According to a court filing released on Tuesday, CEOs of the same publishing houses that once rejected the price-fixing theory will now offer evidence to suggest they colluded with Apple in order to increase ebook prices. The case involves allegations that Apple and its late CEO Steve Jobs organized a conspiracy with the Big Six publishers to introduce a commission-style pricing system in order to wrest pricing power from Amazon.

The new filing, posted below, says that the CEOs of Macmillan, Hachette, Harper Collins, Simon & Schuster and Random House will testify about various aspects of Apple’s role in the alleged conspiracy. All of these companies with the exception of Random House were also named in the antitrust lawsuit brought by the Department of Justice and agreed to settle the case last year.

The government’s new filing says Macmillan CEO John Sargent is expected to testify that:

“[T]he deal that 5 of us did with Apple meant someone was gonna have to do it. Just luck of the draw that it was me. . . . The optics make it look like I stood alone, but in the end I had no doubt that the others would eventually follow.”

Such evidence could prove damaging to Apple, which is also expected to confront testimony from Amazon executives. Apple will also be forced explain a growing list of possibly incriminating comments and emails. One of these, cited by the government to show Apple played an active role in the price changes, describes SVP of internet software and services Eddy Cue telling Jobs:

“In the end, they want us and see the opportunity we give them but they’re scared to commit! It [has] less to do with the terms and more about the dramatic business change for them. . . . They just have to get some balls.”

The new filing also includes the views of other prominent executives, including News Corp’s Rupert Murdoch. According to Harper Collins CEO Brian Murray, Murdoch was “pissed at Amazon” and wanted to “screw Amazon.”

In its own filings, Apple maintains its long-held position that it is not a “ringmaster” of a conspiracy, as the government alleges, but that it simply offered the same pricing system, which is based on a 30 percent commission, that it offers to any company that sells through its iTunes store. Apple also maintains that it helped to create competition at a time when Amazon dominated the ebook market.

The next important step of the proceedings will take place on May 23, when the parties meet before U.S. District Judge Denise Cote for a pre-trial conference.

Here’s the filing (all 156 pages of it!) with some of the key points underlined:

DOJ Motion of Facts and Law

Class action lawyers had earlier demanded that Isaacson provide evidence, based on his interviews with Steve Jobs, about why Jobs asked publishers to sell books on Apple’s iPad device. Isaacson refused to hand over his notes and invoked a New York law that allows journalists to shield their sources in many situations.

The lawyers, who want Apple to pay for allegedly fixing book prices, had subpoenaed Isaacson and said the reporters’ shield did not apply. Last week, however, court documents show the parties agreed to drop Isaacson from the case.

The Isaacson dispute comes at a time when Apple’s antitrust showdown with the Department of Justice and class action lawyers is coming to a head. While the five publishers who were also named as defendants decided to settle, Apple is rejecting the accusations that it acted as the hub for an illegal conspiracy to raise book prices and thwart Amazon. Meanwhile, Amazon executives are poised to testify against Apple.

Even though the Isaacson biography is no longer part of the case, a court transcript shows Steve Jobs will remain a central figure. In response to a question about who decided to sign contracts with book publishers, Apple executive Keith Moerer said, “Ultimately, I would say it was — Steve. But working closely with — with Eddy, Mr. Cue.”

Meanwhile, other recently filed court documents identify one recipient of a highly publicized Jobs email about Amazon and pricing — the recipient was James Murdoch, a senior executive at News Corp, parent company of HarperCollins. The other recipient(s) are still redacted. You can see the email below:

Steve Jobs Emails by

According to a new court filing, Apple is demanding more access to Amazon’s top ebook executives — Russ Grandinetti and David Naggar, who both have the title VP of Kindle content — because the executives have said they “will likely testify at trial on the government’s behalf.” Meanwhile, a filing by Amazon said the company sought legal advice in early 2010 in response to what it perceived as the “the existence of an illegal (possibly criminal) price-fixing conspiracy by the five publishers and one or more retailers.”

A trial in the case is possible because Apple, unlike the five publishers that agreed to settle with the Justice Department, continues to hold out. The DOJ accuses it of acting as the hub of an illegal price-fixing scheme in early 2010. The alleged scheme involved Apple offering its new tablet reading device, the iPad, as a way for publishers to introduce agency pricing and shut out Amazon unless the latter agreed to the new prices.

The latest court filings, which came to light last week, are part of a procedural dispute in which Apple insisted it had a right to obtain more testimony and documents from Amazon executives. Amazon, in response, invoked a shield known as attorney-client privilege, which allows parties to withhold information that was obtained while seeking legal advice. Last week, U.S. District Judge Denise Cote sided with Amazon in the dispute and ruled that the information was privileged.

Court filings also reveal that the dispute in question turns on two meetings between senior Amazon executives in early January 2011; one of the meetings took place at a “boathouse” at the Seattle residence of Amazon CEO Jeff Bezos.

The Amazon executives claim the reason for those meetings was to get legal advice “to avoid the very liability that the publisher Defendants and Apple are facing now.” Apple unsuccessfully argued that the meetings shouldn’t be privileged because Amazon was actually plotting business strategy and that it is now using the presence of its lawyers as a pretext to hold back information. Apple also claims its legal discovery of Amazon has already “exposed a glaring hole in the government’s case.”

A big part of the underlying case turns on “most favored nation” clauses and the publishers’ decision to impose so-called “agency pricing,” which saw retailers like Amazon and Apple take a commission from a price set by the publishers. The agency system, which publishers say was necessary to stop Amazon selling their books at a loss, was modified due to Department of Justice settlements with the publishers. Publishers can still set the prices for their ebooks, but most favored nation clauses are forbidden and retailers have broad discounting powers for ebooks.

Judge Cote, in her order denying Apple’s challenge to Amazon’s attorney-client privilege, also ordered executives from publishing house Penguin to participate in the proceedings. You can read Apple’s earlier letter to Judge Cote below.

This post was updated at 12:30 p.m. ET to clarify that a modified form of agency pricing, as described above, is still in effect.

Apple Letter Re Amazon Discovery by

(Image by Getty Images / Spencer Platt)

According to antitrust experts speaking at a New York book event this week, books should be treated like any other good in the market.

“There’s never been a defendant sued for antitrust who didn’t think their market was special,” said Chris Sagers of Cleveland State University, adding that “agency pricing” (a commission-style pricing system used by the publishers to check Amazon) is just another word for price-fixing.

And according to Ariel Katz, a law professor at the University of Toronto, publishers have been engaging in cartel-like behavior for more than a century. In 1908, for instance, a publisher sued the department store Macy’s for disobeying notices that required books to be sold for at least $1 (the publisher lost and the Supreme Court established copyright’s first sale doctrine).

The recent price-fixing charges, in which publishers allegedly ganged up with Apple in order to stop Amazon, also appear to be classic cartel behavior — meaning the government was justified to sue them to protect the free market. Yet, it also feels intuitively wrong to equate book publishers with oil barrons, AT&T or other antitrust villains.

This is because books are not oil or boots or buttons. They are the repositories of our collective knowledge and exemplify what is best about humanity. Nina Elkin-Koren of the University of Haifa, who also spoke at the event, questioned the antitrust experts about whether it is appropriate to leave something as important as books to the whims of the market.

In the language of economists, the question is whether books are a big enough “cultural externality” to justify interfering with the market through corporate protectionism or government regulation.

Sagers suggested that governments can indeed make economic policies to favor cultural and intellectual activities but that the right way to do is by favoring cultural creators directly — and not through intermediaries like publishers.

The antitrust experts make a compelling case for regarding publishers as just another cartel. It will be interesting to see if the theory continues to hold up as Amazon expands its ever-growing influence on the nation’s reading habits.

The experts spoke at “In Re Books,” a two-day conference on law and the future of books held at New York School.

The email notice is part of a process to resolve a price-fixing case brought by state governments. It calls for retailers like Amazon and Barnes & Noble to inform customers about the settlement during the next two months so that any objectors can speak up before a “fairness hearing” slated for February.

The refunds in question amount to $1.32 for New York Times bestsellers purchased from HarperCollins, Simon&Schuster or Hachette between April 2010 and May of 2012. For older titles, customers will receive 25 or 32 cents. Should the deal go forward, customers will eventually receive a credit to their ebook account or, in some cases, a check in the mail.

While customers can “object,” the reality is that only a tiny percentage ever do in these type of settlements. Instead, the February hearing is likely to provide an occasion for more posturing between those who like the deal (Amazon and the government) and those who don’t (Apple and two holdout publishers, Penguin and Macmillan.)

Amazon is already using the settlement notice process to trumpet its view of events.

“In addition to the account credit, the settlements impose limitations on the publishers’ ability to set e-book prices. We think these settlements are a big win for customers and look forward to lowering prices on more Kindle books in the future,” said the Amazon email, according to the Wall Street Journal.

The three settling publishers are in favor of the deal because it allows them to escape the purgatory of expensive class action proceedings and, presumably, because it will result in some of the $69 million they are to pay coming back to them as a result of customers using the credits for new purchases.

Any customer payments will not occur anytime soon, however, because the final settlement must still be approved after the February hearing. While US District Judge Denise Cote has indicated she is strongly in favor, the deal could be delayed if Apple and the two publishers hold out and the settlement ends up before an appeals court. The upshot is that the earliest consumers will see any refund is next spring; alternately, if the process drags out, it could take until 2014.

“Your Honor, I appreciate that there is ‘No Frigate like a Book,’ but to quote another famous poet, John Masefield, ‘All I ask is a tall ship and a star to steer her by,’” wrote attorney Bob Kohn in a missive to stop the settlement.

Kohn’s literary flourish is in response to U.S. District Judge Denise Cote’s inclusion of Dickinson’s poem in a decision last week that effectively ends some publishers’ power to set the price of ebooks.

Meanwhile, Cote, who is herself an ebook buyer, issued an order saying that she waives her right to collect under a refund agreement that will pay consumers 25 cents to $1.32 to compensate them for price fixing.

• See also: What the book settlement means for publishers, Apple and you

As for Kohn, who submitted a five-page comic strip to the judge this month, his latest appeal appears hopeless because today is when three publishers must tear up their contracts with Apple. The publishers must terminate those and other contracts in exchange for the Justice Department shelving an antitrust case against them. The development has already resulted in new book discounts by Amazon and other retailers.

Kohn, a music executive who has been one of the settlement’s most vehement critics, is arguing (correctly) that Cote’s refusal to stay the deal will result in the new pricing system becoming a fait accompli by the time the issue reaches an appeals court.

Apple and two other publishers are continuing to fight the price-fixing charges in court.

Here are the two poems followed by Kohn’s latest letter to the judge:

“Sea-Fever”

I must down to the seas again, to the lonely sea and the sky,
And all I ask is a tall ship and a star to steer her by,
And the wheel’s kick and the wind’s song and the white sail’s shaking,
And a grey mist on the sea’s face, and a grey dawn breaking.

I must down to the seas again, for the call of the running tide
Is a wild call and a clear call that may not be denied;
And all I ask is a windy day with the white clouds flying,
And the flung spray and the blown spume, and the sea-gulls crying.

I must down to the seas again, to the vagrant gypsy life,
To the gull’s way and the whale’s way where the wind’s like a whetted knife;
And all I ask is a merry yarn from a laughing fellow-rover
And quiet sleep and a sweet dream when the long trick’s over.

By John Masefield, English Poet Laureate (1878-1967).

Kohn Letter Sept 12 (1)

(Image by  Vikulin via Shutterstock)

The news comes from court filings that offer fresh details about a sweeping settlement between state governments and three publishers over an alleged conspiracy with Apple to fix the price of e-books.

As my colleague, Laura Owen, reported last night, Simon & Schuster, Hachette and HarperCollins will pay a total of $69 million to consumers. Here are some fresh details based on today’s filings:

• Consumers will receive $1.32 for each New York Times bestseller they bought between April 1, 2010 and May 21, 2012

• They will receive 32 cents if a book was not on the NYT bestseller list at the time but was in its first year of publication, and 25 cents if it was an older backlist book

• Most consumers will receive the reimbursement in the form of a credit to their Amazon, Barnes & Noble, Kobo or Apple account unless they state they prefer a check

• Those who bought ebooks through Google and Sony will get a check

• Any money left over will go to literacy related charities

If a court approves the deal, the publishers will put aside money into a dedicated consumer account within 30 days and retailers will begin notifying customers by email. The notification process will also include Google and Facebook ads.

The publishers will also put aside $7.6 million to compensate the states’ for investigation and attorneys’ costs and an additional $750,000 each to pay for the notification process.

Consumers in five territories and every state except Minnesota, whose attorney general has opted out of the deal, are eligible to receive money. (We’ve reached out to Minnesota for comment and will update when we hear back).

Even though only three of the five accused publishers are part of the deal, publishers who bought an ebook from any one of the five will be compensated. The office of Connecticut’s attorney general said by email that this is because any conspirator is responsible for the actions of a co-conspirator.

The states are continuing a related lawsuit against Apple and the two hold-out publishers, Penguin and Macmillan. If they prevail, according to the memo below, more money could be forthcoming to consumers.

Here’s the memo with key parts underlined:

Memo in Support of Plaintiff States’ Motion for Preliminary Approval of Settlements Copy

The tens of millions at stake raise questions about the political and business motives behind the deal, and could provide more fodder for critics who question government decisions in the high-profile e-book case.

This investigation offers a closer look at the case’s many moving parts and, in the last section, an estimate of when (or if) any of the money will make it to e-book readers themselves.

“Parent of the nation” to the rescue

The conspiracy case is bitter and complicated but, at its heart, turns on whether Apple and five publishers broke antitrust laws by introducing a commission-style pricing system for e-books in early 2010. The new pricing system was a response to Amazon selling e-books below cost.

The publishers’ Apple partnership soon touched off a wave of class action lawsuits over alleged price-fixing as well as investigations by the Justice Department and state governments. The controversy crested this spring when the Justice Department formally sued Apple and five publishers for violating the Sherman Act.

Three of the publishers promptly settled and agreed to change their pricing policies but Apple and two other publishers, Penguin and MacMillan, are fighting the case in court. The court proceedings (including the settlement talks) are a sprawling affair scheduled to take years. The case has become especially complicated, however, due to the overlapping roles of the Justice Department, the state governments and the class action lawyers.

The Justice Department, you see, is only asking Apple and the publishers to change their pricing — not to pay out any money. It is the state governments and the lawyers who are after cash. They have competing lawsuits to shake civil damages out of Apple and the publishers.

While class action lawsuits are commonplace, the one filed by the state governments is not. The states’ case is based on a power called parens patriae (“parent of the nation”) that lets them sue on behalf of their citizens.

Connecticut and Texas initiated the civil lawsuit in April and more that thirty other states and Puerto Rico since decided to tag along. The dozen or so states sitting it out are mostly in the west.  Their attorneys general have not joined in because state laws require the governor or legislature’s permission to do so or, possibly, because they disagree with the lawsuit.

For the states that are taking part, the initial lawsuit paid immediate dividends. In April, the Connecticut attorney general held up a trophy in the form of a $52 million settlement with publishers Hachette and Harper Collins which will be used to pay “consumer restitution.” A third publisher, Simon & Schuster, settled soon after. The details of the Simon & Schuster deal have yet to be released but, if it’s consistent with the previous settlements, that publisher will also pay tens of millions.

If Connecticut’s prize was an immediate win for the states, it was a direct loss for the class action lawyers. These lawyers, who filed dozens of cases on behalf of Americans across the country, will not be able to collect if the defendants have already paid once to the state governments. (Right now, the class action lawyers still have a hope of collecting from Apple and the two holdout publishers – unless they too decide to settle with the states).

Steve Berman, a prominent lawyer who is leading the class action suit, argues that the states’ deal will ultimately shortchange consumers. He said via email:

“If you were a defendant would you want to negotiate with the law firm that was a lead counsel in the largest settlement in history (tobacco) … or would you prefer to negotiate with some relatively young and inexperienced assistant attorneys general? That’s an easy one, and we are disappointed the attorneys general took the bait.”

Consumer justice or just politics?

Parens patriae suits have been around forever but are still quite rare. The most prominent ones involve mass torts related to pollution or industry.

In the case of something like overpriced e-books, Berman says the job is better left to class action lawyers like him who have experience grinding the most money out of big companies like Apple and the publishers. So why did the states decide to file a parens patriae case in the first place?

“The reason the state is stepping in is it’s great politically for the attorney general,” says Daniel Gifford, an anti-trust professor at the University of Minnesota, who adds that he has “never seen anything like [the e-book suit] before.”

Connecticut’s ambitious former attorney general, Richard Blumenthal, was the impetus for the state investigations. He announced an investigation in mid-2010 when e-book pricing was a big news issue even though the Justice Department appears to have been investigating the situation at the same time. Blumenthal is now a US Senator and the mop-up work has fallen to his successor and has also been taken-up by the attorneys general of Texas and Ohio.

At the same time, the political winds are changing. This week, US Senator Charles Schumer penned an op-ed in The Wall Street Journal saying the New York publishers and Apple did nothing wrong, and urging the Justice Department to back off before it smothers the digital publishing industry. (At the state level, however, New York Attorney General, Eric Schneiderman, signed onto the multi-million dollar suit against the publishers. Schneiderman’s office did not reply to questions about how the money would be disbursed.)

The states’ lawsuit may be politically driven and redundant (don’t forget there is the class action case too) but that doesn’t necessarily mean it’s a bad idea. The states may demand lower legal fees than class action lawyers who typically collect 25 percent of the jackpot. This could mean more money overall for consumers.

The state governments could also bring a quicker end to the whole process. Bert Foer, the president of the American Antitrust Institute, says the three publishers’ motivations for settling with the states was to “make this go away as soon as possible.”

Foer, however, is skeptical about the state governments’ overall role in the process. He says the class action system was already poised to address any harm to consumers. Foer adds that the states will almost certainly take a cut of the settlement to cover legal expenses, including outside lawyers, in the same way as a class action law firm would do.

So when will e-book owners see the money?

Even though two of the publishers have signed a settlement to pay $52 million and a third (Simon & Schuster) is poised to top up that amount, it’s unlikely the money will flow to consumers anytime soon.

Beth Farmer is a law professor at Penn State and a former attorney with the New York attorney general’s office where she worked on antitrust cases. She points out that the proposed $52 million settlement still has to be approved by the court, that consumers have to be notified and so on. None of this is likely to happen while the cases against Apple and the holdout publishers drag on.

“[Consumers] need complete information before they can make an informed decision, I think, and mid-way through the case is premature.  Also, the notice and claims process is going to be complicated and it wouldn’t be efficient for the states to do that multiple times,” said Farmer by email.

For now, the states are scheduled to file for a preliminary approval of the settlement with the three publishers in late August. That filing (if it is not delayed) will lead to a period in which groups, including the class action lawyers, can file objections. Based on Farmer’s comments and the fluid nature of the larger case, it would be a surprise if Judge Denise Cote gives a go-ahead.

Meanwhile, the Justice Department’s case, which partially serves as the linchpin of the other lawsuits, is taking on a chaotic quality. The department has already missed a deadline to publish more than 800 comments filed in response to its proposed settlement. At the same time, political support for the settlement may be weakening as figures like Senator Schumer weigh in and as Justice Department staffers wait to find out if they will have a new boss come November.

Finally, the retail market for e-books is rapidly evolving. While a grand conspiracy between Apple and publishers may once have seemed a great threat to e-book buyers, some have suggested the Justice Department should have targeted Amazon and its giant market share instead. Others argue that the market for digital publishing is changing so rapidly that the government should simply step back from attempting to regulate it all.

As for that $52 million, e-book readers should not hold their collective breath about getting a $5 check anytime soon. The settlement money is tangled in a complicated political and legal process that makes it unlikely payment will arrive in the next two years – if at all.

See more: Everything you need to know about the e-book lawsuit in one post

(Image by StanOd via Shutterstock)

Lawyers for Apple, publishers, the U.S. Department of Justice and state governments on Friday filed a new schedule and status report about how they intend to undertake the case. The case itself turns on whether Apple and five publishers broke antitrust laws when they introduced a commission-style pricing system for e-books in a bid to halt Amazon’s growing dominance in the market.

The schedule confirms that a trial pitting the Justice Department against Apple and two of the publishers is set for June 3, 2013, and reveals that final preliminary filings in the related state government and class action cases are due in October of 2013. In reality, this means any class action trial would not take place until 2014. This second part of the proceedings is important because it determines how much money Apple and the two publishers will have to pay if they are found to have conspired to overcharge readers for e-books. The Justice Department segment of the case, set for next June, could result in new pricing rules but not payouts to consumers.

The new filings also set out a complex agreement as to how the parties will coordinate the expensive process of gathering evidence and deposing witnesses. Under the agreement, the Justice Department and state governments will share transcripts and other findings related to their investigations with the class action lawyers who are seeking millions on behalf of consumers.

The process has become especially complicated because three of the publishers have already reached a settlement with state governments, led by Texas and Connecticut, worth tens of millions of dollars that effectively cuts out the class action lawyers. The settlement, however, does not yet include every state and nor does it cover Apple or the other two publishers, Penguin and Macmillan. The holdout defendants, if found liable, could end up paying tens of millions more into the consumer settlement pool.

The holdouts, however, insist that they did nothing wrong and say that the Justice Department and their other accusers went after the wrong target. Apple and the publishers have said it is Amazon and its dominant control of the e-book market that should be the real subject of antitrust scrutiny.

The documents filed on Friday also state that the parties will begin talks with a mediator this fall to consider a settlement. For now, though, this appears to be a legal formality rather than a sign that the trial will be called off.

As the legal proceedings drone forward, the market for e-books continues to evolve rapidly. A growing number of reading platforms are entering the market — from the Galaxy tablet to new versions of the iPad, Nook and Kindle Fire — and the rest of the world is expected to join North Americans in embracing e-books (see my colleague Laura Owen’s recent report here).

E-book Litigation Schedule Copy
(Image by  Kristo-Gothard Hunor via Shutterstock)

The three other publishers named as defendants — Simon & Schuster, Hachette and HarperCollins — are settling with the DOJ and with the states. Bloomberg reports that Connecticut Assistant Attorney General Gary Becker told Judge Cote yesterday that “a settlement with the three publishers and all 50 states would be agreed to by August 10.”

The date set for next year’s trial coincides with the beginning of BookExpo America, the largest trade book fair in the U.S., which will run from June 4-6, 2013.

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Penguin, Macmillan respond to DOJ in e-book pricing suit

Apple digs in on e-book lawsuits, says Jobs’ quotes “will speak for themselves”

Letters to the DOJ: Public speaks out on e-book pricing case