Apple Inc. (AAPL:US) will find out sometime in the coming weeks whether it’s legally responsible for an alleged scheme to fix prices for electronic books, after an unusual three-week civil antitrust trial in Manhattan.
U.S. District Judge Denise Cote, who heard the trial without a jury, will rule on U.S. claims that Apple, the world’s biggest technology company, led a conspiracy of five publishers to raise the retail price of e-books and to force Amazon.com Inc. (AMZN:US), the No. 1 e-book seller, to change its pricing model.
At stake for Cupertino, California-based Apple is a possible court finding that, as the government claims, it broke the law and forced its customers to pay more for e-books than they would in a free market. States and consumers could use the judge’s findings to bolster their own cases against the company.
“Apple did not conspire with a single publisher to fix prices in the e-books industry,” Orin Snyder, Apple’s lawyer, told Cote in his closing argument June 20. “Apple acted lawfully and did not violate the antitrust laws.”
Snyder told Cote that a ruling for the Justice Department would be “unprecedented and dangerous” for companies. Apple’s entry into the e-book market lowered prices overall and helped consumers by bringing innovation and competition, he said.
The U.S. sued Apple and the five publishers in April 2012. The government claims Apple pushed publishers to sign agreements letting it sell digital copies of their books under what’s known as the agency model. Under that model, publishers, and not retailers, set prices for each book, with Apple getting 30 percent.
Horace Dediu, an Apple analyst with Asymco in Helsinki, estimated that Apple sold 217 million e-books in 2012. Apple took in $329 million in e-book revenue last year, he estimated, assuming it sold most of the books using the agency model that gives it its 30 percent of each sale. Apple’s total sales (AAPL:US) in fiscal year 2012 were $156.5 billion.
The U.S., which didn’t ask for money damages in the case, is seeking a court order prohibiting Apple from using agency pricing for two years. It’s also seeking a five-year bar preventing Apple from using a contract provision with publishers that allowed it to match lower retail prices offered by Amazon and other e-book sellers.
The government also said it wants Cote to require antitrust training for Apple executives and to appoint a monitor to oversee the company’s compliance.
The effect of the proposed remedies is limited by the fact that the publishers, who have already settled, agreed to restrictions on agency pricing.
A group of states is also seeking fines and unspecified damages. If Apple is found liable, damages will be determined in a separate proceeding. A win for the government may fuel class actions by private plaintiffs seeking triple damages permitted under antitrust law.
In a court conference before the trial, Cote told lawyers for both sides her “tentative view” was that the government has evidence Apple “knowingly participated in and facilitated a conspiracy to raise prices of e-books.”
Keith Hylton, a law professor at Boston University, said, “It’s pretty aggressive of Apple to go forward with the case when they judge is saying, ‘Hey you guys might be in trouble here.’”
Cote told the parties before the trial that she had drafted an opinion. She didn’t say when she will rule. Whatever the outcome, chances are good it will be appealed, Hylton said.
The trial focused on December 2009 and January 2010, when Apple was rushing to sign contracts with the publishers and build an iBookstore in time for the introduction of the iPad.
Cote heard testimony from top publishing executives and from Eddy Cue, the senior Apple executive on the negotiations. The government also introduced e-mails from Steve Jobs, the company’s deceased co-founder.
Cue, who took the stand for two days, testified that he felt pressure to put together the iBookstore in time for Jobs’s introduction of the iPad, because of the failing health of Jobs, who died in October 2011.
Snyder said Apple negotiated with each of the publishers independently for its own advantage, over the course of six weeks. Jobs and Cue were strangers to the publishing world and weren’t ringleaders of a publishers’ price-fixing conspiracy, he argued.
In response to a question from Cote, Snyder said Apple isn’t in a position to know whether the publishers conspired with one another without Apple’s participation.
Snyder challenged an exhibit introduced by the government to show a “spider web” of phone calls from Cue to the chief executive officers of the publishing houses. Snyder removed from exhibit calls of less than a minute and those that took place after the government claims the conspiracy was already in place. Only a handful of calls remained.
Apple is the last defendant remaining in the case after the five publishers sued by the government avoided trial by settling.
The settling publishers are Verlagsgruppe Georg von Holtzbrinck GmbH’s Macmillan unit, CBS Corp. (CBS:US)’s Simon & Schuster, Lagardere SCA (MMB)’s Hachette Book Group, Pearson Plc (PSON)’s Penguin unit and News Corp.’s HarperCollins. The No. 1 publisher, Random House Inc., isn’t involved in the U.S. suit.
Mark Ryan, a lawyer for the Justice Department, followed Snyder June 20, arguing that Apple headed up “an old-fashioned, straightforward price-fixing agreement.”
Ryan said Apple took advantage of the publishers’ dislike of Amazon’s practice of selling new e-books for $9.99, less than their cost, offering a scheme that would fix their “Amazon problem” by forcing the Seattle-based online retailer to switch to agency pricing.
“The price that was set in a competitive marketplace was not a price they liked,” Ryan said.
The scheme had two objects, Ryan said: to raise e-book prices from $9.99 to $12.99 and $14.99 and make it harder for retailers to compete on price. Consumers lost in the process, he argued.
Ryan told Cote she should disregard the testimony of Cue and other Apple witnesses as not credible. He said Apple used pricing tiers and the provision allowing the company to match any lower book prices charged by other retailers to ensure that the publishers would force Amazon to switch to agency pricing.
“Why does it care, once it has price protection, whether or not the publishers follow through on what they said they wanted, which is to take control of pricing?” Cote asked Ryan.
“Pricing’s clearly an advantage for Amazon,” he answered. Forcing a switch to agency would “level the playing field,” allowing Apple to compete more effectively in the e-book market, he said.
The case is U.S. v. Apple Inc., 12-cv-02826, U.S. District Court, Southern District of New York (Manhattan).
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