Philippe Chappatte and Kerry O'Connell, Slaughter and May

This is an extract from the second edition of the E-Commerce Competition Enforcement Guide - published by Global Competition Review. The whole publication is available here.

What are MFNs?

This chapter considers the use of parity provisions, otherwise known as most favoured nation (MFN) clauses, in agreements between suppliers and price comparison tools, and between retailers and online marketplaces.

Two main types of MFN clauses have been considered by competition authorities across Europe:

  • ‘wide’ MFNs: typically require suppliers and retailers to publish on a price comparison tool or online marketplace the same or better price and conditions as those published on any other sales channel; and
  • ‘narrow’ MFNs: typically require suppliers and retailers to publish on a price comparison tool or online marketplace the same or better price and conditions as those published on its own (direct) website.

MFN clauses can also be distinguished according to the factor regulated – price being the most common. Non-price MFN clauses may require the supplier and retailer to offer the same product range, availability, conditions and customer services.

The use of MFNs by price comparison tools and online marketplaces has been the target of a number of antitrust enforcement cases and market studies in Europe:

  • Online hotel bookings: starting in 2010, several European national competition authorities (NCAs) have investigated MFN clauses in agreements between online travel agents (OTAs) and hotels, and have taken different approaches. The French, Italian and Swedish NCAs accepted commitments from the OTA Booking.com to replace wide with narrow MFNs in April 2015. The narrow MFN commitments were unilaterally extended by Booking.com throughout the European Union – an approach that Expedia followed shortly thereafter. The German NCA, however, issued prohibition decisions both in respect of the use of the wide MFN by the hotel booking OTA HRS in December 2013 and in respect of Booking.com’s narrow MFN in December 2015, although its decision against the narrow MFN has since been successfully challenged and overturned on appeal. Through the European Competition Network (ECN), a working group comprising 10 NCAs and the European Commission was established to conduct a year-long monitoring exercise with a view to assessing and comparing the impact of these measures. The results were published in April 2017, further to which the ECN decided to keep the sector under review.
  • Insurance price comparison websites (PCWs) and digital comparison tools (DCT) (UK): the UK NCA carried out a market investigation into the private motor insurance (PMI) market in 2012–2014. Aspects covered included the use of wide MFNs in agreements between PMI providers and PCWs. The investigation led to the prohibition of wide MFNs in relation to motor insurance (with PCWs relying instead on narrow MFNs). More recently, the UK NCA published further analysis on MFNs as part of its DCT market study and is currently investigating the use of wide MFNs by insurance provider Compare The Market. 
  • Amazon Marketplace (UK and Germany): in 2012 and 2013, the UK and German NCAs both launched investigations into the use of wide MFNs on Amazon Marketplace. As a result of these proceedings, Amazon announced in August 2013 that it would no longer be enforcing Marketplace parity provisions across the European Union. 
  • Apple e-books (EU): the Commission investigated Apple and a number of international e-book publishers in relation to retail price MFNs and other pricing clauses introduced by Apple in its iBookstore contracts after switching from a wholesale to an agency model. The Commission was concerned that these arrangements formed part of a strategy aimed at raising e-book prices. The case was settled by way of commitments, including a commitment by Apple not to enter into or enforce any retail price MFN clauses in agreements with e-book retailers or publishers for five years.
  • Amazon e-books MFN (EU): the Commission initiated antitrust proceedings in June 2015 examining MFN clauses in agreements between Amazon and e-book publishers. The Commission considered that these clauses, which covered price as well as a number of other aspects, such as distribution model, innovative features and promotions, could impede the ability of other e-book platforms to compete with Amazon. The case was settled by way of commitments in May 2017, under which Amazon offered not to enforce or include such clauses in respect of any e-book distributed in the EEA for five years.
  • E-commerce Report (EU): in 2017, the Commission briefly assessed MFNs as part of its wide-reaching sector inquiry into e-commerce.

What are the competition issues raised by MFNs?

MFN clauses have largely been analysed as potentially anticompetitive agreements under Article 101 of the Treaty on the Functioning of the European Union (TFEU) and national equivalents (see below for an overview of Article 102 of the TFEU analysis to date).

Wide MFNs – theories of harm

Two theories of harm have been advanced by European competition authorities in respect of wide MFNs: that they soften competition between platforms, and impede innovation, entry and expansion by new platforms.

Softening of competition between platforms

Wide MFNs have been alleged to reduce the incentive for platforms to compete on the basis of commission levels by creating ‘price floors’. According to this theory, a platform can increase the commission charged to a supplier who is subject to a wide MFN without the constraint that this supplier could retaliate by setting a higher price and less advantageous conditions on the platform compared with other channels. Instead, short of delisting themselves, suppliers are faced with two options: pass on the commission increase by raising prices across all their distribution channels or maintain current prices and absorb the loss.

In addition, wide MFNs typically spread across a market: competing platforms will have a strong incentive to implement similarly wide MFNs to protect themselves against the risk of rates on their websites exceeding those listed elsewhere. This can result in low levels of price differentiation (i.e., suppliers displaying the same price across all platforms).

Barrier to entry and innovation

Wide MFNs have also been alleged to constitute a barrier to entry, on the basis that online platforms are prevented from entering the market or expanding through a strategy based on offering low commission rates in exchange for better prices and conditions from suppliers (who are constrained by the wide MFNs agreed with other platforms). Platforms can still differentiate themselves based on factors such as quality and brand image; however, these typically require significant upfront investments. As above, these effects are said to be strengthened when MFN clauses spread and become industry standard.

Narrow MFNs – theories of harm

While narrow MFNs have largely been treated positively by NCAs on the basis of associated efficiencies, these potential concerns have been explored: the potential for narrow MFNs to replicate the effects of the wide MFN and restrictions on competition from the direct channel.

Potential to replicate the effects of the wide MFN

Competition authorities have noted that narrow MFNs could have anticompetitive effects if suppliers are not willing to undercut their direct channel (possibly to avoid the cannibalisation of their direct sales). Faced with an increase in commission, these suppliers might opt to raise prices not only on the platform with a narrow MFN and their own website, but also across other channels – thereby replicating the price floor effects of a wide MFN. In this respect, recent studies conducted by European NCAs have found that the switch from a wide to a narrow MFN had a positive impact on competition.

Restricting competition from the direct channel

Narrow MFNs also have the potential to produce anticompetitive effects by limiting the competitiveness of suppliers’ direct sale channels. However, the extent to which direct channels have the potential to exercise a constraint on platforms varies greatly across markets, as it will depend on factors such as the extent to which consumers shop around between platforms and the visibility of direct channels.

Justifying MFNs

Can smaller platforms and suppliers rely on VABER?

The Commission’s Vertical Agreements Block Exemption Regulation (VABER) provides a safe harbour for agreements that would otherwise fall under the Article 101(1) prohibition, provided certain conditions are satisfied – including a 30 per cent market share threshold on both the upstream and downstream markets.

The Commission takes the view in the Staff Working Document supporting its E-commerce Report that parity clauses in vertical agreements are covered by VABER provided neither of the parties’ market share exceeds the 30 per cent threshold. However, NCAs have in the past rejected arguments that wide MFNs could be exempt under VABER. In particular, the French NCA noted in its online hotel bookings decision that the presumption of legality conferred by VABER can be withdrawn when a vertical agreement comes within the scope of Article 101(1) and does not meet the countervailing efficiencies under Article 101(3). 

In a ruling rejecting the appeal by HRS against the German NCA’s 2013 prohibition decision, the Higher Regional Court of Düsseldorf was also unconvinced that wide MFNs could benefit from VABER, on the basis that these clauses do not relate to conditions of sale or resale. The court held that HRS’ wide MFN ‘governs neither the conditions for the procurement of the agency services nor those for the resale of this service by the hotel companies’, and may not constitute a ‘vertical agreement’ within the meaning of Article 1(1)(a) of the VABER. The question was ultimately left open as the court also found that, in any event, HRS would not be able to benefit from the exemption given that its market share was in excess of the 30 per cent threshold.

Moreover, the application of VABER will be dependent on a finding that the supplier and platform are not ‘competing undertakings’ – an analysis that is not always straightforward in online markets. The UK NCA dismissed the possibility of applying VABER during its PMI market investigation on the basis that PMI providers and PCWs were competing undertakings that both provide PMI quotes on their websites and compete for customers through advertising.

Efficiencies analysis

Article 101(3) of the TFEU provides for an individual exemption for otherwise anticompetitive agreements on the basis of associated efficiencies. Four specific conditions must be met for an agreement or concerted practice to be exempted from Article 101(1) in this way. In particular, it must: ‘contribute to improving the production or distribution of goods or to promoting technical or economic progress’; allow consumers ‘a fair share of the resulting benefit’; not impose restrictions ‘which are not indispensable to the attainment of these objectives’; and not ‘eliminate competition in respect of a substantial part of the products in question’.

The Commission’s Guidelines on the Application of Article 101(3) provide that an assessment of efficiencies involves a balancing act: taking into account the extent of relevant restrictions of competition and balancing them against the efficiencies that flow from these restrictions, to determine whether the efficiencies outweigh the harm caused by the arrangement. This provides a framework within which to apply the specific conditions of Article 101(3).

In the context of wide and narrow MFNs, given narrow MFNs are contractually less restrictive than wide MFNs, the Article 101(3) threshold should consequently generally be lower.

Assessment of narrow MFN clauses under Article 101(3)

There has been divergence within Europe as to how NCAs have assessed the efficiency benefits of narrow MFNs.

The UK NCA undertook a detailed analysis of narrow MFNs in its PMI market investigation, and found that such clauses did meet the requirements of Article 101(3). In particular, the UK NCA found that:

  • Narrow MFNs enhanced competition between PMI providers, through increased transparency and reduced search costs for consumers. Without narrow MFNs, PCWs’ existence might be threatened with a consequent reduction in inter-brand competition. In particular, the credibility of PCWs could be undermined, and providers could free-ride on the investments of PCWs, if providers were able to undercut the PCWs on which they advertise. 
  • Consumers would benefit from enhanced inter-brand competition (provided the PCW market was also competitive). 
  • Narrow MFNs would not eliminate competition – in fact, the UK NCA found that ‘if there are any anticompetitive effects from narrow MFNs in the PMI market, these effects are unlikely to be significant’ on the basis that providers would offer lower prices on low commission PCWs despite the narrow MFN, and the websites of PMI providers did not appear to be a significant restraint on PCWs.
  • The narrow MFN was indispensable to achieving the efficiency gains. While there may be alternative mechanisms by which to prevent free-riding (e.g., anonymous quotes or an alternative charging model), the UK NCA stated that it could not:
identify an alternative mechanism for PCWs to protect their credibility as a comparison tool. Rather it appeared to us that the ability to offer prices which were the same as those available online directly was part of the essential, customer-attracting proposition of a PCW. Overall, we found that even if narrow MFNs had some anti-competitive effects, they might be necessary for PCWs to survive.

As set out above, in the online hotel bookings investigations, several NCAs found that narrow MFNs did not restrict competition. These NCAs did, nonetheless, recognise the efficiency benefits associated with narrow MFNs and their decisions leave the impression that the decision to accept Booking.com’s commitments was driven by efficiency considerations. For example, the Swedish NCA stated that OTAs can attract customers that the hotels themselves have difficulty reaching, and ‘offer consumers a search and comparison function that individual hotels are unable to offer’. The Swedish NCA found this contributed to ‘price transparency on the market and to increased competition between hotels’ and that, without the narrow MFN, these efficiency benefits would be put at risk through free-riding. The French and Italian NCAs also recognised that hotel booking OTAs give rise to important efficiencies, which would be protected through the narrow MFN commitments.

The German NCA, by contrast, has so far been unconvinced by the benefits of the narrow MFN – finding instead that the narrow MFN restricts competition and that harm is not outweighed by efficiency gains. In particular, the German NCA found in its decision against Booking.com that none of the conditions of Article 101(3) were met, noting that:

  • The general efficiency gains that hotel booking OTAs bring do not result from the narrow MFN. The German NCA was unconvinced by evidence put forward by Booking.com that the removal of the narrow MFN would result in free-riding or increased search costs, and considered that Booking.com would continue to operate successfully without the narrow MFN.
  • Even if efficiency benefits were attributed to the narrow MFN, they were not indispensable. The German NCA’s view was that in the absence of the narrow MFN, Booking.com could take steps to secure its position in the marketplace; for example, through increased innovation, reducing its commission rate or, if necessary, by changing its business model (e.g., by implementing a usage fee for consumers or a pay-per-click model for hotels).
  • Narrow MFNs ‘palpably restrict price competition and . . . quality competition’ – but whether the fourth condition of Article 101(3) (the agreement does not eliminate competition in respect of a substantial part of the products in question) was met was left open on the basis that the German NCA considered it irrelevant given the first three conditions were not fulfilled.

However, in June 2019, the Higher Regional Court of Düsseldorf overturned the German NCA’s decision in respect of narrow MFNs, finding them to be compatible with competition law. Notably, it approached its analysis through the lens of the ancillary restraints doctrine as opposed to Article 101(3), the implications of which are explored further below.

Wide MFNs – any incremental benefits over and above narrow MFNs?

The UK NCA considered whether the wide MFN had any incremental benefits over the narrow MFN in its PMI investigation. In particular, it considered efficiency arguments that consumers would not trust PCWs unless they had the best prices across all providers; a wide MFN provides a ‘one stop shop’ further reducing search costs for consumers; and wide MFNs prevent other distribution channels free-riding on the advertising investments of PCWs.

The UK NCA found that these claimed efficiency benefits were not supported by evidence. In particular, it found that many consumers searched across multiple PCWs, ‘suggesting that they did not expect the prices returned through each PCW to be the same’ and that PCWs did not currently operate as a ‘one-stop shop’. With respect to free-riding, the UK NCA drew a distinction between the narrow and wide MFN stating that:

as PCWs do not provide a link to other PCWs when they produce their search results, there was not the same possibility for another PCW to free-ride on the first PCW’s investment as other PCWs would still need to invest in advertising to attract customers. Therefore, we did not see that a wide MFN added any protection from free-riding to that provided by a narrow MFN.

Ultimately, the UK NCA found that even if there were some incremental benefits of wide MFNs ‘such incremental benefits would be unlikely to outweigh the anticompetitive effects of wide MFNs’.

The UK NCA reaffirmed its assessment that wide MFNs were not necessary to deliver any potential benefits to consumers over and above those of narrow MFNs in its DCT market study. Other authorities have also found that the wide MFN does not meet the requirements of Article 101(3).

Analysis under the ancillary restraints doctrine

Another potential approach to justifying MFNs is under the ancillary restraints doctrine. This approach is yet to be properly tested by European competition authorities. The German NCA briefly stated in its decision against the wide MFN employed by HRS that ‘the MFN clauses are not ancillary agreements which are required to safeguard the main purpose of a contract which does not violate competition law. The clauses are therefore not exempt from the scope of the ban on anti-competitive agreements,’ but did not consider the doctrine further.

There are stronger arguments that the narrow MFN could be justified as an ancillary restraint, which is a clause that is objectively necessary and proportionate for the implementation of a competitively neutral transaction. Therefore, the same arguments that have been used by PCWs to justify the narrow MFN under an Article 101(3) analysis – namely, that narrow MFNs are necessary to prevent free-riding and ensure credible search and comparison – could also be argued to be a necessary and proportionate restriction for the provision of services by PCWs.

As noted, the Higher Regional Court of Düsseldorf took a different approach to the European competition authorities in its approach to the narrow MFN by assessing the clauses under the ancillary restraints doctrine instead of Article 101(3). It found narrow parity clauses compatible with competition law on the basis that they are a necessary ‘ancillary agreement’ in the contracts with hotels that enable performance of the (pro-competitive) overall contract, and thus considered them exempt from Article 101. Without specifically mentioning efficiencies, the court noted that Booking.com is obliged to perform its part of the contract in advance, and must therefore be able to prevent the ‘evident and serious risk’ that hotels disloyally divert customers to their own sales channels to make the final booking – depriving Booking.com of its commission and disrupting the ‘fair and balanced exchange of services’. The court considered it irrelevant whether Booking.com would be able to prevent the occurrence of free-riding through a different remuneration agreement such as a usage fee, as had been suggested by the German NCA; the starting point is that the disputed price parity clause is a necessary ancillary agreement to implement the contract, and the clause does not go beyond what is proportionate in doing so.

The court did consider the issue of free-riding, but did so as part of its reasoning on ancillary restraints. While the end result is the same, this represents a different way of getting to it, with certain practical implications as to how these clauses may be assessed in future; for example, while the burden of proof under Article 101(3) is on the parties to show that the pro-competitive gains of the agreements outweigh the anticompetitive effects, the burden of establishing a restriction of competition in an ancillary restraints analysis rests with the regulator. It remains to be seen how courts and regulators will approach narrow MFNs in future.

Are there any other considerations for dominant companies?

While MFNs have largely been considered under Article 101, the use of wide MFNs in standard contracts with suppliers by dominant companies could also be found to constitute abuse under Article 102 of the TFEU, because of concerns around associated exclusionary effects.

In particular, the Commission analysed MFNs under Article 102 in the Amazon e-books MFN investigation. The Commission took the preliminary view that Amazon may have abused its dominant position through a number of MFN clauses requiring e-book publishers and suppliers to inform Amazon about more favourable or alternative terms given to competing platforms (relating to price, promotions and e-book features) and to offer Amazon similar (or better) terms. The Commission considered that such clauses could strengthen Amazon’s position by reducing the ability and incentive of e-book suppliers and competing platforms to develop new business models.

The relevance of Article 102 was also raised in the online hotel bookings cases. In particular, the French NCA noted that the imposition of wide MFNs by one or multiple platforms could be deemed to constitute individual or collective abuse of a dominant position. 

What type of economic analysis has been conducted by NCAs on the impact of the switch from wide to narrow MFNs?

In the online hotel bookings sector, an ECN working group conducted a year-long monitoring exercise with a view to assessing and comparing the impact of the switch from wide to narrow MFNs across Europe on the one hand, and the prohibition of MFNs in Germany and France on the other. The working group carried out a difference-in-differences analysis of room price data obtained from metasearch websites, and found that ‘the switch from wide to narrow parity clauses by Booking.com and Expedia led to an increase in room price differentiation between OTAs by hotels in eight of the 10 participating Member States.’ 

The UK NCA also reviewed the impact of the switch from a wide to a narrow MFNs by PCWs in agreements with PMI providers as part of its DCT market study. The econometric analysis carried out showed that ‘commissions have been lower than they would have been since the removal of the wide MFNs . . . this suggest[s] that the impact of narrow MFNs has not (or not fully) replicated that of wide MFNs.’

Practical considerations when drafting narrow MFN clauses

The UK NCA recently provided guidance on the scope of narrow MFN clauses as part of its DCT market study. In the NCA’s view, narrow MFNs should not go beyond the scope of what is strictly necessary to achieve related efficiencies. In particular, the UK NCA noted that narrow MFNs should not apply to existing customers (those customers with whom the supplier already has a contract or who participate in a supplier’s loyalty programme) on the basis that free-riding efficiencies are less likely to apply to these customers. 

Are any new developments expected over the coming months?

MFN clauses are likely to remain a hot topic in Europe:

  • NCAs are continuing to take enforcement action against wide MFN clauses. In September 2017, the UK NCA launched an investigation into the use of wide MFN clauses by a price comparison website, Compare The Market, in relation to home insurance products. A statement of objections was issued in November 2018 that provisionally found Compare The Market had broken the law by preventing home insurers from offering lower prices elsewhere, with a final decision expected in the coming months. Separately, the ECN has indicated that it will continue to monitor the online hotel sector and ‘re-assess the competitive situation in due course’.
  • As noted, in June 2019, the Higher Regional Court of Düsseldorf quashed the German NCA’s prohibition of the narrow MFN on the ground that the court did not find the provisions incompatible with competition law. The German NCA has since filed an appeal with the Federal Supreme Court, but this decision does – at least for now – provide greater legal certainty as to the use of narrow parity clauses by online hotel booking platforms.
  • In the context of private litigation brought by a Swedish tourism association against Booking.com, the Swedish Patent and Market Court held in July 2018 that narrow MFN clauses were restrictive of competition and ordered that these be removed from Booking.com’s agreements with hotels in Sweden – thereby going against the findings of the Swedish Competition Authority in its 2015 commitments decision. However, as in Germany, Booking.com has since successfully appealed and overturned this decision; in May 2019, the second instance court found that the claimant had failed to provide sufficient evidence that the narrow MFNs in question had an anticompetitive effect on the market. This decision cannot be appealed.
  • Legislation has been introduced in France, Austria, Italy and Belgium prohibiting MFN clauses (including narrow MFNs) in contracts between accommodations and hotel booking OTAs. A proposal for similar legislation has been put forward in Switzerland.
  • The European Union’s new platform-to-business regulation, which comes into force on 12 July 2020, will require online platform intermediaries to include an explanation of the ‘main economic, commercial or legal considerations’ for using MFNs (if any) in their terms and conditions for business users (such as suppliers), and make this explanation publicly available.

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