Federal Court Approves DOJ’s Proposed Settlement in E-Book Pricing Case

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Order ends agency agreements for Hachette, HarperCollins, and Simon & Schuster

This afternoon, New York Federal Judge Denise Cote issued an order entering as a final judgment the Department of Justice’s proposed settlement agreement with three publishers —Hachette, HarperCollins and Simon & Schuster — in the e-books antitrust litigation. This means that the three settling publishers are required to terminate all of their agency agreements and any agreement that restricts an e-book retailer’s discretion over pricing as soon as allowed under contract, typically, on 30 days’ notice. The settling publishers are also prevented from adopting new agency-type agreements for two years. Apple, Macmillan, and Penguin did not choose to settle, and their case is scheduled to go to trial in June 2013.

In her 45-page order, Judge Cote summarized the government’s allegations and many of the 868 comments submitted, including those of American Booksellers Association, specifically noting that more than 90 percent of the comments opposed entry of the final judgment. The judge credited DOJ’s argument that, before the advent of agency model agreements with the publishers, the price for newly released and best-selling e-books was $9.99, and that sale at that price was “consistently profitable” for Amazon. The judge noted that a number of commenters contended that the $9.99 price was below the wholesale price. However, the judge also concluded that Apple, Macmillan, Penguin, and the third-party commenters, including independent bookstores, had not demonstrated that any below-cost pricing by Amazon was “predatory,” in the legal sense. Even if Amazon’s pricing were “predatory,” the judge found that this would not justify the publishers in establishing an illegal cartel to fix prices. Further crediting the DOJ’s argument, and contrary to considerable evidence from Barnes & Noble, the Book Industry Study Group, and others, the judge concluded that, after the illegal conspiracy among publishers leading to adoption of agency agreements, e-book prices went up by over 10 percent a year.

Judge Cote discussed the concerns of the Authors Guild, ABA, Barnes & Noble, Books-A-Million and others about the pro-competitive impact the agency model has had in the market, allowing introduction of hundreds of new e-book retailers and minimizing the ongoing free-riding benefits Amazon obtains by capturing brick-and-mortar showrooms customers through below-price selling and by avoiding the payment of sales taxes. Judge Cote explained that “there can be no denying the importance of books and authors in the quest for human knowledge and creative expression and in supporting a free and prosperous society,” and quoted extensively from Emily Dickinson’s poem, “There Is No Frigate Like a Book.” But, the judge concluded that the provisions of the settlement agreement, which allow publishers to compensate brick-and-mortar retailers directly for promotional services, would have to suffice as the appropriate avenue for valuing the contributions of brick-and-mortar stores, if indeed publishers value them. She commented, “It is not the place of the Court to protect these bookstores and other stakeholders from the vicissitudes of a competitive market.”

Ultimately, Judge Cote concluded that the settlement agreement is reasonably based on the evidence described by DOJ, is reasonably narrow in terms of imposing only a two-year ban on agency agreements, and will result in a return to “the pre-conspiracy status quo.”

Apple has said it would appeal any decision by the judge to enter the settlement agreement as a final judgment. Apple contends that, since the entry of judgment requires termination by the settling publishers of their e-book agreements with Apple, it is premature for it to be approved until after Apple has its day in court in June 2013. Judge Cote concluded that the settling defendants were entitled to the certainty of her prompt entry of judgment so that they could be released from and save the expense of the ongoing litigation, and noted that she considered it questionable that Apple would have standing to appeal. It is not clear if Apple’s appeal will result in a stay of Judge Cote’s order, but it is considered unlikely. Instead, it is expected that e-book retailer agency agreements with the settling publishers will be terminated over the next 30 days, and that all e-book retailers, including online sellers, will now have the power to price e-books as their discretion.