Sep 7 2012

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

By Jane • Ebooks, Publishing News • • Tags: ,

Introduction

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.

Background

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.

Summary

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.

Send to Kindle

By • Ebooks, Publishing News • 29 • Tags: ,