Judge Cote rules: Apple loses Agency Model case

Judge Cote rules: Apple loses Agency Model case

“…the Plaintiffs have shown that Apple conspired to raise the retail price of e-books and that they are entitled to injunctive relief. A trial on damages will follow.”
–Judge Denise Cote, decision in Apple Agency Model case (quotation added in update to post)

This is the breaking news, and I haven’t yet read the decision, but I thought you’d want to know right away.

I’ve praised Judge Denise Cote before on how quickly decisions come down, and this one seems fast to me.

According to this

Reuters article

and others, Judge Cote has found Apple guilty of conspiring to raise e-book prices.

What does this mean?

It likely means Apple will appeal. 😉

That would be my guess, but I need to look more into what was said and exactly what happened. I’ll expect to update this post when I have more data.

Update: here’s the decision:

http://www.scribd.com/doc/152915071/United-States-v-Apple-Inc

Update: more quotations from the decision:

“Apple seized the moment and brilliantly played its hand.”

“It [Apple] provided the Publisher Defendants with the vision, the format, the timetable, and the coordination that they needed to raise e-book prices.”

“…the prices in the nascent e-book industry shifted upward, in some cases 50% or more for an individual title.”

“…removed Amazon’s ability to price their e-books at $9.99.”

“…many publishers set a wholesale price for e-books at a 20% discount from the equivalent physical book wholesale price to reflect the many cost savings associated with the distribution and sale of e-books. For instance, there is no cost for the printing, storage, packaging, shipping, or return of e-books.”

“This Opinion has already described several instances in which testimony given by Cue and Sargent was unreliable. Other witnesses who were noteworthy for their lack of credibility included Moerer, Saul, and Reidy. Their demeanor changed dramatically depending on whether Apple or the Plaintiffs were questioning them; they were adamant in denials until confronted with documents or their prior deposition testimony; instead of answering questions in a straightforward manner, they would pick apart the question and answer it narrowly or avoid answering i taltogether. Thus, the findings in this Opinion are informed bythe documentary record, the circumstantial evidence, including an understanding of the competitive landscape in which these events were unfolding, and that portion of each witness’testimony that appeared reliable and credible.”

This post by Bufo Calvin originally appeared in the I Love My Kindle blog.

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15 Responses to “Judge Cote rules: Apple loses Agency Model case”

  1. Bailey Says:

    Wow, that was fast… do you think we can get Judge Cote on the Google Ebooks case too? 😉

    Will this ruling have any practical effect on ebook prices? The publishers have already settled, so it’s mostly gone away (except for Penguin, Random House and maybe Macmillan – can’t remember off the top of my head.)

    And do you think Random House will drop the agency model? If it merges with Penguin, will it be bound by the settlement?

    • Bufo Calvin Says:

      Thanks for writing, Bailey!

      I wish Judge Cote had the Google case from the beginning…

      Penguin Random House is bound by Penguin’s settlement, as I understand it. It was sort of a condition of the merge, very loosely.

      Bestseller e-book prices have already come down some. I don’t think that this ruling specifically impacts that, at least at Amazon.

      Another interesting question, though, is how this impacts the public’s perception of Apple…and if it impacts pricing on other content in any way.

      • Bailey Says:

        Would Apple have to pay a settlement if they’re found guilty (after the appeal they’ll probably do)? If so, to who? The booksellers? The states?

      • Bufo Calvin Says:

        Thanks for writing, Bailey!

        That’s the next phase…the trial on damages. Apple could be ordered to pay something, but that’s part of what could be appealed. The States’ Attorneys General (almost all of them, at any rate) have already won a settlement from the publishers:

        https://ilmk.wordpress.com/2012/10/13/kindle-store-credits-coming-in-states-e-book-settlement/

        Based on the nature of this case, I would think that the pay-out (if any) would be to consumers, not the States or the booksellers. I should point out that I am not a lawyer, and I’m not sure what the judge can or will do.

        The appeal process could certainly take some time, though.

        Edited to add: key to this is how it could impact civil class action suits…this certainly changes the likelihood of winning those (and they are out there).

  2. Ed Foster Says:

    My favorite quote so far.

    “This trial has not been the occasion to decide whether Amazon’s choice to sell NYT Bestsellers or other New Releases as loss leaders was an unfair trade practice or in any other way a violation of law,” the judge wrote. “If it was, however, the remedy for illegal conduct is a complaint lodged with the proper law enforcement offices or a civil suit or both. Another company’s alleged violation of antitrust laws is not an excuse for engaging in your own violations of law.”

    • Bufo Calvin Says:

      Thanks for writing, Ed!

      I agree! There has been, in some, an argument akin to vigilantism…the suggestion that Amazon was doing something anti-competitive by pricing the books below cost in a manner that couldn’t be matched by many other competitors. As the quotation you cite notes, the proper response in that case is not another anti-competitive act. Hypothetically, one party could be found guilty of an anti-competitive act…and then another party could be found guilty of another anti-competitive act in another legal action. You’re never going to impress someone who is employed by the legal system that you are right by going outside the legal system. 😉

  3. Tom Semple Says:

    I would like to suggest that the settlement include a free iPad for everyone. 🙂

  4. Rick Askenase Says:

    I thought I’d share with you my thoughts on the Apple Anti-trust decision by Judge Cote. I did read the whole thing (skimmed a few parts).

    1) She puts forth such detail, that it is impossible to disagree with her conclusion that Apple was the instigator for the conspiracy.

    2) That amount of detail will make it all but impossible to overturn on appeal. (Apple has no chance on a substantive appeal. The dollar amount of damages is a different issue.)

    3) The amount of damages could be VERY significant.

    4) Could it open the door to Apple’s agency pricing on Apps? WOW- that could really upset their applecart.

    5) Could this cause significant damage to the iBookstore?

    6) Although this appears to help Amazon, I’m not so sure/. I do believe that Department of Justice (DOJ) will keep a close eye on Amazon (whose monopoly on e-books will grow from this) as they will closely watch Amazon e-book pricing (i.e.- if they start raising prices!) Amazon will tread carefully help.

    7) Apple, will REALLY walk on eggshells- and their arrogance/hubris has taken a huge hit (as will their pocketbook).

    8) I don’t think this will hurt publishers all that much, as they have now abandoned agency pricing. but they will also watch themselves closely (or have their lawyers watch them) when their two year window expires on how they will price e-books.

    Remember, back when Jobs announced the iPad- and that brief interview with the NY Times (was it Walt Mossberg?) in which he said that all prices will be the same? We talked about this at that time, and it’s potential impact. We were certainly right (as were others) that his remarks were a big deal. In fact, they were a VERY big deal.

    • Bufo Calvin Says:

      Thanks for writing, Rick!

      I think the argument could be made on appeal, despite the almost book-length decision. There are a lot of points in there that look to me like they could have gone either way. One interesting argument would be for Apple to say, “Hey, she said we weren’t credible, so she ignored our testimony. If we were credible, the results might have been different.” In other words, since the judge couldn’t believe us in this case, we don’t know what the results would have be if the next judge does. 😉

      Judge Cote is very clear, in my opinion, that an Agency Model is not the issue…and the way they price apps didn’t have that sudden, coordinated leap in prices. I think your fourth point is a non-starter.

      I agree with your eighth point. The publishers were already hurt by this…they chose to settle earlier. The case has largely had its effect on them. However, since this could impact other legal actions (such as class action suits), and Judge Cote clearly said that the evidence was that the settling Publisher Defendants were guilty, that could still hurt them.

      I do remember talking about Jobs’ comment…it was jaw-dropping for many. I know Andry Basten particularly raised it. Jobs does not come off well in the decision…and Cue comes off as making decisions which are at the least rushed in order to want to benefit Jobs specifically (rather than just for the company as a whole).

      Even if Apple eventually wins, their reputation will have been hurt by this. After all, people still say that Amazon might remove your books at any time, even though that was one case where people were made whole…years ago.

      Honestly? They should have settled…

    • Tom Semple Says:

      I don’t think this hurts Apple much, except that they don’t like to lose (hence their appeal of the ruling). Judge Cote made it clear the ruling wasn’t about the use of agency pricing, which is fine, but the coordinated process by which it came about. The fact that publishers were not offered the freedom to negotiate other terms with other resellers cannot have helped Apple’s case, either.

      And Amazon is perfectly free to raise prices to whatever the publisher’s list price is without any fear of getting into trouble legally. There are many Kindle books which are not discounted at all from the publisher’s list price (it is hard to say what proportion of sales that un-discounted titles account for but it is large) and that has always been the case.

      Publishers have to come to terms with the fact that they are not retailers and that lower prices can be associated with higher revenues. To the extent that they fear Amazon’s undiminished leverage, they might consider abandoning DRM, which would at least carve out space for independent, third party reading platforms to experiment and flourish, which would be to everyone’s benefit even if Amazon (as I would expect) continues to dominate.

      • Bufo Calvin Says:

        Thanks for writing, Tom!

        Judge Cote’s point, as I read it, was that the Agency Model was a tool to achieve the illegal objective on coordinated raising of e-book prices. It’s not that the Agency Model (which is used for other content, I believe without challenge) was illegal. It’s the fact that it was used to coordinate this switch and the MFN then forced that to be used by Amazon (which Judge Cote describes as fighting it tooth and nail…but because it was a coordinated effort, they couldn’t win).

        You can think of the Agency Model like a baseball bat. It’s not illegal to walk down the road with a a baseball bat. It isn’t illegal for five people to get together and walk down the road with baseball bats. If they then use those baseball bats to commit a crime, though, the fact that they brought the baseball bats could be evidence of a conspiracy.

        I think we are likely to see some Amazon discounts to diminish, and as you correctly point out, there are items sold on Amazon with no discount now.

        Dropping DRM (Digital Rights Management) is something that I’ve seen suggested a lot. Tor (part of Macmillan) has already done it effectively. One advantage for publishers is that someone who bought an e-book from Amazon could read it on a device from another company…which limits their lock-in to one company, allowing companies to compete more on future titles, and reducing the concentration of power in the hands of any given e-tailer.

        I’m not convinced that is the best solution, since the alternative is prosecution for (or at least, objection to) illegal distribution, which might occur without intent. I think the way DRM is used could be profitably examined, but I don’t know that dropping it is the answer.

  5. Edward Boyhan Says:

    Well, I’ve been reading a lot of the follow-up commentary (and there’s so much of it that I still have gobs and gobs to read) 😀

    Apple will appeal to the federal 2nd circuit. Most legal experts polled seemed to think that it is very unlikely that the 2nd circuit will overturn what is in essence a “finding of fact”. Historically they have rarely done so. Apple will then probably appeal to the Supreme court, and IMO, they will decline to take the case.

    MY own view as to the significance of this ruling is that Apple will now be faced will a plethora of lawsuits from states’ attorneys general, individual lawsuits, and probably a class action or two. Not settling is probably going to be very expensive for Apple just in legal fees alone.

    The bigger significance of this ruling (if upheld) lies away from the book publishing industry which started all this. We are in the midst of a transformation as to how media of all types (movies, music, books) will be distributed going forward. Content creators and publishers are increasingly in negotiations for rights to distribute MMB with the likes of Amazon, BN, Netflix, Apple, Hulu, Microsoft — even Intel, and a host of others. Two things will change IMV in these negotiations: things like agency pricing, and “most favored nation” clauses will become no-no’s. Creators and publishers will be able to negotiate the price at which they sell a product to the likes of Amazon or Netflix, but will have no control over what Amazon or Netflix charges the public for that product. Of perhaps even more import, no discussions of deals that a publisher might have made with with another distributor will be allowed within the negotiation framework. In fact publishers will probably be barred from even disclosing what the sold a product for to some other party.

    The purchaser of a media product (such as Amazon or Netflix) might be able to know what a competitor is selling that product for at retail, but he will have no idea what the competitor is paying the publisher for that product. This complicates the negotiating strategy quite a bit for both sides of the deal. I don’t pretend to know what the larger impact of this will be over time — especially as the rise of indie publishing — particularly in the music and book business — will reduce the role played over time by traditional publishers.

    • Bufo Calvin Says:

      Thanks for writing, Edward!

      I think you are right that companies like publishers will be a lot more careful about disclosure to each other, and that may also be true of the retailers.

      However, I don’t think this specifically hurts the Agency Model. Judge Cote is pretty clear about that. If there was an Agency Model, but the publisher had not colluded with each other to set the prices, and there had been price competition between the publishers, it would probably have been fine.

      In other words, if there were price wars between Macmillan and Penguin, which thereby lowered the prices of both publishers books, we would still have had competition. Different former retailers, now agents, selling the same Macmillan book would not have been able to compete on price, but I think that would have been ruled okay.

      MFNs (Most Favored Nation) clauses, which Amazon also uses, might be different. I haven’t looked at the public terms recently, but it certainly used to be true that a publisher using Amazon’s Kindle Direct Publishing, could not sell the book for less somewhere else. That always seemed to be anti-competitive to me, and those may go away.

      By the way, one other plus I see for Amazon: they already disclose the terms for the KDP, so they don’t need to adjust that part at all. That may be a real advantage if other people need to rework things. I don’t think anything will force disclosure of terms, though…they may become even more closely kept secrets, to lessen the possibility of a conspiracy. It was pretty clear in the decision that publishers were sharing the information on the offers from Apple with each other, and that was part of the problem.

      • Edward Boyhan Says:

        I probably shouldn’t have used the “agency” term which you correctly pointed out Cote didn’t have a per se problem with. My point has to do with manufacturers/creators of products trying to control the downstream pricing of their products beyond the first sale to a distributor/retailer. This practice has been around for years under the rubric of “fair trade” (sic :D) pricing. Under this model (which is used extensively by Apple), the manufacturer sets the retail price and “forbids” discounting. If the retailer goes ahead and discounts anyway, then the manufacturer refuses to provide any future product to that retailer. Retailers get around this by selling product at the undiscounted price, but bundled with a gift card which represents the “discount”. Other discounters will find ways to get the product from non-manufacturer “grey market” channels.

        This practice was much more prevalent 20 years ago. Regulators are increasingly taking a jaundiced view (a “restraint of trade” view) of such practices. The Apple suit serves to highlight some of the pernicious effects of such practices, and I expect its use to continue to decline. One exception to this is of course if a monopolist is using below cost pricing to drive competitors out of the market, but even there in order to prevail, you have to sue after the fact and prove the damage. Contrary to popular view in the US being a monopoly is not illegal. However, if you are deemed to be one, then your business practices are subject to a stricter scrutiny.

        Defining a monopoly can often be difficult because it depends upon how you segment the market. Many think Amazon is a monopoly. A reasonable person can make that claim. Another can make a counter claim: if one includes ebooks, pbooks, textbooks, professional jounals, Europe, Asia, S. America, etc, etc, then Amazon is far from being a monopoly. Also hampering these issues is that good sales data is not widely available, and different entities count things differently.

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