Antitrust Lawyer: Judge Cote Likely to Approve E-Book Settlement

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By Jeremy Greenfield, Editorial Director, Digital Book World, @JDGsaid

Given the details of the settlement and what has already occurred in the case, Judge Denise Cote is likely to approve the e-book price-fixing settlement between the Department of Justice and three of the largest U.S. publishers, according to an antitrust lawyer familiar with the case.

“She has already denied a motion from Apple to dismiss the case; the settling defendants are willing to settle; the DoJ believes they got a good deal; and the provisions of the settlement go to the heart of the DoJ’s complaint. I expect she’ll approve it,” said Jay Levine, a partner in the D.C. office of Birmingham, Ala.-based law firm Bradley Arant Boult Cummings, who specializes in antitrust law and has been following the e-book price-fixing case.

On April 11, three of the largest U.S. book publishers, Hachette, Simon & Schuster and HarperCollins, agreed to a settlement with the Justice Department over a lawsuit that it filed alleging an e-book price-fixing conspiracy between Apple, the three above publishers and Penguin and Macmillan. Apple, Penguin and Macmillan have not settled with Justice.

For her not to approve the settlement Judge Cote would have to find that it’s not in the public interest, said Levine.

Outside of Judge Cote using her own judgment and hearing out the arguments of all parties – the Department of Justice on one side and the publishers on the other – that’s where the public commentary comes in.

In the 60-day commentary period between when the settlement was filed on April 11 and June 11, Justice received some 150 letters from public parties concerned about the case, amounting to 200 printed pages. The information load was so heavy, that the Judge made the unusual decision not to print the public comments and to host them online.

“She will consider them…it is hard to say whether they will make a difference,” said Levine.

Whether or not Judge Cote finds the settlement to be in the public’s interest will have to do with the details of the agreement, of which several are uncommon.

DoJ settlements attempt to right the alleged wrong, according to James Cooper, a professor at George Mason University School of Law and an expert in antitrust law who has been following the case. Hence, the end to agency pricing with Apple for the settling publishers for two years and the prohibition of most-favored-nation clauses from their contracts for five years.

What is different in this case is the prohibition that the publishers enter into an agency agreement with another bookseller, according to Cooper.

“’We’re going to make you get out of the contracts that were a key part of this alleged conspiracy,’” said Cooper, speculating on the Justice Department’s thinking. “And then we’re going to go further and say ‘you can’t have those kinds of contracts with any other retailer.’”

What’s unusual about this is that in most settlements, the Justice Department will regulate the relationships between the parties involved in the case but no others, said Cooper. This nuance could have a significant effect on the industry.

“There’s a lot of detail in the proposed settlement is that greatly restrains if not completely eviscerates the ability of these publishers to control retailer pricing,” said Cooper.

One other point in the settlement that has been discussed widely in publishing circles is the discounting clause that stipulates that Amazon and other book retailers can now control the price of the settling publishers’ books but have to break even or make a profit on the business they do with each publisher. So, Barnes & Noble, for instance, would be allowed to discount Walter Isaacson’s Steve Jobs e-book at will, taking a loss on each copy sold, but would have to make up that loss by profiting on the rest of Simon & Schuster’s catalog that it sells.

Publishing industry observers have raised many questions around this: When does the fiscal year start and stop for each of the parties? How will this practice be monitored? How are overall profits and losses on e-books going to be accounted for in terms of a large, overall digital business that sells devices and services along with digital downloads? Will there be penalties if a retailer is unable to make a profit at the end of the year after selling books at a loss throughout the year?

According to Cooper, this detail in the settlement was likely negotiated by the lawyers for the settling parties as a way to prevent predatory pricing on the part of some e-book retailers.

Levine, the Washington, D.C. antitrust lawyer, said that this kind of deal in the settlement is not uncommon.

“In every settlement, the DoJ doesn’t want to become the business,” he said. “They do not want to be an oversight regulatory body. They set the broad parameters and have the ability to audit, to look at something if they think there’s a violation, but the parties come up with the details. They may do it in discussions with the DoJ to make sure the DoJ is fine with it.”

While many in the publishing industry may find this part of the settlement confusing and irksome, if Judge Cote approves the settlement on July 27, it will become part of day-to-day operations at some of the largest U.S. publishers.

“The publishing industry finds the settlement troublesome, but from an antitrust standpoint the settlement is pretty much par for the course considering the allegations,” said Levine.

Write to Jeremy Greenfield

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