Apple Battles E-Books Pricing Claims in Antitrust Trial

Apple Inc., accused by the U.S. of being the ringleader in a conspiracy with publishers to fix electronic book prices, went to trial in a case that will feature evidence from its deceased founder, Steve Jobs.

A lawyer for the U.S. Justice Department began his opening statement in Manhattan federal court today in a rare antitrust trial to determine whether Apple orchestrated an illegal price-fixing agreement when it entered the e-books market in 2010 with the introduction of the iPad.

Apple and five of the six biggest U.S. publishers “consciously committed to a scheme to raise e-book prices throughout the industry” that cost consumers hundreds of millions of dollars, Justice Department lawyer Lawrence Buterman told U.S. District Judge Denise Cote today.

Apple claims it did nothing wrong and says it helped consumers by bringing innovation and competition to an e-books market that was dominated by Inc. Apple’s lawyer, Orin Snyder, today echoed Apple’s Chief Executive Officer Tim Cook in his opening statement today, calling the government’s case “bizarre.”

“Apple is going to trial because it did nothing wrong,” Snyder said.

Last Defendant

Apple is the last defendant remaining in the case after the five publishers sued by the government avoided trial by settling.

“You don’t see a lot of these antitrust trials,” said Andrew M. Friedman, a partner with the law firm Patton Boggs LLP in Washington. “It’s pretty unusual.”

The case is part of an upsurge in antitrust litigation by the Justice Department, reflecting an Obama administration that has been more aggressive than its predecessors in challenging companies. The government is seeking an order barring Apple from alleged anticompetitive actions, including price fixing, in the market for digital books. The U.S. isn’t asking for money damages.

A group of states is also seeking fines and unspecified damages. If Apple is found liable in the trial, damages will be determined in a separate proceeding. A win for the government may fuel class actions by private plaintiffs seeking triple damages permitted under antitrust law.

Jobs Quotes

Buterman, in his opening statement, displayed e-mails from Jobs and quotes from him published in Walter Isaacson’s 2011 authorized biography of Apple’s founder.

“Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99,” Jobs wrote in a Jan. 24, 2010, e-mail to James Murdoch, the head of Harper Collins Publishers Ltd. parent News Corp.

In another e-mail, to Simon & Schuster Inc. Chief Executive Officer Carolyn Reidy, former general counsel Elisa Rivlin quotes Jobs responding to a reporter’s question why consumers would buy an Apple e-book for $14.99 when Amazon’s price is $9.99.

“A confident Jobs replies, ‘That won’t be the case … The prices will be the same.’”

“I cannot believe that Jobs made the statement below,” Rivlin wrote. “Incredibly stupid.”

Snyder said the government had twisted Jobs’s words. The idea that Jobs would have admitted to illegal price-fixing, to his biographer and in a recorded press interview, is far-fetched, Snyder said.

‘Chief Ringleader’

Cote will also hear testimony from Eddy Cue, the senior Apple executive who headed negotiations with the publishers. Buterman today called Cue “the chief ringleader of the conspiracy.”

The U.S. sued Apple and the publishers in April 2012. The government claims that in late 2009 and early 2010, before Apple introduced the iPad to the market, the company pushed publishers to sign agreements letting it sell digital copies of their books under what’s known as the agency model. Under that model, publishers, and not retailers, set prices for each book, with Apple getting 30 percent.

At the time, Amazon, with its Kindle reader, sold nine out of 10 e-books bought by consumers, according to Apple. Amazon was selling books to customers for $9.99, less than it paid publishers. Both sides agree Apple didn’t want to sell e-books at a loss.

‘Favored Nation’

In addition to the agency model, Apple’s agreements with the publishers included “most favored nation” provisions that required them to match in Apple’s iBookstore any lower prices offered elsewhere by retailers including Amazon. Apple set pricing tiers -- the company calls them caps -- at $12.99 and $14.99 for most new books, according to the government.

Apple knew the combination of provisions would push the publishers to force Amazon into agency agreements, raising prices across the market, according to the government.

“The linchpin of this is whether there was a conspiracy and if Apple was part of it,” said Eugene F. Zelek Jr., an antitrust lawyer with Freeborn & Peters LLP in Chicago who isn’t involved in the case.

Five publishers signed agency contracts with Apple: Verlagsgruppe Georg von Holtzbrinck GmbH’s Macmillan unit, CBS Corp.’s Simon & Schuster, Lagardere SCA’s Hachette Book Group, Pearson Plc’s Penguin unit and News Corp.’s HarperCollins.

Publishers’ Settlements

The publishers have settled with the U.S., with states and with private plaintiffs for a total of at least $164 million. A sixth publisher, Random House Inc., didn’t sign an agency agreement with Apple and isn’t involved in the U.S. suit.

Chief executives of the publishers will be called to testify in the trial.

Apple has iBookstores available in 155 countries, offering 1.75 million books for sale, Peter Oppenheimer, Apple’s chief financial officer, said during Apple’s earnings call with analysts in April.

Horace Dediu, an Apple analyst with Asymco in Helsinki, estimated that Apple sold 217 million e-books in 2012. Apple took in $329 million in e-book revenue last year, he estimated, assuming it sold most of the books using the agency model that gives it 30 percent of each sale.

Snyder said Apple acted unilaterally, for its own commercial benefit in its negotiations with publishers. He denied the allegation that Apple conspired to fix prices and said the contracts were “hotly negotiated.”

‘Logical Model’

“Agency was a logical model for a new entrant to the e-books business in 2009,” Apple said in a court filing. Publishers were holding back digital versions of books to avoid undercutting their bookstore sales, Apple said. Barnes & Noble Inc., the second-largest e-book seller, was pushing for agency agreements. Amazon considered switching to the agency model in reaction to Apple’s negotiations with publishers, Apple said.

“The market was in disarray and headed for a change,” Snyder said today.

Snyder argued that consumers have benefited from Apple’s entry into the market, giving them access to more digital books, better e-readers and lower prices overall.

“The e-book case to me is bizarre,” Cook, Apple’s CEO, said May 28 in an interview at the D: All Things Digital conference in Rancho Palos Verdes, California. “We’ve done nothing wrong there and so we’re taking a very principled position on this. And so we’re going to fight.”

Part of Apple’s fight will be to win over Cote, who is hearing the case without a jury. Cote said in a final pretrial conference May 23 that the government has evidence to show that Apple knowingly participated in a conspiracy to raise e-book prices.

‘A Blow’

“It’s certainly a blow to Apple to get that kind of feedback going into a trial,” said Jonathan Kanter, an antitrust lawyer with the firm Cadwalader, Wickersham & Taft LLP in Washington.

In his opening today, Snyder addressed Cote’s remarks, saying Apple shouldn’t have to start the trial “with the deck stacked against it.”

Cote assured Snyder that she will do her best to ensure both sides get a fair trial.

“The deck is not stacked against Apple unless the evidence stacks the deck against Apple,” she said.

Apple’s trial team is led by Snyder, a partner in the New York office of Gibson, Dunn & Crutcher LLP. Snyder, a former federal prosecutor, has handled antitrust and other high-stakes litigation for media and entertainment companies including Cablevision Systems Corp., Warner Music Group Corp. and Comcast Corp.’s NBC Universal.

Dish Trial

Last year, Snyder won a $700 million settlement for Cablevision unit VOOM HD Holdings during a trial against Dish Network Corp. He is defending Facebook Inc. against what the company says is a fraudulent suit by a man who claimed Mark Zuckerberg gave him a half share in the social network in a 2003 contract.

The government team is led by Mark W. Ryan, the director of litigation for the Justice Department’s Antitrust Division. Ryan joined the division after a career in private practice.

Ryan supervised a lawsuit that challenged beermaker Anheuser-Busch InBev NV’s proposed $20.1 billion purchase of Grupo Modelo SAB. The suit was settled in April. Ryan is joined by Buterman, who represented the government in a 2011 case that killed H&R Block Inc.’s proposed $287.5 million acquisition of the maker of TaxAct products.

Texas Lawyer

Gabriel Gervey, a lawyer in the Texas attorney general’s office, is the lead lawyer for the states.

Each side will have a total of 29 hours to present evidence. Cote has scheduled June 20 for closing arguments, after which she’ll consider the evidence and issue her ruling.

After the parties delivered their opening statements today, the government called as the first witness Kevin Saul, an in-house Apple lawyer who participated in the negotiations with publishers.

Saul testified that “Apple was indifferent” to whether Amazon and other e-book sellers adopted the agency model. He will continue his testimony tomorrow.

E-books accounted for 22.6 percent of U.S. book publishers’ sales in 2012, according to a full-year report released by the Association of American Publishers Thursday. That’s up from 17 percent of sales in 2011 and 3 percent in 2009.

Revenues for the total U.S. trade book industry -- in which the AAP includes religious publishing -- were $7.1 billion in 2012, up 6.2 percent from the previous year. Of that, $1.54 billion came from e-books: $1.25 billion from adult fiction and nonfiction, $232.8 million from children’s and young adult books and $57 million from religious books.

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

Before it's here, it's on the Bloomberg Terminal.