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Case 1:12-cv-02826-DLC Document 233-1 Filed 05/14/13 Page 1 of 103 UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK __________________________________________ UNITED STATES OF AMERICA, ) ) Plaintiff, ) ) v. ) Civil Action No. 12-CV-2826 (DLC) ) APPLE, INC., et al., ) ) Defendants. ) __________________________________________) __________________________________________ ) THE STATE OF TEXAS; ) THE STATE OF CONNECTICUT; et al., ) ) Plaintiffs, ) ) v. ) Civil Action No. 12-cv-03394 (DLC) ) PENGUIN GROUP (USA) INC. et al., ) ) Defendants. ) __________________________________________) PLAINTIFFS’ PROPOSED FINDINGS OF FACT Case 1:12-cv-02826-DLC Document 233-1 Filed 05/14/13 Page 2 of 103 TABLE OF CONTENTS I. INTRODUCTION .............................................................................................................. 1 II. DEFENDANTS .................................................................................................................. 4 A. Litigating Defendants ........................................................................................... 4 B. Settled Defendants ............................................................................................... 4 III. BACKGROUND ................................................................................................................ 5 A. The Publishing Industry ....................................................................................... 5 B. Amazon Ushered in the Modern E-Book Era in 2007 with the Kindle Device and Low E-Book Prices ....................................................................................... 5 C. Apple Never Wanted to Price Compete Against Amazon ................................... 7 D. Publisher Defendants Hated Amazon’s $9.99 Pricing ......................................... 8 E. E-Books Would Have Been Available on the iPad No Matter What………….10 IV. PUBLISHER DEFENDANTS SOUGHT TO RAISE RETAIL E-BOOK PRICES........ 11 A. The Publishing Industry Is Well-Suited to Coordinated Pricing and Interaction ........................................................................................................................... 11 B. Publisher Defendants Shared Competitively Sensitive Information with Each Other .................................................................................................................. 12 C. Early Plans to Force Amazon to Raise Its Prices Were Abandoned for Lack of Industry Support ................................................................................................ 13 D. Groups of Publisher Defendants Discussed Raising Retail E-Book Prices in the Context of Potential Joint Venture Conversations ............................................. 14 E. Publisher Defendants Used Coordinated Windowing as a Tool to Try to Force Amazon to Raise Its Retail E-Book Prices ........................................................ 16 1. Single-Title Windowing .................................................................... 16 2. Systematic Windowing ..................................................................... 17 ii Case 1:12-cv-02826-DLC Document 233-1 Filed 05/14/13 Page 3 of 103 3. The Threat of Windowing, by Itself, Was Unlikely to Move Amazon’s Prices Due to Insufficient Publisher Participation and Risks Inherent in the Strategy ........................................................... 20 V. IN RECOGNITION OF THEIR SHARED GOALS, APPLE AND PUBLISHER DEFENDANTS AGREED TO INCREASE THE PRICE OF E-BOOKS TO CONSUMERS AND RESTRAIN RETAIL E-BOOK PRICE COMPETITION ............ 20 A. Apple Began Reaching Out to Publishers on December 8, 2009 ...................... 22 B. Some Publisher Defendants Considered Agency Prior to Initial Apple Meetings ........................................................................................................................... 23 C. Apple Held Initial Meetings with Big Six Publishers on December 15 and 16, 2009 ................................................................................................................... 24 D. Apple Embraced Agency and Higher E-Book Prices Following Its Initial Meetings with Publisher Defendants ................................................................. 26 E. Publisher Defendants Communicated Directly with One Another During Apple Negotiations ....................................................................................................... 27 VI. EDDY CUE CONVEYED INDUSTRY-WIDE AGENCY MODEL PROPOSAL IN DECEMBER 21, 2009 CONVERSATIONS WITH THE CEOS OF SIMON & SCHUSTER, MACMILLAN, AND RANDOM HOUSE ................................................ 30 VII. APPLE’S SUBSTANTIVELY IDENTICAL E-MAILS TO PUBLISHER DEFENDANTS ON JANUARY 4 AND 5, 2010 SET FORTH THE PRINCIPLES OF THE CONSPIRACY AMONG APPLE AND PUBLISHER DEFENDANTS ............... 32 VIII. APPLE’S FOLLOW-UP COMMUNICATIONS WITH THE PUBLISHERS WERE DESIGNED TO FACILITATE COLLECTIVE PUBLISHER ACTION ........................ 35 IX. APPLE’S AGENCY AGREEMENTS FACILITATED AN ILLEGAL CONSPIRACY TO RAISE E-BOOK PRICES AND RESTRAIN PRICE COMPETITION BY ENSURING THAT PUBLISHER DEFENDANTS WOULD SWITCH THEIR OTHER E-BOOK RETAILERS TO THE AGENCY MODEL ..................................................... 40 A. Apple’s Initial Written Proposal Included a Most Favored Nation Clause as a Mechanism to Ensure that Each Publisher Defendant Would Move All of Its E-Book Retailers to Agency .............................................................................. 40 B. Apple’s Initial Written Proposal Included “Price Caps” That Would Function as Fixed Prices for Publisher Defendants’ E-books ............................................... 45 iii Case 1:12-cv-02826-DLC Document 233-1 Filed 05/14/13 Page 4 of 103 C. Apple Agreed to Higher Price Tiers .................................................................. 46 D. Apple Pushes Publisher Defendants Forward as Amazon Offers Better Deal to Authors .............................................................................................................. 48 E. In Order to Secure a “Critical Mass” of Publishers for the Conspiracy, Apple Assured Publisher Defendants that Their Competitors Would Join the Agreement .......................................................................................................... 51 F. The Conspiracy Benefited Apple by Allowing Apple to Earn a 30% Commission Without Needing to Compete Against Amazon on Price ............. 57 X. APPLE’S ASSURANCES OF COMMON ACTION GAVE PUBLISHER DEFENDANTS THE NECESSARY CONFIDENCE THAT THEY WERE NOT ACTING ALONE ............................................................................................................. 59 XI. IN ACCORDANCE WITH THEIR CONSPIRACY WITH APPLE, ALL PUBLISHER DEFENDANTS PRESENTED AGENCY AGREEMENTS AS AN ULTIMATUM TO AMAZON ......................................................................................................................... 61 XII. SIGNING AN APPLE AGENCY AGREEMENT WOULD HAVE BEEN CONTRARY TO EACH PUBLISHER DEFENDANT’S ECONOMIC INTERESTS ABSENT THE CONSPIRACY ................................................................................................................. 68 XIII. APPLE AND PUBLISHER DEFENDANTS PRESSURED RANDOM HOUSE TO JOIN THEM IN SIGNING AGENCY AGREEMENTS ................................................. 69 XIV. THE CONSPIRACY AMONG APPLE AND PUBLISHER DEFENDANTS ACHIEVED ITS COLLECTIVE GOALS OF RAISING E-BOOK PRICES AND ENDING RETAIL PRICE COMPETITION.................................................................... 72 A. Prevailing Low E-book Prices Would Have Continued But For the Conspiracy ........................................................................................................................... 72 B. Apple and Publisher Defendants Understood the Price Caps in the Apple Agency Agreements Would Become de facto E-book Prices ........................... 73 C. Average Prices of E-books Increased Soon After Implementation of the Apple Agency Agreements ........................................................................................... 75 D. The Apple Agency Agreements Harmed Consumers by Preventing Promotional Competition Among Retailers. .......................................................................... 82 E. Higher Agency Prices Reduced E-book Sales ................................................... 84 iv Case 1:12-cv-02826-DLC Document 233-1 Filed 05/14/13 Page 5 of 103 F. Reduced Royalty Payments Harmed Authors .................................................... 86 XV. THERE ARE NO PROCOMPETITIVE JUSTIFICATIONS ATTRIBUTABLE TO THE APPLE AGENCY AGREEMENTS ................................................................................. 86 A. The Apple Agency Agreements Did Not Promote Competition for Complementary Products Such as E-readers and Tablets ................................. 87 1. Lower Device Prices Are Not Attributable to Agency ..................... 88 2. Improved Device Features Are Not Attributable to Agency ............. 89 B. The Apple Agency Agreements Did Not Promote Competition for E-Reader Apps ................................................................................................................... 89 1. Features that Preceded the Apple Agency Agreements Cannot Possibly Have Resulted from Those Agreements ............................. 90 2. Features that Appeared Long After the Apple Agency Agreements Did Not Result from Those Agreements ..........................................