The Apple e-book trial: About that dinner on January 20, 2010

There were five people there — three from Apple and two from Macmillan Publishers — but the key players were Eddy Cue, Steve Jobs’ point man in the e-book negotiations, and John Sargent, Macmillan’s CEO.

The government has reason to think that Cue said something that evening that caused Sargent to do a one-eighty and set a course that led to a showdown with Amazon (AMZN) eight days later

According to Russell Grandinetti — Amazon’s vice president for Kindle content, reporting directly to CEO Jeff Bezos — Sargent told him at lunch earlier that day that Macmillan was planning to switch to a “hybrid” model for e-book sales. Macmillan would continue to sell digital books to Amazon the way it always had — on a wholesale basis, where Amazon set the prices and Macmillan decided what e-books it carried. But for another, unnamed retailer, Macmillan was thinking of adopting a so-called agency model, where the publisher set the prices and the retailer took a percentage off the top.

“Based on everything we had heard and read,” Grandinetti testified, “it was clear to me that he was talking about Apple.”

But the next day, according to Grandinetti, Sargent called him on his cell phone and said he might not be able to keep Amazon on the old terms after all. He was about to sign a contract that required Macmillan to offer only agency terms.

When Sargent took the stand two weeks ago, DOJ co-counsel Larry Buterman zeroed in on that change of plans.

In a series of increasingly aggressive questions that began with “Isn’t it a fact,” Buterman accused Sargent of telling Cue at dinner about his luncheon conversation with Grandinetti.

“Why would I do that?” Sargent replied, explaining that if he went around town telling one retailer what another retailer was saying, pretty soon no retailers would talk to him.

And wasn’t it a fact, Buterman pressed on, that Cue told Sargent at that same dinner that Apple’s contract prevented him from continuing on wholesale terms with Amazon.

“What you’re saying sounds completely alien to me,” Sargent responded, pointing out that there was nothing in Apple’s contract that said anything of the sort.

But Buterman wouldn’t let it go. And when he got Eddy Cue on the stand last Thursday, he pursued the same line of argument, questioning him at length about a “stumbling block” Cue and Sargent discussed in vague terms in an e-mail exchange the next morning. That stumbling block, according to Buterman, was Macmillan’s plan to continue business as usual with Amazon.

Wasn’t it a fact, he asked Cue, that you told Sargent during that dinner that the Apple contract required Macmillan to go to agency with Amazon?

“I did not,” Cue replied.

If this is the kind of direct evidence with which the DOJ hopes to prove that Apple knowingly participated in a conspiracy to raise e-book prices, the government might have a problem.

Not only were Sargent and Cue among the trial’s most credible witnesses, but Grandinetti’s recollection of his Jan. 21 conversation with Sargent is open to interpretation. Grandinetti thought he heard Sargent say that Apple forbade Macmillan from doing business Amazon’s way. But what Sargent might have been saying is that the structure of Apple’s contract made wholesale with Amazon unprofitable — a distinction Judge Denise Cote, who will decide the non-jury case — seems to recognize as significant. See Is the e-book judge starting to see things Apple’s way?

And in fact, one week after the Jan. 21 cell phone call, Sargent flew to Seattle to offer Amazon’s Grandinetti the very choice that, according to Buterman, Eddy Cue at that dinner had prohibited: Amazon could either switch to the agency model, or stay on wholesale and wait seven months to get Macmillan’s new releases.

According to Grandinetti, he rejected Sargent’s “ultimatum,” cut the meeting short, escorted Sargent out of the building, removed the “buy” buttons from all of Macmillan’s books — digital and physical — and helped Amazon’s lawyers draft a memo to the Federal Trade Commission telling the government what had just happened. See Enter Amazon.

The DOJ began an investigation and, 15 months later, filed the civil antitrust suit against Apple, Macmillan and four other publishers. The publishers all settled, leaving Apple as the only defendant in the case that’s now being heard in a Manhattan federal court.

The trial enters its third and final week on Monday, when Apple’s lawyers will get a chance to question Cue about the dinner. After that, the government is expected to rest its case. Closing arguments are scheduled for Thursday.

The case is U.S.A. v. Apple.