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

Filing 201

RESPONSE to Public Comments on the Proposed Penguin Final Judgment. Document filed by Unites States of America. (Attachments: # 1 Exhibit Kohn Comment, # 2 Exhibit NACS Comment, # 3 Exhibit Steerads Comment)(Fairchild, Stephen)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK

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

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Civil Action No.12-CV-2826 (DLC)

COMMENTS OF AMICUS CURIAE BOB KOHN
REGARDING PROPOSED FINAL JUDGMENT AS TO DEFENDANTS
THE PENGUIN GROUP, A DIVISION OF PEARSON PLC
AND PENGUIN GROUP (USA), INC.

TABLE OF CONTENTS
INTRODUCTION ...........................................................................................................................1
I.

STANDARD OF REVIEW FOR TUNNEY ACT CASES IN THIS CIRCUIT .....................7

II. A SETTLEMENT WHICH RESTRICTS AGENCY PRICING IS NOT IN THE PUBLIC
INTEREST ............................................................................................................................. 10
A.
B.
C.
D.

Defendants’ Conduct Could Not, As a Matter of Law, Have Harmed Consumers ......................... 10
Defendants’ Conduct Could Not, As a Matter of Law, Have Been a Horizontal Restraint At All . 18
Restrictions on Agency Pricing Have a Harmful Impact Upon the Relevant Market ..................... 23
Restrictions on Agency Pricing Have a Harmful Impact Upon the Public Generally ..................... 25

III. THE GOVERNMENT HAS FAILED TO COMPLY WITH THE TUNNEY ACT BY NOT
DISCLOSING DOCUMENTS THAT WERE DETERMINATIVE ..................................... 30
IV. THE COURT SHOULD APPROVE A REVISED PENGUIN SETTLEMENT .................. 31
CONCLUSION .............................................................................................................................. 32

ii

TABLE OF AUTHORITIES

CASES
A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1011 (9th Cir. 2001) ................................................................. 30
Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982)........................................................................... 26
Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328 (1990) .............................................................................. 8
Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227 (1st Cir. 1983) ............................................................. 16, 17
Bogan v. Hodgkins, 166 F.3d 509 (2d Cir. 1999) ........................................................................................................ 23
Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979)............................................................................................ 22, 24, 25
Broadcast Music, Inc. v. Moor-Law, Inc., 527 F.Supp. 758 (D. Del. 1981) .................................................... 28, 30, 32
Broadcast Music, Inc. v.DMX, Inc., 683 F.3d 32 (2d Cir. 2012) ................................................................................. 38
Brook Group v. Brown and Williamson Tobacco Corp., 509 U.S. 209 (1993) ........................................... 8, 15, 17, 20
Buffalo Broadcasting Co. v. ASCAP, 744 F.2d 917 (2d Cir. 1984) ............................................................................. 24
CBS v. ASCAP, 620 F.2d 930 (2d Cir. 1980)................................................................................................... 23, 24, 25
FTC v. Indiana Fed’n of Dentists, 476 U.S. 447 (1986).............................................................................................. 22
Golan v. Holder, 132 S.Ct. 873, 899 (2012) ................................................................................................................ 29
Guardians Assoc. New York Police Dept., Inc. v. Civil Service Comm’n, 630 F.2d 79 (2d Cir. 1980) .......................37
Janus Films v. Miller, 801 F.2d 578 (2d Cir. 1986) ...................................................................................................... 9
Kohn v. United States, 12-4017 (2d Cir., filed October 4, 2012)................................................................................... 2
Massachusetts v. Microsoft, 373 F.3d 1199 (D.C. Cir. 2004)...................................................................................... 35
NCAA v. Board of Regents, 468 U.S. 85 (1984) .................................................................................................... 23, 25
Northeastern Telephone Co. v. American Tel. & Tel. Co., 651 F.2d 76 (2d. Cir. 1981) ........................... 15, 16, 17, 33
Northwest Wholesale Stationers v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985) ..................................... 23
NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998) .................................................................................................... 23
Sony Corp. of America v. Universal Studios, Inc., 464 U.S. 417, 429 (1984) ............................................................. 29
Todd v. Exxon Corp., 275 F.3d 191 (2d Cir. 2001) ..................................................................................................... 27
United States v. American Cyanamid Co., 719 F.2d 558 (2d Cir. 1984) ................................................................... 7, 9
United States v. Bechtel Corp., 648 F.2 660 (9th Cir. 1981) ........................................................................................ 36
United States v. Bleznak, 153 F.3d 16 (2d Cir. 1998) ...................................................................................... 19, 35, 36
United States v. BNS, Inc., 858 F.2d 456 (9th Cir. 1988) ............................................................................................ 10
United States v. Grinnell Corp., 384 U.S. 563 (1966) ................................................................................................. 20
United States v. Int’l Bus. Machines Corp., 163 F.3d 737 (2d Cir. 1988) ..................................................... 7, 9, 34, 38
United States v. Keyspan, 783 F.Supp.2 633 (S.D.N.Y. 2011) ...................................................................................... 9
United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995) ............................................................................... 10
STATUTES
Copyright Act, 17 U.S.C. §501(a) ............................................................................................................................... 29
Sherman Act, 15 U.S.C. §2.......................................................................................................................................... 14
Tunney Act, 15 U.S.C. § 16(b) .............................................................................................................................. 18, 33
Tunney Act, 15 U.S.C. § 16(e)(1) ............................................................................................................................. 7, 8
Tunney Act, 15 U.S.C. § 16(f)..................................................................................................................................... 18
Tunney Act, 15 U.S.C. §16...................................................................................................................................... 5, 17
iii

OTHER AUTHORITIES
Antitrust Guidelines for the Licensing of Intellectual Property (DOJ/FTC 1995)........................................... 18, 24, 26
Horizontal Merger Guidelines (DOJ/FTC 2010) ................................................................................................... 22, 26
ARTICLES & TREATISES
Christopher R. Leshe, Achieving Efficiency Through Collusion: A Market Failure Defense to Horizontal Price
Fixing, 81 California Law Rev. 243 ........................................................................................................................ 20
David Carr, “Book Publishing’s Real Nemesis,” New York Times (April 15, 2012) .................................................... 2
Doreen Carvajal, Small Publishers Feel Power of Amazon’s Buy Button, NEW YORK TIMES (June 16, 2008) ..........23
John Cirace, CBS v. ASCAP: An Economic Analysis of a Political Problem, 47 Fordham L. Rev. 277, 293-94 (197879) ..................................................................................................................................................................... 24, 25
Philip E. Areeda & Donald F. Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act,
88 Harv. L. Rev. 697 (1975) ............................................................................................................................. 14, 28
R.G. Lipesy & Kevin Lancaster, The General Theory of Second Best, 24 Rev. Econ. Stud. 11 (1956-57) ................20
Richard S. Wirtz, Rethinking Price-Fixing, 20 Indiana L. Rev. 531 (1987)................................................................ 20
T. Macaulay, Speeches on Copyright 25 (E. Miller ed. 1913) ..................................................................................... 25
CONSTITUTIONAL PROVISIONS
U.S. Constitution, Article I, §8 .................................................................................................................................... 31
PUBLIC COMMENTS
Comments of Authors Guild, ATC-0214 (June 25, 2012) ..................................................................................... 23, 27
Comments of Bob Kohn, ATC-0143 (April 30, 2012) .................................................................................................. 1
COURT DOCUMENTS
Amicus Curiae Brief of Bob Kohn, Dkt#110............................................................................................................. 1, 5
Competitive Impact Statement as to Hachette/HarperCollins/Simon & Schuster, Dkt#5 ................................... passim
Competitive Impact Statement as to Penguin, Dkt#163 ........................................................................................ 11, 17
Complaint, Dkt#1 ................................................................................................................................................ passim
Final Judgment as to Hachette/HarperCollins/Simon & Schuster, Dkt#119 ............................................................. 1, 6
Government Response to Comments, Dkt#81 ..................................................................................................... passim
Opinion & Order, Dkt#113 (September 5, 2012) ................................................................................................ passim
Proposed Amicus Curiae Brief of Bob Kohn, Dkt#97-1 ......................................................................................... 1, 26
Proposed Final Judgment as to Macmillan, Dkt#174-1 ............................................................................................. 1, 7
Proposed Final Judgment as to Penguin, Dkt# 162-1 .......................................................................................... passim
OTHER DOCUMENTS
Kindle Direct Publishing Agreement, Pricing Page (as of July 28, 2012) .................................................................. 14

iv

INTRODUCTION
These comments are respectfully submitted in opposition to several provisions of the
proposed Final Judgment (hereinafter, “Penguin Settlement”) 1 between the United States (the
“Government”) and defendants The Penguin Group, A Division Of Pearson Plc. and Penguin
Group (USA), Inc. (collectively, “Penguin”).
In a nutshell, if the Defendants' agency agreements, by definition, eliminated price
competition at the retail level, and if those agreements were intrinsically legal—as the
Government has admitted and as the District Court has now held—then the e-book price
adjustments that followed the adoption of the agency agreements were not the result of any
wrongdoing by the Defendants, but were instead the result of the correction of a pre-existing
market failure brought about by the undisputed, systematic below marginal cost pricing of such
e-books by Amazon, which the Court also determined had the market power (i.e., an undisputed
“90 percent monopoly”) to later recoup its losses. 2 By imposing restrictions upon agency pricing,
the settlements in this proceeding reverse the adjustment of such e-book prices back up to their
efficient equilibrium (i.e., Amazon's marginal cost) and therefore, as a matter of law, such
restrictions have a negative impact upon the relevant market and the public generally.
Accordingly, it would be in the public interest for the Court to approve a revised
settlement in a way that eliminates the restrictions upon Defendants’ use of the agency model
while maintaining the decree’s remaining provisions to deter exchanges of competitive

1

Penguin Settlement (Dkt#162-1)
Thus, the comments herein are focused upon the applicability of several key rulings of the District Court
in its Opinion & Order dated September 5, 2012 (Dkt# 113), which was issued after the previous
submissions of amicus curiae in this matter regarding the Final Judgment as to Hachette, HarperCollins,
and Simon & Schuster (the “Initial Final Judgment”). That is, after the submission of Comments of Bob
Kohn (ATC-0143, April 30, 2012), Proposed Amicus Curiae Brief of Bob Kohn dated August 13, 2012
(Dkt#97-1), and Amicus Curiae Brief of Bob Kohn dated September 4, 2012 (Dkt#110).
2

1

information and monitor compliance during an appropriate timeframe. 3 The recently proposed
settlement between the United States and defendants Verlagsgruppe Georg Von Holtzbrink
Gmbh and Holtzbrink Publishers, LLC d/b/a Macmillan (“Macmillan”)

4

should similarly be

revised before entry. 5 Finally, this amicus curiae is seeking appeal of the Final Judgment 6
entered with respect to Hachette, HarperCollins, and Simon & Schuster for the purpose of
achieving the same effect. Kohn v. United States, 12-4017 (2d Cir., filed October 4, 2012).
This amicus curiae has no quarrel with the business decisions made by the five Publisher
Defendants to settle this action. The conviction that “it’s hard to settle when you’ve done nothing
wrong” is courageous, but courage can turn to foolhardiness when simply having your day in
court becomes commercially impossible. The fact that certain defendants stood firm in that
conviction for as long as they have is an honor to them and their faith in our system of justice.
(Indeed, it will be a sad day when practical due process becomes a privilege enjoyed only by the
Fortune 100 companies, heroic characters of popular fiction, and foolish amicus curiae who
have nothing to lose but their time). Be that as it may, the five major publishers, and the
executives who run them, have suffered enough. As one of them recently conceded, it is, indeed,
time “to move on.” While I am hopeful that that these settlements will achieve for them that
simple objective—putting the legal expense, management distraction, and enormous potential
risks of this litigation behind them—I am convinced that these men and women remain the
victims of an injustice which extends far beyond the economic interests of the companies they
manage. Leaving aside the personal affront suffered by the falsely accused, the mechanisms for
settlement wrought by the Government—insofar as they restrict agency pricing—have had, and
3

The District Court has the power to do so under Second Circuit precedent cited in Section IV below.
Macmillan Settlement (Dkt#174-1)
5
Amicus curiae Bob Kohn intends to submit comments on the Macmillan Settlement prior to the close of
the corresponding 60-day comment period which began on February 25, 2013.
6
Initial Final Judgment (Dkt#119).
4

2

will continue to have, a disturbing impact upon consumers, authors, competition in the market
for trade e-books, and the public generally.
It is not too late to remedy these errors in a way that will allow the parties to close the
door on this litigation while ending the harm to the public that these settlements are causing.
More important, perhaps, there remains an opportunity to establish a precedent that may
discourage the Department of Justice from jumping to conclusions that are not only
unreasonable, but seem all too ridiculous to even the casual observer. 7
The Department of Justice, at this juncture, is not expected to redeem itself by reversing
its position on the settlements, but it is hoped the courts will be more receptive to some
considered arguments which have benefited from several of the District Court’s important
findings and insights enunciated in its Opinion & Order dated September 5, 2012. Dkt#113.
Recall that, in its Complaint, the Government repeatedly alleged that “price competition
among retailers”—which, it contends, was good for consumers—was unlawfully eliminated by
the Defendants’ conduct. Dkt#1 (Complaint) at ¶¶ 3, 4, 5, 6, 8, 56, 66, 79, 92, 95, 97, and 98.
Yet, these statements were facially inconsistent with the Government’s admission that it “does
not object to the agency method of distribution in the e-book industry.” Dkt#81 (Gov’t Response
to Comments) at vi. Indeed, the District Court found, as the Government recognized, that the
terms of the agency agreements (including the retail price restraints and the Price MFN clauses)
used by the Defendant Publishers were not “intrinsically unlawful.” Dkt#113 (Entry Order) at
17. That finding, combined with the District Court’s further finding that it was undisputed that
Amazon had “a 90% monopoly” of the trade e-book market (Dkt#113 at 34-35), as shown

7

See, for example, David Carr, “Book Publishing’s Real Nemesis,” New York Times (April 15, 2012)
(Describing the Justice Department’s action in this case as “the modern equivalent of taking on Standard
Oil but breaking up Ed’s Gas N’ Groceries on Route 9 instead”).
3

below, leads to only one logical conclusion: the District Court should not enter a judgment
imposing restrictions on agency pricing, because such restrictions are not in the public interest.
It is self-evident that the purpose and effect of the agency agreements, by definition, was
to eliminate e-book price competition among e-retailers. This is because, under the agency
model, price competition for e-books occurs among the publishers, not the retailers. If the agency
agreements used by the Defendant Publishers were not “intrinsically unlawful,” as this Court has
found, then any alleged conduct by Defendants for the purpose of limiting pricing competition
through their agency agreements could not, as a matter of law, have been illegal.
It should be clear, then, that this action was never about eliminating e-book price
competition at the retail level. To do so was perfectly legal, because the agency agreements used
to accomplish that end were intrinsically lawful. That being the case, the Government’s
Complaint boils down to simply this: that after the shift to the agency model, it was not legal that
e-book prices went up. Yet, when boiled down to that, the Government’s conclusion that these
settlements are in the public interest evaporates.
We start by assuming that e-book prices actually went up after the adoption of the agency
model. Even though the parties and some commentators have disputed that fact, the
Government’s allegation that e-book prices went up should be accepted as true at this stage of
the proceeding.
What should not be accepted as true is the Government’s conclusion that the higher
prices that ensued after the adoption of the agency contracts harmed consumers. If it can be
shown, as a matter law, that such higher prices could not have harmed consumers, then
Government’s conclusions about the proposed settlement were unreasonable and the Penguin
Settlement cannot be in the public interest. Moreover, to the extent the Penguin Settlement

4

results in lower e-book prices, which is its stated purpose 8, consumers will, in fact, be harmed—
just as they are being harmed by the Final Judgment entered by this Court last year.
In a five-page brief dated September 4, 2012 (Dkt #110), this amicus curiae attempted to
illustrate the Government’s mistaken view of pricing in the realm of antitrust analysis:

The point is that there is nothing inherently unlawful about higher prices. Obviously, a
rise in price as a result of an increase in demand or a decrease in supply is a natural correction of
a working market and is not unlawful under the antitrust laws. Similarly, prices that rise in
correction of a market failure caused by an action that is judicially-recognized as economically
inefficient and illegal—such when a competitor with overwhelming market power sells below
marginal cost (see, Brook Group and Northeastern, infra)—are also not unlawful. Any antitrust
hornbook or economics textbook would attest to the fact that consumers benefit from higher
prices in each of these instances because they benefit from a more efficient allocation of
resources.
When, in its Response to Public Comments, the Government admitted that it “does not
object to the agency method” (Dkt#81 at vi), it necessarily admitted, by definition, that it does
not object to a method of distribution whereby price competition at the retail level is eliminated.
8

See Dkt#5 (CIS). Also, Dkt #81 (Govt. Response to Comments) at 18 (“Consumers, the Victims of the
Conspiracy, Will Benefit as Limits on Retail Discounting are Lifted”).
5

Accordingly, what is left of their case is their objection that, as a result of the switch to the
agency model, higher e-book prices ensued. But, for some reason, the Government failed to
appreciate why the shift to the agency model resulted in higher e-book prices: under the retail
model, Amazon was selling e-books at below marginal cost. Under such circumstances, the shift
to the agency model could only have resulted in an increase in those prices back up to marginal
cost.
Accordingly, the e-book price increases were not caused by any wrongdoing of the
Defendants, but were caused by (1) Amazon’s below marginal cost pricing in combination with
(2) the lawful elimination of retail price competition by means of agency agreements, which the
Government has admitted, and the Court has ruled, were intrinsically legal. The result benefited
consumers, because the elimination of Amazon’s selling below cost—i.e., the correction of the
market failure—resulted in a more efficient allocation of resources.
By entering the Initial Final Judgment in this case, the District Court has made a
regrettable error that—by virtue of the restrictions on the agency pricing—has saddled
consumers with an unnecessary misallocation of resources in the trade e-book market—lasting
the next two years, perhaps longer. This amicus curiae has appealed that decision to the Second
Circuit. In the meantime, the Court should not compound its mistake by entering the proposed
Penguin Settlement—at least not without modification. 9 The Court is urged to do the same with
respect to the announced settlement with Defendant Macmillan. Only by modifying all of the
settlements in this case to remove their respective restrictions on the Defendant’s agency
agreements will the settlements align with the public interest.

9

The public interest does not require that the proposed Penguin Settlement be rejected in its entirety. The
District Court is urged to enter a revised Penguin Settlement comprised only of provisions that do not
unravel the pro-competitive effects that Defendants’ conduct had upon the relevant market and the public
generally. See, Section IV below.
6

I.

STANDARD OF REVIEW FOR TUNNEY ACT CASES IN THIS CIRCUIT
Prior to entry of a proposed final judgment, the Tunney Act requires a court to determine

that such entry is “in the public interest.” 15 U.S.C. § 16(e)(1). Though the statute does not
define that phrase, the Second Circuit has held that such words “take meaning from the purposes
of the regulatory legislation.” United States v. American Cyanamid Co., 719 F.2d 558, 565 (2d
Cir. 1984). More specifically, “the Court should look to the elements of that species of antitrust
violation.” United States v. Int’l Bus. Machines Corp., 163 F.3d 737, 742 (2d Cir. 1988).
The Government touched upon the alleged species of antitrust violation when it stated in
this action that, “Low prices, of course, are one of the principal goals of the antitrust law.”
Dkt#81 (Gov’t Response) at 22 (citing, Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S.
328, 340 (1990) (opinion by Justice Brennan). But, in citing Atlantic Richfield, the Government
omitted Justice Brennan’s crucial caveat, which Justice O’Conner specifically included when she
quoted Justice Brennan: “Low prices benefit consumers regardless of how those prices are set,
and so long as they are above predatory levels, they do not threaten competition.” Brook Group
v. Brown and Williamson Tobacco Corp., 509 U.S. 209, 223 (1993) (opinion by Justice
O’Conner quoting, Atlantic Richfield at 340) (emphasis added).
As noted, this case is not about limiting e-book price competition at the retail level
through the adoption of the agency model. It’s about the rise in e-book prices after the switch to
the agency model. The operative terms of each of the settlements restricts the agency model such
that e-book prices will be lowered for a period of time, at not only cost to the Publisher
Defendants, but to competitors of Amazon, independent booksellers, authors of copyrighted
works, and the public at large who will suffer from the misallocation of resources. It is in that
context the Penguin Settlement is to be considered, and the Tunney Act directs courts to consider

7

several factors, including “the impact of entry of such judgment upon competition in the relevant
market or markets” and its impact “upon the public generally.” 15 U.S.C. § 16(e)(1).
Though normally a court makes only the minimal determination of whether a settlement
agreement is to be accorded the status of a judicially enforceable decree, the court has a “larger
role” where the consent judgment resolves “antitrust suits brought by the United States.” Int’l
Bus. Machines, 163 F.3d 737, 740 (quoting Janus Films v. Miller, 801 F.2d 578, 582 (2d Cir.
1986)).
Some courts, including the District Court, have held that “the relevant inquiry is whether
the Government has established an ample ‘factual foundation for the Government’s decisions
such that its conclusions regarding the proposed settlement are reasonable’.” Dkt#113 at 14
(quoting United States v. Keyspan, 783 F.Supp.2 633, 637-38 (S.D.N.Y. 2011). Research by this
writer has been unable to uncover a single decision by the Second Circuit of Appeals which
adopts the Keyspan standard of review. The standard in this Circuit appears to be that which was
established in American Cyanamid and IBM, cited above.
In any event, the argument below remains unaffected should the District Court again
embrace the Keyspan formulation. Even under the Keyspan standard, the courts may “give due
respect to the government's perception of its case” (Keyspan at 638) and may be “deferential to
the government's predictions as to the effect of the proposed remedies” (Microsoft, 56 F.3d at
1461), but such respect is not due, and such deference is not earned, where the Government’s
conclusions regarding the settlement are unreasonable. Keyspan at 637-38.
In inquiring whether the Final Judgment is in the public interest, or whether
Government’s conclusions are reasonable, the courts need not engage, as the Government has
suggested, in a “full-blown, lengthy and expensive trial.” Dkt#81 (Gov’t Response to Comments)

8

at 44. On the contrary, the courts may inquire into the reasonableness of the Government’s
conclusions assuming all of the factual allegations regarding defendants’ conduct in the
Complaint, stripped of their bare conclusions (i.e., the subject of this inquiry under Keyspan), are
true. To defer to both the Government’s alleged facts as well as their conclusions would indeed
make “a mockery of judicial power.”
Amicus curiae is not suggesting that the Court “construct [its] own hypothetical case and
then evaluate the decree against the case,” or “redraft the complaint to inquire into other matters
that the United States did not pursue” or “engage in an unrestricted evaluation of what relief
would best serve the public.” Dkt#5 (Initial CIS) §VII (quoting United States v. Microsoft Corp.,
56 F.3d 1448, 1459-62 (D.C. Cir. 1995); Keyspan at 638; United States v. BNS, Inc., 858 F.2d
456, 462 (9th Cir. 1988)). Nor is the Court being asked to “reach beyond the complaint to
evaluate claims the government did not make.” Microsoft, 56 F.3d at 1459.
On the contrary, in evaluating the reasonableness of the Government’s conclusions, the
District Court need simply assume all of the Government’s factual allegations as true, and add to
those allegations the Court’s own factual findings. It is respectfully submitted that, when Reason
is applied to the factual foundation, the District Court’s only conclusion can be that elements of
the Penguin Settlement that restrict the operation of the agency model, for however short a
period, are not in the public interest.

9

II.

A SETTLEMENT WHICH RESTRICTS AGENCY PRICING IS NOT IN THE
PUBLIC INTEREST
The Government’s alleged factual foundation, and the District Court’s previous factual

findings, taken together, should be all the District Court needs to consider in reviewing whether
the Penguin Settlement is in the public interest. The undisputed facts and the District Court’s
findings show conclusively that the Penguin Settlement unwinds both the pro-competitive
impacts of Defendants’ conduct upon the relevant market and the favorable impacts of such
conduct upon the public generally.
A.

Defendants’ Conduct Could Not, As a Matter of Law, Have Harmed
Consumers

Based on the facts it alleged, the Government concluded that the Defendants’ alleged
conduct was harmful to consumers. Dkt#5 (Initial CIS) §III; Dkt#163 §III (Penguin CIS). If it
can be shown, as a matter of law, that Defendants’ conduct, as alleged, could not have harmed
consumers (or that, in fact, it could only have benefited consumers), then the Government’s
conclusions regarding the settlement are unreasonable. A settlement, which has the stated
intention of benefiting consumers while, as a matter of law, does the opposite, cannot be in the
public interest.
1.

Summary of Argument

As noted, the District Court found that the terms of the agency agreements (including the
retail price restraints and Price MFN clauses) used by Defendant Publishers were not
“intrinsically unlawful.” Dkt#113 (Entry Order) at 17. By definition, the effect of the agency
agreements was to limit e-book price competition among e-retailers. Indeed, the Government’s
admission that the elimination of price competition at the retail level is perfectly legal is virtually

10

codified in each of the settlements. 10 If the agency agreements were legal, then any alleged
conduct by defendants for the purpose of limiting such competition through their agency
agreements could not, as a matter of law, be illegal.
What is left of the Government’s Complaint is that, following a number of alleged
“opportunities” (i.e., phone logs and dinner meetings) to have conversations pertaining to the
lawful elimination of e-book price competition by switching to the agency model 11, e-book
prices went up. Yet, such price increases were not caused by any wrongdoing of the Defendants,
but were caused by (1) Amazon’s below marginal cost pricing in combination with (2) the lawful
elimination of retail price competition by means of lawful agency agreements. The result
benefited consumers, because the elimination of Amazon’s selling below cost resulted in
correction of a market failure and a more efficient allocation of resources. It is therefore
submitted that, based on the factual foundation alleged by the Government and the District
Court’s finding of facts, consumers, as a matter of law, must have benefited to the extent e-book

10

See, for example, Penguin Settlement (Dkt#162-1) at §V.D. (“After the expiration of prohibitions in
Sections V.A. and V.B of this Final Judgment, this Section V.D. shall not prohibit Penguin from
unilaterally entering into or enforcing any agreement with an E-book Retailer that restricts, limits, or
impedes the E-book Retailer from setting, altering, or reducing the Retail Price of any of Penguin’s Ebooks or from offering price discounts or any other form of promotions to encourage consumers to
Purchase any of Penguin’s E-books”). Oddly, in support of its ruling that the Government met the
“minimal” standard of review for the initial Final Judgment, the District Court found that it was
“undisputed that the Agency Agreements disallowed retail price discounting” and that after the adoption
of such agreements “a consumer could not find Publisher Defendants’ newly-released and bestselling
books for $9.99 at any retailer.” Dkt#113 (Order) at 32-33. If the District Court was suggesting here that
the agency agreements, by disallowing discounting, were somehow unlawful, then the District Court will
need to explain how the agency agreements, which intrinsically eliminate price competition at the retail
level, can be considered unlawful and “not intrinsically unlawful” at the same time. Cf. Dkt#113 (Order)
at 17. If all the District Court was suggesting was that e-book prices rose above the $9.99 price, it has not
explained how such price rises could have harmed consumers or were otherwise unlawful. If the Court is
suggesting here that all price increases harm consumers or are necessarily unlawful, then it clearly
adopted the Government’s mistaken view of pricing under the antitrust law as its own.
11
When you eliminate all of the hot rhetoric in the Complaint about the elimination of retail price
competition—“hot” in the sense that the Complaint is trying to make something legal sound illegal—you
are left with a set of vacuous assertions, such as Publisher Defendants had an “opportunity” to discuss
pricing at private meetings among publisher CEOs (Complaint at ¶45).
11

prices went up (at least up to the level of their marginal cost).
2.

Argument

It is undisputed that, under the retail model, Amazon sold newly-released and bestselling
e-books made available by the defendant publishers and by most, if not all, independent book
publishers, at below its marginal cost, consistently, “[f]rom the time of its Kindle launch” until
Amazon’s acceptance of the agency model. See, Dkt#5 §II.A. The Government directly alleged
facts in its Complaint and Competitive Impact Statement that Amazon was selling e-books at
below their marginal cost, something which the Government has never denied. 12 Amazon’s
marginal cost, under the retail model, was at least equal to the fixed wholesale price (e.g.,
$13.00, which is 50% of a typical list price of $26.00) it pays to the publishers for each
incremental e-book it sells. 13 Dkt#5 (CIS) §II.A. These books were re-sold by Amazon for
“$9.99-or-less.” Id.; Dkt#1 (Complaint) at ¶30. Thus, for example, at a marginal cost per e-book
of $13.00, Amazon was selling such e-books at $3.01 (more than 23%) below its marginal cost.
The Government stated it “reviewed data from Amazon and others” to investigate
Amazon’s e-book distribution business. Dkt#81 (Gov’t Response) at 21. By the end of its
investigation, the Government concluded that Amazon was not engaging in predatory pricing. Id.
Dkt#1 (Complaint) ¶30. It is noteworthy, however, that in reaching such conclusion, the
Government never alleged or asserted that Amazon was not selling below marginal cost.
The Government merely asserted that no objector supplied evidence that “Amazon threatens to
drive out competition and obtain monopoly power.” Dkt#81 at 22. Needless to say, that is not the

12

It may well be that the District Court was mislead by certain carefully crafted statements about
Amazon’s pricing policies set forth in the Government’s Complaint and Response to Public Comments
dated August 3, 2012, discussed below.
13
Amazon has additional marginal costs, such as the cost of wirelessly delivering each incremental ebook to a Kindle e-reader, which is estimated to cost nearly 15 cents per e-book delivery. See, Kindle
Direct Publishing Agreement, Pricing Page (as of July 28, 2012).
12

same as saying Amazon did not re-sell e-books below its marginal cost—a necessary element of
predatory pricing.
Being unable to deny facts which it provided in its Complaint and CIS, and then without
ever categorically denying that Amazon was selling e-books at below marginal cost, the
Government jumped to its peculiar conclusion: based on its investigation and review of data
from Amazon and others, “Amazon’s e-book distribution business has been consistently
profitable.” Dkt#1 ¶30; repeated in Dkt#81 (Gov’t Response) at 4, 21-22).
Implicit in that conclusion was the legal standard which the Government applied to its
review of data. The Government provides no citation for the proposition that the standard for
predatory pricing under Section 2 of the Sherman Act (15 U.S.C. §2) is whether the predator’s
business “has been consistently profitable.”
In Brook Group v. Brown and Williamson Tobacco Corp., 509 U.S. 209, 222-24 (1993),
the Supreme Court set forth two elements for an action for predatory pricing. The first is to
establish that prices were set at “below an appropriate measure of its rival’s costs.” Interpreting
its prior holdings, the Court stated, “below-cost prices should suffice.” Id at 223. This was
consistent with the standard previously adopted by the Second Circuit. Northeastern Telephone
Co. v. American Tel. & Tel. Co., 651 F.2d 76, 86-89 (2d. Cir. 1981), cert. denied, 455 U.S. 943
(1982) (“The relationship between a firm’s prices and its marginal costs provides the best single
determinate of predatory pricing”). Marginal cost is traditionally defined as “the increment to
total cost that results from producing an additional increment of output.” Northeastern at 87
(quoting Areeda & Turner).
This prerequisite is clearly satisfied by the Government’s own factual allegations. By
selling e-books for “$9.99-or-less” that it purchased at higher amounts Amazon was selling such

13

e-books at below their marginal cost. Unless the price cutter can show that its low price is purely
“‘promotional,’ e.g., a ‘free sample’,” or “show that it expects costs to fall when sales increase,”
then “the firm cannot rationally plan to maintain the low price.” Barry Wright Corp. v. ITT
Grinnell Corp., 724 F.2d 227, 230-34 (1st Cir. 1983) (opinion by Circuit Judge Breyer).
Amazon’s practice of below marginal cost pricing was no Macy’s “promotion.” These
were not “free samples” or “loss leaders.” Amazon’s below-cost pricing was consistently applied
to newly-released and bestselling trade e-book made available by the Defendant Publishers and
by most, if not all, independent book publishers, from the time of its Kindle launch until
Amazon’s acceptance of the agency model. Dkt#5 §II.A. “Without special circumstances there is
little to be said in economic or competitive terms for such a price cut.” Barry Wright, 724 F.2d
227, 231. The Government has supplied neither the public nor the District Court with any
evidence of special circumstances to justify Amazon’s below marginal cost pricing. 14
Nor can Amazon expect its marginal cost for e-books to decrease with volume. Amazon’s
marginal cost for selling each incremental e-book having a list price of $26.00 will always
remain $13.00, whether Amazon sells one copy or one million copies. “At a minimum, one
would wonder why this firm would cut prices on ‘incremental production’ below its ‘avoidable’
costs unless it later expected to raise its prices and recoup its losses.” Barry Wright, 724 F.2d
227, 232.
At first, the District Court seemed to embrace the Government’s odd conclusion that
“Amazon’s e-book business was ‘consistently profitable’.” Dkt#113 (Order) at 39. But then, it
went on to elucidate the law of predatory pricing correctly, only to overlook the Government’s
own factual allegations supporting Amazon’s below cost pricing and the apparent care the
14

If the Government has materials or documents that would shed light on this key issue—containing a
“smoking gun” or its “exculpatory opposite”—it is bound by the Tunney Act to share it with the public
and the District Court. See discussion below in Section II.E.
14

Government took never to deny it.
For example, this is how the Government defended Amazon against the charges by
hundreds of commentators of below cost pricing:
No objector to the proposed Final Judgment has supplied evidence that, in the dynamic
and evolving e-book industry, Amazon threatens to drive out competition and obtain the
monopoly pricing power which is the ultimate concern of predatory pricing law. [Dkt#81
(Gov’t Response) at 22 (emphasis added)].
While addressing the ultimate concern of predatory pricing law, the Government left out
the law’s immediate concern, the first prong of the test under Brook Group and Northeastern:
whether Amazon was selling at below marginal cost. The Government never denied this, because
the “evidence” of Amazon’s selling below marginal cost was not only obvious and abundant, it
was factually supported in the Government’s own Complaint and CIS.
Yet, when the District Court addressed the issue of below marginal cost pricing, it stated,
[W]hile comments complain that Amazon’s $9.99 price for newly-re-leased and
bestselling e-books was ‘predatory,’ none of them attempts to show that Amazon’s ebook prices as a whole were below marginal cost. [Dkt#113 at 39].
Of course, none of public commentators attempted to “show” it, because none of them
had to. It was undisputed. As the Government observed, Amazon’s below-cost pricing was the
“overarching theme” of the public comments. Dkt#81 at 2. Facts supporting it were directly
alleged in the Government’s own Complaint and Competitive Impact Statement and the
Government has never since denied that Amazon was selling e-books at below marginal cost.
Indeed, the express terms of each of the proposed settlements—which allow each Publisher
Defendant to prevent Amazon from selling the publisher’s “entire catalogue at a sustained
loss”—is an express admission by the Government that Amazon was selling below marginal
cost. See, for example, Competitive Impact Statement as to Penguin (Dkt#163) at 8; Penguin
Settlement (Dkt#162-1) at Section VI.B.
15

In its criticism of the public’s failure to come forth with sufficient facts regarding
Amazon’s below marginal cost pricing, the District Court seemed careful to use the phrase “as a
whole,” somehow suggesting that it has to be shown that Amazon’s below-cost pricing of ebooks had to concern all of the e-books they offered or that they were “as a whole” sold below
marginal cost. Even if the District Court was meaning to suggest that such a showing is an
essential element of an action against for predatory pricing, it is beside the point: to judge the
reasonableness of the Government’s conclusions regarding the proposed settlements, it need not
be proven that that Amazon would actually be liable in an action for predatory pricing in order to
show that the rise in e-book prices that occurred after the switch to the agency model could not
have harmed to consumers. That is, it cannot logically be denied that such increase in e-book
prices constituted a correction of the market failure that Amazon created with respect to
the huge number of e-books it systematically, and undisputedly, sold below its marginal
cost.
At a procedural level, what the District Court has done here is suggest that it was not the
Government’s, but the public’s responsibility somehow “to show” that Amazon was selling
below marginal cost. Where in the Tunney Act does the public have the right to conduct
discovery on Amazon’s marginal costs? (How else could they have learned this information?)
Needless to say, nowhere. On the contrary, the Tunney Act specifically puts the burden of
producing such facts upon the Government, requiring that “materials and documents that were
considered determinative” in formulating the settlement shall “be made available to the public at
the district court.” 15 U.S.C. § 16(b).
The District Court has simply turned the Government’s statutory responsibility to the
public on its head: instead of the Government, the public is now somehow responsible for filing

16

with the District Court materials and documents that could be the “smoking gun” (or exculpatory
opposite) of Amazon’s below marginal cost pricing. See, discussion in Section III below
regarding United States v. Bleznak, 153 F.3d 16 (2d Cir. 1998).
The District Court should either require the Government to produce its documents
relating to its investigation of Amazon’s trade e-book pricing or appoint a special master under
the Tunney Act, Section 16(f), to conduct discovery directly on Amazon to achieve that end.
The second prerequisite for predatory pricing is a demonstration that the predator has a
“dangerous probability[] of recouping its investment in below-cost pricing.” Brook Group, 509
U.S. 209, 224. In order to recoup their losses, the predator “must obtain enough market power to
set higher than competitive prices.” Id. at 225. This prerequisite was satisfied by the District
Court’s factual finding that Amazon achieved a “90 percent monopoly” of the e-book
market. Dkt#113 34-35. The existence of the requisite market power ordinarily may be inferred
from the predominant share of the market. See, United States v. Grinnell Corp., 384 U.S. 563,
571 (1966) (in which 87% of the market constituted “monopoly power”).

17

Moreover, in the Second Circuit, once the first prerequisite is demonstrated, the second is
presumed. With such a presumption in hand, the Government should not have been expecting
members of the public to produce “evidence” of Amazon’s threat to drive out competition
(Dkt#81 at 22), but disclosing to the District Court exculpatory facts that would overcome that
presumption. Without the presence of facts to overcome the presumption, conduct that
resulted in raising illegally-low (consumer welfare-harming) prices back up to the
consumer welfare-optimizing level of marginal cost could not have, as a matter of law,
harmed consumers.
If there is nothing intrinsically unlawful about limiting e-book price competition among
e-retailers through the use of defendants’ agency agreements, then the only potentially legitimate
Complaint the Government offers is that, as a result of defendants’ other alleged conduct, e-book
prices went up to the detriment of consumers. But if higher e-book prices under these
circumstances could not, as a matter of law, have harmed consumers, then the Government’s
conclusion in this regard about the settlement was not reasonable. Since that conclusion went to
the essence of the settlement—which has the stated purpose of lowering prices for the benefit of
consumers—aspects of the Penguin Settlement that restrict agency pricing cannot be in the
public interest.
B.

Defendants’ Conduct Could Not, As a Matter of Law, Have Been a
Horizontal Restraint At All
1.

Summary of Argument

Because the District Court held, as the Government recognized, that Defendants’ agency
contracts were lawful (Dkt#113 at 17), the Government’s surviving complaint is the alleged
“collusive use” of the lawful agency model. Dkt#81 at vi. But that collusive use could not, as a

18

matter of law, have constituted an illegal horizontal restraint, because (i) the switch to agency
pricing, as the Government has alleged, could not have been accomplished without the alleged
collusive conduct and (ii) it is undisputed that such conduct did not involve any restraint
whatsoever on the right of any publisher defendant to sell its own e-books to any e-retailer at any
price. Moreover, notwithstanding the allegation that Defendants colluded in the migration to the
agency model, and even if the result of that collusion was a correction of prices back up to the
efficient marginal cost level, a settlement which reverses the benefits of that correction, causing
the public generally to suffer a misallocation of resources, cannot be in the public interest.
2.

Argument

Indeed, in resolving conditions which put the objectives of both copyright and antitrust in
concert, the courts have “never examined a practice like this one before.” But, in examining
those conditions, the District Court can look back to when the Second Circuit was confronted
with analogous circumstances of first impression.
As the District Court recognized (Dkt#113 at 39), the U.S. Supreme Court in Broadcast
Music, Inc. v. CBS, 441 U.S. 1 (1979) held that “blanket licenses” for music performances in the
market for network television were not per se unlawful. Indeed, such holding did not provide a
“blanket exception” to the per se rule against horizontal price fixing, but in so ruling the
Supreme Court did rule for the first time that not all horizontal price fixing will constitute a per
se violation. This is because collusive conduct may be sustained under the rule of reason where
there is a “countervailing procompetitive virtue—such as for example, the creation of
efficiencies in the operation of a market or the provision of goods and services.” FTC v. Indiana
Fed’n of Dentists, 476 U.S. 447, 459 (1986) (citing Broadcast Music). See also, IP Guidelines,
infra, at §3.4 (The Government “will assess whether the restraint in question can be expected to

19

contribute to an efficiency-enhancing integration of economic activity,” citing Broadcast Music,
441 U.S. at 16-24). 15
The high court remanded Broadcast Music back to the Second Circuit for further
proceedings, including an assessment of the horizontal price restraint under the rule of reason.
Broadcast Music, 441 U.S. at 25; CBS v. ASCAP, 620 F.2d 930, 932 (2d Cir. 1980). After
remand, however, the Second Circuit never had to evaluate the restraint under the rule of reason,
because it held that the collusive activity among the music publishers that resulted in the blanket
license did not constitute a restraint at all.
This is because (i) the blanket license could not have been accomplished without the
music publishers’ collusive conduct (see, Broadcast Music, 441 U.S. at 23) and, though the
publishers engaged in “literal” price fixing to establish the blanket license, (ii) neither their
collusive conduct nor the resulting blanket license placed any restraint on the right of any
individual copyright owner to sell its own individual compositions separately to any buyer at any
price. See, CBS v ASCAP, 620 F.2d. 930, 938 (2d Cir. 1980); Buffalo Broadcasting Co. v.
15

The Supreme Court reiterated this principal in NCAA v. Board of Regents, 468 U.S. 85 (1984), when
seven Justices declared a horizontal agreement on the price of college football television rights unlawful
under the rule of reason, expressly declining to condemn it under the per se rule. See also, Indiana Fed’n
of Dentists, 476 U.S. 458-59 (“We have been slow to…extend per se analysis to restraints imposed in the
context of business relationships where the economic impact of certain practices is not immediately
obvious,” citing as examples Broadcast Music and NCAA). See generally, Richard S. Wirtz, Rethinking
Price-Fixing, 20 Indiana L. Rev. 531, 627 (1987) (“After Broadcast Music and NCAA, the question is not
whether exceptions to the general prohibition against agreements among competitors will be recognized,
but rather when. Potentially pro-competitive collaboration among competitors is to be encouraged, within
limits, even if it involves agreement on prices”); R.G. Lipesy & Kevin Lancaster, The General Theory of
Second Best, 24 Rev. Econ. Stud. 11 (1956-57) (“The distorting effect of overconsumption could be made
worse if, in cases of horizontal price fixing, antitrust laws are used to decrease prices”); Christopher R.
Leshe, Achieving Efficiency Through Collusion: A Market Failure Defense to Horizontal Price Fixing, 81
California Law Rev. 243, 270. See also, Northwest Wholesale Stationers v. Pacific Stationery & Printing
Co., 472 U.S. 284 (1985) (holding that the per se approach only applies if the boycott was “not justified
by plausible arguments that [it was] intended to enhance overall efficiency and make markets more
competitive”). NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 135 (1998) (upholding the Second Circuit’s
decision to allow defendants to justify the boycott before it would apply the per se rule); Bogan v.
Hodgkins, 166 F.3d 509, 514 (2d Cir. 1999) (“Absent a showing that a presumption of anticompetitive
effect is appropriate, we apply the rule of reason”).
20

ASCAP, 744 F.2d 917, 933 (2d Cir. 1984).
The alleged collusive conduct of the Publisher Defendants in this case never approached
the comprehensive price-fixing collaboration among music publishers required to set up and
maintain the blanket license. Here, the alleged collusive conduct was merely to accomplish a
one-time switch to the agency model, using agreements (including the retail price restraints) the
District Court has already conceded were intrinsically lawful. Dkt#113 at 33. It is submitted that,
consistent with Broadcast Music and CBS v. ASCAP, the questions for the Court to consider are:
(1)

Could the switch to agency model only be accomplished by the alleged collusive
conduct?

(2)

If so, did such collusive conduct or the agency agreements restrain any of the
defendant publishers from selling any of their individual e-books to the e-retailers
or the public at any price?
1.

The Switch to the Agency Model Could Only Be Accomplished by the
Alleged Collusive Conduct

The Government specifically alleged,
“This change in business model would not have occurred without the conspiracy among
the Defendants.” [Complaint ¶5]
The Complaint goes on, repeatedly, to allege facts that “Each Publisher Defendant knew
that, acting alone, it could not compel Amazon to raise e-book prices and it was not in its selfinterest to attempt unilaterally to raise retail e-book prices.” Dkt#1 ¶35. We also know from the
Complaint exactly what would happen—because it did happen—if a defendant publisher acted
alone in approaching Amazon with an agency agreement. Dkt#1 ¶80 (i.e., Amazon’s exercise of
its “buy” button “nuclear option” against defendant Macmillan, effectively eliminating 90% of
the publisher’s e-book and 25% of its printed book revenues in an instant). The Complaint then

21

alleges that Amazon only agreed to the agency model after it “came to fully appreciate that not
just Macmillan but all five Publisher Defendants had irrevocably committed themselves to the
agency model across all retailers, including taking control of retail pricing and thereby stripping
away any opportunity for e-book retailers to compete on price.” Dkt#1 ¶84.
Thus, the Complaint alleges facts, which we here should assume as true, amply showing
that switching to the agency model could only have been accomplished by defendants' alleged
collusive conduct.
2.

Neither Defendants’ Alleged Collusive Conduct Nor the Agency
Agreements Restrained Any of Defendant Publishers From Selling
Their E-Books to the Public at Any Price

The Government has never alleged, and it remains undisputed, that Defendants' alleged
collusive conduct did not restrain any of the Publisher Defendants from selling any of their
individual e-books to the public at any price. See, CBS v ASCAP, 620 F.2d. at 938. See also,
NCAA, 468 U.S. 85, 114 (with reference to Broadcast Music, “each individual remained free to
sell his own music without restraint”); Arizona v. Maricopa County Medical Society, 457 U.S.
332, 355 (1982) ("the blanket license arrangement [in Broadcast Music] did not place any
restraint on the right of any individual copyright owner to sell his own compositions separately
to any buyer at any price" [footnote omitted]).
Neither the alleged information exchanges among the defendants, nor the terms of the
agency agreements, were aimed at preventing, or could prevent, any one publisher from
charging, for example, $4.95-or-less for each of its e-books in competition with the other
publishers. If limiting price competition among e-retailers was not “intrinsically unlawful,” then
it is impossible to say there was a horizontal restraint to raise prices when there was no
allegation of any restraint keeping a publisher from lowering the price of any e-book at any time.

22

Consistent with Broadcast Music and CBS v ASCAP, therefore, the Defendants’ conduct
could not, as a matter of law, have constituted a horizontal restraint. Even if it did, that finding
would not justify the approval of a settlement containing market restrictions that are nowhere
near within reach of the public interest.
C.

Restrictions on Agency Pricing Have a Harmful Impact Upon the Relevant
Market

The Penguin Settlement reverses at least two undisputed pro-competitive impacts upon
the relevant market: reducing Amazon’s monopoly power and monopsony power. Meanwhile,
the settlement’s only alleged pro-competitive impact has been found by the District Court not to
exist.
1.

Impact Upon Amazon’s Monopoly Power

As noted, the District Court found that it is “undisputed” that Amazon had achieved a “90
percent monopoly” in the e-book market and that, following the course of defendants’ conduct as
alleged in the Complaint, Amazon’s market share in trade e-books dropped from an undisputed
90% to 60%. Dkt#113 at 34-34. The restrictions placed on the Defendants’ use of agency pricing
set forth in the settlements unwind the pro-competitive effects which the District Court found to
be undisputed.
2.

Impact Upon Amazon’s Monopsony Power

The Complaint itself alleges ample facts to demonstrate that defendant publishers faced
in Amazon a single buyer generating 90% of their e-book revenues who both wielded and
exercised demonstrable monopsony power. Dkt#1 (Complaint) at ¶80. 16 It has been said that a
monopsony is the “mirror image” of monopoly. Todd v. Exxon Corp., 275 F.3d191, 202 (2d Cir.
16

Amazon’s exercise of this power against Macmillan was not the first time. Doreen Carvajal, “Small
Publishers Feel Power of Amazon’s Buy Button,” New York Times (June 16, 2008). See, Comments of
Author’s Guild (ATC-0214 at 3, 5-6. http://www.justice.gov/atr/cases/apple/comments/atc-0214.pdf.
23

2001). Under the textbook economic definition, the monopsonist, in depressing the price of the
goods purchased, transfers wealth to itself from the supplier of the goods. According to the
Government’s own Merger Guidelines, the monopsonist will not pass along the lower price input
to its downstream consumers. Horizontal Merger Guidelines of 2010 at §12. 17 And, as discussed
infra, the use of monopsony power to reduce the price paid to publishers and authors for e-book
distribution rights is antithetical to the exercise of the rights of copyright owners, whose pricing
is already significantly constrained by the free-rider/piracy problem. 18
When Amazon’s 90% monopoly of the e-book market dropped to 60%, Amazon’s
monopsony power dropped correspondingly. Neither the Government nor the District Court
disputed the fact that this pro-competitive drop in Amazon’s monopoly and monopsony power
were directly attributed to Defendants’ switch to the agency model.
3.

Alleged Pro-Competitive Impact Upon the Relevant Market Never
Existed

Initially, in its CIS, the Government concluded that the agency price restrictions in the
Final Judgment would have pro-competitive impact upon the relevant market, because the
termination of defendants’ agency contracts would reverse the elimination of e-book price
competition among e-retailers. Dkt#5 §III.A.1. But the District Court has since ruled that this
alleged pro-competitive impact never existed. Since the District Court found (Dkt#113 at 33), as
the Government recognized (Dkt#81 at vi), that Defendants’ agency contracts were not
“intrinsically unlawful,” the effect of the agency contracts—the replacement of e-book price

17

U.S. Dept. of Justice and Federal Trade Commission, Horizontal Merger Guidelines (August, 19, 2010)
http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf
18
Moor-Law 527 F.Supp. 758, 763, discussed infra. See also, John Cirace, CBS v. ASCAP: An Economic
Analysis of a Political Problem, 47 Fordham L. Rev. 277, 293-94 (1978-79) (the collusive conduct by
music publishers in Broadcast Music was justified, not by reduced transaction costs, but by the need to
balance the monopsony power of the three TV network buyers of musical performances), discussed in
Proposed Amicus Curiae Brief of Bob Kohn (Dkt#97-1) at 12-14.
24

competition at the retail level with e-book price competition at the publisher level—was not
“intrinsically” anticompetitive.
The worst that could be said about the shift to the agency model was that it had a neutral
impact upon the e-book market. Thus, since the objective of the Penguin Settlement is to return
e-book price competition to e-retailers (Dkt#5 III.A.1), such objective is not pro-competitive at
all. 19
D.

Restrictions on Agency Pricing Have a Harmful Impact Upon the Public
Generally

Defendants’ conduct, as alleged, had undisputed positive impacts upon the public
generally that would be unraveled by the Penguin Settlement.
1.

Harms the Public Interest in Promoting the Creation of Works of
Authorship

One of the essential the considerations in promoting the public interest underlying
copyright and antitrust is the distinctive nature of the products at issue—copyrightable works of
authorship delivered and consumed in digital form.
Recognizing the “tax” 20 that the copyright imposes upon consumers required to achieve

19

Subsequent to entry of the initial Final Judgment, two of the world largest trade book publishers
announced their intention to merge. Eric Pfannner & Any Chozick, “Random House and Penguin Merger
Creates Global Giant,” New York Times (October 29, 2012) (“The deal, analysts said, would give the new
company, to be called Penguin Random House, greater scale to deal with the challenges arising from the
growth of electronic books and the power of Internet retailers…companies [who have] the size to let them
negotiate better terms on prices.” Given the impact of the Final Judgment upon the relevant market, the
proposed merger would appear, not unlike the alleged collusive switch to the agency model, to be a procompetitive response to Amazon’s monopsony power. See, Cirace, supra. Apparently, the Justice
Department would not disagree, as it has announced that it will not raise an anti-trust objection to the
merger. Leslie Kaufman, “Justice Department Approves Random House-Penguin Merger,” New York
Times (February 14, 2013).
20
Though it results in “a tax on readers for the purpose of giving a bounty to writers” (Golan v. Holder,
132 S.Ct. 873, 899 (2012) (opinion by Justice Ginsburg, quoting T. Macaulay, Speeches on Copyright 25
(E. Miller ed. 1913), copyright remains an essential means by which “an important public purpose may be
achieved.” Sony Corp. of America v. Universal Studios, Inc., 464 U.S. 417, 429 (1984).
25

its important public purpose, the Department of Justice and the Federal Trade Commission
jointly devised a specific policy to be applied when enforcing the antitrust laws in cases
involving copyrights and other forms of intellectual property. The antitrust enforcement policy of
the United States with respect to copyrighted works, such as e-books, is stated in the Antitrust
Licensing Guidelines for the Licensing of Intellectual Property (April 6, 1995) (“IP
Guidelines”). 21 The IP Guidelines recognize that intellectual property has important
characteristics that distinguish it from other forms of property. IP Guidelines §2.1. Antitrust
analysis must take these differences into account in evaluating specific market circumstances in
which transactions regarding them occur. Id.
E-books, like music performances and downloads, have the classic characteristics of what
are known as, “public goods.” See, Broadcast Music, Inc. v. Moor-Law, Inc., 527 F.Supp. 758
(D. Del. 1981), aff’d without published opinion, 691 F.2d 490 (3d Cir. 1982). First, unlike
private goods (e.g., apples or printed books), which can be withheld from the market and
released only in exchange for payment, an e-book can be consumed without leaving any less for
others to consume. See, Moor-Law at 763. Second, the digital nature of e-books facilitates the
reproduction of perfect copies at virtually no cost, making it difficult for the copyright owner to
exclude persons who do not pay for consuming the e-book—a problem known as the free rider
problem, 22 misappropriation, 23 infringement, 24 illegal file sharing, 25 or piracy.
For these reasons, courts have recognized that “the natural market forces of supply and
demand do not operate normally on pricing in this market.” Moor-Law at 763. This is because
the cost of acquiring a copy of and consuming an additional printed book costs the consumer
21

http://www.justice.gov/atr/public/guidelines/0558.pdf.
Id.
23
IP Guidelines §1.0.
24
Copyright Act, 17 U.S.C. §501(a).
25
A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1011 (9th Cir. 2001).
22

26

something. By contrast, because of the free rider or piracy problem, the marginal cost of
acquiring and consuming an additional e-book can be as low as zero. Moor-Law at 763.
The public good characteristics of e-books make normal cost-based pricing infeasible. Id.
For example, the price that a publisher can charge for an e-book is subject to a natural constraint:
illegal competitors charging zero for the same e-book. In Moor-Law, the District Court found, as
an observed fact, that “the free rider problem does provide a significant constraint on the price
[the copyright owner] charges.” Id. The free rider problem tends to make the copyright owner’s
enforcement costs high. Because higher enforcement costs can more than consume increased
revenue from a higher price, the copyright owner considers this problem when setting a price. Id.
Thus, there is an inherent limit to how much “tax” may be exacted from consumers by
book publishers for e-books, because they must compete with free riders who can readily take
advantage of the e-books’ digital form to cheaply trade in pirated copies without payment.
Amazon has repeatedly used its monopsony power in attempts to lower its cost for books.
In January, 2008, Amazon removed the buy buttons from more than 1,000 self-published printed
books and threatened that these books would be permanently removed from the Amazon website
unless the books were published via Amazon’s own BookSurge print-on-demand service. See,
Comments of Authors Guild (ATC-0214) at 4. That 2008 incident was a precursor to what
Amazon did to Macmillan on Friday, January 29, 2010. Dkt#1 ¶80. Had Amazon succeeded in
putting Macmillan out of business, there would have been one less major publisher competing to
acquire publishing rights from authors—resulting in authors being paid less for publication rights
to their e-book manuscripts.
The use of monopsony power to reduce the price paid to publishers and authors for ebooks is antithetical to the exercise of the rights of copyright owners, whose pricing is already

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significantly constrained by the free-rider/piracy problem. Moor-Law at 763. At the same time,
there is no corresponding benefit to consumers. According to the Government’s own Merger
Guidelines, the monopsonist will not pass along the lower price input to its downstream
consumers. Horizontal Merger Guidelines of 2010 at §12.
These critical distinctions between e-books and printed books should have been part of
the factual foundation underlying the Government’s decisions in this case. Yet, no mention of
these distinctions, nor mention of the IP Guidelines, can be found in any of the Government’s
filings in this action or the District Court’s Entry Order. Dkt#113. By failing to take them into
account, the Government’s conclusions regarding the Penguin Settlement were not reasonable.
By restricting the freedom of authors and publishers to control the price of their works to the
public, in way that actually harms competition in the relevant market and the public generally,
the proposed settlement unjustifiably interferes with the essential means by which the U.S.
Constitution provides them for the purpose of promoting the important public interest in the
creation of Writings. 26
2.

Harms the Public Interest in Efficient Prices for E-Books

While the public has a Constitutionally-recognized interest in the promotion of works of
authorship, it does not have any interest in low prices. See, Dkt#81 at 21-22 (where the
Government expresses its mistaken belief that “low prices” are a “core ambition” of free
markets). Low prices are not the core ambition of either the law or the markets. Efficient prices
are. As the Second Circuit has held, consumer welfare is not maximized by “low” pricing, but by
“marginal cost” pricing. Northeastern 651 F.2d at 87-88.

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U.S. Constitution, Article I, §8; Copyright Act, 17 U.S.C. §101 et.seq.; Sony Corp., 464 U.S. 417, 429
(1984).
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By seemingly borrowing the Government’s mistaken primacy of “low prices,” the
District Court was lead, for example, to reject the legitimate concerns expressed by “bricks &
mortar” retailers. Retailers of printed books are not seeking protection from “the working of the
market” or the “vicissitudes” of competition. Dkt#113 at 23-24. The digital disintermediation of
printed book retailers may well be inevitable, but Amazon’s below marginal cost pricing does
not constitute a “working of the market” or “competition on the merits.” As Areeda & Turner (at
712) explain, selling below marginal cost leads to an improper allocation of resources and
“greatly increases the probability that rivalry will be extinguished or prevented for reasons
unrelated to the efficiency of the monopolist.” See, Northeastern, 651 F.2d at 87-88.
By allowing a predatory-induced market failure to resume for another two years, the
Penguin Settlement will cause the natural disintermediation of physical bookstores to occur
faster than they would in a competitive market, putting at risk the businesses of physical
retailers, large and small, perhaps years before the digital evolution of the book industry would
otherwise disintermediate them. The immediate beneficiary of this accelerated digital
disintermediation is the predator itself, Amazon. This is precisely the kind of misallocation of
resources that predatory pricing causes and why the Second Circuit makes it presumptively
illegal. It invokes the very essence of the Second Circuit’s declaration that the purpose of
antitrust law is “not to protect businesses from the working of the market,” but “to protect the
public from the failure of the market.” United States v. Int’l Bus. Machines, 163 F.3d 737, 74142 (2d Cir. 1998) (emphasis added).

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III.

THE GOVERNMENT HAS FAILED TO COMPLY WITH THE TUNNEY ACT
BY NOT DISCLOSING DOCUMENTS THAT WERE DETERMINATIVE
Compliance with the procedural requirements of the Tunney Act ensures the district court

has before it the information it needs in order to make an informed determination whether the
decree is in the public interest. Massachusetts v. Microsoft, 373 F.3d 1199, 1246 (D.C. Cir.
2004). Accordingly, the Act requires that the Government make available to the public at the
district court “any other materials and documents which the United States considered
determinative in formulating” the proposed decree. 15 U.S.C. §16(b) [emphasis added]. Such
requirement is confined “to documents that are either ‘smoking guns’ or the exculpatory
opposite.” United States v. Bleznak, 153 F.3d 16, 20 (2d Cir. 1998).
In its CIS, the Government asserted that it considered “no determinative materials or
documents” in formulating the settlement. Dkt#163§VIII. Given, however, that selling below
marginal cost is presumed illegal in this Circuit, it is not up to objectors to supply “evidence” to
the Government of Amazon’s threat “to drive out competition.” That threat was presumed when
the Government alleged facts that Amazon was pricing below marginal cost. Dkt# ¶¶2, 30;
Dkt#5 §II.A; Dkt#163 §II.A. Thus, the burden was not on the public, but rather on the
Government to overcome that presumption with facts supporting their conclusion that Amazon’s
below marginal cost pricing was not exclusionary.
Accordingly, materials or documents supporting the Government’s conclusion that
Amazon’s e-book business was “consistently profitable” would clearly constitute “either
‘smoking guns’ or the exculpatory opposite.” Bleznak, 153 F.3d 16, 20. This is because, to the
extent Amazon was pricing e-books at below its marginal cost, any conduct by defendants to
raise prices back to the marginal level could not have harmed consumers. Since the alleged harm
to consumers constituted a “substantial inducement to the government to enter into the consent
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decree” (Bleznak at 21) such materials and documents were not merely relevant, but
determinative. By failing to disclose them to the public, it is not in compliance with the Tunney
Act and, because they go “to the essence of” the Government’s conclusions regarding the
Penguin Settlement, entry of such settlement must be denied unless and until such determinative
documents are disclosed. See, United States v. Bechtel Corp., 648 F.2 660, 664 (9th Cir. 1981).
IV.

THE COURT SHOULD APPROVE A REVISED PENGUIN SETTLEMENT
Defendants’ conduct was a reasonable means to accomplish a worthy end, a market-

based solution aimed at correcting a disruptive market failure resulting from below marginal cost
pricing by an undisputed monopoly. Such pricing was harmful to consumer welfare, and
Defendants’ conduct which lawfully eliminated it resulted in undisputed pro-competitive
benefits. To the extent it reverses these benefits the Penguin Settlement is an instrument of wrong
to the public.
The Government alleges, however, that Publisher Defendants communicated competitive
information to each other and that Apple helped transmit messages among them. Dkt#1 ¶¶61, 62.
Assuming these allegations are true, which we must at this stage, it may be in the public interest
to enjoin any such conduct and to establish a temporary mechanism for monitoring defendants’
communications for compliance.
Accordingly, it is submitted that a settlement that contains only the following provisions
is in the public interest: Sections I, II, III, V (E and F only), VI (A only), VII, VIII, IX, X, XI,
and XII. The intention is to eliminate all of the restrictions on agency pricing, which would
otherwise have the effect of unwinding the pro-competitive and impacts upon the relevant
market and favorable impacts upon the public generally of Defendants’ conduct. At the same
time, the balance of the settlement would ensure that any future competitive information
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exchanges between or among the Defendants will be enjoined and monitored for compliance
over an appropriate timeframe.
The Government cites no Second Circuit authority for the proposition that the District
Court’s authority under the Tunney Act is limited to merely approving or disapproving a consent
decree. Indeed, the Second Circuit, in de novo review of a District Court’s decision, has held that
itself may vacate a consent decree in part and “remand the case to the District Court for entry of
a revised decree consistent with [its] opinion.” Guardians Assoc. New York Police Dept., Inc. v.
Civil Service Comm’n of the City of New York, 630 F.2d 79, 113 (2d Cir. 1980).

CONCLUSION
If the Defendants’ switch to agency agreements, by definition, eliminated price
competition at the retail level, and if those agreements were intrinsically legal, then the price
adjustments that naturally resulted from the switch was not the result of any wrongdoing by the
Defendants, but the result of the correction of a market failure brought about by Amazon’s below
marginal cost pricing. These adjustments benefited consumers and the public generally as would
any price adjustment that takes place due to market prices returning to their efficient
equilibrium—in this case, back up to Amazon’s marginal cost. Restrictions on the agency model
in the Initial Final Judgment and in the proposed settlements with Penguin and Macmillan have
created market inefficiencies that have harmful impacts upon the relevant markets and the public
generally. Such terms are no where within reach of the public interest.
In the Second Circuit, the courts have a “larger role” where a consent judgment resolves
“antitrust suits by the United States.” United States v. Int’l Bus. Machines Corp., 163 F.3d 737,
742 (2d Cir. 1988). The disinfectant of the Court’s public interest determination under the
Tunney Act need not be a placebo. Cf., Broadcast Music, Inc. v.DMX, Inc., 683 F.3d 32, 49 (2d
32

Cir. 2012). The Court is urged to set aside the “rubber stamp” which the Government submitted
in the form of its proposed standard of review and approve the proposed Penguin Settlement to
the extent it is revised to eliminate all restrictions upon the use of agency pricing.
DATED:

February 28, 2013

Respectfully submitted,

_______________________
BOB KOHN
140 E. 28th St.
New York, NY 10016
Tel. [phone]
Fax. [phone]
eMail: [e-mail]

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