April 19, 2012

How to fight the DOJ: a possible defense

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Among all the seedy details contained in the Department of Justice’s suit against Apple and five of the six largest U.S. trade publishers, one thing stands out: at a time when many feared the rise of Amazon as a mega e-bookseller, the big publishers were far from passive. Beginning in 2008, publishing CEOs met secretly to discuss the problem of Amazon’s disruption of the book market, and they worked—for nearly 18 months—to find a way to combat its ever-expanding control of the ebook market.

The publishers’ original tactic, which was public, was delaying ebooks for new titles. But, as we discussed in early 2010, the solution didn’t fit the problem. Consumers were willing to wait for cheap ebook editions, and Amazon grew ever more powerful.

The DOJ suit alleges that the colluding publishers were primarily concerned with price—especially Amazon’s $9.99 pricing scheme, which the DOJ suit bizarrely calls “a successful marketing” strategy—and feared “lower wholesale prices for e-books, lower prices for print books, or other consequences the publishers hoped to avoid.”

The DOJ suit argues that the eventual move to the agency model, through a “conspiracy” with Apple, “constitutes a per se violation of the Sherman Act” and resulted in “obvious and demonstrable anticompetitive effects on consumers.”

But there is evidence in the suit that contradicts a single-minded view of the publisher meetings: For one, the suit reveals that publishers considered launching an alternative ebook platform to compete with Amazon. (Which was apparently referred to, at Penguin at least, as “Project Z.”) The other hint, buried on page 29 of the suit, is that Penguin CEO David Shanks told executives of “the holdout major publisher” (surely, Random House) that the move to agency was meant to help “save brick-and-morter booksellers.” The DOJ writes this off as a justification for criminality.

From these bits and from what publishers said to the press during 2008 to 2009 about Amazon, it’s not hard to figure out what the publisher meetings documented by the DOJ were about. Yes, price was one issue. But these publishers were also likely discussing the health of the physical book market, brick-and-morter stores, and a diverse market for ebooks. And, perhaps more than anything else, the “other consequences” which would develop if Amazon was allowed to maintain a monopoly share of the ebook market.

Last Saturday, Wall Street Journal columnist Holman W. Jenkins Jr. came to the defense of publishers, characterizing the DOJ’s account of the publisher meetings as “hyperventilating” and saying “it’s hardly offensive that all five used the opportunity of Apple’s arrival in the market to reclaim … power.” What they were really up to, in Jenkins reading, is “retail price maintenance,” which is not illegal.

Jenkins goes on to say that a successful defense would come through a “rule of reason” defense, which the Supreme Court has been friendly to. Indeed, in the face of falling prices and a retailer that loses money on sales, it’s entirely legal to set minimum prices to keep resellers profitable.

This is echoed by Keith Hylton, a law professor at Boston University, who told MarketWatch that Apple and the publishers simply need to “prove that there was no conspiracy involved in shifting to that system.”

Much of this territory is covered in the so-called “Leegin Creative” decision, which our own Dennis Johnson has been writing about, and advocating as an organizing principle, for years now (most recently here): the 2007 Supreme Court decision saying it was all right for manufacturers to “collude” — their language — to set a price if it was good for competition.

Does it matter if the defending publishers acted out of self-interest as opposed to greed? Is this defense one publishers can depend on?

 

Kelly Burdick is the former executive editor of Melville House.

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