CIC group looks at ‘most-favored nation’ clauses

By John Yoswick

What do Amazon’s contract with some online sellers have in common with State Farm’s direct repair agreement (and that of some other auto insurers as well)?

The answer: most-favored nation clauses.

Scrutiny by government regulators could be behind Amazon’s decision last year to drop that clause in the United States, which required third-party sellers to price their products on Amazon no higher than they do anywhere else. Amazon had previously ceased using such “most-favored nation” (or “price parity”) contract clauses in some European countries after government investigations there.

The revived interest in the potentially anti-competitive impacts of most-favored nation clauses (MFNs) — such as the one State Farm “Service First” shops have had to sign since 2006 — was discussed last year by the Collision Industry Conference (CIC) “Governmental Committee.” Michigan attorney Stephen Bolerjack, whose practice focuses on antitrust and contract issues in the automotive industry, said that on the surface, MFNs appear pro-competitive and simplify the negotiation process between parties. But they also can focus solely on price and overlook other factors that can impact pricing, he said.

“If the seller is doing something different with other buyers, there’s a tendency to ignore that,” Bolerjack said, launching into a fictional conversation to offer an example. “‘Well, gee, you gave them a better deal.’ ‘Well, yeah, because he’s agreed to give me 50 percent of his business in the three-county area, so, yes, I gave him a 10 percent discount. Do you agree to that?’ The answer likely will be ‘We just like the lower price. That’s what we’re interested in.’”

Darrell Amberson, a collision repairer who co-chairs the CIC committee, said that’s the case with some MFNs in the collision industry. They may require that a shop give a particular insurer all of the lowest rates or biggest discounts the shop offers any other insurer on parts or labor, even if the shop offers no more than any one of those price-breaks to any other single insurer.

Amberson works for a regional multi-location collision repair business, and said even if just one of its locations belongs to an insurer’s DRP, all of its locations must give any discounts that one store offers to that DRP to other insurers who uses an MFN.

Does he view MFNs as an important industry issue? It might not be up there with such issues as OEM repair procedures, Amberson said, but MFNs can have a significant impact on a collision repair business. In the past, he said, it might take a shop making a labor rate increase two or three months to get all insurers on board with the higher rate. As more of those decisions by insurers are made regionally or nationally, he said, that process has slowed. MFNs add even more delays.

“If you’ve got an MFN clause in a DRP contract, you can’t ask that insurer for the higher labor rate until you get the very last insurer that you interact with to move up,” Amberson said, even if the insurer with the MFN otherwise would be willing to pay the higher labor rate. “It slows the whole process down and hurts your income.”

MFNs in the health insurance market were in the news back in 2010. The U.S. Department of Justice (DOJ) and Michigan’s Attorney General sued Blue Cross Blue Shield of Michigan alleging that the “most favored nation” clauses of the insurer’s contract with hospitals is anti-competitive. The U.S. Department of Justice had brought the lawsuit against the health insurer, saying MFN clauses raise hospital prices, discourage discounting and prevent other insurers from entering the marketplace. It said that some Blue Cross clauses required Michigan hospitals to charge the insurer’s competitors up to 40 percent more for services.

“This cannot be allowed in Michigan, and let me be clear: We will challenge similar anti-competitive behavior anywhere else in the United States,” said Christine Varney, the U.S. Assistant Attorney General’s Office antitrust chief at the time.

The Department of Justice later dropped the suit when Michigan passed a new law prohibiting “most-favored nation” clauses in health insurer preferred provider contracts in that state. A similar law was enacted in North Carolina.

The Department of Justice and Federal Trade Commission (FTC) held a joint workshop in 2012 that many saw as an indication that anti-trust regulators have “a reinvigorated focus on most-favored-nation (MFN) clauses.” 

“Although, at times, employed for benign purposes, MFNs can, under certain circumstances, present competitive concerns,” the two agencies noted prior to the workshop. “This is because they may, especially when used by a dominant buyer, raise other buyers’ costs or (prevent) would-be competitors from accessing the market. Additionally, MFNs can facilitate collusion and stabilize coordinated pricing among sellers.” 

At the CIC last year, attorney Bolerjack said antitrust regulators tend to take particular interest in MFNs when a buyer imposing them has significant market share, generally viewed as 30 percent or more. (State Farm has about 17 percent market share nationally, though a higher percentage in some states.) Still, he said, the interest shown by regulators in MFNs used by tech giants like Amazon might offer an opening for collision repairers.

“It may be a time when you have an opportunity…with the feds or it might be a good time to go to your state legislatures,” he said. “These have been outlawed in certain states.”  •