GBS: Incoming!

DoJ files “statement of interest.” I’m reading, and posting insta-updates to my twitter stream (I’m @grimmelm) as I go.

UPDATE: Okay. Got it. This is a really, really good brief. The Department of Justice appreciates both the potential and the dangers of the settlement. They’re clearly trying to lay the groundwork for a constructive way forward, while protecting copyright owners and competition.

The DoJ, speaking on behalf of the United States, has two broad areas of concern: fairness to copyright owner class members and protecting competition. It also strongly notes the public benefits from making out-of-print works more available, from creating accessible versions for the disabled, and from expanding distribution options for books. Their bottom line is that the settlement as it now stands is untenable, but that with modifications, it could be much better. It indicates that the parties are trying to negotiate (with each other and with the DoJ, it would appear) some of those changes, and the DoJ gives the court suggestions for how it ought to encourage the parties along.

On the class-action fairness side, the DoJ is concerned about whether the named plaintiffs adequately looked out for orphan owners and for foreign owners. If the settlement were flipped to opt-in for out-of-print works, that would solve a lot of the orphan issues, but the DoJ also suggests that other modifications to reduce the conflicts of interest (such as better escrowing procedures) could work, too. As for foreign owners, the DoJ’s idea is that the named plaintiffs should include class representatives who are foreign copyright owners for in-print and out-of-print books. (Note that this is a more intrusive step than saying that Registry directors include foreign copyright owners, because the class representatives have a seat at the table in the negotiations.)

The DoJ also notes the notice concerns but expresses no opinion on whether they’re sufficiently serious to warrant rejection. Their reason for not saying—that the factual record is insufficiently developed to tell—strikes me as right. That said, the factual record is pretty bad for the settling parties. But given the fact that the DoJ wants them to renegotiate a revised settlement, a re-notice seems to be nearly certain in DoJ-world, so presumably that second notice would be a chance to get everything right.

On the antitrust side, the DoJ is deliberately cautious, saying it has an open investigation. I suspect that one of the reasons for caution is to avoid committing while negotiations are still open. They raise four issues, some of which I simply hadn’t noticed. I’m not going to get into their general attempt to parry some of the parties’ arguments about the BMI case; I think specific claims of anticompetitive conduct are the right place to discuss the import of the BMI precedent.

First, they’re concerned about the fixed 63% revenue split, which they call a “price floor” in the wholesale book market. I’m not sure that this is problematic, given that publishers and authors can always remove their books from the settlement’s revenue models entirely and negotiate with Google outside of the settlement. The 63% figure is just an offer extended by Google to all copyright owners in the class. Einer Elhauge’s paper gives strong arguments that this split is unproblematic. I’ll think about it some more, but the DoJ brief leave me unconvinced here.

Second, they believe the settlement restricts Google’s ability to offer retail discounts. I totally had not thought about this issue. I’m going to need to reread the settlement to tell whether they’re right about this; I’m going to need to read the cases they cite in order to decide whether it’s economically problematic. I’ll assume that the DoJ antitrust lawyers are good at reading settlements and reading cases, making this a live, interesting issue.

Third, they think the settlement lets the Registry, in its negotiations set prices of orphan works, which compete with the works of the known rightsholders who control it. Of course it does, and this issue goes to the heart of putting all orphan books under one central managing agent’s control. I think the pricing mechanism rules for the Institutional Subscription and Consumer Purchase deal with these issues (though the settlement may be ambiguous on some details), but as to other new revenue models, the Registry is constrained only by Google’s negotiating position.

Fourth, the DoJ basically channels my views on barriers to entry and the near-impossibility of a competitor being able to obtain the orphan authorizations that Google will. I thank them for putting the case so clearly and sharply. Fascinatingly, they close out the section by saying:

This risk of market foreclosure would be substantially ameliorated if the Proposed Settlement could be amended to provide some mechanism by which Google’s competitors’ could gain comparable access to orphan works (whatever such access turns out to be assuming the parties negotiate modifications to the settlement).

This is standard, so far—the settlement would be much better if competitors could get the same terms as Google. But then the DoJ moves the ball forward for a first down in two ways. They drop a footnote suggesting that the Registry could be authorized “to act as continuing agent for the rightsholders with respect to orphan works already granted to it under the Agreement,” making the case that this change would be only a smallish tweak to the settlement. And then try insert a cite to the settlement in the In re Literary Works in Elec. Databases Copyright Litigation case, citing it for the proposition that it authorizes “numerous companies beyond the named defendants allowed to obtain benefits of settlement.” Precedent! For nonexclusivity! In a copyright class action! For those of us who think that nonexclusivity is the key reform, this is huge.

Of course, the DoJ is appropriately cautious. They don’t say that this change would fix the antitrust concerns. They also warn that any changes would need to be consistent with Rule 23. But the emphasis is on finding a way to fix the antitrust concerns while staying within the limits of class action law. That’s a very constructive approach.

At the end, the bottom line is simple:

This Court should reject the Proposed Settlement in its current form and encourage the parties to continue negotiations to modify it so as to comply with Rule 23 and the copyright and antitrust laws.

This was a really gratifying filing to read. So many of the briefs and letters I’ve gone through in the last few weeks take a one-sided view of the settlement—wholly good or wholly evil—that it’s refreshing to read one that takes both good and bad seriously. It’s even more refreshing that they settle on the most fundamental issues and come out in basically the right place: the settlement has problems but is probably fixable. The emphasis on continued discussion is healthy, and the indications that negotiations are actively underway are very encouraging. I’m feeling more optimistic that something good will result at the end of the day than I have been in a while.