Apple violated antitrust laws when it orchestrated a conspiracy to fix e-book prices with five major publishers, Southern District Judge Denise Cote (See Profile) ruled Wednesday.
Following a June bench trial in which Cote heard testimony about a quickly assembled plan by Apple to plunge into the e-book market by combining with publishers fed up with the $9.99 price charged by Amazon, the judge said in United States v. Apple, 12 Civ. 2826, that "the evidence is overwhelming that Apple knew of the unlawful aims of the conspiracy and joined the conspiracy with the specific intent to help it succeed."
The decision, which Apple said it would challenge at the U.S. Court of Appeals for the Second Circuit, sets up a hearing on injunctive relief and damages, which is expected to include the government's request for a multi-year ban on most-favored-nation clauses—whereby publishers were allowed to match a competitor's decision to drop prices but Apple still retained its 30 percent cut.
Cote's ruling came in an action brought by the U.S. Justice Department's Antitrust Division and State of Texas v. Penguin Group (USA), 12 Civ. 3394, brought by 33 states and U.S. territories.
In addition to Penguin, the other publishers, all of whom settled in the year running up to trial, are Hachette, HarperCollins, Macmillan and Simon & Schuster.
In a statement, assistant attorney general William Baer called the decision "a victory for millions of consumers who choose to read books electronically."
"Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations," said an Apple spokesman.
"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," the spokesman said. "We've done nothing wrong and we will appeal the judge's decision."
Apple's lead lawyer, Orin Snyder of Gibson Dunn & Crutcher, could not immediately be reached for comment. Assistant attorneys general Mark Ryan and Lawrence Buterman led the government's case.
Cote recounted strategies employed by the publisher defendants to combat the Amazon price structure from January 2009 until December 2010 as Apple was developing iBooks and planning to open the iBookstore.
Apple first met with publishers on Dec. 15 and 16, 2009, in New York and discussed moving to the agency model that included use of most favored nation clauses—an arrangement that enabled the publishers to force Amazon, then dominating the market for e-books with its Kindle reader, to switch from its wholesale model to the agency model. The publishers were able to make Google do the same in late January 2010 just as Apple was launching the iPad and the iBookstore.
"Apple seized the moment and brilliantly played its hand," said Cote. "It provided the Publisher Defendants with the vision, the format, the timetable, and the coordination they needed to raise e-book prices."
Key to the judge's ruling were documents Cote said make it "difficult for either Apple or the Publisher defendants to deny they worked together to achieve the twin aims of eliminating retail price competition and raising the prices for trade e-books."
She said that "many of the trial's fact witnesses who are employed by Apple and the Publisher Defendants were less than forthcoming," but the record "was replete with admissions about their scheme."
For example, she quoted one executive with Penguin, which settled on the eve of trial, as saying, "Agency is anti-price war territory. We don't need to compete with other publishers on the price of our books."
Leading the charge for Apple in talks with the publishers was Eddie Cue, Apple's senior vice president of Internet software and services, who initiated discussions with publishers and was an important witness at trial.
"As Cue admitted at trial, raising e-book prices was simply 'all part of' the bargain in creating the iBookstore," Cote said.
Cote said Apple chairman Steve Jobs, who died in October 2011, was "frank in explaining how the scheme worked" when he spoke to his biographer Walter Isaacson the day after the launch in January 2010.
Jobs described the plan as an "a[i]kido move" to eliminate price competition with Amazon."
"Amazon screwed it up," Jobs said. "It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that—they thought it would trash their ability to sell hardcover books at $28."
Jobs said that, even before Apple "got on the scene, some booksellers were starting to withhold books from Amazon."
"So 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 the publishers then went to Amazon and said, "You're going to sign an agency contract or we're not going to give you the books."
Sudden Price Increase
Cote said Apple at trial had "struggled mightily to reinterpret Jobs's statements in a way that will eliminate their bite. Its efforts have proven fruitless."
When the iBookstore opened in April 2010, Cote said, there was "a sudden and uniform price increase" for e-books. The same was later true for Random House, a holdout that eventually adopted the agency model in January 2011. The judge again quoted Cue, this time in an email. "When we get Random House, it will be over for everyone," he wrote.
Cote said the plaintiffs carried their burden in showing that Apple committed a "per se" violation of Section 1 of the Sherman Act.
"There is overwhelming evidence that the Publisher Defendants joined with each other in a horizontal price-fixing conspiracy," she wrote, adding later, "Apple not only willingly joined the conspiracy but forcefully facilitated it."
She said Apple offered a shifting defense of its actions, abandoning several arguments over the course of the trial, including the contention it was unaware the publishers would use their new pricing authority to raise prices.
The judge rejected Apple's argument that the rapid-fire negotiations with the publishers were contentious, especially on price caps, evidence there was no meeting of the minds to forge a conspiracy.
"The fact that provisions, even key provisions, in the Agreements were the focus of hard-fought negotiations does not preclude a finding of liability," she said.
Ankur Kapoor, a partner at Constantine Cannon who specializes in antitrust counseling and litigation who is not involved in the Apple case, said the case wasn't complicated "although the magnitude of the industry and the players makes it a landmark case however you look at it."
Kapoor said this is one of only a "handful of cases where a company has been found liable by participating in an alleged conspiracy not among its competitors in the same level of distribution, but a conspiracy with its suppliers."
He added, "I think it cautions companies to be very, very careful about how they communicate with, not just their competitors, but to be extremely careful in communicating with their suppliers and distributors."
The significant question on appeal, Kapoor said, will be the degree to which there was agreement.
"There was a conspiracy to raise prices, but the question is: Did Apple share that same goal—did they agree with the publishers to screw consumers by raising prices? I don't see evidence of that," he said.
But David Balto, another antitrust attorney not involved in the litigation, said Apple has a steep hill to climb at the Second Circuit.
"I think Apple has a prayer but it's a pretty long prayer," said Balto, a former trial attorney with the U.S. Justice Department and policy director for the Federal Trade Commission now in private practice in Washington D.C. "Cartels are the most pernicious forms of activity under the antitrust laws and Apple will have a difficult time explaining why this was beneficial to the consumer."
Balto called it a "concrete victory for the Justice Department" that was secured in less than a year and a sign of stepped up enforcement against major companies that had been lacking during the George W. Bush administration.
"Apple was using its muscle to stifle competition and raise costs for the consumer," said Balto. "This case sends a clarion call to e-commerce companies that they have to fight hard in the marketplace and not take the easy road by arranging treaties with their rivals."'
The decision also buoyed the prospects of lawyers who have sued Apple in putative class actions.
Steve Berman of Hagens Berman Sobol Shapiro is lead counsel in a putative class action against Apple, Petrus v. Apple, 11-cv-09016, one of 27 cases before Cote under the multidistrict litigation of In re: Electronic Books Antitrust Litigation, 11 MD 2293. Lawyers with Hagens Berman and Cohen Milstein Sellers & Toll have combined on pretrial litigation in the consumer suits.
Berman issued a statement saying "we believe that this ruling is binding on the consumer case."
"Once we receive class certification, the only issue that will remain is for a jury to assess damages, which under federal law are trebled, or tripled," he said.
@|Mark Hamblett can be contacted at email@example.com.
Editors' Note: This article has been updated to reflect a Correction.