On September 10, 2012, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) hosted a joint full-day workshop on most-favored-nations clauses (MFNs) and the implications of MFNs for antitrust enforcement and policy. Speakers at the workshop included high ranking officials from both agencies, economists, and lawyers from both private firms and companies.
Representatives from both agencies made clear that MFNs are a growing topic of interest for potential enforcement. Acting Assistant Attorney General Joseph Wayland stated that understanding MFNs and developing an MFN enforcement policy are a key task of DOJ’s Antitrust Division. More broadly, the agencies discussed implementing joint Guidelines that would explain their analytical approach to MFNs, and likely influence how courts analyze MFNs.1 The agencies are soliciting public comments on MFNs, which must be filed by October 10, 2012.
The workshop included five panels. The first two focused on the economics of MFN clauses, with economic discussions of both the procompetitive justifications for, and the potential anticompetitive effects of, MFNs. One economist, Ramsey Shehadeh of NERA, presented an empirical study on MFNs, which among other findings showed that MFNs appear to be more consistent with efficiency motivations than they are with collusion.
Another panel featured current or former in-house attorneys and discussed real world applications of MFNs. Each attorney addressed the prevalence and necessity of MFNs within their respective business. For example, one panelist explained how MFNs enable companies to enter into long-term contracts where they would otherwise pose too much risk. Another panelist emphasized that the need for MFNs in patent settlements, where speculative value and hold-up concerns make licensing, especially with first movers, nearly impossible absent an MFN.
The remaining panels focused on the legal treatment of MFNs, including how antitrust enforcement should treat MFNs. The overall consensus was that the law is largely undeveloped in this area. The early case law on MFNs regarded them as almost per se legal,2 but following strong advocacy from DOJ, courts began to apply greater scrutiny, as reflected in a 1996 decision denying a motion to dismiss in Delta Dental.3 With a DOJ case against Blue Cross Blue Shield of Michigan pending,4 there are no significant antitrust decisions on MFNs within the last 15 years. The panelists seemed to agree that MFNs must be analyzed under the rule of reason, but there was very little consensus as to whether specific safe harbors or presumptions may emerge. Law professor Steven Salop, for example, was particularly critical of certain efficiency arguments, arguing that getting the best price via an MFN cannot be deemed an efficiency if the bargained price is higher than the but-for price, which he believes is typically the case. Other panelists stressed how difficult it is to determine, prove and measure actual effects stemming from an MFN, which remains a major challenge to both the creation and enforcement of MFN antitrust policy.
Key Takeaways from the Workshop
- MFNs are an emerging hot topic in antitrust, and a key focus of the agencies’ enforcement agenda.
- Special attention was focused on MFNs in the healthcare industry, particularly in contracts between large health insurance companies and healthcare providers. DOJ noted, for example, that it is in ongoing litigation against Blue Cross Blue Shield of Michigan in a case alleging that the insurer used a series of MFNs and “MFNplus” clauses (requiring that health care providers charge Blue Cross less than they charge competing insurers) to increase its market power in multiple local health insurance markets.5 Another panelist noted that 19 states ban or restrict MFNs in healthcare contracts, often as a result of pressure from doctors, without any evidence of anticompetitive harm.
MFNs are prevalent in many industries, are used for many different purposes, and must be analyzed carefully and individually, given their fact-specific nature. In general, though, there are certain recurring factors that appear in MFNs that are viewed as procompetitive and those that are viewed as potentially anticompetitive. Features of procompetitive MFNs include:
- MFNs as part of a long-term contract with locked-in assets
- MFNs provided by small sellers or received by small buyers
- MFNs in unconcentrated markets
- MFNs used to combat opportunistic behavior (hold-up)
- MFNs used to confront innovative new products with uncertain demand
- MFNs covering minor inputs used to alleviate procurement inefficiency
Features of MFNs that present more anticompetitive risk include:
- MFNs that yield a higher transaction price than would exist absent the MFN
- MFN-plus agreements (which necessitate providing other purchasers less favorable terms)
- MFNs armed with retroactive effects, penalties or audit rights
- MFN provisions that favor firms with market power (as buyers or sellers)
- Multiple MFNs with high market coverage
- MFNs adopted jointly among competitors
- MFNs that impact the healthcare sector