September 6, 2012
Judge Approves Settlement With 3 Publishers In Apple e-Book Case
Bloomberg is reporting that Judge Cote approved the settlement between the Justice Department and the three settling publishers accused of price fixing. I haven't seen the order yet. I'll update this post as soon as I see a copy.
The fact that the order is 45 pages of print suggests that it wasn’t something that Judge Cote or her clerks fashioned late last night after all the briefs were finally filed. She grants the motion to implement the Proposed Final Judgment, and in the process destroys all of the arguments raised by opponents. She even recognizes that 90% of the comments filed on the merits of the settlement were negative. They blamed Amazon:
Some comments were filled with extreme statements, blaming every evil to befall publishing on Amazon’s $9.99 price for newly released and bestselling e-books, and crediting every positive event -- including entry of new competitors in the market for e-readers -- on the advent of agency pricing.
The Court summarized the arguments against the settlement into four categories:
First, they expressed concern that the proposed Final Judgment would actively harm third-party industry stakeholders, such as brick-and-mortar bookstores, e-book retailers, independent publishing houses, and authors. Second, they argued that the decree itself is unworkable, goes too far in disallowing practices held to be legal under the antitrust laws, and involves DOJ in “regulation” of the e-books market. Third, they questioned whether the Government has established a sufficient factual basis for its conclusions regarding the competitive impact of the decree. Fourth, they alleged that defendants’ collusive behavior had substantial pro-competitive effects through, among other things, limiting the negative impact of Amazon’s monopoly; these comments contend that the decree is not in the public interest because it will facilitate retrenchment of Amazon’s monopoly practices.
The response to the first arguments is the antitrust laws protect the consumer and not the disruption to existing businesses by new distribution channels:
In this case, the “individuals alleging specific injury from the violations set forth in the complaint” are e-books consumers, not third-party stakeholders like brick-and-mortar bookstores. And although the birth of a new industry is always unsettling, there is a limited ability for anyone to foresee how the market will evolve. What is clear, however, is the need for industry players to play by the antitrust rules when confronted with new market forces. It is not the place of the Court to protect these bookstores and other stakeholders from the vicissitudes of a competitive market.
As to the second argument, the Court stated that some terms of the settlement, specifically the provision that allows the settling publishers to enter into agreements prohibiting the retailer from selling books at a cumulative loss were included at the behest of the publishers. It is voluntary for them to include these terms in their contracts with retailers. Other sections of the agreement, the Court states, address the issues raised in the complaint are neither overbroad or over-regulatory.
Some of the government allegations were attacked because the government did not conduct economic studies. This was argued in several of the briefs. The Court responded that these were not necessary. And as to the arguments that e-book prices fell after the implementation of agency agreements:
[R]egardless of what happened to average e-books prices, it is undisputed that the Agency Agreements disallowed retail price discounting. After defendants’ coordinated switch to agency pricing, a consumer could not find Publisher Defendants’ newly released and bestselling e-books for $9.99 at any retailer. Fourth and finally, the Government has further explained how the proposed Final Judgment will end price-fixing and prevent its recurrence by limiting the Settling Defendants’ ability to collude, share information, and use retail price restrictions and Price MFNs in contracts with e-books retailers. Overall, these detailed allegations and explanations provide ample factual foundation for the Government’s decisions regarding the proposed Final Judgment.
The Court summarizes the fourth argument against the settlement:
In short, the comments contend that competition in the e-books industry is alive and well, in no small part due to the defendants’ allegedly illegal cartel. Even if such a cartel existed, its main accomplishment was to allow industry participants to compete on a level playing field.
This is the Amazon was a monopoly until the publishers did something argument. Judge Cote addressed Bob Kohn’s argument that the market definition includes proprietary reading devices, which makes it difficult for consumers to switch stores. If Amazon gains a monopoly, then this difficulty helps Amazon keep it. The Court says all of this is speculative and that anti-competitive agreements alleged against the publishers foreclose all kinds of market innovations such as “all you can read” subscription services, book club pricing, and rewards programs. Moreover, even if Amazon gained a monopoly, the conduct of the parties is not justified as a reaction. Judge Cote notes:
The familiar mantra regarding “two wrongs” would seem to offer guidance in these circumstances.
The Court next addressed Apple’s arguments. The first is that the settlement requires the publishers to terminate their agency agreements within seven days. These contracts extend that right to thirty days for other retailers. Additionally, the Court may not impose obligations via a settlement on third parties. The Court stated that Apple is under no obligation to do anything under the settlement. The publishers are the only ones who are required to act. Apple more or less had notice of the settlement since April. Any impact on Apple compared to other retailers is minor.
Download the Apple Settlement Order. I guess it will be on to the Second Circuit. [MG]