Learnings from Other Jurisdictions

Retail MFN clauses have been under the close scrutiny of competition law regulators and courts across jurisdictions, particularly for platforms that enjoy a position of dominance. Some of the most prominent developments emerge from the European Union (EU) and its Member States, as well as the United Kingdom (UK). Some of these developments are discussed in detail below.

The European Union

In the EU, retail MFN clauses are governed by the Treaty on the Functioning of the European Union (TFEU), which is enforced by the European Commission (EC).

In 2015, the EC opened an investigation into Amazon,^[2] in particular, the MFN clauses included in its contracts with certain e-book publishers, and their compatibility with Article 101 (dealing with anti-competitive agreements) and Article 102 (dealing with abuse of dominant position) of the TFEU. The MFN clauses required publishers to intimate Amazon regarding more favourable or alternative terms offered to competitors of Amazon and/or to offer Amazon similar terms and conditions as offered to its competitors. There were various clauses in the contracts to ensure that Amazon was offered terms by the publishers that were at least as good as those offered to its competitors.

In its preliminary assessment, the EC noted that the clauses in question had the potential to make it more challenging for Amazon’s competitors to effectively compete with it. This was because publishers’ and competitors’ incentives to develop new types of e-books and alternative distribution services would be reduced. Accordingly, such MFN clauses would lead to less choice, less innovation and, overall, a higher price for consumers due to lessening of competition in the market. However, the case was settled when certain commitments were offered by Amazon not to enforce its MFN clauses. While this is a commitments decision, the EC’s stance indicates that it does not view wide MFN clauses favourably.

While there has been a lack of EC case law on the subject of retail MFN clauses, there have been developments under EU legislation. The Digital Markets Act^[3] (DMA), which seeks to provide rules for digital gatekeepers to ensure open markets, prohibits the use of both wide and narrow MFNs by large online platforms considered as ‘gatekeepers’ in the market. The EU’s new Vertical Block Exemption Regulation No. 2022/720^[4] (new VBER), which provides a safe harbour for certain vertical agreements, also contains provisions relating to MFN clauses. The old Vertical Block Exemption Regulation No. 330/2010^[5] generally exempted MFN clauses in agreements if both the supplier and buyer did not exceed a market share of 30%. Owing to some concerns regarding the potential negative effects on price competition of using MFNs in the platform context, the new VBER introduces a special rule for online marketplaces. Wide MFN clauses are excluded from the benefit of the exemption under the new VBER. By contrast, MFN clauses of offline players and narrow MFNs of online players continue to benefit from the block exemption if both the supplier and buyer do not exceed a market share of 30%.

A perusal of the developments in the EU thus indicates that there is some scope for narrow MFN clauses being considered as consistent with competition law (except for those potentially falling within the scope of the DMA).

Germany

In Germany, the German Federal Cartel Office (FCO) regulates retail MFN clauses on the basis of the TFEU and the German Competition Act.

In 2015, the FCO decided a landmark case against Booking.com, a leading hotel booking platform in Europe, holding that the narrow MFN clauses in their agreements with hotels led to appreciable competitive restraints.^[6] Narrow MFN clauses were used by Booking.com in its agreements with hotels, prohibiting them from offering their rooms on their own website at a lower price than on Booking.com. The FCO noted that the narrow MFN clauses reduced the attractiveness of the hotel’s own sales channel and restricted its pricing sovereignty. The FCO found that such clauses also resulted in market foreclosure with regard to potential competition with established hotel portals and represented an unfair impediment for small and medium hotels.

However, on appeal this decision was quashed by the Dusseldorf Court of Appeal in 2019 which noted that such clauses were not restrictive of competition, but rather necessary for a fair and balanced exchange of services between online portals and hotels.^[7] Such clauses ensured that hotels did not use Booking.com’s services to expand their reach and then offered a cheaper option on their own websites after being found by potential customers on Booking.com (free-rider problem).

In 2021, the Federal Court of Justice overturned this decision and upheld the decision of the FCO holding these narrow MFN clauses to be restrictive of competition.^[8] The Federal Court of Justice found that, because of this clause, hotels were unable to offer better room prices on their own online sales channels than on Booking.com (by way of savings made on commissions). The Federal Court of Justice noted that, while the free-rider problem could not be completely disregarded, a balance had to be struck between the pro-competitive and the anti-competitive aspects of any conduct. Based on the evidence, the Federal Court of Justice found that it could not be conclusively shown that the free-rider problem severely threatened the efficiency of the services offered by Booking.com. On the other hand, however, it found that the narrow MFN clauses significantly restricted the online sales managed by the hotels themselves without using the platform.

The Federal Court of Justice’s judgment means that, for the moment, large platforms in Germany may have difficulty in including narrow MFN clauses in their agreements. Interestingly, the Court did accept that a free-rider problem might exist, and it was only the evidence that was lacking in this case. It is possible that a different position may be adopted in future cases, if the free-rider problem is shown to exist in the market.

The United Kingdom

In the UK, MFN clauses are governed by the Competition Act, 1998.

The competition regulator in the UK, the Competition and Markets Authority (CMA), in November 2020, issued a decision against a price comparison website, Compare the Market (CTM).^[9] In this decision, the CMA found an infringement of Section 2(1) of the Competition Act 1998 and Article 101 of the TFEU (which applied during the relevant period). The case concerned certain wide MFN contractual obligations included by CTM in its agreements with numerous home insurance providers. These clauses required that home insurance providers gave to CTM the lowest or equal lowest prices offered by them on any other sales channel. The CMA ruled that the wide MFN clauses had the following anti-competitive harms: (a) they led to a reduction in the incentives for home insurance providers to lower prices (including by way of promotional deals); (b) they reduced competitors’ incentives to lower the commission charged by them to home insurance provider; (c) they insulated CTM from competition in the market; (d) they stifled the growth and expansion of competitors; and (e) they generally impacted home insurance providers subscribing to price comparison websites.

Subsequently, on appeal, the Competition Appeal Tribunal (CAT) overturned the decision of the CMA and found that the CMA incorrectly found infringement on the basis of the MFN clauses in the agreements involving CTM.^[10] The CAT found that there was no evidence in support of a conclusion that the wide MFN clauses were forced upon insurance providers or that they had any anti-competitive effect. The CAT provided its own relevant market definition and found that significant competitive constraints were posed upon CTM by other sales channels and there was accordingly strong competitive pressure. The CAT also found that the CMA failed to show any actual anti-competitive effect of the MFN clauses. It noted that that the wide MFN clauses in question only restricted the price at which insurance providers could offer their products through price comparison websites – they did not restrict competition on the level of premiums.

On the basis of the decision of the CAT, it appears to be possible for enterprises to argue that their MFN clauses (regardless of whether they are wide or narrow) are consistent with competition law after showing that they have a minimal impact on the market. Pertinently, this could be done by showing that there is ‘strong competitive pressure’ on these enterprises (which, in turn, shows that they do not enjoy dominance or significant power in the market).

The CCI’s Treatment of MFN Clauses

MFN Clauses – Abuse of Dominance

In the MMT-Go Case,^[11] the CCI addressed allegations of abuse of dominance and anti-competitive vertical agreements levelled against online travel agencies (OTAs) MakeMyTrip and Goibibo (MMT-Go) by hotel operators. One of the allegations was that MMT-Go entered into price parity and room parity agreements with the hotels listed on its platform. Under the price parity agreements, the hotels were obliged to provide the rooms on all OTAs including MMT-Go and their own website at the same price. The room parity agreements required the hotels to provide rooms on the MMT-Go platform if the rooms were being provided on other OTAs and their own website. The CCI had initially ordered an investigation in this matter as it was of the prima facie view that such agreements might result in removal of incentives for OTA platforms to compete and might also prevent entry of new players in the market.

The allegations were investigated under Sections 4(2)(a)(i) (imposition of an unfair or discriminatory condition in purchase or sale of goods or services by a dominant enterprise) and 4(2)(c) (denial of market access by a dominant enterprise) of the Competition Act. In its final decision, the CCI observed that these agreements were anti-competitive in nature. Price parity agreements meant that there was no incentive for other OTAs to offer lower commission rates to hotels as the price for the rooms would be the same for all the OTAs regardless of the commission.

In relation to room parity agreements, the CCI observed that these agreements ensured that, if a room was available in a hotel, it would be listed on all the OTA platforms that had signed a room parity agreement. This would further lead to a higher number of bookings from the platform which was offering the maximum discounts even if it was charging the highest commission from the hotels. Room parity agreements would also mean that the hotels would have to make their rooms available on platforms charging high commissions and lower commissions alike and that they could not favour a platform that might be offering the hotels better terms.

Considering these anti-competitive effects, the CCI noted that, as most bookings could be taking place on the platform which had the ability of giving maximum discounts and was also charging the maximum commission, the commission received from the hotels would be used to fund the discounts. More commission meant more discounts which in turn would make the platform more attractive for the customers. The CCI noted that this was a vicious cycle leading to foreclosure of competition as other platforms would not be able to compete. The investigation had shown that the market share of Booking.com had shifted to MMT-Go and the other players were not able to compete because of the price and room parity agreements. Further, in the long run, higher commission would converge into the prices the hotels offered and hence would lead to higher priced rooms being offered to the end consumers.

The CCI observed that these agreements were also taking away the price setting freedom of the hotels that were listed on the MMT-Go platform because the hotels had to provide the same price to all the platforms and offer differential prices to platforms with lower commissions or provide them differential availability of rooms when they had unmet demand. The CCI thus held that these agreements led to reinforcement of the dominant position of MMT-Go in the relevant market because they helped MMT-Go in increasing its network of consumers who increasingly used the platform to grab the best deals and impeded the competitive ability of other OTAs from offering a lower commission and negotiating a lower price from the hotels.

In its defence, MMT-Go had argued that price and room parity terms were an industry practice. The CCI considered this argument and observed that parity agreements entered by a dominant player and parity agreements by small players were not comparable. MMT-Go was the largest platform and hence an essential trading partner for hotels to ensure discoverability, which made its MFN clauses more egregious than those of other players.

MMT-Go had also argued that the parity agreements addressed concerns of free riding by other OTAs or the hotels on the investment (in terms of promotion of the hotel) made by MMT-Go. The CCI rejected this argument, noting that MMT-Go provided discounted rates (offered by the platform itself), and therefore it seemed improbable that a customer would free ride by looking for a hotel on MMT-Go and then buying it on a different platform at a higher price. Moreover, when there were more OTAs to choose from, the customer would not have an incentive to free ride because a higher number of OTAs would itself ensure that competitive price were offered on the platforms.

The CCI therefore concluded that wide price parity agreements as imposed by MMT-Go on hotels were not justified to address any free riding concerns as they led to foreclosure of competition amongst OTAs and high prices to the end consumers. However, the CCI did acknowledge that narrow price parity agreements might be justified to address free riding concerns on account of the contractual relationship between OTAs and hotels.

MFN Clauses – Vertical Concerns

MFN clauses have largely been analysed as an imposition of an unfair condition by a dominant enterprise. However, since they are entered between enterprises at different stages of the production chain, they may also be analysed as a vertical restraint under Section 3(4) of the Competition Act. In a complaint by the National Restaurant Association of India (NRAI), the CCI considered a number of allegations against online food delivery platforms Zomato Limited (Zomato) and Bundl Technologies Private Limited (Swiggy).^[12] It found a prima facie case of breach of Section 3(4) and ordered an investigation by the Director General.

It was alleged that there were price parity terms in the agreements/contracts between Zomato/Swiggy and restaurant partners which did not allow such restaurant partners to develop their own direct ordering channels or a competing platform by offering more competitive rates, thereby directly reducing inter-platform competition. Identifying the competition concerns of price parity clauses for food delivery apps, the CCI noted that it might “result in removal of the incentive for platforms to compete on the commission they charge to restaurants, may inflate the commissions and final prices paid by consumers and may also prevent entry of new low-cost platforms”. The CCI further opined that the price parity clauses imposed by Swiggy and Zomato were in the nature of wide MFN clauses which did not allow the restaurant partners to maintain lower prices or higher discounts on any of their own supply channels or on any other aggregator, so that the minimum price or maximum discounts could be maintained by the platform. Considering that Zomato and Swiggy were the “two biggest platforms” present in the food delivery segment, the CCI prima facie considered that such clauses merited a detailed investigation as they were likely to have an AAEC in breach of Section 3(4) read with Section 3(1) of the Competition Act.

The CCI has thus made it clear that not just dominant enterprises but also enterprises with “market power” can be investigated for imposing MFN clauses.

MFN Clauses – Risk of Collusion

Whilst not tested by the CCI, MFN clauses can facilitate and sustain coordination or tacit collusion that exists between different platforms. Imposition of price parity clauses can increase transparency in the market and encourage enterprises to collude on price and commissions charged from the sellers. This could lead to collusion among competitors to raise prices and share price sensitive information in violation of Section 3(3) of the Competition Act.

Conclusion

Competition jurisdictions around the world have taken an increasing interest in MFN clauses, especially those imposed by large digital platforms. Generally, wide MFN clauses, when imposed by a dominant entity, are found to be anti-competitive by competition authorities. On the other hand, the view towards narrow MFNs is mixed, with regulators allowing them if there is no evidence of any anti-competitive effect in the relevant market.

In India, the CCI seems to have taken a measured approach. It found MMT-Go’s wide MFNs to be anti-competitive but noted that narrow MFNs may potentially be justifiable in certain situations. In the MMT-Go Case, the CCI was concerned with MFN clauses imposed by a dominant entity. The likelihood of such concerns increases if the MFN clauses are accompanied by other restrictions such as exclusivity, which further increase the dependence of an entity on the dominant platform. Even though there were other players in the relevant market imposing similar MFN clauses, the CCI did not find any fault with them owing to their position in the market.

In the NRAI case, the CCI has taken the view in prima facie proceedings that the imposition of MFN clauses by enterprises having market power could also raise competition concerns given the risk of foreclosure without any benefit accruing to the consumer. Considering that vertical agreements are not per se void, it will be interesting to see how the CCI will assess the pro-competitive effects of MFN clauses such as prevention of free riding, hold up problems and lowering of transaction costs.

Footnote

^[1]      Federation of Hotel and Restaurant Associations of India (FHRAI) and Another v. MakeMyTrip India Private Limited and Others, CCI, Case No. 14 of 2019 (19 October 2022).

^[2]      E-Book Amazon, EC, Case AT.40153 (4 May 2017).

^[3]      Commission Regulation (EU) 2022/1925 on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828 (14 September 2022).

^[4]     Commission Regulation (EU) No. 2022/ 720 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (10 May 2022).

^[5]      Commission Regulation (EU) No 330/2010 of on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (20 April 2010).

^[6]     Booking.com Case, FCO, Case B9–121/13 (22 December 2015).

^[7]      Booking.com Case, Düsseldorf Higher Regional Court, Case VI-Kart 2/16(V) (4 June 2019).

^[8]     Booking.com, FCJ, Case KVR 54/20 (18 May 2021).

^[9]     Price Comparison Website, CMA, Case 50505 (19 November 2020). The investigation was opened in 2017 when the EU competition rules applied. Following Brexit, the EU competition rules no longer apply in the UK.

^[10]     BGL (Holdings) Limited and Others v. Competition and Markets Authority, CAT, 1380/1/21 (8 August 2022).

^[11]     See n. 2., above.

^[12]     NRAI v. Zomato and Swiggy, CCI, Case No. 16 of 2021 (4 April 2022) (NRAI case).

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