Justice Department Sues Apple Claiming Ebook Price-Fixing

Apple Shares iPad Stock Market iPhone - H 2011
Peter Macdiarmid/Getty Images

Apple Shares iPad Stock Market iPhone - H 2011

Federal prosecutors are suing Apple Inc. and several publishers over price-fixing in the electronic book market. The Department of Justice filed the lawsuit today.

The lawsuit is the result of a probe of deals made by Apple with several book publishers two years ago when the computer giant launched the iPad and entered direct competition with Amazon.com and Barnes & Noble.

Apple used an agency pricing model on eBooks whereby publishers set prices and Apple would take a 30 percent commission. In theory, that pricing model should stimulate competition and varied pricing among the publishers, but prosecutors have been probing the way the parties may have worked in concert to set the prices with Apple acting as the "hub" of coordination.

The publishers sued included CBS Corp's Simon & Schuster Inc., News Corp.'s HarperCollins Publishers Inc, Penguin, Lagardere SCA's Hachette Book Group, and Pearson and Macmillan. In today's antitrust MDL lawsuit, prosecutors are seeking injunctive relief.

Here's a copy of the lawsuit.

The Justice Department then announced settlement agreements with Simon & Schuster, HarperCollins, and Hachette, with Macmillan and Penguin holding out. The agreements would eliminate Apple's "most favored nation" status, preventing the publishers from selling lower-priced e-books through rival retailers.

According to the lawsuit:

"Each Publisher Defendant desired higher retail e-book prices across the industry before '$9.99' became an entrenched consumer expectation. By the end of 2009, however, the Publisher Defendants had concluded that unilateral efforts to move Amazon away from its practice of offering low retail prices would not work, and they threafter conspired to raise retail e-book prices and to otherwise limit competition in the sale of e-books. To effectuate their conspiracy, the Publisher Defendants teamed up with Defendant Apple, which shared the same goal of restraining retail price competition in the sale of e-books."

As part of the alleged conspiracy, the defendants are said to have moved from a "wholesale model" of pricing set by retailers. By moving to an "agency model," publishers allegedly ended price competition through collaboration with Apple. The lawsuit accuses the company of facilitating the transition with the clear understanding that it would result in higher prices. The complaint also quotes Steve Jobs as saying, "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."

The plan, allegedly dubbed an "aikido move," where each publisher in 2010 entered into a "functionally identical agency contract" with Apple eventually resulted in best-selling e-books, priced at $9.99 at the time, being raised to prices between $12.99 and $16.99. These agreements were then allegedly imposed upon other retailers.

Apple hasn't commented on the potential lawsuit. But the company has responded in the past to similar allegations.

There's currently a class action lawsuit pending against Apple in New York federal court that accuses the company of violating antitrust laws in the eBook market in an effort to take down Amazon.com.

Last month, Apple's lawyers made moves to dismiss the claims, saying its agency pricing agreements are “well established as lawful and legitimate business conduct" and attacking the foundation for the plaintiffs' theories. According to the legal filing:

"Plaintiffs contend Apple acted as a coordinating hub even though they explicitly acknowledge Apple was a new entrant (not a dominant distributor), with no market power, no experience in book distribution, no business relationships with the Publishers, and no vested interest in the success of the physical book market."

Apple also addressed theories that its move were designed to prop up its iPad and negate a potential threat from Amazon's Kindle Fire:

"Nor does this “Kindle theory” make sense on its own terms. For example, if Amazon was a “threat” that needed to be squelched by means of an illegal conspiracy, why would Apple offer Amazon’s Kindle app on the iPad? Why would Apple conclude that conspiring to force Amazon to no longer lose money on eBooks would cripple Amazon’s competitive fortunes? And why would Apple perceive the need for an illegal solution to the “Kindle threat” when it had an obvious and lawful one which it implemented – namely, introducing a multipurpose device (the iPad) whose marketing and sales success was not centred on eBook sales?"

If publishers cut a deal with the DOJ, it's been speculated that they might provide prosecutors with evidence to prove a conspiracy.

In a statement, Hichette said it had “reluctantly” joined the settlement and that "was not involved in a conspiracy to illegally fix the price of e-books, and we have made no admission of liability."

The company added, "“Hachette’s unilateral adoption of agency was designed to facilitate entry by a new retail competitor and to increase the diversity and health of retail booksellers,and we took these actions knowing that Hachette itself would make less money than before the adoption of agency.”

HarperCollins also put out a statement that it had “made a business decision to settle the D.O.J. investigation in order to end a potentially protracted legal battle.”

The DOJ has taken on Apple and other large tech companies in the recent past and forced some changes. The most notable example came in 2010 when after launching an investigation against Apple, Google, Pixar, and others for making "no employee poaching" agreements with each other, prosecutors reached a deal with the companies to cut out the practice.

Amazon is cheering the latest development. Andrew Herdener, a spokesman, said in a statement obtained by The New York Times, “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books.”

E-mail: eriq.gardner@thr.com

Twitter: @eriqgardner