Lessons from the April 2012 “e-books” cases in Europe and the US

Two announcements in mid-April 2012, from the European Commission and the US Department of Justice, have shed light on the extent to which a supplier may agree with its distributors or agents the prices at which they resell its products to consumers.

The cases involve “e-books” – that is, books which are readable on electronic devices such as Apple’s iPad or Amazon’s Kindle. On 11 April 2012, the US Department of Justice announced that it is suing two major book publishers, and Apple as an e-book retailer, for practices violating US antitrust (competition) laws, and that it proposes to reach a settlement with three other book publishers on the basis that they have abandoned the allegedly illegal practices. On the same day, the European Commission announced that it has reached a settlement with Apple and four publishers that they will abandon certain anti-competitive practices, and on that basis the European Commission ended a competition investigation which it had begun in March 2011. (The UK’s Office of Fair Trading had also investigated the issue, but had allowed the European Commission to take over the investigation.)

The alleged practice appears to be that – whereas previously book publishers had sold their e-books wholesale to e-book retailers such as Apple and Amazon, who acted as independent distributors and were free to set their own resale prices – the publishers instead reached agency agreements with Apple. Under these agency agreements, Apple acted as “agent” for the publishers, the publishers set the price at which the e-books were sold via the “agent” to consumers, and the publishers paid Apple an agency commission. There are also allegations that the publishers agreed this strategy among themselves, and in addition that there was an agreement to put pressure on Amazon to agree to similar agency arrangements.

For the book publishers, such an arrangement would have offered the prospect of keeping prices, and therefore their margins, up; for Apple it would have offered the prospect of protection from retail competition (eg, from Amazon).

The practical legal points here include:

  • For a supplier to agree resale prices with distributors of its products – “resale price maintenance” – is strictly illegal under EU competition law and is (mostly) illegal under US antitrust laws.
  • Under EU law, there is a defence of “agency”; where the distributor is genuinely an “agent” of a supplier, an agreement between the supplier and that agent is not caught by EU competition law (or the national competition laws in EU Member States). The concept of an “agent” is defined in the European Commission’s 2010 Guidelines on Vertical Restraints and, in essence, involves all risk of the sale lying with the supplier rather than with the agent/ distributor.
  • The European Commission’s action against the e-books agency arrangements clearly shows the limits of the “agency” defence. In particular, it appears (from the Department of Justice’s claims against the parties) that:
    • The arrangement was not just a “vertical” supplier/distributor agreement, but also involved “horizontal” collusion between the competing book publishers.
    • It is alleged that the arrangements were buttressed by a “most favoured customer” provision under which the publishers promised Apple that they would offer no better terms to rival e-book retailers (eg, Amazon). This has allegedly reduced retail competition further.
  • Where the effects of an arrangement goes beyond Europe, for example affecting sales in the US, a defence in EU law will not be sufficient; parties will also need to consider compliance with the competition laws of the US and other non-European jurisdictions.