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From Antitrust Law Daily, June 6, 2014

Software developer and retailer DNAML has standing to pursue damages claims against Apple in e-book price-fixing action

By Linda O’Brien, J.D., LL.M.

In an action by an electronic book retailer against Apple and five leading publishers for conspiring to fix prices and reduce competition in the electronic books industry, the federal district court in New York City has denied the defendants’ motion to dismiss the retailer’s damages claims under the Sherman Act (DNAML Pty, Limited v. Apple Inc., June 5, 2014, Cote, D.).

Background. DNAML, an Australian company that develops software for the e-book industry, offered tools for authors to produce their own electronic books (e-books) and created websites selling e-books. At some point, DNAML began selling e-books on its websites. DNAML predicated its sale of e-books on aggressive price competition and built marketing tools to provide bundling services. DNAML also began development of an application that would allow consumers to purchase and read e-books on an iPad, iPhone, and other tablet devices. Two publishers, Hachette Book Group and HarperCollins were the primary e-book suppliers to DNAML and thousands of their titles were converted to DNAML’s proprietary digital rights management format (DRM).

DNAML filed suit against Apple, Hachette Book Group, HarperCollins, and three other publishers, alleging that the defendants engaged in a conspiracy to fix prices and reduce competition in the e-book industry, in violation of Section 1 of the Sherman Act. DNAML alleged that, to raise retail e-book prices, the publishers replaced their wholesale model for selling e-books with an agency model in which the publisher sets the prices for e-books. Apple demanded a 30 percent commission from the publishers on its sales of their e-books. Apple also modified its policies regarding applications and required retailers wishing to sell e-books through Apple’s application to pay a 30 percent fee. As a result of the conspiracy, DNAML alleged that it was forced to stop discounting prices for e-books and cease development of its application, which precluded it from establishing a presence in the e-book retail market and caused DNAML to cease e-book retail operations. The defendants moved to dismiss the complaint.

Antitrust injury. The court determined that DNAML adequately alleged an antitrust injury. To determine sufficient pleading of an antitrust injury, the plaintiff must identify an illegal anticompetitive practice and an actual injury, and compare the anticompetitive effect of the practice to the injury caused to the plaintiff. According to the court, DNAML identified an illegal anticompetitive practice that the defendants eliminated retail price competition by arrogating to themselves the power to set retail prices for their e-books and raised e-book prices dramatically. DNAML also alleged that it was harmed by the price-fixing scheme since the conspirators’ adoption of the agency model to raise e-book prices deprived DNAML of the ability to set the retail books for its e-books and forced it to cease its efforts to establish an e-book retail presence based on aggressive price competition.

DNAML also demonstrated that its injury was the type of loss the antitrust laws were intended to prevent and the injury flowed from the defendants’ unlawful acts. DNAML’s alleged injuries – its inability to survive in the market absent price competition where its business model hinged on aggressive price competition and its lost profits from the inability to engage in price competition – were precisely the type of losses that the defendants’ conduct would likely cause by colluding to eliminate retail pricing discretion, the court noted.

Efficient enforcer. The court found that DNAML adequately alleged that it would be an efficient enforcer of the antitrust laws. Although the immediate victims of the defendants’ price-fixing conspiracy were consumers who paid higher prices for the publishers’ e-books, retailers were directly impacted as well. The defendants removed price discretion from retailers which directly injured retailers engaged in price discounting since they were no longer able to compete on price. These retailers were clearly competitors in the market in which trade was restrained, according to the court.

Additionally, DNAML sought to recover lost profits as a result of the defendants’ conspiracy to end retail price competition for e-books and those interests aligned with the public’s interest in promoting price competition. DNAML’s alleged injury – the demise of its business – was reasonably quantifiable. As a new market entrant, DNAML detailed its efforts over several years to (1) acquire industry-defining domain names; and (2) develop an e-book store, distribution platform, digital rights management solution, payment platforms, and authoring tools. DNAML also alleged that it had successfully begun to sell e-books on various websites before it was forced out of the market by the defendants’ conspiracy. The allegations were sufficient to show its intent and preparation to engage in business. It was plausible that a discount retailer was injured by a conspiracy to remove retailers’ ability to discount e-books and, thus, DNAML was a sufficiently showed that it was an efficient enforcer of the antitrust laws to have standing to bring suit, the court concluded.

The case is No. 13 Civ. 6516.

Attorneys: Michael J. Guzman and Derek T. Ho (Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC) for DNAML Pty, Limited. Theodore J. Boutrous, Lawrence J. Zweifach, and Cynthia Richman (Gibson, Dunn & Crutcher, LLP) for Apple Inc. James Q. Quinn (Weil Gotshal & Manges LLP) for Simon & Schuster, Inc. Saul P. Morgenstern (Kaye Scholer LLP) for Penguin Group USA Inc. Walter Stuart (Freshfields Bruckhaus Deringer US LLP) for Hachette Book Group USA, Inc. C. Scott Lent (Arnold & Porter LLP) for HarperCollins Publishers LLC. Joel M. Mitnick (Sidley Austin LLP) for Macmillan Publishers and Verlagsgruppe Georg Von.

Companies: DNAML Pty, Limited; Apple Inc.; Simon & Schuster, Inc.; Penguin Group USA Inc.; Hachette Book Group USA, Inc.; HarperCollins Publishers LLC; Macmillan Publishers; Verlagsgruppe Georg Von.

MainStory: TopStory Antitrust NewYorkNews

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