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Recent interviews shed light on how the antitrust cases against Apple (NSDQ: AAPL) and book publishers will unfold. The e-book controversy will not turn directly on commission-style pricing, but instead on a form of contract that allows a retailer to get preferential treatment.
Recall that e-book prices are the subject of a massive lawsuit that seeks to reimburse consumers who allegedly overpaid. The case is underway in New York after a court consolidated dozens of class action suits from across the country. Justice Department and the European Union are also investigating e-book pricing.
According to Andre Barlow, a Washington antitrust expert and former Justice Department lawyer, the main issue at stake is Apple and the publishers’ use of so-called “most favored nation” clauses to set pricing. The initial lawsuit says these clauses were part of the alleged conspiracy.
“Most favored nation” clauses are not illegal, and are used in a variety of industries such as medical services. They can take different forms but a common one can be summarized as “if we buy your supplies, you have to promise us that no other buyer will sell these at a lower price.”
But a lead lawyer for the class action plaintiffs says Apple and the publishers crossed a line in the way they used the clauses.
“The mfn clauses are significant restraints of trade and part of the anticompetitive acts we will attack,” wrote Steve Berman by email.
Barlow, the Washington lawyer, says that the clauses by themselves are not illegal and neither is “agency pricing,” the system of commissions which the publishers have adopted and which is standard practice for Apple for everything in its app store.
“This is just the way Apple does it – it says ‘you set the prices and we’ll take a cut’.”
But if the publishers and Apple also used a most favored nation clause with an intent to stop Amazon (NSDQ: AMZN), “now we’re getting closer to price fixing.” The lawsuit claims that Apple wanted to hurt Amazon because it feared the Seattle retailer was going to use its Kindle to compete with the iPad.
An illegal agreement between Apple and the publishers — if there is one — would amount to vertical price-fixing which is a conspiracy between suppliers and retailers. Such cases have become rare after the Supreme Court ruled in 2007 that it is not automatically illegal for suppliers to set retail prices.
One of the few recent court cases involving vertical price-fixing involved Babies ‘R’ Us. In 2008, a court found the company guilty of illegally coercing suppliers to fix prices on high-end baby products in order to put a squeeze on internet retailers.
The e-book situation is even more complicated because it also involves allegations of horizontal price-fixing (between the publishers) and includes other potential guilty parties like Amazon who objected to the situation but went along with it all the same.
The outcome of the case may shape the future of the publishing and e-retailing landscape but is unlikely to be decided anytime soon. The class action will be snarled in procedural matters for most of 2012 and government anti-trust investigations often take years.