DOJ v Apple: Or How to Lose Against Apple in Court

| Analysis

The U.S. Department of Justice went into its trial with confidence it could prove Apple was part of a conspiracy to artificially raise book prices, and even had Judge Denise Cote believing its case was strong. After three weeks, however, the DOJ's arguments seem to be in shambles, Judge Cote said the issues have shifted, and it seems pretty clear why Apple was willing to go to the mat defending its claims that there never was any collusion with book publishers.

The DOJ's case against Apple over conspiracy to control ebook prices? Not so good.The DOJ's case against Apple over conspiracy to control ebook prices? Not so good.

The DOJ's civil trial against Apple started three weeks ago with an opening statement that, at least superficially, showed what looked like a detailed case listing the actions Apple took to bring publishers on board with its scheme to change the online book market and push Amazon out of its dominant position as the company all other retailers had to compete against.

Penguin, MacMillan Simon & Schuster, HarperCollins, and Hachette Book Group were also named in the suit, but settled out of court to avoid the astronomical legal costs and potential fines they faced. The DOJ called Apple the ringleader in a conspiracy with book publishers to artificially raise prices by forcing an agency pricing model retailers, and that the iPhone and iPad maker included wording in its contracts ensuring no other retailer could sell books below its iBookstore prices.

Despite the DOJ's compelling opening statements and apparent strong case, Apple's legal team, along with the witnesses both sides called to the stand to testify, systematically tore apart the government's position, leaving their arguments against Apple in tatters.

The DOJ's case claimed that Apple and pubishers colluded to force book prices up from the US$9.99 price point Amazon was charging by pushing retailers into an agency model where publishers set prices, instead of the wholeslae model they were using where retailers pay a set price for books and then charge whatever they want. Since Amazon was selling books at a loss, other retailers were forced to do the same.

When the DOJ called Penguin CEO David Shanks to the stand, he testified that Apple had a take it or leave it attitude towards the ebook market. Apple was trying to swing deals to bring ebook titles to the iPad ahead of its unveiling and launch, but had it failed to do so, it would've dropped the idea and left iPad ebooks to other companies.

"It was fairly clear that they could take or leave being in the book business," Mr. Shanks testified. "If they couldn't get it on their terms, they weren't going to take the jump into being in books."

If Apple really was focused on bringing the major publishers on board in a plan to control the ebook market, its cavalier attitude certainly didn't fit.

The DOJ's tactic to show Apple's intent by introducing a draft email from Steve Jobs didn't pan out, either. The email that was never sent from Mr. Jobs to Senior Vice President of Software and Services Eddy Cue stated, "I can live with this as long as they move Amazon to the agent model too for new releases for the first year. If not, I'm not sure we can be competitive."

The email that Mr. Jobs actually did send detailed the terms Apple and the publishers eventually agreed on: If other retailers drop their prices below the iBookstore's rates, Apple can lower its prices, too, and what it pays publishers for those titles drops accordingly, as well.

When Philip Elmer-Dewitt joined Bryan Chaffin and me on Apple Context Machine to talk about the case, he said that Mr. Cue testified about how Mr. Jobs didn't fully understand all of the details in the negotiations and that his unsent draft emails reflected that. Once Mr. Jobs had a firm grip on the facts, he composed the message that went to Mr. Cue, shooting down the DOJ's intent agrument.

Barnes & Noble helped shoot down the argument that Apple spearheading a conspiracy when Vice President of Digital Content Theresa Horner took the stand and said that her company had started strikingly similar talks with publishers a couple weeks ahead of Apple. She said that B&N was bleeding money on Nook ebook sales because it had to sell each title at a loss to compete with Amazon. Her company was already negotiating agency model contracts with publishers, complete with clauses that let it price match other retailers, ahead of Apple's entry into the game.

Evidence also showed that Amazon struck similar agency pricing deals with publishers, and that it, too, included price matching clauses.

The Department of Justice had to know about the evidence that would be presented ahead of time, just as Apple did, and yet it wasn't able to present a strong case supporting its position. Witness testimony can always bring up surprises, but both sides likely had a good idea ahead of time what those people would say once on the stand, and the DOJ didn't seem prepared to mold those statements to fit its case through examination and cross examination.

And now here we are, three weeks later and waiting for closing statements from both sides. Judge Cote has gone from saying the DOJ had a strong case and would likely win to saying,

It seems to me the issues have somewhat shifted during the course of the trial. Things change. People have to stay nimble.

Once the DOJ and Apple finish their closing statements today it could take a couple months before Judge Cote issues her verdict. Unless I'm completely mistaken, Apple's case was far more compelling and it's likely Judge Cote will rule in its favor. At least, that's how it looks to me.

The bottom line is that when you take on a company that's certain it did nothing wrong -- and has a nearly bottomless money bag to defend itself -- maybe you should make sure your case is air tight.

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Comments

geoduck

If anything the DOJ brought up more evidence of Amazon engaging in predatory pricing to drive other booksellers out of business. If anything what B&N, Apple, and others were trying to do looks to have been purely defensive.

Could it be, and I’m grasping at straws here, that the DOJ is laying the groundwork for a case against Amazon? But it seems like a long way around to gather evidence for a different suit.

aardman

This, and the subpoena of that reporter’s phone calls, and a couple of other recent stumbles leads me to believe that Eric Holder is serving above his proper pay grade.

jameskatt

The DOJ lawyers simply practiced prosecutorial evil - the worse that prosecutors can do.  They knowingly prosecuted an innocent, presented false evidence, and asked for the death penalty.  These lawyers should be given the lawyer’s death penalty and be disbarred.

aardman

The issue then:

DoJ’s story:  Apple called all the publishers to a room and said let’s all go to agency pricing model and you tear up your Amazon contracts and go to agency model as well, then you can raise eBook prices.

Apple’s story:  If Apple signs agency pricing model with a publisher, with the right to overrule the publisher’s price to match a competitor’s lower price, then Apple will be able to be competitive with Amazon plus the publisher will find it in their interest to go to agency pricing with Amazon.  We can get what we want without having to conspire with the publishers; a perfectly legal contract provides the economic incentives that will get the publishers to act in the way we want them to.

skipaq

Holder has shown himself to be a political hack. What a waste of money.

geoduck

So what happens to the companies that settled? If the DOJ case is shown to be without base, do they get their money back?

mhikl

I sure hope the ‘duck is right. smile
What stymies me is a judge entering a court room already pontificating her opinion. I thought that was a no-no in the presumption of outcomes.

skipaq

Nope. And their shareholders should be upset. Apple could afford to fight. The publishers had their profits hurt for years by Amazon’s price cutting. I know many local bookstores that gave up. Even the large chain bookstores have been failing. If things were left to continue they way Amazon wanted, there would be little competition and publishers could be squeezed even more by Amazon. But they chose to settle probably due to the cost of fighting.

mhikl

Money back — another point that crossed my mind, too, geo. However, in law, do the hanged get any more than a ‘sorry’ note?

nolatransplant

Is there a difference between the terms “agency model” and “most favored nation (MFN) clause”? From the coverage I’ve followed it seems they’re interchangeable, but I’m not sure.

Also, does anyone know if these strategies were used before in this or any other industry (i.e.: not international trade)? That is, before B&N. Surely they weren’t the first to use it domestically. I mean it kind of sounds like the DOJ is going after the practice…

vpndev

This case is going much as I expected it would. DoJ’s premise never seemed “right” to me, seeing the way Amazon monopolized e-books.

I have little time for the “hang Holder” trolls. I have no info on whether or not the decision to pursue the case went up to his level. Given the visibility, it’s certainly possible but by no means certain. I expect that it would have reached the level below him though. If anyone has details then please share them.

I do think that more than one DoJ employee has come to the end of his/her career on this one. Given the testimony of B&N’s Horner yesterday, I find it hard to see how anyone at DoJ thought that this case could be won. Surely they had spoken to her since, at least as far as I can tell, she was called by them (I can’t tell for sure, but I think the trial is still in the prosecution phase). If they had, were they not aware of the implication of the testimony. If they were not aware then they should be fired for incompetence. If they were aware then they should also be fired for prosecutorial misconduct.

barryotoole

Agency Model and MFN Clause are two different things.

Under the agency model, the publishers set their own prices, but give a cut to the retailer.

MFN means that a publisher can’t sell their books through any other retailer at a lower price. If they do, then the retailer with an MFN clause can have them lower their price to match. This is because it is the publisher, and not the retailer, that controls prices.

A retailer can have an agency model pricing, with or without the MFN clause.

A wholesale model is entirely different: the retailer buys books in bulk at a price and then sells it at whatever price it wants, even if a loss is incurred. Since the publisher has no control over setting a price, the MFN clause has no value - the retailer can set any price it wants to compete.

vpndev

@nolatransplant “Is there a difference between the terms “agency model” and “most favored nation (MFN) clause”? From the coverage I’ve followed it seems they’re interchangeable, but I’m not sure.”

They’re not interchangeable although sometimes they occur together.

The “agency model” is where the publisher sets the price, and the store sells for that price (or close to it) and retains a percentage. In Apple’s case, the percentage is its standard 30%

For the “wholesale model” (a question you did not ask, but which I’ll answer in order to describe the contrast with “agency model”), the publisher sells at some price of its choosing (often 50% of list)  and then the retailer sells at whatever price it wants. In recent times it has been alleged that Amazon was selling below cost (such as buying at $12.99 and selling for $9.99) in order to eliminate competitors. In the “wholesale model” the retailer sets the retail price whereas in the “agency model” the retailer is an agent of the publisher and must abide by the price set by the publisher.

“Most Favored Nation” (MFN) deals merely say that, if a lower price is offered to some vendor, then that same price must also be offered to the MFN-recipient. So if, for example, one book publisher offered a special deal to Amazon, then it would have to offer the same terms to Apple.

This is quite common in contract negotiations for major deals. In fact, it is required by law for all dealings with the U.S. Government (i.e. it’s not legal to offer a better deal (price plus terms etc) to some company than to the Government.

mhikl

A big prob we have in our ‘modern’ world is the presumption that an expert knows it all. If we don’t do our homework and leave our health to the medical profession (drs., nurses, nutritionists - allopathically) then don’t count on length or strength anywhere near the time ancestrally your great grands had. Scientists are a magical lot, too; but as with MDs, their pocket coin depends upon years of study that can no longer be wiped out with a counter discovery. Physics of old has gone the way of the dodo and now its all theory and mathematics. Something pops up that doesn’t fit; no prob, add a new twist to the theory,  jigger the formula and Bob’s your uncle, the universe carries on, same as usual. And then we have peer review to help us sleep at night and the systems are safe for generations to come.

The law, on the other hand (yes, I’m back on point), now that is bare knuckle boxing of the mind. You got your books and torts and writings that go back centuries, precedents, and other highfalutin words, ideas and schemes and loopholes, (the lingo is prolific and sure takes the best waggler to success) such that now a judge can know it all before the trial even begins. Impression is the game. I wonder if a fancy, articulate sounding, energetic lawyer with a pronounced, incomprehensible speech impediment and a gigantic hairy mole in the middle of his/er forehead might not be able to impress this judge on exuberance alone.

I have my bets on how this trial will turn out. I’ve even added some possibilities that might come out of the judgement by her honour. There is no wiggle room in my guess for what transacts so I I am left with a fifty-fifty chance of being correct: but lofty principle is not what the law seems to have become. Now a judge can pronounce (guess) before the hearing begins, and before the trial’s end can toss another wrench into the gears. Those gears of justice now seem made of rubber and according to precedent of a judge’s will of prognostication, can stand the tension and still lead us on a Leacockean ride as she flings herself upon her horse and rides madly off in all directions.

Three months to wait her answer. I am left speechless.

daemon

Hey look, Apple was found guilty.

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