Apple asking appeals court to freeze monitor

February 3, 2014: 2:22 PM ET

Next round in grudge match over price-fixing decision

FORTUNE -- On Tuesday morning the federal appeals court in New York will hear arguments on whether to halt a court-appointed monitor from overseeing Apple until the company's full appeal can be heard from a judge's ruling last July, finding that its 2010 launch of its iBook store violated the antitrust laws.

Apple (AAPL) argues that the monitorship -- being carried out by Michael Bromwich, a former inspector general of the Justice Department -- is imposing on it attorneys fees and expenses from business disruption that the company will never be able to recover even if it eventually wins its appeal. The government responds that Apple's success on appeal is unlikely and that these unrecoverable costs are, in any case, routine for a party to bear.

The issue has become a weird and fascinating grudge match between Apple and the judge who presided over its price-fixing trial last June, U.S. District Judge Denise Cote of Manhattan, who wrote a 64-page ruling last month defending her refusal to stay Bromwich's appointment.

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But underneath the rancor, posturing, and one-upmanship that has characterized the dispute so far lurks a surprisingly novel legal issue that everyone involved -- Apple, the government, Judge Cote, and monitor Bromwich -- all seem to have initially overlooked. That issue concerns exactly what powers a court-appointed monitor can exercise when the appointment has been contested by the party subject to it -- a surprisingly rare question, since most monitors are appointed pursuant to consent decrees. (With consent decrees, the defendant company voluntarily agrees to let the monitor oversee it -- usually to avoid far more draconian penalties it would otherwise face -- so the monitor's powers in those cases aren't in issue.)

Last July, after a month long trial, Judge Cote found that Apple had engaged in a price-fixing conspiracy, in violation of Section 1 of the Sherman Act, when it entered the market for e-books with the launch of its first iPad. To get cooperation from five major publishers, she found, Apple had facilitated a preexisting conspiracy among the five publishers to raise the standard price of e-books from $9.99 -- where Amazon (AMZN) had been selling them -- to $12.99 and $14.99. (For more detailed accounts of the issues at trial, see here and here.)

While state attorneys generals are seeking $840 million in antitrust damages from Apple, the U.S. Department of Justice was empowered to seek only an injunction -- i.e., an order demanding changes in the way the company does business. Because Apple faced only claims for injunctive relief by the government, it had no right to a jury trial, and its case was presided over solely by Judge Cote, acting as both judge and fact-finder.

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In August, after winning a verdict from Judge Cote, the Justice Department asked for an injunction that would include, among other things, a court-appointed antitrust compliance monitor, who the department wanted to stay in place for 10 years.

Apple protested that the imposition of any monitor would be unnecessary and punitive. It argued that monitors were typically imposed in cases in which a defendant had a long and egregious history of violating the law and circumventing law-enforcement authorities, which was not the case here. Even under Judge Cote's view of the facts and the law -- which Apple would be appealing -- Apple had only opportunistically joined a conspiracy that lasted just six weeks, and it had done so in the process of bringing competition to a market (e-books) that had, prior to its entry, been dominated by a monopolist (Amazon) with an 80-90% market share.

Apple also argued that no monitor was needed because the conduct that triggered the government's suit had ended years earlier and could not possibly be resuscitated, thanks in part to consent decrees that the government had already entered into with each of the five publishers (none of which included monitorships).

In September, Judge Cote issued an injunction that did call for a monitor, though she gave him narrower powers than what the government originally sought, and a term of only two years. The monitor's limited purpose, she determined, would be to assess the adequacy of new antitrust compliance and training regimens that Apple was being ordered to come up with under other provisions of the injunction. The monitor was to evaluate them as they stood 90 days after his appointment.

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Judge Cote felt a monitor was necessary, she explained at a hearing last August, because the trial evinced "blatant and aggressive disregard at Apple for the requirements of the law," and those engaging in the illegal conduct had "included Apple lawyers and its highest-level executives."

She also appointed a monitor, she said, because Apple failed to show any "contrition" for its alleged antitrust violations. As she wrote in her order denying a stay last month: "Apple made little showing … that it had taken to heart the seriousness of the price fixing conspiracy it had orchestrated ... The Court explained [in August] 'that it would have appreciated a presentation by Apple that a monitor is unnecessary, but it made no such showing. There is no admission of wrongdoing. There is no contrition.'"

In October, Apple appealed Judge Cote's verdict and injunction. But it did not initially seek any stay of the injunction, including its provisions creating the monitorship. The government claims, and Judge Cote has held, that Apple thereby waived at least some of the issues it is now raising in its petition for a stay. Apple has responded that it saw no need to stay the monitorship initially, since Judge Cote had indicated at the hearings in August that she was crafting the injunction "to rest as lightly as possible on the way Apple runs its business."

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Apple's hopes that that would be the case were dashed within days after Judge Cote appointed Bromwich as Apple's monitor on Oct. 16. We now know that neither Bromwich nor Judge Cote saw his mission as narrowly as Apple did. His role, as Judge Cote has since made clear, was not merely to ensure that Apple's compliance programs were adequate "in the abstract," but that they were adequate "for Apple." This distinction was important in Judge Cote's mind because of her underlying belief, based on her trial findings, that Apple's culture was peculiarly indifferent to, if not contemptuous of, the antitrust laws. Thus, the goal, in her mind, was to reform Apple's culture, not merely to draw up new guidelines.

Bromwich knew from his private interviews with Judge Cote for the job what she envisioned. To perform his obligations as he understood them, he needed to "crawl into [the] company" and explore its "tone" and "culture," as he later informed stunned Apple representatives.

Accordingly, when Bromwich met with Apple for the first time on Oct. 22, he explained that he wanted eventually to meet with every member of Apple's executive team and board, some of them multiple times. He wanted to start in mid-November with 15 top officials, including CEO Tim Cook, senior vice president for worldwide marketing Phillip Schiller, legendary product designer Jony Ive, and board member and former U.S. vice president Al Gore, Jr.

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The requests flabbergasted Apple, which had assumed that Bromwich would have precious little to do until mid-January, when the 90-day period elapsed for Apple to devise the new compliance and training programs he was to evaluate. They also thought the monitor would never have any reason to interview most of the officers he was naming, who had nothing to do with antitrust compliance.

They viewed the meetings as "incredibly disruptive," as their attorneys eventually told Bromwich, and they also balked at the costs. Bromwich was charging $1,100 per hour for himself and $1,025 for an antitrust partner on his team from a different firm (because of Bromwich's own lack of antitrust expertise), and a 15% "administrative fee" on top of each fees to compensate his consulting firm, The Bromwich Group. His first bill, for two weeks work, came to $138,000. (The government says that Bromwich later expressed willingness to negotiate his fees or to have them mediated, but that Apple hasn't responded to these overtures.)

Though Bromwich had handled four monitorships over the previous 11 years, all of those appear to have been consensual, and he had never encountered this sort of push-back. He wrote to Apple's lead lawyer in his interactions with the company, Ted Boutrous of Gibson Dunn & Crutcher, that Apple's behavior showed that its officials "do not take its obligations and my responsibilities under the Final Judgement very seriously." In November Bromwich wrote directly to all of Apple's directors complaining, "I have experienced a surprising and disappointing lack of cooperation from Apple and its executives that is rare in my oversight experience."

As relations deteriorated, and Apple's lawyers prepared formal legal objections to Bromwich's interpretation of his role, they appear to have focused for the first time on the murkiness surrounding Bromwich's precise legal status, as a nonconsensual monitor. What were the limits of his powers, and where did they come from?

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They concluded that a monitor was a breed of "special master," whose post-trial powers were, under the Rule 53 of the Federal Rules of Civil Procedure, limited to handling "matters that cannot be effectively handled by an available district judge or magistrate judge of the district." Based on case law precedents, Apple lawyers further argue that the monitor may only "aid judges in the performance of specific judicial duties."

If Apple's interpretation was correct -- that Bromwich could only do things that the judge herself could have done, but didn't happen to have time to do -- then monitor Bromwich had already wandered pretty far off the reservation. No one could imagine Judge Cote herself running around demanding personal interviews with Apple's CEO and board of directors. Similarly, no one could imagine her casually discussing Apple's compliance with Apple's adversaries, the government attorneys, without Apple's attorneys being present, as Bromwich had also been doing under the terms of the injunction.

Such conduct by Judge Cote herself would have been particularly unthinkable because Judge Cote isn't just the judge in the government's case against Apple, where the trial has been completed; she is now gearing up to preside over the damages portion of the state attorneys general's jury trial against Apple, which will take place later this year.

No longer seeing the monitorship as simply an abuse of Judge Cote's discretion, but also as an illegal abuse of power, in mid-December Apple asked Judge Cote to halt all of Bromwich's activities pending appeal. Apple's attorneys at Gibson Dunn now argued that the monitorship was  "flatly unconstitutional," "far exceeds what is permitted under Rule 53," and "violates the constitutional separation of powers."

The last theory -- the separation of powers argument -- stemmed from Apple's contention that Cote had delegated to Bromwich "investigative, quasi-inquisitorial, quasi-prosecutorial" powers that neither a judge nor its appointees are empowered to exercise. Under the terms of the injunction, for instance, Bromwich is empowered to ask Apple for "any" document and speak to "any" official, and if he comes across any evidence of what he regards as a violation of law by Apple, he is supposed to promptly turn it over to the government's attorneys.

In response to Apple's latest array of complaints, Justice Department attorneys Mark Ryan and Lawrence Buterman responded that there was nothing prosecutorial about the monitor's duties -- either as outlined in the injunction or as implemented by Bromwich -- and that the remainder of his functions were well within the judge's "inherent" powers in light of her well-founded findings of blatant and aggressive antitrust violations.

Then, in support of its opposition papers, it submitted an affidavit from Bromwich himself, allowing the monitor, for the first time, to give his version of his interactions with Apple. From the government's perspective, it was simply a matter of setting the record straight.

But as unremarkable -- even reflexive -- as filing Bromwich's affidavit must have seemed to the government, to Apple it was the last straw. Bromwich had just taken sides with the government in opposing Apple's stay motion, divesting Bromwich of any further pretense of objectivity or neutrality. It moved for his immediate disqualification.

Judge Cote gave the disqualification motion the back of her hand: "It would be surprising," she wrote, "if a party subject to a monitor could escape the monitorship by launching a cascade of attacks on the monitor and then disqualify the monitor for responding."

This is the tangled mess that a three-judge panel of the U.S. Court of Appeals for the Second Circuit will confront on Tuesday morning.

Though the law and facts are difficult, the court will have a tempting option before it: kicking the can down the road. For all the Sturm und Drang, if the court simply grants the stay, it's extremely hard to pinpoint any perceptible adverse consequences that will come to either the government or American society. A stay would just temporarily prevent Bromwich from acting until a different panel of that court has had a chance to decide whether Apple was properly found liable of antitrust violations to begin with. If it wasn't, then the court will never have to wade into any of the other difficult questions posed by the monitorship.

On the other hand, if the court were to take that route, that decision, in itself, would be a very bad omen for the monitorship's long-term prospects. If the monitor isn't needed now, why would he be needed later? Whatever the monitorship's constitutional standing, it would seem like unnecessary overkill.

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About This Author
Anne VanderMey
Roger Parloff
Fortune

Roger Parloff has been a Fortune staffer since 2004, and is now its senior editor (legal affairs). Before turning to full-time journalism in 1988, he was an assistant district attorney and private criminal defense lawyer in Manhattan. His journalism has appeared in The New York Times and The American Lawyer, among other publications, and he is the author of Triple Jeopardy (Little Brown), a nonfiction book about the death penalty. He has won a National Magazine Award and three SABEW Best in Business awards. His J.D. is from Yale Law School (1982) and his B.A. is from Harvard (1977).

Email Roger Parloff | @rparloff
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