JS 44C/SDNYREV. 2/2014 44 CV 1768CIVIL COVER S

The JS-44 civilcover sheet and the information contained herein neither replace nor supplement the filingand service ofpleadings or other papers as required by law, except as provided by local rules of court. This form, approved by theJudicial Conference of the United States in September 1974, is required for use of the Clerk of Court for the purpose ofinitiating the civil docket sheet.

PLAINTIFFS

Lavoho, LLC, successor in interest to Diesel Ebooks, LLCDEFENDANTS

Apple Inc. et al.

ATTORNEYS (FIRM NAME, ADDRESS, AND TELEPHONE NUMBER ATTORNEYS (IF KNOWN)Eric M. Creizman, Creizman LLC, 565 Fifth Avenue, New York, New York10017, T: (212) 972-0200; Maxwell M. Blecher &Jordan L. Ludwig (pro hacvice pending), Blecher Collins Pepperman & JoyeCAUSE OF ACTION (CITE THEU.S. CIVIL STATUTE UNDER WHICH YOU ARE FILING AND WRITE A BRIEF STATEMENT OF CAUSE)

(DO NOT CITE JURISDICTIONAL STATUTES UNLESS DIVERSITY)

15 USC. 1, Section 1 of the Sherman Act. Unlawful restraint of trade

Has this action, case, or proceeding, orone essentially the same been previously filed in SDNY atany time? NotjYesLJJudge Previously AssignedIfyes, was this case Vol. L~] Invol. |~~| Dismissed NoD Yes If yes,give date & Case No.IS THIS AN INTERNATIONAL ARBITRATION CASE? No IE Yes (PLACEAN[x]IN ONEBOXONLY) NATURE OF SUIT

TORTS ACTIONS UNDER STATUTES

CONTRACT PERSONAL INJURY PERSONAL INJURY FORFEITURE/PENALTY BANKRUPTCY OTHER STATUTES

I mo INSURANCE [ ]310 AIRPLANE (]362 PERSONAL INJURY - [ ]610 AGRICULTURE [ ] 422 APPEAL [ ]400 STATEI 1120 MARINE [ ]315 AIRPLANE PRODUCT MED MALPRACTICE [ ]620 OTHER FOOD & 28 USC 158 REAPPORTIONMENT[ ]130 MILLER ACT LIABILITY [ ] 365 PERSONAL INJURY DRUG [ 1423 WITHDRAWAL W410 ANTITRUST[ 1140 NEGOTIABLE [ ]320 ASSAULT, LIBEL & PRODUCT LIABILITY [ I 625 DRUG RELATED 28 USC 157 [1430 BANKS & BANKING

INSTRUMENT SLANDER [ ] 368 ASBESTOS PERSONAL SEIZURE OF [ ]450 COMMERCEM150 RECOVERY OF [ ]330 FEDERAL INJURY PRODUCT PROPERTY [ ]460 DEPORTATION

OVERPAYMENT & EMPLOYERS' LIABILITY 21 USC 881 PROPERTY RIGHTS I ]470 RACKETEER INFLUENFORCEMENT LIABILITY [ ] 630 LIQUOR LAWS ENCED & CORRUPTOF JUDGMENT []340 MARINE PERSONAL PROPERTY [ ]640 RR STRUCK [ ] 820 COPYRIGHTS ORGANIZATION ACT

I 1151 MEDICARE ACT []345 MARINE PRODUCT [ ]650 AIRLINE REGS [ ]830 PATENT (RICO)[ 1152 RECOVERY OF LIABILITY [ ] 370 OTHER FRAUD [ ]660 OCCUPATIONAL [ ] 840 TRADEMARK I I 480 CONSUMER CREDIT

DEFAULTED [ ]350 MOTOR VEHICLE [ ] 371 TRUTH IN LENDING SAFETY/HEALTH [ ] 490 CABLE/SATELLITE TVSTUDENT LOANS [ ]355 MOTOR VEHICLE [ ] 380 OTHER PERSONAL [ ]690 OTHER [ 1810 SELECTIVE SERVICE(EXCL VETERANS) PRODUCT LIABILITY PROPERTY DAMAGE SOCIAL SECURITY [ ]850 SECURITIES/

N153 RECOVERY OF [ ]360 OTHER PERSONAL [ ] 385 PROPERTY DAMAGE COMMODITIES/OVERPAYMENT INJURY PRODUCT LIABILITY LABOR [ ]861 HIA(1395ff) EXCHANGEOF VETERAN'S [ ] 862 BLACK LUNG (923) [ ]875 CUSTOMERBENEFITS [ 1710 FAIR LABOR [ ] 863 DIWC/DIWW (405(g)) CHALLENGE

[ ]160 STOCKHOLDERS STANDARDS ACT [ ] 864 SSID TITLE XVI 12 USC 3410SUITS [ ]720 LABOR/MGMT [ ] 865 RSI (405(g)) [ ]890 OTHER STATUTORY

[ ]190 OTHER PRISONER PETITIONS RELATIONS ACTIONSCONTRACT [ ]730 LABOR/MGMT [ 1891 AGRICULTURAL ACTS

I 1195 CONTRACT [ ]510 MOTIONS TO REPORTING & FEDERAL TAX SUITS [ ]892 ECONOMICPRODUCT ACTIONS UNDER STATUTES VACATE SENTENCE DISCLOSURE ACT STABILIZATION ACTLIABILITY 28 USC 2255 I ]740 RAILWAY LABOR ACT [ ]870 TAXES (U.S. Plaintiff or [ ]893 ENVIRONMENTAL

I 1196 FRANCHISE CIVIL RIGHTS [ ] 530 HABEAS CORPUS [ ]790 OTHER LABOR Defendant) MATTERS[ ] 535 DEATH PENALTY LITIGATION [ ] 871 IRS-THIRD PARTY I I 894 ENERGY

[]441 VOTING [ ] 540 MANDAMUS & OTHER I ]791 EMPL RET INC 26 USC 7609 ALLOCATION ACT[]442 EMPLOYMENT SECURITY ACT [ ]895 FREEDOM OF

REAL PROPERTY []443 HOUSING/ INFORMATION ACTACCOMMODATIONS IMMIGRATION [ ] 900 APPEAL OF FEE

(]210 LAND [ ]444 WELFARE PRISONER CIVIL RIGHTS DETERMINATIONCONDEMNATION [ ]445 AMERICANS WITH ( ]462 NATURALIZATION UNDER EQUAL

[ ]220 FORECLOSURE DISABILITIES - [ ] 550 CIVIL RIGHTS APPLICATION ACCESS TO JUSTICE[ ]230 RENT LEASE & EMPLOYMENT [ ] 555 PRISON CONDITION [ I 463 HABEAS CORPUS- [ ]950 CONSTITUTIONALITY

EJECTMENT [ ]446 AMERICANS WITH ALIEN DETAINEE OF STATE STATUTES[ ]240 TORTS TO LAND DISABILITIES -OTHER [ I 465 OTHER IMMIGRATIONI I 245 TORT PRODUCT

LIABILITY[ ]440 OTHER CIVIL RIGHTS

(Non-Prisoner)ACTIONS

[ ]290 ALL OTHERREAL PROPERTY

Check if demanded in complaint:

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DO YOU CLAIM THIS CASE IS RELATED TO A CIVIL CASE NOW PENDING IN S.D.N.Y.?IF SO, STATE:

JUDGE Hon- Denise L Cote DOCKET NUMBER 1:13-CV-06516

NOTE: You must also submit at the time of filing the Statement of Relatedness form (Form IH-32).

(PLACEAN x IN ONE BOX ONLY) ORIGIN13 1 Original fj2 Removed from D3 Remanded D 4 Reinstated or

Proceeding State Court from ReopenedI | a. all parties represented AppellateI I b. Atleast one

party Is pro se.

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l~l 7 Appeal toDistrictJudge fromMagistrate JudgeJudgment

(PLACEAN x IN ONE BOX ONLY) BASIS OF JURISDICTION 1 U.S. PLAINTIFF Q2 U.S. DEFENDANT M 3 FEDERAL QUESTION Q4 DIVERSITY

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CITIZEN OR SUBJECT OF AFOREIGN COUNTRY

PTF DEF[ ]3 [ ]3

PTF DEFINCORPORATED and. PRINCIPAL PLACE [ ] 5 [ ] 5OF BUSINESS IN ANOTHER STATE

PTF DEFCITIZEN OF THIS STATE [ ] 1 ( ] 1

CITIZEN OF ANOTHER STATE [ ] 2 [ ] 2 INCORPORATED or PRINCIPAL PLACE [ ] 4 [ ] 4OF BUSINESS IN THIS STATE

FOREIGN NATION [ ]6 []6

PLAINTIFF(S) ADDRESS(ES) AND COUNTY(IES)

DEFENDANT(S) ADDRESS(ES) AND COUNTY(IES)

DEFENDANT(S) ADDRESS UNKNOWNREPRESENTATION IS HEREBY MADE THAT, AT THIS TIME, I HAVE BEEN UNABLE, WITH REASONABLE DILIGENCE, TO ASCERTAIN THE

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Check one: THIS ACTION SHOULD BEASSIGNED TO: WHITE PLAINS [X] MANHATTAN(DO NOT check either box if this a PRISONER PETITION/PRISONER CIVILRIGHTS COMPLAINT.)

DATE 03/14/2013 SIGNATURE OF ATTORNEY OF RECORD

RECEIPT #^yp^/n^l^

Magistrate Judge is to be designated by the Clerk of the Court.

Magistrate Judge

Ruby J. Krajick, Clerk of Court by . Deputy Clerk, DATED

UNITEDSTATES DISTRICT COURT (NEW YORK SOUTHERN)

ADMITTED TO PRACTICE IN THIS DISTRICT

[ ] N0 OS- 10/00H YES (DATE ADMITTED Mo. Yr. SWV)Attorney Bar Code # C 7 18 U

is so Designated.

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

LAVOHO, LLC, successor in interest toDIESEL EBOOKS, LLC,

Plaintiff,

APPLE INC.; HACHETTE BOOK GROUP,INC.; HARPERCOLLINS PUBLISHERS,L.L.C.; VERLAGSGRUPPE GEORG VONHOLTZBRINCK GMBH; HOLTZBRTNCKPUBLISHERS, LLC d/b/a MACMILLAN;THE PENGUIN GROUP, A DIVISION OFPEARSON PLC; and SIMON &SCHUSTER, INC.

Defendants.

14 C? 1768CASE N(COMPLAINT FOR VIOLATIONS OF:

(1) THE SHERMAN ACT (15 U.S.C. 1)(2) THE DONNELLY ACT (N.Y. GEN.BUS. LAW 340)

JURY TRIAL DEMANDED

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1. This Complaint is filed and these proceedings are instituted against the above-

named Defendants under Section 1 of the Sherman Antitrust Act (15 U.S.C. 1) and the

Donnelly Act (N.Y. Gen. Bus. Law 340) to recover damages for injuries to the business and

property of Plaintiff Lavoho, LLC, the successor in interest to Diesel eBooks, LLC ("Diesel").

INTRODUCTION

2. This case is about an already proven conspiracy to fix prices and reduce

competition in the rapidly expanding "e-book" industry between Apple and the Publisher

Defendants. An e-book is a book that is sold to consumers in electronic form to be read on a

variety of electronic devices. As was uncovered in the Department of Justice's investigation into

the conspiracy, the Publisher Defendants saw the rising demand for e-books and Amazon's low-

pricing practices as undermining the traditional business model in the industry. In a nutshell, the

Publisher Defendants did not want consumers to perceive the value of a new book as being only

1

$9.99 (or lower). Accordingly, the Publisher Defendants joined forces with Applewho wasabout to enter the e-book marketto restrain price competition in the sale of e-books. As

phrased by Apple CEO Steve Jobs: "We'll go to [an] agency model, where you set the price, and

we get our 30%, and yes, the customer pays a little more, but that's what you want anyway."

Almost simultaneously, each of the publishers entered into a functionally identical agency

agreement with Apple that would "chang[e] the industry permanently." And it did. After the

Publisher Defendants executed the new agreements with Apple, each quickly imposed the same

agreements on all other retailers. This eliminated retailers' ability to compete on price. The

government's allegations, which it proved at trial, are explained in detail in this Complaint.

3. Consumers have paid tens ofmillions of dollars more for e-books since the price-

fixing conspiracycommenced. But Defendants' conduct did not solely result in injury to

consumers. Competition was also harmed because Defendants' price fixing artificially restrained

the ability of other e-book sellers to compete in the market. As Judge Cote found in her detailed

opinion: "Apple did not want to compete with Amazon (orany other e-book retailer) on price."

U.S. v. Apple Inc., 952 F. Supp. 2d 638, 647 (S.D.N.Y. 2013). Diesel was one such e-book

retailer.

4. Diesel did not have a dedicated e-reader such as the Kindle, Nook, or iPad.

Instead, the drawto Diesel's e-book store was that it pricedaggressively and usedproprietary

andunique real-time bundling software coupled witha desirable rewards program. These

practices incentivized consumers to purchase and download e-books from Diesel's website or

apps andthenaccess their e-books on another e-reader, mobile phone, personal computer, or

laptop computer. Diesel hadan applicationi.e., an "app"for the iOS andAndroid platforms.

Once Apple and the Publisher Defendants entered into theirprice-fixing agreement, however,

Diesel was no longer able to offer its favorable pricing through bundling. If a bundle had a

single agency title in it, Diesel was no longer able to offer the bundle and its attendant favorable

pricing. After years of steady growth, in April 2010right after the imposition of agency

Diesel quickly went under for all intents and purposes.

5. Moreover, in order to further insulate itself from price competition and eliminate

transparency in e-book pricing, Apple would not allow Diesel and others to offer its app in the

Apple App Store without charging a 30 percent commission on all e-book sales, an amount that

was uneconomic and non-competitive because the agency agreements allowed for only 30

percent margins on sales of e-books. Diesel brings the present suit to vitiate Defendants'

unlawful and anticompetitive conduct.

THE PARTIES

6. Lavoho is an LLC organized and existing under the laws ofVirginia, having a

principal place of business in Richmond, Virginia. It is the successor in interest to Diesel

eBooks LLC, which is also an LLC organized and existing under the laws ofVirginia and also

had its principal place of business in Richmond, Virginia.

7. Apple Inc. has its principal place of business at 1 Infinite Loop, Cupertino, CA

95014. Among many other businesses, Apple, Inc. distributes e-books through its iBookstore.

8. Hachette Book Group, Inc. has its principal place of business at 237 Park Avenue,

New York, NY 10022. It publishes e-books and print books through publishers such as Little,

Brown, and Company and Grand Central Publishing.

9. HarperCollins Publishers L.L.C. has its principal place of business at 10 E. 53

Street, New York, NY 10022. It publishes e-books and print books through publishers such as

Harper and William Morrow.

10. Holtzbrinck Publishers, LLC d/b/a/ Macmillan has its principal place of business

at 175 Fifth Avenue, New York, NY 10010. It publishes e-books and print books through

publishers such as Farrar, Straus and Giroux and St. Martin's Press. Verlagsgruppe Georg von

Holtzbrinck GmbH owns Holtzbrinck Publishers, LLC d/b/a/ Macmillan and has its principal

place of business at GansheidestraBe 26, Stuttgart 70184, Germany.

11. Penguin Group (USA), Inc. has its principal place of business at 375 Hudson

Street, New York, NY 10014. It publishes e-books and print books through publishers such as

The Viking Press and Gotham Books. Penguin Group (USA), Inc. is the United States affiliate

of The Penguin Group, a division ofPearson pic, which has its principal place of business at 80

Strand, London WC2R 0RL, United Kingdom.

12. Simon & Schuster, Inc. has its principal place of business at 1230 Avenue of the

Americas, New York, NY 10020. It publishes e-books and print books through publishers such

as Free Press and Touchstone.

JURISDICTION AND VENUE

13. This Court has subject matter jurisdiction over this action under Section 4 of the

Sherman Act, 15 U.S.C. 4 and 28 U.S.C. 1331, 1337(a), and 1345.

14. This Court has personal jurisdiction over each Defendant, and venue is proper in

the Southern District ofNew York under Section 12 of the Clayton Act, 15 U.S.C. 22 and 28

U.S.C. 1391, because each Defendant transacts business and is found within the Southern

Districtof New York. The U.S. componentofeach PublisherDefendant is headquartered in the

Southern District ofNew York, and acts in furtherance of the conspiracy occurred in this

District. Many thousands of the Publisher Defendants' e-books are and have been sold in this

District, including through Defendant Apple's iBookstore.

INTERSTATE COMMERCE

15. Defendants are engaged in, and their activities substantially affect, interstate trade

and commerce. The Publisher Defendants sell e-books throughout the United States, and these

sales represent a substantial amount of interstate commerce. Forexample, in 2010, U.S.

consumers paidmore than$300 million for the Publisher Defendants' e-books. This amount

includes more than $40 million for e-books licensed through Defendant Apple's iBookstore.

UNNAMED CO-CONSPIRATORS

16. Various persons, who are knownand unknown to Diesel,and not namedas

defendants in this action, includingsenior executivesof the PublisherDefendantsand Apple,

have participated as co-conspirators withDefendants in the offense alleged and haveperformed

acts and made statements in furtherance of the conspiracy.

FACTUAL ALLEGATIONS

I. THE CONSPIRACY AS PROVEN BY THE U.S. GOVERNMENT AGAINSTAPPLE

17. The following is taken from the U.S. Departmentof Justice's Complaint filed on

April 11,2012 in this Court. The Publisher Defendants settledwith the DOJ prior to trial. The

DOJ prevailed in a bench trial against Apple before the HonorableJudge Cote. Judge Cote

issued the Court's detailed Opinion and Order on July 10, 2013 and entered its Judgment on

September5, 2013. The restraint alleged by Diesel is identical in virtually all respects to the one

proven by the DOJ.

A. The Publishing Industry

1. Print Books

18. Authors submit books to publishers in manuscript form. Publishers edit

manuscripts, print and bind books, provide advertising and related marketing services, decide

when a book should be released for sale, anddistribute books to wholesalers and retailers.

Publishers also determine the cover price or"list price" ofa book, and typically that price

appears on the book's cover.

19. Retailers purchase print books directly from publishers, orthrough wholesale

distributors, and resell them toconsumers. Retailers typically purchase print books under the

"wholesale model." Under thatmodel, retailers paypublishers approximately one-halfof the list

price ofbooks, take ownership ofthe books, then resell them to consumers atprices ofthe

retailer's choice. Publishers have sold print books to retailers through the wholesale model for

over 100years and continueto do so today.

2. E-books

20. E-books are published inelectronic formats. E-book publishers avoid some ofthe

expenses incurred inproducing and distributing print books, including most manufacturing

expenses, warehousing expenses, distribution expenses, and costs ofdealing with unsold stock.

21. Consumers purchase e-books through websites of e-book retailers or through

applications loaded onto their reading devices. Such electronic distribution allows e-book

retailers to avoid certain expenses they incurwhenthey sellprintbooks, including most

warehousing expenses and distribution expenses.

22. From its very small base in 2007 at the time of Amazon's Kindle launch, the e-

bookmarket has exploded, registering triple-digit sales growth eachyear. E-books now

constitute at least tenpercent of general interest fiction and non-fiction books (commonly knownas "trade" books1) sold in the United States and are widely predicted to reach at least 25 percentof U.S. trade book sales within two to three years.

1Non-trade e-books include electronicversions of children's picture books and academictextbooks, reference materials, and other specializedtexts that typically are publishedby separate

3. Publisher Defendants and "The $9.99 Problem"

23. The Publisher Defendants compete against each other for sales of trade e-books to

consumers. Publishers bid against one another for print- and electronic-publishing rights to

content that they expect will be most successful in the market. They also compete against each

other in bringing those books to market. For example, in addition to price-setting, they create

cover art and other on-book sales inducements, and also engage in advertising campaigns for

some titles.

24. The Publisher Defendants are five of the six largest publishers of trade books in

the United States. They publish a vast majority of their newly released titles as both print books

and e-books. Publisher Defendants compete against each other in the sales of both trade print

books and trade e-books.

25. When Amazon launched its Kindle device, it offered newly released and

bestselling e-books to consumers for $9.99. At that time, the Publisher Defendants routinely

wholesaled those e-books for about that same price, which typically was less than the wholesale

price of the hardcover versions of the same titles, reflecting publisher cost saving associated with

the electronic format. From the time of its launch, Amazon's e-book distribution business has

been consistently profitable, even when substantially discounting some newly released and

bestselling titles.

26. To compete with Amazon, other e-book retailers often matched or approached

Amazon's $9.99-or-less prices for e-book versions of new releases and New York Times

bestsellers. As a result of that competition, consumers benefited from Amazon's $9.99-or-less e-

book prices even if they purchased e-books from competing e-book retailers.

imprints from trade books, often sold through separate channels, and are not reasonablysubstitutable for trade e-books.

27. The Publisher Defendants feared that $9.99 would become the standard price for

newly released and bestsellinge-books. For example,one Publisher Defendant's CEO

bemoaned the "wretched $9.99 price point" and Penguin USA CEO David Shanks worried that

e-book pricing "can't be $9.99 for hardcovers."

28. The Publisher Defendants believed the low prices for newly released and

bestselling e-books were disrupting the industry. The Amazon-led $9.99 retail price point for the

most popular e-books troubled the PublisherDefendantsbecause, at $9.99, most of these e-book

titles were priced substantially lower than hardcoverversions of the same title. The Publisher

Defendants were concerned these lower e-book prices would lead to the "deflation" of hardcover

book prices, with accompanying declining revenues for publishers. The Publisher Defendants

also worried that if $9.99 solidified as the consumers' expected retail price for e-books, Amazon

and other retailers would demand that publishers lower their wholesale prices, further

compressing publisher profit margins.

29. The Publisher Defendants also feared that the $9.99 price point would make e-

books so popular that digital publishers could achieve sufficient scale to challenge the major

incumbent publishers' basic business model. The Publisher Defendants were especially

concerned that Amazon was well positioned to enter the digital publishing business and thereby

supplant publishers as intermediaries between authors and consumers. Amazon had, in fact,

taken steps to do so, contracting directly with authors to publish their works as e-booksat a

higher royalty rate than the Publisher Defendants offered. Amazon's move threatened the

Publisher Defendants' traditional positions as the gate-keepers of the publishing world. The

Publisher Defendants also feared that other competitive advantages they held as a result ofyears

of investments in their print book businesseswould erode and, eventually,become irrelevant, as

e-book sales continued to grow.

4. Publisher Defendants Recognize They Cannot Solve "The $9.99Problem" Alone

30. Each Publisher Defendant knew that, acting alone, it could not compel Amazon to

raise e-book prices and that it was not in its economic self-interest to attempt unilaterally to raise

retail e-book prices. Each Publisher Defendant relied on Amazon to market and distribute its e-

books, and each Publisher Defendant believed Amazon would leverage its position as a large

retailer to preserve its ability to compete and would resist any individual publisher's attempt to

raise the prices at which Amazon sold that publisher's e-books. As one Publisher Defendant

executive acknowledged Amazon's bargaining strength, "we've always known that unless other

publishers follow us, there's no chance of success in getting Amazon to change its pricing

practices." In the same email, the executive wrote, "without a critical mass behind us Amazon

won't 'negotiate,' so we need to be more confident ofhow our fellow publishers will react...."

31. Each Publisher Defendant also recognized that it would lose sales if retail prices

increased for only its e-books, while the other Publisher Defendants' e-books remained

competitively priced. In addition, higher prices for just one publisher's e-books would not

change consumer perceptions enough to slow the erosion of consumer-perceived value of books

that all the Publisher Defendants feared would result from Amazon's $9.99 pricing policy.

B. Defendants' Unlawful Activities

32. Beginning no later than September 2008, the Publisher Defendants' senior

executives engaged in a series of meetings, telephone conversations and other communications

in which they jointly acknowledged to each other the threat posed by Amazon's pricing strategy

and the need to work collectively to end that strategy. By the end of the summer of 2009, the

PublisherDefendants had agreed to act collectively to force up Amazon's retail prices and

thereafter considered and implemented various meansto accomplish that goal, including moving

under the guise of a joint venture. Ultimately, in late 2009, Apple and the Publisher Defendantssettledon the strategy that workedreplacing the wholesalemodel with an agency model that

gave the Publisher Defendants the power to raise retail e-book prices themselves.

33. The evidence showing conspiracy is substantial and includes:

Practices facilitating a horizontal conspiracy. The Publisher Defendantsregularly communicated with each other in private mails to each other toexchange conversations, both in person and on the telephone, and in e-mails to each other to exchange sensitive information and assurance ofsolidarity to advance the ends of this conspiracy

Direct evidence of a conspiracy. The Publisher Defendants directlydiscussed, agreed to, and encouraged each other to collective action toforce Amazon to raise its retail e-book prices.

Recognition of illicit nature of communications. Publisher Defendantstook steps to conceal their communications with one another, includinginstructions to "double delete" e-mail and taking other measures to avoidleaving a paper trail.

Acts contrary to economic interests. It would have been contrary to theeconomic interests of any Publisher Defendant acting alone to attempt toimpose agency on all of its retailers and then raise its retail e-book prices.For example, Penguin Group CEO John Makinson reported to his parentcompany board ofdirectors that "the industry needs to develop a commonstrategy" to address the threat "from digital companies whose objectivemay be to disintermediate traditional publishers altogether" because it"will not be possible for any individual publisher to mount an effectiveresponse," and Penguin later admitted that it would have beeneconomically disadvantaged if it "was the only publisher dealing withApple under the new business model."

Motive to enter the conspiracy, including knowledge or assurances thatcompetitors also will enter. The Publisher Defendants were motivated bya desire to maintain both the perceived value of their books and their ownposition in the industry. They received assurances from both each otherand Apple that they all would move together to raise retail e-book prices.Apple was motivated to ensure that it would not face competition fromAmazon's low-price retail strategy.

10

Abrupt, contemporaneous shift from past behavior. Prior to January 23,2010, all Publisher Defendants sold their e-books under the traditionalwholesale model; by January 25, 2010, all Publisher Defendants hadirrevocably committed to transition all of their retailers to the agencymodel (and Apple had committed to sell e-books on a model inconsistentwith the way it sells the vast bulk of the digitalmedia it offers in its iTunesstore). On April 3, 2010, as soon as the Apple Agency Agreementssimultaneously became effective, all Publisher Defendants immediatelyused their new retail pricing authority to raise the retail prices of theirnewly released and bestselling e-books to the commonostensiblemaximum prices contained in their Apple Agency Agreements.

1. The Publisher Defendants Recognize a Common Threat

34. Startingno later than Septemberof2008 and continuingfor at least one year, the

Publisher Defendants' CEOs (at times joined by one non-defendant publisher's CEO) met

privately as a group approximately once per quarter. These meetings tookplace in private dining

rooms ofupscale Manhattan restaurants and were used to discuss confidential business and

competitive matters, including Amazon's e-bookretailing practices. No legal counsel was

present at any of these meetings.

35. In September 2008, Penguin Group CEO John Makinson was joined by

Macmillan CEO John Sargent and the CEOs of the other four large publishers at a dinner

meeting in "The Chefs Wine Cellar," a private room at Picholene. One of the CEOs reported

that business matters were discussed.

36. In January 2009, the CEO of one Publisher Defendant, a United States subsidiary

of a European corporation, promised his corporate superior, the CEO of the parent company, that

he would raise the future of e-books and Amazon's potential role in that future at an upcoming

meeting or publisher CEOs. Later that month, at a dinner meeting hosted by Penguin Group

CEO John Makinson, again in "The Chefs Wine Cellar" at Picholene, the same group of

publisher CEOs met once more.

11

37. On or about June 16,2009, Mr. Makinson again met privately with other

PublisherDefendantCEOs and discussed, inter alia, the growth of e-books and Amazon's role in

that growth

38. On or aboutSeptember 10, 2009, Mr. Makinson onceagainmet privately with

other Publisher Defendant CEOs and the CEO of one non-defendant publisher in a private room

of a differentManhattanrestaurant, Alto. They discussed the growth of e-books and complained

about Amazon's role in that growth.

39. In addition to the CEO dinner meetings, Publisher Defendants' CEOs and other

executives met in-person, one-on-one to communicate aboute-books multiple times overthe

course of 2009 and into 2010. Similar meetings took place in Europe, including meetings in the

fall of 2009 between executives of Macmillan parent company Verlagsgruppe Georg von

Holtzbrinck GmbH and executives of another Publisher Defendant's parent company.

MacmillanCEO John Sargentjoined at least one of these parent companymeetings40. These private meetings provided the PublisherDefendants' CEOs the opportunity

to discuss how they collectively could solve "the $9.99 problem."

2. Publisher Defendants Conspire to Raise E-book Prices Under theGuise of Joint Venture Discussions

41. While each Publisher Defendant recognized that it could not solve "the $9.99

problem" by itself, collectively the Publisher Defendants accounted for nearly half of Amazon's

e-book revenues, and by refusing to compete with one another for Amazon's business, the

Publisher Defendants could force Amazon to accept the Publisher Defendants' new contract

terms and to change its pricing practices.

42. The Publisher Defendants thus conspired to act collectively, initially in the guise

ofjoint ventures. These ostensible joint ventures were not meant to enhance competition by

12

bringing to market products or services that the publishers could not offer unilaterally, but rather

were designed as anticompetitive measures to raise prices.

43. All five Publisher Defendants agreed in 2009 at the latest to act collectively to

raise retail prices for the most popular e-books above $9.99. One CEO of a Publisher

Defendant's parent company explained to his corporate superior in a July 29, 2009 e-mail

message that "[i]n the USA and the UK, but also in Spain and France to a lesser degree, the 'top

publishers' are in discussions to create an alternative platform to Amazon for e-books. The goal

is less to compete with Amazon as to force it to accept a price level higher than 9.99.... I am in

NY this week to promote these ideas and the movement is positive with [the other four Publisher

Defendants]." (Translated from French).

44. Less than a week later, in an August 4, 2009 strategy memo for the board of

directors of Penguin's ultimate parent company, Penguin Group CEO John Makinson conveyed

the same message:

Competition for the attention of readers will be most intense fromdigital companies whose objective may be to disintermediatetraditional publishers altogether. This is not a new threat but wedo appear to be on a collision course with Amazon, and possiblyGoogle as well. It will not be possible for any individual publisherto mount an effective response, because of both the resourcesnecessary and the risk of retribution, so the industry needs todevelop a common strategy. This is the context for thedevelopment of the Project Z initiatives [joint ventures] in Londonand New York.

3. Defendants Agree To Increase and Stabilize Retail E-book Prices byCollectively Adopting an Agency Model

45. To raise e-book prices, the Publisher Defendants also began to consider in late

2009 selling e-books under an "agency model" that would take away Amazon's ability to set low

retail prices. As one CEO of a Publisher Defendant's parent company explained in a

December 6, 2009 e-mail message, "[o]ur goal is to force Amazon to return to acceptable sales

13

prices through theestablishment of agency contracts in the USA.... To succeed ourcolleagues

must know that we entered the fray and follow us." (Translated from French).

46. Apple's entry into the e-book business provided a perfect opportunity for

collective action to implement the agency model and use it to raise retail e-book prices. Apple

initially contemplated selling e-books throughthe existing wholesale model, whichwas similar

to the manner in which Apple sold the vast majority of the digital media it offered in its iTunes

store. On February 19, 2009, Apple Vice President of Internet Services Eddy Cue explained to

Apple CEO Steve Jobs in an e-mail, "[a]t this point, it would be very easy for us to competeand

I think trounce Amazon by opening up our own ebook store." In addition to considering

competitive entry at that time, though, Apple also contemplated illegally dividing the digital

content world with Amazon, allowing each to "own the category" of its choiceaudio/video to

Apple and e-books to Amazon.

47. Apple soon concluded, though, that competition from other retailersespecially

Amazonwould prevent Apple from earning its desired 30 percent margins on e-book sales.

Ultimately, Apple, together with the Publisher Defendants, set in motion a plan that would

compel all non-Apple e-book retailers also to sign onto agency or else, as Apple's CEO put it,

the Publisher Defendants all would say, "we're not going to give you the books."

48. The executive in charge of Apple's inchoate e-books business, Eddy Cue,

telephoned each Publisher Defendant and Random House on or around December 8, 2009 to

schedule exploratory meetings in New York City on December 15 and December 16. Hachette

and HarperCollins took the lead in working with Apple to capitalize on this golden opportunity

for the Publisher Defendants to achieve their goal of raising and stabilizing retail e-book prices

above $9.99 by collectively imposing the agency model on the industry.

14

49. It appears that Hachette and HarperCollins communicated with each other about

moving to an agency model during the brief window between Mr. Cue's first telephone calls to

the Publisher Defendants and his visit to meet with their CEOs. On the morning of

December 10, 2009, a HarperCollins executive added to his calendar an appointment to call a

Hachette executive at 10:50 AM. At 11:01 AM, the Hachette executive returned the phone call,

and the two spoke for six minutes. Then, less than a week later in New York, both Hachette and

HarperCollins executives told Mr. Cue in their initial meetings with him that they wanted to sell

e-books under an agency model, a dramatic departure from the way books had been sold for over

a century.

50. The other Publisher Defendants also made clear to Apple that they "certainly" did

not want to continue "the existing way that they were doing business," i.e., with Amazon

promoting their most popular e-books for $9.99 under a wholesale model.

51. Apple saw a way to turn the agency scheme into a highly profitable model for

itself. Apple determined to give the Publisher Defendants what they wanted while shielding

itself from retail price competition and realizing margins far in excess of what e-book retailers

then averaged on each newly released or bestselling e-book sold. Apple realized that, as a result

of the scheme, "the customer" would "pay[] a little more."

52. On December 16,2009, the day after both companies' initial meetings with

Apple, Penguin Group CEO John Makinson had a breakfast meeting at a London hotel with the

CEO of another Publisher Defendant's parent company. Consistent with the Publisher

Defendants' other efforts to conceal their activities, Mr. Makinson's breakfast companion wrote

to his U.S. subordinate that he would recount portions of his discussion with Mr. Makinson only

by telephone.

15

53. By the time Apple arrived for a second round of meetings during the week of

December 21, 2009, the agency model had become the focus of its discussions with all of the

Publisher Defendants. In these discussions, Apple proposed that the Publisher Defendants

require all retailers of their e-books to accept the agency model. Apple thereby sought to ensure

that it would not have to compete on retail prices. The proposal appealed to the Publisher

Defendants because wresting pricing control from Amazon and other e-book retailers would

advance their collusive plan to raise retail e-book prices.

54. The Publisher Defendants acknowledged to Apple their common objective to end

Amazon's $9.99 pricing. As Mr. Cue reported in an e-mail message to Apple's CEO Steve Jobs,

the three publishers with whom he had met saw the "plus" of Apple's position as "solv[ing the]

Amazon problem." The "negative" was that Apple's proposed retail pricestopping out at

$12.99 for newly released and bestselling e-bookswere a "little less than [the publishers]

would like." Likewise, Mr. Jobs later informed an executive of one of the Publisher Defendant's

corporate parents that "[a]ll major publishers" had told Apple that "Amazon's $9.99 price for

new releases is eroding the value perception of their products in customer's minds, and they do

not want this practice to continue for new releases."

55. As perhaps the only company that could facilitate their goal of raising retail e-

book prices across the industry, Apple knew that it had significant leverage in negotiations with

Publisher Defendants. Apple exercised this leverage to demand a thirty percent commissiona

margin significantly above the prevailing competitive margins for e-book retailers. The

Publisher Defendants worried that the combination ofpaying Apple a higher commission than

they would have liked and pricing their e-books lower than they wanted might be too much to

bear in exchange for Apple's facilitation of their agreement to raise retail e-book prices.

16

Ultimately, though, they convincedApple to allow them to raise prices high enough to make the

deal palatable to them.

56. As it negotiated with the Publishers Defendants in December 2009 and January

2010, Apple kept each Publisher Defendant informed of the status of its negotiations with the

other Publisher Defendants. Apple also assured the Publisher Defendants that its proposals were

the same to each and that no deal Apple agreed to with one publisher would be materially

different from any deal it agreed to with another publisher. Apple thus knowingly served as a

critical conspiracy participant by allowing the Publisher Defendants to signal to one another both

(a) which agency terms would comprise an acceptable means of achieving their ultimate goal of

raising and stabilizing retail e-book prices, and (b) that they could lock themselves into this

particular means of collectively achieving that goal by all signing their Apple Agency

Agreement.

57. Apple's Mr. Cue e-mailed each Publisher Defendant between January 4, 2010,

and January 6, 2010 an outline of what he tabbed "the best approach for e-books." He reassured

Penguin USA CEO David Shanks and other Publisher Defendant CEOs that Apple adopted the

approach "[a]fter talking to all the other publishers." Mr. Cue sent substantively identical e-mail

messages and proposals to each Publisher Defendant.

58. The outlined proposal that Apple circulated after consulting with each Publisher

Defendant contained several key features. First, as Hachette and HarperCollins had initially

suggested to Apple, the publisher would be the principal and Apple would be the agent for e-

book sales. Consumer pricing authority would be transferred from retailers to publishers.

Second, Apple's proposal mandated that every other retailer of each publisher's e-books

Apple's direct competitorsbe forced to accept the agency model as well. As Mr. Cue wrote,

17

"all resellers ofnew titles need to be in agency model." Third, Apple would receive a 30 percent

commission for each e-book sale. And fourth, each Publisher Defendant would have identical

pricing tiers for e-books sold through Apple's iBookstore.

59. On January 11,2010, Apple e-mailed its proposed e-book distribution agreement

to all Publisher Defendants. As with the outlined proposals Apple sent earlier in January, the

proposed e-book distribution agreements were substantially the same. Also on January 11,2010,

Apple separately e-mailed to Penguin and two other Publisher Defendants charts showing how

the Publisher Defendant's bestselling e-books would be priced at $12.99the ostensibly

maximum price under Apple's then-current price tier proposalin the iBookstore.

60. The proposed e-book distribution agreement mainly incorporated the principles

Apple set out in its e-mail messages of January 4 through January 6, with two notable changes.

First, Apple demanded that the Publisher Defendants provide Apple their complete e-book

catalogs and that they not delay the electronic release of any title behind its print release.

Second, and more important, Apple replaced the express requirement that each publisher adopt

the agency model with each of its retailers with an unusual most favored nation ("MFN") pricing

provision. That provision was not structured like a standard MFN in favor of a retailer, ensuring

Apple that it would receive the best available wholesale price. Nor did the MFN ensure Apple

the Publisher Defendants would not set a higher retail price on the iBookstore than they set on

other websites where they controlled retail prices. Instead, the MFN here required each

publisher to guarantee that it would lower the retail price of each e-book in Apple's iBookstore

to match the lowest price offered by any other retailer, even if the Publisher Defendant did not

control that other retailer's ultimate consumer price. That is, instead of an MFN designed to

18

protect Apple's ability to compete, this MFN was designed to protect Apple from having to

compete on price at all, while still maintaining Apple's 30 percent margin.

61. The purpose of these provisions was to work in concert to enforce the

Defendants' agreement to raise and stabilize retail e-book prices. Apple and the Publisher

Defendants recognized that coupling Apple's right to all of their e-books with its right to demand

that those e-books not be priced higher on the iBookstore than on any other website effectively

required that each Publisher Defendant take away retail pricing control from all other e-book

retailers, including stripping them of any ability to discount or otherwise price promote e-books

out of the retailer's own margins. Otherwise, the retail price MFN would cause Apple's

iBookstore prices to drop to match the best available retail price of each e-book, and the

Publisher Defendants would receive only 70 percent of those reduced retail prices. Price

competition by other retailers, if allowed to continue, thus likely would reduce e-book revenues

to levels the Publisher Defendants could not control or predict.

62. In negotiating the retail price MFN with Apple, "some of [the Publisher

Defendants]" asserted that Apple did not need the provision "because they would be moving to

an agency model with [the other e-book retailers,]" regardless. Ultimately, though, all

Defendants agreed to include the MFN commitment mechanism.

63. On January 16, 2010, Apple, via Mr. Cue, offered revised terms to the Publisher

Defendants that again were identical in substance. Apple modified its earlier proposal in two

significant ways. First, in response to publisher requests, it added new maximum pricing tiers

that increased permissible e-book prices to $16.99 or $19.99, depending on the books' hardcover

list price. Second, Apple's new proposal mitigated these price increases somewhat by adding

special pricing tiers for e-book versions of books on the New York Times fiction and non-fiction

19

bestseller lists. For e-book versions of bestsellers bearing list prices of $30 or less, Publisher

Defendants could set a price up to $12.99; for bestsellers bearing list prices between$30 and

$35, the e-book price cap would be $14.99. In conjunctionwith the revised proposal,Mr. Cue

set up meetings for the next week to finalize agreements with the PublisherDefendants.

64. Each Publisher Defendant required assurances that it would not be the only

publisherto sign an agreementwith Apple that would compel it either to take pricing authority

from Amazon or to pull its e-books from Amazon. The Publisher Defendants continued to fear

that Amazon would act to protect its ability to price e-books at $9.99 or less if any one of them

acted alone. Individual Publisher Defendants also feared punishment in the marketplace if only

its e-books suddenly became more expensive at retail while other publishers continued to allow

retailers to compete on price. As Mr. Cue noted, "all of them were very concerned about being

the only ones to sign a deal with us." Penguin explicitly communicated to Apple that it would

sign an e-book distribution agreement with Apple only if at least three of the other "major[]"

publishers did as well. Apple supplied the needed assurances.

65. While the Publisher Defendants were discussing e-book distribution terms with

Apple during the week of January 18, 2010, Amazon met in New York City with a number of

prominent authors and agents to unveil a new program under which copyright holders could take

their e-books directly to Amazoncutting out the publisherand Amazon would pay royalties

of up to 70 percent, far in excess of what publishers offered. This announcement further

highlighted the direct competitive threat Amazon posed to the Publisher Defendants' business

model. The Publisher Defendants reacted immediately. For example, Penguin USA CEO David

reported being "really angry" after hav[ing] read [Amazon's] announcement." After thinking

about it for a day, Mr. Shanks concluded, "[o]n Apple I am now more convinced that we need a

20

viable alternative to Amazon or this nonsense will continue and get much worse." Another

decisionmaker stated he was "p****d" at Amazon for starting to compete directly against the

publishers and expressed his desire "to screw Amazon."

66. To persuade one of the Publisher Defendants to stay with the others and sign an

agreement, Apple CEO Steve Jobs wrote to an executive of the Publisher Defendant's corporate

parent that the publisher had only two choices apart from signing the Apple Agency Agreement:

(i) accept the status quo ("Keep going with Amazon at $9.99"); or (ii) continue with a losing

policy of delaying the release of electronic versions of new titles ("Hold back your books from

Amazon"). According to Jobs, the Apple deal offered the Publisher Defendants a superior

alternative path to the higher retail e-book prices they sought: "Throw in with Apple and see if

we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99."

67. In addition to passing information through Apple and during their private dinners

and other in-person meetings, the Publisher Defendants frequently communicated by telephone

to exchange assurances of common action in attempting to raise the retail price of e-books.

These telephone communications increased significantly during the two-month period in which

the Publisher Defendants considered and entered the Apple Agency Agreements. During

December 2009 and January 2010, the Publisher Defendants' U.S. CEOs placed at least 56

phone calls to one another. Each CEO, including Penguin's Shanks and Macmillan's Sargent,

placed at least seven such phone calls.

68. The timing, frequency, duration, and content of the Publisher Defendant CEOs'

phone calls demonstrate that the Publisher Defendants used them to seek and exchange

assurances of common strategies and business plans regarding the Apple Agency Agreements.

For example, in addition to the telephone calls already described in this complaint:

21

Near the time Apple first presented the agency model, one PublisherDefendant's CEO used a telephone callostensibly made to discuss amarketing joint ventureto tell Penguin USA CEO David Shanks that"everyone is in the same place with Apple."

After receiving Apple's January 16, 2010 revised proposal, executives ofseveral Publisher Defendants responded to the revised proposal andmeetings by, again, seeking and exchanging confidential information. Forexample, on Sunday, January 17, one Publisher Defendant's CEO used hismobile phone to call another Publisher Defendant's CEO and talk forapproximately ten minutes. And on the morning of January 19, PenguinUSA CEO David Shanks had an extended telephone conversation with theCEO of another Publisher Defendant.

On January 21, 2010, the CEO of one Publisher Defendant's parentcompany instructed his U.S. subordinate via e-mail to find out Apple'sprogress in agency negotiations with other publishers. Four minutes afterthat e-mail was sent, the U.S. executive called another PublisherDefendant's CEO, and the two spoke for over eleven minutes.

On January 22, 2010, at 9:30 a.m., Apple's Cue met with one PublisherDefendant's CEO to make what Cue hoped would be a "final go/no-godecision" about whether the Publisher Defendant would sign an agreementwith Apple. Less than an hour later, the Publisher Defendant's CEO madephone calls, two minutes apart, to two other Publisher Defendants' CEOs,including Macmillan's Sargent. The CEO who placed the calls admittedunder oath to placing them specifically to learn if the other two PublisherDefendants would sign with Apple prior to Apple's iPad launch.

On the evening of Saturday, January 23, 2010, Apple's Cue e-mailed hisboss, Steve Jobs, and noted that Penguin USA David Shanks "want[ed] anassurance that he is 1 of 4 before signing." The following Mondaymorning, at 9:46 a.m., Mr. Shanks called another Publisher Defendant'sCEO and the two talked for approximately four minutes. Both Penguinand the other Publisher Defendant signed their Apple Agency Agreementslater that day.

69. On January 24, 2010, Hachette signed an e-book distribution agreement with

Apple. Over the next two days, Simon & Schuster, Macmillan, Penguin, and HarperCollins all

followed suit and signed e-book distribution agreements with Apple. Within these three days,

the Publisher Defendants agreed with Apple to abandon the longstanding wholesale model for

22

selling e-books. The Apple Agency Agreements took effect simultaneously onApril 3, 2010

with the release of Apple's new iPad.

70. The final versionof the pricingtiers in the Apple Agency Agreements contained

the $12.99 and $14.99 pricepoints for bestsellers, discussed earlier, and also established prices

for all othernewly released titlesbasedon the hardcover list priceof the same title. Although

couched as maximum retail prices, the price tiers in fact established the retail e-bookprices to be

charged by Publisher Defendants.

71. By entering the AppleAgency Agreements, each PublisherDefendant effectively

agreed to require all of their e-bookretailers to accept the agency model. Both Appleand the

Publisher Defendants understood the Agreements would compel the Publisher Defendants to

take pricing authority from all non-Apple e-bookretailers. A February 10,2010 presentation by

one PublisherDefendant applaudedthis result (emphasis in original): "The Apple agency model

deal means that we will have to shift to an agency model with Amazon which [will]

strengthen our control over pricing."

72. Apple understood that the final Apple Agency Agreements ensured that the

Publisher Defendants would raise their retail e-book prices to the ostensible limits set by the

Apple price tiers not only in Apple's forthcoming iBookstore, but on Amazon.comand all other

consumer sites as well. When asked by a Wall StreetJournal reporter at the January 27, 2010

iPad unveiling event, "Why should she buy a book for ... $14.99 from your device when she

could buy one for $9.99 from Amazon on the Kindle or from Barnes & Noble on the Nook?"

Apple CEO Steve Jobs responded, "that won't be the case .... the prices will be the same."

73. Apple understood that the retail price MFN was the key commitment mechanism

to keep the Publisher Defendants advancing their conspiracy in lockstep. Regarding the effect of

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the MFN, Apple executive Pete Alcorn remarked in the context of the European roll-out of the

agency model in the spring of 2010:

I told [Apple executive Keith Moerer] that I think he and Eddy[Cue] made it at least halfway to changing the industrypermanently, and we should keep the pads on and keep fighting forit. I might regret that later, but right now I feel like it's a giant winto keep pushing the MFN and forcing people off the [A]mazonmodel and onto ours. If anything, the place to give is the pricing -long run, the mfn is more important. The interesting insight in themeeting was Eddy's explanation that it doesn't have to be thatbroad - any decent MFN forces the model

74. Within the four months following the signing of the Apple Agency Agreements,

and over Amazon's objection, each Publisher Defendant had transformed its business

relationship with all of the major e-book retailers from a wholesale model to an agency model

and imposed flat prohibition against e-book discounting or other price competition on all non-

Apple e-book retailers.

75. For example, after it signed its Apple Agency Agreement, Macmillan presented

Amazon a choice: adopt the agency model or lose the ability to sell e-book versions of new

hardcover titles for the first seven months of their release. Amazon rejected Macmillan's

ultimatum and sought to preserve its ability to sell e-book versions of newly released hardcover

titles for $9.99. To resist Macmillan's efforts to force it to accept either the agency model or

delayed electronic availability, Amazon effectively stopped selling Macmillan's print books and

e-books.

76. When Amazon stopped selling Macmillan titles, other Publisher Defendants did

not view the situation as an opportunity to gain market share from a weakened competitor.

Instead, they rallied to support Macmillan. For example, the CEO of one Publisher Defendant's

parent company instructed the Publisher Defendant's CEO that "[Macmillan CEO] John Sargent

needs our help!" The parent company CEO explained, "M[acm]illan have been brave, but they

24

are small. We need to move the lines. And I am thrilled to know how A[mazon] will react

against 3 or 4 of the big guys."

77. The CEO ofone Publisher Defendant's parent company assured Macmillan CEO

John Sargent ofhis company's support in a January 31, 2010 email: "I can ensure you that you

are not going to find your company alone in the battle." The same parent company CEO also

assured the head of Macmillan's corporate parent in a February 1 email that "others will enter the

battle field!" Overall, Macmillan received "hugely supportive" correspondence from the

publishing industry during Macmillan's effort to force Amazon to accept the agency model.

78. As its battle with Amazon continued, Macmillan knew that, because the other

Publisher Defendant, via the Apple Agency Agreements, had locked themselves into forcing

agency on Amazon to advance their conspiratorial goals, Amazon soon would face similar edicts

from a united front of Publisher Defendants. And Amazon could not delist the books of all five

Publisher Defendants because they together accounted for nearly half of Amazon's e-book

business. Macmillan CEO John Sargent explained the company's reasoning: "we believed

whatever was happening, whatever Amazon was doing here, they were going to face - they're

going to have more of the same in the future one way or another." Another Publisher Defendant

similarly recognized that Macmillan was not acting unilaterally but rather was "leading the

charge on moving Amazon to the agency model."

79. Amazon quickly came to fully appreciate that not just Macmillan but all five

Publisher Defendants had irrevocably committed themselves to the agency model across all

retailers, including taking control of retail pricing and thereby stripping away any opportunity for

e-book retailers to compete on price. Just two days after it stopped selling Macmillan titles,

25

Amazoncapitulatedand publicly announcedthat it had no choice but to accept the agency

model, and it soon resumed selling Macmillan's e-books and print book titles.

4. Defendants Further the Conspiracy by Pressuring Another PublisherTo Adopt the Agency Model

80. When a company takes a pro-competitive action by introducing a new product,

lowering its prices, or even adopting a new business model that helps it sell more product at

better prices, it typically does not want its competitors to copy its action, but prefers to maintain

a first-mover or competitive advantage. In contrast, when companies jointly take collusive

action, such as instituting a coordinated price increase, they typically want the rest of their

competitors to join them in that action. Because collusive actions are not pro-competitive or

consumer friendly, any competitor that does not go along with the conspirators can take more

consumer friendly actions and see its market share rise at the expense of the conspirators. Here,

the Defendants acted consistently with a collusive arrangement, and inconsistently with a pro-

competitive arrangement, as they sought to pressure another publisher (whose market share was

growing at the Publisher Defendants' expense after the Apple Agency Contracts became

effective) to join them.

81. Penguin appears to have taken the lead in these efforts. Its U.S. CEO, David

Shanks, twice directly told the executives of the holdout major publisher about his displeasure

with their decision to continue selling e-books on the wholesale model. Mr. Shanks tried to

justify the actions of the conspiracy as an effort to save brick-and-mortar bookstores and

criticized the other publishers for "not helping" the group. The executives of the other publishers

responded to Mr. Shanks's complaints by explaining their objections to the agency model.

82. Mr. Shanks also encouraged a large print book and e-book retailer to punish the

other publishers for not joining Defendants' conspiracy. In March 2010, Mr. Shanks sent an e-

26

mail message to an executive of the retailer complaining that the publisher "has chosen to stay on

their current model and will allow retailers to sell at whatever price they wish." Mr. Shanks

argued that "[s]ince Penguin is looking out for [your] welfare at what appears to be great costs to

us, I would hope that [you] would be equally brutal to Publishers who have thrown in with your

competition with obvious disdain for your welfare.... I hope you make [the publisher] hurt like

Amazon is doing to [the Publisher Defendants]."

83. When the third-party retailer continued to promote the non-defendant publisher's

books, Mr. Shanks applied more pressure. In a June 22, 2010 email to the retailer's CEO, Mr.

Shanks claimed to be "baffled" as to why the retailer would promote that publisher's books

instead ofjust those published by "people who stood up for you."

84. Throughout the summer of 2010, Apple also cajoled the holdout publisher to

adopt agency terms in line with those of the Publisher Defendants, including on a phone call

between Apple CEO Steve Jobs and the holdout publisher's CEO. Apple flatly refused to sell

the holdoutpublisher's e-books unless and until it agreed to an agency relationship substantially

similarto the arrangementbetween Apple and the Publisher Defendantsdefined by Apple

Agency Agreements.

5. Conspiracy Succeeds at Raising and Stabilizing Consumer E-bookPrices

85. The ostensible maximum prices included in the Apple Agency Agreements' price

schedule represent, in practice, actual e-book prices. Indeed, at the time the Publisher

Defendants snatched retail pricing authority away from Amazon and other e-book retailers, not

one of them had built an internal retail pricing apparatus sufficientto do anything other than set

retailpricesat the Apple Agency Agreements' ostensible caps. Once their agency agreements

took effect, the Publisher Defendants raised e-book prices at all retail outlets to the maximum

27

price level within each tier. Prior to the PublisherDefendants entering into settlement

agreements, for two years they continued setting e-book retail prices according to the Apple

price tiers and set the retail prices for the electronicversions of all or nearly all of their

bestselling hardcover titles at the ostensiblemaximumprice allowed by those price tiers.

86. The Publisher Defendants' collective adoptionof the Apple Agency Agreements

allowedthem (facilitatedby Apple) to raise, fix, and stabilize retail e-book prices in three steps:

(a) they took away retail pricing authority from retailers; (b) they then set retail e-book prices

according to the Apple price tiers; and (c) they then exported the agency model and higher retail

prices to the rest of the industry, in part to comply with the retail price MFN included in each

Apple Agency Agreement.

87. Defendants' conspiracyand agreementto raise and stabilize retail e-book prices

by collectively adopting the agency model and Apple price tiers led to an increase in the retail

prices ofnewly released and bestsellinge-books. Prior to the Defendants' conspiracy,

consumers benefittedfrom price competitionthat led to $9.99 prices for newly released and

bestselling e-books. Almost immediately after Apple launched its iBookstore in April 2010 and

the Publisher Defendants imposed agency model pricing on all retailers, the Publisher

Defendants' e-book prices for the most newly released and bestsellinge-books rose to either

$12.99 or $14.99.

88. Defendants' conspiracy and agreement to raise and stabilize retail e-bookprices

by collectively adopting the agency model and Appleprice tiers for their newly released and

bestselling e-books also led to an increase in average retail prices of the balanceof Publisher

Defendants' e-book catalogs, their so-called "backlists." Now that the Publisher Defendants

control the retailprices of e-booksbut Amazon maintains control of its print book retail

28

pricesPublisher Defendants' e-book prices sometimes are higher than Amazon's prices for

print versions of the same titles.

II. DIESEL IS CRIPPLED BY DEFENDANTS' PRICE-FIXING CONSPIRACY

A. Diesel's Business

89. The Diesel e-book store was founded in 2005 by Scott Redford. In founding

Diesel, Mr. Redford aimed to fill a perceived void in the e-book marketthat is, provide

consumers with a niche retailer to purchase e-books from. In 2005, the market for e-books was

still budding and was ripe for entry and expansion from new retail competitors. From early on,

Diesel cultivated relationships with the "Big Six" publishers and recruited key personnel with e-

book industry expertise that resided in the New York metro area where the publishers were

based.

90. While Diesel operated as a normal e-book storeoffering over 3 million titles in

its e-book storethe cornerstone of its business model was discounted bundling. Diesel

invested in and developed proprietary software that would allow its e-bookstore to "shrink wrap"

up to six digital e-books and sell them as a bundle to the consumer. Diesel would discount the

cost of each book sold in the bundle and would sometimes partially defer its profit from the

bundle by depositing reward points in customers' accounts. Books could be bundled according

to book series, theme, character, time period, or authoramong other things. Notably, unlike

bundles that were previously offered by publisherswhere content from multiple e-books was

aggregated and converted into one digital file for saleDiesel developed software technology

that would assemble multiple covers and book descriptions from different publishers into a

single presentation for the customer (essentially "shrink wrapping"). Customers could then add

this bundle to the cart with a single click, but the books would be downloaded as separate e-

books. Additionally, to facilitate consumer involvement in the process, Diesel encouraged

29

consumers to propose single- or multi-author bundles with customer-created bundle titles and

descriptions. If Diesel approved thebundle, it deposited $1.50 or $3.00 in rewards money in the

consumer'saccountand recognized the bundle's creatorby name and geography on the e-book

display page. Several of the most popular bundles came from consumer ideas. In addition to

increased revenue from bundle sales, Diesel's bundles introduced customers to newtitles they

mayotherwise not have considered. Even if customers did not purchase the bundle, they would

often navigate from the bundle page to purchase individual titles.

91. To encourage customer loyalty and repeat business, Diesel also offered a

desirable rewards program for its customers enabling themto collect and redeem points on future

e-book purchases. UnderDiesel's program, consumers received on average $.035 cents for

every $1.00 spenton over 100,000 titles and $.15 for every approved e-book review. When

coupled withits bundling discounts, Diesel'sprices were highly competitive; its e-book prices

werearoundor belowthe prevailing rate. Diesel's bundles provided intangible benefits to

consumers as wellnamely, introducing them to new authors.

92. Once it entered the market in 2005, Diesel enjoyed steady growth every singleyear. Within six months, Diesel posted modest profits, and revenue continued to increase.

Diesel offered over 3 million titles and had over 200,000 customers in its database. Given its

growth pattern for several years and increasing popularity with consumers, Diesel planned a

large expansion in2011. Diesel's business model, which was predicated onitsdiscounting,

bundling, and its rewards program, proved to be working because it was desirable and in

consumers' interest. Despite not having a dedicated e-reader, Diesel had apps for the iOS and

Android platforms, and in addition, consumers could read Diesel e-books on their Barnes &

Noble Nook, Kobo eReader, Sony eReader, Google Reader, andAdobe desktop software.

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93. In the months leading up to April 2010before agency was imposedin

exchange for an equity stake in Diesel, an interested software company proposed a multimillion

dollar investment into the construction of the industry's first ever social e-book reader, which

would have been Diesel branded. The software company began investing time and money into

design and planning for the venture. But when the Defendants forced the industry to change to

agency and Diesel's business model was decimated, Diesel's potential suitor quickly cancelled

its plans. Additionally, before agency, Diesel had begun constructing a self-publishing platform

known as "PubDesk" that would have enabled small publishers and authors to directly upload

their content to Diesel's e-book store.

94. In short, Diesel was formed and launched in the nascent period of the e-book

industry when competition was vibrant and businesses were not yet entrenched. Capitalizing on

these conditions, Diesel offered low prices and unique retail features that enabled it to

successfully capture significant business and grow steadily. If Defendants' conspiracy did not

turn the industry on its head, Diesel fully expected to continue growing by competing vigorously.

B. Defendants Force Agency Agreements On Diesel Precluding It FromCompeting In The Market

95. The Defendants had twin aims in carrying out the conspiracy: in addition to

raising the price for e-books, Apple and the Publisher Defendants hoped to destroy retail price

competition. As Judge Cote found, "Apple did not want to compete with Amazon (or any other

e-book retailer) on price." Apple, 952 F. Supp. 2d at 547. The Department of Justice proved that

the agreements "destroyed" competition by "removing the ability of retailers to set the prices of

their e-books and compete with each other on price" and "reliev[ing] Apple of the need to

compete on price," among other things. Id. at 694. Diesel's harm, described below, flows

directlyfrom the destructionof retail price competition, not from raised e-book prices.

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96. After the Defendants hatched their conspiracy, Diesel was required to remove all

of the Publisher Defendants' titles from its websites because it did not yet have an agency

agreement with them. Because Diesel had forged close relationships with the Publisher

Defendants, it signed agency agreements with Macmillan, HarperCollins, and Random House.

Before Diesel went out of business, it was in the process of negotiating with Hachette and

Penguin. Although Diesel did not want to agree to the agency agreements, it had virtually no

choice but to sign them or the Publisher Defendants would no longer permit Diesel to sell their e-

books; even Amazon, with its more considerable market power, could not sway the Publisher

Defendants. Even if Diesel could have somehow convinced one of the Publisher Defendants to

allow it to drop below the tiered prices that Defendants set, the series of MFN clauses would still

have insulated Apple from any price competition. Accordingly, just as Amazon was forced to

raise prices as a result of Defendants' price-fixing agreement, Diesel was forced to stop

discounting its prices, stop including any of the Publisher Defendants' titles in any bundle, and

stop allowing customers to earn rewards for agency e-books. If there was a single agency title in

a six-book bundle, the bundle had to be removed from Diesel's offerings. These forced changes

completely derailed Diesel's successful business.

97. Unlike Amazon or Barnes & Noble, Diesel did not have widespread international

brand recognition. The primary incentive to purchase an e-book from Diesel over Amazon,

Apple, or Barnes & Noble was Diesel's favorable pricing, bundling, and rewards program.

When Defendants eliminated Diesel's ability to offer consumers these perks, Diesel's ability to

compete was crippled. As the Department of Justice already proved, the effect ofDefendants'

conspiracy was to not only deprive consumers of favorable e-book pricing but to also preclude

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retailers from establishing a foothold in the market through competitionbased on price and

innovation.

98. Lastly, Diesel had developedand launched an app for users to read Diesel e-books

on iOS devices. Diesel envisioned vast cross-platform support for its e-books, where consumers

could read their e-books on an array of devices. But in an effort to eradicate retail competition

and price transparency, in 2011,Apple specifically modified its policyto prohibitother e-book

sellers from linking to their websites to allow consumers to purchase e-books. So ifan e-book

seller wanted to sell an e-book through its app, it had to pay Apple a 30 percent fee on top of

what it was already paying the Publisher. Of course, the practical effect of such a policy was to

make the iBookstore the only practical app to purchase books from (or send consumers through

hoops to get e-books through their computers, which they could then download and import).

Other nascent competitors, such as iFlow were foreclosed from selling as soon as Apple

implemented its new policy.

99. As a direct result of the conspiracy and Apple's effective prohibition of using the

iOS platform, Diesel's years of steady growth abruptly ceased and its revenue and profit both

plunged. Without an ability to compete based on price and innovative retail methodsupon

which it predicated its business modelDiesel has not recovered. Diesel presently does a

fraction of the business it once conducted before agency and is currently negotiating to sell its

assets for pennies on the dollar.

100. In sum, Defendants' industry-wide conspiracy forced Diesel in line with everyone

else. It became unable to compete by distinguishing itself through offering attractive prices,

bundling, rewards programs, or offering attractive cross-platform support. Without the ability to

distinguish itself in any meaningful way, Diesel had no chance of competing with several large

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international conglomerates offering the same items at the same prices that were prescribed by an

industry-wide conspiracy.

CLAIMS FOR RELIEF

COUNT ONE

(Against All Defendants for Violations of 15 U.S.C. 1)

101. Beginning no later than 2009, and continuing to at least late 2012 when a few of

the Publisher Defendants settled with the DOJ, Defendants and their co-conspirators have

combined and conspired to unreasonably restrain interstate trade and commerce, constituting a

violation of Section 1 of the Sherman Act, 15 U.S.C. 1.

102. Defendants conspired and agreed to raise, fix, and stabilize retail e-book prices in

order to end price competition among e-book retailers and to limit retail price competition among

the Publisher Defendants. Defendants accomplished this by collectively agreeing to adopt and

adhere to functionally identical methods of selling e-books and by setting price schedules.

103. In reaching their unlawful agreement in restraint of trade, some or all of the

Defendants:

a. Shared their business information, plans, and strategies in order to

formulate ways to raise retail e-book prices;

b. Assured each other of support in attempting to raise retail e-book prices;

c. Employed ostensible joint venture meetings to disguise their attempts to

raise retail e-book prices;

d. Fixed the method of and formulas for setting retail e-book prices;

e. Fixed tiers for retail e-book prices;

f. Eliminated the ability of e-book retailers to fund retail e-book price

decreases out of their own margins; and

34

g. Raised the retail prices of their newly released and bestselling e-books to

the agreed prices - the ostensible price caps - contained in the pricing schedule oftheir Apple

Agency Agreements.

104. Defendants' agreement andconspiracy constitutes a per se violation of Section 1

of the Sherman Act because it is an anticompetitive agreement to raise, fix, and stabilize prices in

the e-book industry. The agreement or conspiracy was meant to eliminate price competition

among e-book retailers, including Diesel.

105. Defendants' agreement andconspiracy has resulted in anticompetitive effects on

consumers in the e-books marketby depriving consumers of the benefits of price competition

and innovation among e-book retailers suchas Diesel. Because of Defendants' unlawful

restraint of trade, Diesel is no longerable to offer, and consumers are no longerable to purchase

e-books at discounted prices, in bundles, or with rewards fromDiesel's rewards program.

Moreover, retail innovationhas also been suppressed. For example, the conspiracyprecludes

Dieselfrom offering e-books in bundles or maintaining its rewards program. Defendants'

agreement or conspiracy constitutes an unreasonable restraint of trade in violation of Section 1 of

the Sherman Act, 15 U.S.C. 1.

106. Where, as here, Defendants have engaged in a per se violation of Section 1 of the

ShermanAct, no allegationswith respect to the relevant product market, geographic market, or

market power are required. To the extent such allegations may otherwise be necessary, the

relevantproduct market for the purposes of this action is trade e-books. The anticompetitive acts

at issue in this case directly affect the sale of trade e-books to consumers. No reasonable

substitute exists for e-books. There are no technological alternatives to e-books, thousands of

which can be stored on a single small device. E-books can be stored and read on electronic

35

devices, while print books cannot. E-books can be located, purchased, and downloaded

anywhere a customer has an internet connection, while print books cannot. Industry firms and

the public also view e-books as a separate market segment from print books, and the Publisher

Defendants were able to impose and sustain a significant retail price increase for their trade e-

books.

107. The relevant geographic market is the United States. The rights to license e-

books are granted on territorial bases, with the United States typically forming its own territory.

E-book retailers typically present a unique storefront to U.S. consumers, often with e-books

bearing different retail prices than the same titles would command on the same retailer's foreign

websites.

108. The Publisher Defendants possess market power in the market for trade e-books.

The Publisher Defendants successfully imposed and sustained a significant retail price increase

for their trade e-books. Collectively, they create and distribute a wide variety of popular e-

books, regularly comprising over halfof the New York Times fiction and non-fiction bestseller

lists. Collectively, they provide a critical input to any firm selling trade e-books to consumers.

Any retailer selling trade e-books to consumers would not be able to forgo profitably the sale of

the Publisher Defendants' e-books.

109. Defendants' agreement and conspiracy has had and will continue to have

anticompetitive effects, including:

a. Increasing the retail prices of trade e-books;

b. Eliminating competition on price among e-book retailers;

c. Restraining competition on retail price among the Publisher Defendants;

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d. Restraining competition among the Publisher Defendants for favorable

relationships with e-book retailers;

e. Constraining innovationamong e-book retailers as more particularly

alleged in paragraphs 93 and 98;

f. Entrenching incumbent publishers' favorable positionin the sale and

distribution of print books by slowing the migration from print books to e-books;

g. Making more likely express or tacit collusion among publishers; and

h. Reducing competitive pressure on print book prices.

110. Defendants' agreement and conspiracy is not reasonably necessary to accomplish

anyprocompetitive objective, or, alternatively, its scope is broader than necessary to accomplishany such objective.

111. Diesel, as well as consumers, have suffered antitrust injury from Defendants'

conduct and have antitrust standing to pursue this action. Competition was diminished because

independent retailers were no longerable to compete with large international conglomerates by

offeringattractiveprices or unique retail innovations. This resulted in less consumer choice.

Because each of the Publisher Defendants forced a functionally identical agency agreement on

Diesel both interbrand and intrabrand competition were reduced or eliminated. Because of this

demonstrable harm to competition, Diesel was crippled and effectively put out of business.

112. Diesel's injury flows directly from Defendants' anticompetitive agreement in the

market for e-books because it precluded Diesel from being able to compete by offering lower

prices or retail innovations to consumers. Without the incentive of lower prices or retail

innovations, Diesel lacked the goodwill and recognition to expand in the market.

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113. Because this case is based in material part on matters complained of in United

States ofAmerica v. Apple, Inc., Case No. 12-CV-2826 in the United States District Court for the

Southern District of New York, filed on April 11, 2012, the running of the statute of limitations

has been suspended since that filing date by reason of Section 5 of the Clayton Act (15 U.S.C.

16(i))-

114. The trial judgment in the aforementioned case, which was entered on September

5,2013, constitutes prima facie evidence that Apple violated the antitrust laws in the ways and

means described by Judge Cote's Opinion of July 10,2013. 15 U.S.C. 16(a).

COUNT TWO

(Against AH Defendants for Violations of N.Y. Gen. Bus. Law 340)

115. Beginning no later than 2009, and continuing to at least late 2012 when a few of

the Publisher Defendants settled with the DOJ, Defendants and their co-conspirators have

combined and conspired to unreasonably restrain interstate trade and commerce, constituting a

violation ofNew York General Business Law section 340, otherwise known as the Donnelly Act.

116. Defendants conspired and agreed to raise, fix, and stabilize retail e-book prices in

order to end price competition among e-book retailers and to limit retail price competition among

the Publisher Defendants. Defendants accomplished this by collectively agreeing to adopt and

adhere to functionally identical methods of selling e-books and by setting price schedules.

117. In reaching their unlawful agreement in restraint of trade, some or all of the

Defendants:

a. Shared their business information, plans, and strategies in order to

formulate ways to raise retail e-book prices;

b. Assured each other of support in attempting to raise retail e-book prices;

38

c. Employed ostensible joint venture meetings to disguise their attempts to

raise retail e-book prices;

d. Fixed the method of and formulas for setting retail e-book prices;

e. Fixed tiers for retail e-book prices;

f. Eliminated the ability of e-book retailers to fund retail e-book price

decreases out of their own margins; and

g. Raised the retail prices of their newly released and bestselling e-books to

the agreed prices - the ostensible price caps - contained in the pricing schedule of their Apple

Agency Agreements.

118. Defendants' agreement and conspiracy constitutes a per se violation of the

Donnelly Act because it is an anticompetitive agreement to raise, fix, and stabilize prices in the

e-book industry. The agreement or conspiracy was meant to eliminate price competition among

e-book retailers, including Diesel.

119. Defendants' agreement and conspiracy has resulted in anticompetitive effects on

consumers in the e-books market by depriving consumers of the benefits of price competition

and innovation among e-book retailers such as Diesel. Because of Defendants' unlawful

restraint of trade, Diesel is no longer able to offer, and consumers are no longer able to purchase

e-booksat discountedprices, in bundles, or with rewards from Diesel's rewards program.

Moreover, retail innovation has also been suppressed. For example, the conspiracy precludes

Diesel from offering e-books in bundles or maintaining its rewards program. Defendants'

agreement or conspiracy constitutes an unreasonable restraint of trade in violation of the

Donnelly Act.

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120. Where, as here, Defendants have engaged in a per se violation of the Donnelly

Act, no allegations with respect to the relevant product market, geographic market, or market

power are required. To the extent such allegations may otherwise be necessary, the relevant

product market for the purposes of this action is trade e-books. The anticompetitive acts at issue

in this case directly affect the sale of trade e-books to consumers. No reasonable substitute exists

for e-books. There are no technological alternatives to e-books, thousands of which can be

stored on a single small device. E-books can be stored and read on electronic devices, while

print books cannot. E-books can be located, purchased, and downloaded anywhere a customer

has an internet connection, while print books cannot. Industry firms and the public also view e-

books as a separate market segment from print books, and the Publisher Defendants were able to

impose and sustain a significant retail price increase for their trade e-books.

121. The relevant geographic market is the United States. The rights to license e-

books are granted on territorial bases, with the United States typically forming its own territory.

E-book retailers typically present a unique storefront to U.S. consumers, often with e-books

bearing different retail prices than the same titles would command on the same retailer's foreign

websites.

122. In addition to the conspiracy's impact on interstate commerce, Defendants'

conduct had a demonstrable impact on intrastate commerce in New York. All five of the

Publisher Defendants have their principal place of business in New York, and much of the

conspiracy between the Publisher Defendants and Apple was hatched and implemented in New

York. For example, the Publisher Defendants met regularly in New York, and Apple's Eddy

Cue traveled to New York to negotiate with the Publisher Defendants. The Publisher Defendants

each conduct significant business in New York because they sell e-books to end users in New

40

York. Apple also conducts significant business in New York through the sale of its products on

which consumers read e-books. Finally, consumers read e-books in New York. In short, the

conspiracy had a direct and substantial impact on intrastate commerce in New York.

123. The