Apple’s Price-Fixing Conspiracy with Book Publishers Ruled Per Se Unlawful

Apple entered the e-book market in April 2010, shortly after the launch of its iPad.  Amazon launched the Kindle e-reader in 2007 and by 2009, had established a $9.99 price point for e-books.  Amazon sold almost 90% of all e-books.  The book publishers did not like the $9.99 price, because they thought it was eating into the sales of their hardcover books, threatening the existence of brick and mortar bookstores and threatening their business model.  Apple did not like the $9.99 price, because it didn’t want to adopt a low price strategy.  From December 2009 through January 2010, Apple met with the top publishers, the Big Six Publishers, to find a way to change Amazon’s $9.99 e-book price point.  The result was five of the Big Six Publishers entering into agency agreements with Apple.  The agency agreements gave Apple a 30% commission, set a $12.99 to $14.99 price range for e-books and gave Apple MFN status.  The MFN clause guaranteed that Apple’s e-book prices would be the lowest retail price in the marketplace and effectively forced the publishers to require all of their distributors, including Amazon, to sign an agency agreement in which the publishers would control the retail prices of books they published.  Apple controlled e-book prices at the retail level.

The U.S. Department of Justice (DOJ) filed an antitrust lawsuit against Apple and the five book publishers on April 11, 2012.  The book publishers settled and the case proceeded to a bench trial against Apple alone.  The district court ruled that the plaintiffs showed by “compelling direct and circumstantial evidence that Apple participated in and facilitated a horizontal price-fixing conspiracy. As a result, they have proven a per se violation of the Sherman Act.”  (Opinion pdf page 120).

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Apple and Publishers Get Political Support in DOJ Case

This post is a follow-up to my post, E-book Pricing the Emphasis of DOJ Suit Against Apple and Book Publishers.  In that post, I discussed the DOJ’s factual allegations and the ways in which Apple and the book publishers allegedly violated U.S. antitrust law.  Senator Charles E. Schumer recently weighed in with his Wall Street Journal editorial, Memo to DOJ:  Drop the Apple E-Books Suit.

Senator Schumer makes two major points; 1) that a single firm, such as Amazon, should not be allowed to control access to books and 2) that traditional industries confront many challenges in adapting to the Internet economy and industries that adapt to the transition to digital platforms should be supported.  He believes that publishers’ adoption of the agency pricing model to make e-book sales work for them is an adaptation to digital platforms that should be supported. 

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E-book Pricing the Emphasis of DOJ Suit Against Apple and Book Publishers

The U.S. Department of Justice (DOJ) filed a civil antitrust action against Apple and five major book publishers – Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster (Publisher Defendants) – for violations of Section 1 of the Sherman Act.  The DOJ seeks “to enjoin the Publisher Defendants and Apple from further violations of the nation’s antitrust laws and to restore the competition that has been lost due to the Publisher Defendants’ and Apple’s illegal acts.”  (Complaint pdf page 5).  This lawsuit attacks the legality of the “agency model,” as implemented by Apple and the Publisher Defendants.

Alleged facts.  Technology has transformed the book publishing industry.  E-books, books in electronic form, are much cheaper to produce and distribute than print books (e.g., reduced manufacturing and distribution expenses, no warehousing and unsold stock expenses).  E-books benefit consumers by allowing them to read books on various electronic devices, by providing consumers with around the clock access to products, by enabling easier portability and storage and by allowing consumers to adjust font size.

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