Justice Department Files Suit Against Apple, Publishers Over Ebook Price Fixing

Posted on April 11, 2012

As expected, the Department of Justice has filed suit against Apple, Simon and Schuster, Hachette, HarperCollins, MacMillan and Penguin for violations of antitrust laws in connection with ebook pricing. HarperCollins, Simon and Schuster and Hachette have settled with the government, so the lawsuit will not proceed against them. However, Apple, MacMillan and Penguin refused to sign, so the legal battle continues for them.

According to The Wall Street Journal, under the settlement the three publishers will terminate their agreements with Apple regarding ebooks and must stop telling retailers what price they can set for ebooks. That means the three publishers can no longer tell Amazon.com what price it must charge for ebooks for two years. Retailers can stagger termination dates of contracts so they are not negotiating with all the book publishers at the same time. The Justice Department said that was necessary to stop "a return to the collusively established previous outcome." The publishers are allowed to stop Amazon.com from selling its entire catalog at a loss, but if Amazon sells bestsellers at a loss and makes up for it on other books, then the publishers can't stop Amazon from discounting all their titles. Attorney General Eric Holder announced that the publishers "will also be prohibited from conspiring or sharing competitively sensitive information with their competitors for five years."

The lawsuit dramatically describes the secret meetings between Jobs and book publishing CEOs where they cooked up a deal to raise prices on ebooks and details the conspiracy to keep it a secret, complete with double deleted emails. It's pretty brutal stuff. The government quotes Steve Jobs, who Walter Isaacson has on tape explaining how he pitched the deal to the publishers:, "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 lawsuit notes that no attorneys were present at the numerous secret meetings to fix prices, which were held at luxury restaurants in New York and Europe. Of course any attorney at such a meeting would have immediately hustled his client out of the room tout de suite muttering dire imprecations about price fixing, collusion and potential lawsuits (which all happened). The government then describes the publishers' actions like some kind of Cold War Communist plot: after the infamous meeting they "regularly communicated" to "exchange sensitive information and assurances of solidarity."

We have to wonder: what were the CEOs thinking when they agreed to such a thing? Were they just so enamored of Steve Jobs that they ignored the fact that price fixing is illegal under U.S. law? This is pretty basic antitrust law, and they seemed to know enough not to allow their attorneys to be present at the meeting. The publishers who settled admitted no wrongdoing and in fact are pretty defiant about the whole thing. HarperCollins issued a press release saying it only settled to avoid a protracted lawsuit, didn't do anything wrong and then listed all the amazing benefits of the agency model that the government just ripped apart.

So, what does it all mean? Cheaper ebooks on Simon and Schuster, HarperCollins and Hachette titles, for one. The publishers must somehow compensate consumers for overpaying on ebooks (we have no idea how that's going to work). Apple will continue to rack up attorneys fees in a case it has no hope of winning. And more lawsuits loom. The EU and 16 U.S state attorneys general are also ready to file suit over price fixing.

Jeff Bezos must be cartwheeling down the halls of Amazon.com with joy. The company issued a mild statement about how the settlement is a victory for consumers and that it looks forward to lowering prices on ebooks soon.