Saturday, August 22, 2015

The Authors United Letter from an Antitrust Law Perspective

Disclaimer: Nothing on my blog is legal advice. I am not a lawyer, nor an expert in antitrust law, and will not be liable for any actions taken based on my thoughts or opinions in this blog. I'm approaching this as nothing other than an academic exercise and I've watched exactly one antitrust motion hearing in federal court (it was a 12(b)(6) motion to dismiss).

After I made some comments on Konrath's blog and over at The Passive Voice regarding some case law that I thought was relevant to the Authors United letter to the DOJ, I was e-mailed by a couple of people and they asked that I write a blog where I analyze the Authors United letter from an antitrust perspective. I am not an expert on antitrust law (or any law). Admittedly, there will be a few holes in my blog post and I welcome comments from anyone on this subject. I also wanted to note that some of the things I look into may not be antitrust law; it will vary based on the allegations.

I will be citing the Authors United letter from this website. I will also only use cases that are in the public record that I can link to (with one exception where I link to a Wikipedia article that has the same basic info). Authors United starts out by admitting "we are not experts in antitrust law, and this letter is not a legal brief." Fair enough. They do complain a lot though and they obviously think the DOJ investigation will lead to some form of relief or redress for them so I thought it would be interesting to look into what they're saying as a legal complaint (even though it obviously isn't one). So what I'd like to do is look into whether they have any valid legal claims.

Claim 1: Monopoly

AU's first point is that "Amazon's dominant position makes it a monopoly as a seller of books and a monopsony as a buyer of books." The U.S. Supreme Court in U.S. v. Grinnell Corp. (U.S. v. Grinnell Corp.) held that the test for monopoly control under Section 2 of the Sherman Act has two requirements "(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident."

Relevant Market

The first question is "what is the relevant market?" If we look to the AU letter, they allege that Amazon has "unprecedented power over America's market for books." They also claim that Amazon has become "the largest publisher and distributor of new books in the world." I have no idea how they're defining new books and the U.S. Supreme Court can't grant relief for a market larger than the United States, so I'd rather focus on "America's market for books." They also note that "according to published figures, this one corporation now controls the sale of:
- More than 75 percent of the online sales of physical books.
- More than 65 percent of e-book sales.
- More than 40 percent of sales of new books.
- About 85 percent of e-book sales of self-published authors."
In their list of figures, it seems that they are alleging that "America's market for books" is made up of e-books and physical books. The other two figures they list would fall into those two categories. I don't know if they're trying to make the relevant market "America's market for books" or if they maintain that Amazon has two separate monopolies (one in e-book sales and one in physical book sales). Justice Sotomayor (who was still a Circuit judge at this point) gave clarification to what the courts should look for in defining a relevant market. In Todd v. Exxon Corp. (Todd v. Exxon Corp.), she held that "to survive a Rule 12(b)(6) motion to dismiss, an alleged product market must bear a "rational relation to the methodology courts prescribe to define a market for antitrust purposes - analysis of the interchangeability of use or the cross-elasticity of demand," Gianna Enters. v. Miss World (Jersey) Ltd., 551 F. Supp. 1348, 1354 (S.D.N.Y. 1982), and it must be "plausible." Hack v. President & Fellows of Yale Coll., 237 F.3d 81, 86 (2d Cir. 2000)." She goes on to say that "cases in which dismissal on the pleadings is appropriate frequently involve either (1) failed attempts to limit a product market to a single brand, franchise, institution, or comparable entity that competes with potential substitutes or (2) failure even to attempt a plausible explanation as to why a market should be limited in a particular way." In other words, in order to continue with your case and not have it dismissed, you must allege in your complaint a relevant market that plausibly doesn't have interchangeability of use or cross-elasticity of demand with other products. In our case, e-books and physical books would have to be different enough that they couldn't be seen as reasonable substitutes for one another. There's some confusion as to what AU wants the relevant market to be. If they want to maintain that Amazon has a monopoly both in sales of e-books and sales of physical books (two distinct markets) then they would need to "attempt a plausible explanation as to why [the] market should be limited in [this] way." I see no discussion in their letter of the differences between e-books and physical books and no reason why they should be seen as different markets. AU even admits that their concern is for "America's market for books."

Monopoly Power

Now that we have AU's alleged relevant market, "America's market for books," we can look into whether Amazon has monopoly power in this market. A case that is perfectly on point is Bookhouse of Stuyvesant Plaza, Inc. v., Inc. (Bookhouse of Stuyvesant Plaza, Inc. v., Inc.). Bookhouse alleged in their complaint that Amazon controlled "60% of the U.S. e-book market." They also made claims that Amazon's market share of the print book market were similar. I'd like to go on a brief tangent related to the relevant market. The judge in Bookhouse also saw one of the problems I found with AU's letter, they didn't list enough differences to make it clear that these are two distinct markets. The judge noted that "without more detailed allegations or explanation, the Court cannot reasonably infer that these two markets simultaneously are so different that e-books and print books are not acceptable substitutes, and yet so similar that the Publishers' market share is the same in both markets." AU's letter does allege a different market share for print book sales, but the two numbers seem to be close enough that it should at least be an open question as to whether we're looking at a U.S. market for books or two markets - e-books and print books. AU has still not addressed the issue of whether e-books and print books are acceptable substitutes for one another.

When looking into Bookhouse's complaint that Amazon controlled 60% of the e-book market, the judge held that "even if plaintiffs had alleged a cognizable market, plaintiffs' only allegation suggesting that Amazon possesses monopoly power is that its market share is 60%. See First Am. Compl. ¶¶ 15, 20, 22. But the Second Circuit has held that “[a]bsent additional evidence, such as an ability to control prices or exclude competition,” even “a 64 percent market share is insufficient to infer monopoly power." PepsiCo, 315 F.3d at 109." Market share does seem to be AU's main argument that Amazon is a monopoly. They allege that Amazon has 65% of the e-book market and 75% of the print book market. If these two figures make up "America's market for books," then Amazon controls 48.75% of American's market for books. Absent "an ability to control prices or exclude competition," this is not enough to establish monopoly control over the market. Even taking their separate figures, 65% of the e-book market would be inadequate to imply monopoly control on its own. I'll address AU's predatory pricing issue later on, but I doubt AU's complaint would survive a 12(b)(6) motion to dismiss on the issue of monopoly control under the first requirement listed in Grinnell above. AU would have an even more difficult time proving the second requirement, that Amazon didn't gain monopoly power "as a consequence of a superior product, business acumen, or historic accident."

The citation from PepsiCo (PepsiCo, Inc. v. Coca-Cola Co.) deserves a little more attention. In that case, the court held that "absent additional evidence, such as an ability to control prices or exclude competition, a 64 percent market share is insufficient to infer monopoly power. See Tops Mkts., 142 F.3d at 99 (holding that “a share between 50% and 70% can occasionally show monopoly power,” but only if other factors support the inference); ALCOA, 148 F.2d at 424 (L.Hand, J.) (expressing doubt that 64 percent market share is enough to constitute a monopoly).” Additionally, companies with market share as high as 74% have been found to lack monopoly power. See Tops Markets, Inc. v. Quality Markets, Inc..

Claim 2: Blocking Sales

AU's next issue is that "Amazon, to pressure publishers over the past 11 years, has blocked and curtailed the sale of millions of books by thousands of authors." Their next point seems to raise a similar issue "Amazon, during its dispute with Hachette in 2014, appears to have engaged in content control, selling some books but not others based on the author's prominence or the book's political leanings." Now I question whether either statement is true, but for the purposes of a 12(b)(6) motion, we assume that the facts alleged by the Plaintiff are true. In response to a similar claim, the judge in Bookhouse said, "in essence, plaintiffs complain that Amazon has not allowed them to sell e-books on Amazon's devices and apps. But no business has a “duty to aid competitors.”" The judge then cites the Supreme Court, noting that "[f]irms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities." That pretty much sounds like the situation between Amazon and AU (most of whom are authors published by the Big 5, Amazon's rivals.)

Claim 3: Economic Duress

AU's next claim is that "Amazon has used its monopsony power, and its ability to threaten punishment, to extract an ever greater share of the total price of a book from publishers, which has resulted in less revenue to support midlist authors and certain kinds of books, effectively silencing many voices." Now if they're trying to bring a claim on behalf of midlist authors, I would argue that AU doesn't have standing unless those authors are members of AU and signed the letter. Basically you can't bring a claim if you weren't injured by the alleged actions of the Defendant. Aside from that point, this seems like a duress issue under contract law. Economic duress is governed by state law (so it varies), but I think the general points are nicely summed up in the Illinois case Alexander v. Standard Oil Co. (Alexander v. Standard Oil Co.). Alexander held that "economic duress is present where one is induced by a wrongful act of another to make a contract under circumstances which deprive him of the exercise of free will, and a contract executed under duress is voidable." Additionally, "duress does not exist where consent to an agreement is secured because of hard bargaining positions or the pressure of financial circumstances. Rather, the conduct of the party obtaining the advantage must be shown to be tainted with some degree of fraud or wrongdoing in order to have an agreement invalidated on the basis of duress." AU doesn't say what the "threaten[ed] punishment" was, but they note that the end result was "to extract an ever greater share of the total price of a book from publishers." I imagine the threatened punishment was simply the "pressure of financial circumstances" which does not constitute duress. We won't know though until AU makes their allegation specific and clear. I don't think any of the Big 5 entered into a contract with Amazon that they were forced into, but if there was fraud or wrongdoing involved, the remedy is to void the contact. I imagine none of the Big 5 want their contracts with Amazon voided, but they can make a duress argument in court if I'm wrong.

Claim 4: Predatory Pricing

AU's next claim is that "Amazon routinely sells many types of books below cost in order to drive less well-capitalized retailers - like Borders - out of business. This practice, known as "loss-leading," also harms readers by reducing the amount of revenue available for publishers to invest in new books." Their first sentence is a claim of predatory pricing. Their second sentence, that readers are being harmed, seems to assume that new books can only reach readers via publisher investments and that when this amount is reduced, readers will have reduced selection. I don't know why they're alleging this because Amazon still pays the publishers the full amount when they price under their cost. There is no reduction of revenue as far as I understand.

The Supreme Court in Cargill, Inc. v. Monfort of Colorado, Inc. (Cargill, Inc. v. Monfort of Colorado, Inc.) defined predatory pricing as "pricing below an appropriate measure of cost for the purpose of eliminating competitors in the short run and reducing competition in the long run." That's what AU is alleging here. They say that Amazon is engaging in predatory pricing to drive competitors like Borders out of business. The Supreme Court later found predatory pricing to have two requirements in Brooke Group Ltd. v. Brown and Williamson Tobacco Corp. (Brooke Group Ltd. v. Brown and Williamson Tobacco Corp.) These requirements are "(1) the prices complained of are below an appropriate measure of its rival's costs, and (2) that the competitor had a reasonable prospect or a "dangerous probability" of recouping its investment in the alleged scheme."

I don't think Amazon was targeting competitors with their below-cost pricing, but I think it could go either way. I agree that there is evidence that they priced below cost at some times, but I doubt they did it to drive Borders and Barnes and Noble out of business. Concerning his book pricing strategy, Jeff Bezos said in an interview (Business Insider Interview with Jeff Bezos), "Books are the competitive set for leisure time. It takes many hours to read a book. It’s a big commitment. If you narrow your field of view and only think about books competing against books, you make really bad decisions. What we really have to do, if we want a healthy culture of long-form reading, is to make books more accessible. Part of that is making them less expensive. Books, in my view, are too expensive. Thirty dollars for a book is too expensive. If I'm only competing against other $30 books, then you don’t get there. If you realize that you’re really competing against Candy Crush and everything else, then you start to say, “Gosh, maybe we should really work on reducing friction on long-form reading." That’s what Kindle has been about from the very beginning."

Let's give AU the benefit of the doubt. Let's say Amazon was targeting competitors with predatory pricing of books. Let's say AU could prove that "the prices complained of are below an appropriate measure of its rival's costs." They then have to prove the second element which is where I think their argument fails. They would have to prove that Amazon "had a reasonable prospect or a "dangerous probability" of recouping its investment in the alleged scheme." It is not enough to prove that a company engaged in predatory pricing. The Supreme Court noted in Brooke Group that "recoupment is the ultimate object of an unlawful predatory pricing scheme; it is the means by which a predator profits from predation. Without it, predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced." I don't see how anyone can prove that Amazon plans on recouping profits when it engages in predatory pricing because Amazon as a company is willing to run on razor-thin margins. It reinvests what it makes in other acquisitions. Let's give AU the benefit of the doubt on this one as well and say that they could somehow prove this.

Beyond these requirements, the Supreme Court also held in Brooke Group that "if circumstances indicate that below-cost pricing could likely produce its intended effect on the target, there is still the further question whether it would likely injure competition in the relevant market. The plaintiff must demonstrate that there is a likelihood that the predatory scheme alleged would cause a rise in prices above a competitive level that would be sufficient to compensate for the amounts expended on the predation, including the time value of the money invested in it." So AU would have to prove that following Amazon's predatory pricing, Amazon would increase the price to recoup themselves for the losses they sustained. It's unlikely that they can prove that because Amazon has shown no sign that they would do something like that. They win by keeping prices at a sustained low, they don't increase them "above a competitive level" to recoup their losses. Amazon is comfortable taking losses.

Claim 5: Failure to aid competitors

AU's next allegation is that "Amazon routinely uses its market power to steer readers toward its own books and away from books published by other companies." As I've already noted above in Bookhouse, "no business has a “duty to aid competitors.”" I'll just leave it at that.

Claim 6: Pricing terms with self-published authors

AU's final claim (before some appeals to emotion and claims that Amazon should, for some reason, be regulated as a utility or means of communication), is that "Amazon dictates pricing to self-published authors, requiring them to price their books within a specific range or be subjected to a 50 percent cut in royalties." I mentioned standing briefly in an earlier claim. AU definitely lacks standing to make any claim on behalf of self-published authors.

To bring a claim, a plaintiff must have standing. This was defined in Doe v. Tangipahoa Parish School Bd. (Doe v. Tangipahoa Parish School Bd.) as having three requirements. The court said, "under Article III of the Constitution federal courts have the power to resolve only “cases” and “controversies.” This constitutional limitation has manifested itself in the requirement that a plaintiff have standing, which requires a showing of (1) an injury in fact, (2) causation, and (3) redressibility." On a claim that Amazon dictates terms to self-published authors, none of the signatories of the AU letter have an injury in fact because none of them are self-published authors. They lack standing for failure to meet the first requirement.


I didn't analyze everything in the letter in depth. I'm more interested in seeing how the law basically applies to the things that AU alleged. As I said earlier, I welcome any comments that are on point with what I discussed here. Thanks for taking the time to read my opinion on this matter.

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