The Risks (and Benefits) of Most Favored Nations Clauses

more+
less-

The latest issue of Antitrust magazine features several articles on Most Favored Nations (“MFN”) clauses, which prompted me to riff a little bit about them.

An MFN is in principle a fairly simple device. It usually protects a buyer, and says that if the buyer’s supplier offers better pricing to any of the buyer’s competitors, the buyer also gets to enjoy the same discounted pricing.

MFNs have not received a great deal of antitrust scrutiny by the courts. To the extent MFNs have been the subject of lawsuits, issues concerning their application have frequently been resolved by settlement or consent decree.  We therefore do not have a wealth of reasoned opinions about them or their effects.

It’s fairly clear that MFNs are not subject to any per se rule, and should be evaluated under the Rule of Reason. Whether an MFN is pro-competitive or anti-competitive depends in part on whether the parties to the MFN have market power. An MFN could not lessen competition unless it affects the prices of products in markets in which buyers or sellers, either individually or collectively, have market power. See W. Stephen Smith, When Most-Favored Is Disfavored: A Counselor’s Guide to MFNs, ANTITRUST (Vol. 27, No. 2, Spring 2013) at 10.

The major pro-competitive effect of an MFN is obvious: it tends to lower cost for buyers. See id. at 13. MFNs may also reduce bargaining costs, and, where buyers and sellers must contract in advance in order for a new product to be developed, facilitate product investment and promotion. See id.

On the other hand, MFNs can lessen price competition. For example, if a larger buyer imposes an MFN, sellers may decide not to discount pricing to other buyers to avoid the effect of the MFN. And so in United States v. Delta Dental of Rhode Island, 943 F. Supp. 172, 176-80 (D.R.I. 1996), the DOJ alleged that Delta had MFN agreements with about 90% of the dentists actively practicing in Rhode Island, and that its insurance plans covered about 35% to 45% percent of persons with dental insurance in the state. In its complaint, DOJ argued that the MFNs lessened price competition from smaller insurers: “Because Delta represents such a large source of income for most Rhode Island dentists . . . Delta’s MFN clause makes it unprofitable for a dentist to accept lower fees from non-Delta patients, even if the dentist would have otherwise been willing to accept those lower fees.” The court refused to dismiss the complaint, and the matter was subsequently settled by a consent judgment. See case information here.   

The law about MFNs remains somewhat inchoate. I would recommend the following rules of thumb (which are just that – rules of thumb, and not definitive guidelines):

1. An MFN should only permit the buyer to insist that the supplier meet, and not beat, competitive pricing.

2. If neither buyer nor seller has market power, it is most unlikely that an MFN could cause competitive concerns. However, the parties may nevertheless want to give the issue of competitive impact at least a cursory glance.

3. If the buyer has market power, then you should consider the extent to which the MFN impacts the supply side of the market. For example, if a buyer accounts for 80% of the market, and has an MFN with only one of 10 equal-sized suppliers, the MFN is unlikely to affect the prices available to the buyer’s competitors.  90% of the suppliers/supply remain free and clear of the MFN.

4. The biggest concern arises when the buyer has market power and uses MFNs with a substantial number of its suppliers. That is the scenario that at least poses the most potential concern – although there may be various mitigating factors or market features that prevent an MFN even here from being net anti-competitive.

[View source.]

Topics:  Competition, Contract Drafting, Most-Favored Nations

Published In: Antitrust & Trade Regulation Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Howard Ullman, Orrick, Herrington & Sutcliffe | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »