Friday, September 7, 2012

Judgment in the Apple e-books settlement: DOJ 1, Publishers 0

On September 5, 2012, Judge Denise Cote entered an order approving the settlement between the DOJ and 3 of the 5 publishers in the Apple e-books litigation: Hachette, Simon & Schuster, and HarperCollins. And on every count, it was a clear win for the DOJ. Maybe not just for today.



Since the settlement is now a Final Judgment, I'll use that term here to reference it. In the Final Judgment the court identifies 4 major negative arguments raised in the public comments and addresses each of them:

1. The Final Judgment would harm third-party stakeholders like brick-and-mortar bookstores because the whole publishing ecosystem is in danger, and it forces  the settling parties to terminate otherwise-valid contracts with them. The court's response with respect to harm to third-party stakeholders: that may be true, but you don't use antitrust law to fix this. And for the contracts: the only contracts that a publisher would have to terminate are ones with illegal clauses.

2. The Final Judgment would outlaw conduct that is legal under the antitrust laws and would make the government into a regulator of the e-books market. The court's response: even if the individual things the publishers and Apple did are legal (MFN clauses, agency pricing), the collective effect and the intent was to create collusion. So it's appropriate for the Final Judgment to regulate them. As for the "regulator" argument, the court basically says just because this might happen that doesn't mean it shouldn't happen if that's what's necessary to stop people from breaking the law.

3. The DOJ hasn't really done its job in determining the competitive impact of the Final Judgment because it didn't bring data about what actually happened to e-book pricing after agency pricing came into existence. The court handles this one quickly: the DOJ doesn't have to do that in order to settle.

4. The conspiracy had positive benefits by curtailing Amazon's monopoly power. This is classic economic and antitrust theory: Amazon was deliberately underpricing e-books to kill competitors expecting to raise prices later once there's no one left. The technical term for this is "predatory pricing". The court spends a lot of time addressing the Bob Kohn comments but at the end of the day thinks the Final Judgment is acceptable. The most significant reasons: it appears that Amazon's pricing wasn't below cost, and even if Amazon was going to engage in predatory pricing that doesn't mean Apple and the publishers can break the law too.

In short, the judge looked at pretty much every argument anyone raised against the settlement and ruled against it. The 3 settling publishers are out of the litigation, leaving only Macmillan and Penguin to stand with Apple.

We should look to see 2 major impacts on the e-book market and this litigation from the Final Judgment:

1. E-books from these publishers should cost less very soon. The judgment takes effect after 7 days and September 5 doesn't count as a day here, so wait until September 13 or maybe 14 if you want to be certain. But at that point we should see prices start dropping.

2. Although the court repeatedly talks about the fact that it's only reaching a judgment based on the standard of review under the Tunney Act (the law that governs settlement criteria for antitrust trials), don't buy it. Many of these arguments are legal ones, which means that the standard of review is really always the same: does the judge think she is going to get overturned on appeal? No judge likes that. So if anyone made an argument at this point and lost, they shouldn't expect better treatment when it's their turn for a judgment.


LINKS:
The order authorizing the settlement:
http://www.justice.gov/atr/cases/f286700/286727.pdf
Link to Legal Minimum post on Bob Kohn cartoon brief:
http://legalminimum.blogspot.com/2012/09/bob-kohn-submits-brief-2-in-apple-e.html

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