Panel Summaries from DOJ and FTC Workshop on Most-Favored-Nation (MFN) Clauses and Antitrust Enforcement and Policy

Transcription

1 SEPTEMBER 2012 EXECUTIVE SUMMARY ANTITRUST PRACTICE GROUP Panel Summaries from DOJ and FTC Workshop on Most-Favored-Nation (MFN) Clauses and Antitrust Enforcement and Policy Topic The Economics of MFNs Page Economic Theories of MFNs: Harms and Efficiencies Evidence on Effects of MFNs Panel Discussion on the Economics of MFNs Legal Treatment of MFNs Luncheon Speaker: Can Fair Prices be Unfair: A Review of Price Relationship Agreements From Theory to the Real World Moving Forward How Has Thinking About MFNs Evolved and Where Might It Go? 18 1

2 Economic Theories of MFNs: Harms and Efficiencies By Eileen Reed and Richard Higgins* Presenters: Jonathan Baker (Professor of Law, American University Washington College of Law) and Judith Chevalier (William S. Beinecke Professor of Finance and Economics, Yale School of Management). Moderators: Robert Majure (Economics Director of Enforcement, Antitrust Division, U.S. Department of Justice) and Leemore Dafny (Deputy Director, Bureau of Economics, Federal Trade Commission). Competitive Harm from MFNs: Economic Theories (Professor Baker) Definition and Types Professor Baker noted that a variety of MFNs exist. The most typical MFN occurs between two parties involving a commitment from a seller to give the buyer the best price offered by the seller. He observed that there is also a converse in which the buyer commits to offer its contracting seller the best price among its prices to competing sellers. For ease of exposition, Baker addressed only commitments from sellers. Other types of MFNs include three-party MFNs where the seller s commitment may be to guarantee its contracting buyer the best price the buyer is offered from other sellers in the market. He described three anticompetitive theories or harms of MFN use: coordination, exclusion, and enhanced bargaining power. Coordination In the Stigler tacit collusion paradigm, a conspiracy among sellers must address two principal problems: (1) reaching agreement on an anticompetitive price, output, etc., and (2) enforcing the agreement. Enforcement involves detection and punishment of cheating. Baker observed that the traditional anticompetitive theory of MFN use focuses on MFNs as means of detecting cheating. If the members of the cartel place MFN 2

3 clauses in their contracts with buyers, a cheater would be forced to offer the lower price to all of its customers, if the reduced price were known to the cheater s customers. Baker opined that in addition to this familiar enforcement role of MFNs, they also may be used effectively to reach a collusive agreement. For example, the 2010 Horizontal Merger Guidelines now refer to Parallel Accommodating Conduct that may be facilitated through the use of MFNs in the same way that posted prices may be used by corner gasoline stations as a focal point for coordination. Exclusionary Use of MFNs Professor Baker discussed the 1996 case against Delta Dental, a dental health insurer, which signed dentists to MFNs in contracts complete with audit provisions. The Delta Dental MFNs would force dentists to choose between a Delta Plan and a new (entrant) rival plan unless the dentists were willing to provide Delta Dental with the same low rates offered the new plan, thus lowering the rival plan s profitability and insulating Delta Dental from competition. Professor Baker noted that it is important to verify that MFNs are profitable: that is, that the gains from collusion or exclusion outweigh the cost of compensating buyers for accepting them. He also noted that just because MFNs are costly does not mean, on balance, that they are not profitable to use as anticompetitive devices. Enhanced Bargaining Finally, Professor Baker introduced the Coase durable goods monopolist framework to explain that such a monopolist would be unable to realize monopoly profit absent the ability to commit to a price. Without this commitment the monopolist would attempt to practice inter-temporal price discrimination charging early buyers higher prices than charged to later buyers. However, rational buyers would anticipate that subsequent buyers would be offered lower prices and would wait for this eventuality. Thus, the monopoly seller is in the position of committing to a single monopoly price or charging the competitive price from the start. An MFN is one means available to the monopolist of committing not to lowering price to subsequent buyers. Professor Baker observed 3

4 that, in this context, the price established between buyers and the seller is often the result of bargaining and that the likely effect of MFN use would be to strengthen the bargaining power of the durable good seller to the detriment of the buyers. Efficiencies from MFNs: Economic Theories (Professor Judith Chevalier) Efficiencies Professor Chevalier s topic was the efficiencies attributed to MFNs. She also noted that there are two-party and three-party MFNs, which are essentially like meeting competition clauses. Although Chevalier identified five different efficiency theories (opportunism, transaction costs, time inconsistency, quality commitment, and risk reduction) in which MFNs have been evaluated, her discussion centered on postcontractual opportunism and transactions costs. Post-Contractual Opportunism Post-contractual opportunism arises when a contractual relationship includes transaction-specific investments. She illustrated the concept using the example of efficient placement of a gas pipeline. The most efficient location for the gas pipeline is likely to be adjacent to the well head or the gas field. If the pipeline construction were undertaken regardless of the price of gas at the wellhead, the owners of the gas could easily exploit the owners of the pipeline after the non-salvageable investment in the pipeline were made by raising the price of gas. Common sense suggests that the gas and the pipeline owner will integrate through ownership or through contract to maximize the joint value of the two operations. In such cases, MFNs may be used to assure the party making non-salvageable investments (i.e., the party constructing the pipeline) that it will not have to compete with a firm that receives a better price. Referencing the Coase durable goods example, the non-salvageable investment is the durable good itself. Chevalier noted also that if MFNs were prohibited, the market for the services of the durable good may not be created. She observed that although there may be several alternative means available to guarantee full exploitation of the demand, in some circumstances, the use of MFNs may 4

5 be the most effective means of fully exploiting demand. Prohibiting MFNs may only serve to induce too little investment, to the detriment of ultimate consumers. Transactions Costs In a situation where there may be high costs associated with price discovery efforts and the need for frequent price negotiation, the use of an MFN can reduce these search and contracting costs and ensure that the buyer will not be disadvantaged if prices change in the future, allowing the resulting transactions cost savings to be passed on to consumers in the form of lower prices. She went on to question if this type of saving can properly be claimed an efficiency if the party relying on the MFN is free-riding off the price discovery efforts of other, non-mfn parties. Professor Chevalier offered the example of a pharmacy benefit manager using its MFN with a pharmaceutical manufacturer as an indication of its competiveness to downstream subscriber companies that would not know how to evaluate or compare the prices of all the drugs its employees might use. However, in such complicated contract settings it may be difficult to discover the ultimate price subject to a range of non-price contract terms. MFNs thus may not be fully enforceable, which limits their efficiency, usefulness, and power. Implicit MFNs Professor Chevalier also observed that much business behavior between buyers and sellers is consistent with implicit MFNs. Decades of Robinson-Patman litigation has occurred because independent dealers are loathe to compete against company-owned outlets for fear of disadvantageous price discrimination. Distributors/retailers for a specific manufacturer s products desire to have the best prices the manufacturer offers. Chevalier emphasized that even in the absence of formal MFNs, sellers relationships with customers are severely compromised upon discovery among buyers that some are being favored over others. 5

6 Panel Discussion Dr. Majure asked if the use of MFNs to enable the durable good monopolist to exploit demand more fully was pro- or anticompetitive. There was no clear answer; one panelist suggested that MFNs are similar to exclusive territories in that both limit competition from rival buyers. And, unlike MFNs, exclusive territories have been studied substantially, suggesting some answers on MFNs may lie in that research. Dr. Dafny asked whether MFNs had to be triggered to be effective either as an anticompetitive device or as a procompetitive device. The answer was a resounding no. For example, price coordination that is working very well requires no enforcement, which includes invoking MFN clauses. Professor Baker was asked if there is danger in unilateral use of MFNs to lessen competition. He said that although the 2010 Guidelines put Parallel Accommodating Conduct under coordinated effects, in his view tacit collusion among the proverbial four-corner gasoline stations facilitated through effective MFNs (posted prices) is the result of unilateral conduct. Professor Baker was then asked if a necessary condition for anticompetitive use of MFNs is market power. He initially replied no, offering the example of small firms using MFNs to enforce a collusive price because they may not be in the best position to deviate effectively from the cartel price. However, he noted there would be no problem with coordination in the first instance if the alleged cartel did not possess market power. 6

7 Empirical Evidence on Effects of MFNs By Eileen Reed and Richard Higgins* Presenter: Ramsey Shehadeh (Senior Vice President, NERA Economic Consulting). Moderators: Robert Majure (Economics Director of Enforcement, Antitrust Division, U.S. Department of Justice) and Leemore Dafny (Deputy Director, Bureau of Economics, Federal Trade Commission). Empirical Evidence Dr. Ramsey Shehadeh summarized two papers studying the empirical evidence on the effects of MFNs, noting that there was not a lot of empirical research relative to the magnitude of theoretical research on this topic. The first paper, by Fiona Scott-Morton, 1 used the natural experiment approach to measure the effect of a change in Medicaid law in 1990 (OBRA 90) that required pharmaceutical suppliers to give federal Medicaid the benefit of their best prices. OBRA 90 affected classes of drugs differently: prices for brands protected by patents did not significantly increase; the average price of branded products facing generic competition rose about 4%; and generic firms raised their prices more as their markets become more concentrated suggesting that the MFN rule resulted in higher prices to some non-medicaid consumers of pharmaceuticals. The second paper, by Crocker and Lyon, 2 used econometrics to test hypotheses. These authors studied regulated gas pipelines which took possession of the gas they shipped subject to meet-and-release clauses on one end, and full requirements contracts on the other. MFNs were used extensively. The authors derived testable hypotheses based alternatively on anticompetitive effect and on procompetitive effect. Their findings show that MFNs serve to facilitate efficient price adjustment and are inconsistent with the anticompetitive use of MFNs. 1 Scott Morton, Fiona M., The Strategic Response by Pharmaceutical Firms to the Medicaid Most- Favored-Customer Rules, 28 RAND J. OF ECON., no. 2 (1997). 2 Crocker, K. and T. Lyon, What Do "Facilitating Practices" Facilitate? And Empirical Investigation of Most-Favored Nation Clauses in Natural Gas Contracts, 37 J.L & ECON (Oct. 1994). 7

8 Panel Discussion on the Economics of MFNs By Eileen Reed and Richard Higgins* Panelists: Jonathan Baker (Professor of Law, American University Washington College of Law), Judith Chevalier (William S. Beinecke Professor of Finance and Economics, Yale School of Management), and Ramsey Shehadeh (Senior Vice President, NERA Economic Consulting). Moderators: Robert Majure (Economics Director of Enforcement, Antitrust Division, U.S. Department of Justice (DOJ)) and Leemore Dafny (Deputy Director, Bureau of Economics, Federal Trade Commission). Price Discrimination After Dr. Shehadeh s talk, the entire panel reconvened to address questions from the audience and each other. Dr. Dafny asked whether the fact that MFNs reduced price discrimination is of competitive significance. Professor Baker opined that MFNs do not completely eliminate price discrimination because some buyers are not protected by MFNs. Relation to Consumer Welfare Dr. Dafny also asked whether enhanced consumer welfare is associated with the efficiencies described by Professor Chevalier. She replied that most certainly this is true in the case of opportunism explanations because, absent the MFN or equivalent, there would be less investment. However, she is not certain whether all of the efficiencies she addressed would be passed on to consumers. Dr. Shehadeh opined that the longer the MFNs were applicable the more likely they would pass through to consumers. Necessity of Transactions Costs Dr. Majure raised the issue of transactions costs again. Specifically, he wondered whether some positive transactions cost is indeed necessary for effective MFNs. He 8

9 proposed a case in which information about pricing was instantaneously available at no cost suggesting that here there would be no need for long run contracts and any price reduction would have to be given to all in a competitive market even without MFNs. In the case of price coordination, a deviation from the collusive price would instantly be offered to all customers and there would be no need for MFNs. Price Transparency Dr. Dafny then noted that if MFNs facilitate price discovery when such discovery is costly there would be competitive implications of any price transparency provisions in the new healthcare law that can also act to suppress price discounting or otherwise affect competition between rivals. MFN-Plus There was also discussion on how little empirical research has been published on the effects of MFN-Plus mechanisms, which are a key component of the current DOJ complaint against Blue Cross Blue Shield of Michigan. The MFN-Plus used by Blue Cross essentially requires the contracting hospital to charge some or all other commercial insurers more than it charges Blue Cross. The panel considered whether an MFN-Plus clause is simply an extension of the standard MFN or is it different. Dr. Shehadeh stated that under certain circumstances of asymmetry between the parties the MFN-Plus can lead to credible efficiency justifications. Safe Harbor The panel concluded that the case-by-case nature of MFN competitive evaluation makes it difficult to construct a safe harbor approach in a Guidelines context. 9

10 Legal Treatment of MFNs By William A. Roach, Jr.* Panelists: Doug Anderson (Of Counsel, Bailey Cavalieri LLC), Andrew I. Gavil (Director, Office of Policy Planning, Federal Trade Commission), Elai Katz (Partner, Cahill Gordon & Reindel LLP), and Janet L. McDavid (Partner, Hogan Lovells US LLP). Moderator: Peter J. Levitas (Deputy Director, Bureau of Competition, Federal Trade Commission). Mr. Levitas made clear that this panel would focus extra attention on the healthcare industry based on the prevalence of case law and relevant enforcement actions in the healthcare arena. Mr. Gavil s outlined the existing, albeit limited guidance on the antitrust implications of MFNs that has developed through the courts and consent decrees. Although guidance is tough to come by, MFNs are not sui generis by any means and are most similar to exclusive dealing arrangements. There is a dearth of case law, and no case provides a full analysis of the competitive effects of MFNs, but Mr. Gavil made clear that some courts have analyzed MFNs in the antitrust context. Those that have can be categorized under the following headings: facilitating collusion; 3 procompetitive effects; 4 exclusionary practices; 5 and evidence of market power. 6 Practitioners in search of guidance should also review consent decrees. 7 Mr. Gavil s visualization of a structured rule-of-reason framework for MFNs would ask the following questions: First, Does the MFN arise in a context that indicates it has the 3 Starr v. Sony BMG Music Entm t, 592 F.3d 314 (2d Cir. 2010); In re Brand Name Prescription Drugs Antitrust Litig., 288 F.3d 1028 (7th Cir. 2002). 4 Blue Cross & Blue Shield United of Wis. v. Marshfield Clinic, 65 F.3d 1406, 1415 (7th Cir. 1995) (Posner, C.J.). 5 Mich. Assoc. of Psychotherapy Clinics v. Blue Cross & Blue Shield of Mich., 325 N.W.2d 471 (Mich. Ct. App. 1982). 6 Reazin v. Blue Cross & Blue Shield of Kan., Inc., 899 F.2d 951, 971 & n.30 (10th Cir. 1990). 7 See, e.g., United States v. Or. Dental Serv., No. C FMS, 1995 U.S. Dist. LEXIS (N.D. Cal. filed July 17, 1995); RxCare of Tenn., Inc., 121 F.T.C. 762 (1996). 10

11 potential for significant anticompetitive effects? If so, is the potential anticompetitive effect collusive or exclusionary? As a sub-issue, what is the mechanism of the anticompetitive effect, i.e., in what ways will the MFN facilitate coordinated interaction (collusive effects), or how might the MFN impact rivals (exclusionary effects)? If anticompetitive effects are evident, the inquiry turns to the efficiency justifications for the MFN. Ms. McDavid stated that in her experience the vast majority of MFNS are procompetitive. When approached by a client interested in including an MFN provision in its contract, the first question she asks is, What do you want to do and why? MFNs are procompetitive because they limit the uncertainty inherent in taking a risk on a new investment or product; the MFN guarantees a fair price for the first-in buyer. MFNs also reduce transaction costs by eliminating the need to perpetually renegotiate the price. Is the client s market share more than 30%? If not, the risk that the MFN creates competitive concerns is probably nil. Importantly, when approached by a client, be careful to advise them of the risk factors that may lead to litigation; but also keep in mind that no plaintiff has sustained their burden of proof to show that a MFN is anticompetitive. Mr. Anderson focused on enforcement at the state level. He pointed out that nineteen states currently bar or significantly restrict the use of MFNs in healthcare contracts. Other states, like Michigan, have issued or are considering whether to issue regulations that would permit the state to review all MFNs in healthcare contracts. Each state is different though, Mr. Anderson cautioned, and each state should consider the composition of its healthcare markets before imposing regulations on market participants. Mr. Katz recognized that MFNs are ubiquitous in the business world. How have courts treated MFNs in cases not involving antitrust issues? Mr. Katz reviewed state court dockets and found that MFNs were common in the areas of patent licensing, real estate transactions, class action settlements, and public utilities disputes. Mr. Katz noted that 11

12 the vast majority of MFNs are not anticompetitive, and he made the point that contracting parties (buyers especially) use MFNs to protect against getting a bad price in their long-term contracts. From a legal perspective, Mr. Katz s view was that courts analyzing MFNs should find a way to distinguish pro- and anticompetitive MFNs without a full-blown rule-of-reason analysis. Additionally, the contracting party who agrees to, but does not initiate the MFN provision should be protected from legal action. 12

13 Luncheon Speaker: Can Fair Prices be Unfair: A Review of Price Relationship Agreements By John J. Fedele* Speaker: Nelson Jung (Director, Markets and Projects, U.K. Office of Fair Trading). Nelson Jung, Director, Competition Enforcement, U.K. Office of Fair Trading (OFT) provided an overview of a paper prepared for the OFT by Lear (Laboratorio di economia antitrust regalomentazione) entitled Can Fair Prices be Unfair: A Review of Price Relationship Agreements. In addition, he shared some of the OFT s concerns regarding a potential enforcement gap with respect to price relationship agreements. OFT commissioned the Lear report based on a concern that price relationship agreements could, at least in certain instances, have anticompetitive effects, particularly in online retail markets. While sellers are typically assumed to set prices independently, price relationship agreements commit sellers to pricing policies that limit their freedom and link their prices to other prices charged for the same (or similar competing) products. These types of pricing policies do not determine absolute price level, but do link different prices to each other. Examples of such pricing policies are price-match guarantees and lowest-price promises (which are price commitments across-sellers ) or most-favored-nation clauses (which are price commitments across-buyers ). Jung initially focused on price-match guarantees and lowest-price promises, contending that there is a danger that these across-seller commitments can result in less consumer price comparisons and less shopping around because of the perception of a guaranteed low price. In fact, however, reciprocal price matching provisions may assist in coordinating prices by suppliers as the provisions facilitate the identification of any deviation from pricing agreements. In addition, these types of across-seller pricerelationship agreements may also allow large incumbents an opportunity to defeat smaller, lower-priced entrants. 13

14 Jung also noted that OFT is concerned about across-platform parity agreements, which appear to be proliferating in the online industry. These agreements are contractual clauses between a seller and a platform by which the seller (or retailer) undertakes to charge on that platform a price that is not higher than the price charged on other platforms. Platforms, as used by the Lear report, refers to those structures that act as a market-place and typically charge sellers a fee for their services, but may also receive payments from buyers for example, online bookstores, auction websites, and shopping malls. The Lear paper posits that these types of agreements can be used to foreclose new, lower-priced platform entrants. In addition, across-platform parity agreements may also soften competition among platforms and lead to increases in the fees paid by sellers and, as a result, the prices charged to consumers. Although these agreements may allow platforms to protect investments made to provide pre-purchase services to buyers (for example, reviews and advice on available products), it may be that these procompetitive effects do not outweigh the harm to competition in all cases. Despite the potential dangers posed by platform parity agreements, Jung noted that OFT is somewhat handicapped to address these types of agreements as they do not amount to hardcore restrictions under U.K. and European Union law, which would eliminate the enforcement agencies need to demonstrate competitive effects. As a possible solution, he suggested that the enforcement agencies consider amending the relevant regulations to make reviewing these agreements less onerous. Until then, OFT is forced to focus its attention on retail-price maintenance agreements, which are often used in conjunction with platform parity agreements. 14

15 From Theory to the Real World By Diane R. Hazel* Panelists: W. Thomas McGough, Jr. (Senior Vice-President & Chief Legal Officer, University of Pittsburgh Medical Center (UPMC)), Murray N. Ross, PhD (Vice-President & Director, Institute for Health Policy, Kaiser Permanente), Melissa A. Scanlan (Director, Legal Affairs, T-Mobile USA, Inc.), John Thorne (Partner, Kellogg Huber Hansen Todd Evans & Figel PLLC), and Mark D. Whitener (Senior Counsel, General Electric Co.). Moderator: Martha A. Samuelson (President & CEO, Analysis Group Inc.). The first afternoon session of the Most-Favored-Nation Clauses Workshop From Theory to the Real World shifted the conference discussion from economic and legal theories to a more practical perspective on the use of MFN clauses. The panelists presented their experiences with MFNs in their respective industries. The majority of the panel expressed the view that MFNs are generally procompetitive. Mr. McGough opened the panel by discussing the frequency of MFNs emerging in the healthcare industry that are not part of a formal contract, which he referred to as MFN arrangements. Mr. McGough attributed the emergence of these MFN arrangements to the growing number of markets that have one dominant commercial payor, citing a 2010 study showing that a single health insurer commanded at least 50% of the health insurance market in the majority of more than 300 metropolitan markets studied. In discussing the revenue breakdown in relation to Medicare and Medicaid, Mr. McGough explained that these dominant commercial insurers have significant bargaining leverage and thus may command the best rates. Mr. McGough referenced a March 27, 2012, Wall Street Journal article, Health-Care Rivals Battled for Patients in Pittsburgh, as providing detail on his experience in western Pennsylvania. Toward the conclusion of the panel, Mr. McGough stated that the largest buyer should not always receive the lowest price and noted that he does not believe that MFNs add much value in the healthcare industry. 15

16 Dr. Ross (Kaiser) provided a different healthcare perspective from that of Mr. McGough and questioned whether the emphasis on price in healthcare is appropriate given how the market for healthcare services is fundamentally different from other markets. Dr. Ross discussed the various attributes of the healthcare market that contribute to these differences, including patients minimal price sensitivity and the duality of care delivery and insurance. In highlighting the evolution of healthcare payment models from cost based to cost based with limits, to fee schedules, to capitation, to mixed models that have a combination of bundling and shared savings Dr. Ross concluded that the focus on unit price has not actually contained cost growth. As costs continue to rise, providers are taking on more financial risk, which has resulted in a blurring of the insurer and provider roles. Dr. Ross questioned whether it is appropriate to focus on price in a time of such payment reform. With growing payment complexities and the general dynamics of the healthcare industry, Dr. Ross sees less justification for the use of MFNs. The other three panelists provided deeper color on the use and implications of MFNs in industries beyond healthcare. Ms. Scanlan (T-Mobile) noted that she frequently sees MFNs in the form of Most-Favored-Licensing (MFL) agreements. Because MFLs facilitate negotiations that lead to deals, Ms. Scanlan argues that MFNs, or MFLs, are procompetitive in concept. Ms. Scanlan, however, acknowledged that these provisions can be difficult to enforce and highlighted issues to consider when negotiating or entering into these agreements. Mr. Whitener (GE) also agreed that most MFNs are procompetitive. Mr. Whitener gave an overview of several scenarios in which MFNs are frequently used, including in the first mover context involving a new product or arrangement that carries some uncertainty and in agreements among multiple participants who are making interdependent commitments to a common customer, supplier, or innovator. Although Mr. Whitener emphasized that there are many legitimate rationales for the use of MFNs, he acknowledged there are a few areas in which MFNs can raise concerns of competitive harm, such as when they involve firms with market power or include non-standard MFN features (e.g., MFN-plus clauses). Even if competitive concerns are raised, Mr. Whitener emphasized that he believes 16

17 MFNs require a full rule-of-reason analysis and argued there is no basis for categorically viewing MFNs more suspiciously than other vertical restraints. In concluding the individual panel presentations, Mr. Thorne (Kellogg, Huber) presented his real world observations on MFNs from the perspective of private counsel. Although Mr. Thorne, like the majority of those on the panel, generally views the use of MFNs positively, he issued some words of caution. First, Mr. Thorne believes MFNs may not actually produce retail price cuts. Retail price cuts generally result from input costs, and Mr. Thorne argued that MFNs may dampen buyers incentives to reduce input costs. Second, Mr. Thorne noted that there is a strong temptation for competitive firms to find creative ways to cut prices that do not technically violate the terms of MFNs. Finally, Mr. Thorne stated that he agrees with Deputy Assistant Attorney General Fiona Scott- Morton that additional compliance monitoring of MFNs may be warranted in some circumstances. 17

18 Moving Forward How Has Thinking About MFNs Evolved and Where Might It Go? By Jay L. Levine* Panelists: David I. Gelfand (Partner, Cleary Gottlieb Steen & Hamilton LLP); Jonathan M. Jacobson (Partner, Wilson Sonsini Goodrich & Rosati), Joseph Kattan, Partner (Gibson Dunn & Crutcher LLP), and Steven C. Salop (Professor of Economics and Law, Georgetown University Law Center). Moderator: Renata Hesse (Deputy Assistant Attorney General (AAG) for Civil Enforcement, Antitrust Division, U.S. Department of Justice). State of the Law and Where It s Heading Jonathan Jacobson noted that early cases did not focus on the type of issues that the workshop was focusing upon, and that cases in the 1990s presumed that MFNs were procompetitive because they assured lower prices. Indeed, only because of an amicus brief filed by DOJ did Judge Posner add a codicil to his Marshfield Clinic opinion that MFNs could be anticompetitive under the right circumstances. Jacobson credited DOJ s advocacy for the more skeptical shift in attitude toward MFNs, although he cautioned that analysis of MFNs is still in an embryonic stage. Joe Kattan observed that there was not a lot of law on the subject and what is out there is not particularly informative. We are still far away from establishing any presumptions. Steve Salop opined that MFNs generally should not be presumptively illegal, though in cases where there is a great deal of market power, such as in certain healthcare cases (Delta Dental, Blue Cross Blue Shield), a presumption may be more appropriate. David Gelfand declared that the agencies should proceed cautiously and predicted that the courts will not wholesale declare MFNs anticompetitive for several reasons, including: They are a common business practice; They can, and do, often lower price; 18

19 Declaring MFNs illegal may affect other contract terms and may reduce incentives to enter into long-term contracts; MFNs produce the same effects as other contract terms that are not presumptively illegal; Showing anticompetitive effects will be hard; and Many MFNs promote new products and innovation. Competitive Effects Steve Salop opened the discussion by noting that ultimately a rule-of-reason balancing will determine the legality of a particular MFN clause, but that the effect the law is focused on is the effect on consumers and not on efficiency. Certain proffered justifications for an MFN would give him pause, including that the largest buyer deserves the lowest price. This, he said, could simply help to entrench a monopolist. On the other hand, if the MFNs were provided by small sellers that lacked market power, or were entered into in order to deter opportunism and encourage product introduction and innovation, the MFN was less likely to concern him. In response to Renata Hesse s question whether the law should only care about the effect an MFN has on price, Salop responded that the focus is on the consumer and thus we look at the MFN s effect on price, quantity, and the promotion of investment. Jacobson argued that a rule that focused exclusively, or even primarily, on price would miss the boat. Kattan worried that an unstructured rule of reason would not provide meaningful guidance for businesses. He noted that non-price vertical restraints have a structure and a safe harbor of sorts in that such restraints are deemed lawful absent market power by the party imposing it. Salop countered that often it can be difficult to determine which party is desirous of the MFN. As to why MFNs are common in healthcare, Salop theorized that because healthcare used to have many regulated monopolies, it is possible that the companies employing MFNs are attempting to entrench their own monopoly. Kattan offered that MFNs may be 19

20 common in healthcare because the input costs represent a very high percentage of the ultimate price. MFN-plus (MFN+) Clauses An MFN+ clause typically requires a seller to give the buyer not just a price equal to what it is offering other buyers, but a lower price. Typically, this is accomplished by guaranteeing that the price for the MFN+ recipient will be the lowest price being offered to competing buyers less some percentage. David Gelfand observed that MFN+ clauses sound spurious, but the rationales supporting MFN clauses could just as well support MFN+ contracts, including easing free-rider concerns and encouraging promotion and investment. Gelfand reasoned that if an exclusive contract would be justified, so would an MFN or MFN+ contract. He noted that MFN and MFN+ contracts are simply an efficient way to get the best deal possible without spending time on the contract and moving on to deals that may be more important to the company. Hesse asked whether we should have industry-specific rules. Uniformly the panelists answered no. Gelfand noted that different industries may have characteristics that lead to certain rules, but we should not apply distinct rules by industry. Jacobson argued that while healthcare is unique, many other industries are as well and several sets of rules are unnecessary. At the end of the panel, Fiona Scott-Morton, Deputy AAG for DOJ s Antitrust Division, made two observations. First, MFNs can cause harm if they make it more difficult for a differentiated (innovative) competitor to enter the market. Second, even if MFNs produce certain benefits, such as product promotion and investment, at some point those benefits cease to justify the MFN. Kattan agreed and said that will be taken into account in the balancing process there will less on the procompetitive side of the scale. Scott-Morton also queried why MFNs are rarely enforced, as some claim. Is it because the participants do not care about them or because they work so well that everyone is adhering to them? Kattan argued that they are rarely enforced because 20

21 they are complicated vehicles. Jacobson noted that if the participants are ignoring them, there is no reason for the agencies to investigate them. *We would like to thank Eileen Reed, MA, Richard Higgins, PhD (Finance Scholars Group, Washington, DC), William A. Roach, Jr., Esquire (Winston & Strawn LLP, Washington, DC), John J. Fedele, Esquire (Baker & McKenzie, Washington, DC), Diane R. Hazel, Esquire (Federal Trade Commission, Washington, DC), and Jay L. Levine, Esquire (Bradley Arant Boult Cummings, Washington, DC), for providing these summaries. Panel Summaries from DOJ and FTC Workshop on Most-Favored-Nation (MFN) Clauses and Antitrust Enforcement and Policy 2012 is published by the American Health Lawyers Association. All rights reserved. No part of this publication may be reproduced in any form except by prior written permission from the publisher. Printed in the United States of America. Any views or advice offered in this publication are those of its authors and should not be construed as the position of the American Health Lawyers Association. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought from a declaration of the American Bar Association 21