Judge Rules Against Apple in E-Books Trial

“Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the spring of 2010,” the judge, Denise L. Cote of United States District Court in Manhattan, said in her ruling. She said a trial for damages would follow.

In a courtroom last month, government lawyers argued that Apple had colluded with five big American publishers to raise prices for electronic books across the publishing market.

The Justice Department had brought the antitrust case against Apple and the publishers a year ago. The publishers all settled their cases, but Apple executives insisted that the company had done nothing wrong.

The antitrust battle underscores the turmoil in the book industry as readers shift from ink and paper to electronic devices like tablets and smartphones, where they can buy content with the push of a button. While the publishers want to embrace new media, they are also trying to protect their profits and retain control of their businesses. Apple’s lawyers noted at the trial that the publishers had long complained that Amazon.com’s uniform pricing of $9.99 for new e-book titles was too low.

In his testimony, Eddy Cue, Apple’s senior vice president of Internet software and services, who was in charge of negotiating deals with the publishers, conceded that Apple opened the door for book publishers to raise prices in its own e-book store. But he said that the company was not intending to push Amazon, the dominant player in the e-book market, to raise its prices, too.

“Amazon could have negotiated a better deal,” Mr. Cue said in his testimony. “They had a lot more power.”

But the Justice Department said Apple’s deal with the publishers left Amazon with no choice but to raise prices. When Apple entered the e-book market in 2010, it changed the way publishers sold books by introducing a model called agency pricing, where the publisher — not the retailer — sets the price, and Apple took a cut of each sale. As a result, the publishers were able to set e-book prices higher. Apple proposed price caps of $12.99 and $14.99.

Apple also included a condition in its contracts, called the most-favored nation clause, requiring the publishers to allow Apple to sell e-books at the same price as the books would be sold in any other store. Apple has said the clause was intended to guarantee that its customers got the lowest e-book prices, but the government argued that it defeated price competition.

The Justice Department said that the publishers used their relationship with Apple, combined with the most-favored nation clause, to threaten Amazon to switch to the agency model so they could raise prices. If Amazon did not agree to those terms, the government said, the publishers intended to withhold their e-books from the retailer until the more expensive hardcover books had been on the market for awhile.

In the trial, government lawyers showed e-mails sent between Apple and the publishers in the weeks leading up to the introduction of the iPad and the opening of Apple’s e-book store.

One e-mail, written by Steven P. Jobs when he was chief executive of Apple, was frequently brought up at the trial. In an e-mail conversation with Mr. Cue about the contracts negotiated with the publishers, Mr. Jobs wrote: “I can live with this, as long as they move Amazon to the agent model too for new releases for the first year. If they don’t, I’m not sure we can be competitive.” The Justice Department said this showed Apple’s intent to help the publishers push Amazon to the agency model so they could raise e-book prices.

But Apple’s lead counsel, Orin Snyder of Gibson, Dunn Crutcher, contended that the note written by Mr. Jobs was a draft. He showed a version of the e-mail that did not have language about forcing Amazon to change the way it sold books. At the trial, it was never fully resolved which version of Mr. Jobs’s e-mail was actually sent to Mr. Cue. But the version presented by the Justice Department indicated that it was written at a later time and was signed “Steve,” suggesting that it might have been the final draft.

Judge Cote said the words of Mr. Jobs were compelling evidence against Apple. They showed that the late Apple chief was aware that the publishers were unhappy with Amazon’s pricing of $9.99 for e-books, and that Apple’s entry would drive up prices across the industry.

In one famous instance, Mr. Jobs made comments to a reporter after he introduced the iPad and the iBookstore in January 2010. When asked why consumers would purchase an e-book from Apple’s store instead of Amazon.com, where e-books were $9.99, Mr. Jobs replied, “The prices will be the same.”

“Apple has struggled mightily to reinterpret Jobs¹s statements in a way that will eliminate their bite,” Judge Cote said. “Its efforts have proven fruitless.”

In his arguments, Mr. Snyder tried to illustrate that the publishers “fought tooth and nail” with Apple before agreeing to the terms, rather than colluding with the company. In support of that argument, he showed e-mails from the publishing executives arguing with Mr. Cue about the contract terms.

On the last day of the trial, Mr. Snyder told Judge Cote that there was much more at stake than the health of the book market. Mr. Snyder said a ruling against Apple could stifle the way retailers do business with media providers, including music labels and movie studios. Retailers negotiating with content providers might feel pressured to “not utter a word” about their discussions with other companies, he said. Businesses negotiating deals with multiple partners often inform each party of what the others have agreed to, he said, so they know they are being treated fairly.

Article source: http://www.nytimes.com/2013/07/11/technology/judge-rules-against-apple-in-e-books-trial.html?partner=rss&emc=rss