Irish Competition Authority Decisions

1. Gill and Macmillan Ltd (Gill and Macmillan), notified their terms and conditions for selling books to Irish bookshops on 30 September 1992. The notification requested a certificate, or in the event of a refusal by the Authority to grant a certificate, a licence. The Authority issued a Statement of Objections to Gill and Macmillan on 22 June 1994. On 7 July 1994 solicitors representing Gill and Macmillan wrote to the Authority stating that Gill and Macmillan were deleting clause 16 from their standard terms and conditions. An Oral Hearing was not requested. The Authority published notice of its intention to issue a certificate in respect of the amended agreement on 16 September 1994 and invited submissions from interested parties. No submissions were received.

2. The notification concerns Gill and Macmillan's terms and conditions for selling books to bookshops within the State. As well as publishing books within the State, Gill and Macmillan also distributes other publishers' books to bookshops. The terms and conditions apply also to those books since the other publishers have entered into agreements with Gill and Macmillan whereby it invoices booksellers on their behalf. In the notification form the arrangements were described as ´Standard Terms and Conditions of Sale'.

3. Gill and Macmillan is an Irish based firm which is engaged inter alia in the publication of books including general, academic, professional and educational books for secondary and tertiary students. It is associated through the Macmillan publishers group, which owns 49.9% of the issued share capital, with publishers throughout the world. It is, according to the notification, one of the largest Irish book publishers. Gill and Macmillan also distributes books produced by a number of other Irish publishers including Attic Press, O'Brien Press, Brandon Book Publishers, Town House & Country House, Irish Academic Press, Four Courts Press, Round Hall Press, Lilliput Press and Wolfhound Press. These distribution agreements are the subject of separate notifications to the Authority. They provide, however, that Gill and Macmillan will invoice booksellers for books produced by the named publishers. The other parties involved are booksellers located throughout the State.

4. The products concerned in the notification are books, specifically those books produced by Gill and Macmillan and by those publishers whose books it distributes throughout the State. To some degree each individual book title may be considered an individual product. Some consumers are interested in particular types of books, e.g. thrillers, while others may have a preference for a particular author. A DIY title is not a close substitute for a romantic novel. Nevertheless there is scope for a considerable degree of substitutability between book titles. It is possible, however, to distinguish between schoolbooks and other types of books as these categories cannot be considered to be close substitutes for one another. The arrangements concern books published by a number of Irish based publishers. The principal market involved is that for the sale of books, other than schoolbooks, throughout the State.

5. According to the parties, total book sales within the State amounted to 81m. They estimated that Irish published books accounted for 33.1m or approximately 41% of this total. They pointed out, however, that Irish books accounted for 90% of the market for educational books but only 18% of the general book market. According to figures supplied by the parties, Gill and Macmillan accounted for 13.2% of sales of Irish published books while the combined sales of those publishers whose books it distributes accounted for a further 4.1%. They also pointed out that UK published books accounted for the overwhelming majority of non-Irish published books sold within the State. The parties indicated that there were approximately 75 Irish book publishers, some of which were extremely small. They also indicated that 700 new titles were published in Ireland in 1991 and that over 6,500 Irish published titles were currently in print. The parties claimed that the structure and characteristics of the Irish market for books were essentially the same as those prevailing in the UK in 1962 when the UK Restrictive Practices Court considered the issue of resale price maintenance (RPM) for books.

6. A more detailed analysis of the book market is provided in the Authority's decision in respect of the Net Book Agreement. [1] The main features are summarised here. In that decision the Authority noted that a study of the Irish book market estimated that the total value of retail sales of books in 1985 was 56m, of which 16m (28.6%) was spent on schoolbooks. [2] It estimated that Irish publishers supplied 85% of the domestic market for schoolbooks and 12% of that for all other publications. This implies that imported books accounted for 88% of the non-schoolbook market or 67% of all books purchased in Ireland. Imports of books from Great Britain and Northern Ireland accounted for 79% of book imports in 1991. In its decision on the Net Book Agreement, the EC Commission stated that books imported from the UK accounted for slightly more than 50% of total book sales in Ireland. [3]

7. According to the 1988 Census of Services, there were 370 retail outlets involved in the sale of books and stationery with 1659 persons engaged. Total turnover of bookshops in 1988 was 79m according to the Census, of which Dublin outlets accounted for 35.7m (45.4%). [4] The number of bookshops had increased by 130 since the 1977 census. Of the 370 outlets, 111 are located in Dublin with the rest of Leinster accounting for an additional 102. This compares with the 1977 figure of 72 and 41 respectively. The province of Munster had 115 outlets in 1988 compared with 84 in 1977. Of the 1988 total 37 were located in Cork, 17 in Limerick and 8 in Waterford. Connacht had 31 bookshops compared to 25 in 1977. The Ulster counties of Donegal, Monaghan and Cavan had a combined total of 11 outlets which represented a decrease on the 1977 figure of 18.

No.of Outlets Gross Turnover (m)

1988 1977 1988 1977

% % % %

Leinster 213 (57.6) 113 (47.1) 52.3 (66.5) 12.1 (66.5)

Munster 115 (31.1) 84 (35.0) 22.2 (28.2) 2.2 (28.9)

Connacht 31 ( 8.4) 25 (10.4) 3.0 ( 3.7) 0.5 ( 2.6)

Ulster 11 ( 3.0) 18 ( 7.5) 1.2 ( 1.5) 0.3 ( 2.0)

State 370 (100) 240(100) 78.6 (100) 18.1(100)

Dublin 111 (30.0) 72 (30.0) 35.7 (45.4) 10.8 (59.6)

Cork 37 (10.0) 24 (10.0) 10.5 (13.4) 2.4 (13.4)

Limerick 17 ( 4.6) 9 ( 3.8) 4.1 ( 5.2) 1.0 ( 5.3)

Waterford 8 ( 2.2) 7 ( 2.9) 2.2 ( 1.7) 0.4 ( 2.3)

Galway 10 ( 2.7) * 1.3 ( 2.8) *

Total 183 (49.5) 112 (46.7) 51.6(65.6) 14.6 (80.6)

* Figures not available

Source: Census of Services (CSO) 1988 and 1977

8. Table 2 shows that the average size of retail bookshops in 1988 was almost 900 square feet. Overall average size in 1988 was 8% higher than in 1977. There were considerable regional variations. The average size of bookshops was 1300 square feet in Dublin compared with 700 square feet outside of Dublin. The average bookshop in Connacht and Ulster was less than half the size of the average Dublin shop, while the average Munster bookshop was only 60% as large. It is clear, however, that the average size of bookshops outside of Dublin increased over the 1977-88 period.

1988 1977

(Sq-Ft)

Leinster 1013 1048

Munster 788 776

Connacht 539 360

Ulster 645 300

Dublin 1304 1369

Rest of Ireland 716 592

State 892 825

Source: Census of Services (CSO) 1988 and 1977.

9. The notified arrangements consist of the Standard Terms and Conditions of Sale under which Gill and Macmillan supplies books to booksellers throughout the State. The books supplied include those published by Gill and Macmillan itself and those which it distributes on behalf of other publishers. Each publisher is identified on the standard invoice on which the terms and conditions are also printed by means of a code letter. The other publishers have agreed with Gill and Macmillan that it should invoice booksellers in respect of their books. The conditions of sale set out the terms and conditions upon which books are supplied to booksellers and make provision inter alia for payment dates, delivery and return of overstocks. Gill and Macmillan indicated that the conditions represent its trading agreements with all of its Irish customers in respect of both its own books and those of its clients. Clause 16 involved a restriction on the price at which booksellers may sell the books. Specifically it stated that:

´16. Retail Selling Price.

Books supplied by the seller are supplied on condition that they are to be offered for sale and sold at retail level in Ireland at not less than the unit price indicated on the invoice by the Seller without the Seller's specific consent. If the Buyer is purchasing for reasons other than direct retail sale, the Buyer undertakes to incorporate in its terms of sale a similar clause including this undertaking. School books and remainders are excluded from this condition.'

10. Gill and Macmillan argued that the only provision in the agreement which might restrict the parties' freedom to take independent commercial decisions was clause 16. They claimed that the object of the clause was to provide book sellers with the surety that the value of their stock holdings would not be diminished by discounting through other outlets which might not provide the same range of extensive stock or of service. It was claimed that booksellers were thereby encouraged to stock a wide range of titles so that a wide range of books was available to the public. It was also claimed that RPM assured Gill and Macmillan of a fixed market for their products thereby placing them in a better position to publish more and more diverse titles. It was also claimed that the RPM provision together with some of the clauses in the distribution agreements was designed for Gill and Macmillan to protect its investment. The notification referred to the decision of the UK Restrictive Practices Court in respect of the Net Book Agreement in 1962 in support of their request for a certificate. They also cited the European Court of First Instance decision in the case of the NBA, arguing that it was significant that the Court only dealt with the inter-state trade aspect of the issues. It was also argued that, in the Dutch books case and others, RPM for books was deemed to be anti-competitive on the grounds of its effect on inter-state trade.

11. In support of their request for a licence it was argued that the cross-subsidisation made possible by the RPM system contributed to the improvement of production and distribution. It was claimed that RPM allowed publishers, as a result of profits realised on their more successful titles, to accept the responsibility and risk of publishing less profitable works. Without this it was claimed some of the smaller publishers would be forced out of business while Gill and Macmillan would be forced to reduce the number of titles published. A reduction in the price of successful titles would result in an increase in the price of all other works. It was therefore claimed that the arrangements ensured a wider range of titles at a lower cost. It was also argued that the alteration of the arrangements would possibly drive some publishers out of business and that the maintenance of employment was a pro-competitive objective. It was argued that RPM was indispensable as the only means of ensuring optimal distribution and production in the book trade. It was claimed that the abrogation of RPM would impose an immense administrative burden on publishers ´if they had to draw up their own standard conditions of sale, setting out the resale condition, and then give notice of each of them to each book seller.'

12. On 22 June 1994 the Authority issued a Statement of Objections to Gill and Macmillan indicating its intention to refuse their request for a certificate or licence because of clause 16 which provided for RPM. They were given 28 days to respond and offered the opportunity of an Oral Hearing. On 7 July 1994 solicitors representing Gill and Macmillan wrote to the Authority stating that, having considered the Statement of Objections and the Authority's decision in respect of the Net Book Agreement, Gill and Macmillan had decided to delete clause 16 from their standard terms and conditions. They indicated that Gill and Macmillan would inform the publishers for whom they distributed books as well as all of their customers that clause 16 should be dropped with immediate effect. They subsequently forwarded copies of letters sent to the publishers and to booksellers informing them of this decision.

13. Section 4(1) of the Competition Act states that ´all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void.'

14. Section 3(1) of the Competition Act defines an undertaking as ´a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.' Gill and Macmillan is a corporate body engaged for gain in the publishing of books and is an undertaking. The booksellers involved are corporate bodies and/or sole traders engaged in the retailing of books for gain and are therefore undertakings within the meaning of the Act. The notified terms and conditions set out the basis on which Gill and Macmillan supplies books to the retailers and upon which they agree to purchase said books from Gill and Macmillan. It therefore constitutes an agreement between undertakings. The notified agreement relates to books published by Gill and Macmillan and a number of other publishers.

15. Clause 16 of the terms and conditions provided that books supplied to booksellers by Gill and Macmillan could not be resold for less than the unit price specified on the invoice without their permission. Such a provision amounted to full scale RPM. The Authority has set out its views in respect of RPM in the case of books in its decision on the NBA.

Resale Price Maintenance.

16. RPM describes a practice whereby a supplier agrees to supply retailers on condition that they sell the goods at a price specified by the supplier. Such arrangements restrict the ability of retailers to determine their own prices. They also eliminate price competition between retailers for the suppliers' products, assuming that the supplier applies such arrangements to all retailers handling his products.

17. There is some disagreement among economists as to whether or not RPM is an undesirable practice. Over the past 25 years or so, the so-called ´Chicago school' economists have challenged traditional economic thinking concerning most forms of vertical restrictions [5] including RPM. Essentially their argument is that manufacturers will not impose vertical restraints such as RPM unless they increase output and hence profits. Specifically it is argued that RPM causes the retailer to devote greater efforts to selling the manufacturer's goods through promotional efforts and/or increased service, in the form of information about the product, instruction in its use, the holding of larger stocks and the like. It is argued that retailers would not provide such services in the absence of RPM since consumers would avail of such free services and then purchase the goods in question from lower cost outlets which would effectively ´free ride' on the services provided by others. According to the Chicago approach consumers benefit from increased service levels resulting from RPM and sales are increased resulting in greater output of the goods in question. Consequently RPM should not be seen as anti-competitive, but as a mechanism for increasing distribution efficiency to the benefit of consumers, retailers and suppliers.

18. The Chicago approach is, however, strongly challenged by other economists. Scherer and Ross, [6] for example, argue that relatively few products are susceptible to the ´free riding' which RPM is supposed to prevent. Many consumers know what they want and do not need pre-sales service. Similarly consumers will only go to lower priced outlets, having availed of the free pre sales service provided in the more expensive outlet, in the case of goods which are expensive, and where the cost saving is significant. They also argue that it is not clear why RPM is necessary to cause retailers to provide a greater level of service anyway. Thus in response to the Chicago claim that without RPM discount retailers would ´free ride', many would argue that a lot of products are not susceptible to free riding and that free rider arguments can only apply in respect of pre-sale services.

19. Scherer and Ross argue that RPM may inhibit competition in a number of ways. It can inhibit the entry of discount outlets and thus prevent retailing innovations. Manufacturers who have relied on RPM in order to encourage product promotion by retailers and increase sales may be unwilling to dispense with such arrangements long after the need to promote new products has ended. Where many manufacturers engage in RPM it may be difficult for one to end the practice since retailers may simply cease stocking the firm's products. They conclude that, on balance, the evidence suggests RPM is likely to restrict competition and result in prices being higher and output lower than would otherwise be the case.

20. While economic theory suggests that there may be circumstances in which RPM may increase overall economic welfare, most goods and services do not appear to satisfy the necessary conditions for such a result. In addition other methods are available to induce greater efforts by retailers to sell the manufacturers' products. On balance therefore economic arguments indicate that RPM is generally harmful and restricts competition.

21. RPM has been prohibited under the competition laws of most developed countries. Legislation which permitted RPM was repealed in the United States in 1976 and the Supreme Court has regarded RPM as a per se violation of the antitrust rules. [7] Legislation prohibiting RPM was enacted in Canada in 1951, in France in 1953 and in the UK in 1964. The UK Competition Act is generally neutral with respect to most forms of anti-competitive behaviour, in that it only prohibits practices which are shown to be against the public interest, and there is no presumption one way or the other as to whether practices are against the public interest. RPM, however, is specifically prohibited by statute. While the latter legislation allows for exemption, there have only been four requests for such exemption, and in only two instances, one involving the Net Book Agreement, has such an exemption been granted (see also para 32).

22. The Authority considers that the weight of evidence indicates that RPM is generally restrictive of competition. Consequently, in its view, agreements involving RPM will generally offend against section 4(1).

23. Individual RPM refers to a situation in which an individual supplier sets resale prices for his products. Collective RPM relates to a situation where a number of suppliers agree to set resale prices for their products. The present arrangements involve a mixture of individual and collective RPM. Clause 16 of the notified arrangements is quite specific in providing that booksellers may not sell the books supplied by Gill and Macmillan at less than the unit price specified on the invoice without their consent. As already stated this constitutes, in the Authority's opinion a system of RPM which applies to books published by Gill and Macmillan and those of other Irish publishers distributed by them. Such a restriction eliminates price competition between retailers in respect of every book title supplied to booksellers by Gill and Macmillan on the basis of the notified terms and conditions. To the extent that each individual book title constitutes a unique product, price competition at the retail level is therefore eliminated. The Authority believes that to some degree certain books are substitutes for one another. While some consumers will wish to buy a particular book by a particular author, others are looking for a particular type of book, whether a thriller or one on gardening, and will therefore choose from among the range of titles available in that particular category. As the arrangements apply to books published by a number of Irish publishers, price competition between retailers in respect of different titles is also restricted. It is true that not all books of a particular type retail at a uniform price, but to the extent that books covered by the arrangements could be regarded as substitutes the possibility of retailers offering discounts on such books is eliminated and so competition is restricted between different titles. It is also relevant that under the terms of the NBA a system of RPM also applied to the vast majority of books imported from the UK. The combined effect of both arrangements is the elimination of price competition between retailers in the case of the vast majority of books on sale within the State.

24. Price fixing agreements have been consistently regarded as in breach of Article 85(1) of the Treaty of Rome. Bellamy and Child point out that:

´Since price is the main instrument of competition, Article 85(1)(a) expressly prohibits agreements, which "directly or indirectly fix purchase or selling prices or any other trading conditions." An agreement to fix prices by its very nature constitutes a restriction on competition within the meaning of Article 85(1) [8] .'

25. The agreement as pointed out restricted price competition between retailers in respect of the books to which it applied. The agreement also distorted competition between publishers. As a book could not be sold below the price designated on the invoice, the publishers of rival titles can set their prices in the knowledge that it would not be sold below the price specified in the invoice. Consequently the agreement reduces the element of uncertainty regarding a competitor's response to a firm's marketing strategy which is an essential feature of competitive markets. Allen and Curwen, for example, argued that:

´In general, given the existence of the NBA, we would expect publishers to price similar products as though they were operating a cartel. The fact that they can fix the level of a specific title at any level they wish is very far from what is meant by "conditions of free competition". In conditions of free competition there would be constant downward pressure upon prices in order to clear the market, so that over time prices, on average, would rise more slowly than elsewhere in the economy where free competition did not exist [9] .'

26. While the Authority does not consider that the notified arrangements necessarily amount to a fully fledged horizontal price fixing arrangement, it nevertheless believes that it doesgo some considerable way towards reducing uncertainty regarding competitors' pricing decisions in the publishing industry and that such uncertainty is normally an essential part of the competitive process. As the arrangements apply to a significant range of Irish publishers, in the Authority's opinion, price competition between retailers and between publishers is restricted and/or distorted in respect of a significant part of the book market within the State. The notified agreement therefore has the object and effect of restricting competition in the market for books within the State.

27. The Authority's view that RPM restricts competition is in accord with that of the EC Commission which stated in the case of the Net Book Agreement:´Thus, the agreements and rules have facilitated and contributed to the maintenance or introduction of fixed book prices by a large number of publishers and continue to do so [10] .'

The Commission found that the arrangements had the object and effect of restricting competition within the EC. This view was subsequently upheld by the Court of First Instance following an appeal by the PA.

28. In VBVB/VBBB v EC Commission the Court of Justice upheld an EC Commission decision that an agreement between two associations of publishers and booksellers, one based in Holland and the other in Belgium, that books could not be sold in Belgium or the Netherlands at prices below those fixed by the Dutch or Belgian publishers infringed Article 85(1).

29. Agreements between Dutch and Belgian publishers and booksellers involving RPM in respect of books were also the subject of proceedings in the national courts. The Amsterdam

district court made an order on 26 May 1977 which provided that books published in the Netherlands, which had been bought abroad, could be sold at a price below that set by the publisher. This was confirmed by the Dutch Supreme Court on 18 May 1979. [11] The Commercial Court in Brussels by order dated 18 June 1979, in a dispute between the Flemish Association and a department store chain, ordered the association to cease making the sale of Dutch language books conditional on the store being obliged to conform to the retail price fixed by the supplier. The Court found that the trade rules infringed Article 85(1) and it had not been shown that there was any great probability that the Commission would grant an exemption.

30. None of the other provisions of the agreement offended against section 4(1). As Gill and Macmillan have now amended the agreement deleting the offensive clause 16, the agreement in its amended form no longer offends against section 4(1).

31. Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which offends against Section 4(1) but which, ´having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

32. The parties have claimed that the conditions in the Irish book market today are akin to those prevailing in the UK in 1962 when the issue of the NBA was considered by the UK Court. The Authority does not accept this claim. In the first place there is a fundamental difference between Irish and UK legislation. Under the UK legislation it is necessary to establish that restrictive arrangements are not in the public interest. Under the Competition Act, the onus is on the parties to establish that the specific requirement of section 4(2) are satisfied. More fundamentally, however, the Authority does not believe that a decision based on the conditions prevailing in the UK book trade over thirty years ago is applicable to the conditions prevailing in the Irish market today. It is also relevant that the UK Director General of Fair Trade announced in 1993 that the NBA was being re-examined because there had been significant changes in the book trade since 1962 and that the decision not to refer it back to the Court in 1989 was prompted in part by an expectation that UK legislation would change and that all restrictive agreements would have to be re-assessed in the light of new legislation. The Director General subsequently announced in September, 1994 that the agreement had been referred back to the Court. The parties have chosen to cite in support of their case the judgment of a UK court in a case decided over thirty years ago under rather different legislation, when, at the same time, in a number of more recent EC cases, RPM for books has been found to be anti-competitive and not to satisfy the requirements for exemption. The Authority set out at large its reasons for concluding that agreements for RPM in respect of books did not satisfy the requirements for a licence in its decision on the Net Book Agreement and sees no need to restate them here.

33. In the Competition Authority's opinion Gill and Macmillan and Irish booksellers are undertakings as they are engaged for gain in the production or distribution of goods. The standard conditions of sale notified by Gill and Macmillan constitute an agreement between undertakings, specifically between Gill and Macmillan and those booksellers who are supplied by them on the basis of such terms and conditions. In the Authority's opinion the agreement, as notified, had the object and effect of preventing, restricting or distorting competition in the market for books within the State insofar as it provided for a system of resale price maintenance in respect of books published by certain Irish publishers. The Authority also considered that the agreement did not satisfy the requirements for a licence. As the offensive provisions have been removed the agreement, as amended, no longer offends against section 4(1).

34. The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, Gill and Macmillan's standard terms and conditions (notification no. CA/813/92E), notified under section 7(2) of the Competition Act on 30 September 1992, and amended by the letters to booksellers suspending clause 16 of the terms and conditions, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

28 October, 1994.

 ⁸ C. Bellamy and G. Child, (1987); 'Common Market Law of Competition',3rd edition, Sweet and Maxwell, London, at para 4-002.