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From Antitrust Law Daily, May 15, 2013

Justice Department Outlines Allegations in e-Books Price Fixing Case

By Jeffrey May, J.D.

In preparation for trial next month in a federal/state action alleging a conspiracy involving Apple, Inc. and major publishers to fix the price of electronic books or e-books, the U.S. Department of Justice and complaining states tendered their pretrial submissions yesterday to the federal district court in New York City. The plaintiffs argue that the challenged conduct is per se unlawful; however, they contend that the anticompetitive effects of the conspiracy also would support a claim under a rule of reason analysis (U.S. v. Apple, Inc., Civil Action No. 12-cv-2826 (DLC)).

In April 2012, the U.S. Department of Justice Antitrust Division and 16 state attorneys general brought actions against Apple, Inc. and publishers for conspiring to fix the sales prices of e-books. The suits named 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). All five of the publishers have now settled the U.S. charges. Penguin has not settled with the plaintiff states, which now number more than 30. Apple is a defendant in both actions.

The publishers allegedly acted collectively to switch to a new sales model for e-books known as the "agency model" and entered into functionally-identical agreements with Apple, which distributes e-books through its "iBookstore." 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 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 agency model purportedly led to rising prices for newly released and bestselling e-books.

According to the plaintiffs’proposed findings of fact and conclusions of law, the challenged conspiracy "had its roots in publisher antipathy for low prices set by retailer Amazon, Inc. for the sale of e-books." The government contends that the publishers "worked individually and together in an effort to persuade Amazon to raise its prices to consumers, especially the $9.99 price it set for New York Times bestsellers and other newly released titles." The government suggests that the publishers and Apple "shared the objective of thwarting Amazon’s ability to compete on price."

"Stripped of the glitz surrounding e-books and Apple, this is an unremarkable and obvious price-fixing case appropriate for per se condemnation," according to the plaintiffs' pretrial memorandum of law.

There is both direct and circumstantial evidence of a horizontal agreement among the publishers to raise e-book prices, according to the government. Moreover, both direct and circumstantial evidence prove that Apple knowingly participated in and facilitated the publishers' agreement.

The government argues that it does not need to prove that "there is no possibility that Apple acted in further[ance] of its own independent, rational and legitimate business interests," as Apple contends. Rather, the government needs only to prove by a preponderance of the evidence that Apple and the publishers "had a conscious commitment to a common scheme designed to achieve an unlawful objective," in the government's view.

The government also contends that the case can be made under a rule of reason analysis. "Should rule of reason analysis be necessary, even a quick review of the evidence establishes that the effects of Defendants’ agreement to raise consumer e-book prices outweigh the speculative and attenuated procompetitive benefits Apple claims resulted from the agreements," the government notes. The agreement allegedly raised e-book prices by up to 30 to 50 percent and also resulted in reduced output, or sales, of e-books.

In their response to Apple's pretrial memorandum of law, the plaintiffs point out that there is "an abundance of direct evidence" refuting Apple's claim that it did not participate in the conspiracy. The plaintiffs also contend that Apple "confuses the relevant legal standard for inferring conspiracy among horizontal competitors accused of parallel conduct (e.g., Publisher Defendants) with the standard for inferring whether Apple was 'in the center as the ringmaster' of that agreement."

"Apple’s argument that it should evade antitrust liability because it never acted contrary to its own economic interests effectively would offer antitrust immunity to any cartel ringmaster," the plaintiffs suggest.

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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