Potential Antitrust Implications Of Most Favored Nation Clauses

Both in the automotive and other industries, parties have turned to most favored nation (MFN) clauses—or clauses having the same effect—as a means to assure the lowest possible input costs. MFN clauses offer pro-competitive, cost-saving benefits including efficiencies in negotiations; buyers need not haggle for the last nickel in cost reduction when an MFN clause guarantees the best available price. Despite these pro-competitive benefits, MFN clauses have drawn increased scrutiny for their possible misuse and potential for creating antitrust exposure.

DOJ's Growing Concerns

Our last article regarding MFN pricing provisions reviewed the growing debate among antitrust practitioners over whether such provisions are pro-competitive or anticompetitive. We noted the Department of Justice Antitrust Division's (DOJ) concerns over such provisions when imposed by a buyer with a large market share. Indeed, the DOJ had filed several antitrust actions alleging that particular MFN clauses violated Sherman Act § 1 and caused anticompetitive effects.

A more recent action offers a cautionary tale of how MFN clauses signed by several competitors can draw DOJ scrutiny: U.S. v. Apple, Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013), aff'd, 791 F.3d 290 (2d Cir. 2015). In Apple, MFN provisions allegedly were used to affect a conspiracy among sellers to raise prices rather than reduce costs. We set forth the DOJ allegations in Apple below, but a principal lesson of Apple is that MFN clauses and other contract terms cannot be used as a means to ensure that competitors agree not to compete with one another.

A Cautionary Tale: U.S. v Apple, Inc.

According to the published court decisions, the facts of Apple are as follows. In 2009, Apple was on the verge of releasing its new tablet computer, the iPad. In connection with the release, Apple wanted to create an ebook marketplace, which came to be known as the iBookstore. At the time, however, Amazon, and its Kindle e-reader, controlled 90% of the ebook marketplace. Amazon's market position was attributed to its "loss-leading strategy" whereby it purchased ebooks from publishers at a given wholesale price, and then sold those ebooks at or below wholesale price. This strategy was most pronounced with new releases and New York Times bestsellers, which Amazon sold for one invariable figure: $9.99.

Apple knew of Amazon's aggressive pricing, and it knew that if it set similarly low prices, its iBookstore would be unprofitable...