US antitrust ruling could temper Apple's revolutionary zeal

Apple may not approach other markets as aggressively as it did with book publishers in 2010

A U.S. judge's ruling Wednesday that Apple violated antitrust laws in its dealings with book publishers may limit the ways in which the company strikes deals in other industries going forward.

"Apple will be under more scrutiny," both from the U.S. Department of Justice and other government regulatory agencies, said Jerry Reisman, a partner and antitrust attorney in the Garden City, New York, law firm Reisman, Peirez, Reisman and Capobianco.

"This is a successful civil prosecution of an antitrust case against Apple," Reisman said. "It could possibly lead to other further investigations in which Apple is engaged in anti-competitive pricing."

As a result, Apple may be more cautious about entering into other markets with the same zeal.

The ruling, if it stands, "ties Apple's hands to some extent," said Keith Hylton, a professor at the Boston University School of Law. The company may want to develop other new features for its products, much like it developed the iBookstore for the iPad. This ruling "introduces a risk that it would face in doing something like that," Hylton said.

Judge Denise Cote of the U.S. District Court for the Southern District of New York found Apple guilty of violating Section 1 of the Sherman Antitrust Act in a ruling issued Wednesday. The plaintiffs -- the U.S. Department of Justice along with 33 states and U.S. provinces -- convinced the court that Apple engaged in "horizontal price fixing" when making deals with the five largest book publishers.

In 2012, the DOJ and 33 states and U.S. territories brought a lawsuit charging that Apple and five of the largest book publishers in the U.S. conspired to raise prices in the e-book market in 2010, in an effort to stop Amazon from pricing their best-selling electronic books at US$9.99.

Apple signed deals in 2010 with five of the six largest book publishers -- Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster -- to sell electronic books in an agency model. Under such an agreement, the publishers would set the prices of e-books, chosen from a set of pricing tiers Apple formulated. Apple got a fixed 30 percent cut of each sale through its iBookstore, which would debut on the about-to-be-launched iPad.

Apple also stipulated that publishers would give Apple "Most Favored Nation" pricing, which would guarantee that the publishers would sell e-books to Apple at a wholesale rate of 70 percent of the lowest retail price of that book, thereby guaranteeing that Apple could offer the books at the same cost of its competitors.

Immediately after the contracts took effect in April 2010, and publishers moved all their retailers to the agency model, prices of e-books offered by both Amazon and Barnes & Noble increased almost immediately.

Apple "provided the Publisher Defendants with the vision, the format, the timetable, and the coordination that they needed to raise e-book prices," wrote Judge Cote in the 160-page opinion.

All the publishers settled out of court, leaving Apple to defend its practices by itself.

Although legal experts agreed that the case is not nearly as significant as the antitrust case that the DOJ brought against Microsoft in 1998, it will have an effect on Apple, given its dominant role in the market of electronic devices and in certain forms of media, such as recorded music sales. "Because Microsoft's case concerned such a wide-ranging scope of conduct, it was bigger. But few cases are that big," said Ankur Kapoor, an antitrust lawyer for the law firm Constantine Cannon.

Apple vowed to appeal the decision, but opinion is divided over whether it can succeed at that.

That Cote has written a comparatively long and detailed opinion might hamper Apple's ability to remake its case. "That limits the freedom the appellate court has to modify a district court's decision," Hylton said.

Others see more optimistic prospects for Apple. Despite the copious amount of evidence it presented to the court, the DOJ "did not prove what they set out to prove, that Apple conspired with the publishers to raise e-book prices," Kapoor said.

"The most that the government could show was that Apple pushed the publishers to move to an agency model and had the publishers do the same with Amazon. But that is a different agreement," Kapoor said. "On balance, there is too much contradicting [evidence] that Apple conspired with the publishers to raise prices."

In the meantime, Apple's lawyers also may be defending the company in other courts.

The European Union, which has come down even harder on monopolistic practices than the U.S., may now be spurred on to investigate Apple as well, Reisman said. Because Apple commands such a large percentage of the markets for tablets and smartphones, the DOJ or the European Union could investigate how Apple interacts with its suppliers or with its retailers.

The ruling will also pave the way for private class-action suits, Hylton said. "There is a lot of room for plaintiffs to seek damages now," he said.

"Apple is sitting on a lot of money already, which means Apple may be able to pay the damages, and a lot of lawyers will have incentives to sue Apple," Hylton said.

The ruling also sends a message to other companies, now that the DOJ successfully prosecuted an antitrust case.

"Be very, very careful with communications when you are negotiating industrywide deals," Kapoor said. "The DOJ will examine your communications under a microscope."

Joab Jackson covers enterprise software and general technology breaking news for The IDG News Service. Follow Joab on Twitter at @Joab_Jackson. Joab's e-mail address is Joab_Jackson@idg.com

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