Judge denies Apple, publishers' motion to dismiss e-book civil suit

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A federal judge on Tuesday denied petitions by both Apple and a group of five major publishing houses to dismiss a class-action lawsuit accusing the companies of collusion in e-book price fixing.

Judge Denis Cote of the U.S. District Court for the Southern District of New York handed down the e-book price-fixing suit's first substantive ruling since the case was filed in August 2011.

In the ruling, Judge Cote cites numerous examples of possible collusion between Apple and the publishers, concluding that the companies' alleged pricing scheme warrants further investigation.

“We thought that Judge Cote’s ruling was spot on, especially when she noted that we’ve gone above and beyond in illustrating the legitimacy of our case,” said Steve Berman, lead counsel and managing partner of Hagens Berman, the law firm handling the suit. “We are eager to push forward with the case.”

The class-action suit claims that Apple, Hachette, Simon & Schuster, Macmillan, HarperCollins and Penguin conspired to raise the prices of e-books by using the so-called agency sales model rather than the predominant wholesale model used at the time.

Under the agency model, a publisher is free to set e-book prices and sell them directly to consumers through an "agent," which in this case is Apple and its iBookstore. In exchange for making the content available, Apple receives a percentage of every e-book sold. The opposing wholesale model used by market leader Amazon gives retailers the power to price e-books purchased from a publisher, allowing them to sell the content at below-cost prices to consolidate market share. According to the class-action suit, the publishers feared that Amazon's discounted prices would translate into an increase of cheap e-book adoption.

“Fortunately for the publishers, Apple was also terrified of Amazon’s pricing and the popularity of its Kindle device,” said Berman. “Rather than compete on merit, price and convenience, we intend to prove that the cabal simply tried to game the system.”

Apple and the five publishing houses's sales strategy has been criticized as being anticompetitive due in part to a "most favored nations" clause which disallows publishers to sell their product through other retailers at lower prices.

In the ruling, Judge Cote notes that there is tangible evidence in inter-company correspondence that points to an exhibited willingness on the part of the publishers to "work together to effect market change, and specifically, to raise the prices of eBooks through collusion." Most notable are the "windowing" efforts used by the houses to stagger release dates of physical books and e-books in an attempt to up revenue. This strategy, used in 2009 before Apple entered the market, was ultimately unsuccessful.

Also cited was an excerpt from Steve Jobs' biography (emphasis highlighted in ruling):

Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that — they thought it would trash their ability to sell hard-cover books at $28. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon. So we told the publishers, “We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.” But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, “You’re going to sign an agency contract or we’re not going to give you the books.” . . . Given the situation that existed, what was best for us was to do this aikido move and end up with the agency model. And we pulled it off.

Tuesday's ruling allows the civil case, which seeks to "compensate e-book purchasers for losses incurred as a result of the alleged price-fixing scheme," to continue, though subsequent hearing dates have yet to be announced.

Earlier this month an amended complaint filed by 17 U.S. states revealed that Apple co-founder Steve Jobs pushed for the agency model. A congruent criminal case is being pursued by the U.S. Department of Justice, though in that instance three of the five publishers settled out of court. The issue is also being examined by the European Commission and is the target of a class-action suit in Canada.