Antitrust Lawyer Blog
On May 25, 2021, the D.C. Office of the Attorney General (DC AG) filed an antitrust complaint against Amazon.com, Inc. in the Superior Court of the District of Columbia. The complaint accuses the company of monopolization and illegal restraints of trade. Interestingly, the complaint does not include allegations of federal antitrust violations.
The complaint alleges that Amazon “fair pricing policy” requires third-party sellers who sell products through Amazon to agree to what is really a most-favored-nation (“MFN”) provision. According to the complaint, this fair pricing policy restrains third-party sellers, which wish to sell on Amazon’s platform, from selling their products on other websites, including their own websites, at prices lower, or on better terms, than offered through Amazon. This fair pricing policy replaced Amazon’s price parity provision, but the claim is that this new policy has the same effect as Amazon’s old policy. It is considered a platform most-favored nation agreement and allows for Amazon to penalize third parties found in violation of these policies. Allegedly, the provisions have the effect of creating a price floor with Amazon’s prices being the lowest. Because these third-party sellers incorporate Amazon’s fees – which can be up to 40% of the product’s price – into their prices, they are forced to inflate their product prices on other platforms since they must account for the fees in their sale price. The claim of the Office of the Attorney General is that this policy suppresses competition and unnaturally inflates prices for consumers across all online retail platforms. The complaint asserts that these unreasonably high fees are built into prices market wide, due to the alleged price floor caused by the most-favored nation provisions.
According to the complaint, Amazon allegedly violates D.C. antitrust law in a variety of ways. First, Amazon is alleged to be engaged in unlawful horizontal agreements because Amazon horizontally competes with many third-party sellers (i) as online retailers, and (ii) in particular products. Second, Amazon is alleged to be engaged in unlawful vertical agreements because the most-favored-nation provisions eliminate competition in online retail. Third, Amazon, accounting for 50-70% of all online retail sales and benefiting from network effects, is alleged to monopolize and attempt to monopolize the online retail sales market.
D.C. Attorney General Karl Racine has stated that the lawsuit is an attempt to end Amazon’s illegal use of price agreements which destroy competition and harm the company’s two million third-party sellers. The complaint states that these pricing agreements “are facially anticompetitive and allow Amazon to illegally build and maintain monopoly power in the online retail market in violation of the District of Columbia’s Antitrust Act.”
In 2019, Amazon faced scrutiny from the U.S. Congress and regulatory agencies regarding a clause in their contracts with third party sellers that was known as a price parity provision. Though the company removed this provision, it was then replaced with the similar fair pricing policy that is under scrutiny today.
Amazon has responded to the lawsuit stating that “the D.C. Attorney General has it exactly backwards – sellers set their own prices for the products they offer in our store.” While the complaint seeks to enjoin Amazon from engaging in this allegedly anticompetitive behavior, Amazon has stated that such relief “would force Amazon to feature higher prices to customers, oddly going against core objectives of antitrust law.”
This case is noteworthy because there is not much litigation that has examined the anticompetitive effects of MFNs. Without precedent indicating that price parity provisions or MFNs are anticompetitive, the DC AG, as the plaintiff, will have a difficult time showing how Amazon’s pricing policies result in anticompetitive effects. Amazon will likely argue that the company’s pricing practices are pro-competitive or have no competitive effect. MFN clauses are common in business. MFN clauses can be advantageous to a purchaser in that they eliminate the purchaser’s risk in negotiating a bad deal under unstable pricing conditions and are generally benign when the purchaser does not have market power. But, Amazon’s MFN has been under scrutiny in the European Union so the DC AG is not on its own in scrutinizing the policy. Indeed, when a monopolist or a firm with market power uses MFN clauses in its contracts, they can be illegal if they result in anticompetitive effects that harms the competitive process and results in increased prices overall. For these reasons and more, MFN clauses alone are subject to the rule of reason—a lenient standard that requires a rigorous market analysis. The difficulty in DC’s case is proving that Amazon has market power. Market analysis or evidence needs to show that Amazon controls more than 50% of ecommerce. Many third-party sellers are increasingly using other online platforms run by Etsy, Shopify, Facebook, Walmart Inc., eBay Inc., Target Corp., and others to reach new consumers in the wake of the pandemic.
Moreover, the lawsuit adds to increasing scrutiny over Amazon’s relationship with its third-party sellers, including a probe launched by the FTC in concert with the attorneys general around the country. It is unclear why the District of Columbia’s lawsuit was filed before the other antitrust enforcers have completed their investigations other than politics. In fact, D.C. Attorney General Racine is rumored to be in the running to be nominated to chair the Federal Trade Commission. Even though this case currently involves only the D.C. AG, it still has important implications for the legal future of big tech companies and platforms. Facebook, Google, Apple, and Amazon have been under increased antitrust scrutiny in the United States for the past few years, indicating that federal and state antitrust enforcers will continue to scrutinize their conduct, actions and policies.
By Rachel Sims