Most Favored Nation Clauses: What is the Way Ahead?

May 6, 2020

[Kritika Dobhal is a student at National Law University, Jodhpur.]

 

Recently, on an information filed by Treebo Hotels, the Competition Commission of India (CCI) formed a prima facie opinion of abuse of dominance against Make My Trip (MMT) and contravention of Section 3(4) of Competition Act 2002 (Act) against Oravel Stays Private Limited (OYO) and MMT. Treebo submitted that MMT has denied market access by delisting Treebo’s partner hotels from its platform and this delisting was a result of vertical arrangement between OYO and MMT. This case follows the information filed by Federation of Hotel and Restaurant Associations of India (FHRAI), and the CCI has clubbed both the investigations.

 

One of the grounds for alleged abuse of dominance by MMT was the imposition of price and room parity clauses on the hotels listed on the platform. The clause restricted hotels from providing a better rate to any competing Online Travel Aggregators[1] (OTAs) and providing the rooms to OTAs unless those rooms are first made available on MMT.

 

What is an MFN clause?

 

A Most Favored Nation (MFN) clause is an obligation imposed on one party by another, to treat it at par with the other competing parties. This implies that the party will be offered the most favorable terms as is being offered to any other competitor. A price parity clause is a subset of an MFN restriction, the obligation here being offer of the best price. For example, if a shopkeeper imposes an MFN condition on a wholesaler regarding price, the wholesaler is restricted from offering goods at a lower price to any other shopkeeper in the market.

 

Anti-competitive effects of an MFN clause

 

Across jurisdictions, competition authorities have recognised the anti-competitive effects of MFN clauses. In the HRS-Hotel Reservation Service decision, the German Federal Cartel Office recognised the anti-competitive effects of a  price parity clause on three levels: (i) restrictions on price competition among OTAs as well as creation of a market barrier for new entrants; (ii) restrictions on price competition among the hotels; and ultimately (iii) restrictions on consumer welfare. This decision was later upheld by the appellate court i.e., Düsseldorf Higher Regional Court.

 

For example, a hotel listed on two major OTA platforms, with a price parity clause with one of them, would not be able to offer a lower price to the other platform. No matter the increase in commission charged by the platform, this clause ensures they gets the best price. Further, the other platform would not have any incentive to offer better terms or charge lower commissions to the hotels as the price is fixed in the market. The hotels are significantly harmed from this approach. Further, the ease with which hotels can engage in price competition is reduced where, if a hotel wants to offer a lower price, it has to offer the same lower price across the platforms. The commission charged by the platforms being constant, this remarkably reduces the profit margin of the hotel. Eventually, the customer is not getting the best price.   

 

CCI touched base with these anti-competitive effects in its prima facie opinion in the FHRAI case when it noted that the parity agreements reduce the incentive for other platforms to compete on the commission and give levy to the imposing platform to increase commission. This eventually inflates the final price paid by the consumer.

 

Narrow vs. wide

 

In the parity clauses imposed by OTA platforms, a distinction has been created between narrow and wide clauses. While the former is a restriction on the hotel from offering better terms to the customers on its own website than the terms offered through the OTA platform, the latter, on the other hand, is the restriction on offering better terms at any other competing OTA platform.

 

In June 2019, Düsseldorf Higher Regional Court overruled the decision of the Federal Cartel Office in the Booking.com case. The Federal Cartel Office had held even the narrow best price clause as anti-competitive. This went against the ruling of national competition authorities of France, Italy, Sweden in their investigation against Booking.com. However, the higher court held the narrow MFN clause to be necessary to ensure a “fair and balanced contractual exchange of services between the portal and the hotels”. Such a clause prevents a free riding of the hotel on the popularity of the OTAs. For example, a hotel, for the price it is listed at a dominant OTA platform, offers complimentary breakfast at its own website. A reasonable customer looking for hotels in a particular area would go to the OTA platform and shortlist this hotel but would book it from the hotel’s website. Thus, the OTA platform, while increasing the visibility of the hotel, would lose on the commission as the booking is done through the hotel’s own website.

 

This distinction has been recognised by the CCI in its prima facie opinion in the FHRAI case and in the market study on e-commerce. The CCI had observed that OTAs and online food catering platforms typically include wide parity clauses.

 

Analysis of MFN clauses across sectors

 

Insurance sector: A prominent application of MFN restrictions has been observed in insurance sectors across jurisdictions. This practice, in turn, significantly increases the cost of healthcare.  

 

In the United States, Delta was the largest dental insurer in Rhode Island and in its Prudent Buyer Policy, it limited the reimbursements to dentists “to such levels as such dentists have agreed to accept reimbursement from other non-governmental dental benefits reimbursement  programs.” The Department of Justice (DoJ) held that such obligation not only excluded potential rivals, limited expansion by existing competitors, but also substantially increased the costs consumers of dental insurance. Delta was restrained from imposing or enforcing such obligation. Another investigation was against Blue Cross Blue Shield (BCBS) of Michigan, which was a dominant player in the health insurance sector. It imposed two types of MFN obligations on the healthcare providers: (i) to provide BCBS with the lowest prices charged to the competitor; (ii) to provide BCBS with lower rates than they offered to any other competitor. The latter was described by the DoJ as an MFN plus obligation. It was alleged in the complaint that this reduced the competitors’ capability of bargaining with the healthcare providers for lower rates and also stunted the entry of new players. Thus, BCBS had used such MFN obligations to maintain its dominance in the market.

 

E-books: From 2007-2010, publishers sold e-books to retailers mainly under wholesale arrangements. Subsequently, Amazon began offering certain newly released English ebooks to consumers for USD 9.99. This retail price set by Amazon was generally significantly below the e-book list price, and in some cases, even below the wholesale price set by publishers. Subsequently, four publishers[2] and Apple concerted to change the business model to agency model. However, an obligation was imposed on these publishers to lower the retail price of the e-book in the iBookstore and match the price, in case another retailer was being offered a lower price. Another investigation was against Amazon's e-book distribution arrangements. These clauses required publishers to ensure that Amazon is offered terms at least as good as those offered to its competitors. The European Commission (EC) observed that such clauses significantly reduce the publishers’ and competitors’ ability and incentive to develop innovative e-books and alternative distribution services. Eventually, in both the cases, the EC accepted commitments such an MFN restriction would not be enforced.

 

Is it necessary to prove dominance?

 

In the majority of the cases, the party imposing the MFN obligation is a dominant entity. This is because a dominant entity would naturally have more bargaining power to impose such a drastic restriction on the other party. However, there is no requirement to prove dominance in every case, and the restriction can be investigated as a vertical restraint under Section 3(4) of the Act. Even though no clarity was provided in the market study on E-commerce, in the prima facie opinion in the FHRAI case, CCI noted that such clauses are generally imposed as a vertical restraint by a platform on the sellers. However, if the platform is dominant, it may also amount to imposition of an unfair pricing condition.

 

The way ahead

 

The investigation against MMT is the first investigation undertaken by the CCI into an MFN clause. The investigation by the Directorate General is still pending, and thus, a deeper analysis and the market impact of such a restrictive provision is yet to be unfolded. This, hopefully, would bring forward many information against such anti-competitive clauses, not only in the online intermediation sector but also in other diverse markets.

 

 

[1]In the information filed by Federation of Hotel and Restaurant Associations of India (Case Number 14 of 2019), the Commission had delineated the relevant product market for Make My Trip as the market for ‘online intermediation services for booking of hotels’. 

 

[2]Hachette, Harper Collins, Holtzbrinck/Macmillan and Simon & Schuster.

Please reload

Our Recent Posts

Please reload

Archive

Please reload

Tags

I'm busy working on my blog posts. Watch this space!

Please reload

©2018 by The Indian Review of Corporate and Commercial Laws. Proudly created with Wix.com