MFNs Becoming A Battleground In FCC’s Review Of Comcast/Time Warner Deal
The biggest regulatory review of the year—the Federal Communications Commission’s examination of Comcast Corp.’s proposed acquisition of Time Warner, Inc.—has taken an interesting foray into analyzing competitive tactics, with the FCC’s invitation to media companies to confidentially raise concerns about Comcast’s use of most favored nation (“MFN”) provisions in its contracts to purchase content.
The Wall Street Journal reported yesterday that the FCC has invited companies, including Discovery Communications, to offer feedback about Comcast’s MFNs to aid its evaluation of the proposed take-over. The FCC also publicly released a request for information to Comcast that included (among many other items) details about each agreement in which Comcast has used an MFN.
In a typical form, an MFN is a contractual promise obtained by a buyer from a seller that the seller will not give a better price to any other purchaser. A buyer usually seeks an MFN clause as a form of protection to ensure that its competitors do not get cost or other advantages.
For many years, MFNs were not the subjects of successful antitrust challenges that were actually litigated to judgment. One of the only courts to render an antitrust decision about MFNs held that a policy of insisting on a supplier’s lowest price tends to further competition on the merits and does not, as a matter of law, violate Section 2 of the Sherman Act. See Ocean State Physicians Health Plan, Inc. v. Blue Cross Blue Shield of R.I., 883 F.2d 1101, 110 (1st Cir. 1989). Despite this holding, federal antitrust enforcers have repeatedly challenged MFNs in the health care field, with the U.S. Department of Justice (“DOJ”) and the Federal Trade Commission collectively filing seven such actions in the 1990s related to use of MFNs by health insurers. These actions, all settled by consent decrees, involved the use of MFNs by dominant firms.
There has been a resurgence of antitrust scrutiny of MFNs in recent years, and they have played a key role in two major enforcement actions by the DOJ. See United States, et al. v. Blue Cross Blue Shield of Michigan, No. 10-cv-14155 (E.D. Mich. 2010); United States v. Apple, Inc., et al., No. 12-cv-2826 (S.D.N.Y. 2012). Neither case engaged in any antitrust analysis of the use of MFNs by dominant firms, as the former was voluntarily dismissed, and the latter involved use of an MFN by a new entrant.
It was reported in June of 2012 that the DOJ had opened a “wide ranging” investigation of Comcast, Time Warner and other cable companies of potentially anticompetitive practices, including the use of MFNs to crush competition from online video services such as Netflix. The current status of that investigation is unknown. But an examination of MFNs is outside the typical purview of the FCC, and this new inquiry in the context of the Comcast’s proposed acquisition of Time Warner is interesting, particularly since the DOJ has been largely silent about its own view of the proposed deal.
The FCC’s interest may well have been sparked by complaints from media companies in their public filings related to the deal that Comcast’s MFNs deter them from licensing content to new entrants. Under the terms of the consent judgment that resolved the DOJ’s challenge of the Comcast/NBC Universal, Inc. joint venture, Comcast is already prohibited from certain types of content exclusivity and discrimination against online video providers such as Netflix. However, some media companies have argued that Comcast’s contacting practices deter them from entering creative licensing arrangements with newer entrants, and that Comcast could use its MFN clauses to reap the benefits of any price concessions without providing any corresponding value. Lion’s Gate Entertainment, in particular, has been vocal about the harm to consumers, and constraints on content distribution, caused by Comcast’s insistence on obtaining the same price for programming as smaller players pay. These MFNs might also prevent one-off or a-la-carte program licensing outside of a bundle of channels, which would create de-facto content exclusivity (although they may not technically violate the existing consent judgment).
Unlike the DOJ, which examines proposed mergers through an antitrust lens, the FCC is examining this deal because it involves a license transfer between Time Warner and Comcast. See FCC Act §214(a) and 310(d). The standard of review used by the FCC is whether the transfer serves the public interest, convenience, and necessity. It is unclear whether, because of the FCC’s different mandate and different standard of review, its evaluation of the use of MFNs by a dominant content licensor will be significantly different from the DOJ’s. The “public interest” standard employed the FCC appears to be more amorphous than the standard antitrust review applied by DOJ.
To the extent the FCC’s public interest mandate relates to access to programming, media companies may be able to make headway with the FCC in their complaints about Comcast’s use of MFNs, and it would not be surprising to see restrictions on the use of MFN provisions as part of any structural relief the FCC demands as a condition of approving the merger.
– Edited by Gary J. Malone