Macmillan is the smallest of the big-six publishers, and the only one that is wholly privately owned. Sargent says there are two reasons Macmillan is not settling: “First, it is hard to settle when you have done nothing wrong. Much as the lawyers explain to me that settling is completely standard business procedure, it still seems fundamentally flawed to me somehow.” More importantly, he writes:

Since the very beginning, the government’s demands have never wavered in all our discussions. They still insist on the two year discounting regime that forms the heart of the agreement signed by the three settling publishers. It was our belief that Amazon would use that entire discount for the two years. That would mean that retailers who felt they needed to match prices with Amazon would have no revenue from ebooks from five of the big publishers (and possibly the sixth) for two years. Not no profit, no revenue. For two years. We felt that few retailers could survive this or would choose to survive this.

Nevertheless, Macmillan has entered new contracts with most ebook retailers “except one whose term was not up yet” (he does not specify which one). Sargent explains the new terms: “All the new contracts are compliant with the government’s requests in their complaint. They contain no most-favored nations clauses and no price limits. They also allow 10 percent discounting on individual books priced at $13.99 and above.” (This was partially reported by Publishers Weekly on Monday.) (Macmillan settled in the European Union “because of many differences in their system and because the discounting change will not materially affect the market there for us.”)

Despite these measures, the lawsuit continues. “The legal bills look like the unit sales numbers for 50 Shades of Grey,” Sargent writes. But though Macmillan is the smallest of the big-six publishers it has no plans to merge with another as Random House and Penguin are doing. Being small “has never hurt us in the past, and I expect it will not hurt us in the future,” Sargent writes. “Publishing trade books is, in the end, a human endeavor…You need a certain level of capital and infrastructure, but that does not require being a behemoth. We will be more than fine in the land of the giants. I expect we will continue to grow and prosper.”

Sargent also comments on Macmillan’s business overall. Twenty-six percent of the publisher’s sales were digital in 2012, and “our e-book business has been softer of late, particularly for the last few weeks, even as the number of reading devices continues to grow.”

“We have entered new agreements with our ebook agents that are in compliance with the DOJ settlement,” S&S SVP of corporate communications Adam Rothberg said in a statement, “and we look forward to working with our retailers to expand the readership for our authors and grow the ebook marketplace.”

All three settling publishers are still using a modified agency pricing model: They set an ebook’s list price and pay the retailer a commission. Under the new contracts, the difference is that retailers can discount the ebooks as much as they want (and can take a loss on the sales of those books).

There are a few exceptions: The settlement allows publishers the option to negotiate retailer contracts that include “a commitment from an e-book retailer that a retailer’s aggregate expenditure on discounts and promotions of the Settling Defendant’s ebooks will not exceed the retailer’s aggregate commission” — though that doesn’t prevent deep discounts on specific titles. The settling publishers can also negotiate one-year contracts that “prevent e-book retailers from cumulatively selling that Settling Defendant’s e-books at a loss over the period of the contract.” More on the settlement and ebook prices here.

Apple, Macmillan and Penguin did not settle with the DOJ, and are set to go to trial in June 2013.

Photo courtesy of Shutterstock / Borys Shevchuk

In a document filed with the U.S. District Court for the Southern District of New York, the states’ attorneys lay out two modifications to their original settlement:

1. Payouts: The settlement had originally said that consumers who bought agency-priced ebooks between April 1, 2010 and May 21, 2012 would receive $1.32 per book for purchase of New York Times bestsellers, $0.36 per book for frontlist titles [in their first year of publication], and $0.25 for backlist [older] titles.” But retailers have said they “will be unable to provide the degree of precision needed to accurately separate and identify frontlist and backlist purchases,” so instead there will now be just two payout categories: $1.32 for New York Times bestsellers and $0.3o for all other titles.

2. Credits: The way that customers receive credits is also changing. The settlement had originally said that retailers like Amazon and Barnes & Noble

would automatically deposit the calculated credit amount in eligible customers’ accounts and would send a notice to consumers telling them that the credit is available for use. As credits are used, the retailer would bill the settlement escrow account for reimbursement. At the end of one year, unused credits would expire.

Amazon will still use this system, and unused credits will expire after a year for Amaozn customers. But other retailers told the states “they would be unable to track the   amount of the specific settlement credit within a customer’s account if that customer has other sources of credit in the account, such as a refund for a returned book or a gift certificate.” The other retailers said they wouldn’t be able to terminate the credits after a year and wouldn’t know when they were used. “Retailers have also expressed concern that their particular method of crediting accounts might be viewed a gift card and could run afoul of certain state laws that require that gift cards have no expiration date.”

So now, Barnes & Noble, Apple and Kobo will use a different credit system. (Google and other ebook retailers are sending out paper checks.) Eligible customers will instead get an email about an account credit and will then have to activate that credit, either by clicking a “click to activate” button or by typing a code into their account. “The customers will have an entire year to activate their credits. However, once activated the credit will be available in the customer’s account for use at any time, and will not expire.”

Here’s the full filing, including a copy of the notice that will be sent to customers.

<em>Photo courtesy of Shutterstock user <a href=”http://www.shutterstock.com/pic.mhtml?id=104965325″>Mohd Hasmi Hamidi</a>.</em>

In documents filed late Friday, Bob Kohn asked U.S. District Judge Denise Cote to stay her ruling on the grounds that consumers will be irreparably harmed by new e-book prices if the settlement goes forward.

Cote approved the settlement last week as a means to fix what she concluded to be blatant price-fixing by Apple and the publishers. The arrangement calls for Simon & Schuster, Hachette and HarperCollins to truncate their contracts with Apple by this Friday and to notify other ebook retailers that they are no longer bound by contracts that set a minimum price for ebooks.

What this means in practice is that, within weeks, mega-retailer Amazon will be able to resume selling ebooks at bargain basement prices, including below cost.

Kohn, Apple and two other publishers had urged Cote to hold off approving the Justice Department settlement until the price-fixing issues could be addressed at a trial next summer. In a surprise move last week, however, Cote threw aside planned court hearings and said the settlement could go into effect.

Kohn, a prominent entertainment industry lawyer, now says that the process should be halted until it goes before the Second Circuit Court of Appeals. If Cote doesn’t grant a stay, he says, “consumer welfare” will be harmed immediately as the new ebook prices will take effect and shift pricing power to Amazon. He also points out that, if the Second Circuit ultimately sides with the Justice Department, ebook buyers will not be hurt; they can simply collect more money under a proposed compensation scheme that proposes to pay them between 25 cents and $1.32 per overpriced ebook.

In an interesting tactical shift, Kohn appears to acknowledge that the publishers did in fact collude to fix prices but that the price-fixing was not illegal. Until recently, publishers have denied that they conspired.

This suggests that the publishers who did not settle are now putting all their hopes on a Supreme Court decision that held that price collusion is not illegal in the case of market failure. The argument is based that on the idea that Amazon, with a 90 percent ebook market share, was a monopsony (a single buyer with all the power) and that publishers had to take a one-time step to fix that.

Kohn first made the argument in a remarkable comic-strip he submitted to the court last week:

Judge Cote will rule on Kohn’s request for a stay in the next few days. According to Peter Toren, a veteran federal court litigator, Cote will almost certainly turn down the request. Toren added that this will pave the way for the settlement opponents to make an urgent request for a stay to the Second Circuit.

If the Second Circuit also rejects the stay, it’s effectively game over. This is so because it would take the Second Circuit many months to address the settlement itself — and, by that point, the new ebook prices will have gone into effect and changed the market.

Here is Kohn’s stay request with some relevant parts underlined:

Kohn Request for Stay

“Apple is taking a bold stance by ignoring the Judge’s admonition to the parties not to oppose the settlement, other than submitting comments,” attorney and RoyaltyShare CEO Bob Kohn, who is seeking permission to file an amicus brief in the case, tells me. “Apple makes a good point that the proposed settlement terminates Apple’s agency contracts without a trial and that would be an unprecedented violation of Apple’s right to due process.”

The proposed settlement would require the three settling publishers — HarperCollins, Hachette and Simon & Schuster — to terminate their existing agency pricing contracts with Apple. Apple says that isn’t fair: “The Government is seeking to impose a remedy on Apple before there has been any finding of an antitrust violation.” This case, the company states, revolves around “an alleged conspiracy to force Amazon to adopt agency.” So a settlement “enjoining collusion or precluding publishers from forcing agency on Amazon would be appropriate,” but Apple is entitled to defend its contracts in court.

Apple also says the most favored nation clauses in its contracts have not “forced any publisher to adopt agency with other retailers,” and notes that “many independent publishers” — not mentioned by name here, but they include Sourcebooks and Scholastic — have agency pricing agreements with Apple and wholesale agreements with Amazon.

Kohn objects to this. If the settling publishers were to terminate their agency agreements with Amazon, he says, “that would (a) allow Amazon to resume predatory pricing (i.e., selling below its marginal cost) and (b) allow Apple, under its agency agreement with the publishers, exercise its MFN clause to match Amazon’s discounts. Since the publishers get 70 percent of what Apple charges, this could really hurt the settling publishers. I don’t think the Apple lawyers intended this, but it does seem an unfair result to the settling publishers.”

Apple’s filing appears intended to increase scrutiny of the proposed settlement but also, at a deeper strategic level, to protect the commission-style pricing system that underlies its entire content business.

Amazon’s story “has yet to be scrutinized”

In a footnote, Apple says that many of the public comments on the proposed settlement