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Friday, August 2, 2013

U.S. Proposes Solutions for Apple\'s E-Book Price-Fixing

Updated, 4:53 p.m. | In July, the Justice Department won its antitrust lawsuit that accused Apple of conspiring with publishers to raise the prices of e-books. Now, the government wants to use its victory to discipline Apple in other markets where it does business, like movies, music and television shows.

The Justice Department on Friday proposed guidelines to the United States District Court in Lower Manhattan on how to enforce the July ruling. The guidelines suggest that Apple should be forced to terminate its existing agreements with five major publishers and also avoid entering similar agreements in the future with providers of music, movies and TV shows and games.

The guidelines would put rules in place to prevent Apple from facilitating price-fixing among publishers, or from retaliating against publishers that refuse to bend to its terms. The Justice Department also suggested that Apple allow Amazon and Barnes & Noble to insert links inside their e-book apps to their e-bookstores, so that consumers can easily compare prices of e-books.

“The court found that Apple's illegal conduct deprived consumers of the benefits of e-book price competition and forced them to pay substantially higher prices,” William J. Baer, assistant attorney general for the Department of Justice's antitrust division, said in a statement. “Under the department's proposed order, Apple's illegal conduct will cease and Apple and its senior executives will be prevented from conspiring to thwart competition in the future.”

In a statement filed by Apple's legal counsel, Gibson, Dunn & Crutcher, Apple said the government's proposal was a “draconian and punitive intrusion” into its business.

The “overreaching proposal would establish a vague new compliance regime - applicable only to Apple - with intrusive oversight lasting for 10 years, going far beyond the legal issues in this case, injuring competition and consumers, and violating basic principles of fairness and due process,” Apple's lawyer, Orin Snyder, said in its statement. “The resulting cost of this relief - not only in dollars but also lost opportunities for American businesses and consumers - would be vast.”

The Justice Department declined to comment.

In the case, brought last year, the Justice Department accused Apple and five book publishers of conspiring to raise e-book prices. It cast Apple as the ringmaster of the conspiracy, colluding with the publishers to collectively help them defeat Amazon's uniform pricing of $9.99 for new e-books.

As part of its pitch, Apple asked the publishers to switch to a different model of selling books, called agency pricing, in which the publishers set the price of the books instead of the retailers. The publishers' contracts with Apple included a so-called most-favored-nation clause, requiring that no other retailer sell e-books for a lower price; if they did, the publisher would have to match the price of the e-book in Apple's store. That, the Justice Department said, defeated price competition and resulted in higher prices across the industry.

The Justice Department's proposed remedy would presumably prohibit Apple from using contracts with a most-favored-nation clause to help providers of music, TV shows and movies raise their prices. But it is unlikely that it would have implications for every contract that includes a most-favored-nation clause. The judge, Denise L. Cote, said in her ruling against Apple that the most-favored-nation clause itself was not the issue, but more specifically the manner in which the clause was used as a mechanism to execute a price-fixing conspiracy.

Outside the book business, it is still unclear whether most-favored-nation clauses raise prices for other industries, like music, said Charles E. Elder, an antitrust lawyer at Irell & Manella. “One question is, to what extent would Apple's getting rid of most-favored-nation clauses in those industries help for competition?” Mr. Elder said. “I don't know the answer to that question, but it's one the court should think about before rubber-stamping a requested remedy by the Department of Justice.”

Judge Cote will hold a hearing next week to discuss the Justice Department's proposed remedy.