Publishers and ABA React to Justice Department Suit

On Wednesday, the U.S. Department of Justice (DOJ) filed a civil suit in district court in New York against Apple and five of the major publishers with agency model pricing for e-books. The suit charges that Apple and the publishers “conspired to raise retail prices of e-books” and, as a result, “consumers paid millions of dollars more for some of the most popular titles.” The five publishers — Hachette Book Group, HarperCollins, Macmillan, Penguin Group (USA), and Simon & Schuster — adopted the agency model for e-book sales at the end of January 2010.  Random House, which adopted the agency model in February 2011, is not named in the suit.

Though they denied violating antitrust laws and defended the agency model, in order to avoid a protracted legal battle, Hachette, HarperCollins, and Simon & Schuster have reportedly settled the suit with DOJ and will terminate their agreements with Apple and agree to refrain from limiting any retailer’s ability to set e-book prices for two years, according to the Wall Street Journal [1].

Apple, Macmillan, and Penguin are fighting the charges and “are on track to face the government in court,” WSJ reported.  

In addition to Wednesday’s DOJ suit, 16 states and U.S. territories filed a suit in federal court in Austin, Texas, seeking monetary damages on behalf of consumers in their states who bought e-books.

American Booksellers Association CEO Oren Teicher, who on March 19 met with representatives of DOJ along with ABA President Becky Anderson, Vice President Steve Bercu, association General Counsel Deanne Ottaviano, to express the association’s strong support for agency model pricing of e-books, called Wednesday’s ruling baffling.

“Following the implementation of the agency model at the end of 2010, the e-book market has become more competitive. There is more — not less — competition among retailers, and more — not fewer — examples of marketing and promotional efforts among publishers that have reduced prices,” Teicher said. “For the Department of Justice to challenge a business model that played an essential role in fostering a more competitive, diverse retail environment seems to turn logic on its head and is not in the best interest of consumers. While it’s not yet clear what the full implications are of the legal action announced today by the DOJ with regard to publishers’ pricing models for e-books, we believe one fact is very clear: There is nothing inherently illegal about the agency model, and — as ABA has strongly said in the past — we believe that fostering a more competitive environment is in the long term best interests of readers and book buyers.”

In a letter to authors, illustrators, and agents [2], Macmillan CEO John Sargent explained his company’s decision not to settle with DOJ. “Let me start by saying that Macmillan did not act illegally. Macmillan did not collude,” Sargent wrote.

Though Macmillan took part in settlement discussion with DOJ, Sargent said the proposed settlement terms were too onerous and that Macmillan had done no wrong. “After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model. We also felt the settlement the DOJ wanted to impose would have a very negative and long-term impact on those who sell books for a living, from the largest chain stores to the smallest independents.

“When Macmillan changed to the agency model we did so knowing we would make less money on our e-book business. We made the change to support an open and competitive market for the future, and it worked. We still believe in that future and we still believe the agency model is the only way to get there.

And so, Sargent explained, having done no wrong, Macmillan decided to fight the DOJ charges in court.

In a statement, John Makinson, chairman and CEO of Penguin Group, said that Penguin had done nothing wrong, and was so against settling, that it had held no settlement discussions with the Justice Department. Regarding the decision to move to agency pricing for e-books, he said, “The decisions that we took, many them of them costly and difficult, were taken by Penguin alone.”

Furthermore, he said, the DOJ suit “contains a number of material misstatements and omissions, which we look forward to having the opportunity to correct in court.”

About Penguin’s adoption of the agency model, Makinson said: “We believed then, as we do now, that the agency model is the one that offers consumers the prospect of an open and competitive market for e-books.” He addded that  “we understood that the shift to agency would be very costly to Penguin and its shareholders in the short-term, but we reasoned that the prevention of a monopoly in the supply of e-books had to be in the best interests, not just of Penguin, but of consumers, authors and booksellers as well.

“We are of course in the business of making money for our shareholders, but our purpose as a company is to make entertaining and intelligent books for readers of all ages and tastes. We shall not achieve either of those objectives in the absence of competition or choice. The decision we took in January 2010 to move Penguin’s e-book business to agency pricing has been vindicated by the very rapid subsequent growth in the volume of e-books sold by agency publishers, and by the benefit to consumers of the steep decline in the price of e-book readers that that has resulted from this open competition.”

Just days before the DOJ filing, author Scott Turow, president of the Author’s Guild, called the possibility of the suit “grim news” [3] and said it “bites hard: our government may be on the verge of killing real competition in order to save the appearance of competition. This would be tragic for all of us who value books and the culture they support.”