Justice Department Responds to Criticism of E-Book Price-Fixing Lawsuit

The U.S. Department of Justice on Monday responded to criticisms of its lawsuit against Apple and publishers for alleged price-fixing in the electronic book market. The government has already made settlements with three of the publishers -- Hachette Book Group, HarperCollins and Simon & Schuster -- it sued in April. The settlements required the DOJ to take public comments, and so the agency received 868 comments from publishers, authors, agents and bookstores since the lawsuit was filed.

Prosecutors say that those critical of its plans "have an interest in seeing consumers pay more for e-books, and hobbling retailers that might want to sell e-books at lower proces."

The DOJ shrugs off concerns that have been raised as being reflective of "a general frustration" about the evolving direction and pressures of the publishing industry. The government agency also says that its e-book price-fixing lawsuit shouldn't be read as an indictment of the agency pricing model at large.

In its lawsuit, the DOJ allege that Apple acted as the "hub" in a hub-and-spoke conspiracy to set higher prices for e-books. Before Apple allegedly got involved, many e-books were being sold under a "wholesale model" by Amazon at $9.99, a cut-rate price point that cost Amazon money and dismayed publishers.

But publishers came to deals with Apple for an "agency pricing model," whereby publishers set prices and Apple would take a commission. The DOJ alleges that Apple was the go-between each of the publishers. After the deals, many best-selling e-books were soon being sold at prices ranging from $12.99 to $16.99.

The DOJ filed its antitrust action, and in reaction, some have rallied behind Apple and raised the argument that Amazon represents the true threat to publishing.

Critics of the lawsuit say that Amazon's aggressive pricing threatens to put publishers and brick-and-mortar bookstores out of business. If that happens, they argue, Amazon and its own publishing ambitions would have massive market power, which among other consequences, might mean that  publishers would no longer be in position to make big investments to authors. Plus, some believe that Apple's introduction into the marketplace as a competitor to Amazon has been a positive development, spurring such innovation as color e-books.

Among those who have filed comments criticizing the government are the American Booksellers Association, The Authors Guild, a group of nine mid-tier publishers, Barnes & Noble, literary agents, and not surprisingly, Apple.

In its response on Monday, the DOJ says the reasons these individuals and groups are offering to look the other way to alleged price-fixing are not legitimate. "That position is wholly at odds with the purposes of the federal antitrust laws—which were enacted to protect competition, not competitors," it says.

The DOJ says it can't excuse price-fixing simply to end Amazon’s reported ninety percent share of the e-book market. And prosecutors says that such commentators are giving Apple too much credit, pointing to Microsoft's $300 million investment with Barnes & Noble and efforts by Google on the e-book front.

"The reality is that, despite its conspiratorial efforts, Apple’s entry into the e-book market was not immediately successful," writes Mark W. Ryan, the lead DOJ attorney in the case. "It was, in fact, Barnes & Noble’s entry—prior to Apple—that took significant share away from Amazon; and many of the touted innovations were in development long before Apple decided to enter the market via conspiracy."

The government is also clarifying its position on an agency pricing model.

"Some critical comments simply misunderstand the decree," says the DOJ's response. "They assert that the United States is imposing a business model on the industry by prohibiting agency agreements.The United States, however, does not object to the agency method of  distribution in the e-book industry, only to the collusive use of agency to eliminate competition and thrust higher prices onto consumers."

The DOJ goes onto say that publishers are free to "resume" agency agreements so long as they act unilaterally. This includes the ones who have settled after they wait two years per the settlement. During this time, settling publishers will also be prohibited from including "most favored nation" provisions and other retail pricing restrictions in their contracts with retailers. The government is also making these publishers hand over communication logs so as to prevent further conspiracy.

A judge needs to bless the agreement. Despite the criticisms, the DOJ argues it should have "broad discretion" to make settlements pursuant to public interest.

The DOJ's full response is on the following page.

E-mail: eriq.gardner@thr.com; Twitter: @eriqgardner