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Justice sues Apple over price-fixing

The Justice Department on Wednesday sued Apple and two publishers, Macmillan and Penguin Group, for alleged price-fixing of electronic books.

Three other publishers, Hachette, HarperCollins and Simon & Schuster, agreed to the government's terms and will avoid litigation.

Prosecutors say Apple and the publishers conspired to stifle competition and raise the price of e-books by about $2 to $3 per book, costing consumers millions of dollars.

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According to the Justice Department's complaint, which was filed in federal district court in New York, the five publishers and Apple were unhappy that competition from Amazon was driving down the price of e-books. Amazon had set the price of all of its e-books at $9.99.

Executives from the publishing companies began meeting in the summer of 2009 in "private dining rooms of upscale Manhattan restaurants" to discuss confidential business information, according to the government's case.

As a result of those discussions, the publishers agreed to adopt a new business model, the Justice Department alleges. Under the new model, the publishers, not bookstores, would set the retail price of e-books. 

The agreement raised the price of most e-books to $12.99, $14.99 or more for the most sought-after titles, according to the Justice Department.

The complaint quotes one executive who allegedly said the goal of the scheme was "to force Amazon to return to acceptable sales prices through the establishment of agency contracts in the USA. ... To succeed our colleagues must know that we entered the fray and follow us." 

The publishers agreed to give Apple 30 percent of the revenue from the e-books sold in the company’s iBookstore. Additionally, they gave Apple "most-favored nation" status, which guaranteed that no other retailer could sell an e-book for less than Apple.

Macmillan and Apple did not respond to a request to comment.

Penguin Group's Chairman and CEO John Makinson strongly disputed the charges in a statement late Wednesday and said the government's lawsuit "contains a number of material misstatements and omissions."

The Justice Department's case quotes the late Apple CEO Steve Jobs as saying, "The customer pays a little more, but that's what you [the publishers] want anyway."

Most books bought in the iBookstore are for Apple's iPad tablet computer.

Under the proposed settlement with Hachette, HarperCollins and Simon & Schuster, the publishers will end their agreements with Apple and other e-book retailers and are barred for two years from entering into any new agreements that constrain the ability of retailers, such as Amazon and Barnes & Noble, to discount books.

The agreement also requires the publishers to submit to an antitrust compliance program.

At a press conference announcing the case, Attorney General Eric HolderEric Himpton HolderVoter suppression bills are the first move in a bigger battle Holder, Yates lead letter backing Biden pick for Civil Rights Division at DOJ Senate panel dukes it out over voting rights MORE noted that the e-book market is growing rapidly. 

"E-books are transforming our daily lives, and improving how information and content is shared," he said. "For the growing number of Americans who want to take advantage of this new technology, the Department of Justice is committed to ensuring that e-books are as affordable as possible."

Sharis Pozen, chief of the Justice Department's antitrust division, claimed the conspiracy "drove up e-book prices virtually overnight."

"As you can see, we allege that these executives knew full well what they were doing. That is, taking steps to make sure the prices consumers paid for e-books were higher," she said.

Under a separate settlement with a group of states, consumers who bought overpriced books could get some of their money back.

A group of 16 states, led by Connecticut and Texas, reached an agreement with HarperCollins and Hachette that requires them to pay $51 million in restitution to consumers.

Connecticut Attorney General George Jepsen said the states are still working out the details of how consumers will be able to reclaim their money.

—This story was first published at 10:27 a.m. and has been updated.