First published in NZ Lawyer, 23 August 2013.
Regulators on both sides of the Atlantic have recently investigated
arrangements between Apple and a number of e-book publishers. The crux of the
case that the US Department of Justice (DOJ) has alleged is
anticompetitive "horizontal" agreements between competing e-book publishers,
facilitated by Apple. However, the case also brings into focus the important
distinction in competition law of agency and reseller agreements, and the
treatment of "most favoured nation" clauses (or "MFNs"). We
take a look at the background to this case and then consider these two issues in
In April 2011, the DOJ filed a civil antitrust lawsuit against HaperCollins,
Hachette, Simon & Schuster, Macmillan, Penguin (collectively the
publishers) and Apple in the US District Court for the Southern
District of New York. It was alleged the parties had conspired to end e-book
retailers' freedom to compete on the retail price of e-books by taking control
of pricing decisions and substantially increasing the prices that consumers paid
for e-books. The European Commission (EC) opened a parallel
investigation in December 2011.
The regulators' allegations turned on the change in 2010 from a wholesale
model, under which the e-book retailers (primarily Amazon) set the retail price
of e-books, to an agency model under which the publisher sets the retail price
for e-books (as principal), with the retailer selling as an agent of the
publisher. It was alleged that the publishers made the switch to the agency
model jointly, and in doing so included the same key pricing terms in their
agreements with Apple, including a retail price MFN and a 30% commission for
The retail price MFN, in favour of Apple, provided that if a publisher's
e-book was available at a lower price from another retailer, the publisher would
have to match that price for sales through Apple's iBookstore. The regulators
saw the MFN clause as a 'commitment device' in that it meant the loss in revenue
would be significant for the publishers if they did not force other retailers to
move to the agency model and prevent the prevalent practice of retail
discounting (as Apple would also sell at the discounted price). Allegedly, the
publishers simultaneously requested retailers (including Amazon) to accept the
agency agreement (or risk not having the ability to sell any of the publishers'
titles). The regulators alleged that the overall structure and pricing terms
were coordinated between the publishers and Apple as part of a global strategy
to increase retail prices of e-books, largely in response to Amazon's
discounting of e-books.
The EC closed its case in December 2012 having accepted commitments from all
parties, including Apple, though none of the parties accepted liability and
strongly denied any wrongdoing. In the US, all five publishers reached
settlement agreements with the DOJ, again maintaining they had not breached the
law. The settlement agreements in both cases required the publishers to cancel
all existing agency agreements with Apple and placed restrictions on agreements
with e-book retailers going forward. Apple continues to fight the DOJ's charges,
but has lost the first round with the District Court's judgment on 10 July 2013
determining that Apple had acted as a ringleader in a conspiracy to fix e-book
Apple is currently disputing the DOJ's requested remedy, which is extremely
wide-ranging. Perhaps most controversially, it extends beyond e-books to
prohibit Apple from "entering into agreements with suppliers of e-books, music,
movies, television shows or other content that are likely to increase the prices
at which Apple's competitor retailers may sell that content." The publishers
have also opposed the proposed remedies on Apple and Apple itself appears set to
explore various avenues of appeal of the substantive decision.
While the crux of the case is the alleged horizontal agreement between
publishers, it highlights some competition law issues that can arise in
so-called "vertical" arrangements: those between companies at different levels
of the supply chain.
First, in March 2013 (Information exchanges – the ABCs of "hub and spoke"
arrangements) we discussed one area of risk in vertical arrangements, where
a company at one level of a supply chain acts as a "hub" in coordinating the
market conduct of companies who compete with each other at a different level of
the supply chain. The e-books case highlights this risk – the allegations (and
finding at first instance) is that Apple, as a retailer, assisted in
coordinating the conduct of the upstream suppliers – the publishers.
Second, the case highlights the concern that suppliers sometimes have about
excessive discounting of their products by retailers. For example, they may have
concerns about the effect of discounting on their brand image, on other
retailers, or on the level of point of sale service that customers receive.
However, restricting retailers from discounting constitutes "resale price
maintenance" (RPM), which is generally prohibited under
competition law (in New Zealand it is prohibited outright, while US competition
law asks whether the RPM will have anticompetitive effects). Conversely, in a
true principal/agent relationship the principal is free to set the price at
which it sells via its agent (e.g. at retail) and so the RPM rules do not
Third, and far less settled, is the competition law treatment of MFN clauses.
MFN clauses are common and are pro-competitive in many instances. For example,
retailers often require "wholesale MFNs", requiring wholesalers to offer the
retailer any lower price that the wholesaler offers to any other retailer. The
retailer's (pro-competitive) aim is simply to maintain a competitive cost
position. However, anticompetitive effects are also possible in some
circumstances. As set out above, the US District Court has found the MFNs in
relation to e-books had anticompetitive consequences. Other concerns have been
raised that MFNs may prevent new entry into markets or facilitate
anticompetitive collusion (although such situations would be very
Because the horizontal aspects were at the fore, the e-books case is unlikely
to shed much light on where the danger areas lie for vertical agreements such as
MFNs, whatever the final outcome. However, if nothing else, the case has added
more fuel to the debate about the competitive effects of "vertical" restrictions
and ensured that this remains a hot topic for competition lawyers globally.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.