Apple feels confident it will defeat U.S. prosecutors' claims it engaged in e-book price fixing

"Our basic view is that we would like the case to be decided on the merits.  We believe that this is not an appropriate case against us and we would like to validate that," defiant Apple, Inc. (AAPL) lawyer Daniel Floyd told U.S. District Judge Denise Cote Wednesday in court.

I. A Fight

The U.S. government announced antitrust charges last week and was met with derision from Apple.  While all the publishers targeted in the case instantly put up press releases formally responding to the U.S. government, Apple wouldn't come forth with an immediate response.  When it did finally respond a day later, it claimed that the U.S. government was bullying it and vowed to fight.

In its Wednesday appearance at the U.S. District Court for the Southern District of New York, a White Plains court, Apple's lawyer requested a trial by jury.  The move indicates that Apple is confident its high power legal team can defeat the U.S. Department of Justice's lawyers.

The world's most valuable company has profited from driving up e-book prices from the former de facto rate of $10 to $15. Apple also granted "most favored nations" to sellers that blacklisted, Inc. (AMZN) and other rivals.  This special status allowed publishers to freely set their prices at whatever they wanted.

iPad v. Kindle
Apple allegedly colluded with five top publishers to force e-books out of Amazon's store and to force prices upwards. [Image Source: Futile]

There's compelling evidence of collusion among publishers in pushing this scheme, which first took grip with the launch of the first-generation iPad in 2010 and inclusion of e-books into the iTunes store.  Publishers News Corp.'s  (NWS) HarperCollins; CBS Corp.'s (CBS) Simon & Schuster; UK publisher Pearson plc's (LON:PSON) Penguin and MacMillan units; and The Hatchett Group, a subsidiary of French publisher Hatchette Livre engaged in a lavish meeting at which they agreed to raise their prices in unison, according to the U.S. DOJ.

As a result of the compelling evidence, most of the publishers have agreed to settle, although the UK's Pearson has joined with Apple in deciding to fight the charges.  While the DOJ's cases against Pearson appears relatively strong, its case against Apple may be weaker, given that Apple does not have a dominant position in this market and did not participate in the multi-publisher meeting.

Apple is trying to turn the tables and is accusing the U.S. government of supporting Amazon's "monopoly" grip on the e-book industry.  While it admits prices have gone up, it says it's benefiting customers by offering them more options.

II. Evidence Apple Might Have Known, Promoted Price Fixing is There

Video hints that late Apple CEO Steven P. Jobs may have had knowledge that the publishers would raise their prices.  Walt Mossberg of All Things Digital and The Wall Street Journal (ironically, News Corp. properties) asks, "Why should she [Kara Swisher] buy an [e-book] at your price when she can buy one from Amazon for $9.99?" 

(at 1:55 in the video, approximately)

Mr. Jobs responds, "Well that won't be the case... the prices will be the same."

So was that simply a bold predication or evidence of Mr. Jobs' knowledge of the collusive summit?  The video could be compelling evidence in a jury trial.  Likewise, other statements could help to convince a jury that customer was being harmed.  

For example in Walter Isaacson's exclusive authorized biography of the late chief executive, Mr. Jobs recalled his pitch as, "We'll go to [an] 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."

Ironically, Simon & Schuster -- the CBS-owned publisher who is listed by the DOJ as among those colluding -- published the biography containing that remark.  Simon & Schuster was among those to accept a settlement.

The DOJ certainly has some pieces, but it will need to assemble them carefully in order to sway a jury in the face of Apple's high-power legal team.  The question is whether they have enough evidence and manpower to paint a clear enough picture to find the company guilty of violating U.S. antitrust laws.

Apple will have the advantage of one of the business's world's strongest legal teams.  In 2011 Apple is estimated to have spent over $100M USD [source].  By contrast Apple is only spending between $2B and $3B USD per year in research and development [source].  Apple has one of the smallest research and development budgets in the industry and one of largest legal budgets in the industry.  

III. Apple vs. the Settlers?

One final complicating factor are the settlements.  While Apple and Pearson hope to fight to the bitter end, CBS, News Corp., and Lagardère desperately want a settlement to be reached, in order to protect their businesses from consumer class action lawsuit.

A non-government class action is pending for the alleged violations.  However, a settlement deal banning publishers from refusing to sell to Amazon in exchange for favored nation status and disallowing them from agreeing to fix prices to gain access to iTunes would potentially supersede and nullify current class action claims.  The settling publishers have agreed to those terms, plus Hachette and HarperCollins have offered up $51M USD in restitution.

Harper Collins
Apple's defense may be undermined by its former allies who have are eager to settle.
[Image Source: She Likes Books Too Much]

The DOJ is eager to make this "deal with the devil" -- promoting settlement in all 50 states that reduce the public's ability to collect potential damages for perceived past antitrust violations.  In exchange, the publishers agree to stop these practices in the present.  That solution is being pushed hard by the publishers, but is being soundly rejected by Apple and Pearson.

The question is this philosophical divide could be leveraged by the DOJ to damage the non-compliers in court.  That is among the interesting storylines that will develop in weeks to come.

The next court hearing is not scheduled until June 22.  Judge Floyd will likely decide at that hearing whether to approve Apple's request for a jury trial. 

Source: Reuters

"We are going to continue to work with them to make sure they understand the reality of the Internet.  A lot of these people don't have Ph.Ds, and they don't have a degree in computer science." -- RIM co-CEO Michael Lazaridis

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