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Five questions that may explain some aspects of the Apple e-books litigation

30 August 2012

From Legal Minimum:

As I’ve been reviewing the documents and the posts around the Web on the Apple e-books price-fixing litigation, I’ve seen a few things that it seems people don’t understand. To help give some background I’ll explain so that you can have an easier time following this important litigation.

. . . .

1. So what’s the illegal activity in this situation? The technical term is something called horizontal price maintenance. There’s two types of price maintenance: horizontal and vertical. Vertical is the one we’re more familiar with: the manufacturer sets the price and everyone else agrees to pay it. Horizontal is less common because it requires a conspiracy among competitors: it occurs when everyone at a certain level in the market (e.g. the publishers) agrees on the cost for a certain good (e.g. e-books).

It’s illegal because it harms consumers. Everyone in the chain of commerce before the consumer actually benefits from this. The DOJ has explained it in the Apple context so let’s use that: publishers get higher prices therefore higher profits, and Apple gets a percentage of those prices therefore higher revenues as well as gets to make sure its competitors can’t undercut it. (And don’t forget authors: higher prices means higher royalties for them too.) The only people who lose out are consumers. That’s why it’s illegal: because if it wasn’t then everyone would do it.

. . . .

3. Why did the DOJ sue publishers that were willing to settle? Although the DOJ brought charges against 5 publishers, 3 of them were willing to settle immediately. So why charge them? Two reasons:

  1. If the DOJ gets a settlement from a publisher, it has a contract with them. If the publisher breaches the contract, the DOJ can sue them. But if it charges first and settles in the context of the trial, then it gets a judgment. If the publisher breaches a judgment, that’s contempt of court.
  2. Antitrust laws exist to protect the public, so it’s important not to settle a criminal offence in quiet behind closed doors. Think of this as similar to a plea bargain: even where both sides agree on a plea charges still have to be filed so that a judge can review the arrangement and decide whether it should be acceptable. In an antitrust case there’s also a law called the Tunney Act that requires the court to solicit, receive, and review comments from the public before accepting a settlement, which has happened here and about which I’ve written a few times (links below).

Link to the rest at Legal Minimum

Amazon, Apple, Big Publishing, Legal Stuff

13 Comments to “Five questions that may explain some aspects of the Apple e-books litigation”

  1. To be clear: I have no proof of this, but it’s possible that Random House may have been the one who told the FTC about the conspiracy. In the US there is a very serious prisoner’s dilemma aspect to price-fixing conspiracies. The first member that goes to the FTC and helps build the case gets immunity. Reading the complaint it’s clear that the FTC and DOJ had access to hundreds of documents, emails, meeting notes, etc. Things they could only have if someone who was in the room gave them up.

    I had wondered where the DOJ had gotten the information and documents, but I hadn’t noticed that Random House was missing. Was there a change in Random House leadership/management recently?

  2. I knew RH didn’t agree to the original price-fixing arrangement with the other publishers and Apple, but if they actually rolled over on them, which does explain a lot about the origin of the damning documents, that’s really an astounding break with the big publishing lockstep dance that’s been going on for decades. Like Jared, I’m curious to know if this was a new blood sort of thing.

    And amusing in a schadenfreudish sort of way is the fact that the remaining publishers can’t even b**** and moan about RH dropping the dime, because they still have to aver the whole thing never happened. Yes, it’s cruel of me to chuckle. I can’t deny it. And yet….

  3. You never need to be an industry insider to see all the “horizontal” practices in trad-publishing, but DOJ getting all the documents and the info?

    Holy Sh!t, what a story that would be.

  4. I hadn’t considered Random House as possibly ratting out the others, I just assumed they weren’t charged because they not only didn’t sign on to the collusion at the beginning, they were essentially pressured into it later (see Penguin encouraging Barnes & Noble to “punish” them). I guess it comes down to why RH stayed out to begin with. Did they do it because they didn’t believe it was a good idea or because they knew it was illegal as hell and wanted to avoid possible future repercussions. If they didn’t believe in it, maybe they were a little annoyed at being basically railroaded to signing on. That would actually be pretty fitting, I think.

  5. Here’s a link to the DOJ Complaint: http://www.justice.gov/atr/cases/f282100/282135.pdf

    Look at paragraph 53 for the clearest instance (on page 17 of the PDF). See the reference to “each Publisher Defendant and Random House”? That’s the clearest instance I’ve seen but there’s a bunch of other references in there that indicate there is a publisher who wasn’t charged. The DOJ wouldn’t refrain from charging a member of (an alleged) conspiracy without good reason. That good reason would be that they’re the one who gave up the documents and the records.

    You’re not looking for someone with a change of leadership at the CEO level. What you’d be looking for is negative evidence: you’d be looking for a company that *didn’t* just lose its General Counsel. If/when this ever gets proven there’s a real risk of charges being brought against executives, and definitely class action litigation as well (e.g. on behalf of everyone who bought an e-book that had higher-than-$9.99 pricing). The two sets of executives that are exposed to this kind of risk are the CEO and the exec who put the scheme into effect, and the General Counsel who knew about the scheme and didn’t stop it. I was an antitrust litigator in a previous life and I’m a GC now (though thankfully not one who has to deal with issues like this) so I’ve seen this movie before.

  6. I had figured Random House was cooperating with the Justice Department as soon as the indictment was released and all the high-level/few participant secret meetings were detailed.

    Along with Random House not being one of the defendants, also remember that Random House was the publisher that sat out the original iPad release:

    http://www.nytimes.com/2010/01/28/business/media/28media.html?_r=1&pagewanted=print

    Supposedly Steve Jobs was pretty furious about that (poor guy apparently got furious quite a lot) as he had wanted all six major publishers on board for the launch.

  7. It had never occurred to me that RH might have dropped the dime on them but it is certainly possible. It always looked as though they got dragged in. Considering that it was as illegal as hell… Good thinking on their part.

  8. One mistake. Higher prices did NOT equal higher royalties for the author. Agency pricing was a contest to see who got screwed harder, the reader or the author.

    • No, it’s not agency pricing’s fault. I adore agency pricing; it lets me have more control over the price of my books, and I find that I like control over my stuff.

      The issue isn’t that they all wanted to have complete control, so much as they all then jacked the prices up, and jacked them up in lockstep with each other. If they’d instituted agency pricing and then played pricing “chicken” with each other and new bestsellers and 99c backlist for a couple months or whatever… I somehow suspect the DoJ wouldn’t have been as happy to pounce.

      Of course, the big publishers have been playing “gas station across the street” at best, for years and years — tweedle a price up, tweedle a price down, all just by a few cents and you move to match your competition. At worst, they’ve been comparing notes and agreeing what a book is worth. It’s not surprising they’d abuse agency publishing the same way.

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