A federal court paved the way to take a big bite out of Apple for its attempt to wrest control of the e-book market from Amazon.   The US District Court in Manhattan ruled that Apple colluded with publishers in a price-fixing scheme that made e-books more expensive to consumers, and set the stage for the next phase of the trial to determine damages:

In a decision that could reshape how books are sold on the Internet, a federal judge ruled that Apple Inc conspired to raise the retail prices of e-books in violation of antitrust law, and called for a trial on damages.

The decision by U.S. District Judge Denise Cote in Manhattan is a victory for the U.S. government and various states, which the judge said are entitled to injunctive relief. …

Only Apple went to trial, while the publishers – Lagardere SCA’s Hachette Book Group Inc and Macmillan, News Corp’s HarperCollins Publishers LLC, Pearson Plc’s Penguin Group (USA) Inc and CBS Corp’s Simon & Schuster Inc – settled with the U.S. government and the states.

Cote said the conspiracy resulted in prices for some e-books rising to $12.99 or $14.99, when Amazon had sold for $9.99.

“The plaintiffs have shown that the publisher defendants conspired with each other to eliminate retail price competition in order to raise e-book prices, and that Apple played a central role in facilitating and executing that conspiracy,” Cote said.

“Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the spring of 2010,” she added.

The settlement with the publishers earlier probably made this outcome inevitable, but Apple tried to fight it by claiming that the negotiations were handled separately — and contentiously.  The Wall Street Journal offers more background on the testimony:

Mr. Cue testified that Apple clashed with the publishers repeatedly about pricing as the company rapidly tried to negotiate agreements with the publishers before the iPad was unveiled in late January 2010. Mr. Cue said that HarperCollins, for example, wanted to set a $18-to-$20 price for best sellers and new releases and withhold books from Apple’s online book store: both nonstarters for Apple.

“I struggled and fought with them about many, many things,” Mr. Cue said. “If they had been talking to each other, I would assume I would’ve had a much easier time getting those deals done.”

David Shanks, chief executive of Penguin Group (USA), separately testified that Penguin tried to get Apple to abandon a price-matching provision and caps on pricing. “I did not get the deal I wanted, but I wanted to be sold to Apple’s customers,” Mr. Shanks said.

However, Russell Grandinetti, vice president for content for Amazon’s Kindle e-reader device, testified that the publishers gave him an ultimatum if the company didn’t switch to an agency model: they would withhold newly released books from its digital bookstore for months.

Instead, the government argued, Apple essentially set the price for books and pressured publishers to push the same deal with Amazon:

In closing statements in June, Mark W. Ryan, a Justice Department lawyer, said that Apple’s agreement with the publishers created price caps for best sellers and new releases, but publishers quickly adopted those prices—$12.99 to $14.99—as the going rates for e-books.

“This is an old-fashioned, straightforward, price-fixing agreement,” Mr. Ryan said.

Next comes the damage phase, which may end up costing Apple a very large chunk of cash.  Most of that will end up in government coffers, apparently, rather than in consumer pockets.  Don’t expect anything to change hands except appeals motions, because both sides have the resources and the motivation to take this all the way up the chain to the Supreme Court.  At some point, though, cooler heads may prevail and a settlement might be found, especially now that Apple has lost on the finding of fact level.