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A Better Partnership

Ahead of the Curve Auto Supplier Blog

July 24, 2013

DOJ Scrutiny of Most Favored Nation Clauses Heats Up

Under a most favored nation (MFN) clause, a seller agrees to provide a customer with a product at a price no higher than it charges to any other buyer. In essence, the MFN clause guarantees a customer that it will receive the seller’s lowest price. The fact that many OEMs routinely require MFN clauses in their supplier contracts should come as no surprise. In light of the Department of Justice’s (DOJ) recent scrutiny of MFN clauses, however, it may be wise to assess the risks they present before including such a clause in your contracts.  The DOJ has filed several suits in the health-care and e-book industries claiming that MFN clauses have the potential to encourage anti-competitive behavior that violates federal antitrust laws. According to the DOJ, this potential is at its highest if the parties to a contract containing an MFN clause have a substantial amount of market power in any given industry. If a seller has given MFN protection to its largest buyer, the seller will be reluctant to discount its pricing for a smaller buyer moving forward. In effect, the seller establishes a minimum price for a particular product – one that the small buyer may be unable to afford. This situation can exclude smaller buyers from the market altogether if the seller enjoys a large market share of the sought-after product. Depending on the product, certain automotive suppliers and OEMs enjoy a substantial amount of market power, so MFN clauses in these contracts may be vulnerable to DOJ antitrust scrutiny in the future. Although the DOJ has thus far concentrated on the use of MFN clauses in other, specific industries, its focus may not be narrow for long. In fact, a handful of trade associations have asked the DOJ to investigate the use of MFN clauses in their industries.  We will be watching this issue carefully. In the meantime, automotive suppliers should proceed with caution when it comes to requesting or providing MFN protection in their contracts.

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