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Apple and publishers subject of competition investigation into sale of e-books

The European Commission is investigating whether Apple helped five international publishers agree anti-competitive measues affecting the sale of electronic books (e-books) within the European Economic Area (EEA).07 Dec 2011

The EEA includes all 27 EU member states, Iceland, Norway and Liechtenstein. The Commission said it has concerned that the companies breached EU competition rules.

Publishers including Penguin, Harper Collins and Hachette Livre, may "have, possibly with the help of Apple, engaged in anti-competitive practices affecting the sale of e-books in the European Economic Area (EEA), in breach of EU antitrust rules," the Commission said. The other publishers being investigated are the German owners of Macmillan and Simon & Schuster. Consumers can read e-books on Apple's iPad devices.

"The Commission will in particular investigate whether these publishing groups and Apple have engaged in illegal agreements or practices that would have the object or the effect of restricting competition in the EU or in the EEA," the Commission said in a statement.

"The Commission is also examining the character and terms of the agency agreements entered into by the above named five publishers and retailers for the sale of e-books. The Commission has concerns, that these practices may breach EU antitrust rules that prohibit cartels and restrictive business practices," it 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 Apple 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.

The European Commission’s investigation will focus on whether these e-book agency agreements are subject to EU competition law, 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 a true 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 true agency agreements.  If they do not, there is a risk that the agreement between Apple and the publishers on the pricing of e-books will amount to resale price maintenance in breach of competition law.

Under the TFEU " agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between member states" are generally prohibited if they "have as their object or effect the prevention, restriction or distortion of competition within the internal market".

Exceptions apply if the agreements can be shown to contribute to "improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit" providing any restrictions that are imposed are "indispensable to the attainment of these objectives" and do not create the situation where competition can be eliminated "in respect of a substantial part of the products in question".

The European Commission is responsible for investigating competition-restricting agreements under the TFEU.

The Commission said it would "co-operate closely" with the UK's competition regulator, the Office of Fair Trading (OFT), during its investigation. The OFT had already made a "substantial contribution" to the investigation to-date, it said. The OFT closed its own investigation into the sale of e-books on Tuesday and said that the European Commission "is currently well placed to arrive at a comprehensive resolution of this matter and will do so as a matter of priority".

Earlier this year the Commission conducted "unannounced inspections" at premises of major e-books 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.