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Summary:

In an amicus brief responding to the DOJ’s proposed ebook pricing settlement against Apple and publishers, attorney Bob Kohn says the DOJ unwittingly showed that Amazon used predatory pricing on ebooks, and asks that the DOJ’s investigation of Amazon be turned over to the court.

Attorney and Royalty Share CEO Bob Kohn is seeking permission (PDF) from U.S. District Judge Denise Cote to file an amicus brief in the Department of Justice’s proposed ebook pricing settlement with book publishers. In the brief that Kohn filed with the court this morning (PDF, and embedded below), he says the DOJ’s own investigation into Amazon’s ebook pricing practices shows that the company engaged in predatory pricing. He asks the Court to demand that the DOJ turn over all documents relating to its investigation of Amazon’s ebook pricing practices.

In addition, Kohn asks Judge Cote (PDF) to hold a hearing on the settlement — something that the Department of Justice is opposed to — and asks permission “to participate in oral argument at any such hearing to address issues that have been raised by the Justice Department’s response to the public comments.”

A bit of background before we get into Kohn’s argument: The Department of Justice’s proposed final settlement with HarperCollins, Hachette and Simon & Schuster would require the settling publishers to terminate existing agreements with Apple and would end agency pricing for those publishers for two years. (Apple, Macmillan and Penguin are fighting the case in court, but the trial will not begin until June 2013.) The DOJ received 868 public comments on the settlement, nearly all of which opposed it. For more, see our guides “What does the DOJ ebook pricing lawsuit mean for readers now?” and “Everything you need to know about the ebook lawsuit in one post.

Judge Cote previously approved Barnes & Noble and the American Booksellers Association’s request to file an amicus brief, but she limited them to the arguments they’d already submitted in support of the brief, rather than a new one. She granted Apple five pages to respond to the proposed settlement, rather than the ten pages the company had requested. Kohn’s brief is 25 pages long and he notes that since the settling publishers will not be objecting to the proposed settlement themselves, “the Court should welcome amicus curiae participation to keep the United States accountable for its statements of law.” However, there is no guarantee that Judge Cote will approve Kohn’s brief.

The DOJ mistakes ebooks for printed books

Kohn argues that the DOJ mischaracterizes ebooks as a private good like “apples or printed books.” Rather, he says, ebooks are public goods: “an ebook can be consumed without leaving any less for others to consume” and can even be consumed free due to piracy. In addition ebooks are “systems goods” that “need to interoperate with other products [like e-readers]to have value.” By contrast, “consumers can read printed books right off the shelf, standing alone.”

The fact that ebooks are public goods and systems goods matters because supply and demand don’t operate on them normally, Kohn writes. He says “antitrust analysis must take these differences into account in evaluating specific market circumstances in which transactions occur.” The DOJ failed to do this, he argues. By treating ebooks the same as “apples or printed books,” it ignored the fact that “the ebook market is best characterized as a stack of interdependent markets.”

The DOJ itself provides evidence that Amazon acted as a predator

Kohn argues that “sufficient ‘evidence’ of Amazon’s exclusionary threat is alleged in the government’s own Complaint and the CIS [Competitive Impact Statement].” He notes that the DOJ’s original complaint

alleges that Amazon ‘lowered substantially the price of newly released and bestselling ebooks,’ and according to the CIS, Amazon bought ebooks from publishers for “a discount (usually around 50%) off the price printed on the physical edition of the book (the ‘List Price’).” Thus, for example, an ebook with a List Price of $26.00 would be sold to Amazon for $13.00 and Amazon would sell that copy to a consumer for $9.9947 — a marginal loss of over $3.00 per unit. In the economics terms, this practice is known as ‘penetration pricing,’ the practice of reducing the price of a component of the system (e.g., ebooks) to initial adopters of the system (e.g., an ebook platform, such as Kindle), thereby enhancing the network effects operating in the market to spur the consumer adoption of the system. In legal terms, Amazon engaged in a clear case of ‘predatory pricing,’ an exclusionary practice that is illegal under federal and state antitrust laws.

Kohn also takes issue with the DOJ’s standard for predatory pricing. In its response to the public comments, the DOJ said “Amazon’s ebook distribution business has been consistently profitable, even when substantially discounting some newly released and bestselling titles.” Kohn notes that according to case law, profitability is not a standard for predatory pricing and the Second Circuit previously ruled that “prices below reasonably anticipated marginal cost will be presumed illegal.”

Before agency pricing was enacted, Kohn says “Amazon sold every newly-released and bestselling ebook made available by the Defendant Publishers and by most, if not all, independent book publishers, at below its marginal cost, consistently.” The only exempt ebooks, he says, were those self-published through Kindle Direct Publishing.

This is relevant to the question of whether the settlement is in the public interest, Kohn argues, because:

Amazon’s $9.99 price was not the result of price competition on the merits, but of Amazon’s illegal predatory pricing activity. As the Second Circuit has acknowledged, selling below marginal cost is antithetical to consumer welfare and is presumptively illegal. Accordingly, the Defendants conduct could not, as a matter of law, have been aimed to illegally raise prices, as the Complaint alleges — unless the objective were to raise prices above Amazon’s marginal cost.

Accordingly, any alleged conduct that resulted in raising illegally-low prices up to the level of Amazon’s marginal cost cannot be a violation of the Sherman Act, because the government cannot prove any consumer harm.

Kohn demands that the DOJ turn its investigation “into the facts of Amazon’s pricing practices” over to the court. “If the DOJ does not provide transparency into the results of its ‘investigation,’ then the reasonableness of its conclusions cannot be sustained,” he writes.

Efficient prices — not low prices — are in the public interest

Kohn says he is “gob-smacked” to read the DOJ declare that low prices are “one of the principal goals of the antitrust laws.” “Low prices are not the core ambition of either the law or the markets,” he writes. “Efficient prices are…Upon this fundamentally flawed legal foundation, one should be hard pressed to find the reasonableness in the government’s conclusion that the settlement is in the public interest.”

The proposed final settlement “would constitute a tragic miscarriage of justice,” Kohn concludes, and recommends that the Court “send the DOJ back to the drawing board” to come up with “a consent decree that enjoins any potentially collusive communications among the Defendants in the future, with some monitoring of information exchanges for a limited period.”

The filing is below.

  1. Kohn is brilliant. Too many times I tried to think through the essential variables of the issue and didn’t hone in on the type of good as Kohn has here. It is the essential, undeniable lynchpin to the argument and many others currently in circulation outside of the DOJ case.

    1. Yes, it is a well thought out and well-written brief that touches on some key issues. We will see now if Judge Cote approves it as an amicus brief. She is allowing Apple to respond to the settlement in 5 pages and they have to have that in by August 15 — it’ll be interesting to see if their argument coincides at all with Kohn’s.

  2. Whatever the merits of this particular case, the notion that “selling below marginal cost is antithetical to consumer welfare and is presumptively illegal” is a problematic assumption. The antitrust laws need to be reconsidered from the ground up, or thrown out, as they have done more harm in connection with their stated intentions than they have good.

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