Class Action Antitrust Suit Against Apple and Major Publishers To Go Forward

Judge Denise Cote denied the motion to dismiss the class action filed by various states against the defendant publishers and Apple yesterday in a signed order (via Gigaom).  The motion came at the pleading stage, meaning Judge Cote ruled on the plausibility of the claims against defendants under the antitrust laws.  This requires the judge to take them as true for purposes of deciding the motion.  Her analysis indicates the plaintiffs overwhelmingly state a claim.

The Judge takes us through the history of the publishing industry’s relationship with Amazon.  Here is a tale of industry fear at the public perception on the price point of $9.99 for e-books, feeble attempts at reforming Amazon’s pricing, and Apple’s entry into the e-book market as a vehicle to bring Amazon into line. 

Apple’s agreement with the publishers allowed for the agency model for e-book sales, meaning the publishers would set the price subject to Apple’s 30% commission, and included a most favored nation clause that would prevent any other retailers from undercutting Apple.  The defendant’s characterized this as parallel conduct that was a simple, independent reaction to market pressures.  Public statements by several of the defendants undercut this, including quotes cited by Judge Cote.  From the opinion:

Apple also revealed that the prices for eBooks on the iPad would be higher than $9.99.  Nevertheless, Apple’s CEO, Steve Jobs (“Jobs”), told a reporter at the event, “The prices [on the iPad and the Kindle] will be the same,” and “Publishers are actually withholding their books from Amazon because they are not happy.”  The following day, Jobs told his biographer the following:

Amazon screwed it up.  It paid the wholesale price for some books, but started selling them below cost at $9.99.  The publishers hated that -- they thought it would trash their ability to sell hard-cover books at $28.  So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon.  So we told the publishers, “We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.”  But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too.  So they went to Amazon and said, “You’re going to sign an agency contract or we’re not going to give you the books.”  . . . Given the situation that existed, what was best for us was to do this aikido move and end up with the agency model.  And we pulled it off.

She further quoted HarperCollins parent News Corp. CEO Rupert Murdoch as saying:

Yeah we don’t like the Amazon model of selling everything at $9.99 they don’t pay us that.  They pay us the whole wholesale price of $14 or whatever we charge but we [sic] I think it really devalues books and it hurts all the retailers of the hard cover books. . . . Amazon, sorry, Apple in its agreement with us, which is [sic] not been disclosed in detail, does allow for a variety of slight of [sic] higher prices.  There will be prices very much less than the printed copy of books.  But still it will not be fixed in a way that Amazon has been doing it.  And it appears that Amazon is now ready to sit down with us again and re-negotiate pricing.

John Sargent, CEO of Macmillan acknowledged concern about pricing and that moving to the agency model meant less profit, but resulted in a more stable market.  These kinds of statements along with a take-it or leave-it ultimatum to Amazon for adopting the agency model are some of the points used by the Judge in sustaining the complaint. 

The Judge cited Supreme Court precedent that countered any characterization of the allegations as insufficient and generally dismissed the arguments that this was all innocent coincidence on the part of the defendants.  Jude Cote posed a hypothetical where each of the parties acted independently and conducted its own cost-benefit analysis in switching to the agency model.  She extended the analysis to several different scenarios and concluded that it didn’t hold up:

This hypothetical reveals that, from the publishers’ perspective, the switch to the agency model had the hallmarks of a classic collective action problem. Whereas many of the benefits of this switch (like increased consumer perceptions of book value and a slower industry-wide transition from the brick and-mortar retail model) were shared across the publishing industry and not susceptible to capture by any single publisher, most of its costs (like decreased revenue per sale and, if a publisher was a first or sole mover, decreased market share) were borne individually. Moreover, in order to compel Amazon to abandon the retail model, a critical mass of publishers was needed. No single publisher would have had the leverage to force Amazon to make the switch. For these reasons, it is at least plausible that no Publisher Defendant would have signed an agency agreement with Apple absent a firm understanding with its rivals that they would do the same.

Apple shared the publishers’ interest in solving this collective action problem. Although the Complaint does not claim that Apple had an interest in higher retail prices, per se, it does plausibly allege that Apple had an interest in limiting retail competition. The Agency Agreements were a means to accomplish both these goals through a single tool. The switch to the agency model meant that the Publisher Defendants could control retail prices, whereas the MFN clauses protected Apple and its 30 percent commission from price competition by other retailers. 

Moreover, Apple had a strong incentive to encourage the Publisher Defendants to act collectively: If a critical mass of publishers had not agreed to these terms and forced an industry-wide switch to the agency model, Apple would have faced stiff competition in establishing its iBookstore. Under such a scenario, the iBookstore would have been able to offer only a limited selection of eBooks at higher prices than stores operating under the wholesale model. Apple would almost certainly have faced a greater challenge in entering the eBooks market and expanding its market share in such circumstances.

Each side, of course, has to present evidence and prove their allegations or defences in the case.  This case is going forward without any doubt on the part of the Judge.  [MG]