Monday, July 23, 2012

Quick thoughts on the Apple-Publishers public comments and proposed settlement

I've been following this case with some interest, in part because the US filed its case the morning that I was scheduled to teach the Book Publishing Law class in my Entertainment Law course - it was one of those days that you take the slides you've prepared and throw them aside for the last 15 minutes of class - and in part because I was an antitrust litigator in a previous life. But also because, if you're interested in books and publishing or really any part of the entertainment industry, this litigation is huge.

Right before filing, the DOJ made it clear that it had reached a settlement agreement with 3 defendants: Hachette, HarperCollins, and Simon & Schuster. But they filed the lawsuit against them anyway. You might wonder why they would do this: it's to make sure the settlement agreement has the power of a court judgment. This way if the publishers break the settlement the DOJ doesn't have to sue them: they already have a judgment, so they can just go to the judge and get contempt of court proceedings. Much quicker and much cheaper.

Under US law, where the government wants to settle antitrust class actions it needs to solicit comments from the public to make sure that it has considered the public interest before acting. Today it publicized all of the 868 comments it received and response to them.

I've read the response (link below) and skimmed a selection of the comments. Here's my (admittedly not very orderly) thoughts.

1. If you're thinking of buying e-books from Hachette, HarperCollins, and Simon & Schuster, wait a month. Once this settlement is approved, the vendors will be allowed to set the pricing for e-books from these publishers. Think Amazon is going to keep the $12.99 and $15.99 price point any longer than it has to?

2. Others have said this but on my review it's true: this will not kill the agency contracting model. This is great news for self-publishers because it means they can keep the $0.99 and $2.99 prices that have been so successful for them. It's also good for musicians loading their own music into iTunes and other music stores where the agency pricing model is also used.

3. The original Complaint talks about 6 publishers who colluded: Hachette, HarperCollins, Simon & Schuster, Penguin, Macmillan, and Random House. The rule in antitrust cases is that if there's a conspiracy and someone reports it to the DOJ then that company gets immunity: it's to encourage people to report. Although I'll never have proof of it, I've always thought Random House was the one that flipped: the original Complaint talks about the 5 Defendants and Random House, who didn't get sued. If so, that may have been the best decision Random House ever made. Not just the obvious - don't break the law, admit it if you did - but also because they will be allowed to keep having agency agreements. This could turn out to be a huge competitive advantage for them over the rest of the Big Six.

4. The judgment restricts MFN (most-favored nation) clauses for 5 years. This is huge. The more usual name for an MFN clause is price-matching. The MFN clause was the quid pro quo for Apple to allow the publishers to have agency agreements and do their price-fixing: if the publishers put a book on Amazon for $9.99 then they had to match it on iTunes. By forcing the publishers to avoid MFNs the DOJ has sent two strong messages: if the DOJ wins the trial then it will make Apple give up its MFN clauses, and it believes companies use MFNs to try to do illegal things. The thing is, Apple didn't come up with the MFN on its own. These clauses are all over entertainment contracts: film, TV, and music distribution contracts all have them. This one is going to echo far and wide.

5. The DOJ has reaffirmed that it has investigated Amazon and, as far as the DOJ is concerned, Amazon has done nothing illegal in its e-book activities so far.

6. The DOJ specifically calls out self-publishing as a market that exists because of e-books and that would be damaged if the publishers' and Apple's (alleged) conspiracy were allowed to force higher pricing on e-books. Self-published author David Gaughran submitted a comment indicating that he and 184 other self-published authors appreciated how e-book publishing allowed them to cut out agents, publishers, and other middlemen, allowing them to price their books lower than traditional publishers with higher overhead charges.

7. Apple is not going to back down. It's not every day that a defendant files comments saying that a court shouldn't allow another defendant to settle, but Apple did that here. Go pop some popcorn, because this movie is just getting started.

Proposed settlement terms
Index to public comments
Comment from David Gaughran
Department of Justice response


  1. Would you mind going into more detail over your final "this movie is just getting started" comment? How so? What's the latest that self-publishers *really* need to hear from this?

    With all disclaimers, of course.

    1. Anonymous: Thanks for your note and your interest. (And thanks for noting the disclaimers!) I'll give a quick explanation here and I'm planning to talk more about this lawsuit in the coming weeks because I think it's incredibly important to the industry.

      Apple could easily have said nothing when the DOJ asked for comments. If I were advising a client it's probably what I would recommend in every context: you gain nothing by making comments and you have a lot to lose. So by making comments, they are signaling that they intend to fight this case and aren't interested in settling.

      I'm not sure that Apple's position affects self-publishers that much though, and to the extent it does it's positive. Remember that what Apple is accused of here is that they created the agency contracting model in order to allow the publishers to price-fix. Their defense would be that the agency model has legitimate business purposes so it's not illegal. To the extent anyone is questioning that (the DOJ isn't in so many words), they will defend that to the end.

      Like I said, more to come.


Thanks for commenting. Posts and comments aren't legal advice; requests for legal advice in the comment probably won't get answered. Sorry to have to do this but someone someday is going to make me glad I did...