Legal language: What is an MFN clause?

If your work is in any way connected to antitrust law, you may have heard a lot recently about MFN clauses. Most-favored-nation clauses are at the heart of an Apple-Amazon court case in which Apple has been accused of conspiring with 5 top publishing companies to fix the prices of e-books. (This DOJ press release on the case was issued on Friday, August 2.)

Let’s talk about what the heck MFN clauses are, anyways. Why use the word nation in a clause between businesses? The term comes from a principle of non-discrimination in world trade agreements, whereby no country may offer special prices to another without also extending the favor to other nations bound by the same trade agreement. Sounds reasonable in this context, right?

In contract law, a most-favored-nation clause is defined as

a contractual provision in which a seller guarantees a buyer that it will receive prices that are at least as favorable as those provided to other buyers on the same products or services. [source]

For a long time, this clause was considered fair under US law. But all that has changed…

Apple vs AmazonThe Wall Street Journal has a great summary article of the Amazon- Apple case here. (This isn’t the only case against MFN clauses—they have been contested in the healthcare and automotive industries, too.)

In brief, when Apple entered the e-book market, it had a hard time competing on price against Amazon, then the e-book retail leader. Apple decided to let publishers set their own price for e-books, unless a better price was found on the market. Then, the publishers would have to eat the loss, giving Apple their e-books for the lowest marketed price available. Apple could thus compete on price without reducing its own profit margin. As a result, these publishers decided to amend their contracts with Amazon, too, to limit their own losses—or else they would cease supplying Amazon with popular, new e-books.

It’s rather difficult to feel much sympathy for Amazon, given the way it has used prices to force the publishing market to change in recent years. However, sympathies aside, this case is quite significant. As noted in the WSJ article above:

“Defendants in antitrust cases have liked to have the sound bite that no court has found an MFN to be anticompetitive,” said Mark Botti, a former Justice Department antitrust lawyer now in private practice. “They can no longer say that.”

From the facts and timelines in this case, it is clear that MFN clauses can be used to manipulate markets as a way around price fixing regulations. I’m sure we’ll be seeing more of these cases cropping up over the next year or so.

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