'Best Value Clauses': a hidden competition risk for manufacturers
Do you offer your customers 'Best Price Clauses'? Do you regularly monitor these clauses? Recent legal developments suggest that you could face investigation by competition authorities resulting in serious fines!
EU and UK competition authorities have recently focused on Best Price Clauses, also known as 'Most Favoured Nation' (MFN) clauses, and their anti-competitive effects. Several household names, including Apple and Amazon, have faced such scrutiny. It is important for you to consider your commercial agreements in light of these developments to avoid the potential risk of investigation and fines.
What Are MFN Clauses?
An MFN clause is one where the manufacturer guarantees to the buyer that they will receive the best price that is offered to any subsequent buyer.
Consider this hypothetical situation. A manufacturer of IT components enters into an agreement with Buyer A for 100,000 units of their latest processor. The agreement contains an MFN Clause and also states that the manufacturer will sell the units to Buyer A for £100 per unit. The MFN Clause can operate to benefit the buyer so that if the manufacture enters in to an agreement with Buyer B for 10,000 units of the same product at £90 per unit, then Buyer A could claim the £10 difference on the order they placed.
The main focus of competition authorities is to prevent companies operating in an anti-competitive way. However, in practice, MFN clauses typically do not limit a seller’s commercial freedom. The seller usually remains free to offer more favourable prices to other customers, provided this favourable treatment is extended to the beneficiary of the MFN clause.
Why Are MFN Clauses Risky?
Consider the hypothetical situation above. On the same facts, the MFN clause creates a situation which favours larger buyers (Buyer A). The manufacturer would have to weigh up the cost difference between the money it would make from the agreement with Buyer B and the amount of compensation it would have to pay to Buyer A under the MFN. This would result in the manufacturer having to pay £100,000 back to Buyer A under the MFN clause, which is greater than the £90,000 value of the contract with Buyer B. This creates an advantage to the buyer with greater buying power.
So, while MFNs have their advantages, the risk is that they could create a financial incentive for the seller not to offer lower prices, resulting in higher overall prices in the market. They can also be used by a company that has a dominant market position to keep out competitors, especially those that have lesser buying power. These are things that competition investigators do not like.
There are also issues surrounding the monitoring of MFN clauses. There would have to be an element of information sharing between businesses to know the contract prices offered to their competitors. Such an arrangement could indicate an 'illegal information exchange'. These can be destructive to competition by leading to co-ordination and collusive behaviour. For instance, information exchanges that create transparency of future price or capacity could lead to collusion even in the absence of express anti-competitive agreement, especially in a market with only a few competitors, which makes it easier to monitor behaviour and compliance of other companies.
Misuse of an MFN clause could result in a breach of the prohibitions contained in Article 101 of the Treaty on the Functioning of the European Union (TFEU) and Chapter 1 of the Competition Act 1998 (CA) for anti-competitive agreements, and also in Article 102 TFEU and Chapter 2 CA for the abuse of a dominant market position. As a result, the offending party can have the following sanctions imposed upon them:
- Fines of up to 10% of group worldwide turnover;
- Damages for aggrieved parties; and,
- A ruling that the offending clause is void and unenforceable.
In the recent eBooks case, the EU and US competition authorities examined arrangements between several book publishers and Apple relating to the publication of eBooks on Apple’s devices. The publishers agreed that the price of eBooks on Apple platforms would have to be as low as the price of the same eBook on other platforms, mainly the Kindle (the eBook reader developed and manufactured by Amazon). The investigating authorities were concerned that this clause would disincentivise publishers to allow Amazon to sell eBooks cheaply on Kindle. This was because the clauses made it excessively costly for publishers to accept the low pricing policy set by Amazon and thus led to publishers forcing Amazon to enter into agency agreements with them, which allowed them to control the resale price of eBooks sold on Kindle. The US federal judge ruled that the MFN provision in Apple Inc's contract with five book publishers was a conspiracy to fix eBook prices.
The Office of Fair Trading (OFT) and the German Bundeskartellamt ran parallel investigations into Amazon’s price parity policy (comparable to MFN clauses). Amazon’s price parity policy requirement prohibited third party sellers from selling their products at lower prices on other online platforms. The authorities were concerned that the policy might be anti-competitive as it had the potential to discourage entry by potential competitors as well as directly affect the prices set on platforms. During the investigation, Amazon informed the authorities that it would end the price parity policy in the EU. As a result, the OFT closed its investigation on the basis of administrative priorities and the German Bundeskartellamt acted in a similar way.
The online hotel bookings market has also been investigated by at least ten national competition authorities, including those of Austria, France, Germany, Hungary, Italy, Switzerland and the UK. The OFT issued a statement of objections alleging that both Expedia and Booking.com had concluded agreements with InterContinental Hotel Group ("IHG") that contained MFN clauses which prevented the travel agents from offering hotel rooms at a lower rate than the rate determined by IHG. The OFT alleged that these agreements were anti-competitive by nature as they could hamper price competition between online travel agents and the hotel's own online platforms and bar new agents from either entering the market or expanding their market share. The three companies have now made legally binding commitments to address the concerns of the OFT.
What Can Manufacturers Do to Avoid the Risks?
The law on MFN clauses is complex and could result in significant fines being imposed if they are entered into and if they are found to be anti-competitive.
These are the key aspects which we believe those in the manufacturing sector should consider:
- You may have unidentified MFN clauses in your current agreements.
- You must make sure you monitor these clauses effectively and legally.
- You may be unsure about the legal validity of a pricing clause in your agreements.
- You could consider the usage of MFN clauses as a legitimate way to manage your commercial needs, but these need to be reviewed now to make sure they are not anti-competitive.
These are all considerations that we can help you with.
The above article contains summaries of complex issues and should not be relied upon in relation to specific matters. Legal advice should be taken on particular problems and we would be happy to assist.