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

Filing 57

ANSWER to 1 Complaint,. Document filed by Penguin Group (USA), Inc., The Penguin Group.(McInnis, Daniel)

UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
)
UNITED STATES OF AMERICA
)
)
Plaintiff
)
)
v.
)
)
APPLE, INC.,
)
HACHETTE BOOK GROUP, INC.,
)
HARPERCOLLINS PUBLISHERS L.L.C., )
VERLAGSGRUPPE GEORG VON
)
HOLTZBRINCK GMBH,
)
HOLTZBRINCK PUBLISHERS, LLC
)
d/b/a MACMILLAN,
)
THE PENGUIN GROUP,
)
A DIVISION OF PEARSON PLC,
)
PENGUIN GROUP (USA), INC.,
)
and SIMON & SCHUSTER, INC.,
)
)
Defendants.
)
)

Civil Action No. 12-cv-2826
THE PENGUIN GROUP ANSWER

COMES NOW THE PENGUIN GROUP, A DIVISION OF PEARSON PLC, and
PENGUIN GROUP (USA), INC. (collectively “Penguin” or “Penguin Group”), and in response
to plaintiffs’ Complaint, states the following:
PREAMBLE
Penguin did not conspire to fix the prices of eBooks with other publishers or with Apple.
Penguin, at the invitation of Apple, independently negotiated and ultimately entered into a
vertical distribution agreement with Apple. Penguin did so, as the Complaint must concede,
because Apple wanted to open an online bookstore and it needed access to eBooks in order to do
so—and not just Penguin’s eBook titles, but enough breadth and variety of titles from different
publishers in order to have a bookstore where consumers would want to shop. From Penguin’s
perspective, Apple’s technology platform, marketing expertise and its millions of customers
presented an opportunity to expand Penguin’s distribution and sell more eBooks, and develop
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and sell new types of enhanced eBooks compatible with Apple’s advanced technology. Apple,
as the Complaint must also concede, wanted to have a profitable business if it was to open an
iBookstore—otherwise there would have been no iBookstore.
The form of the vertical relationship—agency—made independent business sense to
Penguin. The agency distribution model has existed for far longer than the federal antitrust laws
and has specifically been found by the U.S. Supreme Court to be a legitimate way to do business.
The agency distribution model—like vertical distribution agreements generally—has
incontrovertible pro-competitive aspects. It also cannot be discounted that Apple’s entry and the
adoption of the agency model demolished what was widely recognized in the book industry as a
“barrier to entry”—Amazon’s business practice of selling certain new release eBooks below-cost
for certain periods of time—and prevented Amazon from cementing itself as a monopolist that
would continue to dominate the sale of eBooks and eReaders.
A vertical distribution agreement is presumptively pro-competitive. New entry is
presumptively pro-competitive. Broader distribution is presumptively pro-competitive. Lower
barriers to entry are presumptively pro-competitive. Yet the Government intentionally ignores
these facts with regard to Penguin’s decision to distribute its eBooks through Apple and instead
sides with a monopolist.
I. INTRODUCTION
ALLEGATION 1.

Technology has brought revolutionary change to the business of

publishing and selling books, including the dramatic explosion in sales of “e-books”—that is,
books sold to consumers in electronic form and read on a variety of electronic devices, including
dedicated e- readers (such as the Kindle or the Nook), multipurpose tablets, smartphones and
personal computers. Consumers reap a variety of benefits from e-books, including 24-hour

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access to product with near-instant delivery, easier portability and storage, and adjustable font
size. E- books also are considerably cheaper to produce and distribute than physical (or “print”)
books.
PENGUIN’S RESPONSE:

Penguin admits that competition in the book industry is

complex and robust. Part of this dynamism involves eBooks, a new, exciting, and rapidly
developing means of distributing literary content. Penguin admits that this dynamic competition
is characterized by continuing innovations in the format and content of eBooks (including
enhanced eBooks), development and changes in the number and quality of eReading devices, the
2010 entry of Apple into the eBookstore business, and technological giant Microsoft’s recent
investment in the Barnes & Noble Nook line of business. Penguin also admits that eBooks
provide a number of attractive features for consumers, and, so long as there is continued
development of content and technology spawned by new entry, a diverse marketplace, and the
ability of authors to make a livelihood producing a varied assortment of literary works, there will
continue to be other innovations affecting eBooks that will benefit both consumers and
publishers like Penguin. Penguin otherwise denies the allegations contained in paragraph 1.
ALLEGATION 2.

E-book sales have been increasing rapidly ever since Amazon

released its first Kindle device in November of 2007. In developing and then mass marketing its
Kindle e-reader and associated e-book content, Amazon substantially increased the retail market
for e-books. One of Amazon’s most successful marketing strategies was to lower substantially
the price of newly released and bestselling e-books to $9.99.
PENGUIN’S RESPONSE:

Penguin admits that eBook sales have increased since 2007

because publishers, including Penguin, have invested time and resources to convert frontlist (i.e.,
new releases) and backlist titles into eBook format, partnered with authors to develop innovative,

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enhanced eBooks, and worked with a variety of distribution partners including Amazon, to
expand the distribution and sale of eBooks. Penguin also admits that Amazon’s below-cost
selling of certain newly released and bestselling e-books for $9.99, initiated shortly after the
launch of the Kindle, was a successful strategy for locking consumers into its proprietary Kindle
platform and raising a significant barrier to entry. Penguin otherwise denies the allegations
contained in paragraph 2.
ALLEGATION 3.

Publishers saw the rise in e-books, and particularly Amazon’s price

discounting, as a substantial challenge to their traditional business model. The Publisher
Defendants feared that lower retail prices for e-books might lead eventually to lower wholesale
prices for e-books, lower prices for print books, or other consequences the publishers hoped to
avoid. Each Publisher Defendant desired higher retail e-book prices across the industry before
“$9.99” became an entrenched consumer expectation. By the end of 2009, however, the
Publisher Defendants had concluded that unilateral efforts to move Amazon away from its
practice of offering low retail prices would not work, and they thereafter conspired to raise retail
e-book prices and to otherwise limit competition in the sale of e-books. To effectuate their
conspiracy, the Publisher Defendants teamed up with Defendant Apple, which shared the same
goal of restraining retail price competition in the sale of e-books.
PENGUIN’S RESPONSE:

Except as stated in this Response, Penguin denies the

allegations contained in paragraph 3. Penguin consistently has embraced eBooks and views
eBooks as an important opportunity to increase sales, both in volume and in diversity. As
Penguin Group (USA)’s CEO David Shanks testified during the DOJ investigation:
[O]ver the 30 years that I've been in the business there are far
fewer places to purchase books than there were in the past and this
opportunity that the internet is giving our industry and the
consumer of having an unlimited amount of places to buy books is
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great for the book business and I feel ultimately will be great for
the consumer, but only having one place to buy eBooks doesn't
seem to make sense to me, to Penguin. 

Penguin admits that it viewed some of Amazon’s business practices, most especially its
practice of sometimes selling new release eBooks and eBooks versions of New York Times
bestselling titles well below the prices paid by Amazon to Penguin for these eBook titles, as
anticompetitive and detrimental to the long term process of expanding opportunities for
developing authors and creating more content. As the Complaint is careful to avoid stating, prior
to Apple’s entry, Amazon’s share of eBook sales was 80 to 90 percent. This dominant
monopolist1 position, coupled with a strategy of sales below cost –or “loss-leading”— raised
barriers to entry for other actual and potential distributors of eBooks, including both online and
traditional bookstores (referred to in the industry as “brick-and-mortar” sellers). While Amazon
undoubtedly may have furthered its own interests in using eBook best sellers as loss leaders to
install itself as a permanent monopolist and sell its Kindle (a closed device), it threatened the
long-term, overall health of the book publishing industry by creating barriers to entry,
undercutting the margins and incentives of other sellers, fostering a perception of eBooks as lowcost commodities, and threatening the viability of book publishers and authors, as well as other
book selling outlets vital to the marketing and promotion of books. Penguin was especially
concerned about brick-and-mortar outlets like Borders and Barnes & Noble that have
traditionally played a critical role in marketing book titles and encouraging the discovery and

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Amazon was a monopolist as far as sales of eBooks (and eReaders) to consumers were
concerned because Amazon controlled approximately 90% of those sales and imposed barriers
for new retailers to enter the market, but also a monopsonist on the supply side because Amazon
controlled approximately 90% of the purchases of eBooks as far as publisher/ manufacturers
were concerned. “Monopolist” is used throughout for ease of reference.

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development of new authors and titles. Amazon’s one-size-fits-all practice of pricing certain
titles at certain times at $9.99 also incorrectly signaled that these eBooks were of equal value.
Books are not widgets. Each has its own unique literary, cultural and other intellectual value;
each has its own unique production costs, driven primarily by the craft of authorship and each
author’s muse; each has its own unique customer appeal, with no single book title being an
actual direct substitute for another.
ALLEGATION 4.

The Defendants’ conspiracy to limit e-book price competition

came together as the Publisher Defendants were jointly devising schemes to limit Amazon’s
ability to discount e- books and Defendant Apple was preparing to launch its electronic tablet,
the iPad, and considering whether it should sell e-books that could be read on the new device.
Apple had long believed it would be able to “trounce Amazon by opening up [its] own ebook
store,” but the intense price competition that prevailed among e-book retailers in late 2009 had
driven the retail price of popular e-books to $9.99 and had reduced retailer margins on e-books to
levels that Apple found unattractive. As a result of discussions with the Publisher Defendants,
Apple learned that the Publisher Defendants shared a common objective with Apple to limit ebook retail price competition, and that the Publisher Defendants also desired to have popular ebook retail prices stabilize at levels significantly higher than $9.99. Together, Apple and the
Publisher Defendants reached an agreement whereby retail price competition would cease
(which all the conspirators desired), retail e-book prices would increase significantly (which the
Publisher Defendants desired), and Apple would be guaranteed a 30 percent “commission” on
each e-book it sold (which Apple desired).
PENGUIN’S RESPONSE:

Penguin denies the allegations contained in paragraph 4.

To the contrary, Penguin neither devised nor engaged in any joint “scheme” with other publishers

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related to Amazon. In fact, in December 2009, at the very time Penguin first learned that Apple
was considering launching its iBookstore, Penguin was not “windowing” eBooks (i.e., delaying
the introduction of an eBook version of a title when a hardcover version is first released); nor did
it ever have plans to do so. Penguin’s business behavior was contrary to that undertaken by other
publishers. If windowing eBooks is one of the “schemes” that is supposed to demonstrate a
conspiracy, Penguin’s very public stance not to window eBooks proves Penguin was not part of
the claimed publisher conspiracy.
Although Penguin is without information or knowledge as to the beliefs of Apple in this
regard, Penguin notes that it was not “intense price competition” that drove “the retail price of
popular eBooks to $9.99,” but rather the predatory, below-cost pricing practices of monopolist
retailer Amazon, 2 apparently designed to exclude competition and control the pricing of eBooks,
that was the reason for the $9.99 price point for certain eBook titles. It is self evident that Apple,
like any potential entrant, would not have found attractive the prospect of selling eBooks at a
loss. However, Penguin viewed Apple’s possible entry as a way to broaden its distribution and
increase output—not to mention that no business wants to depend on one distributor for 80 to 90
percent of its sales.
Hence, Penguin and Apple shared the common objective of opening a successful and
viable iBookstore and making eBooks available to the tens of millions of Apple customers.
Penguin wanted to foster broader distribution and a broader market for eBooks by sponsoring
new entry, new innovation, and new types of enhanced eBooks (such as Penguin’s enhanced
version of A.A. Milne’s classic Winnie the Pooh, which is pre-loaded as a complementary eBook

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on every iPad) that were previously not possible because the Amazon Kindle was not then
capable of accommodating color or other enhancements. This interest was “joint” only in the
sense that a successful iBookstore had to have a wide and diverse range of titles—which required
that multiple publishers agree to provide content to Apple.
Penguin also denies the Complaint’s conclusory statements about diminished retail price
competition. Price competition did not “cease” under the agency model; it has simply moved to
the manufacturer (publisher) level with regard to publishers that have adopted that model. And
rather than having one price for certain categories of eBook titles set by a monopolist distributor
(Amazon), under the agency model there is dynamic eBook pricing determined by each publisher
based on each specific title. Moreover, whatever the effect on Penguin’s pricing, other
publishers, retailers, and even self-published authors’ retail price competition continues.
Penguin admits that it agreed to pay Apple a commission to distribute Penguin eBooks in
order to incentivize Apple to enter. As a result, under the agency model, the amount of money
that Penguin receives on a per title basis for each eBook is significantly less than under the
retail/wholesale model.
The reason that Penguin was willing to accept less revenue on a per unit basis was that at
the time of Apple’s entry, Penguin’s internal business analysis showed that by moving to the
agency model and making it profitable for other distributors to enter or become more viable,
Penguin’s overall sales volume would increase. As Penguin Group (USA) Inc. CEO David
Shanks testified during the DOJ investigation:
We had our finance people do an analysis of what it would mean to
our revenues to just plug in the agency pricing scheme versus the
wholesale model … and what it would mean to us because it was
going to generate less revenue on a pure one for one basis. So the
discussion was around what kind of lift we would get by having
more the availability of having more players in the mix than just
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Amazon and Sony …. [W]e felt that there were so many
additional players that we anticipated could come in once they
were reasonably assured that they would not lose money selling ebooks that we could make that up, make up the fact that we were
making less money.
ALLEGATION 5.

To accomplish the goal of raising e-book prices and otherwise

limiting retail competition for e-books, Apple and the Publisher Defendants jointly agreed to
alter the business model governing the relationship between publishers and retailers. Prior to the
conspiracy, both print books and e-books were sold under the longstanding “wholesale model.”
Under this model, publishers sold books to retailers, and retailers, as the owners of the books,
had the freedom to establish retail prices. Defendants were determined to end the robust retail
price competition in e-books that prevailed, to the benefit of consumers, under the wholesale
model. They therefore agreed jointly to replace the wholesale model for selling e-books with an
“agency model.” Under the agency model, publishers would take control of retail pricing by
appointing retailers as “agents” who would have no power to alter the retail prices set by the
publishers. As a result, the publishers could end price competition among retailers and raise the
prices consumers pay for e- books through the adoption of identical pricing tiers. This change in
business model would not have occurred without the conspiracy among the Defendants.
PENGUIN’S RESPONSE:

Penguin denies the allegations contained in paragraph 5.

Penguin did not make an agreement with any other publisher related to the agency model; it
entered into a vertical distribution agreement with Apple. Further, there was nothing
“longstanding” about the wholesale model as applied to eBooks, a line of business still in its
infancy. Indeed, Penguin was selling eBooks directly to the consumer through its own website
(and setting its own prices) prior to the “adoption” of the agency model, which was clearly not a
“wholesale model.” Penguin was also selling eBooks through the Apple App Store under the

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agency model prior to the introduction of the iPad. Besides, there is no reason to assume that
what was the business practice for print books should have been ipso facto the business practice
for eBooks. Indeed, the complaint alleges that eBooks are a completely separate product market
from print books. The allegation that there was “robust retail price competition” prior to the
adoption of the agency model ignores the indisputable fact that the “competition” was nothing
more than the below-cost, predatory, market-domination strategy of a monopolist distributor.
Moreover, the agency model is and has been a legitimate and accepted business model since well
before the enactment of the Sherman Act and has been routinely upheld as a presumptive and
preferred method by courts, including the Supreme Court.
Finally, Penguin denies that it ended retail price competition by entering into an agency
agreement with Apple. Penguin simply became the seller of its own eBook titles with pricing
authority, subject to price ceilings that were insisted upon by Apple. Penguin not surprisingly
resisted the imposition of the price ceilings during its negotiations with Apple.
ALLEGATION 6.

Apple facilitated the Publisher Defendants’ collective effort to end

retail price competition by coordinating their transition to an agency model across all retailers.
Apple clearly understood that its participation in this scheme would result in higher prices to
consumers. As Apple CEO Steve Jobs described his company’s strategy for negotiating with the
Publisher Defendants, “We’ll go to [an] 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.” Apple was
perfectly willing to help the Publisher Defendants obtain their objective of higher prices for
consumers by ending Amazon’s “$9.99” price program as long as Apple was guaranteed its 30
percent margin and could avoid retail price competition from Amazon.

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PENGUIN’S RESPONSE:

Penguin denies the allegations contained in paragraph 6.

Retail price competition has not ended nor for that matter has competition among agents ended
either. Penguin, as the direct seller under the agency model, competes at the retail level. As for
the agents, Apple competes against Amazon, both at the device level (eReader) and with regard
to the strength of their respective eBook stores. Penguin is without knowledge of Steve Jobs’
business strategy, and on that basis denies those allegations.
ALLEGATION 7.

The plan – what Apple proudly described as an “aikido move” –

worked. Over three days in January 2010, each Publisher Defendant entered into a functionally
identical agency contract with Apple that would go into effect simultaneously in April 2010 and
“chang[e] the industry permanently.” These “Apple Agency Agreements” conferred on the
Publisher Defendants the power to set Apple’s retail prices for e-books, while granting Apple the
assurance that the Publisher Defendants would raise retail e-book prices at all other e-book
outlets, too. Instead of $9.99, electronic versions of bestsellers and newly released titles would be
priced according to a set of price tiers contained in each of the Apple Agency Agreements that
determined de facto retail e-book prices as a function of the title’s hardcover list price. All
bestselling and newly released titles bearing a hardcover list price between $25.01 and $35.00,
for example, would be priced at $12.99, $14.99, or $16.99, with the retail e-book price increasing
in relation to the hardcover list price.
PENGUIN’S RESPONSE:

Penguin admits that on January 25, 2010 it entered into a

distribution agreement with Apple, which provides that “Publisher hereby appoints Apple as its
non-exclusive agent for the marketing and delivery of eBooks through the Online Store on
Publisher’s behalf in the Territory to end-users for their personal, non-commercial use, and Apple
accepts such appointment.” Under that Agreement, Penguin retained its legal right to set the

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price for its own titles, subject to a set of complicated price ceilings and a provision insisted upon
by Apple to enable it to always compete with the lowest eBook prices in the marketplace (which
the government characterizes as a “most favored nation” clause), which was essentially a
contractual obligation not to price discriminate against Apple—an obligation that notably already
exists in the context of most wholesale/retail relationships under federal antitrust law in the
Robinson Patman Act, 15 U.S.C. § 13.
Under one set of price ceilings that applied only to eBooks associated with New Release
hardcover titles, Penguin’s prices were limited by an Apple-dictated formula based on Penguin’s
list prices for the hard cover version of the book. However, if any such title became listed on one
of forty-two (42) defined slots on the New York Times Bestseller List, the maximum price
ceilings dropped even lower. Likewise, for all books published in mass market or trade
paperback editions on or after March 15, 2010 with a suggested list price of $22.00 or less,
Penguin was subject to a price ceiling of $9.99. In short, the pricing formula insisted upon by
Apple and agreed to by Penguin was a maximum price restriction and Penguin had full discretion
to set its eBook prices at any level below these price ceilings.
Penguin’s eBook prices for New Release hardcover titles were also subject to a price
protection or MFN term. That term states: “Commencing March 15, 2010, or the date on which
Apple begins marketing and soliciting orders for eBooks in the Online Store, whichever occurs
later, if, for any particular New Release in hardcover format, the then-current Customer Price at
any time is or becomes higher than the a customer price offered by any other reseller (“Other
Customer Price”) then Publisher shall designate a new, lower Customer Price to meet such lower
Other Customer Price.” Penguin specifically denies that its distribution agreement with Apple
required that Penguin would raise retail eBook prices at all other eBook outlets.

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Otherwise, Penguin had complete discretion on how to set its prices, including the prices
for eBooks associated with hardcover new releases with a list price over $30.00, hardcovers
released at least twelve months, all paperback editions of books published before March 15,
2010, all paperback books with a list price over $22.00 (whenever published), and graphical or
illustrative books, such as children’s titles.
Penguin otherwise denies the allegations contained in paragraph 7.
ALLEGATION 8.

After executing the Apple Agency Agreements, the Publisher

Defendants all then quickly acted to complete the scheme by imposing agency agreements on all
their other retailers. As a direct result, those retailers lost their ability to compete on price,
including their ability to sell the most popular e-books for $9.99 or for other low prices. Once in
control of retail prices, the Publisher Defendants limited retail price competition among
themselves. Millions of e- books that would have sold at retail for $9.99 or for other low prices
instead sold for the prices indicated by the price schedules included in the Apple Agency
Agreements—generally, $12.99 or $14.99. Other price and non-price competition among e-book
publishers and among e-book retailers also was unlawfully eliminated to the detriment of U.S.
consumers.
PENGUIN’S RESPONSE:

Penguin denies the allegations contained in paragraph 8.

For Penguin, every potential agent with the exception of one—Amazon—welcomed Penguin’s
offer to move to the agency model for eBook distribution and negotiated an agency agreement
with Penguin.
Under the agency model, price competition has moved from the retail level to the
publisher level. Price and non-price competition both among publisher and among eBook
retailers has exponentially increased as a result of the move to the agency model. For example,

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there is more dynamic pricing of eBooks, which has resulted in lower consumer prices on many,
many eBook titles, more robust competition at the device level in terms of both the cost and
variety of eReading devices, handsome and imaginative enhanced, full-color eBooks, which did
not even exist as a category before Apple introduced the iPad, and more vibrant and
differentiated marketing of eBooks by Penguin’s agents, all to the benefit of consumers.
ALLEGATION 9.

The purpose of this lawsuit is to enjoin the Publisher Defendants

and Apple from further violations of the nation’s antitrust laws and to restore the competition that
has been lost due to the Publisher Defendants’ and Apple’s illegal acts.
PENGUIN’S RESPONSE:

Penguin denies the allegations contained in paragraph 9 and

avers that the remedies that Plaintiff seeks in this lawsuit, if implemented by the Court, could
result in the re-establishment of Amazon as the totally dominant monopolist and the elimination
of many or most competitors in eBook retailing.
ALLEGATION 10.

Defendants’ ongoing conspiracy and agreement have caused e-

book consumers to pay tens of millions of dollars more for e-books than they otherwise would
have paid.
PENGUIN’S RESPONSE:

Penguin denies the allegations contained in paragraph 10.

Penguin did not participate in a conspiracy or enter into an agreement with other publishers.
Penguin entered vertical agency agreements with Apple and other agents. These agency
agreements have resulted in more dynamic eBook pricing (with some eBook prices going up and
some eBook prices going down from prior prices charged by monopolist Amazon), more
dynamism in the market generally, new, lower-priced and more frequently improved eReading
devices, enhanced eBooks, increased overall output of sales and number of eBooks titles, and
greater consumer choice.

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ALLEGATION 11.

The United States, through this suit, asks this Court to declare

Defendants’ conduct illegal and to enter injunctive relief to prevent further injury to consumers
in the United States.
PENGUIN’S RESPONSE:

Penguin admits that this is the relief the United States

seeks, but denies that the relief sought will prevent injury to consumers. To the contrary, if the
relief sought by the United States were to be granted, this relief is likely to result in restoring and
reinforcing Amazon’s monopoly power in the eBook retailing, weakening and eliminating other
eBook retailers, and reduction in competition in terms of both price and service.
II. DEFENDANTS
ALLEGATION 12.

Apple, Inc. has its principal place of business at 1 Infinite Loop,

Cupertino, CA 95014. Among many other businesses, Apple, Inc. distributes e-books through its
iBookstore.
PENGUIN’S RESPONSE:

Penguin admits the allegations contained in paragraph 12,

except denies knowledge that 1 Infinite Loop, Cupertino, CA 95014 is the principal place of
business of Apple, Inc.
ALLEGATION 13.

Hachette Book Group, Inc. has its principal place of business at

237 Park Avenue, New York, NY 10017. It publishes e-books and print books through publishers
such as Little, Brown, and Company and Grand Central Publishing.
PENGUIN’S RESPONSE:

Penguin admits the allegations contained in paragraph 13,

except denies knowledge that 237 Park Avenue is the principal place of business of Hachette
Book Group, Inc.

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ALLEGATION 14.

HarperCollins Publishers L.L.C. has its principal place of business

at 10 E. 53rd Street, New York, NY 10022. It publishes e-books and print books through
publishers such as Harper and William Morrow.
PENGUIN’S RESPONSE:

Penguin admits the allegations contained in paragraph 14,

except denies knowledge that 10 E. 53rd Street is the principal place of business of
HarperCollins Publishers L.L.C.
ALLEGATION 15.

Holtzbrinck Publishers, LLC d/b/a Macmillan has its principal

place of business at 175 Fifth Avenue, New York, NY 10010. It publishes e-books and print
books through publishers such as Farrar, Straus and Giroux and St. Martin’s Press. Verlagsgruppe
Georg von Holtzbrinck GmbH owns Holtzbrinck Publishers, LLC d/b/a Macmillan and has its
principal place of business at Gänsheidestraße 26, Stuttgart 70184, Germany.
PENGUIN’S RESPONSE:

Penguin is without knowledge as to the allegations

contained in paragraph 15 and therefore denies them.
ALLEGATION 16.

Penguin Group (USA), Inc. has its principal place of business at

375 Hudson Street, New York, NY 10014. It publishes e-books and print books through
publishers such as The Viking Press and Gotham Books. Penguin Group (USA), Inc. is the
United States affiliate of The Penguin Group, a division of Pearson plc, which has its principal
place of business at 80 Strand, London WC2R 0RL, United Kingdom.
PENGUIN’S RESPONSE:
ALLEGATION 17.

Admit.

Simon & Schuster, Inc. has its principal place of business at 1230

Avenue of the Americas, New York, NY 10020. It publishes e-books and print books through
publishers such as Free Press and Touchstone.

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PENGUIN’S RESPONSE:

Penguin admits the allegations contained in paragraph 17,

except denies knowledge that 1230 Avenue of the Americas, New York, NY 10020 is the
principal place of business of Simon & Schuster, Inc.
III. JURISDICTION, VENUE, AND INTERSTATE COMMERCE
ALLEGATION 18.

Plaintiff United States of America brings this action pursuant to

Section 4 of the Sherman Act, 15 U.S.C. § 4, to obtain equitable relief and other relief to prevent
and restrain Defendants’ violations of Section 1 of the Sherman Act, 15 U.S.C § 1.
PENGUIN’S RESPONSE:

Penguin admits that Plaintiff United States of America

purports to bring this action pursuant to Section 4 of the Sherman Act, but denies the remaining
allegations contained in paragraph 18.
ALLEGATION 19.

This Court has subject matter jurisdiction over this action under

Section 4 of the Sherman Act, 15 U.S.C. § 4, and 28 U.S.C. §§ 1331,1337(a), and 1345.
PENGUIN’S RESPONSE:

The allegations contained in paragraph 19 purport to state a

legal conclusion and no responsive pleading is required.
ALLEGATION 20.

This Court has personal jurisdiction over each Defendant and

venue is proper in the Southern District of New York under Section 12 of the Clayton Act, 15
U.S.C. § 22, and 28 U.S.C. § 1391, because each Defendant transacts business and is found
within the Southern District of New York. The U.S. component of each Publisher Defendant is
headquartered in the Southern District of New York, and acts in furtherance of the conspiracy
occurred in this District. Many thousands of the Publisher Defendants’ e-books are and have
been sold in this District, including through Defendant Apple’s iBookstore.

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PENGUIN’S RESPONSE:

Penguin admits that personal jurisdiction and venue is

proper in the Southern District of New York and that many active readers live and work here but
otherwise denies the allegations contain in paragraph 20.
ALLEGATION 21.

Defendants are engaged in, and their activities substantially affect,

interstate trade and commerce. The Publisher Defendants sell e-books throughout the United
States. Their e- books represent a substantial amount of interstate commerce. In 2010, United
States consumers paid more than $300 million for the Publisher Defendants’ e-books, including
more than $40 million for e-books licensed through Defendant Apple’s iBookstore.
PENGUIN’S RESPONSE:
Penguin admits that its business activities substantially affect interstate trade and
commerce in the United States. Penguin lacks information or knowledge regarding the statistics
cited in paragraph 21 and therefore denies them.
IV. CO-CONSPIRATORS
ALLEGATION 22.

Various persons, who are known and unknown to Plaintiff, and not

named as defendants in this action, including senior executives of the Publisher Defendants and
Apple, have participated as co-conspirators with Defendants in the offense alleged and have
performed acts and made statements in furtherance of the conspiracy.
PENGUIN’S RESPONSE:

Denied.

V. THE PUBLISHING INDUSTRY AND BACKGROUND OF THE CONSPIRACY
A.

Print Books

ALLEGATION 23.

Authors submit books to publishers in manuscript form. Publishers

edit manuscripts, print and bind books, provide advertising and related marketing services,
decide when a book should be released for sale, and distribute books to wholesalers and retailers.
18

Publishers also determine the cover price or “list price” of a book, and typically that price
appears on the book’s cover.
PENGUIN’S RESPONSE:

Penguin denies that Allegation 23 adequately describes the

publishing industry. Prior to manuscript submission, publishers often consult with and advise
authors on subject matter and style. In almost all instances, there are also literary agents who
work on behalf of authors and play a material role in the publication process. Penguin admits
that as a publisher, Penguin edits manuscripts, hires third parties to print and bind books,
provides advertising and marketing for its authors and titles, and distributes books to retailers
and wholesalers. Publishers like Penguin also maintain sales staffs to sell books to retail and online stores, and also to obtain customer views on the marketplace generally and for particular
titles and authors. Penguin decides what the list prices should be, and (including sometimes in
consultation with the literary agents and author), when its titles should be released for sale.
ALLEGATION 24.

Retailers purchase print books directly from publishers, or through

wholesale distributors, and resell them to consumers. Retailers typically purchase print books
under the “wholesale model.” Under that model, retailers pay publishers approximately one-half
of the list price of books, take ownership of the books, then resell them to consumers at prices of
the retailer’s choice. Publishers have sold print books to retailers through the wholesale model
for over 100 years and continue to do so today.
PENGUIN’S RESPONSE:

Penguin is without knowledge as to the specific details of

how any other publisher sells its books under a wholesale model and therefore denies those
allegations contained in paragraph 24. Penguin admits that retailers purchase print books either
directly from Penguin or through a wholesaler, and then resells the books to consumers.
Penguin’s wholesale contracts with retailers and wholesalers differ; generally, the price that

19

retailers or wholesalers pay is about half of the list price of the book. Retailers and wholesalers
have discretion to set the retail price of print books. Retailers and wholesalers also typically
have the right to return unsold print books to Penguin for credit.
B.

E-books

ALLEGATION 25.

E-books are books published in electronic formats. E-book

publishers avoid some of the expenses incurred in producing and distributing print books,
including most manufacturing expenses, warehousing expenses, distribution expenses, and costs
of dealing with unsold stock.
PENGUIN’S RESPONSE:

Penguin admits that eBooks are books published in

electronic formats and that a small percentage of the costs of producing print books are saved
with eBooks, but otherwise generally denies the allegations contained in paragraph 25.
ALLEGATION 26.

Consumers purchase e-books through websites of e-book retailers

or through applications loaded onto their reading devices. Such electronic distribution allows ebook retailers to avoid certain expenses they incur when they sell print books, including most
warehousing expenses and distribution expenses.
PENGUIN’S RESPONSE:

Penguin admits that consumers can purchaser eBooks

through various methods and that some costs of distributing eBooks versus print books are both
higher and lower but otherwise generally denies the allegations contained in paragraph 26.
ALLEGATION 27.

From its very small base in 2007 at the time of Amazon’s Kindle

launch, the e- book market has exploded, registering triple-digit sales growth each year. E-books
now constitute at least ten percent of general interest fiction and non-fiction books (commonly
known as “trade” books1) sold in the United States and are widely predicted to reach at least 25
percent of U.S. trade books sales within two to three years.

20

GOVERNMENT FN 1: Non-trade e-books include electronic versions of children's
picture books and academic textbooks, reference materials, and other specialized texts that
typically are published by separate imprints from trade books, often are sold through separate
channels, and are not reasonably substitutable for trade e-books.
PENGUIN’S RESPONSE:

Penguin admits that its sales of eBooks have grown

tremendously since their introduction and since Apple’s entry. Penguin lacks sufficient
knowledge or information to respond to the remaining allegation in paragraph 27 & footnote 1
and therefore denies them.

C.

Publisher Defendants and “The $9.99 Problem”

ALLEGATION 28.

The Publisher Defendants compete against each other for sales of

trade e-books to consumers. Publishers bid against one another for print- and electronicpublishing rights to content that they expect will be most successful in the market. They also
compete against each other in bringing those books to market. For example, in addition to pricesetting, they create cover art and other on-book sales inducements, and also engage in advertising
campaigns for some titles.
PENGUIN’S RESPONSE:

The allegations contained in paragraph 28 are over-

simplified and inaccurate in a number of respects: books are not widgets; they are highly
differentiated written works imbued with literary, cultural, and intellectual significance. The
allegations in paragraph 28 are therefore denied. Penguin, under the agency model, presently
sells its eBook titles to consumers directly using its agents. Other entities, including other
publishers, online sellers like Amazon.com, brick-and-mortar stores, authors, or others also sell
non-Penguin eBook trade titles to consumers. Different titles may or may not have any
comparative competitive significance. The vast majority of eBook titles are not, in the minds of
21

consumers, publishers, or bookstores, substitutes for one another. For example, Deadlocked
from the Sookie Stackhouse Series by Charlaine Harris (published by the Ace imprint of Penguin
Group (USA)) is hardly is a substitute for Steve Jobs, the biography by Walter Isaacson
(published by Simon & Schuster)—yet both are currently New York Times Bestsellers. Penguin
also admits that there is a measure of competition between itself and other publishers in the
seeking of publishing rights, but this competition is in no material way affected by the vertical
relationship between publishers and agents.
ALLEGATION 29.

The Publisher Defendants are five of the six largest publishers of

trade books in the United States. They publish the vast majority of their newly released titles as
both print books and e-books. Publisher Defendants compete against each other in the sales of
both trade print books and trade e-books.
PENGUIN’S RESPONSE:

Penguin admits that is believes that by certain measures it

is the second largest trade publisher in the United States and that the other four Publisher
Defendants represent numbers three through six. Penguin further admits it is Penguin’s policy to
release most new trade titles in both print and Ebook format and to do so at the same time.
Penguin otherwise denies the allegations contained in paragraph 29.
ALLEGATION 30.

When Amazon launched its Kindle device, it offered newly

released and bestselling e-books to consumers for $9.99. At that time, Publisher Defendants
routinely wholesaled those e-books for about that same price, which typically was less than the
wholesale price of the hardcover versions of the same titles, reflecting publisher cost savings
associated with the electronic format. From the time of its launch, Amazon’s e-book distribution
business has been consistently profitable, even when substantially discounting some newly
released and bestselling titles.

22

PENGUIN’S RESPONSE:

Penguin admits that for some period of time, Amazon

offered some new release and other eBook titles for approximately $9.99 for some period of time
after the date of release. However, Penguin denies that this practice was by any means
consistent. For some significant points in the life cycle of nearly every new release eBook, the
price at Amazon.com might be as high as $16.99 or more—significantly higher than new release
eBooks are ever priced under Penguin’s agency agreements. Penguin also denies the allegation
that its wholesale prices for eBooks were “about th[e] same” as Amazon’s $9.99 price point or
that its wholesale prices for eBooks reflected publisher cost savings associated with the
electronic format in any way: Penguin routinely wholesaled eBooks for the same price it
wholesaled print books—for half of the list price printed on the cover—and this reflected the
reality of the publishing business, which involves fixed costs associated with each individual
book title no matter what the format. Penguin also denies that Amazon’s $9.99 pricing, when it
occurred, involved anything other than selling product at a loss. Penguin is without information
as to the profitability of Amazon’s “e-book distribution business,” but would suspect that it
depends on how that “business” is defined and whether it includes sales of Amazon’s eReading
device, the Kindle. To the extent the allegation in paragraph 31 about Amazon’s profitability is
based on both sales of eBooks and sales of the Kindle, it contradicts the product market
definition in the Complaint that the market consists of all trade eBooks.
ALLEGATION 31.

To compete with Amazon, other e-book retailers often matched or

approached Amazon’s $9.99-or-less prices for e-book versions of new releases and New York
Times bestsellers. As a result of that competition, consumers benefited from Amazon’s $9.99-orless e-book prices even if they purchased e-books from competing e-book retailers.

23

PENGUIN’S RESPONSE:

Penguin admits that other eBook retailers were forced into

a position of selling certain eBook titles at a loss because of the below-cost pricing practices of
monopolist retailer Amazon, but denies the remaining allegations contained in paragraph 31,
including that this situation was representative of “competition,” or fostered the type of real
consumer benefits that are apparent under the agency model.
ALLEGATION 32.

The Publisher Defendants feared that $9.99 would become the

standard price for newly released and bestselling e-books. For example, one Publisher
Defendant’s CEO bemoaned the “wretched $9.99 price point” and Penguin USA CEO David
Shanks worried that e-book pricing “can’t be $9.99 for hardcovers.”
PENGUIN’S RESPONSE:

Penguin admits that its executives were concerned that

Amazon’s below-cost pricing strategy for certain new release titles would be detrimental to the
long term health of the book industry, including by devaluing books and treating them as onesize-fits-all widgets rather than unique, individually crafted products, raising barriers to entry for
other distributors, and destroying the value chain that supports authors, agents, book sellers (both
on and offline) and publishers, among other industry participants. Penguin further admits that on
December 2, 2009, Penguin USA CEO David Shanks wrote a personal email to Glen Moreno,
Chairman of the Board of Pearson PLC, welcoming the advent of eBooks and commenting about
how much he personally enjoyed reading eBooks on his Kindle and Mr. Shanks opined:
When you think about the lack of availability of English language
books (or any books for that matter) in the rest of the world, the
potential is great. We have to have a proliferation of reading
devices, be they single purpose readers or mobile phones or small
tablet laptops first. Then ebooks could be something. We also have
to hassle out the ebook pricing model. It can’t be $9.99 for
hardcovers. Still a lot of shaking out to do but the potential is
there.
Penguin otherwise denies the remaining allegations contained in paragraph 32.
24

ALLEGATION 33.

The Publisher Defendants believed the low prices for newly

released and bestselling e-books were disrupting the industry. The Amazon-led $9.99 retail price
point for the most popular e-books troubled the Publisher Defendants because, at $9.99, most of
these e-book titles were priced substantially lower than hardcover versions of the same title. The
Publisher Defendants were concerned these lower e-book prices would lead to the “deflation” of
hardcover book prices, with accompanying declining revenues for publishers. The Publisher
Defendants also worried that if $9.99 solidified as the consumers’ expected retail price for ebooks, Amazon and other retailers would demand that publishers lower their wholesale prices,
further compressing publisher profit margins.
PENGUIN’S RESPONSE:

Penguin admits that its executives were concerned that Amazon’s

below-cost pricing strategy for certain new release titles would be detrimental to the long term
health of the book industry, including by devaluing books and treating them as one-size-fits-all
widgets rather than unique, individually crafted products, raising barriers to entry for other
distributors, and destroying the value chain that supports authors, agents, book sellers (both on
and offline) and publishers, among other industry participants. Penguin otherwise denies the
remaining allegations contained in paragraph 33.
ALLEGATION 34.

The Publisher Defendants also feared that the $9.99 price point

would make e- books so popular that digital publishers could achieve sufficient scale to
challenge the major incumbent publishers’ basic business model. The Publisher Defendants were
especially concerned that Amazon was well positioned to enter the digital publishing business
and thereby supplant publishers as intermediaries between authors and consumers. Amazon had,
in fact, taken steps to do so, contracting directly with authors to publish their works as e-books—
at a higher royalty rate than the Publisher Defendants offered. Amazon’s move threatened the

25

Publisher Defendants’ traditional positions as the gate-keepers of the publishing world. The
Publisher Defendants also feared that other competitive advantages they held as a result of years
of investments in their print book businesses would erode and, eventually, become irrelevant, as
e-book sales continued to grow.
PENGUIN’S RESPONSE:

Penguin denies the allegations of paragraph 34 as they

relate to Penguin and lacks sufficient information or knowledge regarding the state of mind of
other publishers and therefore denies the allegations in paragraph 34.
D.
Publisher Defendants Recognize They Cannot Solve “The
$9.99 Problem” Alone
ALLEGATION 35.

Each Publisher Defendant knew that, acting alone, it could not

compel Amazon to raise e-book prices and that it was not in its economic self-interest to attempt
unilaterally to raise retail e-book prices. Each Publisher Defendant relied on Amazon to market
and distribute its e- books, and each Publisher Defendant believed Amazon would leverage its
position as a large retailer to preserve its ability to compete and would resist any individual
publisher’s attempt to raise the prices at which Amazon sold that publisher’s e-books. As one
Publisher Defendant executive acknowledged Amazon’s bargaining strength, “we’ve always
known that unless other publishers follow us, there’s no chance of success in getting Amazon to
change its pricing practices.” In the same email, the executive wrote, “without a critical mass
behind us Amazon won’t ‘negotiate,’ so we need to be more confident of how our fellow
publishers will react....”
PENGUIN’S RESPONSE:

Penguin admits it was concerned that the number of

retailers was shrinking rapidly and that their share of sales were being largely absorbed by
Amazon. Penguin also had extensive experience with Amazon that convinced Penguin that
dealing with a new and credible retailer like Apple would probably provoke serious retaliation by
26

Amazon. Penguin otherwise denies the allegations regarding Penguin in paragraph 35. Penguin
is without information or knowledge regarding the allegations contained in paragraph 35 about
other publishers and therefore denies those allegations.
ALLEGATION 36.

Each Publisher Defendant also recognized that it would lose sales

if retail prices increased for only its e-books while the other Publisher Defendants’ e-books
remained competitively priced. In addition, higher prices for just one publisher’s e-books would
not change consumer perceptions enough to slow the erosion of consumer-perceived value of
books that all the Publisher Defendants feared would result from Amazon’s $9.99 pricing policy.
PENGUIN’S RESPONSE:

Penguin denies the allegations of paragraph 36 as they

relate to Penguin and lacks sufficient information or knowledge regarding the state of mind of
other publishers and therefore denies the allegations in paragraph 36.
DEFENDANTS’ UNLAWFUL ACTIVITIES
ALLEGATION 37.

Beginning no later than September 2008, the Publisher

Defendants’ senior executives engaged in a series of meetings, telephone conversations and other
communications in which they jointly acknowledged to each other the threat posed by Amazon’s
pricing strategy and the need to work collectively to end that strategy. By the end of the summer
of 2009, the Publisher Defendants had agreed to act collectively to force up Amazon’s retail
prices and thereafter considered and implemented various means to accomplish that goal,
including moving under the guise of a joint venture. Ultimately, in late 2009, Apple and the
Publisher Defendants settled on the strategy that worked—replacing the wholesale model with an
agency model that gave the Publisher Defendants the power to raise retail e-book prices
themselves.
PENGUIN’S RESPONSE:

27

Denied.

ALLEGATION 38.

The evidence showing conspiracy is substantial and includes:



Practices facilitating a horizontal conspiracy. The Publisher
Defendants regularly communicated with each other in private
conversations, both in person and on the telephone, and in e-mails
to each other to exchange sensitive information and assurances of
solidarity to advance the ends of the conspiracy.



Direct evidence of a conspiracy. The Publisher Defendants
directly discussed, agreed to, and encouraged each other to
collective action to force Amazon to raise its retail e-book prices.



Recognition of illicit nature of communications. Publisher
Defendants took steps to conceal their communications with one
another, including instructions to “double delete” e-mail and taking
other measures to avoid leaving a paper trail.



Acts contrary to economic interests. It would have been contrary
to the economic interests of any Publisher Defendant acting alone
to attempt to impose agency on all of its retailers and then raise its
retail e-book prices. For example, Penguin Group CEO John
Makinson reported to his parent company board of directors that
“the industry needs to develop a common strategy” to address the
threat “from digital companies whose objective may be to
disintermediate traditional publishers altogether” because it “will
not be possible for any individual publisher to mount an effective
response,” and Penguin later admitted that it would have been
economically disadvantaged if it “was the only publisher dealing
with Apple under the new business model.”



Motive to enter the conspiracy, including knowledge or assurances
that competitors also will enter. The Publisher Defendants were
motivated by a desire to maintain both the perceived value of their
books and their own position in the industry. They received
assurances from both each other and Apple that they all would
move together to raise retail e-book prices. Apple was motivated to
ensure that it would not face competition from Amazon’s low-price
retail strategy.



Abrupt, contemporaneous shift from past behavior. Prior to
January 23, 2010, all Publisher Defendants sold their e-books
under the traditional wholesale model; by January 25,2010, all
Publisher Defendants had irrevocably committed to transition all of
their retailers to the agency model (and Apple had committed to
sell e-books on a model inconsistent with the way it sells the vast
bulk of the digital media it offers in its iTunes store). On April 3,
2010, as soon as the Apple Agency Agreements simultaneously
28

became effective, all Publisher Defendants immediately used their
new retail pricing authority to raise the retail prices of their newly
released and bestselling e-books to the common ostensible
maximum prices contained in their Apple Agency Agreements.
PENGUIN’S RESPONSE:
Penguin denies that the conclusory statements contained in paragraph 38 are “evidence”
of a conspiracy involving Penguin.


Penguin specifically denies that Penguin communicated with other publishers to
exchange sensitive information or otherwise facilitate the alleged conspiracy.



Penguin specifically denies that it had any agreement with other publishers to force
Amazon to raise its retail prices—an allegation that is completely conclusory.



Penguin specifically denies that it took steps to conceal any communications, and is
without knowledge as to these allegations regarding other publishers and therefore
denies them.



Penguin admits that it believed that Apple could not have a successful iBookstore
without the participation of and supply of books from other publishers, because if the
iBookstore’s inventory was limited to only a small percentage of available eBooks,
the iBookstore would almost certainly fail. Penguin did not want to sell its eBooks in
a bookstore that was bound to fail; however, Penguin denies that it was against
Penguin’s economic self interest to take steps to expand its eBook distribution,
regardless of what other publishers did. Further, Penguin specifically denies that the
document selectively quoted above—excerpted out of context from a 2009 Penguin
Strategic Plan prepared on August 4, 2009 John Makinson for the Pearson board—
has anything to do with Penguin’s agency agreement with Apple. To the contrary, the
document concerned Penguin’s participation in the lawful U.K. and U.S. eBook
29

publisher marketing joint ventures—“aNobii,” also referred to as “Project Z”
(www.anobii.com), a U.K. joint venture, and “Project Muse” or “Bookish”
(www.bookish.com), a U.S. joint venture. These joint ventures were and are
legitimate competitor-collaborations among Penguin and other publishers – including
Random House and Harper Collins with respect to aNobii, and Hachette and Simon &
Schuster with respect to Bookish—and were conceived as a way for publishers to
replicate online the “book finding” function that brick and mortar stores historically
performed. The legality and propriety of these joint ventures, which Penguin was
recruited to join before it made the decision to enter into an agency model with Apple,
is not and has never been actually challenged (as neither forms part of the Counts in
this Complaint or is mentioned in the requested relief). Conspicuously omitted from
the Complaint’s selective quotation from the strategic plan is a sentence which makes
it absolutely clear that the communications concerned Penguin’s participation in the
Project Z and Bookish joint ventures:
Competition for the attention of readers will be most intense from
digital companies whose objective may be to disintermediate
traditional publishers altogether. This is not a new threat but we do
appear to be on a collision course with Amazon, and possibly
Google as well. It will not be possible for any individual publisher to
mount an effective response, because of both the resources necessary
and the risk of retribution, so the industry needs to develop a
common strategy. This is the context for the development of the
Project Z initiatives in London and New York. We shall be
prepared to discuss these, and the London project in particular, when
we meet next month but there will be significant costs and risks.
(Emphasis supplied.)
This document further bears the date of August 4, 2009, long before anyone outside
of Apple ever heard of the iPad or iBookstore and hence long before any discussion
with or concerning Apple or related to the agency model. Simply put, the three
30

sentences that the Complaint lifts from this document have nothing to do with Apple,
the agency model, or pricing for that matter.


Penguin denies that it was part of any agreement to raise retail prices for eBooks. As
stated above, Penguin did not want to sell eBooks in the iBookstore unless the
iBookstore was going to stock and distribute the type and variety of eBooks necessary
to make it an attractive place for consumers to shop, which necessarily meant the
participation of other publishers. Penguin sought assurances from Apple that Apple
could deliver the breadth of participation Penguin felt was necessary for a successful
eBook store.



Penguin denies that its move to the agency model was an abrupt shift from past
behavior. eBooks were in their relative infancy and Penguin had not made any
decision that the business model for print books necessarily would be appropriate for
eBooks. As the Government has alleged in its Complaint, there are differences
between print book and eBooks, such as shipping costs, manufacturing costs, returns,
risk of loss, etc. For a product so materially different, it would be surprising if
Penguin had blindly followed its print book model. Penguin denies the remaining
allegations in the last bullet point of paragraph 38.
E.

The Publisher Defendants Recognize a Common Threat

ALLEGATION 39.

Starting no later than September of 2008 and continuing for at least

one year, the Publisher Defendants’ CEOs (at times joined by one non-defendant publisher’s
CEO) met privately as a group approximately once per quarter. These meetings took place in
private dining rooms of upscale Manhattan restaurants and were used to discuss confidential

31

business and competitive matters, including Amazon’s e-book retailing practices. No legal
counsel was present at any of these meetings.
PENGUIN’S RESPONSE:

Penguin generally denies the allegations contained in

paragraph 39 other than admitting that Penguin Group CEO John Makinson, but not Penguin
Group (USA) CEO David Shanks, attended a number of social gatherings at which some, but not
all, of the other Publisher Defendant CEOs were present, as well as Random House’s CEO.
While, in addition to purely social matters, general book industry issues and trends were
discussed at high-levels of generality, Makinson did so pursuant to antitrust legal advice and
avoided competitively sensitive topics like terms of trade, prices, or confidential competitive
matters. Certain potential joint venture proposals were also discussed. Penguin specifically
denies that the purpose of any such gathering was to coordinate or fix prices or that any
agreements to fix prices were reached at any such gathering.
ALLEGATION 40.

In September 2008, Penguin Group CEO John Makinson was

joined by Macmillan CEO John Sargent and the CEOs of the other four large publishers at a
dinner meeting in “The Chefs Wine Cellar,” a private room at Picholene. One of the CEOs
reported that business matters were discussed.
PENGUIN’S RESPONSE:

Penguin admits that Penguin Group CEO John Makinson

attended a social dinner with colleagues in the publishing industry on September 15, 2008, 15
months before anyone in publishing ever heard of the iPad or iBookstore, to welcome the new
CEO of Random House, Markus Dohle, who of course attended. Penguin is without information
or knowledge about what other CEOs reported about the dinner and therefore otherwise denies
the allegations in paragraph 40.

32

ALLEGATION 41.

In January 2009, the CEO of one Publisher Defendant, a United

States subsidiary of a European corporation, promised his corporate superior, the CEO of the
parent company, that he would raise the future of e-books and Amazon’s potential role in that
future at an upcoming meeting of publisher CEOs. Later that month, at a dinner meeting hosted
by Penguin Group CEO John Makinson, again in “The Chefs Wine Cellar” at Picholene, the
same group of publisher CEOs met once more.
PENGUIN’S RESPONSE:

Penguin admits that Penguin Group CEO John Makinson

hosted a social dinner at Picholine on January 28, 2009, attended by the CEO of Random House,
as well as the CEOs of Hachette, Harper Collins, and Simon & Schuster. Penguin does not
believe MacMillan’s CEO attended and therefore denies the allegation that the same group of
CEOs attended. While, in addition to purely social matters, general book industry issues and
trends were discussed at high-levels of generality, Makinson did so pursuant to antitrust legal
advice and avoided competitively sensitive topics like terms of trade, prices, or confidential
competitive matters. Certain potential joint venture proposals were also discussed. Penguin
specifically denies that the purpose of any such gathering was to coordinate or fix prices or that
any agreements to fix prices were reached at any such gathering. Penguin is without knowledge
or information about the allegations in the first sentence of paragraph 41 and therefore denies
them.
ALLEGATION 42.

On or about June 16, 2009, Mr. Makinson again met privately with

other Publisher Defendant CEOs and discussed, inter alia, the growth of e-books and Amazon’s
role in that growth.
PENGUIN’S RESPONSE: Penguin admits that Penguin Group CEO John Makinson on
June 16, 2009 attended a social dinner at Picholine along with the CEO of Random House, as

33

well as the CEOs of Hachette, Harper Collins, and Simon & Schuster—but not the CEO of
Macmillan. While, in addition to purely social matters, general book industry issues and trends
were discussed at high-levels of generality, including the growth of eBooks and Amazon’s role
therein, Makinson did so pursuant to antitrust legal advice and avoided competitively sensitive
topics like terms of trade, prices, or confidential competitive matters. Certain potential joint
venture proposals were also discussed. Penguin specifically denies that the purpose of any such
gathering was to coordinate or fix prices or that any agreements to fix prices were reached at any
such gathering.
ALLEGATION 43.

On or about September 10, 2009, Mr. Makinson once again met

privately with other Publisher Defendant CEOs and the CEO of one non-defendant publisher in a
private room of a different Manhattan restaurant, Alto. They discussed the growth of e-books and
complained about Amazon’s role in that growth.
PENGUIN’S RESPONSE:

Penguin admits that Penguin Group CEO John Makinson

attended a social dinner at Alto on September 10, 2009, attended by the CEO of Random House,
as well as the CEOs of Hachette, Harper Collins, and Simon & Schuster—but not the CEO of
Macmillan. While, in addition to purely social matters, general book industry issues and trends
were discussed at high-levels of generality, including the growth of eBooks and Amazon’s role
therein, Makinson did so pursuant to antitrust legal advice and avoided competitively sensitive
topics like terms of trade, prices, or confidential competitive matters. Certain potential joint
venture proposals were also discussed, including potential participation in a mobile telephone
joint venture. Penguin specifically denies that the purpose of any such gathering was to
coordinate or fix prices or that any agreements to fix prices were reached at any such gathering.

34

Penguin is without knowledge or information about the allegations in the first sentence of
paragraph 41 and therefore denies them.
ALLEGATION 44.

In addition to the CEO dinner meetings, Publisher Defendants’

CEOs and other executives met in-person, one-on-one to communicate about e-books multiple
times over the course of 2009 and into 2010. Similar meetings took place in Europe, including
meetings in the fall of 2009 between executives of Macmillan parent company Verlagsgruppe
Georg von Holtzbrinck GmbH and executives of another Publisher Defendant’s parent company.
Macmillan CEO John Sargent joined at least one of these parent company meetings.
PENGUIN’S RESPONSE:

Penguin denies that John Makinson or David Shanks met in

person, one-on-one with Publisher Defendant CEOs or other executives to communicate about
eBooks in order to fix prices or otherwise diminish competition and therefore generally denies
the allegations in paragraph 44. Penguin admits that it was recruited and ultimately joined two
legitimate joint ventures—“aNobii” or “Project Z” in the U.K. (www.anobii.com) and “Bookish”
or “Project Muse” in the U.S. (bookish.com)— that would market and potentially sell eBooks,
and met and communicated with the joint venturer publisher participants about the same.
Penguin is without knowledge regarding other publishers’ meetings with other people and
therefore denies those allegations.
ALLEGATION 45.

These private meetings provided the Publisher Defendants’ CEOs

the opportunity to discuss how they collectively could solve “the $9.99 problem.”
PENGUIN’S RESPONSE:

Penguin denies that any of its executives’ meeting with

other publishers constituted an attempt to fix prices, and the only collective discussion about
creating competition with respect to Amazon involved the creation of two legitimate joint

35

ventures—“aNobii” or “Project Z” in the U.K. (www.anobii.com) and “Bookish” or “Project
Muse” in the U.S. (bookish.com).
F.
Publisher Defendants Conspire To Raise Retail E-book
Prices Under the Guise of Joint Venture Discussions
ALLEGATION 46.

While each Publisher Defendant recognized that it could not solve

“the $9.99 problem” by itself, collectively the Publisher Defendants accounted for nearly half of
Amazon’s e-book revenues, and by refusing to compete with one another for Amazon’s business,
the Publisher Defendants could force Amazon to accept the Publisher Defendants’ new contract
terms and to change its pricing practices.
PENGUIN’S RESPONSE:

Penguin denies the allegations of paragraph 46 as they

relate to Penguin and lacks sufficient information or knowledge regarding the state of mind of
other publishers and therefore denies the allegations in paragraph 46.
ALLEGATION 47.

The Publisher Defendants thus conspired to act collectively,

initially in the guise of joint ventures. These ostensible joint ventures were not meant to enhance
competition by bringing to market products or services that the publishers could not offer
unilaterally, but rather were designed as anticompetitive measures to raise prices.
PENGUIN’S RESPONSE:

Penguin denies that the eBook publisher joint ventures in

which it is a participant—“aNobii” or “Project Z” in the U.K. (www.anobii.com) and “Bookish”
or “Project Muse” in the U.S. (bookish.com)—are anything other than legitimate joint ventures
intended to enhance competition by providing innovative marketing combined with social media
and an additional route to market for eBooks that Penguin could not otherwise offer effectively
on its own. The publisher participants in these joint ventures—including Random House in the
U.K., who is not alleged to be a “conspiring” publisher— have collectively invested several
million dollars in them. Both aNobii and Bookish have independent CEOs, Boards of Directors,
36

legal counsel, staffs and operating budgets. Indeed, the controlling shareholder of aNobii is
HMV, the U.K.’s leading entertainment brand—also not alleged to be a “co-conspirator” by the
government.
ALLEGATION 48.

All five Publisher Defendants agreed in 2009 at the latest to act

collectively to raise retail prices for the most popular e-books above $9.99. One CEO of a
Publisher Defendant’s parent company explained to his corporate superior in a July 29,2009 email message that “[i]n the USA and the UK, but also in Spain and France to a lesser degree, the
‘top publishers’ are in discussions to create an alternative platform to Amazon for e-books. The
goal is less to compete with Amazon as to force it to accept a price level higher than 9.99 .... I am
in NY this week to promote these ideas and the movement is positive with [the other four
Publisher Defendants].” (Translated from French).
PENGUIN’S RESPONSE:

Penguin denies that it agreed with other publishers to act

collectively with other publishers to raise the retail prices for the most popular eBooks above
$9.99. Penguin is without knowledge as to the remaining allegations contained in paragraph 48
and therefore denies them.
ALLEGATION 49.

Less than a week later, in an August 4, 2009 strategy memo for the

board of directors of Penguin’s ultimate parent company, Penguin Group CEO John Makinson
conveyed the same message:
Competition for the attention of readers will be most intense from
digital companies whose objective may be to disintermediate
traditional publishers altogether. This is not a new threat but we do
appear to be on a collision course with Amazon, and possibly
Google as well. It will not be possible for any individual publisher to
mount an effective response, because of both the resources necessary
and the risk of retribution, so the industry needs to develop a
common strategy. This is the context for the development of the
Project Z initiatives [joint ventures] in London and New York.

37

PENGUIN’S RESPONSE:

Penguin admits that Penguin Group CEO John Makinson

drafted a document entitled “Penguin Three Year Plan 2009” to his board on August 4, 2009
relating the quoted language above. However, the language above, on its face, is clearly
discussing the legitimate U.K and U.S. eBook joint ventures in which Penguin is a participant—
“aNobii” (www.anobii.com)( initially called “Project Z”) and “Bookish” (bookish.com). This
document further bears the date of August 4, 2009, long before any discussion with or
concerning Apple or related to the agency model. Simply put, the three sentences lifted from this
document have nothing to do with Apple, the agency model, or pricing.
G.
Defendants Agree To Increase and Stabilize Retail E-book
Prices by Collectively Adopting an Agency Model
ALLEGATION 50.

To raise e-book prices, the Publisher Defendants also began to

consider in late 2009 selling e-books under an “agency model” that would take away Amazon’s
ability to set low retail prices. As one CEO of a Publisher Defendant’s parent company explained
in a December 6, 2009 e-mail message, “[o]ur goal is to force Amazon to return to acceptable
sales prices through the establishment of agency contracts in the USA .... To succeed our
colleagues must know that we entered the fray and follow us.” (Translated from French).
PENGUIN’S RESPONSE:

Penguin generally denies the allegations contained in

paragraph 50. Penguin began to consider the agency model seriously when, and only when,
Apple proposed it to Penguin as a method of doing business for Apple’s proposed iBookstore.
Indeed, on January 4, 2010 – i.e., several weeks after “late 2009” – Penguin sent to Apple a draft
wholesale/retail agreement for the sale of Penguin eBooks in the iBookstore. Penguin is without
knowledge as to the explanations of other publisher CEOs and therefore denies those allegations.
ALLEGATION 51.

Apple’s entry into the e-book business provided a perfect

opportunity for collective action to implement the agency model and use it to raise retail e-book
38

prices. Apple was in the process of developing a strategy to sell e-books on its new iPad device.
Apple initially contemplated selling e-books through the existing wholesale model, which was
similar to the manner in which Apple sold the vast majority of the digital media it offered in its
iTunes store. On February 19, 2009, Apple Vice President of Internet Services Eddy Cue
explained to Apple CEO Steve Jobs in an e-mail, “[a]t this point, it would be very easy for us to
compete and I think trounce Amazon by opening up our own ebook store.” In addition to
considering competitive entry at that time, though, Apple also contemplated illegally dividing the
digital content world with Amazon, allowing each to “own the category” of its choice—
audio/video to Apple and e-books to Amazon.
PENGUIN’S RESPONSE:

Penguin generally denies the allegations contained in

paragraph 51. Penguin admits that Apple approached Penguin in December 2009 to present the
idea of opening an iBookstore to sell eBooks on its new iPad device, and Penguin was eager to
do business with Apple to secure broader distribution for its eBooks and have the opportunity to
create enhanced eBooks, which the iPad promised to be able to accommodate (and which
Amazon’s Kindle could not). Penguin is without knowledge as to Apple’s statements or
contemplations and therefore denies those allegations.
ALLEGATION 52.

Apple soon concluded, though, that competition from other

retailers – especially Amazon – would prevent Apple from earning its desired 30 percent margins
on e-book sales. Ultimately, Apple, together with the Publisher Defendants, set in motion a plan
that would compel all non-Apple e-book retailers also to sign onto agency or else, as Apple’s
CEO put it, the Publisher Defendants all would say, “we’re not going to give you the books.”

39

PENGUIN’S RESPONSE:

Penguin is without knowledge as to the allegations about

conclusions drawn by Apple contained in paragraph 52 and therefore denies them. Penguin
denies the remaining allegations contained in paragraph 52.
ALLEGATION 53.

The executive in charge of Apple’s inchoate e-books business,

Eddy Cue, telephoned each Publisher Defendant and Random House on or around December 8,
2009 to schedule exploratory meetings in New York City on December 15 and December 16.
Hachette and HarperCollins took the lead in working with Apple to capitalize on this golden
opportunity for the Publisher Defendants to achieve their goal of raising and stabilizing retail ebook prices above $9.99 by collectively imposing the agency model on the industry.
PENGUIN’S RESPONSE:

Penguin admits that it was initially contacted in early

December by Apple and met with Apple on December 15, 2009 to discuss the possibility of an
iBookstore, and that this meeting was the first that Penguin learned of Apple’s plans for an
eReader application on its iPad device, but denies the remaining allegations contained in
paragraph 53 as they pertain to Penguin. Penguin is without information regarding the
allegations in paragraph 53 regarding other publishers and therefore denies them.
ALLEGATION 54.

It appears that Hachette and HarperCollins communicated with

each other about moving to an agency model during the brief window between Mr. Cue’s first
telephone calls to the Publisher Defendants and his visit to meet with their CEOs. On the
morning of December 10, 2009, a HarperCollins executive added to his calendar an appointment
to call a Hachette executive at 10:50 AM. At 11:01 AM, the Hachette executive returned the
phone call, and the two spoke for six minutes. Then, less than a week later in New York, both
Hachette and HarperCollins executives told Mr. Cue in their initial meetings with him that they

40

wanted to sell e-books under an agency model, a dramatic departure from the way books had
been sold for over a century.
PENGUIN’S RESPONSE:

Penguin is without knowledge as to the allegations about

Hachette and HarperCollins contained in paragraph 54 and therefore denies them.
ALLEGATION 55.

The other Publisher Defendants also made clear to Apple that they

“certainly” did not want to continue “the existing way that they were doing business,” i.e., with
Amazon promoting their most popular e-books for $9.99 under a wholesale model.
PENGUIN’S RESPONSE:

Penguin admits that its discussed Amazon’s pricing of

eBooks with Apple during the initial meeting between Penguin and Apple on December 15,
2009, insofar as it was an industry fact that Apple needed to be aware of in deciding whether to
open an iBookstore, but Penguin denies the remaining allegations contained in paragraph 55.
ALLEGATION 56.

Apple saw a way to turn the agency scheme into a highly profitable

model for itself. Apple determined to give the Publisher Defendants what they wanted while
shielding itself from retail price competition and realizing margins far in excess of what e-book
retailers then averaged on each newly released or bestselling e-book sold. Apple realized that, as
a result of the scheme, “the customer” would “pay[] a little more.”
PENGUIN’S RESPONSE:

Penguin is without knowledge about the allegations

regarding Apple contained in paragraph 56 and therefore denies them.
ALLEGATION 57.

On December 16, 2009, the day after both companies’ initial

meetings with Apple, Penguin Group CEO John Makinson had a breakfast meeting at a London
hotel with the CEO of another Publisher Defendant’s parent company. Consistent with the
Publisher Defendants’ other efforts to conceal their activities, Mr. Makinson’s breakfast

41

companion wrote to his U.S. subordinate that he would recount portions of his discussion with
Mr. Makinson only by telephone.
PENGUIN’S RESPONSE:

Penguin admits that Penguin Group CEO John Makinson

attended a previously scheduled breakfast meeting with Hachette’s CEO, Arnaud Nourry, on
December 16, 2009 the purpose of which was to discuss participation in a publisher eBook joint
venture. Penguin is without knowledge as to the allegations regarding Arnaud Nourry contained
in paragraph 57 and therefore denies them.
ALLEGATION 58.

By the time Apple arrived for a second round of meetings during

the week of December 21, 2009, the agency model had become the focus of its discussions with
all of the Publisher Defendants. In these discussions, Apple proposed that the Publisher
Defendants require all retailers of their e-books to accept the agency model. Apple thereby
sought to ensure that it would not have to compete on retail prices. The proposal appealed to the
Publisher Defendants because wresting pricing control from Amazon and other e-book retailers
would advance their collusive plan to raise retail e-book prices.
PENGUIN’S RESPONSE:

Penguin denies the allegations contained in paragraph 58

insofar as they relate to Penguin. Penguin did not have further discussions with Apple regarding
the business model under which the two might potentially operate until Penguin proposed a
wholesale/retail distribution agreement with Apple on January 4, 2010. The next day, January 5,
2010, Apple unilaterally announced the agency model to Penguin as a take-it-or-leave-it deal
term. Penguin is without knowledge as to the allegations regarding any other publisher
contained in paragraph 58 and therefore denies them.
ALLEGATION 59.

The Publisher Defendants acknowledged to Apple their common

objective to end Amazon’s $9.99 pricing. As Mr. Cue reported in an e-mail message to Apple’s

42

CEO Steve Jobs, the three publishers with whom he had met saw the “plus” of Apple’s position
as “solv[ing the] Amazon problem.” The “negative” was that Apple’s proposed retail prices –
topping out at $12.99 for newly released and bestselling e-books – were a “little less than [the
publishers] would like.” Likewise, Mr. Jobs later informed an executive of one of the Publisher
Defendant’s corporate parents that “[a]ll major publishers” had told Apple that “Amazon’s $9.99
price for new releases is eroding the value perception of their products in customer’s minds, and
they do not want this practice to continue for new releases.”
PENGUIN’S RESPONSE:

Penguin denies that it acknowledged to Apple that the

publishers had a common objective to end Amazon’s $9.99 pricing and is otherwise without
knowledge as to the allegations regarding Apple other than that Penguin did not participate in a
“second round of meetings” with Apple in December, and was not the Publisher to which Mr.
Jobs communicated, and therefore denies the allegations contained in paragraph 59.
ALLEGATION 60.

As perhaps the only company that could facilitate their goal of

raising retail e- book prices across the industry, Apple knew that it had significant leverage in
negotiations with Publisher Defendants. Apple exercised this leverage to demand a thirty percent
commission—a margin significantly above the prevailing competitive margins for e-book
retailers. The Publisher Defendants worried that the combination of paying Apple a higher
commission than they would have liked and pricing their e-books lower than they wanted might
be too much to bear in exchange for Apple’s facilitation of their agreement to raise retail e-book
prices. Ultimately, though, they convinced Apple to allow them to raise prices high enough to
make the deal palatable to them.
PENGUIN’S RESPONSE:

Penguin admits that Apple—with access to hundreds of

millions of potential eBook buyers through iTunes and the drawing power of its hotly anticipated

43

iPad—had significant leverage in its negotiations with Penguin. Thus, and among other terms,
Apple negotiated a 30% commission, which Penguin understands to be the same commission
Apple received under its agency agreements with regard to the sale of Apps for the iPhone.
Penguin denies that there were any extant “competitive” margins prior to Apple opening an
iBookstore. Penguin admits that it negotiated business terms with Apple that Penguin estimated
would be profitable for Penguin based upon the assumption that the entry of Apple and the
institution of the agency model would expand distribution and increase Penguin’s overall sales of
eBooks significantly, as demonstrated by Penguin’s internal business planning documents.
Penguin denies the remaining allegations contained in paragraph 60 with respect to Penguin, and
is without knowledge as to the allegations regarding any other publisher contained in paragraph
60 and therefore denies them.
ALLEGATION 61.

As it negotiated with the Publisher Defendants in December 2009

and January 2010, Apple kept each Publisher Defendant informed of the status of its negotiations
with the other Publisher Defendants. Apple also assured the Publisher Defendants that its
proposals were the same to each and that no deal Apple agreed to with one publisher would be
materially different from any deal it agreed to with another publisher. Apple thus knowingly
served as a critical conspiracy participant by allowing the Publisher Defendants to signal to one
another both (a) which agency terms would comprise an acceptable means of achieving their
ultimate goal of raising and stabilizing retail e-book prices, and (b) that they could lock
themselves into this particular means of collectively achieving that goal by all signing their
Apple Agency Agreement.
PENGUIN’S RESPONSE:

Penguin generally denies the allegations contained in

paragraph 61 but admits that Apple made it clear to Penguin that Apple, for its own reasons, did

44

not want to have materially different agreements with its book publisher partners. Penguin
further denies that Apple informed Penguin of the status of its negotiations with other publishers,
other than telling Penguin at times that it had agreed to terms with some number of unidentified
other publishers. Penguin is without knowledge as to the allegations regarding any other entity
contained in paragraph 61 and therefore denies them.
ALLEGATION 62.

Apple’s Mr. Cue e-mailed each Publisher Defendant between

January 4, 2010, and January 6, 2010 an outline of what he tabbed [sic] “the best approach for ebooks.” He reassured Penguin USA CEO David Shanks and other Publisher Defendant CEOs
that Apple adopted the approach “[a]fter talking to all the other publishers.” Mr. Cue sent
substantively identical e-mail messages and proposals to each Publisher Defendant.
PENGUIN’S RESPONSE:

Penguin admits that Apple’s Eddy Cue emailed Penguin on

January 5, 2010 outlining the terms it was willing to use to open an iBookstore and that email
includes the statement: “After talking to all the other publishers and seeing the overall book
environment, here is what I think is the best approach for ebooks.” Penguin denies that the
Apple statement was a “reassurance” to David Shanks and denies knowledge of whether it was a
“reassurance” to any other publisher.
ALLEGATION 63.

The outlined proposal that Apple circulated after consulting with

each Publisher Defendant contained several key features. First, as Hachette and HarperCollins
had initially suggested to Apple, the publisher would be the principal and Apple would be the
agent for e- book sales. Consumer pricing authority would be transferred from retailers to
publishers. Second, Apple’s proposal mandated that every other retailer of each publisher’s ebooks – Apple’s direct competitors – be forced to accept the agency model as well. As Mr. Cue
wrote, “all resellers of new titles need to be in agency model.” Third, Apple would receive a 30

45

percent commission for each e-book sale. And fourth, each Publisher Defendant would have
identical pricing tiers for e-books sold through Apple’s iBookstore.
PENGUIN’S RESPONSE:

Penguin admits that Eddy Cue’s email to Penguin dated

January 5, 2010 outlined what Eddy Cue believed was “the best approach for ebooks.” Penguin
is without knowledge of what, if anything, Hachette and HarperCollins initially suggested to
Apple and therefore denies those allegations, and Penguin specifically denies that Penguin
suggested the agency model to Apple, as it in fact had done the opposite by transmitting a draft
wholesale/retail contract to Apple on January 4, 2010—the day before. Penguin admits that
Eddy Cue’s email on January 5, 2010 informed Penguin that it would only go forward using the
agency model (“Just like the App Store, we are proposing a principal-agency model with you,
where you would be the principal and iTunes would sell your product as your agent for your
account. In exchange for acting as your agent, iTunes would get a 30% commission for each
transaction”), and that it would insist upon pricing tiers in order to keep eBook prices low (“On
pricing, you would be free to determine whether to distribute any particular publication through
iTunes (of course if another eBook distributor was able to sell a book then we would as well);
and you would be free to establish the price that eBook would be sold. So that we could
efficiently manage our agency role, we propose a corresponding range of prices for books at
various stages in a book’s publication and distribution evolution.”). Eddy Cue also wrote:
“There are several things we have to accomplish in order to sell eBooks at realistic prices: books
need to be cheaper to buy than physical; you should make less per book since significant costs
have been eliminated but still have a healthy, profitable sale; all resellers of new titles need to be
in agency model.” Penguin specifically denies that Eddy Cue’s January 5, 2010 suggested that
Penguin would have identical pricing tiers as other publishers. Penguin is without knowledge as

46

to the allegations contained in paragraph 63 regarding any other publisher and therefore denies
them.
ALLEGATION 64.

On January 11, 2010, Apple e-mailed its proposed e-book

distribution agreement to all the Publisher Defendants. As with the outlined proposals Apple sent
earlier in January, the proposed e-book distribution agreements were substantially the same. Also
on January 11, 2010, Apple separately e-mailed to Penguin and two other Publisher Defendants
charts showing how the Publisher Defendant’s bestselling e-books would be priced at $12.99 –
the ostensible maximum price under Apple’s then-current price tier proposal – in the iBookstore.
PENGUIN’S RESPONSE:

Penguin admits that Apple sent its initial draft of an agency

distribution agreement for eBooks to Penguin on January 11, 2010, Penguin is without
knowledge as to any proposals sent by Apple to other publishers and therefore denies those
allegations. Penguin admits that Apple also sent Penguin a chart explaining its price tiers that
Apple had proposed in its initial draft agency contract. Penguin denies the remaining allegations
contained in paragraph 64. Penguin is without knowledge as to the allegations contained in
paragraph 64 regarding any other publisher and therefore denies them.
ALLEGATION 65.

The proposed e-book distribution agreement mainly incorporated

the principles Apple set out in its e-mail messages of January 4 through January 6, with two
notable changes. First, Apple demanded that the Publisher Defendants provide Apple their
complete e-book catalogs and that they not delay the electronic release of any title behind its
print release. Second, and more important, Apple replaced the express requirement that each
publisher adopt the agency model with each of its retailers with an unusual most favored nation
(“MFN”) pricing provision. That provision was not structured like a standard MFN in favor of a
retailer, ensuring Apple that it would receive the best available wholesale price. Nor did the MFN

47

ensure Apple that the Publisher Defendants would not set a higher retail price on the iBookstore
than they set on other websites where they controlled retail prices. Instead, the MFN here
required each publisher to guarantee that it would lower the retail price of each e-book in Apple’s
iBookstore to match the lowest price offered by any other retailer, even if the Publisher
Defendant did not control that other retailer’s ultimate consumer price. That is, instead of an
MFN designed to protect Apple’s ability to compete, this MFN was designed to protect Apple
from having to compete on price at all, while still maintaining Apple’s 30 percent margin.
PENGUIN’S RESPONSE:

Penguin admits that Apple’s initial draft agency contract

circulated to Penguin included what might be characterized as “most favored nation” provision
regarding eBook content, and what the government characterizes as a “most favored nation”
provision regarding retail prices. Contrary to the allegations in paragraph 65, the provision with
regard to pricing ensured that the prices set by Penguin for Penguin titles sold in the iBookstore
would be competitive with any price for the same title offered anywhere else. This provision did
not diminish Apple’s incentives to compete; to the contrary, it allowed Apple to match the lowest
eBook prices in the marketplace and thus to ensure that the iBookstore could be the most
attractive location to buy eBooks. Penguin denies the remaining allegations contained in
paragraph 65.
ALLEGATION 66.

The purpose of these provisions was to work in concert to enforce

the Defendants’ agreement to raise and stabilize retail e-book prices. Apple and the Publisher
Defendants recognized that coupling Apple’s right to all of their e-books with its right to demand
that those e-books not be priced higher on the iBookstore than on any other website effectively
required that each Publisher Defendant take away retail pricing control from all other e-book
retailers, including stripping them of any ability to discount or otherwise price promote e-books

48

out of the retailer’s own margins. Otherwise, the retail price MFN would cause Apple’s
iBookstore prices to drop to match the best available retail price of each e-book, and the
Publisher Defendants would receive only 70 percent of those reduced retail prices. Price
competition by other retailers, if allowed to continue, thus likely would reduce e-book revenues
to levels the Publisher Defendants could not control or predict.
PENGUIN’S RESPONSE:
ALLEGATION 67.

Denied.

In negotiating the retail price MFN with Apple, “some of [the

Publisher Defendants]” asserted that Apple did not need the provision “because they would be
moving to an agency model with [the other e-book retailers,]” regardless. Ultimately, though, all
Defendants agreed to include the MFN commitment mechanism.
PENGUIN’S RESPONSE:

Penguin admits that its agency contract with Apple contains

several clauses that might be characterized as “most favored nation” provisions. Penguin also
notes that its agency contract with Amazon also contains several clauses that might be
characterized as “most favored nation” provisions. Both sets of commitments by Penguin were
intended to keep Penguin’s agents’ offerings competitive with each other. Penguin denies the
remaining allegations contained in paragraph 67 with respect to Penguin, and is without
knowledge as to the allegations regarding any other entity contained in paragraph 67, and
therefore denies them.
ALLEGATION 68.

On January 16, 2010, Apple, via Mr. Cue, offered revised terms to

the Publisher Defendants that again were identical in substance. Apple modified its earlier
proposal in two significant ways. First, in response to publisher requests, it added new maximum
pricing tiers that increased permissible e-book prices to $16.99 or $19.99, depending on the
book’s hardcover list price. Second, Apple’s new proposal mitigated these price increases

49

somewhat by adding special pricing tiers for e-book versions of books on the New York Times
fiction and non-fiction bestseller lists. For e-book versions of bestsellers bearing list prices of
$30 or less, Publisher Defendants could set a price up to $12.99; for bestsellers bearing list prices
between $30 and $35, the e-book price cap would be $14.99. In conjunction with the revised
proposal, Mr. Cue set up meetings for the next week to finalize agreements with the Publisher
Defendants.
PENGUIN’S RESPONSE:

Penguin admits that Apple’s Eddie Cue sent an electronic

mail message with revised, proposed deal terms to Penguin on or around January 16, 2010,
which among other items, included price ceilings that were different from the price tiers Apple
had first proposed and a requirement that the price ceiling applied to titles listed on the New York
Times Best Seller list be lowered. Penguin is otherwise without knowledge of Apple’s
negotiations with other publishers and therefore denies those allegations. Penguin further admits
that Apple arranged to meet with Penguin on or around January 20, 2010 to discuss Apple
opening an online bookstore and Penguin’s possible participation. Penguin is without knowledge
as to the allegations contained in paragraph 68 regarding any other entity and therefore denies
them.
ALLEGATION 69.

Each Publisher Defendant required assurances that it would not be

the only publisher to sign an agreement with Apple that would compel it either to take pricing
authority from Amazon or to pull its e-books from Amazon. The Publisher Defendants continued
to fear that Amazon would act to protect its ability to price e-books at $9.99 or less if any one of
them acted alone. Individual Publisher Defendants also feared punishment in the marketplace if
only its e-books suddenly became more expensive at retail while other publishers continued to
allow retailers to compete on price. As Mr. Cue noted, “all of them were very concerned about

50

being the only ones to sign a deal with us.” Penguin explicitly communicated to Apple that it
would sign an e-book distribution agreement with Apple only if at least three of the other
“major[]” publishers did as well. Apple supplied the needed assurances.
PENGUIN’S RESPONSE:

Penguin admits that it sought an assurance from Apple,

prior to entering a business relationship with Apple to sell eBooks, that a number of publishers
would be selling their eBooks in the iBookstore because Penguin wanted to sell its eBooks on a
platform that would attract the greatest number of customers—which would necessarily require
the participation of other eBook publishers in providing titles to the bookstore. Also, because a
switch to agency selling involved costs and some business disruption (e.g., occasioned by
systems changes), Penguin wanted to be assured that Apple was committed to a full-scale, viable
iBookstore, which meant a store selling a large variety of eBook titles being published. In
addition to ensuring the viability of the iBookstore, Penguin was also worried about preserving
its existing distribution—which could have been harmed, for example, if Amazon punitively
refused to sell Penguin titles on its website in retaliation for Penguin entering a business
relationship with a new competitor. Penguin denies the remaining allegations contained in
paragraph 69 with respect to Penguin, and is without knowledge as to the allegations contained
in paragraph 69 regarding any other entity, and therefore denies them.
ALLEGATION 70.

While the Publisher Defendants were discussing e-book

distribution terms with Apple during the week of January 18, 2010, Amazon met in New York
City with a number of prominent authors and agents to unveil a new program under which
copyright holders could take their e-books directly to Amazon – cutting out the publisher – and
Amazon would pay royalties of up to 70 percent, far in excess of what publishers offered. This
announcement further highlighted the direct competitive threat Amazon posed to the Publisher

51

Defendants’ business model. The Publisher Defendants reacted immediately. For example,
Penguin USA CEO David Shanks reported being “really angry” after “hav[ing] read [Amazon’s]
announcement.” After thinking about it for a day, Mr. Shanks concluded, “[o]n Apple I am now
more convinced that we need a viable alternative to Amazon or this nonsense will continue and
get much worse.” Another decisionmaker stated he was “p****d” at Amazon for starting to
compete directly against the publishers and expressed his desire “to screw Amazon.”
PENGUIN’S RESPONSE: Penguin admits that it became publicly known on or around
January 18, 2010 that Amazon was attempting to negotiate deals with literary agents directly, and
that Penguin Group (USA) CEO David Shanks and others were disappointed to learn that
Penguin’s business partner was attempting to disrupt Penguin’s business relationships with
literary agents. Penguin denies the remaining allegations contained in paragraph 70 with respect
to Penguin, and is without knowledge as to the allegations contained in paragraph 70 regarding
any other publisher and therefore denies them.
ALLEGATION 71.

To persuade one of the Publisher Defendants to stay with the

others and sign an agreement, Apple CEO Steve Jobs wrote to an executive of the Publisher
Defendant’s corporate parent that the publisher had only two choices apart from signing the
Apple Agency Agreement: (i) accept the status quo (“Keep going with Amazon at $9.99”); or (ii)
continue with a losing policy of delaying the release of electronic versions of new titles (“Hold
back your books from Amazon”). According to Jobs, the Apple deal offered the Publisher
Defendants a superior alternative path to the higher retail e-book prices they sought: “Throw 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.”

52

PENGUIN’S RESPONSE:

Penguin is without knowledge as to the allegations

contained in paragraph 71 and therefore denies them.
ALLEGATION 72.

In addition to passing information through Apple and during their

private dinners and other in-person meetings, the Publisher Defendants frequently communicated
by telephone to exchange assurances of common action in attempting to raise the retail price of
e-books. These telephone communications increased significantly during the two-month period
in which the Publisher Defendants considered and entered the Apple Agency Agreements.
During December 2009 and January 2010, the Publisher Defendants’ U.S. CEOs placed at least
56 phone calls to one another. Each CEO, including Penguin’s Shanks and Macmillan’s Sargent,
placed at least seven such phone calls.
PENGUIN’S RESPONSE:

Penguin admits that during December 2009 and January

2010, Penguin Group (USA) CEO David Shanks communicated by telephone a handful of times
with the CEOs of Hachette and Simon & Schuster, with whom he serves on the Board of
Directors of the publisher eBook joint venture “Bookish” (bookish.com) (also known as “Project
Muse”) as Penguin during that time period agreed to participate as a founding member of the
joint venture and the Bookish board was in the process of searching for a CEO and engaged in
other formative matters. Penguin denies the remaining allegations contained in paragraph 72
related to Penguin and is otherwise without knowledge as to the allegations concerning other
publishers and therefore denies them.
ALLEGATION 73.

The timing, frequency, duration, and content of the Publisher

Defendant CEOs’ phone calls demonstrate that the Publisher Defendants used them to seek and
exchange assurances of common strategies and business plans regarding the Apple Agency
Agreements. For example, in addition to the telephone calls already described in this complaint:

53



Near the time Apple first presented the agency model, one
Publisher Defendant’s CEO used a telephone call – ostensibly
made to discuss a marketing joint venture – to tell Penguin USA
CEO David Shanks that “everyone is in the same place with
Apple.”



After receiving Apple’s January 16, 2010 revised proposal,
executives of several Publisher Defendants responded to the
revised proposal and meetings by, again, seeking and exchanging
confidential information. For example, on Sunday, January 17, one
Publisher Defendant’s CEO used his mobile phone to call another
Publisher Defendant’s CEO and talk for approximately ten
minutes. And on the morning of January 19, Penguin USA CEO
David Shanks had an extended telephone conversation with the
CEO of another Publisher Defendant.



On January 21, 2010, the CEO of one Publisher Defendant’s parent
company instructed his U.S. subordinate via e-mail to find out
Apple’s progress in agency negotiations with other publishers.
Four minutes after that e-mail was sent, the U.S. executive called
another Publisher Defendant’s CEO, and the two spoke for over
eleven minutes.



On January 22, 2010, at 9:30 a.m., Apple’s Cue met with one
Publisher Defendant’s CEO to make what Cue hoped would be a
“final go/no-go decision” about whether the Publisher Defendant
would sign an agreement with Apple. Less than an hour later, the
Publisher Defendant’s CEO made phone calls, two minutes apart,
to two other Publisher Defendants’ CEOs, including Macmillan’s
Sargent. The CEO who placed the calls admitted under oath to
placing them specifically to learn if the other two Publisher
Defendants would sign with Apple prior to Apple’s iPad launch.



On the evening of Saturday, January 23, 2010, Apple’s Cue emailed his boss, Steve Jobs, and noted that Penguin USA CEO
David Shanks “want[ed] an assurance that he is 1of 4 before
signing.” The following Monday morning, at 9:46 a.m., Mr.
Shanks called another Publisher Defendant’s CEO and the two
talked for approximately four minutes. Both Penguin and the other
Publisher Defendant signed their Apple Agency Agreements later
that day.

PENGUIN’S RESPONSE:

Penguin denies that its executives engaged in any

conversations with other publishers that sought “ assurances of common strategies and business
plans” regarding Apple. At the time Apple presented the possibility of an iBookstore to Penguin,
54

Penguin was in the midst of forming a U.S. based joint publisher venture to market eBooks with
Simon & Schuster and Hachette—“Project Muse” or “Bookish” (bookish.com)—and was
necessarily in conversation with executives at those publishers related to the joint venture.
Specifically, with regard to the allegations in the bullet points, Penguin admits that


On or around the time Apple first presented its agency-model concept to
publishers, David Shanks recalls a joint venture related telephone call with David
Young (a fellow Board Member of Bookish) in which Mr. Young made a casual
comment that everyone was in the same place with Apple.



On January 19, David Shanks had an eleven-minute, Bookish-related telephone
call with Carolyn Reidy (a fellow Board member of Bookish). Penguin denies
that this telephone call was in furtherance of a publisher conspiracy.



David Shanks sent Apple’s Eddie Cue an email on January 22, 2010 in which he
told Apple: You must have the fourth major or we can’t be in the announcement
[of the release of the iPad and the opening of the iBookstore]. Penguin denies that
this statement shows Penguin was part of a publisher conspiracy; otherwise it
would not have to have asked Apple for confirmation.



Penguin call records show David Shanks had a four minute telephone call with
Carolyn Reidy the morning of January 25, 2010. Penguin’s internal electronic
communications further show that Penguin subsequently decided not to agree to
the agency terms as proposed by Apple, and not be part of opening the
iBookstore. Only after negotiating new and different deal terms—which Penguin
believes are unique to it and its business model—did Penguin change course and
enter into an agency agreement with Apple.

55

Penguin otherwise is without knowledge as to any publisher communications not involving
Penguin and therefore denies those allegations contained in paragraph 73.
ALLEGATION 74.

On January 24, 2010, Hachette signed an e-book distribution

agreement with Apple. Over the next two days, Simon & Schuster, Macmillan, Penguin, and
HarperCollins all followed suit and signed e-book distribution agreements with Apple. Within
these three days, the Publisher Defendants agreed with Apple to abandon the longstanding
wholesale model for selling e-books. The Apple Agency Agreements took effect simultaneously
on April 3, 2010 with the release of Apple’s new iPad.
PENGUIN’S RESPONSE:

Penguin admits that Penguin signed an agency agreement

with Apple on January 25, 2010. Penguin is without knowledge regarding any other publisher’s
distribution agreement with Apple and therefore denies those allegations. Penguin denies the
remaining allegations contained in paragraph 75.
ALLEGATION 75.

The final version of the pricing tiers in the Apple Agency

Agreements contained the $12.99 and $14.99 price points for bestsellers, discussed earlier, and
also established prices for all other newly released titles based on the hardcover list price of the
same title. Although couched as maximum retail prices, the price tiers in fact established the
retail e-book prices to be charged by Publisher Defendants.
PENGUIN’S RESPONSE:
ALLEGATION 76.

Denied.

By entering the Apple Agency Agreements, each Publisher

Defendant effectively agreed to require all of their e-book retailers to accept the agency model.
Both Apple and the Publisher Defendants understood the Agreements would compel the
Publisher Defendants to take pricing authority from all non-Apple e-book retailers. A February
10, 2010 presentation by one Publisher Defendant applauded this result (emphasis in original):

56

“The Apple agency model deal means that we will have to shift to an agency model with
Amazon which [will] strengthen our control over pricing.”
PENGUIN’S RESPONSE:

Penguin denies the allegations in paragraph 76 as they

relate to Penguin and is without knowledge as to the understandings of Apple or other publishers
or the content of the referenced February 10, 2010 presentation and therefore denies those
allegations.
ALLEGATION 77.

Apple understood that the final Apple Agency Agreements ensured

that the Publisher Defendants would raise their retail e-book prices to the ostensible limits set by
the Apple price tiers not only in Apple’s forthcoming iBookstore, but on Amazon.com and all
other consumer sites as well. When asked by a Wall Street Journal reporter at the January 27,
2010 iPad unveiling event, “Why should she buy a book for... $14.99 from your device when she
could buy one for $9.99 from Amazon on the Kindle or from Barnes & Noble on the Nook?”
Apple CEO Steve Jobs responded, “that won’t be the case ... the prices will be the same.”
PENGUIN’S RESPONSE:

Penguin is without knowledge as to Apple’s understanding

about its agency agreement with Penguin or anyone else and therefore denies the allegations
contained in paragraph 78.
ALLEGATION 78.

Apple understood that the retail price MFN was the key

commitment mechanism to keep the Publisher Defendants advancing their conspiracy in
lockstep. Regarding the effect of the MFN, Apple executive Pete Alcorn remarked in the context
of the European roll-out of the agency model in the spring of 2010:
I told [Apple executive Keith Moerer] that I think he and Eddy [Cue]
made it at least halfway to changing the industry permanently, and
we should keep the pads on and keep fighting for it. I might regret
that later, but right now I feel like it’s a giant win to keep pushing
the MFN and forcing people off the [A]mazon model and onto ours.
If anything, the place to give is the pricing – long run, the mfn is
57

more important. The interesting insight in the meeting was Eddy’s
explanation that it doesn’t have to be that broad – any decent MFN
forces the model.
PENGUIN’S RESPONSE: Penguin is without knowledge as to Apple’s
understanding about its agency agreement with Penguin or anyone else and
therefore denies the allegations contained in paragraph 78.
ALLEGATION 79.

Within the four months following the signing of the Apple Agency

Agreements, and over Amazon’s objections, each Publisher Defendant had transformed its
business relationship with all of the major e-book retailers from a wholesale model to an agency
model and imposed flat prohibitions against e-book discounting or other price competition on all
non- Apple e-book retailers.
PENGUIN’S RESPONSE:

Penguin admits that by May 26, 2010, it had negotiated

agency agreements with all of its principal distribution partners, including Amazon, and that with
the exception of Amazon, every potential agent welcomed the prospect of moving to the agency
model during Penguin’s negotiations. Penguin admits that under each of its agency agreements,
including its agency agreement with Apple, Penguin has sole discretion to set the prices at which
it would offer to sell Penguin titles.
ALLEGATION 80.

For example, after it signed its Apple Agency Agreement,

Macmillan presented Amazon a choice: adopt the agency model or lose the ability to sell e-book
versions of new hardcover titles for the first seven months of their release. Amazon rejected
Macmillan’s ultimatum and sought to preserve its ability to sell e-book versions of newly
released hardcover titles for $9.99. To resist Macmillan’s efforts to force it to accept either the
agency model or delayed electronic availability, Amazon effectively stopped selling Macmillan’s
print books and e-books.

58

PENGUIN’S RESPONSE:

Penguin admits that Amazon publicly retaliated against

Macmillan in January 2010 by removing the “buy” buttons from Macmillan book titles after
Macmillan purportedly proposed the agency model to Amazon. Penguin is without knowledge
regarding the other allegations contained in paragraph 80 and therefore denies them.
ALLEGATION 81.

When Amazon stopped selling Macmillan titles, other Publisher

Defendants did not view the situation as an opportunity to gain market share from a weakened
competitor. Instead, they rallied to support Macmillan. For example, the CEO of one Publisher
Defendant’s parent company instructed the Publisher Defendant’s CEO that “[Macmillan CEO]
John Sargent needs our help!” The parent company CEO explained, “M[acm]illan have been
brave, but they are small. We need to move the lines. And I am thrilled to know how A[mazon]
will react against 3 or 4 of the big guys.”
PENGUIN’S RESPONSE:

Penguin admits its executives were supportive of

Macmillan given that Amazon could just have easily retaliated against Penguin. Penguin
otherwise denies the allegations in paragraph 81 as they related to penguin. Penguin is without
knowledge regarding the remaining allegations contained in paragraph 81 and therefore denies
them.
ALLEGATION 82.

The CEO of one Publisher Defendant’s parent company assured

Macmillan CEO John Sargent of his company’s support in a January 31, 2010 email: “I can
ensure you that you are not going to find your company alone in the battle.” The same parent
company CEO also assured the head of Macmillan’s corporate parent in a February 1 email that
“others will enter the battle field!” Overall, Macmillan received “hugely supportive”
correspondence from the publishing industry during Macmillan’s effort to force Amazon to
accept the agency model.

59

PENGUIN’S RESPONSE:

Penguin admits it was highly publicized that many people

in the book industry expressed disagreement with Amazon’s actions and believed those actions
were anticompetitive but is otherwise without knowledge regarding the allegations contained in
paragraph 82 and therefore denies them.
ALLEGATION 83.

As its battle with Amazon continued, Macmillan knew that,

because the other Publisher Defendants, via the Apple Agency Agreements, had locked
themselves into forcing agency on Amazon to advance their conspiratorial goals, Amazon soon
would face similar edicts from a united front of Publisher Defendants. And Amazon could not
delist the books of all five Publisher Defendants because they together accounted for nearly half
of Amazon’s e-book business. Macmillan CEO John Sargent explained the company’s reasoning:
“we believed whatever was happening, whatever Amazon was doing here, they were going to
face – they’re going to have more of the same in the future one way or another.” Another
Publisher Defendant similarly recognized that Macmillan was not acting unilaterally but rather
was “leading the charge on moving Amazon to the agency model.”
PENGUIN’S RESPONSE:

Penguin is without knowledge regarding the allegations

contained in paragraph 83 and therefore denies them.
ALLEGATION 84.

Amazon quickly came to fully appreciate that not just Macmillan

but all five Publisher Defendants had irrevocably committed themselves to the agency model
across all retailers, including taking control of retail pricing and thereby stripping away any
opportunity for e-book retailers to compete on price. Just two days after it stopped selling
Macmillan titles, Amazon capitulated and publicly announced that it had no choice but to accept
the agency model, and it soon resumed selling Macmillan’s e-book and print book titles.

60

PENGUIN’S RESPONSE:

Penguin admits that Amazon publicly announced in

February 2010 that it was accepting Macmillan’s proposal of an agency agreement and
reinstituted the “buy” buttons for Macmillan titles on its website. Penguin is without knowledge
regarding the remaining allegations contained in paragraph 84 and therefore denies them.
H.
Defendants Further the Conspiracy by Pressuring Another
Publisher To Adopt the Agency Model
ALLEGATION 85.

When a company takes a pro-competitive action by introducing a

new product, lowering its prices, or even adopting a new business model that helps it sell more
product at better prices, it typically does not want its competitors to copy its action, but prefers to
maintain a first-mover or competitive advantage. In contrast, when companies jointly take
collusive action, such as instituting a coordinated price increase, they typically want the rest of
their competitors to join them in that action. Because collusive actions are not pro-competitive or
consumer friendly, any competitor that does not go along with the conspirators can take more
consumer friendly actions and see its market share rise at the expense of the conspirators. Here,
the Defendants acted consistently with a collusive arrangement, and inconsistently with a procompetitive arrangement, as they sought to pressure another publisher (whose market share was
growing at the Publisher Defendants’ expense after the Apple Agency Contracts became
effective) to join them.
PENGUIN’S RESPONSE:

The first two sentences of paragraph 85 are hypothetical

speculation or abstract economic propositions and not factual allegations and therefore no
response is required. Otherwise the allegations contained in paragraph 85 are denied.
ALLEGATION 86.

Penguin appears to have taken the lead in these efforts. Its U.S.

CEO, David Shanks, twice directly told the executives of the holdout major publisher about his
displeasure with their decision to continue selling e-books on the wholesale model. Mr. Shanks
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tried to justify the actions of the conspiracy as an effort to save brick-and-mortar bookstores and
criticized the other publisher for “not helping” the group. The executives of the other publisher
responded to Mr. Shanks’s complaints by explaining their objections to the agency model.
PENGUIN’S RESPONSE:

Penguin denies that it “took the lead” in pressuring

Random House to move to the agency model. Penguin admits that David Shanks had a
conversation with Madeline McIntosh of Random House in late 2010, and that, on Markus
Dohle’s invitation, David Shanks had lunch with Dohle in late 2010, and discussed the fate of
bricks-and-mortar bookstores with each, but otherwise denies the allegations contained in
paragraph 86. As David Shanks has testified about his conversation with Markus Dohle of
Random House:

Random House is the largest publisher so if it was important that
publishers have book stores, the largest publisher needs to help to
assure that there are book stores because they are the largest so [I
asked] what are you going to do to stop the demise of book stores
and we never talked about pricing or doing anything else, it was
just that my opinion, my personal opinion that he had an obligation
to the industry to do something to help the industry. Never talked
about what that would be, but to do something to make sure that
there will be book stores for a while.
ALLEGATION 87.

Mr. Shanks also encouraged a large print book and e-book retailer

to punish the other publisher for not joining Defendants’ conspiracy. In March 2010, Mr. Shanks
sent an e- mail message to an executive of the retailer complaining that the publisher “has chosen
to stay on their current model and will allow retailers to sell at whatever price they wish.” Mr.
Shanks argued that “[s]ince Penguin is looking out for [your] welfare at what appears to be great
costs to us, I would hope that [you] would be equally brutal to Publishers who have thrown in
with your competition with obvious disdain for your welfare.... I hope you make [the
publisher] hurt like Amazon is doing to [the Publisher Defendants].”
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PENGUIN’S RESPONSE:

Penguin admits that Penguin Group (USA) CEO David

Shanks sent an email to Steve Riggio, the [President] of Barnes & Noble, on March 4, 2010 that
said:
Hi Steve. I wanted to share something that has me concerned. You
know that we are working with your guys to come up with a
formula where all of our accounts will be able to have the same
prices on our ebooks. It will level the playing field for Penguin
books and hopefully allow us to sell both paper and ebook product.
The one discouraging thing as you no doubt know is that Random
House has chosen to stay on their current model and allow retailers
to sell at whatever price they wish. That is their prerogative.
When you go on the Kindle website it could be the Random House
home page. Amazon is showing us what they do to people who do
not do what they want. As Penguin is looking out for B&N at what
appears to be great cost to us, I would hope that B&N would be
equally brutal to Publishers who have thrown in with your
competition with obvious disdain for your welfare. You told me
once that you were nice and Amazon played hardball and they
were winning. I hope you make random House hurt like Amazon is
doing to people who are looking out for the overall welfare of the
publishing industry. I hope you can see how strongly I feel about
this. They should not be allowed to be selfish and win. Thanks for
listening. I hope to see you soon. (emphasis added)

The email speaks for itself. Penguin otherwise denies the allegations contained in
paragraph 87.
ALLEGATION 88.

When the third-party retailer continued to promote the non-

defendant publisher’s books, Mr. Shanks applied more pressure. In a June 22, 2010 email to the
retailer’s CEO, Mr. Shanks claimed to be “baffled” as to why the retailer would promote that
publisher’s books instead of just those published by “people who stood up for you.”
PENGUIN’S RESPONSE:

Penguin admits that on June 22, 2010, after Barnes &

Noble took out a full page advertisement in the New York Times promoting the Nook, a Penguin
employee emailed his contact at Barnes & Noble and commented:

63

Not to be a nudge but the ad prominently show 5 titles, 3 of which
were Random House. I don’t understand why you would advertise
a publisher who has not gone to an agency model. B&N actually
loses money on each sale of these books a the $9.99 so advertising
them rather than so many other great profitable books makes no
sense to me. Penguin went to an agency model to help support
booksellers like B&N where the retailer can raise the price and
perceived value of a book and make the retailer a profit. To have
B&N support the one publisher who didn’t do that in this ad makes
us feel like our efforts to make our industry stronger are not
appreciated by the biggest book account in the country.

Penguin admits that Penguin Group (USA) CEO David Shanks forwarded this email to William
Lynch, the CEO of Barnes & Noble, and said “I am still baffled why you would push RH books
over people who stood up for you.” The email otherwise speaks for itself. Penguin otherwise
denies the allegations contained in paragraph 88.
ALLEGATION 89.

Throughout the summer of 2010, Apple also cajoled the holdout

publisher to adopt agency terms in line with those of the Publisher Defendants, including on a
phone call between Apple CEO Steve Jobs and the holdout publisher’s CEO. Apple flatly refused
to sell the holdout publisher’s e-books unless and until it agreed to an agency relationship
substantially similar to the arrangement between Apple and the Publisher Defendants defined by
the Apple Agency Agreements.
PENGUIN’S RESPONSE:

Penguin is without knowledge regarding the allegations

contained in paragraph 90 and therefore denies them.
I.

Conspiracy Succeeds at Raising and Stabilizing Consumer

E-book Prices
ALLEGATION 90.

The ostensible maximum prices included in the Apple Agency

Agreements’ price schedule represent, in practice, actual e-book prices. Indeed, at the time the
Publisher Defendants snatched retail pricing authority away from Amazon and other e-book
retailers, not one of them had built an internal retail pricing apparatus sufficient to do anything
64

other than set retail prices at the Apple Agency Agreements’ ostensible caps. Once their agency
agreements took effect, the Publisher Defendants raised e-book prices at all retail outlets to the
maximum price level within each tier. Even today, two years after the Publisher Defendants
began setting e-book retail prices according to the Apple price tiers, they still set the retail prices
for the electronic versions of all or nearly all of their bestselling hardcover titles at the ostensible
maximum price allowed by those price tiers.
PENGUIN’S RESPONSE:

Penguin denies the allegations in paragraph 90 to the extent

they relate to Penguin. Penguin lacks information or knowledge with regard to the allegations
concerning other publishers and therefore denies them.
ALLEGATION 91.

The Publisher Defendants’ collective adoption of the Apple

Agency Agreements allowed them (facilitated by Apple) to raise, fix, and stabilize retail e-book
prices in three steps: (a) they took away retail pricing authority from retailers; (b) they then set
retail e-book prices according to the Apple price tiers; and (c) they then exported the agency
model and higher retail prices to the rest of the industry, in part to comply with the retail price
MFN included in each Apple Agency Agreement.
PENGUIN’S RESPONSE:
ALLEGATION 92.

Denied.

Defendants’ conspiracy and agreement to raise and stabilize retail

e-book prices by collectively adopting the agency model and Apple price tiers led to an increase
in the retail prices of newly released and bestselling e-books. Prior to the Defendants’ conspiracy,
consumers benefited from price competition that led to $9.99 prices for newly released and
bestselling e-books. Almost immediately after Apple launched its iBookstore in April 2010 and
the Publisher Defendants imposed agency model pricing on all retailers, the Publisher

65

Defendants’ e-book prices for most newly released and bestselling e-books rose to either $12.99
or $14.99.
PENGUIN’S RESPONSE:
ALLEGATION 93.

Denied.

Defendants’ conspiracy and agreement to raise and stabilize retail

e-book prices by collectively adopting the agency model and Apple price tiers for their newly
released and bestselling e-books also led to an increase in average retail prices of the balance of
Publisher Defendants’ e-book catalogs, their so-called “backlists.” Now that the Publisher
Defendants control the retail prices of e-books – but Amazon maintains control of its print book
retail prices – Publisher Defendants’ e-book prices sometimes are higher than Amazon’s prices
for print versions of the same titles.
PENGUIN’S RESPONSE:

Penguin admits that from time to time, for certain titles and

for certain time periods, Amazon has instituted a practice of loss-leading on certain print books,
pursuant to which Amazon chooses to price those print book lower than the same eBook title
sold by Penguin. Penguin otherwise denies the allegations contained in paragraph 93.
VI. VIOLATION ALLEGED
ALLEGATION 94.

Beginning no later than 2009, and continuing to date, Defendants

and their coconspirators have engaged in a conspiracy and agreement in unreasonable restraint of
interstate trade and commerce, constituting a violation of Section 1 of the Sherman Act, 15
U.S.C. § 1. This offense is likely to continue and recur unless the relief requested is granted.
PENGUIN’S RESPONSE:
ALLEGATION 95.

Denied.

The conspiracy and agreement consists of an understanding and

concert of action among Defendants and their co-conspirators to raise, fix, and stabilize retail ebook prices, to end price competition among e-book retailers, and to limit retail price

66

competition among the Publisher Defendants, ultimately effectuated by collectively adopting and
adhering to functionally identical methods of selling e-books and price schedules.
PENGUIN’S RESPONSE:
ALLEGATION 96.

Denied.

For the purpose of forming and effectuating this agreement and

conspiracy, some or all Defendants did the following things, among others:
a.

Shared their business information, plans, and

strategies in order to formulate ways to raise retail e-book prices;
b.

Assured each other of support in attempting to raise

retail e-book prices;
c.

Employed ostensible joint venture meetings to

disguise their attempts to raise retail e-book prices;
d.

Fixed the method of and formulas for setting retail

e-book prices;
e.

Fixed tiers for retail e-book prices;

f.

Eliminated the ability of e-book retailers to fund

retail e-book price decreases out of their own margins; and
g.

Raised the retail prices of their newly released and

bestselling e-books to the agreed prices – the ostensible price caps
– contained in the pricing schedule of their Apple Agency
Agreements.
PENGUIN’S RESPONSE:
ALLEGATION 97.

Denied.

Defendants’ conspiracy and agreement, in which the Publisher

Defendants and Apple agreed to raise, fix, and stabilize retail e-book prices, to end price

67

competition among e- book retailers, and to limit retail price competition among the Publisher
Defendants by fixing retail e-book prices, constitutes a per se violation of Section 1 of the
Sherman Act, 15 U.S.C. § 1.
PENGUIN’S RESPONSE:
ALLEGATION 98.

Denied.

Moreover, Defendants’ conspiracy and agreement has resulted in

obvious and demonstrable anticompetitive effects on consumers in the trade e-books market by
depriving consumers of the benefits of competition among e-book retailers as to both retail prices
and retail innovations (such as e-book clubs and subscription plans), such that it constitutes an
unreasonable restraint on trade in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1.
PENGUIN’S RESPONSE: Denied.
ALLEGATION 99.

Where, as here, defendants have engaged in a per se violation of

Section 1 of the Sherman Act, no allegations with respect to the relevant product market,
geographic market, or market power are required. To the extent such allegations may otherwise
be necessary, the relevant product market for the purposes of this action is trade e-books. The
anticompetitive acts at issue in this case directly affect the sale of trade e-books to consumers.
No reasonable substitute exists for e-books. There are no technological alternatives to e-books,
thousands of which can be stored on a single small device. E-books can be stored and read on
electronic devices, while print books cannot. E-books can be located, purchased, and
downloaded anywhere a customer has an internet connection, while print books cannot. Industry
firms also view e-books as a separate market segment from print books, and the Publisher
Defendants were able to impose and sustain a significant retail price increase for their trade ebooks.
PENGUIN’S RESPONSE:

68

Denied.

ALLEGATION 100. The relevant geographic market is the United States. The rights to
license e- books are granted on territorial bases, with the United States typically forming its own
territory. E-book retailers typically present a unique storefront to U.S. consumers, often with ebooks bearing different retail prices than the same titles would command on the same retailer’s
foreign websites.
PENGUIN’S RESPONSE:

Denied.

ALLEGATION 101. The Publisher Defendants possess market power in the market for
trade e-books. The Publisher Defendants successfully imposed and sustained a significant retail
price increase for their trade e-books. Collectively, they create and distribute a wide variety of
popular e- books, regularly comprising over half of the New York Times fiction and non-fiction
bestseller lists. Collectively, they provide a critical input to any firm selling trade e-books to
consumers. Any retailer selling trade e-books to consumers would not be able to forgo profitably
the sale of the Publisher Defendants’ e-books.
PENGUIN’S RESPONSE:

Denied.

ALLEGATION 102. Defendants’ agreement and conspiracy has had and will continue to
have anticompetitive effects, including:
a.

Increasing the retail prices of trade e-books;

b.

Eliminating competition on price among e-book

retailers;
c.

Restraining competition on retail price among the

Publisher Defendants;
d.

Restraining competition among the Publisher

Defendants for favorable relationships with e-book retailers;

69

e.

Constraining innovation among e-book retailers;

f.

Entrenching incumbent publishers’ favorable

position in the sale and distribution of print books by slowing the
migration from print books to e-books;
g.

Making more likely express or tacit collusion

among publishers; and
h.

Reducing competitive pressure on print book prices.

PENGUIN’S RESPONSE:

Denied.

ALLEGATION 103. Defendants’ agreement and conspiracy is not reasonably necessary
to accomplish any procompetitive objective, or, alternatively, its scope is broader than necessary
to accomplish any such objective.
PENGUIN’S RESPONSE:
VII.

Denied.
REQUEST FOR RELIEF

ALLEGATION 104. To remedy these illegal acts, the United States requests that the
Court:
a.

Adjudge and decree that Defendants entered into an

unlawful contract, combination, or conspiracy in unreasonable
restraint of interstate trade and commerce in violation of Section 1
of the Sherman Act, 15 U.S.C. § 1;
b.

Enjoin the Defendants, their officers, agents,

servants, employees and attorneys and their successors and all
other persons acting or claiming to act in active concert or
participation with one or more of them, from continuing,

70

maintaining, or renewing in any manner, directly or indirectly, the
conduct alleged herein or from engaging in any other conduct,
combination, conspiracy, agreement, understanding, plan,
program, or other arrangement having the same effect as the
alleged violation or that otherwise violates Section 1 of the
Sherman Act, 15 U.S.C. § 1, through fixing the method and
manner in which they sell e-books, or otherwise agreeing to set the
price or release date for e-books, or collective negotiation of ebook agreements, or otherwise collectively restraining retail price
competition for e-books;
c.

Prohibit the collusive setting of price tiers that can

de facto fix prices;
d.

Declare null and void the Apple Agency

Agreements and any agreement between a Publisher Defendant
and an e-book retailer that restricts, limits, or impedes the e-book
retailer’s ability to set, alter, or reduce the retail price of any ebook or to offer price or other promotions to encourage consumers
to purchase any e-book, or contains a retail price MFN;
e.

Reform the agreements between Apple and

Publisher Defendants to strike the retail price MFN clauses as void
and unenforceable; and

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f.

Award to Plaintiff its costs of this action and such

other and further relief as may be appropriate and as the Court may
deem just and proper.
PENGUIN’S RESPONSE: No response is required and paragraph 104 is therefore denied.
To the extent the Complaint sets forth any allegation to which Penguin has not
responded, such allegation is denied.

AFFIRMATIVE AND OTHER DEFENSES
FIRST DEFENSE
The Complaint fails to state a claim against Penguin upon which relief can be granted.
SECOND DEFENSE
Plaintiff’s claims against Penguin are barred because Penguin was not part of any
contract, combination, or conspiracy in restraint of trade.
THIRD DEFENSE
Plaintiff’s claims against Penguin are barred because Penguin’s alleged actions did not
result in any harm to competition.
FOURTH DEFENSE
Plaintiff’s claims against Penguin fail under the rule of reason because the procompetitive
justifications for Penguin’s alleged actions outweigh any alleged resulting harm to competition.
FIFTH DEFENSE
Plaintiff’s claims against Penguin are barred by the doctrine of unclean hands.
SIXTH DEFENSE
Plaintiff’s claims against Penguin are barred by the doctrine of laches.

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SEVENTH DEFENSE
Plaintiff’s claims against Penguin are barred because the principal/agent relationship does
not form an “agreement” as defined by Section 1 of the Sherman Act.
EIGHTH DEFENSE
Plaintiff has failed to join all parties necessary for a just and appropriate adjudication of
its claims.
NINTH DEFENSE
Penguin’s actions were undertaken in good faith to promote legitimate business purposes
and in order to and did have the effect of promoting competition.
TENTH DEFENSE
Penguin reserves the right to amend this Answer, and to assert additional defenses, crossclaims, and third party claims in this action when and if they become appropriate.

Dated: May 29, 2012

Respectfully submitted,

___/s/ Daniel F. McInnis_____________
Daniel F. McInnis (admitted pro hac vice)
David A. Donohoe
Allison Sheedy (admitted pro hac vice)
AKIN GUMP STRAUSS HAUER & FELD, LLP
1333 New Hampshire Ave, NW
Washington, DC 20036
Tel: [phone]
Fax: [phone]
[e-mail]
[e-mail]
[e-mail]
Attorneys for Penguin Group (USA), Inc. and The Penguin Group, a Division of Pearson plc.

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CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on May 29, 2012, I electronically filed the foregoing
document using the CM/ECF system which will send notification of such filing to the e-mail
addresses registered in the CM/ECF system, as denoted on the Electronic Mail Notice List.
DATED: May 29, 2012
____________/s/__________________
Daniel F. McInnis
AKIN GUMP STRAUSS HAUER & FELD
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036-1564
Telephone: [phone]
Facsimile: 202-887-4288
[e-mail]