Amazon calls quits on e-book 'Most Favoured Nation' clauses
11 June 2015
Let us rewind the clock two years – to June 2015; when The European Commission (EC) announced its decision to initiate an antitrust investigation in relation to Amazon's business practices. In particular, the EC intended to scrutinise the e-commerce giant's use of 'Most Favoured Nation' clauses (MFNs) within its e-book publisher distribution contracts.
Amazon's non-negotiable agreement terms risked shielding the company from competition; by requiring publishers to:
- notify Amazon about alternative or more favourable terms offered by the publishers to Amazon's rivals
- offer Amazon similar terms or, through other means, ensure that Amazon was offered terms at least as good as those available to its competitors
At the time, the EC's decision to investigate highlighted wider concerns that certain contract terms, such as MFNs, might breach EU anti-competition rules generally. Amazon's practices warranted particular scrutiny as the largest e-book distributor in Europe.
The EC recognised Amazon's role as a successful consumer-facing business, but felt investigation was needed in order to determine if the company's parity arrangements risked being harmful to consumers.
The investigation questions posed by the EC addressed: whether other e-book publishers were prevented from innovating and competing effectively with Amazon and was Amazon, via its MFN practices, abusing its dominant market position (again, prohibited under EU competition rules)?
Of particular note, the EC's investigation of Amazon's practices focussed not only on price MFNs but also on (previously un-scrutinised) non-price MFNs.
4 May 2017
Fast forward to today and, following two years of scrutiny, market testing and negotiation, the EC has recently announced that it has accepted a commitment by Amazon to no longer enforce, introduce or change terms such as MFN clauses in agreements with its e-book publishers.
Amazon has further committed to allowing publishers to terminate e-book contracts that contain a clause linking discount possibilities to the retail price of a given e-book on a competing platform (also known as Discount Pool Provisions).
The EC's formal adoption renders Amazon's commitments legally binding, for a period of five years, to all e-books, in any language, distributed by Amazon in the EEA. Amazon risks being fined up to 10% of its annual worldwide turnover if it breaches this commitment. Of note, however, the decision does not reach any formal conclusion about whether Amazon's practices have infringed EU antitrust rules.
The future of MFNs
The EC's investigation and Amazon's commitment is focussed on the e-book market (estimated by the EC to be worth more than €1bn in Europe). However, uses of MFNs in other distribution models are also facing increasing levels of scrutiny. For example, the tourism industry has been subject to EC and member state investigation in relation to use of MFNs in hotel booking platform agreements.
As the antitrust risks inherently associated with MFNs are better understood in today's pro-competition market, the days of their use (particularly by more dominant businesses) may well be numbered. For businesses seeking to contract with the bigger players, it could pay dividends to be aware of the limits of MFNs and the scrutiny their use is under. Whilst MFNs have not been outlawed, understanding their limits can be used as leverage when negotiating distribution and agency-type agreements.
The absence or removal of MFNs will assist companies to better compete, without the restrictions afforded by such clauses.