  our government could take action against a major corporation—in fact, six corporations—and keep it secret.

The story was that the U.S. Justice Department’s Antitrust Division was “considering” a lawsuit against Apple and five major book publishers for “price fixing” and so making products less accessible to people who might want them.

What products? Well, you have heard of the infamous so-called monopoly on oil, and on aluminum, and on electrical equipment, and on telephone services, and on computer operating systems—all legends in the history of antitrust prosecutions. Now, we have the infamous scheme to create an e-book trust and the new villain is Steve Jobs. Jobs is no longer available to prosecute, of course, but, based upon his supposed “price-fixing conspiracy,” Apple is in trouble.

The allegation, as unofficially leaked to the Wall Street Journal, is that as Jobs prepared to launch the first iPad, he set out to price e-books in a new way. The established pattern in  the physical book business is that the publisher sells the book to the retailer, who is free to set the retail price—presumably at a level that sells the most books at the highest profit. This is also how e-books were distributed at first. So, for example, Amazon was able to buy these books from publishers and set the retail price. In fact, Amazon at first may have used this discretion to sell e-books at a loss to encourage as many people as possible to buy a Kindle, its e-book reader.

Jobs supposedly told the book publishers that they should set the retail price of the e-book, which Apple then would sell and take a 30 percent cut. But he went on to stipulate that the book publishers should not permit any retailer to sell the same book for less than the set price. With the leverage of a deal reached with Apple, the book publishers were able to go to Amazon and get the same agreement. Hence “price fixing”: an alleged conspiracy among companies to maintain a specific price for a product across the market. Under the antitrust laws this is known as a per se violation—illegal on the face of it, without considering intent or market impact.

Five major book publishers, Simon & Schuster, Hachette Book Group, Penguin group, Macmillan, and HarperCollins Publishers, Inc., are also being threatened with the Justice Department suit. Apparently, some or all of the companies have been negotiating for quite a while to reach a possible settlement—all in secret up until March 8.

Among the many problems with the antitrust laws, which have existed since the Sherman Act of 1890 and which include four subsequent major pieces of legislation, is that a businessmen never can be sure if he is violating them or not. It seems obvious that Steve Jobs did not realize that what he was doing was illegal because he carefully and fully described what he had done and why to his biographer, Walter Isaacson. Steve Jobs was not the kind of executive who gives interviews with his lawyer on his left and his public relations guy on his right. It seems apparent he made these comments because he did not consider that he might have been breaking the law.

This is not surprising. Throughout their history, the antitrust laws have been criticized as a mass of contradictions—undefinable in advance of suddenly hearing that you are being sued by the Justice Department. For example, Amazon, by selling e-books at a loss, may well have been charged with engaging in “predatory pricing” and “intent to monopolize”—sell at a loss to drive out competitors and then, as the only supplier in the market, charge monopoly prices.

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The antitrust laws are an egregious example of non-objective law. And historically they have accomplished nothing.

There is not enough information (and no official information) about the Apple case upon which to base an analysis of the allegations, so my purpose here is only to point out that the whole history of antitrust has been one of mind-bogglingly complex and unpredictable litigation, the use of the antitrust laws by a business’s rivals to gain an advantage, and what one Supreme Court Justice called “an element of sheer under-doggery”—the punishment of the most successful company in any given field.

Criticisms of antitrust existed from the start, but among the very first principled, consistent, and morally confident attacks on antitrust, and defense of its victims, was one by Ayn Rand . In the very first issue of The Objectivist Newsletter, in 1962, in a lead article entitled, “Choose Your Issues,” Rand identified as the two greatest threats to capitalism, and therefore freedom, the antitrust laws and the Federal Communications Commission's (FCC) control of the airwaves. This and other seminal essays on antitrust by Rand, Alan Greenspan, and others can be found in the collection, Capitalism: The Unknown Ideal.

She made the economic point, which had been made before, that under laissez-faire capitalism it is impossible to sustain a coercive monopoly—a company or companies able to set prices without regard for competition. Both the logic of investment being attracted to fields where potential profits are highest and the historical record suggest that, without fail,  ompetition in a genuinely free market is inconsistent with sustaining a coercive monopoly.

She brilliantly and cogently made the case that all actual coercive monopolies—such as some of the early American railroads—came into existence and were sustained only because they had the backing of government by means of subsidies, exclusive franchises, and special privileges. In case after case, the record shows that the infamous so-called “trusts” were either not coercive monopolies (for example, Alcoa Aluminum Company, which kept improving its efficiency and lowering its prices even without actual competition, and so kept the field unattractive to competitors) or were coercive because they enjoyed government backing (the notorious “Big Four” in railroads).

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The values of free action, freedom of contract, and voluntary cooperation are systematically undercut by antitrust—in the name of “competition.”

But, most crucially, and perhaps for the first time, Rand made the moral case that decade after decade the major antitrust cases targeted the most successful, prosperous, and often largest company of the time—and tried to cut them down to size in the name of competition. In the late 1990s, the premier corporation in America in reputation and profitability was Microsoft and, true to form, it became the antitrust victim of the decade with an enormously expensive, complex court case over its alleged intent to restrict competition by using only its own Web browser.

The Justice Department is nothing if not consistent in this pattern of choosing its victims. Apple is among the most profitable, productive, and wealthiest companies in America. That is a sure signal to the minions of antitrust to bring it down.

The risks to a company of trying to defend itself from an antitrust suit have always been intimidating: the laws are contradictory, the definition of the crime is subjective, the choice of victims (from a legal standpoint) is arbitrary, and the Justice Department, liberal press, and the company’s rivals join in convicting the company in advance in the court of the public opinion. And the Justice Department has unlimited taxpayer funds to spend, while the company bleeds year after year as the litigation drags on. In the 1970s, IBM was mired for 13 long years in an antitrust case brought by the Department of Justice. At one point, IBM had to retain more than 200 lawyers to conduct the case, including responding to the Justice Department's demand for millions of pages of documents. At the end, in 1982, the court dismissed the case as "without merit" and Justice Department dropped it.

Therefore, as expected, one of the leaks to the Wall Street Journal from the book publishers quoted the source as saying, “a settlement is being considered for pragmatic reasons…” And “You have to consider a settlement whether you think it’s fair or not.” This is justice in the world of antitrust.

Also, of course, others have smelled blood in the water. There already are several class action suits against Apple, recently consolidated in a New York federal court. The incentive for private suits is nearly irresistible because under the antitrust laws a successful private suit can collect triple damages from Apple—a little spin included in the

antitrust legislation to encourage private parties to join the attack on big, successful corporations.

Meanwhile, since 2010, when the first iPad was introduced and Jobs shaped the new pricing policy, sales of e-books have soared. In 2011 alone, sales more than doubled to $970 million.

What sustains the antitrust laws decade after decade? Plainly, they are an egregious example of non-objective law. And historically not only have they accomplished nothing, but they have been a huge waste of taxpayer money and business resources and have discouraged untold numbers of new ventures—ventures we will never know about because they were stillborn—by corporations afraid of stumbling into the ghastly circus called “antitrust.”

One problem has been that for many decades conservatives supported the antitrust laws because they were defended in the name of competition, of keeping the economy “free.” Behind this belief was both the misunderstanding of the early history of antitrust (the failure to distinguish between companies achieving success by productivity and companies entrenched by government action) and a Through the Looking Glass concept in economics called “perfect competition.” You may wish to read about this concept in Wikipedia, but be warned that it makes the most abstruse legal document seem lucid. Suffice it to say this concept, which makes such assumptions as “perfect knowledge” and “perfect entry,” is admitted by all concerned to have no application to the real world. What, then, is its supposed value?  Wikipedia explains that, though impossible, perfect competition is an “ideal” against which to measure real-world competition. Well, that is very convenient for those who would condemn competition, because, when measured by the standard of an impossible ideal, the real world will always fall short. (For a penetrating analysis of “pure and perfect competition” see Capitalism by Professor George Reisman, who explores the roots of the concept of perfect competition in a collectivist, or “tribalist,” view of economics and demonstrates its use by contemporary economists to condemn capitalism as such not only alleged monopolies. See especially page 425 and following.)

The other crucial confusion is about competition. The antitrust legislation is based squarely on the idea that competition is an essential feature of a free economy, a primary value. But competition is not and cannot be primary because it is not a primary value; it is a consequence. The primary, in this case, is the individual’s right to produce, trade, and, in doing so, use his property as he sees fit. As individuals strive to sell what they produce for the greatest profit, they will be in the market with other individuals trying to maximize their profits. The consequence will be competition, but the primary value is the freedom to act, to make contracts, to enter any voluntary arrangement. It is this freedom of the acting individual, this unrestrained application of reason to the problem of production, that creates the unique bounty and progress of laissez-faire capitalism.

It should be evident, at this point, that these values of free action, freedom of contract, and voluntary cooperation are systematically undercut by antitrust—in the name of “competition,” which is in fact made possible only by the very values under attack.

And so, less than a year after his death, Steve Jobs, one of the giants of innovation and productivity of our time—a man whose genius and drive have brought untold hundreds of millions of people into the world of computing, communications, and unlimited access to information and entertainment—is being remembered by means of a prosecution justified in the name of defending our economy.

EXPLORE:

Antitrust Apostate
A book review of The Antitrust Religion by  Edwin S. Rockefeller  

CATO Podcast with Edwin S. Rockefeller
What do terms like "price-gouging" and "predatory pricing" really mean?

Completing the American Revolution
(See the section: Antitrust vs. Capitalism)

Capitalism: A Treatise on Economics by George Reisman

Walter Donway has been a trustee of the Atlas Society since its inception. Until 2002, he was editor of Cerebrum: The Dana Forum on Brain Science for the Dana Foundation, where he was director of the Dana Press. He has published dozens of articles on the economics of health-care regulation in Private Practice, Medical World News, and Human Events. His lead op-ed article in the the Wall Street Journal, “In Defense of Decades of Greed,” exposed myths about the history of monopolies. Donway has also published articles in Newsday, Cosmopolitan, Commonweal, and Occasional Review, among other venues. He is the author of a book of poetry, Touched By Its Rays .

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