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The Perils of Pricing

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Jonathan KirschJonathan Kirsch, a publishing attorney based in Los Angeles, is general counsel of the Independent Book Publishers Association and a recipient of its Benjamin Franklin Award for excellence in publishing.

What is the legal risk for the publisher who offers more attractive prices and terms to a preferred customer? Under some circumstances, publishers who engage in what is called “price discrimination” may be exposed to liability under state and/or federal anti-trust law. The key question, as we will see, is whether the alleged discriminatory pricing has a real effect on competition in the marketplace. Rarely, if ever, will a single independent book publisher face liability under anti-trust law for making a better deal for one customer than for others–but there is theoretical risk that it could happen.

The Battle of the Titans

The body of law known as “anti-trust law” is generally designed to preserve free and open competition in the marketplace. One element of anti-trust law is the so-called Robinson Patman Act, a federal statute that generally obliges a business to sell its goods at the same price and on the same terms to all customers who wish to buy them. When a seller engages in discriminatory pricing by offering better prices to a favored customer, both the seller and the buyer may be at risk of a lawsuit for violation of the Robinson-Patman Act.

Several recent lawsuits have raised the principle of price discrimination in the publishing industry. The American Booksellers Association, for example, brought an anti-trust suit against several major book publishers on allegations that they offered better discounts and promotional allowances to the bookstore chains than to independent booksellers. That recent spate of litigation resulted in a series of settlements that were meant to eliminate price discrimination and provide a “level playing field” for all competitors in the book industry.

Although all of the recent high-profile litigation focused on alleged price discrimination by the major players in the publishing industry, it’s important for independent publishers to be familiar with the Robinson-Patman Act and the principle of fair pricing since, at least in theory, they may be at risk if they, too, engage in price discrimination.

The Elements of a Price Discrimination Claim

Certain elements must be present to support a price discrimination claim under the Robinson-Patman Act. If any of these elements is missing, then no violation will be found.

First, the seller must have engaged in discriminatory pricing–that is, offering a better price for the purchase of goods to a favored customer than to another customer. A seller cannot avoid liability by offering the same price to everyone while offering some customers an advantage such as more generous coop advertising allowances or free shipping if the additional terms result in a lower effective price to the customer. Similarly, discriminatory pricing may be found if the publisher offers better credit terms to two purchasers who are equally creditworthy.

Second, the transaction must have been a sale of goods. If the transaction is a bona fide consignment rather than a sale, then the Robinson-Patman Act does not apply. Thus, for example, the publisher is free to offer different terms to various wholesalers or distributors that take the publisher’s stock on consignment rather than purchasing the books for resale.

Third, the goods that have been sold must be identical in kind and quality, and the sales must have taken place at or near the same time. A publisher is perfectly free to charge one price for a quality paperback edition and another price for a mass-market edition as long as all purchasers are charged the same price for each edition. Similarly, a publisher is free to charge one price when a book is newly published, and a different price when the book is on the backlist.

Fourth, the sale must have taken place in interstate commerce. Strictly speaking, a publisher who sells books only locally or within a single state is not at risk of a price discrimination claim under the Robinson-Patman Act, although it is possible that a similar state law may apply. But publishers who sell books throughout the United States are, by definition, subject to the whole body of federal anti-trust law, including the Robinson-Patman Act.

Fifth, and most crucially, the alleged act of price discrimination must result in a substantial injury to competition. Anyone who can prove an injury is entitled to sue a publisher who engages in price discrimination under the Robinson-Patman Act–a competitor of the publisher who engages in price discrimination, a competitor of the publisher’s favored customer, or, at least in theory, someone who buys from the publisher’s other customer(s) who did not get favorable treatment. The preferred customer who enjoys the benefit of discriminatory pricing may also be sued. However, a single independent publisher who engages in price discrimination is unlikely to injure competition in the marketplace to the degree that justifies an anti-trust claim.

If and when sued, a publisher is immediately faced with the burden and expense of defending the lawsuit. Civil suits under the Robinson-Patman Act may be filed by the U.S. Justice Department, the U.S. Federal Trade Commission, or a private party who claims to have been injured. If the lawsuit results in a judgment, the publisher may be required not only to discontinue the offensive practice but also to pay “treble” damages. Criminal charges may be brought for particularly egregious forms of price competition.

When Can a Publisher Lawfully Discriminate in Pricing?

A publisher is entitled to discriminate among customers in setting prices and terms under certain specific circumstances. If any of these circumstances apply to a particular transaction, then no violation of the Robinson-Patman Act will have taken place.

The most important exception to the general rule is that a publisher may cut its price or offer other advantageous terms for certain kinds of sales that result in actual cost savings to the seller. The most familiar example is the practice of giving a deeper discount for volume purchases. However, a publisher who is called upon to defend such a practice will have to show that it actually results in a cost-saving that justifies the advantageous pricing. When the Hearst Corporation was sued by the Northern California Booksellers Association for offering volume discounts to bookstore chains, for instance, the court ruled that Hearst had failed to show that the efficiencies of operation in filling orders from its high-volume customers were sufficient to justify the deeply discounted prices.

Another exception is based on a publisher’s effort to compete with other publishers in setting prices. If a publisher cuts its prices in response to price-cutting by other publishers, whether on a regional or a customer-by-customer basis, the practice may not be deemed an act of discriminatory pricing. Such price-cutting may only match the pricing policies of a competition, however; it may not undercut the competitor.

A third exception is based on changing market conditions. If a book is seasonal in character, for example, the publisher is free to cut the price when the book is “out of season.”

Shopworn or damaged books can be sold at deeper discounts, of course, and a publisher in distress can cut prices when liquidating its business.

The Risks of Price-Cutting and Price-Fixing

As mentioned, a single independent publisher is rarely in a position to affect competition in the book trade by engaging in discriminatory pricing practices. The only likely exception is when a publisher is fortunate enough to have published a runaway best-seller that is in such demand in the marketplace that a retail bookseller could plausibly claim to be damaged because it was unable to secure copies at a competitive price. For that reason, the risk of a Robinson-Patman claim must be regarded as extremely remote for independent publishers.

However, as noted above, the Robinson-Patman Act extends liability to the customer who enjoys the advantage of discriminatory pricing. Thus, if the publisher of a highly desirable title cuts a special deal for a customer that enjoys a dominant position in the book trade, it’s possible that both the publisher and the customer could face a claim of price discrimination–especially if the customer used its commanding position in the market to induce the publisher to cut its prices.

Finally, the Robinson-Patman Act is not the only component of the anti-trusts laws that makes certain pricing practices Illegal. An agreement by an association of competing publishers to fix prices and terms is illegal per se under the Sherman Act, another important component of the federal anti-trust law, for example, and an agreement to boycott a customer or other business concern may be a violation, too. Indeed, publishers who act by common consent are always at greater risk than the single publisher who acts alone, whether in setting prices and terms or in any other aspect of the publishing industry.

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