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In Re: Electronic Books Antitrust Litigation

May 15, 2012


The opinion of the court was delivered by: Denise Cote, District Judge:


This Opinion and Order applies to the following actions: 11 Civ. 5576 (DLC), 11 Civ. 5609 (DLC), 11 Civ. 5621 (DLC), 11 Civ. 5707 (DLC), 11 Civ. 5750 (DLC), 11 Civ. 5896 (DLC), 11 Civ. 5898 (DLC), 11 Civ. 5976 (DLC), 11 Civ. 6019 (DLC), 11 Civ. 6079 (DLC), 11 Civ. 7507 (DLC), 11 Civ. 7534 (DLC), 11 Civ. 7323 (DLC), 11 Civ. 8329 (DLC), 11 Civ. 8608 (DLC), 11 Civ. 9016 (DLC), 11 Civ. 9014 (DLC), 11 Civ. 9559 (DLC), 11 Civ. 9560 (DLC), 11 Civ. 9561 (DLC), 11 Civ. 9562 (DLC), 11 Civ. 9563 (DLC), 11 Civ. 9564 (DLC), 11 Civ. 9565 (DLC), 11 Civ. 9566 (DLC), 11 Civ. 9567 (DLC), 12 Civ. 0476 (DLC). :

Plaintiffs in this class action bring claims for violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1; violation of California's Cartwright Act, California Business and Professions Code §§ 16720, et seq.; violation of state antitrust and restraint of trade laws and consumer protection statutes; and unjust enrichment. The defendants Apple Inc. ("Apple") and five publishing companies -- HarperCollins Publishers LLC ("HarperCollins"), Hachette Book Group, Inc. and Hachette Digital ("Hachette"); Holtzbrinck Publishers, LLC d/b/a Macmillan ("Macmillan"); Penguin Group (USA), Inc. ("Penguin"); and Simon & Schuster, Inc. and Simon & Schuster Digital Sales, Inc. ("Simon & Schuster") (collectively, the "Publisher Defendants") -- have moved for dismissal under Fed. R. 12(b)(6). As described below, certain of the Publisher Defendants are engaged in settlement discussions with governmental authorities and have not submitted a reply brief. Thus, the reply papers were submitted by Apple, Macmillan, Penguin, and Simon & Schuster. For the reasons stated below, the motions to dismiss are denied.


The following facts are taken from the Consolidated Amended Class Action Complaint ("Complaint" or "CAC") unless otherwise noted, and are taken to be true for purposes of this motion. LaFaro v. New York Cardiothoracic Group, PLLC, 570 F.3d 471, 475 (2d Cir. 2009). The plaintiffs bring this action on behalf of themselves and others who paid higher prices for their electronic books or "eBooks" as a direct and foreseeable result of defendants' allegedly unlawful conduct. The plaintiffs allege that Apple and the Publisher Defendants conspired from the Fall of 2009 until April 2010 to raise eBooks prices, and that this conspiracy in fact resulted in higher eBooks prices that continue to this day.

I. Facts

The Publisher Defendants are five of the six largest publishing companies in the United States.*fn1 Together, they publish a significant portion of the trade books released in the United States. For example, along with Random House, Inc. ("Random House"), the Publisher Defendants published more than ninety percent of all hardcover New York Times bestsellers in 2009.

Historically, all major publishing houses, including the Publisher Defendants, have sold their books under a distribution model known as the "wholesale model" or the "retail model." Under this model, publishers sell their titles to retailers at wholesale prices. Typically, these wholesale prices are expressed as a percentage discount off of a title's "cover price" or "list price," which is the price that is printed on the book cover or jacket. The retailers then decide, independently, the retail prices to charge consumers. The wholesale model thus allows each retailer to charge the consumer whatever price it believes will maximize its sales. For decades, the Publisher Defendants have used this model when contracting with physical or "brick-and-mortar" retail book stores. They continued to use it when vendors such as, Inc. ("Amazon") began selling physical books online. eBooks are digital versions of books. They can be read on a variety of hardware devices, including personal computers, mobile phones, dedicated handheld "eReaders" like the Amazon Kindle, the Sony Reader, and the Barnes & Noble Nook, or multi-functional "tablets" like Apple's iPad. eBooks can be purchased directly through many of these devices or on the Internet.

When Amazon released the Kindle in November 2007, each of the Publisher Defendants decided to sell eBooks to Amazon using the wholesale model. Due to the lower costs associated with distributing eBooks as compared to physical books, the Publisher Defendants typically set the wholesale prices for eBooks slightly lower than those for hardcover books. The basic pricing model remained the same, however: eBook retailers could charge consumers any price they wanted. In most cases, the Publisher Defendants released the eBook version of a particular title at the same time they released the hardcover version.

After it released the Kindle, Amazon pursued a discount pricing strategy for eBooks, charging consumers $9.99 or lower for newly released eBooks. This was substantially less than the retail price for hardcover books. In many cases, it was even less than the wholesale prices for eBooks charged by publishers.

Amazon was able to achieve this price point in part due to the lower costs associated with distributing eBooks as compared to physical books. Unlike physical books, eBooks do not need to be shipped or stored, and when a title does not sell as well as expected, retailers do not need to send unsold volumes of eBooks back to the publisher.

Amazon pursued its pricing strategy in part to fuel sales of the Kindle and to capture market share. Kindle sales were brisk from the moment of its release, and the device quickly became the market leader. Although other booksellers, such as Barnes & Noble and Sony, tried to match Amazon's low prices, by 2010 Amazon had captured 90 percent of eBooks sales volume in the United States.

Overall, the market for eBooks is growing rapidly. It is the fastest-growing segment of the publishing industry. In the second quarter of 2010, Amazon's sales of eBooks surpassed its sales of hardcover books for the first time.

By the Fall of 2009, the Publisher Defendants had come to see the growth of eBooks, combined with retailers' discount pricing strategies, as a significant threat to their business model and to the publishing industry as a whole. Traditionally, hardcover book sales have been publishers' most profitable product. Hardcovers typically provide publishers with the highest margins per unit of sale. Hardcover sales account for a significant portion of the profits of brick-and-mortar book stores -- the publishers' traditional retail partners. These stores purchase hardcovers from the publishers wholesale often at a discount of 30--60 percent off the list price, and sell them to consumers at the list price or close to it. The list price for hardcovers often exceeds $26.

The Publisher Defendants feared that low-cost eBooks sales would cannibalize sales of physical books, especially hardcovers, eat into publishers' profit margins, and harm brick-and-mortar retailers. They also feared that in the future, Amazon might use its market power to reduce publishers' share of the profit margins for eBooks. Most fundamentally, the Publisher Defendants worried that Amazon's low price point would condition consumers to believe that a book was only "worth" $9.99, and that this consumer expectation would exert powerful downward pressure on prices for eBooks and physical books alike. In the face of these pricing pressures, the Publisher Defendants feared that their business model would prove unsustainable over the long term.

The CAC alleges that the Publisher Defendants believed they could not successfully pressure Amazon and other online retailers to increase prices for eBooks on their own, so they conspired to do so together. The CAC claims that this conspiracy began in the Fall of 2009 and unfolded in three stages. First, in December 2009, the Publisher Defendants agreed to "window" eBooks. To window an eBook means to delay its release date until sometime after the release of the hardcover version. After this approach proved unsuccessful, the Publisher Defendants each signed contracts to sell eBooks in Apple's iBookstore using a new sales model, the "agency" model, in January 2010. The complaint alleges that the Publisher Defendants and Apple intended for these contracts -- which also included clauses that granted Apple "most-favored nation" ("MFN") pricing guarantees -- to result in higher prices for eBooks and to eliminate price competition among eBook retailers. Lastly, in April 2010, the Publisher Defendants forced Amazon to abandon the wholesale pricing model and adopt the agency model by threatening to withhold their eBooks from Amazon. The CAC alleges that throughout each of these three stages, the Publisher Defendants were coordinating with each other in furtherance of the goals of the conspiracy.

A. Windowing eBooks

Prior to December 2009, the Publisher Defendants' standard practice was to release eBook and hardcover versions of titles at the same time. After a key meeting with an important industry executive, however, this practice changed abruptly. In late November 2009, representatives from a number of publishing companies met with the Chairman of Barnes & Noble, a major chain of brick-and-mortar retail bookstores. During the meeting, the Chairman of Barnes & Noble complained about the potential for Amazon's low prices to hurt hardcover sales.

This meeting spurred a sudden and dramatic change in the business practices of most of the Publisher Defendants. On December 3, 2009, the Chairman and CEO of Hachette met with an Amazon executive and tried to convince Amazon to raise its prices. He stated that Amazon's pricing was a "big problem for the industry," and that this "industry" problem would be solved if Amazon raised its eBook prices by two or three dollars. Amazon indicated that it had no plans to raise its prices, at least in the short term. On December 4, Hachette informed Amazon of its intention to begin windowing a large percentage of its newly released titles for a number of months. On December 7, Simon & Schuster advised Amazon that it would window at least twenty-five titles released between January and April 2010.

These developments did not become public until four days later, when the Wall Street Journal reported on December 8 that Hachette and Simon & Schuster would begin windowing a number of their eBook titles and quoted the Chairman and CEO of Hachette as saying, "We're doing this to preserve our industry." On December 10, HarperCollins indicated that it would window five to ten titles per month for up to six months, and on December 16, Macmillan stated that it would window newly released titles for several months. The CAC does not allege that Penguin ever windowed eBooks.

B. Contracting with Apple

These publishers' decision to window did not succeed in persuading Amazon to raise its prices for eBooks. In the second stage of the conspiracy, however, the Publisher Defendants gained additional leverage over Amazon through a new market entrant: Apple. In January 2010, Apple was preparing to release its new tablet device, the iPad. The CAC alleges that Apple wanted to enter the business of selling eBooks for use on the iPad, but did not want to compete with Amazon on price. Apple therefore insisted on selling eBooks through the agency pricing model, and negotiated nearly identical contracts with each of the Publisher Defendants in January 2010. The CAC alleges that these contracts were signed within days of each other and prompted an industry-wide switch to the agency model, which constrained price competition among eBooks retailers. The CAC also alleges that Publisher Defendants communicated with each other over the course of the negotiations and Apple acted as a conduit for their messages.

Under the wholesale distribution model, the retailer purchases books from the publisher, sets its own retail price, and sells the books to consumers. Under the agency model, however, retailers do not set prices or make sales. Instead, the publisher sets the price and sells eBooks to consumers directly. The retailer acts as the publisher's agent by making the publisher's titles available for sale in the retailer's store. In exchange for this service, the retailer receives as commission a percentage of the sale price for each eBook sold through its store.

In January 2010, Apple signed nearly identical contracts (the "Agency Agreements") with each of the Publisher Defendants. Each of these Agency Agreements allegedly included four major elements. First, each Agency Agreement specified that beginning with the launch of Apple's iPad and iBookstore on April 3, 2010, the publisher would sell its eBooks in the iBookstore under the agency model. For each sale in the iBookstore, Apple was to receive a commission of thirty percent of the sales price. Second, the contracts included MFN clauses. These clauses stipulated that the final sales price for eBooks sold through other distribution channels could not be lower than the prices for those titles in the iBookstore. Third, each Agency Agreement set the prices for eBooks according to a formula tied to the list price of physical books. Under this formula, the eBook prices would range from $12.99 to $14.99 for most newly-released general fiction and nonfiction titles. Lastly, each Agency Agreement explicitly required the Publisher Defendants to use the agency model when selling eBooks through other vendors of any meaningful size beginning on April 1, 2010.

The Publisher Defendants negotiated the Agency Agreements with Apple in the weeks leading up to an Apple event on January 27, 2010, in which Apple announced the upcoming launch of the iPad. The CAC alleges that the Publisher Defendants signed the contracts within a few days of each other, that the Publisher Defendants and Apple communicated the terms of their agreements with each other over the course of the negotiations, and that they agreed to go forward with the deals together. Initially, at least, Random House did not come to an agreement with Apple to sell its eBooks through the iBookstore.

At the January 27 iPad launch event, Apple announced that it had signed agreements with each Publisher Defendant to sell eBooks under the agency model. Apple also revealed that the prices for eBooks on the iPad would be higher than $9.99. Nevertheless, Apple's CEO, Steve Jobs ("Jobs"), told a reporter at the event, "The prices [on the iPad and the Kindle] will be the same," and "Publishers are actually withholding their books from Amazon because they are not happy." The following day, Jobs told his biographer the following:

Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that -- they thought it would trash their ability to sell hard-cover books at $28. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon. So we told the publishers, "We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway." But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, "You're going to sign an agency contract or we're not going to give you the books." . . . Given the situation that existed, what was best for us was to do this aikido move and end up with the agency model. And we pulled it off. (Emphasis supplied.)

Even though the retail prices for eBooks were higher under the agency model than under the wholesale model, the Publisher Defendants typically made less money per eBook sale under the agency model. This is because, whereas a publisher captures the entire retail price for an eBook under the wholesale model, it captures only 70 percent of the sales price under the agency model. For example, a typical wholesale price for a newly-released eBook might be roughly $13. Even if the retailer sold this eBook for $9.99, the publisher would earn $13 under the wholesale model. Under the agency model, however, the publisher could earn less money even as the consumer paid more. A sales price of $14.99 under the agency model would net the publisher only $10.49, due to the 30 percent commission paid to the sales agent. For these reasons, the CAC alleges that the Publisher Defendants' average per unit revenue for eBook sales decreased by 31 percent following the adoption of the agency model.

In addition, because the sales infrastructure for eBooks that existed in 2009 was adapted to the wholesale model, the Publisher Defendants' switch to the agency model involved substantial transaction costs. For example, the CAC alleges that switching to the agency model required costly revisions to the industry's standard for disseminating pricing and sales information, known as the Online Information eXchange or ONIX. The CAC further alleges that the higher sales prices that resulted from adoption of the agency model slowed the growth rate of eBooks sales.

The CAC alleges that the Publisher Defendants understood full well that the switch to the agency model would result in higher retail sales prices, and that this outcome was precisely what made the agreements so appealing. For example, On February 2, 2010, Rupert Murdoch, CEO of HarperCollins corporate parent News Corp., stated the following:

Yeah we don't like the Amazon model of selling everything at $9.99 they don't pay us that. They pay us the whole wholesale price of $14 or whatever we charge but we [sic] I think it really devalues books and it hurts all the retailers of the hard cover books. . . . Amazon, sorry, Apple in its agreement with us, which is [sic] not been disclosed in detail, does allow for a variety of slight of [sic] higher prices. There will be prices very much less than the printed copy of books. But still it will not be fixed in a way that Amazon has been doing it. And it appears that Amazon is now ready to sit down with us again and re-negotiate pricing. (Emphasis supplied.) The Publisher Defendants also understood that they would earn less money per eBook sale under the agency model, but adopted the new model anyway. For example, on February 4, John Sargent, CEO of Macmillan, posted a blog stating:

Over the last few years we have been deeply concerned about the pricing of electronic books. That pricing, combined with the traditional business model we were using, was creating a market that we believe was fundamentally unbalanced. In the last three weeks, from a standing start, we have moved to a new business model. We will make less money on the sale of eBooks, but we will have a stable and rational market.

C. Forcing an Industry Shift

After agreeing to sell eBooks through Apple's iBookstore under the agency model and agreeing to the MFN clauses, the Publisher Defendants threatened to withhold eBooks from Amazon unless Amazon switched to the agency model. On January 20, representatives from Hachette, HarperCollins, Simon & Schuster, and Macmillan each met separately with Amazon representatives, proposed the agency model to Amazon, and imposed a deadline of April 1, 2010 for Amazon to switch to the agency model. Macmillan offered to give Amazon the same thirty percent commission it was giving to Apple, and threatened to delay the release of its eBooks to Amazon until seven months after the launch of the hardcover edition if Amazon did not agree. Amazon initially resisted. It briefly pulled all Macmillan titles off both the Kindle website and Macmillan refused to change the terms of its ultimatum, however, and Amazon agreed to the agency model a few days later. By April 1, Amazon had concluded negotiations with each of the Publisher Defendants to sell eBooks under the agency model.

The Publisher Defendants had similar negotiations with other eBook retailers. For example, the Publisher Defendants withheld eBooks from the retailer BooksOnBoard beginning on April 1 because BooksOnBoard had not yet agreed to sell under the agency model.

After adoption of the agency model, the price of new bestselling eBooks increased by forty percent on average, even though there had been no corresponding increase in costs. eBook prices are now identical at the four major eBook distributors, Amazon, Sony, Apple, and Barnes & Noble. And, in some instances, the price of an eBook now exceeds the price of a physical book. In addition, although Random House initially refused to adopt the agency model, and had not been allowed to sell its books in Apple's iBookstore, Random House agreed to begin selling eBooks through the iBookstore under the agency model on March 1, 2011.

Apple and the Publisher Defendants' activities attracted the attention of state, federal, and foreign authorities. European Union antitrust regulators made unannounced raids on eBook publishers in several countries, and the European Commission announced a formal investigation into Apple and the Publisher Defendants on December 6 for colluding to raise eBook prices. On December 7, a representative from the United States Department of Justice ("DOJ") stated that DOJ was investigating antitrust behavior in eBooks pricing. Prior to the filing of the CAC, the Attorneys General of both Texas and Connecticut had launched similar inquiries. As discussed in more detail below, after the filing of the CAC, DOJ, ...

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