United States: Two Things You Need To Know About The Apple/E-Books Case

There has been plenty of press coverage of the Justice Department's antitrust victory against Apple in the e-books case. The case is on appeal but regardless of how the appeal ends, there are two important take-aways from the District Court decision:

  1. Agency agreements are not dead. The court held that the defendant publishers all adopted agency agreements with Apple at the same time and then forced agency agreements on Amazon—the largest retailer of e-books—in order to raise retail prices collectively, but the court was careful to point out that agency agreements themselves are not inherently illegal. Agency agreements (under which the agent earns a commission for distributing the goods but does not take title to them) can be especially attractive for intangible products such as digital publications, because many of the obstacles that historically have discouraged agency—e.g., retained risk of loss, cost of insurance, UCC filings, monitoring, etc.—simply do not exist. Under an agency model, the principal is able to set the retail price, but so long as that price is not being set or raised pursuant to an agreement among competitors, the Apple decision does not weaken the legality of these arrangements.
  2. Most-Favored-Nations Clauses are not dead. The court held that the "Most-Favored-Nations" (MFN) clauses in the publishers' contracts with Apple provided the means to force the publishers to require Amazon to switch to agency agreements and charge the same higher retail prices as Apple, but again the court was quick to add that MFN clauses themselves are neither improper nor illegal. At the same time, it is important to understand that what the parties and the court termed a Most-Favored-Nations clause (or, alternatively, a "price parity provision" or "Retail Price MFN") really was markedly different from what MFN clauses usually are understood to be.

Ordinarily, an MFN clause appears in a sales agreement, binds either the seller or the buyer, and provides either (a) "I promise to sell to you at the lowest price that I charge any customer," or (b) "I promise to buy from you at the highest price that I pay any supplier." In contrast, the MFN clauses that the publishers entered into with Apple were part of agency agreements, not sales agreements. The publishers were not selling to Apple, although initially they were still selling to Amazon, which resold e-books to consumers at prices that Amazon set. Consequently, each publisher's "MFN" agreement with Apple essentially provided, "I promise to sell to consumers through Apple's electronic bookstore, which is acting as my agent, at the lowest retail price that any of my customers (e.g., Amazon) charges consumers." This meant that if Amazon resold e-books to consumers for less than the retail price at which the publishers were planning to sell through the Apple bookstore (which is exactly what Amazon was doing), Apple, as the publisher's agent, automatically could reduce the retail price at the Apple store to the same amount in order to remain competitive and continue to earn commissions. Since the publishers were not eager for their prices to drop, the court found that they forced Amazon to switch to the agency model too and, as the publishers' agent, begin charging the same higher prices as Apple.

In short, there was nothing typical about the Apple case. Because the MFN was unique, and was found to be part of a price-fixing conspiracy among the publishers, the court's condemnation should not be expected to apply to ordinary MFN clauses. (In the final order, the clause was termed a "Retail Price MFN," narrowly defined as an agreement under which the retail price depends upon the retail price at which another seller sells to consumers.) Although the Justice Department has been hostile toward MFNs for years, and has attacked them in the health care industry, such clauses repeatedly have been upheld by courts in a variety of contexts. They must be approached with caution but they are not defunct.

The remaining lessons taught by the Apple decision should be familiar: Do not collude with your competitors to raise prices or boycott a common supplier or customer; do not write emails that can be misinterpreted as evidence of conspiracy; and do not engage in telephone conversations with one of your competitor's executives unless you are planning a charity event or happen to be married to one another.

The bottom line is that if an agency agreement or ordinary MFN clause is needed to serve a legitimate purpose, it should be safe to adopt it notwithstanding the Apple decision.

Originally published in Antitrust & Competition Review - Spring 2014

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