Smaller Bookstores End Court Struggle Against Two Chains

The trade group for the nation's independent bookstores, battling competition from national chains, suffered a major defeat in court yesterday. In a surprising turnaround, the trade group settled a closely watched antitrust suit against two national chains for a payment of even less than the group's legal fees.

The organization, the American Booksellers Association, which represents about 3,000 stores, had charged that Barnes & Noble and Borders extracted illegal discounts and promotional subsidies from publishers, putting smaller chains and stores at an unfair disadvantage. The association settled the suit after a judge dismissed much of their case in a preliminary hearing.

The suit, in federal court in San Francisco, was the culmination of two decades of legal challenges to the power of the chains as the independents tried to stem their decline. The share of the book market held by the independent stores has dwindled steadily over the last 30 years as consumers turned to shopping mall chains, superstores, discount warehouses and, finally, online stores. In the last 10 years, the independents' share of the consumer book market has fallen to just 15 percent, in 2000, from 33 percent in 1991.

Many independents said they were counting on the suit to diminish the competitive edge of the chains, and the association spent heavily on legal fees in the hopes of winning damages for lost business.

The legal challenges by the independent bookstores have polarized the book business. The stores began by filing a series of lawsuits against publishers in the early 1980's, accusing them of favoring the chains. All were settled out of court, and one publisher, Penguin Putnam, agreed to pay $25 million in damages, a sum that helped finance the lawsuit against the chains.

The litigation by the independents has created a partisan atmosphere in the industry, making publishers afraid to speak openly about either chains or independents. Publishers say they have become wary about their conversations with the national chains.

Last month, the judge in the case, William H. Orrick, dismissed the association's claim for damages in a pretrial hearing.

Association executives initially talked about appealing, but after two weeks of testimony they elected to settle the case to avoid the possibility of a defeat that could leave it crippled by legal fees.

Under the settlement, each chain pays the independents $2.35 million, which chain executives said was less than their anticipated cost of finishing the trial.

The independents must destroy all documents obtained during the case and agree to forgo any further litigation against the chains for three years. Settling the case also precludes an appeal.

Avin Domnitz, chief executive of the booksellers association, said the association had incurred $18 million in legal fees so far. The association pays for almost all of its operating expenses from an endowment of $28 million, including $12.5 million from the Penguin Putnam settlement.

Acknowledging that the independents failed to win their stated goals, Mr. Domnitz said the public trial itself was a victory. He said the suit had ''brought to light'' chain store practices that put independent stores at a disadvantage, and that ''many, if not all, of those practices had already stopped.'' He declined to specify what had changed, citing the terms of the settlement.

The booksellers association plans to make the most of the trial transcript. Executives at the association said the group planned to post highlights of the trial on its Web site, including a quote from an internal memo written by a Borders executive predicting that ''in a couple of years there may only be a couple of players left who will dictate the game on their own terms.''

Reginald D. Steer, a lawyer for Borders with the San Francisco firm of Skjerven Morrill MacPherson, said the memo stemmed from one hotheaded executive boasting about the company's strength in the early 1990's.

During the trial, lawyers for the booksellers association showed that Borders and Barnes & Noble sometimes buy books at prices a few percentage points lower than independent stores or lower than publishers' publicly stated terms.

Lawyers for the chains countered that their size and in-house distribution justified the prices and noted that it was legal to encourage one publisher to match another's terms. The lawyers also showed that single stores and small chains also negotiate aggressively for the best terms they can get from publishers and sometimes win favorable deals.

In separate statements, Barnes & Noble and Borders called the settlement a ''vindication.''

In his office in New York, Leonard Riggio, chairman of Barnes & Noble, the country's largest bookstore company, celebrated with a high-five to a company spokeswoman. He described the settlement as a relief.

''Every day for 15 years, you are accused, accused, accused -- it is not a nice environment for us to work in,'' Mr. Riggio said. ''We have been indirectly maligned for so many years, and this was our first chance to face our accusers.''

Even before the settlement, some bookstore owners had grown impatient with the litigation. ''I think that they went in the wrong direction,'' said Carla Cohen, of Politics and Prose, a bookstore in Washington. She said the organization should have directed more energy toward helping its members sell books, like a much-delayed effort to merchandise books online. ''That money could have been spent more wisely,'' she said.

While the litigation has progressed, independent bookstores appear to have slowed the decline in their market share.

The booksellers association attributes the halt partly to its success at pressing publishers to offer independents more equitable terms, but others in the industry point to astute marketing and business practices as well as a rise in sales at religious bookshops.