What is a “Most Favored Nation” Clause in a Contract?

A “Most Favored Nation” clause (“MFN”) in a contract gives a party to the contract the legal right to terms and benefits under the contract that are as good as or more favorable than the terms and benefits received by anyone else who enters into a similar contract with the other party. MFN clauses are also known as “most-favored customer clauses” or “antidiscrimination clauses,” and are commonly used by people and businesses in their contracts. However, antitrust lawsuits sometimes arise when large businesses use MFN clauses to make their competitors pay more for goods and services. Large businesses sometimes use MFN clauses to try and drive their smaller competitors out of the market. This blog post will explain what MFN clauses are, their benefits, and what legal issues can arise involving their use in contracts by large businesses.

As an example of how MFN clauses work in practice, suppose Jenn and Bob enter into a long-term contract where they agree that Jenn will sell Bob apples every week for $5 per pound. The contract contained an MFN clause under which Jenn and Bob agreed Bob would receive as good of or better terms than anyone else who entered into a contract to buy apples from Jenn at a later date. If Jenn later entered into a contract with another person, Tom, under which Jenn and Tom agreed Jenn would sell Tom apples every week for $4 per pound, the MFN clause in Jenn’s contract with Bob would obligate Jenn to sell apples to Bob for $4 a pound (or less) as well.

The above example shows how MFN clauses can be beneficial to the parties involved in a contract. In the above example, the MFN clause benefited Bob by ensuring he would not be forced to pay more than the market price for apples under a long-term contract. But the clause also benefited Jenn by enabling her to secure Bob as a long-term customer when he likely would not have agreed to a long-term contract if it did not include an MFN clause.

MFN clauses can help buyers obtain more favorable purchase terms, and sellers secure more customers. Legal issues can arise when large entities use MFN clauses to hurt their competition. This can be done in different ways. For example, some MFN clauses require that a party be treated better, not equal, to anyone else who contracts with the other party to the contract. Clauses like this can create antitrust issues if a party with a large market share agrees to an MFN clause in a contract with a very large supplier and thereby ensures the party receives better contract terms than its smaller competitors who also buy from that supplier. Similarly, a party with a very large market share can sometimes use an MFN clause as a way to inflate prices. Such a party could intentionally negotiate a high price with a large supplier in an agreement to purchase large quantities of goods from the supplier, and thereby force its competitors to buy goods from the supplier at the same high price. This would drive up prices and could drive out smaller competition that would have a harder time competing with the larger party. These and similar kinds of practices can prompt antitrust lawsuits if competitors can show a business is exploiting MFN clauses in a way that unfairly hurts its competition.

MFN clauses can be mutually beneficial for both parties to a contract. An attorney can help you determine whether an MFN clause will be helpful to you and review your contracts to make sure your MFN clauses will not create any legal issues. If you are interested in using MFN clauses in a contract or would like to have your contracts reviewed by an attorney, contact McNeelyLaw today. Our experienced team of Indiana business attorneys can assist you with all of your business needs.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.