Irish Competition Authority Decisions

1. Notification was made on 30 September 1992 by Gill and Macmillan Ltd of nine agreements with various Irish publishers. The notification requested certificates under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal by the Competition Authority to issue certificates, licences under Section 4(2). Notice of intention to issue a certificate was published in the Irish Times on 16 September 1994. No submissions were received from interested parties.

2. The decision concerns agreements whereby Gill and Macmillan agrees to act as sole distributor for books produced by nine other Irish publishers. The terms and conditions under which Gill and Macmillan supplies booksellers were notified separately, and are the subject of another decision.

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 second and third level 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. These publishers are the other parties to the agreements, namely Attic Press, Brandon Book Publishers, Lilliput Press, Irish Academic Press, Four Courts Press, Round Hall Press, O'Brien Press, Wolfhound Press, and Townhouse and Countryhouse Publishers Ltd. They are mainly small-scale, specialist publishers.

4. The product concerned in the notification is books, specifically those books produced by those publishers whose books Gill and Macmillan distributes. The service concerned is the distribution of books produced by Irish publishers to booksellers throughout the State. This involves, besides the physical distribution of the books, the provision of storage, stock control, invoicing, credit control and debt recovery, calculation of royalties and financial information. According to the 1988 Census of Services, there were 370 retail outlets involved in the sale of books and stationery. The market is the service of distributing Irish-published books to booksellers. The market for books was described at length in the decision in the Net Book Agreement case (Decision No. 336 of 10 June 1994).

5. Gill and Macmillan stated that it effectively entered the market in 1984 at the request of existing publishers who were clients of Irish Book Handling, which had become insolvent. They were not in a position to handle their own needs, because of the economics of the book trade. It believed itself to be the only firm offering a full book distribution service for all titles of a publisher, although certain other distributors, such as Eason and Newspread, did occasionally distribute whole editions of a given work. Of the larger Irish publishers, only Poolbeg Press and Mercier Press were not clients of their distribution service.

6. In all cases, Gill and Macmillan has been appointed sole distributor in Ireland for the publisher, and also for other territories. It charges a standard service charge, which is reduced, it was stated, for clients with higher sales.

7. The distribution agreement is virtually a standard agreement, as epitomised by the agreement between Gill and Macmillan, the distributor, and Attic Press, the publisher. Under the agreement, the distributor undertakes:

(a) to store the publisher's book stocks for two years (after which additional charges are made);

(b) to provide proper stock control;

(c) to provide a complete invoicing and debt collection service. The distributor informs the publisher of any accounts on stop, and undertakes liability for bad debts. A dispatch service is provided for titles supplied on a consignment basis, which is charged separately;

(d) to pack and dispatch books, including normal carriage charges;

(e) to provide a service which will calculate the royalties due on each title;

(f) to provide monthly sales reports by title and territory;

and

(g) to record orders for titles which are temporarily unavailable.

8. The publisher undertakes to accept the distributor's decision whether an account is to be opened or stopped; not to supply stock to any stopped accounts; to appoint the distributor as its sole distributor within Ireland to the wholesale and retail book trade and to all book trade accounts regularly supplied by the distributor; to accept the distributor's decision as to means of delivering books (and the distributor shall treat publisher's books no differently from their own books); and to be responsible for the authorisation of returns and overstocks.

9. The agreement makes provision for payments by the distributor to the publisher. In the case of the Attic Books agreements, it is clear that Gill and Macmillan acts as distributor for the State, the UK and the rest of the world. The publisher is charged for the services provided at a percentage of invoice value, excluding postage, service and VAT charges. It is stated that the ownership of the book stock and other goods shall remain with the publisher who shall be responsible for insurance of the books and goods held on the distributor's premises. The agreement was to operate for a period of 18 months from 1 July 1992. It was to be renewed automatically thereafter unless otherwise agreed in writing. Six months' notice of termination was required. The agreement is still in existence.

10. The agreement states that the word "seller" printed on the conditions of sale on the distributor's invoices shall mean the publisher and not Gill and Macmillan, particularly in relation to clauses 4, 13 and 14. By implication, therefore, the publishers have accepted the conditions of sale of Gill and Macmillan, including clause 16, which states:

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 Sellers' specific consent.......'.

11. The other eight notified agreements are virtually the same as that described above. The only differences are:

(a) in one case, the publisher has existing distribution arrangements in the UK and US. In all others, the agreement covers distribution throughout the world;

(b) the service charge differed somewhat between publishers;

(c) in four cases, the initial period of the agreement was 18 months, in three cases it was 12 months, and in one case it was 21 months;

and

(d) the agreements commenced at different dates from 1 July 1987 to 1 January 1991.

12. The initial period of each agreement has now expired, and so they are all for an indefinite term, subject to six months' notice of termination. All the agreements appoint Gill and Macmillan as their sole distributor in the State.

13. In its initial submission, Gill and Macmillan stated that it was one of the largest Irish publishers and had invested considerable resources in developing a state of the art distribution service. Having extra capacity, it acceded to the requests of the clients to provide distribution services for them. It was not aware of any other similar network in Ireland. It treated its client's books and its own equally in all respects.

14. In support of its request for a certificate, Gill and Macmillan argued that the present arrangements were not designed to exclude new competitors from the market, whether a distributor or publisher. On the contrary, they had been established to promote the more effective distribution of books and maintain a greater diversity of titles available. The existence of the distribution system offered by the Company acted, if anything, as an incentive to new publishers to publish new and more specialised titles, who were assured of an effective distribution outlet, without the necessity of investing scarce resources in distributing their products. The territorial exclusivity and other ancillary restrictions contained in the distribution agreements were necessary for the Company to protect its investment, which to-date had been considerable. On the one hand, it was agreed that the company did not put the distribution system in place in order to keep competitors out of the market and take advantage of other operators in the market place, but acted in response to the clients' request. Shared distribution was a universal practice among the international book trade and unilateral abandonment of this practice would simply enable the company's competitors to make use of its capital investment to their own benefit. For these reasons, the arrangements had an objective commercial justification.

15. Gill and Macmillan further submitted that competition was not actually or potentially restricted as the clients would not have been able to penetrate the market in the absence of the present agreements. This was corroborated by the fact that the clients approached the company to establish the distribution system. The clients did not have nor presently had the necessary financial and technical resources to set up their own distribution systems and a centralised network such as the distribution network operated by the company permitted the clients to concentrate on their publishing activities, without having to set aside valuable financial and other facilities for the purposes of distributing their products. The books market in Ireland was small as was each of the client's share of the overall market in terms of the number of titles published, and a nationwide distribution system was the only way for each of them to ensure effective and efficient distribution of their products, at more competitive prices.

16. Gill and Macmillan also claimed that the restrictive clauses were ancillary restraints of a nature, duration and scope which were reasonable in all the circumstances to protect the value of the company's investment in setting up the distribution network. The clauses were of a type not uncommon in the book trade worldwide. The duration of the restrictions was limited to six months. The restrictive clauses were a legitimate means of ensuring the full commercial value of the company's investment, and in return, passing on the envisaged benefits to the clients and the booksellers and consumers. The territorial exclusivity granted to the company was a necessary inducement to the company to enter into the distribution agreements as without this protection the company would not have been prepared to make the investment. Furthermore, absence of territorial exclusivity would have prohibited the clients from achieving the market penetration presently enjoyed under existing arrangements. Gill and Macmillan also presented arguments in support of its request for a licence, which are not relevant to this decision.

17. In a further submission on 7 June 1994 in response to questions from the Authority, Gill and Macmillan submitted, contrary to its earlier submissions, that the service provided should be viewed in competition law terms as essentially a storage and order fulfilling service rather than a distribution or commercial agency service. Gill and Macmillan at no stage purchased the books or acquired title to them, so there was no question of resale as envisaged in the category licence for exclusive distribution agreements. Neither did it act as an intermediary between the publishers and retail outlets or have any authority from the publishers to negotiate or conclude sale agreements akin to those undertaken by commercial agents. The service provided to the publishers was limited to that of storage, stock control, stockholding, delivery to retail outlets, invoicing and debt collection, for which it was remunerated by way of a service charge calculated as a fixed percentage of invoice value. It had no function in influencing or concluding sales to retail outlets. The individual publishers exercised complete autonomy as regards marketing, price setting, negotiating with retail outlets on volume of sales, etc.

18. Gill and Macmillan also submitted that the object of the arrangement was solely to ensure an efficient storage, distribution and payment system on behalf of publishers who, because of their scale of operation and the particular features of the Irish book publishing market, were simply not in a position to provide these services economically for themselves. The trade was also very seasonal, due to the influence of school book sales. Some pooling of storage facilities, therefore, made sound economic sense, without giving rise to any coordination of competitive behaviour between publishers. The service was strictly a commercial one which allowed Gill and Macmillan to make efficient use of spare capacity which it enjoyed when the arrangements were established at the suggestion of the other publishers. There was no pressure on publishers to take up this service, and the publishers were completely free to seek out alternative storage and order fulfilling services at relatively short notice. On these grounds, it was submitted that the agreements merited a certificate.

19. On 22 June 1994, the Authority issued a Statement of Objections in respect of the Gill and Macmillan Standard Terms and Conditions of Sale. The Authority considered that clause 16 represented resale price maintenance, and it indicated that it intended to refuse a certificate or a licence to the agreement. On 7 July 1994, Gill and Macmillan wrote that they intended to delete clause 16 from the Standard Terms. Accordingly, on 28 October 1994, the Authority granted a certificate to the amended agreement. Reference to the conditions of sale of Gill and Macmillan in the agreements which are the subject of this decision therefore now relates to the conditions of sale as amended by the deletion of clause 16.

20. On 21 June 1994, the Authority wrote questioning the differential service charges. Gill and Macmillan, in its reply, stated that commission rates were assessed and charged in accordance with turnover, and the rate reflected the cost of handling each list. The rates were negotiable annually at the initiative of clients. It said that it should be noted that there was a considerable variance in the average price per unit of books sold between client companies. The cost of provision of an identical service was the same for a book with an average price of £12.96 as that with an average price of £2.83, but the net commission was considerably less. It maintained that it had to be emphasised that there was no question whatever of discrimination between client companies. The varying commission rates reflected only the economy of scale which could be gained by increased turnover.

21. Section 4(1) of the Competition Act, 1991 prohibits and renders void all agreements between undertakings 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.

22. 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 engaged in the production and distribution of books for gain, and the other publishers are engaged in the production of books for gain. All the parties involved are therefore undertakings, and the agreements are agreements between undertakings. The agreements have effect within the State.

23. Under the notified agreements, Gill and Macmillan is appointed sole distributor in the State of books produced by each of the nine publishers. This operation was undertaken, according to Gill and Macmillan, at the request of the publishers some years ago when the handling firm which distributed their books became insolvent. The services provided are book storage, physical distribution, invoicing, credit control, debt recovery, calculation of royalties, provision of financial information, and the handling of returns and overstocks. In return, Gill and Macmillan imposes a service charge related to sales. While the agreements were for an initial period of 18 months, they are now for an indefinite period subject to six months' notice of termination. Ownership of the books remains with the publisher, who is responsible for insurance while they are on the distributor's premises. The agreements involve acceptance of Gill and Macmillan's conditions of sale. The distributor may decide whether to open or stop a bookseller's account, and undertakes liability for bad debts. It is required to treat the publisher's books no differently from its own books. The publishers determine the prices at which the books are sold to resellers.

24. Contrary to the initial submission by Gill and Macmillan, the agreements do not involve the purchase and resale of books by the distributor, and ownership remains with the publisher and not the distributor, and they are therefore not exclusive distribution agreements. They do not come within the scope of the category licence for exclusive distribution agreements (Decision No. 144 of 5 November 1993).

25. Subsequently, Gill and Macmillan claimed that the arrangements amounted to a storage and order fulfilling service, rather than to a commercial agency service. Unlike commercial agents, it did not negotiate or conclude sale agreements on behalf of the publishers. The Authority considers that the essential feature of the arrangements is that Gill and Macmillan supplies the service of storage and physical distribution of books on behalf of the publishers. It considers that this amounts to something more than the provision of a delivery service, however, because Gill and Macmillan provides additional related services, such as credit control and debt collection, and because it can determine whether an account is to be opened or closed, none of which are normally undertaken by suppliers of delivery services. At the same time, the Authority does not consider that the arrangements amount to commercial agency agreements (as described in Decision No. 286 - Conoco Consignee agreement - of 25 February 1994), since Gill and Macmillan does not conclude the sale or purchase of goods or services on behalf of a principal, which is the fundamental feature of a commercial agency agreement. In the opinion of the Authority, the notified arrangements fall somewhere between a simple delivery agreement and a commercial agency agreement.

26. The Authority considers that undertakings are entitled to decide how their products shall be distributed, that is whether they distribute the goods themselves, or make use of firms providing delivery services, or whether they operate through commercial agents or exclusive distributors. In all except the last case, the Authority considers that distribution arrangements do not, in principle, offend against Section 4(1) of the Competition Act. The publishers are fairly small in size and, while it is essential that their books are distributed to booksellers through the State, they would find it difficult and probably most uneconomic to deliver the books themselves. In the past, they had used a specialist book handling firm, and, when this firm became insolvent, they decided to utilise the spare capacity available from Gill and Macmillan, which distributed its own titles.

27. The situation in this case is not altered by the fact that Gill and Macmillan is a competing publisher of books. It provides what is little more than a delivery service, and it does not sell the books on behalf of the other publishers, nor does it determine the resale price of the books. In addition, under the agreements, Gill and Macmillan is obliged to treat their books no differently from its own books, and it may not discriminate in favour of its own books. Admittedly, provision of this service means that Gill and Macmillan has access to information about deliveries of its competitor's books to booksellers, and possibly also some information about sales to consumers. There is no evidence, however, that this confers a competitive advantage upon Gill and Macmillan.

28. Even though the basic distribution arrangement might not offend against Section 4(1), certain clauses in the agreement might do so. In the Authority's opinion, the clauses relating to storage, invoicing, credit control, debt recovery, royalties, financial information, returns and overstocks, form a necessary part of the overall service provided, and they do not offend against Section 4(1). The distributor undertakes liability for bad debts, so that allowing the distributor to determine whether an account should be opened or closed, when it may not discriminate in favour of its own books, does not offend against Section 4(1).

29. The notified agreements imply acceptance of the conditions of sale of Gill and Macmillan. These included, as clause 16, a resale price maintenance requirement. For the reasons stated in the Authority's decision in the case of those conditions of sale (Decision No. 365, of 28 October 1994), the Authority would not have issued a certificate or granted a licence to an agreement which contained such an obligation. The same situation would have prevailed in respect of the agreements which are the subject of this present decision. Since clause 16 has been removed from the conditions of sale of Gill and Macmillan, it no longer presents any impediment to issuing certificates for these delivery agreements.

30. The Authority was initially concerned that the different rates of service charge might amount to unfair discrimination between publishers, contrary to Article 4(1)(d) of the Act. Having examined the figures supplied by Gill and Macmillan, and having considered the explanation given, the Authority has no grounds for believing that differences in service charges are not objectively justified, and so they do not offend against Section 4(1) of the Act.

31. In the Authority's opinion, Gill and Macmillan and the other publishers who are parties to the agreements are undertakings. The notified agreements are agreements between undertakings. The Authority considers that the sole distribution agreements do not have, as their object or effect, the prevention, restriction or distortion of competition. They do not, in the Authority's opinion, offend against Section 4(1) of the Competition Act, 1991.

32. 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, the following sole distribution agreements between Gill and Macmillan and various publishers, notified on 30 September 1992, do not offend against Section 4(1) of the Competition Act, 1991:

(a) Attic Press CA/804/92E

(b) Brandon Book Publishers Ltd CA/805/92E

(c) The Lilliput Press CA/806/92E

(d) Irish Academic Press CA/807/92E

(e) Four Courts Press CA/808/92E

(f) The Roundhall Press CA/809/92E

(g) The O'Brien Press CA/810/92E

(h) Wolfhound Press CA/811/92E

(i) Townhouse & Countryhouse Publishers Ltd CA/812/92E