Jurisdiction - India
Reports and Analysis
India – Most Favoured Nation Clauses And Competition Law.
12 August, 2013

 

Recent investigations by global competition regulators into the sale of e-books have shone the spotlight on “most favoured nation” clauses. Commonly referred to as “MFN clauses”, these ensure that suppliers agree to treat any single customer no worse than all other customers. As a result, the beneficiary of the MFN clause can always avail of the lowest price in the market relating to that particular product, regardless of any rate fluctuations that may take place.

 

The ability to impact market dynamics makes MFN clauses a source of interest for competition regulators. CCI has yet to examine MFN clauses, but the growing level of global jurisprudence indicates they merit further discussion. This article delves into MFN clauses from a competition law standpoint, particularly in light of the recent decision of a New York federal court in United States v Apple, Inc. It alsoattempts to identify the ways in which CCI might look at such clauses.

 

Apart from the obvious benefits of ensuring costs are as low as reasonably possible, MFN clauses allow retailers to compete with larger competitors, thereby further lowering prices for customers. These clauses reduce the potential for opportunism, where the buyer makes certain investments specific to the seller’s product, allowing the seller to take advantage of such dependency. MFN clauses are generally perceived as pro-competitive and consumer friendly.

 

On the flipside, MFN clauses also have the ability to facilitate collusion, directly or indirectly, between competitors. Sellers entering into MFN arrangements can agree among themselves not to offer discounts to any of their customers. MFN clauses could lead to excessive transparency in the market through sharing of price-sensitive information and serve as instruments of price-signaling to competitors. A seemingly innocuous MFN clause may even cause ‘price stickiness’ on the part of the seller, i.e. it may pressurize the seller into not offering discounts to any buyer

 

A recent judgment of a federal court in New York passed on July 10, 2013 discusses the ills that could emanate from MFN clauses (‘Apple Case’). In the Apple Case, the Court found Apple, Inc. (‘Apple’) guilty of engaging in anti-competitive practices in relation to its online e-book store “iBookstore”, holding that certain agreements between Apple and five major US publishers, Macmillan, Penguin, Hachette, HarperCollins and Simon & Schuster (‘Publishers’) served as a conspiracy to restrain trade.

 

The sale of e-books initially took place through a “wholesale” model, in which publishers would quote their wholesale price to the retailer (the dominant retailer at the time being Amazon, Inc. (‘Amazon’), and the retailer would then set the end price for the consumer. Amazon, which had 90% of the eBook market, elected to sell the e-books at a loss (For example, Amazon paid the various publishers upto USD 14 for their content and then set its retail price at USD 9.99) Apple and the Publishers agreed to discard the wholesale model in favour of the “agency” model. This meant publishers determined the retail price themselves with retailers simply receiving a fixed percentage of the final price. However, a MFN arrangement concluded between Apple and the Publishers disallowed the latter from offering lower prices to any other retailer without extending the same treatment to the iBookstore as well. This made it very costly for the Publishers to allow other retailers to sell at prices lower than Apple and unsurprisingly led to an increase in the price of e-books. It also meant an effective boycott by the Publishers unless Amazon also agreed to the agency model, with Apple allegedly encouraging the Publishers to consult and coordinate with each other on this front.

 

Due to the broad and interconnected nature of the arrangement, the Department of Justice alleged a “conspiracy” as the principal breach, submitting that Apple “…conspired to raise, fix, and stabilize the retail price for newly released and bestselling trade e-books in violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1 and various state laws”.The court noted that agency agreements, MFN clauses and collective behaviour did not in and of themselves run contrary to antitrust laws, but a combination of the three did.

 

A similar investigation was overseen by the European Commission (‘EC’) into what appeared to be a collusive switch-over to the agency model by publishers, leaving the publishers in charge of the sale price of e-books. The EC noted that doing so meant restricting competition at the retail level and achieving higher prices. The primary concern was the possible collusion between the publishers that would be created by the switch-over to the agency model combined with the MFN clause. The EC investigation was eventually settled in December 2012 upon the acceptance of certain commitments offered by the publishers.

The issue of MFN clauses has yet to be examined in India. Theoretically, the Act may impose two separate types of competitive disciplines upon MFN clauses. The ability of MFN clauses to lead to collusion among competitors to raise prices and share price sensitive information could be seen as a horizontal agreement amongst competitors. This could in turn lead to a presumption of causing an AAEC in India under Section 3(3) of the Act.

 

Alternatively, MFN arrangements, which are usually entered into with suppliers and distributors/resellers, could be classified as arrangements between enterprises at different stages of the production chain, i.e. vertical arrangements. MFN clauses inter alia have the ability to create a foreclosure effect by raising the operational costs for competitors. If such foreclosure is of a magnitude significant enough to cause an AAEC in the market, the arrangements may be prohibited under Section 3(4) of the Act. Some of the primary indicators that CCI uses to ascertain the presence of AAEC include consumer harm and foreclosure of competition, evidence of which could result in MFN clauses being struck down as being violative of the Act.

 

In the present business environment; characterized by inflation, increased costs of borrowing, volatility in commodity prices and severe pricing pressures, the use of MFN clauses plays a significant role in a company’s ability to compete. These clauses could help keep prices down for end-consumers. However, as recognised in the United States and the European Union, MFN clauses have the potential to cause certain anti-competitive effects on the market. Should the occasion arise, CCI will balance these anti-competitive effects against the tangible economic benefits MFN clauses provide for enterprises and end-consumers to decide their validity. In any event, companies ought to steer clear of interfering in arrangements that their distributors/suppliers may enter into with their competitors. This is even more so since the Competition Act does not clearly distinguish between agency and wholesale models, and could simply look at arrangements similar to those in the e-books investigations as having the ultimate effect of price fixing.

 

AZB

 

For further information, please contact:

 

Kamya Rajagopal​, AZB & Partners

[email protected]

 
Kathya BragancaAZB & Partners

 

Competition & Antitrust Law Firms in India 

 

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