Federal Judge finds Apple at the head of an e-book pricing conspiracy [Updated]

A federal judge ruled that Apple was the ringleader of a conspiracy to raise e-book prices, and the proposed remedies will affect Apple’s iBookstore and other facets of its business.

Photo by: Adam Steele

Updated September 6, 2013: The court has handed down an order granting a majority of DOJ’s proposed remedies.  Assistant Attorney General Bill Baer of the DOJ’s Antitrust Division issued a statement that the government is “pleased that the court has issued an order supporting the Department of Justice’s efforts to address Apple’s illegal price fixing conduct.  Consumers will continue to benefit from lower e-books prices as a result of the department’s enforcement action to restore competition in this important industry. By appointing an external monitor to ensure future compliance with the antitrust laws, the court has helped protect consumers from further misconduct by Apple.  The court’s ruling reinforces the victory the department has won for consumers.”  The DOJ spokesman’s full statement can be read here.

In April 2012, the Department of Justice (DOJ) filed an antitrust lawsuit against Apple and publishers Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster, accusing them of substantially increasing the prices that consumers pay for e-books.  The DOJ settled with all the publishers, but Apple refused to settle, choosing instead to take the risk of going to trial.   On July 10, 2013, U.S. District Court Judge Denise Cote ruled that Apple had violated Section I of the Sherman Act (pdf).  The DOJ, along with thirty-three state attorneys general, subsequently offered their proposed remedies, which Apple has called “draconian and punitive intrusion[s] into Apple’s business, wildly out of proportion to any adjudicated wrongdoing or potential harm.”  Notably, Apple maintains its denial of any wrongdoing and has been resistant and dismissive towards the proposed changes.  While Judge Cote recently stated that she does not intend to hit Apple as hard as the DOJ has requested, she does intend to make sure that Apple does not repeat its improper conduct in the future.

“Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did.”

Apple immediately vowed to appeal the decision, stating that it “did not conspire to fix e-book pricing” and that it “will continue to fight against these false accusations.”  Apple also proclaimed that “when [it] introduced the iBookstore in 2010, [it] gave customers more choice, injecting much-needed innovation and competition into the market, breaking Amazon’s monopolistic grip on the publishing industry.”

The Justice Department prosecutors contended that Apple had used publishers’ frustration with Amazon’s e-book discounting to collude with book publishers, forcing Amazon—the dominant seller of e-books—to raise its prices.  Judge Cote noted that Apple understood “that no one publisher could risk acting alone in an attempt to take pricing power away from Amazon,” and that “Apple created a mechanism and environment that enabled them to act together in a matter of weeks to eliminate all retail price competition for their e-books.”  Judge Cote also stated that “Apple chose to join forces with the publisher defendants to raise e-book prices and equipped them with the means to do so.  Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did.”

When Apple entered the e-book market in 2010—with the launch of its iPad—it agreed to shift to an agency model rather than the wholesale model employed by Amazon.  Amazon’s wholesale model entailed purchasing the e-books from the publishers and then reselling them at a price selected by Amazon itself.  Under the agency model used by Apple, the publisher would select the price and Apple would take a cut from that price.  The agency model and accompanying price hikes made it profitable enough for Apple to open its own e-book store, in turn forcing Amazon to increase its prices as a result of the publishers’ actions.

Additionally, Apple began to include a Most Favored Nation (MFN) clause in its contracts with publishers that “guaranteed that the e-books in Apple’s e-bookstore would be sold for the lowest retail price available in the marketplace.”  As part of its deals with publishers, Apple received a thirty percent commission on each e-book sold, and the publishers had to match Amazon’s or other competitors’ prices if the competitor’s price was lower.

Jobs seemed not only aware of but also pleased with the wrench Apple had thrown into the e-book market.

Although Apple contends that there was no intent to raise e-book prices, most of the evidence presented heavily weighed against the company.  In fact, on more than one occasion, statements made by Steve Jobs alluded to the management’s awareness of what was actually transpiring.  When Jobs announced the iPad in January 2010, he demonstrated purchasing a book from the iBookstore.  Judge Cote wrote:

When asked by a reporter later that day why people would pay $14.99 in the iBookstore to purchase an e-book that was selling at Amazon for $9.99, Jobs told a reporter, “Well, that won’t be the case.” When the reporter sought to clarify, “You mean you won’t be $14.99 or they won’t be $9.99?” Jobs paused, and with a knowing nod responded, “[t]he price will be the same,” and explained that “publishers are actually withholding their books from Amazon because they are not happy.”. . . The import of Jobs’s statement was obvious.  On January 29, the General Counsel of S&S [Simon & Schuster] wrote to [Simon & Schuster CEO Carolyn] Reidy that she “cannot believe that Jobs made the statement” and considered it “[i]ncredibly stupid.”

Jobs’ statement demonstrated his understanding that the publisher defendants would now have the upper hand in pricing, causing Amazon to raise e-book prices and effectively eliminating any competition.  In emails introduced at trial, Jobs seemed not only aware of but also pleased with the wrench Apple had thrown into the e-book market after receiving reports that a publisher and Amazon were at odds over pricing.  In a January 30, 2010, email, Jobs stated: “Wow, we have really lit a fuse on a powder keg.”  Jobs also sent a group email the next day, commenting that Apple had “definitely helped stir things up in the publishing world.”

The Justice Department said at trial that it wants to block Apple from using the agency model for two years.

In their settlements, book publishers Penguin, HarperCollins, Hachette, and Simon & Schuster agreed to provide $164 million in reimbursements to consumers overcharged for e-books as a result of the pricing scheme.  The proposed remedies for Apple (pdf), however, call for Apple to end its deals with the five publishers involved in the original suit, hire an internal antitrust compliance officer, and allow the U.S. District Court for the Southern District of New York to appoint an external compliance monitor.  Additionally, Apple would be barred from signing fixed pricing agreements with e-book distributors for five years.

As harsh as that sounds, Apple is still free to continue selling e-books, so long as the arrangements do not contain terms resembling those that led the lawsuit.  These guidelines are preventative measures to keep Apple from orchestrating price-fixing among publishers in the future, as well as retaliating against publishers that refuse to alter their terms.  The DOJ also suggested that Apple allow Amazon and Barnes & Noble to insert links inside their e-book apps to their e-bookstore to allow customers to easily compare prices.

The Justice Department said at trial that it wants to block Apple from using the agency model for two years.  However, the five publishing companies have filed an objection to the proposals, claiming that they “effectively punish the settling defendants by prohibiting agreements with Apple using an agency model.”  Although the DOJ is not seeking monetary damages, Steve Berman, a partner at Hagens Berman Sobol Shapiro pursuing consumer class action litigation against Apple, said that the proposals expose Apple to “hundreds of millions of dollars in damages, which is what we’ll ask for.”

Apple’s loss in court could set a precedent for other technology companies that are trying to develop new markets.

Even though Apple plans to appeal the decision, Apple’s loss in court could set a precedent for other technology companies that are trying to develop new markets.  The decision also could affect providers in all types of industries, including music and movies.  “If you’re a tech company and you are looking to aggregate content, you have to be exceptionally conscious about how you talk to your suppliers,” said Ankur Kapoor, an antitrust lawyer at Constantine Cannon LLP.  “United States v. Apple has put these communications under a very fine microscope.”  Apple will likely learn of its fate in May of 2014 at the scheduled damages trial.


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About Amanda Cairns, Senior Staff Writer (11 Articles)
Amanda Cairns is a May 2014 graduate of Campbell Law School and served as a Senior Staff Writer for the Campbell Law Observer. She is originally from Pleasantville, New York. Amanda is a 2011 graduate of Elon University, where she majored in Political Science with minors in Business Administration and International Studies. Following graduation, Amanda came directly to Campbell in the fall of 2011. Amanda spent the summer of 2012 as a law clerk at Clawson & Staubes, LLC and the summer of 2013 as a legal intern at Duke Energy Progress, Inc.
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