16 April 2012

A View Inside the Sausage Grinder

We've got both kinds here today: A forthcoming matter that sheds light on a current event, and current events that shed light on that forthcoming matter. And, this being Monday, that seriously understates just how convoluted this is going to get.

Let's start off with "The Future Is Now." This morning, the Supreme Court granted certiorari (agreed to hear the appeal) in Kirtsaeng v. John Wiley & Sons, Inc., No. 11-697. This will result in a ruling in the October 2012 Term — that is, by the end of June, 2013 — on this critically important question:

How do Section 602(a)(1) of the Copyright Act, which prohibits the importation of a work without the authority of the copyright’s owner, and Section 109(a) of the Copyright Act, which allows the owner of a copy “lawfully made under this title” to sell or otherwise dispose of the copy without the copyright owner’s permission, apply to a copy that was made and legally acquired abroad and then imported into the United States?

(hyperlinks added) Yes, it's legalese, but it's really, really important... because it potentially destroys all territorial rights throughout the world.

There. Do I have your attention yet?

Kirtsaeng bought copies of textbooks in third-world nations where they're a lot (and I mean usually $100 or more per copy) cheaper and imported them to the US, then advertised them on the 'net and sold them to US students. The textbooks were published by Wiley explicitly for sale only in those foreign markets. Of note, these were not pirated or counterfeited editions: They were produced either by Wiley or for Wiley under contract. Naturally enough, Wiley sued to keep Kirtsaeng from undermining its US profits. Kirtsaeng defended by pointing to an earlier decision on mattresses (Quality King Distributors, Inc. v. L'anza Research Int'l, Inc., 523 U.S. 135 (1998)) that Kirtsaeng's practice parallels. The Second Circuit eventually found for Wiley, partially because the Supreme Court had split 4–4 only a couple of years ago on whether Quality King applies regardless of the place of manufacture.

This will have nothing to do with someone ordering individual copies from Amazon.de (or wherever). It will have everything to do with two critical issues:

  1. If the work goes out of print in the US, but remains in print under a separate contract (but the same corporate umbrella) in English in another country, can the US publisher just import copies from its corporate affiliate to keep the work in print and avoid reversion?
  2. Can a US-based bookseller arbitrage its English-language editions to the lowest-cost provider — that is, can Honest Bob's Used Cars and New Textbooks just import the Senegalese edition of a calculus textbook (list price: about $21) and resell those copies to US students as new at a price less than the publisher's US edition (list price: about $175)?

And it will also have a huge impact on the e-book pricing antitrust litigation.

Before diving into why Kirtsaeng matters to Wormyfruit,1 though, here are a few updates on what appears to be going on there, all since I composed my initial announcement on filing of the lawsuit.

  • Three of the publisher-defendants have agreed to settle the charges. That leaves Apple, Penguin, and Macmillan as defendants; Penguin and Macmillan (both, I might note, foreign-owned conglomerates who, unlike two of the three settling publishers, are not subject to SEC disclosure rules2) have done most of the "millions for defense and not a dime for the authors tribute" speechifying, and Apple has just proclaimed that it didn't do nuthin' wrong, and you can't prove it anyway.
  • The proposed settlement itself will be open for comment for 60 days, and then — at least formally, after consideration of the comments — be presented to the court for approval. In the meantime, Litigation Will Happen.
  • Several states have filed a largely parallel action against some, but not all, of the defendants in Wormyfruit. This complaint is, to put it charitably, a seat-at-the-table device, so that the various state attorneys general can advance their careers by legitimately claiming to have been involved in this pro-consumer action. (No, I'm not at all cynical, in an election year, about elected chiefs of law enforcement. Why do you ask?)
  • The Authors' Guild's president has demonstrated that he doesn't get it, commenting (essentially) that this will only help the Big Brazilian River monopolize e-book sales to consumers. Presuming, that is, that copies of e-books are sold and not merely "licensed" like software (purportedly) is... and even asking that question exposes Mr Turow's position as unfounded in fact or in law. It also exposes a problem that many attorneys on the defense side — like Mr Turow — have with conceptualizing a piecemeal legal assault on a complex system; that, however, is a discussion for another time. Suffice it to say that nothing in this action forecloses any action against the Big Brazilian River, particularly if the Big Brazilian River attempts/continues to abuse its monopoly/monopsony power.

    Bluntly, Turow's screed is an excellent example of attacking a proposed measure as being entirely worthless because it doesn't solve the entire problem in one swell foop, for some definition of "entire," "problem", and "swell foop". As a litigator himself, Mr Turow bloody well understands that no US court has the jurisdiction or authority to do so... and, for that matter, neither does any other part of the US government. And that's leaving aside the problem of "will to act." In short, the perfect (again, for some value of "perfect") is the enemy of the good-but-acknowledgely-incomplete.

It's time to turn to the potential effect of Kirtsaeng on Wormyfruit.

First, and perhaps most obvious, if Kirtsaeng is decided in favor of the publisher — that is, the Court holds that the "not for sale in the US" label on works authorized by a US copyright holder, but (perhaps) printed outside the US, governs potential US sales of those copies — that will affect the solidity of the market definitions in Wormyfruit. This can get very complicated very quickly, and will be nuanced based on exactly what the Supreme Court says in Kirtsaeng — and, in particular, how much attention gets paid to treaty obligations that are of superior constitutional weight to the exact language of §§ 109(a) and 602(a) of the Copyright Act. There are lots of possibilities here; the key point is that any decision in favor of the publisher in Kirtsaeng will have implications for what constitutes "trade publishing" in the US, even though Kirtsaeng itself arises from textbook publishing.

Second, regardless of how Kirtsaeng is decided (or even if it is left undecided), the WTO and WIPO are going to get very heavily involved in the aftermath; in fact, I'd be surprised if neither files a brief on the merits. That, in turn, will cause their attention to go to the interplay among international access to the Apple iBookstore, territorial rights in US editions, territorial rights in non-US editions, and a wide range of trade issues... including both censorship and libel tourism, in addition to the more-obvious restraint-of-trade-in-the-face-of-treaty-obligations issues. I do not pretend to know enough to provide answers based on what the law and politics are, let alone should be; anyone who does is probably a monopolist or monopsonist, or has interests of that nature.

Third, and least obvious but perhaps most important, Kirtsaeng implicates one of the critical elements of competitor-based (rather than consumer-based) theory and practice of antitrust. Monopolies (and monopsonies) continue to exist only because there are entry barriers to a competitor. Sometimes those entry barriers are unfair competition, like monopolist/monopsonist refusals to deal; other times, they are legal requirements, such as the difficulty of obtaining import licenses; still other times, they are political, such as government restrictions on conduct (e.g., publishing books that criticize the government); and yet still other times, they are practical and economy-of-scale issues (e.g., the per-copy cost of short versus long print runs). Unfortunately, Wormyfruit has mixed competitor- and consumer-based theories behind it, so this is going to be a Gordian knot faced with a rather dull butterknife and not a sword. My point is that there is no clear, universal answer... and that since there is no such thing as a truly free and unregulated market — especially in the world of ideas and creative expression, which is founded on a government-granted monopoly called "copyright" — anyone who claims that a single model/solution will overcome all of the problems is either deluded or lying.

Conversely, Wormyfruit matters to Kirtseang, too. Rights under § 602 are still subject to limits imposed by the Sherman Antitrust Act, and all of the publisher-defendants in Wormyfruit have significant textbook affiliates/divisions. Further, Apple really, really wants to get into the business of providing textbooks, both for general schooling and postsecondary education, as both a direct means of profit and as a way of grooming a future generation of customers to its brand.3 And unlike in the government's apparent misunderstanding of the market definition of "trade publishing" in Wormyfruit itself, Wiley arguably does have at least shared monopoly (and monopsony) power in the textbook market...

In short, we're in for a good time.

  1. I'm feeling whimsical today, so I'm giving this particular suit a whimsical handle. On a more serious note, there are several other pending and potential matters involving Apple's interface with publishing that could be too easily confused by calling this "Apple this" or "Apple that"... and too many names for varieties of apples are trademarked. Thus, this whimsy is as much to avoid future confusion as it is anything else. I'll try to remember to refer back to this footnote.
  2. The remaining publisher-defendant, Hachette, is a fascinating example of how conglomerate ownership works in the world of international finance. Ultimately, it is a de facto (and, perhaps, de jure, but that is somewhat unclear under European and French law of securities — a subject on which I am no expert) subunit of a conglomerate that includes defense contractors with substantial ties to US defense contracts, both directly and as subcontractors to US defense contractors. Whether the various regulations that restrict award of new contracts to units of antitrust defendants were formally considered in Hachette's decision to settle or not is obviously a private matter for Hachette; the key point is that they should have been.
  3. Serious students of antitrust law may recall the "tying problem." So will serious students of branding and of the limits of trademark identification and origin. Yes, this too is another high-falutin' pseudointellectual morass.