Apple attorneys are set to meet on Monday with U.S. District Judge Denise Cote, the latest chapter in a strange and nonsensical legal battle.
The case in question involves another of America's biggest companies, Amazon, and its contention that Apple has been colluding to keep e-book prices artificially high. Antitrust lawsuits are never friendly, but the animosity between some key players in this battle of tech giants is extraordinary -- and for good reason.
You may remember that Amazon helped persuade the U.S. Department of Justice to sue Apple in April 2012, claiming that Apple conspired with five of the nation’s largest publishers to fix the price of e-books at a level different than what Amazon had set. Amazon, the web’s biggest retailer, had been selling published books at a money-losing rate of $9.99. Why? To get us to buy its Kindle e-book reader, and to dominate the e-book market. Amazon’s strategy worked. According to court documents, the firm soon controlled 90 percent of the e-book market.
This meant that publishers -- who had invested in the writing, production, promotion and distribution of these books -- couldn’t sell their wares at the recommended retail price of $14.99. Nor could brick-and-mortar stores match Amazon’s money-losing discounts. Amazon’s product-dumping and predatory pricing helped bankrupt many small-town bookstores. Yet, neither publishers nor independent booksellers sued Amazon, even though they might have had a good case (as we’ll soon see).
So how did this wacky e-book case get so far?
It started in the Rainier Tower in Seattle, home of Steve Berman and his law firm, Hagens Berman Sobol Shapiro LLP. The gifted litigator works in a blue-gray steel building designed by one of Seattle’s native sons, Minoru Yamasaki (also the architect of the World Trade Center in Manhattan). He built the tower atop an 11-story concrete base that, like an inverted pyramid, widens as it ascends. The effect is disorienting. Visitors swear it has at least 40 stories, but insiders know that the tower supports only 29 floors, all balanced on an extremely narrow pedestal.
Berman works in a long, narrow office lined by windows. Visiting his suite can be unsettling: You either gaze straight out at the birds cartwheeling through the clouds, or glance down thousands of terrifying feet to Seattle’s noisy streets. Berman is a calm man who made his name serving as a special assistant attorney general for 13 states in the Big Tobacco case. He was one of two private attorneys on the negotiating team, which produced a $206 billion settlement for states. Over the years, he’s devised sound legal strategies to sue Blue Cross, Microsoft and Visa in class-action suits.
Yet every industry has its own patois and whenever Berman files a new case, he tends to master a new language. Take his 2001 price-fixing suit against Merck, Pfizer and dozens of other drugmakers. Berman claimed that Big Pharma had long engaged in “a cartel and a conspiracy” by reporting fictitious drug prices. But he couldn’t break the code. It was only after he hired an ex-drug rep to translate the industry’s terms that Berman cracked the case. He won about $500 million for pensioners, consumers and his firm.
In the Amazon case, Berman has alleged that Apple and the publishers colluded against consumers. His case rests on the assumption that the “correct” price of the Kindle editions of published books is $9.99. (That’s like saying that the discounted price of a Mustang automobile on Cal Worthington’s lot is the only “right” price, not the sticker price listed at Ford dealerships.)
Berman’s analysis used price as a means of charging violations of the Sherman Antitrust Act. “The real issue,” explained Dan Crane, professor of law at the University of Michigan, “is whether Apple orchestrated agreement among publishers, or whether it just negotiated a hard deal with them.”
Allegations of collusion attracted the DOJ and other government agencies charged with upholding state and federal laws. In April 2012, the DOJ picked up Berman’s argument and sued Apple. But in their filings, DOJ attorneys seemed most upset that the publishing CEOs had met “in private dining rooms of upscale Manhattan restaurants,” such as Picholine, where they gathered around a chef’s table, perhaps sipping Syrah and smoking cigars. Later, the five publishers separately agreed to set their own prices for books sold in Apple’s iBookstore, and Apple agreed to act as their agent by upholding those prices -- the so-called agency agreement.
During pretrial hearings in the government’s case, it seemed Judge Cote had already made up her mind about Apple’s guilt -- even before hearing the evidence. (I didn’t attend those trials but have read the filings over the past three years.) Sure enough, in July 2013, the judge ruled that the publishers and Apple had indeed conspired to fix prices. By then, the publishers had settled with DOJ, not because they believed they had done anything wrong, but because they were scared of losing even more money at the trial.
Berman seemed jubilant as the judge’s decision cleared the way for his civil suit. “We’ve long held that Apple and this group of book publishers [HarperCollins, Hachette, Macmillian, Penguin and Simon & Schuster] formed a cabal with the sole intent of extinguishing any competitive influences in the e-book marketplace.” Because of that supposed collusion, the attorney suggested, the price of an e-book had shot up from $9.99 to $14.99.
But that’s not what industry numbers show.
Every year, the "Library & Book Trade Almanac," an authority in the field, reports annual sales by book category. It 2008, when Amazon had a lock on the market, it reported that the average price of an adult fiction e-book in the U.S. in was $8.71. In 2009, as more people self-published books, the average dropped to $8.21. In 2010, when Apple introduced its agency model for e-books, the price dropped 14 percent to $7.06. And when publishers were up and running against Amazon in 2011, the average price of an e-book sank by an astonishing 32 percent — to $4.83. “That’s a steal,” said Al Greco, a professor of marketing at Fordham University.
The almanac has yet to publish final figures for 2012. But Digital Book World Daily, another expert, reports that e-book prices for fiction in 2012 ranged from $4 to $7.
“My feeling is that the DOJ didn’t see these numbers,” said Greco.
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Which gets to the heart of this bizarre case: The numbers show that, far from hurting the market, the publishers’ and Apple’s agency model actually helped it. They allowed Barnes & Noble to gain a foothold in the e-book market, provided relief to the independent brick-and-mortar stores, and gave consumers lower rather than higher prices.
But none of this will surface in Monday’s hearing. Instead, the court will weigh the hurt feelings and escalating tensions in this convoluted case. Judge Cote had ordered Apple to overhaul its antitrust compliance and training procedures — not just in its e-book divisions but also in its movies and music units. “That seemed like a bit of an overreach,” said Prof. Dan Crane. To ensure that happens, the judge appointed Michael Bromwich as an external monitor. Bromwich has an impressive record in public service, first as a federal prosecutor in Manhattan, next as a member of the Independent Counsel's office prosecuting the Iran-Contra matter and then as Inspector General of the Justice Department during the Clinton administration. After the catastrophic BP oil spill, President Obama made him the “chief reformer” in offshore drilling, and Bromwich has been involved in several monitorships.
Bromwich is also a friend of Judge Cote. After selecting him from two candidates proposed by the DOJ, the judge suggested that she and Bromwich discuss his progress with Apple in regular ex parte meetings. In other words, only those two would be present for those discussions and no transcript would be made for the public record. This type of “secret” communiqué is a problem for many reasons, including the fact that Judge Cote is still presiding over the case against Apple for e-book damages brought by 33 state attorneys general, and in Berman’s consumer class-action case, potentially worth $1 billion. Whatever the judge hears privately from Bromwich could be used against Apple in its other cases.
In October, Bromwich started his job by trying to interview 15 of Apple’s directors and executives over a three-day period in November. It wasn’t easy scheduling sit-down meetings with Apple board members Arthur Levinson (also Genentech chairman), Bill Campbell (Intuit chairman) and Al Gore (former U.S. vice president) during the week before Thanksgiving. It was a stretch that these men knew much about the agency deal. Besides, Apple saw no need for the rush; the deadline for completing its new compliance and training procedures was Tuesday, Jan. 14, and until then, there’d be nothing for Bromwich to review.
Then Apple received the Bromwich bill. His rate was $1,100 an hour, and since he had no antitrust experience, he had hired a “translator” whose rate was $1,025 an hour. Plus, there was Bromwich’s 15 percent “administrative fee.” While it’s hard to cry for cash-rich Apple, the Cupertino firm was galled that it had to pay $138,430 for two weeks of being monitored by this “demanding” man.
An Apple attorney suggested that Bromwich lower his hourly rate to $800 and cut his antitrust expert’s fee to $700 an hour. Bromwich was to be limited to “per diems of $15 for breakfast, $25 for lunch, and $30 for dinner,” in line with Apple's expense policy. Apple’s lawyer then reminded the monitor that “Apple does not allow the firms it works with to market their representation of Apple,” as Bromwich had done in a press release.
Bromwich was insulted. In his filings with the court, he claimed that Apple had repeatedly tried to block interviews between him and senior executives, and that the company had failed to turn over relevant documents. Apple retorted that Bromwich’s statement underscored his personal bias toward the company and “his adversarial, inquisitorial, and prosecutorial communications and activities toward Apple…” It also brought up a serious complaint that Bromwich was simultaneously playing a quasi-prosecutorial role (by investigating more than just its e-book business) while answering directly to the judge.
On Monday, Apple’s lawyers will ask Judge Cote to fire her friend Bromwich, which places the judge in a tricky position.
Conflicts of interest (real and imagined) are common where revolving doors of power are concerned. Sharis Pozen, the acting director of the DOJ antitrust division, who decided to join the Amazon/Apple suit, left public service in 2012 for Skadden, Arps, Slate, Meagher & Flom, a prestigious firm whose clients include none other than Amazon. And, like some other journalists writing about this case, I too have a conflict, since my books have been published by some of the defendants.
Lost in the cries of “excessive” fees and “inappropriate” manners is much of any common sense. Of course, the book industry is arcane; whereas film studios announce their new movies’ ticket sales every Sunday night, and car makers report the number of units sold every year, publishers keep much of their data in their vest pockets. As Prof. Greco told me: “When you look at the book business, it’s helpful to understand it.”
And once you do take a look at the publicly available figures, you see that book buyers benefitted significantly from Apple’s deal with publishers.
No matter what comes of Monday's hearing, the legal jockeying will continue. Berman’s civil suit is still pending, Apple has appealed Judge Cote’s verdict, and Amazon is still a monopoly, bigger than ever. Meanwhile, the rest of us are stuck in some inverted pyramid, watching legal eagles cartwheel through the clouds, telling us that lower prices are actually higher prices. The entire effect is quite unsettling.