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Tuesday, February 26, 2013

Should the E-Book Case Presage the Decline of the Per Se and Market Share Doctrines

Posted by D. Daniel Sokol

Steven Semeraro, Thomas Jefferson School of Law asks Should the E-Book Case Presage the Decline of the Per Se and Market Share Doctrines?

ABSTRACT: The U.S. Department of Justice, Antitrust Division (Division or DOJ), has filed a high profile case against Apple and several large book publishers (Complaint). The case alleges that the defendants agreed to change the way e-books were sold. Publishers generally follow the wholesale model, selling books outright — both “e” and traditional — to booksellers who then set retail prices. The challenged agreement allegedly required the publishers to switch to an agency model for e-books. Pursuant to this model, each publisher would set the resale price and pay a thirty percent commission to the retailer. The Division alleges that the publishers made these changes because they feared that lower prices for e-books would lead to “lower prices for print books.” Amazon had set a $9.99 retail price for popular e-books, which the Division alleged was “substantially lower than hardcover versions of the same title.” The publisher defendants were concerned these lower e-book prices would lead to the “‘deflation’ of hardcover book prices.” In addition to price competition, the Complaint maintains that traditional publishers were concerned that e-book-only publishers could effectively steer consumers away from print books, thus devaluing investments in manufacturing and distribution assets that the legacy publishers had made to support their print businesses.

Although the DOJ contends that Apple’s agreement with the publishers is a naked agreement to fix prices and thus illegal per se, the government hedges its bets. Much of the complaint reads as if the government were alleging a rule-of-reason case, articulating actual anticompetitive effects in an e-book relevant product market of which the publisher defendants possess a large share. Whether viewed as a per se or rule-of-reason case, however, the Complaint convincingly tells the story of traditional publishers scheming to increase consumer prices and restrain competition from upstart e-book publishers. That three publisher defendants agreed to abandon the agreement and submit to the on-going, intrusive government scrutiny that comes with a consent decree confirms the case’s strength.

Yet a sophisticated, doctrinally focused antitrust lawyer would have no trouble attacking (1) the applicability of the per se rule and (2) the contention that e-books form a separate product market and thus do not compete directly with traditional books. The alleged agreement does not, on its face, appear to almost always harm consumer interests, as per se illegal agreements must. An agency distribution scheme could, for example, pro-competitively facilitate an industry introducing a new product into an established market.

Market definition is often a critical factor in antitrust cases because practices that harm consumers in a narrow market may have an insignificant impact in a broader market. The choice to define the market as “e-books only” is consistent with the Division’s claim that practices only affecting e-books can harm consumers. Many consumers, however, readily substitute traditional books for e-books, and the Division’s anticompetitive story is motivated by e-books’ competitive impact on ordinary book sales. From a doctrinal perspective, defining the market as limited to e-books-only seems too narrow.

That these points are debatable should not suggest that the government’s case is weak. But the litigating defendants will spill plenty of ink nonetheless. Already, Apple’s answer denies the existence of an e-book-only product market and attacks the complaint for ignoring that the agency model enabled robust competition by breaking up Amazon’s dominant position. Could skillful lawyering bamboozle a judge with limited antitrust chops? Perhaps the time has come to ask whether the per se rule and traditional market definition doctrine have become more trouble than they are worth.

Part I reviews the allegations in the complaint with respect to per se liability and market definition. Part II shows how a relentlessly doctrinal approach to criticizing the Division’s per se and relevant market allegations could distort the antitrust analysis. Part III explains that these criticisms do not undermine the case in any meaningful sense — they simply create the opportunity for distracting doctrinal posturing. This Part then raises the question: If traditional doctrine has lost its ability to simplify antitrust cases, do these hoary tools serve any useful purpose?

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