As expected, on Thursday U.S. District Judge Denise Cote in Manhattan approved a price-fixing settlement between the Justice Department and three publishers of e-books–Hachette Book Group, Simon & Schuster, and HarperCollins. Cote signed off on the deal over the objections of Apple Inc., which has been accused by both the DOJ and class action lawyers of conspiring with publishers to jack up e-book prices.
The DOJ sued Apple and five leading e-book publishers in April, alleging that they violated the Sherman Act in 2010 when they switched from a so-called wholesale model for e-book sales (in which retailers, like Apple and Amazon Inc., sold at whatever price they wanted) to a agency model (in which retailers agree to sell for a fixed price set by publishers in exchange for a fixed cut of the profits). Since that shift, e-books prices have jumped an estimated 40 percent.
Hachette, Simon & Schuster, and HarperCollins immediately agreed to settle the DOJ’s claims, while Apple and two other publishers, Macmillan and Penguin Group, opted to fight on. Under the terms of the deal, the three publishers will terminate their agreements with Apple and refrain from entering any contracts that restrict a retailer’s ability to set e-book prices for the next two years. The same three publishers also struck a separate $69 million settlement with a coalition of state attorneys general. All five publishers and Apple still face a proposed antitrust class action brought on behalf of consumers by Hagens Berman Sobel & Shapiro and Cohen Milstein Sellers & Toll. The class action survived a motion to dismiss in May, as we reported here.
Apple and its lawyers at Gibson, Dunn & Crutcher and O’Melveny & Myers filed a motion on Aug. 15 urging Cote to reject the settlement–or at least to defer her decision until after a scheduled June 2013 trial. The deal, by forcing publishers to tear up contracts with Apple, constitutes an “unprecedented” violation of due process rights, they argued. Many booksellers have also voiced opposition to the settlement, insisting that reverting to a wholesale model will allow Amazon to set dirt-cheap prices and drive competitors about of business, just as it did before the industry-wide shift in 2010.
While Cote didn’t consider the merits of the price-fixing allegations in approving the settlement, she rejected an argument Apple has raised in its defense: that the switch to a agency model was pro-competitive because it broke up Amazon’s e-book stranglehold. “Even if Amazon was engaged in predatory pricing, this is no excuse for unlawful price-fixing,” she wrote. “The familiar mantra regarding ‘two wrongs’ would seem to offer guidance in these circumstances…If unfettered e-books retail competition will add substantially to the competitive pressures on physical bookstores, or if smaller e-book retailers are unable to compete with Amazon on price, these are not reasons to decline to enter the proposed Final Judgment.”
Defense counsel for the settling publishers include Skadden Arps Slate Meagher & Flom (for HarperCollins); Freshfields Bruckhaus Deringer (for Hachette); and Weil Gotshal & Manges (for Simon & Schuster).