We all know the old saying: take a bite out of crime. Unfortunately, today a New York federal court took a bite out of Apple, Inc., instead. The court found that Apple violated antitrust laws when it entered into contracts with major book publishers to distribute e-books using the agency model. The opinion is misguided in failing to see these vertical arrangements as efficient and reasonable methods of competing against and responding to Amazon’s below cost e-book pricing, which the government has to date ignored.
The opinion says that two wrongs don’t make a right. On the one hand, Amazon has overwhelming market share in the e-book market. What is more, it can subsidize losses in that product market with profits it makes in other anything but the kitchen sink markets. On the other hand, book publishers don’t have equal e-book market power — nor do they have equal ability to finance below cost pricing of e-books with profits from other diversified product markets.
Nonetheless, in the court’s view, the fact that Amazon was pricing e-books below cost didn’t justify Apple’s contracting with the settling book publishers to stabilize the price of print and e-books at above cost levels. The reason: Apple or the publishers could have either reported Amazon to the Department of Justice, or could have filed their own lawsuit.
The court’s argument assumes that the government is an impartial observer who doesn’t favor one entity over others in this grudge match. Objections to the government’s settlement with the book publishers raised concerns that the Department of Justice was and has been aware of Amazon’s below cost pricing of e-books but didn’t lift — and hasn’t lifted — a finger to address it.
Given the inability of Apple — and the publishers — to get the police officer to take action, they took matters into their own hands. As previously explained in this blog, the market should decide who wins this billion-dollar fight between Godzilla and King Kong — not one judge sitting in the Southern District of New York.
We all know the thirft shop. You go. You buy The Great Gatsby. It is used. It is cheap. It is a great read. And potentially illegal contraband? That could be so. Under the Second Circuit’s ruling in John Wiley & Sons, Inc. v. Kirtsaeng, you may not resell copyrighted materials that are manufactured overseas in the U.S. The Supreme Court heard oral arguments in the case on Monday. Until Congress amends the Copyrigt Act to limit the first sale doctrine to copyrighted materials manufactured in this U.S., the Supreme Court should overrule the Second Circuit.
Under the first sale doctrine, you are permitted to buy a book and then resell it. The copyright owner no longer has a right to restrain your use of the book once you have paid for it. However, there is a provision in the Copyright Act which prohibits you from importing copyrighted works into the U.S. without first obtaining the copyright owner’s permission. The question is whether that provision of the Act applies to copyrighted works that are used.
In Wiley, the Second Circuit was asked to resolve the apparent conflict between these provisions of the Copyright Act. The defendant had family members buy academic books overseas and then send the books to him in the U.S. When here, he sold the books for a profit. The books were manufactured overseas, and were protected by U.S. copyright law. The plaintiff, a publisher of some of the books that defendant was importing, sued him for copyright infringement, claiming he was violating their right to decide what copyrighted goods to import, or not. His defense was that he was protected by the first sale doctrine because all of the books he was importing were used. The lower court refused to instruct the jury about the potential applicability of the defense, and the man was found liable for copyright infringment.
Using some mental gymnastics, the Second Circuit held in Wiley that the first sale doctrine did not apply to the books in question because they were manufactured overseas, whereas there would have been a defense had the books been manufactured domestically. The Second Circuit came to this decision after reading a concurrence by Justice Ginsberg in Quality King, a previous Supreme Court decision in which the court held that the first sale doctrine applies to copyrighted products produced in the United States and resold here after being re-imported. Even though the majority opinion in Quality King didn’t peg its first sale doctrine holding to the fact that the product in question was domestically produced, Justice Ginsberg suggested a different outcome could result if a product were produced overseas and then imported.
It seems if Congress wanted to expand a copyright holder’s rights beyond the first sale depending on whether the product in question was produced oversears, it could easily do so by amending the Copyright Act. Until then, it seems the best way to keep cool local thrift shops (and others) from getting sued and put out of business by major book publishers (or others) for selling used books (or other copyrighted items) manufactured overseas is for the Supreme Court to reverse the Second Circuit.
Last week, we attended the opening night of the Tribeca Film Festival and thought an apt question to address is: why not just distribute content online? Recent press shows that independent authors and filmmakers are now choosing to bypass traditional offline distribution middlemen by distributing online. While this is a good thing for independents and for consumers, there may be some unwanted collateral damage.
We recently read in Cheapest E-Books Upend the Charts that independent writers like Louisville businessman John Locke were able to penetrate Amazon’s top 50 digital best seller list with books that are priced sometimes as low as 99 cents, as opposed to the $9.99 normally charged by other successful authors. By self-publishing and distributing online, authors like Mr. Locke are able to reduce publishing costs and directly reach readers with lower priced content. Now more highly priced authors that distribute through traditional publishers have to show that their content is ten times more valuable than the books that Mr. Locke writes. The same is true in the film world. IMDB reports that the biggest names in Hollywood have been protesting Video on Demand (“VOD”), which has placed major films online in but weeks after they appear in brick and mortar theaters. The theaters are fighting back by taking distribution into their own hands. The Los Angeles Times reports that AMC and Regal recently unveiled a new distribution company called Open Road Films, which will focus on developing and distributing independent films, presumably both on and offline. Any author or filmmaker now has to seriously consider self-publishing or independent distributing online, respectively, as an alternative to traditional distributorship. At the same time, the collateral damage may very well be the disappearance of traditional book stores and movie theaters, which is traditionally where people took their dates or socialized with their fellow neighbors. The disappearance of these fixtures may tend to further erode our social fabric.