Apple Found Guilty of E-Book Price Fixing

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On July 10, 2013 the United States District Court for the Southern District of New York ruled Apple was guilty of anti-trust violations for its role in conspiring with book publishers to raise prices for electronic books.  The five publishers, Hachette Book Group, Inc., HarperCollins Publishers LLC, Holtzbrinck Publishers LLC d/b/a Macmillan, Penguin Group Inc., and Simon & Schuster Inc., had already settled with the Department of Justice.  Apple moved to trial because it claimed it was innocent.  The trial was conducted as a bench trial from June 3 to 20 to determine liability and injunctive relief.

At its heart, the court’s ruling determined Apple played a central role in facilitating and executing the conspiracy to raise e-book prices.  In the court’s opinion, without Apple the conspiracy would not have been as successful.  Amazon was charging $9.99 for e-book versions of New York Times bestsellers and other newly released hardcover books.  Apple met with the five publishers in December of 2009 and January of 2010 and suggested prices of $12.99 to $14.99 for its planned iBookstore.  Apple promised to set those prices only if it could get agreements from the publishers allowing Apple to offer e-books simultaneously with their hardcover releases.

At the iBookstore’s launch new release e-books were given price caps of $12.99 or $14.99.  Apple gave the publishers control of their prices within those caps and also set a 30% commission, similar to the App Store.  More importantly, Apple included in its agreements a price parity provision, also known as a Most-Favored-Nation clause, which would penalize a publisher if they did not force Amazon and other retailers to cede control of e-book pricing to the Publishers.  This clause was the key piece of evidence which influenced the court’s decision.  It essentially prevented Apple from having to compete with Amazon on e-book pricing.  In fact, when Steve Jobs was asked why consumers would not just buy cheaper Amazon books he replied, “The price will be the same.”

As a result of these agreements Amazon’s stock fell 9% after the publishers collectively threatened to pull out from Amazon.  After Amazon caved in, the prices for Kindle books rose up to Apple’s prices.  Average per unit e-book retail prices rose 14.2% for new releases, 42.7% for New York Times bestsellers, and 18.6% across all books from the five publishers.  Macmillan also turned down sales promotions to keep prices up.  Eventually Random House, the last big publisher, moved towards the same pricing scheme.

Apple argued at court they were not guilty and showed data that e-book prices moved lower in the two years since.  However the court was not persuaded and said Apple’s data did not account for other changes in the e-book market.  The court also cited many excerpts from emails which show collusion between Apple and the publishers.  The court ruled Apple participated and facilitated a horizontal price-fixing conspiracy, which is per se unlawful.  Apple was not able to convince the court the agreements had any pro-competitive effects either.

Apple has already stated it will appeal the ruling.  Appeals from the Southern District of New York go up to the 2nd Circuit of Appeals.  If necessary, the next step after the 2nd Circuit is the Supreme Court.  If Apple is still found liable the parties will move to a trial to determine damages.

If you have an issue related to publication or e-books please contact Stone Law at 732-444-6303 or send us a message on our website.