Apple must comply with a series of new restrictions on its ebook contracts, according to an injunction issued last week by a federal court in New York City.
Under the injunction, Apple will not be able to enter into so-called “agency agreements” with ebook retailers; it also won’t be able to enter into agreements that restrict pricing by either Apple or competing ebook retailers. However, Apple dodged a bullet when the court declined to apply the same restrictions to Apple’s agreements with other music, movies, and select content providers. (Court’s order is available via PACER.)
The restrictions arose out of a series of lawsuits that the Department of Justice (DOJ) and several state attorneys general filed, charging that Apple’s ebook agreements with several major trade publishers violated federal and state antitrust laws. The agreements were drafted during early 2010 when Apple was in the final stages of developing and introducing the iPad and its accompanying iBookstore ebook service. At the same time, the publishers were increasingly frustrated by Amazon.com—the dominant ebook vendor in the marketplace—and its $9.99 price standard. The low ebook price was siphoning sales away from more profitable print books.
Finding a New Model
The agreements between Apple and the publishers focused on the development of an “agency model” of ebook sales, according to the lawsuit. Under this model, vendors were compelled to sell ebooks as an agent of the publisher at prices dictated by the publisher. (The previous model was known as a “wholesale model,” where the publishers sold ebooks at a wholesale discount to the vendor, and the vendor set whatever price it chose. Amazon could afford its low $9.99 price point under this model because it was offset by sales of the Kindle and profits from Amazon’s print book and other product sales.)
In addition, the agency agreements included a “most-favored-nation” clause, which guaranteed that Apple would always get the best pricing or that no other vendor would be allowed to sell at a price less than the Apple price. As a result of these agreements, prices on major trade and best-seller ebooks rose by 30% to 50%.
After a 3-week trial in June 2013, the court found that Apple had “played a central role in facilitating and executing” a conspiracy among themselves and five publishers to “eliminate price competition in order to raise e-book prices.” (The publishers, Hachette Book Group, HarperCollins Publishers, Macmillan, Penguin Group, and Simon & Schuster, had previously entered into settlements with the DOJ and the states; only Apple went to trial.) While it is neither uncommon nor illegal for one or more companies within an industry to raise (or lower) prices in response to the actions of another company, both federal and state antitrust laws prohibit companies to act collectively or conspire in a way that restrains trade, commerce, or pricing. Apple was found to violate those laws.
Although sometimes characterized as Apple’s punishment, the goal of the court’s injunction is to remedy the effects of the past illegal actions and to prevent Apple from engaging in similar actions in the future. As such, the injunction was structured into three areas: prohibiting certain conduct, requiring specific conduct, and following through with actions that Apple must perform to ensure compliance with antitrust laws.