On May 15, 2012, the Honorable Denise Cote, U.S. District Court Judge for the Southern District of New York, denied Apple's and five of the largest publishing companies' motions to dismiss in the eBooks antitrust litigation case. See In re Electronic Books Antitrust Litigation, No. 11 MD 2293, 2012 U.S. Dist. LEXIS 68058, at *2 (S.D.N.Y. May 15, 2012). A class action was brought against Apple, Inc. and the publishers for violating Section 1 of the Sherman Act and state antitrust laws. The plaintiffs allege that Apple and the publishers conspired to raise prices in the market for eBooks.
Underlying this law suit is a fight for consumers in the growing eReader/tablet markets. By 2010, three years after the release of Amazon.com, Inc.'s Kindle, Amazon had obtained 90 percent of eBook sales in the U.S. And by the second quarter of 2010, Amazon sold more eBooks than it did hard copies.Then, in 2010, Apple prepared to release its first edition iPad. Apple, and then CEO Steve Jobs, began planning to simultaneously enter the market for retailing eBooks. As noted in Judge Cote's opinion, "Apple announced that it had signed agreements with each [publisher] to sell eBooks under the agency model. Apple also revealed that the prices for eBooks on the iPad would be higher than $9.99." Id. at *13. But Steve Jobs then told a reporter that "[t]he prices [on the iPad and the Kindle] will be the same," and "[p]ublishers are actually withholding their books from Amazon because they are not happy." Id. at *13-14 (internal quotation marks omitted). Soon after the release of the iPad and the switch to the agency model of distribution, "Apple and the [publishers'] activities attracted the attention of state, federal, and foreign authorities. European Union antitrust regulators made unannounced raids on eBook publishers in several countries, and the European Commission announced a formal investigation into Apple and the [publishers] . . . for colluding to raise eBook prices." Id. at *19.
"Agency" vs. "Wholesale" distribution models
Historically, as Judge Cote's opinion states, the publishers have sold books using a distribution model known as the "wholesale model." Under this model, publishers sell their books to retailers at wholesale prices, keeping a suggested retail price as a guide for the retailers. Typically, the retailers would receive between 30 and 60 percent off of the cover price, but the retailers could charge consumers any price. This model dominated the industry and continued to be used with Amazon as eBooks became popular. But as eBook sales began trending toward surpassing hard copy sales, many publishers' distaste of the wholesale model grew.
In 2007, in order to establish its initial dominance in the eReader market, Amazon widely sold eBooks for $9.99 or less. "This was substantially less than the retail price for hardcover books. In many cases, it was even less than the wholesale prices for eBooks charged by publishers." Id. at *5-6. The wholesale model continued until the publishers and Apple agreed to change to the "agency model" just as Apple released the iPad. Under the agency model, publishers retained the right to set the sales price through Apple's iBookstore, but Apple would receive a 30 percent commission on each sale. See id. at *12. "Under this formula, the eBook prices would range from $12.99 to $14.99 for most newly-released general fiction and nonfiction titles." Id.
Class Action Complaint
The plaintiffs allege that the conspiracy among the publishers to raise prices for eBooks manifested itself in three phases. First, the publishers began to "window" eBooks, i.e., delay the release of eBooks until after the release of the hardcover. Second, when windowing didn't work, each publisher contracted with Apple to distribute eBooks under the agency model, including in each contract a most-favored-customer clause guaranteeing Apple the same price as its competitors might receive from the publishers. Third, the publishers threatened to withhold their eBooks from Amazon unless they agree to change to the agency model. See id. at *8-9.
The complaint alleges that the publishers "communicated with each other" as they negotiated with Apple and "Apple act[ed] as a conduit for their messages." Id. at *11. These negotiations culminated in an industry-wide adoption of the agency model, the immediate effect of which was to constrain prices. See id.
Motion to Dismiss
Section 1 of the Sherman Act prohibits "[e]very contract, combination . . . , or conspiracy, in restraint of trade or commerce among the several States." 15 U.S.C. § 1. Horizontal price-fixing agreements or market divisions among competitors on the same level are per se unlawful under the Sherman Act, regardless of the reasonableness of the agreed to prices. Proof of an actual agreement among competitors is often difficult to prove. But circumstantial evidence can show an agreement in restraint of trade. The plaintiff must allege interdependent parallel conduct that rises beyond coincidence or rational economic action. And the U.S. Supreme Court has noted that "complex and historically unprecedented changes in pricing structure made at the very same time by multiple competitors, and made for no other discernible reason," will make out a prima facie case of a Sherman Act § 1 violation. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 n.4 (2007) (citation omitted).In the instant eBooks antitrust litigation case, the court held that the plaintiffs had plausibly alleged a horizontal conspiracy in restraint of trade and that the restraint was "unreasonable per se." Electronic Books, 2012 U.S. Dist. LEXIS 68058, at *29. The court focused on a counterfactual hypothetical to illustrate why it was very plausible that no publisher would have signed the agency agreement with Apple, and later with Amazon, without some understanding that its competitors would do the same. See id. at *32-33. Had a publisher switched to the agency model, and set higher prices, it would have lost significant market share. The court pointed out that Random House, not a party to the eBooks antitrust litigation case, "gained significant market share" from the other publishers "during months between their adoption of the agency model and Random House's capitulation. Id. at *32. "The eBook sales by Random House increased 250 percent in 2010 as it continued to sell them at $9.99." Id.
The court found similarities in the instant case with the facts of Interstate Circuit v. United States, 306 U.S. 208 (1939), and Toys "R" Us, Inc. v. Fed. Trade Comm'n, 221 F.3d 928 (7th Cir. 2000). In both of those cases, one company facilitated a horizontal agreement in restraint of trade by coordinating identical vertical agreements with each manufacturer or distributor. Here, Apple is alleged to have facilitated the horizontal agreement in restraint of trade. As the court points out, "Apple coordinated a series of substantively-identical vertical agreements and made clear to its vertical partners that it was offering each of them a similar deal. Just as with Toys "R" Us and Interstate Circuit, cooperation among Apple's vertical partners was essential to the success of its plan, and the net effect of its vertical agreements was to limit the ability of its horizontal competitors, such as Amazon, to compete on price." Electronic Books, 2012 U.S. Dist. LEXIS 68058, at *37.
The court used fairly harsh language against the publishers and Apple, invoking inculpatory quotes from Rupert Murdoch, Steve Jobs, and other CEOs of major publishers. HarperCollins, Hachette, and Simon & Schuster have already settled. After such a critical opinion favoring the plaintiffs, Apple and the other publishers may follow suit and settle too.
Lexis.com subscribers can access Lexis enhanced versions of the In re Elec. Books Antitrust Litig., 2012 U.S. Dist. LEXIS 68058 (S.D.N.Y. May 15, 2012), Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007), Interstate Circuit, Inc. v. United States, 306 U.S. 208 (U.S. 1939), and Toys "R" Us v. Ftc, 221 F.3d 928 (7th Cir. 2000) decisions with summaries, headnotes, and Shepard's.
David Brown is 2012 graduate of New York Law School. He was Executive Editor of the Law Review. He will be a law clerk to the Honorable Robert L. Vining, US District Court, Northern District of Georgia in the Fall of 2012 and has interned at the US Attorney's Office for the Eastern District of New York.
Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.
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