Barnes & Noble: DOJ e-book suit endangers consumers, bookstores and “future of copyrighted expression”

Posted on June 7, 2012

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In a complaint sent to the Department of Justice this morning, Barnes & Noble says that the DOJ’s proposed settlementwith HarperCollins, Hachette and Simon & Schuster for allegedly colluding to fix e-book prices “represents an unprecedented effort” to become “a regulator of a nascent technology that it little understands” — and “the national economy, our nation’s culture, and the future of copyrighted expression” are at stake. In fact, B&N argues, e-book and hardcover prices have fallen under agency pricing.”

“You’re going to end up having choice control from a server farm in Washington state,” Barnes & Noble’s general counsel Gene DeFelice told me, referring to Amazon.

“In essence, the proposed settlement substitutes one alleged cartel for a new cartel on the industry, albeit one run by the [DOJ],” B&N says. The bookstore chain’s complaint joins others sent to the DOJ during the settlement commenting period, which ends on June 25.

The proposed settlement, B&N says in a brief filed by its in-house counsel and law firm Boies, Schiller & Flexner, “warrants an exacting review because of its potential impact on the national economy and culture, including the future of copyrighted expression and bookselling in general, not only electronic books.” And “many millions of Americans, as well as all levels of the distribution chain for books (from authors to publishers to distributors, and especially brick-and-mortar stores), stand to be affected by this case’s resolution.”

B&N argues that the proposed settlement is a government action “analogous to a cartel imposing a detailed business model on publishers.” It would transform the DOJ “into a regulator” and would “injure innocent third parties, including Barnes & Noble, independent bookstores, authors, and non-defendant publishers; hurt competition in an emerging industry; and ultimately harm consumers.”

The punishment doesn’t fit the crime

English: The interior of the Barnes & Noble lo...

English: The interior of the Barnes & Noble located at The Grove at Farmers Market. Photographed and uploaded by user:Geographer (Photo credit: Wikipedia)

B&N says “the Government has responded to purported price-fixing by implementing government controls of the market, rather than punishing the alleged colluders.” B&N argues that the course of action outlined by the settlement doesn’t fit with the DOJ’s accusations, writing, “if the aim here is to end collusion, the proposed settlement should enjoin collusion and punish the purported colluders” rather than requiring them “to terminate their current agency agreements and then forbidding those same parties from entering legal agency agreements” for two years. The proposed settlement “punishes only third parties and consumers” and “seeks to substitute regulation for market forces.”

“The national economy, our nation’s culture, and the future of copyrighted expression”

The Tunney Act “requires a court to reject a proposed final judgment that is not in the ‘public interest,’” the brief says, and “requires that the Government present some factual basis for the proposed settlement remedies.” The DOJ has failed to do so, B&N alleges, and so it “is asking is that this Court not, through the adoption of the regulatory provisions of the proposed settlement, prevent Barnes & Noble from agreeing with individual publishers on a business model that is the product of bilateral good faith negotiations that both parties agree are in their best interests.

Pre-agency, “Barnes & Noble was losing substantial money”

Barnes & Noble says that before publishers enacted agency pricing, it could not compete against Amazon: “[a]s a result of Amazon’s pricing (which priced most bestselling books sold by Barnes & Noble below Barnes & Noble’s, and Amazon’s, direct costs), Barnes & Noble was losing substantial money in an effort to compete with Amazon’s pricing, and was unable to gain significant market share.”

E-book prices and hardcover prices fell

Under agency, “publishers have engaged in vigorous competition on price, which, contrary to the superficial pricing analysis in the complaints before the Court, has resulted in lower e-book prices,” B&N says, presenting a chart that shows “average e-book price (weighed by units sold)” between August 2009 and February 2012. Barnes & Noble previously shared this data with the DOJ but is revealing it to the public for the first time.

Furthermore, Barnes & Noble says that “hardback retail prices” have also declined under agency.

Under agency, “innovation has flourished.” Without it, competition dies

“Agency has encouraged new participants to invest in e-books,” B&N says, noting it “has introduced multiple versions” of the Nook” and launched “a self-publishing platform, PubIt!; and lending and Read-in-Store programs.” Competition “led to Amazon responding with improved e-readers of its own.”

The proposed settlement would “harm Barnes & Noble and other brick-and-mortar e-book distributors by leaving them where they were two years ago:  a dominant player will set uncompetitive prices that all other potential competitors must meet to compete,” B&N says. “Unable to compete with below-cost pricing, e-book distributors will drop from the e-book space,” and consumers will be left with “limited choice in where they buy their books: online retailers such as Amazon or large, multipurpose brick-and-mortar stores such as Costco, Wal-Mart, and Target, which offer only mass-market selections.”

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