Here’s the Skinny on the Apple E-Book Case

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The Apple e-book case has been front-and-center in the media this last week. For those not following it carefully, here is a quick sketch of the allegations and what’s at stake. (I hasten to emphasize that the government’s allegations are only allegations at this point in time.)

What’s at stake? The pricing of electronic books, or “e-books.” The government (the DOJ antitrust division) alleges that several years ago Amazon lowered e-book pricing dramatically (often to $9.99 per e-book) in connection with its Kindle e-book readers, a move which dissatisfied the book publishers.(*) Other e-book retailers began to match or approach Amazon’s pricing (which the government alleges was profitable).

Who is alleged to have done what? The government alleges that the book publishers and Apple agreed to raise retail e-book prices and to otherwise limit competition in the sale of e-books. The allegations of agreement or conspiracy are important, because absent proof of such, it’s not at all clear that anything unlawful occurred.

What is the nature of the alleged conspiracy? The government alleges that the book publishers agreed to move away from a “wholesale” pricing model, whereby the book or e-book retailer retains retail pricing authority, towards an “agency” model, where the book publishers retain retail pricing authority and the online bookstores are mere “agents.” (According to the government, the wholesale model has prevailed in the book publishing industry for over 100 years.)

What would be the rationale for such an agreement? Again, according to the government, the book publishers wanted to raise e-book pricing. The publishers also allegedly feared Amazon’s e-book pricing spilling over into the hardcopy market. And – again, according to the government – the publishers feared that Amazon’s distribution system would enable it to become a strong rival publisher that could and would deal with authors directly, ultimately threatening the publisher’s business model.

Apple allegedly went along with the plan because under it, Apple would receive a guaranteed and significant 30% commission on books, each of which would presumably be sold at a higher price than otherwise absent the agreement. Apple allegedly communicated with each publisher to coordinate common agreement terms. Relatedly, the government alleges that the book publishers indicated that they would impose the agency model on other retailers and raise e-book prices at all other e-book outlets, too. (Without such a commitment, one presumes that higher pricing only at the Apple online store would not be very effective.)

How did the e-book pricing work? The government alleges that “Apple Agency Agreements” entered into by the book publishers specified price tiers for books tied to hardcopy pricing ranges. Apple also received an “unusual” Most-Favored Nations (“MFN”) clause requiring each publisher to guarantee that it would lower the retail price of each e-book in Apple’s iBookstore to match the lowest price offered by any other retailer, even if the publisher did not control the other retailer’s ultimate consumer price. The government alleges this MFN meant Apple did not have to compete on price at all, while still maintaining its 30% margin.

What is the nature of the government’s evidence? The government alleges, among other things, regular meetings and communications among the publisher defendants; direct discussions and agreements among those defendants; the publisher defendants’ attempts to conceal the “illicit nature” of their communications; parallel pricing or price increases following the April 3, 2010 effective date of the Apple Agency Agreements between each publisher and Apple; and various acts contrary to economic interests (i.e., it would have been contrary to the interests of any single publisher to attempt to impose agency pricing on all of its retailers and then raise its retail e-book prices). The government’s complaint recites many details about alleged communications between the book publishers at high levels, including at the CEO level.

What was the alleged result of the parties’ cooperation? The government contends that e-book pricing went up substantially, from $9.99 per e-book under the Amazon approach to $12.99 or $14.99.

What is the government suing for? Injunctive relief, under Section 1 of the Sherman Act.

What is notable about the relief sought? Although the Complaint reads like a classic conspiracy case, the government is not seeking monetary fines, nor is it exercising its criminal price-fixing authority. Instead, it is seeking only injunctive relief.

Who is left in the suit? Apple, Penguin, and MacMillan. On Wednesday of last week, Hachette, HarperCollins, and Simon & Schuster settled the charges by agreeing to a proposed consent decree. Those publishers have agreed, among other things, not to use the sort of MFN arrangements present in the Apple Agency Agreements.

Are those settling admitting liability? No, and the publishers have also said that the approach with Apple was pro-competitive because it counter-balanced Amazon’s stranglehold on the market.

Are the remaining defendants going to fight the allegations? Presumably. Penguin’s CEO in particular has denied any wrongdoing.  Because the government is seeking only injunctive relief, it’s not clear that a loss-after-litigation would be any worse for the remaining companies than a settlement.

Where is the case pending? In the Southern District of New York, presumably because New York is where the publishers are located.

Is there other related litigation? Yes. Sixteen State Attorneys General have filed suit seeking damages on behalf of consumers. Private class action litigation is also pending.

(*) Hachette Book Group, HarperCollins, Holtzbrinck Publishers (MacMillan), Penguin Group (USA), and Simon & Schuster. The government alleges that these defendants are five of the six largest publishers of trade books in the United States. (Trade books are alleged not to include specialty books such as children’s picture books, academic textbooks, and reference materials.)