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Judge Cote’s rules in favor of settlement in DOJ’s price fixing...


As I posted yesterday, Judge Cote approved the settlement between the DOJ and Simon & Schuster; Hachette; and HarperCollins.  The decision which can be read in its entirety here was rendered without delay because, as Judge Cote wrote on the last page of her decision “E-books consumers should not be forced to wait until after the June 2013  trial to experience the significant anticipated benefits of the decree.”

The majority of the battle was won when the DOJ made the case in its petition (and the petitions of the other parties including the state AGs) for a finding that the case could and should proceed on a Sherman I violation of price fixing.  This was an important win for the DOJ because the only defense to a per se price fixing case is to prove that there was no conspiracy to price fix.  Judge Cote called this a straight forward price fixing case and measured against the alleged harm, the settlement met the public interest standard.


The DOJ filed suit alleging that five publishers and Apple engaged in a conspiracy to fix ebook prices.  This alleged conspiracy was carried out by imposing publisher controlled pricing at every retailer and ensuring that an ebook price at Apple would reflect the lowest price at any competing retailer.  This latter price control is known as an MFN (Most Favored Nation) clause.

At the same time that the DOJ filed the suit, it announced that it had entered into a settlement agreement with Hachette, HarperCollins, and Simon&Schuster, pending approval of the Court.  Apple, Macmillan, and Penguin filed motions to dismiss.  It was in the ruling denying the Motion to Dismiss that Judge Cote issued a strongly worded criticism of the parties actions and rejected the motions to dismiss on the grounds that the DOJ had articulated sufficient facts to proceed on a Sherman I antitrust claim.

Cote ultimately found that the price restraint allegations were horizontal (between firms) and not merely vertical (within the firm) & conscious parallelism and thus measured under a per se standard but that even under a rule of reason would be illegal.


The question, thus, was a measurement of whether it was in the public interest to proceed with the proposed settlement.  The settlement contained four basic requirements.  Each settling publisher must:

  1. Terminate their agreements with Apple within 7 days.
  2. Terminate any agreement with another retailer if it a) restricts the right of the retailer to discount or b) has an MFN clause.
  3. Not contract to restrict the right of a retailer to discount for two years.
  4. Not include an MFN clause for five years.
Under what is known as the Tunney Act, judges are to measure whether a settlement in an antitrust case involving the government is “in the public interest.”
The role of the court is not to determine whether the decree results in the array of rights and liabilities “that will best serve society, but only to ensure that the resulting settlement is within the reaches of the public interest.”  Keyspan, 763 F. Supp. 2d at 637 (citation omitted).
Judge Cote determined that a) the settlement was closely tied to the allegations, addressing the concerns of price fixing through the imposition of agency pricing and the MFN clauses; and b) the public was not third party special interests like brick and mortar stores, but actual consumers of ebooks.

The decree is directed narrowly towards undoing the price-fixing conspiracy, ensuring that price-fixing does not immediately reemerge, and ensuring compliance.  Based on the factual allegations in the Complaint and CIS, it is reasonable  to conclude that these remedies will result in a return to the pre-conspiracy status quo.  In this straightforward price-fixing case, no further showing is required.

Judge Cote acknowledged the numerosity of objections to the settlement, discarding the ones that characterized Amazon as an all evil being.  She didn’t use the word histrionic, but I think the sentiment was lurking behind the sentences.  ( She wrote: 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.)

While the objectors wanted more time, Judge Cote felt that the nearly 900 comments and resistances and amici curae briefs were more than sufficient to provide her with a basis to rule.  She addressed, in some detail, four main objections to the settlement.  You can read my summary of the resistances here.

Four Pronged Complaint

Judge Cote summarized the complaints of the resistors and detractors to the settlement as falling into four broad categories:

  1. Harm to third party stakeholders such as “brick-and-mortar bookstores, e-book retailers, independent publishing houses, and authors.”
  2. Decree is not able to be implemented and involves the regulation of the ebook industry by the DOJ;
  3. DOJ failed to provide sufficient evidence to support its allegations and thus the need for the settlement; and
  4. The conspiratorial acts were necessary to combat Amazon’s monopoly.

A.   Harm to Third Parties

Judge Cote wrote that harm to third party stakeholders was not the type of harm the Sherman Act was designed to address.
“The purpose of the Sherman Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market.”  Int’l Bus. Machines, 163 F.3d at 741-42.  If unfettered e-books retail competition will add substantially to the competitive pressures on physical bookstores, or if smaller e-book retailers are unable to compete with Amazon on price, these are not reasons to decline to enter the proposed Final Judgment.
Instead, Judge Cote places the onus on the publishers to support and subsidize the markets that they feel are important to their business model, instead of the ebook consumer doing it.  Cote encourages publishers to pay promotional dollars to brick and mortar if they feel there is value in doing so.
As to Amazon’s alleged free-riding, the decree expressly permits the Settling Defendants to compensate brick-and-mortar bookstores directly for promotional services that they provide to publishers or consumers.  The Settling Defendants should be willing to pay for these services if they truly value them.

B. Breadth and Functionality of the Decree

Judge Cote said that the scope of the settlement was narrowly focused to address both the agency price fixing and the MFN clauses because those two things were used together.   The functionality question involved the policing of the exemplar agency model that the settlement suggested was permissible.  The settlement outlined one instance in which agency model could exist.

The  settlement agreement allows a retailer, like Amazon, to discount books but limits the discount in one year for one publisher to not exceed the retailers aggregate commission.  Assume Amazon signs an agreement with Hachette and Amazon agrees to accept a 30% commission on every book sold.  For one year, the total amount of discounts cannot exceed the total commission Amazon received for that year.  Some of the books could be half off, buy one get one free, or not be discounted at all.  But the total discount cannot exceed total commission.  Assume Amazon sold 100 books for Hachette that were retail priced at $9.99.  The total commission for Amazon would be $299.70.  Thus, the overall discounts Amazon gave to us readers could not exceed $299.70.

The objecting parties argued that this would require the DOJ to regulate the aggregate commissions and corresponding discounts.  The DOJ in its response argued that it had included this provision at the behest of the settling defendants and those defendants did not indicate any problems in implementation. Judge Cote reminded the parties that this provision is entirely voluntary and therefore does not involve DOJ regulation. Indeed, if the settling publisher and Amazon had such an agreement and the settling publisher felt Amazon had not complied, it would only need to sue Amazon for breach of contract, not run to the DOJ.

C. Factual Basis for the Government’s Conclusions

Apple, B&N, Penguin, Macmillan, and indeed, the infamous Kohn, argued that DOJ need to pony up some real evidence in order to justify the settlement.  Judge Cote wrote that the DOJ only need to make detailed factual allegations, but was not required to prove its case at the settlement phase.  The only facts in dispute, according to Judge Cote, was whether a conspiracy took place.  The agency agreements existed, the pricing tiers by Apple “determined actual prices for many newly-released and bestselling e-books”, no discounting was allowed, and “[a]fter 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.”

D.   Competitive Effects of Defendants’ Alleged Collusion

This is where Judge Cote addresses the Amazon is evil argument.  The objectors and resistors to the settlement argued that competition in the ebook industry existed in large part due to the illegal price fixing.   Cote replied that market conditions of ebooks were in no way similar to the market conditions for performance rights to recorded music, discarding the argument by Bob Kohn that the case of Broadcast Music which permitted price fixing should control; that two wrongs don’t make a right; that it is purely speculative as to whether illegal price fixing allowed for more competition.

As Writers House President Lipskar points out, “Ultimately . . . we can’t possibly know what would have happened had agency not been implemented.  We can conjecture.  We can disagree.” Although Lipskar argues that this lack of certainty disfavors entry of the decree, in fact it indicates the soundness of DOJ’s decision to target a more comprehensible market

Finally, Judge Cote addressed Apple’s supposed worry that it will not be able to renegotiate new contracts within the allotted time.  Cote pointed out that Apple is simply losing 23 days as its agreements allowed for a 30 day termination by either party and that Apple has had five months to engage in negotiations. Further delays, according to Judge Cote, will not serve the harmed party – the ebook customer.

What’s Next?

  • The judge approves the settlement.
  • Within 7 days, the Settling Defendants (Hachette, HarperCollins, and Simon & Schuster) will need to sever their contracts with Apple.
  • Within 30 days, the Settling Defendants will need to bring their pricing arrangements in line with the terms dictated in the Settlement Agreement.
  • Within 30 days, contracts that restrict an ebook retailers ability to set the price of an ebook or a most favored nation clause must be broken. Amazon would be a retailer with whom publishers have an MFN clause.
  • Publishers must designate an Antitrust Compliance Officer to train the employees of the publishers in how to abide by the rules set forth in the agreement; to conduct an audit; provide quarterly reports of compliance to the DOJ, and to maintain a log of communications between “officers and directors” and others if the communication involves selling of ebooks.

For the non settling parties, only Apple could ask for an immediate appeal. I don’t believe it will be granted because Judge Cote noted that any harm to Apple was de minimis or minimal.  The case will proceed toward trial in 2013.

Jane Litte is the founder of Dear Author, a lawyer, and a lover of pencil skirts. She self publishes NA and contemporaries (and publishes with Berkley and Montlake) and spends her downtime reading romances and writing about them. Her TBR pile is much larger than the one shown in the picture and not as pretty. You can reach Jane by email at jane @ dearauthor dot com


  1. Kaetrin
    Sep 07, 2012 @ 05:13:36

    Thank you Jane for the detailed analysis.

  2. Estara
    Sep 07, 2012 @ 06:19:22

    Yes, I just want to echo Kaetrin. There is no other site I’ve seen who breaks it down so understandably. And I’m not even a US citizen (though I buy lots of US ebooks) and haven’t got the slightest background knowledge in your law (except for various rights from the Consitution and its amendments that get quoted often).

  3. Lynnd
    Sep 07, 2012 @ 07:32:06

    Thank you Jane. Your explanations and analysis throughout this process has been clear, coherent and understandable and I look forward to your reports as the case proceeds. Do you think that this might put some pressure on Macmillan and Penguin to fall in line with the settling defendants or will they continue to waste money on what appears to be a losing batthe (both legally and commercially)?

  4. Jane Litte
    Sep 07, 2012 @ 08:06:39

    @Lynnd – I guess it depends on whether Macmillan and Penguin believe it is in their best interest to hold onto Agency pricing for a while longer.

  5. Mike Cane
    Sep 07, 2012 @ 08:32:18

    Gonna be lot and lots of discounts for eBooks for Xmas sales at Amazon. Save your pfennigs.

  6. joe thompson
    Sep 07, 2012 @ 08:40:57

    “Cote ultimately found that the price restraint allegations were horizontal (between firms) and not merely vertical (within the firm) & conscious parallelism and thus measured under a per se standard but that even under a rule of reason would be illegal.”

    I don’t believe she “found” this at all….my understanding is that it is something that will have to be determined at trial…..approving the settlement does not go there…..she restates the DOJ position that it is horizontal thus per se – but makes no finding…..

  7. Weirdmage
    Sep 07, 2012 @ 08:54:29

    Thanks for a good analysis, Jane.

    There’s still several things I don’t understand, or to be more precise that don’t make sense to me. (This may be because I’m Norwegian, and the legal system in the US is so different to what we have here.)
    Firstly, that the DoJ doesn’t actually have to prove that there has been price fixing (i.e. prove in a court of law) before these remedies are put into action. This judge seems to just say that the allegations themselves are enough to not wait for a trial, and then goes on to state cathegorically that there has been price-fixing. I thought this went against everything a system of law was designed to prevent. Shouldn’t the accuser, DoJ, have to prove guilt, not the defendants have to prove innocence?
    And what happens if a court determines there was no conspiracy, and that setting prices (, what this judge calls “price fixing”,) were legal? Can the publishers then sue the DoJ for damages?

    Secondly, MFN clauses are mentioned several times as something bad. Something that has to be removed. -So what will the DoJ do with KDP, and KDP Select, terms? they have MFN clauses. And KDP Select even have anti-competition clauses. What will this have to say for those? Or is that somehow something completely different?

    A final thought. Can publishers, under this judgement, start selling e-books wholesale? For instance in batches of 1,000 as a minimum? It seems to me that this would be a solution that would be perfectly legal, and also make sense from a publisher’s point of view.

  8. Jane Litte
    Sep 07, 2012 @ 08:57:23

    @joe thompson: No, she did FIND that the allegations were sufficient to state a claim for horizontal price fixing which made the case a per se antitrust case not a rule of reason antitrust case.

  9. Jane Litte
    Sep 07, 2012 @ 09:02:16

    @Weirdmage: There is no need for proof here because the participating defendants want to forego the expense of defending themselves and the possibly far more negative consequences of losing at trial. Thus at the settlement stage, a plaintiff is never called upon to prove anything. The remedies in the settlement agreement were negotiated by the settling defendants. They are not fiats imposed upon the settling defendants by the DOJ.

    If the non settling defendants win at trial, they win. There is no remedy against the DOJ.

    The settling defendants cannot use MFN clauses for five years. At all. No retailer. This will affect Amazon’s contracts with those settling defendants. KDP is not part of the suit.

    Under the settlement, the non settling defendants can engage in any contracts with retailers so long as it does not affect the retailers ability to discount.

  10. joe thompson
    Sep 07, 2012 @ 09:09:58

    @Jane Litte:

    right – “sufficient to state a claim” – the way you stated it suggested to me that you were saying she found it as a matter of law – and she essentially said it was plausible given the facts they presented that they could make that claim – she didn’t find that they proved anything but that she sees enough to make it plausible….thank you for your presentation of all of this by the way…..

  11. Jane Litte
    Sep 07, 2012 @ 09:14:51

    @joe thompson: Judge Cote’s finding that this was a per se horizontal price fixing case is super important. It was the measurement against which she weighed the remedies in the settlement. Moreover, rule of reason cases are hardly ever won by the plaintiff whereas per se cases are hardly ever won by the defendant. If you haven’t read her ruling on the motion to dismiss, I urge you to do so. Her language was quite strong which is what led me to believe that she would at the least approve the settlement and quickly.

  12. tom johnson
    Sep 07, 2012 @ 09:15:09

    @Jane Litte:

    Under the settlement, the non settling defendants can engage in any contracts with retailers so long as it does not affect the retailers ability to discount.

    are you sure of this?? the non settliing defendants are not affected by the settlement and they are not reached by it….

  13. Jane Litte
    Sep 07, 2012 @ 09:18:10

    @tom johnson: Oops, that should read “settling defendants”. Thank you for pointing out the error.

  14. joe thompson
    Sep 07, 2012 @ 09:21:15

    @Jane Litte:

    thanks – i get what you are saying…..that she sees it as horizontal price fixing case – and she weighed the settlement as if it had been proven – hence the remedies….but non settlers still have their day in court (as difficult as it may be for them to prove – leegin opened the door a bit more than it had been so…..never know)

  15. Jane Litte
    Sep 07, 2012 @ 09:30:16

    @joe thompson: I hate to be a pedant here, but Leegin doesn’t apply in this case. Leegin was a case that held vertical price restraints were measured under the rule of reason. I.e., agency pricing wasn’t per se a violation of antitrust as it had been for oh, 100 years. In this particular case, the allegation is of horizontal price fixing which involves price restraints agreed to between competitors which, as Judge Cote stated in her approval of the settlement, is simply a straight forward price fixing case.

  16. joe thompson
    Sep 07, 2012 @ 09:44:35

    @Jane Litte:

    please pedant away…..appreciate it….my main point was that leegin overturned a 1911 decision – and, as farfetched as it may seem, it is possible that a legal theory can be developed that can be persuasive (uphill and quixotic as it might be but possible). I am not convinced that they cannot make an argument for vertical price restraint anyway….not saying i am right but it is not foreclosed….

  17. Jane Litte
    Sep 07, 2012 @ 09:45:55

    @joe thompson: What legal theory?

  18. joe thompson
    Sep 07, 2012 @ 09:54:28

    @Jane Litte:

    we’re working on it….stay tuned….:)

  19. Mo
    Sep 07, 2012 @ 11:25:44

    Thank you Jane. And I cannot express how much I appreciate and respect Judge Cote.

  20. Around the Bookish World: Week-in-Review | Book Lovers Inc.
    Sep 07, 2012 @ 15:11:29

    […] The DOJ settlement, with publishers, Simon & Schuster, HarperCollins and Hachette have been finalised. Jane from Dear Author has written a fantastic summary about the ruling which explains how Judge Coates came to the decision, after dismissing the filings to dismiss the case by Penguin, Apple and Macmillan. The Anti-trust trial will probably be held sometime next year, although it is interesting to note that the big publishers are looking for a settlement in the EU which is having its own investigation into Agency pricing. […]

  21. SonomaLass
    Sep 07, 2012 @ 17:38:20

    I hope that the non-agency books sell really well, and that Penguin, Macmillan and Apple have crappy ebook sales.

  22. Maria D.
    Sep 08, 2012 @ 07:58:27

    Thank you Jane for the great breakdown of the case and settlement. I can’t wait to see what happens when Apple, Penguin and MacMillan have to go to trial – though why they wouldn’t settle is a mystery to me since they will more than likely get a severe beating (or at least I sincerely hope they do). Brick and Mortar store agreements don’t really benefit the publisher that much either because they have to take back books they don’t sell so I never really understood why they dragged them into the argument.

  23. Nadia Lee
    Sep 08, 2012 @ 09:54:05

    @Maria D.:

    Brick and Mortar store agreements don’t really benefit the publisher that much either because they have to take back books they don’t sell so I never really understood why they dragged them into the argument.

    It’s because brick and mortar stores equal print distribution, which is completely controlled by publishers, while digital distribution is open to everyone.

  24. Courtney Milan
    Sep 08, 2012 @ 18:34:29

    @joe thompson: it is possible that a legal theory can be developed that can be persuasive…

    It is possible, but not likely. Leegin was overturned because there were years and years of rumbling from the Chicago School of economics, repeatedly explaining why they thought resale price maintenance should be evaluated under the rule of reason. Vertical price restraints fell in 1997, after Circuit Judge Richard Posner (and one of the preeminent law and econ guys) mocked the doctrine under an economic understanding of the law. Leegin followed in the steps of both the economic understanding and an attack on per se rules against vertical restraints. If you want to get some idea of the particular climate that led to that decision, read the petition for certiorari in Leegin. (available here:

    But the most ardent members of the Chicago School still think that explicit horizontal price-fixing should be per se illegal. There is no similar pattern of horizontal restraints being allowed, in defiance of years of precedent.

    So I don’t think there’s much chance of the law changing.

    And, incidentally, I think this case is unlikely to be one that the Supreme Court takes, even if it was looking to challenge this area of law. The question of the justification for the horizontal price fixing–Amazon’s bad behavior–is a factual question for which there is no record within the confines of the case. That makes this case an extremely poor vehicle to decide the question because it’s not cleanly presented.

  25. joe thompson
    Sep 09, 2012 @ 09:16:44

    @Courtney Milan:
    thanks for your take courtney….i realize it is unlikely and far-fetched for this to take a precedent breaking turn…..but as far as “amazon’s bad behavior” and pro competitive justification – i do think that the DOJ assertion that “from the time of its launch, Amazon’s e-book distribution business has been consistently profitable” may be an opening – but clearly it seems quixotic …

  26. Industry News-September 9 » RWA-WF
    Sep 09, 2012 @ 14:43:29

    […] in the lawsuit alleging collusion to fix e-book prices. Dear Author‘s Jane Litte, a lawyer, offers insight into Cote’s decision.  The New York Times predicts the approved settlement will result an e-book price war, but […]

  27. Cheap Ebooks For Mystery Fans | Yet Another Crime Fiction Blog
    Sep 11, 2012 @ 09:05:07

    […] to start anywhere. Since the three publishers (HarperCollins,  Simon & Schuster, Hachette;) have settled with the DOJ, let the discounts begin! Yay! If you find a good title on sale, please share it with us. Thanks! […]

  28. just sit right back and you’ll hear a tale… | a naked library?
    Sep 11, 2012 @ 14:21:43

    […]  the “dear author” blog explains this and the settlement a lot better than i can here. i think maybe the decisive blow was this quote from steve jobs, related by his biographer, walter […]

  29. Stumbling Over Chaos :: Linkity after a long week
    Sep 14, 2012 @ 02:05:15

    […] Dear Author with more details of the settlement in the ebook price fixing case. […]

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