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Digital River - Talk to the Experts

Publishers to Court: Slap Apple, Sting Us

By John P. Mello Jr. MacNewsWorld ECT News Network
Aug 9, 2013 5:00 AM PT

Five major publishers may be collateral damage in the antitrust spat between Apple and the U.S. Department of Justice.

Publishers to Court: Slap Apple, Sting Us

In a court filing opposing the DoJ's proposed relief in the antitrust case it won against Apple, the publishers -- HarperCollins, Hachette, Simon & Schuster, Macmillan and Penguin Random House -- contend the proposal would punish them by killing the agency model for selling e-books.

"The proposed provisions would have that effect by preventing Apple from entering into any agreements that limit its ability to discount e-books for five years," the publishers argue in their filing.

"In other words," they maintain, "the provisions do not impose any limitations on Apple's pricing behavior at all; rather, under the guise of punishing Apple, they effectively punish the [publishers] by prohibiting agreements with Apple using an agency model."

Agency Good, Publishers Bad

The agency model for selling e-books is what got the publishers in hot water with the DoJ in the first place. It allows the publishers to set the retail selling price for an e-book. That contrasts with the wholesale model in which retailers set the price at which books are sold.

There's nothing illegal about the agency model, observed Gene Zelek, an attoney with Freeborn & Peters. It's the way the publishers and Apple implemented the model that brought the justice hounds to their doorstep.

"Apple stepped into a horizontal price-fixing conspiracy," he told MacNewsWorld. "It's not the agency pricing that's at fault. It's the way it was done with a conspiracy among competitors to restrict price or terms of sales."

The publishers also argue in their filing that the DoJ proposal conflicts with the settlements the department cut with them. Those settlements allow the publishers to enter into agency agreements with e-book retailers "with certain enumerated limitations."

By putting a crimp in their ability to ink agency deals, the publishers contend, the DoJ proposal "unreasonably and unnecessarily" restricts their ability to make independent business decisions beyond the periods set forth in those settlements.

Draconian Proposal

A hearing on the DoJ's proposal will be held Friday. Meanwhile, the department is arguing that adoption of its recommendations won't affect the terms of the settlements with the publishers.

"The proposed settlement with Apple, if approved by the court, would prohibit Apple from entering agreements that limit retail price competition during a reset period," said DoJ spokesperson Gina Talamona.

"The proposed relief does not modify the terms of the settlements we reached with the publisher defendants," she added.

In addition to barring Apple from entering into agency agreements for five years, the DoJ proposal calls for Apple to allow e-book retailers, like Amazon and Barnes & Noble, to provide links to their e-book stores from within their iOS apps. It also bars the company from entering into any contracts that would fix the price its competitors charge for books.

Further, Apple would have to pay for an external monitor to oversee its internal antitrust compliance policies.

In a court filing, Apple called the DoJ's proposal a "draconian and punitive intrusion into Apple's business, wildly out of proportion to any adjudicated wrongdoing or potential harm."

Relief Too Far

Apple is not alone in characterizing the DoJ's recommendations as extreme.

"The proposed relief goes well beyond what the court determined was troublesome," Freeborn's Zelek said.

When the decision was handed down against Apple, there was some concern that it could affect other parts of Apple's business -- that is, reach beyond e-book sales to things such as which links should be allowed in apps.

"None of that was before the court. All that was before the court was the issue of e-books -- not the issue of apps or Apple's iTunes business," Zelek pointed out.

"Part of this would be expected. Even if the Justice Department had tailored its proposal more narrowly, you'd expect people to complain about it anyway, but it appears to me that they've gone too far," he said. "They're using it as a wedge to get relief beyond what the case addressed."

Unthoughtful Application of Law

This case isn't the best application of antitrust law, maintained Ronald Cass, former vice chairman and commissioner of the U.S. International Trade Commission and president of Cass & Associates.

"The publishers' complaint here is part of what underscores the problem with the litigation's underlying predicate," he told MacNewsWorld.

"The case is predicated on a view of antitrust law that oversimplifies what it stands for," said Cass, "and doesn't look at effective competition in the marketplace."

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