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

Filing 216

MEMORANDUM OF LAW in Support re: 215 AMENDED MOTION to File Amicus Brief (per docket #215).. Document filed by Bob Kohn. (Attachments: # 1 Exhibit Proposed Amicus Brief)(Brower, Steven)

Case 1:12-cv-02826-DLC Document 214-2

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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)

BRIEF OF AMICUS CURIAE BOB KOHN
IN REPLY TO THE GOVERNMENT’S RESPONSE TO PUBLIC COMMENTS
ON THE PROPOSED FINAL JUDGMENT WITH THE PENGUIN DEFENDANTS

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INTRODUCTION
By Order dated August 28, 2012 (ECF #108), this Court, pursuant to 15 U.S.C. §16(f)(3),
granted leave to Bob Kohn to participate as amicus curiae in this action. On February 28, 2013,
Kohn submitted comments to the Government regarding a proposed Final Judgment with the
Penguin defendants (“Penguin Settlement”) and such comments were filed with the Court on
April 5, 2013 (“Kohn Comments” at http://www.justice.gov/atr/cases/apple/comments1/atc1000.pdf), together with the Government’s response to such comments (“Government Response”
at ECF #201). Kohn respectfully submits the following reply to the Government Response.
I. KOHN CONCEDES THAT THE PROPRIETY OF DEFENDANTS’
CONDUCT IS IRRELEVANT TO THIS TUNNEY ACT PROCEEDING
In its Response to Public Comments to the Penguin Settlement (4/5/13, ECF #201 at 9),
the Government dismissed as irrelevant Kohn’s contention that defendants’ conduct could not, as
a matter of law, have involved any wrongdoing. Kohn, at the outset, concedes that, insofar as it
relates to the Court’s public interest determination, the Government is correct in this regard. But
while the Government dismisses such alleged conduct as irrelevant to this proceeding, it must
necessarily concede that—even if the defendants’ alleged conduct constituted the most egregious
acts of price fixing since the dawn of the Sherman Act—a settlement that is not in the public
interest must not be approved by this Court.
II.

THE GOVERNMENT NOW AFFIRMATIVELY ADMITS THAT
AMAZON WAS SELLING BELOW MARGINAL COST

In support of its motion for entry of the Penguin Settlement, the Government states:
“[T]he proposed Penguin Final Judgment likely will lead to lower e-book prices for many
Penguin titles.” Memorandum, 4/18/13, ECF #211 at 5. Yet, Kohn’s central contention is that the
resulting lower e-book prices will, as a matter of law, have a harmful impact upon the relevant

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market and the public generally. See, Kohn Comments at 10-18, 29-29.
Pivotal to this public interest determination is whether, prior to the adoption of the
agency contracts, Amazon was selling e-books at below marginal cost. The Court recognized
this when it remarked,
[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. Order, 9/5/12, ECF #113 at 39. 1
As explained in pages 10-18 of Kohn’s Comments, if, prior to its adoption of the agency
contracts, Amazon was selling e-books at below marginal cost 2, then any decrease in prices
caused by the settlement—which the Government admits is its “likely” result—cannot be in the
public interest. 3 This is true now matter how collusive or illegal Penguin’s conduct was.
In its Response, the Government has now supplied what this Court said none of the
comments attempted to show: the admission that Amazon’s e-book prices as a whole were below
marginal cost. Specifically, in its Response, the Government asserted that the degree to which
Amazon may discount under the settlement is limited to the “the level of [the e-retailer’s]
aggregate commission.” Government Response to Public Comments, 4/5/13, ECF #201 at 12.
Thus, according to the Government, the settlement permits Amazon to resume selling at
below marginal cost, albeit at prices “closer to their marginal cost” than before. Id. at 12-

1

Implicit in its statement, the Court placed the burden not on the Government, but on members of the public to
produce evidence of Amazon’s below marginal cost pricing. The Court never explained to the public how this feat
could be accomplished by the public without (i) the Court’s exercising its powers under Section 16(f) of the Tunney
Act, (ii) Amazon’s voluntarily agreeing to disclose the information, or (iii) an illegal, physical assault on Amazon’s
facilities to obtain its relevant contracts and accounting records. A more practical means by which the public and the
Court could obtain this information is discussed in Kohn Comments at 30-31, and addressed in Section III below.
2
The Court’s use of the phrase “as a whole” in the context of its public interest determination is discussed in Kohn
Comments at 16.
3
As the Second Circuit recognized in Northeastern, selling below marginal cost causes a misallocation of resources.
Citing Areeda & Turner, “Predatory Pricing,” 88 Harvard Law Review 697, 712 (1974-75). See, for example, Kohn
Comments at 29. Thus, after the adoption of the agency contracts, any increase in e-book prices back up to the level
of Amazon’s marginal cost, the economically efficient equilibrium, could not have harmed consumers. Lower prices
resulting from the Penguin Settlement reverses those benefits thereby having a harmful impact upon the relevant
market and the public generally. Kohn Comments at 10-18 and 28-29.

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13. 4
Surely the inconsistency of the Government’s contentions is now obvious: The
Government admits in its Response that selling e-books at below marginal cost is “presumed
predatory” under Northeastern (Response at 13, note 6). Yet, while admitting that the settlement
allows Amazon to resume selling e-books at below—though “closer to”—their marginal cost,
such activity, contends the Government, is not, and never was, presumed predatory (Id. at 1213).
The agency contracts, which were intrinsically lawful, put an end to Amazon’s below
marginal cost pricing, returning e-book prices back up to their economically efficient level. Even
if the publishers had not colluded, adoption of agency pricing would have resulted in
higher e-book prices, because the agency model forced Amazon to cease selling e-books at
below their marginal cost. The restrictions imposed by the Penguin Settlement now allows
Amazon to resume selling Penguin trade e-books at prices that are below their marginal cost.
(Even though they are being sold “closer to marginal cost,” they are still below marginal cost).
Thus, the forced discounting feature of the settlements, regardless of their aggregate limitations,
elucidates the harm the settlement is causing by reversing (albeit partially) the market-correcting
adjustment in prices following the agency contracts. Reversing such price adjustments, even
partially, causes an economically inefficient result that harms consumers and the public
generally.
III. MISREADING BROOK GROUP, THE GOVERNMENT ADMITS
THAT IT FAILED TO DISCLOSE DETERMINITIVE DOCUMENTS
In a footnote in its Response (ECF #201 at 13, note 6), the Government says
Northeastern found only that prices below marginal costs will be “presumed predatory” (citing
4

How the Government could construe this as “a goal Mr. Kohn applauds” is baffling.

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651 F.2d 76, 78 (2d Cir. 1981). And added, “To succeed on a predatory pricing claim, an
antitrust plaintiff must also establish that there is a ‘dangerous probability’ that the defendant
will later ‘recoup[] its investment in below-cost prices.’ Brook Group Ltd. v. Brown &
Williamson Tobacco Corp., 509 U.S. 209, 224 (1993).” Had Government read the next
paragraph, it would have found such second prerequisite for predatory pricing, as well as the
U.S. Supreme Court’s observation that, in order to recoup its losses, the predator “must obtain
enough market power to set higher than competitive prices.” Brook Group at 225. This was
satisfied by the District Court’s factual finding that Amazon achieved a “90 percent
monopoly” of the e-book market. Order, ECF #113 at 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”). Kohn Comments at 17.
While the pivotal question in this public interest determination is whether Amazon was
selling below marginal cost, the public harm resulting from the lower e-book prices sought by
the settlement does not rely on demonstrating that Amazon engaged in unlawful predatory
conduct. It only relies on the fact that Amazon was selling below marginal cost—a fact which
the Government not only never denied, but has now specifically admitted—activity which is
presumed predatory, a point of law the Government has specifically conceded. Government
Response, ECF #201 at 13, note 6.
If prices below marginal cost will be “presumed predatory,” then by admitting that
Amazon (which yielded 90% market power) had been selling e-books at below marginal cost,
the Government has aligned itself with Kohn’s position on the disclosure of determinative
documents: it is the Government, not the public, who has the obligation to produce documents

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that exculpate the predatory presumption. Any materials or documents concerning the
Government’s “investigation” of Amazon’s pricing practices, including its extraordinary
conclusion that Amazon’s e-book business was “consistently profitable” (Complaint, ECF #1 at
¶30) would thus constitute “either ‘smoking guns’ or the exculpatory opposite” (Bleznak, 153
F.3d 16, 20) on the pivotal question of whether the likely decrease in e-book prices caused by the
settlement will benefit or harm the public.
IV. GOVERNMENT AGAIN URGES THE WRONG STANDARD OF REVIEW
In its Response, the Government did not deny that the standard of review it proposed is
not the one followed by the Court of Appeals for the Second Circuit. The proper standard to be
followed by the District Court is set forth in the Second Circuit decisions discussed in Kohn
Comments at 7-9. This Court may be at liberty to depart from Second Circuit precedent on the
applicable standard of review, but the Government should not be allowed with impunity to
ignore a public comment on the subject when it has a statutory obligation to provide a response.

CONCLUSION
The Government admits that the proposed settlement permits Amazon to resume selling
e-books below their marginal cost, albeit “closer” to their marginal cost than before—an activity
the Government also admits is “presumed predatory.” Without determinative documents that
would exculpate Amazon’s below marginal cost pricing practices prior to the agency model, the
Court cannot logically find restrictions on agency pricing to be in the public interest.
Accordingly, the Penguin Settlement should be modified to remove all restrictions it places on
defendants’ agency contracts.

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Dated: April 29, 2013

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Respectfully submitted,

_______________________
BOB KOHN
California Bar No. 100793
140 E. 28th St.
New York, NY 10016
Tel. [phone]
Fax. [phone]
eMail: [e-mail]