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The Grand eBook Conspiracy: Class Action Efforts Launched against Apple

1 - A Series of Class Action Lawsuits Launched Against Apple Over Fixing eBook Pricing, Aug 2011, Patently Apple 
Summons have been Issued to Defendants Apple, Inc., Hachette Book Group, Inc., HarperCollins Publishers, Inc., Macmillan Publishers, Inc., Penguin Group (USA) Inc. & Simon & Schuster, Inc. in what appears to be a new class action lawsuit in the making in California. Under the "Nationwide California Law Class" segment of this case, the Plaintiff's legal counsel states that "One of the chief architects of the unlawful conspiracy, Steve Jobs, is a resident of California and the CEO of Apple computers." The complaint goes on to state that "Apple facilitated changing the eBook pricing model and conspired with the Publisher Defendants to do so." The pricing model that is constantly referred to in this complaint is labeled the new "Agency model" which is really at the heart of this case. Yet what struck me the most when reading this complaint was its constant references to "Amazon's pro-consumer pricing" and how Apple was out to stop Amazon. Even though the complaint wasn't filed by Amazon, it's pretty clear that the slant for Amazon vs. Apple is no coincidence. Moreover, it doesn't end there. Three additional complaints have been filed against Apple on this very same front late last week with Apple as the central villain in this grand conspiracy for ebook price fixing. Coincidence – I think not. But one thing is for sure: it makes for interesting reading.


Overview: Breakdown of the Case


To get a broad overview of this class action in the making, we first breakdown the case as it's presented in the complaint. The case is relatively broken down into the following segments: Introduction, Market Power over Ebook Sales, Structure of the Industry, Unlawful Agreement to Restrain Trade or Commerce, Antitrust Injury, Nationwide Federal Purchaser Class, Nationwide California Law Class, Indirect Purchaser Class Action Allegations.


The Five Causes of Actions include: Violation of the Sherman Act, Violation of the Cartwright Act, Violations of State Antitrust and Restraint of Trade Laws and Consumer Protection Statutes, Violation of the Unfair Competition Act and Unjust Enrichment.


The Complaint's Introduction


To provide you with an understanding of this case, we present you with the full formal Complaint's "Introduction"  as follows: "In November 2007, Amazon revolutionized the book publishing industry by releasing the Kindle, a handheld digital reader for electronic books or "eBooks." Using proprietary "electronic ink" technology, the Kindle replicated the appearance of ink on paper and introduced numerous efficiency-enhancing characteristics, including portability and other advantages of a digital format. A major economic advantage to eBook technology is its potential to massively reduce distribution costs historically associated with brick-and-mortar publishing. But publishers quickly realized that if market forces were allowed to prevail too quickly, these efficiency enhancing characteristics would rapidly lead to lower consumer prices, improved consumer welfare, and threaten the current business model and available surplus (profit margins). So, faced with disruptive eBook technology that threatened their inefficient and antiquated business model, several major book publishers, working with Apple Inc. ("Apple"), decided free market competition should not be allowed to work – together they coordinated their activities to fight back in an effort to restrain trade and retard innovation. The largest book publishers and Apple were successful.


The original Kindle sold out in less than six hours. To gain market share, take advantage of its first-mover advantage, and capitalize on the tremendous efficiencies associated with eBooks, Amazon set eBook pricing levels significantly below prices for physical books ("paper books" or "hardcover books"). Amazon set the prices of many of the popular new released eBook titles at $9.99. Amazon instituted this pro-consumer, discounted pricing even though on many titles publishers charged Amazon a wholesale price at or above $9.99.


Even though publishers were reaping the benefits of Amazon's successful efforts to vastly expand the consumer base and increase volume of units sold via Amazon's investment in eBook sales, publishers also feared Amazon's $9.99 pricing. Amazon's discount pricing threatened to disrupt the publishers' long-established brick-and-mortar model faster than the publishers were willing to accept. Being hidebound and lacking innovation for decades, the publishers were particularly concerned that Amazon's pro-consumer pricing of eBooks would negatively impact their moribund sales model, and in particular the sale of higher priced physical copies of books. And, longer term, publishers anticipated Amazon would eventually use its market power to reduce the publishers' share of the available surplus (profit margins) from each eBook sale.


Given Amazon's first-mover advantage and ever growing installed user base, publishers knew that no single publisher could slow down Amazon and unilaterally force an increase in eBook retail prices. If one publisher acted alone to try and raise prices for its titles, that publisher would risk immediately losing a substantial (and growing) volume of sales. Not wanting to risk a significant loss of sales in the fastest growing market (eBook sales), the publishers named as defendants ("Publisher Defendants") solved this problem through coordinating between themselves (and Apple) to force Amazon to abandon its pro-consumer pricing. The Publisher Defendants worked together to force the eBook sales model to be entirely restructured. The purpose and effect of this restructuring was to halt the discounting of eBook prices and uniformly raise prices on all first release fiction and nonfiction published by these Publisher Defendants. Under the Publisher Defendants' new pricing model, known as the "Agency model", the Publisher Defendants have restrained trade by coordinating their pricing to directly set retail prices higher than had existed in the previously competitive market.


The Publisher Defendants' unlawful combination and pricing agreement would not have succeeded without the active participation of Apple. Apple facilitated changing the eBook pricing model and conspired with the Publisher Defendants to do so.


Apple had strong incentives to help the Publisher Defendants to restrain trade and increase the price of eBooks. If Amazon continued to solidify its dominant position in the sale of eBooks, strong network effects would make it difficult to dislodge Amazon. Moreover, Amazon's pro-consumer pricing meant that to enter the eBooks market Apple would likely be forced to sell at least some eBooks near or below its wholesale costs for an extended period of time. Apple did not want to enter the eBooks market subject to this margin pressure caused by Amazon's pricing. But at the same time, Apple believed that it had to enter the eBook market because the Kindle was (and is) a competitive threat to Apple's business model. Apple is competing to be – and has become – a dominant manufacturer of mobile devices, such as Apple's iPod, iPhone and iPad devices. These devices are designed to distribute, store, and access digital media through Apple's iOS platform, including Apple's App Store and iTunes Store.


Apple knew that if Amazon could establish the Kindle as the dominant eBook reader by subsidizing the purchase of eBooks, Amazon could then use the Kindle platform (and its large installed user base) to distribute other digital media. Notably, Apple had successfully used a virtually identical strategy to gain a virtual monopoly on the distribution of digital music files through its iPod device and its associated iTunes store.


The Publisher Defendants and Apple implemented this unlawful agreement and combination on or before January 2010, when five of the six major book publishers of fiction and nonfiction works almost simultaneously announced that they were switching from a wholesale pricing model to an Agency model for eBook sales. This was an unprecedented industry shift in pricing (and sales model) in the book industry in the United States. The announcements to shift to the Agency model coincided with the release by Apple of the iPad tablet computer. In fact, when Apple announced the launch of the iPad on January 27, 2010, the Publisher Defendants agreed to allow Apple to use their trademarks in connection therewith.


The same day Apple announced launching the iPad, it was also announced that Apple already struck deals with Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster to switch to the Agency model for Apple's iBookstore – the application on Apple's iPad that functions as an eBook reader (thus competing directly with the Amazon Kindle).


As part of the unlawful agreements, and seeking to leverage its installed user base and dominant position via the Apple iOS platform, Apple and the Publisher Defendants agreed that prices for Publisher Defendants' eBooks that were offered through the iBookstore would be calculated by a formula tied to physical books. This eBook formula would cause current prices for eBooks to increase and, at the same time, would guarantee Apple that the Publisher Defendants would not sell eBooks at lower prices elsewhere, such as through other eBook distributors, including Amazon. The intended effect of this agreement was to force Amazon to abandon its discount pricing of eBooks and allow the Publisher Defendants to establish uniformly higher prices for new release eBooks.


The conspiracy and agreements worked as intended: (1) the Defendants increased and stabilized eBook pricing; and (2) forced Amazon to stop the discounting eBook prices on Publisher Defendants' titles.


As a direct result of this anticompetitive conduct as intended by the conspiracy, the price of eBooks has soared. The price of new bestselling eBooks increased to an average of $12-$15 – an increase of 33 to 50 percent. The price of an eBook in many cases now approaches – or even exceeds – the price of the same book in paper even though there are almost no incremental costs to produce each additional eBook unit. The price of the Publisher Defendants' eBooks sold on the iBookstore, facing no pricing competition from Amazon or other e-distributors for the exact same eBook titles, has remained at supra-competitive levels.


Plaintiffs bring claims under federal and state antitrust laws to enjoin the illegal conduct and to obtain damages."  


Various Other Interesting Points Made in this Complaint


Point One: The complaint reads: "The fact that Apple brokered the simultaneous switch to the Agency model, and the Publisher Defendants agreed to standardize higher eBook prices, is amply demonstrated by a January 2010 interview in which Apple CEO Steve Jobs told Walt Mossberg of the Wall Street Journal that Amazon's $9.99 pricing for eBooks was about to end:


Mossberg: Why should [a consumer] buy a book for $14.99 on your device when she can buy one for $9.99 from Amazon or Barnes & Noble?


Jobs: That won't be the case.


Mossberg: You won't be $14.99 or they won't be $9.99?


Jobs: The prices will be the same . . . Publishers are actually withholding their books from Amazon because they're not happy. (Emphasis added.)


Absent Apple's knowledge of and participation in the unlawful conspiracy, Steve Jobs would not have been able to predict future eBook pricing with such startling accuracy."  


Point Two: The complaint reads: "The simultaneous switch by the "Agency Five" publishers to the Agency model, timed with the release of the Apple iPad, has prompted antitrust scrutiny by several sovereigns.


In March 2011, European Union antitrust regulators, working closely with Britain's Office of Fair Trading, made unannounced raids on several eBook publishers in several countries. According to the Associated Press, the European Commission had "reason to believe that the companies concerned may have violated EU antitrust rules that prohibit cartels and other restrictive business practices."


According to industry newsletter Publishers Lunch, the Texas Attorney General has launched an inquiry that "appears to focus on pricing practices for eBooks and Apple's entrance into the [e-book] market in particular.


The Wall Street Journal reported that at least two major publishers, Hachette and HarperCollins, were under scrutiny by the Texas Attorney General. 87. Connecticut's Attorney General has also launched an inquiry. After a preliminary review, Attorney General Richard Blumenthal commented, "These agreements among publishers, Amazon and Apple appear to have already resulted in uniform prices for many of the most popular eBooks – potentially depriving consumers of competitive prices."


Point Three: The complaint reads: "The Plaintiffs also brings this action on behalf of all members of the following classes (collectively the "State Classes) with respect to claims under the antitrust statues of each of the following jurisdictions: Arizona, California, District of Columbia, Florida, Hawaii, Illinois, Iowa, Kansas, Maine, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York, North California, North Dakota, Oregon, South California, South Dakota, Tennessee, Utah, Vermont West Virginia and Wisconsin."  


The case was filed in the US District Court of Northern California under docket # 3:11-cv-03892-EDL. The presiding Judge in this case is noted as being Magistrate Judge Elizabeth D. Laporte.


Three Other Similar Complaints Launched against Apple and Others


Believe it or not there were three similar complaints filed against Apple this past Wednesday and Thursday as follows: Diamond v. Apple Inc et al; Evans et al v. MacMillan, Hachette Book Group et al (which lists Apple as lead Defendant); and Grover et al v. Macmillan, Simon Schuster, Hachette Group et al (which lists Apple as lead defendant).


To make the case that all of these lawsuits are similar in nature, we present you with a segment of a complaint from the Evans case brought by Clarissa Weiss and Jeffrey Evans:


"This case challenges a horizontal conspiracy amongst the Publisher Defendants who, together with co-conspirator Apple, Inc., entered into contracts and agreements to restrain trade in the consumer retail market for electronic books (eBooks).


The horizontal portion of the conspiracy constitutes per se illegal conduct in that the Publishers Defendants and Apple agreed to raise, fix, stabilize and maintain the retail consumer prices the eBook versions of hardcover best sellers and new releases at artificially high levels. They did this by fixing the consumer retail prices of the eBooks at levels above the $9.99 retail ceiling that prevailed immediately prior to the implementations of this illegal agreement."


At the End of the Day


In my humble opinion, all of the noted cases have a pro Amazon slant to them while painting Apple and the industry's leading publishers as evil conspirators. At one point you have to wonder aloud if we're not actually witnessing a conspiracy of Class Action Lawsuits against Apple and these publishers. There's no way in hell that four class action lawsuits would hit the courts over a three day period with the same basic foundation without some coordination. At the end of the day that's my take on this and now I'd like to hear from you.  


Notice: Patently Apple presents only a brief summary of certain legal cases/ lawsuits which are part of the public record for journalistic news purposes. Readers are cautioned that Patently Apple does not offer an opinion on the merit of the case and strictly presents the allegations made in said legal cases / lawsuits. A lawyer should be consulted for any further details or analysis. About Comments: Patently Apple reserves the right to post, dismiss or edit comments. On most legal cases, comments will be closed. See our Legal Archives for other patent infringement cases.


Interesting News Tid Bit: MacRumors posted a report on Sunday about a Telephonic MacBook Pro prototype. MacRumors updated their report today (Aug 16, 2011) with more photos of the unit supposedly using MagSafe-like magnets.Whether this ever comes to market is unknown at this time, but Apple has been working on this for some time now (see one, two and three) and has even been granted a patent for such a beast. The latest design hides the MacBook antenna internally which sounds more like Apple. Time will tell.  


X - MacBook Pro with 3G antenna prototype, presented on MacRumors Aug 14, 2011, Patently Apple 


Here are a Few Great Community Sites covering our Original Report


MacSurfer, Business Insider, The Dalan Report, Twitter, Facebook, Apple Investor News, Google Reader, UpgradeOSX, TechWatching, Macnews, iPhone World Canada, CBS MarketWatch, Techmeme, Catwalk NYC, BusinessWeek Bloomberg, and more.




As an avid ebook reader, I support the lawsuits. Ebooks have changed the book industry. The cost of distributing an ebook is just much lower than printing, binding, packing, shipping, merchandising, stocking and selling a physical book. Instant availability to millions of readers simulantanously has significant value and is much more cost effective. Beyond that, printed books are often offered for lower than list prices at booksellers. Yet, we only own the right to read. We can't share it, sell it or trade it like we can an ordinary book. Ebook readers are absolutely being ripped off. Keeping the current model is like saying we should charge browsers for Wikipedia access as if they were buying an encylopedia set, to protect those publishers from reduced profits. We are way past that point. On the other hand, I would pay more for an ebook, especially non-fiction, if enhanced content were included such as color (pinchable) pictures, audio files and video files, say in biographies and true crime books. But publishers rarely bother to even upload the grainy, black and white pictures in the printed books. I keep hearing promises of enhanced content in the future, yet we are paying more right now, without it.
It's way past time for change. Does the book industry want to get napstered too?

FWIW I have not bought anything from Amazon.

Not that I am very fond of the publishing houses, but everything I have read about Amazons book sales system reflects poorly on Amazon, it seemed that they were bleeding the publishers dry.

I would prefer to free and fair competition between the publishers and the likes of Amazon, Apple and Google.

Besides, I think that Amazon colluded with the music industry to sell songs at a lower price than Apple were being offered at the same time.

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