Jul 24 2012
Yesterday, the Department of Justice released 868 comments made in support and in protest of the proposed settlement. You can find both the comments and the response here at the DOJ site. This is nothing compared to the number of 30,000+ comments that the Microsoft settlement with the DOJ generated. (A side note. The MS settlement was first proposed in November of 2001 and underwent several changes and wasn’t entered until a year later and there were additional issues that were litigated several years following)
There were only about 70 comments in support of the settlement and 52 were from readers/consumers. Many of those echoed the sentiments in the form letter I created at support4settlement.wordpress.com which was actually name checked in the DOJ papers. The rest of the comments, or over 90% of them, objected to the settlement.
DOJ basically said that the complaints were from self serving individuals and businesses who wanted to profit from collusive activity and that the Court should look to determining whether the settlement benefits consumers rather than brick and mortar stores.
Notes of Interest
- DOJ repudiated that agency helped build a competitive ecosystem and pointed to pre agency events such as ABA announcement in 2009 that it would sell ebooks via independent bookstores; BN nook launch that predated agency as well as current events such as the $300 million investment by Microsoft in B&N. It did not mention the acquisition of Kobo by Ratuken.
- Contracts would not be automatically terminated with the settlement except for those with Apple. Instead, the settling parties had to take all steps necessary to effectuate termination in the 30 days following the settlement. It does appear, though, that many agreements can be terminated in 30 to 60 days.
- DOJ suggests that if brick and mortar stores are so important to traditional publishers that the traditional publishers subsidize those businesses instead of asking ebook consumers to do it.
- There was no plausible evidence that Amazon engaged in predatory pricing and that “[f]rom the time of its launch, Amazon’s e-book distribution business has been consistently profitable, even when substantially discounting some newly released and bestselling titles.”
- All the supposed challenges in implementing the terms of the settlement were fine with the settling defendants and they haven’t indicated that they would have any trouble monitoring or auditing agreements with retailers.
The DOJ writes “When Apple launched its iBookstore in April of 2010, virtually overnight the retail prices of many bestselling and newly released e-books published in this country jumped 30 to 50 percent—affecting millions of consumers. The United States conducted a lengthy investigation into this steep price increase and uncovered significant evidence that the seismic shift in e-book prices was not the result of market forces, but rather came about through the collusive efforts of Apple and five of the six largest publishers in the country.”
Does the DOJ have to prove their case to get this settlement approved?
No. Parties objected (and continue to object) that the DOJ hasn’t proven anything, nor have they brought any evidence before the Court to substantiate the claims that the DOJ makes in the response to the objections or in the initial complaint itself. The standard in approving an antitrust settlement with the DOJ is if the proposed final judgment is in the “best interest of the public.”
The government is given “broad discretion” in settling these claims:
The question in a Tunney Act proceeding is not whether the reviewing court would have imposed a different decree if liability had been established in litigation. Rather, “a proposed decree must be approved even if it falls short of the remedy the court would impose on its own, as long as it falls within the range of acceptability or is ‘within the reaches of public interest.’”
DOJ Response, P. 7. The DOJ asserts that it does not need to prove the underlying allegations only provide “a factual basis for concluding that the settlements are reasonably adequate remedies.”
Can Judge Cote request more information?
Yes. The Tunney Act does allow for the Judge to
(1) take testimony of Government officials or experts or such other expert witnesses, upon motion of any party or participant or upon its own motion, as the court may deem appropriate;
(2) appoint a special master and such outside consultants or expert witnesses as the court may deem appropriate; and request and obtain the views, evaluations, or advice of any individual, group or agency of government with respect to any aspects of the proposed judgment or the effect of such judgment, in such manner as the court deems appropriate;
(3) authorize full or limited participation in proceedings before the court by interested persons or agencies, including appearance amicus curiae, intervention as a party pursuant to the Federal Rules of Civil Procedure, examination of witnesses or documentary materials, or participation in any other manner and extent which serves the public interest as the court may deem appropriate;
(4) review any comments including any objections filed with the United States under subsection (d) of this section concerning the proposed judgment and the responses of the United States to such comments and objections; and
(5) take such other action in the public interest as the court may deem appropriate.
15 U.S.C. § 16(e), (f). Any of these actions will cause further delay to the settlement. It may be that if Judge Cote does undertake any of the above actions, the DOJ will file a motion for temporary injunction. I felt previous readings of Cote’s decisions intimated she may be open to such a filing.
What is the basis of the complaints?
The comments submitted in opposition to entry of the proposed Final Judgment explored five common themes: (1) the legality of restoring discount authority to retailers; (2) the economic impact on industry participants of restoring discount authority to retailers; (3) the viability of collusive pricing as a defense against perceived monopolization and/or predatory pricing; (4) collusive pricing as protection from free riding and low-cost competition; and (5) the clarity and breadth of the proposed Final Judgment.9
The DOJ disagrees that the proposed Final Judgment imposes a business model on the e-book industry. It points out repeatedly that non colluding publishers can continue with their agency contracts (i.e., Random House) and that the settlement parties can return to agency in two years. DOJ then goes on to provide examples of when they’ve imposed restrictions in other industries under a Tunney Act agreement.
2) What about those brick and mortar stores?
The DOJ wrote “Many comments maintain that brick-and-mortar booksellers such as B&N, BAM, and ABA member stores will be harmed if the proposed Final Judgment removes barriers to price competition.” DOJ urges the court to look at the impact on the consumers and not brick and mortar stores whom DOJ characterizes as admitting having benefitted from the conspiracy. Further, those brick and mortar stores (including B&N) were selling ebooks even before agency was implemented.
See, e.g., Press Release, The American Booksellers Association, ABA Indie Bookstores to Sell eContent, Sony Reader (Aug. 25, 2009), http://www.bookweb.org/about/press/20090825.html (announcing more than 200 independent bookstores will sell ebooks through the ABA’s IndieCommerce program).
B&N and the ABA assert that the “collusive agency pricing” as the DOJ refers to it “corrects a distortion in the market fostered primarily by Amazon.com.” The DOJ retorts ”[c]ontrary to the apparent views of many commenters, ‘the goal of antitrust law is to use rivalry to keep prices low for consumers’ benefit. Employing antitrust law to drive prices up would turn the Sherman Act on its head.’ Wallace v. Int’l Bus. Machine Corp., 467 F.3d 1104, 1107 (7th Cir. 2006).”
3) But what about AMAZON!!!!!!!!!!!!!!!!!!!!!!!!!!!
Everybody objecting hates Amazon. Many of the comments suggest that Amazon is the evil monster who is devaluing literature and putting the cultural protectors (brick and mortar retailers) out of business. The DOJ responds that Amazon’s ebook dominance is “highly speculative at best.” DOJ also stated that “B&N had entered the market and taken significant share from Amazon” before agency agreements were in place. I disagree with this statement. B&N was greatly aided by Agency pricing. It is possible that B&N could and would have wrested away some market share even with the discounted pricing but B&N did so without having to participate in the discounted pricing.
But in response to the predatory pricing claims, the DOJ asserts “in the course of its investigation, the United States examined complaints about Amazon’s alleged predatory practices and found persuasive evidence lacking” and that “[f]rom the time of its launch, Amazon’s e-book distribution business has been consistently profitable, even when substantially discounting some newly released and bestselling titles.” Compl. ¶ 30.
Unlawful “predatory pricing,” therefore, is something more than prices that are “too low.” Antitrust law prohibits low prices only if the price is “below an appropriate measure of . . . cost,” and there exists “a dangerous probability” that the discounter will be able to drive out competition, raise prices, and thereby “recoup its investment in below-cost pricing.” Brooke Group v. Brown and Williamson Tobacco Corp., 509 U.S. 209, 222-24 (1993).
4) Amazon is engaging in freeriding
Several of the complaints objected to Amazon’s practice of free riding on brick and mortar showrooms. This is likely in reference to the Leegin case wherein the Supreme Court said that one reason retail price maintenance should be allowed was to protect companies that invest in educating consumers by having nice showrooms and trained sales staff. RPM would prevent a deep discounter to enjoy the consumers going to the showroom and then buying at a discounter for a much cheaper price.
The DOJ responded to this complaint by saying that no one was complaining about the free riding of online sales of print books and that the complaints only targeted ebooks thus reinforcing the DOJ’s position that ebook customers are being harmed in favor of a higher profit business model.
There were independent bookstores that brought up the issue regarding taxation but DOJ did not address this. I found the response to free riding to be the DOJ’s weakest. DOJ ends with reiterating illegal activity in response to a perceived harm is not justified.
5) Comments submitted by B&N, Independent Book Publishers, and others assert that the proposed Final Judgment is too “regulatory” in nature and is overbroad.
DOJ just responds with a “no its not” and that the settling defendants did not believe that the safe harbor was too difficult:
Should they choose to do so, nothing in Section VI.B prohibits a Settling Defendant from agreeing with a retailer on reporting and enforcement provisions under which the Settling Defendant can ascertain the extent of the retailer’s discounting of its e-books. For example, audit clauses are routinely used in contracts between publishers and retailers to enforce pricing and similar terms. See Section V.D.5, infra (discussing publishers’ use of audit clauses to enforce its contracts with Apple). Significantly, Section VI.B was the product of settlement discussions between the United States and Settling Defendants. Settling Defendants evidently believed, in entering this settlement, that they could successfully implement this limited “safe harbor” for which they negotiated.
B&N Specific Complaints
DOJ addressed a number of complaints directly. Most of them were merely a reiteration of what DOJ accounted previously. BN had some specific complaints that the DOJ wanted to address.
1) Our contracts will be voided.
B&N’s asserted that the Final Judgment would nullify its existing contracts. But the DOJ says no. ”In other words, Settling Defendants simply must exit those agreements as provided for by the terms of the contracts themselves. B&N is not, then, simply a company concerned about its contractual rights. Instead, more basically, it is worried that it will make less money after the conspiracy than it collected while collusion was ongoing. ”
2) Amazon Amazon Amazon or lower prices is actually anti consumer.
B&N suggests that lack of agency pricing reduces overall competition but the DOJ points to the fact that Microsoft invested $300 million with B&N to fight Apple and Amazon. It goes on to note that Google has developed a new tablet and that there are others on the horizon. These things, according to the DOJ, do not support B&N’s claims that Agency pricing makes the ebook environment more compettiive.
B&N further argues that prices of ebooks are falling, not increasing. (This is the same argument made by Publishers’ Lunch) DOJ responded “The United States obtained evidence that demonstrated that the conspiracy led to price increases not only in Publisher Defendants’ most popular e-books, but also for ‘the balance of Publisher Defendants’ e-book catalogues, their so- called “backlists.”‘” DOJ points out (as did I) that BN provides no data to support its chart showing a decline in ebooks and also suggests that BN’s data “likely includes the growing volume of inexpensive (and possibly free) e-books from publishers other than Publisher Defendants, which offsets increases in the prices of Publisher Defendants’ e-books, reducing “average” retail e-book prices.”
B&N also said that the higher profit margin allows for BN to provide “more in services, stock, and space” and that lower ebook prices will reduce the amount that B&N can invest in their stores. DOJ suggests that B&N lower costs. ”[I]ncreased profitability is possible not only by raising prices but by lowering costs, which B&N may be free to do should e-book sales continue to increase in volume.”
Finally, the DOJ says that that “Settling Defendants to subsidize B&N and other brick-and-mortar retailers for the services they provide. PFJ § VI.A. Publishers need not increase retail e-book prices to support bookstores they value; they can support them directly.”
3) We need more time.
BN wants a delay (see Courtney Milan’s smart on point blog post about that). The DOJ says no delay is necessary because the government isn’t required to prove its case, just provide a factual basis to support the settlement terms. The DOJ points out that a delay similar to what happened in another antitrust case would be longer than the time period allotted for trying the case (less than a year).
The same delay of entry of the Final Judgment in this case would exceed the period the Court has reserved for litigation with respect to the non-settling defendants. Even a much shorter delay may threaten to disrupt the discovery process for the parties that continue to litigate. Any extension of the collusion that already has persisted for two years is unwarranted, and should be avoided.
Moving on, says the DOJ.
The DOJ addressed two issues raised by Authors’ Guild: (a) books are important cultural products and should be protected by price controls despite the antitrust laws; and (b) agency pricing is necessary to protect quality and diversity in books.
A) Books are special products
“While the Authors Guild did not make this argument directly, many of its members stated or implied that collusion or price fixing should be permitted in the publishing industry. They make the point that books play an important cultural role in our society. From there, these writers leap to the conclusion that a competitive marketplace cannot properly attract the investment required for books to survive.”
DOJ responds “However, an argument that a particular industry or market deserves a blanket exemption from the antitrust laws should be directed to Congress, rather than the United States or the Court.”
B) Big publishers are preserving quality in literature.
Hogwash, says DOJ, “[S]uch a paternalistic view is inconsistent with the intent of the antitrust laws.”
Basically, DOJ said that everything Apple argued was self serving and therefore should not be considered. Most of the issues raised by Apple were essentially the same as addressed above such as the perceived harm to the ebook retailing ecosystem and Amazon’s unfettered dominance if agency pricing were not to exist. Apple playing the downtrodden here when it has over 40 billion in cash isn’t impressing DOJ.
DOJ will file for entry of the judgment:
- August 3, 2012 – DOJ to file for entry of the proposed Judgment.
- August 15, 2012 – Responses to the DOJ’s motion for entry of proposed judgment. Cannot exceed 5 pages. Expect the parties to wax ad naseum about Amazon although the settling defendants will likely put forward supportive statements.
- August 20, 2012 – the settling defendants anticipate filing a proposed settlement for the States’ AG suit.
- August 22, 2012 – Response by the DOJ
Given that this case is on a rocket docket (from filing to trial in nearly a year), I doubt that the judge will linger long over deciding whether this settlement is appropriate. The judge has already determined that the facts support a per se violation so my guess is that the settlement is approved. If it is not approved the DOJ or States could file for a temporary injunction asking for all agency contracts to be suspended.