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Apple faces triple damages, longshot appeal in ebook conspiracy

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Five publishers agreed to pay a total of $166 million to settle their roles in a high-profile ebook price-fixing scheme. For Apple(s aapl), however, the price tag could be much higher in light of a damning court decision that fingered it as the conspiracy’s ringleader.

The publishing and tech sector is still digesting the implications of Wednesday’s 160-page decision but, according to antitrust lawyers, Apple is in a tight legal spot. Here is an overview of what the company might pay and how the process will unfold.

Triple damages could mean large payout

Wednesday’s court ruling was a resounding victory for the Justice Department, which sued Apple and the publishers last year. The ruling will mean symbolic changes to Apple’s ebook pricing practices, but it also lays the table for cash damages in a parallel suit brought by state governments and class action lawyers.

The five publishers, who have already settled, will each pay amounts ranging from around $20 million to $75 million to compensate consumers who overpaid for ebooks — the money will come in the form of retail credits or, in some cases, small payments by check. It’s no coincidence, by the way, that Penguin, who fought the longest, will pay the most; those who settled early got a better deal.

Apple is in a different position. It vehemently denies wrongdoing and has fought the price-fixing accusations at all turns, in court and in the press. Now, if a verdict is entered after the damages phase of the trial, Apple is on the hook to pay special damages under a section of the Clayton Act that automatically triples antitrust awards.

Apple’s liability, according to lawyer Jeff Friedman, will be determined by this formula: harm to consumers x 3, minus the $166 million paid by the publishers.

Friedman is a partner with Hagens Berman, the lead class action firm in the case. He says the damages will be assessed by economists in court but that Apple’s ultimate payout will be in the hundreds of millions of dollars (this prediction, given his interest in the outcome, is likely on the high side).

The appeal and when Apple might pay

Apple says it will appeal Wednesday’s ruling, meaning the U.S. District Judge Denise Cote is likely to put the damages phase of the trial on ice.

According to Andre Barlow, a former Justice Department lawyer and antitrust expert, the judge who issued the ruling “will not want to waste time and resources” on assessing damages if her finding on Apple might not stand. From a technical standpoint, this means that Apple will file for a stay once the judge schedules the damages phase of the trial.

As for the appeal itself, Apple’s chances are slim. Prominent legal scholars told All Things D yesterday that they doubt the appeal will succeed because the decision is very fact specific — leaving Apple with few points of law to attack before the Second Circuit Court of Appeals.

This jibes with Barlow’s assessment:

“The Second Circuit may review the factual findings of the trial court, but typically may only overturn a decision on factual grounds if the findings are ‘clearly erroneous.’  Therefore, it is a huge hurdle in terms of arguing the facts.  If Apple loses at the Second Circuit, the case likely ends unless it is appealed to the Supreme Court and the Supreme Court could decide not to hear the case.”

Ripple effect unlikely

The upshot of the case is that Apple is likely to write a large check to consumers sometime in 2014. The dollar amount, however, is unlikely to faze Apple, which is rich enough to buy the entire publishing industry if it chose.

Instead, the episode will probably be remembered most as a PR headache for Apple, especially as the decision portrays the company’s executive and co-founder as ruthless arch-manipulators.

If there is a silver lining for Apple, it is that the decision is unlikely (as some have suggested) to ripple far beyond the ebook market, which is a relative drop in the bucket in the larger tech industry.

According to David Balto, a Washington antitrust lawyer, the decision could embolden others who deal with Apple — app makers, publishers and so on — to bring class action suits of their own.

Barlow and other lawyers, however, say the decision is very specific to the ebook conspiracy and doesn’t provide legal grounds to attack Apple’s other business practices.

18 Responses to “Apple faces triple damages, longshot appeal in ebook conspiracy”

  1. “The upshot of the case is that Apple is likely to write a large check to consumers sometime in 2014.”

    LOL’ed! When have you ever seen a big check payout for consumers in class action lawsuits?!

    IF I’m Cook, I will forget bringing manufacturing jobs back. IF the result of one put out an innovative product that shakes an industry and then DOJ comes chasing with bs…Go chase after Wall Street instead of companies that actually produces thing.

    What an epic failure for this judge to examine the facts within the context of a changing business environment for both publishers and Apple’s tablet. Last time, I checked tourist towns charge double or triple the prices for simple goods like bottle water. Should we start suing these towns for price-fixing? or is this just common sense of supply and demand? No one is asking nor forcing ebook buyers to purchase at higher prices! No one! ebooks is a cheaper and more convenient product than hardcover and paperback…so as long as it’s cheaper than physical copies, readers are already benefiting from it.

    • Kindroid

      You are obviously blind to the facts. Before Apple/Publishers agency model was created, most ebooks sold for no more than $ 9.99. As soon as the collusion between Apple and the Publishers was inked…prices jumped to between $ 12.99 to $14.99. If you wanted to buy the latest best seller in the form of an ebook, you had no choice but to pay a higher price. Compare that to the hard cover version. While the publishers might suggest the retail price of a best seller at $ 39.99, if Sam’s Club bought the hard back for $ 12.00 and decided to sell it for $ 14.99…that was up to Sam’s Club. The consumer had a competitive choice.

      • I don’t believe that consumers were ever hurt, because the Kindle app is available for use on all Apple products. Apple products will also play an ePub file from anywhere. Their devices support market competition.

        OMG, can you put an iBook on a Kindle device?

        Maybe in the end, the Kindle app goes Bye bye on iOS and OSX?

        Would that be justice?

  2. fredhstein

    Would love to hear a real legal expert (no offense to my deal Gigaom devotees). If Amazon was selling below cost, is it fair to assume that that cost was sustainable? So in the economic case for damages, what is the fair starting point $9.99 or a sustainable price based on prior publish licensing prices? And what about the expansion of the ebook market, meaning more people buy ebook, which were cheaper (post Jan ’10) that hard copy?

    Note Denise Cote, in her ruling of ‘per se’ says that there is no need to prove harm just that the act of collusion was illegal. Perhaps she is leaving a way out.

  3. Kindroid

    Prior to Apple/Publisher collusion, Amazon and other ebook distributors bought ebook rights at wholesale from publishers and were free to set the retail price of the ebook as they saw fit. Had Apple followed suit and sold at a competitive price of $9.99, their cut would have been $ 3.00. The publishers weren’t happy with the deal with Amazon, so they and Apple got together and colluded to set the price for ebooks at $ 15.00. Apples take then became $ 4.50. Further, the agreement required all other ebook distributors to sell at the same price. Enter price fixing, ILLEGAL price fixing.

    As to the argument that Amazon was selling below cost to drive out competition and create a monopoly for ebook, there is no factual evidence of that. Could that have been Amazon’s plan…it may well have been. But no factual evidence was ever presented in any investigation of Amazon’s ebook sales practices. If the publishers thought that was what Amazon was doing, it should have sought DOJ investigation. Instead, they hatched their little conspiracy with Apple. Just because Amazon sold some best sellers as loss leaders to attract business to a fledgling ebook industry, doesn’t make them guilty of anti-competitive practices. At the time they were asking readers to purchase their expensive hardware to be able to purchase ebooks. Nothing new here.

    As to fair pricing of ebooks. If Walmart is selling the current hardback best sellers for $ 20 to $ 25, then ebook prices around $ 10 seems more than generous…considering the cost of publishing, distributing and retailing a hard back version.

    • David Thomas

      I’m sorry to be contrary but there is plenty of factual evidence to show that Amazon was selling below cost. The documentation was invoices and the publisher’s provided that readily. Second, Amazon didn’t have to go on the Agency Plan. It was elective on their part — emphasized in the court proceedings. Your estimation of what the price should be given a certain hardcover price is a ‘base rate’ of your own invention, not at all reflective of the actual costs. Its a popular sport in these discussions. Lastly — and this is really crucial — Amazon didn’t buy rights to an e-book, they sold a digital file and paid a publisher as they sold it. The reduction of labor and transactions costs from selling an e-book as opposed to selling a physical book, is chiefly captured by the dealer — Amazon — not the publisher(s).

      • Kindroid

        Step by step. I didn’t say Amazon didn’t sell below cost, in fact I said Amazon sold some best sellers as loss leaders to attract business ….”. Further, I stand behind the opening line of that paragraph. There has been no evidence that Amazon sold ebooks below cost with the specific purpose of using anti-competitive trade practices to create a monopoly for themselves. I will repeat, Amazon did sell some ebooks below cost. The purpose for Amazon doing that has not be proven in any way to be anti-competitive.

        In regards to how ebook distributors paid for digital rights to ebooks…this comes from Dan Gillmore, journalist for Guardian UK… “Before,(the agency model) publishers had sold digital rights, mostly to Amazon, as it was by far the biggest online retailer, based on the wholesale model that physical bookstores have used: Amazon (et al) would pay a percentage of the retail price, and then was free to set its own price for the retail sale..”.

        In terms of actual cost delivering a book for sale there are two components, fixed costs and variable cost. The primary fixed cost are those related to creating the final print ready or etrade ready manuscript. Those can include editing costs, legal fees related to contracts, proof reading, cover and graphic designs etc. Once the book is ready for publication, those expenses cease. The variable expenses are related to the actual cost of producing the book, be it paper or ebook, are all the rest. Paper, ink, distribution cost (transportation, warehousing etc, labor and attributable overhead from the publication process etc. Virtually all of the remaining variable cost are directly attributable to the paper book product. With the exception of a share overhead costs related to the management of the publisher, ebooks don’t generate any of those other variable expenses. It is with that in mind that a reasonable comparison of costs between print and etrade products can be estimated.

        Ars Technica , the NY Times of tech stuff, reports. “The agency model (along with publisher-set but capped prices of $12.99 to $14.99) made it profitable enough for Apple to open its own e-book store—so long as Amazon’s prices went up, too. Apple thus devised a Most Favored Nation (MFN) clause in its contracts with publishers which “guaranteed that the e-books in Apple’s e-bookstore would be sold for the lowest retail price available in the marketplace,” Cote wrote. For the publishers to charge up to $14.99 for e-books on Apple’s iBooks store, they had to raise prices on Amazon’s Kindle store as well by collectively forcing Amazon to accept the agency model”,

        Apple and the publishing houses colluded to fix prices of ebook. Facts according to the Judge’s decision in this case.

        • “Apple and the publishing houses colluded to fix prices of ebook. Facts according to the Judge’s decision in this case.”

          I swear some of you that sided with the judge/DOJ is smoking something! When you take the facts out of context, what kind of conclusions do you think you would get?

          Apple just created a new innovative product that is about to shake up the consumer world, if you were in their shoes, wouldn’t you want to get as much content onto the platform??? Yes?! A full color 10.1-in tablet that can showcase trade/coffee table books and much much more.

          If creating a product that provides an industry, publishing, in this case, the option to seek an alternative solution to whole sales that basically erodes their profit margin…oh, what should they ever do?

          BTW, emergence of iPad also changed software, movie and gaming industry…maybe DOJ should look into this too? I’m sure they can dig something up and run Apple to the ground.

          Don’t twisted facts out of context and then apply bs law to it.

          • Kindroid

            The overriding fact here is…Apple didn’t, and doesn’t, want to have to compete. The agency model created by Apple and the Publishing houses guaranteed that no one could sell ebooks for less than Apple. The same model exists in the MP3 music field. The number one song this week according to Billboard is Blurred Lines by Robin Thicke. Guess how much that MP3 sells for on Amazon, Google Play Store and iTunes…$ 1.29 on all 3 services. What should the market price of a MP3 be? We don’t know…because Agency pricing short circuits the free market.

            Let’s say all the auto manufacturers got together and agreed that no car in the US could be sold for less than $ 50,000, so their “profit margins wouldn’t be eroded”… would you feel about that? Or the bread bakeries set $ 10 as the minimum price for a loaf of bread…so none of them would have to worry about going out of business? I didn’t hear anybody crying over American appliance manufacturers being driven out of business by cheap Chinese imports.

            American antitrust laws are designed to create a level playing field to foster competition that will yield a fair price for the American consumer.

  4. Jake Ryan

    Everyone is an expert on the matter, but this is a case law setting decision that cover never before trenched legal ground. It will be appealed all the way to the Supreme Court and Apple does stand a solid chance of winning.

    Apple went from ringmaster to key facilitator. Apple had zero market share. Amazon up to 90% market share. Amazon sold titles below cost to eliminate the competition. In many countries it is flat illegal to sell below cost. In the US, it is illegal to sell below cost if it is done to create a monopoly. Is 90% a monopoly?

    The consumers will be the biggest losers if Apple loses. Published will withhold new releases from electronic titles. The publishing industry itself will begin to erode.

    Good job US Government. Another great victory for imperialism.

    • David Thomas

      Mr. Ryan has much of the complete argument down, however I would argue that Amazon is not a monopoly but a monopsony — “a product or service of several sellers is sought by only one buyer”. As such Amazon is capable of dictating terms to their vendor-publisher suppliers. Agency was a means to claim ownership, and consequently the ability to manage pricing, of the ebook, which is distinctly different from the physical format in that there is no inventory to maintain. The DOJ & Cotes took a healthy market adjustment and called it illegal.

      • juancarlosdeburbon

        The irony is that the things Amazon is doing are exactly the same things that WalMart does. They have such tremendous buying power that manufacturers must adhere to WalMart’s terms or risk the opportunity of selling their product in the largest retail chain in the world.

        So in an essence it’s not a true monopoly from a manufacturing or product perspective, it’s more having a monopoly on the distribution channel, and this is something that monopoly law does not cover adequately.

        And the defensive irony is that the distribution chain’s ability to force prices down is to the benefit of customers although the suppliers are stymied from making any money. There’s no balance or equity to these laws because they favor the benefit to the consumer over the manufacturer.

  5. stevesup

    Perhaps this is the outcome Apple wanted. Like Amazon, Apple can now freely and really fix prices; publishers not so much. So maybe Apple will set them at a buck a book. Add ten bucks to the cost of an iPad to cover the dif. Result: Amazon takes it in the neck.