The European Union (EU) E-Books Settlement: A Study in Elephant Avoidance

Background

On December13, 2012, the European Commission (the Commission) issued its decision to make legally binding a number of commitments offered by Apple and four international e-book publishers (Hachette Livre, Harper Collins, Simon & Schuster, and Verlagsgruppe Georg von Holtzbrinck) in an effort to settle with the Commission an allegation of having “[…] contrived to limit retail price competition for e-books in the European Economic Area (EEA)^[1] […]” (the “Commitments Decision”).

The Commitments Decision concludes the Commission’s antitrust investigation – which closely mirrored that of the U.S. Department of Justice (the DOJ) into similar allegations involving many of the same parties – in respect of those five businesses.^[2] In line with the DOJ’s case, the Commission’s concerns related to the near-simultaneous switch in January 2010 of the e-book publishers from wholesale distribution arrangements (under which retailers set the prices paid by consumers) to an agency model (under which the publishers themselves set the prices charged by the retailers to consumers).

During its investigation, the Commission took particular objection to what it termed “unusual” retail price “most favoured nation” (MFN) clauses in the bilateral agreements entered into between Apple and each of the publishers.  These MFN clauses stipulated that if any other retailer (including retailers using distribution models rather than the agency model) offered a publisher’s e-book at a price lower than the price the publisher set for sales via Apple’s platform, the publisher would be obliged to match that price on Apple’s platform.  The Commission took the view that the MFN clauses acted as a joint “commitment device” and, in practice, had the effect of disincentivising the publishers from offering lower prices to competing retailers and forcing such other retailers to adopt the agency model, ultimately resulting in higher e-book prices for consumers.

Pursuant to the Commitments Decision:

>     the four e-book publishers and Apple have committed to terminate their agency agreements.  Apple also committed to terminate its agency agreement with Penguin;

>     the four e-book publishers committed to terminate all agency agreements in the EEA for the sale of e-books which contain: (i) a restriction on the ability of the retailer to unilaterally set the price at which it sells to consumers; and/or (ii) a retail price MFN clause;

>     for a period of two years, the four e-book publishers committed not to enter into agreements which restrict the ability of retailers to set the prices at which these sell to consumers^[3]; and

>     for a period of five years, the four e-book publishers committed not to enter into agreements which contain retail price MFN clauses.

The Commission considered that these commitments, which have been made legally binding by the Commitments Decision, will allow for an “effective competitive reset” of the EEA e-books market and thereby remedy the alleged – but unproven and hotly denied – collusive collective move by the parties to the agency model.

Enter the Elephant

In opting for the commitments route, the Commission was, however, forced to ignore the elephantine presence in the room.  By way of background, the EU competition rules^[4] include a strict, quasi per se, prohibition on suppliers mandating (minimum) prices at which distributors sell their products to consumers –  “resale price maintenance”.  However, those same rules have no application in the case of “genuine” sales agencies as “genuine” agents are deemed, for the purposes of EU competition law, to form part of the same economic entity as the supplier.  Demonstrating that the relationship between a supplier and a retailer is a genuine agency arrangement constitutes an impenetrable defense against resale price maintenance allegations.

Accordingly, if the agency agreements between Apple and the e-book publishers were in fact “genuine” agency agreements, they would not have been considered agreements between two or more undertakings for the purposes of the EU’s prohibition of resale price maintenance agreements.  This was likely a key plank of the arguments put forward by the parties under investigation in defense of their arrangements.

One of the key questions facing the Commission was, therefore, whether the agency arrangements entered into between Apple and each of the e-book publishers was a “genuine” agency agreement for the purpose of an assessment under EU competition requirements.  Doing so would not, however, have been as straightforward as that may seem because the Commission’s detailed guidance on the subject and the case law of the EU’s Court of Justice are not entirely aligned, in particular as regards the question of whether an agent can be regarded a “genuine” agent when it acts for multiple, competing suppliers.

Elephant? What Elephant?

In any event, the Commission apparently decided not to address the question, emphatically stating that theCommitmentsDecision “[…] does not take a position of the compatibility of the parties’ agency agreements with EU antitrust rules”.  In doing so, the Commission clearly considered that hard-nosed pragmatism trumped an opportunity to set a precedent clarifying the limits of the agency defense in EU competition law.  In voluntarily offering the commitments, Apple and the publishers appear to have taken a similarly pragmatic view (albeit, most probably, for other reasons).

The Commission was clearly conscious of the pitfalls of long antitrust investigations (and even longer appeals processes) in nascent, fast-moving consumer markets.  In essence, it likely concluded that quickly remedying the symptoms of potentially anti-competitive practices in the e-books market and the resulting tangible, near-term benefits for consumers was preferable to a drawn-out, comprehensive investigation and appeals process.  The value of a substantive decision on the issue risked being impaired by the fact that the market subject to the decision might have been totally different by the time any final decision would have been reached and the almost inevitable appeals had run their course.

While pragmatism of this kind may make sense in the narrow context of this investigation, it has an unfortunate negative side effect on legal certainty as regards the application of the EU antitrust rules to agency agreements.  The Commitments Decision does not provide companies operating in the EU with any guidance whatsoever on the limits of the concept of “genuine” agency agreements for the purposes of assessing the compliance of their business arrangements with EU competition law.  In the Commission’s words, “[t]he compliance of any new agency agreement, generally speaking, with Article 101 TFEU is likely to require a case-by-case assessment.  As for any other agreement of practice, the responsibility for assessing their compatibility with EU antitrust rules […]remains with the companies concerned.”  Not very helpful but apparently in the Commission’s view a lot easier than wrestling an elephant.

_{[1] The EEA comprises the 27 Member States of the European Union (EU) plus Iceland, Liechtenstein and Norway.}

_{[2] A fifth e-book publisher, Penguin, did not initially offer commitments to the Commission and is not subject to the Commitments Decision.  Technically, the Commission’s investigation is, therefore, ongoing.  However, it is understood that Penguin is currently in the process of negotiating its own commitments with the Commission.}

_{[3] Subject to certain limited exceptions (in the case of agency agreements) which are aimed at preventing retailers from pricing e-books below costs.}

_{[4] Article 101 of the Treaty on the Functioning of the European Union (TFEU).}