Unites States of America v. Apple, Inc. et al

Filing 163

NOTICE of Competitive Impact Statement. Document filed by Unites States of America. (Fairchild, Stephen)

UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
__________________________________________
)
UNITED STATES OF AMERICA,
)
)
Plaintiff,
)
)
v.
)
)
APPLE, INC., et al.,
)
)
Defendants.
)
__________________________________________)

Civil Action No. 12-CV-2826 (DLC)

ECF Case

COMPETITIVE IMPACT STATEMENT
Pursuant to Section 2(b) of the Antitrust Procedures and Penalties Act (“APPA” or
“Tunney Act”), 15 U.S.C. §§ 16(b)-(h), Plaintiff United States of America (“United States”) files
this Competitive Impact Statement relating to the proposed Final Judgment against Defendant
Penguin Group (USA), Inc. and The Penguin Group, a division of Pearson PLC, (collectively
these two entities are referred to herein as “Penguin”), submitted on December 18, 2012, for
entry in this antitrust proceeding.
I.

NATURE AND PURPOSE OF THE PROCEEDING
On April 11, 2012, the United States filed a civil antitrust Complaint alleging that Apple,

Inc. (“Apple”) and five of the six largest publishers in the United States (“Publisher
Defendants”) restrained competition in the sale of electronic books (“e-books”), in violation of
Section 1 of the Sherman Act, 15 U.S.C. § 1. Shortly after filing the Complaint, the United
States filed a proposed final judgment (“Original Judgment”) with respect to Defendants
Hachette Book Group, Inc. (“Hachette”), HarperCollins Publishers L.L.C. (“HarperCollins”),
and Simon & Schuster, Inc. (“Simon & Schuster”). That Original Judgment settled this suit as to

those three defendants. Following a thorough Tunney Act review process, the Court granted the
United States’ Motion for Entry of the Original Judgment. (Docket No. 119).
Penguin has now agreed to settle on substantially the same terms as those contained in
the Original Judgment. A proposed Final Judgment with respect to Penguin (“Penguin Final
Judgment” or “PFJ”) that embodies that settlement was filed today. Of course, the case against
the remaining Defendants—Apple, Inc., Verlagsgruppe Georg von Holtzbrinck GmbH, and
Holtzbrinck Publishers, LLC d/b/a Macmillan—will continue.
The Penguin Final Judgment is described in more detail in Section III below. Because
the language of the Penguin Final Judgment closely follows the language of the Original
Judgment, this Competitive Impact Statement incorporates but does not repeat the extensive
record relating to the Original Judgment.
The United States and Penguin have stipulated that the Penguin Final Judgment may be
entered after compliance with the APPA, unless the United States withdraws its consent. Entry
of the Penguin Final Judgment would terminate this action as to Penguin, except to the extent
that Penguin has stipulated that it will cooperate in the United States’ ongoing prosecution of the
remaining Defendants, and that this Court would retain jurisdiction to construe, modify, and
enforce the Penguin Final Judgment and to punish violations thereof.
II.

BRIEF SUMMARY OF THE EVENTS GIVING RISE TO THE ALLEGED
VIOLATION OF THE ANTITRUST LAWS
As described in detail in the United States’ Complaint (Docket No. 1), and the

Competitive Impact Statement relating to the Original Judgment (“Original CIS,” Docket No. 5),
Publisher Defendants desired to raise retail prices for e-books. (Compl. ¶ 3.) They were
primarily upset by Amazon.com, Inc.’s (“Amazon’s”) pricing of newly released and bestselling
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e-books at $9.99 or less. (Compl. ¶¶ 32-34.) Publisher Defendants feared that Amazon would
resist any unilateral attempt to force an increase in e-book prices and that, even if an individual
Publisher Defendant succeeded in such an attempt, that Publisher Defendant would lose sales to
any competitors that had not forced the price of their books to supracompetitive levels. (Compl.
¶¶ 35-36, 46.) They met privately to discuss ways to collectively solve “the $9.99 problem.”
(Compl. ¶¶ 39-45.) Ultimately, Publisher Defendants agreed to act collectively to raise retail ebook prices. (Compl. ¶¶ 47-50.)
Apple’s entry into the e-book business provided a perfect opportunity to coordinate the
Publisher Defendants’ collective action to raise e-book prices. (Compl. ¶ 51.) At the suggestion
of two Publisher Defendants, Apple began to consider selling e-books under an “agency model,”
whereby the publishers would set the prices consumers ultimately paid for e-books and Apple
would take a 30 percent commission as the selling agent. (Compl. ¶¶ 52-54, 63.) Apple
recognized that, under this scheme, “the customer” would “pay[] a little more,” but that Apple
would realize margins far in excess of what other retailers then averaged on their sales of newlyreleased and bestselling e-books. (Compl. ¶ 56.) To achieve this goal, Apple first expressly
proposed to each Publisher Defendant that it adopt an agency pricing model with every outlet
that would compete with Apple for retail e-book sales, Compl. ¶ 58, and later replaced that
express requirement with a unique most favored nation (“MFN”) pricing provision that
effectively enforced the Publisher Defendants’ commitment to impose the agency pricing model
on all other retailers. (Compl. ¶¶ 65-66.) This MFN protected Apple from price competition
from other retailers, guaranteeing that its 30 percent margin would not be disturbed. (Compl. ¶
65.) Apple kept each Publisher Defendant informed about the status of its negotiations with

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other Publisher Defendants. (Compl. ¶ 61.) In January 2010, Apple sent to each Publisher
Defendant substantively identical term sheets that Apple told them were devised after “talking to
all the other publishers.” (Compl. ¶¶ 62-64.) Those term sheets formed the basis of the nearly
identical agency agreements signed by each Publisher Defendant (“Apple Agency Agreements”).
The purpose of these agreements was to raise and stabilize e-book prices. (Compl. ¶ 66.) Apple
CEO Steve Jobs explained to one Publisher Defendant that the Apple Agency Agreements
provided a path for the Publisher Defendants away from $9.99 and to higher retail e-book prices.
(Compl. ¶ 71.) He urged the Publisher Defendants to “[t]hrow in with Apple and see if we can
all make a go of this to create a real mainstream e-books market at $12.99 and $14.99.” Id.
Apple and the Publisher Defendants adopted these price points in all of the Apple Agency
Agreements, which all were signed within a three-day span in January 2010. (Compl. ¶¶ 74-75.)
As a result of Defendants’ illegal agreement, consumers have paid higher prices for e-books than
they would have paid in a market free of collusion. (Compl. ¶¶ 90-93.)
III.

EXPLANATION OF THE PENGUIN FINAL JUDGMENT

The language and relief contained in the Penguin Final Judgment is largely identical to
the terms included in the Original Judgment. Below, we describe, in abbreviated form, the
purpose of each provision of the Penguin Final Judgment. Penguin’s decision to join the other
settling Publisher Defendants in agreeing to the settlement terms will provide prompt, certain,
and effective remedies that will continue the effort to restore competition to the marketplace.
Settlement likely will lead to lower e-book prices for many Penguin titles; prices for titles
offered by HarperCollins, Hachette, and Simon & Schuster fell soon after those publishers

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entered into new contracts as a result of the Original Judgment.1 The requirements and
prohibitions included in the Penguin Final Judgment will eliminate Penguin’s illegal conduct,
prevent recurrence of the same or similar conduct, and establish a robust antitrust compliance
program.
A.

Required Conduct (Section IV)2

The Penguin Final Judgment begins by addressing those agreements used collusively to
raise and stabilize e-book prices across the industry, requiring that Penguin terminate its Apple
Agency Agreement within seven days of this Court’s entry. See PFJ § IV.A. Because this
agreement included an MFN clause—ensuring that Penguin would remove retail pricing control
from e-book retailers—Section IV.B requires that Penguin’s contracts with retailers that restrict
retailer pricing or include a Price MFN also be terminated. See PFJ § IV.B. Penguin must take
the steps required under each contract to terminate beginning no later than ten days after the
Court enters the Penguin Final Judgment. Section IV.B also allows any retailer with such a

1

See, e.g., Scott Nichols, HarperCollins Offering Discounted eBooks After Price Fixing Settlement, TechRadar
(Sept. 12, 2012), http://www.techradar.com/news/portable-devices/portable-media/harpercollins-offeringdiscounted-ebooks-after-price-fixing-settlement-1096467 (“Bestselling ebooks from the publisher such as ‘The
Fallen Angel’ and ‘Solo’ can now be found for $9.99 on Amazon, Barnes and Noble, and other online retailers.”);
Nate Hoffelder, Hachette Has Dropped Agency Pricing on eBooks, The Digital Reader (Dec. 4, 2012),
http://www.the-digital-reader.com/2012/12/04/hachette-has-dropped-agency-pricing-on-ebooks/ (“Amazon is
discounting the ebooks by $1 to $4 from the list price, and both Barnes & Noble and Apple are making similar
discounts”); Jeremy Greenfield, Simon & Schuster Has a New Deal With Amazon, Other Retailers, Digital Book
World (Dec. 9, 2012), http://www.digitalbookworld.com/2012/looks-like-simon-schuster-has-a-new-deal-withamazon-other-retailers/ (“Ebook prices were lowered for Simon & Schuster titles over the weekend on sites like
Amazon and Nook.com to levels several dollars below what they had been earlier in the week.”).

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Like the Original Judgment, Sections I–III of the Penguin Final Judgment contain a statement acknowledging the
Court’s jurisdiction; definitions; and a statement of the scope of the proposed Final Judgment’s applicability. As
with the settling defendants in the Original Judgment, the definition of Penguin has been drafted to ensure that the
Judgment does not bind subsidiaries of Penguin’s parent corporation that are not in the book publishing business.
Additionally, the definition has been modified to avoid any doubt that if Penguin and Random House, Inc. combine,
as recently proposed, the future entity will be subject to the decree. See PFJ § II.K.

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contract the option to terminate its contract with Penguin on 30 days notice. See also Original
CIS § III.A.1.
Further, in order to reduce the risk that Penguin may use future joint ventures to eliminate
competition among Publisher Defendants, Section IV.C requires that Penguin provide advance
notice to the Department of Justice before forming or modifying a joint venture between it and
another publisher related to e-books. See also Original CIS § III.A.2. Anticipating this
requirement, the Penguin Final Judgment notes that Penguin already has provided appropriate
notice to the United States of its intent to form a joint venture with Random House, Inc.
Finally, to ensure Penguin’s compliance with the Penguin Final Judgment, Section IV.D
requires that Penguin provide, on a quarterly basis, each e-book agreement it has reached with
any e-book retailer on or after January 1, 2012.
B.

Prohibited Conduct (Section V)

In order to ensure that e-book retailers can compete on the price of e-books sold to
consumers in the future, the Penguin Final Judgment also prohibits terms that prevent retail price
competition. Sections V.A, V.B, and V.C limit Penguin’s ability to enter new agreements (and
enforce old agreements) that contain two components of the Apple Agency Agreements: the ban
on retailer discounting, and the retail price-matching MFNs that ensured agency terms were
exported to all e-book retailers. Sections V.A. and V.B. prevent Penguin, for a two-year period,
from forbidding retailers to offer price promotions or discounts on its e-books. Allowing e-book
retailers to negotiate new contracts with Penguin, without permitting Penguin, for a set period, to
prohibit retailers from discounting, will help ensure that new contracts will not be set under the
collusive conditions that produced the Apple Agency Agreements. See PFJ §§ V.A–B. For a

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five-year period, Section V.C also stops Penguin from entering into an agreement with an e-book
retailer that contains a Price MFN (defined as an MFN relating to price, revenue share or
commission available to any retailer). This will eliminate Penguin’s ability to use these MFNs to
achieve, for a second time, the results of the collusive agreements. See also Original CIS §
III.B.1.
Further, Penguin may not retaliate against or punish an e-book retailer based on the
retailer’s e-book prices or its discounting or promotional choices. PFJ § V.D. Nor may Penguin
repeat its previous attempt to retaliate by proxy, as this provision bars Penguin from encouraging
another company to retaliate against an e-book retailer on its behalf. However, the antiretaliation provision does not prohibit Penguin from unilaterally entering into and enforcing
agency agreements with e-book retailers after the two-year proscription, required in Sections
V.A and V.B, has expired. See also Original CIS § III.B.2.
In addition to addressing terms used in the Apple Agency Agreements to implement the
conspiracy, the Penguin Final Judgment also forbids a recurrence of the alleged conspiracy, and
prohibits industry practices that facilitated it. Section V.E prohibits Penguin from agreeing with
other Defendants or e-book publishers to raise or set e-book retail prices or coordinate terms
relating to the licensing, distribution, or sale of e-books. Section V.F likewise prohibits Penguin
from directly or indirectly conveying confidential or competitively sensitive information to any
other e-book publisher. Banning such communications is critical here, where communications
among publishing competitors were a common practice, and led directly to the collusive
agreement alleged in the Complaint. See also Original CIS § III.B.3.
C.

Permitted Conduct (Section VI)

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The Penguin Final Judgment also specifically carves out some conduct—which normally
is permitted under the antitrust laws—that Penguin may unilaterally pursue. Section VI.A of the
Penguin Final Judgment allows Penguin to compensate e-book retailers for services that they
provide to publishers or consumers and help promote or sell more e-books. Section VI.B permits
Penguin to negotiate a commitment from an e-book retailer that a retailer’s aggregate
expenditure on discounts and promotions of Penguin’s e-books will not exceed the retailer’s
aggregate commission under an agency agreement in which Penguin sets the e-book price and
the retailer is compensated through a commission. These provisions allow Penguin to prevent a
retailer selling its entire catalogue at a sustained loss, while still permitting retailers to offer
discounts under Sections V.A and V.B. Absent the collusion here, the antitrust laws would
normally permit a publisher unilaterally to negotiate for such protections. See also Original CIS
§ III.C.
D.

Antitrust Compliance (Section VII)

As outlined in Section VII, Penguin also must designate an Antitrust Compliance Officer,
who is required to distribute copies of the Penguin Final Judgment; ensure training related to the
Penguin Final Judgment and the antitrust laws; certify compliance with the Penguin Final
Judgment; and conduct an annual antitrust compliance audit. This compliance program is
necessary considering the extensive communication among competitors’ CEOs that facilitated
Defendants’ agreement. See also Original CIS § III.D.
IV.

ALTERNATIVES TO THE PENGUIN FINAL JUDGMENT

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The United States considered, as an alternative to the Penguin Final Judgment, a full trial
on the merits against Penguin. The United States believes that the relief contained in the
Penguin Final Judgment will more quickly restore retail price competition to consumers.
V.

REMEDIES AVAILABLE TO PRIVATE LITIGANTS
Section 4 of the Clayton Act, 15 U.S.C. § 15, provides that any person who has been

injured as a result of conduct prohibited by the antitrust laws may bring suit in federal court to
recover three times the damages the person has suffered, as well as costs and reasonable
attorneys’ fees. Entry of the Penguin Final Judgment will neither impair nor assist the bringing
of any private antitrust damage action. Under the provisions of Section 5(a) of the Clayton Act,
15 U.S.C. § 16(a), the Penguin Final Judgment has no prima facie effect in any subsequent
private lawsuit that may be brought against the Defendants.
VI.

PROCEDURES AVAILABLE FOR MODIFICATION OF THE PENGUIN FINAL
JUDGMENT
The United States and Penguin have stipulated that the Penguin Final Judgment may be

entered by this Court after compliance with the provisions of the APPA, provided that the United
States has not withdrawn its consent. The APPA conditions entry of the decree upon this Court’s
determination that the Penguin Final Judgment is in the public interest.
The APPA provides a period of at least sixty (60) days preceding the effective date of the
Penguin Final Judgment within which any person may submit to the United States written
comments regarding the Penguin Final Judgment. Any person who wishes to comment should
do so within sixty (60) days of publication of this Competitive Impact Statement in the Federal
Register, or the last date of publication in a newspaper of the summary of this Competitive
Impact Statement, whichever is later.
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All comments received during this period will be considered by the United States
Department of Justice, which remains free to withdraw its consent to the Penguin Final Judgment
at any time prior to the Court’s entry of judgment. The comments and the responses of the
United States will be filed with the Court and published either in the Federal Register or, with the
Court’s permission, on the Department of Justice website.3 Written comments should be
submitted to:
John Read, Chief
Litigation III Section
Antitrust Division
U.S. Department of Justice
450 5th Street, NW, Suite 4000
Washington, DC 20530
The Penguin Final Judgment provides that the Court retains jurisdiction over this action,
and the parties may apply to the Court for any order necessary or appropriate for modification,
interpretation, or enforcement of the Final Judgment
VII.

STANDARD OF REVIEW UNDER THE APPA FOR THE PENGUIN FINAL
JUDGMENT
The Clayton Act, as amended by the APPA, requires that proposed consent judgments in

antitrust cases brought by the United States be subject to a sixty-day comment period, after
which the court shall determine whether entry of the proposed Final Judgment “is in the public
interest.” 15 U.S.C. § 16(e)(1). In making that determination, the court is directed to consider:
(A)
the competitive impact of such judgment, including termination of alleged
violations, provisions for enforcement and modification, duration of relief sought,
anticipated effects of alternative remedies actually considered, whether its terms
are ambiguous, and any other competitive considerations bearing upon the
adequacy of such judgment that the court deems necessary to a determination of
whether the consent judgment is in the public interest; and
3

The United States posts or links to all public materials regarding United States v. Apple, Inc. at:
http://www.justice.gov/atr/cases/applebooks.html.

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(B)
the impact of entry of such judgment upon competition in the relevant
market or markets, upon the public generally and individuals alleging specific
injury from the violations set forth in the complaint including consideration of the
public benefit, if any, to be derived from a determination of the issues at trial.
15 U.S.C. § 16(e)(1)(A) & (B); see generally United States v. KeySpan Corp., 763 F. Supp. 2d
633, 637–38 (S.D.N.Y. 2011) (WHP) (discussing Tunney Act standards); United States v. SBC
Commc’ns, Inc., 489 F. Supp. 2d 1 (D.D.C. 2007) (assessing standards for public interest
determination).
In other words, under the Tunney Act, a court considers, among other things, the
relationship between the remedy secured and the specific allegations set forth in the
government’s complaint, whether the decree is sufficiently clear, whether enforcement
mechanisms are sufficient, and whether the decree may positively harm third parties. See United
States v. Microsoft Corp., 56 F.3d 1448, 1458-62 (D.C. Cir. 1995). The court’s inquiry is
necessarily a limited one as the government is entitled to “broad discretion to settle with the
defendant within the reaches of the public interest.” Id. at 1461; accord United States v. Alex.
Brown & Sons, Inc., 963 F. Supp. 235, 238 (S.D.N.Y. 1997) (quoting Microsoft, 56 F.3d at
1460), aff’d sub nom. United States v. Bleznak, 153 F.3d 16 (2d Cir. 1998); United States v.
KeySpan, 763 F. Supp. 2d at 637 (same). With respect to the adequacy of the relief secured by
the decree, a court may not “engage in an unrestricted evaluation of what relief would best serve
the public.” United States v. BNS, Inc., 858 F.2d 456, 462 (9th Cir. 1988) (quoting United States
v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir. 1981)); see also Alex. Brown & Sons, 963 F. Supp.
at 238. Instead, the court should grant due respect to the United States’ “prediction as to the
effect of proposed remedies, its perception of the market structure, and its view of the nature of

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the case.” United States v. Archer-Daniels-Midland Co., 272 F. Supp. 2d 1, 6 (D.D.C. 2003).
After all, the court is required to determine not whether a particular decree is the one that will
best serve society, but whether the settlement is “within the reaches of the public interest.”
Bechtel, 648 F.2d at 666 (emphasis added) (citations omitted); accord Alex. Brown, 963 F. Supp.
at 238.4
VIII. DETERMINATIVE DOCUMENTS
There are no determinative materials or documents within the meaning of the APPA that
were considered by the United States in formulating the Penguin Final Judgment.

Dated: December 18, 2012
Respectfully submitted,

s/ Mark W. Ryan
Mark W. Ryan
Lawrence E. Buterman
Daniel McCuaig
Stephanie A. Fleming
Attorneys for the United States
United States Department of Justice
Antitrust Division
450 Fifth Street, N.W., Suite 4000
Washington, D.C. 20530
[phone]
[e-mail]

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Cf. BNS, 858 F.2d at 464 (holding that the court’s “ultimate authority under the [Tunney Act] is limited to
approving or disapproving the consent decree”); United States v. Gillette Co., 406 F. Supp. 713, 716 (D. Mass.
1975) (the court is constrained to “look at the overall picture not hypercritically, nor with a microscope, but with an
artist’s reducing glass”). See generally Microsoft, 56 F.3d at 1461 (discussing whether “the remedies [obtained in
the decree are] so inconsonant with the allegations charged as to fall outside of the ‘reaches of the public interest’”).

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CERTIFICATE OF SERVICE
I, Stephen T. Fairchild, hereby certify that on December 18, 2012, I caused a copy of the
United States’ Competitive Impact Statement to be served by the Electronic Case Filing System,
which included the individuals listed below.

For Apple:
Daniel S. Floyd
Gibson, Dunn & Crutcher LLP
333 S. Grand Avenue, Suite 4600
Los Angeles, CA 90070
[phone]
[e-mail]

For Hachette:
Walter B. Stuart, IV
Freshfields Bruckhaus Deringer LLP
601 Lexington Avenue
New York, NY 10022
[phone]
[e-mail]

For Macmillan and Verlagsgruppe Georg
Von Holtzbrinck GMBH:
Joel M. Mitnick
Sidley Austin LLP
787 Seventh Avenue
New York, NY 10019
[phone]
[e-mail]

For HarperCollins:
Paul Madison Eckles
Skadden, Arps, Slate, Meagher & Flom
Four Times Square, 42nd Floor
New York, NY 10036
[phone]
[e-mail]

For Penguin U.S.A. and the Penguin Group:
Daniel F. McInnis
Akin Gump Strauss Hauer & Feld, LLP
1333 New Hampshire Avenue NW
Washington, DC 20036
[phone]
[e-mail]

For Simon & Schuster:
Yehudah Lev Buchweitz
Weil, Gotshal & Manges LLP (NYC)
767 Fifth Avenue, 25th Fl.
New York, NY 10153
[phone] x8256
[e-mail]

Additionally, courtesy copies of this Competitive Impact Statement have been provided to the
following:

For the State of Connecticut:
W. Joseph Nielsen
Assistant Attorney General
Antitrust Division
Office of the Attorney General
55 Elm Street
Hartford, CT 06106
[phone]
[e-mail]
For the Private Plaintiffs:
Jeff D. Friedman
Hagens Berman
715 Hearst Ave., Suite 202
Berkeley, CA 94710
[phone]
[e-mail]
For the State of Texas:
Gabriel R. Gervey
Assistant Attorney General
Antitrust Division
Office of the Attorney General of Texas
300 W. 15th Street
Austin, Texas 78701
[phone]
[e-mail]

s/ Stephen T. Fairchild
Stephen T. Fairchild
Attorney for the United States
United States Department of Justice
Antitrust Division
450 Fifth Street, N.W., Suite 4000
Washington, D.C. 20530
[phone]
[e-mail]