Most Favoured Nations clauses back in the regulatory spotlight


Author: Eddie Powell, Alex Haffner


Alex Haffner, Partner, Fladgate LLP (ahaffner@fladgate.com)

Eddie Powell, Partner, Fladgate LLP (epowell@fladgate.com)


 

Last week the Competition and Markets Authority (CMA) announced was minded to find against ComparetheMarket (CtM) (the company that increased our knowledge of meerkats) for enforcing “most favoured nation” clauses with home insurers that are anti-competitive.  If upheld, the CMA’s provisional ruling will result in the offending clauses being declared void and CtM could be liable to fines.  As such, it is a poignant reminder that such provisions, which are used across a wide range of commercial agreements, have to be carefully considered from a competition law compliance point of view.

The clauses at issue in the CtM case stop insurers using the CtM service from quoting lower prices on rival sites and on other retail channels. According to the CMA, this prevents rival comparison sites and other channels from trying to win home insurance customers by offering cheaper prices than CtM, harming consumers who miss out on the benefits greater competition would otherwise bring.  The CMA is also concerned that home insurance companies are likely to pay higher commission rates to comparison sites, with the extra costs potentially being passed on to consumers.

Most Favoured Nations clauses (MFNs) are typically used in agreements between a supplier and reseller (who may be a distributor, agent or reseller) where the supplier commits to giving the reseller a price/other terms which are at least the same as (if not better) than the prices/terms it offers other customers.

MFNs have for some time been a source of interest for competition authorities. Given that their purpose is to ensure a seller offers the most attractive pricing to a client, they are often seen as pro-competitive, particularly where they enable buyers to compete more effectively with larger competitors, thus lowering prices for customers.  However, MFNs can also give rise to competition law issues.  By their very nature, MFNs increase transparency in relation to pricing information – sellers and buyers are more likely to discuss prices offered to other customers or contact competitors under the pretext of ensuring compliance with MFNs.  As in the CtM case, there are also concerns that MFNs cause price stickiness, even in the absence of collusion between competitors.  Sellers may be dis-incentivized from reduce prices to ensure they don’t have to offer those lower prices to the buyer(s) benefitting from the MFN.

These concerns are particularly heightened when MFNs are common across a particular industry or market. Previous investigations by the competition authorities into the sale of eBooks, online hotel bookings and pay-TV films have all been motivated by the widespread use of MFNs by suppliers and purchasers of those products and services.

So far, competition authorities have seemed content to take a case by case approach to decide whether or not particular provisions are anti-competitive and the investigations mentioned above demonstrate that those authorities take particular interest in markets where MFNs predominate.

However, this may change; a proposed EU Regulation, published in April of this year, governing the terms offered by online platforms to businesses, would require any online platform using MFNs in its contracts with sellers to publish the economic, legal or commercial grounds for using those provisions. This would make it easier for the authorities to monitor the use of MFNs and to identify potential competition law breaches.

Suppliers and buyers alike would be well advised to consider carefully any existing contracts which include MFNs (whether as a party benefitting from an MFN or subject to one) and the proposed insertion of such provisions in future contracts.

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