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Department of Justice Fires Back at Apple, Penguin, Macmillan, B&N in New Legal Filing

5069265780_3c7be147e1_bThe Department of Justice has filed a 17-page response to the motions for summary judgment filed lately by various parties in the agency pricing anti-trust case, and for those who are enjoying following the game of legal ping-pong, the DoJ has made a great return back over the net.

In the filing, the DoJ responds to arguments raised by Apple, Penguin, Macmillan, and the combination of Barnes & Noble and the American Booksellers Association. A number of the responses have to do with how various cases the parties cited don’t mean what they think they do, but there’s still plenty of stuff that won’t make ordinary readers’ eyes glaze over to go around.

The DoJ starts out by addressing the argument made in common by many who opposed the settlement that e-books are different and anti-trust laws shouldn’t apply to them. Funny thing, says the DoJ, but quite a few other businesses have tried the same “the rules shouldn’t apply to us” argument, including “[r]ailroads, publishers, lawyers, construction engineers, health care providers, and oil companies”. And time and again, the courts have shot these arguments down.

Suggestions that the antitrust laws are of no use when it comes to e-books are especially remarkable in light of the unmistakable consumer harm that resulted from the conspiracy in this case. The conspirators eliminated the “wretched $9.99 price” that so attracted the reading public and so infuriated publishers, Compl. (Docket No. 1) ¶ 32, and made sure that Apple would not have to contend with what it viewed as senseless competition as it entered the e-book market. Now those conspirators that have not settled with the United States seek to upset the settlements that have been reached, and thereby delay the restoration of competition. Those efforts have no basis in law, and this Court should reject them.

In response to Apple’s objection that it’s being punished without its own trial yet, the DoJ says that no existing legal theory allows Apple to be a dog in the manger and prevent everyone else from benefiting from the settlement—especially since Apple’s own contracts with publishers allowed immediate termination by any party on 30 days’ notice—not too different from the 7 days’ notice required by the settlement. (Certainly not different enough that Apple has protested on those grounds.) Apple’s complaint that the settlement changes who has the responsibility for pricing is “bewildering” because it’s actually giving Apple the ability to set its own price that it did not have before—though, of course, the thing that’s really bothering Apple is that everyone else will get to do it, too.

As for Penguin, the DoJ effectively accuses it of trying to mislead with statistics by pointing the court at commenters who incorrectly assumed prices had gone down based on limited information—while Penguin’s own prices had risen by an average of 17% in the four weeks after Penguin implemented agency pricing. It also says that, under existing case law, it is under no obligation to produce any economic analyses in support of its assertion.

The DoJ also rejects Macmillan’s assertion that the settlement will give Amazon back control over the entire e-book market, noting continued heavy competition by other companies—and pointing out that even if Macmillan was right, blunting competition is not the purpose of anti-trust law—rather, it’s “to protect the public from the failure of the market.”

Apparently the only new argument offered by Barnes & Noble and the ABA was the idea that the overwhelming volume of comments opposing the settlement should demonstrate it is not in the public interest. (Even I think that’s kind of a silly assertion, as much as some of those opposed attempted to stack the ballot box with form letters.) The DoJ points out that most of those comments didn’t come from entities who wanted to serve the public interest, but rather from those who stood to benefit by the continuation of agency pricing.

This is all very exciting. I wonder who the judge is going to find most convincing? Will the settlement go through?

I also wonder what the Department of Justice would have to say to the filings from Bob Kohn, assuming the judge permits them. Given what they wrote about him in the original response to comments, it would almost certainly be amusing.

Photo by geetarchurchy.

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George August 23, 2012 um 9:56 pm

As an anarcho-capitalist sort of guy, I should feel bad about all the DOJ is doing. But as a long suffering early and often adapter of eBooks, I actually feel pretty darn good.

Thanks for breaking this down, Chris.

Jack W Perry August 24, 2012 um 10:16 am

It appears that the five publishers will have to concede setting the consumer prices to the retailers. Amazon will then under-price the books. BN NOOK will either have to match (and lose money) or sell at a higher price (and lose market share). Either way, NOOK prospects look dim.

Also, does this mean that Random House is the only publisher allowed to set their consumer prices at Amazon? Does that give the largest publisher an advantadge?

Nate Hoffelder August 24, 2012 um 10:33 am

Only 3 of the 5 publishers have settled, I thought. And yes, RH does get to control it own prices.

But I’m not sure it will make that much of a difference; Amazon could already set prices for most of the ebooks they sold.

fjtorres August 24, 2012 um 10:48 am

A disadvantage, if they use their Agency price fix to keep prices high.
One more time: The DOJ isn’t objecting to the Agency Model itself, only the way it was implemented and the way it was used to *force* higher prices on consumers and, in combination with Apple’s "Most Favored Nation" clause, to prevent competition among retailers.
So, with the MFN clause forbidden and the settling BPHs forbidden from price-fixing for two years, the BPHs clinging to the scam will be at a disadvantage at retail.
*That* is why Apple and the other two publishers are trying to derail the settlement.

Peter August 24, 2012 um 2:18 pm

True, but that doesn’t make their position legally incorrect.

The DoJ’s plan of attack requires the three settling publishers to throw MFN clauses out of their contracts. The problem is, MFN clauses are industry standard and its retailers, not publishers, who logically insist on them.

Amazon, Barnes and Noble, and Apple all have some form of MFN clause in the contracts self-pub authors sign. Authors can’t just opt out.

Besides that, as Apple pointed out and the DoJ ignored, MFN clauses don’t automatically force publishers to sign agency agreements or raise prices at any other retailer. The clauses gave the publishers an incentive to do it, as the publisher would have to match that deal at their own expense at Apple, but that’s not the same thing.

So the settlement, as written, is both non-enforceable and ineffective. It would be like me burning down my house to get out of an underwater mortgage, getting sued for insurance fraud, and then agreeing as part of the settlement that my next mortgage shouldn’t even require me to purchase insurance in the first place, that way I’m not tempted to do it again.

The DoJ touched on this in their response, but it was weak. They could only cite one case in which a consent decree required unusual obligations be inserted into third party contracts, United States vs. Graftech. But if you look that case up the third party (Conoco) never filed any formal objection or indicated any unwillingness to sign the modified contract, even during the public comments period. Also, the logical intent of the new contract language was clearly to prevent Graftech from stealing industry secrets from Conoco, not destroying Conoco’s entire business model.

For that reason I think there’s a pretty good chance the settlement will be thrown out. There are plenty of potential ways to word a settlement that would result in lower prices at the publisher’s own expense.

fjtorres August 24, 2012 um 3:15 pm

Or they could do what the europeans do: fine each publisher a half billion and Apple a cool billion.
No need to ponder imponerables, then.

Peter August 24, 2012 um 4:06 pm

That seems likely.

Peter August 24, 2012 um 2:43 pm

One more potential big legal problem for the DoJ case: the proposed settlement would have the intended effect if Amazon went back to selling ebooks at a loss. If they don’t, ebook prices would actually increase.

Did Amazon ever issue any sort of official, court filing promising that they would follow through with that?

I can’t remember one. I remember a press release, but that’s off the record. The court can’t base a decision on that- they need something they can cite. Which Amazon probably won’t be willing to give because it would be perjury if they later decided to raise prices anyway.

Ravi August 28, 2012 um 12:41 am

If Amazon decided they didn’t want to sell ebooks at a loss, do you think Rakuten (Kobo) would hold back and pass up an opportunity to gain market share? Would Google, especially since their content ecosystem is well behind Amazon and Apple?

We don’t need Amazon to make any promises here. There are plenty of competitors here. They just need to be allowed to compete.

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