No online favourites in most favoured nation clauses

By Karan Chandhiok and Salman Qureshi, Chandhiok & Mahajan
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Over the past decade most favoured nation clauses (MFN) have attracted a lot of attention in the competition space. With their roots in international trade law, these clauses are used in the competition space to describe contractual terms in which a seller commits to giving a buyer or distributor a price or terms or both which are as good as, if not better than, the price or terms or both it offers other third-party buyers or distributors.

Karan Chandhiok,Chandhiok & Mahajan Retail MFNs
Karan Chandhiok
Partner
Chandhiok & Mahajan

The MFNs in the online travel segment have been at the centre of much regulatory scrutiny across the globe and specifically in Europe. While the Competition Commission of India (CCI) has not made any final ruling, it has entered into the fray by directing investigations into the MFNs included in MakeMyTrip’s agreements with hotels. The CCI’s decision, in this case, would set the direction for jurisprudence in India.

MFNs exist in many forms with one primary distinction being made between wholesale MFNs and retail MFNs. A retail MFN relates to the price charged and the terms offered to the end consumer. In contrast, a wholesale MFN is designed to ensure that a distributor gets a favourable term, but it may not have a direct impact on the price paid by the end consumer. Retail MFNs captured attention because the growing popularity of online platforms increased the number of channels of distribution.

Salman Qureshi,Chandhiok & Mahajan Retail MFNs
Salman Qureshi
Associate
Chandhiok & Mahajan

With various platforms currently available, retail MFNs are now regularly included in agreements between sellers and platforms. Platforms usually offer two types of retail MFN, wide and narrow. The former requires that the retail price or terms or both offered on a platform by a seller be the same as or better than those offered through any other sale channel. The latter prevents the seller from offering a lower retail price or better terms or both through its own website and sometimes, through offline direct sales as well. In this column, we examine retail MFNs imposed by platforms.

Retail MFNs pose an enforcement issue for competition regulators. While they do raise concerns, they are also known to generate efficiency. The distinction between narrow and wide MFNs has added to the complexity of assessment.

Some of the main concerns raised by wide retail MFNs include the lessening of competition between platforms in terms of price and quality, enabling collusion and creating entry barriers for new platforms. While narrow MFNs have greater redeeming values, they can also lead to anticompetitive effects, by reducing the competitiveness of a seller’s direct sales channel. Indeed, a network of such clauses would cumulatively have the same impact as wide MFNs. However, MFNs are also recognised as generating efficiencies. A platform may justify the imposition of an MFN by asserting that it is protecting its investment and preventing free-riding.

The complexity in the enforcement of retail MFNs is evident from attitudes towards them in Europe. Some national competition authorities (NCA) such as those in France, Austria, Italy and Sweden permitted narrow retail MFNs to be included in Booking.com’s agreements. They decided that such clauses should be exempted due to free-riding considerations. Wide retail MFNs were not found to be justified. Similarly, the UK’s Competition and Market Authority prohibited wide, but allowed narrow MFNs in the car insurance sector. This nearly consistent position was put in jeopardy by the German and Swedish authorities when they prohibited narrow MFNs as well. These last two rulings were set aside on appeal bringing back consistency to assessments across the continent. This consistency has been compromised by legislative provisions in Italy, France, Belgium and Austria that have banned both narrow and wide clauses in contracts between hoteliers and online travel agents, despite the NCAs permitting the former.

This complex background of MFNs in Europe has set the stage for the CCI’s assessment. As a precursor, the CCI in its market study on e-commerce in India, recognized the concerns about MFNs, as well as the efficiency attributable to them. According to the study, the CCI will determine the compatibility of such clauses on a case-by-case basis. It has not voiced approval for narrow clauses. The CCI’s decision and the report make it clear that MFNs can be considered both as anti competitive vertical restraints and also as abuse of dominant position. In the case of the former, the CCI will have to balance harm against efficiency. However, in regard to abuse of dominant position cases, the CCI has not adopted the effects test and it remains to be seen how the CCI will judge retail MFNs, especially narrow MFNs.

Karan Chandhiok is a partner and Salman Qureshi is an associate at Chandhiok & Mahajan

competition law

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