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Another Setback for Apple in e-book Pricing Case

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Reportedly, Apple’s (AAPL - Free Report) request to temporarily suspend the ruling related to the e-book price fixing case has been denied by. U.S. District Judge, Denise Cote. Instead, the federal judge has proposed remedies, which are expected to thwart future conspiracies and boost competition in the e-books market.

Last month, the District Judge found Apple guilty of conspiring with five U.S. publishers that raised e-book prices by millions in total. The accused publishers included Hachette Book Group, News Corp.’s HarperCollins, Holtzbrinck Publishers, Penguin Group and CBS’s (CBS - Free Report) Simon & Schuster Inc. Though all the publishers have already settled with the Department of Justice (DOJ), only Apple stood for the trial.

Post the favorable ruling, the DOJ suggested that Apple should be forced to cancel all its existing agreements with the five publishers. According to Bloomberg, the federal government and 33 states also asked the court to appoint an antitrust monitoring authority, which will look after Apple’s compliance matters for a period of 10 years.

Further, the government also proposed a ban on Apple from entering into similar kind of agreements with producers of movies, television shows and music. As expected, both Apple and the publishers have protested against the suggested plan, citing that the government remedies, if implemented, will severely hurt their business prospects.

Apple also alleged that Judge Cote has overlooked important evidence related to a testimony by an executive from publisher Random House (acquired by Penguin this year). The executive had testified that the publisher adopted an agency model based on negotiations with Barnes & Nobles (BKS - Free Report) and denied any involvement of Apple.

However, in the recent hearing, the District Judge noted that the evidence was not enough for Apple to win the appeal for temporary suspension of the ruling. While she admitted that there is a need of an injunction against Apple, she also said that the court has no intention to regulate the App store.

Judge Cote proposed that Apple should be forced to enter into separate contracts with each publisher and there should be a time gap of at least six to eight months between each contract. The court believes that this plan will help to restrict such pricing conspiracies in the future.

Moreover, the District Judge also asked Apple to set up an internal mechanism (subject to satisfaction of court), which will look after its compliance related matters, instead of an external monitoring agency. She asked all the related parties to discuss her plan and is expected to hold another hearing in a couple of weeks’ time.

We believe that the District Judge’s refusal to suspend the ruling is a major blow for the company. Although the company has maintained its innocent stance to-date and vows to continue its fight, we believe that Apple is running out of options. However, since the e-book segment does not form a major part of Apple’s business, it will not be a major overhang on the stock in the near term.

Currently, Apple has a Zacks Rank #3 (Hold).

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