[authors: Antoinette C. Bush, Matthew P. Hendrickson, John H. Lyons, Steven C. Sunshine, Tiffany Rider]
The United States antitrust enforcement agencies — Department of Justice, Antitrust Division (DOJ) and Federal Trade Commission (FTC) — held a joint workshop this week on most-favored nation clauses (MFNs). Through a series of panels, the workshop facilitated a dialogue between enforcers, economists, academics, in-house counsel and the private bar. While the DOJ has become increasingly suspicious of MFNs, the majority of the panelists pushed back on the DOJ premise that MFNs are a serious antitrust concern.
In 2010, the DOJ sued Blue Cross-Blue Shield of Michigan (BCBS) over its use of MFN and MFN-plus clauses that the DOJ alleges are anti-competitive, raise rivals’ costs and exclude entry. In April 2012, DOJ’s head economist, Fiona Scott-Morton, Deputy Assistant Attorney General of Economic Analysis, speaking at a conference sponsored by Skadden, presented a paper expressing concern about the anti-competitive potential of MFNs. Most recently, it has been reported that the DOJ is investigating MFNs in the media industry. Finally, the workshop appeared to be a possible precursor to a policy announcement in which the DOJ and FTC might indicate their intent to become more active in bringing cases based on MFN clauses.
The workshop initially seemed to lump all MFNs together, but what became apparent during the later panels is that there is a wide variety of arrangements that are considered MFNs — such as buyer/seller business contracts containing MFNs, consumers as third-party “beneficiaries” to a retailer MFN/RPM, MFNs in settlement agreements (e.g., antitrust class action and patent litigation), MFN-plus provisions, MFNs with and without audit rights, and MFNs to be applied retroactively and/or on a going-forward basis. Panelists stressed that MFNs are common within a number of industries. The majority of panelists observed that most MFNs that they had encountered were benign or pro-competitive. Panelists argued that MFNs encourage investment in a product, reduce transaction costs by encouraging longer-term contracts, provide insurance to a buyer wanting to reduce risk and facilitate “first movers.” Panelists noted that there is little case law or empirical evidence on which to rely for clarity, because most enforcement actions involving MFNs have resulted in consent decrees. Although there has not yet been a fully litigated trial on the competitive effects of MFNs, BCBS is scheduled for trial next year.
It was suggested that MFNs are not a unique category of agreements that need to be isolated and that require a new set of standards by which to analyze them. Some view MFNs as simply a type of vertical restraint that should be analyzed under a basic rule of reason for pro-competitive justifications, anti-competitive effects and efficiencies. In this sense, it is a vertical restraint less restrictive than exclusive dealing.
The agencies were urged by many to proceed with caution on any policy position against MFNs as a group or large groups of MFNs. Such a position, practitioners warned, could have anti-competitive ramifications if the agencies take a position that make common MFNs too risky for the parties to engage in. While businesses and the private bar desire certainty, such as clear guidance, and particularly safe harbors, many noted that the difference between pro-competitive and anti-competitive MFNs are heavily fact dependent.
While such factors as the industry structure, the prevalence of MFNs and the types of MFNs could matter as to whether a particular MFN has anti-competitive effects, one common factual variable that seemed to reappear was whether the party benefiting from the MFN, typically the buyer, has market power. This is particularly important as to whether an MFN has the potential anti-competitive effect of excluding entry. However, it was contended that MFNs not only have the potential to exclude potential entrants, but can also facilitate collusion. In cases of an MFN causing anti-competitive harm by facilitating collusion, the market participants do not necessarily have to possess market power. And, while many cited the common opinion that the largest customer is entitled to the lowest price and an MFN with that guarantee, Ms. Scott-Morton advocated that the largest customer is not always entitled to the lowest price, depending on what other competitors might be able to bring to the negotiating table.
While the workshop provided a useful forum for a dialogue on MFNs, the business community and private bar were left to wonder where the agencies will go from here. In his brief comments, Joe Wayland, Acting Assistant Attorney General of the Antitrust Division, indicated that the DOJ has found that MFNs can have significant anti-competitive harm. While the majority of speakers advocated that most MFNs are pro-competitive or benign and that the agencies should be cautious of condemning them, it is unlikely the agencies will give up their pursuit of what they view to be anti-competitive MFNs. With no bright lines for guidance in sight, companies should assess MFNs on a case-by-case basis mindful of the agencies’ focus on these provisions and a more aggressive enforcement approach.
For more information, you can find the paper “Contracts that Reference Rivals” by Fiona Scott-Morton, Deputy Assistant Attorney General of Economic Analysis, at http://www.justice.gov/atr/public/speeches/281965.pdf and the agenda and presentations from the workshop at http://www.justice.gov/atr/public/workshops/mfn/.