LEGAL
Last month, the tech giant Apple was handed a major blow in the form of a federal court ruling.
The ruling, U.S. v. Apple, Inc., was the result of the Department of Justice's (DOJ) antitrust challenge to Apple's alleged electronic book (ebook) price-fixing scheme with five of the biggest book publishers in the U.S.
The court sided with the DOJ, finding that Apple indeed conspired to violate the Sherman Antitrust Act to restrain trade; the damages that Apple must pay will be determined in a separate, forthcoming trial. Although Apple has vowed to appeal the decision, the ruling nevertheless stands as a warning to other companies, even those not engaged in the ebook trade.
Apple's allegedly unlawful price-fixing scheme began shortly before it released the iPad in early 2010 – and its iBookstore along with it.
Through 2009, Amazon.com was the dominant player in the ebook market, selling nearly 90% of all e-books. It was charging $9.99 for the majority of the ebooks available on its website. In order to compete with Amazon, other ebook retailers also adopted a $9.99 or lower retail price for many ebook titles.
The major publishers were unhappy with Amazon's ebook pricing practices; they believed that the online retailer could charge significantly more for several titles, including many new releases and ebook versions of New York Times bestselling books. But the publishers also wanted Amazon to change its pricing model – known as a "wholesale model" – wherein a publisher receives its designated wholesale price for each ebook and the retailer sets the retail price.
With full knowledge that these publishers wanted to raise e-book prices and that the publishers were working collectively to pressure Amazon to change its pricing strategy, Apple began negotiations with these publishers in mid-December 2009.
During the initial meetings, Apple assured the publishers that it was willing to work with them to raise ebook prices, suggesting prices such as $12.99 and $14.99. According to the court opinion, "Apple seized the moment and brilliantly played its hand."
Apple needed agreements with a core group of publishers to release its iBookstore along with the iPad. Apple took advantage of the publishers' "fear of and frustration over Amazon's pricing" to garner enough publisher signatures to introduce the iBookstore alongside the iPad by providing the publishers "with the vision, the format, the timetable, and the coordination that they needed to raise ebook prices."
As part of this plan, Apple offered the publishers the opportunity to move from a wholesale model to an "agency model," wherein a publisher sets the retail price and the retailer sells the ebook as the publisher's agent. At the same time, Apple used "most-favored-nation" clauses as part of these arrangements, which guaranteed that Apple could match the lowest retail price listed on any competitor's ebookstore.
Thus, although Apple was using a pricing model that allows the publishers to set ebook prices, Apple was allowed to set those prices as low as any of its competitors' prices.
The effect of this dynamic was to force the publishers to switch all of Apple's competitors – most notably, Amazon – over to the agency price model. As a result, consumer prices spiked immediately – with some titles seeing 50% increases literally overnight.
The DOJ targeted the publishers in addition to Apple, but the publishers all reached settlement agreements with both the Department and the 33 state attorney generals who also sued. These settlements have already caused ebook prices to drop.
The ruling is a warning for companies that may seek to coordinate a single pricing model across an entire industry. However, there's certainly an additional significance to the success of the DOJ's enforcement action. Apple is one of the most powerful tech companies currently operating in the U.S. If the Justice Department is able to successfully regulate Apple, there are very few companies beyond its reach.
Jeremy Byellin is a practicing attorney in the state of Minnesota and a writer for the Westlaw Insider blog. His articles for the blog cover a wide range of legal topics, with a specific focus on major legal developments and cyberlaw.
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