E-books: The Agency Question

This article first appeared in The Bookseller, November 2010

Does competition law upset the Apple cart? No prizes for guessing that the question I am currently being asked more than any other is whether the agency e-book sales model is legal. The simple answer is that an agency arrangement, where a publisher appoints an agent to sell e-books on a publisher's behalf at prices determined by the publisher, can be legal. However, the arrangement must avoid certain potential pitfalls to comply with competition laws.

First, the agency must be genuine - not a distribution arrangement dressed up as an agency. If the arrangement is truly a distribution arrangement then, notwithstanding being labelled as "agent", the reseller will be a distributor in the eyes of the law and the publisher-dictated prices would constitute "price-fixing" by the publisher which is anti-competitive and unlawful. Publishers should therefore pay close attention to EC guidance which sets out the factors that determine whether or not a reseller is a genuine agent. In a nutshell, the more responsibility, risk and cost that the reseller assumes in relation to e-book sales, the more likely it is that the reseller will be a distributor rather than an agent.

Second, even a genuine agency arrangement can be anti-competitive if its terms facilitate collusion or co-ordination resulting in resale price maintenance. Publishers must therefore be cautious when negotiating any clause that might have the direct or indirect effect of establishing a minimum resale price in the market. So-called "most-favoured nations" clauses (e.g. an agreement that the agent's resale price will be the same as or better than anyone else's) are a notorious legal quagmire and therefore need to be handled with caution.

Clearly publishers should be concerned about competition law issues. However, there are many other legal issues to consider.

First, there is pro-agent legislation in force across the EU. As the law currently stands, the UK regulations will probably not apply to agents selling e-books. However, the legislation elsewhere in Europe (e.g. France) is broader so, on termination, any agent who sells to France could claim significant compensation from the publisher (regardless of where the publisher is based). Publishers should draft agreements to limit their exposure (so far as is possible) under such legislation.

Second, under an agency relationship a publisher will have a direct contractual relationship with, and therefore direct liability to, customers. Publishers should understand the potential liabilities to the consumer and obtain appropriate obligations, warranties and indemnities from the agent against such potential liabilities.

Third, publishers should analyse the VAT treatment of the supplies they will make and be aware that the agency model may increase VAT-compliance burden.

Fourth, publishers should negotiate firmly to obtain customer data and ensure that the agent's website is structured so that data can be fairly and lawfully shared with the publisher. While there is an understandable tendency to focus on pricing and commercial issues, publishers shouldn't ignore the wider legal implications of shifting from a distribution model to an agency one.

Author:
Caroline Turner, Partner and Head of Publishing