For industry observers, there was a feeling of déjà vu on January 14 when a prominent class-action law firm announced it had filed suit over alleged price-fixing in the e-book market—the second e-book price-fixing suit in a decade. What to make of this new lawsuit? PW has prepared an explainer.
Who is bringing the suit, and why?
The suit is being brought against Amazon on behalf of three named plaintiffs and a potential class of consumers who bought e-books published by the Big Five “through a retail platform that competes with Amazon at a price inflated by Amazon and its Co-conspirator Publishers’ price restraint.” The suit was filed by Seattle-based firm Hagens Berman, which filed the first e-book price-fixing lawsuit against Apple and five of the then–Big Six publishers in August 2011. And we remember how that turned out: with a federal antirust suit and claims from 33 states. The publishers ended up settling all claims for a total of $166 million in consumer credits. Apple lost at trial a year later and paid out a $450 million settlement.
As to why this suit is happening now, suffice it to say that it feels like the Amazon antitrust train is getting ready to leave the station and Hagens Berman wants on. Last October, a congressional subcommittee released its long-awaited report on competition in the digital market that, among other things, details some of Amazon’s hardball practices in the e-book market. Not coincidentally, that report provides much of the factual foundation for the Hagens Berman complaint. Further, the state of Connecticut earlier this month revealed that it has opened its own investigation into the e-book market.
Why are the Big Five publishers referred to as co-conspirators but not named as defendants?
Most likely because of how federal antitrust law is written. “The suit likely only names Amazon because of the so-called ‘direct purchaser’ rule in antitrust,” explained Cleveland Marshall professor of law Chris Sagers, author of the 2019 book United States v. Apple: Competition in America. Indeed, the Hagens Berman complaint refers to the plaintiffs as “direct purchasers,” and under federal antitrust law consumers don’t sue suppliers but the direct sellers of allegedly price-inflated goods.
Still, if the litigation progresses, the publishers will likely be drawn into it in some form, through discovery at least. And it’s possible they could become defendants at some point, Sagers added—perhaps in a separate suit in state court, for example.
When asked by PW if that was a possibility, lawyers for the plaintiffs didn’t rule it out. “We look forward to continuing our investigation and reviewing our options as the case progresses,” said Hagens Berman managing director Steve Berman.
What does the suit allege?
Broadly speaking, the complaint alleges that Amazon is wielding monopoly power in the trade e-book market—hardly a contested view in the book business. In fact, Amazon’s market power was the very thing the publishers were attempting to counter when they coordinated a switch to the agency model for e-books with Apple in 2010. And though that scheme led to a price-fixing suit, it succeeded in securing for publishers the power to set prices for their consumer e-books—a move that checked Amazon’s power to underprice and foreclose potential competitors. The head-scratcher in this case is the allegation that the same major publishers who were found to have conspired with Apple in 2010 to blunt Amazon’s power in the e-book market are now somehow conspiring with Amazon.
Specifically, the suit turns on Amazon’s use of “most favored nation” clauses in its contracts with publishers. Drawing from the aforementioned House report, the complaint details six separate forms of MFN clauses that effectively ensure Amazon can’t be underpriced in the e-book market—a “contractual stranglehold,” the complaint alleges, that prevents existing retail competitors from expanding their market share and dissuades new competitors from entering the e-book market, thus forcing consumers to “overpay” for e-books.
Notably, in the congressional report, book publishers lash out at Amazon’s practices, including the company’s insistence on using MFNs. One publisher told the committee that Amazon uses its market power in print and e-book sales “to force a price MFN on it and other book publishers,” with the result that “publishers are completely handcuffed from stimulating platform competition.” That doesn’t exactly sound like evidence of a price-fixing conspiracy, does it?
But MFNs are legal, aren’t they?
They usually are—and in fact they can even be viewed as pro-competitive in some cases. But MFNs can also facilitate tacit collusion or other anticompetitive conduct. For example, MFNs can facilitate the exchange of pricing information among competitors or be used by firms in a certain market to signal that they do not intend to compete on price. In the Apple case, Judge Denise Cote found that an MFN was the mechanism used to force Amazon to accept the agency model—and higher e-book prices. And in her final order, Cote barred Apple from using MFNs in its e-book contracts for five years.
“It’s certainly possible that the publishers hate the MFNs in their Amazon contracts and would avoid them if they could,” Sagers said. But it is also possible they don’t really mind them, he adds. That’s because Amazon’s MFNs could be viewed as a way for the publishers to coordinate e-book pricing across the industry without engaging in the kind of direct, horizontal coordination that would clearly be illegal.
“I’m not saying that’s what is happening,” Sagers said. “But a comfortably persuasive history of the market holds that the major publishers fear the effect of low e-book prices. So if Amazon is effectively imposing parallel restraints on all of the publishers, it helps ensure that all the publishers will sell their products in the same way.”
Okay, but the theory of this case just doesn’t make sense: Amazon still wants low prices in the e-book market, and the publishers want to break Amazon’s monopoly power, not help sustain it, right?
No question, the allegation in the complaint that Amazon and the publishers are conspiring seems counterintuitive. And Sagers agreed that “untangling” Amazon’s and the publishers’ motivations will be a challenge for the plaintiffs. “Before a court is willing to find that they all agreed to a conspiracy that harms retail consumers,” he said, “the court will need to be persuaded that it makes sense for them to agree to such a thing.”
That may be a tough sell, but it’s not inconceivable. For example, given the market power Amazon wields over the publishers’ print and digital retail markets—and the company’s history of hardball negotiations and alleged retaliation—it is possible that the Big Five all agreed to let Amazon have its MFNs to avoid problems. After all, under their agency agreements the publishers still get to set their consumer e-book prices.
But could that kind of acquiescence to Amazon's demands really be portrayed as a conspiracy to fix prices? Are you really a “co-conspirator” if you are coerced to join an alleged conspiracy with a market-dominating firm’s proverbial gun to your head?
“Yes,” Sagers said. “And this is important. You absolutely can be sued for joining a conspiracy that you were coerced to join.”
The more significant challenge facing the plaintiffs, however, will be showing there is any kind of joint agreement between Amazon and the publishers beyond the presence of parallel terms in their agreements. “I presume the plaintiffs currently have no direct evidence of that kind,” Sagers said. “And you can count on Amazon and the publishers insisting that their agreements are, in fact, five completely independent, bilateral contracts that may have similar terms but are otherwise unrelated.”