Thursday, 14 June 2012

The Untold Story: The ACCC's Role in the Waterfront Dispute - Part 17 – The Settlement – Continued

Part 17 – The Settlement – Continued

As outlined in the Part 16 of The Untold Story, in July and August 1998 the ACCC was being heavily criticised by all of the players involved in the Waterfront Dispute for refusing to settle its case by simply walking away. Indeed, it was quite a remarkable achievement of the ACCC to have unified all the warring parties against it in this way.


Amongst all the criticism, there was some support for the ACCC’s position from an unlikely quarter – namely, Terry McCrann.

McCrann was almost alone in expressing his understanding of, and support for, the ACCC's position. In an opinion piece in the Herald Sun on 5 August 1998, entitled “Fels and the law get in the way of the peace deal”,[1] McCrann insightfully described the dilemma facing the ACCC.

Trustbuster Allan Fels has become the embarrassing uninvited guest at the waterfront party that everyone is trying to pretend it really isn't there.

It's not because he spiked the punch, then immediately polished it off, and is now behaving like an all-round hoon.

In fact the exact opposite. It's like he's just - politely – reminded the partygoers that smoking pot is still illegal. And, well, the law must be enforced.
McCrann continued:
But we ended up with a classic IR ‘deal’ to settle the dispute, and the MUA agreed to abandon its conspiracy action against its two opponents.

The only problem was that Fels and his ACCC had initiated separate actions under the Trade Practices Act against the MUA for its actions during the dispute.

Not unreasonably – in IR terms – the MUA wants this action called off as part of the overall ‘deal’. If it abandons its legal action against Patrick/government, so should actions against it (be abandoned).

This would also be perfectly reasonable in ordinary legal terms, if the action was being taken by Patrick and/or the government. You scratch my back and I'll tickle yours.

Trouble is, the action is by a quite independent party, charged with enforcing the law. It can't – and most definitely should not – simply back off to facilitate the ‘deal’.

Fels spelt this out in crystal clear terms last night, when he said quite simply the ACCC could not just turn a blind eye to substantial, very public breaches of the law.

Further, to do so would open a Pandora's Box. It would set the precedent to every other transgressor to plead a similar argument.

It would only destroy the credibility of the ACCC and Fels himself…

Imagine if the police turned a blind eye to crimes when they could be persuaded it ‘suited’ various parties.

Fels is seeking two things. That the MUA offer a settlement for the damage caused innocent third parties during the dispute as a result of its allegedly illegal behaviour.

And that it promise not to engage in those allegedly illegal acts again.
The second might be easy, except that in IR terms it would amount to the MUA unilaterally disarming itself for future fights. On pain of very heavy penalties.

While the first is much harder, because Fels is talking big dollars. A figure of $10 million has been tossed around.

Such a settlement would have to come from the MUA, and it is unlikely to pay that sort of money willingly, as it feels its members were hard done by the dispute.

And after all, it’s given up its options for suing the government/Patrick.

In practice, some or all of the money should come from Patrick, as part of the price of settling the dispute.
McCrann concluded with the following:
In short, there is no easy way to get Fels off the MUA’s back. And it hasn't helped that the MUA has tried to pretend that the ACCC wasn't there.

On the one hand, the MUA told the ACCC in mid-June that it would come back with a settlement proposal. It never has.

And on the other, MUA secretary John Coombs just blusters in public, saying that Fels should join the deal and abandon the litigation like everyone else.

It's a completely false argument. Fels has to enforce the law. He can agree a settlement, but he just can't ignore the damage the MUA did.
The most interesting aspect of McCrann's article was a suggestion that Patrick should contribute to compensating parties for the financial damages caused by the MUA. At that time, I thought that his suggestion that Patrick pay the MUA’s damages bill was pretty outlandish. However, that is exactly what ended up happening.

MUA digs in

McCrann's references to John Coombs, blustering in the media was a reference to the following types of statements which he was making at that time:[2]

I'll tell you something now: if Fels doesn't drop off, the whole peace deal is over. Why would I withdraw my rights to take [the Minister for Workplace Relations] Mr Peter Reith and Patrick to trial to face conspiracy allegations and leave myself exposed to Fels handful of exporters or importers with its $10 to $20 million worth of damages? Jesus Christ… I have lost my senses and I'm not about to.
Greg Combet was also adamant that the MUA would not pay any damages:
It’s in the public interest that the ACCC should drop off and they have an obligation under their Act to have regard to the public interest.[3]
Combet described the ACCC’s demands that the MUA would have to pay damages for their illegal conduct as “just fantasy”.

Coombs continued his assault on the ACCC with the following letter to the editor which I will quote at length:[4]

Your [AFR’s] leader writer describes the waterfront dispute as a punch-up between “two drunks”, the MUA and Patrick, in the front bar (“Fels stands up to Coombs”, AFR editorial, August 5). Everyone else, you claimed, was an innocent bystander. 
Well, there were more than two in the ring a bit punch drunk during the great docks fight. The fight broke all the rules of fair play, with “promoter” Reith forever claiming the MUA was down when we were still well and truly on our feet.
Ten out of the 11 judges agreed the union had a case and that evidence suggested Patrick and others had conspired to have the workforce illegally sacked for being members of the union. The referee, in this case the High Court, ended the contest with the MUA winning on points.
Isn't it, then, a bit below the belt for your leader writer to now egg on the pugnacious Professor Fels, challenging the union to pay out $10 million in damages when we have not been found guilty of anything?
Now the brawl is over, the ACCC wants to pick a fight with the union, while turning a blind eye to those really responsible for any bruising that business suffered.
The hypocrisy of the ACCC tenaciously pursuing the union, while ignoring other complaints, is well documented. Not so long ago the ACCC failed to take on foreign shipowners over alleged price-fixing collusion.
The ACCC declined to assist importers in 1995 – 1996, despite requests from the Australian importers and despite legal advice that the price increases on freight could have been in breach of the Trade Practices Act.
The price hikes are estimated to have cost the Australian community between $45 million and $90 million over the past three years – costs which have been passed onto Australian consumers in the prices of the imported goods they buy and which far exceed the $10 million in damages allegedly caused by the waterfront dispute.
Well, if Professor Fels wants to take on the MUA, so be it. But if he continues with the ACCC legal action the matter could well end up back in the courts as early as next week. The implementation of the Deed of Settlement depends on the condition precedent that ACCC litigation “be discontinued, settled or dealt with to the reasonable satisfaction of the MUA”. It is worth noting that Mr Reith, if not Professor Fels, is a signatory to the deed.
These comments from Coombs provoked a swift response from Professor Fels who immediately issued the following news release:
ACCC not 'soft' on applying Trade Practices Act[5]

The Maritime Union of Australia is claiming that the ACCC is soft in applying the Trade Practices Act 1974 to business, Australian Competition and Consumer Commission Chairman, Professor Allan Fels, said today.
In fact the ACCC is widely acknowledged to have been extremely vigorous in applying the Trade Practices Act to break up price-fixing and other cartel agreements; the abuse of market power by monopolists; anticompetitive mergers; misleading and deceptive conduct; and unconscionable conduct affecting small business and consumers. It has applied the law without fear or favour to the biggest and most powerful corporations and interests in the land.
The MUA has cited a particular 1995/96 decision not to pursue a price increase by some importers. The key point is that there is a major exemption to prices by shippers written into Part X of the Act. This has been strongly supported by the MUA. The ACCC has strongly opposed this exemption for many years and has tried to get it lifted.
It was essentially because of the Part X exemption that the 1995/96 price rise was not pursued to litigation. Every enforcement agency, no matter whether vigorous or lax, has marginal cases. The 1995/96 price rise was marginal to negative in the ACCC's assessment. A very selective quotation has been taken from an ACCC letter to the industry at the time - even that letter makes it clear that the matter was at most marginal.
What is not said is that as a result of the ACCC's preliminary investigations the price increase was withdrawn (although later some of the increases may have found their way into unambiguously exempt freight charges).
More generally the ACCC has been vigorous in applying the law to the waterfront. It vigorously opposed with success the attempt by P&O to take over the bulk of Port Adelaide some years ago. As a result a new entrant, Sealand, entered the Australian market. It recently opposed Adsteam tugboat mergers in Sydney in court (even though it effectively lost that case). This is not to say that there are not limitations on the effectiveness of the Act in relation to the waterfront. The Act can foster competition, it cannot force it in certain industry structures.
The MUA's claims cannot be taken seriously. They are simply a crude attempt to discredit an independent regulator doing its job properly and to divert attention from issues affecting parties to the recent dispute on the waterfront.
On that same day, the ACCC issued a second news release following comments attributed to Patrick about its future pricing strategies:[6]
ACCC asks Patrick to explain pricing comments

The Australian Competition and Consumer Commission has asked Patrick Stevedore to explain its pricing policies after the resolution of the waterfront dispute. The request follows claims made in the Australian Financial Review where it is reported:

'While Patrick has said publicly it is reviewing pricing, it is understood the company - while promising improved efficiencies and reliability - will resist prices reductions'.

Public statements by Patrick that it is not intending to pass on cost savings in the form of reduced prices, prior to the conclusion of contract negotiations, may be construed as a sign of a lack of competition, ACCC Chairman, Professor Allan Fels, said today.

It is also difficult in most industries to predict what a firm's own prices will be without knowing what other firms in the industry will charge. The ACCC has asked Patrick about this aspect, that is, is their prediction based on a knowledge of the price of their competition?

The ACCC has sought information about whether any comments have been made by Patrick management or employees, since the agreement with the Maritime Union of Australia was announced on 25 June, that it is not intending to pass on any cost savings in the form of reduced prices for stevedoring.

Further, the ACCC has asked Patrick if it is its present intention to pass on savings achieved as a result of the agreement with the MUA.
The ACCC was concerned that Patrick may be engaging in price signaling – effectively, seeking to signal its future pricing intentions to its major stevedoring competitor, P&O Ports. There is little doubt that P&O was concerned that Patrick may use its lower cost structures to drop stevedoring prices in order to win business. However, P&O responded to this threat by seeking a similar outcome to Patrick. It entered into negotiations with the government and the MUA to reduce its MUA workforce. It was also able to avoid having to pay its redundancy liabilities out of its own resources because it was able to access the special stevedoring levy introduced by the government to fund MUA redundancies.


While the recriminations kept flying between Professor Fels and John Coombs in the media, there had actually been some significant progress behind the scenes in terms of settling the ACCC’s litigation. The break came when Chris Corrigan agreed to make a contribution towards compensating the small businesses which had been damaged by the MUA’s conduct.

I must admit that, to this day, I do not know who had the idea to get Patrick to pay the compensation on behalf of the MUA. While the idea had been first raised by Terry McCrann in his article quoted above, I do not know who internally at the ACCC came up with the idea.

However, I understood why Patrick had agreed to paying compensation. Patrick was quite desperate to settle the dispute so they could get back to work with their new streamlined MUA workforce. It was apparent to us that with the loss of a few hundred MUA workers and the fact that these redundancies were to be paid for, not by Patrick, but through an industry levy, that Patrick would become a very profitable company very quickly.

Despite not knowing where the idea came from, I saw the logic of this approach to the settlement. It was clear in my mind that Patrick’s actions had triggered the entire dispute and as such they could and should be held to account for the damages.

On 1 September 1998, with most of the details of settlement worked out, the ACCC was confident enough to issue a news release announcing the details of the settlement:

Waterfront dispute case settled[7]

A settlement has been reached in relation to the Australian Competition and Consumer Commission litigation concerning the waterfront.
The settlement has been endorsed today by the Federal Court of Australia.

The settlement provides that a damages fund of up to $7.5 million, funded by Patrick Stevedore Holdings Pty Ltd, will be available for small businesses damaged by the boycotts during the dispute.
Also, the Maritime Union of Australia has provided a formal undertaking to the Federal Court not to repeat boycotts alleged to be unlawful by the ACCC during the dispute.
The damages fund will be administered by a trustee and payments will be subject to proof of losses arising from the waterfront dispute.
Small businesses which do not have an alternative claim for compensation, such as insurance, will be given priority over other claimants on the fund. A limit will be set on individual claims. 
The undertaking is for two years.
There is an associated dispute settlement procedure.
The undertaking does not apply to normal industrial relations actions protected under the TPA or Workplace Relations Act 1996. It also does not apply to lawful conduct to ensure compliance with relevant occupational health and safety legislation nor for the protection of international seafarers through the MUA's flags of convenience campaign.
The ACCC is satisfied with the outcome, ACCC Chairman, Professor Allan Fels, said today. Its objectives were:

  •  compensation to small business damaged by the dispute; and
  • an appropriate undertaking to the Court by the MUA, as is usual in TPA cases, not to repeat similar behaviour.

These objects have been met and the ACCC has agreed to settle the case.
We also decided to add the following comments in a “Background” section to the news release to fully explain the ACCC’s position in pressing for this settlement:

In 1996 Federal Parliament greatly strengthened the secondary boycott provisions of the Trade Practices Act 1974.
The ACCC is responsible for seeking compliance with the Act. The ACCC did not take sides in the waterfront dispute but it was concerned to ensure that there were no breaches of the law during that dispute.
The ACCC believes that there were substantial, very public breaches of the boycott provisions of the Act which damaged small business and exporters. It issued several warnings to the MUA which were ignored. It had no option then but to take court action. It did not seek penalties. Its actions were directed to obtaining compensation for small businesses damaged by unlawful boycott behaviour and securing of appropriate court orders or undertakings to the Court by the MUA not to repeat similar unlawful behaviour in the future (a standard Trade Practices Act resolution).
The parties to the dispute approached the ACCC in mid-June about a settlement. The ACCC made it clear that it was prepared to settle and advised the parties of the parameters of a possible settlement. These included a compensation fund and a consent court order or an undertaking to the Court which had a similar effect.

Regarding the funding of the compensation payment the ACCC indicated at all times that it had no views as to who paid as it was not involved in taking sides in the rights and wrongs of the waterfront dispute. Its concern was merely the protection of the legitimate interests of small businesses damaged by unlawful actions that occurred during the dispute. There was no effective response by the parties to these proposals until last week. Claims by the MUA that the ACCC was delaying completion of the total agreement on the waterfront were without foundation. Claims that the total resolution of the waterfront dispute would 'come undone' unless the ACCC withdrew its case always lacked foundation and were merely an attempt to avoid compliance with the ACCC's reasonable proposals for settlement.
The ACCC is continuing to investigate a number of matters on the product market side of the waterfront.

The ACCC has perceived it as important to the integrity of the Act that it should have sought to uphold the law during the dispute.
As stated above, the settlement consisted of two parts.

First, there was an agreement by Patrick to pay up to $7.5 million into a trust fund to compensate small businesses who had suffered loss or damage as a result of the Waterfront Dispute. The reason the amount was expressed as “up to $7.5 million” was because the amount which Patrick ultimately had to contribute to the fund depended on particular conditions being met. As it turned out these conditions were not met, so Patrick only ever had to contribute a total amount of $5 million to the fund.

Second, the MUA consented to a range of injunctions in relation to their future conduct and an alternative dispute resolution procedure.

I will discuss the elements of the settlement in more detail in the next post.


Unfortunately, we did experience one strange hiccup in the last stages of the settlement which caused us considerable anxiety.

As stated in the ACCC’s news release a settlement had been “endorsed by the Federal Court” on 1 September 1998. This statement was true when we made it.

Once we had reached a settlement with the MUA and Patrick and agreed the proposed orders and undertakings with the MUA, we approached Justice North to have the orders made. Unfortunately, Justice North was unavailable to make the orders on 1 September 1998.

Accordingly, in the interests of settling the case sooner rather than later, we decided to approach Justice Beaumont (who was after all the judge hearing the larger and more significant of the two ACCC cases), to make the orders. Justice Beaumont made the orders in chambers and the ACCC issued its news release announcing the settlement later than day.

However, after we had obtained the orders and issued the media release, we received advice from the Federal Court that Justice Beaumont had withdrawn his orders and that the orders would now be made by Justice North on 3 September 1998. While we never knew the precise reasons for this strange development, I have my own personal theory about what happened.

Justice North decided to hold a hearing to make the orders. After some fanfare Justice North, made the requested orders finally settling the dispute on 3 September 1998.

Justice North obviously liked some aspects of the settlement as he went so far as to congratulate the parties:

I congratulate the parties upon resolution of a most difficult dispute in a way which appears to be creative and innovative.
Justice North’s orders were followed shortly thereafter by Justice Beaumont remaking his earlier orders.

[1] Terry McCrann, Fels and the law get in the way of a peace deal, Herald Sun, 5 August 1998, pp. 29, 31.
[2]  Peace deal docks but stays on hold, Financial Review, 5 August 1998, p. 5.
[3] Dispute casts pall over docks deal, Financial Review, 6 August 1998, p. 5.
[4] Docks jibe takes wrong tack, Financial Review, 7 August 1998, p. 36.
[5] ACCC not 'soft' on applying Trade Practices Act, ACCC news release, dated 7 August 1998 -
[6] ACCC asks Patrick to explain pricing comments,  ACCC news release, 7 August 1998 -
[7] Waterfront case settled, ACCC news release, dated 1 September 1998 -

Wednesday, 6 June 2012

United States v Apple – the E-book case

This article first appeared in the CCH Australian Competition & Consumer Law Tracker, Issue 5, May 2012.


The US Department of Justice’s (DOJ) announcement of its legal proceedings against Apple Inc (Apple) and a number of major publishers was accompanied by a great deal of fanfare. For example, Attorney General Eric Holder stated at the press conference which was held to announce the legal action that “[T]oday’s action sends a clear message that the Department’s Antitrust Division continues to be open for business – and that we will not hesitate to do what is necessary to protect American consumers.”[1]

Despite the rhetoric, the DOJ’s case against Apple is far from being an antitrust success story. This is because the DOJ has decided to yet again take civil proceedings against Apple for engaging in a naked price fixing arrangement in breach of section 1 of the Sherman Act. It is difficult to understand why the DOJ commenced civil proceedings against Apple and the five major publishers given that the parties were involved in a blatant high-level cartel which, according to some estimates, may have cost US consumers alone more than $100 million. [2]

The DOJ’s decision to take civil proceedings against Apple is even harder to understand given that it is only a year since the DOJ decided to settle yet another serious cartel investigation into Apple on a civil basis.[3] Ultimately, the DOJ’s approach to Apple’s serious antitrust indiscretions will achieve little unless it starts seeking the imposition of criminal sanctions. Indeed, it is only through the imposition of criminal sanctions that Apple may start thinking differently about antitrust laws.


The commencement of legal proceedings against Apple and the five publishers was highly anticipated. This is because the enforcement action followed the commencement of a number of private class actions against both Apple and the publishers in the US during 2011. There had also been a number of rumours that the DOJ, the European Commission and other regulators were investigating the conduct of Apple and its alleged co-conspirators.

The DOJ’s action against Apple and five different book publishers – Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster was for allegedly entering into an illegal cartel to force up the prices of e-books. In response to the allegations, three of these publishers – Hachette, HarperCollins and Simon & Schuster agreed to settle. These proposed settlements will be discussed in more detail below.

In general terms, the DOJ alleged that senior executives at each of the publishers worked together in an elaborate plan to eliminate competition among stores selling e-books, ultimately increasing prices for consumers. The focus of their plan was to eliminate the “wretched $9.99 price point” for new releases and bestsellers introduced to the e-book market by Amazon.

As explained in the DOJ’s Complaint,[4] the publishers had long feared that the lower retail prices for e-books would eventually lead to lower wholesale prices for all books. However, whilst senior executives met regularly to bemoan this particular development, they also recognised that individually they were unable to do anything about Amazon’s discounting activities.

The publishers understood that if any of them decided to unilaterally cease supplying books to Amazon because of their $9.99 price point for new release and bestseller e-books, they were likely to lose a large volume of sales which would make the decision highly unprofitable. As stated by one of the executives of the publishing companies:

…we’ve always known that unless other publishers follow us there is no chance of success in getting Amazon to change its pricing practices…without a critical mass behind us Amazon won’t negotiate, so we need to be more confident of how our fellow publishers will act.[5]
The publishers were not only worried about Amazon’s low prices for e-books, but also that Amazon may decide to establish its own digital publishing business in competition with the publishers. This would have meant that Amazon would be in a position to sell its own e-books rather than having to rely on supply from the major publishers.

The major publishers had some legitimate cause for concern about this development. As stated in the DOJ’s complaint, Amazon had in fact taken the first steps in establishing its own digital publishing business. On 18 January 2010, Amazon had a meeting with a number of prominent authors and agents in New York to explain its plan to become a digital publisher. Amazon advised its audience that in future authors would be able to take their books directly to Amazon to be digitally published and sold through Amazon’s online bookstore. In return, Amazon would pay royalties of up to 70% which was far in excess of the royalties which traditional book publishers paid authors. When the major publishers heard about this particular meeting, they became incensed.[6]

Unlawful conduct

According to the DOJ, the publisher’s alleged unlawful conduct started in late 2008. At this time, the senior executives of the major publishers started discussing ways of dealing with the “Amazon problem”. There were a series of meetings and telephone discussions between these executives to work out a strategy to counter Amazon’s pricing strategy.

The DOJ alleged that all five publishers had agreed by 2009, at the latest, to act collectively to try to raise retail prices above the $9.99 price point for the most popular e-books. However, even though the publishers had agreed on the outcome which they wanted to achieve, they could not decide on a mechanism to achieve that outcome.

As stated by an executive of one of the publishing companies at that time:

In the USA and the UK, but also in Spain and France to a lesser degree, the ‘top publishers’ are in discussions to create an alternative platform to Amazon for e-books. The goal is less to compete with Amazon as to force it to accept a price level higher than 9.99…I am in NY this week to promote these ideas and the movement is positive with [the other publishers].[7]
The initial approach contemplated by the publishers was to establish a number of “sham” joint ventures. As stated by John Makinson, CEO of the Penguin Group:
Competition for the attention of readers will be most intense from digital companies whose objectives may be to disintermediate traditional publishers altogether. This is not a new threat but we do appear to be on a collision course with Amazon, and possibly Google as well. It will not be possible for any individual publisher to mount an effective response, because of both the resources necessary and the risk of retribution, so the industry needs to develop a common strategy. This is the context for the development of Project Z [joint ventures] in London and New York.[8]
In late 2009, the publishers changed their approach. They decided that a more effective way of getting Amazon to “return to acceptable sales practices” would be to move away from a wholesale model to an agency model.

The traditional way that books are sold is through a wholesale model. Under this model, publishers sell books to retailers at wholesale prices and leave it up to the retailer to set their own retail prices.

However, under the agency model it is the publisher that retains control over retail pricing by retaining property or ownership of the books until they are sold to the end customer. A publisher appoints a retailer as its agent who must then sell the e-books at the price determined by the publishers.

It was at about this time, in late 2009, that Apple became involved. Apple had long been contemplating entering the e-book market, but the low prices were proving to be a disincentive. As stated in the complaint: 

Apple had long believed that it would be able to “trounce Amazon by opening up [its] own ebook stores, but the intense price competition that prevailed among e-book retailers in late 2009 had driven the retail price of popular e-books to $9.99 and had reduced retailer margins on ebooks to levels that Apple found unattractive.[9]
Interestingly, the first alternative which Apple considered when deciding how to enter the e-book market was whether it should enter into a global cartel with Amazon to carve up the market. As stated in the DOJ’s complaint, the first strategy that Apple considered was to enter into a cartel with Amazon to illegally divide “the digital content world” allowing each to “own the category of its choice – audio-visual to Apple and e-books to Amazon.”[10]

It appears that Apple abandoned its plans to enter into a cartel with Amazon in favour of facilitating a cartel between the five major publishers.

Towards the end of 2009, Apple started actively pursuing its plan to enter the ebook market – a plan which it described in internal documents as its “aikido move”.[11]

In early December 2009, Eddie Cue, Apple’s Vice President of Internet Services telephoned each of the publishers to schedule exploratory meetings in mid December 2009 in New York.

After receiving these calls from Cue, the senior executives from HarperCollins and Hachette contacted each other to discuss their preferred strategy. They agreed that the way forward was to move to an agency model.

Over the next couple of weeks, all of the publishers advised Apple of their intention of moving to an agency model.

A second round of meetings between Apple and the publishers occurred during the week commencing 21 December 2009. During these meetings Apple proposed that each of the publishers force all of their retailers, not just Amazon, to move to an agency model. As stated in the complaint, this proposal appealed to the publishers because “wresting pricing control from Amazon and other e-book retailers would advance their collusive plan to raise retail e-book prices”.[12]

After these meetings, Cue reported to the late Mr Steve Jobs, the CEO of Apple, that the publishers saw the “plus” of working with Apple to “solve the Amazon problem”. However, he added that the publishers did not like Apple’s proposed pricing of $12.99 for new release and bestseller e-books, which they believed was too low.

Apple realised that it had considerable leverage with the publishers who were desperate to solve the Amazon problem. Accordingly, Apple demanded a commission of 30% on the sale of every e-book sold through its iBookstore. The publishers were even more reluctant to agree to this level of commission given Apple’s proposed pricing of $12.99 for new release and bestseller ebooks.

Negotiations between Apple and the publishers continued throughout late December 2009 and January 2010. Apple became the go-between for the publishers, keeping each publisher informed of the progress of negotiations with the other publishers. Apple also assured each publisher that its proposals to each of the publishers were the same – ie that it was not planning to cheat on the cartel by doing a more favourable deal with any of the publishers.

In early January 2010, Cue emailed a proposal to all the publishers which contained the following features:

  • the publishers would become the principals and Apple the agent for e-book sales;

  • the publishers would introduce an agency model for all other e-book retailers;
  • Apple would receive a 30% commission on each e-book sale; and
  • each publisher would have identical pricing tiers for e-books sold through Apple’s iBookstore.
On 11 January 2010, Apple emailed a formal e-book distribution agreement to all the publishers. This formal agreement contained three significant changes to the earlier proposal – namely Apple:
  • demanded that the publishers provide Apple with their complete e-book catalogs;
  • demanded that the publishers not delay the electronic release of any title behind its print release; and
  • introduced a most favoured nation clause (MFN).
The way the MFN clause operated was to require that each publisher guarantee that it would lower the retail price of each book in Apple’s iBookstore to match the lowest price offered by any other retailer, even if the publisher did not control that other retailer's ultimate retail price.

While the DOJ described this MFN clause in the complaint as being “unusual”, this is not entirely correct in the context of an agency model. Because the publishers were proposing to set the retail prices for all e-books, there was no point having a traditional MFN forcing publishers to reduce their wholesale e-book prices to match the lowest wholesale prices in the market. Rather what Apple needed was some assurance that the publishers would not be able to offer e-books through other retailers at prices which were below the prices which Apple was selling the same e-books. As is apparent the practical effect of the MFN was to fix the retail prices for e-books.

However, the illegal conduct did not end there. The publishers were still concerned about Apple’s proposed $12.99 pricing point, particularly if they were going to have to pay Apple 30% commission. In response to the publisher’s concerns, Apple agreed to modify the agreement.

On 16 January 2010, Apple sent a revised agreement to all the publishers which included two significant concessions to the publishers:
  • the addition of new maximum pricing tiers for e-books of either $16.99 or $19.99 depending on the books hardcover list price; and
  • a carve out for e-book versions of books on the New York Times fiction and non-fiction bestseller list – namely a maximum e-book price of $12.99 for bestsellers with a hardcover price which was $30 or less and a maximum e-book price of $14.99 for bestsellers with a hardcover price between $30 and $35.
Between 24 January 2010 and 26 January 2010, all of the publishers signed the distribution agreements with Apple. The Apple Agency agreements took effect simultaneously on 3 April 2010 with the release of Apple’s new iPad.

Once the agency agreements took effect, the publishers raised e-book prices at all retail outlets to the maximum level permitted under the agreements.

Steve Jobs’ involvement

It is also apparent from the DOJ’s complaint that Steve Jobs was heavily involved in the events. The Complaint records the following statement allegedly made by Jobs to publishers about Apple’s e-book strategy:

We go to an agency model, where you [the publishers] set the price, and we get our 30% and yes, the customer pays a little bit more, but that’s what you [the publishers] want anyway.[13]
The Complaint also refers to a report in the Wall Street Journal following the 27 January 2010 iPad unveiling event. A journalist apparently asked Jobs why customers would buy an e-book from Apple at $14.99 when they could get the same book from Amazon for $9.99. Jobs apparently responded by saying “…that won’t be the case…the prices will be the same”.[14]

Finally, the Complaint recounts how Jobs personally intervened to try to get a publisher who had not agreed to sign an agency agreement to change their mind. Apparently, Jobs called the CEO of the “holdout” publisher,[15] at the behest of the respondent publishers, to advise that Apple would refuse to sell any of its e-books unless it agreed to enter into an agency agreement.[16]


As stated above, three of the five publishers, namely Hachette, HarperCollins and Simon & Schuster, have agreed with the DOJ to a proposed settlement. Under the settlement, these publishers will be required to: 

  • grant retailers the freedom to reduce the prices of their e-book titles; and

  • terminate their anticompetitive most-favored-nation agreements with Apple and other e-books retilers. 
The settlement also includes injunctions prohibiting the publishers from placing constraints on retailers’ ability to offer discounts to consumers and from conspiring or sharing competitively sensitive information with their competitors.

Violations Alleged

The DOJ has alleged that the conduct of Apple and the publishers constituted a conspiracy and agreement in unreasonable restraint of interstate trade and commerce in violation of Section 1 of the Sherman Act. In particular, the defendants are alleged to have conspired:

  • to raise, fix and stabilise retail e-book prices;
  • to end price competition among e-book retailers; and
  • · to limit retail price competition among publishers by fixing retail e-book prices.
The DOJ stated that the conduct had resulted in obvious and demonstrable anticompetitive effects on consumers in the trade e-books market by depriving consumers of the benefits of competition among e-book retailers. As stated above, one estimate has placed the total loss arising from the illegal cartel at $100 million in relation to US consumers alone.


The question arises as to why, given the seriousness of the conduct, the DOJ decided to take a civil action against Apple and the publishers rather than commence a criminal prosecution. In deciding whether to pursue cartel conduct through a criminal prosecution, an antirust agency would generally consider a range of factors including:
  • the anticompetitive effect of the cartel conduct;
  • whether the conduct had been blatant;
  • whether senior executives had been involved in the cartel conduct;
  • whether the members of the cartel had taken any steps to conceal their conduct
  • the level of remorse and contrition shown by the cartel members once they have been discovered;
  • the duration of the cartel; and
  • whether the participants in the cartel had previously been found to have engaged in similar cartel conduct.
It seems that even on a cursory consideration of the above factors, the DOJ should have pursued a criminal prosecution against Apple and the publishers. First, it appears that the alleged illegal anticompetitive conduct has created a great deal of consumer detriment, up to a $100 million overcharge in relation to US consumers alone. Second, the conduct appears to have been quite blatant with senior executives of each company, including the late Steve Jobs, being instrumental in creation of the cartel. Third, the Complaint also states that steps were taken by the publishers to conceal their illegal conduct. Finally, half of the participants in the alleged cartel have shown no apparent remorse or contrition, vowing the fight the case to the end.

Another very significant factor in deciding whether to pursue a cartel criminally is whether the company has been found to have engaged in illegal cartel conduct in the past. Therefore, a highly relevant factor for the DOJ should have been that just a year before, in May 2011, Apple settled a serious cartel investigation with the DOJ involving three illegal cartel agreements. These cartel agreements with Google, Adobe and Pixar had the purpose of prevented each of the companies from poaching the other’s technical staff.

The DOJ concluded that these particular agreements (as well as a number of similar agreements between Google, Intel, Intuit and LucasFilms) constituted naked restraints of trade in violation of section 1 of the Sherman Act. In particular, the DOJ described the competitive effects of these agreements as follows:

The effect of these agreements was to reduce Defendant’s competition for highly skilled technical employees (high tech employees), diminish potential employment opportunities for those same employees and interfere with the proper functioning of the price-setting mechanism that would otherwise have prevailed.[17]

For more details about this case see the previous post on this blog entitled Monsters Inc - No Headhunting Allowed, dated 4 August 2011 which can be found at:

Despite these earlier blatant contraventions, the DOJ again decided to take civil proceedings against Apple in relation to a serious cartel allegation.The most likely explanation for the DOJ’s decision not to take criminal proceedings is due to a concern that they may not be able to prove their case to the criminal standard. This concern may arise from the fact that the agreements specify a maximum price, rather than a minimum price below which the publishers are not permitted to set their prices. Accordingly, the DOJ may have taken the view that because publishers retained at least the theoretical ability to set prices at levels which were lower than the maximum prices listed in the agreements, they had not technically agreed to fix prices.

However, it is hard to see how Apple or the publishers will be able to succeed with this argument, given the compelling evidence identified in the DOJ’s complaint. It is clear that the publisher’s goal was to eliminate Amazon’s $9.99 price point for new releases and best sellers. Furthermore, the evidence referred to in the Complaint shows that the publishers agreed to charge the maximum prices listed in the agreements, which is also what they ended up doing.


The DOJ has touted its case against Apple and the publishers as a significant achievement. Unfortunately, it is difficult to agree with the DOJ’s assessment of its case. Cartels of the type entered into by Apple and the publishers should, in all but the most exceptional cases, be punished with the imposition of criminal sanctions – they should not be resolved through civil proceedings.

Not only is it wrong as a matter of principle to resolve blatant cartel conduct engaged in by senior executives which has caused immense consumer detriment through civil proceedings, but civil such proceedings will not achieve either of the main goals of antitrust – namely, specific and general deterrence. Only through the imposition of criminal sanctions will large corporations, such as Apple, be deterred from engaging in illegal cartel conduct in the future.

Finally, it is hard to understand why Apple has again been subject to a civil proceeding for engaging in an apparently blatant cartel in relation to e-books given that only 12 months previously the DOJ settled an equally blatant cartel investigation against Apple on a civil basis. One thing is clear – it is only through the imposition of criminal sanctions that Apple may start thinking differently about antitrust laws.

[2] Two U.S. Publishers and Apple, Inc. Charged with Price-Fixing for E-books that Resulted in more than $100 Million of Overcharges, Attorney General of Massachusetts, Media Release, dated 11 may 2012 -

[3] United States v Adobe Systems, Inc., Apple Inc., Google Inc., Intel Corporation, Intuit, Inc., and Pixar – (United States v Adobe)

[4] United States v. Apple, Inc., Hachette Book Group, Inc., HarperCollins Publishers L.L.C., Verlagsgruppe Georg Von Holtzbrinck GmbH, Holtzbrinck Publishers, LLC d/b/a Macmillan, The Penguin Group, A Division of Pearson PLC, Penguin Group (USA), Inc., and Simon & Schuster, Inc.

[5] Ibid., p. 11.
[6] Ibid., p. 23.
[7] Ibid., p. 15.
[8] Ibid.
[9] Ibid., p. 3.
[10] Ibid., p. 16.
[11] Ibid., p. 4. The description of Apples’ plan as the aikido move seems quite ironic given the essence of aikido is a form of self-defence – ie to protect a person from attack by using the attacker’s force against the attacker.
[12] Ibid., p. 18.
[13] Ibid., p. 4.
[14] Ibid., p. 26.
[15] It appears that the “holdout” publisher was Random House.
[16] Ibid., p. 29.
[17] Competitive Impact Statement, United States v Adobe Systems, Inc.-