Most Favoured Customer Clauses: Good, Bad or Indifferent?
25 October 2013
Practice Area: EU and Competition
Most favoured customer (MFC) clauses (or most favoured nation clauses, as they are also known) have come under the spotlight in recent years by competition authorities in the EU and the US. These are clauses which oblige a supplier to supply goods or services to a customer at a price, and on terms, which are at least as favourable as those offered to other customers.
Initially, these clauses appear to be pro-competitive in that they bind the supplier to offer the customer the lowest price (and most competitive terms) which the supplier offers to anybody else. However, increasingly these clauses have raised concerns with competition authorities across the world due to the following issues: (i) they can act as a disincentive to price-cutting as a discount offered to a third party must also be offered to the customer benefitting from the MFC clause; and (ii) the cumulative effect of several agreements with MFC clauses can lead to an alignment of prices.
In the recent ebooks case, the EU and US antitrust authorities examined arrangements between several book publishers and Apple relating to the publication of electronic books on Apple’s electronic devices. The publishers agreed with Apple that the price of ebooks on Apple platforms would have to be as low as the price of the same ebook on other platforms, principally Amazon. The authorities were concerned that this clause, rather than keeping prices down, 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.
In an entirely separate case, the OFT and the German Bundeskartellamt ran parallel investigations into Amazon’s price parity policy. Amazon’s policy prohibited third party sellers from selling their products at lower prices on other online platforms. The OFT and the Bundeskartellamt were concerned that the price parity requirement might be anti-competitive as it had the potential to raise platform fees, curtail entry by potential entrants 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. The German Bundeskartellamt made a similar announcement.
While recent cases involving most favoured customer clauses have related to online sales, the same competition law analysis applies to traditional sales. Businesses are well advised to enquire into the reasons for the introduction of a most favoured customer clause, and the potential impacts on competition, before entering into them.