Melville House Books

June 11, 2012

B&N joins forces with superstar attorney to explain the obvious to the DOJ in a blunt, exhilarating letter

by Dennis Johnson

David Boies

Enough already about the BEA, an event held in New York City last week where a big chunk of the book industry stood around talking about Amazon and brooding over how the hell to fight such a monopoly while simultaneously observing, with nervous laughter, that they were doing exactly what the Department of Justice has sued most of the big houses for doing — talking with other publishers about stopping Amazon. (Barring that observation, the best wrap-up, maybe ever, of the BEA experience, is this commentary/report from Emily Gould — really, all you need to know about it, although she is wrong, so very wrong, about which was the best bag at the event).

But the big story last week came at week’s end, and it wasn’t about the BEA, it was about America’s biggest brick-and-mortar book retailer, Barnes and Noble, saying to the Department of Justice, um, you know, we don’t feel very colluded against by those publishers you say were trying to screw us … and B&N did so via a very smart, not to mention fire-breathing,  letter of complaint drawn up by a legal superstar: David Boies.

Few of the reports seemed to register the significance of Boies’ involvement, but it’s worth pointing out that this was half of B&N’s thunder. Boies has been involved in some historic cases (including Bush v. Gore in the Supreme Court), but he’s known in particular for winning antitrust suits from both sides of the bench — he defended IBM in a 13-year antitrust case brought by the DOJ, and successfully prosecuted Microsoft on behalf of the government.

And the letter he wrote about this antitrust case was a doozie. As a report from Marketwatch put it, Boies “has come out swinging in a fun to read, but complex argument.”

First of all, the letter was filed not as a general complaint about the case being prosecuted against Apple and Macmillan and Penguin — the companies fighting back from the six named in the original lawsuit. Rather, Boies protested the settlement made with the three publishers (Hachette, HarperCollins, and Simon & Schuster) who opted out of the fight, according to Marketwatch, in a complaint that “smacks down the DOJ, vocalizing what many in the book publishing industry have been talking about, some privately, since the proposed settlement was announced in April.”

Writes Boies in the letter:

“The proposed settlement represents an unprecedented effort by the Antitrust Division of the U.S. Department of Justice (the “Government” or the “Division”) to reject its traditional role of ending alleged collusion and to become instead a regulator of a nascent technology industry that it little understands.”

A Publishers Weekly report by Andrew Albanese quotes the letter at length, giving a clearer (and frankly exciting) idea of B&N’s counter-charges:

“The proposed regulatory provisions of the settlement are not in the public interest,” the brief concludes. “Given the widespread consequences of its unprecedented regulations, the lack of any factual basis to conclude that these regulations provide reasonably adequate remedies for the harms alleged the Complaint, and the harm that the regulations will inflict on innocent third parties, including Barnes & Noble, independent booksellers, authors, and non-defendant publishers, the proposed settlement should be substantially modified or rejected entirely.”

Citing the Tunney Act, which requires a court to reject a proposed final judgment that is not in the “public interest,” and advises the court to “pay special attention to the potential of any remedy to inflict harm upon third parties,” the B&N brief urges the court to reject the DoJ’s proposed settlement with three publishers, HarperCollins, Hachette, and Simon & Schuster.  The Tunney Act also requires that the Government present some “factual basis” for the proposed remedies—a bar, the brief suggests, the DoJ has not cleared.

“The basis for this proposed settlement is the Complaint, alleging that certain publishers have colluded to lower their own profits and increase their payments to e-book distributors such as Barnes & Noble,” lawyers state. ”If that is a valid theory of collusion, and if the aim here is to end collusion, the proposed settlement should enjoin collusion and punish the purported colluders.”

Instead, B&N argues, the proposed settlement imposes a new “regulatory regime” that will “injure innocent third parties, including Barnes & Noble, independent bookstores, authors, and non-defendant publishers; hurt competition in an emerging industry; and ultimately harm consumers.”

The proposed settlement would end “agency arrangements that are commonplace in many industries,” the B&N brief observes, and “that have brought more competition to the sale of e-books,” and would create “complex compliance issues” requiring oversight by the Division and the Court.  ”While the Division traditionally, and appropriately, seeks to prevent future violations and permit the market to determine prices, the proposed settlement seeks to substitute regulation for market forces.”

A paidContent report from Laura Hazard Owen, meanwhile, points out another key element brought up by the B&N/Boies letter: if agency pricing was so bad for competition, how come, um, it worked so well to encourage competition?

According to the letter, “As a result of Amazon’s pricing (which priced most bestselling books sold by Barnes & Noble below Barnes & Noble’s, and Amazon’s, direct costs), Barnes & Noble was losing substantial money in an effort to compete with Amazon’s pricing, and was unable to gain significant market share.” Under agency: “publishers have engaged in vigorous competition on price, which, contrary to the superficial pricing analysis in the complaints before the Court, has resulted in lower e-book prices.”

And that’s not all — B&N provided charts showing the decline of hardcover pricing during the rise of agency (charts, by the way, B&N says it provided to the DOJ earlier, but that the DOJ failed to make public in its filing). And:

“Agency has encouraged new participants to invest in e-books,” B&N says, noting it “has introduced multiple versions” of the Nook” and launched “a self-publishing platform, PubIt!; and lending and Read-in-Store programs.” Competition “led to Amazon responding with improved e-readers of its own.”

The proposed settlement would “harm Barnes & Noble and other brick-and-mortar e-book distributors by leaving them where they were two years ago:  a dominant player will set uncompetitive prices that all other potential competitors must meet to compete,” B&N says. “Unable to compete with below-cost pricing, e-book distributors will drop from the e-book space,” and consumers will be left with “limited choice in where they buy their books: online retailers such as Amazon or large, multipurpose brick-and-mortar stores such as Costco, Wal-Mart, and Target, which offer only mass-market selections.”

In short, says B&N’s general counsel, Gene DeFelice, in an interview with Julie Bosman for the New York Times, “We think that the Department of Justice got this wrong. The settlement destroys independently negotiated commercial relationships. It harms authors, innocent publishers and bookstores, including small-business owners. And it also punishes consumers who stand to benefit from increased competition and lower prices brought about by the agency model.”

Further, DeFelice says it’s not the first time B&N tried to tell this to the DOJ. He tells Bosman company execs met with DOJ officials before the suit was announced, but that their objections were handled “in a completely unsatisfactory manner. I felt they were checking the box so they could tell people they met with us.”