Court bars Apple from making industry-wide e-book deals

Apple vows an appeal of the injunction

The federal judge presiding over the U.S. electronic books case against Apple has barred the company from striking deals that would ensure that it could undercut prices of other retailers in the e-book market.

Judge Denise Cote, of the District Court for the Southern District of New York, also prohibited Apple from letting any one publisher know what deals the company is striking up with other publishers. To ensure Apple does not run afoul with antitrust laws in the future, the company's audit committee will also appoint an antitrust compliance officer, who will not be employed by Apple, Cote ruled.

Apple vowed to appeal the ruling.

"Apple did not conspire to fix ebook pricing. The iBookstore gave customers more choice and injected much needed innovation and competition into the market. Apple will pursue an appeal of the injunction," according to a statement e-mailed by an Apple spokesman.

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 ebook market in 2010, in an effort to stop Amazon from pricing their best-selling electronic books at $9.99.

In July, Cote found Apple guilty of violating the Sherman Antitrust Act. The plaintiffs -- the U.S. Department of Justice along with 33 states and U.S. provinces -- convinced the court that Apple engaged in so-called horizontal price fixing when making deals with the five largest book publishers.

After reviewing the proposed remedies for the infraction submitted by both Apple and the DOJ last month, Judge Denise Cote handed down her ruling on Thursday.

In the injunction included in the decision, Cote ruled that Apple can not set up any additional "Most Favored Nation" pricing with publishers. The prohibition against Apple discussing with any publisher the deals it is making with any other publisher is intended to prevent it from trying to strike industrywide, collusive deals.

Apple signed deals in 2010 with five of the six largest book publishers -- Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster -- to sell e-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 price as 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 -- which attracted the attention of the DOJ.

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

Cote also ruled that, after a two-year period, Apple can renegotiate its deals with each of the five publishers. The judge staggered the time frames in which deals can be made with each publisher, also in a move to prevent collusion. Apple may strike a deal with Hachette in 24 months, with Harper-Collins in 30 months, Simon & Schuster in 36 months, Penguin in 42 months and Macmillan in 48 months.

The court must also decide on a penalty amount that Apple must pay, a decision that is scheduled to be made in early 2014, after both Apple and the DOJ deliver to the court estimates of how much such damages should be, given the number of e-books sold or not sold in the two-year time period beginning in April 2010.

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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