Most Favored Nation Clauses – Good Business or Antitrust Violation?October 5, 2012 – Articles
Recently, the Department of Justice and Federal Trade Commission held a day-long workshop regarding the antitrust implications of “most favored nation” clauses (“MFNs”). MFNs are used in many industries as a way for a purchaser to ensure that it is getting the best price a seller has to offer, basically by saying if you sell this product to another buyer at a better price, you agree to sell it to me at that better price, too. The idea is that if the buyer receives the same pricing as its competitors, it is better-positioned to compete with its rivals on price, and consumers benefit from lower prices. This seems like the purpose of antitrust law – protecting competition to benefit consumers. So why on earth would the federal antitrust enforcement agencies be opposed to MFNs?
The answer appears to be that they aren’t, necessarily (except for when they are). While both agencies expressed concern regarding the potential for anticompetitive use of MFNs, they also appear to agree that there are instances in which MFNs can be procompetitive. The issue, as is often the case in antitrust, lies in how the MFN is used, and the relative strength of the buyer requiring the MFN. Although MFNs can be procompetitive and have efficiency-enhancing effects, an overreaching MFN could potentially stifle competition. The workshop came on the heels of the Southern District of New York’s approval of DOJ’s settlement with several e-book publishers over alleged antitrust violations in agreements with Apple, including a challenge to an unusual MFN that required the publishers to automatically lower the retail price for their e-books sold by Apple’s iBookstore to match the lowest retail price charged by any other e-book retailer (such as Amazon), even if the publisher had no control over the price charged by the other retailer.
The agencies have paid special attention to MFNs in the healthcare industry in recent years. For example, the DOJ and Michigan attorney general challenged Blue Cross Blue Shield of Michigan (“BCBSM”) over its so-called “MFN plus” clauses, requiring hospitals to charge competing insurers more than they charge BCBSM. In its complaint, the government argues these MFN plus clauses allow BCBSM, already the largest commercial health insurance provider in Michigan, to increase its market power by making it more difficult for smaller insurers or new entrants to compete on price. This case is still pending.
Given the state of flux regarding antitrust treatment of MFNs and the wide swath of industries that use them, we recommend caution with MFNs. Buyers with a strong market position in an industry should avoid structuring an MFN in a way that makes it particularly difficult for newer or smaller players to compete on price. Other suggestions to lessen the risk of antitrust scrutiny of MFNs include:
- Limit the MFN to require the same pricing; don’t demand lower pricing or some other better position.
- Make the MFN forward looking – don’t demand retroactive pricing or penalties.
- Consider limiting the MFN to pricing offered to other “similarly situated” buyers.
Establish clear, pro-competitive (or at least competition-neutral) reasons for the MFN, such as when used in a long term contract with locked-in assets; to combat opportunistic behavior; or when the contract is for innovative products with uncertain demand.