Two weeks after the Competition Bureau (the bureau) announced a settlement agreement was reached with four e-book publishers,1 a leading Canadian e-book retailer filed an application with the Competition Tribunal to challenge the agreement.2 Kobo Inc. obtained a stay of the consent agreement,3 which was to go into effect on 20 March 2014, arguing that it would harm its ability to compete in the e-book market in Canada. A hearing will be held to determine whether the agreement will stand, be amended, or rescinded.

The Settlement

On 7 February 2014, the bureau announced that it had reached a consent agreement with four e-book publishers, Hachette Book Group Canada, HarperCollins Canada, Simon & Schuster Canada, and Macmillan Canada, to resolve its concerns over conduct the bureau alleged violated section 90.1 of the Competition Act. That provision prohibits agreements among competitors that result in a substantial lessening of competition. The bureau argued that various clauses in the distribution agreements between the publishers and individual e-book retailers had the effect of restricting retail price competition. The consent agreement will, among other things, require that the publishers remove or amend the clauses in question.

The settlement followed an 18-month investigation by the bureau. The bureau’s concerns mirrored those of other enforcement agencies, notably in the United States and the EU. Settlements were reached in the US in 2012 and 2013, and in the EU in 2013. These were discussed in detail in our October 2013 issue.4 In short, the publishers had each adopted an agency distribution model that allowed them to set the end retail price for their products, with the seller serving as agent and receiving a percentage of the selling price as compensation. In the bureau’s view, this arrangement had the effect of restricting retail price competition, and eliminating this model will allow retailers to offer discounts on e-books. In addition, the publishers included so-called “most-favoured nations” clauses in their agreements with retailers that had the effect of making the retail price of an e-book sold by one retailer dependent on the retail price of the same e-book sold by another retailer.

The Challenge to the Settlement

The commissioner of competition can register a consent agreement with the tribunal, following which the agreement carries the same force of law as an order of the tribunal5 assuming that the consent agreement is based on terms that could be the subject of an order of the tribunal.6 Until 2002, the tribunal had the power to approve the terms of a proposed consent order, and the tribunal had exercised its discretion in the past to reject proposed orders. After the Competition Act was amended in 2002, the tribunal lost its authority to approve proposed orders, but persons directly affected by a registered consent agreement could apply to the tribunal to rescind or vary the agreement if the tribunal found that the person established that the terms could not be the subject of an order of the tribunal.7

Kobo, the leading e-book retailer in Canada, filed an application to contest the consent agreement among the commissioner and the e-book publishers. Kobo claimed that it would be directly affected by the agreement, as the publishers were required to amend their contracts with Kobo. Under the existing agency contracts, retailers such as Kobo typically receive 30 per cent of the retail price as a commission. Kobo argued that it would bear all of the cost of the change in distribution model, as the agreement with the commissioner permits the publishers to continue to receive 70 per cent of the retail price, with Kobo having to absorb the loss of any discount it offered from the retail price.

Kobo also argued that the agreement does not make clear that the commissioner has established all of the elements that would be needed to show that section 90.1 of the act was contravened. For example, neither the commissioner’s press release nor the consent agreement itself make clear that there was proof of an existing or proposed agreement among the competing publishers. The materials refer to vertical (distribution) agreements between each publisher and retailers, but not between publishers. Section 90.1 of the act requires that there be an agreement between or among competitors. Kobo also raises the point that if the agreements that were subject to enforcement proceedings and settlements outside of Canada applied in Canada (and there was no evidence to suggest they did), the settlements reached with antitrust agencies in those other jurisdictions means those agreements are no longer in force. Section 90.1 of the act only applies to existing or potential agreements.

The commissioner countered that a consent agreement need not be tied to the substance of the statutory provision in issue. Rather, there are only three basic requirements for a valid consent agreement under the Competition Tribunal Rules,8 and in this case they are met. In addition, even if there must be a connection to the provision in question, section 90.1 grants the tribunal the power to prohibit a person, on consent of that person and the commissioner, from taking “any other action”. As such, in the commissioner’s view, the consent agreement was properly registered.

The Stay Decision

The tribunal has not issued its decision on the merits of the challenge. Rather, it granted Kobo a stay of the agreement pending the outcome of its challenge. In that regard, Kobo succeeded in meeting the three tests identified by the Supreme Court of Canada for the granting of a stay: (i) there is a serious issue to be tried; (ii) the applicant will suffer irreparable harm if the stay is not granted; and (iii) the balance of convenience favours granting the stay.9

The hearing on the merits has not yet been scheduled.