UK: Do Me A Favour!

Last Updated: 23 October 2014
Article by Rebecca Owen-Howes

Does price parity mean price increase when it comes to most favoured nation clauses? Rebecca Owen-Howes reports.

Most favoured nation (MFN) clauses (also referred to as most favoured customer clauses) are contractual obligations by one party to offer its best terms to another party. Under a MFN, the seller promises Buyer A that it will not offer Buyer B better terms unless it first offers those, or better terms, to Buyer A. The term MFN also includes price parity agreements, where products are sold on different platforms (often relevant in the context of internet selling).

In the past, competition authorities, including the European Commission, have not appeared to be overly concerned with MFN clauses. The general consensus among competition practitioners was that such provisions could benefit competition by reducing supply chain costs, transaction costs and delays. In the last 10 years or so, however, MFN clauses have started to attract the concern that they may be used to achieve anti-competitive objectives or have an anti-competitive effect. In particular, when in the hands of a dominant buyer of intermediate goods, MFN clauses may raise other buyers' costs or prevent start-ups and potential competitors from accessing the market. Furthermore, MFN clauses can encourage collusion by ensuring transparency of commercially sensitive information and coordinate pricing between sellers.

Time for a concerted approach by the authorities?

Until now, competition authorities have produced little guidance on the question of whether MFNs infringe Art 101 of the Treaty on the Functioning of the European Union (TFEU), which prohibits anti-competitive agreements. Although the authorities have considered MFNs under competition law, many of the cases have resulted in settlements without fines being imposed following commitments by the parties to remove the clauses under investigation, which in turn has prevented the development of a consolidated doctrine on MFNs.

Is all this about to change? In June 2014, the Competition and Markets Authority (CMA) took steps to deal with MFN clauses when it published its provisional decision on remedies in the private motor insurance (PMI) market investigation (Competition & Markets Authority, Private Motor Insurance Market Investigation, Provisional Decision on Remedies:,12 June 2014). To remedy the adverse effects on competition, it has identified in relation to price comparison websites (PCWs), the CMA is minded to prohibit PCWs and PMI providers from entering into certain MFN clauses. The CMA has defined MFN clauses as being either:

  1. narrow MFNs: which provide that the price quoted through the PCW will always be competitive with the price of the insurer's own website, ie. the price on the insurer's own website will never be cheaper than the price on the PCW; and
  2. wide MFNs: which provide that the price quoted through the PCW will always be competitive with other prices available on other sales channels, be they on the insurer's own website or on other PCWs (or any other distribution channel).

The CMA proposes to make an order prohibiting so-called wide MFNs which, by their nature, prevent different PWCs from displaying different prices. It found that wide MFNs restrict competition between PCWs, since they tend to create barriers for new players to access the market, reduce innovation and increase prices for end users. In effect, the clauses prevent a PCW from using a competitive edge over its competitors.

The CMA is also considering prohibiting certain behaviours by the larger PCWs which it found restrict competition in the same way as wide MFNs, such as delisting an insurer if it offered cheaper policies on other PCWs.

Conversely, the CMA held that, generally speaking, narrow MFNs have only limited anti-competitive effects (acknowledging that in certain circumstances, narrow MFNs might have the same effect as wide MFNs, particularly where the insurer's website sales are substantial). Without narrow MFNs, PCWs might not survive and if that were to be the case, competition in the PMI market would be weaker to the detriment of consumers. A relevant factor in the CMA's decision-making was the fact that a high proportion of consumers search only a single PCW and do not shop around, which give PCWs market power.

The CMA published its final report on the PMI market on 24 September 2014. It has decided to introduce a prohibition on wide MFNs as discussed above and a prohibition on MFN-equivalent behaviours. It seems likely that the CMA's final position may be referred to by other competition authorities in their treatment of MFNs in the future. However, the CMA's findings are in the context of a market investigation (and not a breach of the competition rules). PCWs form an important part of the market being investigated and it may be that MFNs which do not concern online platforms should be viewed differently.

Object versus effect?

There are several competition law cases concerning the use of MFNs in contractual arrangements. It appears the authorities' approach has been to assess MFNs on a case by case basis and to examine the effect of the MFN by reference to the specific factual circumstances. Factors which are particularly relevant to any analysis include the structure of the relevant market (and how concentrated it is), the market power of both the seller and the buyer and the scope of the MFN clause.

That does not mean that MFNs could not in future be found to be hardcore restrictions, where they are considered to be so damaging to the competitive process that they infringe Art 101 of TFEU, regardless of whether they have an effect on competition where they support other measures with an anti-competitive effect. Hardcore restrictions, which have the object of restricting competition, include price-fixing. The European Commission's Guidelines on Vertical Restraints (European Commission Notice, Guidelines on Vertical Restraints, para 48), envisage the possibility that MFNs can make direct and indirect price-fixing more effective, thereby bringing them under the hardcore restriction banner when combined with other resale price maintenance measures. Support for this view is also found in the 2014 Commission Staff Working Document (European Commission, Guidance on Restrictions of Competition "By Object" for the Purpose of Defining which Agreements may Benefit from the De Minimis Notice, s 2.1.1.) which refers to the e-books case (see below) when discussing price-fixing.

E-book publishing

The European Commission considered the use of MFNs in the e-book publishing case (Case COMP/AT.39847-E-Books). The Commission took the view that jointly switching the sale of e-books from a wholesale model to an agency model, with the same key pricing terms on a global basis, amounted to a concerted practice, with the object of either raising the retail prices of e-books, or preventing the emergence of lower prices of e-books, in the EEA (in other words, a hardcore restriction). The pricing terms included an MFN, which meant that where the publisher offered a lower price for a particular e-book through a particular retailer, the publisher would have to lower the retail price of that e-book in the iBookstore to match that other lower price. The case was closed in July 2013 by way of commitments from five leading publishing houses and Apple, which terminated their existing agency arrangements. As far as the use of MFNs was concerned, the parties agreed not to include an MFN in any agreement for the sale of e-books within the EEA for five years. The fact that the use of MFNs was not banned outright suggests that, in isolation, the Commission does not regard MFNs as hardcore restrictions.

The US Department of Justice investigated e-books at the same time as the European Commission and reached a settlement with a number of publishers. In court proceedings in 2013 against Apple (Case 1:12-cv-02826-DLC, United States of America v Apple Inc, et al), a US federal judge ruled that the price-matching provision in Apple's contracts with five major book publishers, was part of a scheme to fix e-book prices. The agency contract required the publishers to give Apple's iTunes store the best current market deal on e-books. While the court found that the horizontal conspiracy to raise e-book prices and eliminate price competition was a per se (ie, hardcore) restriction, it was careful to point out that no single action by Apple, including use of the agency model with an MFN, was inherently illegal. In relation to MFNs, the court prohibited Apple from entering into or enforcing such provisions in e-book sale agreements for five years.

Hotel online booking

The most recent UK competition case concerning MFNs is the hotel online booking case (Case CE/9320/10) in January 2014, in which the CMA (then the Office of Fair Trading) did not make a final infringement decision, but accepted binding commitments from, Expedia and InterContinental Hotels Group (IHG) to address its competition concerns in relation to the online offering of room-only accommodation by online travel agencies (OTAs). The arrangements restricted the ability of each OTA to discount the room rate it offered consumers and included MFNs. The CMA's provisional view was that the arrangements should be treated as hardcore restrictions. In response to comments, the CMA confirmed that it had investigated the MFNs in this case, but that it had not assessed whether MFNs may give rise to a breach of Art 101 (or the UK equivalent provision). Under the commitments, MFNs are permitted, provided they allow OTAs (as a minimum) to discount within a closed group of customers. (On 26 September 2014, the Competition Appeal Tribunal quashed the CMA's decision to accept commitments and remitted the matter back to the CMA for reconsideration (Case 1226/2/12/14).) Again, the fact that a more limited use of MFNs was allowed by the authorities implies that they do not have the object of restricting competition (although in certain cases, that may be their effect).

In a similar case, the German Federal Cartel Office took a more hard line approach and banned MFNs. In December 2013, it found that the large online hotel booking platform, HRS, infringed competition law by requiring hotels to offer HRS their lowest room rates and the most favourable conditions with regard to room capacity and booking and cancellation. The scope of the MFN was wide and covered both online platforms and all other types of distribution channel. The Cartel Office found that the MFN restricted competition by preventing the offer of lower hotel rates by both existing and new platforms. It ordered HRS to remove the MFN from both individual contracts and its general terms and conditions by 1 March 2014.

The last word

In answer to the question "does price parity mean price increase", perhaps the last word should go to the president of the Federal Cartel Office who, in relation to the HRS case, stated: "Only at first view do most favoured customer clauses used by online booking portals seem to benefit customers. However, ultimately the clauses prevent the offer of lower [hotel] prices elsewhere."

Originally published by NewLaw Journal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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