What Impacts will a Civil Case have on Apple Shareholders?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The US Department of Justice ("DOJ") has just filed a civil (but actually uncivil and unjust in my opinion) complaint in the federal district court for the Southern District of New York against Apple (NASDAQ: AAPL) and seven book publishers. The complaint alleges these eight violated Section 1 of the Sherman Act, a criminal provision, by conspiring to hype the price of eBooks above the $9.99 standard set by Amazon (NASDAQ: AMZN). Obviously, Amazon had set that low price to capture as much business as possible from the brick and mortar book stores, which historically were the retailers for the traditional publishing houses. Obviously, these traditional Publishers were merely reacting to fierce competition from Amazon, which they believe is threatening to put them out of business. Amazon's Kindle and Createspace are doing this by facilitating author self-publishing. I believe the Publishers' fears are well founded. Self-publishing through Amazon will ultimately loose the monopoly noose of Publishers from the necks of authors whose excellent works or flash topicals are beyond these Publishers' typical criteria for publication and their time schedules.
Before DOJ's current suit, there was a first suit filed near the end of October, 2011, amended near the end of January, 2012, by Hagens Berman, a relatively small Seattle based law firm. Hagens also has smaller offices in nine other cities, including San Francisco where the case was initially filed and New York to where it was transferred.
How will these suits affect Apple, a public company, and the Publishers, all but one private, as befits those who would purvey protected thought far from the madding crowd? The exception is Simon & Shuster, a division of CBS, an obvious, albeit highly regulated, protector of free expression as well.
Were DOJ's civil case brought instead as a criminal action, Apple and each of its alleged co-conspirators would face a fine of $100 million. Each of their authorizing or participating directors, officers, and agents would face a fine not exceeding $5,000 and imprisonment for not exceeding one year, if not the $1 million fine and imprisonment not exceeding 10 years mandated. Either is possible because the discombobulated federal anti-trust laws provide for each without recognizing the conflict. These punishments could be imposed only upon criminal conviction, however.
Fortunately, criminal conviction is not the concern of Apple and the Publishers, for the moment. DOJ possibly had in mind using its civil case as a discovery device for later criminal prosecution, however. More likely DOJ had in mind that the obvious prospect of criminal prosecution would compel Apple and the Publishers to settle the civil case so as to avoid providing evidence for a criminal one to follow. Not settling and also not answering and defending against the DOJ complaint would result in a judgment against Apple and the Publishers, of course, which would make a prima facie case for the Hagens suit and any others than might be brought by anyone else.
A civil action judgment is basically for damages suffered by the plaintiffs. Since the United States has none, DOJ is seeking injunctive relief and costs of suit only.
The Hagens complaint seeks damages, and, of course, certification as a class action to include all purchasers of books at a price higher than Amazon's $9.99. Federal anti-trust law permits trebling of the damages, and, attorneys fees, contrary to the American Rule, but permitted under special anti-trust private enforcement provisions.
Another difference between the two complaints is that Hagens' dwells on public facts. It recites public statements made by the Publishers about the need for changing the wholesale model which permitted the retailers to set their own prices to the agency model which preserves pricing to the Publishers for eBooks. Both complaints characterized this as violations by each defendant of Sherman Act 1.
The DOJ complaint recites private facts; for example, specific telephone conversations, suggesting wire taps, which are permissible only where criminal activity is sufficiently documented to obtain a wire tap warrant from a federal judge. How did DOJ get these? Legally?
Admittedly, Sherman Act 1 is a criminal statute, but I believe it is being misused by DOJ if it is wire tapping phones, and especially by taking sides in an arena where I do not believe the federal government belongs; where as a result, there will be less competition not more; where an unintended consequence could be that all books, whether eBooks, hardcover, or paperback, will ultimately be more expensive than had DOJ stayed out.
Both the DOJ complaint and the Hagens one suffer the same and most serious defect that deserves their defeat: they both bulge with demonstrations of the exact opposite of their assertions. They both shout that competition is belligerent and boisterous on all sides of the eBook arena instead of the clandestine and whispery conspiracy to "restrain trade" that they allege and that is required to violate the federal anti-trust laws. Both complaints demonstrate that Amazon's Kindle competes against the more traditional product of the Publishers—hard cover and paperback books-- based on price and accessibility. A book bought at a brick and mortar store can be obtained immediately, if the book is in stock. It can be obtained from Amazon, Barnes & Noble (NYSE: BKS), and others on line in whatever amount of time it takes the post office, a rapidly declining resource, unfortunately, or one of its competitors—Federal Express or United Parcel Services, usually within a week. It can be obtained immediately, however, via Kindle, Nook, or one of the computer Apps.
The Publishers feared that such eBook competition would eliminate their primary product, the printed page. The Publishers also feared that it would hobble their primary, at least historically, brick and mortar retailers. The Publishers feared that Amazon might be left as the sole distributor to retail their hard covers and paperbacks. They feared that Amazon would sell their books at prices too meager to sustain them. Only one of their brick and mortar retailers, Barnes & Noble, was competing with moderate success against Amazon's Kindle with its Nook. Like Amazon's Kindle, Barnes & Noble's Nook was available on the Internet. However, it was also available at its brick and mortar stores. Indeed, its customers were immediately accosted by Nook reps at the store front. Some proclaim that it is possible that without the Nook, Barnes & Noble would have gone the way of the bankrupt Borders, and their long gone companions—Kroch's & Brentano's, and Crown Books, just to name the biggest of many.
Such fears drove the wily and non-suicidal Publishers to regain control of pricing. They determined, with due regard for Barnes & Noble, that they could do this best by hooking up with Apple, which they perceived to be potentially most like and therefore the most viable alternative to Amazon. Apple was eager to the task because it wanted to enter the eBook arena that Amazon had created. It wanted to replicate its iTunes success with iBooks.
In my opinion these suits against Apple are monumental threats to the Publishers, not so much to Apple, for which the eBooks arena is relatively new, and not a large slice of the Apple Pie. Apple may be soured for a bit, but other market entries and innovations will continue to boost it and its worth as an investment beyond these cases.
Most importantly, the suit, in my opinion, is a serious assault on the availability of all books, more so if it is successful. Amazon, Apple and the Publishers should compete free of the heavy injunctive federal hand of Justice so that purchasers decide the outcomes for themselves each time they decide from whom and how to buy their books and at what price.
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