Publishers, Not Apple, Settle EBook Lawsuit

(CN) - Three of the largest book publishers in the United States agreed Tuesday to settle antitrust allegations over their agreements with Apple on ebook pricing.

"Under the proposed settlement agreement with Hachette, HarperCollins and Simon & Schuster, they will terminate their agreements with Apple and other e-books retailers and will be prohibited for two years from entering into new agreements that constrain retailers' ability to offer discounts or other promotions to consumers to encourage the sale of the publishers' e-books," the Justice Department said in a statement.

The government filed suit early Tuesday against the three publishers as well as Apple, Penguin, Verlagsgruppe Georg von Holtzbrinck and Holtzbrinck's subsidiary Macmillan. Hours later, prosecutors said they are still pursuing claims against the nonsettling parties.

"The proposed settlement agreement also will prohibit Hachette, HarperCollins and Simon & Schuster for five years from again conspiring with or sharing competitively sensitive information with their competitors," according to the statement. "It will impose a strong antitrust compliance program on the three companies, which will include a requirement that each provide advance notification to the department of any e-book ventures they plan to undertake jointly with other publishers and that each regularly report to the department on any communications they have with other publishers. Also for five years, Hachette, HarperCollins and Simon & Schuster will be forbidden from agreeing to any kind of MFN that could undermine the effectiveness of the settlement agreement."

The proposed settlement will be published in the Federal Register, starting 60-day comment period before the court can enter final judgment.

Amazon boosted the popularity of ebooks with the launch of the Kindle reader device in 2007, traditional book publishers quickly regrouped keep themselves in business, according to the complaint filed in the Southern District of New York.

Prosecutors say that ebooks took off in part because Amazon substantially lowered the price of new and bestselling ebooks to $9.99.

"Each publisher defendant desired higher retail e-book prices across the industry before '$9.99' became an entrenched consumer expectation," the 36-page complaint states. "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 thereafter 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."

Timed alongside the launch of Apple's iPad, the companies allegedly "reached an agreement whereby retail price competition would cease (which all the conspirators desired), retail e-book prices would increase significantly (which the publisher defendants desired), and Apple would be guaranteed a 30 percent 'commission' on each e-book it sold (which Apple desired)." (Parentheses in complaint.)

Prosecutors say that the co-conspirators ended price competition with what Apple described as an "aikido" move, referring to the Japanese martial art.

"Over three days in January 2010, each publisher defendant entered into a functionally identical agency contract with Apple that would go into effect simultaneously in April 2010 and 'chang[e] the industry permanently,'" the complaint states (brackets in original). "These 'Apple Agency Agreements' conferred on the publisher defendants the power to set Apple's retail prices for e-books, while granting Apple the assurance that the publisher defendants would raise retail e-book prices at all other e-book outlets, too."

Instead of $9.99, the defendants allegedly priced new and bestselling books at $12.99, $14.99 or $16.99. Retail ebook prices increased in relation to the hardcover price, the complaint states.

"Defendants' ongoing conspiracy and agreement have caused e-book consumers to pay tens of millions of dollars more for e-books than they otherwise would have paid," the complaint states.

Acting Assistant Attorney General for Antitrust Sharis Pozen, Justice Department attorney Daniel McCuaig and others are leading the government's case.

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