A most favored nation clause is a clause that will sometimes be found in commercial contracts. It is a contractual provision in which the seller agrees not to offer a better deal to another buyer without offering similar terms to the original buyer. While commonly referred to as a most favored nation clause, it has also been labeled as a "most-favored-customer clause", "prudent buyer clause" or "non-discrimination clause”.
While having one of these most favored nation clauses in your contract can be either quite enticing (as a purchaser) or intimidating (as a vendor), understanding how to use it properly ensures your compliance with anti-trust laws.
The original purpose of anti-trust laws was to protect consumers from monopolies or any activity that restrains fair trade practices. It helps prevent price fixing. It also restricts any activity that does not offer procompetitive benefits to consumers. Thus, if used incorrectly, a most favored nation provision can raise several issues. Because of this, commercial contracts using a most favored nation provision are monitored closely due to anti-trust issues.
The biggest concern is that it can cause an unfair advantage for companies with a significant share of the competitive market. Most favored nation clauses are also monitored closely to prevent collusion. Collusion is a deceptive act between two parties in order to gain something they could not otherwise gain in an ethical business manner. If it is suspected that someone is in violation of an anti-trust law, the Rule of Reason Analysis is utilized.
Rule of Reason Analysis
In order to determine if someone is in violation of anti-trust laws by using a most favored nation clause, courts utilize the "rule of reason" analysis in which the procompetitive benefits are weighed against the potential anticompetitive effects through a 3-step balancing act.
The plaintiff has to prove that the restraint produces or could produce an anticompetitive effect within the geographic or product market. If the plaintiff is successful, the defendant has to produce a legitimate procompetitive justification for the restraint. If the defendant, in turn, carries the burden, then the plaintiff has to prove that the restraint is not necessary to achieve the restraint's objectives or that the objective can be achieved in a less restrictive manner. If the plaintiff can't achieve this, then the court reaches the point of balancing anticompetitive versus procompetitive effects.
Using a most favored nation clause can be tricky. When used effectively and legally, a most favored nation provision can greatly improve your contracts. It is recommended that you speak to a business attorney prior to wanting to use a most favored nations clause or agreeing to sign a contract that features one. At Cordero Law, we can help dig through the complexities and advise you as to whether using a most favored nations clause is in your best interest. Contact us today to discuss further.
Julian Cordero is an Attorney, Music Producer, and Entrepreneur. Oh and he blogs too! Julian is licensed to practice law in New York and is the Managing Member of Cordero Law LLC, a New York City based law firm focusing on Business Law, Entertainment Law, and Intellectual Property