Understanding the DOJ’s pursuit of Apple and the five publishing companies named in its suit

In the wake of the lawsuit filed yesterday by the Eric Holder led Department of Justice against Apple and publishing houses Macmillian, Penguin, Hachette, HarperCollins and Simon & Schuster, new details about its history are emerging.

According to an article in Time, the origins of this case go back to the 2007 release of Amazon’s Kindle, an event touted as being the starting point of the e-book boom.  In an attempt to boost Kindle sales even further, Amazon started selling popular e-books for $9.99, which effectively made the 5 named publishers go into panic mode, according to the suit.  The publishers, used to the typical list price of a new hardcover book being at least $25, theorized that lower prices would lead to “deflation” of hardcover book prices, and that that would lead to “declining revenues for publishers,” eventually causing them to lose control of the publishing industry.  At this point, the lawsuit alleges, publishing executives started secretly plotting to raise e-book prices before consumers became accustomed to the $9.99 price tag.

Apple’s involvement started when, with the impending release of the iPad, they set their sights on dominating the e-book market.  After contemplating several business models, Eddy Cue, now Apple’s senior vice president of Internet Software and Services, reached out to the panicked publishing companies and suggested they switch from the traditional “wholesale model” in which retailers simply set their own prices, to an “agency model” in which publishers set book prices and Apple, acting as an “agent” would receive a 30% commission on each sale.  According to the suit, Apple played all the major publishers off each other to guarantee that all participated in this model.

The last part of the plan was a “most-favored-nation” clause, which, according to the IT Law Wiki is defined as: “a contract provision in which a seller (or licensor) agrees to give the buyer (or licensee) the best terms it makes available to any other buyer (or licensee).”  This means that once the deals were signed, publishers could not sell their products for a cent less than they were selling them for in the iTunes store, guaranteeing a consumer would not find a better price elsewhere and Apple would never be undersold.

The publishers accepted the deal and gave Amazon a choice:  either accept the agency model deal with higher prices, or lose the right to sell new e-book best sellers.  Amazon quickly determined it had no other choice but to accept the agency model.

The culmination of all this is nothing short of a price fixing conspiracy, the suit alleges.

As of late, three of the five accused publishers have settled with the government and will pay $50 million in restitution to e-book buyers around the United States, though they have not actually admitted to price fixing.  The settlement deal also requires the publishers end the “most favored nation” contracts.  The remaining two publishing companies, Macmillian and Penguin have not agreed to settle and have denied the charges, as has Apple.

The DOJ vows to aggressively pursue those who have not settled, end this “anti-competitive, collusive” behavior and, in a class action lawsuit led by Seattle-based law firm Hagens-Berman, put money back into the hands of the consumers whom they believe overpaid for ebooks since this all began.

Read the full article in Time.

Other sources:

Apple

IT Law Wikia