`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`--------------------------------------
`LAVOHO, LLC, successor in interest to
`DIESEL EBOOKS, LLC,
`
`
`
`
`
`
`
`
`
`Plaintiff,
`
`
`
`-v-
`
`
`
`
`APPLE, INC.; HACHETTE BOOK GROUP,
`INC.; HARPERCOLLINS PUBLISHERS, LLC;
`VERLAGSGRUPPE GEORG VON HOLTZBRINCK
`GMBH; HOLTZBRINCK PUBLISHERS, LLC
`d/b/a/ MACMILLAN; THE PENGUIN GROUP, A
`DIVISION OF PEARSON PLC; and SIMON &
`SCHUSTER, INC.,
`Defendants.
`
`
`
`
`--------------------------------------
`
`APPEARANCES:
`
`For Plaintiff
`Maxwell M. Blecher
`Blecher Collins Pepperman & Joy P.C.
`515 Figueroa St., Suite 1759
`Los Angeles, CA 90071
`
`For Defendant Hachette Book Group, Inc.
`Michael Lacovara
`Richard Snyder
`Samuel J. Rubin
`Freshfields Bruckhaus Deringer LLP
`601 Lexington Avenue
`New York, NY 10022
`
`For Defendant HarperCollins Publishers, LLC
`C. Scott Lent
`Arnold & Porter, LLP
`399 Park Avenue
`New York, NY 10022
`
`For Defendants Macmillan Publishers Inc., and Verlagsgruppe
`Georg Von Holtzbrinck GmbH:
`Joel M. Mitnick
`John Lavelle
`Dorothy Du
`
`14cv1768 (DLC)
`
`OPINION & ORDER
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 2 of 41
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`Sidley Austin LLP
`787 Seventh Avenue
`New York, NY 10019
`
`For Defendant The Penguin Group:
`Saul P. Morganstern
`Amanda C. Croushore
`Margaret A. Rogers
`Kaye Scholer LLP
`425 Park Ave.
`New York, NY 10022
`
`For Defendant Simon & Schuster, Inc.:
`James W. Quinn
`Yehudah L. Buchweitz
`Jeff L. White
`Weil, Gotshal & Manges LLP
`767 Fifth Avenue, 25th Fl.
`New York, NY 10153
`
`DENISE COTE, District Judge:
`
`
`
`Lavoho, LLC, the successor in interest to Diesel eBooks,
`
`LLC (hereinafter, “Diesel”) brings this action against five book
`
`publishers, Hachette Book Group, Inc. (“Hachette”),
`
`HarperCollins Publishers, LLC (“HarperCollins”), Macmillan
`
`Publishers Inc. and Verlagsgruppe Georg Von Holtzbrinck GmbH
`
`(“Macmillan”), The Penguin Group (“Penguin”), and Simon &
`
`Schuster, Inc. (“Simon & Schuster”) (collectively, “Publisher
`
`Defendants”). Pursuant to Section 1 of the Sherman Antitrust
`
`Act, 15 U.S.C. § 1, and Section 340 of the Donnelly Act, N.Y.
`
`Gen. Bus. Law § 340, Diesel seeks damages it asserts it
`
`sustained due to the defendants’ conspiracy with Apple Inc.
`
`(“Apple”) to fix prices and reduce competition in the e-book
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`2
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 3 of 41
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`industry.1 Diesel’s claims arise from discussions initiated by
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`Apple in December 2009 with the Publisher Defendants to explore
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`the terms under which e-books might be available for Apple’s new
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`device, the iPad, which Apple launched in January 2010. As a
`
`result of these discussions, the Publisher Defendants
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`implemented agency distribution agreements with e-book retailers
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`with the purpose and effect of eliminating retail price
`
`competition and raising the retail prices for many e-books.
`
`In 2011 and 2012, the U.S. Department of Justice (“DOJ”),
`
`various states, and class action plaintiffs filed antitrust
`
`lawsuits against the Publisher Defendants and Apple alleging
`
`violations of the Sherman Act. While the Publisher Defendants
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`settled these claims, Apple proceeded to trial and was found
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`liable in July 2013. United States v. Apple Inc., 952 F. Supp.
`
`2d 638, 709 (S.D.N.Y. 2013). Diesel filed this antitrust case
`
`in March of 2014 alleging that its business was predicated on
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`discounting, and that the defendants’ agency conspiracy had
`
`caused Diesel’s demise. Two other e-book retailers filed
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`similar antitrust lawsuits in 2013 and 2014 against Apple and
`
`the Publisher Defendants. The Court has dismissed these two
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`lawsuits. DNAML Pty, Ltd. v. Apple Inc. et al., No. 13-cv-6516
`
`(DLC), 2015 WL 9077075 (S.D.N.Y. Dec. 16, 2015); Abbey House
`
`
`1 The plaintiff also brought this lawsuit against Apple. The
`plaintiff and Apple have settled.
`
`
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`3
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 4 of 41
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`Media, Inc. v. Apple Inc. et al., No. 14-cv-2000, 2016 WL 297720
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`(S.D.N.Y. Jan. 22, 2016).
`
`Following the completion of discovery, the Publisher
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`Defendants moved for summary judgment on the grounds that Diesel
`
`cannot show antitrust injury and that Diesel has not shown that
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`its failure was caused by the agency conspiracy. The motion is
`
`granted. The plaintiff has not offered evidence to show that it
`
`has suffered antitrust injury arising from the Publisher
`
`Defendants’ conspiracy to eliminate retail price competition for
`
`their e-books or from which a jury could find that that
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`conspiracy caused the failure of its business.
`
`BACKGROUND
`
`
`
`The following facts are undisputed or taken in the light
`
`most favorable to the plaintiff. Scott Redford founded Diesel
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`as an e-book retail store in December 2004. Diesel sold e-books
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`through its website, built in part by its programing contractor
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`on top of an existing e-commerce infrastructure. Its e-books
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`were apparently intended to be read by consumers principally on
`
`their desktop computers. Diesel did not purchase its e-books
`
`directly from the Publisher Defendants at any time before the
`
`initiation of the defendants’ price-fixing conspiracy. Instead,
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`it purchased its inventory from Ingram Digital (“Ingram”), a
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`4
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 5 of 41
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`wholesaler.2 As a result, Diesel was required to pay a fee to
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`Ingram of 10% of an e-book’s digital list price (“DLP”), which
`
`increased its costs. Diesel would later tout its search engine
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`optimization knowledge, fraud control, and platform scalability
`
`as the three keys to its early success.
`
`I. Diesel’s Performance Prior to Agency
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`Beginning in 2007, Diesel was faced with stiff competition.
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`Amazon re-entered the e-book market at the end of 2007 and
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`quickly became the dominant e-book retailer. Amazon also
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`introduced its popular e-reader device, the Kindle, in November
`
`2007. Amazon sold e-book versions of many hardcover books for
`
`$9.99, a price that was often well below Diesel’s inventory cost
`
`for the book.
`
`In 2009, Barnes & Noble re-entered the e-books market, and
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`eventually adopted Amazon’s $9.99 model for e-book versions of
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`certain hardcover books. Barnes & Noble then introduced its e-
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`reader device, the NOOK, in November 2009.
`
`Prior to the implementation of agency pricing in the second
`
`quarter of 2010, Diesel’s performance was variable. While
`
`
`2 Initially, Ingram provided Diesel with e-books in multiple
`proprietary formats, including Microsoft Reader, Palm, and
`Adobe. In 2008, Diesel also added a mobile format through the
`company Mobipocket, although Mobipocket’s formatting was later
`purchased and re-packaged for Amazon’s e-reader. Diesel also
`became a retailer for the self-publishing platform Smashwords
`and partnered with Google for access to its open domain content.
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`5
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 6 of 41
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`Diesel was profitable in 2008 and 2009, its net income margins
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`began dropping in the second quarter of 2009, reaching -5.2% in
`
`the first quarter of 2010. Although Diesel’s revenue tended to
`
`grow each quarter, its monthly revenues were never large. For
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`example, it fluctuated between approximately $90,000 and
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`$130,000 from April 2009 to March 2010. Diesel’s year-over-year
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`growth rate also fluctuated, with significantly decreased growth
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`in the months prior to the adoption of the agency model for
`
`distributing e-books.3 Diesel also struggled to maintain market
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`share prior to the beginning of the agency period. Its share of
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`the market decreased from about 4.1% in January 2008 to 0.3% in
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`March 2010. In contrast, by March 2010, Amazon, Barnes & Noble,
`
`and Sony had captured 98% of the e-book market.
`
`Diesel attributed some of its financial challenges to an
`
`inability to compete on price with major retailers like Amazon
`
`and Barnes & Noble. As explained above, Diesel purchased its e-
`
`books through a wholesaler and therefore had higher inventory
`
`costs. It also operated with a higher profit margin.
`
`Accordingly, the prices of Diesel’s e-books were, on average,
`
`higher than those of Amazon or Barnes & Noble. Redford has
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`explained that Diesel could not sell ebooks at below cost prices
`
`
`3 Year-over-year growth percentages, the plaintiff’s preferred
`measurement, compare revenue from a given month to revenue from
`the corresponding month of the previous year.
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`6
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 7 of 41
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`to the same extent as its mega competitors, that Diesel had
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`“somewhat ceded the whole new release business to Amazon [and]
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`the big guys,” and that “as far as what Amazon was doing, no, we
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`didn’t do that. We couldn’t afford to do that.” In fact, on
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`the day that the agency distribution system began for many of
`
`the Publisher Defendants, April 1, 2010, Diesel published a blog
`
`post noting that
`
`Many among our multi-billion dollar competition have
`been selling [New York Times bestsellers] for $9.95,
`eating ‘customer acquisition’ costs of $5.62 per
`title. . . . As an independent, the Diesel eBook
`Store simply does not have the capital to keep up
`with our mega competitors on such a grand scale. We
`would literally be out of business in less than a
`few months.
`
`
`
`Diesel faced additional competitive challenges in these
`
`early years. Diesel lacked its own proprietary e-reader, unlike
`
`Amazon and Barnes & Noble. Customers that purchased e-books
`
`from Diesel could not read books on Amazon’s Kindle, for
`
`example, due to the Kindle’s proprietary “walled garden.”4
`
`Diesel does not dispute that the existence of proprietary e-
`
`reader devices made it difficult for it to compete both before
`
`and after the implementation of agency pricing. Diesel also did
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`not have any mobile apps that would have allowed its e-books to
`
`
`4 Only unencrypted e-books purchased from Diesel could be read on
`a Kindle, and even then customers had to convert Diesel’s e-book
`files through an eleven step process that included physically
`connecting a Kindle to a computer with a USB cable.
`
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`7
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 8 of 41
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`be read on smart phones or other portable mobile devices.
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`Diesel did not even start to develop an app until June 2011,
`
`well after agency pricing was implemented.
`
`
`
`In addition, Diesel struggled with the development of its
`
`website. Because its site was outdated, Diesel sought to build
`
`a “whole new platform” in November 2009. By late October 2010,
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`the new site had still not been launched.
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`II. The Conspiracy Period
`
`
`
`The conspiracy claims that underlie this lawsuit arise from
`
`the discussions which Apple initiated in December of 2009 with
`
`the Publisher Defendants to explore the terms under which the
`
`publishers’ e-books might be available for Apple’s new device,
`
`the iPad, which Apple launched on January 27, 2010. The iPad
`
`had the ability to function as an e-reader and to offer the
`
`iBookstore. Each of the Publisher Defendants agreed to sign an
`
`agency distribution agreement with Apple and supply it with
`
`their e-books. Because of the terms of their agreements with
`
`Apple, each of the Publisher Defendants then required other e-
`
`book retailers to execute similar agency agreements.
`
`Under the agency model, a publisher is the seller of record
`
`and sets the retail price for an e-book. Retailers sell the e-
`
`book as the publisher’s agent, earning a commission on the sale
`
`price. The Publisher Defendants had previously sold e-books
`
`through the wholesale model, whereby the publisher sold an e-
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`8
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 9 of 41
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`book for a wholesale price and the retailer set the retail
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`price. With the arrival of the agency model, Amazon, Barnes &
`
`Noble, Diesel, and every other e-retailer lost the ability to
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`discount those e-books for which the Publisher Defendants sought
`
`to control the retail price. For example, the agency agreement
`
`between Hachette and Apple applied agency pricing to e-book
`
`equivalents of frontlist hardcover books.
`
`The agency model went into effect for most of the
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`Publishers Defendants as of April 3, 2010. The purpose and
`
`effect of this conspiracy was to eliminate retail price
`
`competition for many e-books and to raise the retail prices for
`
`those e-books. As a result of the agency model, e-book
`
`retailers purchasing directly from the Publisher Defendants were
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`guaranteed a commission on the e-books they sold. The Publisher
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`Defendants’ agency agreements set this commission at 30%.5
`
`III. Diesel Welcomes Agency Pricing
`
`Diesel publicly welcomed agency pricing after it was
`
`implemented. In its April 1, 2010 post to the Diesel eBook
`
`Store Blog, Diesel gave its “quick take” on what it
`
`characterized as the “ongoing madness.” It began by reporting
`
`
`5 With the adoption of the agency model and the substantial
`commission payments, the Publisher Defendants actually reduced
`their revenue from sales of many e-books. They anticipated,
`however, that by raising the retail prices of e-books, they
`would protect their sales of hardcover books, from which they
`had traditionally profited.
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`9
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 10 of 41
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`that “[o]ddly enough, the agency model *might* potentially have
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`a very positive benefit for Diesel –- mostly because, lately,
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`our sales have been shifting towards the Indies.”6 Diesel
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`frankly acknowledged that it could not compete on price with
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`deep-pocketed e-book retailers:
`
`As an independent, the Diesel eBook Store simply does
`not have the capital to keep up with our mega
`competitors on such a grand scale. We would literally
`be out of business in less than a few months. Under
`the agency model, the playing field would definitely
`be leveled so that we can compete against stores with
`a lot more resource$. [sic] Practically overnight,
`the quality and personal rapport that’s inherent in
`the eBookstore experience becomes all the more
`important.
`
`Diesel added, however, that customers and authors would be
`
`harmed by the switch to an agency model. As an example, it
`
`noted that “one of the favorite customer practices -- Bundling
`
`-- will be severely limited. (Take note that, at the moment,
`
`Diesel has no plans to discontinue its loyalty or coupon
`
`programs.)”
`
`Five months later, in a second blog post of November 2,
`
`2010, Diesel still felt that the switch to the agency model had
`
`benefitted it and other small e-book retailers. The post stated
`
`that Diesel and other small e-book retailers “don’t have to lose
`
`their shirts through price-cutting, anymore” and that “with
`
`
`6 “Indies” in this context refers to independent publishing
`houses. It does not refer to the Publisher Defendants.
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`10
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 11 of 41
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`everyone on the same [pricing] playing field, providing great
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`customer service is now much more valuable.” The November blog
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`post also noted three negative consequences from the switch.
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`They were the challenges of collecting sales tax, the demand by
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`the Publisher Defendants that their e-books be sold only in the
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`United States, and the limitation on promotions, which “simply
`
`takes the fun out of our business” and requires Diesel to
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`explain to its customers why many promotional benefits are not
`
`available for the Publisher Defendants’ titles. The post
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`concluded with an explanation of why the economics of the agency
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`model made it imperative for small retailers to develop direct
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`contracting relationships with the Publisher Defendants to avoid
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`the fees collected by wholesalers.
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`In the months that followed, Diesel continued to report
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`that it had had very little trouble adjusting to the agency
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`model. For example, in a February 2011 email to his investors,
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`Redford projected that Diesel would have nearly $1 million in e-
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`book sales for 2011. That June, he wrote that Diesel had
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`“survived the agency storm, found it’s [sic] niche and invested
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`heavily in infrastructure that easily accommodates all the
`
`retail requirements of selling online –- now and in the future.”
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`Redford made similar email statements in August and October 2012
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`to representatives of HarperCollins and Simon & Schuster, noting
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 12 of 41
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`that Diesel had “weathered the agency storm” and had “[p]lans to
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`expand our presence.”
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`If Redford was concerned about the effect of agency pricing
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`on Diesel’s business model, he failed to mention it during his
`
`efforts to sell Diesel in 2012. Redford prepared a document for
`
`potential investors that provides significant insight into the
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`nature of Diesel’s business and Diesel’s understanding of its
`
`competitive environment. The document is titled Confidential
`
`Memorandum (“2012 Memorandum”), has been provided in discovery
`
`in two slightly different versions, and runs for about twenty-
`
`nine pages in the longer version. Notably, the 2012 Memorandum
`
`does not describe Diesel’s business as premised on discounting.
`
`Nor does it complain that the elimination of retail price
`
`competition for the Publisher Defendants’ e-books had a negative
`
`impact on Diesel. Instead, the document touts Diesel’s success
`
`in negotiating direct contracts with “all 8 Agency publishers,”7
`
`thereby eliminating the need to pay fees to wholesalers. It
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`explains, however, that to execute Diesel’s long term strategy,
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`Diesel required additional resources to “position itself outside
`
`the fierce pricing battles between the two major players in the
`
`market place (Amazon and Barnes & Noble).”
`
`
`7 Later in the document Diesel explains that it had direct
`contracts with Random House, Macmillan, and four other
`independent publishing houses and was in the final stages of
`negotiations with two larger agency publishers.
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`12
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 13 of 41
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`In describing the “keys” to its early success, the 2012
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`Memorandum describes Diesel’s platform and fraud control
`
`features, but makes no mention of any discounting practices. In
`
`its discussion of the advent of the agency model, Diesel
`
`represents that it quickly deployed the infrastructure necessary
`
`to collect sales taxes and to enforce sales restrictions by
`
`geography. Diesel makes no mention of the loss of the ability
`
`to discount. The 2012 Memorandum also identifies Diesel’s
`
`largest sales, amounting to roughly one-third of its e-books, as
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`“[r]omance.” It also explains that 30% of Diesel’s business was
`
`international.
`
`In a lengthy description of its technology platform, which
`
`was developed by Upshot Commerce, Diesel lists features of the
`
`Upshot system that were available to be used and those Diesel
`
`was actively using. Included in those under active use are a
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`loyalty points program, daily deals and flash sales, and a gift
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`certificate and coupon module. Among the customized modules
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`created for Diesel is an eBook Bundling Module. Diesel brags
`
`about the nimbleness of its platform, particularly its ability
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`to let Diesel set up unlimited “storefronts” and manage content
`
`and customers across each from one place. At the end of its
`
`praise for the platform, Diesel mentions the platform’s utility
`
`with “merchandising (sales, promotions, coupons, gift certs,
`
`bundles, etc . . . ).” In a discussion of merchandising
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`13
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 14 of 41
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`features, Diesel lists pricing options that can be used to offer
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`discounts and special schemes to loyal customers, including a
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`“Robust Couponing System” and “Dollar, Percentage and/or
`
`Shipping Discount.”
`
`One page of the presentation is devoted to “Bundles.”
`
`Diesel describes the platform’s ability to “‘shrink wrap’ up to
`
`six digital eBook files by series, theme, characters, time
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`period or author resulting in enhanced customer convenience and
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`cost-savings” as a “unique feature” of its platform. It
`
`explains that the creation of bundles that cross imprints and
`
`authors can expose customers to new authors. A sample bundle
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`featuring four books united by the theme “Dragons Are A Girl’s
`
`Best Friend” is displayed under this text. The price is $14.91
`
`with “reward money” of $0.52.
`
`The 2012 Memorandum devotes over two pages to recent,
`
`significant developments in e-book distribution, specifically
`
`the adoption of the agency model and publishers’ enforcement of
`
`territory restrictions. It notes that the publishers set retail
`
`prices through the agency model and also restricted retailers
`
`from discounting agency titles “in any way including bundling,
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`coupons and sales promotions.” Diesel reported that the agency
`
`system and territory restrictions were “defining moments for
`
`Diesel,” but that its platform empowered it to “quickly adapt.”
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`The 2012 Memorandum further predicts an e-book revolution
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`14
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 15 of 41
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`and explains why Diesel was “uniquely positioned to seize” new
`
`markets. Diesel describes “under-served niche” markets, genre
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`stores, alternate sales channels, book clubs, and email
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`marketing as “immediate opportunities.” Diesel goes on to
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`praise its erotic romance division (“eBooks Eros”). In
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`particular, Diesel states that it is “bullish” on the prospect
`
`of eBook Eros establishing itself as “a blue-chip profit center
`
`and world-wide, top of mind destination for anyone seeking
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`erotic romantic fiction and non-fiction.”
`
`Noticeably, the 2012 Memorandum makes no mention of
`
`Diesel’s inability to discount as a factor that inhibited
`
`Diesel’s revenue growth or as a potential risk factor for
`
`Diesel’s business. Rather, Diesel lists the following four
`
`factors as the sources of downward pressure on Diesel’s revenue
`
`growth: (1) market share competition from Amazon and Barnes &
`
`Noble; (2) a drop in international sales; (3) Ingram’s inability
`
`to secure a full catalogue of available titles, and (4) the 10%
`
`fee charged by Ingram on all e-book sales to Diesel. In fact,
`
`the 2012 Memorandum highlights Diesel’s challenge in competing
`
`with Amazon and Barnes & Noble in that part of the e-book market
`
`where retail price competition remained. It reported that the
`
`“focus” of those two competitors on “capturing market share at
`
`any cost” was a downward driver of revenue, a factor Redford
`
`attributed to below-cost pricing creating thinner margins.
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`15
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 16 of 41
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`On the positive side, Diesel hailed the DOJ ruling
`
`requiring the Publisher Defendants “to cease their pricing
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`controls under the agency model” as an event with “positive
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`implications for Diesel.” It explained that the big six
`
`publishers were at war with Amazon and its low pricing, which
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`motivated the publishers to enter into direct relationships with
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`independent retailers like Diesel. Diesel’s ability to purchase
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`e-books directly from those publishers would eliminate
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`“overnight” the 10% fee Diesel paid to its wholesaler and
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`thereby reduce the cost of goods. Diesel expressed the hope as
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`well that the post-agency contracts with publishers would open
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`up international markets to Diesel.
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`The absence of any reference to the Publisher Defendants’
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`adoption of the agency model in Diesel’s risk disclosures is not
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`unusual. No contemporaneous document reflects that Redford was
`
`concerned in the period between 2010 and 2012 about the decision
`
`by the Publisher Defendants to alter their distribution model in
`
`this way and eliminate retail price competition for certain e-
`
`books. Quite the contrary, the 2012 Memorandum suggests that
`
`Diesel could not compete where retail price competition
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`remained, and that it was seeking to position itself outside of
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`any fierce pricing battle.
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`IV. Diesel’s Bundling and Rewards
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`As reflected in the 2012 Memorandum, at some point Diesel
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 17 of 41
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`began to offer “bundles” of e-books to its customers. The
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`bundles consisted of groups of up to six digital eBook files by
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`series, theme, characters, time period, or author sold to
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`customers as a bulk package. In the 2012 Memorandum, which is
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`the first Diesel record that mentions Diesel’s bundling, Diesel
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`touted e-book bundling for its “enhanced customer experience and
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`cost savings,”8 its ability to “expose[] customers to new authors
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`they may not buy outside of a bundle,” and its “capability to
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`accelerate increased market-share among high volume eBook
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`purchasers.” Diesel had no common discount available to
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`customers off the DLP of bundled books, and no system for such
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`discounting was ever set out in any contemporaneous documents.9
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`Indeed, during his April 2015 deposition, Redford could not
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`provide any specific details of how Diesel discounted its
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`bundles. Diesel also did not produce transaction-level data
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`that would have allowed for the calculation of discounts off of
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`DLP for bundled books.
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`Diesel also had a loyalty and coupon program through which
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`customers could apply earned rewards points towards future
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`8 The reference to cost savings is a reference to the savings
`Diesel achieved in its acquisition of e-books from wholesalers.
`Diesel does not suggest that this refers to any price discounts
`available to readers.
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` 9
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` In his 2015 affidavit, Redford explains that a “large portion
`of a bundles discount was passed to the customer via reward
`points.”
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`Case 1:14-cv-01768-DLC Document 234 Filed 02/05/16 Page 18 of 41
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`Diesel e-book purchases. Customers could receive $1.5 to $3 if
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`they proposed an idea for a new bundle of e-books that Diesel
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`adopted. They could also earn 15 cents for every approved book
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`review. Customers could also accumulate rewards points with
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`each purchase of a Diesel bundle of e-books of, on average, 3.5
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`cents per bundle. The transaction-level data produced by
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`Diesel, however, only provides information on rewards and
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`bundles from September 2010 onward. Diesel has not presented
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`data through an expert or otherwise to show the significance of
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`its bundling program to its revenue stream or the extent to
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`which its customers earned (from purchases of bundles or
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`otherwise) or redeemed rewards points. It has provided no
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`internal documents in opposition to this motion that track or
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`report such figures.
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`V. Challenges for Diesel in the Post-Agency Period
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`Although Diesel expressed enthusiasm about the Publisher
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`Defendants’ adoption of the agency model, it encountered certain
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`significant difficulties during the transition period. First,
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`because Diesel purchased e-books from Ingram, it depended on
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`Ingram to execute agency agreements with the Publisher
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`Defendants and make e-books available to Diesel under those new
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`terms. That did not happen immediately.10 As a result, Diesel
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`10 Among other things, Ingram was required to collect sales taxes
`in connection with the sale of the defendants’ e-books and it
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`lost access to about half of its inventory on April 1, 2010. It
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`took up to six months for agreements to be executed with the
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`Publisher Defendants to allow Diesel to regain its full
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`inventory. Diesel eventually signed agency agreements with all
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`five of the Publisher Defendants: Penguin on April 28,
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`HarperCollins on May 4, Hachette on July 28, Simon & Schuster on
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`August 23, and Macmillan on October 14, 2010. With the
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`exception of the Macmillan agency agreement, which was made
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`directly with Diesel, these agreements were tripartite contracts
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`with Ingram, the Publisher Defendants, and Diesel.
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`This loss of inventory, even though temporary, was very
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`damaging to Diesel’s business. In March 2012, in response to an
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`article discussing a potential DOJ antitrust suit against Apple,
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`Redford wrote that “[r]eal justice would have Diesel as part of
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`the settlement –- restitution for losing half our inventory
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`overnight on April 1st for six months. We still haven’t
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`recovered from that.” Furthermore, in its 2012 Memorandum,
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`Diesel cited Ingram’s inability to provide Diesel with e-books
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`immediately after the transition to agency pricing as a
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`phenomenon that created downward pressure on Diesel’s revenues.
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`had to set up systems to do so. This apparently delayed
`Ingram’s execution of agency agreements with the Publisher
`Defendants.
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`This loss of inventory during the transition to the agency
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`model was not the only challenge that Diesel faced in the period
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`of 2010 and beyond. Diesel never brought to market any mobile
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`apps or developed an e-reader. While Diesel obtained a
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`commitment to fund the development of its own e-reader in early
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`2010, the proposed e-reader was not set to be available until
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`the end of 2011 and ultimately the funding for the e-reader was
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`withdrawn. Diesel began developing an app for its e-books in
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`June 2011. Redford believed at the time that the absence of a
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`mobile app was “a gaping hole” in Diesel’s offerings. But,
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`Diesel’s Kindle Fire app remained in limbo for years without
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`approval or rejection. While Diesel’s Apple app was ultimately
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`approved by Apple in May of 2012, Diesel abandoned it. Long
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`before approving the app, Apple had modified its app policy to
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`impose a 30% commission, payable to Apple, on every e-book
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`purchased through an app.11
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`During this same period, Diesel continued to face
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`repercussions from the delayed launch of its new website. By
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`late October 2010, Redford complained to Diesel’s programmer
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`that he had “shelled out over $90k for this site that was
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`budgeted to come in at $70k and we’ve yet to sell an ebook.”
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`Redford also noted that he had “stopped marketing the old site
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`11 In 2012, Redford estimated that this project cost Diesel over
`$20,000.
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`months ago” and that “business has dropped accordingly.”12 This
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`delay also pushed back other important Diesel projects because
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`investors were waiting for the launch of the website before
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`investing in new features. Even when launched at the end of
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`2010, the new website experienced problems.
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`Perhaps even more significantly, Diesel lost access to
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`international sales. Diesel knew from at least 2009 that
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`publishers imposed geographic limits on the sale of certain of
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`its e-books, restricting those sales to customers within the
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`United States.13 Publishers’ enforcement of territorial
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`restrictions only increased in the post-agency period, when
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`publishers became the sellers of record. Since over 30% of
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`Diesel’s business had been international, Diesel’s revenue
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`dropped. To recapture this revenue Diesel elected to
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`intentionally breach the territory restrictions in its
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`contracts. Diesel labelled this program “Project Mayhem.” The
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`gambit worked temporarily, increasing Diesel’s revenues. On May
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`28, 2013, however, Ingram notified Redford that Penguin had
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`12 Redford argues that his 2010 emails were filled with
`“hyperbole” to create urgency.
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`13 For example, on January 16, 2009, Diesel received a notice
`from Ingram that no Hachette titles may be sold to customers
`with billing addresses outside of North America. Ingram also
`notified Diesel on April 17, 2009 that seven publishers were
`enforcing their territorial restrictions, including Hachette and
`Penguin.
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`found some of its American titles on Diesel’s Aust