What’s Your Experience with “Most Favored Nation” Provisions?

Some months ago a reader asked the following:

At some point down the road, can you do a blog posting on Most Favored Nation clauses? 

My feeling is that within the last 2-3 decades, some professor in some business school somewhere wrote an article on how important these clauses are. Current CEOs, CFOs, and procurement leaders must have read that article, or must have friends who read that article, because I see these kinds of provisions in agreements to purchase goods or services or both.

I view these clauses as “trophies”. If a supplier readily assents to such a clause, then you don’t need to secure it. If a supplier refuses to accept the clause, then either: (a) you really need it from that supplier, or (b) the supplier is concerned about setting up the mechanism to comply with the clause. Oddly enough, again in my humble view, you may be better off with the supplier who rejects the provision …

Most-favored-nation (MFN) provisions are a feature of international economic relations. If one country grants another country MFN status and thereafter offers to one or more additional countries trade terms that are more favorable than those offered to the MFN country, the granting country must offer the MFN country too those more favorable terms.

The MFN concept has migrated into all kinds of commercial contracts—patent licenses, employment agreements, what have you. (The terminology might be adjusted to, for example, “most favored licensee.”)

But I have no first-hand experience with such provisions. I do know that MFN provisions make it easier for parties to strike a bargain, but they also act as a straitjacket on the granting party.

And MFN provisions are conducive to dispute. For example, when an MFN grantor subsequently enters into a contract granting rights more favorable than those granted the MFN beneficiary, the MFN grantor might be tempted simply not to inform the MFN beneficiary.

And it can be far from clear that terms granted subsequently are more favorable than those granted the MFN beneficiary. Here’s what Raymond T. Nimmer, Jeff Dodd, Modern Licensing Law § 7:15 has to say on that subject:

If one assumed that all licenses granted by the licensor were for a similar duration and differed only in the percentage running royalty rate charged, this formulation would present few difficulties. Thus, a subsequent license at a 2% royalty would clearly be more favorable than the prior license at 7% assuming that all other license terms are identical. However, all other terms are seldom identical or, at least, the parties should assume that they may not be. The issue in this framework thus becomes one of determining what combination of terms is or is not more or less beneficial than another. Making a determination on that issue may present a formidable, if not an impossible, task.

Beyond that, I leave it to you to comment on your experience with MFN provisions

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

9 thoughts on “What’s Your Experience with “Most Favored Nation” Provisions?”

  1. MFN clauses raise potential antitrust concerns for both vendors and customers. They also need to be rationalized with the vendor's duties under the Robinson-Patman Act–often, what the customer wants is already implicitly the law under Robinson-Patman. Usually, on the vendor side, we would either reject the MFN request outright or water it down so much that it became meaningless. Eric.

  2. 1. MFN clauses can be a serious PITA for a vendor to administer. Once you grant MFN status to one customer, you're now a little bit pregnant — in theory, you now have to maintain a master list of MFN customers, and then make sure that no subsequent deal ever involves a better discount than any discount on that list.

    2. Don't forget that GSA procurement contracts usually include MFN clauses.

    3. A vendor's or licensor's violation of an MFN clause can lead to fraud allegations. In the mid-1990s one of my then-partners, representing a very large licensee, got an extremely favorable litigation settlement from its very large licensor because of that.

  3. I would advise against a vendor agreeing to a most-favored-customer clause unless (a) the business has a standarized set of products with standardized list prices and (b) the business has reporting and workflow mechanisms that assure — during the process of selling to subsequent customers — the business lowers its price to the most most favorfed customer to match any lower prices. Otherwise, it turns out to be a royal pain.

    If you do agree to it, make sure to limit its effect to what you can police. One problem you will have to think about is how to handle most-favored-customer clauses when there are multiple dimensions on which the customer is most favored. I would limit it to one dimension: price. If you add a second dimension (e.g., payment terms), you have to figure out whether and how those dimensions trade off against each other. If you have to give the best along each dimension, you end up giving to your lowest-price customer the payment terms that you only offered to your highest-price customer. If you add a third dimension (e.g., "terms" generically), it becomes even harder.

    Chris Lemens

  4. I come across MFN clauses frequently (in the context of investors requesting them from private investment funds). I try to suggest to a client that they (a) limit the MFN to only fee and investment liquidity terms (being the key commercial terms), (b) ensure no "cherry-picking" by requiring the investor to take all of the terms given to the new investor or none of them and (c) ensure that the MFN only applies where the beneficiary has an equal or greater investment in the fund than the other investor at the time the new investor comes in.

    These are obviously very industry-specific points, but the principles are the same as others have mentioned above.

    Unfortunately, fund managers often agree the terms before they come to us, and miss out point (a) in particular. They then find it very awkward to monitor the provisions as a result, because every term of the contract comes into play, and because it is often unclear whether one term is "better" than another in any case.

  5. Do not use the term MFN in a contract. It is incorrect and allows odd arguments at trial such as an MFN clause being country specific or only relating to the tax and tariff term in the contract.

  6. The Justice Department recently sued Oracle over Oracle's alleged failure to comply (or willful efforts to avoid compliance with) such a clause in a GSA contract. According to a DOJ statement:

    Under the contract, GSA used Oracle’s disclosures about its commercial sales practices to negotiate the minimum discounts for government agencies who bought Oracle software. The contract required Oracle to update GSA when commercial discounts improved and extend the same improved discounts to government customers. The suit contends that Oracle misrepresented its true commercial sales practices, ultimately leading to government customers receiving deals far inferior to those Oracle gave commercial customers.

  7. On the customer side, I view MFN clauses as cannon fodder for getting something I *really* want, because I get MFN at best 5% of the time. On the vendor side, unless it really is a critical, huge customer, I don't do it. I will say, however, that people get very creative on pricing — beware the stealth MFN clause that gets slipped into your contracts every once in a while.

  8. In a completely different context I recently encountered a 'most favoured counterparty' clause in an ISDA Master Agreement, which purported to replace the negative pledge, pari passu and adequate assurance undertakings.

  9. When I have served as counsel for a vendor, I have studiously avoided MFN-type clauses whenever possible. In those very few instances in which my client was compelled to agree to such a clause, we generally attempted to qualify it into meaninglessness by specifying that we would not give any better pricing to: similar customers, who purchased equal or lesser quantities of the same products, over the same time periods, on substantially similar terms and conditions, etc., etc.


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