This post is for those publishing professionals who think that if they can just get the DOJ to understand the argument that publishing is special, the lawsuit against the agency publishers will magically vanish.

These people have probably not taken a look at the history of price-fixing. Every industry that has been socked with a price-fixing complaint has argued that it is special, and if only the court understood how special it was, the court would agree that it should have the capacity to fix prices. Every industry. I don’t know why every industry feels it has to make this argument, but they all lose—every single time.

This blog post is a “greatest hits” of antitrust—throwing together a smattering of cases in which industries have argued that they should be exempt from antitrust law, that the Court simply doesn’t understand the industry, and that if only it did, they would prevail!

I start by going back to 1897—an early case, since the Sherman Act was passed in 1890. In United States v. Trans-Missouri Freight Association, 166 U.S. 290 (1897). There, the defendants claimed that railroads were not covered by antitrust law. Railroads, they argued, were a special snowflake: “Among these differences are the public character of railroad business, and, as a result, the peculiar power of control and regulation possessed by the state over railroad companies.” Id. at 320.

The Court disagreed: “Trading, manufacturing, and railroad corporations are all engaged in the transaction of business with regard to articles of trade and commerce, each in its special sphere—either in manufacturing or trading in commodities or in their transportation by rail.” Id. at 322. It concluded:

All combinations which are in restraint of trade or commerce are prohibited, whether in the form of trusts or in any other form whatever.

We think, after a careful examination, that the statute covers, and was intended to cover, common carriers by railroad.

Id. at 326-27.

In United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940), the defendants—like the agency publishers at issue here—thought that they were facing what they called “ruinous competition”—competition so fierce that it (they claimed) could destroy the industry. For that reason, they believed that their price-fixing scheme should be allowed.

Here’s what the Court thought of that:

Congress has not left with us the determination of whether or not particular price-fixing schemes are wise or unwise, healthy or destructive. It has not permitted the age-old cry of ruinous competition and competitive evils to be a defense to price-fixing conspiracies. It has no more allowed genuine or fancied competitive abuses as a legal justification for such schemes than it has the good intentions of the members of the combination. If such a shift is to be made, it must be done by the Congress.

Id. at 321-22.

In Associated Press v. United States, 326 U.S. 1, 6 (1945), one of many cases that hashed out the role of the AP in our society, the Supreme Court dealt with the “Special Snowflake” exemption: “[W]e are not unmindful of the argument that newspaper publishers charged with combining cooperatively to violate the Sherman Act are entitled to have a different and more favorable kind of trial procedure than all other persons covered by the Act.”

The Court’s response?

“Equal—not unequal—justice under law is the goal of our society. Our legal system has not established different measures of proof for the trial of cases in which equally intelligent and responsible defendants are charged with violating the same statutes. Member publishers of AP are engaged in business for profit exactly as are other business men who sell food, steel, aluminum, or anything else people need or want…. All are alike covered by the Sherman Act.”

Id. at 6-7.

In Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975), the Virginia State Bar (not a governmental body, incidentally) had published a minimum fee schedule for its lawyers. The Goldfarbs, unhappy about the cost of legal representation, sued. The State Bar argued that legal professionals were special snowflakes—specifically, that “competition is inconsistent with the practice of a profession because enhancing profit is not the goal of professional activities; the goal is to provide services necessary to the community.” Id. at 786.

The Supreme Court said in response:  “The nature of an occupation, standing alone, does not provide sanctuary from the Sherman Act.” Id.

In National Society of Professional Engineers v. United States, 435 U.S. 679 (1978), the ethics board of the NSPE banned competitive bidding practices. They, like other industries before them, advanced the Special Snowflake defense:

[T]he Society averred that the standard set out in the Code of Ethics was reasonable because competition among professional engineers was contrary to the public interest. It was averred that it would be cheaper and easier for an engineer “to design and specify inefficient and unnecessarily expensive structures and methods of construction.” Accordingly, competitive pressure to offer engineering services at the lowest possible price would adversely affect the quality of engineering. Moreover, the practice of awarding engineering contracts to the lowest bidder, regardless of quality, would be dangerous to the public health, safety, and welfare.

Id. at  684-85.

Once again, the Supreme Court didn’t buy it:

It may be, as petitioner argues, that competition tends to force prices down, and that an inexpensive item may be inferior to one that is more costly. There is some risk, therefore, that competition will cause some suppliers to market a defective product.… These are not reasons that satisfy the Rule; nor are such individual decisions subject to antitrust attack.

Id. at 693-94.

In Arizona v. Maricopa County Med. Soc’y, 457 U.S. 332 (1982), the people fixing prices were, this time, doctors. There, the doctors argued that they were, well, doctors. Doctors, they said, are special. They are professionals. And they have to deal with insurance companies, which are evil. The Court disagreed: “We are equally unpersuaded by the argument that we should not apply the per se rule in this case because the judiciary has little antitrust experience in the health care industry.” Id. at 349.

This is a short history of section one of the Sherman Act. Lawyers and doctors—professionals who have special relationships with their clients—get no exemptions. Civil engineers claimed that if they didn’t get to prop up their fees, bridges would collapse; the Court gave that argument short shrift. Oil companies whined about ruinous competition; the Court’s response was that if the oil company was unable to compete, it should be ruined.

Stop thinking about this emotionally. Stop thinking of this as your livelihood. Ask yourself honestly: Do you think that courts will say that book publishing is more important than the building of safe bridges? Do you really think that courts will find it so much more important that they will grant book publishers a judicial exemption in the face of more than a hundred years denying them?

No. No, you don’t.

There are only two legitimate defenses to a claim of price-fixing:

1. We did not fix prices.
2. It was a legitimate joint venture.

“We are a special snowflake” is not on the list.

The announcement that David Boies had entered the fray that is the DOJ versus agency publishing was greeted by a wave of adulation.

Mike Shatzkin tweeted that his letter “obliterated the gov’ts case.” A slew of commentators rushed to add that if a lawyer as good as Boies was weighing in against the DOJ, it must be that the case was unfounded.

Those people, I think, do not understand how it is that really excellent lawyers make their money. They don’t do it by taking hopeless cases and winning them. That’s the Hollywood version of the law. They don’t do it, either, by waiting for cases that anyone could win and then grabbing them.

No; when loss is inevitable, you hire an excellent lawyer in a hopeless case not because you think that lawyer will help you win against all odds, but to manage the magnitude of that loss.

That is what Barnes and Noble has done by hiring David Boies–they’re not shooting for a win; they’re shooting to manage the loss.

Let me explain.

David Boies wrote that letter knowing that the government and the defendants were going to settle. The stakes are too high for the agency publishers. We are talking about allegations of a criminal act that are supported by phone calls, notes, indiscreet comments made to people. The punishment for that is potentially treble damages–think about the cost of that. The agency publishers who are thinking rationally rather than emotionally know that they are goners. As cases go, this one is a massive stinker.

That is why David Boies’s letter says nothing about the conduct at issue here: the claimed conspiracy between the agency publishers. He has nothing to say on that front; if the allegations made in this and the suit by the attorney generals have any basis in reality, this one is lost on its face.

So take another look. David Boies’s letter to the DOJ is not designed to win that lawsuit or prevent settlement. Settlement is inevitable. The letter is designed to make the settlement process take longer.

So he argues that the proposed settlement is overbroad–in other words, go back and rewrite it! He then argues that the settlement process is not based on a sufficient factual record–in other words, go back and dig for more facts and present them to the court! What he never says is that settlement (in the abstract) is inappropriate or that there was no illegal conduct.

Delay is the only marginal win that Barnes and Noble can hope for. If the settlement is delayed, and agency comes to an end, Barnes and Noble suddenly–painfully–has to compete on price. Boies said so himself:

Distributors, such as Barnes & Noble, at the expense of publishers, enjoy somewhat greater profit margins, as they earn 30 percent commissions on the sales of e-books, as opposed to the negative profit margins they experienced under the wholesale model.

How much do you think it’s worth to B&N to not have to compete on price for another year or two? To be able to grab more market share from Amazon by competing in other ways that are less costly? The last years of Agency were a boon for Barnes and Noble. The more years they can get, the more money they’ll make. Five figures for a lawyer who manages to extend the life of agency for another handful of months would be cheap at the price.

Publishing professionals who are embracing Boies’s letter as an industry savior need to take another hard look. Nothing that Boies said in that letter was designed to do anything other than buy B&N time to consolidate and expand market share without competing on price. In other words, it wasn’t designed to help the publishers win the lawsuit–Boies’s utter silence on the salient legal issue in the suit makes that perfectly clear.

That letter was designed to make the loss less painful for Barnes and Noble. It’s exactly what you’d expect from an excellent lawyer who was trying to do his best for a client in an impossible situation: An attempt to gum up the settlement for as long as possible. If he’s really lucky, Boies will get a settlement that doesn’t bar agency pricing. But that, I suspect, is a luxury on his list. (And, note: it’s a luxury on the list of the publishers.) The meat and potatoes of this letter is that Barnes and Noble would be happy to push settlement off for as long as they can.

And that is why Boies is a great lawyer. He knows that he can’t win the lawsuit, and so he goes for what he can win–which is, for now, another six months.

That’s how you manage a loss. It’s not how you orchestrate a win.

I actually can’t answer this question generally, or, at this point, even for myself. Normally, I would say “talk to your tax preparer.” But the truth of the matter is that the state of Washington is still promulgating regulations to try to deal with some changes that have been made to the law, and the draft form of the regulation does not clarify whether self-publishers (and others who have business dealings with Amazon) are swept in by the new law. So point your tax preparer to this post (which contains the answer I received from the Department of Revenue in its entirety). The ruling I obtained is not binding on you, but it is binding on me.

So here’s the deal.

For background purposes: Washington state has no individual income tax, but it does tax business activity in the state. That means that Washington residents and those who have a sufficient economic nexus with Washington need to pay a certain percentage of their income to Washington every year.

My initial thought was that if I wasn’t living in Washington, I wouldn’t have to pay their business & occupations tax. Then I started reading the tax code. As of 2011, Washington state requires you to license your business in Washington, and pay business occupation taxes, if you have an “economic nexus” with Washington. The standard is outlined on their website:

If your business earns income attributable to Washington that would be taxable under an apportionable B&O classification and meets one of the following thresholds within a calendar year, you have economic nexus with Washington:

    More than $50,000 of payroll in Washington

    More than $50,000 of property in Washington

    More than $250,000 of gross income in Washington

    At least 25 percent of your total property, payroll, or income in Washington

If you have economic nexus, you must register your business with the Washington State Department of Revenue and report and pay Washington B&O tax.