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Apple Receives Final Judgment in Ebook Price-Fixing Case

That didn’t take long. U.S. District Court Judge Denise Cote has released her final judgment in the ebook price-fixing suit brought against Apple by the U.S. Department of Justice (DoJ) and 33 states. The summary? Cote has issued an injunction against Apple, barring the company from a number of the business practices that got it into hot water with the government, and requiring the company to submit to both internal and external compliance monitoring for a period of up to five years.

However, the details of the injunction don’t go as far as the DoJ had initially proposed (see “DoJ Proposed Remedies in Ebook Price-Fixing Suit Miss the Point,” 7 August 2013). That’s good news for Apple, particularly with regard to those proposals that would have affected aspects of Apple’s business outside the iBookstore, such as requiring Apple to allow ebook retailing rivals to include purchasing links to their own stores within their apps. Regardless of whether that policy is bad for customers, it wasn’t involved with the lawsuit, and was overreaching on the part of the DoJ.

Instead, the injunction focuses specifically on Apple’s involvement with all ebook publishers (which technically includes TidBITS Publishing Inc., through our Take Control series, though we don’t anticipate the ruling having any effect on our relatively minimal relationship with Apple).

In the list of prohibited behaviors, Apple may not enforce a retail price MFN term or enter into any agreement with an ebook publisher that includes such a retail price MFN term. (MFN, or most-favored nation, means that a retailer can match other retailers’ prices, regardless of other agreements.)

Plus, Apple cannot enter into an agreement with any of the big five publishers who were also named in the suit (all of whom settled) that restricts Apple’s ability to “set, alter, or reduce” the retail price, with a series of staggered expiration dates for each publisher ranging from 24 to 48 months.

A series of other terms govern Apple’s communications and contract negotiations with ebook publishers. Most of these terms are innocuous (no punishing publishers for not agreeing to particular contractual terms, no sharing details of one ebook publisher’s agreement with another) or obvious (no agreements that will likely result in price-fixing or price increases for other ebook retailers).

In terms of required conduct, Apple must either terminate or modify agency agreements with the big five publishers to avoid the previous restrictions on Apple’s price-setting abilities. It’s not clear if this has much meaning, given that the publishers already had to agree to something similar in their settlements.

Also, Apple must apply the same terms and conditions to ebook apps as all other apps in the App Store. Again, as far as I know, this doesn’t require Apple to change its behavior at all.

Finally, there’s the tattletale clause: Apple must promise to pass on to the DoJ and the states any information that an ebook publisher is attempting to coordinate ebook prices or terms in violation of antitrust laws.

That last task will likely be handled by an internal Antitrust Compliance Officer, reporting to the Audit Committee of Apple’s board of directors. This person has a laundry list of tasks to perform with respect to training, certifying, and monitoring Apple’s board of directors, executive team, and iBookstore employees in antitrust compliance. The Antitrust Compliance Officer must also maintain and produce a log of all oral and written communications between key Apple employees and ebook retailers or a group of two or more ebook publishers. Whoever ends up in this position will probably end up eating lunch alone a lot.

Unless, that is, the Antitrust Compliance Officer can do lunch with the External Compliance Monitor, with candidates for that position suggested by Apple, recommended by the DoJ and the states, appointed by the court, and funded by Apple. The External Compliance Monitor’s task is to review and evaluate Apple’s existing and future antitrust compliance policies and procedures and report the findings back to the DoJ and the states, along with recommendations for improvements in Apple’s antitrust compliance.

Frankly, it sounds like antitrust compliance will involve a lot of jumping through hoops. But it’s in many ways a reasonable penalty for Apple’s executive team and legal counsel failing to see the antitrust concerns while initially negotiating with the big five publishers.

I do have a few other thoughts, based on my close reading of Judge Cote’s opinion and subsequent research (see “Explaining the Apple Ebook Price Fixing Suit,” 10 July 2013), but take these with a grain of legal salt — I’m not an antitrust expert, or even a lawyer.

  • There’s only one mention of financial damages made, in the initial footnote: “Issues related to non-injunctive relief, including damages and civil penalties, will be addressed in subsequent proceedings.” So it remains to be seen how much money this decision will cost Apple. Regardless, with the kind of money Apple makes, no damages are likely to impact the company’s business in a material way.

  • Apple continues to protest its innocence, and will likely file an appeal now that the final judgment has appeared. It’s difficult to see the decision being reversed, and although I know the law doesn’t work this way, from a lay perspective, it’s hard to have huge sympathy with Apple’s protestations after the company settled with the European Union over the same behavior (see “Apple Offers Ebook Settlement Terms… in Europe,” 12 August 2013).

  • The terms of the injunction don’t seem all that different from the settlement terms that Apple agreed to in Europe, apart from the compliance monitors. So the difference would seem to be merely a question of the admission of wrongdoing, which isn’t implied by the EU settlement, but which is implicit in losing the U.S. antitrust case. I assume Apple is trying hard to avoid being painted as a monopolist.

  • The final judgment has a variety of expiration dates built in, ranging from the two- to four-year expirations for agreements with the various publishers to the two-year appointment of the External Compliance Monitor (with optional one-year extensions as necessary). But the final judgment itself expires after five years, assuming that the court doesn’t extend the expiration date by one or more one-year periods, “if necessary to ensure injunctive relief.” In other words, if Apple behaves, all of this will go away, starting in two years, and culminating after five years.

In the end, regardless of whether or not Apple appeals, and whether or not such an appeal succeeds or fails, it’s hard to see this final judgment having a significant impact on Apple’s business. The fact is that the iBookstore is in no way core to Apple’s fortunes; it was, and likely will remain, a tiny percentage of the company’s revenues since it turned out not to be key in the eventual popularity of the iPad.

What about the standpoint of allowing Apple to compete with Amazon in the ebook market? The restrictions imposed by the final judgment ensure that Apple would have to change gears entirely if it wanted to go head-to-head with Amazon; I see that as unlikely. If beating Amazon in the ebook market was really the goal, I think Apple would have to slash retail prices below Amazon’s, drop DRM entirely, eliminate the gratuitous restrictions on the sale of iBooks Author-created ebooks, offer a MatchBook-like service (see “Amazon Announces Kindle MatchBook,” 3 September 2013), and port iBooks to platforms like Android and Windows. I simply don’t think Apple cares enough about the ebook
market to go to such lengths.

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