After having proven that Apple conspired with five major book publishers to fix the prices of ebooks, the Department of Justice (DOJ) seeks to prevent Apple from continuing its anticompetitive practices not only in its ebook sales, but also with its movie, music, and app sales.
In a filing with the federal court, the DOJ would prevent Apple from enforcing its existing ebook contracts, ban “agency model” contracts with book publishers for at least 5 years, and ban Apple from entering into “any agreement” with any “content supplier” that would “increase, fix, or set” prices. [Note: Free access to this key source is not available at this time.]
In July 2013, Federal Judge Denise Cote issued a scathing 160-page opinion finding that Apple had conspired with the publishers to eliminate price competition in the ebook marketplace in violation of federal and state antitrust laws. Apple played on the publishers’ fears and hatred of Amazon’s then-standard $9.99 price model for best-seller and popular ebook sales. This “loss-leader” price was often below the wholesale ebook price, which Amazon could afford as it was offset by profits on sales of its Kindle e-reader and sales from other ebooks.
A Central Role in the Conspiracy
But the publishers, fearing losses from physical book sales, jumped when Apple approached them about a new model for pricing ebooks to be sold through its new iBookstore for the soon-to-be-released iPad. That model, known as an agency model, allowed publishers to set the retail price at which vendors would sell ebooks. Apple conspired with the publishers to switch to an agency model, which when coupled with a Most Favored Nation (MFN) clause giving Apple the best-available price, allowed the publishers to dictate higher retail prices (typically $12.99 to $14.99), and ultimately forced Amazon, and later Google, to adopt the same sales model and pricing structure. In the words of the judge, “Apple played a central role in facilitating and executing that conspiracy. Without Apple’s orchestration ... it would not have succeeded.”
Seeking to both remedy the effects of the past conspiracy and to prevent Apple from engaging in similar actions in the future, the DOJ submitted a proposal on Aug. 2, 2013, for an injunction requiring Apple to take several steps over a period of years to ensure that the company would no longer demonstrate “a callous disregard for U.S. consumers.” The proposed injunction outlines a series of actions in three major categories: conduct that Apple would be prohibited from engaging in; actions that Apple would be required to take; and steps that the court would impose to ensure that Apple continued to comply with antitrust laws.
First and foremost, Apple would be prohibited from enforcing its existing agreements with any ebook publisher for a period of 5 years. For the same period, Apple would be prohibited from entering into any new agreement that contained an MFN clause or that “restricts, limits, or impedes Apple’s ability to set, alter or reduce” retail ebook pricing. That seemingly contradictory clause is targeted toward reducing the impact of the agency pricing model by eliminating any agreement that would allow either Apple or a publisher to set the retail ebook pricing.
Apple would also be prohibited from retaliating against, threatening to retaliate against, or urging anyone to retaliate against an ebook publisher for declining to enter into an agreement with Apple, or for entering into an agreement with any other ebook retailer.
The court’s July opinion extensively outlined Apple’s prominent role in facilitating the exchange and dissemination of information among the publishers and itself, finding that to be an important part of Apple’s illegal conduct. In response, the DOJ proposal would prohibit Apple from communicating to any ebook publisher about any contracts, business plans, strategies, retail prices or pricing strategies, or any sensitive information that it learned from any other ebook publisher.
A Restriction on Agreements
In what may prove to be a controversial component of the proposal, the DOJ would also prohibit Apple from entering into any agreement with any other content supplier—music, movies, televisions, apps—that “likely will increase, fix, or set the price of that content.” At the trial, Apple executives testified that their approach to content negotiations is focused not on low prices but on restrictive agreements that often increased prices. It appears then, that the DOJ saw the ebook agreements as a continuation of this focus and is seeking to restrict these types of agreements.
The proposal would also impact ebook apps that consumers might download to their iPads or other Apple devices. The proposal would require Apple to apply the same terms and conditions to ebook apps that it applies to all of the other apps that it sells through its App Store. In addition, for a 2-year period, Apple must permit any ebook retailer to provide a hyperlink to its own ebookstore as part of its app. For example, this would require Apple to let Amazon place a hyperlink to Amazon.com on its iPad/iPhone Kindle e-reader app.
Additional provisions of the proposed injunction would require Apple to create a board of directors–level audit committee and hire an internal antitrust compliance officer. This officer would be independent of the iBookstore management and would be responsible for providing annual training on antitrust compliance to Apple’s officers, directors, and iBookstore employees. The compliance officer would also compile annual antitrust compliance audits and serve as a resource for internal whistleblowing, to allow employees to disclose information they may have about antitrust violations “without reprisal.”
To further ensure compliance with both the court’s injunction and antitrust laws more broadly, the court would appoint an external antitrust compliance monitor—at Apple’s expense—who would have the power to monitor Apple’s compliance including conducting initial and ongoing reviews, hire staff as needed, and issue ongoing reports to the court on Apple’s practices for as long as 10 years.
Apple’s response was, not surprisingly, negative. In its response to the court, Apple described the proposed injunction as “draconian and punitive” and that the potential costs to consumers and businesses would “be vast.” Apple argues that the harms found by the court have already been remedied by previously announced settlement agreements with the individual publishers that Apple dealt with. As a result, Apple argues that “there is no threat or recurrence” of Apple’s engaging in a further conspiracy with the publishers.
Giving Amazon More Room to Grow
Apple also argued that the restrictions on e-reader apps sold for use on iPads and other Apple devices, and the restrictions on agreements with music, movie, TV, and app content providers are both unwarranted and outside the court’s jurisdiction. Apple warned the court that the e-reader restriction could backfire and allow Amazon to further dominate the ebook market. The injunction, Apple claims, “would give Amazon the advantage of in-app purchasing through a hyperlink without requiring it to pay Apple for the privilege ... [it] simply protects Amazon ... from competition.”
The court will take both the DOJ’s proposal and Apple’s response under advisement. However, it is not obligated to follow either position and may outline its own terms for an injunction. In addition, the court will hold additional hearings on whether and how much Apple may have to pay in damages for violations of both federal and state antitrust laws. Even after those proceedings are concluded, Apple is likely to appeal the judge’s original decision, as well as her final determinations on an injunction and/or damages. Those events are likely to take several more weeks.