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Recent regulatory focus on price parity agreements

On 27 August, Amazon informed the German Federal Cartel Office (“FCO”) that it will no longer enforce contractual price parity obligations against sellers on its EU Marketplace[1] as from 30 August 2013. 

This was closely followed by an OFT announcement (on 29 August[2]) indicating that the UK regulator is minded to close its own investigation following similar assurances from Amazon – although the OFT emphasises that it has not reached a decision as to whether there has been an infringement of competition law.

This marks the latest development in a new chapter of stricter enforcement against price parity agreements under EU competition law.  We summarise here the background to and learning from the case, and explain briefly why both EU and US competition regulators have targeted such agreements in the past couple of years, particularly in the online sector. 

Why was Amazon under investigation?

Amazon’s general terms of business prohibited traders, who signed up to its Marketplace platform, from offering their products cheaper elsewhere – whether on competing internet platforms, such as EBay, or in their own online shops. 

The OFT launched an investigation into Amazon’s price parity policy in October 2012, following “numerous complaints”.  The OFT was concerned that Amazon’s policy could raise online platform fees, restrict new entry, and directly affect the prices that sellers set on platforms (including their own websites), resulting in higher prices to consumers.  The potential anti-competitive effects of the policy were heightened because of Amazon’s position as one of the UK’s biggest e-commerce sites.  As such, the OFT considered that the pricing on Amazon’s website could have a wide impact on the online prices offered to consumers elsewhere.

The German FCO opened its own review of Amazon’s pricing, in February 2013. The FCO surveyed 2,400 sellers who offered their products via Amazon Marketplace.  The FCO wanted to test its concern that by binding traders to price parity, Amazon had potentially breached cartel rules, in particular by hampering competition between different internet market places.  At the time of going to press, the FCO is considering whether Amazon’s commitment is sufficient; in particular, the FCO wants Amazon to drop its price parity clause permanently, to avoid any risk of repeat action.

What does the law say?

Both UK and German competition law mirror the fundamental prohibition in the EU Treaty[3] against anti-competitive agreements (Article 101).  Supplier restrictions on their resellers’ freedom to compete on price (e.g. by discounting) are usually regarded as serious restrictions on competition contrary to EU (and national) law.  So are agreements between competitors to align their pricing (cartels). 

However, recent cases also show a growing recognition of the potential anti-competitive effect of clauses that do not actually specify a fixed or minimum resale price (vertical price fixing) or involve competitors agreeing between themselves how they will price (horizontal price fixing), but which involve a vertical commitment by a supplier or reseller to link its pricing to that of its rivals.

What clauses have come under the spotlight recently?

In the past two years, European and US competition regulators have all turned their attention to the effect of a range of price parity agreements, including:

  1. price commitments ‘across-sellers’, such as price-match (or price beating) guarantees and lowest price promises, whether in an advertisement or in a contract;
     
  2. price commitments ‘across-customers’; also known as most favoured nation (“MFN”) clauses.  Under an MFN, a seller promises to treat a buyer as well as the seller treats its best (most favoured) customer.  Usually this relates to the price at which the seller supplies the goods[4]; and
     
  3. ‘across-platforms’ parity agreements, in which a seller agrees with an online marketplace (e.g. EBay, Amazon etc) that its prices on that marketplace will be no higher than the prices it offers on competing platforms. 


Examples of the increased focus on price parity agreements

Hotel online booking

Following a complaint, the OFT launched an investigation into the hotel online booking sector in September 2010. Its statement of objections (July 2012) explained its concerns about agreements between two online travel agents ("OTAs”)[5] and hotels[6], which restricted each OTA’s ability to discount the rate at which room only hotel accommodation bookings were offered to consumers. 

Whilst MFNs were not part of the OFT’s analysis in this case, the parties’ subsequent commitments nonetheless extended to MFNs to the extent that they might undermine discounting freedom.  The OFT also reserved the right to look at MFNs in future, including in other industries, recognising their potential to impede competition. 

Ebooks

In 2011, both the OFT and European Commission opened cases looking at the retail pricing of e-books. The OFT case was later closed but the European Commission investigation culminated in commitments from Apple and five major international publishers[7]

The MFN in this case provided that if any other retailer were to offer a lower price for a particular e-book, then each publisher would have to lower the retail price they offered for that e-book in Apple’s iBookstore to match it.  The context to this is significant: Apple and the publishers each wished to force Amazon to move from a wholesale model (under which retailers such as Amazon set retail prices) to an agency model (where the publisher determines retail prices for its titles).  The four publishers had expressed concerns that the retail prices being set by Amazon for e-books was at or below wholesale prices.  They wanted to raise retail prices for e-books, a goal shared by Apple.   Apple therefore agreed to enter into the agency agreement.

The European Commission concluded that the retail price MFN had the effect of a ‘commitment device’ to facilitate joint conversion to an agency model in order to avoid substantially lower revenues for the publishers. The strategy enabled publishers to limit retail price competition for e-books.  Each publisher was in a position to force Amazon to switch to an agency model or risk being denied access to the publishers’ e-books. 

Commitments entered into by the parties include:

  • the termination of all agency agreements in the EEA for the sale of e-books that (i) restrict the retailer’s ability to set the retail price or to offer price discounts or promotions; or (ii) contain a retail price MFN clause;
     
  • a promise from the publishers not to restrict the ability of retailers to set retail prices for e-books, or to offer discounts or promotions for a period of two years[8]; and
     
  • for a five year period neither the publishers nor Apple are to enter into any agreement for e-books containing a retail price MFN clause[9]

Shared analysis and discussion between regulators

In September 2012, the OFT published a report on the competitive implications of price relationship agreements, which it had commissioned from Lear[10] (the “LEAR Report”).  Lear had been tasked with reporting on the potential benefits and anti-competitive effects of these agreements, drawing on economic literature and relevant case law. 

The OFT then presented the LEAR Report at a joint public workshop held by the US Federal Trade Commission and Department of Justice, on the implications for antitrust policy and enforcement of MFN clauses[11], demonstrating the focus that regulators on both sides of the Atlantic have given to this issue recently.

Department of Justice acts against e-book MFNs

This shared thinking was further evidenced by the line taken against e-book MFNs by the US Department of Justice (“DoJ”) in the past year or so.  In April 2012, the DoJ brought proceedings against Apple and the same five publishers, similar in substance to those seen in the EU/UK.  In July 2013, the court found the parties guilty of conspiring to fix the price of e-books.  The publishers settled[12], and the DoJ then submitted a proposed remedy to court[13] to address Apple’s conduct.

On 5 September 2013, the US District Judge, Denise Cotes, filed her final judgment.  This does not give the DoJ all the remedies sought [14] but, amongst other things, does prevent Apple from:

  • enforcing existing retail price MFNs in agreements with any e-book publishers relating to the sale of e-books for 5 years – any offending agreements are to be modified or terminated;
     
  • entering into new retail price MFNs with e-book publishers, for a period of 5 years;
     
  • agreeing with any of the publisher defendants any restrictions on Apple’s retail pricing, discounting or promotions of e-books for periods of 2 to 4 years, depending on the publisher[15]; and
     
  • telling any e-book publisher about the terms or status of its negotiations with other publishers, or passing on any commercially sensitive information it learns during those negotiations.

The Court will appoint an external compliance monitor, paid for by Apple, who will ensure that Apple’s internal antitrust compliance policies are sufficient, deliver compliance training to Apple’s senior executives and other employees, and make sure that Apple abides by the relief ordered by the court.  Apple continues to deny price fixing and has reportedly said it will appeal the injunction. 

Why is there now greater concern about price parity?

These clauses are not always problematic.  In fact, price parity agreements can have benefits.  Across-seller agreements can help small players in relatively fragmented markets by enabling them to compete visibly on price.  They can also overcome concerns about price rigidity in long-term contracts.  Similarly, MFNs can encourage investment and increased output, thereby enhancing consumer choice and efficiency, by protecting buyers from unfavourable price changes.  MFNs may also address some free rider problems and, similarly, across-platform parity can help platforms protect any investments made (e.g. pre-purchase services such as reviews and advice).

However, the LEAR Report gives a good overview of how price parity might instead cause consumer harm.

  • Across-customer agreements can keep prices higher because sellers are discouraged from lowering prices (if they lower prices for one buyer, they will need to lower prices for the rest of them).   They can also reduce downstream market entry by smaller – but potentially more efficient - competitors to their existing buyer(s), as new entrants will be denied the cost advantage they might need to attract customers with lower prices and achieve a minimum efficient scale.  
     
  • Across-seller agreements can reduce shopping around by consumers, which in turn can weaken price competition.  They can lead to price discrimination in favour of those who are willing to seek out alternatives (e.g. price-match guarantees) whilst penalising those who don’t by charging them higher standard prices.  The knowledge that any price reduction will be matched quickly by a rival can also reduce sellers’ incentive to compete.   It may also be a mechanism to facilitate collusion and detect any deviation (as customers will let you know of any price drops).  Finally, across-seller price guarantees can be an effective way to discourage entrants.  Across-platform agreements can have similar effects; they can also lead to reduced competition between platforms, thereby increasing the fees paid by sellers. 

Comments

The LEAR Report emphasises that the analysis of price parity agreements is not clear-cut.  Assessing whether they benefit or harm consumers depends on analysing the market affected, the specific clause/agreement and the nature of the seller(s) offering it.  However, the view seems to be that the risks associated with across-customer agreements are generally lower than with across-seller agreements; and that overcoming concerns about across-platform parity is likely to depend on showing that (i) the benefits of any pre-purchase services outweighs the reduction in price competition and (ii) there is not a less restrictive way of achieving any benefits.  

What should you do if considering entering into a price parity restriction? Approach with caution!  Competition regulators have this issue firmly in their sights and have made clear their willingness to investigate and challenge price parity where they have concerns.  To quote the OFT in its statement on Amazon:  ‘[t]he OFT recommends that other companies operating similar policies review them carefully. Businesses concerned that they are being prevented from setting their own prices should not hesitate to contact the OFT’[16] .

For further information, please contact Rachel Iley.


[1]Amazon’s Marketplace price parity policy remains in place elsewhere, such as in the USA.

[2] The close timing of the regulators’ announcements is evidence of the close co-operation the OFT and FCO have engaged in during their parallel investigations.

[3] Treaty on the Functioning of the European Union

[4] This would also cover an MFN-plus clause, which goes further by requiring higher prices to be charged to competitors.

[5] Booking.com BV and Expedia Inc

[6] InterContinental Hotels Group plc

[7] Apple and four publishers (Simon & Schuster, Harper Collins, Hachette and Holzbrinck) had their commitments accepted in December 2012; the fifth publisher, Penguin, at first chose not to offer commitments but in July 2013 agreed substantially the same commitments to those given by the other publishers. 

[8] Publishers can only cap the total discount that any retailer can give at the amount of commission paid to that retailer over a 12 month period

[9] The full commitments can be accessed here: http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=1_39847

[10] Laboritorio di Economia Antitruct Regolamentazione published on 10 September 2012; the report can be accessed here: http://www.oft.gov.uk/shared_oft/research/OFT1438.pdf    

[11] http://www.justice.gov/atr/public/workshops/mfn/

[12] The publishers agreed to pay $164 million back to consumers who paid higher book prices because of their conspiracy with Apple.

[13] United States District Court for the Southern District of New York in the cases United States of America v Apple, Inc et al (Civil Action No 1:12-CV-2826); The State of Texas et al v Penguin Group (USA) Inc, et al (Civil Action No 1:12-CV-3394). 

[14] For example, the DoJ sought wider restrictions on Apple’s agreements with suppliers of other forms of content (e.g., music, other audio, movies, television shows, or apps) where these had an effect on pricing.  The DoJ had also wanted to deny Apple the ability to place new restrictions on e-book apps already in its store.  Instead, Apple is required to apply the same terms and conditions to the sale or distribution of an e-book app through its store as Apple applies to all other apps. Apple can, however, introduce new categories of apps and change to its terms and conditions as long as Apple does not discriminate against e-book apps.

[15] The duration depends on how long the publisher originally took to settle with the DoJ; so, Apple’s agreement with Macmillan faces the longest restriction.

[16] Cavendish Elithorn, OFT Senior Director of Goods and Consumer