Friday, July 30, 2010

SkyRiver/III v. OCLC: the lawsuit

I have now had a chance to read the legal complaint that SkyRiver/III have filed against OCLC. Marshall Breeding does a good overview of the complaint in a Library Journal piece. I'm going to focus on highlights and lowlights, what I think works and what I think doesn't. The caveat is that I do not know enough about anti-trust law to understand whether the suit is convincing on that score. So what follows is my reading of the complaint today, and I welcome corrections, other views, and any commentary.

Smoking Guns

The complaint has what I see as two smoking guns:
  • the use of differential pricing to specifically prevent OCLC members from becoming SkyRiver customers
  • the claim that OCLC paid cash "inducements" to university officials and paid for "luxury trips to expensive resorts to obtain their commitments to promote OCLC products..." (p. 21)

Both of these are extremely damaging to OCLC if they are true. The latter is possibly not illegal on OCLC's part, although it may have been illegal on the part of the officials who accepted such favors in exchange for a contract with OCLC. This, however, should come to the attention of OCLC's members, who, if this is proven to be true, will undoubtedly find this activity unacceptable for their organization.

The arguments about differential pricing are less sensational but could be equally damaging. Differential pricing is a normal practice in business, often based on concrete aspects like volume of trade or length of contract. Whether or not it is normal for a non-profit I don't know. Member libraries have accepted that each one forges a contract with OCLC which is considered confidential (although I suspect that librarians discuss with each other informally about what they pay to OCLC). SkyRiver/III claims to have proof that OCLC has used this differential pricing to punish libraries that have moved their cataloging activity from OCLC to SkyRiver. (The MSU case, as one example.) They also claim to have proof that OCLC lowered cataloging charges for some libraries that were intending to move to SkyRiver, and thus kept them as customers. (See pp. 14-19) This alone may not be illegal, but in this complaint it is described as an unfair use of OCLC's current monopoly position on cataloging services.

[Note: There appear to be more libraries that batch load their records into OCLC than ones that catalog on OCLC. In the 2008/2009 annual report, OCLC states that it has 11,810 member libraries, and 72,035 participating libraries. (I'm not sure of the difference.) In that same time frame, "the number of items cataloged by batch loading increased to 241.8 million, up from 212.1 the previous year...." They also state (p.2) that the total of cataloged records plus batch loaded records was 278.3, meaning that batch loading accounted for 87% of the records added to OCLC that fiscal year.]

Solid Arguments

The complaint has a number of solid arguments about OCLC's behavior that may be significant should this go to court. Briefly, these are:

OCLC does not act like a non-profit or a cooperative. Throughout the document the complaint uses terms like "purported member-based cooperative" when referring to OCLC. In particular, it says:
"Plaintiffs are informed and believe and based thereon allege that OCLC is not a true cooperative in that its members do not share its revenues or control its management, operations or policies. A majority of its Board of Trustees is elected by the Board itself. ... Rather than operating with transparency as a cooperative would be expected to do, OCLC charges different prices to its members for the same services and conceals those differences from its members." p. 5

The complaint also speaks to OCLC's revenue:
"An insignificant percentage of OCLC's revenues come from membership, grants or charitable contributions." (p. 26)
This is followed by a table of revenues, expenses and corporate equity (in 9-digit figures).

It isn't clear to me that this is a convincing argument. Non-profits are not required to obtain their revenue through contributions, and there are probably many non-profits that receive considerable income from services. Perhaps OCLC's "mix" of revenues is off the normal curve? That's data that would be interesting to see. However, the degree of competitive behavior against for-profit companies does seem to belie the nonprofit status of the organization.

OCLC competes directly with for-profit companies. This argument is for a large part about OCLC's entry into the ILS market with its web-based services, but also relates to its inter-library loan (ILL) services, which compete with III's ILL. The main thrust, though, is that OCLC has announced that it will go into direct competition with the primary services of commercial vendors who serve the library market with library systems. The argument is that as a non-profit OCLC has an unfair advantage because it does not pay the federal taxes that are required of its for-profit competitors. Repeatedly the complaint refers to OCLC's "tax-free profits." (see p. 2, 9, 21)

OCLC is a monopoly, and is taking advantage of its monopoly position. I believe that the unfair use of a monopoly position is essential to the anti-trust aspect of this lawsuit. I also believe that this is a point that is hard to prove. To begin with, there is nothing illegal about having a monopoly position in a market if one has acquired that position with normal dealing. And some of the accusations in the complaint may not be anything other than regular business practices, such as providing some services for free (WorldCat Local quickstart, as an example) as a way to induce customers to buy into for-fee services, or to reward customers for their loyalty. The use of pricing to make it financially untenable for its own customers to contract for non-OCLC services is probably the most damaging argument in this area.

OCLC has used its position to avoid the public procurement process. As we know, most public institutions have to go through a cumbersome process in order to procure goods and services. This process is designed to make sure that public money is spent fairly and under controlled conditions that are designed to minimize corruption. The complaint claims that OCLC has obtained contracts for WorldCat Local with public institutions without going through that procurement process. (p. 20)

Trustees are also members. There is a claim of conflict of interest in the fact that high-level employees of OCLC member institutions also sit on OCLC's board. What isn't mentioned here, oddly enough, is that some of those members draw salaries from OCLC (in addition to the salaries received from their institutions -- see any recent IRS 990 form from OCLC, which lists salaried officers). The conflict of interest is that these same individuals may have decision-making roles in their institution for the purchase of library vendor services. "By agreeing to advance the interests and products of OCLC they are effectively excluding competitors." (p. 27) This may be an issue for OCLC, but it seems that it should also be an issue for the institutions that employ these folks.

Coming next: Some odd claims, and some misses


Jonathan Rochkind said...

The 'non-profit thing is getting a lot of attention, but I'm unsure what importance it actually has in the legal suit.

I don't think non-profits (of any variety) have any exemptions or relaxations of anti-trust enforcement. Anyone know any reason to think otherwise?

Thanks for your analysis/reporting on this stuff, Karen.

Jonathan Rochkind said...

But when you do get to the non-profit/cooperative aspect (which I don't think matters for unfair competition), here's an interesting thing -- they complain that OCLC doesn't act like a cooperative, and complain that trustees are representatives of member institutions -- that's the one way in which OCLC surely DOES act like a cooperative, that's the ordinary way cooperatives work.

The way many lawsuits work though, is the plaintiff throws a whole lot of stuff into the complaint, knowing that some of it won't stick.

Karen Coyle said...

Jonathan, we really need someone with legal expertise to weigh in on many of these issues. Unfortunately, I don't know of anyone who would be inclined to do so.

The nonprofit issue is an interesting one. Just out of curiosity I pulled down the IRS reports from some obvious nonprofits (ACLU, Planned Parenthood, Internet Archive) just to see how their makeup and financials compared to OCLC. The numbers themselves are interesting, although I do not know what they mean. OCLC is HUGE as a non-profit, earning way more than, say, the ACLU (about 3 times more). Its officers are compensated quite a bit more than the other nonprofits (OCLC CEO: $1.3 million; ACLU CEO: <$400K), but not out of proportion to its size. Also, in none of the other nonprofits that I looked at were the board of directors members given any compensation. OCLC's trustees earn between $30K-$60K.

I don't know what is and what isn't normal for a nonprofit, but OCLC seems to be in a fairly rare category in terms of income source (almost entirely services, almost no donations) and size. It's therefore hard to analyze what affect its nonprofit-ness has on the library market, because it would be hard to find a comparable situation in another community to compare it to.

Anonymous said...

I think many people have a too-narrow understanding of what non-profits are allowed to do, and what latitude they have in pricing and products.

For example, credit unions are not-for-profit organizations. Some of the nonprofit-based complaints against OCLC are reminiscent of the complaints the banking lobby makes against credit unions. I don't think they will have much traction.

On the other hand, it seems like determining whether or not some form of product tying or barrier to entry is being practiced is of some legal interest in this case.

Karen Coyle said...


I do think that you are right about a narrow view of nonprofits. Also, there are different kinds of nonprofits, of which the 501(c)3 is only one kind (and there are categories within that, as well).

Jonathan's question about nonprofits and anti-trust is a good one, and I don't know who might have the answer to that one.