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Justice Department Responds to Ebook Lawsuit Objections
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Posted On July 30, 2012


In a strongly worded document, the U.S. Department of Justice responded to public comments made objecting to the department’s proposed settlement of price fixing charges levied against Apple, Inc., HarperCollins, Simon & Schuster, and four other publishers. The charges arose out of an alleged scheme between Apple and the publishers to establish an “agency model” of ebook pricing, with a goal of defeating Amazon.com’s widespread ebook discounting. Under this model, the publishers agree to follow the same pricing models in their sales to all ebook vendors including Amazon. According to the Justice Department, the scheme resulted in higher ebook prices and was a violation of federal antitrust laws.

The Justice Department filed the antitrust complaint in April 2012 after a multiyear investigation related to Apple’s entry into the ebook market with its newly released iPad. Up until that point, Amazon dominated the ebook market with its Kindle e-reader and its discount pricing practices. Amazon’s broad market of physical books and other products allowed it to offer most newly released ebooks at a $9.99 price tag, well below the cost of the physical book, and often below the wholesale cost that Amazon paid to the publisher for its ebooks. Amazon recouped those losses by its high volume of overall sales, as well as sales of its Kindle e-reader.

According to the Justice Department’s investigation and complaint, when Apple planned to enter the ebook market with its iPad, it did not attempt to match Amazon’s discount pricing practices. Instead, Apple and the publishers “colluded,” or agreed to use the agency model for pricing ebooks. This model requires all ebook sellers, including Amazon, to follow the same retail pricing plan for ebooks, tied to the cost of the print book. As a result, there was reportedly a sudden increase in ebook prices as newly published books suddenly increased by $3 or $4 per title, with the same price on Amazon, Apple iTunes, Barnes & Noble, and other ebook sellers. While publishers and vendors are free to select whatever pricing model suits their particular needs, it is a violation of antitrust law for publishers to collectively agree to a pricing policy or pricing scheme for the purposes of defeating competition or raising prices.

Simultaneously with the Justice Department’s antitrust filing was a proposed settlement of the claims. The settlement would require publishers to terminate their contracts with Apple, as well as any other “agency model” contracts with other ebook vendors. The settlement would also put a 2-year moratorium on any other form of agency contract, require the publishers to stop communicating competitive information and not to retaliate against retailers that discount ebooks, and agree not to fix prices for ebooks. To ensure that the publishers are complying with the settlement, they would need to provide the Justice Department with copies of retail ebook sales agreements and allow department review of their practices.

Because antitrust law is intended to benefit the public by restricting price-fixing and other anticompetitive measures, the public is permitted to submit comments on antitrust settlements, such as the one proposed by the Justice Department. The department received nearly 870 comments. Interestingly, the majority of them (nearly 800, opposed the settlement and supported the practices that Apple and the publishers were engaging in.

The Justice Department considered but dismissed the objections, finding that the proposed settlement was in the public interest and in compliance with federal antitrust law. The department noted that most of the objections were from organizations and businesses that “have an interest in seeing consumers pay more for ebooks”, such as booksellers such as Barnes & Noble and the American Booksellers Association, literary agents, publishing and authors groups, including the Authors Guild, and even defendant Apple. The Justice Department found that objections to the settlement—which would preserve the status quo of higher prices—were “serving their own self-interests” and that the group's frustrations arose not from the settlement but from, “the evolving nature of the publishing industry.”

Responding more specifically, the Justice Department argued that agency model pricing wasn’t illegal in and of itself, but that the collective action among Apple and the publishers was illegal. Antitrust laws “were enacted to protect competition, not competitors.” Reacting to claims that the collective action was necessary to “end Amazon’s ninety percent share of the ebook market,” the Justice Department noted Barnes & Noble, Apple, and other ebook vendors had already begun to take market share from Apple before the agreements, and that the iPad, NOOK, and new e-reader technologies were also broadening competition. Also, the Justice Department reported that “low prices, fierce rivalries, and innovations” are central to free markets and the core of what antitrust law is intended to protect.

As for the changing publishing industry, the Justice Department noted that the settlement does not impact existing print book sales practices. Publishers and sellers can continue to engage in discounting, subsidizing of marketing and promotion, and other sales activities. If, however, consumers opt not to go to physical bookstores or purchase print books, that is up to the marketplace, not the publishers or booksellers to determine.

The Department’s response sets the stage for the next step, which is for the judge to accept the proposed settlement, make changes in the settlement, or reject it. However, both the settlement proposal and the original antitrust lawsuit remain controversial.

As noted, nearly 90% of the comments received by the Justice Department opposed the settlement. Apple, along with MacMillan and Penguin Group publishers  rejected the settlement and indicated a willingness to take the case to trial. Sen. Charles Schumer (D-N.Y.) recently wrote an op-ed piece for The Wall Street Journal urging that the Justice Department drop the suit outright. He argues that competition increased and average ebook prices decreased after the agency agreements went into effect.

Some commentators, however, are expecting the settlement to go through and changes to begin quite rapidly. Industry expert and blogger Mike Shatzin suggested that Amazon could be “liberate(d)” from agency model pricing constraints by September, and that other ebook vendors will likely adjust (drop) prices to compete. Robert Gottlieb, chairman of Trident Media, expressed concern that authors are not being considered in this debate and will likely lose market share. An article in Time.com noted that Amazon revolutionized the way books are distributed and read, and consumers benefitted from that revolution, and that their dominance has yet to “stifle innovation and authorship.”

It’s likely that no matter how this turns out, the ebook and broader publishing industry will continue to undergo profound change. Amazon.com, the angel or devil of the story depending on perspective, remains a power to be dealt with. Perhaps the quote that may be most telling is from the comments of a self-published author who suggested that the “kind of disruption caused by the Internet is often messy,” and that middlemen such as literary agents, publishers, and brick and mortar booksellers have “gone from being indispensable to optional.”


George H. Pike is the director of the Pritzker Legal Research Center at Northwestern University School of Law. He writes the Legal Issues column and feature articles for Information Today.

Email George H. Pike
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