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Judge Cote grants class action status to consumers in e-book lawsuit

Reuters is reporting that a federal judge has given consumers the go-ahead to proceed with a class action lawsuit against Apple for colluding with a number of publishing houses to raise the price of e-books.

U.S. District Judge Denise Cote said the plaintiffs had "more than met their burden" to allow them to sue as a group. She rejected Apple's contentions that the claims were too different from each other, or that some plaintiffs were not harmed because some e-book prices fell.

"This is a paradigmatic antitrust class action," wrote Cote, who has scheduled a trial later this year to determine damages, which could reach hundreds of millions of dollars.

Of course, Apple's ongoing e-book price fixing saga with the US Justice Department and U.S. District Judge Denise Cote in particular is not without its fair share of controversy. Recall that Apple expressed major reservations about Cote choosing Michael Bromwich to serve as the company''s external anti-trust compliance monitor, even attempting, albeit unsuccessfully, to remove him.

What's more, those who feel Apple has been getting a raw deal in all of this have pointed out that Cote, in the past, has been accused of pre-determining which side she favors in a legal dispute.

That said, it's worth pointing out that the Reuters report relays that Cote this past Friday "denied Apple's motion to exclude the opinions of Apple's two damages" while at the same time deciding to throw "out the opinions of Apple's two damages experts, saying they were not based on 'rigorous application of economic methods.'"

And speaking of economics, and with respect to Cote's statement that Apple's e-book saga represents a "paradigmatic antitrust class action", two Professors of Economics earlier this month published a 30-page amici curiae brief articulating that Judge Cote's ruling in favor of the US Justice Department was completely misguided and belied a fundamental lack of understanding of economics.

The brief, put together by Bradford Cornell from CalTech and Janusz Ordover of NYU, reads in part:

Efficient markets depend on firms acting in their independent business interests. In this case, the District Court's failure to consider the economics of the vertical agreements between Apple and the Publisher Defendants led it to infer that Apple facilitated and participated in a horizontal price-fixing conspiracy. The District Court never considered evidence and economic reasoning that the vertical agreements were in Apple's independent business interest in entering e-book retailing, wholly apart from any horizontal conspiracy.

The provisions of the agreements at issue-agency, 'most-favored-nation' (MFN) clauses, and price caps-can be instrumental in facilitating new entry, particularly into markets with an entrenched, dominant firm. In this case, the District Court disregarded economic evidence and reasoning that these provisions served Apple's independent business interest in entering the e-book market, where Amazon was a near-monopolist.

The District Court also ignored economic evidence and reasoning suggesting that Apple's entry into e-book retailing, and not the MFNs, allowed the Publisher Defendants to persuade Amazon to switch from a wholesale to an agency business model. The District Court also erred in equating price increases for some e-books with harm to competition. Apple's entry into the e-book retail market dramatically increased competition by diminishing Amazon's power as a retail monopolist (and its ability to pursue a "loss-leader" strategy that inefficiently priced e-books below their acquisition cost). That increased competition gave publishers more bargaining power, thereby bringing ebook pricing closer to competitive levels. These errors threaten to chill competition by discouraging the use of common vertical contracting techniques that are often essential to facilitating the expensive and risky investments needed for entry into highly concentrated markets. Our antitrust laws should encourage, not penalize, vertical contracting arrangements that facilitate entry and enhance competition.

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