DOJ sues Apple over price-fixing scheme
NEW YORK (CNNMoney) -- The U.S. Department of Justice on Wednesday brought a lawsuit against Apple and several publishing companies over a scheme to fix e-book prices.
The suit stems from the 2010 release of the iPad, when Apple (AAPL, Fortune 500) reached an agreement with five publishers to release books on its then-new iBookstore. The DOJ said Apple colluded to raise the price of e-books with CBS's (CBS, Fortune 500) Simon & Schuster, News Corp.'s (NWS) HarperCollins, Hachette Book Group, Pearson's (PSO) Penguin unit and Macmillan.
European authorities are also probing Apple and the publishers for similar antitrust violations. Attorneys general for Connecticut and Texas led a handful of other states in separate litigation against the companies as well.
Before the release of the iPad, Amazon's (AMZN, Fortune 500) Kindle was the preeminent e-book reader on the market. Amazon forced publishers to sell most books at $9.99 -- a price that came in below the cost of the books.
According to the DOJ, booksellers were unnerved by the discounted e-book price structure Amazon launched in 2007. The publishers went to Apple in late 2009 to find a way to force Amazon to raise its prices. The iPad proved to be the perfect tool to accomplish that.
The alleged conspiracy placed many books at so-called "agency pricing," putting them on the market for about $12.99 and giving Apple a 30% cut. About three days later, Amazon allowed publishers to set their own prices, resulting in higher prices on the Kindle as well.
"This action drove up e-book prices virtually overnight," said Sharis Pozen, head of the DOJ's antitrust division, at a news conference. "Let me be clear: When companies enter agreements that prevent price competition, that is illegal."
The Justice Department settled with three of the publishers -- HarperCollins, Simon & Schuster and Hachette -- requiring them to grant retailers like Amazon and Barnes & Noble (BKS, Fortune 500) the freedom to reduce prices.
The publishers will also be forced to tear up their current agreements with Apple and other e-book publishers and negotiate new, fair, and legal agreements.
"The settlement will begin to undo harm and restore price-competition," Pozen added. "It will result in lower e-book prices and provide a more open and fair marketplace."
The DOJ said it would "vigorously" pursue its claims against Apple, Pearson and Macmillan, which opted not to settle.
The states' attorneys general reached a separate settlement with the three publishers, two of which agreed to pay restitution of $51 million to affected e-book customers in the participating states. Simon & Schuster did not agree to pay restitution, and the states continue to negotiate with that publisher.
The DOJ pointed to Steve Jobs' biography to argue Apple knew that the scheme would result in higher costs for consumers and would remove pricing competition from Amazon.
"We'll go to [an] agency model where you set the price, and we get our 30%, and, yes, the customer pays a little more, but that's what you want anyway," biographer Walter Isaacson quoted Steve Jobs as saying.
"This took place at the highest levels of these companies," Pozen argued. "Executives knew full-well what they were doing."
As a result, e-book customers have paid between $2 and $3 more per book, amounting to upwards of $100 million dollars more than they otherwise would have, the DOJ alleged.
Apple and the publishers declined to comment.
Amazon still has regular skirmishes with publishers over rates it considers too high. In February, the company yanked distributor IPG's digital books from its Kindle store after a dispute over terms of their contract.
Amazon, too, has come under fire for dancing on the legal lines around e-book pricing.
Apple and Amazon both strike deals with publishers that forbid them from offering other retailers' deeper discounts. Those agreements, dubbed "most-favored nation" clauses, aren't straight-out illegal under antitrust laws -- but they're also not always legal.
As part of the settlement reached with the three publishers, the companies will also be forced to terminate their most-favored nations contracts with retailers and Apple. They also will not be allowed to negotiate new most-favored nations contracts for five years.
CNNMoney's Aaron Smith, Julianne Pepitone and CNN Justice Department Producer Terry Frieden contributed to this report.