The DOJ recently filed suit against Apple, Inc. and e-book publishers Macmillan and Penguin Group for conspiring to drive up e-book prices paid by consumers. The Complaint alleged that between 2007 and 2010, e-books were mainly distributed to consumers through a wholesale model. Under this model, retailers such as Amazon were free to set the prices at which e-books were sold to consumers. Amazon successfully sold newly released and bestselling e-books to consumers for $9.99, lower than their hardcover counterparts. Soon, other e-book retailers followed suit.

The Complaint alleged that e-book publishers were concerned that Amazon's low retail prices for e-books would result in:

The DOJ alleged that executives of the e-book publisher defendants shared their concerns about Amazon's discounting with one another in a series of in-person group and one-on-one meetings. As a result of these communications, the publishers determined that they needed to act together to overcome Amazon's bargaining strength against each of the publishers individually.

In early 2009, Apple started contemplating its entry into the e-book market with the introduction of its iPad device. By late December 2009, the Complaint alleged that Apple was negotiating with each of the e-book publisher defendants about using an agency model to distribute e-books in which:

The DOJ characterized the MFN provision as anticompetitive because it forced the e-book publishers to enter into agency agreements with their other retailers to take control of setting the retail prices for e-books. Alternatively, under the wholesale arrangements, the publishers would have to lower Apple's iBookstore price to match the prices of retailers like Amazon selling e-books at $9.99. The DOJ alleged that this switch to an industry-wide agency model protected Apple from competing on retail price and effectively turned the pricing tiers set out in the agency agreements into fixed retail prices for e-books.

Shortly after the agreements were in place, the e-book publishers transitioned their other major retailers to the agency model, including Amazon, who acquiesced once it became clear that the e-book publishers were working in concert. Thereafter, the prices for e-books increased above the $9.99 price level.

Agency agreements and MFN provisions are often legal and appropriate when entered into unilaterally. The key to the DOJ's complaint is the alleged conspiracy between the e-book publishers and Apple's role in furthering that conspiracy. The complaint sets out that e-book publisher CEOs talked to each other about their negotiations and dealings with Apple, including placing 56 phone calls to one another during the two-month period between December 2009 and January 2010 when the publishers were negotiating with Apple. Each of the publishers also allegedly confirmed with Apple that the other e-book publishers were entering into similar agreements with Apple. The complaint acknowledges that Apple also benefitted from increased retail e-book prices because its 30% commission was fixed, and, therefore, its total commission increased as the retail prices of e-books increased.

The DOJ settled with three of the five e-book publisher defendants. Whether the court agrees with the DOJ's characterization of the e-book publishers and Apple's dealings as a conspiracy remains to be seen.