The Antitrust Division of the US Department of Justice has challenged the use of “most favored nation” clauses by an alleged dominant health insurer, contending that contracts guaranteeing a buyer the lowest price may exclude competition.
Most favored nation (MFN) contracts require a seller to give a buyer the seller’s lowest price. They are a common tool for negotiating lower prices and, as such, are generally considered procompetitive and lawful under the antitrust laws.
But when a powerful buyer uses MFN contracts with most or all of the sellers in a given market, the result, at least theoretically, can be less price competition and higher prices. And when that buyer asks these sellers to agree that they will charge competing buyers more, the resulting “MFN Plus” contracts may exclude the buyer’s competitors and reduce competition. In that extreme case, regulators have argued that MFNs violate state and federal antitrust laws.
The Antitrust Division and the Michigan Attorney General are employing this theory in their lawsuit challenging the use of MFN and MFN Plus agreements by Blue Cross Blue Shield of Michigan (Blue Cross). The key allegations of the complaint are that:
The complaint also charges that Blue Cross’ MFNs are unreasonable restraints of trade.
MFNs are commonly used in many industries and they are usually legal, because they often result in lower prices by requiring sellers to expand their discounting. The question is, when do MFNs cross the line? The DOJ’s lawsuit suggests that MFNs are anticompetitive and illegal when buyers are so large and the demanded discount is so steep that the MFNs effectively prevent sellers from lowering their prices or selling to non-dominant buyers.
Even under the DOJ’s theory, most MFNs will be legal because most buyers are not large enough to be able to exercise excessive control in the marketplace. For very large players, however, the DOJ’s lawsuit serves to remind buyers with high market shares of the antitrust risks of MFNs.
For more information about United States v. Blue Cross Blue Shield of Michigan, or any other matter raised in this Legal Update, please contact at +1 202 263 3257 or at +1 202 263-3203.
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