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

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

20 Responses to “Justice Department slams Apple, refuses to modify e-book settlement”

  1. James Katt

    What Apple needs to point out is that Amazon, itself, is a publisher. Thus, it has a huge incentive to kill publisher’s own profits outside of Amazon by selling their books as a loss leader at Amazon.

  2. The publishers are settling because their corporate parents told them to, not because they colluded or think they could not win a case. Why settle ? Becase media giants have more at risk in taking on the government than the issues in this case. If you can bring yourself to be a one-issue voter, don’t vote for Obama and this will go away. It is his DOJ that decided to go after book publishers instead of the oil industry and the Wall Street crooks who brought our economy to its knees and destroyed the lives of thousands of Americans.

  3. I think it’s fine for the DOJ to proceed with their suit. From what little I have read of the background, it seems like Steve did the old “nudge-nudge wink-wink” number. The operative word being “seems”. However, it also seems like that will be for the jury to decide, and it’s a jury I could be one, because I presume that Steve is innocent. My conclusion? The publishers are probably settling because they colluded, and Apple is probably *not* joining the settlement for the simple reason that they did not collude.

    • If it’s a jury of their RalphF’s, Apple is sunk. But I’m guessing/hoping that Apple is going to hand the Justice Department a painful defeat if the anti-trust action ever goes to trial.

    • If Apple faces a jury of RalphF’s, they’re sunk. But I’m guessing that in the real world Apple is going to hand the Justice Department a painful defeat if the antitrust action ever comes to trial.

  4. David Thomas

    “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.'”

    This is absurd. How did agency pricing ever affect the potential for self-publishing at Amazon?

  5. Jack C

    It really isn’t that hard. Don’t (overtly) conspire with your “competitors” to fix pricing. Just because you claim to be conspiring for a “good cause” (e.g., claiming underdog status or suggesting that it helps bring in more profits for the content originators) doesn’t make it okay. Anyone opposed to the DOJ here is standing on corrupt ground.

    • eldernorm

      “Anyone opposed to the DOJ here is standing on corrupt ground.” So you are saying that if FORD has the same dealer agreements with all of its dealers, this is collusion? Where does a general discussion of what is the best way to approach a problem become conspiring?

      I think that is the key to this whole thing. Amazon had a monopoly and Apple knew the sellers were not happy. Apple agreed to work with some of the book sellers to give them the ability to price ebooks as they wished versus how Amazon wished to sell them.

      Last thought, does Congress “conspire” to make each law, when they have a majority of members vote for it????

    • David Thomas

      “Anyone opposed to the DOJ here is standing on corrupt ground.” This concluding statement takes a personal step that is ultimately self-righteous, but also demonstrates that many of the “arguments” against publishers in this case are based more in sentiment than reason. No one claims to be conspiring in this case at all, and if you took time to read the particulars and details BEFORE forming your opinion, you wouldn’t frame the discussion with arm-chair psychology.

      • Jack C

        So the DoJ statement doesn’t say, “…the seismic shift in e-book prices was not the result of market forces, but rather came about through the collusive efforts of Apple and five of the six largest publishers in the country”?

    • Jeff Laing

      Apple did not conspire with its “competitors”. Amazon is it’s competitor.

      Apple provided an alternate venue for its suppliers who were being given “like it or lump it” conditions from Amazon.

      What everyone is confusing here is that the industry that will be killed by the DOJs action is *retail*, not *publishing*.

      • Jack C

        You are seriously suggesting that the publishers listed aren’t also Apple’s competitors? So if I go to Penguin Publishing’s website right now, I won’t find any ebooks that Penguin is selling direct? Nothing the DoJ is saying stops publishers from selling through Apple; the linchpin is the whole “collusion” thing.

  6. Seems like the boys at DoJ are a little miffed by the criticism they’ve (rightly, in my mind) gotten. Amazon (by FAR the biggest source of e-books) were the predominant source of e-books by far. They were in Apple’s position, in fact, with the iTunes store. Jobs insisted that the price remain 99c a song. The industry wanted variable pricing. Jobs wanted no DRM, and the same pricing. What did the music business do? They licensed their songs to Amazon, with variable pricing, and they gave the DRM-free tracks to Amazon a year or so before they gave them to Apple. So you could get some tracks at .69, a lot more recent releases and best sellers at $1.29, and some at .99. Where was the outrage about this collusion? An e-book on Amazon still costs the same thing, no matter what the publisher wants it to be. Apple’s e-book pricing is not price-fixing. It’s variable pricing.