Is the Fix In? DOJ Sues Apple for e-Book Price Fixing

by Holly Shoemaker

I discussed in March how the U.S. Department of Justice (DOJ) started to investigate Apple for e-book price fixing. On Wednesday, April 11, 2012, the DOJ filed a lawsuit against Apple and five publishing companies for price fixing. The publishers include: Simon & Schuster, Hachette Book Group, Penguin Group, Macmillan and HarperCollins. HarperCollins, Simon & Schuster and Hachette have since settled.

Overview of DOJ’s Case

The case centers on the pricing strategy used with Apple’s 2010 iPad release. The DOJ claims that Apple conspired with the five publishers to increase e-book prices, which prevented price competition.

• Agency model – Apple and the publishers entered into an "agency model" agreement. This allowed the publishers to set e-book prices. In turn, Apple received 30 percent of the profits. Part of this component included a “most favored nation” clause, which stipulated that retailers, like Amazon, had to partake in agency deals for four months.
• Executive involvement – The DOJ said that high-level executives held secret meetings and discussed how to get Amazon to cooperate in offering books at what they deemed acceptable price levels.

Apple’s Response

Apple does not make public statements too often. It did in this case. Apple maintains it allowed publishers to set e-book prices just like developers set prices for apps. Therefore, the company claims it did not engage in price fixing.

Concluding Thoughts

Ultimately, Apple used contractual agreements to force parties into an agency model. However, the issue is a murky one as Amazon has engaged in tactics that some would call price fixing to promote its Kindle line.

Because the DOJ claims to have recordings and documents, it has a stronger case against Apple. Furthermore, some of the publishers were against the agency model from the start. Clearly the decision to promote and “force” others into an agency model was Apple’s e-book strategy to compete with Amazon. Ironically, it will have the opposite effect as Amazon now gains the prime position for setting pricing. In the end, the action taken by the DOJ will result in lower prices for consumers. It may also impact Apple's e-book textbook plan.