Most-favoured nation clauses in distribution contracts: what you need to consider?
As we mentioned in one of our first posts, very often the answer to a question regarding competition law is ’it depends’. The ‘depending’ factor is also present in distribution agreements containing most-favoured nation clauses. What are they and what entrepreneurs, especially those who are actively concluding distribution agreements, should consider in order to avoid an infringement of competition law?
Most-favoured-nation (MFN) clauses, also referred to as ‘price parity’ or ‘best price’ clauses, are contractual terms agreed between two parties, whereby one party promises another to offer its best or no less favourable rates or terms for a product or service. In other words, such clauses guarantee to a distributor that no other distributor will receive a better deal. Depending on the scope of MFN clause, they can be qualified as (a) wide MFN (where better terms cannot be offered to any party or via any other sales channel) and (b) narrow MFN (where better terms cannot be offered via seller’s own channel).
MFN clauses, like most vertical restrains, can be pro-competitive but also potentially lead to anti-competitive effects. However, there is no national regulation or case law addressing the issue of MFN clauses assessment in Lithuania. Accordingly, guidelines and case law of the European Commission and foreign competition authorities should be followed. But as mentioned in the beginning of the post, the conclusion always depends because even on EU level, the conclusion depends on the circumstances.
Thereby, the adverse effect of MFN clause on competition should be examined on a case-by-case basis and is more likely occur when the parties to the agreement have substantial market power. Despite of the similar criteria for assessing MFN clauses, important disparities persist with regard to assessment of MFN clauses carried out by the European Commission and national competition authorities across the Europe. For example, German authorities has previously determined that the use of both wide and narrow MFNs effectively foreclosed entry to the market. On the other hand, European Commission, French, Italian and Swedish competition authorities agreed that only wide MFN clauses can have negative effect on competition.
So how to know whether MFN clause could possibly restrict competition and what should be evaluated? It is not possible to provide a general answer to this question, but below are criteria that have to be taken into account when assessing MFN clauses:
Identify the relevant product and geographic markets affected by the MFN clause;
Analyse the structure of the relevant market and market share of respective entities (are they vertically integrated or not, maybe they are active on both upstream and downstream levels). It is important to note that MFN clauses are more likely to lessen competition in a market where buyers or sellers have sufficient market power. MFN clauses are also more likely to be harmful in highly concentrated markets rather than in markets involving an important number of actors competing fiercely;
Define the type and scope of the clause (retail vs. wholesale, wide vs. narrow);
Assess the potential negative and positive effects on competition, for example, can the use of MFN clause raise the barriers to enter the market or reduce competitors incentives to invest in new and innovative business models?; maybe MFN clause can strengthen dominant position and reduce choices for the customers? On the other hand, maybe the use of MFN can bring any efficiency gains that are sought sufficiently outweigh any potential anti-competitive effects?;
Analyse the extent of use of similar clauses by other suppliers and distributors in a relevant market.