Bookhouse of Stuyvesant Plaza, Inc. v. Amazon.Com, Inc.

• Decision Date: 05 December 2013
• Docket Number: No. 13 Civ. 1111(JSR).,13 Civ. 1111(JSR).
• Parties: The BOOKHOUSE OF STUYVESANT PLAZA, INC., Fiction Addiction LLC, and Posnan Books at Grand Central, Inc., Plaintiffs, v. AMAZON.COM, INC., Random House, Inc., Penguin Group (USA) Inc., Hachette Book Group, Inc., Simon & Schuster, Inc., HarperCollins Publishers LLC, and Holtzbrinck Publishers, LLC d/b/a MacMillan, Defendants.
• Court: U.S. District Court — Southern District of New York

985 F.Supp.2d 612

The BOOKHOUSE OF STUYVESANT PLAZA, INC., Fiction Addiction LLC, and Posnan Books at Grand Central, Inc., Plaintiffs,

v.AMAZON.COM, INC., Random House, Inc., Penguin Group (USA) Inc., Hachette Book Group, Inc., Simon & Schuster, Inc., HarperCollins Publishers LLC, and Holtzbrinck Publishers, LLC d/b/a MacMillan, Defendants.

No. 13 Civ. 1111(JSR).

United States District Court,

S.D. New York.

Dec. 5, 2013.

Maxwell M. Blecher, Blecher & Collins, Los Angeles, CA, Eric M. Creizman, Creizman PLLC, New York, NY, for Plaintiffs.

Edwin Mark Baum, Kathryn D. Kirmayer, Kent A. Gardiner, Ryan C. Tisch, Crowell & Moring LLP. Daniel F., McInnis, Mollie McGowan Lemberg, Akin, Gump, Strauss, Hauer & Feld LLP, Washington, DC, Amanda Christine Croushore, United States Attorney's Office, Saul P. Morgenstern, Kaye Scholer LLP, James W. Quinn, Yehudah Lev Buchweitz, Weil, Gotshal & Manges LLP, Paul Madison Eckles, Clifford Hank Aronson, Skadden, Arps, Slate, Meagher & Flom LLP, Walter B. Stuart, IV, Samuel Joseph Rubin, Freshfields Bruckhaus Deringer LLP, Joel M. Mitnick, Thomas Andrew Paskowitz, Sidley Austin LLP, Steven Glen Mintz, Paul Ostensen, Mintz & Gold LLP, New York, NY, for Defendants.

OPINION AND ORDER

JED S. RAKOFF, District Judge.

This is a putative class action brought by The Bookhouse of Stuyvesant Plaza, Inc., Fiction Addiction LLC, and Posnan Books at Grand Central Inc., three independent “brick-and-mortar” bookstores, asserting antitrust claims against Amazon.com, Inc. (“Amazon”) and the six largest book publishers in the United States–Random House Inc., Penguin Group (USA), Inc., Hachette Book Group, Inc., Simon & Schuster, Inc., HarperCollins Publishers LLC, and Holtzbrinck Publishers, LLC, doing business as MacMillan (collectively, the “Publishers”). Plaintiffs assert claims for unlawful restraint of trade under Section 1 of the Sherman Act against all defendants, and claims for monopolization and attempted monopolization under Section 2 of the Sherman Act against Amazon. The Publishers have moved to dismiss plaintiffs' restraint-of-trade claim, and Amazon has moved to dismiss the First Amended Complaint in its entirety. For the reasons that follow, those motions are granted.

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotation marks omitted). In deciding a motion to dismiss, the Court must “accept[ ] all factual allegations in the complaint and draw[ ] all reasonable inferences in the plaintiff's favor.” Kleinman v. Elan Corp., plc, 706 F.3d 145, 152 (2d Cir.2013). In accordance with that legal standard, the pertinent facts alleged in the First Amended Complaint are as follows.

Plaintiffs sell both traditional print books and e-books, i.e., are electronic books that can be read on a compatible e-reader device. First Am. Compl. ¶¶ 4–6. Defendant Amazon, the country's largest retailer of both print books and e-books, id. ¶¶ 7, 22, holds 60% of the U.S. e-book market. Id. ¶ 22. Its largest competitors are Barnes & Noble, which holds 27% of the market, and Apple, which holds less than 10%. Id. Amazon is also the maker of the “Kindle” line of e-reader devices. Id. ¶¶ 15, 20. Kindle devices command 60% of what plaintiffs call the “dedicated e-reader market,” id. ¶ 15, as well as 60% of the “small media tablet market,” id. ¶ 20. In addition, since 2009, Amazon has also provided free Kindle applications or “apps” that enable Amazon e-book buyers to read Kindle-compatible e-books on “the iPhone, iPad, Android devices, the BlackBerry, Mac computers, and PC computers.” Id. ¶ 19.

Publishers are the six largest publishers of print books and ebooks in the United States. Id. ¶¶ 8–14. While the First Amended Complaint does not allege each Publisher's individual market share, the Publishers together account for 60% of the revenue associated with the sale of print books in the United States and 85% of the revenue from the sale of New York Times bestsellers. Id. ¶ 14. Plaintiffs infer that the Publishers' share of the e-book market is similar to its share of the print book market.

Around the time of the release of the original Kindle in 2007, each of the Publishers entered into contracts with Amazon for the distribution of e-books. Id. ¶ 16. Among other terms, these contracts required (in a limited manner described below) Amazon to use “digital right management access control technology” (“DRM”) on all e-books published by the Publishers and distributed by Amazon. Id. Originally developed by the music industry, id. ¶ 17, DRM is “specifically designed to limit the use of digital content after sale” in order to “prevent the unauthorized use, sharing, or copying of the content of [the Publishers'] e-books,” id. ¶ 16.

However, although the contracts did not expressly require further restrictions, Amazon's DRM technology in fact restricts the devices on which e-books distributed by Amazon can be read. Id. ¶ 16. In particular, e-books with Amazon's DRM can only be read on Kindle devices or on non-Kindle devices that have been enabled with a Kindle app. Id. ¶ 18. Kindle devices and Kindle apps, in turn, can only display e-books enabled with Amazon's proprietary DRM. Id. ¶¶ 18–19.

In other words, Amazon's e-book platform is, in industry parlance, a “closed ecosystem.” Publisher Defs.' Joint Mem. of Law in Supp. of Mot. To Dismiss at 5. As a result, if consumers “would like to read an e-book published by any of the [Publishers] and they choose to buy it from AMAZON[,] they must read it on a Kindle device or via a Kindle app.” First Am. Compl. ¶ 18. Additionally, “if a consumer already owns a Kindle device and wants to read an e-book on [the consumer's] Kindle that was published by any of the [Publishers], [the consumer] must buy the book from AMAZON.” Id. The First Amended Complaint alleges that Amazon's decision to operate its e-book platform as a closed ecosystem “was, and is still, a deliberate choice ..., designed to leverage AMAZON's domination of the dedicated e-reader market, and lacks any pro-competitive justification.” Id.

After Amazon began operating its e-book platform as a closed ecosystem, each of the Publishers entered into new distribution contracts with Amazon. Id. ¶ 21. Plaintiffs allege that by entering into these new contracts, the Publishers “confirmed, affirmed, and/or condoned AMAZON's use of restrictive DRMs that limit the devices on which AMAZON's e-books published by the [Publishers] can be read to either the Kindle or another device enabled with a Kindle app.” Id. Plaintiffs also allege that the Publishers' “assent to AMAZON's device specific DRM plausibly suggests that there may have been oral discussions or agreements directly between one or more of the [Publishers] and AMAZON regarding the use of restrictive DRMs.” Id. ¶ 21.

The First Amended Complaint further alleges that none of the Publishers has “directly entered into any agreements with any independent brick-and-mortar bookstores or independent collectives to sell their e-books.” Id. ¶ 24. Plaintiffs acknowledge, however, that they are able to sell the Publishers' e-books by virtue of an agreement between the American Booksellers Association (“ABA”) (a trade group of independent bookstores) and Kobo, which sells its own line of e-reader devices and apps. Id. ¶ 24 n. 2. Nevertheless, the First Amended complaint alleges that the Publishers' renewed contracts with Amazon, “along with the [Publishers]' absolute failure to directly license their e-books to independent brick-and-mortar bookstores, constitutes evidence of concerted activity” in restraint of trade by the defendants. Id. ¶ 21. Plaintiffs also allege that the distribution contracts, along with Amazon's decision to operate its e-book platform as a closed ecosystem, show that Amazon has monopolized or attempted to monopolize the U.S. market for e-books. Id. ¶¶ 38–39, 47–48.

Plaintiffs' first claim for relief is for violations of section 1 of the Sherman Act, which prohibits “[e]very contract, combination ... or conspiracy, in restraint of trade or commerce.” 15 U.S.C. § 1. Of course, “restraint is the very essence of every contract,” and thus a literal reading of this provision “would outlaw the entire body of private contract law.” Nat'l Soc. of Prof'l Engineers v. U.S., 435 U.S. 679, 688, 98 S.Ct. 1355, 55 L.Ed.2d 637 (1978). The Supreme Court accordingly has construed section 1 to prohibit only unreasonable restraints of trade, “focus[ing] directly on the challenged restraint's impact on competitive conditions.” Id. To state a claim under Section 1, a plaintiff thus must show (1) “a combination or some form of concerted action between at least two legally distinct economic entities,” and (2) “that the agreement constituted an unreasonable restraint of trade either per se or under the rule of reason.” Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d 537, 542 (2d Cir.1993). Defendants argue that the First Amended Complaint plausibly pleads neither of these elements. The Court agrees.

Beginning with the requirement of concerted action, the speculative nature of plaintiffs' allegations is evident from the very language of the First Amended Complaint. Plaintiffs do not allege that the terms of the distribution contracts between Amazon and the Publishers require restrictive DRM or the maintenance of a closed ecosystem.¹ Rather, plaintiffs allege that the Publishers' “assent to AMAZON's device specific DRM plausibly suggests that there may have been oral discussions or agreements directly between one or more of the [Publishers] and AMAZON regarding the use of restrictive DRMs.” First Am. Compl. ¶¶ 21. The evasiveness of this allegation is remarkable. Plaintiffs do not allege an unlawful agreement, only vague “oral discussions or...