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Court Closes The Book On Bookhouse Antitrust Claims Against Amazon And Publishers

Posted  December 17, 2013

By Allison F. Sheedy

The U.S. District Court for the Southern District of New York has dismissed antitrust claims against Amazon and the six largest book publishers related to the publishers’ contracts with Amazon for the distribution of e-books requiring the use of digital rights management software (“DRM”) in The Bookhouse of Stuyvesant Plaza, Inc. et al. v., Inc. et al.

The Bookhouse plaintiffs are independent bookstores that sell both print books and e-books.  They alleged claims of unlawful restraints of trade under Section 1 of the Sherman Act against all defendants, and claims of monopolization and attempted monopolization under Section 2 of the Sherman Act against Amazon.

Generally speaking, DRM limits the ability to use digital content after its sale.  The plaintiffs alleged that Amazon, manufacturer of the Kindle e-reader, employed more restrictive DRM technology than required by its agreements with the six publisher defendants – Random House Inc., Penguin Group (USA) Inc., Hachette Book Group USA Inc., Simon & Schuster Inc., HarperCollins Publishers LLC and Macmillan Publishers Inc.  Plaintiffs claimed that this DRM technology effectively restricted the devices on which e-books sold and distributed by Amazon could be read, which rendered Amazon’s e-book platform a “closed ecosystem.”

Although the complaint did not specify any concerted action on behalf of any of the publisher defendants, it claimed their failure to directly license e-books to a purported class of independent bookstores, combined with the publishers’ “assent” to Amazon’s use of restrictive DRM, rendered their behavior unlawful.  Judge Jed S. Rakoff disagreed.

Discussing the lack of specific factual evidence, and implausibility of, any discussions or agreements about more restrictive DRM between the publishers and Amazon, the court found that plaintiffs’ allegations did nothing more than “raise theoretical possibilities,” falling far short of the pleading requirements enunciated by the Supreme Court in Bell Atlantic Corp. v. Twombly.

As for the claim that publishers were aware of Amazon’s DRM policy, and did nothing to stop it, the Court noted that under Monsanto Co. v. Spray-Rite Serv. Corp., “it is certainly not illegal for one party to announce terms of dealing and the counterparty to acquiesce to those terms.”

In July of this year, a different Southern District of New York judge found the horizontal aspects of another distribution relationship in the e-book market sufficient to warrant analysis as a per se violation of the Sherman Act.  In U.S. v. Apple, Inc., et al., Judge Denise Cote found that Apple had participated in a horizontal price-fixing scheme in connection with its 2010 release of the iPad.  Although Apple argued that it was in a vertical relationship with the five publisher defendants, Judge Cote held that because “Apple directly participated in a horizontal price-fixing conspiracy” among those publishers, “its conduct is per se unlawful.”  That ruling is currently on appeal.

The death knell for plaintiffs in the Bookhouse case was the failure to show actual harm to competition resulting from Amazon’s “closed ecosystem.”  After all, the complaint conceded that competitors to Amazon exist for both the sale of e-reading devices, and the distribution of publisher defendants’ e-books, including Barnes & Nobel, Apple, and Kobo.  The court found that the inability of consumers to buy the same product—e-books on the Kindle—from a different seller only harms that seller and does no cognizable harm to competition as a whole.

Judge Rakoff dismissed the booksellers’ claims with prejudice, having previously ruled that they would not get a third bite at the apple if their amended complaint was found deficient.

Edited by Gary J. Malone

Tagged in: Antitrust Litigation, Monopolization, Price Fixing,