The E-book Investigations: Are Publishers And Apple Breaking The Law?

It’s been a week to forget for publishers after both the Justice Department and the European Commission announced investigations into e-book pricing tactics. Meanwhile, dozens of law firms are steaming ahead with a class action to reclaim money for customers who allegedly overpaid for books on the iPad. So what’s going on – is this an illegal conspiracy or much ado about nothing? Here’s a guide:

Who Is Investigating the Publishers?

Before Congress today, the head of the Justice Department’s antitrust division reportedly confirmed months of rumors by stating that the federal government and state attorneys general are investigating the electronic book industry. Earlier this week, the European Commission said it has begun formal investigations to follow up on raids of publishers’ offices that took place in March.

What is the Conspiracy?

The case turns on “agency pricing,” a scheme under which the publishers set the price for e-books on the iPad. In return, Apple (NSDQ: AAPL) collects a commission.

What is the Point Of Agency Pricing?

Publishers watched in horror as Amazon (NSDQ: AMZN) decided to build up its market share in e-books by selling prized titles for less than $10. Amazon sometimes sold at a loss. This set a low floor for e-book prices and also threatened the sale of more expensive hard cover books. The agency model lets publishers set higher prices and ensure customers don’t become used to cheap e-books.

What’s the Problem with Agency Pricing?

The class action suits complain that agency pricing is an illegal cartel. Here is how one complaint describes it: “As a direct result of this anti-competitive conduct as intended by the conspiracy, the price of e-books has soared. The price of new best-selling e-books increased to an average of $12 – $15 — an increase of 30 to 50 percent.”

Is Agency Pricing Against the Law?

For decades, it was illegal for manufacturers to impose prices on retailers. That’s why you used to see “Manufacturers Suggested Retail Price” on many items — companies could suggest a price but not impose one. This changed after a 2007 case called Leegin in which the Supreme Court said it wasn’t illegal for a handbag maker to control prices. Now, the analysis is done on a case-by-case basis to see if pricing is fair. In this case, the publishers are the manufacturers and Apple is the retailer.

What will happen with the Government Investigations?

The Justice Department, along with the FTC, conduct these sort of investigations all the time. They typically take place behind the scenes but the U.S. may have announced today in response to the European news. If the government concludes the Apple e-book scheme is anti-competitive, it can file a complaint which would typically lead to a settlement. But the government may also conclude nothing is amiss. As for Europe, all bets are off given the continent’s tougher regulatory standards and zeal for punishing US companies.

What about the Lawsuits?

These are private actions taking place separately from the government investigations. According to lawyer Douglas Thompson, 25 or 26 different class action suits are in the process of being consolidated. Some of the suits name Amazon and Barnes & Noble (NYSE: BKS) as part of the “conspiracy.” The law firms were in court last week to argue over whether the case should take place in New York or California. A decision will appear in the next week or two.

Who Stands to Gain from the Lawsuits?

If a court decides that the pricing scheme violates anti-trust laws, Apple and the publishers would likely agree to pay a small reimbursement to people who bought an e-book (and a healthy fee for the lawyers). The class actions will be stronger or weaker depending on whether or not the government concludes the publishers broke the law.