Australia: Technology: Lessons from the ebooks case

Rulings from the EU and the US – and Germany – illuminate key aspects of antitrust law

July 2013 saw two key developments in the EU and US antitrust processes in the so-called ebooks case, under which arrangements between several book publishers and Apple, as distributor of electronic books – "ebooks" – on its iPad tablet computers and other Apple electronic devices (in competition with Amazon's rival "Kindle" ebook reader), have been found to be restrictive of competition and, therefore, illegal.

  • On July 10, a judgment of the US District Court in the Southern District of New York held that Apple's participation in the arrangements constituted an unlawful conspiracy to restrain trade in violation of Section 1 of the Sherman Act and equivalent state legislation18. The case resulted from a civil antitrust law suit brought by the US Department of Justice's Antitrust Division against Apple and the book publishers; the Department had meanwhile negotiated settlements with the five publishers, and on August 2 it proposed a set of "remedies" to address Apple's conduct that had been found illegal in the July District Court judgment19.
  • In the EU, meanwhile, the European Commission's competition proceedings against the parties under the Article 101 prohibition on anti-competitive agreements reached its conclusion on July 25 when the European Commission accepted commitments by one of the publishers to remedy its anti-competitive practices20. The other publishers and Apple had already agreed to those remedies in December 2012.

The ebooks case, pursued on both sides of the Atlantic, is clearly significant in that it represents a major antitrust intervention in a rapidly-developing and expanding consumer technology sector. It also highlights the international nature of antitrust enforcement in global markets.

But, in addition, the case is important in that it illuminates key elements of antitrust law, particularly in respect of:

  • resale price maintenance, and the extent to which "agency" arrangements allow suppliers to control their distributors' resale pricing; and
  • so-called "most favoured customer" clauses – also called "most favoured nation" or MFN clauses. Strikingly, in a completely separate case, Apple's rival Amazon has also been censured under competition law for operating MFN obligations - in a ruling by Germany's competition authority in August 2013 (see below)21.

Resale price maintenance – and the limits of "agency" to justify it

In competition and antitrust laws of most jurisdictions in the world, it is unlawful to engage in "resale price maintenance", sometimes also called "vertical price-fixing". (See also the article elsewhere in this issue, "Resale price maintenance: Crackdown in East Asia".) This is the practice under which a manufacturer of goods obliges downstream resellers of those goods (such as distributors or retailers) to resell those goods to their customers at a specified price, or not below a specified minimum price (or gives the reseller financial or other inducements for complying with a specified price).

The effect of such practices is that the final customers who buy the products from the resellers, and who choose to purchase a particular manufacturer's product, do not enjoy the benefit of price competition in respect of that product; this is sometimes described as an absence of "intra-brand" competition (i.e. of competition for products of the same brand). That generally keeps retail prices higher than they might otherwise be and, in the absence of price competition at the level of the reseller (i.e. the distributor or retailer), the spurs to efficiency at that level are muted.

For these reasons, resale price maintenance is generally unlawful, subject to exceptions for certain sectors where price competition is thought problematic (e.g. certain pharmaceutical products). There is some debate, both academically and within competition authorities and courts, as to whether resale price maintenance is always anti-competitive ("per se") or, alternatively, can in some circumstances have beneficial or pro-competitive effects.

Within these legal constraints, there are generally two ways in which manufacturers or suppliers can influence the resale price of their products:

  • By simply recommending resale prices to their retailers or distributors (rather than compelling adherence to such prices). Recommended resale prices will generally be permitted, provided that the recommendation is not underpinned or enforced by financial inducements or penalties.
  • Alternatively, the reseller can act as an agent of the manufacturer/supplier rather than as its independent distributor or retailer. In an agency context, the contractual relation is between the manufacturer/supplier as principal and the end-user, and so of course the manufacturer/supplier is entitled to determine the price at which it (as principal) sells to the end-user. In EU competition law, there are some stringent conditions as to when an arrangement between a manufacturer/supplier and its reseller is recognised as truly one of "agency" – in essence, in order to count as an "agent", the reseller must not bear the financial commercial risk of the sale to the end-user - but, once it is recognised as genuine agency, the manufacturer/supplier is entitled to control the resale price.

In the ebooks case, presumably with the "agency" point in mind, the publishers (as suppliers of the content of ebooks) and Apple (as distributor/retailer of those books via its electronic platform) agreed in 2009 to switch their distribution arrangements from an independent distributor arrangement to an agency agreement, in the US. The publishers then specified the price at which their ebooks would be resold by Apple over its electronic platform.

The motive of both the publishers and Apple appears to have been to put an end to the downward pressure on the pricing of ebooks as a result of Amazon's relatively cheap sales of e-books on its Kindle platform. The publishers had an interest in preventing this downward price pressure generally weakening the price and value of book sales, and Apple had an interest in being able to operate as a distributor/retailer of ebooks over its iPad platform profitably, and without being undercut by Kindle's cheap sales. The apparent plan was to ensure the ebook prices were relatively high over the iPad platform, and to induce ebook prices on Kindle to follow suit. This was to be achieved by a combination of an agency agreement under which the publishers could control book prices on the Apple's iPad platform, together with (as explained below) a "most favoured nation" clause benefitting Apple that would induce Amazon, in respect of books sold over its Kindle platform, to agree to enter into similar agency arrangements with the publishers.

However, the move to an agency arrangement was not sufficient to save the publishers' attempt to control the resale price over Apple's iPads, iPhones, etc from infringing both the EU prohibition on anti-competitive agreements (Article 101) and the equivalent US prohibition on agreements in restraint of trade (Section 1 of the Sherman Act). This was because the resale price maintenance had been agreed not merely bilaterally between each publisher and Apple as agent, but also through a degree of "horizontal" collusion between competitors, i.e. between the publishers.

  • The European Commission, announcing its preliminary findings before reaching a settlement, took the preliminary view that the publishers had "engaged in direct and indirect (through Apple) contacts aimed at... raising the retail prices of e-books above those of Amazon..." and that the publishers had "jointly" decided to switch from a wholesale model (where the retailer determines retail prices) to an agency model (where the publisher determines retail prices):
  • "In the preliminary assessment, the Commission took the preliminary view that to achieve such a joint switch, each of the four publishers disclosed to, and/or received information from, the other four publishers and/or Apple, regarding the four publishers' future intentions"

    as regards entering into an agency agreement with Apple and the key terms of such an agency agreement – in other words straightforward exchange of information and price collusion between competitors, which is an infringement of EU competition law whether or not the arrangement with the reseller is one of agency.23

  • The US District Court reached essentially the same conclusion. The District Court recognised that purely vertically restrictive agreements (i.e. bilateral agreements between a supplier and its downstream customer) might be allowable under the "rule of reason", but that "price-fixing agreements or agreements to divide markets that are horizontal in nature – meaning that the parties to the agreement are 'competitors at the same level of the market structure' – are per se unlawful".24 The Court went on to find that the publishers had engaged in precisely such a horizontal price-fixing agreement:
  • "There is overwhelming evidence that the Publisher Defendants joined with each other in a horizontal price-fixing conspiracy. ... Apple was a knowing and active member of that conspiracy. Apple not only willingly joined the conspiracy, but also forcefully facilitated it. ... There is little dispute that the Publisher Defendants conspired together to raise the prices of their e-books. They shared a common motivation: the elimination of the 'wretched' $9.99 retail price that Amazon, the chief distributor of their e-books chose for many of their New Releases... The Publisher Defendants simultaneously switched from a wholesale to an agency model for the distribution of their e-books."25

"Most favoured nation" clauses

The EU and US antitrust consideration of the ebooks case has also raised a concern about most favoured nation (MFN) clauses – or as they are sometimes known, more prosaically and accurately, "most favoured customer" clauses. These clauses are obligations in a supplier/customer agreement under which the supplier promises its customer to supply goods or services to that customer at a price, and on terms, at least as favourable as those which the supplier has with other customers.

At first sight, these appear to be pro-competitive, exerting a downward pressure on price: the supplier is binding itself to offer the customer the most competitive terms (including the lowest price) that it offers anyone.

Yet, depending on the economic and commercial circumstances, MFN clauses have on occasion caused concern to competition authorities. In particular:

  • They can act as a disincentive to price cutting. If a supplier knows that, by offering a discount to any third-party customer, the supplier must also offer the customer benefiting from the MFN clause a discount to ensure that the latter enjoys the most favourable price, that is a "double cost" to price cutting, and therefore could have the effect of deterring price cuts and keeping prices higher than they might otherwise be.
  • Where there is a series of parallel agreements between suppliers and customers, each of which contains an MFN clause, the cumulative effect of those clauses could be an alignment of prices, in that whenever one supplier increases the price charged to its customer, that is a signal that all the others could do so too consistently with the MFN clauses. A similar consideration arose in the context of a cumulative series of MFN clauses favouring the supplier, where pay-TV companies had agreements to buy content from Hollywood studios and offered each studio the most favourable terms (i.e. the highest prices) which they offered to any other studio; in 2004, the European Commission secured the parties' agreement to terminate this arrangement26.

Concerns about MFN clauses have now arisen in the context of the EU and US antitrust consideration of the ebooks case. As part of the strategy of boosting Apple's offering at the expense of the Amazon Kindle offering, each publisher agreed with Apple that the price at which they sold ebooks over the Apple platform would have to match (i.e. be as low as) any lower prices available for the same ebook title from other online retailers. The competition concern, both in the EU and in the US, was that this MFN clause, far from keeping prices down, would act as a disincentive to the publishers to allow Amazon to sell ebooks cheaply on Kindle, impelling them to force Amazon to enter an agency relationship with the publishers, similar to Apple's agency relationship with the publishers, so that the publishers could control the resale price of ebooks sold over Amazon's Kindle as well. It was in the interests of Apple (not wishing to be undercut by Amazon) to have this arrangement too.

  • The European Commission's preliminary view was that:
  • "The financial implications for publishers of the retail price MFN clause were such that this clause acted as a joint 'commitment device'. Each of the four publishers was in a position to force Amazon to accept a change to the agency model or otherwise face the risk of being denied access to the e-books of each of the four publishers..."27

  • The US District Court reached the same conclusion:
  • "Apple fully understood and intended that the MFN would lead the Publisher Defendants inexorably to demand that Amazon switch to an agency relationship with each of them. ... Because of the MFN, Apple concluded that it did not need to include as an explicit term in its Agreements a demand that a Publisher Defendant move all of its resellers to agency. The MFN was sufficient to force the change in model."28

A similar approach to MFN clauses was taken in August 2013 by the German competition authority, working in conjunction with the UK's Office of Fair Trading, in a case querying Amazon's practices. Amazon operated a policy for products sold over its online sales channel that restricted selling of products on the Amazon website from offering lower prices on other online sales channels. This provision, which the competition authorities called a "price parity policy", but which operated as an MFN clause, was considered to have the possibility of raising online platform fees, curtailing the entry of potential entrants (i.e. competitors of Amazon's website) and directly affecting the prices which sellers set on platforms, resulting in higher prices to consumers .29

Remedies

In attempting to address these antitrust concerns, the EU and US authorities have proposed broadly similar remedies. The European Commission has required a five-year period in which the agency agreements and the MFN clause can no longer apply, and a two-year period in which the publishers must allow retailers to discount their ebooks. In the US, the Antitrust Division of the Department of Justice announced in August 2013 that it was seeking from the court a package of remedies in broadly similar terms30; on September 5, 2013, a US District Court, ruling on the application, issued an injunction prohibiting Apple from facilitating coordination between the publishers and prohibiting the MFN clause, while requiring Apple to have an internal antitrust compliance officer and to report to an external monitor for a two-year period31.

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Footnotes

18United States v Apple Inc., Nos. 12 Civ. 2826 (DLC), 12 Civ. 3394 (DLC), 2013 WL 3454986 (S.D.N.Y. Jul. 10, 2013).
19See Press Release, U.S. Department of Justice, "Justice Department Issues Statement on the U.S. District Court Ruling that Apple Violated Antitrust Laws" (July 10, 2013), available at http://www.usdoj.gov/atr/public/press_releases/2013/299273.htm; Press Release, U.S. Department of Justice, "Department of Justice Proposes Remedy to Address Apple's Price Fixing" (August 2, 2013), available at http://www.justice.gov/opa/pr/2013/August/13-at-877.html.
20European Commission press release IP/13/746, "Antitrust: Commission accepts legally binding commitments from Penguin in e-books market", July 25, 2013.
21German Federal Cartel Office (Bundeskartellamt) press release of August 27, 2013, "Amazon announced end to price parity". See also the press release a couple of days later by the UK Office of Fair Trading, press release 60/13, "OFT welcomes Amazon's decision to end price parity policy", August 29, 2013, made following close cooperation between the OFT and the German Federal Cartel Office.
22European Commission Guidelines on Vertical Restraints (2010/C 130/01), OJ 2010 C 130/1, paragraphs 12 to 17.
23European Commission, Summary of Commission decision, Case COMP/39.847 e-books, OJ 2013 C73/17, decision of December 12, 2012, paragraphs 8 and 9.
24United States v Apple, 2013 WL 3454986, at *38 (citations omitted).
25Id. at *41.
26European Commission press release IP/04/1314, "Commission closes investigation into contracts of six Hollywood studios with European pay-TVs", October 26, 2004.
27European Commission, Summary of Commission decision (as above), paragraph 9.
28United States v Apple, 2013 WL 3454986, at *42.
29Office of Fair Trading press release 60/13, "OFT welcomes Amazon's decision to end price parity policy", August 29, 2013.
30Press Release, U.S. Department of Justice, Department of Justice Proposes Remedy to Address Apple's Price Fixing (August 2, 2013), available at http://www.justice.gov/opa/pr/2013/August/13-at-877.html.
31United States v Apple, Nos. 12 Civ. 2826 (DLC), 12 Civ. 3394 (DLC), Doc. 374, Plaintiff United States' Final Judgment and Plaintiff States' Order Entering Permanent Injunction (S.D.N.Y. Sep. 5, 2013).

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