DOJ Files Pleading in Google Books Case

September 18, 2009. The Department of Justice's (DOJ) Antitrust Division filed a pleading [32 pages in PDF] titled "Statement of Interest of the United States of America Regarding Proposed Class Settlement" in the U.S. District Court (SDNY) in Authors Guild and American Association of Publishers v. Google.

It recommends that the "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." It adds that this pleading contains only a "preliminary explanation" of the DOJ's antitrust concerns.

The DOJ pleading first enumerates the benefits of the settlement. "The United States strongly supports a vibrant marketplace for the electronic distribution of copyrighted works, including in-print, out-of-print, and so-called ``orphan´´ works. The Proposed Settlement has the potential to breathe life into millions of works that are now effectively off limits to the public. By allowing users to search the text of millions of books at no cost, the Proposed Settlement would open the door to new research opportunities. Users with print disabilities would also benefit from the accessibility elements of the Proposed Settlement, and, if the Proposed Settlement were approved, full text access to tens of millions of books would be provided through institutional subscriptions. Finally, the creation of an independent, transparently-operated Book Rights Registry (the ``Registry´´) that would serve to clarify the copyright status and copyright ownership of out-of-print works would be a welcome development." (Parentheses in original.)

The pleading also states that "the inaccessibility of many works due to the lack of clarity about copyright ownership and copyright status -- is a matter of public, not merely private, concern." However, it stops short of stating that the settlement is legislation, or that the use of the judicial process violates the Constitution's delegation of legislative authority to the Congress.

The pleading merely argues that the legislative nature of the process warrants closer review by the courts. It states that "A global disposition of the rights to millions of copyrighted works is typically the kind of policy change implemented through legislation, not through a private judicial settlement. If such a significant (and potentially beneficial) policy change is to be made through the mechanism of a class action settlement (as opposed to legislation), the United States respectfully submits that this Court should undertake a particularly searching analysis ..." (Parentheses in original.)

Rule 23 and Problems of Representation of Those Who Are Not Class Members. The pleading argues that the settlement does not comply with Rule 23, of the Federal Rules of Civil Procedure, which addresses class action litigation. It argues that the settlement affects the rights of persons who are not members of represented class, and especially "rightsholders of out-of-print works and foreign rightsholders". In addition, class members were not "afforded adequate notice".

The pleading elaborates, with respect to rightsholders of out of print works, that the settlement authorizes "the Registry to license Google to exploit the copyrighted works of absent class members for unspecified future uses (potentially derivative works or other uses) -- essentially authorizing, upon agreement of the Registry, open-ended exploitation of the works of all those who do not opt out from such exploitations. ... Such licensing is far afield from the facts alleged in the Complaint. And the rights conferred are so amorphous and malleable that it is difficult to see how any class representative could adequately represent the interests of all owners of out-of-print works (including orphan works)." (Parentheses in original.)

It also states that the settlement "draws distinctions between in-print and out-of-print works. Google must obtain the permission of copyright owners of in-print works before making use of those works (beyond scanning). ... But Google can incorporate out-of-print works into new commercial products without the owner’s permission ... Copyright owners of out-of-print works can deny Google permission to use their works in certain ways if they learn of the agreement and their rights under it. ... But, copyright owners of out-of-print works provide a release to Google for any exploitation of their rights that occurred prior to those owners becoming aware of Google’s use. ... And, because the owners of orphan works are an incredibly diverse group that includes not only living authors or active publishers, but heirs, assignees, creditors, and others who acquire the property interest by contract or operation of law, these rightsholders are difficult or impossible to locate, and thus difficult to notify. Moreover, no amount of notice is likely to protect those orphan rightsholders who are unaware of their rights or unclear how or whether they want to exploit them. Yet, if an out-of-print copyright owner does not come forward within five years, profits from the commercial use of the out-of-print work are distributed to pay the expenses of the Registry and then to the Registry’s registered rightsholders. ... The structure of the Proposed Settlement itself, therefore, pits the interests of one part of the class (known rightsholders) against the interests of another part of the class (orphan works rightsholders)." (Parentheses in original.)

The DOJ suggests that "changing the forward-looking provisions of the current Proposed Settlement applicable to out-of-print rightsholders from an opt-out to an opt-in would address the bulk of the Rule 23 issues raised" by the DOJ.

Next, the DOJ pleading elaborates on inadequate representation of foreign rightsholders. It states that the settlement "operates to sweep in untold numbers of foreign works, whose authors, under current law, are not required to register in the same manner as U.S. rightsholders. Many of those authors have never published works in the United States and are not members of the Authors Guild or the Association of American Publishers, which exclude many foreign copyright owners from membership by virtue of their membership criteria. Moreover, the interests of these class members likely differ from those of the class representatives."

Antitrust Problems: Restricting Price Competition. The DOJ's pleading also raises antitrust concerns. It states that the DOJ has "opened an investigation into the competitive impact of the Proposed Settlement. That investigation is not yet complete ..." This pleading does not "state with certainty whether the Proposed Settlement violates the antitrust laws".

Nevertheless, the pleading articulates two concerns. "First, through collective action, the Proposed Settlement appears to give book publishers the power to restrict price competition. Second, as a result of the Proposed Settlement, other digital distributors may be effectively precluded from competing with Google in the sale of digital library products and other derivative products to come."

The DOJ continues that "In at least three respects, the collectively negotiated provisions of the Proposed Settlement appear to restrict price competition among authors and publishers: (1) the creation of an industry-wide revenue-sharing formula at the wholesale level applicable to all works; (2) the setting of default prices and the effective prohibition on discounting by Google at the retail level; and (3) the control of prices for orphan books by known publishers and authors with whose books the orphan books likely compete."

It adds that these features of the settlement "bear an uncomfortably close resemblance to the kinds of horizontal agreements found to be quintessential per se violations of the Sherman Act."

Regarding agreement on wholesale terms, the DOJ argues that "The parties' contention that this kind of industry-wide pricing mechanism is necessary to create a vibrant market for digital books is difficult to reconcile with the facts on the ground. Millions of digital books are already available for purchase, including growing numbers of out-of-print books, as a result of bilateral negotiations between distributors and individual rightsholders."

Regarding restrictions on retail price competition, the DOJ argues that courts in other cases have found such restrictions to be per se illegal.

Regarding orphan works, the DOJ pleading explains that the settlement "appears to limit price competition by giving publishers, through the mechanism of negotiations conducted by the Registry, the ability to control the future pricing of orphan works that may compete with the works of known rightsholders. The Registry is effectively controlled by large commercial publishers. Allowing it to set the prices of orphan works effectively allows known rightsholders to choose the price at which their competitors' books (those of unknown rightsholders) are offered for sale."

Thus, the DOJ warns that "there is a significant potential" the DOJ will conclude that these provisions violate the Sherman Act.

Antitrust Problems: Restricting Competition in Digital Distribution. The DOJ argues that the settlement grants "Google de facto exclusive rights for the digital distribution of orphan works". Moreover, "Google's competitors are unlikely to be able to obtain comparable rights independently."

This then "appears to create a dangerous probability that only Google would have the ability to market to libraries and other institutions a comprehensive digital-book subscription. The seller of an incomplete database -- i.e., one that does not include the millions of orphan works -- cannot compete effectively with the seller of a comprehensive product."

The DOJ suggests that "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".

More Information. The DOJ pleading also makes the argument that "data provided should be available in multiple, standard, open formats supported by a wide variety of different applications, devices, and screens. Once these books are digitized, the format in which they are made available should not be a bottleneck for innovation".

The DOJ also issued a release.

The DOJ's pleading focuses only on antitrust related objections to the settlement. It does not address other objections to the settlement.

For background on the underlying litigation, see:

This case Authors Guild and Association of American Publishers v. Google, U.S. District Court for the Southern District of New York, D.C. No. 05 Civ. 8136 (DC).