DENISE COTE, District Judge.
Four related lawsuits have been filed against Apple and five publishers
Apple alone went to trial, and in a bench trial held in June of 2013 in the DOJ's and States' Actions, Apple was found liable. 952 F.Supp.2d 639 (S.D.N.Y. 2013) (the "Liability Opinion"). The States and class are now pursuing damages from Apple; a damages trial is scheduled to occur shortly.
This Opinion is one of two issued today. The other Opinion certifies a class. This Opinion addresses class plaintiffs' and the States' (collectively, "plaintiffs") motions to exclude the opinions of Apple's experts from the trial, as well as from consideration on the class certification motion and pending summary judgment motion.
Apple submits the opinions of two experts, Dr. Joseph Kalt and Mr. Jonathan Orszag. For the reasons set out below, plaintiffs' motions to exclude are granted with respect to Kalt and granted in part with respect to Orszag.
The relevant background facts, as well as the definitions of certain capitalized terms, are set out in today's Opinion deciding class plaintiffs' motion for class certification.
In brief, the DOJ and the States succeeded in proving at trial that Apple conspired with the Publisher Defendants to raise e-book prices in violation of the Sherman Act. The Publisher Defendants were opposed to Amazon's practice of selling many e-book versions of NYT Bestsellers and New Releases for $9.99. Apple was aware of that discontent as it made a decision in late 2009 to see if it could add an e-bookstore to its iPad. Apple planned to launch the iPad at a presentation on January 27, 2010 ("Launch"). Apple approached the Publisher Defendants and during the ensuing negotiations presented them with the means to eliminate Amazon's control over the retail pricing of e-books and to raise e-book prices. Through negotiations that lasted less than two months, Apple engineered the transformation of the e-book marketplace from a model in which the Publisher Defendants sold their e-books to retailers at wholesale prices and the retailer set the retail price, to one in which the Publisher Defendants took control of retail pricing and sold to consumers by making Amazon and Apple, among others, their agents.
The power that the Publisher Defendants acquired through the agency agreements, which Apple executed with each of the Publisher Defendants ("Agreements"), and which the Publisher Defendants imposed on Amazon, had an immediate impact on the prices of the Publisher Defendants' e-books. In the period after early April 2010, when Apple began to sell its iPad — an iPad that launched with Apple's iBookstore — the prices of the Publisher Defendants' e-books increased dramatically.
The relevant expert reports were filed in support of and opposition to class plaintiffs' October 11, 2013 motion for class certification. Plaintiff's expert, Dr. Roger Noll, submitted a declaration in support of certification on October 11 and a reply declaration on December 18; Apple's experts, Kalt and Orszag, submitted declarations in opposition to class certification on November 15 and sur-reply declarations on January 21, 2014. On December 18, class plaintiffs moved to exclude Kalt's and Orszag's opinions, both from motion practice and at trial. Also on December 18, the States joined class plaintiffs' motion to exclude Kalt's opinions and filed their own motion to exclude Orszag's. These motions were fully submitted on February 4, 2014.
Today's Opinion granting class certification denied the motion brought by Apple to strike Noll's expert opinion. Because it held that class certification was appropriate whether or not Apple's experts' opinions were admissible, it did not decide whether those opinions should be stricken.
Noll, a Professor
Damages calculations for each transaction are straightforward: damages for a given sale are equal to the price paid multiplied by the overcharge for that title's category. In the example above, purchasing the e-book of a Penguin NYT Bestseller for $14.99 would result in damages of $14.99 × 29.4% = $4.41. Subtracting these damages from the actual price reveals the but-for price — that is, the price a consumer would have paid but for the price-fixing. In the example of the Penguin NYT Bestseller, the but-for price is $10.58, that is, $14.99 less $4.41.
In all but 0.2% of transactions, Noll found that price fixing had resulted in an overcharge, amounting to total damages to consumers of just over $280 million. Noll's model has an adjusted R
Apple has relied on the opinions given by Kalt and Orszag to oppose the class plaintiffs' motions for class certification and for summary judgment. It seeks as well to rely on these opinions at the upcoming damages trial. Neither Orszag not Kalt, however, conducted their own econometric or statistical analysis of damages. Orszag did, however, re-run Noll's regression analysis using a modified control group and date range.
For the reasons given below, the motion to strike the Kalt's and Orszag's opinions are granted with one exception. Orszag will be permitted to testify regarding his re-running of Noll's regression analysis, assuming that there is an adequate evidentiary basis to support that analysis at trial.
Federal Rule of Evidence 702 grants an expert witness testimonial latitude unavailable to other witnesses, provided that (1) "the testimony is based on sufficient facts or data," (2) "the testimony is the product of reliable principles and methods," and (3) "the expert has reliably applied the principles and methods to the facts of the case." Fed. R. Evid. 702. "[T]he proponent of expert testimony has the burden of establishing by a preponderance of the evidence that the admissibility requirements of Rule 702 are satisfied."
In order to be admissible, "[a]n expert opinion requires some explanation as to how the expert came to his conclusion and what methodologies or evidence substantiate that conclusion."
While a district court has "broad latitude" in deciding both "
"[A] trial judge should exclude expert testimony if it is speculative or conjectural or based on assumptions that are so unrealistic and contradictory as to suggest bad faith."
The
Joseph P. Kalt is the Ford Foundation Professor Emeritus of International Political Economy at the John F. Kennedy School of Government at Harvard University and a senior economist at the economic consulting firm Compass Lexecon. Kalt holds a B.A. in Economics from Stanford University and a Ph.D. in Economics from the University of California, Los Angeles.
Kalt offers three principal criticisms of Noll's model. First, Kalt argues Noll's model is unreliable because (a) book prices exhibit "churning" and "dispersion" that aren't explained by Noll's model; (b) Noll uses four-week average prices
Plaintiffs seek to exclude all of Kalt's opinions, arguing that they are based on five unreliable "subsidiary opinions":
For the reasons set out below, Kalt's opinions are excluded in their entirety.
Kalt opines that the shift by the Publisher Defendants to agency agreements with their e-tailers "demonstrably resulted in large numbers of titles' prices declining." This opinion is unexpected given that a different Apple expert at the liability trial gave completely contrary testimony.
At trial, Apple offered evidence of a dramatic and uniform increase in the prices of the Publisher Defendants' e-books right after they were able to take control of retail prices. The following graph, offered by Apple at trial, demonstrates this effect as it played out at Amazon. It was based on a comprehensive analysis of detailed transaction records undertaken by Apple's expert.
Liability Opinion, 952 F. Supp. 2d at 682.
As can be seen from the graph, there is one anomaly. In what is labelled in the graph as "wave 1," the e-book prices for four of the five Publisher Defendants rose, sharply, in unison the week of April 4. This coincided with the sale of the iPad with an iBookstore. The sudden upturn in the prices of Penguin's e-books, however, lagged behind the upturn in the other Publisher Defendants' e-book prices since Penguin's contract with Amazon did not permit it to take full advantage of the agency model until a few weeks later.
Despite this graphic illustration of the rise of the Publisher Defendants' e-book prices as they moved to the agency model, Kalt opines that approximately 60% of e-books sold (by volume) in the month following the move to agency were sold at or even below pre-agency prices.
Kalt made this error by identifying all prices charged before the date a publisher's
Penguin did not execute an agency agreement with Amazon until June 2, 2010, and began withholding newly released e-books from Amazon as of April 1 (the "withheld titles"). Liability Opinion, 952 F. Supp. 2d at 682. In his initial analysis, Kalt classified the price for every Penguin e-book sold through the iBookstore in April and May 2010, and sold on Barnes & Noble's Nook Book Store during that same period, as a pre-agency price even though Penguin had executed agency agreements with those retailers, Penguin was setting the retail prices for those e-books, and Apple and Barnes & Noble were acting as Penguin's agents. Between April 3 and May 28, Kalt concedes that Penguin released fewer than 20% of its new e-books to Amazon and Amazon was largely confined to selling Penguin e-books that had been released on or before March 31 under the wholesale model.
Kalt has admitted that his initial analysis was flawed. He has admitted that he overlooked the fact that the titles withheld by Penguin were only available for sale under agency agreements after April 3. But his revised analysis continues to treat prices for all other Penguin books, including those sold under agency agreements by Apple and Barnes & Noble, as "pre-agency prices" through May 28, since Amazon continued to purchase them from Penguin under the wholesale model.
Kalt fails to justify this gross misclassification. He asserts that, in the abstract, "basic economics . . . teaches that if a single retailer continues to have pricing authority over a Publisher Defendant's titles, . . . then that retailer's pricing decisions would discipline the pricing of that publisher's titles in the marketplace." But, Amazon's ability to impose any discipline was eviscerated by Penguin's decision to largely withhold new e-books from Amazon.
An analysis by Dr. Orley C. Ashenfelter offered during the liability trial and referenced by Noll confirms that e-book prices moved just as the conspirators intended. Ashenfelter found that in April and May 2010, more than 96% of Penguin e-books were priced higher at the iBookstore and Barnes & Noble (under the agency model) than at Amazon (under the wholesale model), with an average price difference between $1.67 and $2.00. Kalt does not dispute the accuracy of this analysis.
There can be little dispute that Kalt's misclassification of these Penguin prices had a tremendous effect on his results, as Kalt himself admits. Kalt calculates the effect of moving the pre-agency date back from May 27 to March 31 for the Penguin titles not withheld from Amazon. While Kalt's analysis, with the improper May 27 date, indicates that 61% of e-books (by unit sales) saw no price increase, a March 31 date lowers that figure to 26%.
Accordingly, Kalt's decision to classify sales of Penguin e-books through Apple and Barnes & Noble under the agency model as "pre-agency," despite undisputed evidence that 96% of Penguin e-book prices at the iBookstore and Barnes & Noble were higher than competing wholesale prices set by Amazon, renders his analysis not just unreliable but also misleading.
Moreover, Kalt's analysis fails to account in any way for titles with prices one would expect to decrease for independent reasons, like the introduction of a paperback edition or aging out of the New Release or frontlist categories.
Because Kalt's analysis is based on demonstrably false assumptions regarding the agency date for Penguin's withheld titles and fails to control for other expected causes of price decreases, it is inadmissible.
Use of this analysis before a jury is also barred by Rule 403, Fed. R. Evid. Its flaws are so fundamental that any probative value is substantially outweighed by the danger that it will confuse and mislead the jury and cause unfair prejudice to the plaintiffs.
Plaintiffs next challenge Kalt's opinion that "there is no standard, stable e-book `pricing structure,'" an opinion based on Kalt's findings of "pervasive dispersion and `churning'" among e-book prices. Dispersion refers to variance among prices, both for a given e-book title and across all e-book titles; churning is defined as "more or less continuous and tumultuous changes in [e-books'] prices relative to one another." Because this analysis is unreliable and would tend to mislead and confuse a jury, it is excluded.
Before turning to the errors in Kalt's analysis which require its exclusion, it is useful to place it in context. Kalt undertakes his analysis of churning and dispersion in order to undermine Noll's calculation of damages without directly engaging with Noll's regression model. Even though Noll identifies the critical variables that might affect pricing, and his regression model produces 502 separate categories into which the Publisher Defendants' e-books fall, Kalt argues that the model is simply unable to account for the dispersion and churning of prices that regularly occur.
But, the evidence at the liability trial, which was undisputed, showed a remarkable uniformity in the movement of the prices of the Publisher Defendants' e-books. One such graph is incorporated above, in connection with the discussion of Kalt's error in identifying pre-agency pricing. There is an abundance of additional statistical evidence confirming the striking stability in pricing. In the five months that followed the shift to the agency model in April 2010, the Publisher Defendants collectively priced 85.7% of their New Release titles sold through Amazon and 92.1% of their New Release titles sold through Apple within 1% of the price caps. Liability Opinion, 952 F. Supp. 2d at 682. This was also true for 99.4% of the NYT Bestseller titles on Apple's iBookstore, and 96.8% of NYT Bestsellers sold through Amazon.
This regularity in the pricing structure for the Publisher Defendants' e-books is not surprising. With the adoption of the agency model, a single publisher controlled the retail pricing of its e-books across all retailers. Adding to the stability of the marketplace, as the publisher-witnesses explained at trial, the major publishers do not compete with each other on price; they compete for authors and agents and in other ways. Thus, it was not surprising that so many of the e-books were priced by each of the Publisher Defendants at or very near the price caps that Apple imposed upon them through the Agreements. After all, the Publisher Defendants entered this conspiracy to raise e-book prices and raise those prices they did.
Against this backdrop, Kalt has tried to create the impression of a disordered marketplace with so much churning and dispersion that no model, even one as rigorous as the one Noll has created, can be relied upon to calculate the damages attributable to the price-fixing scheme fairly. But, Apple has not pointed to any literature within the field of econometrics, or within the field of statistics more generally, that uses a study of churning and dispersion like the ones conducted by Kalt as a critique of a multivariate regression analysis capable of explaining 90% of the variance in prices among e-book titles.
In any event, the plaintiffs do not have the burden of showing that all e-book prices behaved in just the same way. It was the goal of the conspiracy to raise e-book prices. Neither Apple nor its experts deny that the Publisher Defendants raised the prices of many e-book titles. The plaintiffs have provided a reliable basis to find that the class sustained widespread damages from prices raised by the conspirators above but-for prices, and for calculating individual damages. Kalt's analysis does not suggest otherwise.
Of course, even if Kalt's study does not provide a legitimate basis for rejecting Noll's work, the issue remains whether it may be admitted at trial to create a general impression that Noll's work may be unreliable, or that Noll has attempted to accomplish the impossible in a marketplace characterized by chaotic pricing. But, as will be seen, to create an appearance of dispersion and churning, Kalt has ignored the evidence described above, relied on unreasonable assumptions unmoored to the record evidence or directly contradicted by it, and avoided rigorous analysis.
The fundamental problem with Kalt's "churning" analysis, which purports to show random daily and weekly price movements, is that the data Kalt uses do not reliably establish the date on which the seller of the e-book (the publisher under the agency model, the e-tailer under the wholesale model) changed the price of the e-book. Kalt analyzes transaction records, which give the price on the date the consumer purchases the e-book.
This uncertainty presents a tremendous obstacle to any analysis of price changes over periods of time shorter than several weeks. Even if a seller simultaneously changed the prices for an entire category of e-books, the lag between the price change and the next purchase of each e-book would cause the prices of the e-book titles in the category to appear to move days or weeks apart. Kalt's own graphs demonstrate the issue: in Figure 14A, he graphs the percentage of titles with an increase or decrease in their daily modal prices
When asked to address this problem at his deposition, Kalt essentially demurred. He insisted that prices are irrelevant until reflected in a transaction, as before that it is "not a real price that anyone is buying [at]" and therefore is "not in the market." Although that might be true in certain contexts, for instance when a pedestrian is haggling over the price of a book at a Central Park bookstall, it is not true here. Kalt is supposedly investigating whether e-books are priced in an orderly manner, and to do so reliably he must measure the prices as they are actually set by e-book sellers. This he has not done.
Kalt's error is exacerbated by his failure to distinguish among sellers. Where different sellers charge different prices for a given e-book title, purchases distributed among those sellers will create the appearance of price volatility, even if each seller keeps its list price constant.
A simple hypothetical demonstrates Kalt's error. Imagine that all e-tailers always charged the same price for a given title, only changed prices on the first of each month, and each month changed all titles' prices by the same percentage. Despite this incredibly ordered pricing structure, in which changes to e-books' prices are perfectly correlated with one another, because of the infrequency in sales, Kalt's analysis may well show little correlation and tremendous churning. Kalt's method would register the price changes as occurring on the date of the first purchase of title each month, even though many titles would not be bought for days or weeks after the monthly price adjustment. Kalt's analysis would be not only inaccurate but very misleading.
Thus, Kalt's opinions about daily and weekly price movements are based on data that cannot reliably establish daily or even weekly prices for particular titles, and in fact would tend to inflate apparent price volatility and churning. Rather than constructing a methodology that properly addresses this issue — say, by testing probable error rates based on the frequency of transactions and measuring churning based on an appropriately lengthy time period — Kalt dismisses it. These analyses must be excluded under both Rule 702 and Rule 403.
In addition, Kalt's dispersion and churning analysis fails to support his opinions because it fails to control for systematic factors affecting prices. Some of his "analyses" simply chart the price at which titles were sold over time.
In his sur-reply, Kalt offers two revised graphs, in which he purports to "normalize" prices to account for Noll's explanatory variables, including title-specific indicator variables. But, these graphs simply chart residuals from Noll's regression. Noll's regression model explains 90% of the variance among e-books' pricing; Kalt has graphed the remaining 10% of variance. Kalt does not explain how these results are meaningful. As any regression on real data will have residuals, it is not clear how such results could demonstrate a good fit between the model and the data as opposed to a poor one. These revised graphs do not cure the blatant deficiencies in Kalt's original charts, reflect no accepted scientific methodology, and would, if admitted at trial, create a serious risk of misleading the jury.
Because Kalt's analysis of price movements is based on data that does not reliably establish the date of price changes, and because Kalt does not control for systematic factors affecting prices, Kalt's analyses are unreliable and likely to mislead and confuse a jury. Thus Kalt's dispersion and churning analyses must be excluded for this reason as well.
Kalt also presents a correlation analysis as a subset of his churning analyses. The correlation analysis purports to measure the frequency with which the daily and weekly modal prices of pairs of e-books published the same week in the preagency period moved in the same direction. Even if Kalt's churning analyses were generally admissible — and they are not — it would be necessary to strike Kalt's correlation analysis.
A correlation analysis must, according to its own terms, exclude all titles with prices that did not change, that is, those with perfectly stable pricing. This limitation biases the results against a finding of stability. Kalt admits that, if he were to include titles with perfectly stable pricing, the percentage of title-pairs with a positive correlation of 0.8 or higher, which is a "very strong [correlation] and of great practical importance," would increase to approximately 39%.
Accordingly, Kalt's correlation analysis, which he offers to support a finding of chaotic pricing, is ill-suited to this task. The correlation analysis must be stricken for this reason under Rule 702, on the ground that it is not a reliable scientific measurement of the extent to which e-book pricing is structured, and under Rule 403 for its substantial risk of misleading the jury while offering little useful information.
Plaintiffs also move to exclude Kalt's opinion that Noll's model is flawed because Noll fails to include a variable for "buzz" and because Noll's genre categories are too broad. Kalt has undertaken no analysis to confirm that either criticism has any validity. Because these opinions are unsupported by any rigorous analysis and are purely speculative, they are excluded.
Kalt charges that Noll fails to include in his model "authors' growing or shrinking reputations, the appearance of good or bad reviews, events such as a movie release of the title, so-called `buzz' and `word-of-mouth' effects, celebrity, expert or other endorsements, and real-time advertising and other marketing efforts by retailers, authors and/or publishers." There are at least three problems with allowing Kalt to render this naked opinion.
First, Kalt offers no reason to believe that one could reliably measure a title's "buzz" for the purposes of a multivariate regression analysis. Moreover, as significantly, Noll's regression
Similarly, Kalt accuses Noll of adopting genre categories that are so "highly aggregated," with "extreme heterogeneity" within each genre category, that "many hundreds of titles . . . are too diverse to reasonably be expected to share pricing behavior," including a common relative overcharge as the result of price-fixing. Of course, an e-book title's genre is only one of the variables that Noll uses in his model. In any event, Noll largely adopted the genre categories from the
Apple may, of course, cross-examine Noll regarding his decision to rely on that particular system of categories, as opposed to any other. But, it does not need Kalt in order to do so. In order for Kalt to advance his own opinion about the impact of Noll's choice of genre categories in a damages calculation, Kalt would be required to perform some economic analysis. He has not. After all, Kalt is being tendered by Apple as an expert in various disciplines within the field of economics. He has no special expertise in publishing. To be of assistance to the jury, he would have to bring his own expertise as an economist to bear on a subject.
Kalt does refer to a chart showing Amazon's more narrowly drawn genre categories, and a chart showing that titles within a genre category have a wide range of different price points. Again, these charts may provide fertile ground for cross-examination of Noll, but standing alone they do little more than present a collection of facts in a pseudo-scientific way. Kalt has done no analysis to permit him to opine as an expert economist about the impact of more fine-grained genre categories on Noll's model or on any reliable calculation of damages. Without any economic analysis to give meaning to data, Kalt's offer of these charts would be of no assistance to the jury.
Throughout his report, Kalt asserts that Noll improperly assumes, rather than proves, that e-book titles within one of Noll's 502 categories suffered the same relative common impact. It is for this purpose that Kalt has speculated that "buzz" might affect a title, or that a more narrowly drawn book genre may have unique pricing characteristics. Noll's hedonic pricing model disaggregates the major quantifiable factors that might influence e-book pricing — publisher, genre, bestseller status, age, and the availability of a hardcover or paperback edition — and then controls for these factors to compare competitive prices against collusive prices. Noll's regression analysis assumes that,
Plaintiffs next attack Kalt's opinion that Noll's model produces millions of "false positives," based on an analysis purporting to show that millions of transactions occurred at prices below Noll's predicted but-for prices. In fact, Kalt's analysis compares
Although Noll's model was not intended to be used in this way, the model can be made to produce an estimated average but-for price of an e-book in a given four-week period. Noll's goal was to calculate the percentage elevation in prices due to price collusion for each e-book. By focusing on the level of prices, rather than the changes in prices attributable to collusion, however, Kalt misidentifies transactions as being unaffected by price collusion.
Noll provides a simple example to demonstrate the error. Assume the standard price for an e-book is $20 before collusion (the "competitive price") and $24 after, with the $4 increase a result of price-fixing. Assume also that in both periods one-third of customers pay the standard price; one-third receive a 25% discount; and one-third receive a 50% discount. Thus, consumers would pay the following:
As the model's predicted price is the average price, the model predicts a competitive price of $15 and a collusive price of $18.
Kalt's test, which simply compares the actual transaction price (i.e., the actual collusive price) to the predicted (average) competitive price, would flag as a "false positive" the transaction where consumers received a 50% discount, since the actual price they paid ($12) is less than the average competitive price ($15). But as this example presupposes, these consumers
Finally, plaintiffs move to exclude Kalt's opinions concerning offsets for certain supposed pro-competitive effects of the price-fixing. In particular, Kalt opines that "it is likely that substantial numbers of class members would not have purchased e-books in the damages period but-for the launching of the iBookstore"; that an unknown number of self-published e-books would not have been published but-for the iBookstore; and that e-book buyers who purchased an e-reader during the damages period were benefitted by lower e-reader prices resulting from the price-fixing conspiracy. For the reasons set forth below in the discussion of Orszag's offset opinions and in the Opinion granting class certification, Apple is barred from proposing these offsets to any damages calculation. Moreover, just like Orszag's slightly more developed offset opinions, Kalt's opinions are based on guesswork rather than analysis and fail to meet professional standards.
Thus each of Kalt's major opinions must be excluded. Apple has not argued, nor has it established, that the remaining interstitial opinions would aid the trier of fact. Accordingly, Kalt's opinions are excluded in their entirety.
Apple's second expert is Jonathan Orszag, a Senior Managing Director at Compass Lexecon. Orszag holds an A.B. in economics from Princeton University and an M.Sc. in Economics and Social History from Oxford University, and has served as Assistant to the Secretary and Director of the Office of Policy and Strategic Planning, U.S. Department of Commerce (1999-2000), and Economic Policy Advisor to the National Economic Council (1997-1999).
Orszag raises two chief objections to Noll's damages model. First, he argues that Noll used an inappropriate control group. Orszag believes Noll was wrong to include e-book publishers beyond the Big Six, many of which are small specialty publishers or self-publishers, and wrong to include time periods much in advance of the conspiracy as they differ substantially from the remainder of the period.
Second, Orszag amplifies Kalt's criticism that the model fails to account for certain features of the but-for world. Specifically, he claims that in his calculation of a final damages figure Noll failed to account for benefits that consumers received due to the price-fixing conspiracy. These include lower e-reader prices, more free e-books and self-published books, and sales that would not have otherwise occurred without the iBookstore or the Barnes & Noble Nook Book Store. Orszag opines that the damages owed to class were, conservatively, not more than $30 million.
Class Plaintiffs move to exclude all of Orszag's opinions, which they classify as follows:
The States move to exclude all but the fourth opinion. For the reasons set out below, the first three opinions are excluded from consideration in connection with any summary judgment motion and at trial, but not the fourth.
Orszag's first three opinions, which concern offsets, are irrelevant as a matter of law. At trial, the DOJ and States showed both that Apple's price-fixing conspiracy was a per se violation of the antitrust laws and that they were entitled to judgment under the rule of reason test. At that trial, Apple failed to show that "the execution of the Agreements had any pro-competitive effects." Liability Opinion, 952 F. Supp. 2d at 694. The Court found that "[t]he pro-competitive effects to which Apple has pointed, including its launch of the iBookstore, the technical novelties of the iPad, and the evolution of digital publishing more generally, are phenomena that are independent of the Agreements and therefore do not demonstrate any pro-competitive effects flowing from the Agreements."
Even if Apple were not estopped from challenging those findings with respect to the class action, no such offsets from a properly calculated damages figure would be appropriate as a matter of law. As explained in the Opinion filed today certifying a class, damages will be calculated by a formula that multiplies the relevant relative overcharges by the actual transaction prices paid by class members for the Publisher Defendants' e-books. Apple may not seek to reduce that amount of damages by resort to phenomena outside those transactions or by speculation over how the world may have been different if it had not chosen to engage in a scheme to fix e-book prices. This includes the theory on which Orszag places special emphasis, that is, that Amazon would have cut the prices of its Kindles less but for the conspiracy. Not only is such an offset barred as divorced from the transactions at issue, for the reasons set out in the class certification Opinion, but it would also be particularly inappropriate to consider this supposed effect since it concerns a different market entirely. Apple cites no case where an antitrust defendant has been granted an offset to damages flowing from price-fixing in one market by alleged benefits in another market, even a market for a complementary good.
Accordingly, Apple's proposed offsets for speculative happenings in the but-for world are barred. These include an offset for some roughly calculated portion of the reduction in price of Amazon's Kindle;
Moreover, even if they weren't irrelevant as a matter of law, Orszag's opinions regarding the amounts of any offset from a damages figure would be independently excluded as unmoored from record facts and unsupported by any rigorous analysis. Orszag opines that Noll "may have overstated" the plaintiffs' damages. He suggests some ways in which those overstatements may exist, some of which he presents "for illustrative purposes only." None of these opinions represents a considered and developed economic analysis that would be of assistance to a jury in either understanding a weakness in the Noll calculation of damages or in using an alternative calculation to arrive at a damages figure. A discussion of his three proposed offsets illustrates the flaws in his analysis.
Orszag contends that, because the e-reader and e-book are complementary products, Apple may be entitled to an offset from Noll's damages calculation to account for the benefits that consumers received because the prices of Amazon's Kindle declined during the conspiracy period. There is no dispute that the price of Kindles declined in 2010; indeed it had been declining since November 2009 when the price fell by $140. November 2009 was roughly five months before the iBookstore opened and the Publisher Defendants raised e-book prices. As significantly, Orszag acknowledges that some of the factors that led to the decline in Kindle prices were entirely independent of the price-fixing conspiracy, such as the fierce competition in the e-reader and tablet markets and Amazon's investment in 2010 in the development of the Kindle Fire. Orszag also has no evidence to support a contention that Amazon subsidized one side of its business with another line of business, and agreed in his deposition that he was accepting the proposition that it did not. Despite those realities, Orszag speculates that at least some hard-to-quantify component of that price decline — Orszag suggests a benefit of [REDACTED] in 2010 alone — should be attributed to the conspiracy and is therefore an offsetting benefit from the conspiracy to consumers.
There are many problems with this analysis, but it is only necessary to list a few of them to explain why this entire theory of offset is inadmissible at trial, and why Orszag's opinion must be stricken. First, Orszag's hypothesis rests on layers of assumptions, many of which are untethered to the real world or at odds with the facts. In addition, the sheer length of Orszag's chain of shaky inferences, without any modeling or analysis, invites the jury to speculate about any potential impact on a damages calculation.
Orszag's theory is that Amazon's price cuts on its Kindles during the period of the conspiracy were steeper than Amazon would otherwise have made because the higher prices for e-books set by the Publisher Defendants during the agency period gave Amazon "an incentive to sell devices [REDACTED] in order to capture the more profitable content sales." As an "example" of the impact that this phenomenon may have had, Orszag undertakes a back-of-the-napkin calculation.
Orszag's calculation is as follows. Orszag notes that, from 2009 to 2010, Amazon's contribution to profits on devices and accessories went from [REDACTED], and [REDACTED] was more than [REDACTED. the previous year's contribution to profit. Based on a statement from an Amazon executive that Amazon wanted both e-books and Kindle businesses "sustainable in their own right," Orszag concludes that the [REDACTED] due to increased competition in the device market is exactly equal to [REDACTED]. He assumes that [REDACTED] must have been "due to more vigorous competition . . . unrelated to e-book prices." Orszag then further assumes that none of the swing [REDACTED] should be attributed to that competition between devices. Instead, he assumes that it was "the result of . . . a change in business strategy by Amazon [REDACTED] on devices and attempt to earn [REDACTED] on content through higher e-book prices" given "more profitable content sales" because the Publisher Defendants had raised e-book prices pursuant to the Agreements.
Orszag then uses [REDACTED] figure to calculate a benefit equivalent to a [REDACTED] reduction in the prices of e-books sold by the Publisher Defendants during the conspiracy. This calculation is also jerry-rigged. He starts with the amount that Amazon collected in e-book revenues in 2010 and multiplies this by [REDACTED] — which he assumes is the useful life of a Kindle, [REDACTED]. Indeed, Orszag cites no evidence of a useful life [REDACTED]. He asserts that the resulting figure, approximately [REDACTED], is the e-book revenue expected over the useful life of Kindles sold in 2010. Orszag next divides those revenues by [REDACTED] that Amazon [REDACTED] on its devices in 2010, and calculates that that [REDACTED] is equivalent to [REDACTED. the anticipated [REDACTED] e-book revenue linked to 2010 Kindle sales. Next, Orszag calculates the percentage of Amazon's 2010 e-book revenue for which the Publisher Defendants' titles were responsible: 47%. The final step of the calculation is to determine the percentage of the Publisher Defendants' e-book revenue equivalent to Amazon's [REDACTED] on Kindle devices. To do this, Orszag divides [REDACTED] ([REDACTED] as a percentage of expected e-book revenue) by 47% (the Publisher Defendants' share of that revenue), to get [REDACTED].
The result of this long chain is a conclusion that Amazon's [REDACTED], which Orszag speculates would not have existed but for the e-book conspiracy, are equivalent to a [REDACTED] price reduction in the price of the Publisher Defendants' e-books. This is a substantial portion of the damages figure that Noll's regression model has calculated. Noll's model finds that the Publisher Defendants' e-book prices were 18.1% higher, on average, as a result of price fixing.
It is only necessary to mention a few of the deficiencies in Orszag's calculation. An economist who wished to measure the effect of competition within the e-reader market on e-reader prices would undertake an examination of that market and perform a study. Orszag did not. He simply took a single, general remark about Amazon's goals from an Amazon executive and extrapolated from that. Orszag therefore has no basis for the central assumption in his string of assumptions, that is, that every penny [REDACTED] in 2010 from sales of the Kindle may be attributed to the rise in e-book prices and is not attributable to competition in the e-reader market or anything else.
Second, as was already alluded to, Orszag has identified no reliable basis for determining that Kindles have a [REDACTED] useful life. If Orszag had chosen a [REDACTED] useful life — which, as Orszag admits, [REDACTED] — he would have calculated an implausible benefit equivalent to a [REDACTED] price reduction in the price of e-books, all other components of his calculation remaining the same. Because Noll finds only an 18.1% average overcharge, Orszag's price reduction would be so great that all of the damages attributable to the antitrust violation would be wiped out.
Third, Orszag has identified no basis for attributing all of Amazon's e-book revenue in 2010 to purchases made by consumers using their Kindles, let alone to purchases made by consumers using Kindles purchased in the year 2010.
Fourth, Orszag's analysis ignores changes in the e-books market that caused e-book demand to grow rapidly during the period of the conspiracy despite the significant hike in e-book prices. All by itself, this rise in the demand for e-books requires a careful analysis before any reliable conclusions can be drawn about any effect of a price rise in the e-book market on e-reader prices. Without performing that analysis, Orszag simply assumed a connection between price changes in two distinct albeit related markets. The fact that two phenomena occur in the same period of time does not prove that they are related or how they are related, much less that one caused the other. There are scientific tools to study relationships between phenomena, or markets, and to confirm causality; Orszag has employed none here.
Finally, Orszag does not dispute evidence that sales of Amazon's Kindle in 2010 were [REDACTED]. This strongly suggests that [REDACTED]. In any event, to create admissible expert testimony, an expert would be required to examine the impact on his hypothesis of this fact as well.
In sum, Orszag's calculation does not illustrate anything that would be useful to a jury. Rather, it would merely invite the jury's speculation. For the absence of "the same level of intellectual rigor that characterizes the practice of an expert" economist,
Orszag conjures up another illustration of how consumers might have benefitted from e-book price fixing, this time from competition between Apple and Amazon and the creation of the iBookstore. Orszag suggests that that competition may have benefitted e-book consumers by increasing the availability of self-published and free e-books,
As already discussed, there are evidentiary and legal hurdles to relying on an assumption that the creation of the iBookstore was due to the price-fixing conspiracy. But, even if Apple were able to establish these connections, the many other problems with this set of Orszag's illustrations would bar this testimony at trial.
First, this analysis is not tethered directly to the Publisher Defendants' e-books or their price-fixing conspiracy. It concerns self-published e-books and free e-books, which by definition are not e-books published by one of the Publisher Defendants. Apple has not provided any theoretical basis, either legal or economic, for including an adjustment for the "sale" of self-published or free e-books to a calculation of the damages caused by the Publisher Defendants and Apple fixing the prices of other e-books.
Second, Orszag does not even purport to reliably calculate the supposed benefits to consumers from the self-publishing or free e-book phenomena. He has created no model based on economic theory and has done no rigorous study. Instead, as he readily admits, he has selected arbitrary figures "only for illustrative purposes." He muses that if, for instance, 25% to 50% of the increase in self-publishing were due to the creation of the iBookstore, and one applies a certain demand curve for e-books, then that would "suggest[]" that the benefit to consumers from the increase in self-publishing was "approximately" $15 million to $30 million.
Similarly, "to illustrate the potential impact of the increase in free e-books," he assumes that 25% to 50% of the increase in free e-books was due to the creation of the iBookstore, and then assumes (with no explanation for why this is so) that consumers are willing to pay $0.50 for a "free" e-book. From this, Orszag calculates a benefit of between $20 million and $41 million "for illustrative purposes only."
Such guesswork does not meet the
Orszag offers a third set of illustrations to suggest that consumers may have benefitted from the price-fixing conspiracy in a manner that should be taken into account when calculating their damages. These illustrations assume that certain e-book sales would not have occurred but for the price-fixing conspiracy.
Orszag's analysis begins with the iBookstore. He assumes that but for the conspiracy, the iBookstore would not have launched. He recognizes that some sales of e-books made through the iBookstore would have occurred, via another e-tailer, even if the iBookstore had never launched, but he also assumes that some percentage of sales would not have occurred. Orszag reasons that some iPad owners would not have used an app on their iPad to purchase an e-book from another e-tailer — for instance, Amazon — or would not have had another device for reading e-books. Acknowledging that it "is difficult" to make this "estimate," Orszag guesses that 15% of iBookstore sales may not have occurred in the but-for world,
Orszag makes similar assumptions with respect to Barnes & Noble's Nook Book Store. He assumes that the Nook Book Store would not have been profitable in the but-for world, and consequently that Barnes & Noble would have shuttered its e-bookstore shortly after investing tremendous sums into its Nook platform. Orszag ignores the fact that the Nook Book Store still exists today, nearly two years after the end of the collusive Agreements. Guessing that 15% of Nook Book Store sales would not have occurred in the but-for world, Orszag calculates that Noll's model overestimates damages by between $5 and $14 million.
Again, Orszag's guesses fall far short of professional standards and would not assist the trier of fact. Accordingly, Orszag's opinions regarding the offsets are also barred under Rules 702 and 403.
Orszag's fourth opinion, regarding Noll's definition of the control group and time period for his regression analysis, is admissible. Orszag's opinion is sufficiently supported, as Orszag re-ran Noll's regression using a control group limited to the Big Six and a date range limited to the 24 weeks before April 1, 2010 and the 24 weeks after.
The States do not challenge this opinion. Class plaintiffs' only argument in favor of exclusion rests on estoppel. They argue that Apple should be judicially estopped from making this argument, through Orszag, because Apple's prior expert, Dr. Michelle Burtis, criticized a different expert of the plaintiffs for failing to include all publishers and for not extending the time period.
Judicial estoppel generally applies where
Here, because the Court did not adopt Burtis's critique in the Liability Opinion, judicial estoppel is inapplicable. Thus, class plaintiffs' motion to exclude is denied with respect to Orszag's opinion regarding Noll's control group and time period.
Apple argues repeatedly that it need not present any definite economic analysis because the burden of proof regarding damages is on plaintiffs. Apple is correct. The burden of persuasion is on the plaintiffs and Apple is under no obligation to call any expert or present any independent analysis of damages. Apple may rely entirely on a cross-examination of Noll regarding the choices he made in constructing his model. That cross-examination may be wide-ranging and vigorous so long as Apple has a good-faith basis for the line of cross-examination and the line does not run afoul of the Federal Rules of Evidence. Apple may then argue on the basis of such cross-examination at summation.
What Apple does not have the right to do, however, is to call an expert economist to present opinions unless those opinions are the product of the expert's rigorous application of economic methods. No expert may offer an opinion inadmissible under Rules 401, 702, and 403 of the Federal Rules of Evidence, and no party may call an expert unless that expert has an admissible opinion to offer. Each of the opinions stricken today runs afoul of one or more of these Rules of Evidence.
Apple has belatedly requested a
Plaintiffs' motions to exclude are based wholly on written materials, not disputed issues of fact best resolved through live testimony. The written record is robust, including memoranda of law totaling nearly 160 pages, declarations and sur-reply declarations from both Kalt and Orszag, and transcripts of the depositions of both experts. And it is manifestly clear from the papers that Kalt's and Orszag's opinions cannot pass muster under Rules 401, 702, and 403.
Apple has not explained how it believes a hearing would aid the Court in deciding these motions. Expert discovery has closed, and Kalt and Orszag may not revise or supplement their declarations. Because there are no factual issues that might be elucidated by live testimony and the proper resolution of plaintiffs' motions is not in question, no hearing is necessary.
Apple argues that it is premature to rule on plaintiffs' motion to exclude for purposes beyond class certification, including trial. But, the December 9, 2013 Joint Stipulation and Scheduling Order, which set deadlines for the briefing on the class certification and
In addition, in resisting the class plaintiffs' motion for summary judgment, Apple has relied on Kalt's and Orszag's opinions. It asserts that their opinions raise questions of fact as to the reliability of Noll's model that may only be resolved at trial. For this additional reason, it is necessary for this Court to grapple now with the motions to strike those opinions. Thus plaintiffs' motions to exclude Kalt's and Orszag's testimony are ripe.
Apple also argues, in a separately filed motion for suggestion of remand to the Judicial Panel for Multidistrict Litigation ("JPML"), that these actions should be transferred to their original venues for a decision on summary judgment and trial, and that those courts should decide motions to exclude Apple's experts' opinions for purposes beyond class certification. But, it is in the interest of judicial efficiency, and consistent with the statute governing coordination of multidistrict litigation, 28 U.S.C. § 1407, for this Court to decide these motions regardless of whether these cases are ultimately remanded to separate venues for trial.
Section 1407 provides in relevant part that "[w]hen civil actions involving one or more common questions of fact are pending in different districts, such actions may be transferred to any district for coordinated or consolidated pretrial proceedings." As the JPML has recognized, "pretrial, as an adjective, means before trial — that all judicial proceedings before trial are pretrial proceedings."
While a court has discretion to suggest remand prior to the end of pre-trial proceedings, the standard to be applied is whether such early transfer will promote judicial efficiency. "[T]he essential purpose of section 1407 [is] to promote the just and efficient conduct of complex multidistrict litigation."
Plaintiffs' December 18, 2013 motions to exclude Kalt's opinions are granted. The States' December 18 motion to exclude certain of Orszag's opinions is granted, and the class plaintiffs' December 18 motion to exclude Orszag's opinions is granted in part.
It is unnecessary to engage with the merits of the Peterson/Lemon thesis since their economic analysis is not applicable here. Peterson and Lemon simply note that, where actual prices overlap with but-for prices and there is no reliable way to match a given actual price with a given but-for price, it may be impossible to calculate an individual's damages with certainty on a class-wide basis. Here, where Noll's model calculates an overcharge for each of 502 different categories of e-books, and a but-for price is determined by multiplying the appropriate overcharge by the actual transaction price paid by an individual class member, plaintiffs have presented a reliable method of matching actual prices with but-for prices and determining individual damages.
