DOJ Settles with Three Publishers On E-book Pricing, But Apple, Two Others Fight Back

Justice reached a settlement with Hachette, HarperCollins and Simon & Schuster that would allow retailers like Amazon to reduce their e-book prices. If the court approves the agreement, the publishers must terminate their agreements with Apple and other e-book retailers and must not enter into any agreements that “constrain retailers’ ability to offer discounts or other promotions” for the next two years. The publishers will also agree to refrain from sharing “competitively sensitive information” with their competitors for the next five years.

Sen. Mike Lee, R-Utah, backed the DOJ’s decision to sue Apple and the other two publishers. “Illegal price fixing harms consumers and must not be tolerated,” he said. “I am confident the judicial process will properly resolve this matter and curtail any illegal actions that result in significant consumer harm."

However, CEA President Gary Shapiro decried the DOJ decision as “another sad milestone in our government’s war on American companies.” He called Apple “an American crown jewel that other nations covet.” Still, “our own government leads an attack on its entry” into e-books, Shapiro said. “Sadly, we've seen this before with absurd legal U.S. government challenges to Google, Intel, Microsoft and Qualcomm -- world-class American innovators. Each time, no real harm was found, but our government’s attacks enabled others to extract billions in fines or foolish remedies. Our nation is heading toward an economic cliff, and the administration is not only putting its full weight on the accelerator, it is removing the airbags of innovation and growth, which are our best chance at safely avoiding economic catastrophe."

The government has a strong complaint, but must prove publishers acted collectively, Penn State antitrust law professor John Lopatka told us. To disprove the price-fixing allegations, the publishers must prove they did not conspire with each other, he said. If they could prove that, it would mean their agreements with Apple were not per se illegal, he said. In that case, the government could still sue on grounds that the agreements reached had anticompetitive effects and were harmful to consumers.

"There is little chance that the Department of Justice will fail,” said Consumer Federation of America Research Director Mark Cooper. “This is a ’slam-dunk’ case of collusive, anti-competitive behavior. ... At this crucial moment in the transition to a digital economy, the case will make clear that antitrust laws have an important role to play in ensuring competition in the digital economy of the 21st century."

"Macmillan did not act illegally. Macmillan did not collude,” CEO John Sargent said in a post on a Macmillan website (http://xrl.us/bm3fxs) addressed to “authors, illustrators and agents.” Macmillan acted independently from the other publishers, he said. While the costs of continuing to fight Justice are “daunting,” Macmillan decided settling would have “allowed Amazon to recover the monopoly position it had been building before our switch to the agency model,” Sargent said. “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.” Apple declined to comment.

Amazon awaits the outcome of the case. Amazon had initially offered e-books for $9.99, often selling them at a loss to promote Kindle sales. Publishers that Justice alleges conspired together forced Amazon to raise e-book prices. “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books,” said an Amazon spokesman.

Justice will still litigate against Apple, Macmillan and Penguin, which refused to sign agreements, U.S. Attorney General Eric Holder told a news conference Wednesday. “As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles,” he said. “We allege that executives at the highest levels of these companies -- concerned that e-book sellers had reduced prices -- worked together to eliminate competition among stores selling e-books, ultimately increasing prices for consumers.”

E-book prices were raised as much as $5 per book, costing customers an extra $100 million since April 2010, said Acting Assistant Attorney General Sharis Pozen. “We will pursue vigorously our claims against those companies to ensure that consumers get the full benefits of the competition they deserve."

Apple and the publishers also face lawsuits from 15 states. Attorneys general from Texas, Ohio, Connecticut and Pennsylvania filed their own suits in U.S. District Court in Austin, Texas Wednesday. Connecticut and Texas reportedly reached agreements with HarperCollins to provide restitution of $52 million to consumers, based on the number of books sold in each state and the number of states participating.

The Justice action would stop free enterprise and allow Amazon to “dominate” the e-book market, said Competitive Enterprise Institute Vice President for Policy Wayne Crews. Any negative effects from the alleged agreements could be addressed by customers, said CEI fellow Ryan Young: “Consumers are much better positioned to reward good pricing models and punish bad ones than are Justice Department attorneys.”