By JOE PALAZZOLO
Apple Inc.
heads to a U.S. federal court Monday to face civil accusations that it conspired with five publishers to drive up the price of electronic books in the weeks leading up to the 2010 introduction of the iPad.
The Justice Department will try to prove during the three-week trial in Manhattan that the publishers seized on Apple's entrance into the e-book market as an opportunity to shift from low prices set by Amazon.com Inc.
to higher ones set by the publishers themselves.
"Stripped of the glitz surrounding e-books and Apple, this is an unremarkable and obvious price-fixing case," Justice Department lawyers said in a May 14 court filing.
If a federal judge finds Apple liable, the company could face claims for damages in separate proceedings from a group of states that joined the Justice Department in the 2012 antitrust suit. A judgment against the company could also open the door for private lawsuits. Apple last year settled an antitrust case with the European Commission over e-book pricing, but the pact didn't expose the company to private lawsuits.
In the U.S. case, the Justice Department appears to have an early edge.
"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," said U.S. District Judge Denise Cote, who is presiding over the case, at a pretrial hearing last month, "and that the circumstantial evidence in this case, including the terms of the agreements, will confirm that."
For Apple, the trial represents an opportunity to make the case that the iPad and its iBooks application revolutionized the e-book market in the same way iTunes and the iPod changed the music industry.
But the company will have to do so alone. The five publishing companies—HarperCollins, Lagardère
SCA's Hachette, CBS Corp.'s
Simon & Schuster, Pearson
PLC's Penguin Group (USA) and the Macmillan unit of Georg von Holtzbrinck GmbH
—have settled with the government and terminated their 2010 agreements with Apple. HarperCollins is owned by News Corp
., as is The Wall Street Journal.
Apple Chief Executive Tim Cook explained recently why the company hasn't settled, calling the Justice Department's case "bizarre." "We've done nothing wrong there, and so we're taking a very principled position of this," he said at a recent conference hosted by News Corp.'s All Things Digital news site. "We were asked to sign something that says we did do something, and we're not going to sign something that says we did something we didn't do. And so we're going to fight."
The trial will focus on Apple's decision to adopt a so-called agency model in which publishers set e-book prices and retailers are paid by commission. Apple's contracts capped e-book prices at $12.99 or $14.99, depending on the hardcover price.
In the wholesale configuration used by Amazon, retailers set the price of digital as well as physical books. Amazon had established a price of $9.99 for most newly released and best-selling e-books.
Ten months after Amazon switched to the agency model, its e-book prices increased an average of more than 20%, according to the Justice Department.
The government's lawsuit said Apple acted on behalf of the publishers, which had long complained that Amazon's prices eventually would eat into their already razor-thin margins.
Apple not only acceded to some of the publishers' requests for an agency model, but acted as a go-between for them, ensuring that all five committed to it in lock step, the Justice Department said. The publishers then threatened to delay sales of new e-books to Amazon, which accounted for 90% of the market in 2009, unless the online retailer accepted the new pricing model as well, the lawsuit said.
E-mails cited in court documents showed that Apple executives kept the publishers aware of each other's progress during negotiations of the agency agreements.
That alone wouldn't constitute a violation unless government lawyers could prove that more likely than not there was an agreement among the publishers to set prices, said Herbert Hovenkamp, a professor at the University of Iowa College of Law. Still, he said, "Price fixing has been proved on thinner evidence than this."
Apple's lawyers have argued that the company was unconcerned with the publishers' agreements with other retailers and that it never pressured them to confront Amazon.
Apple executives believed the company would be at a disadvantage if the company adopted the wholesale model because of its inexperience in pricing e-books, Apple lawyers said in a May 15 court filing. Moreover, Apple's lawyers contended that the average price of an e-book fell when its agency agreements were in place.
The witness list in the case hasn't been released. But publishing executives are quoted extensively in court documents. Among those executives, David Shanks, the CEO of Penguin Group (USA), described Apple's role as "the facilitator and go between" for the publishing companies.
It was unclear how prominently Apple co-founder Steve Jobs, who died in 2011, will figure into the trial. The Justice Department has cited a passage in his biography and an interview with The Wall Street Journal as proof that Apple worked with the publishers to usurp the pricing model used by Amazon.
"We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway," Mr. Jobs said in the book.
Apple's defense lawyers are expected to argue that Mr. Jobs's statements should be given little weight, given that he can't put them in context, and that, regardless, they should be interpreted in a light most favorable to the company.
When asked in the Journal interview why someone would buy a book at a higher price on the iPad, Mr. Jobs said the price would eventually be the same.
Write to Joe Palazzolo at [email protected]
A version of this article appeared June 3, 2013, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Apple's E-Book Trial to Begin.