Apple Inc. (AAPL), the world’s biggest technology company, “played a central role” in conspiring with five publishers to fix the prices of electronic books, and will face a trial to set damages, a federal judge ruled.
U.S. District Judge Denise Cote, ruling in a suit brought by the U.S. government and 33 state attorneys general, said Apple lost the case, in part, because of statements by its deceased founder, Steve Jobs, that government lawyers said showed Apple was targeting e-book leader Amazon.com (AMZN) Inc.
The ruling means that Apple will be ordered to stop its price-fixing conspiracy and may have to pay triple damages for overcharging customers under the state suits. The Justice Department isn’t seeking damages. Apple said it will appeal.
“The plaintiffs have shown that the publisher defendants conspired with each other to eliminate retail price competition in order to raise e-book prices, and that Apple played a central role in facilitating and executing that conspiracy,” Cote, in Manhattan, said in her opinion today.
While Apple said during the trial that is has about 20 percent of the e-books market, the sales are a fraction of its overall business. The company had $156.5 billion in sales last year, with about half that coming from the sale of iPhones.
“It’s not a material part of their business,” said Colin Gillis, an analyst with BGC Partners LP.
Apple fell $1.99, or 0.47 percent, to $420.36 at 2:59 p.m. today in New York.
The U.S. sued Apple and five of the biggest publishers in April 2012, claiming the maker of the iPad pushed publishers to sign agreements letting it sell digital copies of their books under a model that raised prices and harmed consumers. In that so-called agency model, publishers, not retailers, set book prices, with Apple getting 30 percent.
The intent was to force Amazon.com, the No. 1 e-book seller, to change its pricing model. At the time, Amazon was selling electronic versions of best-selling books for $9.99, which was often below cost.
When Apple entered the e-book market in 2010, it reached agreements with the five publishers to let it sell digital copies of their books under the agency model. A so-called “most favored nation” clause in the contracts meant that Apple could match lower prices charged by Amazon and other e-book retailers.
“Through the vehicle of the Apple agency agreements, the prices in the nascent e-book industry shifted upward, in some cases 50% or more for an individual title,” Cote said in her ruling. “Virtually overnight, Apple got an attractive, additional feature for its iPad and a guaranteed new revenue stream, and the publisher defendants removed Amazon’s ability to price their e-books at $9.99.”
Apple, based in Cupertino, California, was the last defendant left in the case after the publishers avoided trial by settling.
The settling publishers are Verlagsgruppe Georg von Holtzbrinck GmbH’s Macmillan unit, CBS Corp. (CBS)’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, Bertelsmann SE’s Random House Inc., wasn’t involved in the U.S. suit.
“Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations,” Tom Neumayr, an Apple spokesman, said today in a statement. “When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon’s monopolistic grip on the publishing industry. We’ve done nothing wrong and we will appeal the judge’s decision.”
Cote said evidence of the conspiracy came from Jobs himself.
“Compelling evidence of Apple’s participation in the conspiracy came from the words uttered by Steve Jobs, Apple’s founder, CEO, and visionary,” Cote said in the opinion. “Apple has struggled mightily to reinterpret Jobs’s statements in a way that will eliminate their bite. Its efforts have proven fruitless.”
Cote cited e-mails Jobs wrote to James Murdoch at News Corp., HarperCollins’s parent, urging the publisher to join the others, saying Amazon’s model for selling e-books at below cost “isn’t sustainable for long.”
Customer Pays More
“Heck, Amazon is selling these books at $9.99, and who knows, maybe they are right and we will fail even at $12.99,” Jobs wrote. “But we’re willing to try at the prices we’ve proposed.”
Jobs also told his biographer, Walter Isaacson, that Amazon “screwed it up.”
“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,’” Jobs said, according to the decision.
States are seeking triple damages for overcharges to consumers, according to Connecticut Attorney General George Jepsen’s office. Spokeswoman Jaclyn Falkowski declined to comment on the specific amount.
“As we move into the next phase of this trial, we will continue to aggressively seek compensation for those who have been injured by this conspiracy,” Jepsen said.
“This result is a victory for millions of consumers who choose to read books electronically,” Assistant U.S. Attorney General Bill Baer said in a statement today. “Through today’s court decision and previous settlements with five major publishers, consumers are again benefiting from retail price competition and paying less for their e-books.”
The ruling is likely to help consumers with claims against Apple in class action suits claiming they were forced to pay more for e-books than they would have had to in a competitive market.
The ruling is a blow to Chief Executive Officer Tim Cook, whose tenure since replacing Jobs in 2011 has been marred by controversies, including criticism of the company’s labor practices in China and accusations by members of Congress that the company uses tricks to avoid paying billions of dollars in U.S. taxes.
Cote previewed her eventual decision in a court conference before the trial in which she told lawyers for both sides her “tentative view” that the government could show Apple “knowingly participated in and facilitated a conspiracy to raise prices of e-books.”
“The decision will set a road map for future antitrust enforcement in electronic commerce,” said David Balto, a Washington-based antitrust lawyer who represents consumer groups and wasn’t involved in the case. “This is a signal to corporations thinking they can beat the Justice Department.”
Because the book publishers settled with the government before the Apple trial, the pricing model that was found to be in violation of antitrust laws has already been phased out.
For Apple, the loss means it may face a new regime of government oversight for sell e-books, as well as future deals with other entertainment companies, Balto said.
“Any financial penalty is pocket change for Apple, but this decision can have a long-term effect,” said Balto.
The trial, which Cote heard from June 3 to June 20, 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 showed Cote statements and e-mails made by Jobs about the e-books market.
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.
The case is U.S. v. Apple Inc., 12-cv-02826, U.S. District Court, Southern District of New York (Manhattan).