Last week, Federal Judge Denise Cote approved a class action settlement agreement in which Apple may begin paying $400 million dollars to as many as 23 million consumers. The suit regarded antitrust law violations that it committed when it conspired to raise e-book prices with book publishers.

According to Publishers Weekly, the settlement terms are as follows:

Apple will pay $400 million to consumers only if the liability finding survives the appeal process; it will pay $50 million if the liability question is vacated or remanded for further proceedings. If the liability finding is reversed on appeal, Apple will pay nothing.

The actions that precipitated the lawsuit started a few years ago. Before 2010, the big-6 publishers (now the big-5 publishers since the Penguin-Random House merger) used the wholesale model to sell e-books. Under the wholesale model, publishers recommended a retail price to a wholesaler and sold the book to the wholesaler for a certain percentage off the publisher’s recommended retail price. The wholesaler then sold the book to the retailer, who set its own e-book prices. For example, a publisher could set a recommended retail price for a book of $15.99, sell the book to the wholesaler for a fifty percent discount of $7.99, and the retailer could then sell the book at $10.99.

Amazon then began selling e-books at $9.99, and publishers initially had trouble competing. In 2010, Apple convinced the big-6 publishers to change business models, and the publishers entered into the agency model. Under the agency model, publishers set the retail price  of an e-book and use retailers as agents to sell the e-book. The retailer then receives thirty percent of the sales price of the e-book, and the publisher receives the remaining seventy percent. For example, a publisher can set a retail e-book price at $15.99, and the retailer must sell the e-book at $15.99; however, the retailer receives thirty percent of the sales price, and the publisher receives the remaining seventy percent.

The Department of Justice soon accused five of the big-6 publishers and Apple of fixing e-book prices to thwart Amazon’s $9.99 e-book price, and the publishers and Apple were later found guilty of violating the Sherman Act. Penguin, Hachette Book Group, Macmillan, HarperCollins, and Simon and Schuster paid $75 million, $31 million, $25 million, $19 million, and $17 million in damages respectively to e-book consumers, for a grand total of roughly $167 million in damages.

The potential $400 million class action settlement with Apple is in addition to the $167 million paid in damages by the publishers, so all eyes in the publishing industry will be focused on the Second Circuit on when it hears Apple’s appeal on December 15..

This class action settlement comes at an interesting time in the book publishing industry.  As part of the original DOJ antitrust settlement, Hachette, HarperCollins, and Simon Schuster ended their contracts with e-book retailers like Amazon and allowed retailers to renegotiate the contracts. Moreover, the settlement allowed retailers to return to the wholesale model, and the three publishers also agreed to not interfere with price discounts for two years. Now, Hachette and Simon and Schuster have entered into separate agreements with Amazon concerning e-book prices.

Apple and the publishers are undoubtedly hoping for a reversal, but I don’t think that is likely.  We will just have to see what happens.

Joseph Perry

Joseph Perry is a graduate of St. John’s University School of Law whose goal is to become a publishing and media law attorney. He has interned at William Morris Endeavor, Rodale, Inc., Columbia University Press, and is currently interning at Hachette Book Group and volunteering at the Media Law Resource Center, which has given him insight into the legal aspects of the publishing and media industries. Contact Joe at staff@LawStreetMedia.com.

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My publishing career is unique because it has solely been through an intern’s eyes. I attended the 2010 NYU Summer Publishing Institute–where, I might add, I met my fiancée, who is currently a book editor. Like most English majors, I wanted to be an editor; however, by the end of the six-week program, my tune changed 180 degrees, and I knew I wanted to be a literary agent and a book publishing attorney. Two years later, I enrolled in law school.

Excluding one summer internship at talent agency William Morris Endeavor, the bulk of my legal internships have been with book publishers like Rodale, Inc., Columbia University Press, and Hachette Book Group. You can say that I’ve found my way across the publishing landscape.

Regardless of where I’ve interned, however, I’m continually amazed at the people I’ve come across and the amount of effort it takes to publish books, which outsiders—consumers, critics, and dare I say, even authors—may not realize.

It’s no secret that the majority of employees in book publishing are grossly underpaid (interns included, if they are paid at all). For the majority of departments, employees start earning larger salaries once they reach senior positions, which can take more than a decade at times. However, the lack of pay produces camaraderie among book publishing industry members, especially younger employees who trade in their lack of a paycheck for the opportunity to assist in creating great art and surrounding themselves with books all day.

From top to bottom, book publishers are made up of mostly English majors who are editors, or who had dreams of becoming editors, but gravitated toward marketing, publicity, production, finance, art, contracts, subsidiary rights, or if you’re like me, the legal department. For this reason, publishing companies are unique in that each department contains members who are just as passionate, or even more passionate, than the next department about books.

This passion creates a work ethic within employees that the public may associate with big law firm attorneys, doctors, or investment bankers. Bringing work home and working on weekends can be the norm for some, especially when first beginning a book publishing career. Editorial assistants, in particular, are known to work extremely long hours, and their lives, which used to contain a full social calendar, are suddenly taken over by their authors’ books. They live and breathe through their authors’ successes or lack thereof. Life isn’t much better for mid-level and senior employees who bear the brunt of the responsibility for producing great books, turning a profit, and essentially keeping the book publishing industry afloat.

No matter how little they’re paid or how hard they work, what amazes me the most about the publishing industry is how genuine and kind everyone is.  Somehow they manage to wake up, wait in rush hour traffic—sometimes traversing across states lines—and walk into the office, smiling brightly or laughing, knowing deep down that they get to develop their own piece of culture.

This is why I’m glad Amazon and Hachette agreed to e-book and print price terms yesterday.  Forget the economic reasons. Forget who was right or who was wrong. The book publishing industry produces wonderful, kind people who help create art that can change you. Let’s not forget about that, and more importantly, let’s not forget about them.

Sometimes, I feel they were lost in the shuffle during the dispute. The media didn’t pay attention to them. Why would they? They didn’t create newsworthy events. Nevertheless, for six months they all sat in their cubicles and wondered aloud or to themselves what would happen if Amazon won. Would the book publishing industry meet the music industry’s fate? Would they be out of a job? Would they have to find a new career?

Fortunately, they’re not going anywhere.

Joseph Perry

Joseph Perry is a graduate of St. John’s University School of Law whose goal is to become a publishing and media law attorney. He has interned at William Morris Endeavor, Rodale, Inc., Columbia University Press, and is currently interning at Hachette Book Group and volunteering at the Media Law Resource Center, which has given him insight into the legal aspects of the publishing and media industries. Contact Joe at staff@LawStreetMedia.com.

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For a few months now, retail giant Amazon.com, and book publisher Hachette have been feuding. The most recent development in their fight came on July 30, 2014, when Amazon pushed for Hachette to allow the sale of e-books at a cheaper price of $9.99. The math behind Amazon’s reasoning is laid out clearly on their website. For every book priced at $14.99, Amazon would sell 1.74 more copies if the book was priced at $9.99.  As the saga stretches onward, Hachette’s bargaining power continues to erode, and it’s looking like this will turn into a clear win for Amazon.

The Background

The battle began earlier this year when readers logged on to Amazon only to discover the pre-order button for certain Hachette books, like J.K. Rowling’s “The Silkworm,” had disappeared. Amazon began understocking Hachette books. Customers reported the books they ordered took extra time to arrive. The website recommended users buy a non-Hachette book instead.

Some observers cite these tactics as instances of bullying by the retail giant. Many saw it as a new low, since the company was actively damaging the customer experience. More than 900 prominent authors have staked their positions against Amazon. Stephen Colbert, carried by Hachette, is not just mad, but “mad prime.”

E-book pricing disputes are nothing new. Book publishers have long pushed for an “agency” model of pricing, where the publishers dictate pricing. Amazon instead advocates a “wholesale” model, where retailers set the retail price and can offer discounts. Publishers aren’t fans of these hefty discounts which can give one retailer–like Amazon–a huge advantage.

The “big five” publishers–Hachette, HarperCollins, MacMillan, Penguin Random House, and Simon and Schuster–thought they found a way out of the issue when they signed contracts with Apple in 2010 to ensure an agency pricing model for e-books. Amazon was not happy. The Department of Justice’s Antitrust Division rushed to Amazon’s aid and brought a suit against these companies for price fixing. The publishers all settled out of court, but Apple was found guilty of price-fixing–a decision it is still appealing. Since the settlement, Amazon has been allowed to discount e-books up to 30 percent. But any discount by Amazon comes from their own pocket, which obviously isn’t preferable for the company.

A Lawsuit in the Works?

With the 2012 settlement set to expire this year, it is likely the recent dispute is Amazon’s attempt to open a new window for pricing negotiations. Amazon wants to buffer its own earnings rather than taking a hit from out-pricing competitors. Publishers are fearful Amazon will dominate the market even further, demand lower wholesale prices, and squeeze profit margins to zero.

Despite Amazon’s questionable tactics, it is difficult to see how Hachette could win in an antitrust suit against Amazon. First, Amazon is not a classic monopoly. If anything, Amazon would be a monopsony. While a monopoly occurs when a dominant seller can raise prices of what it sells, a monopsony occurs when the buyer of goods can unlawfully lower the price of what is buys. Both can distort the market, and both can violate antitrust laws.

Amazon controls more than 60 percent of the e-book market and more than 40 percent of new book sales. But simply dominating the market is not an antitrust violation. The precedent for pushing a monopsony case against Amazon does not look promising. There has never been a case in U.S. competition law where a single company was declared a monopsonist. Most scholars today agree the Amazon and Hachette dispute is just that–a typical business dispute–rather than an antitrust violation.

“Dominant Power”

Section Two of the Sherman Antitrust Act, the 1890 Act which regulates anti-competitive business practices, outlaws monopolistic power in the relevant market acquired or maintained through exclusionary or anti-competitive behavior.

By bringing a lawsuit, Hachette would first have to prove Amazon is the dominant buyer in the “relevant market.” It is unclear if the market would be defined as the market for e-books, for Hachette books in general, or for Hachette books online. For Amazon to be the dominant power in the market, Hachette must have no other viable options to sell their e-books. Since publishers do have the freedom to sell e-books through other websites, many argue Amazon cannot be considered a monopsony.

“Anticompetitive Practices”

Secondly, Amazon must have engaged in “exclusionary or anticompetitive practices,” such as refusal to deal or predatory pricing. “Refusal to deal” involves restricting the supply of goods or the methods of buying or selling goods. By partially cutting off Hachette from the market in recent months, the argument could be made that Amazon is refusing to deal. However, courts narrowly interpret “refusal to deal” and are unlikely to see Amazon’s acts as an antitrust violation.

A lawsuit could be brought on the grounds that Amazon is engaged in predatory pricing practices by setting low prices to drive out all other competition. However, the bar to prove predatory pricing is very high. It would be hard to prove Amazon is not simply engaged in legitimate price competition. Since antitrust suits aim to help consumers, low prices are not typically seen as a problem.

Proving predatory pricing usually means proving that suppliers are forced to sell books at such a loss that there is decrease in the overall supply of books for consumers. So far this has not been the case. There has been no reduction in the variety of new books, nor has Amazon driven out all competitors to later jack up prices themselves.

The Upshot

Book publishers realize how little power they have against Amazon, so the recent trend in the industry has been to merge for greater bargaining power. Penguin recently merged with Random House, and HarperCollins bought Harlequin. Bigger publishers mean greater power plays and a better chance for even pricing negotiations with Amazon.

Ultimately it isn’t likely that Hachette has a case against Amazon on its own. If anything, the legal battle may be whether Amazon engaged in deceptive sales practices by saying certain Hachette titles were unavailable. For now, Amazon’s market power itself isn’t hurting consumers’ wallets, and Hachette can still sell e-books through other vendors. The pricing wars will continue, but don’t expect Hachette to win an antitrust suit anytime soon.

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Alexandra Stembaugh is a senior at the University of Notre Dame studying Economics and English. She plans to go on to law school in the future. Her interests include economic policy, criminal justice, and political dramas. Contact Alexandra at staff@LawStreetMedia.com.

Featured image courtesy of [Karin Lizana via Flickr]

Alexandra Stembaugh

Alexandra Stembaugh graduated from the University of Notre Dame studying Economics and English. She plans to go on to law school in the future. Her interests include economic policy, criminal justice, and political dramas. Contact Alexandra at staff@LawStreetMedia.com.

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