08 June 2012

Yet More Wormy Answers in Wormyfruit

... this time, from the publishers who are defending against the DoJ's lawsuit, instead of settling. There are actually three answers to consider: Penguin's, and two from different aspects of von Holtzbrinck/Macmillan USA. I'll start by looking at Penguin's answer, because the analysis of that answer is going to look somewhat familiar after analyzing Apple's.

Just as did Apple's Answer, Penguin starts out by misconstruing the facts stated in the complaint, and then piles on misstatements of both legal and economic doctrine.

Penguin did not conspire to fix the prices of eBooks with other publishers or with Apple. Penguin, at the invitation of Apple, independently negotiated and ultimately entered into a vertical distribution agreement with Apple. Penguin did so, as the Complaint must concede, because Apple wanted to open an online bookstore and it needed access to eBooks in order to do so—and not just Penguin’s eBook titles, but enough breadth and variety of titles from different publishers in order to have a bookstore where consumers would want to shop....

The form of the vertical relationship—agency—made independent business sense to Penguin. The agency distribution model has existed for far longer than the federal antitrust laws and has specifically been found by the U.S. Supreme Court to be a legitimate way to do business. The agency distribution model—like vertical distribution agreements generally—has incontrovertible pro-competitive aspects. It also cannot be discounted that Apple’s entry and the adoption of the agency model demolished what was widely recognized in the book industry as a “barrier to entry”—Amazon’s business practice of selling certain new release eBooks below-cost for certain periods of time—and prevented Amazon from cementing itself as a monopolist that would continue to dominate the sale of eBooks and eReaders.

A vertical distribution agreement is presumptively pro-competitive. New entry is presumptively pro-competitive. Broader distribution is presumptively pro-competitive. Lower barriers to entry are presumptively pro-competitive. Yet the Government intentionally ignores these facts with regard to Penguin’s decision to distribute its eBooks through Apple and instead sides with a monopolist.

US v Apple, Inc., et al., No. 12cv2826 (S.D.N.Y.) (Doc. 57, 29 May 2012) (PDF) at 1–2 (ellipses supplied, emphasis in original).

  • If the negotiations with Apple were "independent," how did the terms end up identical with the other publishers?
  • Vertical distribution agreements are neither procompetitive nor anticompetitive in isolation... except when they are part of an dysfunctional marketplace.13
  • Note that this preamble simply denies "collusion" without engaging in any other aspect of horizontal antitrust violations.
  • Last for now, note yet another justification for lawbreaking in the face of other alleged lawbreaking. Curiously, the rhetoric is inconsistent; either Amazon was "prevented... from cementing itself as a monopolist" or "the Government... sides with a monopolist."

Just as it did with Apple, the rhetoric in responding to ¶ 6 reveals more between the lines than it actually denies. Penguin's denial reads:

Penguin denies the allegations contained in paragraph 6. Retail price competition has not ended nor for that matter has competition among agents ended either. Penguin, as the direct seller under the agency model, competes at the retail level. As for the agents, Apple competes against Amazon, both at the device level (eReader) and with regard to the strength of their respective eBook stores. Penguin is without knowledge of Steve Jobs’ business strategy, and on that basis denies those allegations.

Have you spotted the missing denial here? The Government alleged a horizontal conspiracy among publishers — and this would be the place to deny it specifically, if one was going to say more than "denied." This paragraph is full of grand statements of what is not without denying by more than implication (the allegation that Penguin "competes at the retail level") that the RPMA would necessarily work if, and only if, those horizontal competitors Penguin views as its peers — that is, the other publisher-defendants — also had virtually identical terms not just with Apple, but with other retailers, too.14

The key point that Apple could get away with eliding, and Penguin definitely cannot, is the actual horizontal conspiracy allegation. That doesn't mean it won't try, though.15 The logic problem here is that Penguin, as only one of several (alleged) conspirators, simply does not have the direct, personal knowledge to deny enough of most of the allegations to truly refute the government's case... and does not deny enough of some of the allegations that it does have sufficient knowledge to deny to evade liability as a participant in a conspiracy. Paragraph 61's response to allegations that Apple kept each publisher informed of how the negotiations with other RPMA participants were going is rather enlightening.

Penguin generally denies the allegations contained in paragraph 61 but admits that Apple made it clear to Penguin that Apple, for its own reasons, did not want to have materially different agreements with its book publisher partners. Penguin further denies that Apple informed Penguin of the status of its negotiations with other publishers, other than telling Penguin at times that it had agreed to terms with some number of unidentified other publishers. Penguin is without knowledge as to the allegations regarding any other entity contained in paragraph 61 and therefore denies them.

(emphasis added) I wonder whether those reasons might have included, say, antitrust violations known to or inferred by Penguin USA's management?

And on, and on, for seventy-four pages. At least sometimes, though, counsel was satisfied with a bare "denied"... or it would have been even longer. It's too bad adequate proofreading — for an Answer that whinges repeatedly about the government's misunderstanding of the publishing industry — was not a higher priority.

Things get even more interesting with Macmillan USA and its closely held German parent... but that'll have to wait a couple of days.

  1. For example, during the last Democratic administration, an Assistant Attorney General in the Antitrust Division explained that:

    But what if the promise is not efficiency-enhancing? What if, for example, the efficiency-enhancing benefits from the prevention of free-riding are less than the benefits that the distributor could realize from distributing products manufactured by others? If the value created by transactions with other manufacturers would exceed the value generated by the efficiency-enhancing benefits of the exclusive dealing agreement, one would expect the market (and thus the distributor) to reject the exclusionary promise and to choose the other, more efficient transactions instead.

    Unfortunately, this does not mean that the market will always choose the most efficient vertical arrangement, nor does it mean that anticompetitive exclusionary agreements can never happen. But it does mean that exclusionary agreements that are less efficient than the alternatives can happen only in one of two circumstances. The first is mistake, which the market presumably will correct.

    The second, and more important, circumstance is this: If the manufacturer expects to gain or preserve market power by the exclusion of its rivals, it can endeavor to induce the distributors to go along with the exclusionary scheme by sharing with them a portion of the anticipated supracompetitive profits. The sharing of supracompetitive profits could take the form simply of a high price paid for distribution services, or it could be part of the consideration paid to the distributors in more subtle or complex commercial arrangements.

    A. Douglas Melamed, Exclusionary Vertical Agreements (address to American Bar Ass'n, 02 Apr 1998, Washington, DC). The same reasoning applies to nonexclusionary vertical agreements that seek not to exclude a competitor, but to restructure a dysfunctional market. Accord, Guidelines on Vertical Restraints, Eu. Com. 2000/C291/01 (13 Oct 2000).

  2. Cf. the responses to ¶¶ 61, 76–79 (imposing the RPMA on other vendors under the rubric of the most-favored-nation clause).
  3. Cf. the responses to ¶¶ 39–45, which seem curiously unknowledgeable about what Penguin USA's own CEO knew/did at various "industry dinners."