The Laboratorium
July 2013

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Too Good To Be True

The core of the antitrust case in United States v. Apple was simple. Apple convinced five major publishers to shift to the agency model, under which the publisher rather than the retailer controls the price of ebooks. Since Apple insisted on a 30% agency commission instead of Amazon’s razor-thin markups, publishers received a smaller cut of the price for each ebook sold. The publishers used the agency model to raise the retail prices paid by consumers. Unsurprisingly, readers bought fewer ebooks as a result.

In other words, Apple talked publishers into selling fewer ebooks and making less money on each one, while paying Apple for the privilege. It sounds too good to be true.

Publishers went along with this money-losing scheme so they could collectively raise ebook prices. They didn’t want readers to become accustomed to $9.99 ebooks, and they didn’t want Amazon undercutting other retailers. Publishers couldn’t do it alone; they had to act all at once. Enter Apple, which offered publishers the agency model they wanted, as part of a course of negotiations which ensured that each publisher knew the others were on board.

In other words, Apple knew that the reason its deal was attractive to publishers was that it provided the framework for an illegal cartel to fix prices. It sounds too good to be true because it was.

PW: The Google Case Grinds On

My latest Publishers Weekly column is online. This one, unsurprisingly, concerns the decertification of the Google Books class action. If you read my blog post yesterday or my tweets, there will be few surprises. Here’s the opening:

The Google Books litigation, now in its eighth year, is not so much out of gas as low on motor oil. It grinds on, with more smoke and noise than forward progress. Last May, Judge Denny Chin certified the case as a class action, setting it on a track to resolve, at long last, Google’s liability in one fell swoop. But today, the Second Circuit appeals court vacated Chin’s order, decertifying the class and sending the case back to him to consider Google’s fair use defense.

And here’s a brief passage from later on

The difference is one of those procedural distinctions that lawyers love to hate, and everyone else simply hates: the proper sequencing of issues. Judge Chin put class certification first, and would have gone on to consider fair use at a later date. But the Second Circuit held that fair use is a horse, not a cart, so it must come first. In theory, Judge Chin is free to recertify the class once he deals with fair use.

Second Circuit Decertifies the Google Books Class

Remember when Judge Chin certified a class action in the Google Books lawsuit? Seven years and a failed settlement into the case, it looked like it might finally be going somewhere. Yeah, well, not so much, because today the Second Circuit just vacated the class certification and remanded to Judge Chin to consider … fair use. The order is brief (five pages), but to my eye it strongly suggests that the judges in the appeal believe that Google has a compelling fair use defense that will end the case without the rigamarole of a full class action.

Google had argued, with support from academics, that the Authors Guild and its fellow associations weren’t good representative plaintiffs for all authors. The court didn’t address that argument, except in a brief aside, saying it was “an argument which, in our view, may carry some force.” Instead, it turned to fair use, saying:

[W]e believe that the resolution of Google’s fair use defense in the first instance will necessarily inform and perhaps moot our analysis of many class certification issues, including those regarding the commonality of plaintiffs’ injuries, the typicality of their claims, and the predominance of common questions of law or fact.

There follows a page-long string cite of cases to illustrate the proposition that class certification requires some consideration of the merits of the case, such as the statement from a famous Fifth Circuit case that, “[A] court must understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues.” Typically, when a class certification is intertwined with the merits of a case, the judicial response is to go ahead and consider the merits so far as necessary to resolve the class certification question, but no further.

That’s not what the Second Circuit did, however. Instead, it remanded the case “for consideration of the fair use issues.” And the court was explicit that this meant resolving the fair use questions first, before ruling on class certification: “[W]e are persuaded that holding the issue of class certification in abeyance until Google’s fair use defense has been resolved will not prejudice the interests of either party.” This is … unusual. In particular, it seemingly takes away Judge Chin’s ability to use subclasses to focus the fair use questions, or even to consider the fair use of books other than those which are owned by the individual named plaintiffs. Without a class, all the other books — some perhaps with different or stronger fair use cases — are off the table, and not properly before the court.

My best guess, based on the opinion and what I have heard about the oral argument, is that the judges on this appeal were convinced that Google has a winning fair use defense across the board. It’s not a fact-dependent defense, one that would work for some of the books owned by class member but not for others. Rather, it’s a general defense, one that would render class certification itself irrelevant, even “moot the litigation.” The court’s quotation of Wal-Mart v. Dukes language that a defendant is “entitled to litigate its statutory defenses to individual claims” also suggests that it believes the fair use ruling will go in Google’s favor rather than the plaintiffs’.

These fair use issues were, however, outside the scope of the appeal, which concerned only class certification. Indeed, appellate record wouldn’t have contained the factual material necessary to make a justifiable fair use ruling. So, I believe, the court decided to gently signal what it thought about the fair use question and invite Judge Chin to cut to the chase. It’s not the most juridically correct resolution of the appeal, but it seems justifiable on pragmatic grounds. Class actions are cumbersome, slow, and expensive: why spin up all that machinery if the case is going to be dismissed on fair use grounds in the end?

Today’s news is good for Google and bad for the authors’ associations bringing the suit. Not only does it slow down the one lawsuit in which they’ve made any significant headway and undo the one major ruling in their favor in the past few years, it also signals that three Second Circuit judges are inclined to see the fair use questions from Google’s point of view. If the case ever does manage to reach the fair use merits, Google is now that likelier to get the same kind of sweeping fair-use blessing that its library partners got in the HathiTrust decision. The Google Books program lumbers on, one step closer to being unambiguously legal.