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Journal Article
'Tied to the Mast': Most-Favored Nations Clauses in Settlement Contracts
Journal of Legal Studies
Author(s)
Many settlement contracts in lawsuits involving either multiple plaintiffs or multiple defendants include so-called "most-favored-nation" (MFN) 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. This paper presents two frameworks for evaluating the private and social desirability of MFNs. First, MFNs can mitigate asymmetric information problems and encourage cases to settle earlier. While avoiding delayed settlement is privately and socially desirable, it is shown that the litigation rate may rise. Second, MFNs may be used as a bargaining tool for extracting value from future plaintiffs, leading to breakdowns in future negotiations. In both frameworks, the private incentives to use MFNs may diverge from the interests of society as a whole.
Date Published:
2003
Citations:
Spier, Kathryn. 2003. 'Tied to the Mast': Most-Favored Nations Clauses in Settlement Contracts. Journal of Legal Studies. (1)91-120.