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By William Kolasky

Jon Jacobson in his initial posting claims that it would be “hard to find an easier case” than Apple e-Books, and David Balto and Chris Sagers seem to agree. I suppose that would be true if, as Richard Epstein claims, “the general view is that horizontal arrangements are per se unlawful.”

That, however, is not the law, and has not been since William Howard Taft’s 1898 opinion in Addyston Pipe. In his opinion, borrowing from an earlier dissenting opinion by Justice Edward Douglas White in Trans-Missouri Freight Ass’n, Taft surveyed the common law of restraints of trade. He showed that it was already well established in 1898 that even horizontal restraints of trade were not necessarily unlawful if they were ancillary to some legitimate business transaction or arrangement.

Building on that opinion, the Supreme Court, in what is now a long series of decisions beginning with BMI and continuing through Actavis, has made it perfectly clear that even a horizontal restraint cannot be condemned as per se unlawful unless it is a “naked” restraint that, on its face, could not serve any “plausible” procompetitive business purpose. That there are many horizontal arrangements that are not per se unlawful is shown by the DOJ’s own Competitor Collaboration Guidelines, which provide many examples, including joint sales agents.

As I suggested in my initial posting, Apple may have dug its own grave by devoting so much effort to denying the obvious—namely, that it had helped facilitate a horizontal agreement among the publishers, just as the lower courts found. Apple might have had more success had it instead spent more time explaining why it needed a horizontal agreement among the publishers as to the terms on which they would designate Apple as their common sales agent in order for it to successfully enter the e-book market, and why those terms did not amount to a naked horizontal price fixing agreement. Had it done so, Apple likely could have made a stronger case for why a rule of reason review was necessary than it did by trying to fit a square peg into a round hole by insisting that its agreements were purely vertical.

By Morgan Reed

In Philip K. Dick’s famous short story that inspired the Total Recall movies, a company called REKAL could implant “extra-factual memories” into the minds of anyone. That technology may be fictional, but the Apple eBooks case suggests that the ability to insert extra-factual memories into the courts already exists.

The Department of Justice, the Second Circuit majority, and even the Solicitor General’s most recent filing opposing cert. all assert that the large publishing houses invented a new “agency” business model as a way to provide leverage to raise prices, and then pushed it on Apple.

The basis of the government’s claim is that Apple had “just two months to develop a business model” once Steve Jobs had approved the “iBookstore” ebook marketplace. The government implies that Apple was a company so obviously old, inept, and out-of-ideas that it had to rely on the big publishers for an innovative business model to help it enter the market. And the court bought it “wholesale,” as it were. (Describing Apple’s “a-ha” moment when it decided to try the agency model, the court notes, “[n]otably, the possibility of an agency arrangement was first mentioned by Hachette and HarperCollins as a way ‘to fix Amazon pricing.'”)

The claim has no basis in reality, of course. Apple had embraced the agency model long before, as it sought to disrupt the way software was distributed. In just the year prior, Apple had successfully launched the app store, a ground-breaking example of the agency model that started with only 500 apps but had grown to more than 100,000 in 12 months. This was an explosion of competition — remember, nearly all of those apps represented a new publisher: 100,000 new potential competitors.

So why would the government create such an absurd fiction?

Because without that fiction, Apple moves from “conspirator” to “competitor.” Instead of anticompetitive scourge, it becomes a disruptor, bringing new competition to an existing market with a single dominant player (Amazon Kindle), and shattering the control held by the existing publishing industry.

More than a decade before the App Store, software developers had observed that the wholesale model for distribution created tremendous barriers for entry, increased expense, and incredible delays in getting to market. Developers were beholden to a tiny number of physical stores that sold shelf space and required kickbacks (known as spiffs). Today, there are legions of developers producing App content, and developers have earned more than $10 billion in sales through Apple’s App Store. Anyone with an App idea or, moreover, an idea for a book, can take it straight to consumers rather than having to convince a publisher, wholesaler or retailer that it is worth purchasing and marketing.

This disintermediation is of critical benefit to consumers — and yet the Second Circuit missed it. The court chose instead to focus on the claim that if the horizontal competitors conspired, then Apple, which had approached the publishers to ensure initial content would exist at time of launch, was complicit. Somehow Apple could be a horizontal competitor even through it wasn’t part of the publishing industry!

There was another significant consumer and competitive benefit from Apple’s entry into the market and the shift to the agency model. Prior to the Apple iPad, truly interactive books were mostly science fiction, and the few pilot projects that existed had little consumer traction. Amazon, which held 90% of the electronic books market, chose to focus on creating technology that mirrored the characteristics of reading on paper: a black and white screen and the barest of annotation capabilities.

When the iPad was released, Apple sent up a signal flag that interactivity would be a focal point of the technology by rolling out tools that would allow developers to access the iPad’s accelerometer and touch sensitive screen to create an immersive experience. The result? Products that help children with learning disabilities, and competitors fighting back with improved products.

Finally, Apple’s impact on consumers and competition was profound. Amazon switched, as well, and the nascent world of self publishing exploded. Books like Hugh Howey’s Wool series (soon to be a major motion picture) were released as smaller chunks for only 99 cents. And “the Martian,” which is up for several Academy Awards found a home and an audience long before any major publisher came calling.

We all need to avoid the trip to REKAL and remember what life was like before the advent of the agency model. Because if the Second Circuit decision is allowed to stand, the implication for any outside competitor looking to disrupt a market is as grim and barren as the surface of Mars.

By Thomas Hazlett

The Apple e-books case is throwback to Dr. Miles, the 1911 Supreme Court decision that managed to misinterpret the economics of competition and so thwart productive activity for over a century. The active debate here at TOTM reveals why.

The District Court and Second Circuit have employed a per se rule to find that the Apple e-books agreement with five major publishers constituted a violation of Section 1 of the Sherman Act. Citing the active cooperation in contract negotiations involving multiple horizontal competitors (publishers) and the Apple offer, which appears to have raised prices paid for e-books, the conclusion that this is a case of horizontal collusion appears a slam dunk to some. “Try as one may,” writes Jonathan Jacobson, “it is hard to find an easier antitrust case than United States v. Apple.”

I’m guessing that that is what Charles Evans Hughes thought about the Dr. Miles case in 1911.

Upon scrutiny, the apparent simplicity in either instance evaporates. Dr. Miles has been revised as per GTE Sylvania, Leegin, and (thanks, Keith Hylton) Business Electronics v. Sharp Electronics. Let’s here look at the pending Apple dispute.

First, the Second Circuit verdict was not only a split decision on application of the per se rule, the dissent ably stated a case for why the Apple e-books deal should be regarded as pro-competitive and, thus, legal.

Second, the price increase cited as determinative occurred in a two-sided market; the fact asserted does not establish a monopolistic restriction of output. Further analysis, as called for under the rule of reason, is needed to flesh out the totality of the circumstances and the net impact of the Apple-publisher agreement on consumer welfare. That includes evidence regarding what happens to total revenues as market structure and prices change.

Third, a new entrant emerged as per the actions undertaken — the agreements pointedly did not “lack…. any redeeming virtue” (Northwest Wholesale Stationers, 1985), the justification for per se illegality. The fact that a new platform — Apple challenging Amazon’s e-book dominance — was both cause and effect of the alleged anti-competitive behavior is a textbook example of ancillarity. The “naked restraints” that publishers might have imposed had Apple not brought new products and alternative content distribution channels into the mix thus dressed up. It is argued by some that the clothes were skimpy. But that fashion statement is what a rule of reason analysis is needed to determine.

Fourth, the successful market foray that came about in the two-sided e-book market is a competitive victory not to be trifled. As the Supreme Court determined in Leegin: A “per se rule cannot be justified by the possibility of higher prices absent a further showing of anticompetitive conduct. The antitrust laws are designed to protect interbrand competition from which lower prices can later result.” The Supreme Court need here overturn U.S. v. Apple as decided by the Second Circuit in order that the “later result” be reasonably examined.

Fifth, lock-in is avoided with a rule of reason. As the Supreme Court said in Leegin:

As courts gain experience considering the effects of these restraints by applying the rule of reason… they can establish the litigation structure to ensure the rule operates to eliminate anticompetitive restraints….

The lock-in, conversely, comes with per se rules that nip the analysis in the bud, assuming simplicity where complexity obtains.

Sixth, Judge Denise Cote, who issued the District Court ruling against Apple, shows why the rule of reason is needed to counter her per se approach:

Here we have every necessary component: with Apple’s active encouragement and assistance, the Publisher Defendants agreed to work together to eliminate retail price competition and raise e-book prices, and again with Apple’s knowing and active participation, they brought their scheme to fruition.

But that cannot be “every necessary component.” It is not in Apple’s interest to raise prices, but to lower prices paid. Something more has to be going on. Indeed, in raising prices the judge unwittingly cites an unarguable pro-competitive aspect of Apple’s foray: It is competing with Amazon and bidding resources from a rival. Indeed, the rival is, arguably, an incumbent with market power. This cannot be the end of the analysis. That it is constitutes a throwback to the anti-competitive per se rule of Dr. Miles.

Seventh, in oral arguments at the Second Circuit, Judge Raymond J. Lohier, Jr. directed a question to Justice Department counsel, asking how Apple and the publishers “could have broken Amazon’s monopoly of the e-book market without violating antitrust laws.” The DOJ attorney responded, according to an article in The New Yorker, by advising that

Apple could have let the competition among companies play out naturally without pursuing explicit strategies to push prices higher—or it could have sued, or complained to the Justice Department and to federal regulatory authorities.

But the DOJ itself brought no complaint against Amazon — it, instead, sued Apple. And the admonition that an aggressive innovator should sit back and let things “play out naturally” is exactly what will kill efficiency enhancing “creative destruction.” Moreover, the government’s view that Apple “pursued an explicit strategy to push prices higher” fails to acknowledge that Apple was the buyer. Such as it was, Apple’s effort was to compete, luring content suppliers from a rival. The response of the government is to recommend, on the one hand, litigation it will not itself pursue and, on the other, passive acceptance that avoids market disruption. It displays the error, as Judge Jacobs’ Second Circuit dissent puts it, “That antitrust law is offended by gloves off competition.” Why might innovation not be well served by this policy?

Eighth, the choice of rule of reason does not let Apple escape scrutiny, but applies it to both sides of the argument. It adds important policy symmetry. Dr. Miles impeded efficient market activity for nearly a century. The creation of new platforms in Internet markets ought not to have such handicaps. It should be recalled that, in introducing its iTunes platform and its vertically linked iPod music players, circa 2002, the innovative Apple likewise faced attack from competition policy makers (more in Europe, indeed, than the U.S.). Happily, progress in the law had loosened barriers to business model innovation, and the revolutionary ecosystem was allowed to launch. Key to that progressive step was the bulk bargain struck with music labels. Richard Epstein thinks that such industry-wide dealing now endangers Apple’s more recent platform launch. Perhaps. But there is no reason to jump to that conclusion, and much to find out before we embrace it.

By Andrew Albanese

In October of last year, I had the chance to interview Hachette CEO Arnaud Nourry from the stage at the Frankfurt Book Fair, and I asked him whether his 2009 concerns that low e-book prices would devalue the book—the driving factor behind the alleged e-book price-fixing conspiracy—were in the the past. After all, much has changed over the last six years.

Nourry was resolute in his response.

When you lose control over your price point you are on the way to death. We have to be very careful and never think it is behind us. We are still concerned. And I am glad that there is a consensus among major publishers that we should keep control.

As the non-lawyer here, I’m necessarily going to take a slightly different approach to today’s symposium. But I want to be clear, right up front: However the Supreme Court dispatches with Apple’s appeal in it e-book price-fixing case, whether the court declines to take up the appeal, or ultimately reverses, it is going to have little effect on the e-book market.

Even though it triggered a high profile antitrust case, and two years of market sanctions, Apple’s 2010 scheme with publishers to eliminate retail price competition from the e-book market ultimately succeeded. Today, the Big Five publishers (Hachette, HarperCollins, Macmillan, Simon & Schuster and Penguin Random House) now control the consumer prices of their e-books. Apple does not have to worry about the iBookstore being undercut on price by Amazon. And Amazon’s main competitive advantage has been blunted—its $9.99 price on bestselling new release e-books—“that pitiful, paltry price,” as Daily Beast co-founder Tina Brown once called it—is history. Frontlist e-books now retail for as high as $14.99.

So, how is the e-book market faring, post-Apple? It’s been a mixed bag. On one hand, e-book sales from the Big Five publishers declined in 2015. For Nourry’s company, Hachette, digital sales (including digital audio) accounted for 22% of trade sales last year, down from 26% in 2014. So much for Steve Jobs’ 2010 prediction that Apple would usher in a “mainstream e-book revolution.”

On the other hand, print sales are up. Publishers say the dip in e-book sales and the rebound of print is a sign that the book market that is beginning to find its balance. And while they concede that higher e-book prices are clearly playing a role in the market’s re-balancing act, it is still too early to tell to what degree price or other factors are driving format choices in the publishing market.  

For me, the interesting question is where we go from here. In 2016, for the first time in the modern e-book market’s short history, there are no major disruptions on the horizon: no game-changing device like the iPad; no fundamental changes coming in the retail market (like the agency model); no looming negotiations with Amazon (for now); no court-imposed e-book discounting. With fewer thumbs on the scale, the next two years are poised to present the clearest picture yet of the demand for e-books, what prices work, or don’t, the viability of emerging new channels such as subscription access, where the competitive fault lines truly lie.

In that light, the narrow legal question before the Supreme Court in Apple’s appeal—whether a vertical firm that organizes a price-fixing conspiracy among its suppliers can be condemned as per se liable—feels anticlimactic, and largely academic. Sure, there is $400 million in consumer refunds at stake, per Apple’s settlement with the states and consumer class. But here’s what’s not at stake: the future of innovation.

Despite some outstanding work by Apple’s counsel, and some outraged editorials and amicus briefs, this case has never been about innovation, new technology, or novel business arrangements in emerging markets. When the publishers first agreed to Apple’s terms, they had yet to even see an iPad, or the iBookstore. And there is no dispute that the iPad was going to be used as an e-reading device regardless of whether or not Apple got into e-book retailing.

Rather, as Macmillan CEO John Sargent once suggested in an email, the benefit of the iPad was that its launch presented a singular opportunity to change the business model for e-books—to wrest pricing control from Amazon, and to raise e-book prices to levels they considered “rational.” 

While it is a compelling narrative, it seems highly unlikely to me that upholding per se liability in this case would discourage tech companies from innovating or striking novel new arrangements in emerging digital markets. Again, I am no lawyer. But isn’t the greater concern that, if vindicated, Apple’s scheme would essentially serve as a blueprint for large vertical players to work with major suppliers to eliminate retail price competition from nascent markets?

I keep going back to U.S. attorney Mark Ryan’s closing argument at Apple’s trial. Who knows, Ryan argued, how the market would have solved Amazon’s $9.99 problem? That, it seems to me, remains the key question.

Andrew Richard Albanese is Senior Writer for Publishers Weekly and the author of The Battle of $9.99: How Apple, Amazon, and the Big Six Publishers Changed the E-Book Business Overnight.

by Jonathan Jacobson

Try as one may, it is hard to find an easier antitrust case than United States v. Apple.

Consider: The six leading publishers all wanted to prevent Amazon and others from offering best seller e-books at $9.99 (or other similar low prices). The problem, however, was that they had no mechanism for accomplishing that result. Then came Apple. Apple figured out that the “Amazon problem” could be fixed if the publishers changed their customer relationships from sale/resale to “agency,” all subject to an MFN with Apple that would prohibit any of the publishers – and, through the MFN, Amazon – from underselling the (higher) prices on Apple’s iBookstore. Loving this “aikido move” (in Steve Jobs’ words), all the publishers but Random House happily agreed. Prices for best seller e-books increased 30% almost overnight.

So what is this? The fact of a horizontal conspiracy among the five publishers is largely undisputed. Is it any less per se illegal because Apple was involved? Hardly; especially on these facts, where the participation by the “vertical” player was essential to make the whole scheme work. Apple’s role in no way made the conspiracy benign. It made it worse – and it couldn’t have been achieved without Apple’s active role.

Truly, all one needs to know about the case is in the attached video clip from the iPad launch event. Asked by the Wall Street Journal why anyone would pay $14.99 for a book from the iBookstore when it could be had for $9.99 on Amazon, Steve Jobs said: “Well, that won’t be the case.” Asked to explain, he added: “The prices will be the same.”

So we have a horizontal conspiracy to fix and raise e-book prices, made operational only through Apple’s aggressive involvement, that immediately raised prices by 30%. If that’s not an antitrust violation, we’re all in trouble.

By William Kolasky

In my view, the Second Circuit’s decision in Apple e-Books, if not reversed by the Supreme Court, threatens to undo a half century of progress in reforming antitrust doctrine. In decision after decision, from White Motors through Leegin and Actavis, the Supreme Court has repeatedly held—in cases involving both horizontal and vertical restraints—that the only test for whether an agreement can be found per se unlawful under Section 1 is whether it is “a naked [restraint] of trade with no purpose except stifling competition,” or whether it is instead “ancillary to the legitimate and competitive purposes” of a business association. Dagher. The cases in which the Court has consistently applied this test read like a litany of antitrust decisions we all now study in law school: White Motors, Topco, GTE Sylvania, Professional Engineers, BMI, Maricopa, NCAA, Business Electronics, ARCO, California Dental, Dagher, Leegin, American Needle, and, most recently, Actavis. Significantly, more than two-thirds of these cases involved horizontal, not vertical restraints.

In these decisions, the Court has also repeatedly warned that this test cannot be applied by simply asking whether the defendants “have literally ‘fixed’ a ‘price,” or otherwise agreed not to compete. Warning that “[l]iteralness is overly simplistic and often overbroad,” the Court insisted in BMI that courts instead focus on “the effect and, because it tends to show effect…, on the purpose of the practice” to determine whether “the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output… or instead one designed to ‘increase economic efficiency and render markets more, rather than less, competitive.”

In applying this test the Court has also repeatedly emphasized that a court should classify an alleged restraint—whether horizontal or vertical—as per se unlawful “only after considerable experience” with the particular restraint at issue. In addition, the Court has repeatedly emphasized that all that is necessary for a restraint to escape per se illegality is that there be a “plausible” procompetitive purpose behind it. See, e.g., Cal Dental; Business Electronics; Northwest Wholesale Stationers.

By focusing so much attention in their cert. papers on whether the agreements between Apple and the publishers should be characterized as “vertical” or “horizontal,” both Apple and the DOJ seem to have lost sight of the fundamental teachings of this long line of Supreme Court decisions—namely, that even if an agreement is horizontal, it can be found to be per se unlawful only if it is a naked agreement that, on its face, serves no purpose other than to restrict competition and restrain output. This is particularly important where, as in this case, the alleged agreements have both horizontal and vertical elements. In such cases, the right question is not whether the agreements can be labeled a “hub-and-spoke conspiracy,” but instead what the nature and purpose of those agreements were.

In this case, the nature of the arrangement between Apple and the publishers by which they all appointed Apple as their common sales agent is not fundamentally different from the an agreement among a group of competitors to appoint a joint sales agent. While such an arrangement can, in some circumstances, be used to facilitate cartel behavior, it can also serve legitimate pro-competitive purposes by enabling those competitors to market their goods or services more efficiently. The courts and antitrust enforcement agencies have, therefore, recognized—ever since the Supreme Court’s decision in Appalachian Coals—that these joint sales arrangements must generally be evaluated under the rule of reason and cannot in all instances be condemned as per se unlawful. See, e.g., FTC/DOJ, Competitor Collaboration Guidelines(For those of you who remember the criticisms that used to be directed at that decision by your antitrust professor in law school, I urge you to read Sheldon Kimmel’s excellent revisionist article, How and Why the Per Se Rule Against Price Fixing Went Wrong, showing that the Court’s holding was perfectly consistent with its more recent rulings in BMI and its progeny.

Viewing this as an agreement among the publishers to appoint Apple as their common sales agent might have helped the lower courts to have focused on what should have been the key issues in the case. The first is whether the agency arrangement was a “naked” agreement to “restrict competition and decrease output,” or could “plausibly” have been intended to serve other legitimate pro-competitive business purposes. The second is whether, if so, the restraints that were part of this arrangement—such as price caps and most-favored nation clauses—were ancillary to those legitimate purposes.

Based on the record as I read it, it appears to me that the answers to these two questions are obvious, and that they compel the conclusion that this common sales agent arrangement could not be classified as per se unlawful, but would need to be evaluated under a full-blown rule of reason analysis. Let me address each issue in turn.

Was the common sales agent arrangement between Apple and the five publishers a naked agreement to fix prices and restrict output?

Neither the lower courts nor the parties in their cert papers address this key issue in any detail, choosing instead to spend page after page debating whether the agreement between Apple and the publishers was horizontal or vertical. Fortunately, the amicus briefs that were filed in support of Apple’s cert. petition by ICLE and by a group of antitrust economists do address the issue at considerable length.

Those briefs make a convincing argument that the common sale agent arrangements between the publishers and Apple were designed to serve at least two pro-competitive purposes. The first was to introduce greater competition into the downstream market for the distribution of e-books by ending Amazon’s below-cost pricing of e-books at the retail level. The second was to give the publishers greater control over the downstream pricing of their e-books in order to prevent below-cost pricing of e-books from cannibalizing the sales of their print books.

The common sale agent arrangement served to introduce more competition into the downstream market for the distribution of e-books

This one is easy. No one disputes that before Apple entered, Amazon dominated the downstream market for e-books with a 90% market share, giving it a virtual monopoly. Hopefully, few, if any, would dispute that Amazon’s loss-leader strategy of selling e-books at well below cost served to entrench its near monopoly position in that market. It is easy to understand why publishers of e-books would not want to allow Amazon’s monopoly to continue, leaving them with only a sole distributor for their products.

The record below makes it clear that Apple did not believe it could profitably enter the e-book market so long as Amazon continued to maintain its first-mover advantage by selling e-books below cost. Apple and the publishers therefore had a common interest in moving from the existing wholesale model of e-book distribution to a new agency model under which the publishers, not Amazon, would control the retail pricing of e-books and could set those prices at a level that would enable other competitors, such as Apple, to enter. That seems pro-competitive to me.

The record also makes it clear that this objective could not be accomplished through a simple vertical agency agreement between Apple and one or two individual publishers. In order to enter successfully, Apple needed a critical mass of titles, which it could have only by securing the agreement of most of the leading publishers to appoint it as their common sale agent. Apple, therefore, had a legitimate pro-competitive business reason to facilitate—or, as the Second Circuit charged, “orchestrate” —agreements among the publishers to switch to an agency model and to appoint Apple as their common non-exclusive agent for the sale of their e-books.

The common sales agent arrangement gave the publishers control over the retail prices of e-books, protecting them from harms to their businesses that could otherwise be caused by below-cost pricing by a single dominant retailer.

The Second Circuit and DOJ both make much of the fact that the publishers wanted to control the retail prices of e-books in order to raise those prices above the level set by Amazon’s loss-leader pricing strategy. They both seem to believe that this alone is enough to characterize their conduct as a “naked price fixing scheme.” But it is not. As the Supreme Court held in Leegin, resale price maintenance can be pro-competitive even if it leads to higher prices if it is designed promote competition by creating a more efficient and competitive distribution system.

As Areeda and Hovenkamp teach in their treatise, Fundamentals of Antitrust Law, the same principle applies to agreements among a group of horizontal competitors to appoint a single sales agent. Those competitors will frequently “have to agree with each other that they will not accept less than a certain minimum price, or sometimes may even have to agree on the entire price schedule,” and these prices may sometimes be higher than the prices at which they were previously selling the products individually. See Areeda & Hovenkamp (2015 Supp.), at 19:31-32. But even if these agreements result in an increase in price, they argue that it should not be found illegal if the effect on output is positive. Their argument is supported by the language in BMI, in which the Court focused on the effect of a restraint on output, not price, in describing what was necessary to classify an alleged restraint as a per se illegal naked price-fixing agreement.

Here, although the district court found that prices went up and output went down in the short run after the publishers switched from their wholesale model to an agency model, these immediate, short-term effects do not necessarily show that the switch to the new agency model might not, over the long-term, have resulted in an increase in output. DOJ concedes that since Apple’s entry, e-book sales have grown exponentially, but speculates that this growth might have occurred even if Amazon had continued to maintain its monopoly position in the retail sale of e-books. As someone who reads e-books on my iPad, I doubt that, but this is the type of issue that can only be resolved through a full rule-of-reason analysis, not through the application of a conclusive presumption of illegality under the per se doctrine.

Here, as the amicus briefs argue, there are several ways Amazon’s loss-leader pricing strategy could have depressed the output of both e-book and print books long-term. First, of course, once its monopoly was fully entrenched, Amazon could have sought to recoup its losses by raising its e-book prices above a competitive level. Second, if instead Amazon continued to cannibalize print sales through below-cost e-book pricing, publishers might have been forced to reduce the royalties they pay authors, giving those authors less reason to continue writing, thus reducing the output of all books. Again, these are the types of issues that require a full rule of reason analysis, not summary condemnation under the per se doctrine.

Were the price caps and most-favored nation clauses ancillary restraints that may have been reasonably necessary to the legitimate pro-competitive purposes of the common sales agent arrangement?

The ancillary nature of the terms that were included in Apple’s agency agreements with the publishers, and which the publishers may have agreed among themselves to accept, is equally easy to show.

The price caps on which Apple insisted were obviously designed to protect it from opportunistic behavior by the publishers in charging higher prices for their e-books than what Apple felt the market would accept, thereby preventing it from selling a sufficient volume of e-books to make its entry successful. Such opportunistic behavior by the publishers could also have made it harder to convince consumers to buy Apple’s new iPad, the success of which was critical to its future.

The most favored nation clauses on which Apple insisted, and which the publishers may also have agreed among themselves to accept, were likewise arguably necessary to protect Apple from the risk of having to compete against an established competitor offering lower prices than it could, thereby impeding its successful entry and damaging its goodwill with consumers.

In both cases, these are classic and legitimate reasons for ancillary restraints. Whether or not these particular restraints were reasonably necessary to Apple’s successful entry is a question that could only be decided on the basis of a full rule of reason analysis. All that is needed to avoid per se condemnation is that there be a plausible argument that they were, and that, again, should be something that no one could dispute.

* * *

Given the way the case was litigated, I recognize that it may be difficult to introduce at the Supreme Court level a whole new way of looking at the facts of the case. But if the Court does grant cert., I would hope that Apple and the amici supporting it would try to refocus the Court’s attention away from a sterile argument over whether the restraints in question were vertical or horizontal, and to focus it instead on whether they were a “naked” attempt to fix prices and restrict output or were instead ancillary to a pro-competitive business relationship.

 

 

 

 

 

 

 

Imagine

totmauthor —  27 August 2015

by Michael Baye, Bert Elwert Professor of Business at the Kelley School of Business, Indiana University, and former Director of the Bureau of Economics, FTC

Imagine a world where competition and consumer protection authorities base their final decisions on scientific evidence of potential harm. Imagine a world where well-intentioned policymakers do not use “possibility theorems” to rationalize decisions that are, in reality, based on idiosyncratic biases or beliefs. Imagine a world where “harm” is measured using a scientific yardstick that accounts for the economic benefits and costs of attempting to remedy potentially harmful business practices.

Many economists—conservatives and liberals alike—have the luxury of pondering this world in the safe confines of ivory towers; they publish in journals read by a like-minded audience that also relies on the scientific method.

Congratulations and thanks, Josh, for superbly articulating these messages in the more relevant—but more hostile—world outside of the ivory tower.

To those of you who might disagree with a few (or all) of Josh’s decisions, I challenge you to examine honestly whether your views on a particular matter are based on objective (scientific) evidence, or on your personal, subjective beliefs. Evidence-based policymaking can be discomforting: It sometimes induces those with philosophical biases in favor of intervention to make laissez-faire decisions, and it sometimes induces people with a bias for non-intervention to make decisions to intervene.

by Berin Szoka, President, TechFreedom

Josh Wright will doubtless be remembered for transforming how FTC polices competition. Between finally defining Unfair Methods of Competition (UMC), and his twelve dissents and multiple speeches about competition matters, he re-grounded competition policy in the error-cost framework: weighing not only costs against benefits, but also the likelihood of getting it wrong against the likelihood of getting it right.

Yet Wright may be remembered as much for what he started as what he finished: reforming the Commission’s Unfair and Deceptive Acts and Practices (UDAP) work. His consumer protection work is relatively slender: four dissents on high tech matters plus four relatively brief concurrences and one dissent on more traditional advertising substantiation cases. But together, these offer all the building blocks of an economic, error-cost-based approach to consumer protection. All that remains is for another FTC Commissioner to pick up where Wright left off.

Apple: Unfairness & Cost-Benefit Analysis

In January 2014, Wright issued a blistering, 17 page dissent from the Commission’s decision to bring, and settle, an enforcement action against Apple regarding the design of its app store. Wright dissented, not from the conclusion necessarily, but from the methodology by which the Commission arrived there. In essence, he argued for an error-cost approach to unfairness:

The Commission, under the rubric of “unfair acts and practices,” substitutes its own judgment for a private firm’s decisions as to how to design its product to satisfy as many users as possible, and requires a company to revamp an otherwise indisputably legitimate business practice. Given the apparent benefits to some consumers and to competition from Apple’s allegedly unfair practices, I believe the Commission should have conducted a much more robust analysis to determine whether the injury to this small group of consumers justifies the finding of unfairness and the imposition of a remedy.

…. although Apple’s allegedly unfair act or practice has harmed some consumers, I do not believe the Commission has demonstrated the injury is substantial. More importantly, any injury to consumers flowing from Apple’s choice of disclosure and billing practices is outweighed considerably by the benefits to competition and to consumers that flow from the same practice.

The majority insisted that the burden on consumers or Apple from its remedy “is de minimis,” and therefore “it was unnecessary for the Commission to undertake a study of how consumers react to different disclosures before issuing its complaint against Apple, as Commissioner Wright suggests.”

Wright responded: “Apple has apparently determined that most consumers do not want to experience excessive disclosures or to be inconvenienced by having to enter their passwords every time they make a purchase.” In essence, he argued, that the FTC should not presume to know better than Apple how to manage the subtle trade-offs between convenience and usability.

Wright was channeling Hayek’s famous quip: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” The last thing the FTC should be doing is designing digital products — even by hovering over Apple’s shoulder.

The Data Broker Report

Wright next took the Commission to task for the lack of economic analysis in its May 2013 report, “Data Brokers: A Call for Transparency and Accountability.” In just four footnotes, Wright extended his analysis of Apple. For example:

Footnote 85: Commissioner Wright agrees that Congress should consider legislation that would provide for consumer access to the information collected by data brokers. However, he does not believe that at this time there is enough evidence that the benefits to consumers of requiring data brokers to provide them with the ability to opt out of the sharing of all consumer information for marketing purposes outweighs the costs of imposing such a restriction. Finally… he believes that the Commission should engage in a rigorous study of consumer preferences sufficient to establish that consumers would likely benefit from such a portal prior to making such a recommendation.

Footnote 88: Commissioner Wright believes that in enacting statutes such as the Fair Credit Reporting Act, Congress undertook efforts to balance [costs and benefits]. In the instant case, Commissioner Wright is wary of extending FCRA-like coverage to other uses and categories of information without first performing a more robust balancing of the benefits and costs associated with imposing these requirements

The Internet of Things Report

This January, in a 4-page dissent from the FTC’s staff report on “The Internet of Things: Privacy and Security in a Connected World,” Wright lamented that the report neither represented serious economic analysis of the issues discussed nor synthesized the FTC’s workshop on the topic:

A record that consists of a one-day workshop, its accompanying public comments, and the staff’s impressions of those proceedings, however well-intended, is neither likely to result in a representative sample of viewpoints nor to generate information sufficient to support legislative or policy recommendations.

His attack on the report’s methodology was blistering:

The Workshop Report does not perform any actual analysis whatsoever to ensure that, or even to give a rough sense of the likelihood that the benefits of the staff’s various proposals exceed their attendant costs. Instead, the Workshop Report merely relies upon its own assertions and various surveys that are not necessarily representative and, in any event, do not shed much light on actual consumer preferences as revealed by conduct in the marketplace…. I support the well-established Commission view that companies must maintain reasonable and appropriate security measures; that inquiry necessitates a cost-benefit analysis. The most significant drawback of the concepts of “security by design” and other privacy-related catchphrases is that they do not appear to contain any meaningful analytical content.

Ouch.

Nomi: Deception & Materiality Analysis

In April, Wright turned his analytical artillery from unfairness to deception, long the more uncontroversial half of UDAP. In a five-page dissent, Wright accused the Commission of essentially dispensing with the core limiting principle of the 1983 Deception Policy Statement: materiality. As Wright explained:

The materiality inquiry is critical because the Commission’s construct of “deception” uses materiality as an evidentiary proxy for consumer injury…. Deception causes consumer harm because it influences consumer behavior — that is, the deceptive statement is one that is not merely misleading in the abstract but one that causes consumers to make choices to their detriment that they would not have otherwise made. This essential link between materiality and consumer injury ensures the Commission’s deception authority is employed to deter only conduct that is likely to harm consumers and does not chill business conduct that makes consumers better off.

As in Apple, Wright did not argue that there might not be a role for the FTC; merely that the FTC had failed to justify bringing, let alone settling, an enforcement action without establishing that the key promise at issue — to provide in-store opt-out — was material.

The Chamber Speech: A Call for Economic Analysis

In May, Wright gave a speech to the Chamber of Commerce on “How to Regulate the Internet of Things Without Harming its Future: Some Do’s and Don’ts”:

Perhaps it is because I am an economist who likes to deal with hard data, but when it comes to data and privacy regulation, the tendency to rely upon anecdote to motivate policy is a serious problem. Instead of developing a proper factual record that documents cognizable and actual harms, regulators can sometimes be tempted merely to explore anecdotal and other hypothetical examples and end up just offering speculations about the possibility of harm.

And on privacy in particular:

What I have seen instead is what appears to be a generalized apprehension about the collection and use of data — whether or not the data is actually personally identifiable or sensitive — along with a corresponding, and arguably crippling, fear about the possible misuse of such data.  …. Any sensible approach to regulating the collection and use of data will take into account the risk of abuses that will harm consumers. But those risks must be weighed with as much precision as possible, as is the case with potential consumer benefits, in order to guide sensible policy for data collection and use. The appropriate calibration, of course, turns on our best estimates of how policy changes will actually impact consumers on the margin….

Wright concedes that the “vast majority of work that the Consumer Protection Bureau performs simply does not require significant economic analysis because they involve business practices that create substantial risk of consumer harm but little or nothing in the way of consumer benefits.” Yet he notes that the Internet has made the need for cost-benefit analysis far more acute, at least where conduct is ambiguous as its effects on consumers, as in Apple, to avoid “squelching innovation and depriving consumers of these benefits.”

The Wrightian Reform Agenda for UDAP Enforcement

Wright left all the building blocks his successor will need to bring “Wrightian” reform to how the Bureau of Consumer Protection works:

  1. Wright’s successor should work to require economic analysis for consent decrees, as Wright proposed in his last major address as a Commissioner. BE might not to issue a statement at all in run-of-the-mill deception cases, but it should certainly have to say something about unfairness cases.
  2. The FTC needs to systematically assess its enforcement process to understand the incentives causing companies to settle UDAP cases nearly every time — resulting in what Chairman Ramirez and Commissioner Brill frequently call the FTC’s “common law of consent decrees.”
  3. As Wright says in his Nomi dissent “While the Act does not set forth a separate standard for accepting a consent decree, I believe that threshold should be at least as high as for bringing the initial complaint.” This point should be uncontroversial, yet the Commission has never addressed it. Wright’s successor (and the FTC) should, at a minimum, propose a standard for settling cases.
  4. Just as Josh succeeded in getting the FTC to issue a UMC policy statement, his successor should re-assess the FTC’s two UDAP policy statements. Wright’s successor needs to make the case for finally codifying the DPS — and ensuring that the FTC stops bypassing materiality, as in Nomi.
  5. The Commission should develop a rigorous methodology for each of the required elements of unfairness and deception to justify bringing cases (or making report recommendations). This will be a great deal harder than merely attacking the lack of such methodology in dissents.
  6. The FTC has, in recent years, increasingly used reports to make de facto policy — by inventing what Wright calls, in his Chamber speech, “slogans and catchphrases” like “privacy by design,” and then using them as boilerplate requirements for consent decrees; by pressuring companies into adopting the FTC’s best practices; by calling for legislation; and so on. At a minimum, these reports must be grounded in careful economic analysis.
  7. The Commission should apply far greater rigor in setting standards for substantiating claims about health benefits. In two dissents, Genelink et al and HCG Platinum, Wright demolished arguments for a clear, bright line requiring two randomized clinical trials, and made the case for “a more flexible substantiation requirement” instead.

Conclusion: Big Shoes to Fill

It’s a testament to Wright’s analytical clarity that he managed to say so much about consumer protection in so few words. That his UDAP work has received so little attention, relative to his competition work, says just as much about the far greater need for someone to do for consumer protection what Wright did for competition enforcement and policy at the FTC.

Wright’s successor, if she’s going to finish what Wright started, will need something approaching Wright’s sheer intellect, his deep internalization of the error-costs approach, and his knack for brokering bipartisan compromise around major issues — plus the kind of passion for UDAP matters Wright had for competition matters. And, of course, that person needs to be able to continue his legacy on competition matters…

Compared to the difficulty of finding that person, actually implementing these reforms may be the easy part.

by Hon. F. Scott Kieff, Commissioner, International Trade Commission (on leave from academic post as Fred C. Stevenson Research Professor at George Washington University School of Law)

I join all the others in congratulating Professor Wright on his accomplishments at the FTC. As both an academic and government official myself, I’ve long benefited from Dr. Wright’s work in academia and in government. I’ve also greatly enjoyed a ring-side view of the his upbeat and thoughtful manner for constructively engaging the diverse perspectives offered by personnel across the government, academic, and private sectors. Thanks to President Obama’s nomination and the Senate’s confirmation, Commissioner Wright consistently brought to bear a most serious and productive set of carefully considered ideas in both law and economics that he prudently adapted for helpful real world application. I thank Commissioner Wright for all that he has given to our country, and I wish him all continued success in the many important academic endeavors to which he has returned.

by Robert H. Lande, Venable Professor of Law, University of Baltimore School of Law

There’s an old saying, “It’s better to light a single bipartisan candle than to curse the darkness caused by your opponents.” This might not be the way most people articulate this proverb, but in Washington D. C. anyone who, like Commissioner Joshua Wright, puts so much effort into finding, developing, and promoting bipartisan agreement is a rarity indeed.

Commissioner Wright’s final accomplishment at the Commission was the agency’s Section 5 Policy Statement. It had been a high priority of his for years. In light of the fact that the Commission had gone a century without issuing anything describing its central competition mission and the wide divergence of views at the Commission on the underlying issues, many of us thought his task impossible. But he succeeded! It wasn’t the statement he wanted, of course, but his preferred statement was opposed by so many (including me) that agreement on a detailed document was not feasible. He nevertheless secured a compromise that perhaps will be the building block for a future, more detailed and even more useful document. By persevering and stressing the areas where the Commissioners agreed, he forged a historic bipartisan consensus.

Another example of Commissioner Wright’s approach is a policy recommendation he and his frequent co-author, Judge Douglas Ginsburg, developed, wrote and are promoting together with two extraordinarily unlikely co-authors: Bert Foer, the founder and past President of the American Antitrust Institute, and me, a Director of this organization. You might wonder what the four of us possibly could agree upon?

Wright & Ginsburg sent a proposed set of recommendations to the US Sentencing Commission calling upon it to make a large number of changes involving criminal antitrust penalties. At the same time Foer & Lande recommended that the Sentencing Commission implement an almost opposite list of policy changes. In fact, the dueling recommendations agreed on only one issue: Both wanted to ban corporations convicted of price fixing from hiring their cartel’s convicted employees after they were released from prison. Stressing their agreement, this unlikely quartet co-authored a piece advocating this policy option. We of course hope and believe that the politically diverse names on the recommendation will cause it to have a much greater impact than separate recommendations by either team would have had.

Because he always pushed as hard as possible for his preferred positions, he of course didn’t get everything he wanted. But he persevered and in this way forged and secured whatever agreements he could. In today’s Washington D.C. these candles are noteworthy accomplishments. Kudos to Commissioner Wright!