"Terrified" by Amazon's Kindle e-reader and discounted e-book pricing, five major publishers allegedly acted together to increase e-book prices and compel Amazon to abandon its discount sales strategy. That's the gist of a new class action antitrust lawsuit filed in the US District Court for the Northern District of California by the Hagens Berman litigation group.

The five book sellers named in the suit are HarperCollins, Hachette Book Group, Macmillan, Penguin Group Inc., and Simon & Schuster Inc, plus one more defendant: Apple.

"Fortunately for the publishers, they had a co-conspirator as terrified as they were over Amazon's popularity and pricing structure, and that was Apple," charges Hagen Berman attorney Steve Berman. "We intend to prove that Apple needed a way to neutralize Amazon's Kindle before its popularity could challenge the upcoming introduction of the iPad, a device Apple intended to compete as an e-reader."

The essence of the claim is that these publishers, in coordination with Apple, conspired to nix the low price e-books that Amazon launched in 2007. Amazon wanted to quickly gain market share with its Kindle, the court filing observes, the first version of which sold out in less than a quarter of a day. And so, capitalizing on its "first mover" advantage, Amazon sold e-books at prices conspicuously lower than physical books—many titles were made available for $9.99.

This had to be stopped, the class action charges.

"What is most loathsome about the behavior of Apple and the publishers is that it is stifling the power of innovation, the very thing Apple purports to champion," Berman's press release observes. "A few big business heavyweights are taking a powerful advancement of technology that would benefit consumers and suffocating it to protect profit margins and market-share."

Supra competitive

There's more than rhetoric to this lawsuit, and Berman isn't the first lawyer to see something fishy in the e-book trade. About a year ago the Attorney General of Connecticut went so far as to demand that both Amazon and Apple meet with him to allay fears that they were monkeying with the market in anti-competitive ways... through collusion.

This action sees Apple and Amazon as adversaries, the former forcing the latter's hand. The accusation is that the publishers and Apple fixed prices via two means. First, the publishers embraced an "agency model" arrangement with Apple in which Apple would act as an agent for the publishers, accepting their pricing and simply taking a cut of the proceeds. (Compare this to a model where a company agrees to "buy" each e-book at a set price, but it can then offer those e-books at any price it chooses. Amazon, in fact, was widely believed to be taking a loss on many e-books in order to encourage adoption of e-readers like the Kindle and e-books at the $9.99 price.)

Second, the publishers allegedly agreed not to sell books to any other online venue (like Amazon) at prices lower than those offered to Apple (a "most favored nation" agreement).

The agency model deal was cut around January 2010. Apple would act as "agent" for the publishers. Prices would be calculated by a formula linked to physical books. "This e-book formula would cause current prices for eBooks to increase and, at the same time, would guarantee Apple that the Publisher Defendants would not sell e-books at lower prices elsewhere, such as through other eBook distributors, including Amazon," the lawsuit charges.

The alleged conspiracy worked, according to the lawsuit. The publishers caused the prices of e-books to rise, and they forced Amazon to accept a similar agency model.

In fact, the retail cost of e-books has "soared," the complaint insists. New best selling e-books have in many cases gone up to $12 or $15 per eBook, a boost of as much as 50 percent from the $9.99 price Amazon had been pushing.

"The price of the Publisher Defendants' eBooks sold on the iBookstore, facing no pricing competition from Amazon or other e-distributors for the exact same eBook titles, has remained at supra-competitive levels," says the lawsuit.

Finding intent

This kind of lawsuit must, by necessity, demonstrate that one or more company's actions restrained trade. But it must also prove that the defendants conspired to fix or raise prices. A well known exchange between Apple's Steve Jobs and the Wall Street Journal's Walt Mossberg functions as a key exhibit in the legal action. It took place during the unveiling of the iPad at the Yerba Buena Center for the Arts in San Francisco in January 2010 and was documented in the New Yorker.

During the conversation, Mossberg asked Jobs why consumers should buy Edward Kennedy's book True Compass on the iPad for $14.99 when they could purchase it from Amazon for five dollars less.

"That won't be the case," Jobs replied.

This terse prediction had Mossberg scratching his head. "You won’t be $14.99 or they won’t be $9.99?"

"The price will be the same," Jobs insisted. "Publishers may withhold their books from Amazon. They're unhappy."

The lawsuit extracts this conclusion from the aforementioned dialog: "Absent Apple's knowledge of and participation in the unlawful conspiracy, Steve Jobs would not have been able to predict future e-book pricing with such startling accuracy."

We have to capitulate

The suit also cites MacMillan's alleged attempts to get Amazon to switch to an agency model following the Apple deal. According to the document, Macmillan proposed that Amazon take on an agent role similar to the 70/30 percent revenue sharing terms it had agreed to with Apple (the computer company getting 30 percent).

Amazon offered a brief show of resistance to this proposal, then issued a statement of surrender. "We want you to know that ultimately, however, we will have to capitulate and accept Macmillan's terms because Macmillan has a monopoly over their own titles," the company told consumers, "and we will want to offer them to you even at prices we believe are needlessly high for e-books."

But the class action contends that it wasn't just Macmillan's "monopoly over their own titles" that won the day (companies, after all, tend to have monopolies on their own unique products), it was the combined power of the five publishers that forced Amazon's hand.

Macmillan was able to threaten Amazon with this ultimatum even though Amazon at the time possessed ninety-percent of the market share for eBook sales, because, on information and belief, Macmillan knew each of the other Publishing Defendants had reached similar agreements with Apple. Like Macmillan, the other Publisher Defendants and Apple had agreed to a pricing formulae and MFN [most favored nation] clauses, assuring themselves that Amazon would be closed out of the market for the Publisher Defendants' eBook titles unless Amazon agreed to allow the Publisher Defendants to raise prices.

The lawsuit charges Apple and the publishers with violation of the Sherman Antitrust Act and several other federal laws. It names two individual plaintiffs who bought an e-book at a price higher than $9.99—after the Apple/publisher agency model deal.

"Once approved, the lawsuit would represent any purchaser of an e-book published by a major publisher after the adoption of the agency model by that publisher," the law firm's class action suit website pledges.