Why Apple is settling EC’s e-books antitrust case – but not DOJ’s

September 20, 2012

On Wednesday, Reuters confirmed what it first reported last month: Apple and four book publishers have offered to settle a European Commission investigation of price-fixing in the market for e-books. That’s particularly notable because Apple and two of those publishers – Macmillan and Viking – have refused to settle with the U.S. Justice Department’s antitrust division, which reached an agreement last April with three other publishers accused of conspiring with Apple to change the pricing model for e-books. Neither the DOJ settlement nor the proposed EC deal involve a financial penalty, so why would Apple, Viking and Macmillan agree to settle with antitrust regulators from the European Union but not their U.S. counterparts?

Two reasons: EC procedure and U.S. liability.

First, a caveat. I reached out to Macmillan’s lawyers at Sidley Austin, Penguin’s counsel at Akin, Gump, Strauss, Hauer & Feld and Apple’s lawyers at Gibson, Dunn & Crutcher, but none would comment, nor did Apple respond to a request for comment. In other words, I’m offering informed speculation rather than from-the-horse’s-mouth reporting.

That said, consider the way antitrust cases proceed at the EC, which is the trade section of the European Union. After regulators complete their investigation and conclude that defendants have engaged in anti-competitive behavior, they have the power to levy a fine before there’s any court ruling on liability. Those fines, moreover, can be huge. In 2008, the EC levied a $1.3 billion penalty against Microsoft for failing to comply with a previous EC directive to permit competitors to run programs on Windows. The following year European regulators set a new record with a $1.4 billion fine for the accused chip monopolist Intel.

Unlike in the United States, where the Justice Department’s allegations can be tested in court before there’s any presumption of liability and assessment of damages, defendants in EC proceedings can only go to court after the EC announces its penalties. According to Reuters’ account of Intel’s argument this summer to the General Court in Luxembourg, where it hopes to overturn the EC’s 2009 penalty, Intel’s lawyers said essentially what they would have said to a U.S. judge on a motion to dismiss or motion for summary judgment; indeed, Intel settled the same allegations that led to the EC fine with the Federal Trade Commission in 2010 for no monetary payment. But because this was an EC case, Intel has had to deal with the overhang of a billion-dollar penalty for the last three years. And proceedings to overturn or reduce EC antitrust fines are anything but a sure bet. This summer, Europe’s second-highest court upheld Microsoft’s 2008 penalty, though it reduced the fine slightly. The leverage that the EC enjoys simply by virtue of the process has also changed Google’s approach to negotiations with European regulators, according to a Reuters special report in June.

I’m assuming that Apple wasn’t at risk for a billion-dollar penalty in the EC’s e-books case, considering that the settlement it’s offering merely calls for Apple and the publishers to suspend most-favored-nation agreements that prevented other e-book sellers from undercutting Apple’s prices. But the company has an incentive to seem like a good corporate citizen to European antitrust regulators, who just happen to be investigating Apple’s allegations that Motorola is illegally blocking competitors from standard-essential technology in the smartphone wars.

Apple and the publishers also face less collateral damage from an EC settlement than a DOJ agreement. The Justice Department did not extract money damages from the three publisher defendants that settled in April, but those publishers also reached a $29 million deal with 49 state attorneys general. There’s also a pending antitrust class action that may not be mooted by the AG deal. Presumably, if Apple, Viking and Macmillan had settled with the Justice Department, their admissions of collusion would be evidence in the parallel AG and private cases. By contrast, there’s no analogous private litigation in Europe. If the European Commission agrees to the offer extended by Apple and the publishers, they’ll be out of hot water in Europe without paying any money at all.

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