Most Favored or Too Favored? Suits Challenge MFN Clauses Used by Amazon and Valve

Most-Favored Nations (MFN) clauses (also known as antidiscrimination clauses or most-favored customer clauses) are common in business today. These provisions require that the supplier will treat a particular customer no worse than all other customers (and sometimes even better). They are often coupled with some sort of monitoring mechanism, such as the power to audit the supplier. For example, imagine a flour mill signs a requirements contract with Bakery A that contains an MFN clause. The mill cannot then turn to Bakery B and offer the flour at a lower price without either a) offering the same to Bakery A or b) breaching the requirements contract. These clauses can extend beyond price to other contractual terms and conditions (e.g., product release dates, promotional prices, or product offerings).

Common as they may be, a series of lawsuits out of New York and California will subject those very clauses to scrutiny under U.S. antitrust law. First, a class action suit against Amazon and the five largest book publishers in the United States—Hachette Book Group, HarperCollins Publishers, Macmillan Publishing Group, Penguin Random House, and Simon & Schuster (the “Big Five”)—alleges that MFN clauses in ebooks agency contracts amount to an illegal price-fixing agreement. The suit echoes a 2012 suit against Apple and the Big Five that culminated in a consent decree restricting the use of MFN clauses that prevented ebook retailers from adding their own discounts.

The second class action accuses Valve, Inc. of using MFN clauses in its contracts with game developers—both big (Ubisoft) and small (Rust)—to maintain its monopoly in personal computer video game sales through its online marketplace Steam as well as stifle competition more generally. The complaint alleges that the MFN clauses cause game prices across online marketplaces to be the same even though stores like the Epic Games Store take a smaller commission than Valve. Rather than pass those savings on to the consumer, the developers must maintain higher prices to remain profitable on Steam.

While the suits target different markets, they boil down to the same issue: when do MFN clauses become anticompetitive? As the panels to a day-long public workshop on these types of clauses by the 2012 Department of Justice and Federal Trade Commission indicate, it depends on the market at issue, the contracting parties, and the effect on that market. On the one hand, MFN clauses are practical and advantageous in that they eliminate the purchaser’s risk in negotiating a bad deal under unstable pricing conditions, reduce transaction costs in re-negotiating agreements upon discovery of lower prices, and are generally benign when market power is absent. On the other hand, MFN clauses as a price-monitoring mechanism can be used to facilitate collusion amongst competitors; discounts to the purchaser’s competitors and new market entrants, regardless of their size, are effectively foreclosed, resulting in increased prices overall. For these reasons and more, MFN clauses alone are subject to the rule of reason—a lenient standard that requires a rigorous market analysis.

So, what made Amazon and Valve targets for these suits? Market power. Amazon was public enemy number two (second only to Google) in the House Judiciary Committee’s antitrust report on competition in digital markets, which denounced Amazon’s impact on small- and medium-sized enterprises dependent on the monopolist’s platform. A humble bookseller no more, the class action alleges that Amazon now enjoys a stunning 90% of the ebook market. As for Valve, European antitrust regulators recently fined them 1.6 million euros (approx. $2 million) for the practice of restricting access to games based on physical location, which the European Commission deemed an illegal partition of the Digital Single Market. And U.S. regulators may turn towards Valve if the class action is correct in asserting that 75% of all PC games sold in the United States are through Steam. Both companies have inordinate market share for online sales at a time when antitrust enforcement is experiencing a renaissance and the digital economy is subject to exacting scrutiny.

The suits should not be a cause for alarm for most companies using MFN clauses. After all, when small purchasers in unconcentrated markets use MFN clauses to reduce price fluctuations or to commit to a long-term business relationship, courts should recognize that the economic efficiencies outweigh the anticompetitive effects. But when big tech closes off competition by maverick firms, keeps a watchful eye on its supplier through auditing rights or algorithmic pricing, and guarantees dominance over an extended period of time, it is no surprise that consumers, competitors, and Congress cry foul. MFN clauses have a time and a place, but it is not at the top.