Behind Apple's mutiny against its court-ordered e-books monitorDecember 2, 2013: 3:22 PM ET
Apple is taking aim not just at the court-ordered monitor in the e-books antitrust case, but also at U.S. District Judge Denise Cote herself.
FORTUNE -- On Thanksgiving eve, Apple filed court papers launching a searing attack on the court-ordered monitor who had been appointed barely a month earlier to oversee its compliance with an antitrust decree relating to its sale of e-books.
Apple accused the monitor, Michael Bromwich, a partner at the law firm of Goodwin Procter, of charging excessive fees, behaving in an "unfettered and inappropriate manner," relying on "secret communications with the court," evincing "incredibly disruptive" mission creep, and acting in ways that threatened to turn him into an "quasi-inquisitional" offshoot of the federal judge who appointed him in violation of the constitutional principle of separation of powers.
Melissa Schwartz, a media relations specialist at Bromwich's consulting firm, The Bromwich Group, said Bromwich was out of the country and unavailable to comment. A Justice Department spokesperson said that any response from it would be made in court.
The more eye-catching of Apple's claims were its accusations that Bromwich was already insisting on meeting every member of Apple's executive team and board, including former U.S. Vice President Al Gore, Jr., and the company's legendary product designer, Sir Jonathan Ive -- neither of whom had anything to do with antitrust compliance issues, according to Apple (AAPL). In addition, the papers noted, Bromwich was demanding that Apple pay a 15% "administrative fee" to his consulting firm on top of his $1,100 hourly rate and the $1,025 hourly fee of antitrust lawyer Bernard Nigro, who was appointed to assist him because of Bromwich's lack of antitrust experience. (Nigro heads the antitrust group at the law firm of Fried, Frank, Harris, Shriver & Jacobson, where Bromwich was a partner from 1999 to 2010.)
But legal fees are clearly not the crux of this dispute. Many of the top partners at Apple's own outside counsel on the e-book matter, Gibson Dunn & Crutcher, bill more than $1,000 an hour, and its appellate ace, Ted Olson, reportedly charged $1,800 per hour on one bankruptcy matter in 2012.
It was, rather, Apple's last claim -- accusing Bromwich of simultaneously playing a quasi-prosecutorial role and yet answering directly to the judge -- which may be the most significant. It signals that Apple is taking aim not just at Bromwich, but also at U.S. District Judge Denise Cote herself.
The immediate triggering event for Apple's tirade was an order by Judge Cote issued on November 21, proposing that Bromwich be permitted to hold regular ex parte meetings with herself -- that is, meetings where only she and he would be present and where no transcript would be made to preserve a record of what was said. At those meetings, Apple said it feared, Bromwich could potentially share with her everything he had learned from his meetings with Apple officials and his perusals of potentially confidential and privileged Apple documents.
In her November 21 order Judge Cote also proposed reserving the right, "on notice to the parties" and "in the interests of justice," to file "publicly" materials the monitor had obtained from Apple during his work.
In its Thanksgiving eve submission, Apple demanded to know if such ex parte meetings had already occurred, and suggested that such meetings, if they ever were to occur, would be a grounds for recusing Judge Cote, who is still presiding over other litigations against Apple stemming from its iBookstore launch of April 2010, including a damages case being brought by 33 state attorneys general and an overlapping $1 billion consumer class-action brought by private attorneys.
Lurking beneath Apple's bristling at the monitor's legal fees and bridling at his "disruptiveness" is a more fundamental issue: Should a monitor have ever been appointed here at all -- an unusual step in a case like this one, in which the defendant has no long history of either egregious wrongdoing or recalcitrant behavior. Judging from the tenor of Apple's filings, the company now appears likely to ask the appeals court to stay the monitor's activities entirely pending its review of Judge Cote's verdict against the company.
Directly or indirectly, the company appears to be arguing that the overkill that such an appointment reflects is of a piece with a loss of perspective that Apple claims has characterized Judge Cote's rulings throughout the case. In the end, Apple's key target here appears not to be Bromwich at all, but rather Judge Cote.
Here's the nutshell background. The government's antitrust case against Apple revolves around the company's conduct during a two-month period that began in late 2009, when Apple decided to enter the e-books market and have all the technical and contractual details required to launch its iBookstore sewed up by mid-January 2010, in time for then-CEO Steve Jobs to include it in his ballyhooed launch presentation for the first iPad. (The iBookstore itself opened the following April.)
Judge Cote concluded last July -- after hearing the case without a jury in June -- that in order to launch that store Apple belatedly joined a pre-existing horizontal price-fixing conspiracy then being hatched by five major book publishers: Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster. The alleged goal of the conspiracy was to force Amazon (AMZN), which then dominated the e-book market with at least a 70% share, to drop its policy of selling e-books for just $9.99, which was $3 to $5 below the wholesale price at which the publishers were selling e-books to e-book retailers. (Publishers maintained that the below-cost price was helping Amazon maintain its near monopoly, driving down the price of hardbacks and paperbacks, endangering the survival of brick-and-mortar bookstores, and harming authors.)
To do this, Apple and the publishers allegedly agreed to adopt an "agency" model of pricing, whereby publishers would set the retail prices of their own books and Apple would take 30% of whatever retail price the publishers elected. By issuing a standardized contract to each publisher, and letting every publisher know that it was using standardized contracts, the publishers could, in effect, act collusively. By acting collusively and threatening not to let Amazon sell their most-desirable books, Judge Cote found, the publishers eventually forced Amazon, too, to switch to the agency model. As the publishers and Apple anticipated, the publishers then set retail prices for most best-selling books at $13 or $15 -- well above Amazon's $9.99 price.
Although Judge Cote acknowledged that use of the agency model was not intrinsically illegal, nor was the use of standardized contracts, the use of both under the totality of the circumstances constituted an illegal restraint of trade, prohibited by Section 1 of the Sherman Act.
Apple has appealed Judge Cote's antitrust ruling to the U.S. Court of Appeals for the Second Circuit, where its briefs are due in February. (The company denies having known of any illegal collusion by the publishers and maintains that it always acted solely to achieve its own legitimate business objective: entering the e-book market.)
Though state attorneys general and private attorneys are seeking damages from Apple, the federal government sought only injunctive relief, that is, orders requiring Apple to stop violating the antitrust laws. On September 5 Judge Cote issued her final judgment in the case, including that injunction. Although it was narrower in breadth and shorter in duration than what the Justice Department had sought -- Justice hoped it would last ten years and reach Apple business units beyond just e-books -- she did order, over Apple's objections, the appointment of an "external antitrust compliance monitor" for a term of at least two years.
Apple had strenuously opposed the appointment of a monitor, contending that it was an unusual and unnecessary step. In the first place, the conduct the government was complaining about ended years ago. Each of the five publishers -- who settled long ago -- committed back then to stop using the sorts of agency contracts to which the government objected, all without the appointment of any compliance monitors.
Compliance monitors are usually required in cases where a defendant has acted egregiously over a long period of time, manifesting longstanding contempt and resistance to the law. The only precedents for antitrust monitors that the government brought to Judge Cote's attention were one that had been imposed on a company called AU Optronics, after it had been found guilty of a longstanding, criminal bid-rigging scheme, and the consent decree entered into by Microsoft in 2002, after nearly a decade of investigations and litigations in the U.S. and the European Union relating to the core of its business operations.
On the other hand, the duties of the monitor Judge Cote ordered seemed modest, at least as Apple initially understood them. The monitor's main function was to assess whether Apple's internal antitrust compliance policies and training program, "as they exist 90 days after his appointment, are reasonably designed to detect and prevent violations of the antitrust laws." In addition, Judge Cote's comments in court about what she wanted also sounded encouraging to Apple. She had crafted the injunction, she said, "to rest as lightly as possible on the way Apple runs its business."
When Apple filed its appeal from the final judgment on October 3, it sought no immediate stay of her injunction.
Two weeks later, however, she appointed Michael Bromwich to be the monitor, selecting him from among two candidates proposed by the Justice Department and state attorneys general.
Bromwich has had an illustrious career in law enforcement and public service, as a federal prosecutor in Manhattan, a member of the Independent Counsel's office prosecuting the Iran-Contra matter, the Inspector General of the Justice Department during the Clinton Administration, and, in a 17-month stint that ended in late 2011, as President Barack Obama's chief reformer concerning off-shore drilling in the wake of the Deepwater Horizon catastrophe. He has also been involved in at least four monitorships over the past 11 years, including three as monitor and one as counsel to the monitored entity.
On the other hand, at least three of these monitorships were set up -- as most monitorships are -- pursuant to consent decrees, i.e., situations in which the defendant voluntarily agreed to be monitored.
Bromwich wanted to hit the ground running, a plan that, according to letters and emails he sent Apple officials that have now been filed in court, he had discussed with Judge Cote when he was interviewing for the job.
Accordingly, on October 22 he shocked Apple officials by announcing his desire to fly to Cupertino to begin meeting with as many Apple executive team members and board members as possible during a three-day period of interviews during the week of November 18. He named 15 top officials that he hoped to see, including CEO Tim Cook and Phillip Schiller, Apple's senior vice president for worldwide marketing, as well as the three board members who live in or frequent the Silicon Valley area: Genentech chairman Arthur Levinson, Intuit chairman Bill Campbell, and former Vice President Gore.
An Apple inhouse attorney, Kyle Andeer and, later, its lead outside appellate counsel, Ted Boutrous of Gibson Dunn, each pushed back -- first gently, but later more pointedly. They said they saw no need for either Bromwich's rush or for the wide-ranging battery of interviews he sought, since, as they read the final judgment, the monitor would have nothing to review or evaluate until Apple finished drafting its new compliance and training procedures, which weren't due till January 14, 2014 -- 90 days after Bromwich's appointment.
Furthermore, on October 24, Apple liaison Andeer angered Bromwich by sending him an email questioning Bromwich's proposed $1,100 hourly fee and 15% "administrative fee." Andeer offered, as a counterproposal, a $800 hourly rate for Bromwich and a $700 rate for his antitrust specialist, Nigro. Andeer further informed Bromwich -- in gestures that we now know were seen as quite insulting by Bromwich -- that, in accordance with Apple's standard expense policy, Bromwich would be limited to "per diems of $15 for breakfast, $25 for lunch, and $30 for dinner," and he reminded Bromwich that "Apple does not allow the firms it works with to market their representation of Apple," protesting that Goodwin Procter had issued a press release violating this policy when it announced Bromwich's appointment.
Bromwich responded with a tart reminder that he was a court-appointed monitor, not one of Apple's outside counsel, and that the propriety of his fees was a matter to be determined by the court, the Justice Department, and the state attorneys general. He also wryly suggested that he would consider following Apple's expense policy only upon being advised "whether your lawyers from Gibson Dunn working on this matter ... follow these expense guidelines without exception."
Apple in the end agreed to schedule Bromwich to meet with nine officials from its compliance and legal departments in early December, plus director Ronald Sugar, the former Northrop CEO who sits on Apple's audit committee. But Apple said that if Bromwich insisted on coming the week of November 18 it could schedule only two people for him then: the head of its compliance department and a senior inhouse lawyer working on compliance issues.
Bromwich responded with anger. "Your response suggests that our request was not -- and is not -- taken seriously by the company [and that Apple officials] do not take its obligations and my responsibilities under the Final Judgment very seriously." He demanded to know which of the 15 top officials he'd asked to see would be unavailable the week of November 18, adding, "Be prepared to support any representations concerning their unavailability with detailed copies of their schedules for that entire week."
Though tempers were later soothed, Apple held fast and permitted Bromwich to meet with only three officials the week of November 18 -- the third being chief litigation counsel Noreen Krall, who continued to pepper Bromwich with what he considered to be impertinent inquiries about his fees and budget. Bromwich also asked for a courthouse visit with Apple general counsel Bruce Sewell, whom Bromwich knew to be then attending Apple's multi-hundred-million-dollar patent trial against Samsung, but Apple refused.
The central bone of contention was Apple's continuing position that there was really nothing for Bromwich to do until January 14 -- when the company finished drawing up the compliance and training manuals that Bromwich had been appointed to evaluate.
In a blistering letter to Bromwich on November 22, Matthew Reilly, one of Apple's special antitrust counsel at Simpson Thacher, protested that Bromwich's "cascades of emails and demands for immediate attention" were "inconsistent with Judge Cote's direction," "counter-productive," and "incredibly disruptive."
Bromwich responded in an email: "We simply disagree with the oft-repeated claim that Judge Cote meant for us to begin our work before January 14. We have the distinct advantage of having discussed our intentions to get off to a fast start directly with her during the interviewing process. We give that discussion far more weight than snippets of transcript taken out of context."
It was in the midst of these sharp-elbowed skirmishes that Judge Cote then issued, on November 21, a "proposed amendment" to her order appointing Bromwich. It is unclear what, if anything, prompted her to do so. But whether by coincidence or otherwise, the order did appear to speak to some of the disputes that were then taking place.
To begin with, for instance, she urged the monitor to proceed with "all reasonable diligence," which appeared to back Bromwich's interpretation of his mandate and the need for his immediate immersion in Apple's affairs.
She also authorized Bromwich to "communicate with a party or a party's agent on an ex parte basis if reasonably necessary to carry out his duties" -- an ambiguous command. She might simply have meant that he was free to talk to Apple without the government's representatives being present, which everyone had already assumed. Alternatively, she might have intended -- as Apple's counsel at Gibson Dunn evidently feared -- to retract a provision in her original final judgment of September 5, which had guaranteed that Apple's officials could have counsel present when they were interviewed by the monitor.
Finally, she ordered the monitor to provide her with "ex parte oral briefings at least once a month, or more frequently as the monitor or court decide," and reserved the right to file "publicly" the documentary materials Bromwich obtained from Apple in the course of his work.
Matters worsened the next day when Bromwich wrote directly to all eight members of the Apple board, seeming to confirm -- at least in the minds of Apple's outside counsel -- that the monitor was now trying to do an end-run around Gibson Dunn.
"I have experienced a surprising and disappointing lack of cooperation from Apple and its executives that is rare in my oversight experience," Bromwich complained to the board. The company had "largely ignored" his requests to meet with key personnel, he continued, and "had sought to manage our relationship as though we are its outside counsel or consultant, to whom it can dictate terms and conditions, and whose approval is required before we can undertake our work."
He urged the directors to intervene to encourage a "constructive relationship" and also asked them to "promote a positive, direct relationship between the company liaisons and the monitoring team that is unfiltered through outside counsel."
The combination of Judge Cote's supplemental order and Bromwich's letter to the board -- though each has its ambiguities -- appears to have triggered Apple's no-holds-barred reply, filed late last Wednesday.
The truth is that the limits of power for a monitor in a situation like the one Bromwich finds himself are not well defined. The vast majority of monitorships are set up as part of a consent decree, or a non-prosecution agreement, or a deferred-prosecution agreement. In those situations, the company consents, so the monitor's role is essentially being determined by contract.
But that's obviously not so in Bromwich's case. In filing its objections to Judge Cote's supplemental order, Apple takes the position that an involuntary monitor's duties are limited to what an involuntary special master can do under Rule 53 of the Federal Rules of Civil Procedure: taking actions that are necessary "to aid judges in the performance of their judicial duties."
Apple then protests that Bromwich, with Judge Cote's blessings, has already exceeded those limits.
"The unilateral investigation the Court has empowered Mr. Bromwich to undertake," it writes in its Thanksgiving eve submission, "is not a judicial function, and therefore cannot be delegated by the Court. The injunction, particularly as the Court proposes to amend it and in light of how Mr. Bromwich interprets his authority ... vests the monitor with wide-ranging, intrusive, and excessive inquisitorial powers of a sort reserved to prosecutors." The submission was authored by Gibson Dunn's Boutrous, Apple's lead appellate counsel in the case.
Bromwich, the government, and Judge Cote herself have yet to be heard, and they will likely brush aside Boutrous's broadside as overwrought and histrionic, if not fantasy.
But what may have started as a routine spat between posturing litigators appears to have escalated into a weighty legal dispute, destined for the appellate court, about the limits of a court's power to interfere in the internal affairs of a corporation.
And one of country's most admired, powerful, and illustrious corporations, at that.
UPDATE: On late Monday, December 2, Judge Cote issued an order responding to Apple's filing. In measured tones, she said she'd held no ex parte meetings with the monitor in the past, and she agreed to drop her plan to hold them in the future. For all of Apple's other complaints about the monitor, she said the company should take them up with the Justice Department and the state attorneys general first and, if still not satisfied, come to her then.