Judge approves a settlement between DOJ and publishers in landmark opinion

It’s being called “a move that could reshape the publishing industry” and “a decision that could start an e-book price war.”

Late Thursday, Federal Judge Denise Cote approved a settlement between the Justice Department and three major publishers in a landmark opinion in the e-book price-fixing case.

The settlement includes Hachette Book Group, Simon & Schuster, and HarperCollins and orders the three publishers to terminate their contracts with Apple within a week. It also orders them to terminate contracts with “most favored nation” clauses, which prohibit other retailers from selling books for less. The publishers must also refrain for two years from entering any new contract that puts limits on a retailer’s ability to price e-books.

The settlement comes as a result of the Justice Department’s accusation that Apple and five publishers illegally conspired to fix the price of e-books in an attempt to unseat Amazon from market dominance. Penguin Group USA, Macmillan, and Apple did not agree to the settlement and will fight the suit in court next summer.

Judge Cote’s decision came despite “voluminous and overwhelmingly negative” comments on the case and the proposed settlement, but Cote defended her decision.

“Some comments were filled with extreme statements, blaming every evil to befall publishing on Amazon’s $9.99 price for newly released and bestselling e-books, and crediting every positive event – including entry of new competitors into the market for e-readers – on the advent of agency pricing,” Cote wrote in her 45-page opinion. “Even if Amazon was engaged in predatory pricing, this is no excuse for price-fixing,” she continued, asserting that “the familiar mantra regarding ‘two wrongs’ would seem to offer guidance in these circumstances.”

The decision comes as a decisive victory for Amazon, whose pricing model Apple and five publishers attempted to topple with its agency pricing plan. The e-retailing giant is expected to drop the price of many e-books back to $9.99 or lower following the decision, pressuring competitors to do the same.

But Cote’s opinion was seen as a blow for hundreds of other parties, including the Authors Guild, the American Booksellers Association, Barnes & Noble, and other e-book retailers who opposed the settlement. In their formal complaints, these parties predicted the settlement would return the e-book marketplace to where it was several years ago when Amazon controlled close to 90 percent of the market and other retailers were marginalized.

“It’s devastating to bookstores,” executive director of the Authors Guild Paul Aiken told the Wall Street Journal. “For two years the settling publishers must allow vendors to discount e-books at any price they want. The court acknowledges that this restores the status quo conditions before 2010, when Amazon was able to capture 90 percent of the e-book market. The Justice Department is reshaping the literary marketplace without submitting a single economic study to the court to justify its actions.”

As for consumers, the jury’s still out. Critics of the settlement say it will harm consumers in the long-run by creating an e-book market monopolized by Amazon. But readers will see an almost-immediate benefit: restitution for e-books purchased between April 1, 2010 and May 12, 2012, and more importantly, rapidly falling prices on e-books.

“The approval opens the door for Amazon and other retailers to steeply discount e-book titles,” the WSJ reported, which, means “other retailers, like Barnes & Noble, could feel pressure to respond,” added the New York Times.

“I think everybody competing with Amazon in the e-book market had better fasten their seat belts,” Mike Shatzkin of the Idea Logical Company, a consultant to publishers, told the NYT. “I would expect Amazon to be leading the charge to cut prices on the most high profile e-books as soon as the decision allows them to do so. As soon as that starts to happen, all the books that are competing with them will have to reconsider their prices.”

As the Atlantic’s Adam Martin wrote, “Hello, e-book price war.”

Husna Haq is a Monitor correspondent.