In 2007, unhappy with Amazon’s low, flat price of $9.99 for e-books, five major U.S. publishers negotiated a new business model for e-book pricing with Apple, which was getting ready to launch the iPad.
Under the prevailing wholesaling model, publishers sold their books and e-books to retailers like Amazon, which could then set whatever price they liked. Apple and the five publishers agreed to switch to a so-called agency model, which would allow the publishers to set their own prices for e-books in exchange for giving Apple a 30% sales commission. At least one of the publishers then upped the ante by threatening to delay the release of its digital editions to Amazon unless it switched to an agency model. Amazon reluctantly agreed, and e-book prices rose across the industry to about $14.99.
The publishers and Apple claimed that their goal was to increase competition in the e-book market by opening up alternatives to Amazon’s Kindle reader. But the U.S. Department of Justice didn’t see it that way and accused the parties of colluding to artificially raise e-book prices. The five publishers reached a settlement with the government; Apple did not.
Reading between the lines
In U.S. district court testimony, Apple and publishing executives portrayed the publishers’ negotiations with Apple on e-books as a typical process in which each side pushed hard for concessions. But Department of Justice lawyers argued that the publishers communicated with one another through Apple and shared information about both Amazon and Apple. Moreover, in their contracts with Apple, the publishers agreed to a so-called most-favored-nation clause requiring that no other retailer sell e-books for lower prices—a stipulation that the government argued imposed the agency model on other retailers, according to the New York Times.
On July 10, a U.S district judge ruled that Apple and the publishers had indeed engaged in a price-fixing conspiracy that resulted in consumers paying more for e-books. Apple vowed to appeal the verdict. Arguing that marketplace negotiations would have led to higher e-book prices even if Amazon hadn’t felt pressured to change its model, some observers predicted that the case could go all the way to the Supreme Court.
The question of whether the parties colluded is a complex one. But as we wrote in the article “Giving Outsiders a Voice in Your Negotiation” in the June 2012 issue of Negotiation, the story serves as a reminder that, in their zeal to reach a mutually beneficial agreement, negotiators often forget the importance of considering how parties away from the table—in this case, consumers—will be affected by the final outcome of their deal.
The risks become all the more complicated, from a legal standpoint, when your negotiating partners also happen to be your direct competitors. In the United States, any contract that restrains interstate or international trade or commerce is outlawed by the Sherman Act. That doesn’t mean that you can’t negotiate with your competitors, writes Harvard Business School and Harvard Law School professor Guhan Subramanian in his book Dealmaking: The New Strategy of Negotiauctions (Norton, 2011). But it does mean that your ultimate agreement must promote rather than stifle marketplace competition and efficiency. If it doesn’t, it could be contested in court.
Negotiating by the book
Here are three pieces of advice for negotiators seeking to avoid the legal and ethical trouble that Apple and the five publishers faced following their deals.
1. Look beyond the negotiating table. As you approach a negotiation and during the process, think about who, other than the parties involved, might be affected by whatever agreement you reach. This list might include your competitors, consumers, and society at large. Is your deal likely to create net value for society? If not, you have an ethical and perhaps legal responsibility to find ways to reduce the potential negative effects on outsiders.
2. Study relevant laws and standards. Don’t assume that you or your counterpart has a firm grasp of which laws and regulations are likely to apply to your agreement. Be sure to consult with your lawyers throughout the negotiation process. A good legal team will scrutinize your predictions of how an agreement will unfold, recognizing that you may be overly optimistic. (For tips on avoiding deal-drafting mistakes, see the cover story in this issue.)
3. Err on the side of caution. Experts disagree about whether Apple broke the law in its negotiations with the publishers, but in the end, only one opinion truly mattered: that of the judge. Skirting up to the edge of the law is a risky practice. Give yourself a wide berth by avoiding deal terms that could even suggest your agreement will result in a net loss for the marketplace at large.