JURIST Guest Columnist Harry Gerla of the University of Dayton School of Law says that contrary to Daniel Crane’s prediction, the alleged agreement among the e-book publishers may wind up being summarily condemned even if they never agreed on a price or price level…

The recent JURIST article by Daniel Crane contains a statement of the law that is either misleading or incorrect. Specifically, his claim that unless the US Department of Justice (DOJ) Antitrust Division can prove that the defendant publishers agreed on a price or price formula for e-books, the DOJ faces the task of establishing that the agreement among the publishers runs afoul of the rule of reason is highly suspect.

Crane writes:

It is important here to distinguish between different subject matters of agreement however. An agreement to share information and pursue a common strategy to switch the industry from a wholesale model to an agency model — though a horizontal agreement — would likely be subject to the rule of reason as well. Unless the government can prove that the publishers actually agreed on e-book prices or a formula for setting e-book prices, the per se rule is unlikely to apply. If the rule of reason analysis applies, it’s off to the races.

The lack of agreement on price or price formula will not be some sort of magic bullet for the publishers. While Crane may call the agency arrangement a “common strategy” or a “model,” it is also a term of trade that at least one of the customers of the publishers, Amazon, found competitively significant. If the publishers, with or without Apple, agreed to only sell their e-books via the agency model, they were effectively fixing a term of trade. Going back more than 80 years to Paramount Famous Lasky Corp. v. United States, in which there was an agreement among competitors to require arbitration clauses in their contracts with customers, agreements among competitors fixing terms of trade (at least where the terms were non-minor or had competitive significance) have been viewed with an extreme degree of suspicion, if not de facto treated as per se illegal. Indeed, the distinction between competitors jointly fixing the price term of a contract (or a price-related term such as the availability of credit in Catalano, Inc. v. Target Sales, Inc.) and competitors fixing other terms of a contract is somewhat artificial. As anyone who has negotiated a complex contract can attest, the price term and price-related terms affect and are affected by all other terms in the contract.

It is true that in cases involving product standardization, joint ventures and blanket licensing, conduct which appeared to be forms of “term fixing” were accorded rule of reason treatment. However, each of these instances involved circumstances which do not appear to be present in the current litigation. Many of the standards set for products did not deal with any aspects of the product over which a customer would care to bargain. Moreover, the product standardization often involved productive efficiency benefits for both the suppliers and customers. Joint ventures often involve productive efficiency benefits that stem from the partial integration of the venturers. The blanket licensing system that was given rule of reason treatment in Broadcast Music, Inc. v. Columbia Broadcasting System involved the creation of a new joint product which could not be individually produced by any of the copyright holders, and which competed with the individual compositions that were licensed.

If the agency model is so beneficial and efficient, why did the publishers have to agree among themselves to use it? Apple certainly would not have objected to a demand by any individual publisher to use the model. According to the government’s complaint, Apple was strongly supportive of the agency model. About the only readily apparent explanation for the need for an agreement among the publishers on using the agency model is that, without an agreement to use the model, no individual publisher could be sure that the others would not give in to a demand by the 800 pound gorilla/customer in e-book retailing, Amazon, that the wholesaling model continue to be used. Once one or more of the publishers gave into Amazon’s demand that Amazon be allowed to set the price it charged for e-books, other publishers would be “forced” to go along with Amazon, and that once Amazon could resume selling e-books for $9.99, Apple could not sustain the $14.99 “agency” price for e-books. The problem with this explanation is that it is a claim that competition itself is bad, and at least since National Society of Professional Engineers v. United States that has not been an acceptable argument.

Thus, contrary to Crane’s prediction, the alleged agreement among the publishers may wind up being summarily condemned even if they never agreed on a price or price level for the electronic copies of their books. Even if they “merely” agreed to jointly insist that the publisher be allowed to set the price at which an e-book was to be resold, that may well be characterized as “term fixing,” which may not quite carry the same stigma as “price fixing” but may allow the government to avoid the burdens and perils of a full-blown rule of reason inquiry.

Harry Gerla is a Professor of Law at the University of Dayton School of Law. His research focuses on antitrust, securities and corporate law. Prior to this, he clerked for Judge John Godbold of the US Court of Appeals for the Fifth Circuit before becoming an attorney for the US Securities and Exchange Commission Division of Market Regulation.

Suggested citation: Harry Gerla, Reconsidering the e-Book Analysis: A Response to Daniel Crane, JURIST – Forum, Apr. 26, 2012, http://jurist.org/forum/2012/04/harry-gerla-ebook-pricing.php.