A History of Most Favored Nation Clauses // Cooley // Global Law Firm

On August 8, 2022, the UK Competition Appeal Tribunal (CAT) unanimously overturned a £17.9 million fine imposed on the Compare The Market (CTM) website by the Competition and Markets Authority (CMA). ). The CAT found that the CMA had failed to demonstrate that CTM’s historical use of extensive retail parity obligations, also known as most-favoured-nation (MFN) clauses, had effects. anti-competitive.

The CAT judgment is another example in the ongoing debate about how competition law should deal with MFN clauses, adding to a fragmented legal landscape in which the European Commission, EU member states and the UK have taken various approaches in recent years.

We have summarized the key points of the CAT ruling below and explained what it means for companies that use MFN clauses in their agreements with suppliers or customers.

Reminder on MFN clauses

MFN clauses come in many forms. Essentially, MFN clauses prohibit contracting party 1 from offering better terms to a third party than contracting party 2. MFN clauses can relate to all aspects of a contractual relationship, including price, availability of products, services and quality.

The legal treatment of MFN clauses may differ depending on several factors, as shown below.

  • If the NPF is “wide” or “narrow”: Extended MPNs apply to suppliers indirect sales channels (e.g. sales through other intermediaries), while narrow MFNs apply to direct sales channel (for example, via the supplier’s website).
  • Whether MFN applies at the business-to-business or retail level: As explained below, extended retail MFN clauses are prohibited in the UK.
  • The industry impacted by the MFN clause: For example, some EU Member States have banned MFN clauses in the online hotel booking sector.
  • The identity of the contracting parties: For example, the future EU Digital Markets Act will prohibit broad and narrow MFN clauses for certain services by designated gatekeepers.

Since June 1, 2022, UK law has included broad retail MFN clauses in its list of “hardcore restrictions” of competition, which means that any agreement containing such a clause is presumed illegal. In the EU, broad retail parity clauses are instead “excluded” from legislative safe harbors in contracts with online intermediation services, meaning their impact on competition must be assessed on a case-by-case basis. .

The challenge by the CMA of the MFN clauses used by CTM

The November 2020 CMA ruling challenged agreements between CTM and 32 home insurers that contained broad retail MFN clauses preventing home insurers from offering lower prices to consumers on other price comparison sites (PCWs) .

The CMA held that the MFN clauses in question violate competition law by “effect” because they:

  • Reduced incentive for insurers to offer lower prices (e.g. promotional offers) to CTM’s competitors.
  • Discouraged CTM’s competitors from offering lower commission fees and thereby gaining a competitive advantage over CTM.
  • Limitation of CTM’s competitors’ ability to expand as they have not been able to gain a price advantage over CTM.
  • Limited competition among home insurers more generally. (The CMA found that because the 32 insurers competed less on price, other providers were subject to less competitive pressure, and retail price competition among all insurers competing on PCWs was reduced.)

The CMA also noted that contracts with CTM prevented insurers from offering lower prices on their own websites (i.e. via a narrow MFN clause), but found that these narrow MFN clauses were a “characteristic of the market “. The CMA found that narrow MFN clauses prevented insurers from profiting from investments made by PCWs in their own websites and services, because they prevented insurers from undercutting the prices displayed on PCWs (where a large number of customers would see offers) on their own websites.

The CAT reverses the conclusions of the CMA

The CAT disagreed with the CMA’s analysis and reversed the decision on the grounds that the CMA had failed to demonstrate that the MFN clauses had anti-competitive effects. In particular, the CAT criticized the evidence base on which the CMA sought to base its decision, noting that it was “anecdotal” and could not be verified by either CTM or the CAT itself.

In the CAT’s view, the onus was on the CMA to prove the adverse effect on competition on a balance of probabilities. The mere fact that the CMA had shown that the extended MFN clauses were contractually respected was not sufficient for this purpose.

In particular, the CAT found that the CMA had not sufficiently taken into account the fact that MFN clauses could have pro-competitive or at least neutral effects on the incentive of home insurers to reduce commissions, promotional discounts or home insurance products themselves. The CAT noted that the broad MFN clauses only limited the price at which home insurers could offer their products through PCWs – they did not restrict competition on the level of premiums – and criticized the CMA for not taking this into account in his analysis.

Further, the CAT found that in many cases, extensive MFN clauses in the home insurance market would not prevent differential pricing between PCWs. The CAT noted that for extended MFN clauses to have any effect, a consumer’s risk profile would need to be identical across different PCWs, requiring the same questions to be asked and the same answers to be provided. The CAT found that this was not necessarily the case in practice.

The CAT also clarified that extended MFN clauses are not restrictions “by object” (ie presumed to be anti-competitive, whatever the effect). The CAT found that broad MFN clauses could lead to a number of different results, not all of which were anti-competitive. By way of example, the CAT again referred to competition between home insurers on the prices offered to consumers, noting that this could even be “accelerated” by the fact that home insurers must offer the same low price on different sales channels. In addition, the CAT pointed out that CTM and the home insurers voluntarily accepted the MFN clauses and may have commercial reasons for doing so.

And after?

The CAT judgment adds to the ongoing debate about the impact of parity clauses on competition and how they should be treated legally.

Shortly after the CAT ruling, the European Commission published the results of its market study on hotel distribution practices in the EU. One of the findings of the market research was that laws in Austria and Belgium prohibiting the use of wide and narrow parity clauses for online travel agents in the hospitality sector did not appear to have resulted in significant changes. in hotel distribution practices, including no significant increase in commission rates. or a noticeable effect on hotel price differentiation strategies, compared to other Member States covered by the study.

The CAT’s findings are more in line with the results of these market studies than with UK legislation prohibiting broad retail parity restrictions. Nevertheless, the CMA has given no indication that it is reconsidering the status of retail MFN clauses as “hardcore restrictions” under competition law (although it does not appear to have appealed against the stop).

Companies will need to ensure that MFN restrictions – especially those with cross-border effects – are legally sound in an increasingly fragmented European landscape and carefully assess any restrictions.

About Marilyn Perkins

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