Case 1:12-cv-03394-DLC-MHD Document 549 Filed 10/15/14 Page 1 of 163

Second Report of the External Compliance Monitor

United States v. Apple, Inc., et al., No. 1:12-CV-2826, and

The State of Texas, et al. v. Penguin Group (USA) Inc., et al., No. 1:12-CV-3394

Michael R. Bromwich External Compliance Monitor October 14, 2014 Case 1:12-cv-03394-DLC-MHD Document 549 Filed 10/15/14 Page 2 of 163

Executive Summary

This is the second semi-annual report (“Report”) submitted by the External Compliance Monitor (the “Monitor”) in United States v. Apple, Inc., et al., No. 12-cv-2826, and State of Texas et al. v. Penguin Group (USA) Inc., et al., No. 12­ cv-3394 (“ebooks Litigation”).

In the September 5, 2013 Final Judgment and Order Entering Permanent Injunction (the “Final Judgment”), this Court ordered the Monitor to submit reports every six months “setting forth his . . . assessment of Apple’s internal antitrust compliance policies, procedures, and training and, if appropriate, making recommendations reasonably designed to improve Apple’s policies, procedures, and training for ensuring antitrust compliance.”1 The Monitor is required to evaluate whether Apple’s policies and procedures are “reasonably designed to detect and prevent violations of the antitrust laws” and whether Apple’s antitrust training program is “sufficiently comprehensive and effective.”2

We issued our “First Report” on April 14, 2014. At that time, for reasons set forth in detail in the First Report, we had very little information on which to assess the comprehensiveness and effectiveness of Apple’s antitrust policies, procedures, and training (Apple’s “Antitrust Compliance Program” or “Program”). We had experienced substantial delays in our efforts to obtain relevant documents and interview relevant personnel, in part due to litigation initiated by Apple beginning in late November 2013 and continuing until February 2014, when we were able to resume our work. In addition, although the Final Judgment established that we were to review Apple’s Antitrust Compliance Program as of mid-January 2014, Apple had not, by then, completed revisions to various elements of its Program.

For these reasons, the assessment and recommendations we set forth in the First Report were very preliminary. We credited Apple with a promising start to developing and implementing its revised Antitrust Compliance Program, but it was clear that the company still had a great deal of work to do. Our review of various pieces of work in progress, including drafts of Apple’s revised policies, some procedures it had developed, and three live training sessions that had taken place, prompted us to make a number of recommendations for improvements to the Program.

1 Final Judgment § VI.C. 2 Id.

i Case 1:12-cv-03394-DLC-MHD Document 549 Filed 10/15/14 Page 3 of 163

The time period addressed in this Report is from early March 2014 through the end of August 2014. During the past six months, we were able to perform our work uninterrupted by the legal challenges and other sustained disruptions that characterized the period covered in the First Report. Our relationship with Apple during this period has been more productive and constructive than it was during the first few months of the monitorship. But by no means were we at all times satisfied with Apple’s level of cooperation and responsiveness. In fact, we continued to experience some resistance to our monitoring work as well as attempts to limit and delay access to relevant personnel and materials. As a result, on too many occasions, we experienced substantial delays in receiving relevant information, some of our requests for various categories of relevant information were rejected, others were ignored, and our ability to perform live monitoring of antitrust compliance training sessions and other relevant activities was inappropriately limited. These limitations on access to information are fully described in