Ebook Price-Fixing – Point and Counterpoint

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We’re getting pretty close to the end of posts about the antitrust suit against the Price-Fix Six until something else happens.

Here are diverging views on the merits of the suit from two law school professors.

First, Professor Daniel Crane:

The book publishers felt that Amazon was devaluing the e-book market in order to promote its proprietary systems and technology. They feared that Amazon’s low e-book pricing would condition consumers to expect low e-book prices forever — that it would poison the well. Because Amazon was initially the only game in town for e-book distribution, the publishers had little power to resist Amazon’s demands. The advent of the iPad (and to a lesser extent the Nook) emboldened the publishers to demand different terms of dealing with Amazon.

Here is where the narrative becomes contested. The DOJ says that in late 2008 the publishers began to conspire with one another and eventually with Apple to force Amazon’s hand. The conspiracy allegedly began as a deal between Apple and the publishers. Under the terms of the deal, the publishers would set the ultimate retail price, which would be capped in several tiers based on the hard copy list price. Thus, for example, a bestseller with a list price below $30 could be sold for up to $12.99; one with a list price between $30 and $35 for up to $14.99. Amazon would collect a 30 percent royalty for distributing the book. Further, the publishers would agree to an unusual most favored nation (MFN) contract with Apple, providing that the publisher would guarantee to lower the retail price of each e-book in Apple’s iBookstore to match the lowest price offered by any other retailers, even if the publisher did not control the other retailer’s ultimate price to consumers.

. . . .

First, for purposes of modern antitrust analysis, it is critically important to distinguish between vertical and horizontal agreements. The complaint, of course, alleges a horizontal agreement, but most of the direct evidence alleged of the complaint seems to be of a series of vertical deals between Apple and the publishers. Assume that the government ultimately proves that the book publishers were all interested in moving to an agency model, that they had a number of discussions with each other about how to do that, and that Apple agreed to help by entering into a series of vertical contracts that would serve as the benchmark for other industry contracts. Under the US Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., a set of vertical resale price maintenance agreements with MFN clauses would be judged under the rule of reason, not the per se rule. [And the government would have a harder case to prove.]

. . . .

The DOJ will argue that there is ample evidence of horizontal agreement among the publishers since they clearly had many contacts on the subject of e-book pricing and coordinated their strategies with respect to Apple and Amazon. It is important here to distinguish between different subject matters of agreement however. An agreement to share information and pursue a common strategy to switch the industry from a wholesale model to an agency model — though a horizontal agreement — would likely be subject to the rule of reason as well. Unless the government can prove that the publishers actually agreed on e-book prices or a formula for setting e-book prices, the per se rule is unlikely to apply. If the rule of reason analysis applies, it’s off to the races.

Link to the rest at Jurist Forum

And, from Professor Harry Gerla:

The lack of agreement on price or price formula will not be some sort of magic bullet for the publishers. While Crane may call the agency arrangement a “common strategy” or a “model,” it is also a term of trade that at least one of the customers of the publishers, Amazon, found competitively significant. If the publishers, with or without Apple, agreed to only sell their e-books via the agency model, they were effectively fixing a term of trade. Going back more than 80 years to Paramount Famous Lasky Corp. v. United States, in which there was an agreement among competitors to require arbitration clauses in their contracts with customers, agreements among competitors fixing terms of trade (at least where the terms were non-minor or had competitive significance) have been viewed with an extreme degree of suspicion, if not de facto treated as per se illegal. Indeed, the distinction between competitors jointly fixing the price term of a contract (or a price-related term such as the availability of credit in Catalano, Inc. v. Target Sales, Inc.) and competitors fixing other terms of a contract is somewhat artificial. As anyone who has negotiated a complex contract can attest, the price term and price-related terms affect and are affected by all other terms in the contract.

. . . .

If the agency model is so beneficial and efficient, why did the publishers have to agree among themselves to use it? Apple certainly would not have objected to a demand by any individual publisher to use the model. According to the government’s complaint, Apple was strongly supportive of the agency model. About the only readily apparent explanation for the need for an agreement among the publishers on using the agency model is that, without an agreement to use the model, no individual publisher could be sure that the others would not give in to a demand by the 800 pound gorilla/customer in e-book retailing, Amazon, that the wholesaling model continue to be used. Once one or more of the publishers gave into Amazon’s demand that Amazon be allowed to set the price it charged for e-books, other publishers would be “forced” to go along with Amazon, and that once Amazon could resume selling e-books for $9.99, Apple could not sustain the $14.99 “agency” price for e-books. The problem with this explanation is that it is a claim that competition itself is bad, and at least since National Society of Professional Engineers v. United States that has not been an acceptable argument.

Link to the rest at Jurist Forum and thanks to Al for the tip.