Antitrust Agencies, Courts Delve Deeper into Enforcement, Legal Treatment of MFNs

Courts are dealing with MFN issues more often, some antitrust attorneys and experts said during a different panel. Antitrust claims regarding MFNs “have arisen in a number of industries,” said Andrew Gavil, director of the FTC’s policy planning office. The courts “have evolved toward more consistent recognition of both the anti-competitive and pro-competitive potential,” he said. MFNs emerged in the form of consent decrees in the 1990s, and in recent cases, like the 2010 Justice Department case against Blue Cross Blue Shield of Michigan, Gavil said. Dormant MFNs still can be problematic and deter entry into a market, he said.

However, “there are few, if any cases, that provide a complete analysis in the merits based on evidence,” Gavil said. There are hardly any litigated examples of the anticompetitive effects or efficiencies of MFN use, he said. Although there isn’t a decision to point to, there is guidance, Gavil said. He recently left Howard University, where he taught antitrust law, to join the FTC.

The MFN use “limits the ability of the seller to discriminate in price, but it doesn’t entirely eliminate that ability,” Baker said. A bottle maker “can charge a higher price to a brewer that doesn’t have an MFN with it, but it can’t charge a lower price,” he said. Therefore, a firm exercising market power “may want to discriminate in price if it can, but a monopolist that charges a single monopoly price can harm competition even without that extra benefit,” he said. “The limitation on price discrimination inherent in an MFN doesn’t prevent the exercise in market power.”

Opportunism, transaction cost reduction, time inconsistency and quality commitment are some of the efficiencies of MFNs, said Judith Chevalier, a professor at the Yale University School of Management. Opportunism and transaction costs are the most prevalent reasons, she said. There may be circumstances where a fast food chain asks a credit card company for a lower per transaction fee in exchange for a bigger fixed fee, she said. That will give the chain an advantage every time it sells items using a particular credit card, she said.

Transaction-cost reductions happen when the MFN involves “one seller free-riding off of the price discovery efforts of another,” Chevalier said. The transaction costs “are substantial enough that, absent a most favored customer clause, either of the transaction costs would be inefficiently high or contracting wouldn’t take place because transaction costs are too substantial,” she added.

MFNs are implemented in different ways, Baker said. They can be included in an explicit contract with one or more companies, he said. The terms could be negotiated bilaterally or the MFN “can be used as a method of price determination in a long-term contract,” he said. It also could be implemented by announcing it as a policy “that’s applied to all buyers across the board,” he said. “The MFN has to specify the period when the price comparison takes place.” Most antitrust scrutiny has gone to MFNs that operate between suppliers and intermediate goods producers, but they can also be used by retailers who are selling to consumers, he added.

MFNs can be hard to enforce in practice, said Chevalier and another antitrust expert. There’s a number of situations in which industries appear to look “MFN-like even though no one has formal MFNs,” Chevalier said. “Enforceability tends not to be an issue with the MFNs in antitrust scrutiny,” Baker said. MFNs “are usually an attempt by a buyer to assure that it’s getting the best possible price,” said Janet McDavid, a Hogan Lovells antitrust attorney. Most MFNs handled at that firm are either pro-competitive or competitively neutral, she said. “They're fairly rarely enforced.”