Judgment in ebook case limits Apple's deals, appoints external monitor

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The other shoe has dropped: U.S. District Court Judge Denise Cote on Friday issued a permanent injunction against Apple in the ebook price-fixing suits brought against it by the Department of Justice as well as a similar case brought by 31 U.S. states, the District of Columbia, and Puerto Rico. The injunction, which takes effect 30 days from its issuance on Thursday, imposes several restrictions on the way Apple can conduct its ebook business over the next several years.

“We’re pleased that the court has issued an order supporting the Department of Justice’s efforts to address Apple’s illegal price fixing conduct,” said Assistant Attorney General Bill Baer of the DOJ’s Antitrust Division in a statement on the agency’s website. “Consumers will continue to benefit from lower ebooks prices as a result of the department’s enforcement action to restore competition in this important industry. By appointing an external monitor to ensure future compliance with the antitrust laws, the court has helped protect consumers from further misconduct by Apple. The court’s ruling reinforces the victory the department has won for consumers.”

Apple, however, is not yet ready to give up the fight. On Friday, company spokesperson Tom Neumayr told Macworld via email: “Apple did not conspire to fix ebook pricing. The iBookstore gave customers more choice and injected much needed innovation and competition into the market. Apple will pursue an appeal of the injunction.”

The cost of doing business

Most significantly, the terms of the final judgment dictate what manner of agreement Apple may make with the five publishers—Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster—with whom the company was accused of conspiring. Unsurprisingly, Apple is not allowed to make any deals with those publishers that would potentially restrict Apple’s ability to offer cheaper ebooks. Those restrictions expire on a per-publisher basis: it may renegotiate with Hachette after 24 months, HarperCollins after 30 months, Simon & Schuster after 36 months, Penguin six months after that, and Macmillan another six months after that.

Crucially, such deals may not include any “most-favored nation” clause, which was one of the issues at the heart of the case. That practice prevented other retailers with whom the publishers had deals from undercutting Apple’s ebook prices by offering discounted prices. More generally, the judgment says Apple may not take part in any deal with publishers or retailers that would see ebook prices rise or be set at a particular level.

Of course, Apple is also barred from talking to publishers about its deals with any other publishers, or those companies’ strategies, pricing plans, agreements with authors, and so on. And the company may not take any retaliatory action against any publishers, regardless of whether or not Apple has an existing agreement with them.

The watchers and who watches them

In order to ensure Apple’s compliance with these terms, the judgment empowers two separate monitors. The first is a full-time antitrust compliance officer who is selected by Apple’s external directors (i.e. those not directly employed by Apple, which is basically anybody but CEO Tim Cook) and who is not employed by Apple.

That officer, who reports to the external directors, is responsible for informing and training Apple’s board, executive team, and other relevant employees in matters relating to the judgment itself. In addition, the compliance officer conducts annual audits, provides logs of communications between Apple and ebook retailers and publishers, and is required to correct any actual or potential violation of the terms of the judgment and report it to federal and state governments.

In addition to that monitor, the court will also appoint an external compliance monitor with consultation from Apple and the involved state governments. That monitor essentially reviews Apple’s internal antitrust compliance system to make sure that it meets with the letter of the law, recommending changes where necessary.

As with the antitrust compliance officer, it’s the external monitor’s job to report violations to the U.S. and state governments, though the monitor has no authority to investigate or pursue such matters directly. And though the external monitor is not an employee of Apple, the position’s expenses and salary will be paid by the company with oversight from the U.S. and state governments.

Lasting impacts

While the injunction is less strenuous than the terms pursued by the DOJ—which wanted, among other remedies, to apply antitrust regulations to Apple’s App Store and iTunes Store, as well—the company did object to the imposition of an external monitor. However, the final judgment makes it clear that an external monitor is an integral part of the compliance process.

Should the case not go to appeal, how badly would this injunction this affect Apple’s ebook business? It’s unclear at present, but it would certainly seem to put the company at a disadvantage when stacked up against its major competitor in the market, Amazon. Unlike Apple, Amazon continues to rely on the retailer model, where it buys books wholesale from publishers then sets the price wherever it wants to; Apple, on the other hand, was working on an agency model that gave the publishers a percentage of the selling price.

Amazon, for its part, doesn’t appear to be wasting any time solidifying its place in the market. Earlier this week it announced MatchBook, a new service that provides—for no or low cost—an ebook copy of any physical book that customers have purchased from Amazon.

While the terms of the judgment largely impose more overhead on Apple’s business, there’s no reason that the company shouldn’t still be able to succeed in the ebooks market—it just requires the company to come up with creative (and, naturally, legal) solutions for competing against the player in the market. And that’s something with which Apple has plenty of experience.

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