Gerlinger v. Amazon.Com, Inc.

• Decision Date: 23 March 2004
• Docket Number: No. C 02-05238 MHP.,C 02-05238 MHP.
• Citation: 311 F.Supp.2d 838
• Parties: Gary GERLINGER, individually, on behalf of all others similarly situated, and on behalf of the California general public, Plaintiff, v. AMAZON.COM, INC.; Borders Group, Inc.; Borders, Inc.; Borders Online, LLC; and Borders Online, Inc., Defendants.
• Court: U.S. District Court — Northern District of California

311 F.Supp.2d 838

Gary GERLINGER, individually, on behalf of all others similarly situated, and on behalf of the California general public, Plaintiff, v. AMAZON.COM, INC.; Borders Group, Inc.; Borders, Inc.; Borders Online, LLC; and Borders Online, Inc., Defendants.

No. C 02-05238 MHP.

United States District Court, N.D. California.

March 23, 2004.

COPYRIGHT MATERIAL OMITTED

Robert C. Schubert, Juden Justice Reed, Miranda Kolbe, Schubert & Reed LLP, San Francisco, CA, Roy A. Katriel, The Katriel Law Firm, P.L.L.C., Washington, D.C., for Plaintiff.

Joel S. Sanders, George Charles Nierlich, Gibson, Dunn & Crutcher LLP, Reginald D. Steer, Akin Gump Strauss Hauer & Feld, San Francisco, CA, Dianne L. Sweeney, Pillsbury Winthrop LLP, Palo Alto, CA, for Defendants.

MEMORANDUM & ORDER RE: PLAINTIFF'S MOTION FOR JUDGMENT ON THE PLEADINGS; DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

PATEL, Chief Judge.

Plaintiff challenges an agreement between Amazon.com, Inc. and Borders Online, LLC as violating federal and California antitrust laws, the California unfair competition law and the common law of unjust enrichment. Defendants have moved for summary judgment on all claims. Plaintiff moves for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) or in the alternative, for a continuance pursuant to Rule 56(f) to conduct further discovery. Having considered the submissions of the parties, and for the reasons set forth below, the court rules as follows.

BACKGROUND¹

Plaintiff is a consumer who purchases books online and who "purchased books directly from at least one of the [d]efendants." FAC ¶ 10. Amazon.com Inc. ("Amazon") is a market leader in the online retail book market. Amazon has invested hundreds of millions of dollars in technology and the content design of its website, Amazon.com. Declaration of Steven Kessel ("Kessel Decl.") at ¶ 6. In addition to selling products to consumers, Amazon.com generates revenue by providing technology and business services to other retailers. Declaration of Daniel Cooper in Support of Defendants' Motion for Summary Judgment ("Cooper Decl.")² at ¶ 3. Beyond selling its own products on its website, Amazon.com operates Amazon Marketplace where sellers of new and used books (among other products) offer their products for sale on the Amazon.com website. When a visitor to the Amazon.com website searches for a book title, they will be provided with both the Amazon.com offering for that title as well as any available Marketplace seller's offering and prices for that title, even if the price is lower than that offered by Amazon.com. Id. at ¶ 5. See also Declaration of Kyle Graham ("Graham Decl.") at ¶ 2 (copy of book Empire Falls available on Amazon.com website through Amazon.com for $14.46 and from Amazon Marketplace seller for $11.37, both including standard shipping).

Amazon.com also hosts auction sites on its website, where sellers offer products available for consumers to bid on. Merchants can also establish their own "storefronts" through Amazon.com's zShops, which enables sellers to offer their merchandise for sale at the prices they choose. Thus, a given product on Amazon.com's website may be listed for sale simultaneously by Amazon.com as well as several different Marketplace, zShops, and auction sellers. Cooper Decl. at ¶ 6.

Amazon.com has also entered into collaborations with other retailers. These collaborations take many different forms. For example, Amazon.com and Toys `R' Us agreed to launch a toy and video game store on the Amazon.com website. In that arrangement, Toys `R' Us supplies the inventory and Amazon.com provides the hosting, order fulfillment and customer relations services. Cooper Decl. at ¶ 7. For Target Stores, Amazon.com operates Target's website selling Target's products under the Target brand name.

Amazon.com also has arrangements with a number of partners who wish to maintain a presence on the web but do not wish to incur the cost involved in selling products through the Internet. In these arrangements ("Syndicated Stores") Amazon.com uses the partner's website, (which site retains the partner's name and URL) but Amazon.com sells its own products and is responsible for filling orders and for customer service. Amazon.com's partners in these arrangements earn commissions on the products sold through the site. Amazon.com has a "Syndicated Store" arrangement with Borders as well as with partners such as Virgin Mega stores and Waterstones in the United Kingdom. Id. at ¶ 8.

Defendant Borders, Inc. is a wholly-owned subsidiary of defendant Borders Group, Inc. Defendant Borders, Inc. (collectively "Borders") operates and manages more than 400 brick-and-mortar stores. Declaration of Edward Wilhelm ("Wilhelm Decl.") at ¶ 2. Borders touts itself as the nation's second largest operator of retail book "superstores." Borders did not launch a website until 1998 and even then did so with some reservations based on its lack of experience as an Internet retailer and the fact that at that point the ability to earn an acceptable return on investment in the Internet arena was uncertain. Id. at ¶ 5. Borders did not make a large capital investment in its website. Id. at ¶ 7. Borders instead invested in expansion and improvement of its brick-and-mortar stores. Id. at ¶ 8.

Between 1998 and 2000, Borders.com sales accounted for less than 1% of Borders' total consolidated sales. Sales on the Borders.com website account for less than one-tenth of one percent of industry-wide book sales (i.e., both online and brick-and-mortar stores book sales). Kessel Decl. at ¶ 14; Graham Decl., Exh. L at 2 and Exh. M.³

Although sales on Borders.com increased, so did its losses. Wilhelm Decl. at ¶ 9 (In fiscal year 1999, Borders.com generated sales of $17.9 million and losses of $17.2 million but in fiscal year 2000, Borders.com lost $29.7 million on sales of $27.4 million). Because of these losses, in 2000 Borders considered various options in regards to its website such as shutting it down, spinning it off as a public company or outsourcing the web site to a third party.⁴ In November of 2000, Borders began discussions with Amazon.com about a co-branded website. Id. at ¶¶ 10-12. At this time Amazon.com was actively pursuing its strategy of providing technology and business services to other retailers and believed that entering a venture with Borders would "further validate its model of providing services to brick-and-mortar retailers." Cooper Decl. at ¶ 11. Moreover, the Agreement with Borders helped Amazon.com achieve additional economies of scale, thus reducing Amazon's costs. Id. At ¶ 11; Kessel Decl. ¶ 18.

In April 2001, Amazon and Borders executed a "Syndicated Store" agreement (the "Agreement" or "Mirror Site Hosting Agreement") under which they would jointly relaunch www.borders.com as a co-branded website.⁵ The Agreement provides that www.borders.com will be operated by Amazon and that Amazon will provide the inventory fulfillment, customer services, and site content for the new co-branded website. Under the Agreement, Amazon.com unilaterally determines the selection of products offered, the terms of sale and the prices for the books sold on the web site except for those books available for instore pickup at a Borders brick-and-mortar store. Borders sets the price for books to be purchased online but picked up in its stores. Wilhelm Decl. at ¶ 13.

Amazon is the actual seller of the books sold on the website and accordingly retains proceeds for those sales. Borders paid Amazon.com a one-time fee for creating the website and Borders receives a commission on each sale. Defendants assert that the Agreement is a service agreement. Amazon must achieve certain service levels or risk being in breach of the Agreement which would enable Borders to terminate the Agreement prior to the expiration of the Agreement term (originally two years, then extended an additional three years). Borders alleges that its objectives in entering into the Agreement were to "maintain a retail presence on the Internet, preserve a connection from the Internet back to [their] stores, reduce [their] losses and improve [their] financial returns." Wilhelm Decl. at ¶ 12. The Agreement has no impact on the legal ownership of the www.borders.com URL which continues to be held by Borders. In April 2002, the parties extended the Agreement to include the www.waldenbooks.com site as well. Cooper Decl. ¶ 16

Plaintiff generally alleges that the Agreement eliminates competition between two former rivals in the market for online sales of books and that consumers are therefore denied a competitive choice for their online book purchases. As discussed in detail below, plaintiff claims that two provisions of the Agreement are per se violations of the antitrust laws.

Earlier in 2003 Defendants brought a motion to dismiss several counts of plaintiff's complaint. At the hearing on April 7, 2003 this court denied defendant's motion to dismiss without prejudice for renewal of it on a motion for summary judgment. See Hearing Transcript attached as Exh. A to the Declaration of Roy Katriel in support of Plaintiff's Opposition to Defendants' Motion for Summary Judgment ("Katriel Decl.")

Defendants have now filed a motion for summary judgment and plaintiff has filed a Motion for Judgment on the Pleadings as to liability on counts II, IV, V, VI, and VII of the First Amended Complaint.

LEGAL STANDARD

A. Motion for Judgment on the Pleadings

After all parties have submitted their pleadings, any party may invoke Federal Rule of Civil Procedure 12(c) and move for judgment on the pleadings as long as consideration of the motion does not delay trial. Fed.R.Civ.P. 12(c). "Judgment on the pleadings is proper when the moving party clearly establishes on the face of the pleadings that no material issue of fact remains to be resolved and that it is entitled to judgment as a matter of law." Hal Roach Studios, Inc. v. Richard...