The 20-word clause that exposed Amazon to an antitrust lawsuit

Washington, DC district attorney Karl Racine says one key clause in Amazon’s policies for third-party vendors shuts down competition in e-commerce.
Washington, DC district attorney Karl Racine says one key clause in Amazon’s policies for third-party vendors shuts down competition in e-commerce.
Image: REUTERS/Jonathan Ernst
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Amazon’s latest legal headache centers on one 20-word clause in a policy all its third-party vendors must follow in order to sell their goods on the e-commerce giant’s platform.

In an antitrust lawsuit filed May 25 (PDF), Washington DC attorney general Karl Racine accused Amazon of using these agreements to unfairly dictate how much retailers can charge for their products on other platforms, squashing competition and raising prices for consumers.

The clause at the heart of the lawsuit bans third-party sellers from “setting a price on a product or service that is significantly higher than recent prices offered on or off Amazon.” In other words, if a vendor sells a product on Amazon, it can’t sell the same product at a lower price on Walmart, eBay, or even its own website. Amazon reserves the right to kick non-compliant vendors off its platform, among other punishments.

A snippet of the Amazon Marketplace Fair Pricing Policy, with the company's most favored nation clause highlighted. It bars vendors from “setting a price on a product or service that is significantly higher than recent prices offered on or off Amazon.”
Thou shalt not undercut Amazon prices.

As a result, Racine’s complaint alleges, “other online retail sales platforms were not able to use lower product prices to lure buyers and sellers to their competing online retail sales platform and capture some of Amazon’s dominant market share.” Amazon, however, has asserted that its policies lower prices for its consumers.

Amazon’s “most favored nation” clause

Amazon’s Fair Pricing Policy is an example of a “most favored nation” clause (MFN), a common provision in business deals and international trade agreements. The term comes from the World Trade Organization (WTO), which requires countries to provide the same concessions, privileges, and immunities they offer in one trade deal to all the members of the WTO. In other words, every WTO member gets the same trade perks as the most favored nation does. Private businesses make similar deals to ensure their business partners won’t grant more favorable terms when striking deals with with their rivals.

Amazon’s MFN used to be much more explicit. An older version of its policy stated, “You will maintain parity between the products you offer through [other platforms] and the products you list on any Amazon site,” and specifically required that price, customer service, and product description quality be exactly as good or better for products listed on Amazon. The company removed that clause in Europe after British and German antitrust regulators began investigating the company in 2013, and finally deleted the clause globally in 2019 amid scrutiny from US antitrust regulators.

In his complaint, Racine alleges that Amazon’s new pricing policy is “an effectively-identical substitute” that has the same negative impact on competition. Amazon asserts that it’s simply an effort to deter price gouging on its platform.

Racine told CNBC his office decided to take on Amazon by itself—rather than banding together with dozens of US state attorneys general, as it did in antitrust lawsuits against Google and Facebook—because it views this as a fairly cut and dry case. But, as a consequence, the lawsuit may have a smaller impact, since it only covers Amazon’s impact on consumers in DC.

The case may prove to be more challenging than Racine lets on. Generally, MFN deals don’t land companies in legal trouble, according to Janelle Wrigley, managing editor at Thomson Reuters’ Practical Law and a former US antitrust prosecutor.

“The use of MFNs, by itself, has never been found illegal under US antitrust law and there are relatively few antitrust cases that have analyzed MFNs in depth,” she wrote in an email. But although court precedents are sparse, she said MFNs may enter legally murky territory when the company pushing the deals has significant market power.

The major challenge for Racine’s office, she said, will be proving its contention that Amazon controls between 50% and 70% of the US e-commerce market. In antitrust cases, these debates are generally settled by highly-paid economic consultants, whose fees can run into the tens of millions of dollars. Even the federal government struggles to afford these cases—so the cost of this market analysis could be a major hurdle for the DC district attorney’s office.

Racine will also have to prove that Amazon’s MFN clause raised prices for consumers across the entire online retail market. “DC’s case is in some ways pretty simple but it is also very broad—it’s not narrowing in on any particular product segment sold on Amazon, for example—and for that reason it’s a tough one to prove,” Wrigely wrote.

Update: An Amazon spokesperson emailed the following statement: “The DC Attorney General has it exactly backwards—sellers set their own prices for the products they offer in our store. Amazon takes pride in the fact that we offer low prices across the broadest selection, and like any store we reserve the right not to highlight offers to customers that are not priced competitively. The relief the AG seeks would force Amazon to feature higher prices to customers, oddly going against core objectives of antitrust law.”