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What Publishers Need to Know About Pricing, Terms, and Antitrust

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Given the evolving and unsettled state of pricing and distribution terms, this is a good time to learn, or relearn, what is permissible within the constraints of anticompetitive collusion and price discrimination. The information that follows focuses on cases against publishers from the late 1980s and early 1990s up to the most recent case against Apple and the Big 5 to help you understand antitrust law and the terms and tactics that it marks as out of bounds.

The overview is this: There are three ways that current antitrust law circumscribes what publishers may do in setting prices or discounts or negotiating other business terms with the other parties in their distribution chain. One involves price fixing and is now being played out; one involves resale price maintenance and hasn’t been litigated or challenged in the publishing industry; and one involves price discrimination and was played out several times between the late 1980s and the early 2000s.

The Price Fixing Cases

Antitrust law makes collusion over prices and terms unlawful without regard to whether the resulting agreement helps or hampers competition.

The principal allegations in the current cases involving Apple and five of the big six publishers are that the publisher-defendants met and conspired to set prices and terms for the sale of e-books through Apple and that Apple participated in this collusion.

A little more than a year has passed since the first of several class action lawsuits was filed against Apple, Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster (but not Random House) alleging that they had conspired to fix prices and terms for e-books in restraint of trade and to the injury of e-book-buying consumers. Subsequently, several state attorneys general and the European Union opened their own investigations. In March of this year, the U.S. Justice Department joined the pack and about a month later filed its own suit against the same defendants.

Unlike the wholesale model historically employed in the sale of printed books and carried over to e-book purchases by Amazon (with Amazon paying publishers a negotiated price for the right to distribute copies to consumers, but setting its own retail prices), the Apple “agency” model allowed publishers to dictate the retail prices for their books (which usually were several dollars higher than the prices set by Amazon).

In addition, the Apple agreements included a “most favored nation” (MFN) provision that caused the five big publishers to threaten to withdraw their books from Amazon unless Amazon agreed to take them on an agency basis. As a result, Amazon was forced also to adopt agency terms for the biggest houses (those companies represent approximately 60 percent of Amazon’s e-book sales).

In support of its allegations, the Justice Department pointed to private and public statements made by the publishers about an industry problem (Amazon’s success at driving down retail prices for e-books) that required a coordinated response; to opportunities for the publishers to conspire through trade associations; to meetings and communications among the defendants where this issue was discussed; to the fact that all these publishers signed agreements with Apple within a few days; and to the fact that the agreements were virtually identical in terms—among many other things.

The day this suit was filed, three of the publishers (Hachette, Simon & Schuster, and HarperCollins) entered settlement agreements with the Justice Department. The terms of settlement require the termination of their existing Apple contracts but permit these publishers to continue to do business on an agency basis, albeit with substantially altered terms—the MFN provision is history, and the settling publishers are not permitted, for the next two years, to set retail prices.

Apple and the other two publishers soldier on with their defense, maintaining that there was no collusion and that the similarity among their deals was the result of something called “conscious parallelism”—that is, that each publisher decided independently that the deal it struck was in its best interests.

As if we needed more to convince us that collusion over prices and terms is a bad idea, on the same day the Justice Department case was filed, 16 state attorneys general joined together and filed a separate suit against the same defendants over the same conduct.

You have probably heard, and perhaps said, that these antitrust actions are misguided and that, far from protecting consumers from higher prices, they will instead result in upsetting the balance recently achieved with agency pricing. Many industry insiders are predicting that Amazon will reclaim monopoly-like market power, return to its predatory pricing practices, and drive competition out of the market for e-books, which will eventually mean higher prices for everybody.

But the lesson here is that agreements among competitors to fix prices are “per se” violations of U.S. antitrust law. The consequences are beside the question.

The Resale Price Maintenance Issue

At one time, U.S. law also had a “per se” rule against minimum resale price maintenance (RPM) agreements: any agreement with a distributor that purported to set a floor for the resale price was automatically deemed unlawful without regard to its competitive effect.

Most recently, in 2008, the U.S. Supreme Court decided in a case involving women’s accessories that RPM agreements can actually increase interbrand competition because they reduce intrabrand competition among retailers selling the same brand.

So we now operate under a rule of reason when it comes to RPM agreements—a particular RPM agreement will not be automatically deemed unlawful unless it is established that it has a substantial negative effect on competition. However, since there are many complementary state laws, and some of them have not followed the lead of federal law in adopting the rule-of-reason approach, RPM agreements still involve significant risks.

Note that only agreements that purport to set a minimum price (or a maximum price, for that matter) are potentially unlawful. Establishing a manufacturer’s suggested resale price (MSRP) is not unlawful because there is no purportedly enforceable agreement. (Such a policy of recommended or suggested resale pricing is sometimes called a “Colgate” policy, from the case that authorized its use.)

So you may set a “list” price, and you may print it in your traditional and e-book catalogs and on the covers of your printed books, but in the absence of an agency agreement (where the publisher still owns the product, controls the final retail sale, and can thus set the end price), you should probably avoid adopting any agreement with distributors or booksellers that purports to control retail prices.

The Price Discrimination Cases

The case law of price discrimination is replete with cases involving publishers.

The first of them were filed in 1988 against six publishers individually under the price discrimination provisions of the Robinson-Patman Act. (The defendants were Harper & Row, Hearst, Macmillan, Putnam Berkley, Random House, and Simon & Schuster.)

Collusion was not an element of these claims. The core of the complaints was that the publishers gave certain national bookstore chains price and promotional concessions that they did not make available to independent bookstores, to the detriment of competition and consumers. The allegedly favored chains were Waldenbooks, B. Dalton, and Crown Books. Interestingly, none of them exists anymore.

Publishers were charged with granting favored booksellers additional discounts not shown on their published pricing schedules, and with providing allowances, services, and facilities for promotion, display, and inventory control to favored chains without making the same benefits available on proportionally equal terms to the independent booksellers.

In 1992, after four years of litigation, the publishers proposed settlement terms, but after another four years of review and consideration, the settlements were rejected and the cases were dismissed because the industry had changed appreciably with the growth of superstores, and behavior that had seemed problematic in 1988 no longer seemed to be prevalent or troublesome.

Meanwhile, in 1994, the American Booksellers Association filed a suit against Houghton Mifflin, Penguin, St. Martin’s Press, Hugh Lauter Levin Associates, and Rutledge Hill Press. The ABA suit complained of the same discriminatory pricing conduct—better prices and promotional allowances were being offered to certain large chains and not offered on proportional terms to independent booksellers.

This case was settled a few years later on terms that met with a less-than-enthusiastic response from independent booksellers; antitrust litigation has a well-earned reputation for being outrageously expensive, and the ABA apparently lacked the resolve or the resources to press for a better result. Subsequent suits by the ABA against Random House and Putnam Berkeley also settled on terms similarly unsatisfying to independent booksellers.

Finally, in 1998, the ABA and one independent publisher filed separate suits on opposite sides of the country against Barnes & Noble and Borders. These cases also settled short of a verdict, in 2001, at a purported aggregate litigation cost to the parties approaching $100 million; it’s not likely anyone got their money’s worth.

The Robinson-Patman Act behind each of these cases prohibits a seller from discriminating in price or terms between two or more competing buyers when the effect may substantially lessen competition. The injury to competition may take place on two levels. A primary-line injury is an injury to other similarly situated sellers who may have trouble competing as a consequence of the discriminatory pricing (much as they might as a consequence of predatory pricing ). A secondary-line injury is an injury to the buyers discriminated against, who don’t get the benefit of the better prices.

Important defenses to a discriminatory pricing claim are:

● cost justification—that is, the difference in prices is justified by lower cost of manufacture, sale, or delivery in serving the favored customer, resulting from a different method of fulfillment or sale of a larger quantity (this defense must generally be established through rigorous accounting)

● changing conditions (deterioration, obsolescence, or distress sales)

● good-faith effort to meet competition

Unlike a price-fixing claim, a price-discrimination claim is not per se illegal; it is examined under the rule-of-reason test. However, it is not just the seller who is exposed. It is also unlawful for a buyer to induce or receive a discriminatory price when the effect may be to substantially lessen competition.

The Takeaway

The likelihood of government attention to antitrust issues, through the Justice Department or state attorneys general, ebbs and flows with the times and the political tides. Class action lawyers and disgruntled competitors are more consistently vigilant.

Whatever the level of attention, the actions of one independent publisher or a couple of independent publishers are unlikely to have sufficient heft to threaten a substantial lessening of competition; and, even with respect to per se unlawful conduct, they are unlikely to trigger the sort of interest, attention, and commitment of resources that larger threats do.

But it still makes sense to understand the limits that apply to pricing and terms; to distinguish what you can demand from what you should not; and to know what is absolutely out of bounds and what will be judged by its effect on competition.

By the same token, you should be able to tell when your business partners in the distribution chain are describing real limits on what they can agree to—or what they are permitted to demand of you—and when they are confused or blowing smoke.

As the business models for distribution of e-books evolve and resolve, some players may be tempted to press their leverage, and their luck. If you are, remember that just because Amazon—or Apple—says something is okay, that doesn’t necessarily make it so.

Steve Gillen is a lawyer and partner in the intellectual property firm of Wood Herron & Evans and has focused his practice on publishing and media matters for 30 years. He is a member of IBPA and a frequent contributor to the Independent.

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