29 June 2007

Dennis Moore's Week With the Supremes

In no particular order, here are a few initial — that is, I reserve the right to change my mind later on — reactions to the busy week at the Supreme Court, focussing on implications for publishing and the arts.

Over the past quarter, we've read plenty of whingeing that bookstores won't make any money by selling the new Harry Potter novel, because discounting has gotten out of control. (The real problem is the unrealistic $34.95 "retail price" slapped on a book whose marginal cost is under $1.40 for production and fulfillment.) This appears to be an instance of being unable to make an omelet without dropping a few eggs on the floor; setting and enforcing a minimum retail price is unlawful under US antitrust law.

Until yesterday, that is, when the Court overturned a century-old decision (Dr Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911)) holding that "vertical price restraints" are per se — that is, always and as a matter of law, not of fact — unlawful under the Sherman Antitrust Act. My slightly sarcastic take is that five members of the Court were convinced that, because some economists in scholarly literature had hypothesized instances in which vertical price restraints could lead to harm to consumers, the per se rule no longer can withstand scrutiny. Instead, one must now follow the so-called "rule of reason" (which might better be called "rule of most-expensive antitrust counsel") in analyzing vertical price restraints. Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 06–480 (28 Jun 2007).

In practice, this will mean that very few plaintiffs can afford to challenge a retail-price-maintenance agreement or condition. A simple per se antitrust complaint costs a couple of orders of magnitude less to investigate and prepare than does a rule-of-reason complaint, and that's before we get to the battling experts. Thus, it would now be possible for Scholastic to enforce a "thou shalt not sell Harry Potter and the Cauldrons of Cash for less than $22.95" agreement, because one can make a rule-of-reason argument that excessive discounting will harm consumers by forcing independent bookstores out of business. In practice, nobody is going to be able to challenge that agreement; they can't even claim that it results in an unwarranted windfall for Scholastic, because the distribution system pays Scholastic based on the list price, not the mandatory minimum or actual sale price.

Although that seems a rather subtle and indirect argument, the most obvious example that will be paraded before any court is the demise of the "record store" industry after the state attorneys general attacked CD pricing. That will lead to lots of chicken-and-egg arguments over the relative importance of commercial and technological factors, with nobody at all paying any attention to the anticompetitive impact of mergers in the distribution chain that presented some short-term economies of scale and only one or two fringe commentators wondering whether it's as much because there's so much crap on CDs as anything else.

The Morse decision (on Monday) may turn out to be much more disturbing for publishing in the long run. I'm still wading my way through some of the depths of the opinion; thus far, I've turned up a few inapposite citations of authority in the lead opinion that make me think that there's something else going on. Nothing I've yet found, though, changes the general scope of my original concern: That the Court improperly delegated too much of the judicial fact-finding function to a nonjudicial factfinder. The ordinary standard of proof in an administrative-law context is that the administrative decision must be supported by some substantial evidence in the record, and must not be "arbitrary and capricious" (a term of art in administrative law). Morse, however, would allow this particular administrative decision to stand unless there is no reasonable ground for supporting the decision — which, in practice, is a significantly less-stringent standard than "some substantial evidence" supporting the decision. If you've attended a book-censorship hearing in the last decade, you'll understand why this is worrisome for the arts; and if you've paid any attention at all to George III's various attempts to manipulate the Corporation for Public Broadcasting and scientific reports, not to mention the three-decade-long battle waged by Theocracy Now!1 against perceived "immoral" art, you'll realize that this is far less hypothetical than any rule of reason justification for vertical price restraints.

Notice that not once in the preceding paragraph did I discuss the free speech aspects of the Morse case. In this instance — yet again — the procedural context and rule of decision are outcome-determinative, regardless of the facts or other values at issue. That is disturbingly parallel to the implications of Leegin, with its practical effect of taking challenges to vertical price restraints out of the hands of all but the most well-off private litigants.

  1. It's quite unfair to many with conservative religious values — such as the Perfesser — to call these theocrats the "religious right." The Theocracy Now! movement believes not in informing government with moral values, but with replacing government with its own moral values. That means you, Ralph R33d, Pat R0b3rt50n, et al. I can think of few greater threats to a constitutional system of government... and some of my ancestors would have been happy to make that argument through their daily lives in the shtetl. Thus, I will no longer refer to those enemies of the Constitution based on their "conservative" ideology.