When Most-Favored Is Disfavored: A Counselor’s Guide to MFNs

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Originally published in the American Bar Association on April 1, 2013.

The U.S. Antitrust Agencies Have turned the spotlight on most-favored-nation (MFN) clauses. The Department of Justice is currently litigating two high-profile cases that challenge the use of MFNs in the health insurance and e-book industries. The DOJ’s most senior officials have given speeches and testimony describing the potential anticompetitive effects of MFNs. And the DOJ and the Federal Trade Commission recently held a public workshop to discuss “the evolution of economic and legal thinking on MFNs and their implications.”

How does an antitrust counselor determine whether an MFN is likely to become the subject of an investigation or challenge in the current environment? Like any other agreement between a buyer and seller about the terms of a transaction, MFNs are vertical restraints and therefore evaluated under the rule of reason. Notwithstanding the recent attention they have attracted, there is general consensus that most MFNs do not have anticompetitive effects. The agencies’ concern is that the use of MFNs in certain market circumstances may result in higher market prices because—to borrow a phrase from a DOJ report of an earlier era—a firm that 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.” The task, therefore, is to identify those circumstances in which MFNs may have such effects, and determine whether use of a particular form of MFN in those circumstances is likely to lessen competition. This article provides an analytical framework and guideposts designed to aid counselors in assessing the antitrust risks of MFNs under U.S. law.

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