DoJ Proposed Remedies in Ebook Price-Fixing Suit Miss the Point

The legal drama continues around the ebook price-fixing antitrust suit filed against Apple by the United States Department of Justice (DoJ) and 33 states. In her opinion on 10 July 2013, Judge Denise Cote ruled against Apple, stating “this Court finds by a preponderance of the evidence that Apple conspired to restrain trade in violation of Section 1 of the Sherman Act” (for a complete discussion, see “Explaining the Apple Ebook Price Fixing Suit,” 10 July 2013).

The last sentence in Judge Cote’s opinion was “A scheduling order will follow regarding the Plaintiffs’ request for injunctive relief and damages.” That trial is now underway, and although Apple said it would appeal Cote’s ruling to the Second Circuit Court of Appeals, that appeal likely won’t be filed until there’s a final judgment.

The provisions in the DoJ’s Proposed Final Judgment (PDF) include the following laundry list:

• Apple is prohibited from entering into contracts that would in any way fix the price that any of its competitors charge for content.

• Apple is barred, for five years, from either enforcing its retail price Most Favored Nation (MFN) clauses or accepting limitations on its own ability to price-compete with respect to ebooks.

• Apple may not agree with any other ebook retailer to fix retail ebook prices.

• Apple must terminate its existing agency agreements with each of the big five publishers.

• Apple may not discriminate against rival ebook apps, and in particular, it must allow rivals to include purchasing links to their own stores within their ebook apps.

• Apple must hire a full-time internal Antitrust Compliance Officer, who would report directly and exclusively to the Audit Committee of Apple’s Board of Directors.

• An External Compliance Monitor, appointed by the court, would oversee Apple’s compliance with the Proposed Final Judgment and Apple’s internal antitrust compliance provisions.

Needless to say, Apple is livid — legally speaking — about these provisions, calling them “a draconian and punitive intrusion into Apple’s business, wildly out of proportion to any adjudicated wrongdoing or potential harm,” and has filed its own brief in response (PDF).

Frankly, Apple is right to be angry. The company’s response notes correctly that a number of the harms for which relief is sought have already been remedied by the settlements with the publishers. Those settlements required the publishers to renegotiate their agency agreements with Apple, eliminated the publishers’ ability to use retail MFNs for five years, and prohibited publishers from entering into agency agreements without discounting for two years, along with $166 million in restitution.

It’s hard to see how the DoJ’s proposed terms would have any positive effect on the ebook industry, given what has already happened. Plus, the Court explicitly noted that agency agreements, and both MFN clauses and price caps, were perfectly acceptable in general, so it seems unreasonable to prevent Apple from using them. In fact, the publishers have filed a motion with the court, saying that the DoJ’s proposals would hurt them, by limiting Apple’s ability to discount books.

More worrying for Apple, and what would seem to be a case of overreaching on the part of the DoJ, the proposed injunction steps outside of Apple’s ebook business to attempt to dictate terms — the requirement to allow purchasing links — for ebook retailer apps in the App Store.

Don’t get me wrong — as a publisher, I hate the fact that Apple won’t allow purchasing links to outside sites (such as my own!). But Apple’s policies with respect to its other businesses were not at issue in this suit, and were not found unlawful, so it seems unreasonable for the DoJ to attempt to regulate Apple’s behavior here.

Finally, Apple argues that injunctive relief in antitrust suits is designed to undo what the violation caused and create a situation where unrestrained competition can occur, but is not intended to be punishment of past transgression. Since Apple’s actions were found unlawful only in the unique circumstances of the ebook market of 2009 and 2010, it’s hard to see how these proposed terms would have a beneficial effect in today’s market.

Most troubling, I believe, is that the DoJ seems to see Apple as the dominant player in the ebook retailing world, and as such is attempting to curtail Apple’s power. But that’s clearly misguided — Apple has never been the dominant ebook retailer. The company’s collusion with publishers might have eventually had the effect of propelling Apple into that position, but in reality, Apple has always played a distant second fiddle to Amazon.

Therein lies the rub. This trial is explicitly not about what Amazon has or has not done, but it is concerned with overall competition in the ebook market. Apple should absolutely be forced to compete on a level playing field with other ebook retailers, but if the goal of antitrust law is the restoration of unrestrained competition, stringing an injunctive albatross around Apple’s corporate neck hampers that aim. I tend to agree with Judge Cote that Apple’s actions in the days leading up to the iBookstore launch were anticompetitive, but given that the settlements with the publishers put an end to the offending agreements, it’s hard to see any benefit to consumers in the DoJ’s Proposed Final Judgment.

Regardless, the Proposed Final Judgment is just that for the time being, a proposal. The trial for damages started on 9 August 2013, and in the first hearing, Judge Cote gave mixed signals. On the one hand, she said she plans to issue an injunction against Apple to remedy the price-fixing caused by the company’s agreements with publishers, and she chastised Apple for refusing “to express any remorse” for its illegal actions. The injunction would prevent publishers from setting prices under the agency model for two years, and would stagger contract renegotiation to prevent future collusion. Apple would also be required to set up an internal compliance program. On the other hand, she said she had no desire to regulate Apple’s App
Store and wasn’t inclined to have Apple submit to outside compliance monitoring.

TidBITS won’t be covering the blow-by-blow of this trial, any more than we did the initial one because it’s just soap opera. Once there’s another decision or significant action, we’ll dig back in.