Publishers’ Woes ‘No Excuse’ for E-book Price-Fixing, Judge Says

The court’s role is only to ensure a settlement is “within the reaches of the public interest,” Cote said. “By effectively disallowing the [three publishers] from using the agency model for at least two years ... and from using [most favored nation clauses] for at least five,” the settlement “appears reasonably calculated to restore retail price competition to the market for trade e-books, to return prices to their competitive level, and to benefit e-books consumers and the public generally,” she said. The limited terms in the settlement are indeed a “cooling-off period” as Justice described them, and won’t “unduly dictate the contours of competition” in the “nascent” e-books industry, Cote said.

The government didn’t need to submit any economic studies backing its allegations, which detail a “straightforward, horizontal price-fixing conspiracy, which is per se unlawful under the Sherman Act,” Cote said: “No further showing is required.” But she acknowledged that more than 90 percent of the 868 comments submitted to the court opposed the settlement, so “hesitation is clearly appropriate” before approving the settlement. Cote even quoted an Emily Dickinson poem on the importance of books to society. But that large record actually argues in favor of Cote ruling without a public hearing, which “would serve only to delay the proceedings unnecessarily,” she said.

The judge bemoaned comments “blaming every evil to befall publishing” on Amazon’s $9.99 pricing strategy for new e-books and crediting the agency model with “every positive event,” such as new competing e-readers. Regardless of whether the settlement will reduce Barnes & Noble’s e-book margins; harm booksellers’ agency contracts with Google among others; “decimate brick-and-mortar and specialty bookstores” by aiding Amazon’s “discount” strategy; or “effectively provide free advertising” to sales-tax scofflaw Amazon by “serving as physical showrooms for books,” she said, “this is not the type of harm that the Sherman Act is designed to prevent."

Consumers, not “special interests,” are the parties to be protected, Cote said: “And although the birth of a new industry is always unsettling,” what’s clear “is the need for industry players to play by the antitrust rules when confronted with new market forces. It is not the place of the Court to protect these bookstores and other stakeholders from the vicissitudes of a competitive market.” The settlement doesn’t “void” contracts as retailers claimed, but requires the three publishers to “act in accordance with their bargained-for contractual rights,” she said. Amazon’s “alleged free-ridingno way justifies subsidizing brick-and-mortar bookstores no way justifies subsidizing brick-and-mortar bookstores” through price-fixing, the judge said.

Comments that the settlement is too broad are “beside the point,” because the publishers allegedly used most favored nation clauses and agency agreements “together in furtherance of a horizontal price-fixing conspiracy,” Cote said. She said she’s not allowed to deny a settlement just because “the remedies [don’t] perfectly match the alleged violations.” Though several commenters called unenforceable a provision that retailers can’t sell e-books at a “cumulative loss” within a year, it was the settling publishers themselves, concerned about Amazon’s strategy, who requested it, she said.

Though several retailers submitted evidence that average prices fell for e-books following agency agreements, the government under law has to show only that it has a “factual foundation for thegovernment’s decisions such that its conclusions regarding theproposed settlement are reasonablefactual foundation for thegovernment’s decisions such that its conclusions regarding theproposed settlement are reasonablefactual foundation for thegovernment’s decisions such that its conclusions regarding theproposed settlement are reasonablefactual foundation for the government’s decisions such that its conclusions regarding the proposed settlement are reasonable,” Cote said. Through “detailed allegations” of the conspiracy to subvert the so-called $9.99 problem, the contents of the agency contracts themselves, and the resulting unavailability of the publishers’ new e-books for $9.99 from “any retailer,” the government has met this threshold, the judge said.

Complaints about Amazon’s alleged anticompetitive behavior and the “pro-competitive” nature of agency agreements fall short, Cote said. Justice has found “persuasive evidence lacking” that Amazon engaged in predatory pricing, and showed that Barnes & Noble and Google were planning to enter the e-book market before the coordinated switch to agency pricing, she said. Cote laid out but did not give much credence to a lengthy analysis by RoyaltyShare’s Kohn that, owing to the nature of e-books and accompanying hardware, “Amazon had enormous incentives to try to achieve a monopoly as the e-books market emerged” and used predatory pricing. None of the comments has shown that Amazon’s e-book pricing was below its marginal cost, she said, and even if it was predatory, that’s “no excuse” for price-fixing. “What cannot be disputed is that the Agency Agreements ended retail price discounting and eliminated potential pricing innovations, such as ‘all-you-can-read’ subscription services, book club pricing specials, and rewards programs,” the judge said.

Since the settlement imposes “no obligations” on Apple, only requiring the settling publishers to end their agency agreements with the company, it can’t complain, Cote said. The contracts themselves allow for termination with 30 days’ notice, and Apple has known since April when the settlement was filed that those publishers intended to end the agreements, the judge said. Apple’s stated determination to appeal the settlement if approved doesn’t dissuade Cote, she said, because the settling publishers would be put in “legal limbo” and forced to prepare for trial, she said.

Industry response was muted. The American Booksellers Association said Cote’s finding that e-book prices rose more than 10 percent a year following agency agreements was “contrary to considerable evidence from Barnes & Noble, the Book Industry Study Group, and others,” but otherwise simply summarized her ruling (http://xrl.us/bnothw). We couldn’t reach the Authors Guild, another settlement critic, for comment. RoyaltyShare’s Kohn told us by email: “It was very disappointing when the Court deferred to the DOJ to such a great extent as to dismiss Congress’s intent [in the Tunney Act] so readily.” The act invites public participation in settlement evaluation.