By Joe Palazzolo 

The U.S. government on Monday faced aggressive questioning from judges reviewing a finding last year that Apple Inc. conspired with publishers to raise the price of electronic books as it prepared to enter the market in 2010.

Amazon.com Inc., though not a party in the case, cast a long shadow over the arguments in Manhattan-based Second U.S. Circuit Court of Appeals. The company held 80% to 90% of the market before the iPhone maker decided to get into the book business, and at least one of the three judges on the appellate panel suggested that Apple's negotiations with publishers spurred competition by "breaking the hold of a monopolist."

"It's like all the mice getting together to put a bell on the cat," said Judge Dennis Jacobs.

Antitrust officials believed Amazon's aggressive discounting--$9.99 for most best sellers--benefited consumers, said Malcolm Stewart, one of the Justice Department's top appellate lawyers. A spokeswoman for Amazon declined to comment.

Most antitrust cases target horizontal agreements--collusion among competitors on the same rung of distribution. But the ruling by the Second Circuit expected in the coming months could provide fresh antitrust guidance for retailers brokering contracts with manufacturers, known in antitrust parlance as vertical agreements.

The Justice Department sued Apple in 2012, alleging civil antitrust violations. After a three-week trial, U.S. District Judge Denise Cote in Manhattan ruled last year that Apple helped publishers fed up with Amazon's discounts, over which they had no control, change the market landscape. Apple's agreements handed publishers power to set their own prices, an arrangement some of the publishers had suggested in meetings with Apple executives, according to evidence presented during the trial.

If the Cupertino, Calif.-based company loses, it would pay $450 million, most of it to e-book consumers, as part of a settlement with private plaintiffs and 33 states that joined the Justice Department's lawsuit against the company. The publishers also reached a settlement with authorities, paying a total of about $160 million.

A key provision of the Apple contacts required publishers to give Apple's store the best deal that they gave anyone on e-books. That, in turn, ensured publishers would force Amazon to change its business model, otherwise they would suffer heavy losses matching Amazon's discounted prices in Apple's e-book store, according to Judge Cote. Prices on many e-books increased immediately.

One question facing the appeals court is whether Judge Cote was obligated to weigh more carefully the economic impact of Apple's entry into the market. Theodore J. Boutrous Jr., a lawyer for Apple, said Apple increased competition by diminishing Amazon's power. Some new e-book prices increased, but average prices across the market decreased, and the number of available titles increased dramatically.

Judge Raymond J. Lohier Jr. asked Mr. Stewart how Apple could have broken Amazon's monopoly without violating antitrust laws, as the Justice Department interprets them.

Apple could have tried to persuade publishers to sell at a lower wholesale price, Mr. Stewart said. Or the company could have filed a complaint against Amazon with antitrust authorities, he offered.

"Are you saying the Justice Department didn't notice that there was a new industry dominated by a monopolist?" Judge Jacobs asked.

"We noticed a $9.99 price point, but we regarded it as good for consumers," Mr. Stewart said.

Judge Debra Ann Livingston, who was on the appeals panel with Judge Jacobs and Judge Lohier, found evidence of coordination among the publishers "particularly compelling." But she asked Mr. Stewart how Apple's contracts were legal on their face but also the linchpin of an illegal conspiracy.

Mr. Stewart said the agreements offered by Apple made sense only if most of the major publishers signed them. If the others didn't agree to the same terms with Apple, a publisher acting alone couldn't have forced Amazon off its loss-leader strategy, he said.

Write to Joe Palazzolo at joe.palazzolo@wsj.com

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