Apple Vows to Appeal Guilty Verdict in E-book Price-Fixing Case

NEW YORK CITY - A U.S. judge ruled Wednesday that Apple (IW 500/4) violated antitrust law in a price-fixing case, saying the company "conspired to restrain trade" with publishers to boost the price of e-books.

Apple quickly rejected the decision and said it would appeal

In a sweeping ruling, U.S. District Judge Denise Cote, who presided over a bench trial in New York in June, concluded that Apple was liable for "facilitating and encouraging" a collective effort by the publishers to end price competition for e-books.

Damages Still to be Determined

She ordered a new hearing to determine damages.

Cote rejected arguments from Apple, which claimed its entry into the e-book market promoted competition. The judge also determined that comments from late CEO Steve Jobs helped prove the government's allegations of a conspiracy.

Analysts said the case was unlikely to have a material impact on Apple, which had nearly $145 billion in cash when it last reported earnings. While the case could result in a "significant judgment," Apple "should be able to weather this," said Rob Enderle, a California technology analyst.

The Justice Department has said it will seek injunctive relief and a court-ordered independent monitoring trustee. A group of 33 states will seek unspecified damages against Apple. A class-action suit against Apple could also be bolstered by Cote's ruling.

Cote had said before the trial that the government had a strong case, but Apple attorney were buoyed by some of her comments at trial. During closing arguments, Cote pointedly questioned both sides.

The trial focused on a six-week period in late 2009 and early 2010 during which Apple negotiated contracts with publishers ahead of its iPad launch and proposed a new and more profitable business model.

Publishers at the time were unhappy with Amazon's practice of charging $9.99 for bestsellers but were unable to effect change until Apple helped organize the group, Cote said.

"Understanding that no one publisher could risk acting alone in an attempt to take pricing power away from Amazon, Apple created a mechanism and environment that enabled them to act together in a matter of weeks to eliminate all retail price competition for their e-books," Cote said in her opinion.

"Evidence is Overwhelming"

"The evidence is overwhelming that Apple knew of the unlawful aims of the conspiracy and joined that conspiracy with the specific intent to help it succeed."

Each of the five publishers originally named in the U.S. government's civil lawsuit settled the case, leaving Apple to stand trial alone.

The Justice Department hailed the ruling, which it said would help undo agreements that had harmed millions of consumers.

"Companies cannot ignore the antitrust laws when they believe it is in their economic self-interest to do so," said Assistant Attorney General Bill Baer.

Apple said it would pursue its appeal, saying in a statement that its actions "gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon's monopolistic grip on the publishing industry."

"Apple did not conspire to fix e-book pricing, and we will continue to fight against these false accusations," said an Apple spokesman.

Amazon held "wholesale" contracts with publishers in which it set prices. Apple's contracts shifted to an "agency" model where publishers set the price and paid a 30% commission to Apple.

As Apple was finalizing the new model with publishers, several publishers successfully pressured Amazon to accept the agency model and higher prices, threatening to withhold books from Amazon unless it made the shift.

Cote sided with the government on charges that Apple helped orchestrate the industry's shift.

Cote also dismissed Apple's arguments that it was indifferent to price, concluding, "Apple convinced the Publisher Defendants that Apple shared their goal of raising e-book prices, and helped them to realize that goal."

Judge Rejects Notion Apple Promoted Competition

Cote also rejected Apple's contention that its entry into the e-book market was pro-competitive because of Amazon's dominance.

Apple's agreements with the publishers "did not promote competition, but destroyed it," she said.

Cote also cited a number of statements from Jobs that the government touted as proof of the conspiracy. These included a Jobs remark to his biographer boasting that the publishers "went to Amazon and said, 'You're going to sign an agency contract, or we're not going to give you the books.'"

Apple defense attorneys said Jobs' comments had been misinterpreted.

But Cote concluded that "Apple could find no effective way at trial to escape the import of Jobs' remarks."

Keith Hylton, a professor at Boston University School of Law, said Apple's chances of winning the appeal were "slim" given that Cote's 160-page opinion relied extensively on factual evidence.

"An appellate court is unlikely to have room to modify the decision substantially," Hylton said.

But Daniel Crane, a professor at the University of Michigan Law School specializing in antitrust law, said Apple has some "fairly strong" grounds to appeal whether Cote misinterpreted events and misapplied antitrust law to a fast-changing technology issue.