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In e-books trial, U.S. says Apple conspired with publishers

An illustration picture shows application icons on an Apple Ipad tablet held by a woman in Bordeaux, Southwestern France, February 4, 2013.
An illustration picture shows application icons on an Apple Ipad tablet held by a woman in Bordeaux, Southwestern France, February 4, 2013.

By Nate Raymond

NEW YORK (Reuters) - Apple Inc conspired with publishers to raise the price of e-books in a scheme costing consumers "hundreds of millions of dollars," a U.S. government lawyer said on Monday.

A three-week trial got under way before a federal judge in New York in a case pitting the Justice Department against the popular iPad and iPhone maker that could shine a light on the secretive Silicon Valley giant's business practices.

"Apple told publishers that Apple - and only Apple - could get prices up in their industry," Lawrence Buterman, a lawyer at the Justice Department, said during opening arguments.

The trial came more than a year after the Department sued Apple and five of the largest U.S. publishing houses, accusing them of working together illegally to increase e-book prices and undo Amazon.com Inc's market control.

Orin Snyder, an attorney for Apple, described the case as "bizarre." Apple acted in its own business interests in negotiating deals with publishers in the run up to the debut of its iPad in January 2010, he said.

"What the government wants to do is reverse engineer a conspiracy from a market effect," Snyder said.

Apple is going to trial alone after the five publishers agreed to eliminate prohibitions on wholesale discounts and to pay a collective $164 million to benefit consumers.

The five publishers were Pearson Plc's Penguin Group, News Corp's HarperCollins Publishers Inc, CBS Corp's Simon & Schuster Inc, Hachette Book Group Inc and MacMillan.

The U.S. government is not seeking damages, but instead an order blocking Apple from engaging in similar conduct. However, if Apple is found liable, it could still face damages in a separate trial by 33 state attorneys general, who would seek civil penalties on behalf of consumers.

'TENTATIVE VIEW'

The non-jury trial is proceeding before U.S. District Judge Denise Cote, who gave a "tentative view" at the last hearing before trial that she thought the Justice Department might win.

"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," Cote said on May 23.

During opening arguments, Snyder expressed Apple's "concern" about the comment, adding later, "all we want is a fair trial." Cote retorted that she made her comments only after the Justice Department and Apple asked for her view, which was based on hundreds of documents submitted in advance of trial.

"The deck is not stacked against Apple unless the evidence stacks against Apple," Cote said.

The case has its origins in concerns by publishers that had emerged by 2009 about low prices for best-seller and new e-books sold by Amazon, which launched its Kindle e-reader in 2007.

Amazon, which by that time sold up to 90 percent of all e-books, was buying e-books wholesale and then discounting them, selling new and best-selling books for $9.99, sometimes at a loss.

Buterman, the government's lawyer, said publishers became increasingly dissatisfied with those prices, which they considered too low. They tried a number of tactics, increasingly in parallel, to fight Amazon's pricing model.

Those tactics were unsuccessful, though, until Apple entered the market, he said.

Apple acted as a facilitator for the publishers, enabling them to reach agreements that would move their industry to an agency model, in which publishers set the price and Apple took a fixed 30 percent cut, Buterman said.

Buterman cited former Apple chief executive officer Steve Jobs, who died in 2011, telling his biographer that, "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.'"

Buterman said, "Overall, average prices of e-books went up, costing consumers millions of dollars."

'MAKES NO SENSE'

Apple's Snyder called the government's story a "fiction" saying many of Job's emails and statements the prosecution will show will be taken out of context.

As for the agency model, Snyder said there was nothing wrong with it. He said both Amazon and Barnes & Noble Inc considered it before Apple did.

"Agency is good and beneficial to consumers and markets," he said.

Moreover, Snyder said data showed that in the wake of Apple's entry into the market, average e-book prices fell instead of increasing. In court papers, Apple said prices fell from $7.97 to $7.34.

The case is United States v. Apple Inc et al, U.S. District Court, Southern District of New York, No. 12-02826.

(Reporting by Nate Raymond; Editing by Eddie Evans and Leslie Gevirtz)

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