Apple and publishers plan to scrap 'agency model' for e-books pricing in bid to resolve EU competition concerns

Out-Law News | 21 Sep 2012 | 8:47 am | 3 min. read

Apple and four international publishers have offered to scrap their existing 'agency model' agreements in order to alleviate regulatory concerns that they colluded to fix the price of electronic books (e-books) in breach of EU competition laws.

The European Commission said that Apple, Simon & Schuster, Harper Collins, Hachette Livre and the German firm that owns Macmillan "may have breached EU antitrust rules that prohibit cartels and restrictive practices by jointly switching the sale of e-books from a wholesale model to agency contracts containing the same key terms".

The Commission said it had "particular" concerns over the existence of a 'Most Favoured Nation' clause in the contracts that affected "retail prices". Under internationally recognised trade rules established by the World Trade Organisation (WTO), traders from WTO member states are generally to be treated as equal in contractual arrangements. Most Favoured Nation (MFN) clauses generally cannot be used to favour traders established in one WTO member state over those established in other WTO member states.

The Commission said that the five firms have offered "commitments" to drop their agency model agreements in order to address concerns that they may have "engaged in an anti-competitive concerted practice affecting the sale of e-books in the European Economic Area (EEA)". The regulator has asked for views on the proposals and said that if the "market test" proves successful, it could make the commitments the companies have offered "legally binding" on them.

"The agency model allows more control by publishers over retail prices," the Commission said in a statement. "The Commission has concerns that this switch may have been the result of collusion between competing publishers, with the help of Apple, and may have aimed at raising retail prices of e-books in the EEA or preventing the emergence of lower prices."

"In the proposed commitments, the five companies offer to terminate existing agency agreements and refrain from adopting price MFN clauses for five years. In case any of the four publishers would enter into new agency agreements, retailers would be free to set the retail price of e-books during a two-year period, provided the aggregate value of price discounts granted by retailers does not exceed the total annual amount of the commissions that the retailer receives from the publisher," it added.

The Commission said (3-page / 727KB PDF) that the five companies "do not agree" with its "preliminary assessment" that their agreements may have been anti-competitive, but said that the firms had "nevertheless" offered the commitments in order to address its "concerns".

The traditional system for the distribution of printed books involves publishers selling to wholesalers or retailers who are free to resell the books at whatever price they wish.  This is in line with EU and UK competition law which requires independent resellers of goods to be able freely to set resale prices. 

However, in some EU Member States, including France and Germany, publishers are required by law to set the resale prices for new publications, primarily to prevent major retailers undercutting the price at which smaller local booksellers can sell books. The Net Book Agreement in the UK also allowed publishers to fix the resale prices of books for booksellers, but was abolished in 1997 as being anti-competitive.

The e-book market has developed differently. Apple entered into agreements with certain publishers whereby it would distribute the e-books as an agent of each publisher. In so doing, the publishers would fix the resale price of the e-books and Apple would receive a commission on each e-book sale.

In the EU the question is whether these e-book agency agreements are subject to EU competition law, as set out in Article 101 of the Treaty on the Functioning of the European Union (TFEU) or whether they fall outside of its scope. Only "agreements between undertakings” are caught by the competition rules, in particular, the prohibition on anti-competitive agreements. 

Commission guidelines on vertical agreements provide that a reseller will be regarded as an agent for competition law purposes if they bear no or only insignificant financial or commercial risk in relation to the sale of the books. In that case, the principal and the agent are regarded as one and the same entity, and there is therefore no “agreement between undertakings” to be caught by the competition rules. 

The Commission will therefore have been examining whether the e-book agreements meet all the relevant conditions in order to qualify as agency agreements for the purposes of the competition rules. The Commission appears to have preliminary determined that the agreement between Apple and the publishers on the pricing of e-books may amount to resale price maintenance in breach of EU competition law.

The European Commission is responsible for investigating agreements that restrict competition and have an effect on trade between EU Member States.