Apple Rejects DOJ’s eBook Settlement Proposal, Calls it “Draconian”

The U.S. Department of Justice (DOJ) accused Apple, Inc. (AAPL) of costing customers “millions of dollars” by entering into secret deals with eBook publishers and offering to reward them for blacklisting Apple’s competitor Amazon.com, Inc. (AMZN).  In an apparent mea culpa, most of the publishers quickly settled with the U.S. Department of Justice (DOJ) — but Apple has defiantly chosen to fight the feds in court.

I. After Losing in Court, Apple Refuses to Obey a Judge’s Ordered “Remedy”

At the trial Eddy Cue, Apple’s internet software and services who masterminded the e-book deals, admitted that his company was responsible for raising e-book prices.  He appeared to concede that his company’s deals later drove up e-book prices from the former de facto rate of $10 to $15.  Asked if Apple (or Amazon) customers complained about the higher prices, he commented, “They may or may not have, I can’t recall.”

Apple was found guilty by a judge early last month.  Bill Baer, head of the Justice Department’s (DOJ) antitrust division, late last week handed Apple a proposed remedy, approved by the case’s presiding judge, U.S. District Judge Denise Cote of the U.S. District Court for the Southern District of New York.  

The deal, cosigned by 33 state attorney generals, would prohibit Apple from entering “anticompetitive” contracts with the five publishers it alleged conspired with and would be subject to monitoring.  Most onerously, the DOJ would force Apple to allow publisher to put links in their apps advertising alternatives from Amazon.com, Inc. (AMZN) and Barnes & Noble, Inc. (BKS) whose sales proceeds Apple would not get a cut of.

Apple is rejecting a Judge’s order to change its e-book business tactics.
[Image Source: Telegraph]
To be clear, the latter term bears some similarities to how the European Union required Microsoft Corp. (MSFT) to put links to rivals browsers upon Windows installation to compensate for prior anticompetitive behavior.  However, the punishment for Apple is slightly different and not as extreme, as Apple is simply required to modify its terms of service agreement to allow rival apps to do so.  On the other hand it’d be an unprecedented punishment for Apple, which bans competitors from offering purchase links to storefronts when it can’t get a cut of sales.

8.2.13 Apple’s Brief Opposing Injunctive Relief by eprotalinski

Apple fired back on Monday, rejecting the proposal as “a draconian and punitive intrusion into Apple’s business, wildly out of proportion to any adjudicated wrongdoing or potential harm.”  Apple says require external compliance monitoring “will place bureaucratic tentacles around Apple’s e-books business, stifling the company’s ability to innovate and compete.”

II. Apple Proposes Alternative to DOJ Punishments

The Cupertino company accuses the DOJ of conspiring with Apple’s competitors to “regulate” Apple’s business and adversely affect its “relationships with thousands of partners across several markets.”  Apple particularly takes issue with the demand to allow publishers to advertise links to other markets, commenting:

Apple is under no duty to allow other retailers to offer apps on the iPad in the first place, much less on terms that subsidize their operations. Pac. Bell Tel. v. LINKLINE Commc’s, 555 U.S. 433, 450 (2009) (“if a firm has no antitrust duty to deal with its competitors at wholesale, it certainly has no duty to deal under terms and conditions that the rivals find commercially advantageous”). Nevertheless, Apple allows all e-book retailer apps that are compliant with its policies — including those offered by Amazon, Barnes & Noble and other competing e-book retailers — to be offered in its App Store. Trial Tr. 1908:5-1909:21 (Cue). It also permits consumers to download e-books purchased through another e-book retailer’s website or bookstore onto its e-reader devices without charge…

Without any basis in the evidence or the Court’s findings, the proposed regulation of the App Store is simply outrageous and cannot be included in an injunction.
Apple contends it should basically have to do nothing since the settlements the publishers sign already prevent them from entering into anticompetitive deals with it.

But as a “concession” Apple is proposing:

• A 2 -year settlement
• No direct outside compliance monitoring
• Limtations on Apple’s ability to share information between publishers on deals, similar to the settlement the publishers agreed to.
• A prohibition on “most favored nation” (MFN) deals which incentivize publishers from ditching the competition
• “Reasonable” antitrust training courses ordered by the court for senior Apple managers

The DOJ’s settlement has real teeth to it — regardless of whether you agree it is fair or not.  Apple’s settlement sounds like it has some small concessions but upon closer examination purposefully offers the government no way to directly verify compliance and makes no promises that Apple will not go back to the tactics that got it in trouble in the first place (MFN offers and alleged price fixing) after the two year deal rolls by.

It should be interesting to see what the court says, but it would be surprising to see them agree to Apple’s toothless, neutered version of their antitrust punishments.