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Federal judge approves settlement in e-book conspiracy suit

A judge for the US District Court for the Southern District of New York [official website] on Thursday approved a settlement agreement [opinion, PDF] between the US Department of Justice (DOJ) [official website] and certain e-book publishers in a price-fixing suit under the Sherman Act [text]. The DOJ alleges that Apple, Hachette, HarperCollins, MacMillan, Penguin and Simon & Schuster [corporate websites] conspired to fix the prices of e-books in response to Amazon's discount pricing strategy. Hachette, HarperCollins and Simon & Schuster have agreed to the settlement, but the other defendants have elected to continue litigating the case. The settlement agreement requires the settling defendants to terminate the price-fixing agreements, prohibits retaliating against e-book retailers based on the retailer's e-book prices, requires the termination of the "most favored nation" clauses of their agreements which prevented other retailers from undercutting Apple's prices, prevents e-books publishers from transmitting "sensitive information" between each other, and creates a series of reporting requirements to the DOJ to monitor any potential anti-competitive agreements. The agreement also requires the settling defendants to phase out their agency agreements whereby the publisher, rather than the retailer, sets the price of each title and the retailer takes a fixed percentage of sales. The agency model was an attempt to combat Amazon's discount pricing strategy under the old system where retailers purchased books at a wholesale price and established whatever price they wanted. Apple and the non-settling defendants argued that the settlement will greatly harm brick-and-mortar book stores which cannot compete with Amazon's discount pricing strategy and decrease the diversity of booksellers and that the agency agreements actually helped e-book competition by allowing everyone to compete on an even playing field. US District Judge Denise Cote disagreed:

Markets characterized by network externalities tend to tip towards a single, dominant firm, resulting in monopoly. And once a monopolist establishes itself in such a market, such as Microsoft in the computer operating systems market and Apple in the digital music market, the result is inflated prices and retarded innovation.
Cote further stated that the settlement agreement was "reasonably calculated to restore retail price competition to the market for trade e-books, to return prices to their competitive level, and to benefit e-books consumers and the public generally" and that antitrust laws were not designed to protect businesses from failure, but rather protect the market from failure..

The DOJ brought the suit in April, and the court denied a motion to dismiss [JURIST reports] by the defendants in May. The DOJ alleged that price fixing conspiracy allegedly employed by Apple and the publishers costs consumers USD $100 million [Bloomberg report] in the preceding two years. Commentators had been very mixed in response to the proposed settlement agreement. Some commentators have suggested that the DOJ's lawsuit is merely "superficial" [JURIST op-ed] and that the effect of the agency agreements may actually have been a net-positive to consumers if Amazon was selling e-books as loss leaders in order to drive the sale of Kindles. Other commentators, however, state that commentators against the settlement agreement and the defendants' arguments are based on a premise that competition is wrong [JURIST op-ed].

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About Paper Chase

Paper Chase is JURIST's real-time legal news service, powered by a team of 30 law student reporters and editors led by law professor Bernard Hibbitts at the University of Pittsburgh School of Law. As an educational service, Paper Chase is dedicated to presenting important legal news and materials rapidly, objectively and intelligibly in an accessible format.

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