15 May 2012

What's Worse Than Finding a Worm in an Apple?

Finding half a worm. Or other malware.

* * *

And thus, the trade association for literary agents demonstrates its inability to understand law — despite its members' obligation to look out for the legal interests of its clients — and demonstrates rather definitively why literary agents should be licensed and regulated. In particular, its misunderstanding (presumably deliberate) of the Department of Justice's suit against Apple and a number of major publishers over the deceptively misnamed "agency model" resale price maintenance agreement for e-books ("Wormyfruit") demonstrates its intellectual and ethical bankruptcy.

I thought I'd go ahead and put the conclusion first, since the rest of this piece risks damage to your monitor from fire, brimstone, acid, and other aspects of prose. That way, at least you'll get to see the conclusion. The precipitating event is the AAR's "official" letter to the Department of Justice opposing Wormyfruit and an AAR board member's "expansion" upon that letter. The letters are not just nonsense. They reflect disdain for the AAR's clients, to whom each AAR member owes a duty of loyalty. They reflect abject ignorance of the powers and limitations of courts, of regulation, of legislation, and of market economies. They reflect failure to actually read the complaint, especially the requested remedies, and ponder how what is actually being done meets the "objections" stated in the letters... as opposed to the spin put on things by various PR statements from Apple and publishers. Most of all, they reflect an abject failure to think.

The first, and most obvious, logical error in the AAR's letters concerns market function. The letters engage in a two-tailed analysis of e-book prices to consumers, and asserts that the RPMA has caused no consumer harm.4 The problem here is that antitrust law, and logic, make it rather clear that the comparison must be not to whatever distorted marketplace exists, but to a marketplace that is not distorted by other antitrust violations. To list just a few of those violations that distort the marketplace, consider the uniform imposition of net-90-or-more payment terms, inconsistent with the Uniform Commercial Code and customary practices in virtually every other industry; the returns system, which logically shouldn't apply to e-books anyway; the monopsonistic structure of publishing, and particularly publishing of so-called "bestsellers"; the oligopolistic structure of the existing e-book and trade printed book markets... I could go on, but each of these flaws is by itself sufficient to reject the AAR's analysis under the AT&T and Microsoft frameworks, which remain the law.5 And that's before considering the distortive effect of the later imposition of the RPMA on Amazon and other vendors... which was only possible due to the conduct the DOJ complains of that established this RPMA. One of the underlying principles of antitrust law is that market participants may not violate antitrust law in the name of combatting competitors' independent violations of antitrust law; the AAR seems to have forgotten this.

But even if the pretty graphs were valid, they are not sound. They simply do not reflect reality, for a very simple reason: The "after" element is also after the RPMA was imposed on Amazon and other vendors. That is, we are being asked to accept an "average" that is based upon not just the antitrust matter complained of, but further antitrust violations, as examples... and for a market that is subject to substantial external forces that change its nature. Consider, for example, all of the reading-device upgrades (and price drops) that occurred between "Q1 2010" and "Q3 2010", let alone by April 27, 2012. Consider the substantially higher proportion of e-books actually being released simultaneously with print publication. And so on. In short, these are noncomparable markets.

Ironically, the letters undercut their own analysis of what the e-book market actually looks like with whingeing about the imperfections of the proposed settlement with three of the publishers:

Furthermore, the government’s assertion that prices increased by 30-50% for “many” trade e-books, without defining which books those are, is yet another strained attempt to interpret the increased price of bestselling hardcover-period ebooks published by the agency publishers as a more general increase; the use of 30% and 50% as markers is self-evidently based upon the increase from $9.99 to $12.99 (i.e. 30%) in most cases and $14.99 (i.e. 50%) in others (Apple’s price-banding requirements demanded that publishers only price hardcover period ebooks at $14.99 if their print prices exceeded a certain level, and most hardcovers at that time were below that price point); the quite specific consumer price increase of 30% and 50% for a limited set of hardcover-period bestselling ebooks does not in any way equate to a 30-50% increase in prices more generally, and it is the very use of the percentage increases attached to this one situation that underline the limitations and invalidity of the United States’ broader argument. (Lipskar)

Notice that no definition of "bestseller" has been offered in opposition, nor anything else of that nature. Notice, too, that there is no refutation of the complaint — that is, instead of answering the question asked, the AAR's position is instead that it will restate the question to be one that it wants to answer.

The second logical error in the AAR letters is the underlying assumption that price is the only way that consumers can be harmed. This is, admittedly, what the Bork propagandists would have one believe about antitrust law; indeed, it is one of the flaws in the majority opinion in Leegin, although for different reasons. The real problem is that consumers seldom choose between literary products based solely upon price; they instead choose between vendors and packaging on price, and at inconsistent rates across different aspects of publishing. Consider, for example, a Rabid Romance Reader. RRR will not shift buying preference from subtype x to subtype y — for illustrative purposes only, from supernatural southern gothic (Sookie Stackhouse) to regency, or vice versa — because subtype x is being sold, "on average", at $0.75 cheaper. Similarly, RRR is not going to start buying Jason Bourne continuation novels because they're cheaper, either. RRR might choose between a paperback and an e-book based on price... but one must remember that e-book format/compatibility wars drive her toward (or away from) Apple — price is almost irrelevant between devices, and they are not the same packaging and are not priced under the same model.

The third logical error in the AAR letters — and here is where things get really disturbing, if you weren't already disturbed — is that the so-called "agency model" provides added pressure for author compensation from e-book sales to be measured from "publisher's net" rather than from "list price." Under "traditional" royalty calculations, an author's royalty rate is a percentage of the list price of a work; that is, for books not shipped at a "deep discount"6 or otherwise not in the ordinary course of trade, the author's royalty is a percentage of that $24.95 list price whether the consumer purchases it at full list price or at some vendor-offered discount. Under net-revenue calculations, the author can never predict how much he/she will earn from a given sale. It's even worse under the RPMA, due to the most-favored-nation clauses that are an integral part of the RPMA.

The hidden problem here is not predictability; it is auditability. Anyone with any knowledge of commercial publishing understands that royalty statements are, at best, somewhat fictional. If I were responsible for auditing any publisher under the standards required of even commodity brokers doing business with the federal government (e.g., supplying aviation fuel of a certain grade to Burpelson Air Force Base), I couldn't even start to do my job. One of the other dirty little secrets about e-book sales that will eventually come out during the course of litigation is that the big e-book vendors are treating the actual sales as trade secrets, and will not disclose them to the publishers; in turn, the publishers, when they get even summary data, are bound by the trade secret provisions in their contracts with the vendors and won't release them to the authors. Agents have undertaken the legal and ethical responsibility for policing this problem, but the AAR letters abrogate a fiduciary duty voluntarily accepted by literary agents.

Fourth, the AAR's entire position is valid if, and only if, this case falls under the so-called Rule of Reason. Under the Rule of Reason, one must balance the "good" and the "bad" effects of a particular instance to see if it rises to the level of a violation that actually restrains trade. Some kinds of antitrust violations — such as conspiracies among "competitors" to fix prices, as is alleged in the complaint and implicitly acknowledged in so many places that I can't begin to cite them, are not judged under the Rule of Reason, but are considered per se violations of antitrust law. That is, the ills arising from these violations are so pervasive and widespread that one simply cannot judge their impact. In this instance, the AAR's position seems to be "no harm to consumers on price as we analyze it means no foul" — a classic Rule of Reason analysis. The problem is that we're not playing rugby here: We're playing basketball. Grabbing an opponent and throwing him/her to the ground is never allowed in basketball; in rugby, it is under certain circumstances, and is indeed encouraged! Collusion on price between purported "competitors" has such serious, and difficult to measure, consequences that it is an unacceptable means for reaching any economic end. A marketplace defined by collusion is neither a fair nor a free market... and every economic measurement stated in the AAR's letter is valid only in fair and/or free markets. The whole point of antitrust law is to prevent the harms caused by unfair/unfree markets, regardless of the benefits that some can siphon off from unfair/unfree markets.

Fifth, the AAR's position is essentially that "no lawsuit could ever improve matters for everyone equally, so no lawsuit should be allowed to improve matters for less than everyone or unequally." The letter makes clear that what the AAR wants is legislative action (and probably legislative action that is not only improbable, but constitutionally questionable). The demands for "Oversight by the Department of Justice over the formation of new joint ventures between settling publishers" and "Governmental endorsement of the agency model per se" exceed any court's authority under existing legislation... and raise substantial constitutional questions when they relate to selling speech and not widgets. This "perfect is the enemy of the good" approach assumes that whatever is in place at the moment is "good enough" — a factual assertion not only not in evidence, but laughably incorrect. It also, rather subtly, reflects the kind of "the ends justify the means" philosophy that is precisely counter to both antitrust law and reality. The ends are shaped by the means, particularly when it comes to culture and the arts.

It would be nice if one had a magic wand to make everything better all at once. The key question that the AAR should have been asking is not "Is this settlement perfect, and in the best interests of every single member of the public?", but "Does this settlement reflect a positive incremental step toward systemic reform of the means of distributing speech to the public, especially as it affects our clients?" That is not just the intellectually honest approach; it is the ethically required one. The AAR's role is to represent its author-clients to the best of its ability. Because the author-clients are also members of the general bookbuying public, it should certainly give some consideration to the general bookbuying public. That consideration, however, is neither definitive nor the representative role of the AAR. Instead, the AAR letters do not once concern themselves with revenue streams to its author-clients, nor with enforceability and/or information flows to its members and author-clients. Most egregiously, the letters do not once concern themselves with the settlement's potential effect on discovery efforts that might expose other collusive misconduct among the settling publishers, such as the uniform rush toward "25% of net" royalty rates on e-books.7

The bottom line is rather simple: The AAR's "official" objections reflect disloyalty to its principals, the author-clients. I know from personal conversations since the letters were released that not all AAR members agree with the letter.8 The letter reflects fundamental misunderstandings of antitrust law, of intermediate economics, of the relationship among government units (particularly, but not just, the courts and the executive branch), of the difference between "allegations in a complaint" and "ultimate facts based on actually admitted evidence," of the reality that settlements are always being less than perfect, and of its own fiduciary duty to its author-clients. The letters are so deeply flawed that the Department of Justice should ignore them... and so should authors, publishers, e-book vendors, e-book device makers, and everyone else. The letters are essentially a response to an argument not actually made; this being a presidential election year, we should all be able to recognize that rhetorical strategy by now.

I demand much better of the AAR. So should you.

Update note, 17 May: Singulars changed to plurals to clarify that this entry refers to both the AAR Board's letter and Simon Lipskar's "reinforcement" letter; a coding error led to inconsistency.

  1. It's not an "agency model." Technically, it isn't even a resale price maintenance agreement; it is, instead, a consignor-imposed price directive. There's very, very little case law or academic literature on consignor-imposed pricing, primarily because most consignment is of individual pieces of property and not of multiple copies of the same intellectual property. That said, the e-book market acts like it is a resale, so that's what I'm going to call it. I will not call it an "agency model", because the "agent" has no duty of loyalty to the "principal" — rather the opposite, given the most-favored-nation ("MFN") clauses that form an essential part of the model... and that the DOJ would rightly prohibit in its proposed settlement (and indeed the underlying complaint).
  2. I'm going to leave the mathematical flaws for another forum. HTML does a poor job of unambiguously stating the relatively complex mathematical notation. In plain English, the pretty graphs on the letter are misleading. They do not show sample sizes, or variance, or deviation, or standard error, or indeed any other data necessary to determine whether they are statistically valid. The letter does not define "bestseller," nor does it state what portion of the market (in units, revenue, or any other measure) consists of "bestsellers." It does not define who is a "consumer"... such as whether that includes students buying trade books (e.g., Pride and Prejudice) as required textbooks. In short, this analysis would not be admissible under the Federal Rules of Evidence, and would not even constitute a satisfactory executive summary of an expert's report under Fed. R. Evid. 702 and 703 — a report that itself would discuss all of these issues, and more.
  3. I'm saying "shipped" here because we're talking about the terms of sale, not the actual revenue received. As I specifically warned at the outset of the Borders bankruptcy proceedings, some publishers are presently trying to retroactively construe this as a forced "net revenue" substitution. It's not. Any publisher that tries to rewrite the terms of sale under which it shipped merchandise is breaching its own contract with the authors... which is not stopping them from doing so.
  4. The irony that this is the one legitimate institutional concern that the AAR should have about the proposed settlement is not lost on me, but appears to have been lost on the AAR. But then, the AAR has been rather chickensh*tish and under/misinformed about anything related to antitrust since its predecessor, the Society of Authors' Representatives, ran afoul of the Department of Justice back in the 1970s... and settled with the DoJ on allegations of price-fixing (and eventually dissolved because of that matter). That irony has not escaped my notice, either — and now you can share in it.
  5. Indeed, my sample-selection-biased sample of agents shows no support for it whatsoever. As a group and individually, they do not support either the RPMA or the AAR's objections to the proposed settlement. I do not, however, pretend that this necessarily reflects the general opinion of AAR members; after all, the agents I've spoken to since the beginning of the RPMA concentrate their representations in three of the thirteen publishing industries, and they all recognize that their own experiences are not necessarily going to be comparable to others.