U.S. District Court rules Apple colluded on E-Book Prices

On 10 July 2013 the District Court in Manhattan ruled in United States v. Apple Inc., et al that Apple conspired with five major publishers to raise prices on e-books. The publishers settled and denied any wrongdoing. However, the case against Apple went to trial.

The alleged collusion is connected to Apple’s launch of the iPad tablet and of e-books in the iTunes online store. It went on from late 2009 until early 2010. Apple tried to compete with Amazon, which sold e-books under the wholesale model and at that time accounted for between 80% and 90% of e-book sales. Amazon sold the e-books below cost to promote its Kindle reading device. Apple got five major publishers – Hachette, Penguin, HarperCollins, Macmillan and Simon and Schuster  –  to agree to the agency model, i.e. publishers set their own prices and Apple receives a 30% commission on the sale. These publishers also agreed to a “most favored nation” clause, which determined that Apple could match prices in other e-book stores. The publishers then got Amazon to accept an agency model on the same terms as with Apple. This resulted in price control by the publishers and a price increase of 18 percent.

The Justice Department argued that Apple made use of the publishers’ dissatisfaction with Amazon’s e-book discounting strategy when it entered the e-book market. It is not seeking monetary damages; instead it asked the court to adopt measures which ensure that Apple won’t engage in such conduct in the future. These measures include not entering “most favored nations” clauses or charging 30% commission.

Judge Denise Cote held that Apple was at the center of the conspiracy as it created a mechanism and environment which enabled collusion to eliminate retail price competition for e-books. E-Mails by Steve Jobs were compelling evidence for the judge that Apple participated in the conspiracy.

Apple plans to appeal as it says it did not conspire to fix e-book pricing and instead injected innovation and competition into the e-book market.

This decision could expose Apple to substantial damages in a separate lawsuit as 33 state attorneys-general seek to recover money on behalf of consumers.  Furthermore the decision could impact on the leverage Apple may have in negotiating future deals.

On August 9, 2013 Judge Cote held a hearing on the remedy requests of the Justice Department. She said that she was considering a plan according to which Apple would be required to negotiate future contracts in a specific way, i.e. separately with major publishers and in defined intervals of possibly six to eight months apart. However, Judge Cote said that she did not want to over-regulate the business of Apple. Lawyers for Apple and the government said that they would meet and discuss the judge’s plan.

On September 5, 2013 the final judgment was issued by Judge Cote. The judgment includes restrictions in how Apple has to deal with publishers for the next five years. An example of such a restriction is that Apple has been barred from concluding most favored clauses with publishers or enforce existing most favored nation clauses. Additionally, Apple’s Audit Committee or another committee comprised of only outside directors has to designate an Antitrust Compliance Officer to supervise Apple’s antitrust compliance efforts. Furthermore the Court will appoint an External Compliance Monitor. Apple will appeal the injunction.

Judge Cote has scheduled a trial to determine monetary damages in May 2014. Such damages could total hundreds of millions of dollars. [Nicole Daniel]

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