The Lawyer’s Perspective on MFN

What is MFN?
Under a Most Favoured Nation clause, a publisher must tell the distributor if it gives a better price and/or distribution deal to any other party, and it must then offer the same, or sometimes better, terms to that distributor. This may be in respect of prices, content or terms and conditions (delivery times, provision of a full catalogue, timing of new releases, etc). The third-party terms may even apply automatically, with no need for specific acceptance by the distributor. Another form of MFN involves the distributor requiring a publisher always to offer to it the same business model arrangements as it offers any other distributor.

What is the problem?
The problem is that MFN clauses reduce competition between distributors because several (or all) of them will potentially receive exactly the same products, at the same prices, at the same time. This limits their ability and incentive to put forward a more competitive offer to consumers. Even the publisher itself cannot sell more cheaply on its own website. The party benefiting from the MFN gets the best overall deal and has the power to take market share, or entrench its market position. Other distributors are hindered in their ability to compete because the favoured distributor can always match their offer. Choice for consumers diminishes and retail prices even out, potentially at a higher retail level than would otherwise have been the case. The EC will also be concerned about the dampening effect such a clause may have on competition in the publishing market itself over time, particularly if MFN clauses are now contained in all, or the majority, of Amazon’s contracts. Publishers potentially cease to have any incentive to come up with innovative marketing ideas, content or channels to market because they know that they would have to offer the same deal to Amazon. This then indirectly reduces competition between publishers.

What rules does this break?
The EU and its member states have rules that ban anti-competitive agreements (Article 101) and abuses of dominance (Article 102). The use of MFN clauses may breach both provisions in Amazon’s case. For the former, the regulator has to show that the agreement has the object or effect of preventing, restricting or distorting competition. For the latter, the EC would need to prove that Amazon is dominant in the market for e-book distribution and that its use of MFN clauses is abusive conduct. (Expect Amazon to argue that the market is broader, encompassing all books, and that it is not dominant.) While people freely talk of Amazon being dominant, the EC will need to collect data to prove this if it wants to use Article 102 (which it may not need to, if it relies on Article 101 alone). Just being powerful in a market, or having a high market share, is not enough. 

What are the penalties and how long will it take?
If found to have breached one or both rules, Amazon could be fined up to 10% of its group worldwide turnover. Anti-competitive MFN clauses, and sometimes whole agreements, would be void and unenforceable. However, we are not likely to know the outcome of the investigation for a year at least, if Amazon decides to settle, as Apple did, and more like three years if the investigation drags on. Interested parties can communicate their views to the commission if they want to expedite the case.

Vivienne Robinson is a competition lawyer