U.S. District Judge Denise Cote formally approved Apple’s settlement agreement, which may end the 2-year protracted trial charging Apple and the Big Five trade publishers with conspiring on ebook pricing. The widely covered litigation that ended on Nov. 21 followed charges alleging that Apple entered into unlawful agreements to inflate, fix, maintain, and stabilize ebook prices, which violated federal antitrust laws.
The court ruled in July 2013 that Apple’s agreements with five ebook publishers—Hachette Book Group, HarperCollins Publishers, Simon & Schuster, Penguin Group, and Macmillan Publishers—had included “a price parity provision, or Most-Favored-Nation clause (‘MFN’), which not only protected Apple by guaranteeing it could match the lowest retail price listed on any competitor’s e-bookstore, but also imposed a severe financial penalty upon the Publisher Defendants if they did not force Amazon and other retailers similarly to change their business models and cede control over e-book pricing to the Publishers.” Earlier, the publishers had settled in the case for $69 million. Apple also agreed to a conditional settlement: If Apple loses its appeal, it will pay $450 million; if it wins its appeal, it will pay nothing. So Apple continues to aggressively fight the charges alone. Oral arguments were held before the Second Circuit Court of Appeals on Dec. 15.
The formal judgment against Apple bars the company from enforcing “any Retail Price MFN in any agreement with an E-book Publisher relating to the sale of E-books,” and notes that “Apple shall not enter into any agreement with an E-book Publisher relating to the sale of E-books that contains a Retail Price MFN.” The judgment also decrees, “Apple shall not (1) retaliate against or punish, (2) threaten to retaliate against or punish, or (3) urge another Person to retaliate against or punish any E-book Publisher for refusing to enter into an agreement with Apple relating to the sale of E-books or for the terms on which the E-book Publisher sells E-books through any other E-book Retailer.”
Additionally, “Apple shall not enter into or maintain any agreement with an E-book Publisher where such agreement likely will increase, fix, or set the price at which other E-book Retailers can acquire or sell E-books,” and “Apple shall not enter into or maintain any agreement with any other E-book Retailer where such agreement likely will increase, fix, stabilize, or set the prices or establish other terms on which Apple or the other E-book Retailer sells E-books to consumers.”
The judgment also provides damages of $400 million to consumers (in cash and ebook credits) and $50 million to lawyers. It has been estimated that the $400 million may be distributed to as many as 23 million consumers. Formal litigants include 33 states and class action counsel representing consumers.
It Isn’t Over Till It’s Over
However, Apple may not be willing to pay up and move on. The settlement agreement was devised to “resolve any and all disputes arising from the Complaints as to Apple (except for Plaintiff States’ claims for injunctive relief against Apple, which are currently under appeal in the Liability Appeal).”
Judge Cote notes that “Apple essentially did an about face in this litigation [and] after it lost, it changed tactics and decided it would do everything in its power to prevent these actions from reaching a final judgment.” Clearly, the judge is frustrated by Apple’s tactics—including a series of motions and a circuit appeal of her class certification decision—which all were denied, but they extended and exacerbated the process.
The settlement is final, but Apple’s payout only happens if it either accepts the judgment (which it has indicated it won’t) or loses in appeal. TechHive reports that “lawyers for the ebook buyers have said they ‘strongly believe’ that Apple’s appeal won’t be successful.” The New York Times similarly reports that the appeals court “is not expected to change its previous ruling.” Details on the process of getting a piece of the judgment and who qualifies are available; however, the open period for applying for compensation ended in October.
Eddy Cue, SVP of internet software and services, negotiated Apple’s entry into the ebook market in 2010 and played a key role in the trial.
Speaking to Fortune writers after the decision, Cue noted that Apple feels it has to “fight for the truth. Luckily, Tim [Cook, CEO] feels exactly like I do, which is: You have to fight for your principles no matter what. Because it’s just not right.” Cue seems to be saying that this litigation stems from legal, poorly documented negotiations: “If I had it to do all over again, I’d do it again,” Cue concluded, “I’d just take better notes.” According to Fortune, “In their clubby world the publisher CEOs naively hobnobbed with abandon. Four times between September 2008 and September 2009, at least five of them supped together without lawyers present. Three of those dinners were in a private room at Picholine, a fine French restaurant on Manhattan’s Upper West Side.” Will an appeals court buy this version (or revision) of the Apple defense? Hopefully, we will know soon.
Apple Faces More Days in Court
Although Apple prefers to present itself as an innovation leader, the Cupertino, Calif., giant faces another court trial pertaining to its alleged monopolistic business practices. On Dec. 2, the company began its defense against another federal class action suit, this time alleging illegal monopolistic practices related to its iPod digital music business. Although Apple had (and still has) a majority share of the music-downloading business, the suit (filed in 2005) alleges that in order to maintain control of this new marketplace, Apple’s release of a software update required that iTunes music could only be played on iPods, blocking potential competition from other device manufacturers. Apple’s counter is that the software included legitimate product improvements, and the company should not be found guilty of antitrust, anticompetitive practices.
In first-day hearings, the plaintiffs presented emails from Apple showing that the company was especially interested in tracking the effect of RealNetworks’ entry in the market. In one 2005 email, Cue told then-CEO Steve Jobs that iTunes’ market share fell to 68% from 70% after RealNetworks ran a 49-cents-per-song promotion. One witness in the trial will, in fact, be the late Jobs himself—in the form of videotaped testimony taken 6 months before his 2011 death. In the video interview, Jobs notes that competing products were undermining Apple’s end-to-end product ecosystem and that RealNetworks’ competing Harmony music product was “collateral damage” in Apple’s product development evolution.
Early testimony brought out that from 2006 to 2009, iPod owners trying to sync their devices with iTunes—while having music from another digital store on their devices—would get an error message instructing them to reboot their iPods to factory settings, effectively wiping all non-iTunes music from their devices. Apple countered that this was done to protect users from malicious content and hackers; however, internal documents and Jobs’ own comments raise serious issues about Apple’s fear of competition. Is this another case of monopolistic control or the efforts of a company to maintain and build market share and protect its market niche from competitors?
Apple Dominates—But at What Price?
Apple is an enormously successful, innovative company with unmatched brand loyalty. It’s never had as bad a reputation as Microsoft because of heavy-handed tactics, and it always presents a very positive public image. However, Apple is also known for actively and aggressively enforcing its intellectual property interests, which is clear in both of these cases. Its strident efforts to fight these charges are puzzling. The company’s fiscal year 2014 revenue totaled $182 billion, so why incur the cost of pursuing these legal cases instead of just settling and moving on? Why bother to drag all of this through the courts (and the court of public opinion)? Is this an issue of assumed honor? A refusal to accept any nicks to its image or armor?
Apple sees itself as far more than a major, innovative consumer electronics company. Jonathan Ive, SVP of design, explains: “What people are responding to is much bigger than the object. They are responding to something rare—a group of people who do more than simply make something work, they make the very best products they possibly can. It’s a demonstration against thoughtlessness and carelessness.”
The free market may be oftentimes careless and thoughtless, but the occasional chaos that results also leads to fair dealing and open competition, something needed in the ebook marketplace as well as in other aspects of our digital economy. As one unnamed industry sage noted, “With Apple, there’s always another chapter to the tale.” We can hope that the chapter on ebook pricing collusion will soon be closed, once and for all. It’s time to move on.