What Is The Most Favored Nation Clause?

The Most Favored Nation Clause is the founding principle of the World Trade Organization, and there are noteworthy exceptions to it in World Trade Organization rules. Most-favored-nation (MFN) clauses (also known as nondiscrimination clauses or majority-favored-customer clauses) are prevalent in commerce today. A Most-Favorite Nation (MFN) clause requires that a country that grants trade concessions to one trade partner must also offer those trade concessions to everyone. A contractual clause known as the most-favored-nation clause (MFN) is the assurance that the buyer receives from the seller that the seller will not offer the other buyer a better price.

In the healthcare context, an MFN clause usually appears as a clause in the contracts for a network of health plans, where the dominant health plan receives a promise that a provider (a supplier of medical services) will not provide a price equal or better than that of any other plan. When used in the health care industry, an MFN clause is a contractual arrangement guaranteeing that a health insurance company will offer a health insurance company that offers a health insurance product at a better price than its competitors in the marketplace. An MFN clause is variously called a customer-favors clause, buyer-discretionary clause, or nondiscrimination clause, as it guarantees the purchaser of services the best price available from the provider. As noted above, the MFN clause has traditionally been defined as a contract in which the seller agrees that the purchaser will obtain terms that are at least as favorable as the terms offered to any other purchaser.

MFN clauses may pose problems for companies, as they imply that if they must offer better terms in order to attract an after-market buyer, then they must offer these terms to existing investors, too. The benefit of the MFN clause in the investment agreement is that it benefits investors by allowing them to have access to the same terms that may be applicable in future rounds of funding. A Most Favored Nation Clause, or MFN Clause, as most preferential nations clauses are often known, protects the investor by giving him the same rights and benefits received by subsequent investors, as long as these rights and benefits are more favorable than the ones initially agreed upon. Most Favored Nation clauses enable regional trading blocs such as the European Union, and NAFTAs successor, the United States-Mexico-Canada Agreement, to discriminate against imports from outside the bloc in setting tariffs.

In global trade, the principle of nondiscrimination, embodied by most-favored-nation provisions, spreads the benefits of trade liberalization measures as far as possible, protecting smaller exporters against the preferential terms secured by larger ones. The most-favored-nation clause helps smaller countries negotiate preferential trade terms they might not otherwise obtain. The most favored nation clause is a term given to a particular nation, which implies that the recipient of a preferential treatment should get an equal trading benefit to the more favored nation in that nations trade policy. The most favored nation clause is a provision requiring that a country grant concessions, privileges, or immunities to be granted to one country within the scope of a trade agreement. Regional trading agreements are treaties signed between two or more countries with the intent to promote free flow of goods and services between them, or that are granted to all other countries who are members of the World Trade Organization (WTO).

A country providing another country with most-favored-nation status must provide concessions, privileges, and immunities in the trade agreements. The term MFN originated from international trade, in which a treaty or agreement between countries can contain a provision that gives a single country (nation) a right to receive the same beneficial trading terms offered to any other nation. In short, an MFN is non-discriminatory trade policy, since it guarantees fair trading between all members of GATT/WTO, instead of exclusive trading privileges. For instance, if a WTO-member nation lowers or waives a tariff on a specific product to one trade partner, then the MFN provision in the treaty obliges it to extend that same treatment to all World Trade Organization members.

Under the obligations of its World Trade Organization (WTO) Treaty of Accession, the members of GATT/WTO automatically extend to one another their Most Favored Nation (MFN) treatment, except where specified in an agreement or program reported by such a member to the WTO. As the provisions on MFN facilitate non-discrimination between countries, they tend also to further the objectives of free trade generally. On one hand, MFN clauses are practical and beneficial because they remove a buyers risk in bargaining for a poor bargain under uncertain price conditions, they lower the transaction costs in renegotiating an agreement after discovering lower prices, and they are usually benign in cases where market power is lacking.

MFN clauses, as price-tracking mechanisms, may be used to promote collusion between competitors; discounts on a purchases competitors and on new entrants into a market, no matter how small, are effectively closed, leading to higher prices in aggregate. Indeed, in cases in which the MFN clause is granted only to smaller market players, it can very well have an overall price-lowering effect on the downstream market, by making sure smaller players enjoy discounts provided to larger firms. After all, where smaller buyers in non-concentrated markets use an MFN clause to mitigate price fluctuations or commit to a longer-term trading relationship, courts should acknowledge the economic benefits override anticompetitive effects.

Existing state prohibitions bar contracts between plans and providers guaranteeing a plan the same or a more favorable rate for services provided by other plans. Because of an MFN provision in an investors Series A seed-round SAFE, a startup alerts an earlier investor of more favorable terms from a later investor, and agrees to amend the initial SAFE to conform with the terms in the new SAFE.

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