EXHIBIT A TO EXPERT REPORT OF WALLACE H. KURALT

  1. Background and Qualifications 2
  2. A Brief History of the Trade Book Industry in 20th Century America. 3
  3. Opinions 17
  4. Assumptions of Fact 37
  5. Analysis 43
  6. Conclusions 65

 

 

Appendices

Appendices listed below are incorporated into this report by this reference.

Appendix A: Experience of Wallace H. Kuralt in Business [Appendix A.doc]

Appendix B: Costs of Printing and Accepting Returns [Pubcosts1.xls, sht 2]

Appendix C: Estimated Value of Extra Benefits given Defendants [Appendix C.doc]

Appendix D: Publisher Shipping Expenses [Appendix D.xls]

Appendix E: Store Placement, Competition and Closings [Placement.doc]

Appendix F: Co-op Fees and Allowances [Coop fees.xls]

Appendix G: Illustrative Charts [Appendix G.xls]

  1. Background and Qualifications, Education and Experience.
  1. My name is Wallace Hamilton Kuralt, Jr., and I have been a resident of Chapel Hill and Carrboro, North Carolina, since 1956. I am a graduate of The University of North Carolina at Chapel Hill, class of 1960, and hold a Bachelor of Arts degree in English. I serve on the board of visitors of the UNC School of Information and Library Science. I am a member of the board of governors of the UNC School of Social Work. I serve as a member of the Smart Start early learning program’s board of directors. I have been for more than 20 years an election judge for the Orange County Elections Board. I have produced four books, edited five and published two. I served for 10 years as officer and exchange director of The Friendship Force, an in-home citizen exchange between ordinary Americans and citizens of other countries. My wife, Brenda, and I have been officers and principal shareholders of The Intimate Bookshop, Inc. since 1965. I am serving at no fee as an expert witness for the plaintiff, The Intimate Bookshop, Inc. I have never given sworn testimony as an expert, at trial or in deposition, at any time.
  2. I have worked with books and bookselling continuously since 1958, some 43 years. I spent seven years, from 1958 until 1965, learning the book business from my mentors, Paul and Isabel Smith, and learning and working from knowledge gained by my own experiences and analyses of the business – involving sales, finances, business and financial and inventory systems, customer service initiatives, fixture and store design, site negotiation and leasing, construction, advertising in all media, staff hiring and training, staff benefits, banking and investment, loss prevention, purchasing and returns, selection of remainders and hurt books, publishing and marketing and human nature.
  3. I then spent over 30 years growing and expanding our business, usually into areas in which there was little, if any, full-line independent bookselling. For a more detailed view of my accomplishments and experience, please see Appendix A: "Experience of Wallace H. Kuralt in Business," which report is incorporated by this reference into this report.
  4. I spent over four years trying to save The Intimate Bookshop, Inc. from the huge influx of new competition, chiefly from the defendants. I closed shops, transferred fixtures and inventory and attempted to find a way to pay due bills. I dealt with creditors, landlords, attorneys and press. I fired good booksellers, usually after helping find other jobs for them, and sought outside help while I operations.
  5. The last Intimate shop closed in March of 1999. For two years I have been engaged in the business of selling old and rare books and maps and some new books, as well as old musical instruments, tools, Caroliniana and other antiques.

    6.  

    II. A Brief History of the Trade Book Industry in 20th Century America.

  6. The 20th Century trade book industry -- that is, the business of publishing and selling books intended for general public consumption (not books published in furtherance of a "trade" or field of endeavor) -- has been characterized as a field peopled by distinguished amateurs, by many of the idle rich, by intellectuals, radicals and scoundrels – both in bookselling and in publishing. The early booksellers were often wealthy patrons of the arts and letters, selling old and rare books and maps as well as the rather small annual output of the nation’s publishers – themselves often printers of some means.
  7. Publishers used "rules of thumb" to establish the "list" prices at which the books were to be sold, often specifying a price which was a certain multiple of the out-of-pocket costs of printing – the multiple changing according to circumstances or needs. In the late 1950s, publishers serving us might initially select a price which was five times the cost of setting, printing and binding the book. If they intended to make a national splash with the title, the publishers might price the book at only four times the printing costs in order to lower the list price and increase the possibility of making the book a bestseller. Or, if the title was likely to be one which would appeal to a much smaller audience, the publishers might raise the list price to six times the printing costs, hoping that those who wanted it would pay the higher price anyway, and the extra margin would help make up for its lower sales potential. One well-known publisher of "remainder" or "bargain" books used the multiple of four and, as well, searched the nation for printers who would sell their "down" time at a low price. The publisher would give the printer a number of special titles to print. These were good, older titles whose sales had slowed, and the publisher had purchased the right to reprint the books. The publisher gave the printer instructions to print each only in a low, set quantity -- and only when the printer had no other work. The printing concern was thus guaranteed fullest possible use of its expensive equipment and the publisher was pleased to receive a small but steady stream of books which it could sell at lower prices – and its customer could sell at lower than normal prices for a book of that quality -- and each could still garner normal profits.
  8. While most industries offer merchandise at a "manufacturer’s suggested list price," only in the book industry is that price nationally advertised. In other industries stores can increase the price in areas of low competition. Others will often increase the price initially, and then discount that higher price. This is not possible in the book business. Any discounts made must be from the published price – the same "suggested" price from which the buyer’s cost is calculated.
  9. Prices are not arrived at by accident. They are the product of rules of thumb reconciled with considerations of the following:
  1. In the late 1950s and early 1960s the cost of printing was heavily affected by the initial costs of setting the type for the book and readying the press, while paper was relatively cheap. The publisher could achieve a significantly lower unit cost when printing larger quantities. The "sliding scale" of reseller discounts from the list price took these factors into account, giving volume purchasers a higher discount because of the savings in manufacturing which could be earned by the publisher from higher print runs, justified by larger volumes of sales. The extra discount was also an incentive to all buyers to make larger purchases. In the late 1970s these numbers changed about: The cost of preparation of the book was reduced through the use of computer services and new printing methods which speeded press preparation; however, the cost of paper rose dramatically. This factor required a change in the strategy of supply and marketing: Smaller printings were made more frequently, and the size of the initial printing was calculated from the early call reports of the sales representatives of the publisher, with few "extra" copies being produced. Depending upon the location of the printer (from local to Far East) the time required for reprinting could vary from as little as four weeks up to four months or more. Small miscalculations could lead to large losses of sales due to "out of stock" conditions. The unit cost of a book from a smaller printing was very nearly the same as the unit cost from a very large print run. The "sliding scale" discount schedules no longer applied, from a cost basis, but could not be abandoned or changed. There were other ramifications, too:
  1. In the 1950s and 1960s publishers shipped almost all except the larger shipments by the parcel post service of the US Post Office, at Special 4th Class Book Rate. The cost was four cents for the first pound and three cents for each pound above the first. These expenses, paid by the retailer, added to the retailer’s cost of sales, but not significantly. Prices began to rise, however, and by the 1970s "book rate" had been phased out and books were shipped at regular Parcel Post rates. In many cases the cost of shipping was higher than the bookseller’s earned gross margin on a smaller shipment.
  2. In many cases, the publisher was the sole source for a selected title, usually a title to which the publisher alone held copyright. The wholesalers of the day tended to be either library jobbers, who ordered and processed books for the libraries, or "rack jobbers," who serviced the racks of drug stores and supermarkets with the latest paperback offerings. Neither was a reliable alternative to the publisher, and their discounts to retailers ranged from 20% to a top of 30% from retail. Ingram Book Company was formed near Nashville, Tennessee, and began to supply best sellers and a good selection of other titles to retailers, offering 40% discount for orders of ten or more books, and giving free freight on selected "mass market" books. But, best of all, they created an efficient and accurate delivery system. Until this time booksellers were "30 days away" from their supply of books from the publisher, and were required to stock fairly deeply in order to avoid out-of-stock conditions. Ingram delivered the books within one week. The discounts were much lower than those offered by the publishers, but retailers understood clearly that the discount didn’t matter nearly as much as having the book to sell and not losing a customer.
  3. During the crisis when shipping charges rose so precipitously (and before UPS), I made a study of the needs of the booksellers and came up with a detailed plan which would create a not-for-profit organization to manage the shipping of books nationwide. I proposed the creation of four primary distribution centers (one near each publishing center) and 17 secondary distribution centers spread across the country according to population. At that time shipments could be made at "full truck load" rates if the truck stopped at no more than two locations on its journey. I developed a system called "Silver Service" using bar-coded labels and a mix of delivery services. Full truck loads (using independent truckers) would take "consolidated" shipments from the publishers’ warehouses to the primary distribution centers, at which point they would undergo "flow-through" gating and would be consolidated in containers for full truck load delivery to two different secondary centers. At the secondary centers the Post Office would accept the shipments for final delivery to the retailer, all at significant savings over Parcel Post. I sent information regarding the proposed system to the Post Office Department and made an appointment with the assistant postmaster general. Several ABA officials and I had a meeting with this official, who told us that they would be happy to see such a system and would even build all the distribution centers for all nationwide book shipments if we would also include commercial movie film cans as part of the program. The official emphasized that the Post Office would have to be "ordered" to create the service by a vote of the Congress. The plan was given over to the ABA for action and Silver Service was never heard of again.
  4. In the late 1960s and early 1970s one of the companies that had formerly operated leased book departments in various department stores began, instead, to open leased spaces in the new shopping malls which were springing up all over the country. Early on The Intimate had enjoyed access to these larger enclosed shopping centers by virtue of its good reputation for drawing and serving customers and its professional store design and operation. By the mid-1970s Walden Book Company was claiming the leases in almost every new center opening in the Carolinas, outbidding The Intimate on many occasions for available spaces. Walden Book Company had been purchased by K-Mart Corporation. Then the B. Dalton, Bookseller, stores began to compete for the bookseller "slot" in the malls, and the two chains bid up the prices of such spaces to levels which precluded The Intimate from even attempting to obtain these spaces any more.
  5. Though Waldenbooks and B. Dalton opened nearly 2,000 retail bookshops in shopping centers all across America, they never achieved real profitability and changed hands a number of times. When their owners, defendants Borders and Barnes & Noble respectively, decided to embark on the plan of producing "superstores," the defendants’ mall stores were some of the first to suffer, and nearly half have now been closed.
  6. Defendants Barnes & Noble and Borders, as of June 2001, now operate nearly 1,000 superstores and have plans to open many more in the near future. Their respective companies now control nearly half of the trade book business, and more than two thirds of retail bookstore sales. Most of the closely held multi-store book operations such as The Intimate have been eliminated from competition.
  7. In the case of the publishing industry there is a clear and present danger of severe violence to elements of our rights under the First Amendment, as well, and an urgency that amends be made at once to prevent a catastrophic erosion of these rights.
  8. Retail bookselling is the last significant vestige of truly free and reliable free speech on a large scale. (Yes, the Internet allows "free" speech, but there is no "gate-keeper" editing out the untrue, the unproven, the deliberately false or the "tract" literature or the simply disgusting and base). Consider:
      1. Nothing more than a consideration of its marketability and profitability;
      2. Nothing more than its literary content and/or value to the reading public;
      3. Some combination of the above;
      4. Whether or not the subject of the title fits in with the plan of publishing held by the company;
      5. The scholarly value of the book to the academic community and to the body of knowledge on the subject.

Speaking of conditions that prevailed during the Covered Period (for this action, 1994 through 1999), I found the following to be of major concern:
    1. Sales Representation. Thousands of sales representatives, who formerly competed with each other for business from smaller retailers, have disappeared. Thousands of smaller booksellers who once saw sales representatives regularly must now make their purchasing decisions from catalogs or telephone sales personnel without the benefit of the ready information available from the sales rep or the inside information regarding print runs, advertising plans for the book, book club adoptions, purchases made by others, and more. Regarding this "critical lifeline" of bookselling, the publisher’s sales representative, several points should be made:
    1. Literary Experts. Editors and members of the company operations staff have been dismissed, resulting in a lesser ability of the resulting larger publisher in supplying services to the booksellers, such as assistance in obtaining authors for appearances, assistance in obtaining jackets for damaged books and promotional materials and even assistance in expediting orders, credit claims, advertising claims and simply obtaining information regarding their account.
    2. Tighter Terms. In keeping with corporate strategy, credit lines have been reduced to the smaller retailers and credit terms have been tightened, requiring faster payment by the account -- well in advance of selling many of the books purchased -- thus putting heavy additional pressure upon of the capital structure of the smaller company.
  1. Publishers regularly offer new titles to their larger chain customers first, and if certain titles do not bring in sufficient pre-publication orders they may be cancelled -- even without being offered to the smaller booksellers at all.
  2. The larger publishers routinely attempt to draw successful authors away from the smaller houses with the promise of greater sales through greater distribution and promotion facility, and are frequently successful.
  3. The larger publishers routinely "censor" and reject certain controversial books (as is their right) so as not to offend any of the buying public; these titles can then be passed down to the smaller publishers who will accept the responsibility for making public the problematic title, but who have fewer resources with which to distribute and publicize the title.
  4. Wholesalers require of smaller publishers expensive pre-publication registration of new titles, even if they refuse to stock any copies until they receive orders for the title.
  5. Large retailers can and do require extensive payments of fees from the publishers, whether or not they comply with published standards of the publishers, and these are paid to the large chains to the exclusion of the smaller booksellers.
  6. "Co-op" terms made by the publisher are so limiting and requirements of proof of advertising so onerous that the smaller bookseller cannot make use of this formerly very valuable resource.
  7. Payment terms to the smaller bookseller are no longer extended for the holiday selling season, a fact which reduces the inventory level which can be afforded by the smaller retailer by as much as 50% -- a denial of a vital benefit for independents.
  8. The larger publishers tend to spend the bulk of their energies in obtaining (often by paying heavy advances) the books which are expected to be high-volume sellers, very much to the exclusion of titles which might well have profitable smaller runs if given reasonable opportunity.
  9. The larger publisher tends to focus on making money to the exclusion of the value of the words on the page, publishing only those titles which have a chance of reaping profits from sales of subsidiary rights -- for reprinting in quality or mass-market paperback, for serialization or overseas sale, for film or television or theatre rights or for audio or video republication rights. The value of the book is as that of a commodity, not that of a valuable exercise in the communication of ideas, ideals and entertainment.
  10. Smaller publishers, who can ill afford to pay exorbitant fees to the chains, are forced to do so anyway because of the actions of the larger publishers, to the serious disadvantage of the smaller publisher and to the even worse damage to the disfavored smaller bookseller.
  11. Large publishers, with publicly traded shares, are reluctant to publish certain controversial titles lest their shareholders be offended, denying the author access to their sales and distribution power.
  12. Certain larger publishers have now "boycotted" the annual national book trade show, taking umbrage at the action of the national booksellers organization in attempting to require the larger publishers to cease in their violations of the Robinson-Patman Act and other reasonable standards of fairness in business practice.
  13. Payments of amounts of up to $2 billion to the large national chain bookstore companies have brought in such inordinately high gross profit margins that the chains have been successful in making public offerings of their shares; even though the chains have been losing heavily from operations, and have only recently showed any profit, the public -- being without knowledge of these illegal benefits -- has been induced to purchase shares in the companies in the belief that the companies are successful in their dealings, and not that they are marginally profitable only because of huge sums extracted from the publishers at the expense of the smaller competing booksellers. These "profits" do not even consider the hundreds of millions of dollars that the chains have "written off" from the closing of unprofitable stores.
  14. As the chains have the power to force the publishers to pay huge sums in fees for services which they do not even render -- amounting actually to payments guaranteeing that the chain will place orders for that publisher’s books -- so also do they have the power to ignore the normal credit terms of the publisher and pay much as though the books had been placed "on consignment" -- as the books are sold. Publishers, in an attempt to make up these losses in cash flow, then turn to the independent smaller booksellers for more rapid payment, pushing hardest those least able to resist and also those with the least ability to subsidize the operations of the publisher.
  15. While the defendants have each closed some 500 smaller stores and opened nearly as many "superstores" nationwide, the number of independent booksellers has dropped sharply over the past few years, with the independents’ share of the market falling from over 50% to just above 20%. The hardest hit have been the independent chains, which have clearly been "targeted" by the national chains, who have sought to place competing superstores as close as possible to the independents’ locations, at whatever cost and regardless of whatever losses they might incur from oversupplying a relatively small market.
  16. All of these stumbling blocks to success in the publication of the widest possible variety of worthwhile books constitute additional limitations to the right of the American public to read whatever they choose to read. They alone pay the full price of the book, without subsidization by advertisers or government and without any editorial pressure by either. But if the book can not find its way to publication for any of the reasons shown above, both the right to read and the right to speak are seriously diminished. It is illegal under the Constitution for the legislature to make rules abridging free speech. Actions that result in abridgment of free speech can be challenged in the courts, though only with great difficulty and at great expense. Even successful actions that reclaim for plaintiff some or all of plaintiff’s losses result in but a relatively minor penalty to defendants in those cases when defendants have routinely collected millions and even billions of dollars illegally. Free and open publication requires that all involved observe all of the rules all of the time.
  17. The American public is becoming less and less enchanted with the "big box" stores, even though the prices of what they stock might be relatively low; the quality of the merchandise can be questioned, as can the skill with which it is selected for the local market; its seems to be understood that service both before and after the sale will be lacking, and all seem to suffer large omissions in their inventory which they refuse to correct in the form of filling "special" orders; these shortcomings combined with the relatively inconvenient locations of many of these stores have served to dampen enthusiasm for the chains -- bookselling and hardware and building supplies and computer and clothing chains and all. Yet the damage has been done and continues. The smaller sellers have been unable to match the financial muscle of the national chains, and many excellent specialty retailers have gone out of business.
  18. In the case of the bookselling industry, however, the American consumer is missing more than the opportunity to buy specific brands of paint or galvanized bolts of a specific size or interactive computer cables or panty hose and shoes of unusual sizes -- the public is missing the valuable and interesting ideas and information of more than 80% of the authors in this country when limited to the offerings of the "big box" booksellers. While no smaller retailer might stock more than one-third to one-half of the number of titles available in the typical chain "superstore," the great mass of independents sells many times more than the number of titles available from the chain stores in any given year. Without plaintiff and other independent stores the diversity of the industry of over 1,000,000 titles is lost.

 

  1. Opinions
  1. I have been asked by the Carl Person, attorney for the plaintiff The Intimate Bookshop, Inc., to render opinions concerning the facts and assumptions in this case. These opinions are based upon the assumptions of fact as set forth below under "IV. Assumptions of Fact."

    2. Methodologies, Limitations and Approximations

  2. I offer my own expert opinion based upon the qualifications shown in Section I, chiefly the experience and knowledge gained in over 40 years of daily activity in the retail book business. Please note that I am working under several handicaps:
  1. I am not an expert in economics or statistics. However, I have developed a working familiarity with the use of spreadsheet technology (Lotus 123, Enable and Excel) and have used these programs over many years in order to quantify certain present conditions and forecast likely future conditions. As part of my examination of the elements of the complaint I have produced spreadsheets in Microsoft Excel. Printed copies of these studies will accompany this report, and I will make available on disc digital copies of all such studies, including the formulas used and information regarding the assumptions made.

    2. Opinion of Expert Opinions.

  2. I understand that the practice of using experts and their reports in Robinson-Patman Act cases was begun in the 1960s. The information that can be brought to the study of the complaint by such reports would seem to be of obvious value, but in my opinion the practice has been permitted to become adversarial rather than purely informational. When working with other experts, those in economics and forensic studies, I have detected a certain cynicism directed toward some of these reports, especially by those academics that do not serve as expert witnesses. Whatever else the reporter might claim as expert capability, the reporter should be expert in the very matter at hand and in the industry under study. It seems to me that papers and calculations prepared (for pay) for one side in a dispute might well be considered tainted. Certainly, these reports should be held to the standards of statements made by any other witness. The producer of such documents should be paid no more than the costs incurred in producing the documents, and not at the $600 an hour and up which seems to be the norm. Too, the witness should be required to produce all evidence that has been discovered, exculpatory or condemning, positive or negative, as any eyewitness to an event would be required to do.
  3. In April, 2001, Kurt Jacobsen reported in the Guardian on a "revolution" in the fields of statistics and political science regarding the use of "autistic economics" in analyzing human behavior. "Rational choice theory" was attacked as having become "an end in itself" with "little relational to real life." The "post-autistic economics" advocates hold that the "rational-choice" practitioners and their techniques of mathematical modeling have created a system which is "an end in itself" and serves to exclude other approaches to understanding. "The problem should dictate the method, not the other way around," according to researcher Susanne Rudolph, and should include the values of cultural, historical and psychological understanding as well as the formal methods and mathematical models typically employed. This uprising would seem to point out certain difference of opinion as to the reliability of expert examinations even among the experts and within the academic field, itself -- pointing up the old saying that "when all you have is a hammer, every problem tends to look like a nail." The dogmatic, unworldly theory of "rational choice" has dominated the discipline of political science for years, according to the Guardian report.
  4. The introduction of the need for expensive expert witnesses works yet another burden on the plaintiff in a Robinson-Patman Act case, a cost of admission to the door of the Court that plaintiff is particularly unlikely to be in a position to pay.
  5. The expert opinions that I have been allowed to read in the ABA case in California betray a lack of depth of understanding and familiarity with basic facets of the book industry. These reports also delve into obscure calculations of probabilities that seem to be so speculative as to be useless. They also contain errors of fact which show the expert’s knowledge of the book industry to be cursory at best.

    6. Opinion and Litany of Damages

  6. The Intimate Bookshop was attacked by the national chains, including the defendants. In only a few years the Intimate’s nine stores were facing 22 superstores, most within a short walk of the Intimate’s locations. In my opinion, had The Intimate Bookshop company not suffered the attack of the defendants – an attack fueled heavily by funds allegedly gained through illegal acts – The Intimate would almost certainly be alive and well and still growing. It had every reason to succeed: It can be shown that, in almost every case, the plaintiff’s shops had some actual financial "edge" which was created for it by inventive strategies of The Intimate’s management group.
  7. There are obvious and logical links between the chains’ illegal acts of extracting more and more benefits from the publishers and the damages suffered by The Intimate. The publishers’ responses to these illegal acts and the consequent changes instituted by the publishers are heavily in favor of the defendants and disfavor The Intimate Bookshop and other independent bookshop companies.

    8. Illegal Acts which Benefit the Defendants.

  8. These have been well documented. And, as one of the defendants has noted, every 1/10 of 1% means another $3 million in gross profit. I believe that the defendants averaged about 47% gross profit (not including the co-op funds which they applied to reduce expenses, rather than add to gross profit). The ABACUS report of 1988 shows the independent shops averaging about 40% in gross profit. The Intimate’s audited financial statements showed a steady margin of 42%. Because The Intimate was regularly purchasing at the highest discounts offered by the publishers (according to the ABA Buyers Guide), they should be averaging the same as the chains, yet there is a difference of 5% of list price. By calculation, that 5% is worth $150 million annually to the chains, far more than their annual profits.
  9. By definition, every benefit to the chains from the publishers boosted the financial strength of the Defendants and bolstered the ability of the chains to wage competitive attacks on other booksellers, including The Intimate Bookshop group of stores. And in many if not most cases, these benefits to the chains came at an almost equal cost to the independents.

    10. Publishers’ Responses.

  10. The publishers could ill afford to give away an extra 5% of the list price without taking unusual actions. Under the "squeaky wheel" theory, they had to give the extra funds to the chains or risk being left out of the game, and so they did it. At first they simply did it illegally, but, after several judicial decisions they took the precaution of having the chains issue a "letter of meeting competition" before granting certain extra benefits; the very fact that they saw the need for these letters proves that they intended to give benefits to the Defendants without offering the same benefits to those who were not asking for them. These letters invariably encompassed only the benefit being sought, and did not address at all any of the dozens of other factors which should be considered as part of the competition quotient, making the letters little more than an attempt to excuse an illegal act.
  11. What the publishers did is clear. They dramatically raised the prices of their books, especially the more important new titles, and they reduced the benefits which they offered to the independent stores, including The Intimate, who had little power to object to the changes or to affect the publisher sales if they discontinued buyer from the publisher. (Note that the independents were precluded by law from "acting in combination" to combat the abuses).

    12. Book Price Increases and Effects Upon The Intimate.

  12. By looking through the titles in a library or used book store, one can see easily the enormous jump in prices which occurred in the 1990s. These increases served the chains well, and worked to the disadvantage of the independents, including The Intimate.

    13. Higher inventory costs – or lower inventories.

  13. Higher list prices meant that the cost to the retailer also climbed. A yearly 10% increase in list price translated to about a 10% increase in the cost price. This meant that a store which desired to keep inventory levels even with the previous year would be required to make an additional investment of 10% in inventory – or reduce the number of books in order to maintain the same cost of inventory.

    14. Fewer Sales.

  14. Higher prices also translated to fewer sales for the independent. The Defendants, however, as part of their competitive method of operation, were heavily discounting the prices of these same titles. The comparison of the list price which was too high and the lower discounted price was thus made even more dramatic. The independents lost sales during this period, in part because of the higher prices for books which had been forced up by the actions of the chains, including the Defendants, and because of the discounting of the chains. Indeed, for some years after the publishers put their higher prices into effect the nationwide sales of books declined, despite the presence of some 400 new superstores.
  15. In early years some of the publishers gave a "fee" to the chains for these heavily-promoted titles in order to make up for the discounts given. Later, the publishers allowed co-op funds for "placement" of titles in prominent positions in the shop (at no cost to the Defendant companies) for the same purpose, and to ensure display in high-traffic locations. These "placement fees" were not offered to the independent shops, including The Intimate. After certain court orders were handed down, publishers began to offer the option of "placement" as a standard part of the "co-op" allowance program to all booksellers, as can be seen from the terms listed in the ABA Buyers Guides for various years.

    16. Fall Dating.

  16. The higher prices and costs also made the publishers’ "fall dating" plans all the more valuable to the independents. The practice of publishers offering fall dating was a fixture of bookselling in the 1950s and even earlier. It was fostered by the desire of the publishers to increase sales of backlist titles and to help control their shipping procedures. In November and December the publishers’ warehouses were extremely busy getting out stock for Christmas. In October, many new titles were shipping and, as well, the department stores would order in all of their Christmas stock and jam the warehouses. In August and September more new titles were shipping, and, as well, the college stores were ordering in huge quantities for the start of the fall semester. The ABA convention was in June, and many booksellers would see the fall list for the first time and also browse many of the top backlist titles. The publishers desired to have the booksellers place their large fall backlist orders at the ABA convention so that the orders might be packed and shipped at a time which was relatively slow for the warehouse. They offered "ABA special deals" for backlist ordered at the convention. This involved, often, some extra discount, and usually involved a choice of free shipping or "dating" until December or January. Later, prompted by complaints of those who were unable to attend the convention, the publishers offered the same deal to anyone who would place the order in June or July. Many also offered a second "pick-up" order in November, to allow the store to replenish stock on titles which had sold well.
  17. The dating program enabled an independent to "try out" many backlist titles which it had not stocked before, and to offer a full stock over the relatively slow summer sales months. If the titles didn’t sell, they could be returned for credit. If they did sell, the store had the money to pay for them, and, possibly, had found another steady backlist seller. There was little risk and no cost to the publisher (they had already paid for all these books), but there was also little cash flow for the publisher over the summer, because few new titles were published in that period.
  18. When the publishers became embattled with the chains regarding extra discounts and special fees, they found also that the chains were taking heavy advantage of fall dating, and the cash flow of the publisher was suffering. Too, the chains sold backlist poorly, and often returned more than half of what they had bought. (Returns for The Intimate averaged only about 10% due to the intelligent selection process on the part of The Intimate’s buyers). Many publishers cancelled their fall dating programs, a heavy blow to the independent shops, including The Intimate, who had designed their selling and stocking plans around the former terms. (The Intimate included in its unique inventory control systems provisions for selecting backlist with great accuracy for each of their shops for the fall dating period). The chains, who were already stretching their bills to more than 90 days, simply slowed down even more.
  19. The publishers began to de-emphasize backlist, dropping titles out of print once they slowed perceptibly in sales and even making dramatic price increases on the titles which did sell well. The heavy emphasis turned to new titles, the stock-in-trade of the chains. The Intimate and other independent shops had, in the past, sold about 60% backlist annually to only 40% new publications. The chains, on the other hand, concentrated their efforts on the new titles, more than 80% of their book sales coming from the best-sellers and other new publications.

    20. Co-operative Advertising.

  20. The "co-operative" part of "co-op" advertising came from the original practice of the sharing of the cost of advertising between the publisher and the bookseller. Some offered funds on a "50-50" basis, though most were "75-25," meaning that the publisher contributed 75% of the funds (up to an allowable limit) and the bookseller was required to contribute the remaining 25% of the costs. Originally, most publishers who offered co-op gave a percentage of the purchases of the previous year by that store, and allowed it to be used to advertise any of the publisher’s titles. The money had to be used for media bills only; no costs of production could be included. The store was required to present copies of the finished ads, media bills clearly identifying the ad and showing that the bills had been paid. Later, some publishers gave money based on purchases of particular lines and limited the advertising to those titles. Later, some publishers offered 100% co-op on certain titles or lines. Others permitted radio and/or television advertising, provided adequate proof of advertising and payment were supplied.
  21. In all cases the publishers required that any claims for co-op advertising be held until the publisher’s staff had verified all data and issued credits. The credits could then be used against due bills, but the use of "chargebacks" against due bills was forbidden. Verification could often take months, meaning that the credits for a $10,000 advertising campaign for Christmas might not be available for use by the shop until well into the spring.

    22. Co-op Pool and by-title contracts.

  22. Originally, the amounts paid by the publishers to the chains for preferred placement and signage were given without regard to any "co-op" consideration, a lump sum for a simple contracted service; these funds were not offered to the independent shops, including The Intimate. These funds were collected by the chains whether the title sold or not, and, often, whether the service was ever provided or not.
  23. Several judicial rulings prompted the publishers to include the "placement" payments as part of a co-op "pool," which pool was arrived at by various means. Increasingly, the publishers began to adopt terms which heavily favored the chains and served to prevent the independents from participation in the "co-op" advertising program. Rather than allow funds to be accrued from all purchases and used by the bookseller for titles the bookseller selected to promote, the publishers specified the title to be advertised, and based the allowance on initial purchases, title by title. Chains were permitted to "gang" the money earned by all the stores and use it all in a large ad in a local market where it needed a competitive edge, rather than spend it all in the market in which it was earned. Small booksellers could "group" several titles together in one ad, only to find that the money earned for each title was too little to pay for an ad. For example, if a publisher gave 5% of an order for 100 copies of a $20 book -- a large purchase for a smaller store -- the total purchase, at 40% discount, would be $1,200.00 and the co-op allowed would be $60.00, not enough for more than a column inch or two. And though the chains might be buying only 25 books for each store, their co-op for 1,000 stores would come to $15,000.00. This gave the chains a huge advantage and caused many independents simply to forego any attempt to use the "available" co-op funds. In the late ‘60s, when The Intimate was still a single shop, the company earned some 8% of its total purchases in co-op funds, some $100,000.00 in all. In the mid-’90s The Intimate earned less than that on sales of some $10,000,000.00, a dramatic difference in benefits.

    24. Verification of Co-op Advertising.

  24. The independent booksellers, including The Intimate, were required to give verification of all advertising in order to obtain credits against purchases (or checks for repayment, in some cases). For the plaintiff this process could be quite time-consuming, and could cost the receiving staff as much as one fourth of their work day. These claims, a copy of which went to the publisher, were then handed in to the accounting crew and entered into the computer system, to be handled each month until cleared.
  25. These claims could not be used against current bills, but had to be matched with credits from the publisher first. However, the chains simply deducted a "chargeback" amount from their payments and disputed any denial of credit.
  26. Many authors complained that their titles, for which the publisher had paid a large "placement" fee, were not visible in the chains’ stores at all, and there is ample evidence that "dumps" of mass market paperbacks which were to be displayed at the front of the shop were, instead, discarded, the books simply being filed in their usual sections.

    27.  

    Changes in Co-op Policy and services.

  27. Because of judicial decisions, many publishers recently changed their co-op policies to permit the independents to use their "co-op" allowances for "placement," as they had permitted the chains to do for many years. The publishers also began to permit the chains to claim additional funds beyond the allowable co-op pool.
  28. Special co-op funds and extra discount and extra terms are offered by the publishers for new stores and new expansions of stores, more than 95% of which is being collected by the chains, including the Defendants.
  29. Many publishers cut their sales forces dramatically during the ‘90s, and the independents, including The Intimate, lost most -- if not all -- of the publisher sales representatives which had given them so much assistance and support.
  30. Each extra promotional dollar given to the defendants, estimated at some 8% of $3 billion, or $240,000,000 annually, caused pressure on the publishers to find a way to replace it. The publishers are not, themselves, wildly profitable enterprises, and they have very definite financial limitations on how much they can give away and still remain in business. The chains have the "purchasing power" to dictate terms to the publishers, and do so continually, while the independents do not. It should be obvious that any benefits given the chains cause double damage to the independents -- the independents are deprived of needed funds, and the chains use the funds given them to compete more efficiently against the independents.
  31. Only because of court rulings have the publishers allowed the independents to use co-op money for placement and other purposes other than simple media advertising, just as they must allow the chains to do. But the chains also have a standard operating procedure of making numerous claims, many of them invalid, and then "settling" their differences with the publishers for many millions of dollars of gain each year. The publishers feel that they can not risk losing the business of a company which may account for as much as one third of its annual sales and so accept these negotiated deductions and continue shipping all the while. And publishers are mindful of the fight in the ‘80s in which Doubleday and Viking insisted upon the chains adhering to terms and the chains returned all of these publishers’ books and refused to make any purchases for a year, until the publishers relented.

    32. So even though the defendants may not have set out deliberately to do violence to the independent competitors, their illegal actions have invariably led to the creation of business conditions which favor only themselves and work against the independents, including The Intimate. The actions of the publishers that have worked against the independents could well be viewed as merely normal and expectable defenses of themselves against the defendants (though the dollar signs surely had some influence, as well), leaving the independents at a serious and unfair disadvantage.

    They could have used all of these extra funds to hire and train better staff, to create better computer systems in order to provide better service, to hire and train better buyers in order to use these systems and buy more intelligently and hold down returns. They could have worked with the industry to help create more efficient shipping, for the benefit of all. The could have encouraged publishers to expand their literary horizons by bringing in small quantities of "high quality, low print" titles into selected stores.

    But, they didn’t and they still don’t.

    Advantages The Intimate created for itself:

  32. Special Fit: The plaintiff’s company took odd-shaped spaces (which were more difficult for the shopping center to lease) at "bargain" rents, and created special shops to fit the space, rather than require a "standard" space for each shop.
  33. Created free space: The company built mezzanines in six of its spaces over the years, and multiple stories in one of the shops, thus gaining extra "free" square footage;
  34. Shared expenses: Real estate brokers gave the company generous allowances for upfit expenses in order to attract The Intimate to their centers;
  35. Low Rents: Shopping centers allowed the plaintiff, a smaller company, to pay comparatively low rents in order to encourage The Intimate to take locations in their centers;
  36. Unique Quality: Shopping centers gave The Intimate prime spaces at lower-than-prime rents because it was known that the bookshop was a strong attraction for good customers, and it was not just another chain bookstore, carrying the same goods as every other chain store.

    37. Positive Qualities of The Intimate.

  37. The reasons the shopping centers allowed The Intimate these benefits are clear:

Special Tactics and Strategies of The Intimate

Added Value of The Intimate to its Landlords.
  1. The Intimate designed its own fixtures, specifically for bookselling. The Intimate had discovered during its spurt of growth in the late 1960s that a shop could have "too many" books – and that this fact could hurt sales. Even though the sales records showed that the shop could make more sales of many titles, the real-life experience of having all these books turned out to be counter-productive. The company learned valuable lessons early on from the problems they found:
  1. It was decided that the top shelf of the fixtures would jut forward in front of the lighting fixtures, and would be only three inches deep, so books could only be faced out on this shelf; this gave the entire shop a look of face display. The fixtures were seven feet tall, allowing all but the shortest of customers to reach the top shelves easily, but allowed the attachment of from seven to nine display shelves, giving more room for the face display of any titles, whatever the size of the book.
  2. The Intimate sought out the best/cheapest fixture manufacturer, one willing to work with the company to keep costs down; these fixtures cost less than half that of the most popular fixture company, and had great strength and durability. The company design allowed even the heaviest books to be placed on four-foot-long one-half-inch-thick shelving without damaging or "bowing" the shelves. The savings of one-quarter-inch on each of seven or eight shelves made the top shelf about two inches lower and easier to reach, and gave The Intimate an extra four shelf feet on each wall fixture.
  3. The custom fixtures created allowed The Intimate to create from 1.1 to 1.2 shelf-feet of sales shelving for every square foot of the occupied space (including the storage areas); many competing shops, including the chains, rarely had more than .6 to .8 shelf-feet of sales shelving per square foot. This meant that The Intimate could have more inventory per square foot and more inventory attraction per shop and still display it well, and do it in less space at lower cost; it meant that even with lower initial sales per square foot the company could serve a greater variety of customers and grow quickly, and achieve very high sales per square foot over all. This permitted The Intimate at once to serve a smaller market and still become profitable after a fairly short period of time, even working at a fairly low 42% average discount and using the available co-op funds expeditiously and legally.
  4. The custom fixtures were arranged in a "wagon-wheel" plan around each service desk, permitting staff members to view the entire shop easily and helped customers to find the service desks easily. Even though some of the shelf units were seven feet tall, this arrangement helped the booksellers to notice customers who needed help and, as well, those customers who might be planning to "help themselves," thus helping increase sales and reduce losses. Defendants’ stores, arranged as they are, must be a haven for shoplifters.
  5. The arrangement of the custom fixtures, planned specifically for each shop, aided in the scheme of placing subject sections logically, such that books which might interest the same customer would be located adjacent to one another, all through the shop. This also helped to avoid the static "grocery store" look of all parallel aisles, or the dull "library" look, and allowed the customer to feel "closed in" by books. The customer’s view, in almost every direction, was that of more books.
  6. The computer systems created by The Intimate helped its very experienced buyers (who knew books and bookselling well, and cared about books); they could make their purchases with accuracy for each shop specifically, and this gave the company several huge edges, and was of great benefit to the publishers as well.

    7. Added Value of Intimate to Publishers:

  7. Avoiding Returns. By buying from strong experience and good intelligence, the buyers avoided clogging the shelves with titles which were not selling;
  8. While still stocking a number of slower-moving important books and old favorites, the buyers used the available financial resources to the best advantage of the shop, and filled the available space with proven backlist titles (books published before the current selling season) and the best of the new titles; in some cases the buyers would purchase almost every title offered on a publisher’s new list, while other times their judgment called for trimming the offering because much of it didn’t suit the market of the particular shop involved.
  9. Using Computer Systems. The information the company’s buyers applied in their backlist purchasing resulted in there being almost no backlist returns to the publishers, a great saving to the publisher as well as the shop; the buyers had access to a huge database of over 30 years of sales experience on tens of thousands of titles and authors from all publishers. Even if the book were no longer in print, the buyer could access the OP database to find out how a similar title had sold for each shop and for the company over all, whether similar in subject matter or author.
  10. Saving Time. Plaintiff’s buyers, using the company’s proprietary computer systems, were able to make accurate purchases quickly, saving the time of the publisher’s sales representative. At each session the buyer covered backlist and new titles, paperback and hardcover, children’s book and adult books – for all stores at once. The buyer would search for good backlist titles which the publisher might have brought back into print recently. The buyer would buy remainders (publishers’ overstocks from previous seasons), hurt books (usually books returned to the publisher by another shop and not in perfect condition) and "white sale" titles, books offered (to everyone) at special low prices (usually non-returnable). The buyer would work up co-operative advertising agreements (at published terms) and go over any problems plaintiff might have had with the representative’s company regarding poor shipping procedures, slowness in issuing credits, books shipped at one price (printed on the jacket) but billed on the invoice at a higher price, and other operations snags. The buyer would total orders by "line" (in order to obtain the top discount for each schedule), and often add a few purchases to meet a discount "break." The sales representative would be given sorted and printed copies of each order, by line, and a total of all orders – both unit and dollar totals – for the benefit of the representative’s sales reporting chores (saving the rep the task of sitting in the motel room until late at night to obtain the same totals).
  11. Buying Backlist. When making backlist purchases, the buyers also selected out titles to be returned to the publishers; however, before the returns were entered into the system, transfers of the books involved were made to other shops in the group which needed them; this saved the cost of returning and then repurchasing the same books, a gain of time and money to The Intimate and the publisher, as well.
  12. The information the buyers gained from making the backlist purchases for each publisher was put to work in making an intelligent selection of the new titles being offered. Buyers could select for each store the books which best suited its market, while still "taking flyers" on possible "sleepers." Again, the buyer could consult the "in-stock" database as well as the "Out-of-Print" database to help make an intelligent decision on each title, whether comparing the author’s overall sales or the sales in a particular shop or in comparing the subject matter of the title to previous books on similar subjects.
  13. By leading the South in bookselling – in efficient buying and in volume of selling – The Intimate attracted some of the best sales rep talent the publishers had to offer. Plaintiff’s buyers and officials often were asked for their opinions of different books (the title, the jacket, the price) and the results of buying sessions were immediately passed on to the upper management of the publishers, who helped set initial press runs from the figures supplied, at least in part, by The Intimate. Plaintiff was happy to have the attention; the reps often had their own helpful inside information about a book (sometimes warning off the buyer), and plaintiff’s figures helped the publishers in their decision-making process, plaintiff’s buyers were told.
  14. Representatives from The Intimate, Mr. and Mrs. Kuralt and others, were invited to serve on a number of different advisory panels of booksellers brought together by publishers to help guide the publishers’ operations and to give information regarding the needs of booksellers nationwide.
  15. Representatives from The Intimate served in official capacities for the national American Booksellers Association and the regional Southeastern Booksellers Association. These organizations have long brought booksellers of all kinds from all regions in order to shares thoughts and ideas about bookselling for the good of all booksellers. Their conventions have also given the smaller booksellers, who might not enjoy the privilege of regular sales calls from the publishers’ representatives, an opportunity to view the important new titles for the important fall selling season, and to talk with publishing officials about the books.
  16. All of this helped The Intimate Bookshop company to hold down costs of operations, especially regarding returns and the associated costs both to the bookseller and to the publisher. All of this helped the publisher keep its costs of services to The Intimate stores low. Sales, in relation to inventory, were maximized by the computer-assisted process of selecting titles viewed as suited specifically to each shop. The selection of new titles was somewhat more problematic, with the buyers having to rely to some extent upon the opinions of the publisher and the sales representative, but even in these areas returns were held to some 15% or so, with an occasional spectacular "dud" pushing that figure higher.

    17. Assets of plaintiff in business:

  17. The Intimate Bookshop had every reason to be profitable.
  1. In my opinion, The Intimate had positioned itself for success. It had closed its smaller, less competitive stores and had two true superstores in excellent locations and had another three shops which, while a bit smaller, were still "superstores" relative to the smaller market which they served. The Charlotte SouthPark shop remained a powerhouse to the end, even with two of defendants’ stores directly across the street from it, each one nearly ten times the size of plaintiff’s shop.
  2. The franchising idea which plaintiff had begun to implement was, in my opinion, the perfect way to spread good bookshops to deserving very small markets with very little investment required of plaintiff. Mrs. Kuralt and I spent a few days each year talking with persons who had the desire to open their own bookshops and were seeking consultation concerning costs and possibilities. And each year The Intimate was offered dozens of locations, some of which would have been suitable for a store smaller than The Intimate’s planned size. Franchising would serve both parties.
  1. As a preliminary conclusion, based upon the evidence which I have been allowed to view and on analysis of the charges in light of my knowledge of the book industry, I can only conclude that defendants violated many provisions of the Clayton Act and the Robinson-Patman Act, and as a result of these illegal acts caused serious injury to competition, including plaintiff, leading to the destruction of this worthy competitor, The Intimate Bookshop, and others.

    2. IV. Assumptions of Fact

  2. I have been unable to examine certain documents pertaining to activities and actual results of operations. However, the book industry has long had the reputation of being unable to keep secrets very long and having a very active "grapevine" of rumors and other information. In this section I will draw upon the fruits of this legacy in the firm belief that the essential truth of each item will be borne out by the facts which are yet to be discovered within the tens of thousands of pages which have not yet been examined by plaintiff’s attorney or by me.
  3. Ad hoc reports and attached appendices and other documents are hereby incorporated by reference and made a part of this report.
  4. Plaintiff, The Intimate Bookshop, on its audited financial statements, has shown for many years a calculated gross margin (including the cost of shipping-in, but not including any "occupancy" costs) of 42% of the publishers’ suggested list prices. This average annual discount percentage is calculated by starting with the value of the inventory at the end of the previous year (as validated by a full physical inventory), adding in the net purchases (including the invoiced cost of shipping the books, as shown by the publisher), giving a subtotal of the invoice value of all books on hand at any time during the year. From this the auditors subtract the actual cost of the current year’s inventory after another annual physical count. The value of each book is established from the inventory control system by calculation using information from the oldest available invoice for that title for that year. Once the auditors have verified the physical count, the unit-cost price for that title (as shown on that invoice) is multiplied by the number of copies on hand. The total cost value of all books on hand is then calculated, an observed value (each year approximating 2% of the list price) is added to include inbound shipping costs, and this total inventory value is then subtracted from subtotal of books on hand during the year, giving an accurate cost-of-sales figure for the year. Estimated inventory totals, from year-long operations, have always come within 1% of the actual total, indicating that the estimates are accurate and that plaintiff company enjoys a fairly low loss rate.
  5. Plaintiff has made periodic purchases of inventory combining orders for all stores, typically earning the highest published discount rate from each publisher. Smaller orders have been placed as often as daily, both from the central system and at the store level. Most of these smaller orders have been sent out to be fulfilled by one of a number of wholesalers, depending upon the in-stock status of the title (as shown on The Intimate’s control systems).
  6. Each of the defendants, Barnes & Noble and Borders, makes available figures from the required SEC filings; these are available for viewing on the Internet through YAHOO and Edgar listings. Each unaudited report purports to show a net sales figure, from which is subtracted cost-of-sales (including "occupancy" expenses), giving "Gross Profit" figures. From this Gross Profit figure is subtracted the cost of administration, showing a profit or loss figure. The attorney for the plaintiff has asked for reports showing the sales, cost-of- sales, operating expenses, net profits and losses in more detail, so that I and/or other experts might be able to perform a direct comparison of profit and expense factors of the various companies, but none has been provided and no explanation has been given for this failure. I would estimate at this time that it will be shown that the effective discount received by defendants will exceed 55% from the retail price and could range as high as 65% after all facets of "price" and "discount" have been examined, including what must be heavy losses from theft.
  7. According to the opinion and order of Judge William Orrick of the United States District Court, Northern District of California, regarding the ABA suit against Barnes & Noble and Borders, defendants did not appear to deny or dispute that they, for many years, had been given special discounts and other benefits not available to plaintiff and other independent booksellers.
  8. According to the transcript of the proceedings of the trial in Judge Orrick’s Court, at least one of the defendants expected that all or virtually all of the independent bookshops would soon be gone, leaving only themselves.
  9. Defendants claimed, as to extra discounts given for the operation of a Retail Distribution Center (RDC), that the extra discounts of 2% were "cost justified" as a "functional discount," stating that defendants saved the participating publishers costs of distribution amounting to at least 2% of the list price of the books (or about 4% of the cost price). However,
  1. Defendants claimed, as to extra funds given over many years by the publishers for "co-operative advertising," that placement of the books in favored positions in the shops earned defendants these extra fees – benefits which had never been available to the independent competitors of these stores. The availability of such "placement" funds had never been published, by any of the publishers involved, in any trade publications or made known to other booksellers through announcements from the ABA or from the publishers’ sales reps assigned to serve the independent stores. The funds given the defendants for specific titles over many years far exceeded the advertising and promotion expenses of defendants for these titles. Defendants claim that these extra funds were given to them by each publisher in order to "meet competition," that is, to meet an equally low price of a competitor. This explanation brings up a number of questions -- and I speak here as an expert on bookselling, and not in law, attempting to apply the law as I understand it to certain questionable practices that I believe harm competition, the industry and the plaintiff:
  1. Note 1 of the FTC Guides cautions: "The discriminatory purchase of display or shelf space, whether directly or by means of so-called allowances, may violate the Act, and may be considered an unfair method of competition in violation of section 5 of the Federal Trade Commission Act." It seems clear that this practice has gone on for many years, with defendants heavily favored to the disadvantage of plaintiff.
  2. The suggestion is made several times by expert witness Ordover that the costs incurred by defendant in the operation of its RDC are somehow justification for the granting of discriminatory prices. I am no legal scholar, but I have read the following carefully:
  1. It seems clear to me that the maximum amount a publisher can pay to a purchaser for the performance of services normally provided by the publisher can not exceed the costs normally incurred by that publisher in providing these same services. Any additional – regardless of the expenses incurred by the purchaser in performing these same services – could easily be seen as indirect price discrimination. This question is further analyzed below.

 

  1. Analysis
  1. Almost since the beginning of the trade the independent bookseller has been forced to share its market with others. The publishers (then and now) sold direct to the public, as well as to the bookseller. The bookseller had to compete with other sources in information and entertainment for the attention and custom of the population in the market (many of whom could not read or write). Twentieth Century bookselling was challenged by the presence of many new free public libraries, by theatre and vaudeville presentation, then by the radio, the movies, the book club, television, the coming of paperback books, specialty stores selling books in their specialty, department stores selling general books, portable radios, video devices, shopping malls (almost exclusively housing national chain bookstores), drug stores and others selling "mass market" books, discount stores selling a limited variety of books at large discounts from retail, computers (with all their capabilities in audio, video, games, data processing, including storage of books on disk), cable television and the Internet.
  2. The advent of many of these innovations brought cries of a dark future for books and bookselling. Publishers and booksellers seem to have lived through all these natural phenomena – natural in that each "competitor" to bookselling was forced to operate under the normal constraints of business, and each developed competition within its own sphere in a natural manner.
  3. Larger stores were found competing on the same block as smaller stores, each serving its own clientele, each with its own specialties and services. Stores routinely called a competitor on behalf of a customer to help find a copy of a title that was not in their own stock.
  4. Then came the book superstores. In a relatively small industry of some $8 billion or so, the operators of superstores found themselves able to purchase locations in good markets almost without regard to cost and quickly become far larger than the largest of their suppliers. By taking away just 10% of a competing bookseller’s business, they knew, they could render that company unprofitable. Because of the nature of the independent booksellers and their relaxed business practices, almost always operating in a rather leveraged mode (encouraged by the publishers, with their fall dating programs and other benefits, including co-op advertising) the superstore operators, including defendants, found that few independents had the resources to withstand an extended period of fierce competition without falling behind in payments, being forced to downsize or shift emphasis or being forced to close.
  5. The superstores also found that almost all of the smaller publishers, and even the larger ones, were susceptible to pressure. They mounted a program of almost constant demands for higher discounts, special discounts, special terms, extra funds for advertising, rebates on freight, free books, rack allowances and special allowances for shipping errors, and engaged in the practice of claiming credits whether credits were due to them or not, and then "settling" regularly with the publisher, often for half or less of the amounts the publishers showed were due them.
  6. In one absolutely remarkable series of events, the defendants were given, by one publisher, the benefit of some $160 million or more in "early payment fees" amounting to more than 50% of the amounts due the publisher. The parent company, when it discovered the actions, declared them to be "unauthorized," and demanded repayment of the credits given. It is not known whether defendants ever repaid any of these remarkable sums.
  7. Publishers were encouraged by the chains to "meet competition." Defendants produced one or more documents showing that other publishers were giving a lower price in some way – shipping charges, Retail Distribution Center (RDC) discounts, special returns discount or other benefit – and the targeted publishers were asked to meet that specific "lower price," without regard to all the other parts of the equation which makes up "price."

    8. Good Faith, Equally Low Price, and Meeting competition.

  8. The terms "good faith," "equally low price" and "meeting competition" require vigorous examination.

What is a Competitor?

  1. Can a book publisher -- which owns exclusive rights to every title (or nearly every title) that it publishes and sells – be considered a competitor of a second publisher which owns exclusive rights to all (or nearly all) titles that are in the second publisher’s stock list? To be sure, each publisher of books is competing (to some extent) for the limited shelf space and the limited cash resources of the buyer for a bookstore group.
  2. But is a distributor of an exclusive line of sunglasses a competitor (to the same extent as above) of a seller of athletic shoes, even though both are occupying shelf space in the same department store? Is a tire manufacturer a competitor (to the same extent) of a potato-chip maker, even though both might be in the same Wal-Mart? Is then every seller a competitor (to some extent) of every other seller?
  3. One must determine at what point can the company which is not allowed to compete in the same exclusive (copyrighted) goods as a second seller be said to be a competitor of the second seller, and at what point can their differing terms of sale be considered a valid subject of discussion for giving discriminatory prices for "meeting competition," wherein one seller agrees to change some single facet of its business practice to equal that of another seller, even though their goods are not at all the same and they are both merely competing for selling space.
  4. Certainly a publisher who owns the exclusive rights to a specific almanac could be considered a competitor of a second publisher who might own the exclusive rights to a second almanac; even though the two products are different, the market is the same. But the publisher of a John Grisham title has no competition for that title.
  5. The John Grisham title is a novel (and there are other novels) and it is a book (and there many other books), and it could be considered as a gift (among many other possibilities for gifts), and it could be considered merchandise, competing for the consumer dollar with absolutely everything else for sale. But the question is at what point the reselling buyer of that merchandise can be within its legal rights to ask that any supplier give the buyer discriminatory terms in order to "meet" the business terms of a company selling entirely different merchandise.
  6. There are a great many facets in the gem of business competition. Any of these facets, though it might carry the same designation from one seller to the next seller, can have an entirely different impact when invoked in differing circumstances in different companies, with entirely different costs and benefits.
  7. Consider the sellers of titles from two different areas of publishing.
  1. Clearly, "competition" involves consideration of far more than a single aspect of business, far more than just a handful of points upon which there can be competition. A "good faith" effort in considering the making of a change in business terms necessarily involves the consideration of all relevant business terms and practices.
  2. For example, just within the book industry, there exist great differences from one company to another – in many areas – even though all are considered "publishers of books."
  1. Each copyrighted book is a product unto itself, competing in no more than a very general sense with almost every other product. The publisher and seller of this product is thus a competitor only in a general sense with the seller of almost any other product. All of the prices and terms set by each publisher – all of which must be fair to all customers -- are thus to be applied to all customers of the publisher, without regard to the terms of any other seller. Any changes made by the publisher must apply fairly to all its reseller customers.
  2. These bookseller customers, including the plaintiff are, indeed, competitors – selling many of the exact same books as other booksellers, including the defendants.
  3. The maker of a brake shoe for a 1996 Chevrolet Camaro is a competitor of any other maker of the same brake shoe. If logic were to be pushed to absurdity, this brake shoe maker could be considered a competitor of a Bible publisher. By grouping items generally considered to be serving a similar purpose, the brake shoe maker and a car radio manufacturer might be considered to be competitors. But by grouping items sold in the same store, almost any seller of goods could be considered a competitor of any other seller of any other goods.
  4. The maker of a soft drink is a competitor of another maker of a soft drink, and arguably a competitor of a seller of alcoholic beverages. A maker of clothing for women might be a competitor of other makers of clothing for women, though probably not a competitor of a maker of children’s apparel.
  5. Given the above, it is my opinion that in the case in which

Then the two items (and their original sellers, as well as the retailers stocking these items) may be considered to be in competition with one another.

 
  1. In light of the above, no effort is required by the publisher, in good faith or otherwise, to consider making changes in business terms or policy in order to "meet competition," because, in the case of most publishers and most publishing, there is no competition between sellers, in the direct sense. If there are no competitors, then no other sellers’ prices need be considered, whether equally low or not. Thus, "meeting competition" can not be claimed as a defense either by the publisher or the purchaser in the face of charges of price discrimination.

    2.  

    Equally low price.

  2. Even in any case in which competition might be found to exist within the publishing industry, and a good faith effort might be required in order to meet a competing low price (or the services or facilities furnished by a competitor), the question arises as to what constitutes a "price."
  3. The Court has held that certain payments and fees are "indirect price discrimination" resulting in a lowering of the buyer’s cost of goods. Thus one should not deem the term "price" simply as a reference to a number in a column on an invoice, but must also consider the value of all of the material benefits received by the buyer from the seller, whether regarding that item individually or including benefits conferred in regard to that entire shipment or in regard to all shipments made from the seller to the buyer.
  4. Therefore, all of the elements which go into the "price" must be considered by the seller who has been asked to discriminate, knowingly, in price, if the seller is to be able to "show the existence of facts which would lead a reasonable and prudent person to believe that the granting of a lower price would in fact meet the equally low price of a competitor..." and to show that the seller offered the lower price "in good faith for the purpose of meeting the competitor’s price, that is, the lower price must actually have been a good faith response to that competing low price."
  5. It is not enough for the seller to show, in knowingly discriminating, that the value given by the seller to the purchaser is "equally low" on any one specific aspect of the totality of the considerations involved in the determination of the price. Seller, rather, must also examine all other relevant terms, conditions and considerations, including "services or facilities furnished by a competitor," in arriving at a reasonable and prudent decision. Further, it seems likely that a prudent person would consider, as well, whether or not the terms which the seller is being asked to meet are themselves known to be discriminatory and, if so, whether or not such terms might be considered to be illegal price discrimination.
  6. Some of the aspects of "price"

Each of the "benefits" noted above, whether offered on "normal" terms to all customers or on discriminatory terms to a special few, becomes a part of the calculation of "price" once offered. It is the duty of the purchaser to make available to the seller information regarding all of the benefits which it receives from each of the "competitors" whose terms the targeted publisher is being asked to meet. As the publisher is not in a position to have knowledge of such private terms, it must rely upon the representations and information provided by the seller. Any omission of material fact would seem to be materially misleading.

Lower Price
  1. The lower price offered by the seller must be made for the purpose of meeting (and not going lower than) the currently lower price of the competition.
  1. Any of the above given in a discriminatory manner may be considered "functional discounts" if and when the customer provides some service of value to the seller, which service is approximately equal in value to the compensation paid; that is, any service normally performed by the seller at a certain expense which is taken over and performed by the purchaser could logically qualify for a "functional discount" the amount of which would approximate the expense which the seller is no longer required to incur. These "savings" can come from many areas:
  1. It should be noted, however, that – if any saving ever were actually realized by the seller -- the sum of the "savings" realized by the seller (by virtue of having been relieved of the costs of performing services to the purchaser) is the maximum amount that can be granted by the seller as a "functional discount." The sum of the expenses actually incurred by the purchaser in performing those services is the maximum amount the purchaser can claim. The purchaser can claim a functional discount of the lesser of the two sums:

The "costs" of the purchaser in operating an RDC are not a consideration in the process of "justification," when making a decision to provide a functional discount, except inasmuch as they meet or fall below the expenses of the publisher in providing those same services. (For the seller to use the purchaser’s costs of operating an RDC – whatever that cost might be – as the "value" to be "equalized" would be folly; purchasers could build gilded palaces of distribution at no cost to themselves).

Any funds granted above the normal expense of the publisher in providing these services can be easily construed to be indirect price discrimination.

Regarding Cost Justification and Retail Distribution Center (RDC) Discounts.

  1. Defendants declare that the 2% extra discount given to defendants by the publisher is "cost-justified" in that it relieves the publishers of the need to perform certain services of distribution, and that the publisher is thereby relieved of the expenses involved in performing these services. Defendants claim that the savings to the publisher is at least 2% of the retail price of the books involved.

    2. RDCs and the comparative expenses to publisher of distribution

  2. Costs of distribution when shipping is not involved. The costs of picking and shipping 1,000 copies of 10 assorted titles to one location (called a "direct" or "bulk" shipment), all of the books in carton quantities, are somewhat lower than the costs of picking, packing and shipping 10 orders of 100 for the same books – one shipment to each of 10 separate locations – (called a "drop" shipment) totaling the same 1,000 books also in carton quantities. The number of boxes used in the multi-shipment scenario would be the same, the amount of time required for the warehouse crew would be slightly higher, but the expense of picking and labeling would be the same. If, however, the cartons must be opened and re-packed, a reasonable estimate might be that it would require an extra two work hours of warehouse time for repacking. At $15 per hour (including benefits and company share of unemployment) this might cost the company about $30 in all.
  3. It is possible that evidence yet to be produced will show that defendants would calculate these costs at figures even lower than these.

    4. Thus, using figures of plaintiff, assuming the books are hardcover books at $20 apiece, and the cartons must be re-packed, the extra expense would come to about 2/10 of 1% additional (0.2%) – or less -- as shown in Table A, below.

     

    Comparative expenses to publisher of distribution

  4. Comparative shipping expense to publisher:

Bearing in mind that the total weight of the single bulk shipment would equal the weight of the ten drop-ship shipments (possibly including the negligible additional weight of 10 empty cartons), and all shipments would be LTL, the distance of the shipments would also come into play:

While this can save the publisher up to two-thirds of the freight expense of making shipments for which it pays freight, it saves the publisher nothing on those shipments for which defendants normally would have to pay, anyway, but does cost the publisher the added cost of consolidation and having a one or more docks tied up continuously. In those cases in which the publisher "saves" money from this special arrangement, defendants invariably "negotiate" a circuitous rebate, in which the publisher puts a freight charge on the invoice but then allows defendants to take "chargebacks" (deductions) equal to the total of all freight charges from their payments to the publisher involved.

  1. Thus the sum of the freight costs of servicing The Intimate stores with drop shipments of similar quantity, price and weight:
  1. As can be seen from the above two sections and from Table A, below, the publisher expenses of distribution to defendants and plaintiff, including all warehouse expenses and all freight charges, amount at most to a few tenths of one percent more for shipments made to plaintiff’s stores even when all qualified RDC shipments are included.
  2. Plaintiff holds that the establishment of an "RDC discount" category is clearly discriminatory in that the terms established by the publishers for the operation of RDCs simply exclude all retailing companies except for a favored few. Publishers who permit such operations, and who give extra discount to retailing companies who operate RDC facilities, make the requirements so stringent that only the very largest retailing booksellers can afford to participate and enjoy the additional benefits.
  3. Publishers do not make any provision for any other retailing companies to qualify for "functional discount" on the basis of the many other functions which are involved in the process of ordering, picking, packing and shipping. Plaintiff routinely saved time for the publishers’ representatives and provided them with printed copies of orders containing all totals that they needed for their call reports. Plaintiff was happy to supply – at no charge -- sales information for any or all of a publisher’s titles, and the fact that The Intimate regularly sold 1/10 of one percent of the industry’s annual trade book sales made forecasting easy and accurate for the publishers. The Intimate never asked for and never received any "cost justified" benefits for these services.
  4. Plaintiff also holds that benefits other than an extra discount -- benefits to be gained only through the operation by the defendants of their own RDCs -- far outweigh any expense of the operation to the defendant companies or value saved by the publishers who are granting extra 2% RDC discounts.