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Summary:

The Department of Justice’s trial against Apple kicked off in New York Monday. The DOJ alleges that Apple conspired with publishers to set ebook prices, while Apple argues that there was no conspiracy and that Apple was operating the way it normally does with content providers.

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The Department of Justice’s ebook pricing case against Apple kicked off in federal court in New York on Monday, and is expected to last for three weeks. The DOJ accuses Apple of conspiring with book publishers to fix ebook prices for the launch of the iBookstore in 2010. All five publishers originally named in the case have settled with the government, and Apple remains the sole defendant pressing on with the trial.

The Department of Justice and Apple’s opening statements lasted for nearly the entire day, but they introduced little material that would be surprising to anybody who has been following the case since the DOJ first sued Apple and publishers in April 2012. Both parties primarily rehashed the agreements that they have been making for over a year.

Judge Cote: No, I’m not siding with the DOJ…yet

Federal judge Denise Cote, who is overseeing the case, indicated in a pretrial hearing last week that she is “leaning toward” the DOJ’s version of events, based on all of the evidence that she has seen already. Not surprisingly, Apple attorney Orin Snyder brought up that inclination in court again today, describing Cote’s “tentative view” as “not so great for my client…every defendant should be presumed to have done nothing wrong” until the end of a trial.

Cote quickly jumped in to defend her position, saying that it is customary for her to share her pretrial views if both parties agree and that it is not an uncommon practice in either New York or California courts. “You had months to think about whether you wanted my pre-trial views or not,” she told Snyder, and stressed she hasn’t made a final decision yet: “My view was a tentative view…The deck is not stacked against Apple unless the evidence stacks the deck against Apple.” She noted that both parties’ opening statements and summations “will be particularly helpful” in making her decision.

DOJ: Apple and publishers conspired to change the entire industry

In the DOJ’s opening argument, attorney Lawrence Buterman described the launch of the iBookstore in April 2010 as “the day the prices of the most popular ebooks went up across the United States as much as 50 percent … The $9.99 price for ebooks that [customers] had become accustomed to was largely gone.” Buterman argued that Apple conspired with publishers to move to agency agreements (in which the publisher sets an ebook’s retail price and the retailer takes a cut) with Apple and then forced other retailers — namely Amazon — to move to agency as well. “The key word here is collective,” Buterman said, because no one publisher was willing to adopt agency pricing on its own. Apple needed to keep “weak-kneed CEOs” in line and “move the whole market off of $9.99.”

Buterman repeatedly stressed that Apple and publishers acted together with the goal of changing “the entire ebook industry.” Citing an email exchange between Apple SVP of internet software and services Eddy Cue and Simon & Schuster CEO Carolyn Reidy, for instance, Buterman said, “These are not the words of an independent actor.” The DOJ also alleges that Apple was a “facilitator and go-between” to get publishers to enact higher ebook prices in the agency pricing negotiations between publishers and Amazon — when Macmillan CEO John Sargent went to Seattle to talk to Amazon about agency pricing, for example. And when individual publishers were trying to decide whether they should adopt agency pricing and join Apple’s iBookstore, the DOJ says that Apple acted as “a conduit” by telling them what other publishers were doing and thinking.

The DOJ cited the MFN (most-favored nation) clause that Apple required in its publisher contracts as an obvious way for Apple to try to control Amazon’s own ebook pricing practices: Buterman said that Apple was “fully aware that the imposition of an MFN in its agency agreements” would lead publishers to enact agency agreements with Amazon.”

Apple’s entry into the ebook market “arrested all ebook price competition,” Buterman concluded, arguing that any innovation in the space around the time that the iBookstore launched either existed before the launch or couldn’t be tied to it. “The iPad was going to be introduced regardless of whether there was an iBookstore,” he said, while describing “increased book sales and new devices” as “trends that were well underway” before Apple came on the scene.

Apple: DOJ “reverse-engineered a conspiracy”

Apple’s attorney Orin Snyder argued in his opening statement — which lasted over three hours — that the government had provided no direct evidence of a conspiracy between Apple and publishers. Apple “simply was not willing to start a new business that would lose money” by matching Amazon’s $9.99 price for bestsellers. But the DOJ, Synder said, is asking the court to “ignore the actual negotiation of the contracts that define the relationships between the parties.”

Apple and publishers were not aligned, Snyder argued: Rather, he claimed negotiations between them were “contentious and hard-fought…in some cases knock-down, drag-out fights” (becoming so “noxious” in the eyes of Random House that it would not sign a deal). HarperCollins only agreed to an agency agreement with Apple, he said, because News Corp wanted to retain a good relationship with the company. Snyder said that Apple had “no evidence — zero — that Apple knew anything about interactions between publishers.”

In response to the DOJ’s allegations that Apple acted behind the scenes to help publishers get Amazon to agree to agency pricing, Snyder said there is “iron-clad proof…in emails and in testimony that Apple told its supposed co-conspirators” that it didn’t care what kinds of agreements publishers signed with Amazon. He said Apple would not have needed a MFN clause in its agreements if it already knew the types of agreements that publishers would enact with other retailers: Instead, an MFN gave Apple “the ability to be indifferent to what happens at other retailers.” He also alleged that Amazon initiated discussions about changing the pricing model with publishers before Apple signed its own agency agreements.

“Apple should be applauded and not condemned for its beneficial impact on the ebook market,” Snyder said. Before the launch of the iBookstore, the market was “headed nowhere good.” With the iBookstore’s launch, Snyder claimed that many more parties have been able to start selling ebooks — everyone from “little brownstones in Vermont” to “solo authors acting without a publisher.”

  1. MFN’s aren’t illegal — even Amazon uses them — so if the publishers did ‘interact’ (i.e., if parallelism is not a defence for them) can parallelism still be a viable defence for Apple itself?

    Has there ever been a case before where the DOJ claims hub and spoke communication where the actors at the hub acted benignly?

    Fascinating.

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  2. DOJ didn’t care enough about the economic meltdown with wall street and banks but apparently book publishers are real criminals for partnering to share a pricing business strategy…by that, they see it as “colluding”, and worst, this is really bad for consumers! That’s right, paying a few dollars more on ebooks is totally killing readers slowly or making them poorer or dumber??? The whole point of ebooks is that it is already cheaper than print version. Find me some ebook readers that complaints against agency pricing!

    DOJ has no logic from the start with this and if this judge buys this bs…I have lost all hope in this system.

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  3. >>>“Apple should be applauded and not condemned for its beneficial impact on the ebook market,” Snyder said.

    And he could say that with a straight face and also sleep well at night?

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    1. GuestCommenter Tuesday, June 4, 2013

      I have no idea. How could you have known?

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  4. Perhaps the most intriguing aspect of this trial is who’s not a defendant–Amazon. To grasp just how incredible that is, recoup a few of the facts.

    At the time this alleged crime occurred Apple had precisely zero percent of the ebook market while Amazon had upwards of 90%. Exactly how does someone with no market share propose to not only set prices but raise them higher than prices set by a company with ninety percent of the market? That’s insane.

    Why would Apple want to raise ebook prices in general and in particular why would it want to sell ebooks for iPads for more than those same ebooks were selling on Amazon? Remember, Apple wants to sell iPads, which bring them a large profit.

    As an author, I’d be more than willingly to testify that Apple isn’t that into selling ebooks, that their iBooks division is obviously starved for cash and staff. Amazon approved my latest revision to Hospital Gowns and Other Embarrassments in a little over a day. For the iPad version, I’m still waiting after two weeks. Pitiful.

    If Apple intends to dominate ebook sales and dictate prices, why can’t someone who gets an ebook from the iBookstore read it on anything other than an iDevice? We can’t, at least as yet, even read them on Macs, much less PCs or Android devices. For a would-be market dominator, Apple is behaving remarkably poorly.

    And keep in mind that, in the music market Apple does want to dominate. There, it has an iTunes version for Windows as well as Macs and, since music from the iBookstore isn’t DRMed you can move it to your Android device. Why not sue Apple there?

    Personally, I can explain the DOJ’s behavior in only two ways. Either the DOJ lawyers (and this judge) are really, really stupid, or that a Chicago Machine sort of deal has been made. In Chicago, businesses must pay-to-play. Give the right politicians money and the bureaucracy leaves you alone and may even hammer your competitors.

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    1. Scott Jensen Tuesday, June 4, 2013

      “Exactly how does someone with no market share propose to not only set prices but raise them higher than prices set by a company with ninety percent of the market?”

      By being Apple. If you don’t understand how big of a gorilla Apple is, then you’re clueless about what is being discussed here. This was a MAJOR bully that has had a LONG history for monopoly practices that was deciding it now wanted to get into the tablet PC market and viewed ebooks as one of the things it can sell on its own tablet PCs. Apple doesn’t like and cannot handle competition. Amazon was competition and Apple wanted to cripple them. Apple didn’t think it could turn a profit on $9.99 books as Amazon does so it used its muscle and influence to get publishers to, in Apple’s warped mind, level the playing field with Amazon. The customer be damned.

      “Why would Apple want to raise ebook prices in general and in particular why would it want to sell ebooks for iPads for more than those same ebooks were selling on Amazon?”

      It didn’t think its iPad was going to be successful as it became so it was trying to manipulate the market to make more money off of ebooks.

      “If Apple intends to dominate ebook sales and dictate prices, why can’t someone who gets an ebook from the iBookstore read it on anything other than an iDevice?”

      Because Apple is a monopolistic company that doesn’t play well with others. ALL other computer companies are PC. It is ONLY Apple which still has its own separate operating system. To understand Apple, you have to understand the mindset of a monopolist.

      “Why not sue Apple there?”

      Because Apple didn’t have secret meetings with the record companies to try to do price fixing.

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  5. Scott Jensen Tuesday, June 4, 2013

    Anyone here who is defending Apple needs to read the facts. If there was nothing wrong with what they were doing, why the secret meetings? Why tell all parties to “double delete” their emails? Why did all ebook prices instantly climb to $14.99 when iPad came onto the market. I know there are Apple fanboys here who believe that Apple is holier than the Pope but for the rest of us in the real world, they’re just another greedy corporation.

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