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7/10/2013
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Apple Conspired To Fix E-book Prices, Court Rules

U.S. Department of Justice prevails in its antitrust claim against Apple, which vows to appeal.

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U.S. District Court Judge Denise Cote on Wednesday ruled that Apple conspired to raise e-book prices, handing the Department of Justice a win in its antitrust case against the company.

"This result is a victory for millions of consumers who choose to read books electronically," Assistant Attorney General Bill Baer said in a statement. "Companies cannot ignore the antitrust laws when they believe it is in their economic self-interest to do so. This decision by the court is a critical step in undoing the harm caused by Apple's illegal actions."

The Justice Department filed its lawsuit last year against Apple and five publishers -- Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster -- claiming that Apple coordinated a switch from a wholesale pricing model to an agency pricing model among the publishers as a way to limit Amazon's ability to sell e-books at discounted prices.

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Under the wholesale model, publishers sold e-books to retailers, and retailers could then sell those e-books at prices they set. Amazon often chose to sell e-books at $9.99, a price point Apple's former CEO and co-founder Steve Jobs considered harmful to publishers and an obstacle to his company's ability to compete in the e-book market.

"The current business model of companies like Amazon distributing ebooks below cost or without making a reasonable profit isn't sustainable for long," Jobs wrote in an email to James Murdoch, deputy chief operating officer at HarperCollins' parent company News Corp, on January 23, 2010, attempting to secure an agreement prior to the launch of Apple's iPad and iBookstore.

The arguments put forward by Jobs and other Apple executives ultimately convinced the publishers to throw in with Apple and switch to agency pricing, under which publishers make their e-books available to retailers for a fixed price and retailers collect a 30% commission for every sale. In so doing, Apple and its publishing allies removed Amazon's ability to set prices for e-books at a different level.

Baer said that the Apple-led conspiracy resulted in an average 18% increase in e-book prices.

Following the Justice Department's lawsuit in April 2012, which was joined by a price fixing complaint brought by 33 State Attorneys General a month later, the five publishing companies settled at different times between August 2012 and May 2013 for a total of $164 million in compensation to consumers.

Apple alone elected to defend its position in a trial that began last month. The company's gamble, however, did not pay off.

"Apple is liable here for facilitating and encouraging the Publisher Defendants' collective, illegal restraint of trade," Cote wrote in her ruling. "Through their conspiracy they forced Amazon (and other resellers) to relinquish retail pricing authority and then they raised retail e-book prices. Those higher prices were not the result of regular market forces but of a scheme in which Apple was a full participant."

Apple maintains that it did not violate the law. "Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations," a company spokesman said in an emailed statement. "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. We've done nothing wrong and we will appeal the judge's decision."

If Apple fails to reverse the ruling on appeal, it faces a separate trial for damages.

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