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At close of ebook trial, Apple gains ground: what lies ahead

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At the outset of a June trial that captivated the publishing world, Apple’s(s aapl) role in fixing ebook prices was nearly a foregone conclusion: Five publishers had already settled and the trial judge started the proceedings by saying the government could likely prove Apple had organized the whole thing.

Three weeks later, the situation looks somewhat different. Apple made a forceful argument that it brought competition to a market dominated by Amazon(s amzn) and, according an antitrust expert, forced the trial judge to rethink the foundation of the case. Here’s an easy-to-read Q&A about the case and what will happen next.

Why was Apple on trial in the first place?

The Justice Department filed a lawsuit claiming that Apple was the ringleader of a conspiracy among publishers to fix the price of ebooks. All of the publishers agreed to settle, pay fines and change their pricing systems. Apple held out and the case went to trial.

What happened at the trial?

The government held up emails and phone calls between Apple and the publishers as evidence of a conspiracy brokered by Apple. The company’s lawyers, however, made slides to show that these communications were not the smoking gun that the Justice Department claimed. More importantly, Apple laid out an alternative theory of the case: that its pricing policies were not a conspiracy but a business decision that was good for consumers.

“[Judge Cote] may have had certain impressions before the trial started from reading the written materials. But then, throughout the trial, Apple made a lot of headway in explaining their actions and how their model came about, and how they interacted with these publishers,” said Andre Barlow, a former Justice Department lawyer who is now a partner at the antitrust firm, Doyle, Barlow & Mazard.

“The judge now has a lot more to think about it. It’s not a simple case the way the Department of Justice was presenting it.”

What happens now?

The judge is expected to issue her decision later this summer. If Apple loses, the company will have to agree not to use certain types of pricing terms in its ebook contracts. It will also have to pay millions in fines to state governments who are suing on behalf of consumers.

More broadly, the case could be a bellwether for the tech sector.

“It’s going to be a big deal, whatever the decision is, because not many of these cases go to trial. Whenever you have an Apple, or Amazon(s amzn) or Google(s goog) go to trial against antitrust, it’s really important,” says Barlow. “This isn’t a case about money, it’s about conduct and principle on both sides. The Justice Department is concerned about these tech companies that control distribution.”

How will the decision affect the ebook market?

Ironically, the decision will have very little practical effect. That’s because the publishers, under the settlements, have already agreed to abandon controversial pricing tactics, including some forms of “most favored nation” clauses. If Apple is barred from using such clauses in the ebook market, it won’t change anything at this point.

Will there be an appeal?

If Apple loses, yes. The company will almost certainly file an appeal to the Second Circuit Court of Appeals. The commission-style pricing system at issue is a basic part of how Apple does business, says Barlow, and the company will appeal out of principle.

If the government loses, an appeal is less certain. The Justice Department has already made a high profile legal and public relations bet. A loss would be an embarrassment and an appeal would mean doubling down.

“From the Justice Department perspective, I’m sure they’ll have to go back and decide if it makes sense to appeal. It’s one thing to have a district court decision — it’s another to lose at the Second Circuit.”

3 Responses to “At close of ebook trial, Apple gains ground: what lies ahead”

  1. James

    If Apple wins it will be a blow to the consumer who has already been forced to pay higher prices as a result of Apple and the publishers actions. If Apple felt like Amazon was doing something untoward they could have filed a complaint against them rather than colluding with the publishers to raise prices on everyone. There is nothing wrong with the wholesale pricing model and if Apple can’t play in that sandbox, maybe they shouldn’t.

  2. Quote: “The Justice Department filed a lawsuit claiming that Apple was the ringleader of a conspiracy among publishers to fix the price of ebooks.”

    That’s silly. Why would Apple want to organize a conspiracy to keep ebook prices high. The less ebooks cost and the more readily available they were, the more high-margin iPads Apple would sell. At best, Apple is guilty of little more than feigning sympathy for the major publishers as they struggled to deal with a new technology heavily dominated by Amazon.

    I fought a lengthy copyright dispute in the Sixth Circuit, so I’ll explain what this article’s last paragraphs mean. District court decisions, which this will be, aren’t binding on other courts. Another judge, even one at that same circuit, can simply claim that his case is different enough to rule differently.

    But if the DOJ appeals this one and loses again in the Second Circuit–one many feel tilts heavily toward NYC-based publishers–then the DOJ would be in trouble many times over. An appeals court decision in favor of Apple would become binding in the Second Circuit. Since so many publisher’s are headquartered there, it’d would effectively become binding on the entire industry. A judge would be reluctant to decide differently in a different circuit because, as a lawyer told me me about my case, that could quickly lead to his contrary decision being on a fast track for the U.S. Supreme Court. No judge likes to find his decision overruled that way.

    Even worse for the DOJ, because it has attempted to closely link what Apple did with what the Big Six publishers did, a decision in Apple’s favor, particularly if the DOJ appealed and lost, becomes effectively a win for other publishers. If Apple can legally include agency and MFN pricing in its contracts, then how can the DOJ claim that publishers can’t include those same clauses in their contracts? That makes no sense.

    In the long run, even those out-of-court settlements become threatened. Yes, the publishers who made them and agreed not to have those clauses in their contracts won’t be able to do so for a time. But, in the end, if thousands of other publishers can have those clauses, the legal system won’t be able to stop the Big Six from readopting them.

    That means that the DOJ will have accomplished nothing. Personally, as a writer, editor and small publisher, I like that. I think agency pricing and subscriptions are as natural for digital sales as the wholesale/retail model is for physical objects. Agency and subscription already dominate the market in music and movie sales. They’re going to be the predominate ways that ebooks are marketed. All the DOJ can do is sow confusion and delay the inevitable.