The U.S. Department of Justice (DOJ) came out swinging in its opening statement of its antitrust suit against Apple in New York on June 3, 2013. The April 2012 suit alleged that what was then the Big Six trade publishers conspired with Apple to “limit ebook price competition … [and] reached an agreement whereby retail price competition would cease (which all the conspirators desired), retail ebook prices would increase significantly (which the publisher defendants desired), and Apple would be guaranteed a 30 percent ‘commission’ on each ebook it sold (which Apple desired).” In the past year, all of the publishers settled with the DOJ, ending their involvement in the case. Apple, however, has chosen to fight the charges in court.
In opening statements, the DOJ presented about 80 presentation slides that cited emails and other data outlining the process of the meetings and agreements between Apple and the publishers in detail. DOJ attorney Lawrence Buterman focused on evidence that Apple and the publishers “consciously committed to a scheme to raise ebook prices throughout the industry” that, in turn, cost consumers hundreds of millions of dollars. These agreements, which Apple’s then-CEO Steve Jobs described in his interviews with Walter Isaacson for his book (Steve Jobs), stemmed from detailed discussions and agreements made on ebook pricing between the parties in the months before Apple released its iPad.
Orin Snyder, Apple’s lead attorney, countered that Apple was working to break into the crowded ebook market using the same approach it did with iTunes and apps, noting that “Apple should be applauded, not condemned.” Snyder is described on The Verge as “a warrior who thinks outside the box,” and appears to be taking a very aggressive defense of Apple, basing his arguments less on the facts of the case (with which the DOJ appears to have the clear upper hand), but on law and the lack of serious damage created by Apple’s efforts. In Snyder’s PowerPoint, he stressed the “pro-competitive benefits of Apple’s entry in the ebook market.”
Two Sides to Every Issue
Apple CEO Tim Cook, at the D: All Things Digital conference in May 2013, noted that “the ebook case to me is bizarre. We’ve done nothing wrong there and so we’re taking a very principled position on this. And so we’re going to fight.”
CNNMoney senior editor Roger Parloff notes that “the publisher defendants were charged with engaging in a horizontal price-fixing conspiracy—a well-recognized, frequently encountered, and widely condemned variety of collusive behavior. While the publishers’ motivations may have been unusual—some would argue laudable—there is much evidence that they did, in fact, collude to hike up the price of ebooks.” Apple, on the other hand, “had a vertical relationship to all the other players in the alleged plot. As a result, its conduct poses far less familiar factual and legal questions. Far from being a dominant player in the book industry, Apple was a new entrant. Far from instigating the scheme, it was—even on the government’s view of the evidence—an opportunistic late-comer who exploited a pre-existing situation. Moreover, it’s not at all far-fetched to believe that Apple behaved at all times in a manner that furthered its own independent, seemingly lawful business objectives: Opening a digital bookstore. In the process, Apple brought competition to a market that was, prior to its arrival, dominated by an 80% to 90% near-monopolist, Amazon.”
Others see this as a no-brainer for the DOJ. GigaOM’s Mathew Ingram, for example, believes the evidence is overwhelming and that this is, in reality, an open-and-shut case: “The DOJ has what amounts to a slam-dunk case—no matter how you look at it, the company colluded with publishers to keep ebook prices high. … The bottom line is that Apple engaged in risky behavior with publishers because it felt it had to do so in order to break Amazon’s iron grip on e-books, and offering higher prices to publishers if they cut a deal with the company seemed like the best way to do that. Apple may even have been correct in that assessment—but collusion is still collusion. The only question now is how large the judgment against the company will be in terms of damages.”
Was Apple trying to set up reasonable distribution systems in a market overwhelmingly dominated by Amazon? Or was Apple working with publishers to set up a new distribution system that would better allow for new entrants into the marketplace and give publishers more freedom to charge what they believed to be fair in the marketplace?
The Reason Why Apple Went to Trial
Why Apple decided to go to trial is a good question and one that I posed to legal scholars not involved with the trial or the case. Antitrust professor Christopher L. Sagers of Cleveland-Marshall College of Law’s reaction: “I don’t know why Apple is going to trial. The case against Apple is very strong. My best guess is that Apple does not want to be stuck with the government oversight that probably would be imposed on it if it settled with DOJ. DOJ might insist on reporting obligations that would involve the government in intimate aspects of Apple’s business operations, perhaps going beyond its ebook business, and might also subject Apple to specific limitations on what sorts of choices it can make in doing its business. And, to be honest, Apple doesn’t have much to lose by going to trial. The expense of actually trying the case in court will not really be all that much greater than the legal expenses Apple has already incurred in preparing for the trial.”
“I think Apple is hoping to win,” says Thomas F. Cotter, University of Minnesota law professor. “Even if the publishers colluded among themselves in violation of the antitrust laws, it is possible that Apple was not a part of the conspiracy but rather lawfully negotiated its own agreement with each publisher. The government’s theory is that Apple was a participant in the conspiracy among the publishers—that Apple and the publishers had a common interest in preventing Amazon from pricing ebooks at $9.99, and Apple was in some way the facilitator of this agreement. So there’s a question of fact whether Apple conspired with the publishers or simply negotiated individual agreements that were in Apple’s interest but not illegal.”
Long-Term Implications and Potential Impact in Europe
Emma Linklater, European University Institute Ph.D. researcher, is actively researching ebook antitrust in Europe (EU). “Publishers fixing the prices of books here in the EU is nothing new; multiple Member States (including France, Germany, the Netherlands, Italy, Spain ... ) have adopted such policies in order to shelter their book sectors, enacting national laws that remove retail price competition and give pricing power to publishers. These business agreements are the crux of the matter for me, and although evidently Apple is fighting this battle in Court to save its own skin, I wonder if the collusion element were eliminated then perhaps this case could get to the bones of the matter and deal with vertical fixed pricing once and for all.”
Linklater sees a longer-term issue being missed in the case. “Part of the problem here is the short-term outlook of the DOJ, which seems to have current consumers in focus in bringing this case,” she says. “It wouldn’t go amiss to have longer-term consumers in mind, who will be particularly disadvantaged if publishers become more risk adverse or invest less in niche markets and new authors as a result of the removal of the agency agreements.”
The Case Unfolds
Corporate management from Amazon, Google, and major publishers have taken the stand and some serious grilling from Apple attorneys. The trial is also turning into a high-stakes battle between the DOJ and Apple. “Over the last few years,” Reuters’ Andrew Longstreth notes, “[T]he U.S. Justice Department’s Antitrust Division has scored a few high-profile victories in the courtroom, a fact that government officials often cite to bolster the credibility of its litigation threat.”
Last week, publishers took the stand, testifying to the details of the meetings and correspondence amongst themselves and with Apple. Simon & Schuster’s CEO Carolyn Reidy testified on sending her boss, Les Moonves, president and CEO of CBS Corp., an email noting that “unless other publishers follow us, there’s no chance in getting Amazon to change its pricing practices.”
Perhaps some of the most interesting testimony came Thursday when Eddy Cue, Apple’s senior vice president of internet software and services, took the stand and admitted that after the publishers and Apple instigated the new pricing scheme, customers paid more for many ebooks (especially The New York Times best-sellers) from the time of the opening of Apple’s iBookstore in April 2010 through 2012. This confirms the DOJ’s core assertion that the colluded agreements in fact caused customers to pay more for ebooks than they had previously paid. Cue will return to the witness stand today (Monday), beginning the third and final week of the planned 3-week trial. Closing arguments are scheduled for June 20.
Along with its testimony, some interesting facts have come up about Apple: It currently controls 20% of the ebook market in the U.S. with ebook sales growing 100% last year alone through the iBookstore, which had more than 100 million customers and now has “most of the top 100 U.S. publishers” in its ranks. The Association of American Publishers released data showing that ebooks accounted for 22.6% of U.S. book sales in 2012, up from 17% in 2011 and 3% in 2009. Revenues were $7.1 billion in 2012, up 6.2% from the previous year.
At the time of the alleged collusion, ebooks were being priced at about 20% less than print copies, with retailers getting about half the purchase price. So a $25 hardcover would sell for $9.99 electronically. At this, Amazon could only hope to break even, and publishers were making money, but they feared that this undervaluing would lead to future problems.
A Speedy Trial but No End in Sight
All of the publishers involved in the lawsuit have settled with the government for their roles in the arrangement. Their fines totaled an estimated $164 million. Apple, on the other hand, seems ready to dig in for the long haul, regardless of the outcome of this trial. And, on top of this are the looming suits from states seeking compensation for overpriced ebooks. In late August, the states offered a settlement of at least 25 cents for every ebook purchase made from major publishers from April 2010 to May 2012. This isn’t much for individual customers, but it adds up to a total of $69 million for consumers and publishers (all but Penguin and Macmillan) paying states’ investigation and legal fees. Anyone looking for compensation for purchased ebooks can check out the settlement website.
Another expert who weighed in on the merits and meaning of this trial, John Lopatka, distinguished professor of law at The Pennsylvania State University’s Dickinson School of Law, notes that, “Because the publishers agreed in their settlements with the DOJ not to use certain terms in their contracts with retailers, those terms cannot be used even if a retailer, such as Apple, wanted to use them. Even if Apple were to win the litigation, it could not insist on contractual terms with publishers that the publishers cannot use. Even publishers not subject to the consent agreements would be wary of these terms now, regardless of what happens in the trial. The real impact of this case on the ebook industry was caused by the filing of the case (and related cases) and to a lesser extent the settlements that have been reached, not the trial now taking place.”
Some are suggesting that Apple would be willing to take this through the court system to the Supreme Court if needed, since “the unique facts of Apple’s case will make it a singularly sympathetic one to today’s markedly pro-business Supreme Court—if the case reaches it.”
“I doubt that the case will have a major impact on the law,” says Lopatka. “The law is, and has been for a long time, clear that horizontal price fixing is illegal, and if the publishers agreed that they would contract with retailers only on an ‘agency’ basis, that would be illegal price fixing. The question here is factual: Did Apple become part of a publishers conspiracy?”
A Judge and No Jury
The case is being tried before U.S. District Judge Denise Cote, without a jury. In a final preliminary hearing a few weeks ago, Cote noted that “I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books, and that the circumstantial evidence in this case, including the terms of the agreements, will confirm that.” Some saw this as an effort on her part to get Apple to settle and avoid trial. However, Snyder took the offensive during his introductory remarks, noting that the agency model and most-favored-nation status is something widely used throughout industry and has never been found illegal; that Supreme Court decisions have legitimized pricing discussions with manufacturers; and perhaps most interestingly that “no case in the history of the antitrust laws has imposed liability on a new entrant facing a dominant player with a 90% market share,” inferring Amazon’s wide lead in the market at the time of the iPad release.
In response, Cote noted, “This isn’t a vote about whether I like Apple. The deck is not stacked against Apple, unless the evidence is stacked against Apple.” Is this type of comment on the likely outcome of a case typical pretrial? Sagers says, “[O]n the one hand, I definitely agree with her comments. On the other hand, while I’m no litigator myself, I think it’s unusual for a judge to make such a public statement.”
Will the case go to the Supreme Court as Cook seemed to imply in his recent statements? “Supreme Court consideration is inconceivable,” according to Sagers. “On the one hand, assuming Apple doesn’t settle before the trial is over and it really does go all the way to final judgement, the odds are that there may be appeals on various specific issues to the intermediate appellate court that sits in NYC (known as the Second Circuit Court of Appeals). But any such appeal will end there. This is what lawyers call a ‘fact case.’ That is, the legal issues in the case are simple and not really controversial. So the only issues there really are revolve around whether the government can prove, with sufficient evidence, the facts alleged in its compliant. Of course, I should say, too, that nothing is impossible. Apple might conceivably pull something out of its hat or convince one of these courts that there really is a question of law that should be resolved differently than the government. I just believe that any such outcome is at this point very unlikely.”
Sitting in the courtroom each day is Andrew Albanese, Publishers Weekly’s senior writer. He weighed in on his take on Apple’s position: “The government seeks oversight and sanctions. Apple is not going to settle, because any settlement would involve the kinds of sanctions publishers also agreed to, and as you can imagine, for a company like Apple, having government oversight isn’t going to work. So the DOJ is going to have to earn its invitation to set up shop in Cupertino and poke around Apple’s content business.”
“I personally don’t see this going to the Supreme Court,” writes Good e-Reader blogger Mercy Pilkington, “especially not with so many other antitrust cases already having been decided and with all of the publishers settling out of court. Everyone keeps saying that this is a victory for Amazon, and there are going to be people who feel that way. At the end of the day, though, this is a victory for consumers and for the marketplace. It is illegal to fix prices, and there’s a reason for it: Because it hurts the consumer, and in turn can hurt the economy.”