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.
  1. Plaintiff contends:

 

TABLE A. Expense to seller in picking, packing and labeling the same 1000 books:

  1. Direct to defendant RDC

  • Drop-shipped to plaintiff

    • at average list prices of from $ 2.00 each to $35.00 each,

    with books packed from 10 to 50 per box (20 to 50 boxes).

    Direct:

    Hours

    @ $/hr

    $ Expense

    Drop ship:

    Hours

    @ $/hr

    $ Expense

    Pick

    0.5

    15

    $ 7.50

    Pick

    0.5

    15

    $ 7.50

    Repack

    Repack

    2

    15

    $ 30.00

    Extra materials (boxes, tape)

    Extra materials

    $ 5.00

    Labeling

    $ 5.00

    Labeling

    $ 5.00

    Total

    $ 12.50

    Total

    $ 47.50

    Savings: Difference in expense of drop ship over direct shipping.

    $ 35.00

    Average retail price of each book:

    2

    5

    10

    15

    20

    25

    30

    35

    Total retail price of 1000 books:

    2,000

    5,000

    10,000

    15,000

    20,000

    25,000

    30,000

    35,000

    Difference in cost as % of retail price:

    1.75%

    0.70%

    0.35%

    0.23%

    0.18%

    0.14%

    0.12%

    0.10%

     

     

     

    As a footnote to the above, it should be noted that defendants also have been permitted to make certain large purchases of regular inventory (not close-outs) at a special higher non-returnable discount, while the Red Book and other published terms show that this option may be made only for a full year of all purchases, and may not be used on a selective basis, except as offered on distress merchandise.

     

    Damages to plaintiff by defendants:

    1. Even though the company exerted great effort and possessed many assets for successful competition, The Intimate was undermined by the efforts of the defendants compounded by the acquiescence of the publishers.

    Publishers’ Policy Changes for the Benefit of a Favored Few:

    The publishers would send the sales manager or other official out to those who were the buyers for defendants and would take orders for all the titles on the new list. If, after meeting with the buyers for defendants, the publisher had not received a suitably substantial volume of orders for a title, it was removed from the list and not published at all – even titles for which there were signed contracts.

    The limit seemed to be about 25,000. If the defendants failed to order at least that quantity, the title was scrapped. Plaintiff was given information on some of these titles, and felt that all were perfectly salable by The Intimate and others, though perhaps in limited quantities of five copies or fewer per shop. At that time there were some 6,000 bookshops in America other than the defendants, and if each had purchased only a few copies, the print run would have been over 15,000 copies. These 15,000 copies – of hundreds or thousands of titles – were never published, and the plaintiff and other smaller booksellers never had an opportunity to sell them, and millions of customers of the smaller stores never were permitted to read these books. The only fatal flaw of these titles was that a handful of buyers in a few companies found these titles to be unappealing. The publishers found it imperative to kill millions of books because they didn’t fit the plans of their few largest customers.

    One can only guess how many careers were stifled, how many great ideas were muffled and how many dollars were lost to all who could have gained from their publication.

     

    VI. Conclusions.

    Price Discrimination and Knowledge Thereof

    1. Clearly defendants have solicited and been granted benefits of many sorts not available to plaintiff.
    2. Clearly, defendants knew the benefits were discriminatory. Defendants even went to the trouble of taking precautions to "protect" both themselves and their supplier by going through the motions of making out "meeting competition" documents with the publishers.
    3. Clearly defendants have been granted discriminatory benefits including but not limited to:
    1. The sales made both to defendants and plaintiff consisted of many of the exact same books -- national bestsellers and other titles – and all were made in interstate commerce and made at the same time – as the titles were first published.

      2.  

       

      Results of Price Discrimination

    2. This price discrimination – of a significant amount of difference over quite a long period of time – injured competition by giving defendants many decided competitive advantages:
    1. Plaintiff had enjoyed record sales and profits and was increasing in sales at more than $1 million per year, and had just completed restructuring its lineup of stores so that it could handle easily even greater sales which were anticipated.
    2. Plaintiff had competed with success for many years with many other stores, among them defendants’ mall stores, discount stores, drug stores, specialty retailers, department stores, book fair operators, national book clubs, mail order houses, the publishers and the start-up internet operations, and others.
    3. Within a very short period of time defendants placed two new mall stores and some seventeen superstores in the market areas of plaintiff, most within a mile or so -- and several only a short walk away. These seventeen superstores were the equivalent in size to about 150 typical "mall-size" bookshops.
    4. Defendants could and did advertise and promote heavily in these stores, and defendants could and did discount heavily in these stores.
    5. Regarding other discriminatory benefits given to and received by defendants:

      1. Plaintiffs can show that RDC discounts
      1. Plaintiffs can show that incentives granted by Ingram
      1. Plaintiffs can assert a claim against defendants
      1. Plaintiffs can show that defendants
      1. As to part a: Plaintiff here can show that RDC discounts given defendants are not lawful functional discounts and are also not cost-justified (See Paragraph 104 and following of this document). As to whether defendants knew or did not know whether the discounts given were legal, plaintiff feels that it is the duty of the prudent to determine whether a departure from known legal standards is, itself, legal -- before making the change. It is not within the capacity of plaintiff – or the duty of the plaintiff -- to read the mind of the defendants. However, Defendants showed by their actions that they knew they ran the risk of having their actions ruled illegal, as evidenced by the multiplicity of "meeting competition letters" they solicited and sent over many years. In the efforts to "legitimize" an illegal activity, defendants failed to consider all relevant elements of business competition which are a part of the makeup of "price," and instead focused only on the elements which concerned them at the time, e.g. shipping costs, RDC discounts, co-op advertising funds for "placement" of books, etc. This cavalier approach to obtaining extra income was not unlike telling an ugly woman that she would be the equal of the queen if only she wore the same shoes.
      2. This cavalier approach to obtaining extra income may have been encouraged by several facts of business and law;
      1. As for the defense that the differentials in price are only due allowances for differences in the cost of manufacture, sale or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered, the following should be considered:

     

     

      1. As to Part b: Incentives granted to defendants by Ingram were clearly discriminatory:
      1. As to Part c: Plaintiff can show that defendants many times knowingly induced and received a discrimination in price.

    Plaintiff can show the following:
      1. As to Part d: Special terms were demanded by defendant and received.

    (It should be noted here that there was a cardinal rule of the publishers in claiming credit for co-op, as stated in the Red Book, trade publications, in letters from the publishers and even on the co-op advertising contract form, and this was: Co-op claims could not be used as deductions against payment. Only when the publisher had

    could any deductions be taken in payment of due bills. Defendants routinely made "charge-backs" for co-op and deducted them from the due bills.

    These claims were then "settled" on a regular basis, always to the advantage of defendants).

    Invoices "in dispute" were not paid, and publishers did not press for payment. Such kindnesses were not afforded to plaintiff.

     

    Meeting Competition

    1. In the book industry it could be argued that there is no competition -- for the publisher owns the exclusive rights to almost every title it publishes.
    2. In any industry it can be shown that dozens of factors enter into the "price" of an item being sold, and that discrimination in any significant portion of these factors can be damaging to competition. Sellers being induced to meet an "equally low price" may, in fact, go far below the competitor’s price if all factors are not considered, bringing about discrimination in price. Some of these factors are:
    1. It is clear that the price charged for a new novel purchased returnable might be considered to be significantly lower than the same price charged for that same new novel shipped on a non-returnable basis. Charging an "equally low" invoice price for equivalent books shipped returnable would be, in fact, far lower than the "price" of the same books shipped by a competitor on a non-returnable basis at the same invoice price. The same analysis would hold true for an "equally low" price of books shipped free as compared to equivalent books by a competitor at the same invoice price but with shipping charges added. The invoice "price" is but the beginning of the equation, from a point of view of competitive and proportionally "equal" pricing.
    2. The values given one seller must be proportionally and essentially equal to the values given by a competing seller for the price to be considered "equally low" from a point of view of "meeting competition."
    3. The values given to one buyer by the seller must be proportionally and essentially equal to the values given to a competing buyer for the price to be considered nondiscriminatory.
    4. The fact that sellers regularly favored defendant buyers over plaintiff buyer – in many significant considerations – shows that the sellers regularly practiced price discrimination, to the advantage of defendants and to the disadvantage of plaintiff.
    5. The fact that sellers regularly favored defendant buyers over plaintiff buyer – in many significant considerations – shows that the defendants regularly received prices that were lower as a result of price discrimination.
    6. Defendants both solicited and received these lower prices, whereas plaintiff did not. Defendants knew that the prices were discriminatory.
    7. Defendants solicited these extra discounts and extra benefits that resulted in their receiving lower prices for their own benefit, without any regard for any extra benefit (or extra expense) which might accrue to the seller.
    8. Defendants solicited these extra discounts and extra benefits which resulted in their receiving lower prices for their own benefit, without any regard for any ramifications to the industry such as the following considerations:
    1. Defendants solicited these extra discounts and extra benefits which resulted in their receiving lower prices for their own benefit, in full knowledge of the fact that the benefits were discriminatory and that such gains would enable them to be more competitive and thus be more able to succeed in business over their competitors.

      2. Cost Justification

    2. It can be shown that the value of extra discounts and other benefits given by publishers to defendants (including the 2% RDC discount) greatly exceeded any "savings" value to the publishers. It can be shown that the costs of servicing plaintiff was significantly lower to the publisher than the costs of servicing the defendants’ operations, even when the defendants took over some of the usual duties of the publishers. There can be no "cost justification" defense under such conditions.

      3.  

       

      Damage to Plaintiff

    3. From anecdotal evidence, that of former customers reporting that they moved their business to the defendants’ stores from The Intimate stores, it can be shown that the actions of the defendants damaged plaintiff.
    4. Plaintiff suffered losses in sales as each new store of defendants came into its market, then began to recover, only to have yet another new store of defendants come into its market, until defendants’ total square footage of nearly ten times that of plaintiff simply overwhelmed plaintiff’s ability to rebound and to maintain profitability and to avoid heavy losses of profits.
    5. Because of the illegal acts of the defendants and the subsequent and consequent acts of the publishers, many bookshops and several large wholesalers failed. These failures caused significant losses for the publishers and the banks. Normal business practices could be said to call for caution on their part in such conditions, even though The Intimate might be able to show that it was weathering the storm fairly well. Sales for the company fell as each new competing store opened in the market served by The Intimate; the company’s sales then recovered, only to fall again when yet another competing store opened in the same market as The Intimate stores. At last The Intimate was simply surrounded by the chains, including the defendants, and picked clean of its ability to compete.
    6. Defendants are competent business practitioners and are well aware of the fact that taking away a mere 10% of a competing company’s sales takes away far more than 10% of their profits; indeed, virtually all of the gross profit lost by the competitor under attack is a loss of net profit. Fixed expenses remain the same, whether sales are rising or falling; the "variable" expenses experienced from either rises or falls is only some 7% or so. Therefore losing a sale of which 40% is gross profit causes a loss of 33% of profits while 7% is a reduction in the cost of overhead (the sale wasn’t made, so the money didn’t have to be spent). If a company is operating at a profit margin of 4% of list price, cutting that company’s sales by 10% or so will virtually eliminate all net profit. Cutting that company’s sales by 20% or more for any significant period of time will cause them to lose money heavily and, unless they are supported by large amounts of capital, they will fail. Defendants are well aware that The Intimate Bookshop, Inc., as typical of most independents, did not have the capital to withstand such damage for long. Defendants’ tactics were aimed quite clearly at achieving the goal of eliminating The Intimate Bookshop as a competitor.
    7. Defendants’ tactics were successful.

      8. Damage to Plaintiff

    8. The defendants used the profits illegally gained in order to expand their resources and to open shops in competition with the plaintiff. Defendants damaged plaintiff, and did so in several ways.

    Methods Employed by Defendants to Harm The Intimate:

    Discounted Sales, and Requirements for Achieving Equivalent Gross Profit Dollars

    Quantity

    List Price

    Total list

    Cost

    Total cost

    Gross Prof

    Total GP

    At List Price

    100

    20

    2000

    12

    1200

    8

    800

    At 10% Disct

    100

    18

    1800

    12

    1200

    6

    600

    At 10% Disct

    133

    18

    2400

    12

    1600

    6

    800

    Increase Reqd

    33%

    20%

    33%

    GP Diff

    0%

    Quantity

    List Price

    Total list

    Cost

    Total cost

    Gross Prof

    Total GP

    At List Price

    100

    20

    2000

    12

    1200

    8

    800

    At 20% Disct

    100

    16

    1600

    12

    1200

    4

    400

    At 20% Disct

    200

    16

    3200

    12

    2400

    4

    800

    Increase Reqd

    100%

    60%

    100%

    GP Diff

    0%

    Quantity

    List Price

    Total list

    Cost

    Total cost

    Gross Prof

    Total GP

    At List Price

    100

    20

    2000

    12

    1200

    8

    800

    At 30% Disct

    100

    14

    1600

    12

    1200

    2

    200

    At 30% Disct

    400

    14

    5600

    12

    4800

    2

    800

    Increase Reqd

    300%

    180%

    300%

    GP Diff

    0%

     

    Discounting given by The Intimate from 1992/1998 (ignoring 99)

    (Values for 96-98 must be verified)

    Partners cards gave user 30% discount on bestsellers and 10% on everything else.

    All customers got 15% on bestsellers

    Bestseller business was about 10% of business overall (including discount), or about

    12% before discount.

    About 1/3 of Partner card holders spent less than $100 per year, and thus did not

    Earn back the $10 fee; about 1/3 bought approximately $100. The last third bought

    More than $250 per year, on average.

    Overall, discounts came to about 3% of gross each month.

    There were some 10,000 Partner cards out at any one time.

    Spending

    Customers

    Net @ 10% disc

    List

    ~$100

    3333x100

    333,300

    370,333

    <100

    3333x60

    199,980

    222,200

    100+

    3333x250

    833,250

    925,833

    1,366,530

    1,518,367

    151,837

    Discount given each year, in dollars.

    Bestsellers all discounted by 15% additional

    Partner

    15%

    Additional

    Other

    15%

    Additional

    Per month

    10%

    Of net monthly sales (after discount)

    % Per mo

    1.67%

    Discount as % of sales at list price.

    "Normal"

    Sales

    92

    93

    94

    95

    96

    92-96 total

    Net

    8,537,727

    9,238,160

    10,227,279

    9,637,531

    8,400,000

    46,040,697

    Part disct

    151,837

    151,837

    151,837

    151,837

    151,837

    759,183

    8,689,656

    9,390,090

    10,379,210

    9,789,463

    8,551,933

    46,800,350

    gen disct

    145,117

    156,814

    173,333

    163,484

    142,817

    781,566

    List prices

    8,834,773

    9,546,904

    10,552,542

    9,952,947

    8,694,750

    47,581,916

    Discounts

    296,954

    308,651

    325,169

    315,321

    294,654

    1,540,749

    "Normal"

    "Closing"

    "Closing"

    Sales

    92-96 ttl

    97

    TTL 92-97

    98

    TTL 92-98

    Net

    46,040,697

    5,200,000

    51,240,697

    3,000,000

    54,240,697

    Part disct

    759,183

    759,183

    759,183

    46,800,350

    46,800,350

    46,800,350

    gen disct

    781,566

    2,228,571

    3,010,137

    3,000,000

    6,010,137

    List prices

    47,581,916

    7,428,571

    55,010,488

    6,000,000

    61,010,488

    discounts

    1,540,749

    2,228,571

    3,769,321

    3,000,000

    6,769,321

     

     

     

     

     

     

    Net sales

    List sales

    Discount

    Discount %

    92

    8,537,727

    8,834,773

    297,046

    3.36%

    93

    9,238,160

    9,546,904

    308,744

    3.23%

    94

    10,227,279

    10,552,542

    325,263

    3.08%

    95

    9,637,531

    9,952,947

    315,416

    3.17%

    96

    8,400,000

    8,694,750

    294,750

    3.39%

    97

    5,200,000

    7,428,571

    2,228,571

    30.00%

    98

    3,000,000

    6,000,000

    3,000,000

    50.00%

    54,240,697

    61,010,488

    6,769,791

    11.10%

     

     

    1. Loss of Sales While Still Operating. In addition to the discounts given by The Intimate in an effort to compete with defendants operations, plaintiff lost business that it fully expected to garner under normal circumstances.

      2.  

       

       Potential

       

      15th yr

      96

      97

      98

      99

      00

      01

      #1

      2,141,972

      1,008,264

      1,159,504

      1,275,454

      1,402,999

      1,543,299

      1,651,330

      #2

      2,400,000

      2,472,000

      2,546,160

      2,622,545

      2,701,221

      2,782,258

      2,865,726

      #3

      959,868

      740,000

      791,800

      831,390

      872,960

      916,607

      944,106

      #4

      752,355

      774,926

      798,173

      822,119

      846,782

      872,186

      898,351

       

       

      #5

      6,357,007

      3,441,208

      3,785,329

      4,163,862

      4,580,248

      4,900,865

      5,243,926

      #6

      595,936

      569,077

      586,150

      603,734

      621,846

      640,502

      659,717

      #7

      859,455

      820,720

      845,341

      870,702

      896,823

      923,727

      951,439

      #8

      2,760,849

      1,643,969

      1,808,366

      1,989,202

      2,128,446

      2,277,438

      2,391,309

      #9

      2,514,550

      986,369

      1,183,643

      1,361,189

      1,497,308

      1,647,039

      1,811,742

      #10

      4,642,363

      1,821,035

      2,185,242

      2,513,028

      2,764,331

      3,040,764

      3,344,840

      Ttl

      23,984,355

      14,277,567

      15,689,707

      17,053,224

      18,312,964

      19,544,684

      20,762,486

       

      TTL 96-01

      105,640,632

      = Sales lost due to competition

       

       

       

       

      Loss of Profits from Lost Sales.

    2. Had The Intimate been permitted to grow normally, it expected its fixed expenses to remain stable (it planned no new stores) and its variable expenses to increase at a rate of about 7% of additional sales per year. Given a growth rate of some $1 million each year, with gross profit of 42% and variable expenses of 7%, some 35% of the increases should have been claimed as profits (before taxes). The increases in sales would total some $30 million over the Covered Period, the additional gross profit some $12.6 million. Subtracting variable expenses of about $1 million, the additional net profits might well have been over $11 million.

      3. Or, estimating net profits at some 10% of lost sales, as calculated above, net profits would have been very nearly $11 million.

      Loss of Assets. The assets which were in use by The Intimate included the following:

    3. Store and equipment. Costs of construction of 11 stores, some 75,000 square feet, estimated at $40 per square foot for "vanilla box" and upfit finishing charges (some of it contributed by the developers) comes to some $3 million. Custom fixtures for all of these stores came to about $12 per square foot, or about $900,000. Equipment (very little of which could be sold or salvaged) had a value estimated at some $100,000. The total for store and equipment comes to about $4 million.
    4. Discounts and Benefits not Received. If plaintiff had enjoyed the benefits that the defendants appear to have enjoyed, funds and credits amounting to some 10% or more of retail additional, in the Covered Period of 1994-2001 plaintiff would have collected some $10 million additional, all of which would have been net profit.
    5. Good Will. The Intimate did not carry on its books any value for good will, at the insistence of its auditors, in order to maintain their books in generally accepted accounting procedures (GAAP) condition. Nevertheless, the value of over 65 years of operation, of many millions of dollars in advertising and promotion, and of satisfying service for many millions of customers in that time had great value for the continuing business, all of which was lost at once when the company ceased active operations.

      6. Totals of Losses

    6. In all, the losses to The Intimate might be estimated as
    1. This total monetary loss, a reasonable estimate, is in excess of $35 million.
    2. In the period in which the national chains, including defendants, opened some 1,500 "superstores" some 3,000 independent stores failed, including plaintiff.

    The loss to the communities in which these independent shops operated can not be calculated, nor can the cost of the disruption of the lives of tens of thousands of good booksellers and their families. No one who hasn’t lived through the trial of having bill collectors calling, many of them several times a day, dozens of calls each day, while trying gamely to save a dear and valuable company under siege, can quite understand the discomfort of years of such life. The loss of good friends and colleagues, the ignominy of having the sheriff show up at the door several times a month, the desperate search for new investment, loans, even a buyer for the whole company – all of these live with those undergoing the experience every day and most nights, without surcease.

    The end comes quietly, closing a door, locking it and walking away from a lifetime of work and achievement, of the enjoyment of the good times and of dealing with the troubles, of life as one has known it for over 40 years. To think that it may have come from nothing more than the desire of someone or some group to make a little more money is disappointing. To find in closer investigation that those thoughts greatly underestimate the rapacity of the winning team – their willingness to destroy good institutions for their own sort of gain – is appalling. And to find that they did it all not by being better or smarter or quicker or even richer, but simply by breaking the rules which one has always believed to be more important than personal gain – however great – brings a smoldering anger which demands that one make whatever effort and additional sacrifice is required in order to set matters aright, and to make the attempt to see that such abuses of order, civility and law not be permitted to continue or, once halted, to recur.

     

    _____________________________________

    Wallace H. Kuralt, Jr.

    110 Watters Road

    Carrboro, NC 27510

    June 10, 2001

     

    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: Estimate 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]

     

    Appendix A:

    Experience of Wallace H. Kuralt in business
    1. While a student at the University, I joined The Intimate Bookshop as a staff member in 1958. I became, successively, manager of the paperback books, manager of the law books, manager of the medical books, manager of the course textbooks and, in 1960, store manager. I assisted in the operation of the accounting machine and its system, and handled inventory control functions. I brought in and trained all new staff members, performed purchasing for the sections I managed, and worked on the sales floor serving customers. During the early spring, when the owners of The Intimate spent six weeks or so as amateur archaeologists in Mexico and Peru, and during the summer, when the owners operated a smaller bookshop in Provincetown, Massachusetts, I managed the entire shop. .
    2. In 1962 I left the shop for duty in the US Army, serving as information specialist for the 3274th US Army Hospital. As part of my training, I served at Ft. McPherson in Atlanta, Georgia, in the 3rd US Army Recruiting District Headquarters and CONARC Command and was responsible for the creation of all publicity and recruiting materials for recruiters in the 13-state 3rd Army area, and received a citation from my commanding officer. I was offered promotion to Captain if I chose to remain with the Army’s Medical Service Corps at Ft. McPherson, the service responsible for the creation, operation and maintenance of US Army hospitals worldwide, but I declined the honor in order to return to Chapel Hill to be a bookseller.
    3. I returned to Chapel Hill and was married in 1963 to Brenda Dosik of New York. I made an analysis of the bookshop company and, acting on the conclusions, began to take steps to increase sales and profits. By 1965 sales had risen to more than 300% of their 1962 levels, and negative results had turned into remarkable profits. I decided to move on and open my own shop, but was offered the opportunity for ownership of The Intimate and accepted.
    4. Working with Mrs. Kuralt, I continued to increase the sales and profits of The Intimate, and in 1967 began the creation of a mainframe computer system to help manage the growth. With assistance from staff and students from the university, I converted the excellent manual system to a computerized system, retaining and expanding its capabilities. In the fall of 1968 the system came on line, as well as an accounts-receivable system – probably the first in the nation for any bookshop, and one of the first installations for any retailer. Mrs. Kuralt became the chief buyer and I continued to work on the computer systems and advertising and promotion for the shop.
    5. In 1970 The Intimate opened its first expansion shop, in Charlotte, NC, in the SouthPark Shopping Center. The new computer systems played an important part in the task of selection and purchasing of initial inventory and later in the control of the inventory of a shop that had a dramatically different clientele from the original Chapel Hill shop. I designed all new fixtures, based upon the bookselling needs we had found from our years of operations, and created a new concept of bookstore design and category placement.
    6. In 1979 The Intimate purchased its own Hewlett-Packard computer, and work began on the creation of fully interactive systems, based on the original work. High-speed telecommunications were designed by me and developed and implemented, and by 1980 all shops were operating with real-time on-line systems, enabling over 60 staff members, company-wide, to offer even better service to customers and make and save money for the company at the same time.
    7. For the state public library system of North Carolina, I created the CLASS I system, a model for an ordering, receiving and distribution system for their central ordering facility. This not-for-profit agency stocked no books, but accepted orders for books from any library in the state system, batched the orders for efficient handling and for better discount, and submitted the batch to the appropriate vendor; when the books arrived, each book was processed, including labeling with Dewey Decimal System markings, stamping with the library name and rejacketing in heavy plastic and being given a pocket with all the necessary cards for circulation and filing. The design of the receiving-and-processing room was a critical part of this "flow-through" system design, as well as the handling of paperwork.
    8. I was invited to San Antonio, Texas, to help work on an inventory system using Hewlett-Packard equipment for a statewide chain of inexpensive dry-goods stores to help replace a system which required that each order placed be photocopied nearly 100 times (giving a copy for each store in the chain). In this case the company was unwilling to make a single investment of as little as $1,000 per store to save, potentially, over $3,000 per store in sales each month.
    9. I created the Monthly Accounting Control (MAC) system, a multi-corporate, multi-store computer system, to give the company more accurate and more timely reports at considerably lower cost than before, using The Intimate’s well-established manual system as its model.
    10. I purchased and experimented with a variety of electronic hardware modules which might be used in the creation of a "smart" retailing point-of-sale device. Devices from more than 15 different manufacturers were brought into compatibility (some of the devices still in the early testing phases of production) and special software and firmware was introduced to enable the user of the device to use a keyboard, a bar-code scanning device, an Optical Character Reader (OCR), a credit-card reader or a touch-screen to perform functions of inventory control and sales. Using it, the operator could gain access to The Intimate’s remote databases, could examine and store data and could make multi-copy sales almost effortlessly, and then print a sales receipt showing all the detail, including method of payment, exact time and date and the name, address and telephone number of the store and the register number -- and then open the cash drawer briefly when payment had been made. We later settled for a combination of commercially available products – an electronic cash register complemented by an inexpensive "dumb" terminal, high-speed remote communications equipment and a printer.
    11. In the late 1980’s I was approached by John Bodett, former executive director of FTD, and the Friedt Group, former owners of Teleflora, to provide expert assistance to them in the areas of computer operations and of bookselling. I created for them the "Books by Wire" system, a nationwide operation of booksellers taking orders for books to be delivered that day or the next anywhere in the United States. I used much the same hardware as that used by The Intimate (with specially designed and programmed "smart terminals"), created the software from parts of The Intimate’s system, with new telecommunication features, set up eight regional centers and signed on over 1,000 members. The first iteration of the system, for demonstration purposes only, was ready for trade shows in less than 90 days.
    12. After a disastrous fire destroyed all of the central computer equipment for The Intimate, the company was able to find and rent a suitable replacement building, have it re-wired for electrical and computer cabling, buy a used computer and ship it in from Seattle, re-establish dedicated computer telecommunications, load the new machine with firmware and software and test all operations, and some stores were back on line within nine days from the time the fire started. I designed the replacement building using AutoCad, and dealt with the Chapel Hill town council and all the boards (zoning, appearance, historic, inspections and more). I expanded the footprint from 3,000 square feet to 4,200 square feet, raised the height by only two feet and got in three floors rather than the original two (the roof poured as the floor for a fourth level later), and turned over the drawings to our architects for official rendering. We won the town architectural award for 1993.
    13. The Intimate Bookshop was the only American member of the British Booksellers Association. Mrs. Kuralt and I regularly attended their annual convention and engaged in discussions of bookselling with our British colleagues. We attempted to carry a stock of British books, and were successful in some cases but were confounded by copyright restrictions and shipping costs in most cases.
    14. The state of independent bookselling remained much as it had been for some 100 years: Few booksellers joined the industry with the primary goal of making a lot of money. Some needed to earn a living from the operations of the shop, but many were independently wealthy. Other booksellers were considered to be friendly competitors. Annual conventions were great social events, and booksellers freely shared with one another their bright ideas for improving their shops and their sales. Most shops, including those of plaintiff, kept a list of the telephone numbers of the other area bookshops and would call the other shops frequently in attempts to help a customer obtain a book not available in one’s own shop.
    15. When in the early 1990s the national chain bookstore companies began to open their "superstores" in our area, I created a number of new programs which could help The Intimate compete:

    I also created the program "Bookshow," a system for independent bookshops which would bring in a large and attractive feature display for two or three weeks at a time, each of 30 or 40 features containing a wide variety of books from all publishers on a very narrow subject of interest: Fishing, Love Poetry, Civil War, Stock Market, Cars, Gems, Antique Cookie Jars, and the like. These shows would rotate from store to store, with replacements being made from a central warehouse as titles sell out. This program is still under consideration, should the company return to active status.

    1. I have served as a committee member of The American Booksellers Association, as a board member and treasurer of the Southeastern Booksellers Association (SEBA) and created for SEBA its first accounting system and balanced its books for the first time. Mrs. Kuralt and I have been asked to serve in a number of bookseller panels and discussion groups at individual publisher events and at conventions. The Intimate was the only independent bookselling group to be invited to a Bantam event and a Golden press event of "brainstorming" for the benefit of both publisher and bookseller.
    2. Many who have worked with us at The Intimate Bookshop have remained in the book business. Several have become high ranking sales officials at major book publishers, a dozen or more have become book publishing sales representatives, several have gone on to create their own shops, one has become the president of the ABA and bookseller of the year, and many have now gone to work with other book retailing companies, including some owned by the defendants. The man who was named bookseller of the year was kind enough in his acceptance speech to mention The Intimate and me as the models for his philosophy of bookselling, saying that we had "taught him everything he knew."
    3. During the 1980s and ‘90s, before The Intimate was so drastically impacted financially, allegedly by the actions of the defendants, the company sold over $100,000.000 worth of books at retail and steadily maintained a market share of one tenth of one percent of the national trade book business. Much of this income was earned when retail prices were significantly lower than now. We were told, by our suppliers, that we were the largest independent retail book operation in the southeastern United States.
    4. When the national chain grew from a size approximately equal to that of The Intimate in its geographic market area to a size more than ten times larger than The Intimate, I worked hard to keep the company operating successfully and growing.
    5. When sales began to fall I took steps to reduce expenses, close stores and move their inventory and fixtures and equipment to other stores and continue operations.
    6. I dealt with publishers, collection agencies and lawyers to stave off bankruptcy, and paid The Intimate’s bills from my own checking account when needed to keep the books flowing in.
    7. I sought out special bargains and hurt books with which to fill the shelves of the shops to help keep them going, all the while hunting new investment or a purchaser for the company. For over three years the company survived even without a single shipment from a major publisher.
    8. After determining that The Intimate had been the victim of unfair and allegedly illegal trade practices, I sought help from several attorneys – locally and from the Internet listings – and began in 1997 to work with Carl Person in mounting a legal action. The aim was to secure an injunction under the Robinson-Patman Act against the alleged illegal practices and to help any remaining booksellers to survive and compete.
    9. Since April of 1999, I have engaged in purchasing and valuing and selling old and rare books and manuscripts and maps (and some new books, chiefly related to antiques and to the state of North Carolina), and with Mrs. Kuralt have opened two antique shops in the town of Pittsboro, NC.

     

     

    APPENDIX D: Publisher shipping expenses

    Expense to seller in picking, packing and labeling the same 1000 books:

    at average list prices of from $ 2.00 each to $35.00 each,

     

     

    with books packed from 10 to 50 per box (20 to 50 boxes).

    I.                    Direct to defendant RDC

     

    II.                 Drop-shipped to plaintiff

    Direct:

    Hours

    @ $/hr

    $ Expense

    Drop ship:

    Hours

    @ $/hr

    $ Expense

    Pick

    0.5

    15

    $7.50

     

    Pick

    0.5

    15

    $7.50

    Repack

     

    Repack

    2

    15

    $30.00

    Extra materials (boxes, tape)

     

    Extra materials

    $5.00

    Labeling

    $5.00

     

    Labeling

    $5.00

    Total

    $12.50

     

     

    Total

    $47.50

     

     

    Savings: Difference in expense of drop ship over direct shipping.

     

     

    $35.00

    Average retail price of each book:

     

     

    2

    5

    10

    15

     

    20

    25

    30

    35

    Total retail price of 100 books:

     

     

    2,000

    5,000

    10,000

    15,000

     

    20,000

    25,000

    30,000

    35,000

    Difference in cost as % of retail price:

     

     

    1.75%

    0.70%

    0.35%

    0.23%

     

    0.18%

    0.14%

    0.12%

    0.10%

     

     

    Appendix E: Store Placement, Competition and Closings

    Placement of Plaintiff Stores and Defendants’ Stores.

    All of plaintiff’s stores were on unlimited-access four-lane streets that led directly to defendants’ stores without any barriers other than traffic signals.

    There were two small independent shops (3,000 and 1,500 sq ft), both about three miles from the SouthPark shop and 8 miles from the Eastland shop.

     

    Shops more than five miles away were not felt to be difficult competition, unless they were superstores, in which case they could be damaging even if 8 miles away. Large malls helped their tenants attract shoppers, including defendants in their mall shops, especially during their grand opening period. The Media Play shops in Charlotte, which drew customers away heavily during their grand opening period, made very little difference to sales of The Intimate after their heavy advertising ceased.

    Malls in Durham all had defendants’ bookstore locations, the closest being 12 miles away from Chapel Hill, with another some five miles farther away.

    .

    Despite the extraordinary "edges" which The Intimate created for itself, and despite its successful operations over many years against many competitors, plaintiff suffered a decline after the defendants’ stores came in nearby to compete.

    For years The Intimate had been able to compete successfully against all comers, even though dozens of other competitors came along, and came in many forms.

    Long-Term Competitors of The Intimate:

     

    It is significant to note that the rate of new competition from all of these bookselling sources did not increase materially at any time.

    During all this period of growth and expansion, The Intimate retained a sales volume approximating 1/10 of 1% of the national trade book sales market, as shown below, until 1995, when the effects of the defendants’ stores began to make a large difference in the ability of The Intimate to compete.

     

     

     

     

    National Retail Book Sales, 1991 through 1997, and Intimate Book Sales for the same period.

    Natl trade book sales

    (x1,000)

    versus Intimate book sales:

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    National

    7,731,000

    8,329,000

    9,199,000

    10,306,000

    11,524,000

    12,381,000

    12,688,000

    Intimate

    8,204,864

    8,537,727

    9,238,160

    10,227,279

    9,637,531

    6,000,000

    3,000,000

    Intimate %

    0.1061%

    0.1025%

    0.1004%

    0.0992%

    0.0836%

    0.0485%

    0.0236%

    Sources: Intimate = WHK93296 (from financial stmt)

    National Sales = ABA Research Page: "Retail Sales for 1991-1997"

     

     

     

    Until Waldenbooks opened within sight of the plaintiff’s shop in Eastland Mall in Charlotte – and used heavy discounting to attract customers -- The Intimate grew almost unabated. When The Intimate was denied a lease renewal and Waldenbooks took over The Intimate’s old location in University Mall in Chapel Hill, the new competition may well have had an effect on sales, though it was not evident to The Intimate because the plaintiff had moved into the Eastgate strip center ¼ mile away and had expanded its operation into, first, a "superstore" of 7,000 sq ft (twice the size of the Waldenbooks), and then into a 14,000 sq ft space, and its sales had climbed nicely in that shop as compared to the old University Mall shop. (As an aside, it should be noted that when The Intimate had built its shop at the new University Mall in 1965, it had been allowed to add a 2400 sq ft "mezzanine" to the 3200 sq ft space – at no additional rent. When Walden successfully outbid The Intimate for the location, in 1990, Walden tore down the mezzanine and used only the basic floor space).

     

    From time to time The Intimate made changes, common to any multi-store operation, and responded to the current market.

    The industrialist insisted on selling the shop (for a very small amount) rather than accept the assistance of The Intimate. Staff members from both companies performed a physical inventory and determined that the value was close that the value of the inventory shown on the account books of The Savile.

    The Intimate made the purchase ("as is," with a guarantee of the accuracy of the accounts books), installed telecommunications and inventory controls and brought in a new manager, retaining most of the Savile staff members. They discovered large discrepancies in the accounts payable and, later, in the stock on hand.

    Then it was found that the inventory figures on The Savile’s books had been arbitrarily adjusted to show more value at the end of the previous fiscal year – and thus a greater cost of sales and lower profits from operations and, thus, lower taxes to be paid by the industrialist owner. Normal accounting should have shown the value of the inventory at the time of the physical count to be far higher than it was. Therefore, heavy losses through the year, largely through theft, had thus been disguised from The Intimate. The Intimate sued in Federal District Court in Washington, alleging fraud, and, though Judge Gerhardt Gesell felt there were issues to be tried, The Intimate settled with the former owner during trial.

    The shop was closed at the end of the lease in 1979 and all assets were transferred to the North Carolina shops.

     

    When the flagship shop on East Franklin Street in downtown Chapel Hill burned to the ground in 1992, fully covered by insurance, the new building was enlarged to three stories of 4,200 sq ft each, rather than the two stories of 3,300 sq ft as before. All administration and computer operations were consolidated and moved into the third floor, and a public meeting room was made available to local organizations.

     

    In June of 1999 Wallace and Brenda Kuralt opened "Past Perfect," a retail operation in Pittsboro, NC, some 17 miles south of Chapel Hill. A large part of the shop was given over to the sale of books, chiefly old and rare books, with some new books on antiques and Caroliniana. Thus The Intimate Bookshop lives on, though in greatly reduced circumstances.