Day two of the U.S. Department of Justice’s antirust suit against Apple saw Penguin Books CEO David Shanks take the stand to testify in the antitrust trial over the Cupertino firm’s role in an alleged e-books price fixing scheme.
According to in-court reports from Reuters, Shanks testified on Tuesday that Apple inserted a provision in its e-book contract with Penguin which forced the publisher to modify its existing agreements with other retailers, including market leader Amazon.
This stipulation was Apple’s most favored nations clause, part of the so-called “agency model” that allows a publisher to set content pricing as long as it doesn’t sell the same content to another retailer for a lower price.
“The fact that the parity clause was in the contract more or less made it a given we’d have to be at agency,” Shanks said in a previously recorded deposition that was played in court.
Shanks also noted in his testimony that Apple’s clause was “certainly a factor” in moving rivals over the agency model where publishers have control over pricing. Amazon uses the wholesale model, in which content owners sell rights in bulk to a retailer, who then can resell the content at or below cost.
The DoJ claims consumers were hurt by fixed prices resulting from alleged collusion between Apple and five major publishing houses. All of the publishers have settled out of court.
Penguin was the final holdout among the five publishers, finally settling with the Justice Department in December 2012, and also paid $75 million to 33 state attorneys general for a parallel suit in May of this year.
While the first part of Shanks’ testimony was favorable to the government’s case, cross-examination appeared to strengthen Apple’s position. Shanks admitted that there was concern over Amazon’s low prices, suggesting that, as Apple has suggested, negotiations were tough, which makes collusion a less compelling argument.
With the most favored nations system in place, Barnes & Nobel also adopted the model, and Penguin attempted to get Amazon to come on board as well. Shanks noted that the internet reseller did not take the news well.
“They yelled and screamed and threatened,” he said. “It was a very unpleasant meeting.”
Shanks testimony was the first from an executive of the five publishing houses.
