E-book investigation settlement subject to publisher actions, Commissioner says

Joaquin Almunia said the European Commission was collaborating with the US competition regulators in assessing the 'agency model' that publishers used to set the retail price of e-books in 2010, according to the Reuters news agency. Details of the specific concerns that the Commission has raised are unknown.  However, the US and EU competition authorities are also understood to be investigating whether there was, in effect, an anti-competitive agreement or understanding between the publishers, facilitated by Apple, that they would all move to the agency model for e-books on the same terms and at the same time.   It is this aspect that is likely to be of greater concern as regards the consequences of breaching competition law.

In December, the Commission announced that it had launched an investigation into whether  five international publishers including Penguin, Harper Collins and Hachette Livre, "possibly with the help of Apple, entered into anti-competitive practices affecting the sale of e-books in the European Economic Area (EEA), in breach of EU antitrust rules".

The other publishers being investigated are the German owners of Macmillan and Simon & Schuster. Consumers can read e-books on electronic devices including Apple's iPad devices.

"The Commission will in particular investigate whether these publishing groups and Apple have engaged in illegal agreements or practices that would have the object or the effect of restricting competition in the EU or in the EEA," the Commission said in a statement at the time.

"The Commission is also examining the character and terms of the agency agreements entered into by the above named five publishers and retailers for the sale of e-books. The Commission has concerns, that these practices may breach EU antitrust rules that prohibit cartels and restrictive business practices," it said.

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 Apple would distribute the e-books as an agent of each publisher. In so doing, the publishers fix the resale prices of the e-books and Apple receives a commission on each e-book sale.

The European Commission is responsible for investigating anti-competition  agreements under the Treaty on the Functioning of the European Union (TFEU).

Only "agreements between undertakings” are caught by the competition rules, in particular, the prohibition on anti-competitive agreements.  However, Commission guidelines on vertical agreements provide that a reseller will be regarded as a true 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. 

A key question that the Commission will be examining is therefore whether the e-book agreements meet all the relevant conditions in order to qualify as true agency agreements.  If they do not, there is a risk that the agreement between Apple and the publishers on the pricing of e-books will amount to resale price maintenance in breach of competition law.

Under the EU competition rules, "agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between member states" are generally prohibited if they "have as their object or effect the prevention, restriction or distortion of competition within the internal market".

Exemptions apply if agreements can be shown to contribute to "improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit" providing any restrictions that are imposed are "indispensable to the attainment of these objectives" and do not create the situation where competition can be eliminated "in respect of a substantial part of the products in question".