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The Authors` Guild, et al vs. Google, Inc: An Economic Analysis oI Ongoing Antitrust
Litigation in Regards to the Google Books Project




Charles J. Fackler
University of Kentucky
Lexington, KY











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This paper seeks to add to the various academic literatures in regards to the
Google Book Search project and associated litigation. It focuses upon the ongoing
litigation between The Author`s Guild, a non-profit trade organization which
represents authors, publishers, and other publishing industry related persons and
entities, versus Google Inc., a multifaceted corporation primarily focused upon
providing internet-related products and services. This paper is focused on the
economic implications regarding the ongoing litigation between the two
abovementioned parties and the subsequent intervention by the Department of
Justice`s Antitrust Division. This paper will consider and scrutinize the
Department of Justice`s Antitrust Division`s purview of this case. It will also
expand upon the economic scholarship Hausman and Sidak provide for
consideration of the economic implications of this case. This paper will find that
the Department of Justice`s analyze of this case is fundamentally flawed and
detrimental from an economic efficiency and consumer welfare enhancing point
of view. It will in conclusion offer the legislative branch of the Federal
government should align antitrust laws in the United States more towards the goal
of promoting economic efficiency in the 21
st
century.







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In 2004, Google Inc. launched an audacious and monumental project in scope and
purpose: scanning and digitizing every book ever published in the course of modern history into
a single digital archive. Initially named Google Book Search, this project is intended by Google
Inc. to largely increase its portfolio in regards to its unspoken quest in becoming the world`s
largest arbiter of information. Google Inc. entered into partnership agreements with several
world-renowned libraries, such as the New York Public Library, OxIord University`s Bodleian
Library, Harvard University Library, and the University of Michigan library system to scan and
digitize their library holdings. (Statement of Interest 2009) For Google Inc. undertaking this
endeavor and providing the abovementioned libraries with digitized versions of each respective
library`s collection, Google granted itself the contractual permission to use said digitized
collections for the commercial usage of Google Inc. in its Google Book Search project. (Dumain,
et. al 2005) Including in Google Inc.`s digitized collections were several works still under
copyright protection. This action by Google Inc. was the impetus for the ongoing litigation that is
the Iocus oI this economic analysis: The Author`s Guild, et al v. Google Inc.
On September 20, 2005, The Author`s Guild Iilled suit against Google Inc. over its
Google Book Search project. The lawsuit initially requested and was granted class action status
on behalI oI all publishers and authors whose works are held at the University oI Michigan`s
library system. (Dumain, et. al 2005) The lawsuit contends that Google Inc. engaged in
wholesale copyright infringement, in respect to the Copyright Act 17 U.S.C. 101, which
required Google Inc. in regards to this complaint to obtain permission from copyright holders of
the works it digitized under its Google Book Search project before making commercial use of the
works in question. More speciIically, counsel Ior the plaintiIIs allege Google Inc.`s oIIering oI
brief previews of copyrighted works is in violation of the Copyright Act. Google Inc. had
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previously claimed that indeed offering these previews were permissible under its reading of the
Copyright Act. (Dumain et. al 2005) The lawsuit then requests from the Court an emergency
injunction preventing Google Inc. from continuing its book scanning project and displaying
copyrighted material on its Google Book Search project online.
The case would continue to develop until October 28, 2008, when both parties reached
what would be their first settlement agreement. Google Inc. would make a lump-sum payout of
approximately $125 million, with $45 million dollars to potentially affected right holders, $45.5
million dollars to plaintiIIs` attorneys, and $34.5 million dollars Ior the creations oI a 'Book
Rights` Registry. (United States District Court of Southern New York 2008) The settlement,
and subsequent amended settlement, would have given Google far-reaching abilities to continue
its book scanning project; indeed, the settlement would have created a provision where authors
and publishers would have to 'opt out oI the Google Book Search project versus 'opt in
Google Book Search massive digital archives. (Cavanaugh, et. al 2010) The settlement also
would have given The Author`s Guild the ability to act as a class representative Ior all authors
and publishers whose works are scanned or are scheduled to be scanned by the Google Book
Search project. (Cavanaugh, et. al 2009)
The Department oI Justice`s Antitrust Division would Iile its Iirst Statement oI Interest
on the grounds oI the abovementioned proposition oI The Author`s Guild being able to
adequately represent the defined class of authors and publishers in the settlement agreement
proposed in 2008. (Cavanaugh, et. al 2009) This first Statement of Interest provides little for the
economic analysis of the case; however, it is the forbearer to the subsequent Statement of Interest
filed in 2010 in response to the proposed Amended Settlement Agreement reached between the
two parties in the case. The Statement of Interest of the United States Regarding the Proposed
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Class Settlement on the behalf oI the Department oI Justice`s Antitrust Division would in large
part provide supervising Justice Denny Chin provision to reject the first settlement agreement.
(Chin 2009)
Both parties would continue to negotiate until finally agreeing to the Amended
Settlement Agreement, which was reached in 2009. (United States District Court of New York
2009) The Amendment Settlement Agreement was presented to Judge Chin for approval. The
Department oI Justice`s Antitrust Division would then also provide another Statement oI Interest
in regards to the Amended Settlement Agreement. The Department of Justice first lauds
Google`s work in breathing liIe into what it categorizes as 'orphan works. Orphan works in
regards to this case shall be defined as written works for which the right holders are not know
and are no longer in continual publication. (Cavanaugh, et. al 2010)
The Department of Justice then raises several concerns about the Amended Settlement
Agreement. It first takes into consideration and agrees with various academicians providing
scholarship on the case that the Amended Settlement Agreement provides Google with what is
considered in industrial economic theory as a most-favored nation clause. (Cavanaugh, et. al
2010) The Department of Justice furthermore asserts that Google Inc. by virtue of the Amended
Settlement Agreement is concocting to use a class action mechanism to provide itself with
significant future market protections by virtue of forward-looking business arrangements.
(Cavanaugh, et. al 2010) The Department oI Justice`s canonical view on this purported forward-
looking business arrangement is that it creates an anti-competitive atmosphere in the newly-
emerging market for digital archives of literary works far into the future and potentially provides
for Google Inc. to use the judicial system to create itself a long-term protected monopoly for its
Google Book Search project in the digitizing of literary archives and subsequent marketing of
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said archives far into an undefined and undetermined future. (Cavanaugh, et. al 2010) The
Department of Justice subsequently recommends to Judge Chin to reject the Amended
Settlement Agreement and order both parties back to negotiations towards crafting a settlement
that is more in respect to the Department oI Justice`s views oI both copyright and antitrust laws,
which he did. (Chin 2011) Both parties have yet to present a perdurable subsequent settlement at
the time of publication of this economic analysis and the case remains in court system.
Several economic implications could arise if Google Inc. is not allowed to move forward
with this project. Industrial organizational economists generally assert that the creation of new
goods and services are among most effective sources of increases in consumer welfare.
(Hausman, et. al 2009) By creation of essentially an entirely new category of goods and
services, Google`s Book Search project has the potential to greatly increase consumer welfare.
Google`s Book Search project will greatly increase the eIIiciency oI the exchange oI written and
published information. By having such a vast available archive of every written work ever
published available online and easily searchable, search costs for previously-created scholarship
upon which to base new scholarship will be drastically reduced. Instead of the academic
economist having to travel to research libraries in Washington, New York, Los Angeles,
Houston, Chicago, London, or Berlin, for example, to access a particular copy of a work which
benefits his or her scholarship, this academic economist simply can access the work from his or
her office or home. (Hausman, et. al 2009)
Hausman and Sidak in their pinnacle work on this case 'Google and the Proper Antitrust
Scrutiny oI Orphan Books estimate in the dynamic gains to economic eIIiciency Irom the
Google Book Search project to be in the hundreds of millions of dollars. (Hausman and Sidak in
this work refer to what we previously defined as orphan works instead as orphan books.) We can
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expound upon this claim by Hausman and Sidak that these gains will indeed be from the reduced
search costs by academicians and the subsequent increased publication of vital research of
sundry genres. Furthermore, we can assume that existing published works, including so-called
orphan works, are the exogenesis for future works to be published. This assumption holds upon
consider that previously-published works are complementary goods in regards to future works to
be published, in that an increase in the economic value of existing works leads to an increase in
the economic value (and creation) of future works. These economic gains will offset the modest
static efficiency losses claimed by myriad affected interests whose inefficient goods and services
will be lost in the various amicus curia briefs filed in this case, whom are primarily established
and inefficient publishing houses. (Hausman, et. al 2005) Subsumed, Google Books Search will
bring to the market the positive benefits of the economic principle of creative destruction, which
holds that the market naturally destroys economically inefficient industries and replaces them
with more efficient new industries. (Hausman, et. al 2005)
One of the perdurable tenets of macroeconomics (and especially in the field of financial
economics) holds that risk requires compensation. Applying this concept to the Google Book
Search case, Google must be afforded adequate protections and the potential to achieve
compensation for undertaking this consumer welfare-increasing project. Hausman and Sidak
approximate that approximately 80 percent of new consumer products and services fail.
(Hausman, et. al 2009) The likelihood of a good or service failing or succeeding is not dependent
on the market size of the producer offering the good or service. A popular and germane example
oI this paradox would be the Iailure oI Google Inc.`s recent oIIering oI a social networking
platform, Google+. (It may be contended Google Inc. never intended for this project to be
successful and that Google Inc. had alternative purposes for the Google+ project. However, this
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contention is not relevant to the scope of this economic analysis.) Google`s market size in itselI
did not provide unreasonable and unfair guarantees that this particular product offering would be
successful and it most assuredly was not successful. Therefore, Google Inc. should be able to
provide itself with reasonable contractual and legal provisions to minimize its risk of failure for
offering such a potentially economically beneficial and consumer welfare increasing service. For
Google Inc. to continue to have economic incentive to offer this new category of services of the
economy, it must have reasonable assurances that it has a chance to achieve economic profits in
excess of the costs it continues to realize as it develops and implements the infrastructure
necessary for this project to achieve fruition.
As such, the Department oI Justice`s insistence that the Google Inc. remove from a future
final settlement what the Department of Justice categorizes as a most-favored nation clause is
fundamentally flawed from an economics perspective. A most-favored-nation clause offers
consumers protection from price discrimination is essence, in that it assures the consumer of a
good or service that the good or service will not be offered to another buyer at a lower price.
(Salop 1986) Indeed, by insisting upon the removal of Google Inc.`s provisioning of a proverbial
most-favored nation clause into the Amended Settlement Agreement, the Department of Justice
is paving the way for quicker entry of future potential entrants. While it is generally desirable to
promote entry into a market up to the point of equilibrium from an economic efficiency
perspective, promoting entry too soon in a still-developing industry could be economically
inefficient and potentially destructive. A most-favored nation clause would both reduce the risk
to Google Inc. while developing and offering this new category to services, providing more
assurance that a market for digitizing of library archives would sufficiently develop, and that
Google Inc. would be able to more quickly recoup its initial investment in the infrastructure and
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development of the market, so that it can profitably allow other firms to enter the market once
the market has sufficiently developed.
Google would not have to worry about authors and publishers selling their works to
another potential entrant into this new market for a certain unspecified number of years at a
better price. This removes from Google Inc.`s risk analysis and consideration the prospects of
Iuture potential entrants exercising what Hausman and Sidak call the 'Iree option. (Hausman,
et. al 2009) The free option in this case would be defined as potential future entrants allowing
Google Inc. to develop the market to the point that it appears to be marginally economically
sustainable, and then entering the market. These potential future entrants would undercut Google
Inc. with new services oIIerings based upon Google Inc.`s already-existing infrastructure without
having to make the initial investments that Google Inc. made into the Google Book Search
project. These potential future entrants would benefit economically without having to assume
any of the risk from the development of this new market. If the goal of the Department of
Justice`s Antitrust Division is indeed both allowing Google Inc. to develop this new service and
also allowing for the future entrance of new entrants into this market, the most-favored nation
clause is the penultimate vehicle for achieving this goal. If Google Inc. is not allowed to give
itself protection by means of a most-favored nation clause, it will not invest as much, or anything
further, into developing this new market. Without Google Inc. continuing to develop this new
market, there would be no market for potential future entrants in which to enter.
The Department of Justice also fails to consider the economic benefits that would arise
from a well- and efficiently-regulated monopoly in the developing digital archives market for
orphan books. While indeed there might be slight welfare losses from an initial monopoly in this
market, these losses will be offset by several dynamic economic gains. Google Inc.`s ability to
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efficiently use its potential monopoly power in this market is especially beneficial to consumer
welfare as a whole as the industry is in its developmental stage. Google Inc.`s possibility to earn
monopoly profits for a fixed number of years may motivate it to invest further into this emerging
new market, allowing for a greater degree of efficiency and a better degree of production
development all welfare-enhancing and economic-efficiency promoting qualities.
As Google Inc. operates under an efficiently-regulated monopoly as it develops this new
market for digitized archives of books, it will be able to keep its fixed costs lower by not having
to face economics losses from the abovementioned free option. Google Inc.`s minimization of its
fixed costs will permit it to invest more in developing and expanding this new market. If Google
Inc. is not able to protect its product and infrastructure by creation of a temporary monopoly
either by virtue of legal codification or patent protection, future potential entrants could
essentially collapse in upon itself this emerging market before it could become large enough to
be self-sufficient. Potential future entrants will not be able to harm the market with the
efficiency-loss outcomes of the business stealing effect, allowing Google Inc. to expand and
develop the market in an economically efficient manner. If Google Inc. is not permitted by the
Department oI Justice`s Antitrust Division to have the possibility to obtain monopoly proIits Ior
a fixed number of years, it may not invest as much into this emerging market. As such,
innovation in the digitized archives market will not be as great as it would be under monopoly,
resulting in significant long-term consumer welfare losses.
Society faces compounding welfare losses each day regulatory and legal restraints
constrain Google Inc.`s ability to continue with the Google Book Search Project. Technological
development and evolution is a highly efficient conveyor of consumer welfare creation and
economic efficiency. Continued holdup by the US Court system and the Department of Justice`s
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Antitrust Division leads to losses in consumer welfare and economic efficiency that are forever
lost. (Hausman, et. al 2005) With each legal and antitrust impediment Google Inc. faces, the
higher its incentive becomes to abandon the Google Search Project. As previous referenced,
Google Inc`s last publically documented accounting of its legal costs was in excess of $45.5
million. (Settlement Agreement 2008) As Google Inc. continues to accrue what could be
construed as variable costs for the Google Book Search project, it could very well come to the
rational decision of applying the shut-down rule of industrial organizational economics. If
variable costs become greater than revenue (or in this particular case, future expected revenue), it
might become the economically-optimum option for Google Inc. to indeed abandon the Google
Book Search project. While Google Inc. would lose its current investment in creating this
digitized archive of over $100 million (Hausman, et. al 2005), it enjoyed a nearly $12 billion
operating revenue windfall in 2011 to console itself. (Google Financial Statements 2011)
Needless to say, Google Inc. is more than financially healthy to absorb these losses and focus its
massive research and development apparatus on other projects of less resistance and more
potential economic viability and fruition. Society stands to lose far more than Google Inc. would
if the US courts and the Department of Justice`s Antitrust Division continue to stand in the way.
Economists are in general agreement that the goals of antitrust regulation and law should
be to promote gains in consumer welfare and economic efficiency. (Schmalenesee 1979) With
this central operating paradigm in consideration, Google Inc. should be allowed to move forward
with its Google Book Search project as defined in the Amended Settlement Agreement. Any
further review action on the behalf of the Department of Justice`s Antitrust Division is
counterintuitive at best and economically destructive at worst. The Department of Justice
threatens to bring about ruination to a project we have substantially defined in this paper as
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bearing many economic benefits to society, along with greatly increasing consumer welfare. It
must be noted in respect to equality of consideration that the Department of Justice`s Antitrust
Division raises many valid concerns from the lens of jurisprudence. However, the Department of
Justice`s concerns are woefully ignorant and inadequate in respect to what should be the
economically optimum outcome at best and are in need of reconsideration.
The Department oI Justice`s Antitrust Division recognition oI the economic beneIits oI
increasing market exposure of so-called orphan books is laudable, if fleeting in its legal filings.
The Department of Justice however does provide a significant and possibly only plausible
suggestion for resolving this case and moving forward with the Google Book Search Project in
its Statement of Interest that it filed in 2010. (Cavanaugh, et. al 2010) It suggests that the issues
raised in the application of jurisprudence regarding the Amended Settlement Agreement should
be addressed by legislative channels, and not by the mechanics of the judicial system.
(Cavanaugh, et. al 2010) For the Google Book Search Project to reach fruition, and indeed in a
forward-looking, dynamic view of overall antitrust legislation and law, Congress will need to
reconsider the various antitrust laws that the US courts use to analyze potential issues of
anticompetitive behavior. Current antitrust laws are hardly relevant or efficient in regards to the
fast-paced technological evolution that is increasingly facing the US economy. In many cases,
antitrust laws in their current draconian form are indeed significant impediments to technological
evolution. While current antitrust laws promoted economic efficiency and consumer welfare
improving behaviors at the turn of the 20
th
century, these same antitrust laws today act as
significant and impermeable barriers to economic efficiency and consumer welfare creation.
Antitrust legislation must be 'living in nature, such that it can grow and change with respects to
the times and economic needs of society at the present moment and into the foreseeable future.
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