Justice Department slams Apple, refuses to modify e-book settlement

Department Of Justice

The Justice Department released a document today that characterized criticism by Apple and publishers of a controversial price-fixing settlement as “self-serving” and ill-founded. The Department also pointed to recent ventures by Google and Microsoft as evidence that the e-book market is thriving and that Amazon’s dominant position has been overstated.

The arguments came as a reply to the 868 public comments that were filed in response to a settlement announced in April under which three publishers agreed they would change their pricing policy in accordance with Justice Department demands.

The settlement was imposed after the Justice Department sued Apple and five publishers for allegedly conspiring to wrest pricing power from Amazon. Apple and two of the publishers, Penguin and Macmillan, refused to settle and are fighting the case in court.

The Justice Department document is posted below with key passages underlined. The primary upshot is that the Department is refusing to modify any parts of the settlement agreement despite about 800 comments in opposition to the deal and new political opposition from people like Senator Charles Schumer (D-NY).

In its filing, Justice says it addresses Apple’s objections at length because of “[Apple’s] central role in the events leading to the underlying enforcement action.”  It also quotes an incident in which Steve Jobs reportedly told publishers, “the customer pays a little more, but that’s what you want anyway.”

The government goes on to refute Apple’s contention that it is imposing a business model on the industry:

Nothing in the proposed Final Judgment would force Apple or B&N to exercise discounting authority—they are free to carry out their own businesses exactly as before. What they may not do is continue to rely on a conspiracy to restrain their competitors.

Under the terms of the settlement, Apple and the settling publishers must terminate existing “Apple Agency Agreements” within seven days time of the settlement’s final approval. The publishers can then sign new contracts but are forbidden for two years from using clauses that limit retailers’ rights to discount. (Amazon often offers discounts whereas Apple instead uses a commission-style system favored by publishers).

The Justice Department’s filing largely skates away from issues related to Amazon’s role in the e-book market. It states that public comments suggesting it sue Amazon for abuse of dominant market power or address issues of online sales tax issues are beyond the scope of the antitrust action.

The filing does, however, repeatedly point to a recently announced $300 million partnership between Microsoft and Barnes & Noble and to Google’s plan to use its Nexus 7 tablet and Google Play store to compete with Amazon’s Kindle Fire.

The Justice Department also addresses comments by the Authors Guild which has been one of the most virulent critics of the settlement. The Guild has complained that the settlement will allow Amazon to resume predatory pricing (one term of the settlement is that retailers can’t sell at a loss — but it allows the retailers to average their margins across their entire e-book catalogue, meaning they can sell individual titles at a loss).

The Justice Department described Authors Guild’s arguments that Amazon’s pricing policies hurt publishing and culture as a “paternalist view.” It added that many agents and authors who had submitted comments against the settlement had “taken up the torch” on the Guild’s behalf. In contrast, Justice cited self-published authors who had submitted comments saying that Amazon provided them “a path to publication that was immune from Publisher Defendants’ hegemony.”

The next step in the case is for the proposed settlement to go before Judge Denise Cote who will decide in coming months whether to approve it, reject it or delay approval pending a more detailed fact-finding investigation. In the meantime, the court case against Apple and the publishers will continue as will as a parallel case brought by class action lawyers and state governments seeking tens of millions in damages.

Judge Cote has so far appeared hostile to Apple and the non-settling publishers. In refusing to dismiss part of the related case, she referred to Apple and Steve Jobs helping publishers to “collude.”

Here is the filing with key parts underlined:

DOJ Response to Comments

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