Most Favored Nation ('MFN') Pricing Draws Scrutiny As Potential Anticompetitive Practice

An interesting and growing debate in the antitrust arena is whether most favored nation ("MFN") pricing provisions are pro-competitive or anticompetitive. For many years, MFN provisions have been considered a fairly noncontroversial contract term included by purchasers in an attempt to assure that other buyers do not receive a more favorable price. But not all agree that MFNs result in lower prices, including some economists and, more importantly, the Department of Justice Antitrust Division ("DOJ"). The DOJ not only has expressed potential concerns about MFN clauses but also has filed several antitrust actions alleging that particular MFN clauses violate Sherman Act § 1 and cause anticompetitive effects. The challenge for businesses that prefer to include MFN clauses in their purchase agreements is to recognize when those clauses potentially raise antitrust risk.

The procompetitive benefits of MFN clauses are fairly straightforward. First, the most typical reason for obtaining an MFN clause is to reduce the buyer's price in the event that the seller agrees to sell to another customer at a price lower than that specified in the contract with the MFN clause. This is usually considered procompetitive because a reduction in the cost of inputs may enable the buyer to lower the price it charges when selling the product downstream. Indeed, if the downstream market is highly competitive, we would expect that competition in the downstream market would cause the MFN beneficiary to pass on most or all of that cost savings to the downstream customers.

A second procompetitive effect of an MFN clause is a reduction in the transactional costs associated with negotiating a sales contract. The purchasing agent for the buyer need not wring every nickel from the seller on price because the buyer has the protection of the MFN. In the technology licensing context, and particularly when there is no good understanding of the market for the technology, an MFN clause assures that the first licensee pays no more than a later licensee. This facilitates negotiation of the license and thereby helps push new technology to the market sooner than it would have if the licensee waited to see what its competitors would pay for the technology.

So with these benefits, what is the antitrust concern? Typically the antitrust issues arise when the buyer has a large market share and can exclude competitors or make it more difficult for them to compete. For example, one concern is...