[Federal Register Volume 77, Number 145 (Friday, July 27, 2012)]
[Notices]
[Pages 44271-44287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-18313]
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DEPARTMENT OF JUSTICE
Antitrust Division
United States v. Apple, Inc., et al.; Public Comments and
Response on Proposed Final Judgment
Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.
16(b)-(h), the United States hereby publishes below the United States'
Response to Public Comments on the proposed Final Judgment in United
States v. Apple, Inc., et al., Civil Action No. 12-CV-2826 (DLC), which
was filed in the United States District Court for the Southern District
of New York on July 23, 2012, together with copies of the 868 comments
received by the United States.
Pursuant to the Court's June 11, 2012 order, comments were
published electronically and are available to be viewed and downloaded
at the Antitrust Division's Web site, at: http://www.justice.gov/atr/cases/apple/index.html. A copy of the United States' Response to
Comments is also available at the same location.
Copies of the comments and the response are available for
inspection at the Department of Justice Antitrust Division, 450 Fifth
Street NW., Suite 1010, Washington, DC 20530 (telephone: 202-514-2481),
and at the Office of the Clerk of the United States District Court for
the Southern District of New York, Daniel Patrick Moynihan United
States Courthouse, 500 Pearl Street, New York, NY 10007-1312. Copies of
any of these materials may also be obtained upon request and payment of
a copying fee.
Patricia A. Brink,
Director of Civil Enforcement.
United States District Court for the Southern District of New York
United States of America, Plaintiff, v. Apple, Inc., Civil Action
No. 12-CV-2826 (DLC) Hachette Book Group, Inc., Harpercollins
Publishers, L.L.C., Verlagsgruppe Georg Von Holtzbrinck GMBH,
Holtzbrinck Publishers, LLC d/b/a Macmillan, The Penguin Group, a
Division of Pearson Plc, Penguin Group (USA), Inc., and Simon &
Schuster, Inc., Defendants.
Response of Plaintiff United States to Public Comments on the Proposed
Final Judgment\*\
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\*\ Public Comments are available at http://www.justice.gov/atr/cases/apple/index.html.
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July 23, 2012.
Table of Contents
Table of Contents
Preliminary Statement................................... 7
I. Introduction......................................... 9
II. The Complaint and the E-Book Industry............... 13
III. Standard of Judicial Review........................ 16
A. The United States Is Entitled to Substantial 16
Deference in Crafting a Settlement.................
B. The Court's ``Public Interest'' Inquiry Should 18
Focus on the Relationship Between the Harm Alleged
and the Remedy Selected............................
IV. The Proposed Final Judgment......................... 20
A. Ending Collusion by Settling Defendants.......... 20
B. Restoring Competition for E-Books With Respect to 21
Settling Defendants................................
C. Compliance and Enforcement....................... 24
V. Summary of Public Comments and the United States' 25
Response...............................................
A. Prominent Themes in Industry Comments............ 27
1. A Window for Retail Discounting Eliminates 27
Terms That Facilitated Collusion Without
Imposing a Business Model on the Industry......
2. Consumers, the Victims of the Conspiracy, 28
Will Benefit as Limits on Retail Discounting
are Lifted.....................................
3. Collusion Is Not Acceptable, Even in Response 31
to Perceived Anticompetitive Conduct...........
4. Protection From Aggressive Competition Does 36
Not Justify Keeping Collusive Agreements Intact
5. The Proposed Final Judgment Is Neither Too 37
Regulatory Nor Too Ambiguous for Enforcement...
B. Individual Responses to Detailed Comments........ 39
1. Barnes & Noble, Inc.......................... 40
2. Consumer Federation of America............... 47
3. Independent Book Publishers.................. 50
4. American Booksellers Association and Members. 52
5. Authors Guild and Members.................... 53
C. Additional Responses to Comments With Unique 58
Perspectives.......................................
1. Brian DeFiore, Literary Agent................ 58
2. Bob Kohn, CEO of Royalty Share............... 59
3. Steerads, Inc................................ 61
4. National Association of College Stores....... 62
5. American Specialty Toy Retailing Association. 63
D. Apple, Inc....................................... 63
1. The Proposed Final Judgment Reasonably 64
Requires the Termination of the Apple Agency
Agreements.....................................
2. The Proposed Final Judgment Does Not ``Impose 66
a Business Model''.............................
3. The Proposed Final Judgment Will Help To 67
Restore Competition, Not End It................
4. Apple Misstates the Standard of Review Under 69
the Tunney Act.................................
5. Apple's Suggested Changes to the Proposed 70
Final Judgment Are Self-Serving and Contrary to
the Public Interest............................
VI. Conclusion.......................................... 71
Table of Authorities
Cases:
[[Page 44272]]
Am. Med. Ass'n v. United States, 130 F.2d 233 (D.C. 23
Cir. 1942).........................................
Atlantic Richfield Co. v. USA Petroleum Co., 495 22
U.S. 328 (1990)....................................
Brooke Group v. Brown and Williamson Tobacco Corp., 22
509 U.S. 209 (1993)................................
Brown Shoe Co. v. United States, 370 U.S. 294 (1962) vi, 51
Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 51
477 (1977).........................................
Copperweld Corp. v. Independence Tube Corp., 467 51
U.S. 752 (1984)....................................
Fashion Originators' Guild of Am. v. FTC, 312 U.S. 23
457 (1941).........................................
Ford Motor Co. v. United States, 405 U.S. 562 (1972) 12
FTC v. Ind. Fed'n of Dentists, 476 U.S. 447 (1986).. 23
FTC v. Superior Court Trial Lawyers Ass'n, 493 U.S. 23
411 (1990).........................................
Nat'l Soc'y of Prof'l Eng'rs v. United States, 435 12, 37, 40
U.S. 679 (1978)....................................
Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 19, 52
(1993).............................................
Swift & Co. v. United States, 276 U.S. 311 (1928)... 46
United States v. Alcan Aluminum Ltd., 605 F. Supp. 7
619 (W.D. Ky. 1985)................................
United States v. Alcoa, Inc., 152 F. Supp. 2d 37 9
(D.D.C. 2001)......................................
United States v. Alex. Brown & Sons, Inc., 963 F. 7, 9, 10, 26
Supp. 235 (S.D.N.Y. 1997)..........................
United States v. Am. Tel. & Tel. Co., 552 F. Supp. 7
131 (D.D.C. 1982)..................................
United States v. Archer-Daniels-Midland Co., 272 F. 9
Supp. 2d 1 (D.D.C. 2003)...........................
United States v. Armour and Co., 402 U.S. 673 (1971) 46
United States v. Bechtel, 648 F.2d 660 (9th Cir. 9-10
1981)..............................................
United States v. Bleznak, 153 F.3d 16 (2d Cir. 1998) 7
United States v. BNS, Inc., 858 F.2d 456 (9th Cir. 9, 10
1988)..............................................
United States v. Comcast, 808 F. Supp. 2d 145 14
(D.D.C. 2011)......................................
United States v. Delta Dental of R.I., No. 96-113P, 11
1997 WL 527669 (D.R.I. July 2, 1997)...............
United States v. Gillette Co., 406 F. Supp. 713 (D. 7, 10
Mass. 1975)........................................
United States v. Glaxo Group, Ltd., 410 U.S. 52 12
(1973).............................................
United States v. Graftech Int'l Ltd., No. 1:10-cv- 14, 26, 49
02039, 2011 WL 1566781 (D.D.C. Mar. 24, 2011)......
United States v. Int'l Bus. Mach. Corp., 163 F.3d 8, 19, 51-52
737 (2d Cir. 1998).................................
United States v. Int'l Salt, 332 U.S. 392 (1947).... 11, 12
United States v. KeySpan Corp., 763 F. Supp. 2d 633 7, 8, 45
(S.D.N.Y. 2011)....................................
United States v. Loew's, Inc., 371 U.S. 38 (1962)... 17
United States v. Microsoft Corp., 56 F.3d 1448 (D.C. (\1\)
Cir. 1995).........................................
United States v. Nat'l Lead Co., 332 U.S. 319 (1947) 11, 49
United States v. Paramount Pictures, 334 U.S. 131 10, 14, 48-49
(1948).............................................
United States v. SBC Commc'ns, Inc., 489 F. Supp. 2d (\1\)
1 (D.D.C. 2007)....................................
United States v. Socony-Vacuum Oil, 310 U.S. 150 22-23
(1940).............................................
United States v. U. S. Gypsum Co., 340 U.S. 76 12, 17, 26, 53
(1950).............................................
United States v. Visa, 163 F. Supp. 2d 322 (S.D.N.Y. 25
2001)..............................................
Wallace v. Int'l Bus. Machine Corp., 467 F.3d 1104 21
(7th Cir. 2006)....................................
Zenith Radio Corp. v. Hazeltine Research, Inc., 395 12, 37
U.S. 100 (1969)....................................
Statutes
Antitrust Procedures and Penalties Act, 15 U.S.C. 16(a). 46
Antitrust Procedures and Penalties Act, 15 U.S.C. 16(b)- 1
(h)....................................................
Antitrust Procedures and Penalties Act, 15 U.S.C. 16(d). 1
Antitrust Procedures and Penalties Act, 15 U.S.C. 16(e). (\1\)
Antitrust Procedures and Penalties Act, 15 U.S.C. 16(f). 31
Sherman Act, 15 U.S.C. 1................................ 1
\1\ Passim.
Preliminary Statement
When Apple launched its iBookstore in April of 2010, virtually
overnight the retail prices of many bestselling and newly released
e-books published in this country jumped 30 to 50 percent--affecting
millions of consumers. The United States conducted a lengthy
investigation into this steep price increase and uncovered
significant evidence that the seismic shift in e-book prices was not
the result of market forces, but rather came about through the
collusive efforts of Apple and five of the six largest publishers in
the country. That conduct, which is detailed in the United States'
Complaint against those entities, is per se illegal under the
federal antitrust laws.
Three of the publishers named in the Complaint as defendants--
Hachette Book Group, Inc., HarperCollins Publishers L.L.C., and
Simon & Schuster, Inc.--have entered into settlement agreements with
the United States. As it is required to do under the Tunney Act, the
United States solicited comments from the public regarding the
settlements. The United States received 868 comments from
individuals, publishers, booksellers, and even from Apple, a key
conspirator in the underlying price-fixing scheme.
Comments were submitted both in support of, and in opposition
to, the proposed settlements. Those in support largely commented
favorably on the government's efforts to end the conspiracy that
cost e-book purchasers millions of dollars, and restore competition
to the e-book market. Critical comments generally were submitted by
those who have an interest in seeing consumers pay more for e-books,
and hobbling retailers that might want to sell e-books at lower
prices. Many such comments expressed a general frustration with
conditions that arise not from the settlements or even the United
States' Complaint, but from the evolving nature of the publishing
industry--in which the growing popularity of e-books is placing
pressure on the prevailing model that is built on physical supply
chains and brick-and-mortar stores. Many critics of the settlements
view the consequences of the conspiracy--higher prices--as serving
their own self-interests, and they prefer that unfettered
competition be replaced by industry collusion that places the
welfare of certain firms over that of the public. That position is
wholly at odds with the purposes of the federal antitrust laws--
which were enacted to protect competition, not competitors. See,
e.g., Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962).
The United States received many comments that sought to excuse
price fixing as necessary to end Amazon's reported ninety percent
share of the e-book market, and noted that Apple's entry effectuated
erosion of Amazon's share and spurred all sorts of innovations, such
as color e-books. But the reality is that, despite its
conspiratorial efforts, Apple's entry into the e-book market was not
immediately successful. It was, in fact, Barnes & Noble's
[[Page 44273]]
entry--prior to Apple--that took significant share away from Amazon;
and many of the touted innovations were in development long before
Apple decided to enter the market via conspiracy.
Some critical comments simply misunderstand the decree. They
assert that the United States is imposing a business model on the
industry by prohibiting agency agreements. The United States,
however, does not object to the agency method of distribution in the
e-book industry, only to the collusive use of agency to eliminate
competition and thrust higher prices onto consumers. Publishers that
did not collude are not required to surrender agency agreements and
even the settling publishers here can resume agency, if they act
unilaterally, after only two years. This brief cooling-off period
will ensure that the effects of the collusion will have evaporated
before defendants seek future agency agreements, if any.
Overall, the United States is entitled to broad discretion to
settle with antitrust defendants, so long as the settlements are
within the reaches of the public interest. In that regard, the
Court's inquiry is a limited one, focused on whether the proposed
Final Judgment provides effective and appropriate remedies for the
antitrust violations alleged in the Complaint, with respect to the
Settling Defendants. As set forth below, after carefully considering
the comments received, the United States has concluded the
settlements meet that test.
Introduction
Pursuant to the requirements of the Antitrust Procedures and
Penalties Act, 15 U.S.C. 16(b)-(h) (``Tunney Act''), the United
States hereby responds to the public comments received in this case
regarding the proposed Final Judgment as to defendants Hachette Book
Group, Inc., HarperCollins Publishers L.L.C., and Simon & Schuster,
Inc. (collectively ``Settling Defendants''). After careful
consideration of the comments, the United States has concluded that
the proposed Final Judgment will provide an effective and
appropriate remedy for the antitrust violations alleged in the
Complaint, with respect to the Settling Defendants. The United
States will move the Court for entry of the proposed Final Judgment
after this response has been published in the Federal Register and
online. All timely comments are posted publicly at http://www.justice.gov/atr/cases/apple/index.html, pursuant to 15 U.S.C.
16(d).
On April 11, 2012, the government filed a civil antitrust
Complaint alleging that Apple, Inc. (``Apple'') and five of the six
largest publishers in the United States (``Publisher Defendants'')
restrained competition in the sale of electronic books (``e-
books''), in violation of Section 1 of the Sherman Act, 15 U.S.C. 1.
On the same day, the United States filed a proposed Final Judgment
with respect to the three Settling Defendants.
The United States and Settling Defendants have stipulated that
the proposed Final Judgment may be entered after compliance with the
requirements of the Tunney Act. Pursuant to those requirements, the
United States filed its Competitive Impact Statement (``CIS'') with
the Court on April 11, 2012; the proposed Final Judgment and CIS
were published in the Federal Register on April 24, 2012, at 77 FR
24518; and summaries of the terms of the proposed Final Judgment and
CIS, together with directions for the submission of written comments
relating to the proposed Final Judgment, were published in both The
New York Post and The Washington Post for seven days beginning on
April 20, 2012 and ending on April 26, 2012. The sixty-day period
for public comment (``Tunney Act period'') ended on June 25, 2012.
The United States received 868 comments during the Tunney Act
period.\1\ Nearly seventy of those comments favored the suit and
settlement. The favorable comments included a submission from the
Consumer Federation of America (``CFA''), the only consumer group to
submit a comment on the decree. Another supportive comment included
the signatures of 186 authors who favorably noted the growth of the
e-book industry and the opportunities it gave them to bypass
traditional distribution channels and successfully self-publish e-
books at lower prices. Among the group of comments that supported
the settlement were fifty-two readers and consumers, several of whom
echoed the themes of a form letter suggested by online publisher
Wordpress.com.\2\ The comments supporting the proposed Final
Judgment did, however, include several that asserted the relief
obtained in the settlements did not go far enough. One observation
raised in these comments was that two years is too short a period to
ban Settling Defendants from prohibiting price discounting by
retailers.
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\1\ An additional fourteen comments arrived after the Tunney Act
period expired and, therefore, have not been published. However, the
United States reviewed the comments and none of them raised any
issue not already addressed in this Response to Comments.
\2\ As of this writing, that letter is available at: http://support4settlement.wordpress.com/2012/04/30/support-the-settlement/.
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The remaining comments opposed the suit and/or the
settlement.\3\ Most of these comments came from publishers, authors,
agents, and bookstores that acknowledged an interest in higher
retail e-book prices. An overarching theme of their comments was
that lower e-book prices would harm booksellers directly and others
indirectly. They claimed that the pre-conspiracy lower e-book prices
were caused by predatory conduct of Amazon and that the proposed
Final Judgment would allow Amazon to lower prices once again, which
could lead to an Amazon monopoly. These comments suggested that the
current industry equilibrium, even if collusively attained, is
preferable to the competitive dynamic that preceded it, and that the
United States erred both in suing the conspirators and in agreeing
to a settlement designed to restore competition. Comments among this
group include those from the American Booksellers Association
(``ABA''), The Authors Guild,\4\ a group of nine mid-tier publishers
(``Independent Book Publishers''), and Amazon's two largest e-book
retail competitors, Barnes & Noble (``B&N'') and Apple.
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\3\ Two comments expressed no opinion either in favor of the
suit or settlement, or in opposition to it.
\4\ Both the Authors Guild and the ABA posted talking points
online and instructed members ``How to Weigh In'' on the proposed
Final Judgment. As of this writing, that guidance is available at:
http://authorsguild.org/advocacy/articles/the-justice-departments-e-book-proposal-needlessly.html, and http://news.bookweb.org/news/aba-members-urged-make-their-voices-heard-re-agency-model.
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This response proceeds as follows: Section II describes the
Complaint and the industry facts that the United States considered
when it entered into the settlements. Section III outlines the legal
considerations for the Court as it reviews the proposed Final
Judgment. Section IV explains the provisions of the proposed Final
Judgment and how they will aid in restoring competition. Finally,
Section V addresses the most prominent concerns raised in comments,
then responds directly to the key assertions of the most detailed
comments submitted.
I. The Complaint and the E-Book Industry
On April 3, 2010, simultaneously with Apple's iPad launch, the
retail prices of most bestselling and newly released e-books
published by Publisher Defendants jumped from the then-prevailing
price of $9.99 to $12.99 or $14.99. Compl. ]] 7-8, 74. In May 2010,
the United States formally opened an investigation into the
possibility that the price hike was the result of collusion. During
the investigation, the United States issued Civil Investigative
Demands to obtain documents and sworn testimony from defendants and
third parties. On the strength of the evidence gathered during its
investigation, the United States filed its Complaint on April 11,
2012.
The Complaint alleges that defendants conspired and agreed to
raise, fix, and stabilize retail e-book prices, to end price
competition among e-book retailers, and to limit retail price
competition among Publisher Defendants. Defendants ultimately
effectuated this agreement by collectively adopting and adhering to
functionally identical price schedules and methods of selling e-
books, as laid out in each Publisher Defendant's contract with Apple
(the ``Apple Agency Agreements''). In 2008, defendants began to
communicate about the threat posed by Amazon's $9.99 pricing
strategy, and the need to work together to end it. Compl. ] 37.
Though Amazon's e-book distribution business was ``[f]rom the time
of its launch * * * consistently profitable,'' it ``substantially
discount[ed] some newly released and bestselling titles.'' Compl. ]
30. By the end of the summer of 2009, Publisher Defendants agreed to
work collectively to raise Amazon's retail prices. Compl. ] 37.
Apple was aware of Publisher Defendants' common objective to end
Amazon's $9.99 pricing. Compl. ] 59. In late 2009, Apple and
Publisher Defendants agreed to replace the wholesale model for e-
book sales with an agency model that would allow Publisher
Defendants to raise prices. Compl. ] 37. Apple first proposed that
each publisher expressly adopt an agency pricing model for all of
its retail e-book sales, Compl. ] 63, then replaced that express
requirement with an
[[Page 44274]]
unusual most favored nation (``MFN'') pricing provision that
accomplished the same result. Compl. ]] 65-66. This MFN was designed
to protect Apple from having to compete on price at all, while still
maintaining its margin. Compl. ] 65. Apple facilitated this
transition to agency pricing across all e-book retailers by entering
into functionally identical agency contracts with each Publisher
Defendant that allowed Publisher Defendants to set Apple's retail
prices for e-books. Compl. ] 6-7. The same terms granted Apple the
assurance that Publisher Defendants would raise retail e-book prices
at all other e-book retailers, and contained price tiers that
created de facto retail e-book prices as a function of a title's
hardcover list price. Compl. ] 7.
As explained more fully in the Complaint and CIS, defendants'
conspiracy resulted in higher consumer prices for e-books than would
have been possible absent collusion. ``[T]he average price for
Publisher Defendants' e-books increased by over ten percent between
the summer of 2009 and the summer of 2010.'' CIS at 8-9. ``On many
adult trade e-books, consumers have witnessed an increase in retail
prices between 30 and 50 percent.'' CIS at 9. Additionally,
defendants' agreement prevented e-book retailers ``from introducing
innovative sales models or promotions with respect to Publisher
Defendants' e-books, such as offering e-books under an `all-you-can-
read' subscription model where consumers would pay a flat monthly
fee.'' CIS at 9.
Since the proposed Final Judgment was announced, more companies
are investing to enter or expand in the market and compete against
Amazon, Apple, and other e-book retailers. According to public
reports, Microsoft has invested hundreds of millions of dollars in
Barnes & Noble's digital book business, a business that Microsoft
valued at $1.7 billion.\5\ Microsoft soon thereafter announced it
would sell a tablet computer, named Surface, that will compete
against the iPad and serve as an e-reader.\6\ Google, already an e-
book content provider, also announced after the settlement that it
would for the first time sell a tablet, called Nexus 7. The Nexus 7
is designed to compete directly against Amazon's Kindle Fire and
bring more business to Google Play, Google's online store that sells
e-books and other digital content.\7\
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\5\ See Shira Ovide & Jeffrey A. Trachtenberg, Microsoft Hooks
Onto Nook, Wall Street Journal, May 2, 2012; Press Release, Barnes &
Noble, Barnes & Noble and Microsoft Form Strategic Partnership to
Advance World-Class Digital Reading Experiences for Consumers,
(April 30, 2012), http://www.barnesandnobleinc.com/press_releases/4_30_12_bn_microsoft_strategic_partnership.html (quoting B&N's
CEO as saying that the Microsoft partnership is an important part of
the strategy ``to solidify our position as a leader in the exploding
market for digital content in the consumer and education
segments'').
\6\ See Madalit Del Barco, Microsoft's Surface Tablet to Compete
with iPad, National Public Radio (June 19, 2012), http://www.npr.org/2012/06/19/155337886/microsoft-debuts-surface-tablet-to-compete-with-ipad; Michael Kozlowski, How Will the Microsoft Surface
Tablet Function as an e-Reader, Good E-Reader (June 20, 2012),
http://goodereader.com/blog/electronic-readers/how-will-the-microsoft-surface-tablet-function-as-an-e-reader.
\7\ See Joanna Stem, Google Nexus 7 Tablet Move Over, Kindle
Fire, ABC News.com (Jun. 27, 2012), http://abcnews.go.com/blogs/technology/2012/06/google-nexus-7-tablet-move-over-kindle-fire/;
Michael Liedtke, Google, Kindle have tablet showdown, Charlotte
Observer.com (June 28, 2012), http://www.charlotteobserver.com/2012/06/28/3346735/googles-nexus-seven-tablet-challenges.html.
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III. Standard of Judicial Review
Under the Tunney Act, proposed consent judgments in antitrust
cases brought by the United States are subject to a sixty-day
comment period, after which the court shall determine whether entry
of the proposed final judgment ``is in the public interest.'' 15
U.S.C. 16(e)(1). As discussed in more detail below, the public
interest inquiry considers the relationship between the allegations
in the government's complaint and the proposed remedy, with
deference to the United States' role in crafting a settlement.
A. The United States Is Entitled to Substantial Deference in
Crafting a Settlement
When parties come before the court in a Tunney Act proceeding,
they have resolved their dispute with respect to a government
antitrust complaint. Accordingly, the court's inquiry is necessarily
a limited one as the government is entitled to ``broad discretion to
settle with the defendant within the reaches of the public
interest.'' United States v. Microsoft Corp., 56 F.3d 1448, 1461 (DC
Cir. 1995); accord United States v. Alex. Brown & Sons, Inc., 963 F.
Supp. 235, 238 (S.D.N.Y. 1997) (quoting Microsoft, 56 F.3d at 1460),
aff'd sub nom., United States v. Bleznak, 153 F.3d 16 (2d Cir.
1998); United States v. KeySpan Corp., 763 F. Supp. 2d 633, 637
(S.D.N.Y. 2011) (same); United States v. SBC Commc'ns, Inc., 489 F.
Supp. 2d 1, 15-16 (D.D.C. 2007) (assessing public interest standard
under the Tunney Act).
The question in a Tunney Act proceeding is not whether the
reviewing court would have imposed a different decree if liability
had been established in litigation. Rather, ``a proposed decree must
be approved even if it falls short of the remedy the court would
impose on its own, as long as it falls within the range of
acceptability or is `within the reaches of public interest.'''
United States v. Am. Tel. & Tel. Co., 552 F. Supp. 131, 151 (D.D.C.
1982) (citations omitted) (quoting United States v. Gillette Co.,
406 F. Supp. 713, 716 (D. Mass. 1975)); see also United States v.
Alcan Aluminum Ltd., 605 F. Supp. 619, 622 (W.D. Ky. 1985)
(approving the consent decree even though the court would have
imposed a greater remedy).
To meet this standard, the United States ``need only provide a
factual basis for concluding that the settlements are reasonably
adequate remedies for the alleged harms.'' SBC Commc'ns, 489 F.
Supp. 2d at 17; accord KeySpan Corp., 763 F. Supp. 2d at 637-38. The
United States ``need not prove its underlying allegations in a
Tunney Act proceeding,'' as such a requirement ``would fatally
undermine the practice of settling cases and would violate the
intent of the Tunney Act.'' SBC Commc'ns, 489 F. Supp. 2d at 20
(citing 15 U.S.C. 16(e)(2) for the proposition that the Act does not
require a court to hold an evidentiary hearing). Congress intended
that the court reach its determination expeditiously, giving due
deference to the government's predictions regarding the effect of
its proposed remedies. See Microsoft, 56 F.3d at 1461.
B. The Court's ``Public Interest'' Inquiry Should Focus on the
Relationship Between the Harm Alleged and the Remedy Selected
The Tunney Act requires the court to consider specific factors
in determining whether the proposed Final Judgment is in the
``public interest.'' 15 U.S.C. 16(e)(1); see also United States v.
Int'l Bus. Mach. Corp., 163 F.3d 737, 740 (2d Cir. 1998). Courts
``cannot look beyond the complaint in making the public interest
determination unless the complaint is drafted so narrowly as to make
a mockery of judicial power.'' SBC Commc'ns, 489 F. Supp. 2d at 15.
Under the statute, the court should consider the following factors:
(A) The competitive impact of such judgment, including
termination of alleged violations, provisions for enforcement and
modification, duration of relief sought, anticipated effects of
alternative remedies actually considered, whether its terms are
ambiguous, and any other competitive considerations bearing upon the
adequacy of such judgment that the court deems necessary to a
determination of whether the consent judgment is in the public
interest; and
(B) The impact of entry of such judgment upon competition in the
relevant market or markets, upon the public generally and
individuals alleging specific injury from the violations set forth
in the complaint including consideration of the public benefit, if
any, to be derived from a determination of the issues at trial.
15 U.S.C. 16(e)(1)(A)-(B).
In other words, under the Tunney Act, a court considers, among
other things, the relationship between the remedy secured and the
specific allegations set forth in the government's complaint, whether
the decree is sufficiently clear, whether enforcement mechanisms are
sufficient, and whether the decree may positively harm third parties.
See Microsoft, 56 F.3d at 1458-62. With respect to the adequacy of the
relief secured by the decree, a court may not ``engage in an
unrestricted evaluation of what relief would best serve the public.''
United States v. BNS, Inc., 858 F.2d 456, 462 (9th Cir. 1988) (quoting
United States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir. 1981)); see
also Microsoft, 56 F.3d at 1460-62; Alex. Brown & Sons, 963 F. Supp. at
238; United States v. Alcoa, Inc., 152 F. Supp. 2d 37, 40 (D.D.C.
2001). Instead, the court should grant due respect to the United
States' ``prediction as to the effect of proposed remedies, its
[[Page 44275]]
perception of the market structure, and its views of the nature of the
case.'' United States v. Archer-Daniels-Midland Co., 272 F. Supp. 2d 1,
6 (D.D.C. 2003).
The balancing of competing social and political interests
affected by a proposed antitrust consent decree must be left, in the
first instance, to the discretion of the Attorney General. The
court's role in protecting the public interest is one of insuring
that the government has not breached its duty to the public in
consenting to the decree. The court is required to determine not
whether a particular decree is the one that will best serve society,
but whether the settlement is ``within the reaches of the public
interest.'' More elaborate requirements might undermine the
effectiveness of antitrust enforcement by consent decree.
Bechtel, 648 F.2d at 666 (emphasis added) (citations omitted); accord
Alex. Brown, 963 F. Supp. at 238.\8\
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\8\ Cf. BNS, 858 F.2d at 464 (holding that the court's
``ultimate authority under the [Tunney Act] is limited to approving
or disapproving the consent decree''); Gillette, 406 F. Supp. at 716
(the court is constrained to ``look at the overall picture not
hypercritically, nor with a microscope, but with an artist's
reducing glass''). See generally Microsoft, 56 F.3d at 1461
(discussing whether ``the remedies [obtained in the decree are] so
inconsonant with the allegations charged as to fall outside of the
`reaches of the public interest''').
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IV. The Proposed Final Judgment
The purpose of the proposed Final Judgment is to stop collusive
conduct by Settling Defendants and mitigate the consequences of their
collusion in the sale of e-books. Accordingly, the terms of the
proposed Final Judgment are designed to accomplish three things: (1)E
the current collusion; (2) restore competition eliminated by that
collusion; and (3) ensure compliance.
A. Ending Collusion by Settling Defendants
The function of a decree in a Sherman Act case ``includes undoing
what the conspiracy achieved.'' United States v. Paramount Pictures,
334 U.S. 131, 171 (1948). Here, defendants achieved higher retail e-
book prices in large part by collectively agreeing to wrest control of
pricing and other terms from retailers. As explained more fully in the
Complaint and CIS, the anticompetitive results of the conspiracy
ultimately were ensured by Publisher Defendants' near-simultaneous
execution of the Apple Agency Agreements, which included common price
schedules and MFN clauses, and which proscribed retail discounting.
Accordingly, the proposed Final Judgment requires that Settling
Defendants terminate the Apple Agency Agreements. PFJ Sec. IV.A.
Courts have long required termination of contracts found to be unlawful
under Section 1 of the Sherman Act. See United States v. Nat'l Lead
Co., 332 U.S. 319, 328 n.4, 363-64 (1947) (approving a decree
cancelling unlawful agreements and enjoining further performance); see
also United States v. Delta Dental of R.I., No. 96-113P, 1997 WL 527669
(D.R.I. July 2, 1997) (entering decree voiding MFN enforcement).
The proposed Final Judgment also requires that Settling Defendants
terminate, as soon as they are contractually permitted to do so, all
other agreements that include restrictions on the ability of e-book
retailers to compete on price or that may be used to facilitate price
fixing. This allows retailers the opportunity to renegotiate those
contracts with Settling Defendants unimpeded by collusion. The proposed
Final Judgment does not require Settling Defendants to breach any such
contracts; rather, it requires Settling Defendants not to extend them,
and to take any such steps necessary to terminate the contracts
according to their own terms. PFJ Sec. IV.B.
B. Restoring Competition for E-Books With Respect to Settling
Defendants
To allow the competition foreclosed by defendants' collusion to
reemerge, the proposed Final Judgment requires that Settling
Defendants: (a) Refrain for two years from entering into contracts
containing retail price restrictions and price commitment mechanisms;
(b) stop communicating competitively sensitive information to
competitors; (c) not retaliate against retailers that exercise
discounting authority; and (d) agree not to fix terms or prices with
competitors for the provision of e-books. PFJ Sec. Sec. V.B, V.C, V.D,
V.E, and V.F.
It is well established that the remedy for a violation of the
Sherman Act may extend beyond the specific agreements that embodied the
violation. Once a violation has occurred, ``advantages already in hand
may be held by methods more subtle and informed, and more difficult to
prove, than those which, in the first place, win a market.'' United
States v. Int'l Salt, 332 U.S. 392, 400 (1947) (abrogated on other
grounds). Consequently, while the scope of the remedy must be clearly
related to the anticompetitive effects of the illegal conduct,
Microsoft, 56 F.3d at 1460, courts are ``empowered to fashion
appropriate restraints on [the transgressor's] future activities both
to avoid a recurrence of the violation and to eliminate its
consequences.'' Nat'l Soc'y of Prof'l Eng'rs v. United States, 435 U.S.
679, 697 (1978). Relief may ``range broadly through practices connected
with acts actually found to be illegal.'' United States v. U. S. Gypsum
Co., 340 U.S. 76, 89 (1950). A court ``has broad power to restrain acts
which are of the same type or class as [the] unlawful acts'' and which
``may fairly be anticipated'' from the defendant's past conduct. Zenith
Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 132 (1969)
(internal quotation marks and citation omitted). The relief should
``unfetter a market from anticompetitive conduct,'' and include that
which is ``necessary and appropriate'' in order ``to restore
competition.'' Ford Motor Co. v. United States, 405 U.S. 562, 573, 577
& n.8 (1972) (internal quotation marks and citations omitted).
In this case, a prohibition on price fixing or the termination of
the Apple Agency Agreements standing alone would be insufficient to
undo the effects of the conspiracy. By colluding, defendants learned
that they shared a common goal to raise e-book prices, agreed to use
particular tools to achieve that goal, found those tools to be
effective, and found each other reliable in the application of those
tools. It is appropriate, therefore, to restrict defendants' ability to
use the tools that effectuated the conspiracy. See, e.g., United States
v. Glaxo Group, Ltd., 410 U.S. 52, 64 (1973) (barring the use of a
patent employed to effect a conspiracy); Int'l Salt, 332 U.S. at 400
(``it is not necessary that all of the untraveled roads'' to collusion
``be left open and that only the worn one be closed''). Thus, retail
price restrictions and MFN pricing clauses are prohibited for two- and
five-year periods, respectively. The United States negotiated these
limited prohibitions as a means to ensure a cooling-off period and
allow movement in the marketplace away from collusive conditions. Such
precautions are particularly important in this case, as three
defendants have not yet agreed to terminate their collusive behavior.
These limitations also are designed not to last long enough to alter
the ultimate development of the competitive landscape in the still-
evolving e-books industry.
These provisions are tailored to restore a measure of competition
to the market, while avoiding harm to other market participants (e.g.,
retailers) that may have relied on the collusive agreements in effect
for more than two years. For example, the proposed Final Judgment
specifically permits Settling Defendants to pay for e-book promotion or
marketing efforts made by brick-and-mortar booksellers. PFJ Sec. VI.A.
Each Settling Defendant also may negotiate a commitment from any e-book
retailer to limit its annual discounts, so that each Settling
Defendants may ensure that its
[[Page 44276]]
entire catalog of e-books is not sold by any retailer below its total
e-book costs. PFJ Sec. VI.B. Monitoring and enforcement of this
provision is left to the discretion of Settling Defendants and the
retailers with which they contract.
C. Compliance and Enforcement
To ensure that Settling Defendants abide by the substantive terms
of the proposed Final Judgment and decrease the likelihood that they
might attempt to collude in other ways, the proposed Final Judgment
requires that Settling Defendants: (a) Provide the United States with
copies of current retail agreements immediately, future contracts
quarterly, competitor communication logs quarterly, and notification of
new or changing joint ventures as needed; (b) allow the United States
to investigate compliance from time to time, as authorized by the
Assistant Attorney General for Antitrust; and (c) provide officers and
employees counseling on the requirements of the proposed Final Judgment
and the antitrust laws so they may understand their obligations. PFJ
Sec. Sec. IV.C, IV.D, VII.C, VII.I, VIII.A.
These mechanisms are commonly used means of ensuring compliance
with a decree, while minimizing administrative costs. See, e.g., Final
Judgment at Sec. Sec. IV.I-O, United States v. Comcast, 808 F. Supp.
2d 145 (D.D.C. 2011) (No. 1:11-cv-00106) (requiring quarterly provision
of communication logs and retention of twelve categories of documents);
Final Judgment at Sec. IV.C, United States v. Graftech Int'l Ltd., No.
1:10-cv-02039, 2011 WL 1566781 at *3 (D.D.C. Mar. 24, 2011) (requiring
quarterly and annual provision of contracts and reports). None of these
provisions requires the United States Department of Justice
(``Department'') or the Court to become deeply involved in the daily
operation of Settling Defendants' businesses. Cf. Paramount Pictures,
334 U.S. at 162 (rejecting provision of a consent decree because it
``involves the judiciary so deeply in the daily operation of this
nation-wide business'').
In this case, the enforcement provisions focus on the specific
terms that affected the conspiracy. Current and future agreements must
be provided to confirm that retail pricing restrictions and price MFNs
are not included. The requirement that Settling Defendants provide logs
of communications among publishers will discourage unnecessary and
anticompetitive communications, such as those that led to their e-books
conspiracy. Likewise, as Publisher Defendants considered forming joint
ventures to better coordinate pricing, Compl. ]] 47-49, future joint
ventures must be reviewed by the United States. In the event concerns
about compliance arise, the proposed Final Judgment allows the United
States to investigate. Finally, in order to empower Settling Defendants
to avoid such concerns, antitrust counseling also is required.
V. Summary of Public Comments and the United States' Response
Comments opposing the proposed Final Judgment and those supporting
it have at least one element in common: they agree that entry of the
decree likely will reduce retail prices for e-books, at least in the
short term. Detractors insist that lower pricing will mean reduced
profits for bookstores, authors, literary agents, and publishers, and
an eventual reduction in quality, service, variety, and other benefits
to consumers. Supporters welcome a reduction in e-book prices for
consumers, and dismiss any lost benefits to industry participants as
undeserved, speculative, or irrelevant.
The comments submitted in opposition to entry of the proposed Final
Judgment explored five common themes: (1) The legality of restoring
discount authority to retailers; (2) the economic impact on industry
participants of restoring discount authority to retailers; (3) the
viability of collusive pricing as a defense against perceived
monopolization and/or predatory pricing; (4) collusive pricing as
protection from free riding and low-cost competition; and (5) the
clarity and breadth of the proposed Final Judgment.\9\ Section A
responds to these themes in detail. Section B highlights portions of
the most detailed comments for individual responses, including comments
submitted by B&N, the CFA, the Independent Book Publishers, the ABA,
and the Authors Guild. Section C addresses additional comments that
presented distinct ideas.\10\ Finally, Section D discusses the comment
submitted by Apple, which is the only comment submitted by a defendant
in this matter. The United States carefully reviewed all of the
submitted comments and, after serious consideration, concludes that the
proposed Final Judgment is in the public interest and requires no
modification.
---------------------------------------------------------------------------
\9\ Many of the 868 comments received from the public did not
bear on issues related to the antitrust merits of the proposed Final
Judgment or on any other issue arguably related to the Court's
inquiry under the Tunney Act. While the United States did undertake
herein to respond generally or specifically to all germane comments,
we do not address those that are wholly outside the scope of Tunney
Act proceedings. Following are some examples of the types of issues
that arose in comments we determined were not relevant for Tunney
Act review: (1) The Complaint should not have been filed, see, e.g.,
Alicia Wendt (ATC-0314) at 1 (writing ``to urge the US Department of
Justice to reconsider its complaint and drop the related charges'');
(2) the United States should sue Amazon, see, e.g., Nancy L.
Cunningham (ATC-0733) (suggesting ``the Department of Justice should
turn its attention to Amazon, a company that seeks to create a
monopoly''); (3) tax reform is needed to require payment by online
retailers, see, e.g., Roberta Rubin (ATC-0323) (claiming Amazon is
``evading any tax demands in most of the states in which they sell
books''); (4) the United States has been improperly influenced by
Amazon to bring this lawsuit, see, e.g., Richard Howorth (ATC-0790)
at 1 (suggesting that the DOJ was improperly influenced because a
former Deputy Attorney General sits on Amazon's board of directors).
\10\ For ease of access, all of the comments discussed in
Sections B and C have been collected and separately saved, and are
available both in Exhibit A in the folder titled ``Detailed
Comments'' and on the Antitrust Division's Web site, at http://www.justice.gov/atr/cases/apple/index.html, under ``Detailed
Comments.''
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A. Prominent Themes in Industry Comments
1. A Window for Retail Discounting Eliminates Terms That Facilitated
Collusion Without Imposing a Business Model on the Industry
Many comments, including those submitted by B&N, Books-A-Million
(``BAM''), the ABA, and the Authors Guild, argue that the proposed
Final Judgment inappropriately prohibits the use of an agency sales
model. B&N claims that the ``[g]overnment should not regulate legal
agreements that are independently negotiated by industry participants
who are in the best position to determine if the agreements are in
their interests.'' B&N (ATC-0097) at 24. BAM adds that ``[i]t is now
well-established * * * that vertical restrictions, even vertical price
restrictions, are not necessarily anticompetitive.'' BAM (ATC-0261) at
2.
As a preliminary matter, the proposed Final Judgment does not
impose a business model on the e-book industry. Of course, publishers
that were not parties to the conspiracy face no government challenge
whatsoever as to agency agreements independently arrived at with e-book
retailers. Even Settling Defendants, whose agency contracts were the
product of the conspiracy, are not permanently barred from using the
agency model. For two years, however, Settling Defendants cannot
prohibit retailers from discounting e-books. The United States believes
that this limited restriction is necessary to prevent Settling
Defendants from continuing to benefit from their conspiracy by
insisting that retailers enter new contracts that are identical to the
contracts produced through collusion. See CIS at 10 (``[T]he
[[Page 44277]]
proposed Final Judgment will ensure that the new contracts will not be
set under the collusive conditions that produced the Apple Agency
Agreements.'').\11\
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\11\ As one comment put it more colloquially, defendants ``maxed
out on chutzpah,'' and now ``[t]he only remedy for such blatant
collusion is to wipe the slate clean'' and let the market sort
pricing out. Courtney Milan (ATC-0262).
---------------------------------------------------------------------------
Nor are restrictions on agency pricing inappropriate when necessary
to prevent furtherance of a conspiracy or when agency contracts were
the heart of a conspiracy. As the CFA observed, when B&N and other
retailers negotiated agency contracts with publishers, they were ``not
negotiating with independent publishers'' but ``with members of a
cartel.'' CFA (ATC-0775) at 9. When ``otherwise permissible practices
[are] connected with the acts found to be illegal'' then they ``must
sometimes be enjoined'' to ensure relief. United States v. Loew's, Inc.
371 U.S. 38, 53 (1962); see also U. S. Gypsum Co., 340 U.S. at 89
(``Acts entirely proper when viewed alone may be prohibited,'' if
needed for effective relief). In this case, allowing retail price
restrictions to continue without interruption would maintain the
collusive status quo in the e-book industry. The limitations placed on
the terms of agency contracts entered into by Settling Defendants for a
period of two years will break the collusive status quo and allow truly
bilateral negotiations between publishers and retailers to produce
competitive results.
2. Consumers, the Victims of the Conspiracy, Will Benefit as Limits on
Retail Discounting Are Lifted
Many comments maintain that brick-and-mortar booksellers such as
B&N, BAM, and ABA member stores will be harmed if the proposed Final
Judgment removes barriers to price competition. They contend that
higher retail margins produced by the conspiracy ameliorated declines
in brick-and-mortar revenues, generated ``procompetitive benefits''
such as entry by new retail competitors and innovation, and allowed
brick-and-mortar booksellers to offer new marketing service and support
for e-books. See, e.g., B&N at 13-14, 20; ABA (ATC-0265) at 2-3. Of
course, protecting profits attributable to collusion is squarely at
odds with a fundamental purpose of the antitrust laws: The promotion of
competition. And, many of the so-called ``procompetitive benefits''
that these commenters believe will be lost if the decree is entered are
illusory or cannot be attributed to the collusion.
While the Tunney Act directs the court to consider the impact of
the settlement on third parties, these third parties are limited to
those ``alleging specific injury from the violations set forth in the
complaint.'' 15 U.S.C. 16(e)(1)(B). In this case, the third parties
that the Court is directed to consider under the Tunney Act are the
consumers of e-books, not the brick-and-mortar booksellers, which admit
that they benefited from the conspiracy. See, e.g., B&N at 19. The
booksellers' objection is not that they were harmed as a result of the
violation, but that the proposed Final Judgment ends the collusively-
attained equilibrium that provided them with an anticompetitive
windfall. This is not the type of impact that the Tunney Act directs
the Court to consider. Instead, the Court should consider that
consumers who were actually injured by the conspiracy will benefit as
the proposed Final Judgment returns price competition to the market. As
the Second Circuit observed when terminating a consent decree despite
competitor objections, ``[t]he purpose of the [Sherman] Act is not to
protect businesses from the working of the market; it is to protect the
public from the failure of the market.'' Int'l Bus. Machines Corp., 163
F.3d at 741-42 (2d Cir. 1998) (quoting Spectrum Sports, Inc. v.
McQuillan, 506 U.S. 447, 458 (1993)).\12\
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\12\ Although the Tunney Act requires a ``public interest''
determination only to approve a consent decree, the Second Circuit
applies the same ``consider[ation of] the public interest'' when
evaluating a termination. See Int'l Bus. Machines Corp., 163 F.3d
737, 740 (citations omitted).
---------------------------------------------------------------------------
In addition, many brick-and-mortar booksellers, as well as the
Authors Guild, speculate that collusive limits on retail discounting
were instrumental in encouraging new entry into e-book distribution by
brick-and mortar booksellers, spurring entry by online distributors,
and incentivizing e-reader innovation. To the contrary, brick-and-
mortar stores, including B&N, were selling e-books before
implementation of the Apple Agency Agreements.\13\ Any expansion of
brick-and-mortar sales after the Apple Agency Agreements were
implemented was limited in its impact because new sellers could not
compete by offering discounts. Likewise, online distributors such as
B&N and Google had entered or planned to enter the e-book market before
the Apple Agency Agreements were signed.\14\ Additionally, innovations
such as the iPad and B&N's Nook were either introduced or already
planned prior to formation of the Apple Agency Agreements.\15\ In the
pre-conspiracy competitive market, innovation, discounting, and
marketing were robust. In contrast, the conspiracy eliminated any
number of potential procompetitive innovations, such as ``all-you-can-
read'' subscription services, book club pricing specials, and rewards
programs. See Compl. ] 98; CIS at 9.
---------------------------------------------------------------------------
\13\ See, e.g., Press Release, The American Booksellers
Association, ABA Indie Bookstores to Sell eContent, Sony Reader
(Aug. 25, 2009), http://www.bookweb.org/about/press/20090825.html
(announcing more than 200 independent bookstores will sell ebooks
through the ABA's IndieCommerce program).
\14\ See, e.g., David Weir, Amazon v. Sony, et. al., in War of
the eBook Giants, BNet.com (Aug. 18, 2009), http://www.cbsnews.com/8301-505123_162-33243776/amazon-v-sony-etal-in-war-of-the-ebook-giants/?tag=bnetdomain (describing the eBook industry as ``a crowded
field,'' noting Google is one of the other ``important players in
this space,'' and Apple is expected to enter); Dan Fromer, Sony to
Unveil E-Reader With Wireless in 2 Weeks?, Business Insider (Aug.
11, 2009), http://articles.businessinsider.com/2009-08-11/tech/30085553_1_sony-reader-e-reader-wireless.
\15\ See, e.g., Jeffrey A. Trachtenberg & Geoffrey A. Fowler,
Barnes & Noble Challenges Amazon's Kindle, Wall Street Journal (July
21, 2009), available at http://online.wsj.com/article/SB124812243356966275.html.
---------------------------------------------------------------------------
3. Collusion Is Not Acceptable, Even in Response to Perceived
Anticompetitive Conduct
B&N, BAM, the ABA, the Authors Guild, and other industry
participants claim that collusive limits on retail discounting were a
necessary response to anticompetitive behavior by Amazon and, thus,
should be preserved.\16\ B&N claims these limits are necessary to avoid
``competition with a potential Amazon below-cost price-point.'' B&N at
22-23. The ABA suggests that collusive agency pricing ``corrects a
distortion in the market fostered primarily by Amazon.com.'' ABA (ATC-
0265) at 1. The Authors Guild insists that removing limits on retailer
discounting will enable Amazon to use ``predatory pricing'' to return
to a dominant or ``monopoly'' position and allow the company to charge
supracompetitive prices for e-books in the future. See, e.g., The
Authors Guild (ATC-0214) at 1-2.
---------------------------------------------------------------------------
\16\ Other comments dispute the benefits of retail price
control. As one commenter put it, Publisher Defendants ``were out-
performed by Amazon'' which, in contrast to Publisher Defendants,
``did nothing illegal.'' Phillis A. Humphrey (ATC-0250). Another
writes, ``I don't want to be forced to pay higher prices'' because
Publisher Defendants ``work together to slow the adoption of this
relatively new technology.'' Kathy Baughman (ATC-0094).
---------------------------------------------------------------------------
There is no mistaking the fear that many of the commenters have of
the prospect of competing with Amazon on price. No doubt Amazon is a
vigorous e-book competitor. In addition to aggressive pricing, it was
an early innovator in the e-book market, introducing its Kindle e-
reader more
[[Page 44278]]
than two years before B&N's Nook and Apple's iPad. Of course, low
prices, fierce rivalries, and innovation are among the core ambitions
of free markets. Contrary to the apparent views of many commenters,
``the goal of antitrust law is to use rivalry to keep prices low for
consumers' benefit. Employing antitrust law to drive prices up would
turn the Sherman Act on its head.'' Wallace v. Int'l Bus. Machine
Corp., 467 F.3d 1104, 1107 (7th Cir. 2006).
Moreover, the notion that Amazon will come to exclude competition
in e-books and monopolize the industry is highly speculative at best.
Before the collusive Apple Agency Agreements, B&N had entered the
market and taken significant share from Amazon. In addition, the e-book
industry has attracted participation from the likes of Apple,
Microsoft, Google, and Sony. The future is unclear and the path for
many industry members may be fraught with uncertainty and risk. But
certainly there is no shortage of competitive assets and capabilities
being brought to bear in the e-books industry. A purpose of the
proposed Final Judgment is to prevent entrenched industry members from
arresting via collusion the potentially huge benefits of intense
competition in an evolving market.
The United States recognizes that many of the comments reflect a
concern that a firm with the heft of Amazon may harm competition
through sustained low or predatory pricing. In the course of its
investigation, the United States examined complaints about Amazon's
alleged predatory practices and found persuasive evidence lacking. As
is alleged in the Complaint, the United States concluded, based on its
investigation and review of data from Amazon and others, that ``[f]rom
the time of its launch, Amazon's e-book distribution business has been
consistently profitable, even when substantially discounting some newly
released and bestselling titles.'' Compl. ] 30.
Some of the criticism directed at Amazon may be attributed to a
misunderstanding of the legal standard for predatory pricing. Low
prices, of course, are one of the principal goals of the antitrust
laws. Cf. Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328,
340 (1990). This is because of the unmistakable benefit to consumers
when firms cut prices. Id. ``Loss leaders,'' two-for-one specials, deep
discounting, and other aggressive price strategies are common in many
industries, including among booksellers. This is to be celebrated, not
outlawed. Unlawful ``predatory pricing,'' therefore, is something more
than prices that are ``too low.'' Antitrust law prohibits low prices
only if the price is ``below an appropriate measure of * * * cost,''
and there exists ``a dangerous probability'' that the discounter will
be able to drive out competition, raise prices, and thereby ``recoup[ ]
its investment in below-cost pricing.'' Brooke Group v. Brown and
Williamson Tobacco Corp., 509 U.S. 209, 222-24 (1993). No objector to
the proposed Final Judgment has supplied evidence that, in the dynamic
and evolving e-book industry, Amazon threatens to drive out competition
and obtain the monopoly pricing power which is the ultimate concern of
predatory pricing law. The presence and continued investment by
technology giants, multinational book publishers, and national
retailers in e-books businesses renders such a prospect highly
speculative. Of course, should Amazon or any other firm commit future
antitrust violations, the United States (as well as private parties)
will remain free to challenge that conduct.
Finally, even if there were evidence to substantiate claims of
``monopolization'' or ``predatory pricing,'' they would not be
sufficient to justify self-help in the form of collusion. When Congress
enacted the Sherman Act, it did ``not permit[] the age-old cry of
ruinous competition and competitive evils to be a defense to price
fixing,'' no matter if such practices were ``genuine or fancied
competitive abuses'' of the antitrust laws. See United States v.
Socony-Vacuum Oil, 310 U.S. 150, 221-22 (1940); see also, e.g., FTC v.
Superior Court Trial Lawyers Ass'n, 493 U.S. 411, 421-22 (1990) (``[I]t
is not our task to pass upon the social utility or political wisdom of
price-fixing agreements.''). Competitors may not ``take the law into
their own hands'' to collectively punish an economic actor whose
conduct displeases them, even if they believe that conduct to be
illegal. See FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 465 (1986)
(``That a particular practice may be unlawful is not, in itself, a
sufficient justification for collusion among competitors to prevent
it.''); Fashion Originators' Guild of Am. v. FTC, 312 U.S. 457, 467-68
(1941) (rejecting defendants' argument that their conduct ``is not
within the ban of the policies of the Sherman and Clayton Acts because
the practices * * * were reasonable and necessary to protect the
manufacturer, laborer, retailer and consumer against'' practices they
believed violated the law (internal quote omitted)); Am. Med. Ass'n v.
United States, 130 F.2d 233, 249 (D.C. Cir. 1942), aff'd 317 U.S. 519
(1943) (``Neither the fact that the conspiracy may be intended to
promote the public welfare, or that of the industry nor the fact that
it is designed to eliminate unfair, fraudulent and unlawful practices,
is sufficient to avoid the penalties of the Sherman Act.''). Thus,
whatever defendants' and commenters' perceived grievances against
Amazon or any other firm are, they are no excuse for the conduct
remedied by the proposed Final Judgment.
4. Protection From Aggressive Competition Does Not Justify Keeping
Collusive Agreements Intact
The ABA, B&N, the Authors Guild, and others contend that brick-and-
mortar booksellers require agency pricing to insulate themselves from
competition from online e-book sellers, and they accuse online
competitors of free riding on their efforts.\17\ In support of its
argument, the ABA claims that online retailers such as Amazon usurp
brick-and-mortar store ``showrooms,'' encouraging customers to browse
in physical stores but buy online. However, to the extent that free
riding occurs, it is just as likely that print book sales by online
sellers free ride on the efforts of brick-and-mortar booksellers as e-
book sales. The ABA and its members do not distinguish between print
and e-book online sales, and they offer no explanation for why e-books
allow free riding by online sellers but print books, which are
unaffected by the proposed Final Judgment, do not.
---------------------------------------------------------------------------
\17\ The ABA alleges that Amazon's ``free-riding'' has been
facilitated, in part, by ``sales tax avoidance,'' a strategy that is
unavailable to brick-and-mortar booksellers. ABA at 4. A number of
brick-and-mortar booksellers echoed the ABA's frustration with this
cost advantage; representative comments include: Gayle Shanks (ATC-
0251) and Kate Stine (ATC-0455).
---------------------------------------------------------------------------
Further, to the extent a response to ``free riding'' by online
retailers is desirable, the proposed Final Judgment provides a path for
it: Settling Defendants may compensate brick-and-mortar retailers for
e-book ``marketing or other promotional services.'' PFJ Sec. VI.A. The
CIS elaborates that this provision is intended ``to support brick-and-
mortar retailers by directly paying for promotion or marketing
efforts.'' CIS at 14. Rather than subsidizing these services with the
earnings from collusive e-book profits, Settling Defendants may pay
brick-and-mortar stores directly for marketing and promotional support.
Of course, retailers are not entitled to the continuation of a
collusive equilibrium to maintain the windfall they enjoyed under that
collusion. As noted above,
[[Page 44279]]
the antitrust laws are not intended, after all, to protect firms from
the rigors of a competitive market. See United States v. Visa, 163 F.
Supp. 2d 322, 404-05 (S.D.N.Y. 2001) (rejecting free riding and
creation of ``equal opportunity'' defenses for joint venture rules that
prohibited members' issuance of competing credit cards); see also
Section V.A.3, supra.
5. The Proposed Final Judgment Is Neither Too Regulatory Nor Too
Ambiguous for Enforcement
Comments submitted by B&N, Independent Book Publishers, and others
assert that the proposed Final Judgment is too ``regulatory'' in nature
and is overbroad. At the opposite extreme, others maintain that at
least one provision, Section VI.B, is vague and unenforceable. B&N
argues that the proposed Final Judgment converts the Department into a
``regulator of an entire industry,'' by restricting future agency
agreements and the use of MFN clauses, and by imposing enforcement
provisions. B&N at 21-22. Mistakenly relying on SBC Communications, B&N
submits that ``when the relief sought in the proposed settlement is
unrelated to the violations alleged in the complaint, that relief
should not be ordered.'' Id. at 15. B&N adds that, because these
remedies are not included in the prayer for relief in the Complaint,
they cannot be awarded. Id. at 21. In turn, the Independent Book
Publishers object that Section VI.B, which allows Settling Defendants
to negotiate retailer agreements to limit aggregate retailer discounts,
is ``[u]nworkable and [u]nenforceable.'' Independent Book Publishers at
18.
To begin with, the proposed Final Judgment does not transform the
Department into a ``regulator'' of the e-book industry, nor are its
provisions any broader than necessary to remedy the harm alleged. Far
from being ``unrelated'' to the harm alleged in the Complaint, most of
the provisions in the decree are designed to return the market to the
state of competition it enjoyed before the Apple Agency Agreements were
signed. Further, nowhere does the SBC Communications court suggest that
the Tunney Act requires a one-to-one correspondence between the
specific relief requested in a complaint and the details of the remedy
required by the consent decree. Instead, it emphasizes that a court
must ``accord deference to the government's predictions about the
efficacy of its remedies.'' SBC Commc'ns, 489 F. Supp. 2d at 17; see
also U.S. Gypsum Co., 340 U.S. at 89 (holding that relief may ``range
broadly through practices connected with acts actually found to be
illegal''). Additionally, the provisions in the decree designed to
facilitate enforcement are narrow, requiring little more than that
Settling Defendants provide their current and future contracts to the
Department, which will allow the United States to detect violations of
the decree. Such a requirement is consistent with past practice, as a
number of decrees entered in recent cases have required that contracts
be provided to the Department so that it can monitor enforcement. See,
e.g., Graftech Int'l Ltd., 2011 WL 1566781 at *3,*5 (requiring
contracts and other business documents be provided for a period of ten
years). Consent decrees approving much more burdensome enforcement
mechanisms have previously been approved by other courts. See, e.g.,
Alex. Brown & Sons, 963 F.Supp. at 237, 239, 242, 246-47 (approving a
consent decree that required monitoring of up to seventy hours of phone
conversations per week for five years, because it would help to ensure
the return of competition). The proposed Final Judgment in this matter
is no broader than the relief requested in the Complaint, which
includes a request for an injunction against future misbehavior as well
as ``further relief as may be appropriate.'' Compl. ] 104.
B&N, Independent Book Publishers, and others also contend that the
proposed Final Judgment creates ``complicated safe harbors that are
difficult to implement or administer.'' B&N at 22; see also Independent
Book Publishers at 18. The proposed Final Judgment allows Settling
Defendants to limit retailer discounting authority, up to the total
commissions a particular retailer earns from the sale of that
publisher's e-books. PFJ Sec. VI.B. B&N and other commenters expressed
concern that it will be impossible for Settling Defendants to enforce
the limits on retail discounting permitted in this Section. However,
this provision is entirely voluntary; neither Settling Defendants nor
their retailers are compelled to enter any such agreement. Should they
choose to do so, nothing in Section VI.B prohibits a Settling Defendant
from agreeing with a retailer on reporting and enforcement provisions
under which the Settling Defendant can ascertain the extent of the
retailer's discounting of its e-books. For example, audit clauses are
routinely used in contracts between publishers and retailers to enforce
pricing and similar terms. See Section V.D.5, infra (discussing
publishers' use of audit clauses to enforce its contracts with Apple).
Significantly, Section VI.B was the product of settlement discussions
between the United States and Settling Defendants. Settling Defendants
evidently believed, in entering this settlement, that they could
successfully implement this limited ``safe harbor'' for which they
negotiated.
B. Individual Responses to Detailed Comments
1. Barnes & Noble, Inc.
B&N, which represents that it is ``the largest bookseller in the
United States,'' B&N (ATC-0097) at 8, objects to the proposed Final
Judgment primarily because blocking the ability of its retail
competitors to discount is ``in B&N's economic interests,'' and entry
of the proposed Final Judgment would upset the current collusive
equilibrium. See id. at 19. In addition to the issues discussed in
Section V.A, supra, B&N objects that: (a) Section IV.B of the proposed
Final Judgment voids all of its agency contracts; (b) returning
discount authority to retailers will have a negative ``competitive
impact,'' and (c) the Complaint does not provide sufficient factual
support for the remedy.
a. The Proposed Final Judgment Does Not Void Any Third Party Contracts
B&N's assertion that the proposed Final Judgment would ``declar[e]
as null and void [its] agency contracts,'' B&N at 18, is inaccurate.
The proposed Final Judgment neither voids nor requires the breach of
any contract between a Settling Defendant and a third party. Rather, it
requires that, for any such contract that restricts the retailer's
discounting authority or contains a price MFN and remains in effect 30
days after entry of the Final Judgment, ``each Settling Defendant
shall, as soon as permitted under the agreement, take each step
required under the agreement to cause the agreement to be terminated
and not renewed or extended.'' PFJ Sec. IV.B. In other words, Settling
Defendants simply must exit those agreements as provided for by the
terms of the contracts themselves. B&N is not, then, simply a company
concerned about its contractual rights. Instead, more basically, it is
worried that it will make less money after the conspiracy than it
collected while collusion was ongoing. See B&N at 19 (stating that B&N
``enjoy(s) somewhat greater profit margins'' under the collusive agency
agreements than it ``experienced under the wholesale model.''). This
concern, that the company will lose benefits generated by collusion, is
not one that the Tunney Act directs the Court to consider. See Section
V.A.2, supra.
[[Page 44280]]
b. Returning Discounting Authority to Retailers Is Not Likely To Have a
Negative ``Competitive Impact''
B&N maintains that allowing retailer discounting will, by driving
down consumer prices, subject consumers to a variety of anticompetitive
effects. But the procompetitive consumer benefits that B&N alleges are
the result of the conspiracy are either not substantiated or are
untethered to the conspiracy. B&N does not explain how freeing
retailers to compete on price will lead to ``uncompetitive,'' rather
than competitive, pricing, and its claim that the return of retail
price competition will discourage investment is belied by the fact
that, shortly after the proposed Final Judgment was filed in this
matter, B&N was able to attract a $300 million investment from
Microsoft specifically to ``battle with Amazon and Apple in e-books.''
\18\
---------------------------------------------------------------------------
\18\ See Ingrid Lunden, Microsoft Makes $300M Investment In New
Barnes & Noble Subsidiary To Battle With Amazon And Apple In E-
books, TechCrunch (April 30, 2012), http://techcrunch.com/2012/04/30/microsoft-barnes-noble-partner-up-to-do-battle-with-amazon-and-apple-in-e-books/; Press Release, Barnes & Noble, Microsoft Form
Strategic Partnership to Advance World-Class Digital Reading
Experiences for Consumers, Microsoft News Center (April 30, 2012),
http://www.microsoft.com/en-us/news/Press/2012/Apr12/04-30CorpNews.aspx.
---------------------------------------------------------------------------
B&N also claims that ``average'' retail and wholesale prices for e-
books have declined under the current, collusively-established regime,
although it admits that the price of ``some e-books'' increased
following Publisher Defendants' collective shift to agency and the
Apple Agency Agreement price points. See B&N at 13-15. The United
States obtained evidence that demonstrated that the conspiracy led to
price increases not only in Publisher Defendants' most popular e-books,
but also for ``the balance of Publisher Defendants' e-book catalogues,
their so-called `backlists.' '' Compl. ] 93. Although B&N does not
describe the data that underlies its comments, it likely includes the
growing volume of inexpensive (and possibly free) e-books from
publishers other than Publisher Defendants, which offsets increases in
the prices of Publisher Defendants' e-books, reducing ``average''
retail e-book prices. Further, unlike the United States, B&N does not
have access to sales data from competing retailers, so its results only
address one retailer's slice of the market.\19\ However, as the CFA
observed, even with these uncertainties, B&N's own data suggests that
the collusive agreement played a role in stabilizing retail e-book
prices. CFA at 13. As the CFA points out, just as the collusive agency
agreements were taking effect in the spring of 2010, a trend of falling
e-book pricing was arrested.\20\
---------------------------------------------------------------------------
\19\ Even without access to industry data, readers noticed the
price changes and attributed them to the conspiracy. One ``avid
reader'' cites several examples of steep price hikes on books she
had purchased, observing that ``[s]ince `agency' pricing was forced
on Amazon, book prices have gone up very dramatically.'' Adrianne
Middleton (ATC-0158).
\20\ CFA at 13. The CFA also disputes claims by B&N and others
that publisher margins declined under agency. CFA observes that cost
savings ``in the range of 50% to 70%'' associated with the
production and distribution of e-books have boosted publisher
profits. CFA at 15. According to CFA, publishers ``took the money
that had been put on the table by technological change and put it in
their pockets.'' CFA at 16.
[GRAPHIC] [TIFF OMITTED] TN27JY12.000
Finally, many of the benefits that B&N attributes to collusive
pricing could be otherwise achieved and may be of questionable worth.
For instance, the company suggests higher retail prices allow it to
invest more in services, stock, and space. However, B&N's claim that it
``must meet'' e-book prices set by a price leader and cannot maintain
[[Page 44281]]
higher prices to invest in its stores, B&N at 20, casts doubt on the
value that consumers assign to non-price factors when it comes to e-
books. In addition, increased profitability is possible not only by
raising prices but by lowering costs, which B&N may be free to do
should e-book sales continue to increase in volume.\21\ The proposed
Final Judgment also allows Settling Defendants to subsidize B&N and
other brick-and-mortar retailers for the services they provide. PFJ
Sec. VI.A. Publishers need not increase retail e-book prices to
support bookstores they value; they can support them directly.
---------------------------------------------------------------------------
\21\ Indeed, cost reduction may be an option for all print
booksellers. As one former bookstore manager explains:
``[t]raditional publishing is predicated on the expectation of
waste,'' citing the routine destruction of unsold books by
bookstores. Heather Ripkey (ATC-0276) at 1. Ms. Ripkey points out
that, for e-book sales, ``there is no need to factor such extreme
waste into the equation. Id.
---------------------------------------------------------------------------
c. The Complaint Provides Sufficient Factual Support for Entry of the
Proposed Final Judgment, and Delay Will Extend Harm
B&N challenges the ``factual basis'' for a public interest finding,
and calls on the Court to ``conduct a searching review'' as part of its
public interest determination. B&N at 18. The company submits that the
proposed Final Judgment ``requires close scrutiny because of its
potential impact on the national economy and culture, including the
future of copyrighted expression * * *'' Id. at 16.
The Tunney Act does not require the Court to gather evidence to
supplement the facts alleged in the Complaint, no matter how broad an
impact the decree may have. Instead, the statute simply allows the
Court to gather additional evidence, at its discretion. See 15 U.S.C.
16(f) (``In making its determination * * * the court may--(1) take
testimony * * *'' (emphasis added)). Nor is the Court compelled to
conduct an evidentiary hearing or permit intervention. See 15 U.S.C.
16(e)(2) (``Nothing in this section shall be construed to require the
court to conduct an evidentiary hearing * * *''). This is consistent
with legislative history; as Senator Tunney explained: ``The court is
nowhere compelled to go to trial or to engage in extended proceedings
which might have the effect of vitiating the benefits of prompt and
less costly settlement through the consent decree process.'' 119 Cong.
Rec. 24,598 (1973).
In support of its position, B&N urges the Court to follow the
expansive approach taken by the United States District Court for the
District of Columbia in SBC Communications. But that case differed from
this one in the complexity of the harm alleged, the relief imposed, and
in the factual detail included in the complaint. SBC Communications
considered potential anticompetitive effects in dozens of local
markets, each including three separate product markets, arising from
the merger of two telecommunications companies. 489 F. Supp. 2d at 18-
19. The settlement under review in the Tunney Act process called for
the divestiture of ten-year leasehold interests that gave the holder
the right to use certain telecommunications fibers in 748 individual
buildings. See id. at 7. In contrast, the United States, in this case,
alleged a per se violation of the Sherman Act in a single national
market, affecting one product area. Further, the conspiracy alleged in
this matter was effectuated through the Apple Agency Agreements, the
terms of which are not in dispute.\22\ In addition, because litigation
in this matter is proceeding against the three non-settling defendants,
the United States submitted a detailed, thirty-five page complaint in
this matter, which included easily verified public events and
statements. In contrast, to support the relief requested in SBC, where
the United States had already reached settlement terms with all
parties, the United States submitted a twelve-page complaint typical of
cases where the dispute has been wholly resolved. See id. at 9. SBC did
not involve ongoing litigation or discovery. Indeed, in this case,
litigating defendants have already admitted key allegations in their
answers to the Complaint.\23\
---------------------------------------------------------------------------
\22\ As the SBC Communications court observed, the United States
``need not prove its underlying allegations in a Tunney Act
proceeding.'' 489 F. Supp. 2d at 20. Requiring it to do so ``would
fatally undermine the practice of settling cases and would violate
the intent of the Tunney Act.'' Id. (citing 15 U.S.C. 16(e)(2),
which states that the Act does not require a court to hold an
evidentiary hearing).
\23\ See, e.g., Apple Ans. at ] 62 (``Given the looming
announcement of the iPad, each publisher would have been aware that
Apple was necessarily negotiating simultaneously with numerous
publishers and was attempting to develop an approach that would
attract a sufficient number of publishers in total to warrant
Apple's entry.''); Penguin Ans. at 33-34 (``Penguin admits that
Penguin Group CEO John Makinson on June 16, 2009 attended a social
dinner at Picholine along with the CEO of Random House, as well as
the CEOs of Hachette, Harper Collins, and Simon & Schuster--but not
the CEO of Macmillian. While, in addition to purely social matters,
general book industry issues and trends were discussed at high-
levels of generality, including the growth of eBooks and Amazon's
role therein, Makinson did so pursuant to antitrust legal advice * *
*''); Macmillan Ans. at ] 72 (``* * * admits that during December
2009 and January 2010, Mr. Sargent placed at least seven calls to
the CEOs of other Publisher Defendants, five of which lasted no more
than twenty seconds.'').
---------------------------------------------------------------------------
Moreover, the ``impact'' of the proposed Final Judgment will be
limited to restoring competitive conditions that prevailed before
collusion ensued--only two years ago. Under these circumstances,
detailed fact finding is likely not needed to evaluate the probable
effects of the entry of the proposed Final Judgment. Further, delaying
entry of the proposed Final Judgment to gather additional factual
support will necessarily delay the beneficial impact of its provisions.
In SBC, the United States moved for Entry of the Final Judgment on
April 5, 2006, but the decree was not entered by the court for nearly a
year, on March 29, 2007. See SBC Commc'ns, 489 F. Supp. 2d at 8, 24.
The same delay of entry of the Final Judgment in this case would exceed
the period the Court has reserved for litigation with respect to the
non-settling defendants. Even a much shorter delay may threaten to
disrupt the discovery process for the parties that continue to
litigate. Any extension of the collusion that already has persisted for
two years is unwarranted, and should be avoided.
2. Consumer Federation of America
The CFA is the only consumer organization that submitted a comment.
It wrote in support of the proposed Final Judgment. The CFA is an
association of almost 300 non-profit public interest groups. It
frequently is called upon to advise on Internet and digital product
issues. CFA (ATC-0775) at 1. The CFA's analysis: (a) Debunks the
claimed procompetitive benefits of collusive pricing; and (b) concludes
the proposed Final Judgment is not overbroad.
a. CFA Explains How Collusive Agency Pricing Harms Consumers
The CFA disputes the ``[f]airytale'' that collusive agency pricing
produced benefits for consumers, reasoning that: (a) Collusion on price
was not necessary to attract entry; (b) if consumers valued services
provided by brick-and-mortar booksellers, they would be willing to pay
for those services; and (c) most such benefits are otherwise available.
First, the CFA observes that the e-book ``space'' experienced
significant entry ``before and after the advent of the cartel pricing
model.'' Id. at 16. The CFA points out that B&N committed to entry
before Publisher Defendants and Apple entered into agency contracts, no
evidence suggests Apple would have withheld the iPad in the absence of
collusion, and ``[w]e doubt that Microsoft will now exit the e-book
market, or cancel its plans to offer a
[[Page 44282]]
tablet'' should collusive pricing end. Id. at 16.
Second, the CFA questions the ``carefully concocted, self-serving
argument'' that the physical book browsing allowed by brick-and-mortar
bookstores is essential to the ``literary ecosystem'' when consumers
``are unwilling to pay for'' that experience. Id. at 3-4. According to
the CFA, accepting ``cartel agency pricing'' in order to maintain
physical bookstores improperly allows ``[c]olluding publishers, not the
marketplace [to] decide what is good for consumers.'' Id. at 4.
Finally, the CFA points out that many of the benefits of bookstores
can be realized digitally. Browsing, for instance, may be more
effective online, where search engines and algorithms that personalize
recommendations may make readers more inclined to try new authors and
titles. Id. at 21. Benefits like these may, in fact, be lost if
collusion, not competition, guides the market. In sum, the CFA
concludes, ``[i]f publishers can dictate which business models flourish
and which fail, consumers and authors will be worse off,'' because such
a practice confers no advantage on the consumer, and might discourage
procompetitive developments in the digital realm. Id. at 19.
b. The Remedy Appropriately Addresses the Collusion
The CFA rejects the assertions of B&N that the proposed Final
Judgment imposes ``an unprecedented, draconian remedy that illegally
and unnecessarily interrupts routine business practices * * *'' Id. at
11. As the CFA explains, the proposed remedy is consistent ``with
normal antitrust practices'' and is less intrusive than remedies
imposed to address antitrust concerns in related industries. Id. at 10-
11. The CFA also articulates the importance of prohibiting Settling
Defendants from restricting retailer discounting of e-books for two
years: ``Without a moratorium on agency contracts for the colluding
publishers, the publishers could tear up the offending contracts and
immediately sign identical contracts, claiming to act individually to
adopt terms and conditions that were worked out by the cartel. Such a
remedy would make a mockery of antitrust law and enforcement.'' Id. at
9.\24\ The United States shares this concern.
---------------------------------------------------------------------------
\24\ The CFA also notes that the two-year period is shorter than
antitrust agencies normally impose to allow a ``market to heal.''
CFA at 8. But a few citizen comments took the contrary position that
three to six months would provide a sufficient ``competitive
reset.'' See, e.g., Catherine Flynn Devlin (ATC-0084).
The United States determined that too short a period of time,
such as three to six months, would not allow e-book retailers to
stagger sufficiently the termination and renegotiation of their
contracts with publishers. Allowing negotiations with multiple
publishers at the same time risks continuing the collusion. See CIS
at 10 (``Additionally, a retailer can stagger the termination dates
of its contracts to ensure that it is negotiating with only one
Settling Defendant at a time to avoid joint conduct that could lead
to a return to the collusively established previous outcome.'').
Also, if the cooling-off time period were too short, Settling
Defendants might simply choose to forgo the sale of e-books through
significant retailers in that short period of time, awaiting the
opportunity to return to the collusively established agency terms.
---------------------------------------------------------------------------
3. Independent Book Publishers
The ``Independent Book Publishers,'' a group of mid-sized trade
publishers consisting of Abrams Books, Chronicle Books, Grove/Atlantic,
Inc., Chicago Review Press, Inc., New Directions Publishing Corp., W.W.
Norton & Company, Perseus Books Group, The Rowman & Littlefield
Publishing Group, Inc., and Workman Publishing, submitted a joint
comment.\25\ They object to the proposed Final Judgment because they
``benefitted significantly from the fact that the Big Six publishers
were able to adopt agency pricing arrangements with Amazon.''
Independent Book Publishers (ATC-0727) at 2. However, to the extent the
Independent Book Publishers received benefits from Settling Defendants'
conspiracy to raise e-book prices, those benefits were fruits of the
conspiracy and that loss is not relevant in a Tunney Act determination.
See 15 U.S.C. 16(e)(1)(B).
\25\ These nine publishers also complain that the United States
did not contact them during its investigation. Independent Book
Publishers (ATC-0727) at 3, 10. However, the United States reached
out to a number of other publishers during the course of its
investigation, and routinely attempts not to burden industry
participants with demands for duplicative or cumulative information.
In any event, industry participants that feel they have relevant
information are free to contact the United States to share that
information. When, as was the case here, the existence of an
antitrust investigation is disclosed publicly, interested
individuals frequently reach out to the United States to share their
views and information. See, e.g., Grant Gross, DOJ investigating
ebook pricing, official says, Macworld (Dec. 7, 2011), http://www.macworld.com/article/1164113/doj_investigating_ebook_pricing.html.
---------------------------------------------------------------------------
The Independent Book Publishers do not claim to be concerned about
their current e-book contracts with any retailer, as they are not
agency agreements. They instead take up the cause of their competitors,
the three Settling Defendants, noting that agency agreements are not
``inherently unlawful,'' and complaining that ``the proposed
settlements * * * would effectively ban the use of the agency model by
Settling Defendants for two years.'' Independent Book Publishers at 13.
They believe it would be more appropriate to ``void the existing agency
agreements'' and allow Settling Defendants to enter into ``new agency
agreements in the absence of collusion.'' Id. at 14. The Independent
Book Publishers concede that the proposed Final Judgment does not
dictate a business model, but only prohibits agreements that do not
allow the retailer to discount prices (subject to the option of
contracting to limit discounts to commissions earned over the course of
a year). They say that this takes ``true agency sales agreement[s]''
off the table for two years for Settling Defendants. Id. at 14.
As discussed above, the United States determined that terminating
existing agency agreements, without imposing limited restrictions on
the contracts that would replace them, would allow Settling Defendants
to immediately return to the same collusively-established contractual
terms. Such an outcome would fail to eradicate the anticompetitive
effects of the collusion. Courts are ``empowered to fashion appropriate
restraints on [the trangressor's] future activities both to avoid a
recurrence of the violation and to eliminate its consequences.'' Nat'l
Soc'y of Prof'l Eng'rs, 435 U.S. at 697; see also Zenith Radio Corp.,
395 U.S. at 132-33 (upholding an injunction against the conspiracy to
block Zenith's entry into worldwide markets that were not at issue in
the litigation, after finding that defendants conspired to block Zenith
from entering the Canadian market). While agency agreements are not
inherently illegal, collusive agreements that prevent price competition
are, and the settlement is designed to unwind the effects of agency
contracts stemming from a collusive agreement.
4. American Booksellers Association and Members
The ABA submitted a detailed comment objecting to the restrictions
on agency pricing in the proposed Final Judgment as well as other
issues, most of which were discussed above.\26\ The ABA raised one
unique complaint about the impact of the proposed Final Judgment on
agreements between ABA member organization IndieCommerce
[[Page 44283]]
and Google, which were negotiated after April 2010. ABA (ATC-0265) at
5. The ABA claims that these agreements ``occurred long after * * * the
dates at issue in the civil complaint,'' and were not the product of
collusion. Id. However, the proposed Final Judgment, which addresses
only contracts in which Settling Defendants are parties, has no direct
or immediate impact on arrangements between ABA member booksellers and
Google. Of course, it is certainly possible that Google may seek to
modify the terms of its agreements with the bookstores to reflect its
new authority to discount the books of the three Settling
Defendants.\27\ See also Section V.A.1, supra.
---------------------------------------------------------------------------
\26\ The ABA also solicited its member booksellers to submit
comments in opposition to the proposed Final Judgment, outlining its
objections. As a result, the United States received approximately
200 comments from bookstores, which largely mirrored the ABA's
arguments. Representative examples include Susan Novotny (ATC-0213),
Kenneth J. Vinstra (ATC-0216), and Barbara Peters (ATC-0295).
\27\ Prior to the filing of the Complaint, Google announced that
it was terminating its reseller program in 2013 since it had ``not
gained the traction'' Google had hoped for and because it was
``clear that the reseller program has not met the needs of many
readers or booksellers.'' Scott Dougall, A Change to Our Retailer
Partner Program: eBooks Resellers to Wind Down Next Year, Google
Book Search (Apr. 5, 2012), http://booksearch.blogspot.com/2012/04/change-to-our-retailer-partner-program.html.
---------------------------------------------------------------------------
5. Authors Guild and Members
The Authors Guild, representing a collection of writers and
literary agents, submitted a comment that addressed the impact of
removing collusive pricing restrictions on price competition from
Amazon. The Authors Guild claims the settlement will ``allow e-book
vendors to routinely sell e-books at below cost, so long as the vendors
don't lose money over the publisher's entire list of e-books over the
course of a year.'' Authors Guild (ATC-0214) at 1. The Authors Guild
also asked its members to submit comments, adding that the settlement
``needlessly imperils brick-and-mortar bookstores while it backs an
online monopolist and discourages competition among e-book vendors and
e-book device developers.'' \28\ Many authors and agents took up the
torch, submitting comments that paraphrased the arguments laid out by
the Authors Guild or, in some cases, simply attached the Authors
Guild's email, verbatim.\29\
---------------------------------------------------------------------------
\28\ See The Justice Department's E-Book Proposal Needlessly
Imperils Bookstores; How to Weigh In, The Authors Guild (June 4,
2012), http://blog.authorsguild7.org/2012/06/04/the-justice-departments-e-book-proposal-needlessly-imperils-bookstores-how-to-weigh-in/; see also Last Call. Tell DOJ: Don't help Amazon target
booksellers, The Authors Guild (June 22, 2012), http://authorsguild.org/advocacy/articles/last-call-tell-the-justice-department.html.
\29\ Representative comments include: T.J. Stiles (ATC-0177),
Kristy Athens (ATC-0465), and Mirka Knaster (ATC-0462).
---------------------------------------------------------------------------
The Authors Guild's primary argument, that collusion was a
justified response to competition from low-priced rivals, and that
collusive pricing is necessary to protect brick-and-mortar bookstores,
is addressed in Section V.A.3, supra. Likewise, the Authors Guild's
concerns with Section VI.B of the proposed Final Judgment, which
permits (but does not require) Settling Defendants to limit retailer
discounting to the aggregate commissions earned by the retailer, are
addressed in Section V.A.5, supra. The Authors Guild and its members,
however, make two unique observations: (a) Books are important cultural
products and should be protected by price controls despite the
antitrust laws; and (b) agency pricing is necessary to protect quality
and diversity in books. But, as discussed below, some Guild members
submitted comments disagreeing with their association's position, and
other self-published authors see competition by e-book retailers as an
opportunity to reach an audience without interference by traditional
publishers.
a. The Sherman Act Applies to the Publishing Industry
While the Authors Guild did not make this argument directly, many
of its members stated or implied that collusion or price fixing should
be permitted in the publishing industry. They make the point that books
play an important cultural role in our society. From there, these
writers leap to the conclusion that a competitive marketplace cannot
properly attract the investment required for books to survive. They
posit that, absent an agreement that stops retailers from discounting
e-books, declining revenues would undermine the perceived value of all
books, reduce author royalties, and put booksellers out of business. A
comment typical of this perspective suggests ``fixed pricing on books''
should be allowed ``to protect their value.'' Rebecca Gardner (ATC-
0077) at 1. A literary agent likewise observed that price-fixing models
are being adopted ``[n]early across the board'' in other countries, in
response to online retail discounters. Molly Friedrich (ATC-0232) at 2.
However, an argument that a particular industry or market deserves a
blanket exemption from the antitrust laws should be directed to
Congress, rather than the United States or the Court. Otherwise, all
industries are subject to ``a legislative judgment that ultimately
competition will produce not only lower prices, but also better goods
and services.'' Nat'l Soc'y of Prof'l Eng'rs, 435 U.S. at 695.
b. There Is No Support for the Notion That Retail Discounts Will Reduce
Quality or Diversity in Publishing
Many authors and agents complained that removing the ability of
Settling Defendants to prohibit discounting would dissuade or prevent
publishers from investing in ``quality'' books, or limit the variety of
books likely to be published. Many comments state or imply that
Publisher Defendants must stand in the place of consumers to preserve
quality. Such a paternalistic view is inconsistent with the intent of
the antitrust laws, which reflect a legislative decision to allow
competition to decide what the market does and does not value.\30\ A
market fettered by a collusive agreement cannot properly assign such a
value. These comments may also reflect a misunderstanding of the
discounting authority granted by the proposed Final Judgment, which
requires only that Settling Defendants, for two years, give retailers
the authority to compete away their own margins. PFJ Sec. Sec. V.A,
VI.B. The proposed Final Judgment, however, does not otherwise limit
how e-books are sold. Publishers would be free, for example, to
negotiate a wholesale price with retailers, and require retailers to
pay them the same amount per e-book sold, regardless of the discount
applied to the sale to the consumer, just as they did prior to the
collusive agreements. Thus, the author can be paid out of higher
wholesale price, while consumers buy more of the author's books at a
lower retail price.
---------------------------------------------------------------------------
\30\ Many authors and readers expressed skepticism of the
capacity or willingness of Publisher Defendants to protect
``quality'' of publications. As a retired college librarian put it,
``[t]o suggest that only the Big Six are arbiters of quality is
belied by much of what they have published,'' citing the absence of
copy editing, long delays in publication, and a short shelf life for
most titles. Eric Welch (ATC-0021) at 2. One reader observed
anecdotally that Publisher Defendants recently granted an advance to
reality television personality ``Snooki'' for a ghost-written book,
implying themove was in response to commercial potential rather than
literary quality. Cathy Greiner (ATC-0073).
---------------------------------------------------------------------------
c. The Authors Guild's Opposition to the Settlement Is Not Universal
It is worth noting that members of the Authors Guild also wrote in
support of the proposed Final Judgment and against the Authors Guild's
position. Joe Konrath, author of 46 books, clarifies that letter-
writing campaigns by the Authors Guild and the Authors Representatives
``did not solicit the views of their members, that they in no way speak
on behalf of all or even most of their members.'' Konrath (ATC-0144) at
1. He observes that agency pricing has slowed global growth and hurt
[[Page 44284]]
consumers and writers. Lee Goldberg, a published author and member of
the Authors Guild writes, ``I believe that it's detrimental to authors
and readers, as well as to the establishment of a free and healthy
marketplace, for publishers to collude with Apple to create
artificially inflated prices for ebooks.'' (ATC-0553). Author Laura
Resnick writes, ``breaking the law is not a reasonable reaction to
being faced with aggressive business competition.'' (ATC-0801).
d. Self-Published Authors Disagree That Collusive Agency Pricing Is
Necessary To Protect Authors' Interests
Many comments from self-published authors, in particular, expressed
appreciation that Amazon opened a path to publication that was immune
from Publisher Defendants' hegemony. David Gaughran, writing on behalf
of 186 self-published co-signors, writes that ``Amazon is creating, for
the first time, real competition in publishing'' by charting a ``viable
path'' for self-published books. Gaughran (ATC-0125) at 1, 3. Mr.
Gaughran observes that ``[t]he kind of disruption caused by the
Internet is often messy,'' and those who ``do quite well under the
status quo'' naturally resist change. Id. at 2. He compares publishers
and literary agents to ``[a]ll kinds of middlemen,'' which have ``gone
from being indispensible to optional'' with the rise of the Internet.
Id. Writing in support of the proposed Final Judgment, Mr. Gaughran
confirms that self-published writers, in particular, see opportunities
in a market not subject to collusive pricing.
C. Additional Responses To Comments With Unique Perspectives
1. Brian DeFiore, Literary Agent
Many literary agencies submitted comments in opposition to the
proposed Final Judgment, but Mr. DeFiore's submission raised a unique
issue.\31\ He argues that, by removing limits on retailer discounting,
the proposed Final Judgment will allow retailers to apply discounts
disproportionately, reducing the retail price of some titles much more
than others. He argues that the uneven price cuts undermine the ability
of authors to maximize their royalty income and may impact the value of
individual author's rights in future books, foreign markets, film, and
television. DeFiore (ATC-0242) at 3. However, to the extent that author
royalties were buoyed by collusive pricing, that windfall should not be
protected at the expense of thwarting the collusion. See Section V.A.2,
supra.
---------------------------------------------------------------------------
\31\ Simon Lipskar's comment (ATC-0807) is the most detailed of
the many comments submitted by literary agents and agencies, but it
did not raise unique issues. A less detailed, but typical, comment
was submitted by the Association of Author's Representatives (ATC-
0003).
---------------------------------------------------------------------------
The adequacy of the Final Judgment should be evaluated in light of
the antitrust violations alleged in the Complaint, SBC Commc'ns, 489 F.
Supp. 2d at 14-15, and those allegations explicitly address the
contractual relationships between Settling Defendants and retailers.
Authors have independent contracts with Settling Defendants that govern
their intellectual property licenses, and those agreements are not
discussed in the Complaint or addressed by the proposed Final Judgment.
Thus, all of the intellectual property rights of authors remain subject
to market competition. To the extent Mr. DeFiore's complaint reflects
dissatisfaction with the state of that competition, it is not relevant
to the proposed Final Judgment.
2. Bob Kohn, CEO of Royalty Share
Copyright attorney and CEO of RoyaltyShare, Bob Kohn, submitted a
lengthy comment that focused largely on his criticisms of the
Complaint. Kohn (ATC-0143). Mr. Kohn offers the Court his views of the
proper standard it should employ in ruling on a motion to dismiss, even
though none of the settling or non-settling defendants (each of which
is represented by highly experienced and sophisticated counsel) chose
to move to dismiss the Complaint. Similarly, Mr. Kohn suggests a series
of dispositive motions that the Court should grant in favor of the
defendants, although he does not indicate whether defendants themselves
contemplate such motions or explain why the Court should substitute Mr.
Kohn's litigation judgments for those of defendants' counsel. Mr.
Kohn's determinations that ``The Complaint Alleges the Wrong Relevant
Market,'' or ``Collective Action by Competitors to Fix Prices is Not
Always Illegal,'' id. at 20, 21, reflect a misunderstanding of the role
that public comments play in the Court's Tunney Act inquiry. For
example, seeing corollaries between this case, copyright law, and the
music industry, Mr. Kohn concludes that the proposed Final Judgment is
not in the public interest because the ``factual allegations in the
Complaint are plausibly explained by lawful behavior.'' Id. at 12.
However, the Complaint sets forth in considerable detail the basis for
a finding that the defendants have engaged in per se unlawful conduct.
Defendants are, of course, free to dispute that evidence just as they
are entitled to settle with the government. It would hardly be in the
public interest to exclude settlements of antitrust cases whenever a
member of the public asserts that there are possible ``plausible''
lawful explanations for the defendants' behavior. And it is difficult
to see how the Court could reach the same conclusions as Mr. Kohn
without the benefit of a full-blown, lengthy and expensive trial, thus
substantially undercutting much of the benefit of the settlements. It
is a misreading of the Tunney Act and the role of public comments to
suggest that either the government or private parties should be so
severely constricted in settling antitrust cases. Microsoft, 56. F.3d
at 1459.
Mr. Kohn also takes issue with the standard of review articulated
in the CIS for a Tunney Act determination. Mr. Kohn submits that, to
find a settlement only ``within the reaches'' of the public interest is
inconsistent with the text of the Tunney Act, as amended in 2004. Kohn
at 16. He maintains this argument though the same standard was applied
in this District as recently as last year in KeySpan Corp.,763 F. Supp.
2d at 637. Kohn at 16. Further, the court in SBC Communications
thoroughly analyzed the legislative intent behind the 2004 amendments
and concluded that a settlement should be approved if it lies ``within
the reaches of the public interest.'' 489 F. Supp. 2d at 17.
Mr. Kohn also discusses language added to the Tunney Act in 2004
that requires the court to consider the impact of entry of the decree
``upon competition in the relevant market or markets.'' Kohn at 16
(emphasis omitted). However, the legislative history of that amendment
does not support Mr. Kohn's argument that the change was designed to
expand the court's role in Tunney Act review. Instead, it indicates the
opposite, that the change was intended only to focus review on the
competitive impact of ``the judgment, rather than extraneous factors
irrelevant to * * * antitrust enforcement.'' 150 Cong Rec S 3610, *3618
(statement of Senator Kohl). Accordingly, ``the 2004 amendments have
left in place the [D.C.] Circuit's holding that this Court cannot look
beyond the complaint in making the public interest determination,
unless [a] complaint is drafted so narrowly as to make a mockery of
judicial power.'' SBC Comm'cs, 489 F. Supp. 2d at 15.
3. Steerads, Inc.
Steerads, Inc. (``Steerads'') is a Canadian digital advertising
corporation based in Montreal, Quebec.\32\ Steerads
[[Page 44285]]
concludes that the terms of the proposed Final Judgment are ``clear and
complete, thus enforceable.'' Steerads (ATC-0374) at 1. The company
requests, though, that the United States ``insist on the inclusion of a
prima facie provision'' in the proposed Final Judgment in order to
``[e]ase[] recovery of treble damages'' by private litigants. Id. at 3.
Steerads, however, misreads the statute, which allows the use of a
``final judgment or decree'' as prima facie evidence in other
proceedings, but not if the ``consent judgment or decree[ ] [is]
entered before any testimony has been taken.'' 15 U.S.C. 16(a). Because
no testimony has been taken in this litigation, the proposed Final
Judgment would not constitute prima facie evidence in any private
litigation, regardless of how the decree is worded. Even if that were
not the case, the Supreme Court has long endorsed the value of consent
judgments in cases where there is no finding of liability, because they
avoid the costs and delays associated with litigation.\33\
---------------------------------------------------------------------------
\32\ See STEER>ads.com, http://www.steerads.com/; Steerads (ATC-
0374) at 4.
\33\ See Swift & Co. v. United States, 276 U.S. 311, 327 (1928)
(refusing to vacate injunctive relief in consent judgment that
contained recitals in which defendants asserted their innocence);
United States v. Armour and Co., 402 U.S. 673, 676, 681 (1971)
(interpreting consent decree in which defendants had denied
liability for the allegations raised in the complaint); see also 18A
Charles Alan Wright & Arthur R. Miller, et al., Federal Practice and
Procedure Sec. 4443, (2d ed. 2002) (``central characteristic of a
consent judgment is that the court has not actually resolved the
substance of the issues presented'').
---------------------------------------------------------------------------
4. National Association of College Stores
The National Association of College Stores (``NACS'') expressed
concern that the Proposed Final Judgment will apply to ``the entire e-
book universe'' including ``e-textbooks.'' NACS (ATC-0845) at 7-8. NACS
claims this broad application will injure third parties, including
textbook publishers and textbook retailers, which would be barred from
reaping the potential procompetitive benefits they might realize from
the use of agency pricing. Id. at 9-10. NACS claims the Complaint did
not identify harm arising in the e-textbook market, so the Final
Judgment should be modified to exclude e-textbooks from the prohibition
of limits on retail discounting in the decree. Id. at 11-12. However,
it was not necessary to expressly exclude e-textbooks from the proposed
Final Judgment because none of the Settling Defendants sell e-
textbooks, and the Complaint already makes it clear that ``e-books'' in
the context of this case does not encompass ``[n]on-trade e-books
includ[ing] * * * academic textbooks * * *.'' Compl. ] 27 n.1; see also
Compl. ] 99.
5. American Specialty Toy Retailing Association
The American Specialty Toy Retailing Association (``ASTRA'') writes
that the proposed Final Judgment will have a chilling effect on the use
of agency pricing in other markets. It reasons that the decree ``could
create an environment in which manufacturers are uncertain about the
legality of an important pro[]competitive pricing policy.'' ASTRA (ATC-
0228) at 1. However, the proposed Final Judgment is limited to the
three Settling Defendants, none of which sells toys. Further, because
the CIS expressly states that agency pricing is permissible when
unpaired with anticompetitive conduct, there seems to be no plausible
risk of confusion.
D. Apple, Inc.
Apple, a non-settling defendant and party to the conspiracy
described in the Complaint, opposes Court entry of the decree. Apple
complains that the proposed Final Judgment: (1) Treats Apple unfairly;
(2) ``seeks to impose a business model,'' rather than letting market
forces play out; and (3) ``will enable the retrenchment of Amazon's e-
book monopoly.'' Apple (ATC-0703) at 1, 7. While much of what Apple
offers in its comment merely echoes the same points other commenters
have made and should be rejected for the reasons noted above, the
United States offers a detailed response to Apple because of its
central role in the events leading to the underlying enforcement
action. As set forth below, Apple's protests are based on factual
errors and on an unsound view of Tunney Act jurisprudence.
1. The Proposed Final Judgment Reasonably Requires the Termination of
the Apple Agency Agreements
Apple argues that it has been improperly ``singled out'' for
``uniquely punitive restrictions on its ability to negotiate
agreements.'' Id. at 2. The requirement that the Apple Agency
Agreements be terminated is reasonable, though, given the role of those
agreements in cementing the terms of the conspiracy alleged. Further,
stripped of Apple's rhetoric, there are only two substantive
distinctions between Settling Defendants' required conduct as to Apple
(governed by Section IV.A) and their required conduct as to all other
e-book retailers (governed by Section IV.B), and those distinctions are
both modest and necessary.
The agency agreements between Apple and Settling Defendants must be
terminated within seven days of entry of the proposed Final Judgment,
while Settling Defendants have thirty days to ``take each step
required'' to terminate agreements with other retailers that include
prohibited terms. See PFJ Sec. Sec. IV.A, IV.B. However, as the
Complaint alleges, the Apple Agency Agreements did not arise from
bilateral negotiations between a retailer and a number of publishers,
but from a conspiracy encompassing Apple and Publisher Defendants.
Apple alone among e-book retailers was at the bargaining table when
these collusive agency contracts were agreed to. Further, the Apple
Agency Agreements also require immediate termination because they form
the bedrock of the conspiracy and restrain trade directly. See, e.g.,
Paramount Pictures, 334 U.S. at 149 (ordering the termination of
contracts used in collusion); Nat'l Lead Co., 332 U.S. at 328
(upholding termination of patent cross licenses that allowed the
patents to be ``forged into instruments of domination of an entire
industry.'').
In addition, Apple's claim that it ``will have to quickly negotiate
new agreements with these publishers under a dark cloud of uncertainty
in just seven days,'' Apple at 5, ignores that more than three months
have already passed since the proposed Final Judgment was filed, during
which time Apple has been free to pursue its negotiations with Settling
Defendants. Indeed, even under Apple's existing contracts with each
Settling Defendants, each publisher has rights to terminate its own
agreement. Likewise, Apple too has the right to terminate its agreement
with each Settling Defendant on thirty to sixty days' notice.\34\ Both
Apple and Settling Defendants have been free even to execute new
agreements during this period, so long as such agreements comply with
the proposed Final Judgment. It is, in fact, quite typical that parties
to a proposed Final Judgment execute their provisions or prepare to do
so prior to entry of the decree.\35\
---------------------------------------------------------------------------
\34\ For instance, Apple's agreement with Hachette, signed Jan.
24, 2010, reads: `` `Term' means the period beginning on the
Effective Date and continuing for one (1) year, and renewing for
one-month successive periods unless * * * terminated at any time
after the first year period by either Party upon advance written
notice of not less than thirty (30) days.'' EBOOK AGENCY
DISTRIBUTION AGREEMENT, Sec. 1(m), APPLETX00018481 at -18482
(emphasis added). This was the case when the proposed Final Judgment
was being negotiated (and the United States has no reason to believe
this has changed).
\35\ For example, in United States v. Graftech Int'l Ltd.,
GrafTech implemented, prior to entry of the decree, a requirement
that it execute new contracts with its supplier. See GrafTech, 2011
WL 1566781 at *2 (requiring that ``[d]efendants shall not consummate
the Merger until the Supply Agreements have been modified in a
manner consistent with this Final Judgment.''). Divestitures
required for consummation of proposed mergers are also commonly
executed and approved by the United States prior to entry of the
Final Judgment.
---------------------------------------------------------------------------
[[Page 44286]]
2. The Proposed Final Judgment Does Not ``Impose a Business Model''
Apple asserts twice in a single page that the proposed Final
Judgment would ``dictate business models.'' Apple at 7; see also id. at
1 (``impose a business model''). Apple fails, however, to explain what
business model the proposed Final Judgment would dictate. That is
because the proposed Final Judgment does nothing of the sort. Apart
from the specific and limited proscriptions necessary to ensure the
effectiveness of the consent decree, the proposed Final Judgment leaves
open all possible legal business arrangements. Indeed, even Apple
recognizes that ``[t]he Proposed Judgment modifies only two terms in
Apple's agreements with the Settling Defendants--the MFN and Apple's
pricing discretion under the agency agreement.'' Id. at 4.
To the extent the proposed Final Judgment requires changes to the
business relationship between retailers such as Apple and Settling
Defendants, it ensures that retailers have more flexibility, not less.
Apple's stated position on this point is that ``eBook retailers such as
Apple and Barnes & Noble should be free to continue with the agency
model without Government-mandated changes.'' Id. at 3. They are indeed
free to do so. Nothing in the proposed Final Judgment would force Apple
or B&N to exercise discounting authority--they are free to carry out
their own businesses exactly as before. What they may not do is
continue to rely on a conspiracy to restrain their competitors.
3. The Proposed Final Judgment Will Help To Restore Competition, Not
End It
Apple also insists that the proposed Final Judgment ``puts Apple,
and every other eBook distributor [except Amazon], in peril.'' Apple at
7. This is so, Apple claims repeatedly, because the proposed Final
Judgment will ``allow an eBook agent a nearly unfettered ability to
discount a Settling Defendant's title.'' Id. at 2, 6. That is, Apple
objects that the goal of the conspiracy--to raise e-book prices by
wresting discount authority from retailers--will be undone by the
proposed Final Judgment, at least with respect to Settling Defendants.
Under such conditions, Apple worries, some ``retailers * * * may be
unable to continue to do business,'' id. at 2, ``dramatic and
irreversible'' consequences may limit innovation and diversity, id. at
3, and Amazon will be able to ``charge monopoly prices into
perpetuity.'' Id. at 4.
First, Apple is not entitled to retain the benefits of any
collusive agreement, much less one it participated in directly. As has
been noted throughout, it is black letter law that that the Sherman Act
was ``enacted for `the protection of competition, not competitors.'''
Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 767 n.14
(1984) (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S.
477, 488 (1977) (quoting Brown Shoe Co., 370 U.S. at 320)). Indeed, the
Supreme Court has expressly recognized that the type of ``robust
competition'' protected by the Sherman Act could well expose individual
competitors to commercial harm. Copperweld Corp., 467 U.S. at 767-68.
If the proposed Final Judgment were expected to lead to a more intense
competitive environment, that would be cause to embrace the proposed
Final Judgment, not reject it. The same competitive forces that would
pressure retailers would benefit consumers.
Further, the Tunney Act is not designed to be a weapon that is
wielded by competitors seeking to forestall competition. The Act
directs the Court to consider the impact of a proposed decree not on
the participants in the anticompetitive conduct, but on those
``alleging specific injury from the violations set forth in the
complaint.'' 15 U.S.C. 16(e)(1)(B); see also Int'l Bus. Machines Corp.,
163 F.3d at 740-42 (finding termination of a decree was in ``the public
interest,'' despite competitor objections, because ``[t]he purpose of
the [Sherman] Act is not to protect businesses from the working of the
market; it is to protect the public from the failure of the market.''
(quoting Spectrum Sports, Inc., 506 U.S. at 458). As neither the
antitrust laws nor the Tunney Act purport to remedy the loss of ill-
gotten gains, Apple's complaints need not be considered by the Court.
Second, Apple's claim, that the settlements will result in imminent
retail exitings and lessened industry innovation, is not supported by
any evidence. In fact, what the evidence does show, is to the contrary.
As noted above, since the proposed Final Judgment was filed, Microsoft
has made a significant investment in the industry. See Section II,
footnote 6, supra. The investment is likely a boon to Apple's largest
brick-and-mortar retail competitor, B&N. See Section V.B.1.b, footnote
18, supra. Google, too, rather than retiring from the e-book field,
recently has announced a new investment in a tablet computer intended
to promote its own e-book sales, through GooglePlay. See Section II,
footnote 7, supra.
Third, like other retailers with an interest in high consumer
prices and protected distributor margins, Apple makes the argument that
the ability to compete on price ``will enable Amazon to charge monopoly
prices into perpetuity.'' Apple at 4. That argument assumes, without
support, that Amazon could or would exercise such market power, even in
the face of significant share erosion, which was already significant
prior to Apple's entry. Further, the entire conspiracy alleged here
was, for Publisher Defendants, about increasing the retail price of e-
books. As the Complaint alleges repeatedly, the shared goal of
Publisher Defendants was to ``act collectively to force up Amazon's
retail prices.'' Compl. ] 37. Publisher Defendants would have welcomed
monopoly-like pricing with open arms; what they feared was the exact
opposite--that the Amazon-led $9.99 price would stick, to the benefit
of consumers and the perceived detriment of Publisher Defendants.\36\
See also Section V.A.3, supra. The proposed Final Judgment will, of
course, do nothing to undermine existing law prohibiting exclusionary
conduct.
---------------------------------------------------------------------------
\36\ As Steve Jobs said, ``the customer pays a little more, but
that's what you want anyway.'' Comp. ] 6.
---------------------------------------------------------------------------
4. Apple Misstates the Standard of Review Under the Tunney Act
Apple also argues that the proposed Final Judgment ``ignores an
important rule of law'' that a remedy must be ``directly related to the
violations alleged in the Complaint.'' Apple at 6 (citing SBC
Communications). But SBC Communications says no such thing. Instead,
that court made clear that ``[t]he government need not prove that the
settlements will perfectly remedy the alleged antitrust harms; it need
only provide a factual basis for concluding that the settlements are
reasonably adequate remedies for the alleged harms.'' SBC Commc'ns, 489
F. Supp. 2d at 17. Furthermore, a court ``may not require that the
remedies perfectly match the alleged violations.'' Instead, the court
must defer ``to the government's predictions about the efficacy of its
remedies.'' Id. Indeed, Apple's interpretation would suggest that a
consent decree must be more narrowly tailored than judgments entered
after trial, which often include much broader relief. See, e.g., U.S.
Gypsum Co., 340 U.S. at 89 (holding
[[Page 44287]]
that relief may ``range broadly through practices connected with acts
actually found to be illegal'').
Apple's reliance on SBC Communications also is misplaced given that
the court in that case entered the government's Proposed Final
Judgment, notwithstanding arguments by amici that purchasers of the
divested telecommunications assets were unlikely to fully replace the
competition lost in the merger of two large telecommunications
companies. The court acknowledged the purchasers' shortcomings had the
potential to ``reduce the effectiveness of the proposed settlements,''
but concluded that ``the government ha[d] presented a reasonable basis
for concluding that the proposed settlements * * * are reasonably
adequate, and thus within the reaches of the public interest.'' SBC
Commc'ns, 489 F. Supp. 2d at 21. Although the United States believes
that the settlement reached in SBC Communications fully restored
competition in the alleged relevant market, the case confirms that the
United States is obligated only to show that the settlement was
reasonable and within the reaches of the public interest.
5. Apple's Suggested Changes to the Proposed Final Judgment Are Self-
Serving and Contrary to the Public Interest
Contrary to Apple's assertions, the terms of the proposed Final
Judgment are not novel, and the provisions are closely tailored to
address the harm alleged in the Complaint. See Section V.A.5. Apple's
requested modifications to the proposed Final Judgment, on the other
hand, would serve only to undermine the proposed Final Judgment's
effectiveness, reducing the value of the settlement to consumers.
Apple proposes that Section VI.B be altered to ``allow retailers to
discount from their commissions on a per unit and not an aggregate
basis.'' Apple at 3. That suggested modification, however, is a naked
attempt by Apple to have its competitors' ability to compete on price
constrained--to take away the ``nearly unfettered ability to
discount,'' id. at 2, 6, that a retailer who desires to compete would
embrace but Apple fears. For example, Apple's modification would
effectively prohibit retail innovations that benefit consumers, such as
loss leading, ``buy one get one free,'' or subscription services. Apple
has provided no basis to conclude that a ``per unit'' constraint would
better serve the public interest than an aggregate constraint, and its
enforceability argument is pure makeweight. Section VI.B, which is
permitted not required conduct, contemplates voluntary agreements
between Settling Defendants and retailers, and permits Settling
Defendants to negotiate their own enforcement mechanisms with
retailers, including Apple. That these sophisticated parties are
capable of designing terms to enforce contractual obligations is
demonstrated by the Apple Agency Agreements themselves, which provide
an audit mechanism to verify proceeds due to the publisher on e-book
sales.\37\
---------------------------------------------------------------------------
\37\ ``Publisher, at its expense, may audit directly applicable
records of Apple . * * * [No] audit shall be conducted for a period
spanning less than six (6) months.'' EBOOK AGENCY DISTRIBUTION
AGREEMENT, Sec. 12(b), APPLETX00018481 at -18488.
---------------------------------------------------------------------------
VI. Conclusion
The issues raised in the public comments were among the many
considered by the United States when it evaluated the sufficiency of
the proposed remedy. The United States has determined that the proposed
Final Judgment, as drafted, provides an effective and appropriate
remedy for the antitrust violations alleged in the Complaint and is
therefore in the public interest. The United States will move this
Court to enter the proposed Final Judgment after the comments are
published on the Department's Web site and this Response to Comments is
published in the Federal Register.
Dated: July 23, 2012.
Respectfully submitted,
Mark W. Ryan,
Stephanie A. Fleming,
Lawrence E. Buterman,
Laura B. Collins,
Attorneys for the United States, United States Department of
Justice, Antitrust Division, 450 Fifth Street NW., Suite 4000,
Washington, DC 20530, (202) 532-4753, [email protected].
Certificate of Service
I, Stephanie A. Fleming, hereby certify that on July 23, 2012, I
caused a copy of the United States' Response to Public Comments to be
served by the Electronic Case Filing System, which included the
individuals listed below. Copies of all Public Comments, collected as
digital files in a compact disc entitled ``Exhibit A,'' have also been
sent via overnight delivery to the same individuals.
For Apple:
Daniel S. Floyd, Gibson, Dunn & Crutcher LLP, 333 S. Grand Avenue,
Suite 4600, Los Angeles, CA 90070, (213) 229-7148,
[email protected].
For Macmillan and Verlagsgruppe Georg Von Holtzbrinck GMBH:
Joel M. Mitnick, Sidley Austin LLP, 787 Seventh Avenue, New York, NY
10019, (212) 839-5300, [email protected].
For Penguin U.S.A. and the Penguin Group:
Daniel F. McInnis, Akin Gump Strauss Hauer & Feld, LLP, 1333 New
Hampshire Avenue NW., Washington, DC 20036, (202) 887-4000,
[email protected].
For Hachette:
Walter B. Stuart, IV, Freshfields Bruckhaus Deringer LLP, 601 Lexington
Avenue, New York, NY 10022, (212) 277-4000,
[email protected].
For HarperCollins:
Paul Madison Eckles, Skadden, Arps, Slate, Meagher & Flom, Four Times
Square, 42nd Floor, New York, NY 10036, (212) 735-2578,
[email protected].
For Simon & Schuster:
Yehudah Lev Buchweitz, Weil, Gotshal & Manges LLP (NYC), 767 Fifth
Avenue, 25th FL, New York, NY 10153, (212) 310-8000 x8256,
[email protected].
Additionally, courtesy copies of the Response to Public Comments,
sent electronically, and Exhibit A, sent via overnight mail, have been
provided to the following:
For the State of Connecticut:
W. Joseph Nielsen, Assistant Attorney General, Antitrust Division,
Office of the Attorney General, 55 Elm Street, Hartford, CT 06106,
(860) 808-5040, [email protected].
For the Private Plaintiffs:
Jeff D. Friedman, Hagens Berman, 715 Hearst Ave., Suite 202, Berkeley,
CA 94710, (510) 725-3000, [email protected].
For the State of Texas:
Gabriel R. Gervey, Assistant Attorney General, Antitrust Division,
Office of the Attorney General of Texas, 300 W. 15th Street, Austin,
Texas 78701, (512) 463-1262, [email protected].
Stephanie A. Fleming, Counsel for the United States, Antitrust
Division, 450 Fifth Street NW., Suite 8700, Washington, DC 20530, (202)
514-9228, [email protected].
[FR Doc. 2012-18313 Filed 7-26-12; 8:45 am]
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