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Judge rules against Apple in e-book case

With its reputation on the line, Apple vows to appeal the federal judge's ruling that it conspired with publishers to raise prices.

July 10, 2013|By Chris O'Brien and Alana Semuels
(Justin Sullivan, Getty…)

SAN FRANCISCO — A New York federal judge's ruling that Apple Inc. conspired to raise electronic book prices cuts straight to the heart of the company's image as a consumer-friendly tech giant.

Apple now faces the prospect of a judge imposing government oversight of its deals with content companies along with the possibility of paying monetary damages. But for the company, the greatest stake in the case has always been the potential damage to its reputation.

With its motives and principles called into question, Apple took a defiant stance, vowing to appeal Wednesday's ruling despite the judge's decisive verdict and a decision by all its alleged co-conspirators to settle.

"Apple did not conspire to fix e-book pricing, and we will continue to fight against these false accusations," Apple spokesman Tom Neumayr said. "We've done nothing wrong, and we will appeal the judge's decision."

The ruling by U.S. District Judge Denise Cote came just two weeks after the end of one of the government's largest antitrust cases in recent years. The ruling echoed remarks she made in pretrial hearings that the government would probably prove its case.

Cote said the evidence left no doubt that Apple conspired with publishers to raise the prices of their e-books and counter Amazon.com Inc., the top e-book seller. Publishers were afraid, she wrote, that Amazon's $9.99 price point for bestsellers would completely upset their business model.

"Apple was a knowing and active member of that conspiracy," Cote wrote. "Apple not only willingly joined the conspiracy, but also forcefully facilitated it."

The judge must now schedule a new round of hearings to determine what penalties, if any, to impose against Apple. A group of states that joined the case are asking for monetary damages. The Justice Department is asking the judge to establish an ongoing antitrust compliance program that includes an independent trustee.

In addition to protecting its reputation, avoiding a monitoring program and a trustee is probably a big reason Apple refused to settle, said Mark Lemley, a Stanford Law School professor.

Apple may also simply be unable to believe that its late co-founder, Steve Jobs, could have done anything illegal, Lemley said.

"There is a kind of Steve-Jobs-can-do-no-wrong mentality that can take root in Apple's culture that is hard to square with the facts here," he said.

David Balto, a former attorney in the antitrust division of the Justice Department, said Apple's determination to push the case in the face of long odds and its continued insistence that it has done nothing wrong could cause the judge to grant some of the harshest penalties.

"Arrogance sometimes comes with great peril," Balto said. "And they failed to recognize that. I think that arrogance is going to count against them when the judge imposes a remedy."

Still, Apple has made it clear it is willing to appeal the case all the way to the U.S. Supreme Court if necessary.

Ankur Kapoor, an antitrust attorney with the law firm Constantine Cannon, said Apple may have a better shot with the Supreme Court, which has been generally pro-business.

"I think Apple's chances are even stronger at the Supreme Court," Kapoor said. "When it comes to antitrust, this is a very conservative court."

For now, consumers aren't likely to feel much effect from the ruling.

The five publishers accused of conspiring with Apple already settled with the government. Penguin, HarperCollins, Simon & Schuster, Macmillan and Hachette Book Group agreed to pay $166 million in damages to the states that had also brought antitrust claims.

The publishers also agreed not to use the "agency model," under which publishers rather than retailers set prices. Publishers liked the agency model because they hoped it would allow them to charge higher rates than the $9.99 imposed by Amazon.

In a trial that lasted three weeks, federal prosecutor Mark Ryan argued that when Apple entered the e-book market in April 2010, it offered publishers a way to fight back against Amazon by raising the prices of e-books. Prices went up shortly thereafter, and Apple negotiated 30% of the profits.

The government showed that Apple executive Eddy Cue was in contact via email and phone with representatives of the five publishers that ultimately signed agreements with the company, calls that led the publishers to switch how they distributed and priced their books.

Apple argued that the phone calls were benign negotiations and that it did not conspire with anyone. It said it was Amazon, which sells the majority of e-books, that was hurting consumers.

Assistant U.S. Atty. Gen. Bill Baer, who is in charge of the Justice Department's antitrust division, called the ruling "a victory for millions of consumers who choose to read books electronically."

"Companies cannot ignore the antitrust laws when they believe it is in their economic self-interest to do so," he said. "This decision by the court is a critical step in undoing the harm caused by Apple's illegal actions."

chris.obrien@latimes.com

alana.semuels@latimes.com

O'Brien reported from San Francisco and Semuels reported from New York.

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