In a surprisingly swift decision, federal judge Denise Cote has approved a deal between U.S attorneys and three publishers (Hachette, HarperCollins, and Simon & Schuster) to settle claims of e-book price fixing. Calling the matter a “straightforward price-fixing case,” Cote held that the Court was “well-equipped to rule” following “voluminous submissions” from the public, and said an evidentiary hearing “would serve only to delay the proceedings unnecessarily.”
Approval of the settlement had been widely expected. Still, the timing took the industry by surprise and suggested that despite being hotly contested, approval was in fact a slam dunk for Cote—dated September 5, the final decree comes less than five months after the Department of Justice first announced its action; just over two months since the end of the public comment period; two weeks following the final round of briefs; a single day after the final amicus briefs were filed in the case, and on the same day the DoJ filed a reply urging speedy approval without a public hearing. It also comes one week after the three publishers struck a more than $70 million deal with 54 states and U.S. territories to settle their price-fixing claims. That deal, also before Cote, has yet to be approved.
The three settling publishers had no comment on the decision. An array of industry players, however, expressed their opposition to Cote’s ruling. “To say the least, we are colossally disappointed that the judge failed to understand how consumers will be negatively impacted by a decision that does not take into account the realities of the book business in 2012,” said Oren Teicher, president of the American Booksellers Association. “ABA will consult with our counsel and other affected parties to determine if there is any further action we can take.”
Similarly the National Association of College Stores, which had filed comments in opposition to the settlement expressed disappointment. But, said Charles Schmidt, director of public relations, "we are pleased that the judge agreed in her ruling with our opinion that e-textbooks are not covered by the Final Judgment. By making this distinction, we hope that compeition and innovation in the higher education textbook market continues."
Attorney and Royaltyshare founder Bob Kohn, whose thoughtful public comment was singled out by Cote for discussion in her ruling (although his amicus brief was entirely disregarded), said he was "very disappointed" with the decision, and the decision to skip a public hearing. "It appears that the District Court completely deferred to the DOJ, whose analysis of the case was faulty and insufficient," Kohn said. "I am hopeful that the U.S. Court of Appeals will closely review the important public issues in this case."
In a twist, news of the settlement broke on September 6, just as Amazon—a key player in the case—was announcing its new Kindle devices at a glitzy event in Los Angeles.
The Broad Strokes
Cote’s sudden approval follows an outpouring of criticism from the within the industry, including 868 public comments that were, the judge conceded, “overwhelmingly negative.” In a brief analysis, in which she divided the negative comments into four categories, Cote dismissed the criticism.
Speaking to any potential harm facing third parties “such as brick-and-mortar bookstores, e-book retailers, independent publishing houses, and authors,” Cote said she was sensitive to the importance of books—she even quoted an Emily Dickinson poem. But “harm to industry stakeholders like bookstores,” she held, “is not the type of harm that the Sherman Act is designed to prevent.” While the “birth of a new industry is always unsettling” she concluded, “it is not the place of the Court to protect these bookstores and other stakeholders from the vicissitudes of a competitive market.”
As to whether the proposal is overreaching in terminating agency contracts, rather than simply addressing collusion, Cote found the evidence of a price-fixing conspiracy compelling, and the consent decree proper. “The two year limitation on retail price restraints and the five year limitation on Price MFNs appear wholly appropriate given the Settling Defendants’ alleged abuse of such provisions in the Agency Agreements,” Cote wrote, agreeing with the Government’s contention that such “time-limited provisions” will function as a “cooling off period” for the e-books industry that will allow it to “return to a competitive state free from the impact of defendants’ collusive behavior.”
Regarding the Government’s “factual basis” for its conclusions—translation: its understanding and portrayal of the publishing and e-books business—Cote ruled that the Government had “more than met” the minimal standard for approval. “The Complaint and CIS provide a sufficient factual foundation as to the existence of a conspiracy to raise, fix, and stabilize the retail price for newly-released and bestselling trade e-books, to end retail price competition among trade e-books retailers, and to limit retail price competition among the Publisher Defendants.”
Cote explained that the Government did not have the burden of proving its underlying facts, only the reasonableness of the settlement, and that the court’s role in deciding whether to approve under the Tunney Act is limited. “The role of the court is not to determine whether the decree results in the array of rights and liabilities ‘that will best serve society,’ but only to ensure that the resulting settlement is within the reaches of the public interest,” she stated, citing case law. “In making this determination, the court ‘is not permitted to reject the proposed remedies merely because the court believes other remedies are preferable.’ Rather, the court should be ‘deferential to the government’s predictions’ as to the effect of the proposed remedies.”
On the final arc of public criticism—whether the actions of these publishers were in fact pro-competitive and appropriate in order to blunt the true monopolist—Amazon—Cote was glib. “In short, the comments contend that competition in the e-books industry is alive and well in no small part due to the defendants’ allegedly illegal cartel,” she stated. But even if Amazon was engaged in “predatory pricing,” she notes, it would not excuse unlawful price-fixing.
“The familiar mantra regarding ‘two wrongs,’” she concludes, “would seem to offer guidance in these circumstances.”
Now What?
First and foremost, for the settling publishers the clock now starts ticking. They must terminate their Agency Agreements with Apple within seven days, and must terminate agency contracts with other e-book retailers covered by this settlement “as soon as each contract permits” after 30 days. For two years, they may not agree to any new contract that restricts the retailers’ ability to set e-book prices, and for five years, they may not enter into an agreement with retailers that contain price “most favored nation” clauses.
Not using the agency model may not be a bad option for settling publishers—remember, publishers actually made more money per unit under the wholesale model for e-books. The real pain of the settlement for the settling publishers is in compliance. Not only will new retail agreements need to be executed, each settling publisher will now have to engage in a number of compliance measures, including: the appointment of an Antitrust Compliance Officer; training for relevant staff delivered by an attorney; an annual compliance audit; “maintain[ing] and furnish[ing]” a log of all oral and written communications, excluding privileged or public communications, between any employees involved in e-book strategy. The DoJ can also visit the publishers’ offices with written notice, and the publishers must furnish copies of all “books, ledgers, accounts, records, data, or documents” relating to the settlement upon request. DoJ officials can also interview employees or agents of the company.
The agreement also includes a provision forbidding "retaliation" against retailers, although it is not spelled out what constitutes retaliation. Could raising prices on e-book bestsellers to counter the effects of discounting be construed as retaliation? It's possible.
Apple has vowed to appeal Cote’s approval—and they could ask for a stay. In their August brief, Apple asked the court to withhold approval until the case has been decided at trial. After all, as Cote conceded in her ruling, Apple has not settled, but believes it has standing to appeal this settlement because its contracts are being forcibly terminated without having been found guilty of any wrongdoing. But success, Cote suggests, is not likely. "The Settling Defendants have elected to settle this dispute and save themselves the expense of engaging in discovery," the judge noted. "They are entitled to the benefits of that choice and the certainty of a final judgment.”
The mention of "certainty" meanwhile, is a reminder that the case is far from over. A trial now looms for Apple, and the non-settling publishers Macmillan, and Penguin. That trial is slated to begin in June, 2013, and raises the specter that this litigation could very well still be ongoing in 2014, when the settling publishers are coming out of their penalty. In addition, a consumer class action suit is still in play against five of the "big six" publishers (excluding Random House, which was not part of the alleged conspiracy).
For consumers, the question is whether they will notice a drop in e-book prices. Some media outlets have speculated that a price war could be in the offing, although that seems unlikley as a direct result of this settlement, which involves just three (albeit) major publishers. Random House, which was not part of the alleged conspiracy, and the non-settling publishers, as well as most other independent publishers are stil using the agency model. The question is, will they be able to keep their prices at current levels if Amazon begins to deeply discount bestselling e-books from the settling publishers?
