Apple vs. DOJ e-Book Case: Judge Cote's Guilty Verdict "Impossible"

On Friday, Judge Denise Cote reversed course and signed off on the Apple-DOJ plea bargain, thereby eliciting the single best explanation I've seen as to why the Appeals Court should overturn Cote's guilty verdict against Apple in the e-book anti-trust case.

"Antitrust experts in particular were outrage at the verdict as under that section of the law it should be impossible for a 'vertical' reseller (like Apple) to join a 'horizontal' conspiracy amongst publishers. Cote also ignored evidence that other booksellers had previously urged publishers to force Amazon to use the 'agency' model (where publishers set prices) before Apple even began planning its iBookstore business as Amazon's predatory pricing at the time was preventing competitors from joining the market."

Note the word "impossible." Analysts love words like "impossible" because they set up a binary choice that usually isn't hard to evaluate — something is either impossible or it's not. 

Never mind the verdict's other problems which I've listed off and linked to before — anti-trust experts are asserting that, as a matter of black-letter law, a vertical reseller like Apple can't be part of a horizontal conspiracy like the one DOJ says existed among the publishing houses...legally, it's "impossible." That's no mere technicality. If that's true, here's the binary choice:

1. DOJ prosecutors and Judge Cote were incompetent and didn't understand the relevant case law; or

2. They did know the law and ignored it for reasons I won't speculate on here.

Incompetence or bias. If the anti-trust experts are right, there are no other possible conclusions.

Apple vs DOJ e-Book Case: The Plot Thickens...

Called it. Judge Cote wants the deescalation clause pulled from Apple's settlement agreement with the DOJ.

"U.S. District Judge Denise Cote in Manhattan said she found 'most troubling' a clause requiring Apple to pay only $70 million if an appeals court reversed her finding that the company is liable for antitrust violations and sent it back to her for further proceedings.

Speaking on a teleconference, Cote questioned if that would be fair and what might happen if the appeals court reversed her ruling on a minor issue."

A lawyer for the plaintiffs said he doesn't think that's likely and, given the problems inherent in retrying such a case, $70 million "would be a good outcome for consumers."

When a judge insists on a settlement amount from a defendant higher than the law requires and the plaintiff requests, it's probably a good sign that the judge dislikes the defendant.

Read the whole Rueters article here.

Apple vs DOJ e-Book Case: Settlement Agreement a Poison Pill?

Yes, I'm still harping on the Apple e-book anti-trust saga. Every writer and book lover ought to be paying attention to it. The outcome will decide the future of book publishing in the US. And, as an analyst, I find it fun mental exercise to parse through possible outcomes of stuff like this. If any readers are lawyers, feel free to correct my misunderstandings about the legalities over on my Facebook page.

The latest bit of news is that Apple agreed to pay $450 million to settle the inevitable class-action lawsuit that resulted Judge Denise Cote verdict that Apple colluded in price-fixing with publishers.

"The settlement was first announced last month, but the terms of the deal were not announced at that time. With the news of a $450 million agreement, Apple would save nearly $400 million from the $840 million the lawsuit originally sought, if it were to have gone to trial.

While Apple has agreed to the terms, they must still be ratified by U.S. District Judge Denise Cote. If the court's ruling that Apple violated antitrust laws is affirmed, consumers will receive $400 million from Apple."

This wasn't unexpected. Large corporations typically negotiate settlement agreements in class-action lawsuits rather than risk having to write a check for the maximum possible penalty. It's a simple cost-benefit calculation and guilt or innocence isn't part of the equation. Where the maximum penalty is $850 million, $450 million, a bit more than 50%, is a perfectly reasonable settlement. Apple is meeting DOJ halfway. That's righteous...assuming the judge doesn't hate you.

See, here's the interesting bit -- Judge Denise Cote has shown unremitting hostility towards Apple since before the anti-trust trial began and that accusation is a big part of the basis for the appeal of her guilty verdict. Which is why I find it notable that there's a clause that kicks in if the Appeals Court overturns her verdict and orders a t:

"...if the ruling is not affirmed and liability must be retried, the settlement provides a smaller recovery of $50 million."

Now, I'm not a lawyer (IANAL) so I don't know how common such provisions are in settlement agreements; but to my untrained eye, that bit of legal language looks like it's designed to twist Judge Cote's arm "Take the deal and we'll agree to $450 million. Reject the deal and it drops to $50 million." Why do I think that?

If Judge Cote is unfairly biased against Apple, that clause presents her with a choice she must find abhorrent:

1. Accept the settlement and Apple pays half the maximum penalty she probably wants to inflict if the Appeals Court sustains her verdict; or

2. Reject the perfectly rational settlement offer, thereby giving Apple more evidence of personal bias and strengthening their appeal while also positioning Apple to settle the whole morass for $50 million if the appeal succeeds. Apple has something north of $150 billion cash on its balance sheet at last report, so $50 million is .0003% of Apple's checking account. It's a rounding error (though $450 million is only a slightly larger rounding error and the full $850 million penalty Judge Cote would probably like impose would only be ~0.6% of Apple's cash on hand).

If #2 happens and the Appeals Court overturns her original verdict, the only way to slap Apple with any non-chump-change penalty would be for DOJ retry the case -- not a pleasant prospect. It would take years, Apple would come armed with an Appeals Court ruling that neutralizes at least some of their previous arguments, and Judge Cote can't force them to do it. So she either accepts the smaller settlement or Apple pays virtually no penalty at all no matter what happens unless the DOJ wants to start the whole mess all over again.

DOJ must be confident that Apple's appeal will fail; otherwise I can't imagine how/why DOJ's lawyers agreed to that clause. I don't know what Judge Cote thinks Apple's chances are on appeal, but if she's at all worried it will succeed, I can't imagine she's very happy with the DOJ right now.

Who didn't see this coming?

Judge Denise Cote and the US Department of Justice, apparently.

"Hachette is not the only imprint to find itself under Amazon's thumb as the online retailing giant has begun turning the heat up on smaller publishers in the U.K., demanding terms that one publishing executive likened to a 'form of assisted suicide for the industry.' 

Perhaps emboldened by its victory by proxy over rival Apple in the U.S., Amazon has been 'bullying' U.K. publishers to accept its terms, a representative from one shop told the British broadcaster."

You don't say. This won't stop until the judiciary overturns Judge Cote's decision, or the publishing industry is turned into a wasteland.

Apple, DoJ Reach e-Book Antitrust Settlement Agreement

"In a court filing on Monday, an attorney representing the plaintiffs in a class action suit seeking damages from Apple's e-book price fixing scheme informed federal Judge Denise Cote that the company has agreed to settle."

This was going to be a separate proceeding from the ongoing anti-trust trial — with Judge Cote having declared Apple guilty of anti-trust violations, she was going to determine whether Apple should pay almost $1 billion in punitive damages. Having settled, Apple will avoid the maximum penalty in the event that its appeal of the original verdict fails. We don't know yet how much the company would pay out in that event, but you can bet it will be a lot less than $840 million.

This isn't an admission of guilt. I don't think there was any question Apple would settle the class action suit. Companies settle such cases more often than not if they think there's any chance they'll have to pay the judgment—and, seriously, did anyone think Apple had a prayer of Judge Cote not hitting them with an almost-$1 billion dollar judgement?

Lawyers Are Just Wired Different

Some of you might be wondering why I've been harping on this Apple-DoJ-Amazon anti-trust trial lately. The answer is simple — 1) I'm an author; and 2) the outcome will have huge ramifications for the future of the publishing industry. In fact, if Amazon's growing power isn't checked, I'm not entirely sure the big publishers will survive and I'm dead certain that Barnes & Noble and the other booksellers won't. They're barely surviving now and Amazon is breaking arms to squeeze them for more profit. If the big publishers and booksellers go under, the future of publishing is going to look very different very quickly and I think what comes after might not be very pretty.

What really chaps my hide, though, is Judge Denise Cote.

In July 2013, Judge Cote convicted Apple of illegally colluding with the publishing industry to jack up e-book prices, thereby restoring monopoly power to Amazon (which didn't hesitate to use the judge's gift to start strong-arming Hachette this past month). Apple is appealing the decision and asked the 2nd US Circuit Court of Appeals to stay the damages trial for its conviction until its appeal is heard. The court denied the request.

The Second US Circuit Court of Appeals has rejected Apple's bid to delay a damages trial until after the company has appealed the original decision. As a result, a July court date will go forward with the same judge -- Denise Cote -- who originally found Apple guilty of conspiring to fix e-book prices alongside the publishers in a bench trial last year. Judge Cote will preside over the damages trial as well.

For those who haven't followed the trial, a brief history of Judge Cote's behavior surrounding the affair might be of interest. Hang on and enjoy this little ride.

Before the trial even began, Cote said in public that she thought Apple was guilty, a statement consisted with an alleged historic pattern of pre-trial biases. After rendering the official verdict, she appointed an anti-trust monitor. Michael Bromwich, who:

1) had no previous experience as an anti-trust monitor;

2) who is a "long-time friend"; and

3) who promptly began charging Apple $70,000 per week in fees —$1,100 per hour plus a 15% "administrative fee" plus per diem plus another several-hundred-dollars-per-hour fee to pay the anti-trust monitor advisor who's teaching Bromwich on the fly how to be an anti-trust monitor, to be precise.

Bromwich then immediately exceeded his purview by demanding interrogations of Apple executives who have nothing to do with e-books or Apple's iBookstore and publicly slammed the company when it refused to comply. Apple asked Judge Cote to reign him in and, to no one's surprise, she refused. Apple finally went over her head to the Appeals Court and tried to have Bromwich removed. The Appeals Court didn't take that step, but they did warn Bromwich in veiled terms that he was headed for trouble if he didn't tone it down. Judge Cote didn't even throw Apple that tiny sop.

History lesson over. Back to the present, which is this — instead of withholding punishment while Apple tries to prove it shouldn't be punished because Judge Cote pre-determined the case, the Appeals Court is going to let the very same judge whose conduct is suspect proceed with a damages trial to decide whether Apple has to pay the maximum ~$800 million fine. 

Any bets on what her ruling will be?

Destroying the US Market for Books

The NY Times gets this one absolutely right.

"This week, as part of a contract dispute with the publisher Hachette, we’re seeing Amazon behaving at its worst. The company’s willingness to nakedly flex its anticompetitive muscle gives new cause for concern to anyone who cares about books — authors, publishers, but mainly customers ...

But the more basic problem here is that Amazon is violating its own code. To win a corporate battle, Amazon is ruining its customer experience. Mr. Bezos has long pointed to customer satisfaction as his North Star; making sure customers are treated well is the guiding principle for how he runs Amazon.

Now Amazon is raising prices, removing ordering buttons, lengthening shipping times and monkeying with recommendation algorithms. Do these sound like the moves of a man who cares about customers above all else?"

This in the wake of the DoJ's successful prosecution of Apple and the Big Five publishers who it accused of engaging in illegal collusion to fix e-book prices. From Amazon's post-trial behavior, it's apparent that the DoJ and Judge Denise Cote picked the wrong side, stomped on abused entities that were trying to renew competition in the market, and restored a monopoly to power -- exactly what the government is not supposed to do.