Thursday, April 17, 2014

Is the Kindle Direct Program MFN Legal?

If you sell an ebook through Amazon's Kindle Direct program, Amazon doesn't want you to offer it for less somewhere else. It's easy to understand why; if you're a consumer, you hate to pay $10 for an ebook on Amazon and then find that you can get it direct from the author for $5. But is it legal for Amazon to enjoin a publisher from offering better prices in other channels? In other words, is Amazon allowed to insist on a "Most Favored Nation" (MFN) provision?

Here's the provision in Amazon's Kindle Direct Program that constitutes an MFN:
4. Setting Your List Price
You must set your Digital Book's List Price (and change it from time-to-time if necessary) so that it is no higher than the list price in any sales channel for any digital or physical edition of the Digital Book.
But if you choose the 70% Royalty Option, you must further set and adjust your List Price so that it is at least 20% below the list price in any sales channel for any physical edition of the Digital Book. 
I really don't know the answer, but I do know that Apple's MFN provision was a focus of the Department of Justice's successful prosecution of Apple and 5 colluding publishers for violations of the Sherman Antitrust Act. If Apple couldn't have a MFN, then how can Amazon insist on it, given their dominant market position in ebooks?

The Winston & Strawn law firm has a nice discussion of MFN clauses in the light of Judge Cote's decision in the US vs. Apple case. Here's the highlight:
Although the judge found that the MFN clause in this instance was critical to Apple’s ability to orchestrate the unlawful conspiracy, Judge Cote explicitly held that MFN clauses are not, in and of themselves, “inherently illegal.” Judge Cote explained that “entirely lawful contracts may contain an MFN …. The issue is not whether an entity … used an MFN, but whether it conspired to raise prices.” This determination, she stated, must be based on consideration of the “totality of the evidence,” rather than on the language of the agency agreement or MFN alone. Examining the facts in this particular case, Judge Cote found that Apple’s use of the MFN clause to facilitate the e-book conspiracy with the publishers constituted a “per se” violation of the antitrust laws.
Martin Coleman writes in mondaq:
depending on the economic and commercial circumstances, MFN clauses have on occasion caused concern to competition authorities. In particular:
  • They can act as a disincentive to price cutting. If a supplier knows that, by offering a discount to any third-party customer, the supplier must also offer the customer benefiting from the MFN clause a discount to ensure that the latter enjoys the most favourable price, that is a "double cost" to price cutting, and therefore could have the effect of deterring price cuts and keeping prices higher than they might otherwise be.
In the European Union, Amazon has run into problems with a similar "Price Parity" provision for the Amazon Marketplace.  After inquiries by European Union regulatory agencies Amazon agreed NOT to enforce Price Parity, a policy that has been in effect since August 31, 2013. The Bookseller reported on the effect of this agreement in the (print) book market.

In the U.S., there's further confusion about distribution channel pricing because of the Robinson-Patman Act, which prevents them from pricing print books to favor one distributor over another. But according to the Federal Trade Commission, "The Act applies to commodities, but not to services, and to purchases, but not to leases." Since ebooks are licensed, not sold, it seems to this non-lawyer that Robinson-Patman shouldn't apply to ebooks.

The particular situation that has drawn my attention is the case of authors and publishers that make their ebooks available under Creative Commons licenses. Many of these authors also make their ebooks available via the Kindle Direct Publishing Program. There's nothing at all wrong with that - many readers prefer to get these ebooks onto their Kindles via Amazon, and are happy to know that some money ends up with the creators of the ebook. Amazon offers convenience, reliable customer service and wireless delivery.  

At Unglue.it, we're starting to offer Creative Commons creators the ability to ask people who download their ebooks for support (the program officially launches on April 30). The top concern these authors have expressed to us about this program is the "setting your list price" clause for their Kindle Direct channel. If they participate in our "Thanks for Ungluing" program they worry that Amazon will kick them out of the KDP program and the corresponding revenue stream.

We've done a few things to address this concern. Creators can set a "list price" in unglue.it- it's the suggested contribution for the pay-what-you-want download. And that's the price we report in our schema.org metadata.

But what if Amazon sees Unglue.it offering free downloads of books they're offering for $3.99 on the Kindle? Would they delist the book from the Kindle platform and kill that revenue stream? Or maybe delist the publisher entirely?

It seems to me that if Amazon did this, it could be running afoul of Judge Cote's guidelines for MFN provisions. Enforcing the MFN would amount to a retaliation against creators who offer lower prices (including zero) in other channels. Amazon doesn't even let you set your price to zero

What do you think?
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2 comments:

  1. Isn't the point of the judge's decision that Apple and the publishers used MFN to keep prices high whereas Amazon is using them to keep prices low? What made it an antitrust issue was a combination of collusion and higher prices for ebook consumers.

    Also, I don't know how it works for traditional traditional publishers, but with KDP, if Amazon sees that your book is cheaper on another platform, they just lower the price of your book in the Kindle store. the terms of KDP allow them to do that.

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    1. Carmen, you're exactly right- the MFN is OK unless it's used to keep prices high. And yes, it appears that Amazon can cut off your royalties if they find that you offer it free in some other program.

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