U.S. takes Apple to court over e-books price-fixing

NEW YORK Sun Jun 2, 2013 5:48pm IST

Two children use the iPad Mini at the Apple Store during Black Friday in San Francisco, California, November 23, 2012. REUTERS/Stephen Lam/Files

Two children use the iPad Mini at the Apple Store during Black Friday in San Francisco, California, November 23, 2012.

Credit: Reuters/Stephen Lam/Files

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NEW YORK (Reuters) - Apple Inc(AAPL.O) goes to trial Monday over allegations by federal and state authorities that it conspired with publishers to raise the price of e-books.

The trial pits the maker of the popular iPad and iPhone against the U.S. Justice Department in a case that tests how Internet retailers interact with content providers.

"This case will effectively set the rules for Internet commerce," said David Balto, a former policy director for the U.S. Federal Trade Commission.

The Justice Department filed its case against Apple and five of the six largest U.S. book publishers in April 2012. The lawsuit accused them of conspiring to increase e-book prices and break Amazon.com Inc's(AMZN.O) hold on pricing.

Apple is going to trial alone after the five publishers agreed to eliminate prohibitions on wholesale discounts and to pay a collective $164 million to benefit consumers.

The five publishers were Pearson Plc's(PSON.L) Penguin Group, News Corp's(NWSA.O) HarperCollins Publishers Inc, CBS Corp's (CBS.N) Simon & Schuster Inc, Hachette Book Group Inc and MacMillan.

The U.S. government is not seeking damages but instead an order blocking Apple from engaging in similar conduct. However, if Apple is found liable, it could still face damages in a separate trial by the state attorneys general and consumers pursuing class actions.

'DIRECT EVIDENCE'

Based on a comment by the presiding judge at the final hearing before the trial, Apple may face an uphill battle.

"I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books," U.S. District Judge Denise Cote, who is hearing the case without a jury, said on May 23.

While those comments suggested Apple might be smart to seek a settlement, Chief Executive Tim Cook said in an interview Tuesday with All Things Digital that Apple was "not going to sign something that says we did something we didn't do."

Apple may be calculating that future damages claims by states and class actions make it worth going to trial, said John Lopatka, a law professor at Pennsylvania State University.

"Apple might think, 'We may lose at the trial level, but we may well convince an appellate court the trial judge mischarachertized the evidence," Lopatka said.

'MARKET IN TURMOIL'

Neither side disputes that in 2009 publishers were concerned about low prices for e-books resulting from the dominance of Amazon.com, which launched its Kindle e-reader in 2007.

As it prepared to launch its iPad and was looking into opening an electronic bookstore, Apple has said it was entering a "market in turmoil," with growing tension between the publishers and Amazon.

Amazon, which declined comment, was selling 90 percent of all e-books in 2009. It was buying books wholesale and at times selling them at a loss, pricing them at $9.99, with the goal of promoting its Kindle.

The Justice Department contends that Apple's entry into the market provided publishers with a means to get together to increase prices.

At the suggestion of Hachette and HarperCollins, the government says Apple began considering an agency model in which publishers set the price and Apple took a fixed percentage.

Former Apple CEO Steve Jobs, who died in 2011, told his biographer that, "we told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that's what you want anyway.'"

The Justice Department said Apple provided assurances to publishers their rivals would join.

Apple says that it was unaware of efforts by the publishers to conspire before it entered the marketplace, and said when it did, it act independently.

It also contends that in the wake of its introduction of the iBookstore, prices have fallen rather than risen from $7.97 on average to $7.34.

BIGGER ISSUE

For the Justice Department, many of its goals have been accomplished, thanks to the settlements with publishers, which lifted restrictions on discounting and promotions by e-book retailers. Those deals have already lowered prices for consumers, the department says.

But the government may be aiming at a bigger issue, said Geoffrey Manne, a law professor at Lewis & Clark Law School.

Among other things, the government lawsuit seeks to declare that certain provisions in the agreements between Apple and the publishers are unenforceable.

These provisions, known as most-favored-nation clauses, provided that if other e-bookstores sold the books at cheaper prices, then Apple could reduce its prices. The government has said this provided an incentive for the publishers to raise prices at other retailers.

Similar types of most-favored nation clauses have been central in other content industries such as music and television where content providers have a role in setting the price. They have also become a discussion point in certain antitrust communities, Manne said, and a government win could "send a pretty strong message" about their use.

"If the government wins this case, it would be because the court for some reason determines that most-favored-nation clauses are more harmful to competition than helpful," he said.

The case is United States v. Apple Inc et al, U.S. District Court, Southern District of New York, No. 12-02826.

(Reporting by Nate Raymond; Editing by Eddie Evans and Kenneth Barry)

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