Distribution, Competition, and Antitrust / IP Law

The eBooks Case: A Canadian Perspective

This is a guest post authored by Steve Szentesi & Mark Katz.  Steve blogs at ipvancouverblog.com.  Thanks to the guest authors for sharing their thoughts on perspectives from Canada.

(A version of this piece was first published in Competition Policy International, Antitrust Chronicle.)

“As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles. We allege that executives at the highest levels of these companies—concerned that e-book sellers had reduced prices—worked together to eliminate competition among stores selling e-books, ultimately increasing prices for consumers.”

(Attorney General Eric Holder, April 11, 2012)

“This was competition on the merits, with Apple providing a superior reading platform on a beautiful 10 inch iPad screen, with color, multi-media, and fixed display, and access to millions of future iPad purchasers. This is classic procompetitive behavior that should be celebrated, not condemned through litigation.”

(Apple Answer, May 22, 2012)

Before Shortly after the U.S. Department of Justice (“DOJ”) filed its claim in the eBooks case earlier this year, Canadian class action plaintiffs followed suit by commencing commenced their own proceedings in the provinces of British Columbia, Ontario, and Quebec. The Competition Bureau has not, however, yet announced any investigation.

As in the United States, the Canadian actions are challenging the agency eBook distribution model adopted by Apple and five of the world’s largest book publishers, three of which have settled claims brought against them by the U.S. DOJ. Specifically, the Canadian plaintiffs allege that Apple and the defendant publishers violated Canada’s price-fixing offense under section 45 of the Competition Act (the “Act”). The publishers allegedly committed the offense by collectively agreeing to discontinue their former wholesale distribution models, under which publishers sold eBooks at wholesale prices to distributors who in turn set retail prices, for a new agency model under which publishers set prices with distributors receiving sales commissions.

The Canadian plaintiffs also allege that the publisher defendants illegally agreed not to set eBook prices below Apple’s iBookstore prices (a “most-favored-nation” provision) and plead a variety of non-statutory grounds for recovery, including certain common law torts and, in Québec, claims under the Quebec Civil Code.

As in the United States, the key substantive issue in Canada will be whether the conduct of Apple and the defendant publishers constitutes an illegal conspiracy. The case also raises some uniquely Canadian issues relating to jurisdiction and certification and the interpretation of Canada’s conspiracy offense.

Threshold Issues: Jurisdiction and Certification

Fully litigated competition civil actions are still rare in Canada, including class actions. To the extent that litigation has occurred in the class action context, most of it has revolved under the threshold issue of whether or not the class should be certified to proceed and, specifically, whether “indirect purchasers” claims are permissible.

The ability of indirect purchasers to commence price-fixing class actions in Canada is currently unsettled, with conflicting provincial appellate decisions in British Columbia, Ontario, and Québec. The issue is now scheduled to be heard by the Supreme Court of Canada in the fall of 2012.

Depending on how and when the Court decides the “indirect purchaser” issue, the publisher defendants could argue that certification in Canada should be denied on the grounds that the plaintiffs purchased their eBooks indirectly, i.e., through distributors such as Amazon and Apple rather than from the publishers themselves. The plaintiffs’ claims anticipate this argument, as they go to some effort to characterize the eBook sales as direct sales between publishers and consumers, with publishers retaining title and physical possession of the eBooks.

The Canadian plaintiffs also claim that damages are capable of being assessed on an aggregate basis calculated as the difference (i.e., overcharge) between eBook prices in the presence and absence of the alleged agreement. This approach avoids the necessity of making individual damages arguments at the certification stage and is another strategy to counter indirect purchaser related arguments by defendants.

Another defense that can be raised in Canada in the context of “foreign” cartels is that the courts lack jurisdiction over extra-territorial defendants. The Supreme Court of Canada recently pronounced on the substantive aspect of this question in a trilogy of decisions considering the ability of Canadian courts to assert substantive jurisdiction in civil claims involving foreign defendants.

The basic test is that Canadian courts can assume jurisdiction where there is a “real and substantial connection” between the matter at issue and Canada. In its trilogy of decisions, the Supreme Court of Canada clarified that, in establishing whether such a connection exists, a court should consider if: (i) the defendant is domiciled or resident in the province, (ii) the defendant carries on business in the province, (iii) the tort was committed in the province, and (iv) a contract connected with the dispute was made in the province. The Court also held that, even where substantive jurisdiction is established, the claim should proceed subject to a court’s discretion to stay the proceedings on the basis of forum non conveniens.

As a general observation, it is difficult to succeed in contesting competition cases on jurisdictional grounds unless the defendant has no business presence in Canada at all. Even then, the real issue is often that of establishing “personal” jurisdiction over the defendant rather than “substantive” jurisdiction. Given that the majority of the defendants in the eBooks case carry on business in Canada, the chances of successfully contesting certification on jurisdictional grounds appear remote.

Substantive Issues

The key issue in Canada—as in the United States—is whether the agency agreements between the publishers and Apple are illegal at all involved any illegal coordination at all.

As noted, the plaintiffs in Canada principally rely upon section 45 of the Act, which is analogous to section 1 of the U.S. Sherman Act.

Section 45 makes it a per se criminal offense for competitors (or potential competitors) to enter into agreements to: (i) fix, maintain, increase, or control the price for the supply of a product; (ii) allocate sales, territories, customers, or markets for the production or supply of a product; or (iii) fix, maintain, control, prevent, lessen, or eliminate the production or supply of a product.

In the United States, the defendants have argued vigorously that the agency agreements are the product of a series of separately negotiated bilateral agreements that did not involve any form of illegal horizontal collusion. They also dispute allegations that circumstantial evidence of meetings and information exchanges support the existence of illegal agreements. The defendants argue that the occasional meetings between publishers were only for social purposes or to discuss market trends or legitimate joint ventures, and that the similarity among the agency agreements can be explained by Apple’s desire for uniform supplier agreements.

Proof of the existence of an “agreement” will obviously be a key issue in Canada as well. In Canada, as in the United States, information exchanges between competitors are not in and of themselves illegal. However, they can form the basis for concluding that an illegal agreement was reached, circumstantial evidence being commonly relied upon for that purpose in civil proceedings under section 36 (and in criminal prosecutions as well).

Another issue that has been raised by the U.S. proceedings is whether the shift by the publishers from a wholesale to an agency model was illegal simply because the new model could adversely affect pricing for eBooks, even if there were no express agreements between the publishers (and Apple) to “fix” these prices. In other words, is an arrangement illegal if it does not literally fix prices, but has the effect of increasing prices nonetheless?

This could be an issue in Canada as well, now that liability under section 45 requires that conduct fit within defined categories, i.e., in this case, that there be an agreement to “fix, maintain, increase or control the price for the supply of [a] product”. There is no case law on point yet, but it is interesting to note the Bureau’s approach to the issue in its enforcement guidelines on section 45 (the “Collaboration Guidelines”). In the discussion of price-fixing agreements in these Guidelines, the Bureau takes the very broad view that section 45 prohibits any arrangements between competitors to fix or increase the prices paid by customers (or a component of price, such as a surcharge or credit terms). According to the Bureau, this can include agreements to “fix prices at a predetermined level, to eliminate or reduce discounts, to increase prices, to reduce the rate or amount by which prices are lowered, to eliminate or reduce promotional allowances and to eliminate or reduce price concessions or other price related advantages provided to customers.”

The Bureau also notes that price fixing can be accomplished in many ways, and need not establish an actual price for the relevant product; rather, prohibited price-fixing agreements could involve agreements between competitors to use a common price list in their negotiations with customers, to apply specific price differentials between grades of products, to apply a pricing formula or scale, or not to sell products below cost.

Of note, however, the Bureau also states that it does consider arrangements between competitors to fall under section 45 “solely on the basis that they have the effect of increasing prices charged by competitors”. For example, the Bureau would not proceed against an agreement among competitors to implement certain measures designed to protect the environment or implement a new industry standard simply because this may increase the costs of producing a product and ultimately result in an increase in price to consumers.

While the Bureau’s Collaboration Guidelines are not binding on the courts, one can see the defendants in the eBooks case potentially relying on a similar line of thinking to assert that their distribution arrangements cannot be condemned solely on the basis that an ancillary effect may be to raise prices, when these arrangements otherwise have benign or even beneficial effects.

In addition to the above, other specifically Canadian issues could arise, owing to the particular nature of the conspiracy offense in Canada, both in its current and recently repealed versions.

The current version of section 45 was enacted in March 2009 and came into force in March 2010. Importantly, the previous version of section 45 (i) did not limit the offense to horizontal agreements between competitors/potential competitors, or to the three categories of conduct specified above, and (ii) incorporated a “market effects” test that required proof (beyond a reasonable doubt) that the impugned agreement prevented or lessened competition “unduly” or resulted in an “unreasonable” enhancement in price. It is generally agreed that, by eliminating proof of market impact as a condition precedent to criminal liability, the new section 45 also arguably lowers the bar for civil recovery by private litigants under section 36.

Given the time frames involved, certain of the Canadian plaintiffs are purporting to rely on both the pre- and post-amendment versions of section 45. This could ultimately require these plaintiffs to prove that the pre-March 2010 conduct in question resulted in an “undue” lessening or prevention of competition, or an “unreasonable” enhancement of prices, in order to recover. Although the plaintiffs would not be required to meet the criminal burden of proof in this regard, given the civil nature of the proceeding, there is no doubt that having to prove market impact would significantly complicate their ability to prevail in any contested proceeding. For example, Apple and the publisher defendants would no doubt argue that the arrangements had a pro-competitive effect by facilitating Apple’s entry and accelerating innovation and increased competition and output.

While the assumption is that market impact considerations will not be relevant for civil litigation under the current version of section 45, this is not yet settled since there have not been any decided cases. For example, it is possible that a court might consider the effect of the agreements in this case, including any pro-competitive justifications, in deciding whether they qualify as per se prohibited price-fixing agreements under section 45 to begin with.

At the same time, one of the difficult issues facing plaintiffs with respect to post-amendment conduct will be how to characterize Apple as a “competitor” of the publishers, given that new section 45 only applies to agreements between competitors (or potential competitors). While there are historical precedents in Canada for parties being convicted for participating in cartels organized by upstream or downstream parties, these cases were decided under the old version of section 45, which was not limited to prohibiting anticompetitive agreements among “competitors.”

Conclusion

Although the key legal battles in the eBooks case will no doubt be fought in the United States, the litigation raises interesting issues for Canada as well. In particular, to the extent that the case actually proceeds to litigation, it could raise—and decide—important issues relating to the interpretation of the new per se conspiracy offense under the Act.

 

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About Howard Ullman

Antitrust, competition, and IP law enthusiast.

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