DOJ Sues Apple and Book Publishers Alleging E-Book Price Collusion

April 11, 2012. The Department of Justice's (DOJ) Antitrust Division filed a complaint [36 pages in PDF] in the U.S. District Court (SDNY) against Apple and five book publishers alleging violation of Section 1 of the Sherman Act in connection their alleged conspiring to increase the prices that consumers pay for e-books.

The publisher defendants are Hachette (which includes Little Brown), Harper Collins, Simon & Shuster, Holtzbrink (which includes Macmillan), and Penguin

Complaint. The complaint alleges "Apple and Publisher Defendants reached an agreement whereby retail price competition would cease (which all the conspirators desired), retail e-book prices would increase significantly (which the Publisher Defendants desired), and Apple would be guaranteed a 30 percent ``commission´´ on each e-book it sold (which Apple desired)." (Parentheses in original.)

Apple and the publishers "jointly agreed to alter the business model governing the relationship between publishers and retailers. Prior to the conspiracy, both print books and e-books were sold under the longstanding ``wholesale model.´´ Under this model, publishers sold books to retailers, and retailers, as the owners of the books, had the freedom to establish retail prices. Defendants were determined to end the robust retail price competition in e-books that prevailed, to the benefit of consumers, under the wholesale model. They therefore agreed jointly to replace the wholesale model for selling e-books with an ``agency model.´´ Under the agency model, publishers would take control of retail pricing by appointing retailers as ``agents´´ who would have no power to alter the retail prices set by the publishers. As a result, the publishers could end price competition among retailers and raise the prices consumers pay for e-books through the adoption of identical pricing tiers. This change in business model would not have occurred without the conspiracy among the Defendants."

The complaint alleges that "Apple facilitated the Publisher Defendants' collective effort to end retail price competition by coordinating their transition to an agency model across all retailers."

How? The complaint states that "Over three days in January 2010, each Publisher Defendant entered into a functionally identical agency contract with Apple that would go into effect simultaneously in April 2010 ..."

Moreover, these contracts with Apple also provided that "the Publisher Defendants would raise retail e-book prices at all other e-book outlets, too", so that "electronic versions of bestsellers and newly released titles would be priced according to a set of price tiers contained in each of the Apple Agency Agreements ..."

Then, after executing the Apple agency contracts, these publishers "acted to complete the scheme by imposing agency agreements on all their other retailers", who thereby "lost their ability to compete on price".

The effect, the complaint alleges, was to raise prices that consumers pay. Previously, the most popular e-books were sold for $9.99. After the defendants implemented their scheme, these same e-books sold for $12.99 or $14.99.

And, the complaint alleges, this violates federal antitrust law. The complaint states only one claim -- violation of Section 1 of the Sherman Act, which is codified at 15 U.S.C. § 1.

Settlement with Three Publishers. The DOJ simultaneously announced that it reached a settlement with three book publishers (Hachette, Harper Collins, and Simon & Schuster).

The proposed settlement agreement [PDF], which must be approved by the District Court, provides that within seven days of Court approval the defendants "shall terminate any agreement with Apple relating to the Sale of E-books that was executed prior to the filing of the Complaint".

It also prohibits the settling e-book publishers for two years from entering into new agreements that constrain e-book retailers' ability to offer discounts or other promotions to consumers to encourage the sale of the publishers' e-books.

It also prohibits the three settling defendants for five years from agreeing to any kind of most favored nation (MFN) provision that could undermine the effectiveness of the settlement agreement.

Non-Settling Defendants. Apple, Holtzbrink (Macmillan), and Penguin are fighting the lawsuit.

John Sargent, CEO of Macmillan, a unit of one of the publishers that is fighting the DOJ, wrote that "Macmillan did not act illegally. Macmillan did not collude."

He stated in a letter to authors that "the terms the DOJ demanded were too onerous. After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model. We also felt the settlement the DOJ wanted to impose would have a very negative and long term impact on those who sell books for a living, from the largest chain stores to the smallest independents."

John Makinson, Ch/CEO of Penguin Group, stated in a release that "alone among the publishers party to the investigations that resulted in today's announcements, we have held no settlement discussions with the DOJ or the states. We have held strongly to this view for two, and only two, reasons."

First, "we have done nothing wrong. The decisions that we took, many them of them costly and difficult, were taken by Penguin alone." Also, the complaint "contains a number of material misstatements and omissions".

Second, "the agency model is the one that offers consumers the prospect of an open and competitive market for e-books".

DOJ Comments. The DOJ also held an event at which Attorney General Eric Holder  gave a speech, and Sharis Pozen, acting Assistant Attorney General in charge of the DOJ's Antitrust Division, gave a speech.

Holder (at left) stated that "publishing company executives discussed confidential business and competitive matters -- including Amazon’s e-book retailing practices -- as part of a conspiracy to raise, fix, and stabilize retail prices. In addition, we allege that these publishers agreed to impose a new model which would enable them to seize pricing authority from bookstores; that they entered into agreements to pay Apple a 30 percent commission on books sold through its iBookstore; and that they promised -- through contracts including most-favored-nation provisions -- that no other e-book retailer would set a lower price".

Pozen (at right) stated that "the antitrust laws are flexible and can keep pace with technology and a rapidly changing industry. This can be seen by our efficient and thorough investigation of this matter as well as the effective remedy we have proposed for three of the publishers."

Both Holder and Pozen noted that the DOJ worked with the European Commission on this matter.

Google Books Case. This is the second major deal involving large book publishers and a large Silicon Valley company to incur the opposition of the DOJ's antitrust enforcers. The other was the proposed class action settlement in the Google books case.

See, story titled "DOJ Files Pleading in Google Books Case" in TLJ Daily E-Mail Alert No. 1,985, September 21, 2009, and story titled  "DOJ Criticizes Amended Google Books Settlement" in TLJ Daily E-Mail Alert No. 2,043, February 12, 2010. See also, stories titled "District Court Rejects Google Books Class Action Settlement" in TLJ Daily E-Mail Alert No. 2,206, March 22, 2011, and "Orphan Works and the Court's Rejection of the Google Book Deal" in TLJ Daily E-Mail Alert No. 2,207, March 23, 2011.

Amazon, whose $9.99 pricing was the target of the defendants, did not return a phone call from TLJ.

This case is U.S. v. Apple, et al., U.S. District Court for the Southern District of New York, D.C. No. 1:12-cv-02826-UA.