The news comes just a couple of weeks before Apple is set to face the DOJ in court. In the trial, beginning June 3, the DOJ will argue that Apple conspired with book publishers to fix ebook prices. Apple argues that it offers agency pricing to all retailers in iTunes and that the launch of iBookstore created competition in the marketplace.

Under the proposed settlement, announced Wednesday morning, Penguin would pay $75 million to consumers represented by 33 states’ attorneys general and by Hagens Berman, the Seattle-based law firm that filed the class action suit against Apple and publishers in 2011. The settlement still has to be approved by the courts, in a hearing set to take place later this summer.

Penguin’s settlement with the consumers and states is the largest that any publisher has agreed to. HarperCollins, Hachette and Simon & Schuster settled together for a combined $69 million, while Macmillan agreed to a $20 million payout.

The settlement also clears the way for the Penguin-Random House merger to move forward in the second half of this year. Penguin’s parent company Pearson said in a statement, “In anticipation of reaching this agreement, Pearson had made a $40m provision for settlement in its 2012 accounts. An incremental charge will be expensed in Pearson’s 2013 statutory accounts as part of the accounting for the Penguin Random House joint-venture.

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In the case, HarperCollins says that its 1971 contract with George gives it the right to publish Julie of the Wolves in any format, including as an ebook. Open Road argues that HarperCollins never had ebook rights. George, who was 92 when HarperCollins first filed its lawsuit, said that she was “with Open Road all the way,” but she died in May 2012 and never gave a deposition.

HarperCollins argues that its contract included future types of works, and  that print books and ebooks are the same. Open Road contends that it did have the right to publish Julie of the Wolves because ebooks didn’t exist in the 1970s, and because HarperCollins’ 1971 contract with George didn’t specify a royalty rate on electronic works.

Both of the motions filed last week refer to a 2001 case in which Random House sued Rosetta for publishing ebook editions of Random House works. A federal judge ruled that ebooks and books weren’t the same thing and that Random House couldn’t block RosettaBooks from selling the titles. Random House appealed, but the decision was upheld, and Random House and RosettaBooks ultimately settled. Because of the outcome of that case, HarperCollins specifies in its motion how different the Julie of the Wolves case is from Random House v. Rosetta, and Open Road stresses the cases’ similarities.

HarperCollins: Ebooks weren’t around in 1971, but we knew they were coming

HarperCollins notes (here’s the PDF of the motion) that its 1971 contract grants it the right to publish Julie ”in book form,” and says that the grant “encompasses ebook publishing rights of the type Open Road has unlawfully appropriated, particularly given the virtually identical reading experience afforded by its offering to the hardcover and paperback offerings of HarperCollins, with which it directly competes.”

HarperCollins and Open Road both focus closely on the “storage and retrieval and information systems” clause in the original contract. The contract had stated:

“the publisher shall grant no license without the prior written constant of the Author with respect to the following rights in the work: use thereof in storage and retrieval and information systems, and/or whether through computer, computer-stored, mechanical or other electronic means now known or hereafter invented…”

HarperCollins argues that it’s “no stretch to recognize that ‘storage and retrieval information systems’ fully encompass the display of an ebook via an ebook reading device.” In a section of its motion on “the antecedents to ebooks,” it mentions, for instance, a 1968 article “envisioning the Dynabook, a new storage and retrieval device the size of a three-ring binder that would have a multipurpose screen that could be used for both reading and writing.” HarperCollins concludes that “without doubt, as of 1971, when the Agreement was executed, ebooks of the type offered by entities such as Open Road were foreseeable…Electronic delivery of books and other textual works was further anticipated as early as the 1950s and 1960s, when computer scientists envisioned and experimented with devices that could store books, documents and even entire libraries electronically.”

Open Road: “Information, storage and retrieval systems” don’t mean “ebooks”

In its motion (PDF), Open Road says that while HarperCollins takes the phrase “in book form” to include the right to publish an ebook as well, the judge in Random House  vs. Rosetta “found that this term excluded ebooks…It has been for decades the standard grant language that trade usage in the publishing industry has been understood to mean paper forms of the work.” Open Road cites HarperCollins’ own online dictionary, for instance, which defines “book” as “a number of sheets of paper, parchment, etc. with writing or printing on them” and has a separate entry for ebooks: “Hence, ‘book form’ and ‘digital form’ are clearly distinguished as separate forms of publication.”

Open Road also looks at HarperCollins’ later contracts and finds that, unlike the 1971 contract with George, they referred more explicitly to ebooks and didn’t use ”information, storage and retrieval systems” to mean ebook rights. Open Road adds, “ebooks and information storage and retrieval systems are apples and oranges…Harper cannot reasonably argue it now believes there is no difference between ebooks and information storage and retrieval systems, in light of its own differentiation of the two technologies in its earlier contracts.”

Open Road focuses on the fact that digital royalties were absent from the 1971 contract. It says it

“offered to pay Ms. George a 50% royalty to publish her work as an ebook. Ms. George was intrigued by Open Road’s offer and the prospect of bringing her work to a new medium. Still, she wanted to keep her works ‘in-house’ with her print publisher. So she asked Harper to publish Julie of the Wolves as an ebook for the same royalty. Harper flatly refused. It told her it would publish the ebook, but only for a 25% royalty … even though … (1) the contract is silent as to ebook publishing rights and lacks a royalty provision in exchange for those rights, (2) Ms. George expressly reserved all rights not specifically granted, and (3) the technology for such a product did not exist until many years later and a commercially viable ebook publishing market did not take hold until just a few years ago.”

The publisher argues that there was no nascent ebook market in 1971 “or 1981 or 1991,” saying, “the issue is not whether a few isolated academic visionaries could dream of a day when the words of an author’s work could be digitally transmitted through space.”

HarperCollins and Open Road both declined to comment, and a court date has not yet been set.

HarperCollins motion

Open Road motion

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This week Tamiz made wave with an appeal against Google, which he was trying to sue over defamatory comments about him made on Blogger posting. In a case that goes back to 2011, Tamiz had argued that Google was effectively the publisher of a series of comments calling him, falsely, a thief and a drug dealer, and should have deleted them as soon as they were made aware of them. Google did delete the comments, but only after a five week gap.

Tamiz is familiar with online controversy: one reason he was a lightning rod for angry comments in the first place was because, he stepped down as a local election candidate in 2011 after calling Margate’s women “sluts” on Facebook. And so, when he did not originally win his case — the first judge ruling that Google was not the publisher of the comments — he appealed to a higher court. There Google’s inaction was found to be troubling, though it did not actually overturn the libel ruling itself.

As the Financial Times reported:

Although Lord Justice Richards and Lord Justice Sullivan agreed with the original ruling that Google was not the primary or secondary publisher of the content it hosted, they said it was “at least arguable that some point after notification Google became liable for continued publication of the material”.

The Lords Justice likened the situation to a 1930s court case in which a golf club was held responsible for defamatory material left on its noticeboard because it failed to remove it after it was notified.

Cue the shrill sound of the press screeching into action. “Blogger.com libel case opens door for internet giant being required to monitor users’ posts”, squealed the Daily Mail with barely contained delight. Except, as it outlines in the story, the headline is essentially trolling — Tamiz was denied his libel claim and asked to pay 50 percent of Google’s legal costs: likely to be a tidy sum. And it’s a stretch to suggest, as much commentary does, that this is another step towards internet regulation — asking a company to respond to notices of illegal content may not be popular (just see the DMCA) but it is reasonable to expect them to comply with local jurisdiction.

Still, Tamiz — and the kerfuffle around his case — does show the amount of energy being expended around online libel in Britain right now.

Defamation laws in the U.K. are notoriously harsh, in large part because they lean in favor of the plaintiff and put the burden of proof on the defendant: it’s a case of “prove your comments were true” rather than “prove their comments were false”.

And the precedent for defamation in online publishing stretches back 15 years, to the case of Godfrey v Demon Internet Service, in which a physics lecturer sued an ISP over comments made in a Usenet group it hosted: the ISP settled the case, because a pre-trial ruling intimated that it was potentially culpable since, despite knowledge of the situation, refused to act for 10 days. Although the award was small — just £15,000 in 1997, the equivalent of around $33,000 today — it has laid the groundwork in Britain.

It’s one major reason many media companies employ battalions of comment moderators, and carefully police the comment threads on their own stories.

But remember, we are all media companies now. And that means that we are all open to the same set of rules. There have also been plenty of high-profile cases on Twitter and Facebook against individual users, but so far there has not been much success in taking on platform providers themselves. Just last week a judge in Northern Ireland ruled that while anonymous comments made on Facebook were defamatory, Facebook itself was not liable.

Still, with Godfrey in the background and more and more cases coming along, you can understand why people see Tamiz’s case as another push at a brick in the wall between platforms and publishing.

Yes, everyone’s a media company now: and eventually that will go for Google, Facebook, Twitter and the rest as much as it does you and me.

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“We have closed our investigation and took no action,” a DOJ spokeswoman confirmed.

The merger, which remains under review by other antitrust authorities including the European Commission and the Canadian Competition Bureau, would create the world’s largest publisher. According to the announcement sent by Pearson, “Pearson and Bertelsmann continue to expect the transaction to close in the second half of 2013, after all necessary approvals have been received.”

Pearson’s full announcement:

Pearson and Bertelsmann today announce that they have been notified by the U.S. Department of Justice that it has closed its investigation into the proposed merger of Penguin and Random House, without conditions.

The two companies announced their agreement to combine Penguin and Random House in October 2012. The proposed merger is currently under review by the European Commission, the Canadian Competition Bureau and various other antitrust authorities around the world. Pearson and Bertelsmann continue to expect the transaction to close in the second half of 2013, after all necessary approvals have been received.

Following completion, Bertelsmann will own 53% and Pearson 47% of Penguin Random House. It will encompass all of Random House and Penguin Group’s publishing units in the U.S., Canada, the U.K., Australia, New Zealand, India and South Africa, as well as Penguin’s operations in China and Random House’s publishers in Spain and Latin America. Pearson and Bertelsmann believe that the combined organisation, the world’s leading consumer publishing company, will have a stronger platform and greater resources to invest in rich content, new digital publishing models and high-growth emerging markets.

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Macmillan’s $20 million payout is added to the $69 million that Hachette, HarperCollins and Simon & Schuster agreed to pay consumers. The money will be doled out in the form of small credits at ebook retailers.

The fifth publisher involved in the ebook pricing lawsuits, Penguin, settled with the Department of Justice in December but hasn’t reached settlements in the class action suit or with the states. Apple continues to fight all three lawsuits, in a trial set to begin in June.

As my colleague Jeff Roberts wrote last August, the class-action lawyers don’t reap much from the deal: “The settlement lets publishers short-circuit the class action lawyers who are coming at them with a separate lawsuit. Those lawyers, who say they would get more money if they were in charge, are now frozen out because there is no money left to collect on behalf of consumers.” Publishers Lunch speculates that “the class action lawyers may be expecting to reap their bounty from any settlement with or judgment against Apple.”

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How this settlement is different

According to documents filed with the court Friday (PDF, and see links below), Macmillan agreed to many of the same settlement terms that HarperCollins, Simon & Schuster, Hachette and Penguin already agreed to — but there are also significant differences. Retailers will immediately be allowed to discount Macmillan’s ebooks, in order to “provide for more prompt relief to consumers.” In the cases of the three original settling publishers (HarperCollins, Simon & Schuster and Hachette) and Penguin (which settled in December), “several months passed before consumers saw the benefits of the settlements through lower retail prices on many of the settling publishers’ ebooks.” In Macmillan’s case, however, according to the competitive impact statement:

That “two-year cooling-off period” means that, for two years, settling publishers can’t restrict retailers like Amazon from setting, changing, or lowering ebook prices. The settlement means Macmillan gets a back-dated head start on this period, so it will again be able to restrict discounting in December 2014. Most-favored nations clauses are prohibited for five years, but Macmillan had already removed those from its contracts.

Unlike the other big-six publishers, Macmillan also publishes digital textbooks. Those are exempt from the settlement because the DOJ antitrust case focused only on trade books.

Finally, there are provisions to make it clear that Macmillan’s parent company, Holtzbrinck, would be in trouble if it “worked in concert with Macmillan to evade Macmillan’s obligations under the settlement.”

“Our company is not large enough to risk a worst case judgment”

In his letter, Sargent describes massive legal bills that Macmillan — the smallest of the big-six publishers, and the only one that is entirely privately owned — would have had to pay in “a worst case judgment”:

As each publisher settled, the remaining defendants became responsible not only for their own treble damages, but also possibly for the treble damages of the settling publishers (minus what they settled for).  A few weeks ago I got an estimate of the maximum possible damage figure. I cannot share the breathtaking amount with you, but it was much more than the entire equity of our company.

Court docs

Macmillan’s proposed final judgment (PDF)

Competitive impact statement (PDF)

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In the wake of his suicide, Swartz’s case quickly became a cause celebre, and a group of legislators including Darrell Issa (R-Calif) — who was also instrumental in the fight against SOPA and PIPA — recently asked the Justice Department to look into the behavior of the U.S. attorney’s office in pressing for a severe penalty against the young hacker. Zoe Lofgren (D-Calif.) has also proposed a number of changes to the Computer Fraud and Abuse Act that would prevent the state from going after others for what Swartz did.

Breaching terms of use shouldn’t qualify as hacking

Among other things, those changes — some of which were proposed by users of Reddit during a session with Lofgren last month — would prevent prosecutors from pressing charges for simple breaches of a website’s terms of service or user agreement, which is one of the clauses in the CFAA that was used against Swartz. Changing a computer’s hardware address (which Swartz did in order to avoid detection) would also not qualify as criminal hacking.

But while Aaron Swartz’s experience has drawn some much-needed attention to the problems with outdated laws like the Computer Fraud and Abuse Act — which was written in 1986, before the web was even invented — we shouldn’t forget that others have also been hit with this overly broad and vague piece of legislation, even though they haven’t become popular causes in the way that Swartz has.

As Marcia Hoffman of the Electronic Frontier Foundation has pointed out, one of the most problematic parts of the CFAA is that the law makes it a crime to access a computer or website “without authorization” or in a way that “exceeds authorized access,” but those terms are never really defined. In a number of cases, prosecutors have defined them to mean that anyone accessing a web-based service in any way that isn’t explicitly approved by the terms of use is committing a crime under the act.

A broad and overly vague legal net

In 2008, for example, prosecutors used this aspect of the law to go after a woman who created a MySpace profile using an assumed name (although a judge declined to hear the case) — and as one security researcher has explained, the same principle could easily be used to charge anyone who simply goes to a website without the explicit permission of the owner.

Aaron Swartz

One of those who has been caught in this particular net is almost the polar opposite of Aaron Swartz, although both were clearly hackers: Andrew Auernheimer, who is known by the online handle Weev, has also been found guilty and is facing potential jail time for unauthorized access to a computer or web service. In his case, Weev and a fellow hacker collected a list of AT&T customer email addresses by generating random URLs at the AT&T website, and then gave them to Gawker in what they said was an attempt to draw attention to AT&T’s lax security measures.

Unlike Swartz, who has been hailed by most of his friends and acquaintances — including luminaries such as Creative Commons founder Lawrence Lessig and even the creator of the World Wide Web, Sir Tim Berners-Lee — as a force for good and a crusader for openness and other just causes, Weev is somewhat notorious for being an online troll who reportedly delights in causing mischief, aggravation and hurt feelings wherever he goes.

Being a troll shouldn’t qualify as hacking either

All of that may make him less than appealing as a public cause, but the flaws in the Computer Fraud and Abuse Act are just as obvious in his case: in fact, what Weev did barely even qualifies as hacking, since he simply generated random iPad ID numbers and then used those to get the AT&T email addresses. In other words, the addresses were freely available and not hidden behind technological locks or passwords of any kind (Weev also made no attempt to use them or sell them).

The bottom line is that the CFAA isn’t worth scrapping or rewriting just because it was used to go after Swartz, or even Weev — the biggest issue is that it is so broad and technologically ignorant that it can be used to criminalize behavior that should barely even register as a nuisance, let alone a crime. Swartz’s downloading of JSTOR documents wasn’t serious enough for the archive to press charges, and yet the prosecutor chose to threaten the young hacker with jail time.

At its best, hacking of the kind that both Swartz and Weev engaged in is no different than the kind that Microsoft founder Bill Gates employed when he let lose a worm that shut down a corporate computer network when he was 14. Within reason, testing the limits of computer systems and revealing security holes is something for which we should be thanking hackers — or possibly admonishing them — not sentencing them to prison terms.

Post and thumbnail images courtesy of Shutterstock / ER 09 and Fred Benenson

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GeekWire first reported the news. Here’s the description of the patent:

Digital objects including e-books, audio, video, computer applications, etc., purchased from an original vendor by a user are stored in a user’s personalized data store. Content in a personalized data store may be accessible to the user via transfer such as moving, streaming, or download. When the user no longer desires to retain the right to access the now-used digital content, the user may move the used digital content to another user’s personalized data store when permissible and the used digital content is deleted from the originating user’s personalized data store. When a digital object exceeds a threshold number of moves or downloads, the ability to move may be deemed impermissible and suspended or terminated. Additionally or alternatively, a collection of objects may be assembled from individual digital objects stored in the personalized data stores of different users, and moved to a user’s personalized data store.

Users’ rights to resell digital content is already a contentious issue under copyright law. Startup ReDigi, which allows users to resell digital music, says its model is legal according to U.S. copyright law’s “first sale” doctrine, which lets people resell physical content. But the record label EMI is suing ReDigi, claiming that digital files can’t be resold like physical objects because there is no way to ensure that the “original” digital file was deleted. A court will rule on the case this year, and the outcome could have implications for Amazon’s marketplace.

Amazon’s patent for this marketplace is likely to muddy the legal waters even further. If the patent is as broad as it seems, Amazon could theoretically bar ReDigi and everyone else from offering a resale market in the first place. The company, after all, has spent years in court fighting to own the right to “one-click shopping” based on a 1999 patent.

As for the “electronic marketplace” patent itself, Amazon appears to take account of copyright owners’ concerns. The patent outlines a system to “maintain scarcity” of content: “a threshold may limit how many times a used digital object may be permissibly moved to another personalized data store, how many downloads (if any) may occur before transfer is restricted, etc….These limits may be set for a specific digital object, a digital object type (such as a particular title of book), a digital object category (such as all movies), etc….Alternatively, a user’s ability to access the used digital object by streaming may also be limited upon the occurrence of certain events.” It’s not clear, though, how the system would ensure that a user hadn’t stored a copy of the file somewhere other than his or her “personalized data store.”

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In a blog post Friday, Google CEO Eric Schmidt announced two new initiatives to appease France: “First, Google has agreed to create a €60 million [USD $82 million] Digital Publishing Innovation Fund to help support transformative digital publishing initiatives for French readers. Second, Google will deepen our partnership with French publishers to help increase their online revenues using our advertising technology.” Google won’t pay for links, however.

As paidContent’s Jeff John Roberts reported recently, French publishers had wanted more money, between €70 and €100 million euros. And a tweet from Frédéric Filloux suggests that more details still have to be worked out. The agreement is similar to one that Google reached with Belgian publishers in December; in that deal, Google agreed to buy around $6 million worth of advertising.

Thumbnail image courtesy of Shutterstock user alp33.

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Square confirmed the report, saying in a statement:

The first we heard of any of these allegations was when we received the threat of a lawsuit two weeks ago. We took these allegations very seriously and we immediately launched a full investigation to ascertain the facts. While we have not found evidence to support any claims, Keith exercised poor judgment that ultimately undermined his ability to remain an effective leader at Square. We accepted his resignation.

In a post on his personal blog on Friday, Rabois wrote:

In May 2010, I met someone via mutual friends. With increasing frequency, we hung out, drank wine, and I helped prepare him for interviews with tech startups. As our friendship deepened, we spent more time together, and our relationship became physical. … Several months after our relationship began, I recommended that he interview at Square. He went through the interview process and was ultimately hired. I had no impact on his potential success at the company. At no point did he ever report directly to me, and I have seen his work product less than a handful of times.

Rabois denied the allegations:

I realize that continuing any physical relationship after he began working at Square was poor judgment on my part. But let me be unequivocal with the facts: (1) The relationship was welcome. (2) Square did not know of the relationship before a lawsuit was threatened; it came as a complete surprise to the company. (3) He never received nor was denied any reward or benefits based on our relationship. And (4), I did not do the horrendous things I am told I may be accused of. While I have certainly made mistakes, this threat feels like a shakedown, and I will defend myself to the full extent of the law.

He said he “decided to resign from Square so my colleagues could continue to do great work without the distraction that a lawsuit would most certainly bring.”

Square appeared ready to back Rabois in the suit. Richard Curiale, outside counsel for Square and Rabois, told AllThingsD, “I have not as yet found any conduct that is illegal and therefore there is no adverse relationship between Keith and Square. We don’t pay for claims that have no merit to them, because it amounts to extortion.”

Square, a Silicon Valley-based startup that allows vendors to accept credit card payments from mobile phones, was cofounded by Twitter cofounder Jack Dorsey in 2009. The company has raised over $340 million in funding, with a reported valuation of $3.25 billion.

This story was continuously updated Friday afternoon as information became available.

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