Most Favored Nation Clause

What is a Most Favored Nation Clause?

Most favored nation clauses are contract provisions that require that a party must receive rights and benefits under the contract that are equal to or more favorable than the rights and benefits received by any other parties. So, for example, if you had the right to most favored customer pricing on a product, you would know you were getting as good a deal as anyone; you would have the contractual right to buy the item in question for the lowest price available.

These clauses are sometimes referred to as “Most Favored Customer” or “MFN/MFC”. Other common terminology in these types of clauses include “best-in-class prices”; “Competitive Parity”; or terms related to specific types of contract or parties, such as “Most Favored Lender” in a credit agreement.

The term comes from the field of international trade, where treaties and trade agreements often include provisions that require a nation to receive treatment (in terms of tariffs, quotas, trade barriers, etc) that are equal to or more favorable than any other trading partner.

Contracting parties use MFNs in order to protect themselves against fluctuating prices; to transfer risk of opportunism, as when a buyer has made investments specific to the products and wants to prevent the vendor from exploiting that to extract higher prices; and to reduce the transaction costs while negotiating. Often, most favored customer / most favored nation terms apply to pricing, and are offered by a supplier to a customer. Most favored nation terms sometimes cover things other than price, such as legal terms. They also exist beyond customer/supplier relationships, such as in private equity investor agreement side letters, where large investors get rights beyond those of ordinary investors.

As contract terms go, they are pretty uncommon. Many people find them very important when they show up.

Most favored nation clauses appear in a variety of document types, including customer, distribution, credit, purchase and service agreements.

Why do Most Favored Nation Clauses Matter?

MFNs are among the most commonly reviewed terms in contract review situations. The review can uncover various risks, including:

  • Understanding the prevalence of MFN clauses in a set of contracts gives visibility into the price flexibility available.
  • Price changes to one customer under a contract can trigger a duty to notify other customers with MFNs of the change and change prices to them all. If you don’t know if you have any most favored customer provisions, giving a great financial deal (or giving on a legal term you don’t usually) is extra risky. You may have to give the benefits of your great deal to already-existing customers.
  • Some types of MFNs in specific situations have attracted scrutiny from US antitrust enforcement authorities.

MFNs can be especially scary in the context of M&A. If you acquire a business, and it has a most favored customer provision in any of its contracts (even a small, seemingly unimportant one), the terms of that MFN could apply to the acquiror. So, for example, imagine a small software company gives Bank of America a great deal just to get the benefit of having the BoA “logo” among its customers. Bank of America—already getting a great deal—also demands and gets a MFN in the contract. If IBM then buys the small software company, depending on how the most favored customer clause is drafted, IBM could become subject to it. IBM might well do hundreds of millions of dollars of business with Bank of America, and having to give them most favored customer pricing across all of that could be a business disaster. So, savvy acquirers take finding MFNs across all of a target’s contracts exceedingly seriously. A bad MFN could be more costly than the price of the acquired business itself.

The flip of this is that potential buyers of your business may be very concerned with discovering whether you have any most favored customer provisions in your contracts, and it may impact how much your business is worth (depending on the scope of the clause and how it is drafted).

For both ongoing operations and preparation for M&A, it is very important to know if you have any most favored nation clauses.

How Do You Review Most Favored Nation Clauses in Contracts?

While the enforceability heavily depends on economic analysis to evaluate potential anticompetitive effects in the applicable market, certain key pieces of information should receive focus on when reviewing MFN provisions. They include:

  1. Market(s) affected. Identifying exactly what product and geographic markets are affected by the MFN clause is important so that contract parties understand the extent of the benefit to be accorded to the party imposing the MFN.
  2. Scope. MFN clauses generally break down into either “wide” or “narrow”. A wide MFN provides that better terms may not be offered to any party, or offered via any other sales channel). A narrow MFN provides that better terms cannot be offered via the seller’s own channel. For example, under a wide MFN, a hotel would be prohibited from offering hotel rooms at lower prices on other competing channels, and under a narrow MFN, a hotel would be prohibited from offering hotel rooms at lower prices only on their own websites.
  3. Carve-Outs. Parties that are obligated by MFN provisions often attempt to add language the limits the scope of the MFN, such as by qualifying the MFN language with similar volume, geographical location, and other limiting factors (e.g., “most favorable prices for equivalent type and volume of services”). Careful review of those limitations and exceptions is a key piece of reviewing this provision, as they may negate the intended benefit of the MFN.
  4. Enforcement Mechanisms. In order to evaluate an MFN provision, it is important to have an understanding of the mechanisms by which competitor pricing is determined. I.e., are redacted contracts used for comparison, or are third-party auditors engaged to determine compliance with the provision? Effective safeguards should also be in place in order to ensure that sensitive information is not compromised.
  5. Industry-specific or Other Unusual Points. MFNs are frequently negotiated in certain industries, so it is important to understand industry specific language in the appropriate context. Also look for any unusual terms, including retroactive MFNs (such that the MFN is not only applicable to contemporaneous customers but also applies to past purchases) and MFN-plus arrangements, which were addressed in A.U.S. v. Blue Cross Blue Shield of Michigan (809 F.Supp.2d 665 (2011)). Blue Cross Blue Shield Michigan, the largest health insurer and largest purchaser of healthcare services in the state of Michigan, had entered into agreements with certain Michigan hospitals that included MFN-plus clauses. Rather than require that the hospitals provide BCBSM with prices equal to the lowest price agreed to with other insurers/purchasers of healthcare services, the clauses required the hospitals to charge BCBSM’s patients as much as 40 percent less than any other patient. As a result, BCBSM ensured that it was paying significantly less than its competitors for the same services. This led to the U.S. Department of Justice filing a complaint against BCBSM and over two years of litigation.
  6. Penalties/Consequences of Non-Compliance. In some cases, a party that has breached the terms of an MFN provision may be responsible for paying damages to the beneficiary party.

As with the review of any contractual provision, it’s also important to be aware of other provisions in the agreement that may affect the interpretation and operation of MFN provisions.

Additionally, one of the hardest parts of reviewing for MFNs is simply finding them. MFNs can appear in any contract, even a seemingly insignificant one, and they might not be clearly labeled as “Most Favored Nation” or any of the term’s synonyms. They can be hard to find, even for more experienced lawyers, This is why MFN clauses lend themselves to automated review using AI-based contract review tools.

Examples of Most Favored Nation Clauses

Here are a number of examples of most favored nation clauses in contracts, from a variety of contract types. Note that while a few of these have a section header that stands out as most favored customer language, many don’t. A keyword search for “favorable” would reveal some of these clauses, but not all. A most favored nation clause is a pretty bad one to miss; not a good spot for mediocre review technique or technology. Best in class contract review AI technology searches for concepts, not keywords, and can help you faster and more accurately track down most favored customer (and other clauses) clauses.

From a sales agreement:

Best-In-Class Prices. The Product prices offered by Supplier shall be not less favorable than prices charged by Supplier for comparable products sold to other customers under the same terms and conditions that apply to the Products sold to Seagate. Limited promotional programs and demos and sample products are excepted from this provision.

From an employment agreement

You will eligible to participate in any plans, programs, or forms of compensation or benefits that the Company provides to the class of employees that includes you, on a basis not less favorable than that provided to such class of employees, including without limitation, group medical, disability and life insurance, vacation and sick leave, and retirement.

From a real estate lease:

In the event that Landlord declines its right to own the facility, Tenant (or an affiliate thereof) shall have the right to consummate the subject transaction without Landlord’s involvement, provided the same is on terms no more favorable to the counterparty than those presented to Landlord for consummating such transaction.

From a debenture agreement:

4.17 Most Favored Nation Provision. From the date hereof until the date when such Purchaser no longer holds any Debentures, if the Company effects a Subsequent Financing, each Purchaser may elect, in its sole discretion, to exchange all or some of the Debentures then held by such Purchaser for any securities or units issued in a Subsequent Financing on a $1.00 for $1.00 basis based on the outstanding principal amount of such Debentures, along with any accrued but unpaid interest, liquidated damages and other amounts owing thereon, and the effective price at which such securities were sold in such Subsequent Financing; provided, however, that this Section 4.17 shall not apply with respect to an Exempt Issuance. The Company shall provide each Purchaser with notice of any such Subsequent Financing in the manner set forth in Section 4.12.

In the event that prior to final shipment under this order, Supplier sells or offers to sell to others goods substantially of the same kind as ordered herein at lower prices and/or on terms more favorable to a third party than those stated in this order, the prices and/or terms herein shall be deemed automatically revised to equal the lowest prices and/or most favorable terms at which Supplier shall have sold or shall have offered such goods and payments shall be made accordingly. In the event Purchaser shall become entitled to such lower prices, but shall have made payment at any price in excess thereof, Supplier shall promptly refund the difference in price to Purchaser.

Notwithstanding the foregoing, if Supplier enters into a sales arrangement with any third party during the Term hereof which is similar to this Agreement for the supply of Product to such third party on terms or conditions more advantageous to such third party than those provided to Purchaser under this Supply Agreement, then Purchaser shall be provided with supply of Product on such terms and conditions including, without limitation, the price for Product being provided by Supplier to such third party.

SUPPLIER agrees that the price for the Components is at least as favorable to BUYER as the price and the terms upon which SUPPLIER sells comparable components to any other customer under similar circumstances.

Such prices shall be fixed for a period of 12 months commencing with the Effective Date of this Agreement, except that if Seller’s price offered to its customers generally for the Products are reduced, such reduction shall be immediately effective and shall apply to all subsequent regular lead time orders issued by Buyer.

[Company] will supply the Product to the Third Party on terms no more favorable than the terms on which [Company] supplies the Product to [Buyer] under this Agreement;

In the event that Publisher reduces the Standard Wholesale Price of a Title or it offers Titles to other customers outside of the Territory at a price lower than the Standard Wholesale Price, Publisher shall immediately offer that reduced price to [counterparty]. In addition, Publisher shall promptly credit [counterparty’s] account for the difference between the Standard Wholesale Price charged to [counterparty] and the reduced price for each Software Package either held in inventory by [counterparty] or shipped by [counterparty] to the Channels of Distribution and not yet sold-through on the date the reduced price is first offered (“Price Protection”).

From a pipeline agreement:

If, during the Term, Operator offers any of its customers transporting Product from the [location] to the [location] or to the [location] terminals or [location] Pipeline System, other than Customer, a tariff lower than the applicable Tariff for volumes, services and delivery points equivalent to those under this Agreement, then the applicable lower tariff shall automatically apply to the applicable portion of Customer’s affected volumes. If such a reduction becomes effective for Product delivered pursuant to this Agreement, then Customer’s Minimum Annual Revenue will be adjusted accordingly. Additionally, if after the Service Commencement Date and during the

Term, the Operator Parties publish a tariff from [location] to [location] terminal, and such tariff, when combined with a published tariff from [location] to [location], is less than the Operator Parties' Tariffs from the [location] to [location] terminal, Customer’s tariff from the [location] to Customer’s [location] terminal shall be adjusted to equal the lower tariff.

From a specialty TV station distribution agreement:

The Service will be treated no less favorably in marketing, advertising and promotional activities than any other [category] service offered to Distributor Subscribers by Affiliate; provided that Affiliate shall be deemed to have complied with this requirement if it implements substantially similar activities on behalf of the Service as on behalf of such other [category] service(s).

Best Price

Seller warrants that the prices for the Supplies sold to Buyer are no less favorable than those that Seller currently extends to all third parties for the same or similar Supplies at similar locations under substantially similar Terms and in similar quantities. If Seller reduces its prices to third parties for the same or similar Supplies at similar locations under substantially similar Terms during the term of the Order for the Supplies, Seller shall correspondingly reduce the prices charged to Buyer.

8.1. Most Favored Customer.

8.1.1. Seller agrees to treat Buyer at least as well as its most favored customers. Seller agrees that the prices, warranties, benefits and other material terms being provided hereunder and to be provided hereafter are and shall be equivalent to or better than the terms being offered by Seller to its current and future customers; provided, however, Seller may offer other customers volume discounts in accordance with the volume discounts offered to Buyer. This obligation requires Seller to provide Buyer with at least pari passu treatment with other customers (i) as to quantity of Products made available to Satcon in a shortage situation and (ii) as to the Purchase Order Delivery Dates for Purchase Orders.

8.1.2. If Seller enters into an agreement with any other customer under circumstances substantially similar (as described above) to that of Buyer and if Seller provides such other customer with more favorable terms, then this Agreement shall be deemed appropriately amended to provide such terms to Buyer. Seller shall promptly provide notice thereof to Buyer and shall provide to Buyer refund or credits, if any, in an amount equal to the difference between the lower prices charged to other customer and the amount paid by Buyer from the date the lower prices went into effect with the other customers.