Apple, Macmillan Said to Prepare for U.S. E-Books Lawsuit

Apple Inc. (AAPL) and the publisher Macmillan are preparing to be sued as soon as today by the U.S. Justice Department over alleged collusion in the pricing of e- books, according to two people familiar with the matter.

Apple and Macmillan, which have refused to engage in settlement talks with the Justice Department, deny they colluded to raise prices for digital books, the people said. In an antitrust case, they will argue that pricing agreements between Apple and publishers enhanced competition in the e-book industry, which was dominated by Amazon.com Inc. (AMZN)

The Justice Department is probing how Cupertino, California-based Apple changed the way publishers charged for e- books on the iPad, a person familiar with the matter said last month. The Justice Department’s antitrust division told Apple and five publishers that it’s preparing to sue them for allegedly fixing the prices of electronic books, a person familiar with the matter told Bloomberg News March 8.

CBS Corp. (CBS)’s Simon & Schuster, Lagardère SCA’s Hachette Book Group and News Corp. (NWSA)’s HarperCollins are seeking to avoid a costly legal battle and could reach a settlement as soon as today, two people familiar with the matter said.

Door Open

The U.S. is still leaving the door open for last-minute settlement discussions this week, a person familiar with the situation said. Pearson Plc (PSON)’s Penguin Group (PNGN) was also preparing to fight the U.S. Justice Department in court if necessary, two people familiar with knowledge of the matter told Bloomberg News April 5.

Gina Talamona, a spokeswoman for the Justice Department’s antitrust division, and representatives of Apple, Simon & Schuster, HarperCollins, Hachette, Penguin and Macmillan, which is a unit of Verlagsgruppe Georg von Holtzbrinck GmbH, declined to comment on prospects for lawsuits or settlements.

Apple, Penguin and Macmillan want to protect the so-called agency model that lets publishers -- not vendors -- set e-book prices, said the people on April 5, who declined to be identified because they weren’t authorized to speak publicly.

The government is seeking a settlement that would let Amazon and other retailers return to a wholesale model, where retailers decide what to charge customers, the people said. A settlement could also void so-called most-favored nation clauses in Apple’s contracts that require book sellers to provide the maker of the iPad with the lowest prices they offer competitors, the people said.

Competition Questions

Consumers and competition could be hurt if several companies sign contracts that refer to prices charged to rivals even if those firms aren’t dominant, said Fiona Scott-Morton, a Justice Department economist, in an April 5 speech in Washington, signaling the antitrust division’s thinking on the issue of most-favored-nation clauses.

Upholding the agency model would give publishers more control over pricing and limit discounting, helping the industry avoid sales losses as more consumers buy books online.

Sales of e-books rose 117 percent in 2011, generating $969.9 million, Publishers Weekly reported Feb. 27, citing estimates from the Association of American Publishers. By eliminating printing and shipping costs, digital versions generate higher profit margins than physical copies.

When Apple came out with the iPad in 2010, it let publishers set their own prices for e-books as long as it got a 30 percent cut and the publishers agreed to offer their lowest prices through Apple. This agency model overtook Amazon’s practice of buying books at a discount from publishers and then setting its own price for e-reader devices.

The results of a settlement or lawsuit wouldn’t necessarily kill the agency model or prevent other publishers from continuing to set their own prices for e-books, one of the people said.

Random House Inc., based in New York, has agreements with Apple and Amazon that lets the book publisher set prices for e- books, the essence of the agency model. The company isn’t a part of the U.S. inquiry.

To contact the reporters on this story: Sara Forden in Washington at sforden@bloomberg.net; Andy Fixmer in Los Angeles at afixmer@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

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iPads at an Apple store in San Francisco on March 16, 2012.

iPads at an Apple store in San Francisco on March 16, 2012. Photographer: David Paul Morris/Bloomberg