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From Antitrust Law Daily, June 21, 2013

Closing arguments made in e-books price fixing case against Apple

By Jeffrey May, J.D.

After nearly three weeks of eliciting testimony from high level executives in the publishing industry and at Apple, Inc., counsel for the Department of Justice Antitrust Division and Apple made their closing arguments yesterday in the federal e-book price fixing trial (U.S. v. Apple, Inc., Civil Action No. 12-cv-2826 (DLC)).

In April 2012, the U.S. Department of Justice Antitrust Division and a number of state attorneys general brought actions against Apple and leading publishers for conspiring to fix the sales prices of e-books. The suits named as defendants Apple and publishers Hachette Book Group (USA), HarperCollins Publishers L.L.C., Simon & Schuster Inc., Holtzbrinck Publishers LLC, which does business as Macmillan, and Penguin Group (USA). Only Apple went to trial, as all five of the publishers settled the federal and state charges.

In its summation, the government argued that Apple orchestrated a horizontal conspiracy among the publishers to move the industry to an “agency model” in an effort to drive up prices for New York Times bestsellers and other newly released e-book titles. Both Apple and the publishers purportedly had a “shared objective” in putting an end to the low prices set by retailer Amazon, Inc. for the sale of e-books.

Under the agency model, publishers sold titles to consumers directly at prices set by the publishers, with retailers serving as the publishers’ “agents” and receiving a percentage of each sale as commission. Previously, the publishers had sold e-books using the “wholesale model,” meaning they sold titles to retailers at a wholesale price or discount off the price listed on the physical edition of the book or “list price.” Retailers were then free to sell titles to consumers at retail prices of their choosing.

The government contended that Apple facilitated and knowingly participated in a horizontal price fixing conspiracy by, among other things, assuring each publisher that it was not alone in its switch to the agency model. Apple also allegedly monitored the publishers' movement to the agency model. The result, according to the government, was higher prices.

The Justice Department also argued that, while price fixing is per se illegal, Apple would be liable even under rule of reason analysis. According to the government, Apple's conduct has a substantially harmful effect on competition; Apple lacks creditable procompetitive justifications; and any procompetitive benefits could have been achieved through alternative means.

With respect to a remedy, the government seeks prohibitions on:

agency agreements for two years;

retail price most favored nation (MFN) clauses for five years;

future antitrust violations by Apple; and

retaliation or discrimination by Apple.

In addition, the Justice Department told the court that Apple should be required to, among other things, implement a compliance program with training for executives and agree to an independent monitoring trustee.

In its closing statement, Apple argued that its communications with publishers do not show that it was involved in a conspiracy. Apple’s decision to go with the agency model was based on the company's core business principles. Apple suggested that it had an independent business interest in treating all of the publishers the same and in imposing similar contractual terms. Moreover, according to Apple, it had virtually no contact with the publishers after the Apple agency agreements were signed.

Apple also pointed to testimony from Eddy Cue, its senior vice president for Internet software and service, and others that the MFNs had a procompetitive purpose. The MFNs were intended to ensure that Apple could be competitive on price.

Procompetitive benefits also flowed from Apple's entry into the e-book market, it was argued. Apple pointed to increased output, decreased prices, and greater product innovation.

Apple suggests that under the government's theory, its only options, if it wanted to enter the e-book market, were to either accept the industry's wholesale model and lose money and face e-book release delays, or enter into agency agreements and face antitrust liability.

Companies: Hachette Book Group Inc.; HarperCollins Publishers L.L.C.; Simon & Schuster Inc.; Penguin Group (USA) Inc.; Holtzbrinck Publishers, LLC; Apple Inc.

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