Apple bashes Amazon and proposed ebook settlement

In a memo filed with the Southern District of New York this afternoon (PDF; embedded below), Apple (s APPL) argues that the Department of Justice’s proposed settlement with three book publishers forces Apple to tear up existing contracts. That is “fundamentally unfair, unlawful, and unprecedented,” Apple says: It’s not settling, so it’s entitled to a trial.

“Apple is taking a bold stance by ignoring the Judge’s admonition to the parties not to oppose the settlement, other than submitting comments,” attorney and RoyaltyShare CEO Bob Kohn, who is seeking permission to file an amicus brief in the case, tells me. “Apple makes a good point that the proposed settlement terminates Apple’s agency contracts without a trial and that would be an unprecedented violation of Apple’s right to due process.”

The proposed settlement would require the three settling publishers — HarperCollins, Hachette and Simon & Schuster — to terminate their existing agency pricing contracts with Apple. Apple says that isn’t fair: “The Government is seeking to impose a remedy on Apple before there has been any finding of an antitrust violation.” This case, the company states, revolves around “an alleged conspiracy to force Amazon to adopt agency.” So a settlement “enjoining collusion or precluding publishers from forcing agency on Amazon would be appropriate,” but Apple is entitled to defend its contracts in court.

Apple also says the most favored nation clauses in its contracts have not “forced any publisher to adopt agency with other retailers,” and notes that “many independent publishers” — not mentioned by name here, but they include Sourcebooks and Scholastic — have agency pricing agreements with Apple and wholesale agreements with Amazon.

Kohn objects to this. If the settling publishers were to terminate their agency agreements with Amazon, he says, “that would (a) allow Amazon to resume predatory pricing (i.e., selling below its marginal cost) and (b) allow Apple, under its agency agreement with the publishers, exercise its MFN clause to match Amazon’s discounts. Since the publishers get 70 percent of what Apple charges, this could really hurt the settling publishers. I don’t think the Apple lawyers intended this, but it does seem an unfair result to the settling publishers.”

Apple’s filing appears intended to increase scrutiny of the proposed settlement but also, at a deeper strategic level, to protect the commission-style pricing system that underlies its entire content business.

Amazon’s story “has yet to be scrutinized”

In a footnote, Apple says that many of the public comments on the proposed settlement

expressed concerns about the possibility that the Government has unwittingly placed a thumb on the scales in favor of Amazon, the industry monopolist. Amazon was the driving force behind the Government’s investigation, and it told a story to the Government that has yet to be scrutinized. Amazon talked with the Government repeatedly throughout the investigation, even hosting a two-day meeting at its Seattle headquarters. In all, the Government met with at least fourteen Amazon employees—yet not once under oath. The Government required that Amazon turn over a mere 4,500 documents, a fraction of what was required of others.

Therefore, Apple says, the settlement should be rejected — or the Court should defer ruling on it until after the trial, which is set for June 2013.

Full document below.

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