Issue: Sep 2012


Schiff Hardin LLP Antitrust and Trade Regulation Alert



FTC and DOJ Hear Theories and Facts about Most-Favored-Nation Clauses in September 10 Workshop

by James Hilton

The U.S. Federal Trade Commission and the Antitrust Division of the Department of Justice held a workshop September 10 on the proper antitrust evaluation of "most-favored-nation" clauses ("MFNs"). See ourAugust 28 Client Alert for background on MFNs and the workshop. The Antitrust Division's two recent actions in the area drew a standing-room-only crowd to hear economists, lawyers, industry members and agency officials discuss MFN uses. While officials from both agencies emphasized that the workshop was an opportunity for them to learn from the discussion of experts so as to better formulate policy and guidance to industry, their comments indicated that those two actions are unlikely to be the last agency challenges to MFNs.

One point the agencies heard from many corporate counselors was that MFNs are common across industries and usually pro-competitive or benign. These clauses can reduce opportunism by one party to a contract and cut transaction costs by reducing uncertainty and a need for re-negotiation. For those reasons, no court has ever rendered a final decision finding an MFN anti-competitive - although the courts' early uncritical acceptance has given way to a more nuanced analysis, especially in opinions approving consent decrees blocking the use of an MFN.

Part of that analysis comes from a small sample of economics literature (some written by current agency officials). That literature theorizes that MFNs could increase the risk of collusion by rivals, exclusion of rivals or a seller's bargaining power. These same theories also see possible pro-competitive effects from the clauses. The even smaller body of empirical studies does not clarify when the anticompetitive effects will dominate the pro-competitive.

The result is that the counselors must use the small number of cases and consent decrees to divine when agencies or courts will find MFNs objectionable. Almost all the panelists saw no actual or theoretical competition issues unless at least one party to the contract had market power. Some counselors used a rough market power screen to advise clients and suggested the agencies might do the same when choosing investigation targets. All the panelists agreed that firms using MFNs should be able to articulate how the clause advances a pro-competitive goal. Some thought that pro-competitive goal would be more difficult to articulate for MFN+ clauses, where a party negotiates for a price that is a function of a specified rival's price. Finally, counselors emphasized that MFN use by several rivals was not, by itself, sufficient to find an anti-competitive agreement under the Sherman Act.

The workshop also highlighted two different specific applications of the analysis. First, several panelists with health care experience described the facts of the industry that have led to several government actions against MFNs: market power of physician groups, hospital systems or insurance companies as either sellers or buyers; government insistence on the lowest price for its health care purchases; and the insulation of most consumers from the real price of health care. Second, an official from the UK's Office of Fair Trading (OFT) gave the European perspective. He explained OFT's recent actions against the MFN clauses used in the e-book and online hotel booking industries. He also described a report on the issues available on the OFT's website here: www.oft.gov.uk/news-and-updates/press/2012/79-12

The workshop did not - and was not intended to - provide any definite conclusions or guidance from the agencies. The workshop did allow experts to describe to the agencies how widespread and benign MFNs usually are and debate the unusual circumstances when that conclusion might not be warranted. Given the obvious and continued interests of both agencies in the potential anti-competitive effects of MFNs, we should expect to see future enforcement actions against such clauses. Clients will be well-served to seek advice prior to entering new MFN agreements or implementing any existing ones.

Links to the presentations made at the workshop can be found on the Antitrust Division's website here: www.justice.gov/atr/public/workshops/mfn/index.html

For further information, please contact Steve Cernak, scernak@schiffhardin.com, or another member of Schiff Hardin LLP's Antitrust and Trade Regulation Practice Group.

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