Running Head: STRAYING FROM THE PATH 1

Straying From the Path: How OCLC Navigates its Purpose, Non-profit Rules, and Interlibrary

Lending

Claire D’Mura

Erin McCaslin Kooyman

Sola Whitehead

University of Washington

LIS 550: Assignment 3

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OCLC (Online Computer Library Center), a major nonprofit library organization, has

been sued by SkyRiver and Innovative Interfaces, two library service companies, for

anticompetitive practices and violating antitrust laws in four parts of OCLC’s business services:

bibliographic data, cataloging, interlibrary loans, and integrated library services. This legal

action raises concerns about monopolistic practices by OCLC that could affect how OCLC

continues to provide services to 72,000 libraries worldwide.

First, we examine what constitutes a nonprofit organization. Looking at this argument

from a legal perspective, we conclude that many of OCLC’s actions are within the strict

definition of nonprofit based on Ohio state law. However, looking at the federal antitrust laws,

SkyRiver and Innovative seem to have some valid allegations in their case. To support this

opinion we look at the history and necessity of interlibrary lending (ILL), and how OCLC

provides this service to its member libraries. Because ILL cannot be separated easily from other

essential library services, the lawsuit has raised concerns that OCLC is using coercive tactics,

such as punitive pricing, to get member libraries to participate.

In addition, we look at the organization of OCLC in reference to the case brought by

SkyRiver and Innovative, and examine some of its actions that to public perception do not

support its nonprofit status. We also look at how these actions are moving the nonprofit

organization farther away from its published objectives and the needs of libraries today.

To Be a Nonprofit

The ins and outs of what it means to be a nonprofit are much more complicated than it

initially sounds. Shouldn’t it mean that an organization doesn’t work to make a profit? To be a

nonprofit does not necessarily mean that an organization must not generate funding greater than

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its expenses, rather the “nonprofit” designation dictates what must be done with any profits, and

what cannot be done. Nonprofits are expected to devote any excess earnings to their nonprofit

purposes (Hopkins, 2005, p. 6). Additionally, an organization being designated a nonprofit does

not necessarily mean the organization is tax-exempt. Not all nonprofits are tax-exempt, although

most tax-exempt organizations are nonprofits. An organization may lose its tax-exempt status

and still be considered a nonprofit. The designations “nonprofit” and “tax-exempt” are typically

determined by two different legal entities: state law determines nonprofit status, whereas federal

tax law is the basis for tax-exempt status (Hopkins, 2005, p. 6).

The first step for an organization in gaining nonprofit, tax-exempt status is to form a

nonprofit corporation. The most important aspect of this process is the preparation of articles of

incorporation, which outline an organization’s primary purposes. These articles are submitted to

the state in which the organization is seeking incorporation, usually in a form that is prescribed

by that state’s law. The most crucial component of the articles of incorporation is the entity’s

purposes (O’Hare, 2005, p. 1). The purposes outlined in this document are the defining factor in

whether or not an entity qualifies for both nonprofit status and tax-exemption. After the articles

of incorporation are filed with the state, the state will return a document (usually a certificate or

charter) that recognizes the nonprofit as a legal entity and the effective date of incorporation

(O’Hare, 2005, p. 2).

In Ohio, nonprofit corporation law is determined by Ohio Revised Code 1702, which

defines a nonprofit corporation as, “domestic or foreign corporation that is formed otherwise

than for the pecuniary gain or profit of, and whose net earnings or any part of them is not

distributable to, its members, directors, officers, or other private persons, except that the payment

of reasonable compensation for services” (Ohio, 2001).

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If a nonprofit, after being formally recognized by the state in which it is incorporated,

would like to apply for tax-exemption it must go through further paperwork, namely Form 1023,

with the Internal Revenue Service. The IRS considers several categories of tax exemption, which

are designated by a code such as 501(c)(3). OCLC is a 501(c)(3) organization, as are most other

tax-exempt nonprofits, which means it is organized and operated “exclusively for broadly

defined charitable, religious, educational, scientific or literary purposes” (Hyatt, 2005, p. 11). If

recognized, the IRS will provide the organization with a letter of determination.

Nonprofit organizations are also usually exempt from state income taxes, and most states

will automatically recognize exemption from state income tax once federal exemption has been

recognized (Hyatt, 2005, p. 10). Some states, such as Ohio, have exemptions for other state and

local taxes, such as property and sales taxes. These exemptions, however, do not come

automatically, and usually have much narrower standards. It was this type of property tax

exemption that was revoked from OCLC in 1984.

As summed up by blogger Peter Murray, this case began in 1980 when OCLC applied for

property tax exemption with the Ohio Tax Commissioner under RC 5709.12 and RC 5709.121

and was denied. OCLC filed an appeal asserting that, “The commissioner erroneously held as a

matter of law and fact that there is nothing unique in the nature of Appellant OCLC’s services

that would make it an unlikely service to be engaged in by private enterprise” (Murray, 2010).

The appeal was again denied, and OCLC took the case to the Ohio Supreme Court (Murray,

2010).

The Ohio Supreme Court upheld all previous decisions on the grounds that, “OCLC is

neither a ‘public college or academy’ or a ‘public institution of learning,’ as those terms are

employed under R.C. 5709.07, nor was the property found to be used ‘exclusively for charitable

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purposes so as to entitle OCLC to an exemption under R.C. 5709.12” (OCLC v. Kinney, 1983).

The court argued against OCLC’s “vicarious charitable exemption,” and argued that the

company’s activities more closely resemble those of a publisher or database firm, not a library.

In its opinion, the court states, “OCLC essentially offers a product to charitable institutions, for a

fee exceeding its cost, and, as the board concluded, is not itself a charitable organization” (OCLC

v. Kinney, 1983).

This 1984 case shows how OCLC may walk a fine line as a nonprofit. While this case

did, in fact successfully argue that OCLC did not meet the Ohio Tax Commissioner’s criteria for

a charitable nonprofit as the law stood in 1984, OCLC has never been challenged on such in the

eyes of the Ohio Secretary of State or the IRS. However, the arguments made in these

proceedings are still compelling and worth noting.

OCLC was not long without its statutory property tax exemption, however. In 1985, the

Ohio State Legislature introduced a new section to the Ohio Revised Code that defined a narrow

qualification that would allow OCLC to retain the property tax exemption. This code, R.C.

5709.72, allows property tax exemption for library technology development, specifically a

nonprofit corporation that is “exempt from federal income taxes under the provisions of section

501(c)(3)” and “the owner’s primary purposes are conducting research and development in

library technology and providing computerized or automated services to public, charitable or

educational libraries” (Ohio, 1985). Clay Holtzman, the nonprofit business reporter at the Puget

Sound Business Journal said it is not uncommon for state government to modify laws for their

major employers, since the benefit of keeping the employer is greater than the taxes they would

earn from them (personal communication, December 3, 2010). It may be fuzzy ethics, but it isn’t

illegal.

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In the current lawsuit, SkyRiver and Innovative Interfaces make charges against OCLC’s

nonprofit status, but in reality this could be outside of the scope of this case, and serves more as a

reflection of OCLC’s character. A citizen cannot sue to revoke the nonprofit status of an

organization directly, but can file a complaint about abuse of the nonprofit to the appropriate

agency, be it state or federal. Challenges to a nonprofit's status usually go through an official

process with the IRS, in which the nonprofit organization is scrutinized through both compliance

checks and examinations (IRS 2010a). These are administered through the Exempt Organizations

(EO) function, which is part of the IRS’s Tax Exempt and Government Entities (TE/GE)

Operating Division. The “examination” process is essentially an IRS audit that looks at an

organization’s records, may also interview third parties, and has the power to modify an entity’s

exempt status based on its findings. A compliance check is less stringent and only reviews

whether an organization is adhering to record keeping and information reporting requirements or

whether an organization’s activities are consistent with its stated tax-exempt purpose. A

compliance check can be turned into an examination if the IRS agent finds closer scrutiny to be

necessary (IRS, 2008).

A nonprofit, tax-exempt organization can jeopardize its status if it, “ceases to be operated

exclusively for exempt purposes” (IRS, 2010b). Some of the activities that will get a charity in

trouble include: private inurement, excessive lobbying and operating for “the primary purpose of

conducting a trade or business that is not related to its exempt purpose” (IRS 2010b). According

to OCLC’s articles of incorporation, the company’s primary established purposes are:

...to maintain and operate a computerized library network and to promote the evolution of

library use, of libraries themselves, and of librarianship, and to provide processes and

products for the benefit of library users and libraries, including such objectives as

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increasing availability of library resources to individual library patrons and reducing the

rate of rise of library per-unit costs, all for the fundamental public purpose of furthering

ease of access to and use of the ever-expanding body of worldwide scientific, literary and

educational knowledge and information. (OCLC, 2008)

In order to show that OCLC is not living up to its legal nonprofit qualifications, a substantial

portion of their operations would have to be shown to not further these purposes. This is not to

say that a company cannot have any operations that fall outside of their primary purpose. These

activities should be kept to minimum, and an organization must pay taxes on any income

incurred as a result of these activities (Hopkins, 2005, p. 147). This is called the Unrelated

Business Income Tax, and OCLC does pay it.

Potentially more troubling to OCLC’s tax-exempt status is a developing body of law

derived from the courts called the “commerciality doctrine.” According to nonprofit lawyer and

blogger Ellis Carter, under the commerciality doctrine, one of the factors that can indicate a

commercial manner is the existence of for-profit competitors (2009). Carter states, “It is not

enough to price goods or services below the competition. To operate in a noncommercial

manner, exempt organizations must provide services at substantially below cost, preferably to

charitable recipients, and should not advertise in a commercial manner or operate in a manner

that indicates a purpose of maximizing profits” (2009).

However, some legal experts criticize the commerciality doctrine for being too ill-

defined. Historically, it grew out of “loose language in court opinions, which in turn seem to

have reflected judges’ personal views as to what the law ought to be (rather than what it is)”

(Kelley, 2004, p. 2477). Kelley explains the commerciality doctrine to his law students by

comparing it to the “bludger” from the game of quidditch in the Harry Potter books. This

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“bludger” is a hard ball that catches the players off-guard, knocking them off their broomsticks.

Kelley says the commerciality doctrine works this way, inconsistently impacting some nonprofits

and not others (2004, p. 2476). At this stage in the lawsuit, it is unclear if OCLC could be hit by

the bludger of the commerciality doctrine.

Challenges are most often brought to the IRS through outside channels, which are then

analyzed by the IRS itself. Anyone in the public may file a complaint with the IRS against an

organization using Form 13909, Tax-Exempt Organization Complaint (Referral) Form (IRS

2008). Additionally, IRS agents review an organization’s 990 forms, similar to how taxpayer’s

personal income taxes are analyzed, and may begin an examination based on the professional

analysis. The IRS also reviews media reports and receives complaints from Congress regarding

compliance, and any of these may initiate a closer look (IRS, 2010a). It is entirely possible (but

still speculation) that attention drawn to OCLC from a broadly publicized antitrust case could

result in review by the IRS.

In recent years there seems to be growing confusion over what a nonprofit is and how one

should function. Nonprofit organizations have become more savvy in business, and some would

argue necessarily so, as costs of operation have gone up, while public funding has not. According

to an article in the New York Times, an increasing number of states are revoking charities’

property tax exemptions, and organizations such as hospitals and private universities are under

fire for their large cash reserves and high profits (Strom, 2008). “The idea behind tax exemptions

is that the organizations provide a public service or substantially reduce the burdens of

government,” the article states, yet as these organizations look more and more like traditional

businesses, cash-strapped governments are wanting to regain what they see as lost revenue

(Strom, 2008).

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Allegations of Antitrust violations

When looking at antitrust litigation, the first consideration of the court is that “antitrust

laws protect competition, not individual competitors” (Steren, 2005, p. 89). The only protection

afforded to individual competitors is when the elimination of that competitor will harm

competition in the market.

Allegations of antitrust practices are analyzed by several methods in the courts. The first

and most definitive method is the per se method of analysis. If a practice, usually an

anticompetitive agreement, is found to be a per se violation of antitrust law, there is no need to

prove any actual injury to competition. Rather, the simple existence of the agreement is enough

to make it illegal (Hopkins, 2005, p. 249).

The rule of reason method of analysis is the most common, as well as the most

cumbersome. This is used when the anticompetitive action in question is not a per se violation,

and entails a full economic analysis of the practice. Initially, the burden is on the plaintiff to

demonstrate the organization’s anticompetitive actions. Once that has been met, the burden is

shifted to the defendant to counter the claims and demonstrate procompetitive conduct. After

such, the plaintiff may counter the arguments laid out by the defendant (Steren, 2005, p. 94).

A rule of reason analysis requires both definition of the relevant market affected by the

anticompetitive conduct, as well as the market power of the defendant. A “relevant market”

includes both the product or service market, and the geographic area where the product or service

is sold (Steren, 2005, p. 94). The complaint against OCLC defines three separate markets for

established monopolies: The bibliographic data market, cataloging market and interlibrary

lending market (SkyRiver v. OCLC). The complaint also defines the integrated library systems

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market as one where OCLC has an attempted monopoly. Despite how interconnected these

markets are, the court is likely to treat them independently.

After the markets are defined, the court will look at the market power of an organization.

Market power is defined as, “the ability to raise prices above the competitive level” which is

determined by analyzing the organization’s market share and comparing that with the barriers to

entry in the market (Steren, 2005, p. 94). Generally, an organization is considered to have market

power with a market share of 30 percent and a high barrier to entry (Steren, 2005, p. 94). Taking

those factors into account, the inquiry will examine the organization’s individual conduct to

determine if they have abused their market power and stifled competition.

An alternative to the rule of reason analysis is the quick look analysis. In a quick look

analysis, the practice in question is not a violation per se, but any anticompetitive effect on the

market is obvious enough as to not warrant a rule of reason analysis. The Supreme Court has

stated that the quick look is appropriate when an “observer with even a rudimentary

understanding of economics could conclude that the arrangements in question would have an

anticompetitive effect on customers and markets” (Hopkins, 2005, p. 250).

In the SkyRiver/Innovative v. OCLC lawsuit, the plaintiffs charge that OCLC is violating

multiple antitrust laws, including Sections 1 and 2 of the Sherman Act. Section 1 of the Sherman

act states, “Every contract, combination in the form of trust or otherwise, or conspiracy, in

restraint of trade or commerce among the several States, or with foreign nations, is declared to be

illegal” (Sherman Act, 2010). The terms in Section 1 have historically been read broadly and

encompass all types of concerted behavior (Steren, 2005, p. 90). The Supreme Court has written

that, “the sweeping language of Section 1 [of the Sherman Act] applies to nonprofit entities”

(Hopkins, 2005, p. 248).

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Whereas Section 1 concerns the action between two entities, Section 2 of the Sherman act

prohibits unilateral anticompetitive conduct, or monopolization, and is intended to put a stop to

abuses by an entity that results from its use of monopoly power. This section of this act states

specifically:

Every person who shall monopolize, or attempt to monopolize, or combine or conspire

with any other person or persons, to monopolize any part of the trade or commerce

among the several States, or with foreign nations, shall be deemed guilty of a felony.

(Sherman Ac, 2010)

There are numerous factors that must be in place to prove a monopoly to exist. A central

concept in this case is the idea of “monopoly power.” An entity’s monopoly power is essentially

“the ability to control prices or exclude competition” (Steren, 2005, p. 90) and is a greater degree

of the aforementioned market power. An indication of this monopoly power is an organization’s

market share. Steren (2005) offers these guidelines when determining the existence of monopoly

power: An organization that holds 70 percent or more of the market share is considered to have

monopoly power. An organization with less than 50 percent market share is not likely to be

considered to have monopoly power. An organization with market share between 50 percent and

70 percent is the most “grey” area, and where the most difficult court arguments might occur (p.

90). In its complaint, SkyRiver/Innovative Interfaces asserts, “OCLC’s share of each of these

markets for academic libraries in the United States is greater than 90 percent” (SkyRiver v.

OCLC). This claim, however, will require further concrete proof, which will be seen in later

stages of the lawsuit.

It is important to note that a monopoly isn’t inherently unlawful. In order to be an

unlawful monopoly, the entity must be proved to have both possession of monopoly power in the

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relevant market and willful acquisition or maintenance of that power (Steren, 2005, p. 91).

“Companies that achieve monopoly status by virtue of natural growth through superior product,

business acumen, or even by regulation are perfectly lawful” (Steren, 2005, p. 91). An unlawful

monopoly requires the organization to have both monopoly power and willful maintenance of

that power through the use of tactics that have no purpose but to discourage competition (Steren,

2005, p. 91). SkyRiver/Innovative Interfaces makes several claims that OCLC has been actively

maintaining its monopoly power through exclusionary agreements, punitive pricing of several

university libraries and unlawful tying arrangements. These claims will be further developed in

later stages of the lawsuit.

Interlibrary Loan

“…within librarianship no area is changing more rapidly than ILL…” (Sapp & Brunswick,

2002).

Interlibrary loan (ILL) is an integral part of library services. It cannot be easily separated

from other library services such as collection development, cost analyses, and circulation. As

libraries are required to become ever more focused on balancing budgetary concerns with

services to patrons, ILL becomes one of the services that can land on both sides of the scale: a

possible cost savings due to a decreased budget for collection development, as well increased

costs in the ILL department and the need for reliable, rapid ILL services in order to serve

patrons. The SkyRiver/Innovative Interfaces lawsuit alleges that OCLC is using the importance

of ILL to coerce libraries into using OCLC products, and is doing so by increasing the costs to

those libraries which choose not to use OCLC for their catalog to participate in OCLC ILL

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services. However, ILL is not so easily split out for most libraries, and there are many reasons

why.

ILL has a long and rich history. Indeed, Winchell (1930) traced ILL in America back as

far as 1850, when fourteen libraries, responding to a questionnaire from the Smithsonian

institution, replied that they had regulations by which books “may be lent by courtesy to persons

at a distance” (p. 41). Winchell further noted that in 1876, Samuel S. Green of the Worcester free

public library wrote to the first volume of the Library Journal

It would add greatly to the usefulness of our reference libraries if an agreement should be

made to lend books to each other for short periods of time. It happens not unfrequently

that some book is called for by a reader…which he [the librarian] finds in the catalogue

of another library, but which does not belong to his own collection. (p. 11)

Winchell (1930) additionally cited Mr. Dewey as stating in 1892 that interlibrary loans were

“now of daily occurence [sic]” (p. 12).

Queries regarding the possibility of interlibrary loan were for many years conducted by

letters sent from library to library. This could result in an extended period of time before the

material was located, let alone obtained, and might take longer than the need existed for the

patron (Winchell, 1930, p. 37). However, as new technologies developed, so too did the ability to

find and obtain materials for ILL more rapidly, as well as the need for ILL departments to keep

abreast of those changes. Indeed, Sapp and Brunswick (2002), in citing Walters, noted that “the

reality is that ILL staff are often on the ‘bleeding edge’ of technological experimentation” (p.

69). Over the course of the last 80 years, this “bleeding edge” has included development in the

manner that library catalogs are created, maintained and made available to others, submission of

ILL requests via fax, telephone, and e-mail, development of standardized ILL request forms, and

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integration of the ILL process with complementary departments throughout a library, such as

collection development and billing procedures.

One cannot explore recent literature on the topic of ILL without running into multiple

references to OCLC. In fact, Chang and Jackson (1996) noted that

the promise of a national online system that would automate many ILL functions became

reality when OCLC, the Online Computer Library Center, activated its first ILL system

in 1979. Most significantly, OCLC paved the way for electronic messaging systems in

other major utilities and engineered links between bibliographic information in its online

union catalog with the online requesting and messaging component. (p. 15)

The links between bibliographic information and ILL, often referred to as “verification” due to

the need to verify the existence and location of a title, has historically been one of the challenges

of ILL. Chang and Jackson further noted that the first OCLC ILL system, due to allowing for

verification and location of an item in a single step, expedited the process of ILL considerably, as

it was no longer necessary to search catalogs, union lists or printed indexes (p. 15). Even as

recently as 2002, Hilyer noted that “verification is a challenging and potentially frustrating

activity for ILL staff” (p. 62). One of the reasons for this frustration was the problem of “murky

citations” (p. 62) from the patron. Hilyer (2002) went on to indicate that services which transfer

full bibliographic information from database records to ILL requests, such as that offered by

OCLC’s FirstSearch could alleviate this (p. 62). Today, no less than four separate products are

available from OCLC alone for the purposes of resource sharing, and others have also created

their own ILL integrated services. Currently, OCLC’s ILLiad is often raised in the literature as a

system which integrates borrowing, lending and document delivery.

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In addition to integrating borrowing, lending and delivery, OCLC has also addressed the

issue of how to bill for ILL. Whether to bill or not, and if so how, is a decision that is at the

discretion of each individual library. OCLC’s ILL Fee Management system (IFM) is one of the

options that libraries can choose to meet this need. Sapp & Brunswick (2002) noted that use of

IFM allowed member libraries “to bill and pay through the OCLC system, with only a small

processing charge assessed. OCLC has estimated that over $10 million has been saved by

libraries through the elimination of processing costs for invoices and checks” (p. 63).

The ILL literature periodically raises debate of “access versus ownership.” Under

pressure due to rising costs of subscriptions and other materials, libraries may be inclined to

reduce the amount spent on collection development in favor of increasing ILL activity. Sapp and

Brunswick (2002) noted that this debate has been ongoing since the late 1980s (p. 64). However,

even while algorithms were determined to set a bar that would place a material or subscription

clearly in one or the other camp, concerns about the trend to move toward cancelling

subscriptions and relying on ILL continued. Indeed, it was noted that “a library based solely

upon access would become no more than an information broker, totally at the mercy of

suppliers” (Brunswick & Sapp, 2002, p. 66). Although these concerns were cited in 2002, they

do not appear to have been diminished over the course of the last eight years, as costs of all kinds

have continued to rise for libraries, particularly academic research libraries which have a need to

provide specific serial subscriptions to its researchers.

Collection development also interacts with ILL aside from the “access versus ownership”

debate. In 1999, Murphy and Rupp-Serrano noted that “the most obvious information provided

to collection development librarians by interlibrary loan and document delivery services is that

of who requests what” (p. 18). Purchases can be directed to the areas which are requesting the

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most materials. They also cited Mounir Khalil who, in 1993, urged that purchase decisions be

based on a systematic analysis of collection use and ILL statistics, which could assist in

determining collection strengths and weaknesses (p. 16).

Cost considerations can rapidly become part of the discussion around the relationship

between collection development and ILL, as the costs associated with borrowing items may be

considerably smaller than the costs of purchasing those items. Other costs around ILL include

staffing, supplies, equipment, and telecommunications (Chang & Jackson, 1996). Boucher

(1997) cited that the two budget areas most critical to ILL are personnel and operations. In the

definition of “operations,” Boucher noted that “supplies, communications, and the purchase of

such services as OCLC, RLIN and WLN constitute a large portion of the operations part of a

budget” (p. 128). As can be seen from the SkyRiver/Innovative Interfaces lawsuit, the cost of

including bibliographic records in WorldCat, to allow for other participating libraries to have

knowledge of items available for ILL, must now be considered as well, especially if a library is

considering not using OCLC for its catalog.

Because the OCLC subsystems can be so tightly integrated, it is understandable that

libraries would aim to use it to meet multiple needs, including ILL. Pederson and Gregory (1994)

described a study conducted at Iowa State University to compare ILL with commercial document

suppliers. The study required that the commercial document suppliers evaluated be accessible

over the OCLC ILL subsystem. Pederson and Gregory (1994) noted that Iowa State University

used OCLC and that “economies of scale would apply if all outgoing requests - those to libraries

as well as those to commercial suppliers - could be placed on the same utility, with no need to

change systems and/or type a manual form” (p. 264). Thus, when OCLC is not used for some

services, some of those “economies of scale” may be lost.

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The fact that OCLC’s products can be closely integrated is not, in fact, at issue in the

SkyRiver/Innovate Interfaces lawsuit. However, SkyRiver/Innovative Interfaces charge that

OCLC maintains a monopoly over ILL by virtue of the integration of OCLC’s ILL system and

the bibliographic records stored in WorldCat. Libraries which choose not to use WorldCat for

their catalogs would still need to submit records to WorldCat so that the ILL system would

continue to function smoothly. It is here that it appears that OCLC may have lost sight of its

purpose. The lawsuit states that batch loading records into WorldCat has been done in the past at

a charge of $0.23 per record. This cost may be acceptable to libraries that opt to no longer use

WorldCat for catalog purposes, but only participate in it in order to retain ILL services.

However, both Michigan State University and California State University at Long Beach were

quoted a charge of $2.85 per record for inclusion in WorldCat so that those records would be

available for ILL.

Due to the complexity of WorldCat, ILL and the other services and systems offered by

OCLC, it is not possible to determine the true cost of batch loading records into WorldCat.

However, without an explanation from OCLC explaining the reasoning behind the increased

cost, it is difficult find a justification for the twelve-fold rise in per record charges. K.G.

Schneider (2010a), in the “Free Range Librarian” blog, offered a thoughtful response by stating

Offering differential batch loading costs is a form of punishment that hurts all of us if

those libraries give up on OCLC altogether (though how much we are hurt is an

interesting question), and it also paints OCLC as the big gorilla whose response is to

simply put its competitors out of business. But there is nothing ethically wrong with

redoing a cost model to offer libraries relief and encourage participation (and further

increase the size of WorldCat).

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From the perspective of ILL, OCLC has made the process easier and faster. However, the service

will only truly serve the library community if all members can participate. Although OCLC must

be able to charge enough to maintain those critical services, the charges also must be in line the

mission of OCLC.

Organizational Structure of OCLC

OCLC has experienced immense changes since its inception as a small nonprofit

company in the early 1970s. Through it tremendous growth and restructuring, however, OCLC

has lost sight of what it did best, which is providing a collaborative service to libraries at an

affordable price.

OCLC started as a small organization headquartered in Ohio that provided a timely, cost

effective and highly demanded service of shared bibliographic data for libraries (Grant, 2010).

Today, OCLC has expanded to become a huge corporation serving over 72,000 libraries in 171

countries around the world (Young, 2010). In part, OCLC’s growth can be attributed to its

contracts with what Bailey-Hainer (2009) refers to as a network of regional service providers.

These networks “were defined as library service organizations that are independent from OCLC

and which contract with OCLC to provide services to libraries and other organizations in their

geographic region” (Bailey-Hainer, 2009, p. 625). This service network and OCLC originally

had a common goal of helping libraries, and while some of the ventures came at a financial loss

to OCLC and the network, they would use other business ventures to subsidize the losses.

The relationship and contracts between these service networks and OCLC changed

throughout the years, with less and less financial and governance support between the entities as

OCLC moved from a national company to an international one. This distribution structure no

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longer worked for OCLC and in 2008, OCLC decided to restructure their organization based in

part on two studies related to distribution channels. One study was conducted by Barney and

Arnand of Ohio State University and the other was done by R2 Consulting LLC. The R2 study

looked at distribution models of insurance companies and the Microsoft Corporation, and came

to the conclusion that OCLC needed to diversify their distribution network. OCLC altered their

relationships and contracts with these service providers. This meant these companies faced

assimilation by OCLC, consolidation or merging with each other or financial instability and

collapse (Bailey-Hainer, 2009, p. 626-628). OCLC, despite its official nonprofit status, appears

to be organizing itself more like a for-profit company. This may be due to the fact that to survive

as a strong company, nonprofit or otherwise, these are necessary actions; but taken into

consideration with other actions by OCLC, such as the purported pricing debacle, they could be

viewed as moving away from their cooperative roots.

OCLC’s Products and Services

While OCLC’s objectives have remained relatively unchanged, its actions have not

always reflected its collaborative roots or its nonprofit mission. OCLC offers an incredible

breadth of services to its member libraries, including the four brought to scrutiny in the

SkyRiver/Innovative Interfaces lawsuit: cataloging services, bibliographic data services,

interlibrary lending, and integrated library systems (Breeding, 2010). To receive services from

OCLC, libraries must become a member of the OCLC cooperative. There are a number of terms

and conditions a library must meet as outlined in OCLC’s “Membership and Governance

Protocols,” such as, “Members shall be those entities that meet the minimum but continuing

threshold of engagement with OCLC” (OCLC, 2010, p.1) and agreeing to contribute and share

STRAYING FROM THE PATH 20

intellectual content and resources with the consortium of member libraries. However, the

protocols that specify the OCLC services and products qualifying for membership status can

change annually (OCLC, 2010, p. 2). This makes it difficult for members to know if they are

meeting their contracts and whether they should be concerned about exploring more cost

efficient cataloging services based on OCLC raising the rate charged for Michigan State

University’s (MSU) to batch-load records into the OCLC WorldCat catalog. Such punitive

pricing may be effective in keeping member libraries from straying from the fold, but it hardly

supports the stated mission of the organization.

OCLC is designed as an “aggregator,” offering multiple products to member libraries

from its own productions, as well as products from companies they have acquired or with whom

they have contracts. Pricing for these packages are not published on OCLC’s website, but are

negotiated with individual libraries or a consortium of libraries based on any number of factors,

such as size and usage numbers. Some advantages to libraries in dealing with aggregators like

OCLC are not having to negotiate so many individual contracts, which is time consuming and

difficult, and the frequent use by aggregators of a user-friendly, integrated interface on which to

operate all the complex systems and databases (Boss, 2003).

OCLC’s Nonprofit Status and the Market Place

A motivation behind the SkyRiver/Innovative Interfaces lawsuit is OCLC’s new

movement into Web Scale Management Services (WMS), where OCLC will be in direct

competition with Innovative Interfaces. WMS will broaden OCLC’s collaborative sharing to

include a community of networked collections and acquisition data, which could change

collection development decisions to be made on a global level, rather than on local or consortium

STRAYING FROM THE PATH 21

levels (Collins, 2010, p.93). A response to Breeding’s article, from Bradley Watson, a professor

at Franklin University, claims that OCLC is successful in providing libraries with affordable

pricing structures due to its nonprofit status; another advantage over its for-profit competitors

(Breeding, 2010).

One difficulty in competing for market share of libraries is that there are a limited

number of customers, and given the economy and nature of libraries, it is a stagnant market.

Businesses can only hope to lure an existing consumer away from their current vendor, not

capture a new part of the market. Another difficulty facing businesses serving the library

industry is that for the last ten years, new innovations in integrated library services didn’t

advance fast enough to keep up with what libraries and their patrons expected. Andrew Pace

(2009) attributes this stagnation of innovation to a glut of companies all offering very similar

products, library loyalty to vendors and their contracts, and a large number of mergers and

acquisitions, of which OCLC played a large role (p.643).

OCLC is also showing its loss of its collaborative origins by buying and selling for-profit

companies that compete with them, directly and indirectly, to help with the expansion across the

globe. OCLC continues to operate these as for-profit companies, while allegedly backing them

with their tax-exempt assets (Grant, 2010). The lawsuit, along with the bad press from the

punitive pricing against MSU, again defeats the purported goals of OCLC of creating a

collaborative and supporting the best interests of libraries in a cost effective manner.

OCLC’s Push for a New Policy on WorldCat Records

There are definitely some actions by OCLC that call into question its motivations and

sincerity to its objectives and members. An example of these actions is in OCLC’s dealings with

STRAYING FROM THE PATH 22

Michigan State University and OCLC’s use of punitive pricing for part of its service, even

though MSU is still a member library. OCLC stated that the reason for this was that MSU was

asking “them to perform ‘data stewardship’ duties for MSU’s records” (Breeding, 2010).

Another example of not keeping their members’ interests at heart was the document OCLC

introduced in November 2008 titled “Policy for Use and Transfer of WorldCat Records.” This

policy included language in which it appeared that OCLC was trying to claim copyrights on the

bibliographic data submitted by its member libraries. In a previous case, Feist v. Rural

Telephone Service, the courts ruled that collections of data were denied copyright protection, but

OCLC appeared to be attempting to obtain this copyright through contract law (Dames, 2009.

p.16). The language OCLC used is, according to K. Matthew Dames, “standard rhetoric

companies use to indicate they are seeking ways to recoup or monetize their investment in

noncreative collections of data or facts” (Dames, 2009, p. 16). The language OCLC used would

also cede ownership of any of the copyrights from member libraries on their original

copyrightable contributions to the catalog. These are not actions of a nonprofit company nor are

these the actions of a collaborative looking to make information easier to access, as OCLC’s

objectives clearly state.

Member libraries would not sign the new contracts until the language was changed. Some

members and industry experts are still unhappy with the new language, but thought there was

enough of a change to sign their contracts with OCLC. There is still a lot of controversy over the

intent of OCLC trying to claim intellectual rights over the data entered by member libraries.

There is also worry that a policy of restricting data sharing could again hurt creativity and

innovation (McElfresh, 2009, p. 6). If OCLC is going to stick to its objectives of lower costs for

libraries and easy access of information for the public, then it needs to operate on open access

STRAYING FROM THE PATH 23

principles. LibLime CEO Joshua Ferraros, a competitor in the market, suggests that OCLC

doesn’t understand its own business model. He goes on to say, “They’re not in the business of

providing data, they’re in the business of providing services.” (Oder, 2009). Librarian and

blogger Karen Schneider repeats this exact sentiment: “I’ve said before that OCLC sometimes

acts as if it doesn’t understand the work it’s in. It’s the services, not the data.” (Schneider,

2010b). In September, 2010, Carl Grant, writer of the often cited Ex Libris blog, wrote:

It appears to me that the interests of the OCLC we know today do not appear to be in

total alignment with the needs and interests of its overall actual membership. Perhaps

they are in alignment with the interests of the Board, Council, and other governing and

administrative arms, but the feeling I get in talks with librarians is that it is not in

alignment with what they want. As I talk to librarians, across the country today, I hear

that what they want is an organization, a cooperative that is focused on developing and

providing open and collaborative library content and services that are widely accessible

by all in order that they (the librarians) can focus on re-establishing and/or maintaining

the value of libraries in our society.

Grant (2010) continues with some excellent suggestions on how OCLC could re-align

itself with its nonprofit and collaborative roots, such as “providing open interfaces that support

both open source and proprietary extensions so that the totality of solutions and services

available to the profession would deliver substantial added value to information.” Rick Mason, in

his Libology Blog (2010), suggests OCLC could split into two groups -- one nonprofit, where

libraries pay a membership fee for access to the bibliographic data and WorldCat, and the other a

for-profit component which would include many of OCLC’s products and some services, such as

ILLiad, FirstSearch, and WMS. These suggestions are good starting places for constructive

STRAYING FROM THE PATH 24

conversations as OCLC is challenged in court on its motives, both economic and moral.

Unfortunately, OCLC’s actions are causing distrust, further questions, and divisive stances in

libraries and among librarians when there needs to be unity and cooperation. OCLC continues to

provide a much needed service, but members would like to see the return of the company’s

collaborative and nonprofit nature.

Conclusion

This case is likely to be very lengthy and contentious, as there are strengths and

weaknesses on both sides, and each party is undoubtedly going to be well represented. Based on

what we have learned about antitrust law in this quarter, there does seem to be convincing

evidence against OCLC for both attempted and established monopolies. The case also does a

thorough job of highlighting OCLC’s more unsavory behaviors. However, demonstrating many

of these behaviors to be illegal rather than simply unethical may not happen in this case. The

folks at OCLC know their domain well, and undoubtedly have been very careful in practice to

not allow themselves to cross any legal lines in regards to their nonprofit status.

On the other hand, SkyRiver/Innovative Interfaces makes some strange requests in their

claims for relief, namely the request for the WorldCat database to be openly available to for-

profit competitors. It simply doesn’t make sense for OCLC to be required to freely hand over its

primary product that all member libraries helped to build (and that all member libraries fund) to

companies that have the express goal of making money. Instead, a better claim might be a

guarantee that member libraries retain all rights to the data they create and contribute to OCLC’s

database so that the individual libraries may choose to share or not share with other companies.

This solution would answer the concerns libraries have had over OCLC’s attempted control of

STRAYING FROM THE PATH 25

the data they created, as well as SkyRiver and Innovative Interfaces’ complaint that OCLC is

holding unlawful exclusionary agreements.

The sentiments echoed by the library community indicate that nobody wants the death of

OCLC, but rather look at this case as an opportunity to express some grievances with how OCLC

has been treating its members and possibly change the course. It needs to be considered that

OCLC offers products that may have some superior functions if operated in a highly integrated

manner. The ILL system serves as a strong example, and we have to ask: would ILL work as

well if it were more fragmented? Having multiple systems that may or may not be fully

interoperable could reasonably be expected to compromise some level of function. However, it

should be the job of libraries as a whole to decide what they want, and not OCLC.

STRAYING FROM THE PATH 26

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