Why the DOJ (Antitrust Division) should intervene in the GSU case

wpid-Photo-Apr-11-2012-848-PMEarlier the previous week the US Department of Justice announced that it reached a settlement with McMillan in the antitrust e-books case, following previous settlements with the other four book publishers (Hachette,  HarperCollins, Penguin, and Simon & Schuster)that it sued less than a year ago. According to the DOJ, the agreements between those publishers and Apple “provided a perfect opportunity to coordinate the Publisher Defendants’ collective action to raise e-book prices.” The DOJ took swift action to prevent anticompetitive practices at a crucial moment in the development of digital publishing to ensure the competitiveness of this rapidly emerging industry.

Earlier last month, however, the DOJ asked the Eleventh Circuit Court of Appeals for a 21-day extension to consider whether to intervene in the appeal filed by three academic publishers who lost most of their copyright case against Georgia Statue University. The DOJ requested the extension to consider whether to file any amicus brief in support of appellants, or in support of neither party. If the DOJ actually decides to support the publishers in the GSU case it will quite unfortunate. The same DOJ that was swift in ensuring healthy competition in trade books will be giving its blessing to a less obvious but equally harmful collective action by academic publishers to lessen competition and raise the prices of scholarly works.

Some background. In April 2008, three publishers, Cambridge University Press, SAGE Publications, and Oxford University Press, filed a copyright infringement lawsuit against Georgia State University, alleging that GSU infringed their copyrights by allowing professors to upload excerpts from books onto the university’s electronic reserve system (ERes). The complaint alleged “systematic, widespread, and unauthorized copying and distribution of a vast amount of copyrighted works”, and argued that GSU “has facilitated, enabled, encouraged, and induced Georgia State professors to upload and post to these systems – and Georgia State students simultaneously to download, view, print, copy, and distribute – many, if not all, of the assigned readings for a particular course without limitation.” Unless GSU’s “infringing digital distribution practices are enjoined”, the complaint asserted, “Plaintiffs, authors, and the publishing community at large will continue to face a certain, substantial, and continuing threat of loss of revenue, which will in turn threaten Plaintiffs’ incentive to continue supporting and publishing the cutting-edge scholarship upon which the academic enterprise depends.” Last May, the court rejected the vast majority of the plaintiff’s allegations. In a 350 pages decision, Judge Evans dismissed 94 out of the 99 claims of copyright infringement. Of the initial 99 claims, only 75 reached the final stages of the trial. Some of the claims were dismissed on the grounds of de minimis copying, others on the ground that plaintiffs could not demonstrate that they were the owners, while the rest were found to be fair use. Infringement was found in only 5 cases. Significantly, Judge Evans held that when licenses for excerpts of works are easily accessible, reasonably priced, and that they offer excerpts in a format which is reasonably convenient for users, loss of licensing revenues resulting from unauthorized copying would cut against fair use.

Practically, Judge Evans told them: “Go ahead, develop convenient licensing schemes, and if you do, it will be hard for teachers to argue that they can copy without paying you”. In a normal industry this should have made the publishers quite satisfied. But the publishers aren’t happy, because the case was not really about those 99 works or about any significant harm that they have suffered. The purpose of the lawsuit, and of the publishers’ argument in their appeal, is to craft copyright law in such a way that would effectively force universities to purchase licenses from the Copyright Clearance Center (CCC), a collective of copyright owners who has orchestrated the litigation and funds half its cost. The GSU case looks like an ordinary copyright infringement case, but only superficially. Its true goal is to facilitate collusion among academic publishers via the CCC.

CCC was founded on the assumption that there might be situations in which users such as universities would need permission to photocopy academic articles or excerpts from books, and that in such situations it would be prohibitively costly for them to seek permission from the publisher. The idea was to create a collecting society, an uber-intermediary, that would provide licenses, similar to those that Performing Rights Organizations (PROs) like ASCAP or BMI provide for publicly performing music.

But if the (questionable) logic supporting tolerating PROs ever applied to photocopying, it does not apply to digital copying of scholarly work in 2013, and certainly not to major publishers such as the three plaintiffs. As major academic publishers, significant parts of the plaintiffs’ catalogues are available in digital form and licensed to universities. These catalogs include not only journals, but increasingly books too, and not only new books, but older ones as well. The availability of all this content in digital form is extremely useful for teachers, students, and researchers, and universities are willing to pay a lot for this convenience. Thus, with the move to digital content, universities began demanding not only “access” to content but also the copyright permissions to make this content useful (e.g., by printing it, photocopying it, scanning it, posting it on course management systems, etc.). After some hesitation, publishers began realizing that if they bundle licensing access to their content with generous permissions to use it, their content becomes more valuable, and if the product is more valuable, universities are willing to pay more for it.

So far so good. But there’s a limit on the ability of each individual publisher to raise prices. Even though the catalogs of different publishers aren’t perfect substitutes to each other publishers still compete on the margin. Beyond a certain point each university has to consider whether each publisher’s content is worth the extra dollar, and whether it can drop it and go by with the others.

In a world without antitrust laws, the publishers would be able to collude and still raise their prices a little more, but in a world with antitrust laws, simply fixing prices can be too risky. The motivation to collude still exists, but to avoid antitrust liability collusions has to be more sophisticated and less apparent.

Enters the CCC. To understand its role, imagine that we’re not dealing with books, articles, and publishers, but with cars, steering wheels, and automakers. Assume that consumers are willing to pay $25,000 for a new car, but that competition between automakers drives prices down to $20,000. Automakers would be happy to collude, raise the prices to $25,000 and squeeze the extra surplus from consumers, but antitrust law prohibits them from doing that. But now let’s assume that new cars come with steering wheels that use patented technologies. Each automaker uses its own patented steering wheel, and each of them can sell its cars without infringing any other patent. Notwithstanding the patents, consumers still pay $20,000.

But assume that the automakers create a patent pools and call is the Consumer Car Coalition, or the Car Control Consortium, or in short, CCC. The automakers still sell cars for $20,000, but tell consumers that buying a car does not include a license to use its patented steering wheel. A steering wheel license can be obtained from the CCC for an annual license fee of $0.2 per mile. A consumer driving 5000 miles per year would pay $1000 annually. If that consumer keeps the car for 5 years the car’s total price would be $5000: exactly the same price that the automakers would charge if allowed to collude. Since a car without a steering wheel is useless, consumers would be forced to pay the competitive price for a car ($20,000) plus the additional supra-competitive fee for the steering wheel license. While the price for the car body seems as competitive as before, unbundling the product from the right to use it and collectively licensing that right allows the automakers to earn the same supra-competitive profit that they would have earned had they formed a price-fixing cartel.

In the 1940 and the 1950s the courts and the DOJ forced ASCAP and the music publishers to abandon a similar scheme in the licensing of music in films. Music publishers would only grant movie producers the right to synchronize their music in films but not the right to publicly perform them. The right to publicly perform the music had to be licensed separately from ASCAP. Since many of the movie producers owned major music publishers this scheme benefited them as well. But in 1948 the practice was prohibited following a private civil action brought against ASCAP by movie theaters. In Alden-Rochelle v. ASCAP the Court found that copyright holders could directly negotiate with movie producers to license performance rights at the same time that they negotiated with those producers to license synchronization rights, and therefore there was no efficiency justification for allowing ASCAP to collectively license movie producers or theaters. In the early 1950s similar provisions were entered into the consent decree between the DOJ and ASCAP that settled the DOJ’s antitrust case against ASCAP.

The same kind of scheme is what the CCC and the publishers are trying to implement via the GSU case. The restrictive view of fair use that they urge the court to adopt is meant to make it impossible for universities to use the materials that they buy without obtaining a license from the CCC. This would allow publishers to license “access” to their works in competition with each other, but unbundle from those licenses some of the usage rights, which they would then license collectively through the CCC.

In the 1940s and 1950s the DOJ protected movie theaters and movie viewers from such a scheme. Last year, the DOJ swiftly intervened to protect e-books readers from another anti-competitive scheme. It would be a shame if instead of protecting universities, teachers, and students from similar anti-competitive practices, the current DOJ would be actually be involved in promoting a price-fixing combination against them.


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