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Appeals court rules Apple conspired with e-book publishers

The company must now pay $450 million as part of a settlement, but it maintains it did nothing wrong.

The appeals court says Apple violated antitrust law by working with book publishers to set new pricing terms in the e-books market. Apple

An appeals court has ruled that Apple did in fact conspire with book publishers to gain a foothold in the e-book space and ultimately hurt competition.

The 2nd US Circuit Court of Appeals ruled in a 2-1 vote on Tuesday that Apple conspired with five major book publishers to fix pricing on e-books to establish itself in the space and damage Amazon's standing in the marketplace. Reuters was among the first to report the news, earlier Tuesday. The judges said Apple violated antitrust law by working with the book publishers to set new pricing terms. The loss means Apple must now pay $450 million as part of an earlier settlement agreement: $400 million to consumers and $50 million in attorneys' fees to plaintiffs' counsel.

Apple was quick to criticize the ruling.

"Apple did not conspire to fix e-book pricing and this ruling does nothing to change the facts," an Apple spokesman said. "We are disappointed the Court does not recognize the innovation and choice the iBooks Store brought for consumers. While we want to put this behind us, the case is about principles and values. We know we did nothing wrong back in 2010 and are assessing next steps."

E-books -- like apps, music or other digital media -- are downloaded to mobile devices, such as e-readers or tablets. Users can flip through pages, highlight items and get definitions of words they don't know. Several companies, including Apple, Amazon and Barnes & Noble, are competing in the space.

The e-book market has ushered in a new yet controversial era in the world of book publishing. Publishers were initially suspect of delivering digital books to e-readers, like Amazon's Kindle, for fear of e-book sales cutting into profits on traditional printed books. The Apple case also illustrated their concern with e-book pricing models.

Over the last few years, however, publishers -- happily or not -- have embraced e-bookstores, including Apple's iBookstore and Amazon's Kindle marketplace. Apple's store currently has over 2.5 million e-books available, while Amazon's store has more than 3 million.

The new ruling is the latest in a string of setbacks over the past several years as Apple has tried unsuccessfully to argue that it did not act inappropriately by partnering with book publishers through its iBooks e-book platform.

In an attempt to improve its position in the e-books market with its own iBooks in 2010, Apple offered a contract that allowed publishers to determine the price of e-books. The pricing system, called the "agency model," meant prices would go up and publishers would in turn make more from the sale of each title.

Amazon, its top competitor at the time, was using a traditional pricing model that allowed the e-retail giant to offer a sales price on e-books. While the revenue was lower per sale, Amazon argued that it followed traditional pricing on regular books, which gave retailers latitude to offer pricing on their own terms to follow demand.

Soon after, Apple and major book publishers were rolled into lawsuits across the US, including one from the US Department of Justice, filed in 2012. The European Union also launched an investigation into the matter, arguing that the agency model could be in violation of competition law. But the EU promptly closed its inquiry after the parties settled.

In a series of statements and e-mails revealed during the DOJ case, Apple co-founder and then-CEO Steve Jobs told one publisher in 2010 that the publisher could benefit by joining Apple to "see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99." At the time, Amazon had kept most e-book prices to $9.99.

As the lengthy investigation wore on, the major book publishers accused of collusion with Apple in the DOJ case settled out of court for their alleged involvement in the agency model pricing. Apple continued to argue that it was innocent, but last year it agreed to a settlement with the Justice Department after a federal judge ruled, in 2013, that the company had violated antitrust laws.

Under that settlement, Apple said it would pay $400 million to eligible consumers and $50 million in attorneys' fees to plaintiffs' counsel. But the company also appealed the federal judge's ruling, and its deal with the DOJ stipulated that the settlement amount could change based on the outcome of the appeal.

If the court of appeals had reversed and remanded the case back to district court, Apple would have been required to pay consumers $50 million -- plus $20 million in attorneys' fees -- to settle their damages claims, while the DOJ and states' attorneys general would have remained free to continue litigating their claims for injunctive relief. If the court of appeals had flat-out reversed the lower court decision, Apple would not have been liable for any damages.

In an odd twist of fate, the very company Apple allegedly colluded against -- Amazon -- is now in its own legal trouble over e-books.

Earlier this month, the EU's competition watchdog, the European Commission, launched a formal investigation into Amazon's deals with e-book publishers. The European Commission said it's particularly interested in determining whether Amazon's contracts with the publishers violate competition rules by requiring the e-book publishers to disclose to Amazon more favorable terms in deals they may have signed with competitors, like Apple.

CNET's Shara Tibken contributed to this report.

Update, 11:32 a.m. PT: Adds details on the history of the case.