SAN FRANCISCO — Prosecutors said Wednesday that they will not bring charges against a tech blogger who bought an Apple iPhone prototype after it was found at a bar in March 2010 by an N.C. State graduate who worked for Apple (Nasdaq: AAPL)  in a case that ignited an unusual First Amendment debate.

San Mateo County Assistant District Attorney Morley Pitt said charges were not filed against Gizmodo.com’s Jason Chen or other employees, citing California’s shield law that protects the confidentiality of journalists’ sources.

“The difficulty we faced is that Mr. Chen and Gizmodo were primarily, in their view, engaged in a journalistic endeavor to conduct an investigation into the phone and type of phone it was and they were protected by the shield law,” said Pitt.

“We concluded it is a very gray area, they do have a potential claim and this was not the case with which we were going to push the envelope.”

The device was left at a bar by Gray Powell, an Apple employee and a 2006 graduate of N.C. State.

“Apple Software Engineer named Gray Powell” made “the honest mistake … of losing the next-generation iPhone,” Gizmodo reported last April. The site said Powell is an “Apple Software Engineer working on the iPhone Baseband Software, the little program that enables the iPhone to make calls. A dream job for a talented engineer like Powell, an Apple fan who always wanted to meet Steve Jobs.”

The phone was left at a bar in Redwood City, Calif. on March 18, 2010.

“’I underestimated how good German beer is,’ he typed into the next-generation iPhone he was testing on the field, cleverly disguised as an iPhone 3GS,” Gizmodo reported.

AOL Inc.’s Engadget blog published photos on a Saturday that were taken by an unknown person of an iPhone-esque device.

On the next Monday, Gawker Media Inc.’s Gizmodo, a competing gadget blog, had the phone in its possession and posted photos and videos of its own. Nick Denton, founder of Gawker Media, said the company paid $5,000 for the phone.

Chen’s house was raided and his computer seized after Gizmodo posted images of the prototype. The website and other media organizations objected, saying the raid was illegal because state law prohibits the seizure of unpublished notes from journalists.

“We feel there was not a crime to begin with and still believe that, and are pleased the DA’s office has an appropriate respect for the First Amendment,” said Thomas J. Nolan Jr., a lawyer for Chen.

Prosecutors did, however, file misdemeanor charges against Brian Hogan, 22, and Sage Wallower, 28, the two men who found and sold the device, which had been left at a Redwood City bar by an Apple Inc. employee.

Hogan was charged with one count of misappropriation of lost property; Wallower with misappropriation of lost property, and possession of stolen property. Each faces a maximum of a year in county jail, plus fines and probation.

“Clearly the phone was left in the bar, and clearly Mr. Hogan took the phone and knew what he had,” Pitt said. “Shortly after that he made the wrong choice, and instead of returning the phone to the owner or to Apple he turned to a friend of his and concocted the scheme to sell the phone to Gizmodo.”

Hogan’s attorney said his client has no criminal background and regrets not returning the phone.

“Although we do not believe that charges of any kind should have been filed, Brian fully accepts responsibility for his actions,” the attorney, Jeffrey Bornstein, said in a statement.

Apple referred calls to the district attorney’s office.

An attorney for Wallower could not be immediately identified.

Gaby Darbyshire, Chief Operating Officer of Gawker.com, which owns Gizmodo, said the company is pleased with the outcome of the case.

“While we have always believed that we were acting fully within the law, it has inevitably been stressful for the editor concerned, Jason Chen, and we are glad that we can finally put this matter behind us,” she said in an email.

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