Most favored nation clauses (MFN) (also known as anti-discrimination clauses or most favored nation clauses) are common in business today. These regulations require that the supplier treat any particular customer no worse (and sometimes even better) than any other customer. They are often associated with some sort of monitoring mechanism, such as the authority to audit the supplier. For example, imagine a mill signs a request contract with Bakery A that contains an MFN clause. The mill cannot then turn to bakery B and offer the flour at a lower price without either a) offering the same to bakery A or b) violating the requirements contract. These clauses may extend beyond the price to other contractual conditions (e.g. product release dates, promotional prices or product offers).
As common as they may be, a number of lawsuits from New York and California will subject these very clauses to US antitrust scrutiny. First, a class action lawsuit against Amazon and the five largest book publishers in the United States – Hachette Book Group, HarperCollins Publishers, Macmillan Publishing Group, Penguin Random House, and Simon & Schuster (the “Big Five”) – alleges that MFN clauses are in e- Books, agency contracts are illegal price fixing. The lawsuit mirrors a 2012 lawsuit against Apple and the Big Five, which culminated in a consent decree restricting the use of MFN clauses that prevented e-book retailers from adding their own discounts.
The second class action alleges Valve, Inc. using MFN clauses in its contracts with game developers – both large (Ubisoft) and small (Rust) – to maintain its monopoly on the sale of PC video games through the online Steam marketplace and suppress competition more generally. The complaint alleges that the MFN clauses mean that game prices are the same on online marketplaces, even though stores like the Epic Games Store charge a lower commission than Valve. Instead of passing those savings on to the consumer, developers need to maintain higher prices to stay profitable on Steam.
While the suits target different markets, they are limited to the same problem: when do MFN clauses become anti-competitive? As the panels at a one-day public workshop by the Department of Justice and the Federal Trade Commission on these types of clauses show in 2012, it depends on the market in question, the contracting parties and the impact on that market. On the one hand, MFN clauses are practical and beneficial in that they eliminate the buyer’s risk in negotiating a bad deal in unstable pricing conditions, lower transaction costs in renegotiating agreements upon discovery of lower prices, and are generally harmless when market power is absent. On the other hand, MFN clauses can be used as a price monitoring mechanism to facilitate collusion between competitors. Discounts on the buyer’s competitors and new entrants, regardless of their size, are effectively excluded, resulting in higher prices overall. For these and other reasons, MFN clauses are subject to the rule of reason alone – a mild standard that requires strict market analysis.
What did Amazon and Valve make targets for these suits? Market power. Amazon was the number two public enemy (second only to Google) in the House Judiciary Committee’s antitrust report on competition in digital markets, which denounced Amazon’s impact on small and medium-sized businesses that depend on the monopoly’s platform. The class action lawsuit is no longer a humble bookseller, claiming that Amazon now has an impressive 90% share of the e-book market. Valve was recently fined 1.6 million euros (approximately $ 2 million) by European antitrust authorities for restricting access to games due to physical location, in what the European Commission calls an illegal division of the digital single market looked. And US regulators may turn to Valve if the class action lawsuit is correct, claiming that 75% of all PC games sold in the US come through Steam. Both companies have excessive online sales market share at a time when antitrust enforcement is enjoying a renaissance and the digital economy is under scrutiny.
The suits shouldn’t be a cause for concern for most companies using MFN clauses. Eventually, when small buyers in non-concentrated markets use MFN clauses to reduce price volatility or to establish a long-term business relationship, the courts should recognize that the economics outweigh the anti-competitive effects. But when Big Tech is competing with loner companies, keeping an eye on its suppliers through audit rights or algorithmic pricing, and guaranteeing dominance for an extended period of time, it’s no surprise consumers, competitors, and Congress scold. MFN clauses have a time and a place, but are not at the top.