Counseling on MFNs After e-books

May 01, 2014

Until The District Court's decision in United States v. Apple, Inc. (“e-books”), antitrust attorneys defending the use of most-favored-nation (MFN) clauses had been fond of noting that, despite increased scrutiny in recent years, no U.S. court had yet found an MFN to be unlawful. And in counseling clients on MFNs, it was common to advise that the risk of an antitrust violation is low if the parties to the MFN lack market power. This advice was sound because, until e-books, courts and scholars believed that an MFN typically does not cause competitive harm (such as raising rivals’ costs, deterring entry, or softening price competition among upstream suppliers) unless the MFN deters discounting, which is unlikely when the MFN beneficiary accounts for only a small portion of the MFN grantor’s sales.

In e-books, however, the Southern District of New York condemned Apple’s use of MFNs in agency agreements with several e-book publishers even though Apple, the new entrant, had no market share, and even though the court did not find that the MFNs deterred any e-book publisher from offering discounts or that the MFN otherwise raised Apple’s rivals’ costs, deterred entry, or softened competition among the upstream publishers. Rather, the court found that Apple’s MFNs facilitated an unlawful “price-fixing” conspiracy among the upstream publishers because the agreements “eliminated retail price competition” in the downstream distribution of e-books.

When taken together with other recent challenges to and investigations of “price parity” clauses—which are conceptually similar to MFNs—e-books raises the question of whether counselors should reconsider the legal and economic foundations for their advice on MFNs. For example, can MFNs lead to competitive harm even when the MFN beneficiary does not have a large enough market share to deter the MFN grantor from giving discounts to other buyers? Should an MFN in an agency agreement be condemned for “eliminating [intrabrand] retail price competition” regardless of whether it discourages discounting? This article explains why the answer to these questions is “no” and why it is still advisable to focus on the central question of whether an MFN deters discounting.

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