Iowa joins antitrust suit over e-book price-fixing

Iowa Attorney General Tom Miller was one of 16 state attorneys general to file a federal antitrust lawsuit yesterday against Apple Inc. and three major U.S. publishers. The complaint alleges that the publishers and Apple conspired to raise prices on electronic books, causing consumers to be overcharged by more than $100 million. The U.S. Department of Justice filed a similar lawsuit against Apple and two publishers in a different federal court.

Since I don’t own an e-reader, I was not aware that prices for e-books and best-sellers in particular went up in 2010, when the iPad was launched. Given the consolidation in the publishing industry over the last couple of decades, I’m not shocked to hear that major players may have colluded to keep prices artificially high. An April 11 press release from the Iowa Attorney General’s Office summarizes how the alleged scheme worked.

(DES MOINES, Iowa)  Attorney General Tom Miller and 15 state attorneys general today alleged that three of the nation’s largest book publishers and Apple Inc. colluded to fix the sales prices of electronic books, or e-books.  The states’ antitrust case, which was filed in federal court in Austin, Texas, cites the defendants for violating the states’ antitrust laws and the federal Sherman Antitrust Act.

“We’re alleging that these publishers deliberately manipulated e-book prices.  That means consumers paid more than they should have, and that’s against the law,” Miller said.

The states’ antitrust action stems from a two-year investigation, led by the Texas Office of the Attorney General and coordinated with the offices of the Connecticut Attorney General and the U.S. Department of Justice, into allegations that the defendants conspired to raise e-book prices.

For years, retailers sold e-books through a traditional wholesale distribution model, under which retailers – not publishers – set e-books’ sales prices. However, the investigation revealed that Penguin, Simon & Schuster and Macmillan conspired with other publishers and Apple to artificially raise prices by imposing a distribution model in which the publishers set the prices for bestsellers at $12.99 and $14.99.

When Apple prepared to enter the e-book market, the publishers and Apple agreed to adopt an agency distribution model as a mechanism to allow them to fix prices. To enforce their price-fixing scheme, the publishers and Apple relied on contract terms that forced all e-book outlets to sell their products at the same price.  Because the publishers agreed to use the same prices, retail price competition was eliminated.  According to the states’ enforcement action, the coordinated agreement to fix prices resulted in e-book customers paying more than $100 million in overcharges.

“By colluding to use the agency distribution model to effectively eliminate free market competition and allowing publishers – rather than the marketplace – to set the price of e-books, we allege that these practices violated antitrust laws, hurt competition and cost customers more money,” Miller said.

The states’ antitrust action seeks injunctive relief to reverse the effects of the defendants’ anti-competitive conduct as well as damages for customers who paid artificially inflated prices for e-books.

The states have reached an agreement in principle with Harper Collins and Hachette to provide $52 million dollars in nationwide consumer restitution and injunctive relief.

Iowa was joined in today’s enforcement action by attorneys general in Connecticut, Alaska, Arizona, Colorado, Illinois, Maryland, Missouri, Ohio, Pennsylvania, Puerto Rico, South Dakota, Tennessee, Texas, Vermont and West Virginia.

Defendants named in the States’ antitrust action:

Macmillan

Simon & Schuster

Penguin Group

Apple Inc.

You can read the plaintiffs’ court filing here (pdf). The plaintiffs are demanding a jury trial and are requesting that the defendants pay civil penalties in each of the 16 states that joined the lawsuit.

In addition to Apple Inc., the lawsuit names three of the “big six” U.S. publishers. Another two (Harper Collins and Hachette) chose to settle out of court with the state attorneys general. The largest American publisher, Random House, is not named as a defendant. The plaintiffs allege on pages 29 to 31 of the complaint that Random House resisted pressure from the “conspiring publishers” and the Barnes & Noble retail bookseller to switch to an agency distribution model.

The Los Angeles Times reported that Simon & Schuster joined Harper Collins and Hachette in settling with the U.S. Justice Department. Apple, MacMillan and Penguin are fighting the federal government’s lawsuit as well as the one filed by state attorneys general.

I have no idea how much a typical e-book consumer can expect to receive in restitution if these lawsuits are successful.

Any relevant comments are welcome in this thread.

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