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A group of more than thirty states have bagged $52 million from publishers as part of a price fixing investigation involving Apple (s aapl). More money is on the way. While state leaders say the money is for overcharged consumers, legal and antirust experts say the arrangement is unusual.
The tens of millions at stake raise questions about the political and business motives behind the deal, and could provide more fodder for critics who question government decisions in the high-profile e-book case.
This investigation offers a closer look at the case’s many moving parts and, in the last section, an estimate of when (or if) any of the money will make it to e-book readers themselves.
“Parent of the nation” to the rescue
The conspiracy case is bitter and complicated but, at its heart, turns on whether Apple and five publishers broke antitrust laws by introducing a commission-style pricing system for e-books in early 2010. The new pricing system was a response to Amazon (s amzn) selling e-books below cost.
The publishers’ Apple partnership soon touched off a wave of class action lawsuits over alleged price-fixing as well as investigations by the Justice Department and state governments. The controversy crested this spring when the Justice Department formally sued Apple and five publishers for violating the Sherman Act.
Three of the publishers promptly settled and agreed to change their pricing policies but Apple and two other publishers, Penguin and MacMillan, are fighting the case in court. The court proceedings (including the settlement talks) are a sprawling affair scheduled to take years. The case has become especially complicated, however, due to the overlapping roles of the Justice Department, the state governments and the class action lawyers.
The Justice Department, you see, is only asking Apple and the publishers to change their pricing — not to pay out any money. It is the state governments and the lawyers who are after cash. They have competing lawsuits to shake civil damages out of Apple and the publishers.
While class action lawsuits are commonplace, the one filed by the state governments is not. The states’ case is based on a power called parens patriae (“parent of the nation”) that lets them sue on behalf of their citizens.
Connecticut and Texas initiated the civil lawsuit in April and more that thirty other states and Puerto Rico since decided to tag along. The dozen or so states sitting it out are mostly in the west. Their attorneys general have not joined in because state laws require the governor or legislature’s permission to do so or, possibly, because they disagree with the lawsuit.
For the states that are taking part, the initial lawsuit paid immediate dividends. In April, the Connecticut attorney general held up a trophy in the form of a $52 million settlement with publishers Hachette and Harper Collins which will be used to pay “consumer restitution.” A third publisher, Simon & Schuster, settled soon after. The details of the Simon & Schuster deal have yet to be released but, if it’s consistent with the previous settlements, that publisher will also pay tens of millions.
If Connecticut’s prize was an immediate win for the states, it was a direct loss for the class action lawyers. These lawyers, who filed dozens of cases on behalf of Americans across the country, will not be able to collect if the defendants have already paid once to the state governments. (Right now, the class action lawyers still have a hope of collecting from Apple and the two holdout publishers – unless they too decide to settle with the states).
Steve Berman, a prominent lawyer who is leading the class action suit, argues that the states’ deal will ultimately shortchange consumers. He said via email:
“If you were a defendant would you want to negotiate with the law firm that was a lead counsel in the largest settlement in history (tobacco) … or would you prefer to negotiate with some relatively young and inexperienced assistant attorneys general? That’s an easy one, and we are disappointed the attorneys general took the bait.”
Consumer justice or just politics?
Parens patriae suits have been around forever but are still quite rare. The most prominent ones involve mass torts related to pollution or industry.
In the case of something like overpriced e-books, Berman says the job is better left to class action lawyers like him who have experience grinding the most money out of big companies like Apple and the publishers. So why did the states decide to file a parens patriae case in the first place?
“The reason the state is stepping in is it’s great politically for the attorney general,” says Daniel Gifford, an anti-trust professor at the University of Minnesota, who adds that he has “never seen anything like [the e-book suit] before.”
Connecticut’s ambitious former attorney general, Richard Blumenthal, was the impetus for the state investigations. He announced an investigation in mid-2010 when e-book pricing was a big news issue even though the Justice Department appears to have been investigating the situation at the same time. Blumenthal is now a US Senator and the mop-up work has fallen to his successor and has also been taken-up by the attorneys general of Texas and Ohio.
At the same time, the political winds are changing. This week, US Senator Charles Schumer penned an op-ed in The Wall Street Journal saying the New York publishers and Apple did nothing wrong, and urging the Justice Department to back off before it smothers the digital publishing industry. (At the state level, however, New York Attorney General, Eric Schneiderman, signed onto the multi-million dollar suit against the publishers. Schneiderman’s office did not reply to questions about how the money would be disbursed.)
The states’ lawsuit may be politically driven and redundant (don’t forget there is the class action case too) but that doesn’t necessarily mean it’s a bad idea. The states may demand lower legal fees than class action lawyers who typically collect 25 percent of the jackpot. This could mean more money overall for consumers.
The state governments could also bring a quicker end to the whole process. Bert Foer, the president of the American Antitrust Institute, says the three publishers’ motivations for settling with the states was to “make this go away as soon as possible.”
Foer, however, is skeptical about the state governments’ overall role in the process. He says the class action system was already poised to address any harm to consumers. Foer adds that the states will almost certainly take a cut of the settlement to cover legal expenses, including outside lawyers, in the same way as a class action law firm would do.
So when will e-book owners see the money?
Even though two of the publishers have signed a settlement to pay $52 million and a third (Simon & Schuster) is poised to top up that amount, it’s unlikely the money will flow to consumers anytime soon.
Beth Farmer is a law professor at Penn State and a former attorney with the New York attorney general’s office where she worked on antitrust cases. She points out that the proposed $52 million settlement still has to be approved by the court, that consumers have to be notified and so on. None of this is likely to happen while the cases against Apple and the holdout publishers drag on.
“[Consumers] need complete information before they can make an informed decision, I think, and mid-way through the case is premature. Also, the notice and claims process is going to be complicated and it wouldn’t be efficient for the states to do that multiple times,” said Farmer by email.
For now, the states are scheduled to file for a preliminary approval of the settlement with the three publishers in late August. That filing (if it is not delayed) will lead to a period in which groups, including the class action lawyers, can file objections. Based on Farmer’s comments and the fluid nature of the larger case, it would be a surprise if Judge Denise Cote gives a go-ahead.
Meanwhile, the Justice Department’s case, which partially serves as the linchpin of the other lawsuits, is taking on a chaotic quality. The department has already missed a deadline to publish more than 800 comments filed in response to its proposed settlement. At the same time, political support for the settlement may be weakening as figures like Senator Schumer weigh in and as Justice Department staffers wait to find out if they will have a new boss come November.
Finally, the retail market for e-books is rapidly evolving. While a grand conspiracy between Apple and publishers may once have seemed a great threat to e-book buyers, some have suggested the Justice Department should have targeted Amazon and its giant market share instead. Others argue that the market for digital publishing is changing so rapidly that the government should simply step back from attempting to regulate it all.
As for that $52 million, e-book readers should not hold their collective breath about getting a $5 check anytime soon. The settlement money is tangled in a complicated political and legal process that makes it unlikely payment will arrive in the next two years – if at all.
(Image by StanOd via Shutterstock)