Most Favored Nation Clauses in Commercial Contracts: the Devil in Disguise?
Автор: Тетяна Вовк
Джерело: The Ukrainian Journal of Business Law. – Березень 2018.

Most favored nation clauses (MFNs) are recently catching increasing attention from competition authorities across the globe. Typically, MFNs are vertical arrangements whereby the supplier undertakes to offer to the purchaser the most favorable terms available to its other purchasers. The arrangement may as well work the other way around: the buyer may commit that it will pay the supplier the best price it pays to its competing suppliers. Sometimes, the parties agree that that the benefiting party is offered even better terms than the other counterparts. Importantly, the most favorable terms secured by an MFN are not necessarily about the price or discounts.

There can be other forms and variations of the said arrangements. By way of example, the supplier may agree to sell on its best terms only to brick-and-mortar stores of a buyer, but not to online channels, and so on. Irrespective of the essence, any practices effectively amounting to an MFN will be assessed under the same rules.

In parallel with MFNs, retailers then often use matching policies and practices like "best price guarantee", "price matching" or similar. At the retail end, price matching practices might look perfectly in the interests of the customer, because the customer always gets a better deal, and – as such – are not likely to harm competition. Still, application of MFNs continues to raise questions with antitrust enforcers resulting in some cases even in a legislative ban on using such practices altogether.

We will discuss below how such practices are likely to be assessed and what the suppliers and distributors need to take account of while including MFNs into their contracts.


How it works

Genuinely, an MFN aims to set an even level playing field for the competing buyers or suppliers, as the case may be. With an MFN, it is not only the parties' bargaining power that drives negotiations, but also the terms they offer to third parties. In the result, an MFN allows eliminating potential discrimination between the buyers (or suppliers) and may be regarded pro-competitive in that sense. This is especially true for non-concentrated markets with information asymmetry.

On the other hand, quoting the US Department of Justice’s position: if a firm is required to reduce prices to some only at the cost of reducing prices to all may well end up by reducing them to none. With the overall tendency for the prices to gradually increase over time, aligning terms of supply and purchase across the whole industry may amount to interference with the free market operation without properly justified reasons for that, potentially resulting in lessening of competition on the market and general price increase.


A few recent examples: it’s getting serious

MFNs have been evaluated across various industries: hotels and flights, books, gas supply, insurance services, and the retail sector generally. There have been several big name national and supra-national decisions causing hot debates recently.

Following an investigation, in 2017 the European Commission (EC) took the preliminary view that Amazon may have abused its dominant position on the markets for the retail distribution of e-books by requesting parity conditions in its e-books agreements with publishers. In particular, according to the European Commission, Amazon requested that the publishers offer Amazon similar non-price and price terms and conditions as those offered to Amazon's competitors (or at least to inform Amazon about such terms and conditions). These included terms related to alternative/new business models, release date and catalogue of e-books, features of e-books, promotions, agency price, agency commission and wholesale price.

The EC was concerned that such clauses could make it more difficult for the other e-book platforms to compete with Amazon by reducing publishers' and competitors' ability and incentives to develop new and innovative e-books and alternative distribution services. The clauses may have led to less choice, less innovation and higher prices for consumers due to less overall competition in e-book distribution. The case closed by Amazon committing not to enforce the relevant provisions and allow publishers to terminate e-book contracts that contain a clause linking discount possibilities for e-books to the retail price of a given e-book on a competing platform.

During the last decade, there have also been several major investigations by the EU Member States national competition authorities, in particular:

  •   in France, the court issued in 2017 a fine of EUR 1 million to Expedia for having agreed MFNs with a number of French hotels preventing the latter from offering prices lower than those advertised on the booking websites;
  • German Bundeskartellamt has been persistent arguing that MFNs can only have anti-competitive effects. In particular, in 2015 the authority prohibited booking.com portal from applying its 'best price' clauses and ordering to completely delete them from contracts and general terms and conditions. It is worth noting that in this case the German authority took the strictest approach: not only it said that wide best price clauses were anticompetitive (i.e., where the hotels were obliged to always offer to booking.com their best terms comparing to all online and offline booking channels), but also that the less restrictive narrow best price clause (i.e., allowing the hotels to offer their rooms cheaper on other hotel booking portals but not on their own websites) restricted competition and should be prohibited;
  • similar MFNs in the online booking sector have been analysed also in Austria, Denmark, Hungary, Ireland, Italy, Sweden, Switzerland and the United Kingdom, resulting mainly in outright prohibition of wide MFNs (or – in some jurisdictions – of any type MFNs);
  • in the UK, narrow MFN clauses were found justifiable in the private motor insurance investigation because they helped build consumer trust in the relevant service offering.

While in the US, treatment of MFNs has been generally more positive, as the assessment is made under the rule of reason; the European discussion seems to shift towards stricter regulation. According to recent studies and reports, the new question to respond is whether MFNs may in themselves effectively amount to resale price maintenance (a hard core violation).

It will also be interesting to see how treatment of MFNs develops in the context of further markets digitalisation, popularization of digital comparison tools and platforms, as well as wider use of online sale platforms etc.


What can go wrong?

Available practice, case-law and theory on MFNs suggest, among others, the following negative interpretation scenarios:

  • MFNs as a resale price maintenance mechanism: in highly concentrated markets, wide use of MFNs may effectively result in resale price maintenance, as the beneficiaries of such MFNs will have little incentive to compete with each other;
  • MFNs as a tool facilitating implementation of a resale price maintenance system: MFNs may be used by the supplier to monitor compliance with resale price maintenance system;
  • market foreclosure and raising barriers for new entrants, who will be disincentivised to compete on price by offering lower prices (or by offering other better terms) than the existing market players;
  • MFNs as a tool facilitating collusion or enabling to monitor compliance with a wider anticompetitive arrangement.

The likelihood of such interpretation will depend on the type of products or services concerned, the market structure, parties' market shares, the share of the market covered by MFNs and so on.


Assessment under Ukrainian law

In Ukraine, analysis of the MFNs will start under the rules applicable to assessment of vertical restraints, in particular, under the recently adopted Antimonopoly Committee of Ukraine's (AMC) rules on block exemption of vertical restraints. Further, in cases where MFNs are capable of causing horizontal effects, those will be analyzed under the stricter general competition rules.

In most cases, where the market shares of the parties are above the safe harbour thresholds, the substantive analysis will go down to efficiencies vs anticompetitive effects analysis. Then, the parties will have to decide if they want to keep the MFN after having it cleared by the AMC (if the result of the analysis is positive) or drop the arrangement altogether (if the result is negative).

In practice, the AMC only occasionally looked at MFNs in the past, without going into deep research though. However, recent attention to these arrangements in the EU may prompt the AMC to pay closer attention to the issue in particular because Ukraine has committed to approximate both the laws and the enforcement practices to the EU competition rules and principles. The AMC has already implemented the EU vertical block exemption regulation; aligning practices on the issue may be the next step on the agenda. 

For this reason, while considering an MFN the parties will first need to honestly answer the question: why do we need an MFN in the first place? Further, more careful contract drafting will be required to mitigate possible risk of fines and other negative consequences, including individual pre-contractual analysis of the market involved, the parties' and other market players' market shares, ability of the other market players to continue effectively engage in price or non-price competition, potential positive effects for the customers or negative effects for the market, industry usage of MFNs etc.

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