Feds Claim Unlawful “Conspiracy” Inflated Prices of E-books

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Antitrust lawsuit alleges Apple and five publishers conspired to eliminate competition.

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Confirming rising speculation over an impending lawsuit, the Antitrust Division of the Department of Justice (DOJ) sued Apple Inc. and five of the six largest domestic trade book publishers yesterday for an alleged “conspiracy” to raise the price of e-books.

The Justice Department claimed that the conspirators raised prices by causing the e-book industry to switch from a wholesale business model, in which retailers set retail prices, to an agency model, in which publishers set retail prices. The lawsuit seeks to enjoin any current or future agreements in which the publishers or Apple attempt to fix the retail prices of e-books.

Under the formerly dominant wholesale model, the largest retailer of e-books, Amazon.com, commonly sold the most popular e-books for $9.99. Other e-book retailers frequently competed with Amazon at this price.  According to the government’s complaint, agreements among the conspirators caused the prices of the most popular e-books to rise from the competitive $9.99 to tiered prices ranging from $12.99 to $14.99.

The publishers allegedly threatened to withhold their e-books from Amazon and other retailers unless they agreed to the higher, tiered prices. The government asserted that these other retailers had no choice but to adopt the agency model, which unlawfully forced consumer to overpay for e-books by “tens of millions of dollars.”

Three of the five publishers have agreed to proposed settlements that would require the publishers to terminate any agency model pricing agreements with Apple. In addition to allowing other retailers to terminate similar pricing agreements with the publishers, the settlements would prohibit the publishers for two years from entering into any contacts that set the retail prices of e-books. The settlements have been submitted to the judge for approval.

This antitrust lawsuit is likely the last under the direction of Acting Assistant Attorney General Sharis A. Pozen, who has announced she will step down as the head of the DOJ’s Antitrust Division at the end of the month. In her prepared remarks at a press conference announcing the government’s lawsuit, Pozen recognized the ability of the U.S. antitrust laws to “keep pace with technology” and asserted that the lawsuit and proposed settlements “will restore price competition so that consumers can pay lower prices for their e-books.”

With the departure of Pozen, Joe Wayland will take over as acting head of the Antitrust Division.  President Obama’s permanent nomination to the position, William Baer, is awaiting confirmation by the Senate.