ABA Section of Business Law
Business Law Today
May/June 1999
New page, same ol’ story
Independent booksellers vs. the giants.
By KRISTEN SCHMIDT
Schmidt is a free-lance writer in Champaign, Ill.
Thousands of square feet. Warm oak trim, plush carpeting. And aisles crammed full of books waiting to be opened.
Know where we are? It could be a Barnes and Noble, or it could be a Borders. It could be in New York City, or it could be in Montana.
Wherever it is, it is a booklover’s bookstore — a paradise for the hyperliterate, and a thorn in the side of independent bookstores across the country.
The American Booksellers Association, a group of about 3,500 independent bookstores, as well as 26 individual bookstores, filed suit against Barnes and Noble and Borders in March last year, alleging a slew of misdoing. The suit is going through massive discovery right now, with no quick end in sight. Documents and records from all 26 bookstores and the chains must be reviewed.
Though the case is scheduled to go to trial in May 2000, Borders counsel Reg Steer of Pillsbury Madison & Sutro in San Francisco said that, with the great volume of documents, the discovery process is taking longer than anticipated. The defendants recently deposed four independent bookstore owners who are not plaintiffs in the case. Steer could not comment on the reason the four owners were deposed.
The case has been assigned to Judge Fern Smith in the U.S. District Court of Northern California. A former San Francisco County Superior Court judge and partner with Bronson, Bronson & McKinnon in San Francisco, Smith was appointed to the federal court by Ronald Reagan in 1988. Smith presided over a Jan. 15 hearing at which the discovery process was reviewed. The next hearing in the case is set for July, according to the booksellers association’s Web site.
In the meantime, however, independents are determined to fight for survival.
The lawsuit claims the chains violated the Robinson-Patman Act, the California Unfair Trade Practices Act and the California Unfair Competition Law. These laws are designed to protect small, independently owned businesses from large retailers. The association rests its argument largely on the idea that smaller stores "make significant contributions to the nation’s economy and culture."
Allegedly, the chains received extra discounts, including off-schedule discounts, shared markdowns, extra discounts on small orders, special terms for new stores or expansions, and special terms for "nonreturnable" purchases. The suit also claims the chains solicited and received better payment terms, favorable returns terms and a vast array of co-op and "promotional" terms not provided to independents. The chains’ explosive growth, the independents claim, can be attributed in part to these illegal deals.
The suit says more than the survival of the American independent bookstore is at stake. The very diversity of American culture in bookselling is being threatened by the increasing power of the chains. The association fears that, as chains grow, the availability of books will depend on the chains’ opinions. If a publisher takes a book to the chains and the chains don’t buy it, they fear, the book will never be published because of the chains’ clout. A mere 35 buyers purchase books for Barnes and Noble’s more than 1,000 stores.
The publishing industry has been hit with several shakeups since the suit was filed. Bertelsmann acquired Random House in July after pleas against the deal by authors and agents and a lengthy investigation by the Federal Trade Commission that ended in late May. That merger resulted in the "largest trade publisher in the English-speaking world, with sales of about $1.8 billion," according to Publishers Weekly. The proposed purchase of Ingram, the country’s largest book distributor, by Barnes and Noble is currently being reviewed by the FTC, and has brought more noise from independent bookstores.
Independents have long championed the causes of small presses and lesser-known authors. Take, for example, Salman Rushdie’s Satanic Verses. Rushdie risked his life to write and publish the book, and it forced him into exile from the Iranian government.
Andy Ross, president of Cody’s Books, one of the California plaintiffs, said "America’s two largest chains responded by pulling [The Satanic Verses] from the shelves of 1,000 stores nationwide. Independent bookstores throughout the country rallied to the cause of intellectual freedom by continuing to carry this book even in the face of possible physical harm."
The chains argue that their resources make them the best place for small presses and new authors to get exposure. Business Week reported "Barnes and Noble was supposed to stifle the small presses, but some of those publishers say the chain’s vast shelf space and centralized buying has helped them."
The lawsuit claims independent bookstores have lost 40 percent of the market share since 1991. The association’s membership dropped from 5,100 bookstores in 1993 to 3,427 in 1998. Barnes and Noble has "more than tripled its number of superstores from 135 in 1992 to 469 in 1997." Borders, too, is on the rise, and has "increased its number of superstores by a multiple of six, from 31 to 189" in the same amount of time, according to the lawsuit.
According to a Business Week article profiling Barnes and Noble CEO Leonard Riggio, Barnes and Noble alone sells one in eight books in America. The company has broken into the Fortune 500, rising from 518 in 1996 to 496 in 1997.
But isn’t this capitalism at its best? The chains use brilliant marketing techniques, fearless expansion and exceptional selection to power their growth. It’s economic evolution, say the chains — survival of the fittest.
The subject of discriminatory discounts is nothing new to the booksellers association, which settled suits against six publishers under similar circumstances.
The association sued Penguin USA, Houghton Mifflin, St. Martin’s Press, Rutledge Hill Press and Hugh Lauter Levin in 1995. Random House was later added to the suit. All the defendants settled after numerous attempts to dismiss the suits.
Though none of the publishers admitted wrongdoing when they settled with the association, Publishers Weekly has reported that "the terms of the agreements, as well as the fact that the ABA received approximately $2 million in court costs, suggest that the weight of the evidence favored the association." The largest settlement came from Penguin, for $25 million, which was distributed to member bookstores. That settlement was the largest in U.S. anti-trust discrimination law history.
The publishers claimed the suits were based on emotion, that the plaintiffs’ evidence was too broad for the Robinson-Patman Act, and that the association’s discovery requests were nothing more than a "fishing expedition." The Robinson-Patman Act makes price discrimination illegal where it might "lessen competition or tend to create a monopoly."
But the settlements sent signals to the association. Its former president, Barbara Bonds Thomas, reasoned that someone had to be receiving the illegal discounts from the publishers. Independent stores were asked during the publisher suits if they had received any special discounts. None of them said they had, and this led the association to suspect the chains. In an interview soon after the announcement of the suit against the chains, Thomas said, "the results of the earlier litigation have, I believe, shown the appropriateness and wisdom of taking this course of action."
The FTC was investigating publishers long before the booksellers association. The association’s lawyer, Jerald Jacobs of Jenner & Block in Washington, explained that the FTC began investigating publisher anti-trust activity in 1979. The FTC filed suit against publishers in 1988, and publishers signed consent orders in 1992. The consent orders, however, were never made final, and the FTC walked away from the suit in 1996. That suit sought only injunctive relief. The current suit against the chains seeks both damages and injunctive relief, Jacobs said.
Chains have an especially large presence in California — the suit claims the "defendants already own almost 300 bookstores" in California. Eight of the 26 plaintiff bookstores are in California. The chains are being sued by those eight stores for violating state law — Sections 17200 and 17045 of the Business and Professional Code — as well as for violating the Robinson-Patman Act. These sections are included, respectively, in the California Unfair Trade Practices Act and the California Unfair Competition Act.
Borders counsel Steer said Section 17200 is a very broad law that hasn’t been tested in court until now. It defines unfair competition as "any unlawful, unfair or fraudulent business act of practice and unfair, deceptive, untrue or misleading advertising."
Section 17045 of the California Business and Professional Code forbids the "secret payment or allowances of rebates, refunds, commissions or unearned discounts, whether in the form of money or otherwise, or secretly extending to certain purchasers special service or privileges not extended to all purchasers purchasing upon like terms and conditions, to the injury of a competitor and where such payment or allowance tends to destroy competition."
In an October 1997 interview in Publishers Weekly following the settlement of suits against publishers, Avin Mark Domnitz, now CEO of the booksellers association, said "ABA membership ‘overwhelmingly’ wants the association to be an advocate for booksellers. Toward that end, the ABA intends to ‘keep the light on’ concerning illegal practices, and has a range of options that includes further litigation, lobbying and public relations."
Maybe it’s ironic that Copperfield’s Bookstore in downtown Napa, Calif., is only a short walk away from a recently closed independent children’s bookstore and a Waldenbooks store. It’s a typical independent bookstore — that "feeling" independent store enthusiasts speak of is evident in the slight clutter and haphazard arrangement of the store, the small piles of trinkets and bookmarks at the register, and the gigantic monarch butterfly that hovers over the children’s section of the store.
Copperfield’s has six stores in Northern California, and the one in Napa is one of the smallest. Keeping customers informed about the lawsuit and the state of publishing has been a priority for Copperfield’s management.
Paul Jaffe, president and CEO of Copperfield’s, said managers try to point out what’s happening in the book industry to customers, answering their questions and enforcing the fact that mergers and increasing size aren’t issues endemic to book retailing. These trends have happened to other businesses in the past, Jaffe said. The possible purchase of Ingram by Barnes and Noble has been asked about by customers more than the lawsuit simply because it’s in the news more, Jaffe said. But the emphasis on educating customers means Copperfield’s isn’t going to cry and whine about the dominance of the chains.
Jaffe said that though the legal process is tedious and lengthy, all the bookstores knew it would be a long road to resolution in this lawsuit.
The Midnight Special Bookstore is in Berkeley, Calif. One glance at its Web site reveals bristling anger toward the superstores. The site unabashedly offers an opinions forum for visitors, so they can pound their anti-chain sentiments into a keyboard. Midnight Special has every right to fear the chains — two opened up only blocks away from the plaintiff bookstore in 1995. It is now literally surrounded by 72,000 square feet of competition.
"All the independents have a loyal customer case," said Margie Ghiz, owner of Midnight Special. But those loyal customers are not going to be enough for the little guy to survive the onslaught of the chains.
"You can’t make it on your customer base — they can’t afford to support you," she said, citing the discounts chains put on New York Times bestsellers. Midnight Special was ordering and selling about 150 copies of best-selling titles before the chains came to town. Now, Ghiz says, they sell only about 30 copies.
"You walk into an independent and you know it by the makeup of its staff, by events, displays — something hits you," she said. The chains, though, don’t feel unique.
But she knows it isn’t a personal thing. Chains move to districts that have proven good for bookselling. "That’s where the money is. It’s not a personal vendetta. Some independents take it personally, but [the chains] are just corporations," she said.
Barnes and Noble spokesperson Mary Ellen Keating suggested the independents look to wholesalers and merchandisers who take 56 percent of the market while Barnes and Noble accounts for only 14 percent of the totals. She said the booksellers association has targeted the chains only because they are an easy target. "We will vigorously defend ourselves," Keating said. "This is a public-relations ploy, not a real anti-trust suit."
Barnes and Noble CEO Riggio wrote his first public response to the suit, not ironically during publishing’s biggest event, the BookExpo convention, last May. In it, he denied all claims made in the lawsuit and said, "there is absolutely no credible evidence of wrongdoing on the part of Barnes and Noble."
