Apple pushing for e-book trial, deems DoJ settlement with publishers unlawful

As you know, the United States Department of Justice (DoJ) in April filed an antitrust lawsuit against Apple and five publishers for alleged price fixing related to digital books. Though the Government proposed a settlement with Hachette SA, HarperCollins and Simon & Schuster, Apple is now calling that deal “fundamentally unfair, unlawful, and unprecedented”, arguing that litigation is needed.

Claiming the Government has “unwittingly placed a thumb on the scales in favor of Amazon”, Apple says that the proposed settlement would “terminate and rewrite Apple’s bargained-for contracts” before the company has a chance to defend itself…

Laura Hazard Owen of paidContent (which recently turned 10) explains Apple’s stance.

It boils down to assertion that DoJ’s settlement would allow Amazon to continue imposing its wholesale business model, which is unacceptable to the Cupertino firm since it had refused to settle.

Apple’s memo [PDF document], filed this afternoon, reads:

Apple has not settled with the Government; it denies the allegations against it and is actively defending this case. Apple has never participated in, encouraged, or sought to benefit from collusion. It has no objection to the Proposed Judgment’s bar on collusion.

But the Government proposes to go much further.[…]Nullifying a non-settling defendant’s negotiated contract rights by another’s settlement is fundamentally unfair, unlawful, and unprecedented. The Government does not cite a single case in which such relief was granted without a trial or merits determination.

In a nutshell, Apple is saying that the proposed settlement would require HarperCollins, Hachette and Simon & Schuster to terminate their existing agency pricing contracts with Apple.

Should that happen, Amazon will be free to set e-book prices below its marginal cost, prompting Apple to match Amazon’s discounts and consequentially hurting publishers doing business with Apple due to the 30 percent cut under Apple’s agency model.

Apple’s legal argument?

“The Government is seeking to impose a remedy on Apple before there has been any finding of an antitrust violation.” This case, the company states, revolves around “an alleged conspiracy to force Amazon to adopt agency.” So a settlement “enjoining collusion or precluding publishers from forcing agency on Amazon would be appropriate,” but Apple is entitled to defend its contracts in court.

Indeed, Apple should be entitled to defend itself before any settlement is enforced. The trial is scheduled for June 2013 and Apple is demanding that the court reject DoJ’s proposed settlement, or delay it, until after the trial.

As you know, DoJ is accusing Apple of working in concert with the publishers in an effort to raise e-book prices. Apple’s iBookstore employs an agency model which allows publishers to freely set prices of their warez (with Apple taking its customary 30 percent cut), but also requires them to offer their e-books on competing stores at equal or higher prices.

The clause ensures that no competing store can undercut Apple’s prices on the iBookstore.

On the other hand, Amazon’s wholesale model lets the online retailer dictate prices. As Amazon often undercuts other digital stores with low prices, this has resulted in inexpensive e-books for buyers, consequentially hurting publishers’ revenues.

Apple’s model gives publishers full control over pricing, with DoJ saying the policy led to price fixing that resulted in higher prices for e-books.

Mind you, both business model are perfectly valid and used by other physical and digital retailers.

Is Apple taking it too far with claims of unfair DoJ settlement?

Is the company shooting itself in the foot by pushing for the trial?