Most-Favored-Nation Clauses Face Continued Antitrust Scrutiny
Legal Alerts
7.31.13
The recent federal court decision that Apple violated the antitrust laws in the e-books case has again focused attention on the possible risks of utilizing most-favored-nation (MFN) provisions in contracts. The Antitrust Division of the Department of Justice has brought a number of cases challenging such provisions, and enforcers have given a number of speeches expressing concerns about MFN clauses, including at a Department of Justice/Federal Trade Commission workshop last September. Businesses using MFN clauses, or considering adding them to contracts, should be aware of the potential antitrust risks and the “red flags” that may draw the attention of enforcers.
Named for their use in international trade agreements, most MFN provisions provide that a seller will reduce the buyer’s price for a product or service if it charges a lower price to any other buyer during the term of the agreement. This is normally viewed as procompetitive, since the lower price may help the buyer lower its price, or at least remain competitive with other customers, and help to reduce transaction costs of the negotiation. Additional MFN provisions seem less benign, including “MFN-plus” clauses requiring the seller to charge other buyers a higher price or “airtight MFN” clauses that provide the buyer rights to audit the seller’s transactions with other buyers and provide for penalties in the event of violation.
Significant Market Share
The primary reason for the enforcers’ concern is the possible anticompetitive effects of MFN clauses when used by firms with a significant share of the market. The potential effects identified by enforcers include raising barriers to entry by new or smaller firms and raising rivals’ costs. They may also act as a disincentive for sellers to offer discounts, since the clauses will require the seller to provide the same discount to all buyers.
This was the basis for the suit against Blue Cross Blue Shield of Michigan by the Department of Justice and the State of Michigan. Blue Cross’ market share in Michigan is greater than 60%. The complaint alleged that “the MFNs have harmed competition by (1) reducing the ability of other health insurers to compete with Blue Cross or actually excluding Blue Cross’ competitors in certain markets, and (2) raising prices paid by Blue Cross’ competitors and by self-insured employers.” In certain communities, Blue Cross employed MFN-plus clauses that required the healthcare provider to charge some or all other health insurers more than it charged Blue Cross, sometimes by as much as 40%. The case was dropped after the State of Michigan enacted legislation prohibiting MFN clauses in health care contracts, joining a number of other states with similar prohibitions.
Collusion
Another reason for enforcement concern is that firms may use MFN clauses to collude regarding price (or coordinate their actions without agreement). If several sellers enter into MFNs, competing sellers may agree not to discount prices to any buyers. It may also signal to other sellers that a seller does not intend to compete on price.
If a large portion of competitors, whether buyers or sellers, enter similar MFNs, enforcers are more likely to raise collusion concerns. In a case involving the sales of music on the internet, a court determined that the adoption of MFNs by sellers responsible for over 80% of the sales was evidence supporting an antitrust claim.
Collusion is also the basis for the recent decision in the e-book litigation that Apple violated the antitrust laws. The court found that Apple conspired with a group of book publishers to raise the price of e-books. The publishers had long been concerned that Amazon was selling e-books for as low as $9.99, and the MFN proposed by Apple was an “elegant solution” to their pricing concerns. The facts regarding the use of the MFN are unusual in that the customer (Apple) insisted on an MFN in an agreement (the “agency” agreement) that permitted the seller (five of the six biggest publishers) to set the retail price for e-books in the Apple iBookstore and provide Apple a 30% commission. The MFN ensured that e-books in the Apple store would be sold for the lowest retail price in the market. This made the publishers’ existing agreements with Amazon unsustainable, since the e-books were sold to Amazon at wholesale and if the publishers did not change their arrangements with Amazon, the publishers would receive less than $7 per e-book sold in the Apple store, converting a “bad economic arrangement” to a “disastrous one for the Publishers.”
“Red Flags”
One of the participants at the September, 2012 DOJ/FTC workshop provided a list of elements that can signal when MFN clauses raise antitrust concerns. These include: jointly adopted by agreement among competitors; provided by large sellers with large market shares; received by the largest buyers; MFNs used in agreements covering a significant portion of transactions in a market; and use of MFN-plus or airtight MFN clauses.
Those considering the use of MFN clauses should review the reasons for including the provision, the likely effects of the clause, and the presence of the “red flag” elements, including the market shares of the firms involved and whether there have been any discussions with competitors that could serve as a basis for a claim of collusion. If you have questions or wish to discuss this further, please contact the author of this alert, Steve Bolerjack, at sbolerjack@dykema.com or 313-568-5365, any of the Dykema lawyers listed on the left or your Dykema relationship lawyer.
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