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Friday, July 19, 2013

Where do MFN clauses stand after Apple Price-Fixing Decision?

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A “most-favored-nation” (MFN) clause requires the seller to provide the buyer the lowest price offered to any rival purchaser.  (The clause takes its name from the arena of international trade).  

Apple had a MFN clause in its contracts with five major book publishers.  Last week, Judge Denise Cote (SDNY) held that this clause was part of a conspiracy to fix e-book prices. The contracts required the publishers to give Apple’s iTunes store the best deal in the marketplace on e-books. 

What does this decision mean for MFN clauses, which are used in a number of industry contracts?  The WSJ took up this topic in a recent article:

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."

Apple, meanwhile, has strongly denied that it conspired to fix prices, and has said it will appeal the decision.

Judge Cote avoided a broad denunciation of MFN clauses, but her decision could haunt contract negotiations in industries as diverse as entertainment and health care, legal experts said. In recent years, the Justice Department has sued a few companies over the use of MFN clauses and is investigating others.

"While most favored-nation clauses can be competitively benign, when they are used as a tool to engage in anticompetitive conduct that harms consumers, the Antitrust Division will take enforcement action," said Assistant Attorney General Bill Baer, who oversees the division at the Justice Department.

MFN clauses guarantee the recipient the lowest prices or rates charged to any buyer. While in theory that could encourage competition and lower prices for consumers, in practice such agreements sometimes end up establishing a minimum price, according to antitrust lawyers and government officials.

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Apple said the provisions guaranteed its customers would get the lowest price for new and popular e-books. But Judge Cote offered a less-flattering interpretation.

"[The MFN] eliminated any risk that Apple would ever have to compete on price when selling e-books, while as a practical matter forcing the publishers to adopt the agency model across the board," she wrote in her 160-page ruling.

The article reports that the Justice Department is expected to request that the court “impose a variety of conditions on Apple's business, including barring the company from using MFN clauses,” sending the viability of MFN clauses into doubt.

More of the article here on the WSJ site (subscription required).

[Meredith R. Miller]

http://lawprofessors.typepad.com/contractsprof_blog/2013/07/where-do-mfn-clauses-stand-after-apple-price-fixing-decision.html

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