Penguin settles with Department of Justice in ebook pricing case

Penguin, which is merging with Random House, has settled with the Department of Justice in the ebook pricing lawsuit, the DOJ announced late Tuesday afternoon. The DOJ sued Apple, Penguin and four other publishers in April for conspiring to set ebook prices. Penguin had planned to fight the case in court, along with Apple (s AAPL) and Macmillan, but the company’s pending merger with Random House compelled it to get the litigation out of the way.

The DOJ alleges that publishers, fearing Amazon’s practice of selling ebooks at $9.99, conspired with Apple at the launch of the iPad and iBookstore to adopt agency pricing, in which the publisher sets an ebook’s price and pays the retailer a commission. Previously, publishers had used wholesale pricing for ebooks, where the publisher sets a suggested list price and the retailer buys the ebook at a discount (usually 50 percent) and can then sell it at whatever price it wants. The DOJ says that that the alleged collusion led to higher ebook prices for consumers and harmed competition in the ebook marketplace. Publishers maintain that agency pricing created a more diverse marketplace by leveling the playing field and reducing Amazon’s power. (Here’s some background on the case.)

Penguin said in a statement:

Penguin has always maintained, and continues to maintain, that it has done nothing wrong and has no case to answer. Penguin continues to believe that the agency pricing model has encouraged competition among distributors of both ebooks and ebook readers and, in the company’s view, continues to operate in the interest of consumers and authors. But it is also in everyone’s interests that the proposed Penguin Random House company should begin life with a clean sheet of paper.

The DOJ said it is “currently reviewing the proposed joint venture announced by Penguin and Random House Inc., the largest U.S. book publisher. Should the proposed joint venture proceed to consummation, the terms of Penguin’s settlement will apply to it.” Random House was not included in the DOJ’s original lawsuit, because it adopted agency pricing over a year after after the other big-six publishers did.

According to the DOJ’s competitive impact statement (PDF), Penguin has agreed to “substantially the same terms” that the three other settling publishers — HarperCollins, Simon & Schuster and Hachette — agreed to in April: The publisher will terminate its existing agreements with ebook retailers and enter into new ones that, for two years, allow retailers to freely discount its ebooks (with a few limitations). Most-favored nation clauses (which state that no other retailer can charge a lower price) are prohibited for five years. If and when the settlement is approved by Judge Denise Cote of the New York federal court, Random House will be subject to the same terms and will also have to negotiate new retailer contracts.

Like the original settlement, the DOJ’s proposed settlement with Penguin (PDF) is subject to a 60-day public comment period. The DOJ received over 800 public comments on the original settlement, the vast majority of them opposing it. Judge Cote approved it anyway.

Since the original settlement went through, HarperCollins, Simon & Schuster and Hachette have entered new ebook contracts with Amazon (s AMZN) and other ebook retailers. They are still setting the prices for their ebooks and paying retailers a commission, but retailers can discount the books as they wish and can sell them at a loss. The DOJ claims that “[the] settlement likely will lead to lower e-book prices for many Penguin titles; prices for titles offered by HarperCollins, Hachette, and Simon & Schuster fell soon after those publishers entered into new contracts as a result of the Original Judgment.” (Many of the settling publishers’ ebooks have only dropped in price slightly.)

Penguin is discussing a similar settlement with the European Commission.

The DOJ notes that “of course, the case against the remaining Defendants” — Apple and Macmillan’s parent company Holtzbrinck — will continue.