Justice files suit against Apple, publishers for e-book pricing

The Justice Department said on Wednesday that it has reached a settlement with three publishers but will press ahead with a lawsuit against Apple and two other publishers alleging that they conspired to set prices for electronic books, driving up prices "virtually overnight" and costing readers millions of dollars extra.

Hachette Book Group, HarperCollins Publishers, and Simon & Schuster have agreed to settle the e-book price-fixing allegations included in the Justice Department's lawsuit. Justice, however, said it will litigate against Apple and publishers Macmillan and Penguin Group, which chose not to settle the case.

Connecticut Attorney General George Jepsen announced that his state and Texas had filed a similar lawsuit in Texas along with more than a dozen other states. He said the states have reached their own settlement with Hachette and HarperCollins, which together have agreed to provide $51 million in restitution to consumers.

The Justice Department alleges that the price-fixing scheme began in the summer of 2009 when both the publishers and Apple, which was preparing to launch its first iPad, were increasingly threatened by Amazon's growing dominance in the e-book market and its $9.99 e-book price model. The five publishers and Apple conspired to raise prices for e-books by $2 to $3 per book and limit competition in the growing market for digital books that can be read on e-readers such as Amazon's Kindle, officials said at a news conference.

"As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles," Attorney General Eric Holder said.

As part of the scheme, Apple and the publishers agreed to alter their business model under which publishers sold books to retailers, which were then free to set their own prices for the books. Under the deal reached with Apple, the five publishers would instead set the price for e-books, limiting the ability of retailers such as Amazon to discount books. At the same time, Apple would get a 30 percent cut from the e-books it sold and a pledge that publishers would not allow any other retailer to sell e-books for less than Apple charged. The scheme "drove up e-book prices virtually overnight," said Acting Assistant Attorney General for Antitrust Sharis Pozen.

The lawsuit, filed in U.S. district court in New York, alleges that top executives at Apple and the publishers were involved in the conspiracy -- including the late Apple cofounder Steve Jobs. "We'll go to [an] agency model where you set the price and we get our 30 percent, and yes, the customer pays a little more, but that's what you want, anyway," Jobs was quoted as saying, according to the complaint.

The lawsuit is another ding to the reputation of Apple, which is already battling criticism about working conditions at its Chinese factories. In contrast to rival Google, Apple has a low profile in Washington and has managed to escape much scrutiny from Congress and regulators.

As part of the proposed settlement with Justice, Hachette, HarperCollins, and Simon & Schuster have agreed to end their agreements with Apple and other e-book retailers. The publishers also will be barred for two years from entering into new agreements that limit the ability of retailers to offer discounts. They must allow retailers such as Amazon and Barnes & Noble to price e-books as they please. The three publishers will be prohibited for five years from conspiring or sharing sensitive information with their competitors. They also have agreed to a strict "antitrust compliance program" that will require them to seek approval before entering into any new e-book ventures with other publishers and to provide the Justice Department with regular updates on any communications with other publishers.

Officials with Apple, Macmillan, and Penguin did not respond to requests for comment on the Justice lawsuit.