Previewing e-books defense: No price-fixing, no harm to readers

April 16, 2012

Has there ever been a price-fixing case in which the alleged conspirators agreed to take less money for their product and simultaneously up their production and boost competition? The answer to that question may determine the success of the Justice Department‘s e-books antitrust suit against Apple and the two publishers that have not agreed to settle DOJ’s civil charges.

On Friday, Apple and three publishers filed reply briefs in their effort to win dismissal of the private antitrust class action that parallels the Antitrust Division’s case. Those filings, coming two days after the government brought suit, offer good hints at how defense lawyers for Apple and the publishers will counter the Justice Department’s allegations. (Interestingly, Hachette and Harper Collins — the two publishers that have reached a tentative $52 million settlement with 16 state Attorneys General — did not sign the joint publishers’ motion, which suggests that they may argue their AG deal resolves the class action plaintiffs’ damages claims.)

The essence of the government’s case (as well as the private class action) is that the publishers regarded Apple’s entry into the e-books market as a chance to break Amazon’s 90-percent monopoly. As part of that effort, the publishers allegedly conspired with Apple to change the e-books model from the wholesale pricing Amazon insisted upon to so-called “agency pricing,” in which publishers set prices and Apple received a commission for every e-book it sold. Both the class action and the government suit assert that Apple and the publishers engaged in what’s known as “per se” price-fixing, which means that plaintiffs must only prove there was a conspiracy to restrain competition and raise prices. The Justice Department and private plaintiffs claim the proof of the conspiracy is the rise in e-book prices after the publishers all signed agency-pricing deals with Apple, from $9.99 to $12.99 or $14.99 for new titles.

But the publishers have long argued that the price-fixing evidence doesn’t add up, since they actually make less money per book through Apple’s agency model than through wholesale pricing, in which they sold books directly to Amazon and received a percentage of that sale price. Before Amazon’s e-book reader, the Kindle, faced competition from the iPad and Barnes & Noble’s Nook, the publishers assert, Amazon regarded e-books as a loss leader to drive Kindle sales, so it was willing to pay relatively high prices to publishers. Nevertheless, according to the 24-page brief filed Friday by Penguin, Macmillan, and Simon & Schuster, the publishers were all so concerned about Amazon’s stranglehold on the e-books industry — and the risks that monopoly posed for sales of both e-books and traditional books — that they independently signed on with Apple. Independent decisions, even in parallel, don’t constitute price-fixing, the publishers contend.

The publishers’ motion to dismiss the class action relied heavily on the U.S. Supreme Court’s 2007 ruling, Bell Atlantic v. Twombly, which held that antitrust plaintiffs must show specific, detailed evidence of a conspiracy. That may be a less appealing defense against the Justice Department’s complaint, which includes the sort of specific allegations of meetings and e-mails that Twombly demands. Instead, when Apple and the publishers move to dismiss the government’s suit, I’ll expect to see an argument Apple raised in the 20-page brief its lawyers at Gibson, Dunn & Crutcher filed Friday in the class action. Apple asserted that the e-book case should be considered under the “rule of reason” standard articulated in the U.S. Supreme Court’s 2007 ruling Leegin Creative Leather v. PSKS. Under the rule of reason, as opposed to a per se price-fixing case, the plaintiffs have to prove the alleged conspiracy impacted the market.

In Leegin, the Supreme Court held that only price restraints that restrict competition and decrease output are per se illegal under the Sherman Act, and courts may only find per se illegality when they “have had considerable experience with the type of restraint at issue.” Apple contended that the e-book class action plaintiffs can’t meet the rule of reason standard because Apple didn’t have the market power to insist on higher prices and e-book sales soared after Apple entered the market. “Apple simply entered a market it never competed in, using bargained-for agreements that did not set prices or limit output at all,” the brief said. “Prices cannot be divorced from output, legally or economically, and it is beyond dispute that Apple’s entry with the iPad and iBookstore was expected to, and did, ‘prompt a surge in eBook purchasing.'”

Though Apple emphasized that it can’t be the hub of a price-fixing conspiracy through individual agreements with publishers — and thus the per se rule can’t apply to its conduct — the publishers also have a strong argument that no court has the requisite “considerable experience” with the kind of price-fixing conspiracy alleged in the e-books case to apply the per se standard. The publishers could argue that aside from the higher prices consumers now pay for e-books, the e-books scenario lacks classic indicators of price-fixing, such as more money for members of the conspiracy, less competition, and reduced output for purchasers. If the defendants persuade U.S. District Judge Denise Cote of Manhattan federal court, who is overseeing all of the e-books litigation, to adopt the rule of reason standard and consider the marketplace impact of the alleged conspiracy, they are sure to point out that increased competition in the e-books market has led to drastically lower prices for e-readers like the Kindle and the Nook, as well as many more titles becoming available.

Apple is represented in the Justice Department case by O’Melveny & Myers. On Friday’s brief for the publishers are Sidley Austin for Macmillan; Akin Gump Strauss Hauer & Feld for Penguin; and Weil, Gotshal & Manges, Proskauer Rose, and the Law Office of Martha E. Gifford for Simon & Shuster. Harper Collins, which did not join the publishers’ reply brief and has settled both the Justice Department and state AG cases, is represented by Skadden, Arps, Slate, Meagher & Flom in all of the e-books litigation. Hachette, which has also settled with DOJ and the AGs, has Freshfields Bruckhaus Deringer.

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Wow! That’s a whole lotta mumbo jumbo, worthy of the $1,000 per hour boys (and girls)! Nothing can be more obvious than that this arrangement brought the prices up up books up to the level of paperbacks. Just go visit Amazon. As people realized that they saved nothing by buying ebooks instead of print books in the case of bestsellers and the top trade books — despite the obvious cost savings in paper, shipping, etc. — many were discouraged to buy ebooks and e readers. And that was the whole idea! Because the publishers can’t possibly dominate a world in which their cost advantages and marketing leverage in print books is undermined by cheap e-books purchased over the internet (often self-published). This has nothing to do with profits on the individual titles — and that’s why they can make these deceptive arguments. It has EVERYTHING to do with keeping ebooks as unattractive as possible and thereby preserving the old system in which they dominate. Perfectly comprehensible and perfectly illegal.

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