The Most Favored Nation clause: the ultimate double edged sword.

• Author: Reynolds, Charles E., II

Until a few years ago, the term "Most Favored Nation" was a phrase restricted primarily to the world of international trade. However, with the upsurge in both class action and mass tort lawsuits, Most Favored Nation clauses (MFN), are increasingly used as tools to encourage settlement.

If you are unfamiliar with the concept, MFN clauses are primarily used in large tort case settlements. Essentially, the clause is a stipulation incorporated into a settlement agreement between a Defendant and a single Plaintiff or small group of Plaintiffs. The clause requires that if the Defendant settles for more money with another party in the future, the Defendant will pay the difference of the two settlements to the first settling Plaintiff(s) pursuant to the MFN clause. For example, a Defendant settles with a single Plaintiff in a mass tort case or class action for $1,000. Thereafter, Defendant later settles with other Plaintiffs for $1,500. If the first Plaintiff had negotiated a MFN clause to the settlement agreement, the Defendant would then owe that Plaintiff an additional $500.

This scenario would seem to beg the question "why would any Defendant use such a clause?" Primarily, the reason appears to be an effort to weed out weaker cases in litigation, capping costs, and then allowing the Defendant to proceed to trial with more serious Plaintiffs if he so chooses. Strategically, the Defendant could argue that small amounts paid to prior Plaintiffs act as a "ceiling" or lower the "market rate" for future settlements. Even if the Defendant is forced to later pay a small percentage to other Plaintiffs under the MFN clause, he could potentially save himself money in the long run by encouraging settlements early at a low dollar figure.

From the Plaintiff's perspective, it would appear to be a tantalizing choice. Settle today for a sum certain with the guarantee that if other Plaintiffs do better than you do, you will later be paid an equal amount of money. On the other hand, of course, it could be that the Defendant chooses to go to trial against other Plaintiffs in which case the amount of the judgment would not effect an earlier Plaintiff's settlement under the concept of Most Favored Nation. Additionally, if the Plaintiff actually has a strong case, an MFN clause is unlikely to do him any good since other settlements will presumably be at or below the same amount. At its very heart, one who is the beneficiary of an MFN clause is essentially making a...