Apple under the gun as US e-book trial starts

Apple faces off with DOJ alone after publishers settle antitrust charges

Apple appears to face an uphill battle as it goes to trial Monday in New York on e-book price fixing charges brought by the U.S. government.

In a courtroom packed to capacity, the company squared off alone against the U.S. Department of Justice in a non-jury trial presided over by Judge Denise Cote for the U.S. District Court for the Southern District of New York, who in a pre-trial hearing had already indicated her inclination to rule against the company.

The DOJ filed the antitrust lawsuit in April last year alleging that Apple and five publishers -- Penguin Group, HarperCollins, Simon & Schuster, Hachette, and Macmillan -- had conspired to raise e-book prices. The publishers, however, have since all settled, agreeing to stop prohibiting wholesale discounts and to pay a cumulative $164 million, earmarked to benefit consumers.

The DOJ charges that Apple and the five publishers colluded to raise prices of e-books, working together to compete against Amazon, which set the price of most e-books at $9.99 beginning in late 2007. At that time, the rising popularity of Amazon's Kindle made it the dominant player in the e-book market, with about 90% market share by 2009.

"There's simply no dispute that publishers wanted to raise e-book prices and that Apple conspired with them to do the same," said Lawrence Buterman, a lawyer for the DOJ, in opening arguments Monday.

Buterman said the DOJ's case will be buttressed by testimony from executives from the publishers, who will be called on to testify during the three-week trial.

"Apple was a facilitator and go-between to move publishers to higher prices," Buterman said.

Apple, in a court filing in May, said that the publishers in 2009 had on their own pursued a so-called agency business model to sell e-books where the publisher would set the price or a price range for each e-book and the retailer, acting as an agent, would receive a commission on each e-book sale. The publishers also discussed raising wholesale prices of e-books, Apple said in the filing.

Apple said at that point it stepped in to negotiate with publishers to set up its own iBooks e-book store. As an agency business model had helped the company in its App Store, where the developer fixed the consumer price, Apple said it favored an agency model with the publishers that gave it 30% commission.

By the time Steve Jobs unveiled the iPad on Jan. 27, 2010, Apple had content deals in place with Hachette, Macmillan, Penguin, and Simon & Schuster.

However, Apple said it did not enter into or facilitate a conspiracy to eliminate price competition or raise prices in the e-book industry.

"Apple has been waiting for this day for a long time," said Orin Snyder, an attorney for Gibson, Dunn & Crutcher, a law firm representing Apple in the case. "Apple is going to trial because it did nothing wrong."

The government has taken snippets from conversations, mainly from preliminary "get to know each other" meetings between Apple and the publishers, out of context, Snyder said. The actual negotiations between Apple and the individual publishers were hard-fought, Snyder said. "Those agreements make it clear that the interests of Apple and the publishers were not aligned," Snyder said.

The agreements included a "most favored nation" clause, requiring that if other retailers sold e-books for a lower price than Apple, the publisher would have to cut their price to Apple to allow the company to match the lower price.

The government contends that this provision helped push the publishers to force Amazon to switch to the agency model. To put pressure on Amazon, the publishers said that they would delay putting out e-books until sometime after the hardcover editions were released -- a procedure known as "windowing."

The DOJ said in a May court filing that Apple and the publishers exercised their market power when they collectively increased the average price of trade e-books. Average prices of trade e-books sold by the defending publishers increased by 18.6% at Amazon and by 19.9% at Barnes & Noble through the transition to agency, the DOJ said.

"Stripped of the glitz surrounding e-books and Apple, this is an unremarkable and obvious price-fixing case," the DOJ said in the filing.

In a pretrial hearing last month, U.S. District Judge Denise Cote said she believed the government has a strong case.

"I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books, and that the circumstantial evidence in this case, including the terms of the agreements, will confirm that," Cote said, according to published reports.

On Monday, Snyder asked Cote "to erase any tentative conclusions" she may have reached.

Cote reminded Snyder that all parties in the case had agreed to hear her "tentative views" before the trial began. "The deck is not stacked against Apple unless the evidence stacks the deck against Apple," Cote said, adding that she would not reach a final opinion until she hears all the testimony.

The U.S. government is not seeking monetary damages or a fine, but wants the judge to order Apple not to engage in conduct related to price fixing in the future.

If the judge rules against Apple, however, it could face a separate trial by state attorneys general and consumers pursuing class actions and seeking monetary damages. Apple last year settled an e-book price-fixing antitrust case with the European Commission.

In court on Monday, Connecticut Assistant Attorney General W. Joseph Nielsen said that "immediately after switching to the agency model ... e-books prices went up considerably."

Nielsen added that "the harm to consumers was substantial," and that the states involved in the case intend to ask for penalties.

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