U.S. Department of Justice Sues Apple and Publishers over E-Book Pricing

Following up on last month's threat to file suit over the Apple-backed agency model of e-book pricing, the U.S. Department of Justice today sued Apple and a number of book publishers over the practice, Bloomberg briefly reports. Settlement talks had been ongoing, but Apple and the publishers were reportedly unwilling to meet the Department of Justice's demands.

The U.S. filed a price- fixing antitrust lawsuit against Apple Corp. and Hachette in New York district court over eBook pricing. The government also sued HarperCollins, Macmillan and Penguin, according to court papers.

Settlement talks had centered around dismantling the agency model, which sees publishers set retail pricing and vendors receive a percentage of the sales price. Apple had pushed for the agency model in an attempt to dilute Amazon's power in the book market, where it had offered vast discounts, even sometimes selling books at a loss, in order to attract customers who would make other purchases through the site.

But the Department of Justice believes that the agency model as implemented by the publishers at Apple's behest amounts to collusion, with contracts between Apple and the publishers including language that prevented the publishers from offering lower pricing to competitors than they did to Apple. Contrary to the government's claims of an anti-competitive impact from the agency model, Apple and several of the publishers have argued that the move has fostered competitiveness by limiting Amazon's stranglehold on the book market. Consequently, the two sides have been unable to reach a settlement.

Update: Bloomberg reports that the Department of Justice has reached a settlement with Simon & Schuster, Hachette, and HarperCollins over the issue. Once finalized, the settlement would leave Apple, Macmillan and Penguin as defendants in the case.

Macmillan CEO John Sargent has published an open letter to the publisher's authors, illustrators and agents outlining why it will fight the lawsuit.

It is always better if possible to settle these matters before a case is brought. The costs of continuing—in time, distraction, and expense— are truly daunting.

But the terms the DOJ demanded were too onerous. After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model. 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.

Sargent notes that Macmillan makes less money under the agency model than it did under the previous wholesale model, but that it made the change to support competitiveness in the market, not stifle it.

Addressing the Department of Justice's claim that publishers and Apple colluded to fix pricing, Sargent also describes the circumstances under which he made the final decision to move to the agency model, calling it the "loneliest decision" he has ever made.

The government’s charge is that Macmillan’s CEO colluded with other CEO’s in changing to the agency model. I am Macmillan’s CEO and I made the decision to move Macmillan to the agency model. After days of thought and worry, I made the decision on January 22nd, 2010 a little after 4:00 AM, on an exercise bike in my basement. It remains the loneliest decision I have ever made, and I see no reason to go back on it now.

Update 2: The Department of Justice has released a transcript of a press conference statement from Attorney General Eric Holder regarding the lawsuit.

Update 3: Connecticut Attorney General George Jepsen today announced that a group of sixteen states have followed the Department of Justice's lead and filed their own lawsuit against Apple and publishers. The complaint claims that consumers were overcharged by at least $100 million due to the alleged price fixing.

Update 4: The Verge has a thorough analysis of the highlights from the Department of Justice's filing.