Apple monitor under fire for $2.6M bill, “roving inquisition”

The lawyer overseeing an Apple antitrust order is a political hack who has run roughshod over the judicial process during ten visits to the company’s Cupertino headquarters, a Wall Street Journal editorial charged Tuesday, and he should pay back the $2.65 million he has already charged the company for a court-ordered investigation

The page-long editorial (paywall) makes a case against Michael Bromwich, who was appointed by U.S. District Judge Denise Cote in 2013 to oversee issues related to her ruling that found Apple fixed the price of ebooks.

While the Journal has gone after Bromwich before, Tuesday’s editorial is especially provocative, and is paired with a separate article that excerpts parts of a transcript from a recent appeals court hearing. Here is some of what the Journal, which appears to smell blood in the water, had to say:

Mr. Bromwich has since charged Apple in excess of $2.65 million for his services through January, conducted some 80 interviews with executives and staff, and made 10 fact-finding missions to California. According to billing records and his semiannual reports to Judge Cote, which we reviewed, there are new reasons for the Second Circuit to sack Mr. Bromwich and end what is a major abuse even by the standards of modern antitrust.

The editorial goes on to repeat criticism that Bromwich, who is billing $1,100/hour, has no background in antitrust law, and that he is a friend of the judge. It also claims he has exceeded his authority, and conflated the role of the prosecution and the judiciary:

The problem is that Mr. Bromwich has been stumbling all around Cupertino to conduct a roving, unfettered inquisition into Apple’s business … He even probes units such as Siri voice recognition, the maps group and hardware engineering. None of this is relevant to antitrust.

As for Mr. Bromwich’s narrow ‘defined mission,’ he finds that the live or online antitrust training sessions that are mandatory for 5,000 employees are insufficient because they do not ‘acknowledge, dissect, and discuss past cases in which Apple was involved.’ Apparently he wants these seminars to be encounter groups in which Apple workers come to terms with misdeeds they vigorously deny.

You get the idea. While the Journal has vented about Bromwich before, the new editorial’s tone — and its assessment of an appeals court hearing in December — suggests Apple might just succeed in rolling back parts of Judge Cote’s landmark 2013 ruling. That’s because the new details of Bromwich’s activities (some of which were redacted until) may sway the appeals court judges, who have already appeared more sympathetic to Apple than Judge Cote, that this may be an investigation run amok.

Apple has already agreed to a $450 million settlement with the Justice Department and class action lawyers over claims it headed a price-fixing conspiracy, but the deal is contingent on the Second Circuit of Appeals’ review of the original 2013 decision. In addition to that case, which is still pending, the appeals court is also taking up the question of the Bromwich’s conduct in March.

Critics, including me, have argued that the Justice Department’s antitrust campaign against Apple has been misguided given that the company remains a bit player in a market dominated by Amazon. Now, the Journal‘s latest salvo (whose appearance may have been fostered by Apple’s lawyers) and the upcoming hearing, will but the long-running affair under yet more scrutiny. Here, by the way, is how the Journal thinks the whole thing should end:

If Apple prevails in the Second Circuit, it ought to sue Mr. Bromwich and attempt to disgorge the $2.65 million he has soaked from shareholders.

SiriusXM can fight windfall for ’60s singers, judge rules

Music lovers finally caught a break this week as a federal judge ruled SiriusXM can appeal a jaw-dropping ruling that created a new type of copyright royalty, and that could oblige digital media companies to pay the likes of the Turtles additional money for songs they sang fifty years ago.

The issue concerns so-called “sound recording rights,” which are separate from songwriter rights, and are paid to musicians whenever a recording is sold. In recent years, record labels has been claiming that companies like Pandora and SiriusXM should pay again under state laws for pre-1972 songs — even though copyright law is federal, and that no one has received such payments before. The 1960s Turtles singers, known as Flo & Eddie, have been the face of the campaign through a series of class action lawsuits.

The Turtles’ legal argument is far-fetched but, perhaps due to the complexity of music copyright, some judges have swallowed it, including Colleen McMahon, who initially gave the Turtles permission to go forward with a class action on behalf of anyone whose pre-1972 song has been performed in public or the internet. If this transpires, it would amount to a huge financial punch not just for many bars, restaurants and AM/FM radio stations, but for every digital media company — including YouTube, Apple and Vimeo — that plays Oldies.

On Tuesday, however, Judge McMahon appeared to have second thoughts and told SiriusXM that it may appeal the ruling to the Second Circuit.

“There is indeed a critically important controlling question of law in this case. If the Court’s holding that they do have such a right is incorrect, then significant portions of this lawsuit — including the public performance copyright infringement and unfair competition claims — will have to be dismissed,” she wrote in a decision cited by the Hollywood Reporter, which provides some more legal nitty-gritty on Tuesday’s ruling.

McMahon’s words are a big relief. While there’s no guarantee that the Second Circuit will put a stop to this runaway royalty theory, which has already triggered copycat class actions, it is hard to see how it could do otherwise.

As I’ve pointed out repeatedly, the original decision (and a related one in California) should be reversed for two reasons. The first is that the rulings are just wrong as a matter of law: Santa Clara law professor, Tyler Ochoa, explained why in a mic-drop of a blog post in October.

The other season is that the music industry’s pre-1972 campaign is a cynical misuse of copyright that seeks to trick the public into paying new money for old rope, under the guise of “closing a loophole” (that phrase is industry’s explanation, but it has has unfortunately been taken up by some in the press).

While we do need a new royalty regime for the digital age, it should not involve raising rates in order to grant a windfall for 50-year-old songs. Instead, if everyone is to pay more for copyright (and perhaps we should), let the new money be directed to supporting the many young musicians who would like to earn a living like the Turtles did so long ago.

Judges question Apple ebook verdict and Amazon’s role

In a new twist in the long running antitrust case against Apple, an appeals court on Monday cast doubt on the Justice Department’s theory that the company brokered an illegal conspiracy among book publishers, and asked instead why the government’s focus has not been on Amazon.

The 90-minute hearing, which took place at the Second Circuit Court in Manhattan, represented a major shift in momentum in a case that has until now gone completely against Apple. On Monday, the three appeals court judges suggested that District Judge Denise Cote might have been too quick to conclude that Apple’s pricing arrangements with five publishers violated antitrust laws.

“Would it not matter that all those people got together to defeat a monopolist? It’s like the mice that got together to put a bell on a cat,” U.S. Circuit Judge Dennis Jacobs told the Justice Department’s lawyer, Malcolm Stewart.

The cat in question here is [company]Amazon[/company], which controlled over 90 percent of the ebook market in early 2010 when Apple and the publishers introduced “agency pricing,” which lets publishers set an ebook’s retail price and pay the publisher a commission. Amazon had previously used the wholesale model for all ebooks.

On Monday, Apple’s lawyer Theodore Boutros urged the appeals court to regard the pricing tactic as a legitimate business arrangement used to “come into a market dominated by a monopolist.”

The judges appeared to give weight to this suggestion, and to accept Boutros’ contention that a brief price spike, which damned Apple and the publishers before Judge Cote, should not result in an automatic finding of illegal price-fixing. Instead, Boutros said the price spike was limited only to the five publishers, and that the overall effect of Apple’s entry to the ebook market dramatically benefited consumers since many more players were willing to enter the market.

The appeals court judges also expressed skepticism over Stewart’s repeated attempts to liken the agency pricing arrangements to a criminal drug conspiracy in which [company]Apple[/company] was the driver.

“When you’re dealing with the illegal drug industry, you’re looking at one of the few areas where the law doesn’t look favorably on new entrants,” said Circuit Judge Debra Livingston.

$450 million settlement at risk

If the appeals court decides to disturb Judge Cote’s verdict, their ruling would have an immediate ripple effect on a related legal proceeding, involving class action lawyers and state governments, in which Apple has agreed to pay out $400 million to consumers and another $50 million in legal fees.

But in an unusual arrangement, the $450 payout is contingent on the Second Circuit upholding the verdict. If the appeals court judges remand the verdict, the payout could drop to a total of $70 million and, if they reverse it entirely, the payout will be nothing.

At the hearing, Boutros suggested that the appeals should overturn Court’s ruling as a matter of law, or at least remand it to a different judge.

The major legal issue at stake turns turns on competing antitrust doctrines known as “per se” versus “rule of reason” — which specify how courts should assess situations in which companies are found to have colluded on a given business issue.

The appeals court, however, may be hard-pressed to reverse Judge Cote, who found in a 160-page decision that Apple was liable under either standard.

In the event the appeals court does remand or reverse, its finding is likely to turn on whether Apple and the publishers’ behavior was justified in the context of what Judge Jacobs called a “new entrant breaking the hold of a monopolist” using “arguably predatory” tactics.

For the publishers, the outcome will not effect their liability since they have already agreed to pay out millions as a result of voluntary settlements.

A five-year cooling off period

A portion of Monday’s arguments were taken up by lawyers from Simon & Schuster and Macmillan, which are two of the five publishers that were caught up in the antitrust investigations (the others are Hachette, HarperCollins and Penguin, which has since merged with Random House).

Macmillan and Simon & Schuster were there to object to a part of Judge Cote’s order in which Apple must engage in a five-year “cooling off period” with the publishers, and engage in only arms-length negotiations. For practical purposes, this means that the publishers will not be able to limit Apple’s ability to engage in discounting, which could in turn complicate their negotiations with other retailers.

The publishers claim this five-year provision is unfair since they are this month coming to the end of their own two-year settlements with the government. They claim that the Justice Department is, in essence, reneging on its earlier agreement with them since the five-year arrangement with Apple will have knock-on effects in their negotiations with other ebook retailers.

The publishers asked the judges to excise a part of Judge Cote’s order that applies the five-year cooling-off period and, if necessary, to make a special preliminary decision on this matter so their pricing strategies are not compromised.

Finally, the appeals court judges also mulled what to do with the special monitor that Justice Cote appointed to oversee Apple’s compliance. The appointment has drawn criticism because the monitor selected by Cote was a friend of the judge who lacked antitrust experience and hired a special advisor at extra cost.

The appeals court said it will reserve its decision, meaning a ruling is likely to come sometime in 2015.