Let me begin this blog post by saying, once again, that I am not a lawyer and nothing on my blog is legal advice. I simply want to take a look at the Authors United amicus brief from an antitrust law perspective. There's going to be some legal jargon that I'll try to explain. Let's start with "amicus brief." According to Wikipedia, "[a]n amicus curiae (literally, friend of the court; plural, amici curiae) is someone who is not a party to a case and offers information that bears on the case, but who has not been solicited by any of the parties to assist a court. This may take the form of legal opinion, testimony or learned treatise (the amicus brief) and is a way to introduce concerns ensuring that the possibly broad legal effects of a court decision will not depend solely on the parties directly involved in the case." The Authors United amicus brief brings up facts and legal arguments that they feel (and their lawyer feels) should be considered by the Supreme Court. While I disagree with a large portion of their factual claims, I'm more interested in their legal argument. You can read the entire Authors United amicus brief here. I'm going to continue calling it the Authors United amicus brief (or AU amicus brief or the brief) because the Authors Guild has the same initials as the Attorney General and I don't want any confusion on that point. Just keep in mind that the Authors Guild supported this brief as well.
2nd Circuit Ruling
I'd like to start by getting at the heart of the 2nd Circuit's holding in UNITED STATES v. APPLE. When Apple decided to enter the ebook market, they made a series of agreements with 5 of the Big 6 publishers (Random House didn't make an agreement) that ultimately caused these 5 publishers to impose new terms on Amazon. This had the effect of raising the prices of ebooks and allowed Apple to enter the market making a profit on every sale instead of taking a hit (which Amazon was doing). The 2nd Circuit had to decide whether the agreements between Apple and the publishers were vertical agreements or horizontal agreements because they have a different standard of review. The 2nd Circuit found these agreements to be horizontal agreements (mixed with vertical agreements) which makes them a per se (or automatic) violation of the Sherman Act.
In explaining the difference, the 2nd Circuit notes that: "This appeal requires us to address the important distinction between “horizontal” agreements to set prices, which involve coordination “between competitors at the same level of [a] market structure,” and “vertical” agreements on pricing, which are created between parties “at different levels of [a] market structure.” Anderson News, L.L.C. v. Am. Media, Inc., 680 F.3d 162, 182 (2d Cir.2012) (internal quotation marks omitted). Under § 1 of the Sherman Act, the former are, with limited exceptions, per se unlawful, while the latter are unlawful only if an assessment of market effects, known as a rule-of-reason analysis, reveals that they unreasonably restrain trade. See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 893, 127 S.Ct. 2705, 168 L.Ed.2d 623 (2007)." UNITED STATES v. APPLE (Emphasis added).
Vertical agreements are analyzed under a rule of reason analysis while horizontal agreements are an automatic violation of the Sherman Act. Both the trial court and the 2nd Circuit found the agreements between Apple and the publishers to be horizontal agreements. The Authors United amicus brief argues that the 2nd Circuit should have found the agreements to be vertical agreements and applied the rule of reason analysis. The rule of reason analysis is the default preferred method used by the courts.
The court in LEEGIN CREATIVE LEATHER PRODS. v. PSKS, INC. explains the default rule of reason. Notably, "Under this rule, the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition." Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49, 97 S. Ct. 2549, 53 L. Ed. 2d 568 (1977). Appropriate factors to take into account include "specific information about the relevant business" and "the restraint's history, nature, and effect." Khan, supra, at 10, 118 S. Ct. 275, . Whether the businesses involved have market power is a further, significant consideration. See, e.g., Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768, 104 S. Ct. 2731, 81 L. Ed. 2d 628 (1984) (equating the rule of reason with "an inquiry into market power and market structure designed to assess [a restraint's] actual effect"); see also Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 45-46, 126 S. Ct. 1281, (2006). In its design and function the rule distinguishes between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer's best interest." (Emphasis added). Vertical agreements are analyzed by the courts looking into the factors in bold in the above quote.
The court in LEEGIN CREATIVE LEATHER PRODS. v. PSKS, INC. also explained when the per se (or automatic violation) rule applies. "The per se rule, treating categories of restraints as necessarily illegal, eliminates the need to study the reasonableness of an individual restraint in light of the real market forces at work, Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723, 108 S. Ct. 1515, 99 L. Ed. 2d 808 (1988); and, it must be acknowledged, the per se rule can give clear guidance for certain conduct. Restraints that are per se unlawful include horizontal agreements among competitors to fix prices, see Texaco, supra, at 5, 126 S. Ct. 1276, 164 L. Ed. 2d 1, or to divide markets, see Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49-50, 111 S. Ct. 401, 112 L. Ed. 2d 349 (1990) (per curiam)." (Emphasis added). In other words, agreements between competitors at the same level in the marketplace (like the publishers) to fix prices or divide markets are automatic violations of the Sherman Act.
I don't want to spend too much time analyzing the 2nd Circuit's decision. In very basic terms, the 2nd Circuit found that Apple's agreements with the publishers were a "hub and spoke" agreement that includes both vertical and horizontal agreements. Their agreements effectively imposed a vertical agreement between Apple and each publisher individually and a horizontal agreement between the 5 publishers. Apple was the "hub" and the publishers were the "spokes." This has been found to be a per se violation of the Sherman Act in the 3rd and 7th Circuits because "hub and spoke" agreements have both vertical and horizontal elements. The 2nd Circuit agreed with and adopted this approach. If you'd like to read the entire 2nd Circuit case, you can find it here.
The AU Amicus Brief - Rule of Reason
Let me start by saying that you can read the entire AU amicus brief here. The entire brief is 38 pages and cites 8 cases. It does not include the word "vertical" or "horizontal" anywhere in the document. The brief instead relies on questionable facts (they cite Scott Turow articles several times) and a shaky legal argument that doesn't even include an analysis of vertical or horizontal agreements. Let's start with their argument for applying the rule of reason standard.
The brief starts off by noting that the rule of reason is the default standard for analyzing agreements under antitrust law. I agree with this idea and the Supreme Court has said the same. The brief then goes on to say that the 2nd Circuit ignored precedent and "the Second Circuit ignored this court's unwavering instruction that per se rules should not apply to conduct with potentially procompetitive effects." They cite LEEGIN CREATIVE LEATHER PRODS. v. PSKS, INC.. I disagree with this point. The court's "unwavering instruction" is that "horizontal agreements among competitors to fix prices" are per se illegal. If such an agreement exists, and I believe that it does here, we don't analyze the procompetitive effects of the agreement because it's already automatically illegal.
Let's concede the point and say the rule of reason applies. Let's say the agreements were strictly vertical agreements. I still think Apple loses the case. The Department of Justice takes that stance that exclusionary vertical agreements are also violations of the Sherman Act. For an interesting read, check out this article on the DOJ's website. A. Douglas Melamed (Principal Deputy Assistant Attorney General for the Antitrust Division of the DOJ) gave this address to the American Bar Association. Here are a few quotes I find helpful:
1. "Although vertical agreements are generally procompetitive, they can injure competition, under some circumstances, when they deny (or raise the cost of) a needed or valuable input -- such as distribution services -- to a rival."
2. "Exclusionary vertical agreements are agreements that tend to exclude competitors of one of the parties to the agreement. Examples include exclusive dealing, tie-in arrangements, and most favored nation agreements."
3. "The foregoing suggests that a necessary condition for an exclusionary vertical agreement to be anticompetitive is that the agreement is likely to enable the manufacturer that would benefit from the exclusion of a rival to gain or preserve market power that it otherwise would not have. The additional market power enables the manufacturer to recoup its investment in the otherwise inefficient restraint, including the consideration it must pay to the distributors."
The second quote is applicable because the agreements between Apple and the publishers included a most favored nation clause. The third quote applies directly to this situation. Apple gained market share that it otherwise would not have had but for the terms that the publishers imposed on Amazon.
The AU Amicus Brief - 1st Amendment
The AU brief also claims that allowing Amazon to have monopoly control over the ebook market is at odds with the 1st Amendment. The brief claims "Amazon's dominant market position... threatened the free exchange of ideas which this country values so highly." The brief goes on to argue that Amazon "suppressed" both Macmillan and Hachette. Throughout this entire section of their argument, AU cites no case law, with the exception of the first paragraph. Their argument also implies that the 1st Amendment pretty much mandates the continued existence of publishers since they fund nonfiction, academic research. Their first paragraph contains three cherry picked quotes from two cases. I'd like to look at those.
The brief starts by saying "[t]he United States has a 'profound national commitment to the principle that debate on public issues should be uninhibited, robust, and wide-open." That's a quote from NEW YORK TIMES CO. v. SULLIVAN. It's vague and doesn't really help their argument. Additionally, they left off the ending "and that it may well include vehement, caustic, and sometimes unpleasantly sharp attacks on government and public officials." The sentence they partially quoted was specifically addressing the rights of citizens to verbally attack the government and public officials.
From the same New York Times case, AU also says that "right conclusions are more likely to be gathered out of a multitude of tongues, than through any kind of authoritative selection." Here's the full quote from Judge Learned Hand:
"The First Amendment, said Judge Learned Hand, 'presupposes that right conclusions are more likely to be gathered out of a multitude of tongues than through any kind of authoritative selection. To many, this is, and always will be, folly, but we have staked upon it our all.'"
I don't see how this is in any way favorable to the publishers' case. Their companies, by definition, rely on authoritative selection to create books. They reject the vast majority of what is sent to them. In contrast, Amazon removed the barrier to entry, allowing a "multitude of tongues" once silenced by traditional publishing to speak. Amazon is the champion of the 1st Amendment, not traditional publishing.
The AU brief also acknowledges the "right of the public to receive suitable access to social, political, esthetic, moral, and other ideas and experiences." This quote comes from the case RED LION BROADCASTING CO. v. FCC. The case is about Congress and the FCC restricting public broadcasting, but that's fine. These three quotes were cherry picked for a general appeal to emotion because they surely don't make any kind of coherent legal argument.
The most amusing part of the AU's 1st Amendment argument is as follows: "[f]ortunately, when Apple and others entered the e-book market, Amazon's control over culture decreased. E-books not sold on Amazon were available elsewhere. E-books not marketed by Amazon were marketed elsewhere." They're actually arguing that:
1. Amazon was violating the public's 1st Amendment right to be able to purchase e-books through multiple channels.
2. Apple's illegal price-fixing scheme with the publishers corrected this 1st Amendment violation so their illegal agreements were ok.
I'm not even sure how to respond to that. It's ridiculous. Apple wanted to enter the market making money and illegally forced the market to change to accommodate higher prices. They weren't courageously protecting the public from a continued 1st Amendment violation.
The AU brief only cited 8 cases, most of them for cherry picked quotations. Their only remotely plausible argument comes in under Leegin and that argument seems to lose under both the per se rule and the rule of reason. The FTC notes in an article, Monopsony and The Meaning of "Consumer Welfare" that "[c]ourts and federal law enforcement officials routinely invoke 'consumer welfare' as the guiding principle behind their application of the antitrust laws." Consumer welfare is enhanced by the low prices Amazon provides, not by the artificially higher prices Apple and the publishers forced on the market. For more info on this subject, you can check out my last Authors United antitrust article here.