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Retailers: You could get the chance to TEAR UP Penguin ebook contracts

EU competition commitments opened up to market testing

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Retailers could be offered the chance to terminate some agreements formed with Penguin over the sale of electronic books as part of the UK publishing company's bid to resolve European Commission concerns about the nature of those agreements.

Penguin has formed an informal agreement with the Commission over its practices in relation to the sale of ebooks (7-page /1.24MB PDF) within the European Economic Area (EEA) after the Commission said that the company may have been involved in an illegal cartel operation with Apple and several other publishers. The agreement is subject to market testing, but the Commission has said that Penguin could be legally bound to the commitments it has made if the testing phase confirms that the commitments are "suitable to address the Commission's competition concerns".

Late last year Apple and four publishers, Simon & Schuster, Harper Collins, Hachette Livre and the German owner of Macmillan, reached a settlement with the European Commission over claims that the companies had engaged anti-competitively in relation to the sale of ebooks.

The companies, among other things, have agreed not to use "agency model" agreements for the sale of ebooks within the European Economic Area. The term, in the ebooks case example, refers to Apple's role as an agent to publishers for the distribution of ebooks and the arrangements made around the resale price and commission paid as a result of those sales.

"The agency model allows more control by publishers over retail prices," the Commission said. "The Commission has concerns that this switch may have been the result of collusion between competing publishers, with the help of Apple, and may have aimed at raising retail prices of ebooks in the EEA or preventing the emergence of lower prices."

Penguin has now offered similar commitments to those previously given by Apple and the four other publishers. If they were made legally binding, Penguin would be obliged to end ebook distribution agreements it has with Apple and to offer other ebook retailers the chance to end any existing agency agreements that "restricts, limits, or impedes the ebook retailer's ability to set, alter or reduce the retail price of any ebook or to offer discounts" or where those agreements contain a "Most Favoured Nation" (MFN) clause.

Last September the Commission said that the MFN clauses protected Apple from competition and led to a situation where “to avoid lower revenues and margins for their ebooks on the iBookstore, the publishers had to pressure other major ebook retailers offering ebooks to consumers in the EEA to adopt the agency model”.

A number of other restrictions would also be placed on Penguin under the terms of the company's draft settlement with the Commission regarding the company's future practices in relation to the sale of ebooks.

"In the proposed commitments, Penguin offers to terminate existing agency agreements and refrain from adopting price MFN clauses for five years," the Commission said in a statement. "In case Penguin would enter into new agency agreements, retailers would be free to set the retail price of ebooks during a two-year period, provided the aggregate value of price discounts granted by retailers does not exceed the total annual amount of the commissions that the retailer receives from the publisher."

Penguin "strongly contests" the view previously expressed by the European Commission that it had acted in breach of EU competition rules in the ebooks market, but by offering to settle with the regulator it may escape any financial penalty the Commission could impose if it reached a final determination that the company had acted in breach of the law.

"If the market test indicates that the commitments are a satisfactory solution to the Commission's competition concerns, the Commission may adopt a decision ... to make them legally binding on Penguin," the Commission said. "Such ... [a] decision does not conclude that there is an infringement of EU antitrust rules but legally binds the companies concerned to respect the commitments offered. If a company breaks such commitments, the Commission can impose a fine of up to 10 per cent of its annual worldwide turnover, without having to find an infringement of the antitrust rules."

The Treaty on the Functioning of the European Union prohibits companies from forming agreements or engaging in concerted practices that negatively impinge on competition.

Copyright © 2013, Out-Law.com

Out-Law.com is part of international law firm Pinsent Masons.

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