Unites States of America v. Apple, Inc. et al

Filing 104

MEMORANDUM OF LAW in Opposition re: 88 MOTION for Entry of Judgment under Rule 54(b) and §15 U.S.C. 16(b)-(h).. Document filed by Holtzbrinck Publishers, LLC. (Mitnick, Joel)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

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UNITED STATES OF AMERICA,
Plaintiff,
- against APPLE, INC.,
HACHETTE BOOK GROUP, INC.,
HARPERCOLLINS PUBLISHERS L.L.C.,
VERLAGSGRUPPE GEORG VON
HOL TZBRINCK GMBH,
HOL TZBRINCK PUBLISHERS, LLC
d/b/a MACMILLAN,
THE PENGUIN GROUP,
A DIVISION OF PEARSON PLC,
PENGUIN GROUP (USA), INC., and
SIMON & SCHUSTER, INC.,

Case No. 12-cv-2826

ECFCase

Defendants.

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OPPOSITION OF HOLTZBRINCK PUBLISHERS, LLC D/B/A MACMILLAN
TO THE PLAINTIFF UNITED STATES OF AMERICA'S
MOTION FOR ENTRY OF FINAL JUDGMENT

Joel M. Mitnick
John J. Lavelle
Alexandra Shear
SIDLEY AUSTIN LLP
787 Seventh Avenue
New York, NY 10019
212-839-5300
Counsel for Holtzbrinck Publishers.
LLC, d/b/a! Macmillan

TABLE OF AUTHORITIES
Page(s)
CASES

Leegin v. Creative Leather Products v. PSKS, Inc.,
551 U.S. 877 (2007)

2

United States v. Abitibi-Consol. Inc.,
584 F. Supp. 2d 162 (D.D.C. 2008)

4

United States v. Alex. Brown & Sons,
963 F. Supp. 235 (S.D.N.Y. 1997)

1

United States v. Grinnell Corp.,
384 U.S. 563 (1966)

2

United States v. Microsoft Corp.,
56 F.3d 1448 (D.C. Cir. 1995)

1

United States v. Morgan Stanley, .
No. 11 Civ. 6875 (S.D.N.Y. Aug. 7, 2012)

1

STATUTES

15 U.S.C. § 16(e)( 1)

1

OTHER

Horizontal Merger Guidelines (DOJ 2010)

4

In this extraordinary Tunney Act proceeding, the government asks the Court to ratify an
eBook pricing scheme even though the vast majority of public comments warn it is likely to
reestablish an eBook monopoly. The government makes this request without offering a single
economic study or analysis showing why its mandated pricing scheme is necessary to undo the
effects of the alleged collusion, or why it is in "the public interest.") The public interest standard
takes on heightened importance in this case because the monopolist in question would serve as
"gatekeeper" over the dissemination of the ideas and information that are at the core of our free
society. Defendant Holtzbrinck Publishers, LLP d/b/a! Macmillan ("Macmillan") urges the
Court either to find that the government has failed, on the record before it, to demonstrate that
the proposed Final Judgment is in the public interest or else to defer its decision whether to enter
the proposed Final Judgment until after the June 2013 trial on the merits of the government's
case against the remaining defendants.

The Statutory Framework. In making its "public interest" determination under the
Tunney Act, a court is required to consider: (1) "the impact" of the judgment on competition in
the relevant market; (2) the impact on third-parties; and (3) "the public benefit, if any, to be
derived from a determination of the issues at trial." 15 U.S.c. § I6(e)(l).

"[T]he Tunney Act

was designed to prevent 'judicial rubber stamping' of proposed Government consent decrees."
United States v. Morgan Stanley, No. 11 Civ. 6875 (S.D.N.Y. Aug. 7, 2012) at 4, quoting United
States v. Alex. Brown & Sons 963 F. Supp. 235, 238 (S.D.N.Y. 1997), quoting United States v.
Microsoft Corp., 56 F.3d 1448, 1460 (D.C. Cir. 1995» (citation omitted).

) The proposed Final Judgment may be entered only upon an affirmative finding by the Court that the judgment is
"in the public interest." 15 U.S.C. § 16(e)(I).

Background.

This case has its roots in the aggressive below-cost eBook pricing policy

Amazon introduced for certain eBooks in late 2007 when the eBook industry was still in its
infancy. Whether characterized as "below cost," "predatory," or "loss leading," it is uncontested
that Amazon's pricing foreclosed any practical challenge to its 90 percent market share.
Moreover, as comment after comment makes clear, no other bookseller could profitably compete
in the long-term against this strategy, and indeed the government offers no study or analysis
showing otherwise. Predictably, as the eBook marker' grew in relation to overall book sales,
Amazon's pricing policy cemented its monopoly over eBook distribution in America.
The size of Amazon's market share is at the center of this proceeding regardless of whose
narrative the Court accepts. The government's narrative, as told through its complaint and CIS,
views Amazon's monopoly as having been achieved by superior competition.

By contrast, the

narrative of the overwhelming number of the Tunney Act comments focus on Amazon's belowcost pricing as a means by which Amazon "willfully maintained" its monopoly;' foreclosed
competition with other potential distributors in the eBook market and hindered competition in
the markets for related products and services. However, there is agreement that the Publisher
Defendants' move to agency pricing" (whether in parallel or, as the government alleges, in
concert) led almost immediately to an erosion of Amazon's 90 percent market share. While
Amazon's current approximately 60 percent market share is still substantial by any measure, that

2 Market definition is contested in this litigation. For purposes of readability, however, Macmillan will assume in
this memorandum only that the relevant market is eBooks and will not include the word "alleged" before each
reference to the government's alleged market definition.

The "willful maintenance" of monopoly power through exclusionary conduct is unlawful.
Grinnell Corp., 384 U.S. 563,570-71 (1966).

3

United States v.

4 The government does not, and could not, challenge the legality under the antitrust laws of the publishers'
various
agency agreements. The publishers also could have individually compelled Amazon under the wholesale model to
adhere to publisher list prices. Leegin v. Creative Leather Products v. PSKS, Inc., 55l U.S. 877 (2007).

2

market share has declined in favor of other competitors, including B&N, Apple, Kobo and
independent booksellers.
On April 11, 2012, the government filed the instant case and published the Proposed
Final Judgment for public comment. The centerpiece of the proposed Final Judgment is a
requirement that functionally allows Amazon to discount as much or more than it actually
discounted in its pre-agency monopolist days." 868 members of the public submitted timely
comments, an extraordinary number of public comments by any measure. Comments were
submitted by individuals, organizations and commercial enterprises representing every level of
the publishing ecosystem, including booksellers, authors, literary agents, publishing consultants
and consumers. More than 90 percent, of the comments urged the Court not to enter the
proposed Final Judgment.
ARGUMENT

The Government Has Failed to Consider the Negative Consequences of the Proposed
Final Judgment. The government framed its complaint as a routine challenge to an allegedly
collusive agreement.

It accordingly framed the discounting provisions in the proposed Final

Judgment as directed to the "tools" of the alleged collusion, namely a prohibition on "retail price
restrictions."

CIS at 12. The CIS states "[t]he United States negotiated these limited

prohibitions as a means to ensure a cooling-off period and allow movement in the marketplace
away from collusive conditions."

Id. at 13. Other than to explain the government's intention in

requiring such substantial limitations on price restrictions, the CIS offers no precedential or
evidentiary support for why those limitations would be in the public interest, no analysis of the
5 The proposed Final Judgment requires the Settling Defendants to offer its eBook distributors the choice to return to
the wholesale model or to permit distributors to discount up to the full amount of their annual commissions (i.e., the
distributor's entire revenue). This would allow Amazon to discount the most popular e-books not just to $9.99 but
indeed to $0.99 or lower if Amazon deemed it necessary to restore its monopoly.

3

market effect of such a prohibition and no analysis of the potential effect on third-parties of such
a prohibition, even though the Tunney Act demands such an analysis. It is inconceivable how
the government can argue that the proposed relief is in the pulic interest without having first
considered whether that relief may cause more harm than it remedies. Indeed, the CIS
acknowledges the lack of any determinative document, study or analysis relied on by the
government in fashioning its proposed relief. Id. at 21. In other words, all that may be
determined from the face of the CIS is that certain individual government staff attorneys and/or
economists thought it might be a good idea to substantially limit price restrictions as so-called
"fencing in" relief aimed at the alleged collusion, with no apparent thought to the potential
consequences for helping to re-establish an impenetrable monopoly over the distribution of
eBooks.6 But, "the relevant inquiry is whether there is a factual foundation for the government's
decisions such that its conclusions regarding the proposed settlement are reasonable."

United

States v. Abitibi-Conso!. Inc., 584 F. Supp. 2d 162, 165 (D.D.C. 2008). Here, the government's
failure to provide any factual foundation or analysis with respect to possible competitive effects
on the market or third-parties of Amazon's foreseeable reconstituted 90 percent monopoly alone
requires denial of the government's motion.
The Government Mlscharacterizes

the Concern Expressed in Vast Bulk of Comments.

Sweeping aside the substance of more than 90 percent of the Tunney Act comments as selfserving expressions of industry participants who would benefit from higher prices, the
government entirely ignores the main point posed by the comments and the important public
b Contrast the government's
failure even to consider the possible negative effects ofa likely increase in Amazon's
market share as a result of the Final Judgment with the government's own Merger Guidelines, which warn against
the artificial creation of monopoly power. Horizontal Merger Guidelines (DOJ 2010). Were DOJ presented with a
proposed merger between a company with a 60 percent market share and a substantial competitor, it would be
compelled by the Guidelines to engage in extensive study and evidence gathering to assure that monopoly power
would not result. Indeed, a transaction that would raise a firm's 60 percent market share by even I percent would be
presumptively unlawful under the Guidelines.

4

policy issue inherent in Amazon's pre-agency market share: the commenters' concerns are not
with lower prices per se but that Amazon will use the judicially granted freedom to discount to
grow its 60 percent market share towards the 90 percent it had prior to the switch to agency.
The government dismisses the fear that Amazon will reclaim its stranglehold over eBook
distribution as mere "speculation."

(See Response at 22: "no objector ... has supplied evidence

.... ") However, the Tunney Act requires the government to show, and the Court to find if it is to
approve the proposed settlement, that the settlement will not result in an Amazon market share
that is contrary to the public interest. Based on the CIS, however, it is clear that the DOl has
engaged in no economic studies to satisfy itself or the Court that the settlement will not have the
harmful results anticipated by so many with knowledge of the publishing industry. Absent such
an analysis, however, DOl's cavalier assumption that its settlement terms will not result in remonopolization is also mere "speculation."

7

Whether Amazon's Pre-Agency Below-Cost Pricing was "Predatory" Within the
Meaning of the Antitrust Laws is Besides the Point. DOl defends Amazon's pre-agency
pricing as not meeting a technical legal standard for predatory pricing. While doubtful, the
government's defense misses the point. The issue is whether, lawfully or otherwise, Amazon
will be able to use the judicially compelled discounting to grow its market share to a level that is
not in the public interest.
Conclusion.

Based on the foregoing, Macmillan respectfully requests the Court to deny

the government's motion or to defer ruling on it until after trial.

Likewise, DOJ appears to have engaged in no economic studies to determine whether alternative approaches to
settlement bearing less risk of monopoly would have satisfied its concern (itself unsupported by any evidence) that
absent the 2-year discounting requirement the effects of the alleged collusion would have persisted once the settling
defendants had terminated their agency agreements and negotiated new agreements. Ironically, DO] peremptorily
dismissed the idea of different forms of settlement with different publishers, including Macmillan, as unworkable.

7

5

Dated: New York, New York
August 15,2012
SIDLEY AUSTIN LLP

By~~J'ti{zL ~

Jo M Mitnick
Jo
. Lavelle
Alexandra Shear
787 Seventh Avenue
New York, NY 10019
Telephone: [phone]
Facsimile: [phone]
[e-mail]
[e-mail]
[e-mail]
Attorneys for Defendant Holtzbrinck
Publishers, LLC d/b/a/ Macmillan