Apple is currently being prosecuted by the US Department of Justice for anticompetitive practices in relation to claims of price fixing in the eBook market. The Department alleges that Apple convinced five major US publishers to use an “agency” pricing model which had a prohibited anti-competitive effect.
Notwithstanding that ostensibly an “agent” has no control over prices, the case stands as a warning to Australian distributors to ensure that their distribution agreements comply with Australian competition law. Suppliers that make use of “agency” type agreements which may be perceived to avoid the operation of the resale price maintenance provisions of the Competition and Consumer Act 2010 may still be at risk of engaging in anti-competitive conduct, particularly if the parties to the agreement are (or would be) competitors.
The case against Apple arises from an antitrust action brought last year by the US Department of Justice alleging that five of the country’s largest book publishers conspired with Apple to drive up the price of electronic books. Prior to Apple entering the eBook market in 2010, electronic books were priced under the wholesale pricing model, whereby retailers bought books at wholesale prices and then sold them at retail prices for a profit. In 2009, retailer Amazon. com used this model to price best-selling and newly released books at $US9.99 per eBook, which was substantially lower than the price for the hardcover version.
The Department alleges that when Apple entered the eBook market, it did not want to compete with Amazon’s low prices so it convinced the major publishers to adopt the “agency” model. The publishers agreed that instead of selling books to retailers and letting them set the price, they would convert the retailers into “agents” who were restricted from lowering the publisher-set retail price, and provide them with a commission from the sale of each book. This arrangement with the publishers guaranteed Apple a 30% commission on each eBook it sold. The publishers then used the agreements they struck with Apple to renegotiate with Amazon.com and they threatened to withhold new releases to Amazon.com unless it adopted the agency model.
It is alleged that under this arrangement, consumers paid hundreds of millions of dollars more for eBooks than they would have under the wholesale pricing model. The five publishing companies – HarperCollins, Hachette, Simon & Schuster, Penguin Group and Holtzbrinck Publishers have reached settlements with the US government that required them to lift the restrictions that they had imposed on retailers and terminate their 2010 agreements with Apple. However, Apple denies any culpability.
While the proceedings continue in the US, they stand as a warning to Australian distributors who use “agency” agreements to supply their goods and services. These arrangements are generally structured so that the ownership of the goods or services does not pass from the supplier to the re-supplier and the supplier sets the price that the goods or services are to be sold. It is a commonly held view that these types of arrangements are generally not prohibited by the resale price maintenance provisions of the Competition and Consumer Act 2010 (the Act). However, these arrangements could be considered to be absolutely prohibited anti-competitive arrangements if the parties are or would be competitors.
Price fixing occurs when competitors reach an understanding that fixes, controls or maintains prices. A prohibited arrangement occurs when competitors (or would be competitors) make written, informal or verbal agreements or understandings on prices for selling goods or services. It is a criminal offence for businesses (and individuals) to participate in a price fixing agreement.
Australian distributors should be aware that there are still competition law risks associated with agency, or consignment type distribution arrangements that control prices. Distributors that make use of these agreements should ensure that their arrangements are enforceable and that their conduct does not constitute prohibited anti-competitive conduct. It is also worth noting that recent PPSA legislation may now treat consignment arrangement a “security” that needs to be registered in order to be enforceable. It may be prudent to review these arrangements for compliance with current law.