Apple and Big Publishers Conspired To Fix Ebook Pricing, Lawsuit Alleges E-Mail This Link Enter recipient's e-mail: Close<javascript:void(0)> By Michael Kelley Library Journal.com Aug 10, 2011 A Seattle-based law firm filed a nationwide class-action suit on Tuesday against Apple Inc. and five of the Big Six publishers alleging that the companies conspired to illegally fix ebook pricing in an effort to undermine Amazon's "pro-consumer, discounted pricing." The suit, filed by Hagens Berman in U.S. District Court for the Northern District of California, claims that Apple, HarperCollins Publishers, Hachette Book Group, Macmillan Publishers, Penguin Group Inc., and Simon & Schuster Inc. colluded to restrain trade and violated antitrust laws. "Fortunately for the publishers, they had a co-conspirator as terrified as they were over Amazon's popularity and pricing structure, and that was Apple," Hagens Berman attorney Steve Berman said in a press release<http://www.marketwatch.com/story/hagens-berman-files-class-action-lawsuit-against-apple-and-publishers-2011-08-09?reflink=MW_news_stmp>. "We intend to prove that Apple needed a way to neutralize Amazon's Kindle before its popularity could challenge the upcoming introduction of the iPad, a device Apple intended to compete as an e-reader." "What is most loathsome about the behavior of Apple and the publishers is that it is stifling the power of innovation, the very thing Apple purports to champion," Berman said. "A few big business heavyweights are taking a powerful advancement of technology that would benefit consumers and suffocating it to protect profit margins and market-share." The lawsuit charges Apple and the publishers violated a variety of state and federal laws, including the Sherman Act, the Cartwright Act, and the Unfair Competition Act. The Federal Trade Commission was not involved in the case, even though it involves antitrust claims. "Macmillan denies the allegations and intendes to defend the case vigorously," a spokesperson for Macmillan said. Representatives from HarperCollins and Simon & Schuster declined to comment. Representatives from Apple and the other two publishers could not be reached for comment. The lawsuit alleges the following scenario took place (quotes are drawn from the complaint<http://www.hbsslaw.com/cases-and-investigations/ebooks>): Describing the publishing industry as "hidebound and lacking innovation for decades," the five named publishers were deeply concerned by "the disruptive ebook technology that threatened their inefficient and antiquated business model." Amazon's setting of ebook prices at $9.99 would "disrupt the publishers' long-established brick-and-mortar model faster than the publishers were willing to accept,," and threaten their profit margins. At the same time, "Apple did not want to enter the ebook market subject to... margin pressure caused by Amazon's pricing." Apple was also concerned that if Amazon's Kindle became the dominant ereader, the Kindle platform would also begin to dominate in the distribution of other digital media where Apple prevailed. The companies then began to coordinate their activities in order "to restrain trade and retard innovation." Collusion was necessary because "if one publisher acted alone to try and raise prices for its titles, that publisher would risk immediately losing a substantial (and growing) volume of sales." A key event was the simultaneous announcement in January 2010 by the publishers that they were switching from a wholesale pricing model to an agency model for ebook sales. [The agency model allows publishers to set the retail price for ebooks, and the retailers take a commission on the sale to readers. Under the wholesale model, which is used for print books, publishers sell books to retailers for a set price, but they surrender control over the price customers are ultimately charged.] On January 27, 2010, four days after the announcement that the publishers were switching to the agency model, Apple released the iPad and disclosed that it had agreements with the publishers to provide ebook content with prices based on the agency model. "The shift to the Agency model occurred simultaneously and almost overnight - under any definition this shift constitutes a radical, structural change to a business model that has been in existence for decades." The switch to the agency model was accompanied by an agreement that ebooks offered through Apple would be calculated by a formula tied to physical books and also by a "most favored nation" (MFN) clause that prevented the publishers from offering lower prices than Apple's to other distribution channels-resulting in higher ebook prices. Apple and the publishers then colluded to force Amazon to accept the agency model, and if Amazon refused, since the agency model would prevent discounting, then the publishers would deny Amazon access to its titles. A January 2010 interview between Walt Mossberg of the Wall Street Journal and Apple CEO Steve Jobs is cited as evidence that Apple brokered the switch to the agency model: Mossberg: Why should [a consumer] buy a book for $13.99 on your device when she can buy one for $9.99 from Amazon or Barnes & Noble? Jobs: That won't be the case. Mossberg: You won't be $14.99, or they won't be $9.99? Jobs: The prices will be the same.... Publishers are actually withholding their books from Amazon because they're not happy. The suit then chronicles Amazon's battle in early 2010 with the publishers (particularly Macmillan<http://www.nytimes.com/2010/02/01/technology/companies/01amazonweb.html>) over demands that Amazon switch to the agency model. Amazon ultimately lost the battle, entering into agency agreements with all the publishers that had signed with Apple. The suit "seeks damages for the purchase of e-books, an injunction against pricing e-books with the agency model and forfeiture of the illegal profits received by the defendants as a result of their anticompetitive conduct." The named plaintiffs are Anthony Petru, a resident of Oakland, CA, and Marcus Mathis, a resident of Natchez, MS, who are described as purchasers of ebooks above the price of $9.99 for use on the Amazon Kindle, "and all others similarly situated." It wasn't clear if there was a connection between the plaintiffs. The simultaneous switch to the agency model timed to the release of the iPad has spurred investigations by Texas<http://lunch.publishersmarketplace.com/2010/08/connecticut_joins_texas_in_inve/> and Connecticut<http://lunch.publishersmarketplace.com/2010/08/connecticut_joins_texas_in_inve/>. Tom Kelley, a spokesperson for the attorney general of Texas, said the office does not, as a matter of policy, "acknowledge investigations of any kind." In July 2010, Connecticut's then attorney general Richard Blumenthal (who is now a senator) wrote<http://www.ct.gov/ag/lib/ag/consumers/amazonltr080110.pdf> to both Apple and Amazon to express his concerns about their coupling of the agency model with MFN clauses. "MFN clauses-especially when they are offered to two of the largest e-book retail competitors in the United States-have the potential to impair horizontal competition by encouraging coordinated pricing and discouraging discounting," he wrote<http://www.ct.gov/ag/lib/ag/consumers/appleltr080210.pdf>. The concern is not limited to the United States. In March, European Union antitrust officials raided the offices of several publishers as part of a preliminary investigation into whether they had conspired to keep ebook prices high. According to the new BookStats survey released on Tuesday, e-book revenue for trade publishers increased<http://www.libraryjournal.com/lj/home/891561-264/new_statistics_model_for_book.html.csp> by 1274 percent since 2008, reaching $878 million in 2010. Hagens Berman filed a separate lawsuit<http://www.hbsslaw.com/newsroom/?nid=2081> on Monday alleging that several large e-book publishers are under-reporting the number of e-books sold, paying authors less than their share of royalties. Sheila A. Stuckey Director of Libraries Kentucky State University Paul G. Blazer Library Frankfort, Kentucky 40601 Phone: 502-597-6852 Fax: 502-597-5068 [cid:485262412@07102009-19A8] "Celebraing 125 Years - Uniting Generations: Securing Futures"