The Justice Department and 16 states today filed suits against Apple and five major publishers -- Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster -- alleging they conspired to limit competition in the pricing of e-books. The suit has been reported to be in the works for several months.
"What was at first a great benefit to buyers of electronic books – lower prices – apparently was considered too much of a benefit," said Ohio Attorney General Mike DeWine. "Customers who pay out their hard-earned money, no matter the product or service, deserve better."
Hachette, HarperCollins and Simon & Schuster have agreed to a proposed settlement, U.S. Attorney General Eric Holder said at a news conference this afternoon. He said the proposed settlement would require the publishers "to grant retailers – such as Amazon and Barnes & Noble – the freedom to reduce the prices of their e-book titles." He said the settlement also requires the companies to terminate their anticompetitive most-favored-nation agreements with Apple and other e-books retailers.
Arizona Attorney General Tom Horne said the states have reached agreements in principle with Harper Collins and Hachette to provide "significant consumer restitution" as well as injunctive relief.
Holder said the alleged comspiracy began in the summer of 2009, whe "executives at the highest levels of the companies included in today’s lawsuit – concerned that e-book sellers had reduced prices – worked together to eliminate competition among stores selling e-books, ultimately increasing prices for consumers."
"As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles," Holder said. "During regular, near-quarterly meetings, we allege 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. Our investigation even revealed that one CEO allegedly went so far as to encourage an e-book retailer to punish another publisher for not engaging in these illegal practices."
Holder said Connecticut Attorney General George Jepsen and Texas Attorney General Greg Abbott played a major role in the investigation and warned that other major companies should beware of running afoul of the antitrust laws.
"Today’s action sends a clear message that the Department’s Antitrust Division continues to be open for business – and that we will not hesitate to do what is necessary to protect American consumers," Holder said.
The Justice Department's case is similar to an antitrust suit filed last August by by attorney Jeff Friedman of Hagens Berman Sobol Shapiro LLP, a Berkeley, Calif., law firm.
Friedman's suit claims Apple conspired with five major publishers to raise the price of e-books, dominate the market and force Amazon to stop selling at a discount. The conspiracy worked so well that e-books now cost as much or more than paperbacks, the suit alleges.
Friedman's suit traces the history of e-books, noting that when Amazon introduced the Kindle back in November 2007, its “electronic ink” technology was such a hit that supplies of the original Kindle sold out in less than six hours. Besides portability and instant delivery, e-books greatly reduce the costs associated with brick-and-mortar publishing. But the suit, filed in U.S. District Court in San Francisco, says large publishing houses quickly realized that e-publishing also represented a huge threat to their profit margins.
Amazon was selling Kindle e-books for $9.99 or less, while hardcover editions of the same books sold for more than $20. Faced with this threat to their business model, the suit says, publishers teamed up with Apple to “fight back in an effort to restrain trade and retard innovation.”
“Given Amazon’s first-mover advantage and ever growing installed user base, publishers knew that no single publisher could slow down Amazon and unilaterally force an increase in e-book retail prices. If one publisher acted alone to try and raise prices for its titles, that publisher would risk immediately losing a substantial (and growing) volume of sales,” the suit charges.
“Not wanting to risk a significant loss of sales in the fastest growing market (e-book sales), the publishers … solved this problem through coordinating between themselves (and Apple) to force Amazon to abandon its pro-consumer pricing.”
States take action
The states' lawsuit, filed in the U.S. Court for the Western District of Texas, alleges that Macmillan, Penguin and Simon & Schuster conspired with other publishers and Apple to artificially raise retail prices for e-books by imposing a distribution model in which the publishers set the prices for bestseller e-books at $12.99 and $14.99. When Apple prepared to enter the e-book market in late 2009 and early 2010, the publishers and Apple agreed to adopt an agency distribution model as a mechanism to allow them to fix prices. To enforce their price-fixing scheme, the publishers and Apple relied on contract terms that forced all e-book outlets to sell e-books at the same price. Because the publishers agreed to use the same prices, retail price competition was eliminated. According to the States’ enforcement action, the coordinated agreement to fix prices resulted in e-book customers paying more than $100 million in overcharges.
The states seek injunctive relief to reverse the effects of the defendants’ anti-competitive conduct as well as damages for customers who paid artificially inflated prices for e-books.
States mounting the action are Arizona, Alaska, Colorado, Connecticut, Illinois, Iowa, Maryland, Missouri, Ohio, Pennsylvania, Puerto Rico, South Dakota, Tennessee, Texas, Vermont and West Virginia.
The Justice Department today filed suit against Apple and five major publishers, alleging they conspired to limit competition in the pricing of e-books. Th...