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The Use of 'Most-Favored-Nation' Clauses in Settlement of Litigation

47 Pages Posted: 5 Nov 2001  

Kathryn E. Spier

Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

Abstract

Many settlement agreements in lawsuits involving either multiple plaintiffs or multiple defendants include so-called "most-favored-nation" clauses. If a defendant facing multiple claims, for example, settles with some plaintiffs early and settles with additional plaintiffs later for a greater amount, then the early settlers will receive the more favorable terms as well. These MFN provisions have been prominent in the recent MP3.com case, as well as tobacco litigation, class actions, and many antitrust lawsuits. This paper considers a defendant who is facing a large group of heterogeneous plaintiffs. Each plaintiff has private information about the (expected) award that he or she will receive should the case go to trial. MFN clauses are valuable because they commit the defendant not to raise his offer over time. This has two important effects. First, holding overall settlement rate fixed, MFNs encourage earlier settlement. Second, depending upon the distribution of plaintiff types, MFNs can either increase or decrease the overall settlement rate. Social welfare implications are discussed, and alternative theories, including the strategic use of MFNs to extract value from future plaintiffs, are explored.

JEL Classification: K41, D82, D74

Suggested Citation

Spier, Kathryn E., The Use of 'Most-Favored-Nation' Clauses in Settlement of Litigation (October 2001). Northwestern Law & Econ Research Paper No. 01-8; and USC CLEO Research Paper No. C02-12. Available at SSRN: https://ssrn.com/abstract=289016 or http://dx.doi.org/10.2139/ssrn.289016

Kathryn E. Spier (Contact Author)

Harvard University - Law School - Faculty ( email )

1575 Massachusetts
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Cambridge, MA 02138
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National Bureau of Economic Research (NBER)

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United States

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