Settling Publishers Are Allowed Modified Agency for Two Years That Could Limit Predatory Pricing

HarperCollins, Hachette Book Group and Simon & Schuster have settled the Justice Department's lawsuit over agency ebook pricing, officially filed earlier Wednesday. Under the settlement, they promise for two years not to "restrict, limit, or impede an e-book retailer's ability to set, alter, or reduce the retail price of any e-book or to offer price discounts or any other form of promotions to encourage consumers to Purchase one or more e-books." They also "shall not enter into any agreement with an e-book retailer relating to the sale of e-books that contains a price MFN" during that period, and they will void any current e-book contracts with retailers (including, for example, Amazon) that currently contain MFNs.

All three are required to void any ebook contracts with Apple within seven days of final approval of the settlement, but that is subject to at least 60 days of review, and Apple is free to "negotiate new contracts with any settling defendant."

Interestingly, the settlement does not require them to abandon the agency selling relationship itself. Justice says in one of their filings that "these provisions do not dictate a particular business model, such as agency or wholesale, but prohibit settling defendants from forbidding a retailer from competing on price and using some of its commission to offer consumers a better value, either through a promotion or a discount."

In fact, Justice appears to have set up a system that will allow limited discounting of ebooks, so as to inhibit predatory loss-leader pricing of ebooks from the settling publishers. They acknowledge that settling publishers retain the ability "to prevent a retailer selling its entire catalogue at a sustained loss."

Those publishers still can "enter into Agency Agreements with E-book Retailers under which the aggregate dollar value of the price discounts or any other form of promotions to encourage consumers to purchase one or more of the Settling Defendant's E-books (as opposed to advertising or promotions engaged in by the E-book Retailer not specifically tied or directed to the Settling Defendant’s E-books) is restricted." But that restriction "shall not interfere with the e-book retailer's ability to reduce the final price paid by consumers...by an aggregate amount equal to the total commissions the settling defendant pays to the e-book Retailer, over a period of at least one year, in connection with the sale of the Settling Defendant’s E-books to consumers."

So retailers can elect to give away ALL of the commission they receive over the course of a year in reduced prices to consumers--but they are not allowed to lose money selling ebooks if the settling publishers chose to introduce new, revised agency models. (They can lose money on individual titles, but not across a company's entire list over the course of a year.)

Meanwhile, Macmillan has pledged to continue their existing agency pricing model, and one can infer that Penguin will continue with it as well. Since agency itself persists, those who adopted it later, such as Sourcebooks, can also continue to employ agency if they wish.

It even appears that distribution clients of the settling publishers who are using agency are allowed to continue to do so if they wish: it "shall not prohibit a Settling Defendant from entering into and enforcing agreements relating to the distribution of another e-book publisher's e-books (not including the e-books of another publisher defendant) or to the co-publication with another e-book Publisher of specifically identified E-book titles or a particular author's E-books."

The settling publishers are also allowed to engage in industrywide initiatives such as "participating in output-enhancing industry standard-setting activities relating to E-book security or technology."

They also promise to "not retaliate against, or urge any other e-book publisher or e-book retailer to retaliate against, an e-book retailer for engaging in any activity that the Settling Defendants are prohibited by Sections V.A, V.B, and VI.B.2 of this final judgment from restricting, limiting, or impeding in any agreement with an e-book retailer."