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Apple and e-books publishers accused of price fixing conspiracy by US Government in lawsuit

The US Department of Justice (DOJ) has initiated legal proceedings against Apple and publishers Penguin and Macmillan alleging that the companies have violated US antitrust laws by colluding to fix the price of electronic books (e-books).13 Apr 2012

DOJ announced that three other publishers - Simon & Schuster, Harper Collins and Hachette – have agreed to resolve its concerns about their part in the allegedly anti-competitive agreements and will take action to ensure e-books are available at competitive prices, subject to a court approving proposed settlements.

The US's top legal advisor said DOJ believes the alleged collusion on prices for e-books caused consumers to pay more for publications than they would have otherwise had to.

"Beginning in the summer of 2009, we allege that executives at the highest levels of the companies included in today’s lawsuit – concerned that e-book sellers had reduced prices – worked together to eliminate competition among stores selling e-books, ultimately increasing prices for consumers," US Attorney General Eric Holder said in a statement. "As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles."  

"During regular, near-quarterly meetings, we allege that publishing company executives discussed confidential business and competitive matters – including Amazon’s e-book retailing practices – as part of a conspiracy to raise, fix, and stabilize retail prices," Holder said. 

"In addition, we allege that these publishers agreed to impose a new model which would enable them to seize pricing authority from bookstores; that they entered into agreements to pay Apple a 30 percent commission on books sold through its iBookstore; and that they promised – through contracts including most-favored-nation provisions – that no other e-book retailer would set a lower price. Our investigation even revealed that one CEO allegedly went so far as to encourage an e-book retailer to punish another publisher for not engaging in these illegal practices," he said.

Holder said DOJ had filed a lawsuit against Apple and the five publishers in a district court in New York but that Simon & Schuster, Harper Collins and Hachette had agreed to proposed settlements.

"If approved by the court, this settlement would resolve the Department’s antitrust concerns with these companies, and would require them to grant retailers – such as Amazon and Barnes & Noble – the freedom to reduce the prices of their e-book titles," the Attorney General said. "The settlement also requires the companies to terminate their anticompetitive most-favored-nation agreements with Apple and other e-books retailers."  

"In addition, the companies will be prohibited for two years from placing constraints on retailers’ ability to offer discounts to consumers. They will also be prohibited from conspiring or sharing competitively sensitive information with their competitors for five years. And each is required to implement a strong antitrust compliance program. These steps are appropriate – and essential in ensuring a competitive marketplace," he said.

In a related development 16 States in the US have filed a lawsuit in a district court in Texas alleging that Apple, Penguin, Macmillan and Simon & Schuster have acted anti-competitively by fixing e-book prices. Hachette and Harper Collins have "reached settlements" with the states over the issue and "have agreed to provide consumer restitution" to remedy the situation, according to a State of Connecticut statement.

In the EU, the European Commission has also been investigating alleged price collusion in the e-books market by Apple and the five publishers and whether the companies have breached EU competition law. The Commission has worked closely with DOJ on the issue since opening its investigation in December.

EU Competition Commissioner Joaquín Almunia said the regulator had held "fruitful" talks with the companies over the concerns it has raised.

"In the context of its antitrust investigation into the distribution of e-books, the European Commission has received proposals of possible commitments from Apple and four international publishers, Simon & Schuster, Harper Collins, Hachette Livre and [the German owners of Macmillan] Verlagsgruppe Georg von Holtzbrinck," Almunia said in a statement. "In parallel, three of these publishers - Simon & Schuster, Harper Collins and Hachette - have reached a settlement with the US Department of Justice."

"I welcome the fact that these five companies are making proposals to reach an early resolution of the case, so promptly after we opened proceedings in December 2011. We are currently engaged in fruitful discussions with them, without prejudice to the outcome of these talks.  We will assess any final proposals of commitments and we will test them with third parties in order to check whether they are sufficient to preserve competition for the benefit of consumers in this fast-growing market," the Commissioner said.

"I am happy that the very close and productive cooperation between the DOJ and the Commission has benefitted the investigations on both sides of the Atlantic," he said.

The traditional system for the distribution of printed books involves publishers selling to wholesalers or retailers who are free to resell the books at whatever price they wish.  This is in line with EU and UK competition law which requires independent resellers of goods to be able freely to set resale prices. 

However, in some EU Member States, including France and Germany, publishers are required by law to set the resale prices for new publications, primarily to prevent major retailers undercutting the price at which smaller local booksellers can sell books. The Net Book Agreement in the UK also allowed publishers to fix the resale prices of books for booksellers, but was abolished in 1997 as being anti-competitive.

The e-book market has developed differently. Apple entered into agreements with certain publishers whereby it would distribute the e-books as an agent of each publisher. In so doing, the publishers will fix the resale price of the e-books and Apple will receive a commission on each e-book sale.

In the EU the question is whether these e-book agency agreements are subject to EU competition law, as set out in Article 101 of the Treaty on the Functioning of the European Union (TFEU) or whether they fall outside of its scope. Only "agreements between undertakings” are caught by the competition rules, in particular, the prohibition on anti-competitive agreements. 

However, Commission guidelines on vertical agreements provide that a reseller will be regarded as an agent for competition law purposes if they bear no or only insignificant financial or commercial risk in relation to the sale of the books.  In that case, the principal and the agent are regarded as one and the same entity, and there is therefore no “agreement between undertakings” to be caught by the competition rules. 

A key question that the Commission will be examining is therefore whether the e-book agreements meet all the relevant conditions in order to qualify as agency agreements for the purposes of the competition rules.  If they do not, there is a risk that the agreement between Apple and the publishers on the pricing of e-books could amount to resale price maintenance in breach of EU competition law.

The European Commission is responsible for investigating agreements that restrict competition and have an effect on trade between EU Member States.  Last year the Commission conducted "unannounced inspections" at premises of major e-book publishers in the EU. At the time, it said it had "reason to believe that the companies concerned may have violated EU antitrust rules that prohibit cartels and other restrictive business practices". The Commission can use unannounced inspections as a preliminary investigative tool when it has concerns about anti-competitive behaviour.