History Repeats: Publishers, Retailers, and Antitrust

At the heart of last week’s antitrust lawsuit, which the US filed against Apple and a group of book publishers, was the publishers’ concern about Amazon’s discounted pricing for e-books. The complaint alleges that the publishers sought to move away from the wholesale pricing model, which allowed Amazon to buy ebooks and resell them at whatever price it chose, and institute an “agency model” instead, under which the publishers set the retail price and the retailer gets a commission.

This is not the first time that book publishers are unhappy about discounting resellers and collude to adopt a different model. A century ago, an industry-wide cartel of book publishers and traditional booksellers was formed in order to prevent the discounting of books. Some readers of this blog will be familiar with Bobbs-Merrill v. Straus, the US Supreme Court case from 1908, which established the first-sale doctrine.

Bobbs-Merrill was the publisher of a novel titled The Castaway. A notice printed on the book prohibited anyone from reselling it for less than $1, and threatened to treat any violation of this condition as copyright infringement. Macy’s, then a discount department store, purchased copies of the book from a distributor and sold them for ¢89 each. Bobbs-Merrill sued for copyright infringement. The Supreme Court dismissed the action, relying on the principle of exhaustion borrowed from earlier patent cases, as well as on the general policy against restraints on alienation.

The Court’s decision in Bobbs-Merrill case ends with a remark explaining that in light of the Court’s conclusion dismissing the copyright infringement claim, “it [is] unnecessary to discuss other questions noticed in the opinion in the circuit court of appeals, or to examine into the validity of the publisher’s agreements, alleged to be in violation of the acts to restrain combinations creating a monopoly or directly tending to the restraint of trade.”

This single allusion to antitrust, opens the door to a much richer antitrust history discussed in the lower courts’ decision, and reveals remarkable similarities to the current lawsuit against the publishers. It turns out that the dispute in Bobbs-Merrill did not involve a single publisher desiring to exercise control over the distribution system of its books. Rather, the case concerned an industry-wide cartel established in 1900, comprising the majority book publishers and booksellers who conspired to “correct some of the evils connected with the cutting of prices on copyright books” by requiring all publishers to fix the retail prices of their respective books, to prevent discounting, and eliminate discounters by collectively refusing to deal with them. Resale Price Maintenance (RPM) was the means to enforce the cartel and copyright was an effective method to enforce the RPM. The case was not about the vertical relationships between a publisher and a reseller, but had horizontal aspects as wide as horizontal aspects can be.

In fact, as early as 1903 Macy’s attempted to fight the cartel by suing the American Publishers’ Association and the American Booksellers’ Association relying on the Sherman Act and its equivalent New York Anti-Monopoly Act. Macy’s bid was only partially successful. The New York Court of Appeals found in favor of Macy’s on the basis that the publishers’ and booksellers’ rules sought to prevent the discounting of all books, copyrighted and non-copyrighted alike. Relying on Bement v. National Harrow, however, the court held that a combination to fix the prices of copyrighted books alone would be legal. Soon thereafter, the respective associations’ rules were amended to cover copyrighted books only, and Bobbs-Merrill commenced its copyright infringement suit against Macy’s. In its defence, Macy’s argued that the notice could not restrict the right of an owner of a copy of a book, lawfully printed and sold, to resell it as it saw fit. Macy’s further defended on the grounds that the lawsuit was an attempt to enforce an unlawful combination. The circuit court sided with Macy’s on both issues and refused to construe Bement v. National Harrow as broadly as the state court did. On appeal, the  Court of Appeals affirmed, but addressed only the copyright question. The Supreme Court, as noted above, mentioned the antitrust issue only in passing and based its decision solely on copyright grounds.

There are remarkable similarities between the turn of the 20th century case and the present one. Both of them involve resellers who revolutionized retail, and whose ability and willingness to sell books at discounted price threatened the existing business models of publishers and retailers. In both cases publishers had to collude among themselves and with some retailers in order to eliminate the threat of the discounting retailer and force a shift from a wholesale model to a model that allows the publisher to control the retail price. There are some differences, of course. The old case involved a retail innovator and collusion between publishers and resellers of yore, whereas the current case involves, in addition to publishers, two innovators (Amazon and Apple) and two innovations (retail innovation and product innovation).

But as the new case unfolds, it may be important to consider not only the antitrust aspects of the case but its copyright aspects as well. In Bobbs-Merrill, the Supreme Court avoided the antitrust questions and solved the case on copyright grounds, by establishing the first-sale doctrine. Since RPM was the means to enforce the cartel, and copyright was supposed to be the means to enforce the RPM, the Court’s decision destabilized the cartel. Thus, the Court broke the cartel by removing the ability of relyong on copyright law to maintain it.

The move to ebooks, however, and publishers’ tendency to “license” digital copies of content rather than “sell” it, put the first-sale doctrine under serious pressure. In a recent case, Vernor v. Autodesk, the 9th Circuit held that a software publisher could avoid the first-sale doctrine by licensing the software and including post-sale restraints in the license terms. If this approach is followed by other courts, there is danger that even if the DOJ wins the antitrust case, the victory may be short-lived.

The antitrust history of Bobbs-Merrill shows that post-sale restraints, enforceable with unexhausted IP rights have greater capacity to facilitate cartels and other types of anti-competitive behavior compared to contractual restraints. When the first-sale doctrine is inapplicable, publishers may use post-sale copyright restraints to support tacit collusion (or to collude without leaving incriminating evidence). The DOJ and the courts should remember this lesson not only in the current antitrust case but also when they decide whether and how to apply the first-sale doctrine to ebooks and other digitally distributed content.

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I explore this issue of the future of the first-sale doctrine in greater detail in this recent paper.

UPDATE: Kenneth Crews reminded me that Isidor Straus died 100 years ago today on the Titanic. Just another historic coincidence.