Introduction
Settlement
Challenge to settlement
Stay decision


Introduction

Two weeks after the Competition Bureau announced that a settlement agreement had been reached with four e-book publishers,(1) a leading Canadian e-book retailer filed an application with the Competition Tribunal challenging the agreement.(2) Kobo Inc obtained a stay of the consent agreement,(3) which was to take effect on March 20 2014, arguing that it would harm Kobo's ability to compete in the e-book market in Canada. A hearing will be held to determine whether the agreement will stand, or be amended or rescinded.

Settlement

On February 7 2014 the bureau announced that it had reached a consent agreement with four e-book publishers – Hachette Book Group Canada, HarperCollins Canada, Simon & Schuster Canada and Macmillan Canada – to resolve its concerns over conduct which the bureau alleged violated Section 90.1 of the Competition Act. Section 90.1 prohibits agreements among competitors that result in a substantial lessening of competition. The bureau argued that various clauses in the distribution agreements between the publishers and individual e-book retailers restricted retail price competition. Among other things, the consent agreement requires that the publishers remove or amend the clauses in question.

The settlement followed an 18-month investigation by the bureau. The bureau's concerns mirrored those of other enforcement agencies, notably in the United States and the European Union. Settlements were reached in the United States in 2012 and 2013, and in 2013 in the European Union. In short, the publishers had each adopted an agency distribution model that allowed them to set the end retail price for their products, with the seller serving as agent and receiving a percentage of the selling price as compensation. In the bureau's view, this arrangement restricted retail price competition; eliminating this model would allow retailers to offer discounts on e-books. In addition, the publishers included so-called 'most-favoured nation' clauses in their agreements with retailers that made the retail price of an e-book sold by one retailer dependent on the retail price of the same e-book sold by another retailer.

Challenge to settlement

The commissioner of competition can register a consent agreement with the tribunal, following which the agreement carries the same force of law as an order of the tribunal.(4) This is subject to the requirement that the consent agreement must be based on terms that could be the subject of an order of the tribunal.(5) Until 2002, the tribunal had the power to approve the terms of a proposed consent order and had exercised its discretion to reject proposed orders. After the Competition Act was amended in 2002, the tribunal lost its authority to approve proposed orders, but those directly affected by a registered consent agreement could apply to the tribunal to rescind or vary the agreement if the tribunal found that those affected had established that the terms could not be the subject of an order of the tribunal.(6)

Kobo – the leading e-book retailer in Canada – filed an application contesting the consent agreement between the commissioner and the e-book publishers. Kobo claimed that it would be directly affected by the agreement, as the publishers were required to amend their contracts with Kobo. Under the existing agency contracts, retailers such as Kobo typically receive 30% of the retail price as a commission. Kobo argued that it would bear all of the cost of the change in distribution model, as the agreement with the commissioner permitted the publishers to continue receiving 70% of the retail price, with Kobo having to absorb the loss arising from any discount it might offer from the retail price.

Kobo also argued that the agreement did not make clear that the commissioner had established all of the elements that would be needed to show that Section 90.1 was contravened. For example, neither the commissioner's press release nor the consent agreement itself made clear that there was proof of an existing or proposed agreement among the competing publishers. The materials referred to vertical (distribution) agreements between each publisher and retailers, but not between publishers. Section 90.1 requires that there be an agreement between or among competitors. Kobo also raised the point that if the agreements that were subject to enforcement proceedings and settlements outside Canada were applied in Canada (there was no evidence to suggest they did), the settlements reached with antitrust agencies in those other jurisdictions would mean that those agreements were no longer in force. Section 90.1 applies only to existing or proposed agreements.

The commissioner countered that a consent agreement need not be tied to the substance of the statutory provision in issue. Rather, there are only three basic requirements for a valid consent agreement under the Competition Tribunal Rules(7), and in this case they were met. In addition, even if there must be a connection to the provision in question, Section 90.1 grants the tribunal the power to prohibit a company or person – on consent of that company or person and the commissioner – from taking "any other action". As such, in the commissioner's view, the consent agreement was properly registered.

Stay decision

The tribunal has not issued its decision on the merits of the challenge. Rather, it granted Kobo a stay of the agreement pending the outcome of its challenge. In that regard, Kobo succeeded in meeting the three tests identified by the Canadian Supreme Court for granting a stay:

  • There is a serious issue to be tried;
  • The applicant will suffer irreparable harm if the stay is not granted; and
  • The balance of convenience favours granting the stay.(8)

The hearing on the merits has not yet been scheduled.

For further information on this topic please contact Kevin Ackhurst at Norton Rose Fulbright Canada LLP by telephone (+1 416 216 4000), fax (+1 416 216 3930) or email ([email protected]).The Norton Rose Fulbright Canada website can be accessed at www.nortonrosefulbright.com/ca.

Endnotes

(1) Competition Bureau Takes Action to Promote Competition for e-books, press release, February 7 2014.

(2) Kobo Inc v The Commissioner of Competition (CT-2014-002), notice of application.

(3) Ibid, order granting the applicant's motion for a stay.

(4) Competition Act, RSC 1985, c C-34, s 105(1).

(5) Ibid, s 105(2).

(6) Ibid, s106(2).

(7) The Competition Tribunal Rules (SOR/2008-141) require that the consent agreement set out:

  • the sections of the act under which the agreement is made;
  • the name and address of each person in respect of which the agreement is sought; and
  • the terms of the agreement.

(8) RJR-MacDonald Inc v Canada (Attorney General), [1994] 1 SCR 311 at p 334.