On 10 September 2012, the US Department of Justice (DOJ) and Federal Trade Commission (FTC) held a joint, day-long workshop on the implications of most-favorednations clauses (MFNs) for antitrust enforcement and policy. MFNs can take various forms, but in one common variation they involve contract clauses that require a seller to provide a buyer with the seller’s lowest price. The workshop, which was well-attended by over 200 practitioners and enforcers, featured panel discussions with DOJ and FTC officials, economists, and lawyers.
Speaking at the workshop, the acting head of the DOJ Antitrust Division, Joseph Wayland, affirmed that the agencies will continue to investigate and challenge MFNs, declaring that “most favored nation clauses have the potential to inflict significant harm to consumers and competitors.” DOJ is currently challenging MFNs in Blue Cross Blue Shield of Michigan’s hospital contracts and in contracts between Apple and e-book publishers in Federal Court. There are also several ongoing agency investigations related to MFNs, as well as other private lawsuits around the country challenging the use of MFN clauses. Wayland said that the workshop was intended to help enforcers understand “industry perspectives to help us formulate appropriate policy initiatives.”
Despite the recent surge in antitrust scrutiny of MFNs, the speakers generally recognized the dearth of case law on the legality of MFNs. Although panelists noted that there are some cases recognizing that MFNs can have either procompetitive or anticompetitive effects, there have been no litigated cases that have determined the legality of MFNs on the merits. Therefore, panel discussions focused on economic theory, what the legal standard for MFNs should be, and how MFNs are used in the real world.
First, economists outlined both potential competitive harms and benefits of MFNs. They noted that MFNs could potentially exclude competitors by raising their costs, or could facilitate collusion among competitors by discouraging price competition. However, they noted that MFNs can also have procompetitive benefits, including facilitating investments that would not otherwise occur and reducing transaction costs. Steven Salop, Professor of Economics and Law at Georgetown University, said that merely arguing that MFNs are intended to reduce costs is insufficient where there is evidence that prices have increased. Relatedly, both Salop and Fiona Scott Morton, the Deputy Assistant Attorney General for Economic Analysis for the DOJ, asserted that the antitrust laws should protect the ability of less efficient rivals to obtain lower costs, and should therefore prevent large buyers from protecting themselves through MFNs. The economists also discussed how empirical evidence on the effects of MFNs on price is generally inconclusive. They generally agreed that whether MFNs are anticompetitive is a fact-specific inquiry requiring case-by-case analysis.
Panelists also discussed what legal standards should apply to evaluate MFNs. Andrew Gavil, recently appointed FTC Director of Office of Policy Planning, suggested that courts should evaluate MFNs using existing antitrust theories under a traditional “rule of reason” analysis rather than creating new theories of harm. Others agreed, noting that enforcers should consider threshold requirements, such as high market share, before challenging MFNs in order to provide certainty to businesses. Other panelists, however, argued for a more sweeping rule of reason analysis that is not confined to the limits of existing case law or market power thresholds. For example, Salop argued that a threshold showing of market power should not be required.
Panelists also addressed the use of MFNs in practice. Panelists, including Jan McDavid, partner at Hogan Lovells, argued that MFNs are extremely common in business contracts and generally procompetitive or neutral. Other panelists agreed that MFNs provide practical solutions for legitimate business problems, and that there should be a high bar for finding an antitrust violation. Panelists noted that enforcement may be in direct tension with other policies, such as Robinson Patman Act enforcement and licensing on fair, reasonable, and non-discriminatory (FRAND) terms. The panelists discussed several practical factors that may make antitrust scrutiny of MFNs more or less likely. For example, panelists said so-called “MFN plus” provisions that require a seller to charge less to a particular buyer than all other buyers may face more scrutiny in light of the DOJ’s case against Blue Cross Blue Shield of Michigan challenging those clauses. Other risk factors discussed include high market share; MFNs that result in higher prices; MFNs adopted jointly among competitors; multiple MFNs covering a substantial portion of a market; or MFNs with strict or retroactive audit and/or recoupment rights. In contrast, risks may be reduced where market share is low, where MFNs facilitate investment that would not otherwise occur, or where there are other compelling business justifications.
Finally, the panelists discussed MFNs in the healthcare context. W. Thomas McGough, Chief Legal Officer for the University of Pittsburgh Medical Center, argued that the problem is not necessarily MFNs, but “virtual MFNs” that arise when large health insurers demand that hospitals charge their lowest rates, in situations where insurers have no incentive to pass along these savings to consumers. Other participants said that MFNs in the healthcare context are potentially more problematic because provider costs are the bulk of insurance costs, and therefore an insurer could use MFNs to raise rival insurers’ provider costs and exclude them from the market.
- DOJ and FTC will continue to investigate and challenge MFNs.
- The consensus among economists, enforcers, and practitioners is that MFNs can potentially have both procompetitive and/or anticompetitive effects.
- There is little consensus on the legal standards that should be applied to evaluate MFNs.
- MFNs may be subject to greater antitrust scrutiny where certain risk factors are present (discussed above).
- MFNs may be subject to greater antitrust scrutiny in the healthcare industry (multiple states have statutes that ban or restrict MFNs in healthcare contracts).
Additional information about the workshop, as well as the materials prepared by the panelists, is available on DOJ’s website: http://www.justice.gov/atr/public/ workshops/mfn/index.html