NEW YORK (Reuters) - In a sweeping rejection of Apple Inc's strategy for selling electronic books on the Internet, a federal judge ruled that the company conspired with five major publishers to raise e-book prices.
U.S. District Judge Denise Cote in Manhattan found "compelling evidence" that Apple violated federal antitrust law by playing a "central role" in a conspiracy with the publishers to eliminate retail price competition and raise e-book prices.
Wednesday's decision could expose Apple to substantial damages. It is a victory for the U.S. Department of Justice and the 33 U.S. states and territories that brought the civil antitrust case. The five publishers previously settled.
Apple was accused of conspiring to undercut Amazon.com Inc's e-book dominance, causing some e-book prices to rise to $12.99 (8.63 pounds) or $14.99 from the $9.99 that the online retailer charged. Amazon once had a 90 percent market share.
"Apple chose to join forces with the publisher defendants to raise e-book prices and equipped them with the means to do so," Cote said in a 159-page decision. "Without Apple's orchestration of this conspiracy, it would not have succeeded as it did."
The decision was not a total surprise as Cote had indicated before the 2-1/2 week non-jury trial began on June 3 that Apple's defences might fail.
"This result is a victory for millions of consumers who choose to read books electronically," Bill Baer, head of the Justice Department's antitrust division, said in a statement. "This decision by the court is a critical step in undoing the harm caused by Apple's illegal actions."
Baer said Cote's decision, together with the earlier settlements, help consumers by reducing prices of e-books.
Cote set an August 9 hearing to discuss remedies, and plans to hold a trial on damages. She also ordered both sides "to pursue settlement discussions" under the supervision of her colleague, U.S. District Judge Kimba Wood.
Amazon now controls about 65 percent of the e-book market, while Barnes & Noble Inc has about 20 percent and Apple a single-digit percentage, according to Albert Greco, a book industry expert at Fordham University's business school.
In a statement, Apple said it will appeal Cote's decision.
"Apple did not conspire to fix e-book pricing," spokesman Tom Neumayr said. "When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon's monopolistic grip on the publishing industry. We've done nothing wrong."
Last year, Apple settled a separate antitrust case over e-book pricing with the European Commission, without admitting wrongdoing.
The alleged collusion began in late 2009 and continued into early 2010, in connection with the Silicon Valley giant's launch of its popular iPad tablet.
Only Apple went to trial, while the publishers agreed to pay more than $166 million combined to benefit consumers.
The publishers included Lagardere SCA's Hachette Book Group Inc, News Corp's HarperCollins Publishers LLC, Pearson Plc's Penguin Group (USA) Inc, CBS Corp's Simon & Schuster Inc and Verlagsgruppe Georg von Holtzbrinck GmbH's Macmillan.
Geoffrey Manne, who teaches at Lewis & Clark Law School in Portland, Oregon, said Cote's decision may not change the e-books market much because of the earlier settlements, which ended the publishers' pricing arrangements with Apple.
Shares of Apple closed down $1.62 at $420.73 on the Nasdaq.
Steve Berman, a partner at Hagens Berman Sobol Shapiro pursuing consumer class-action litigation against Apple, called Cote's decision "a very big deal."
"It exposes Apple to hundreds of millions of dollars in damages, which is what we'll ask for," Berman said.
Apple ended March with nearly $145 billion of cash and marketable securities. It plans to spend $100 billion on share buybacks and higher dividends through 2015.
Amazon's strategy involved buying e-books at wholesale and then selling them at below cost, in an effort to promote its Kindle reading device.
Apple, in contrast, entered into "agency agreements" in which publishers were able to set prices and pay 30 percent commissions to the Cupertino, California-based company.
The federal government said this arrangement pushed Amazon into a similar model and resulted in prices of e-books from the five publishers increasing by 18 percent.
"What happens next may depend on Amazon," said Keith Hylton, a Boston University law professor and antitrust specialist. "If Amazon feels a need to keep driving e-book prices down to maximize Kindle sales, it could put downward pressure on prices overall, and perhaps help Amazon win market share back."
Amazon spokesman Drew Herdener declined to comment.
Evidence in the case included emails from Apple's late co-founder, Steve Jobs, to News Corp executive James Murdoch that the government said reflected Jobs' desire to boost prices and "create a real mainstream e-books market at $12.99 and $14.99."
Those emails hurt Apple's case.
"Apple has struggled mightily to reinterpret Jobs' statements in a way that will eliminate their bite," Cote said. "Its efforts have proven fruitless."
Cote also rejected Apple's argument that it would be unfair to single out the company when Amazon and Google Inc, among others, entered similar agency agreements with publishers.
Apple argued that it had never understood that publishers might have discussed higher prices before the iPad launch.
"There is no such thing as a conspiracy by telepathy," Apple's lawyer Orin Snyder said in closing arguments on June 20.
The Justice Department said at trial that it wants to block Apple from using the agency model for two years. It also wants to stop Apple over a five-year period from entering contracts with clauses designed to ensure it offers the lowest prices.
The case is U.S. v. Apple Inc et al, U.S. District Court, Southern District of New York, No. 12-02826.
Reporting by Nate Raymond and Jonathan Stempel in New York; Additional reporting by Alistair Barr; Editing by Gerald E. McCormick, John Wallace and Dan Grebler