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

A “most-favored-nation” (MFN) clause requires the seller toprovide 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 bookpublishers.  Last week, Judge Denise Cote(SDNY) held that this clause was part of a conspiracy to fix e-book prices. Thecontracts required the publishers to give Apple’s iTunes store the best deal inthe marketplace on e-books. 

Whatdoes this decision mean for MFN clauses, which are used in a number of industrycontracts?  The WSJ took up thistopic in a recent article:

Defendants in antitrust cases have liked to have the soundbite that no court has found an MFN to be anticompetitive,” said MarkBotti, a former Justice Department antitrust lawyer now in private practice.”They can no longer say that.”

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

Judge Cote avoided a broad denunciation of MFN clauses, buther decision could haunt contract negotiations in industries as diverse asentertainment and health care, legal experts said. In recent years, the JusticeDepartment has sued a few companies over the use of MFN clauses and isinvestigating others.

“While most favored-nation clauses can be competitivelybenign, when they are used as a tool to engage in anticompetitive conduct thatharms consumers, the Antitrust Division will take enforcement action,”said Assistant Attorney General Bill Baer, who oversees the division at theJustice Department.

MFN clauses guarantee the recipient the lowest prices orrates charged to any buyer. While in theory that could encourage competitionand lower prices for consumers, in practice such agreements sometimes end upestablishing a minimum price, according to antitrust lawyers and governmentofficials.

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

“[The MFN] eliminated any risk that Apple would everhave to compete on price when selling e-books, while as a practical matterforcing the publishers to adopt the agency model across the board,” shewrote in her 160-page ruling.

The article reports that the Justice Department is expectedto 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 (subscriptionrequired).

[Meredith R. Miller]