Corporate & Securities Law

What?s Your Experience with ?Most Favored Nation? Provisions?

By Ken Adams

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

Full post as published by AdamsDrafting on August 02, 2010 (boomark / email).