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Apple Judge Proposes Remedies in E-Books Pricing Case

The federal judge who ruled that Apple Inc. (AAPL) conspired to fix prices of digital books proposed remedies she said would prevent the iPad maker from further harming competition in the e-books market.

U.S. District Judge Denise Cote in Manhattan yesterday considered the federal government’s proposed injunction against Apple, the world’s largest technology company. She told the parties to discuss her proposals for an order and said she would hold another hearing in a couple of weeks.

“I want to fashion as narrow a remedy as possible to restore competition to retailers of e-books,” Cote said yesterday in court. “We do need an injunction here. There was blatant price-fixing.”

Cote, ruling after a nonjury trial, found in July that Apple violated U.S. antitrust law by conspiring with publishers on prices. A second trial will be held to determine damages that, according to Apple lawyer Orin Snyder, could be “hundreds of millions of dollars.”

The federal government and 33 states submitted a proposal on Aug. 2 asking Cote to order Apple to terminate its e-book agreements with five publishers who were also sued by the U.S. The proposal also called for the court to appoint someone to monitor antitrust compliance at Apple for 10 years. The injunction “would halt Apple’s anticompetitive conduct, restore lost competition and prevent a recurrence of the illegal conduct,” U.S. Justice Department officials said.

Staggered Negotiations

Cote proposed yesterday that Apple be required to hold staggered contract renegotiations with the five publishers over a period of several years to ensure that the company wouldn’t be in contract discussions with more than one publisher at a time.

She also said that instead of appointing a monitor she would prefer that Apple “adopt a vigorous internal antitrust program and convince the court there’s no need for a monitor.”

The U.S. sued Apple and the five publishers in April 2012, claiming the Cupertino, California-based company pushed publishers to sign agreements that would allow it to sell digital copies of their books under a model that raised prices and harmed consumers.

The conspiracy was designed to force Amazon.com Inc., the largest e-book seller, to change its pricing model, the U.S. said. At the time, Amazon was selling electronic versions of best-selling books for $9.99, which was often below cost.

Agency Model

When Apple entered the e-book market in 2010 to boost the appeal of its iPad tablet as a reading device, it reached agreements with the five publishers to sell digital copies of their books under the agency model, by which the publishers set the prices and Apple takes a 30 percent commission. 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.

The publishers, 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, settled with the government before the trial for a total of at least $164 million. The largest publisher, Bertelsmann SE’s Random House, didn’t sign an agency agreement with Apple and wasn’t involved in the U.S. suit. Penguin was merged with Random House this year.

On Aug. 7, publishers who settled with the U.S. filed an objection to the government’s proposal to force Apple to terminate its contracts with them. They claimed that they would be punished by the proposed order.

Settlement Criticism

Cote criticized the publishers in court Aug. 8 for not admitting wrongdoing in the antitrust matter.

The judge also considered a letter she received yesterday from Apple’s lawyers saying that she had erred in excluding some evidence from the trial.

Testimony from a Random House Inc. executive that the publisher adopted an agency model for sales based on its discussions with Barnes & Noble Inc. (BKS) and “not because of any actions by Apple” was excluded, while e-mails and testimony that would have rebutted the judge’s findings were disregarded, Apple’s lawyer Snyder said in the letter.

“These evidentiary issues demonstrate that Apple has a substantial possibility of prevailing on appeal,” Snyder said in the letter.

Cote addressed each of the points in the letter and concluded that she didn’t “believe Apple has shown that it is likely to succeed on appeal.”

Cote denied a bid by Apple to halt proceedings in the case pending the outcome of the appeal.

The case is U.S. v. Apple Inc., 12-cv-02826, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net; Christie Smythe in Brooklyn at csmythe1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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