Apple to Fight E-Books Pricing Claims in Antitrust Trial
By Bob Van Voris - Jun 3, 2013 12:00 AM ET
Apple Inc., accused by the U.S. of being the ringmaster in a conspiracy with publishers to fix prices of electronic books, is going to trial in a case Chief Executive Officer Tim Cook called bizarre and vowed to fight.
Barring a last-minute settlement, lawyers for Apple and the U.S. Justice Department will give their opening statements 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.
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. Photographer: Daniel Acker/Bloomberg
Apple claims it did nothing wrong and says it benefited consumers by bringing innovation and competition to an e-books market that was dominated by Amazon.com Inc. (AMZN) 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.
A group of states, led by Texas, is also seeking fines and unspecified damages. A win for the government may fuel class-action lawsuits by private plaintiffs seeking triple damages permitted under antitrust law.
Trial evidence is set to include e-mails and statements from Apple’s late founder, Steve Jobs, and testimony from Eddy Cue, the senior Apple executive who headed negotiations with the publishers.
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 retailer, 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.
“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.
The government claims Apple led a conspiracy among the publishers. Apple denies it.
“Apple knew that the major publishers also disliked Amazon’s low prices and saw Apple’s potential entry as a pathway to higher retail prices industrywide,” the U.S. said in a court filing in April.
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, the U.S. claims.
Five publishers signed agency contracts with Apple: 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.
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 are on a list of witnesses to be called in the trial.
Apple says it acted unilaterally, for its own benefit. It denies conspiring with publishers to fix prices and says it engaged in weeks of tough negotiations with each of the publishers before getting them to agree.
“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. (BKS), 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.
Apple also claims consumers have benefited from its 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. We’ve done nothing wrong there and so we’re taking a very principled position on this,” Cook, Apple’s CEO, said May 28 in an interview at the D: All Things Digital conference in Rancho Palos Verdes, California. “And so we’re going to fight.”
Part of Apple’s fight will be to win over U.S. District Judge Denise 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.
“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.
Apple’s trial team is led by Orin 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. (CVC), Warner Music Group Corp. and Comcast Corp. (CMCSA)’s NBC Universal.
Last year, Snyder won a $700 million settlement for Cablevision unit VOOM HD Holdings during trial against Dish Network Corp. (DISH) He is defending Facebook Inc. (FB) 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 (ABI)’s proposed $20.1 billion purchase of Grupo Modelo SAB. The suit was settled in April. Ryan is joined by Lawrence Buterman, who represented the government in a 2011 case that killed H&R Block Inc. (HRB)’s proposed $287.5 million acquisition of the maker of TaxAct products.
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.
The case is U.S. v. Apple Inc. (AAPL), 12-cv-02826, U.S. District Court, Southern District of New York (Manhattan).
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