The most unlikely cast of characters introduced me to the most favored nations provision in settlement agreements.

First came Sally Noma of Noma Law, who put the clause on my radar during a conversation a few months ago. Until then, I had never encountered the concept in the context of litigation settlements. Sally explained how the provision could protect a party that settles early by ensuring that it will not receive less favorable treatment than another similarly situated party who settles later.

Then came Meryl Streep.

Not long after that conversation, I came across a Variety article discussing the compensation arrangements for Meryl Streep, Anne Hathaway, and Emily Blunt in The Devil Wears Prada 2. According to the article, the three actresses negotiated favored nations treatment, meaning that they received the same base salary and comparable opportunities for additional compensation.

Sally Noma and Meryl Streep are not two names I ever expected to mention in the same article about subrogation. Yet both led me to the same contractual concept.

Whether the setting is a Hollywood production or a multiparty subrogation dispute, the concern is remarkably similar. A party may be willing to make a deal today, but it wants protection against learning tomorrow that someone in a comparable position received substantially better terms.

That is the purpose of a most favored nations provision.

What Is a Most Favored Nations Provision?

A most favored nations provision, commonly abbreviated as an “MFN provision,” is a contractual promise that one party will receive treatment at least as favorable as the treatment given to another similarly situated party.

In a settlement agreement, the concept commonly works as follows.

A defendant settles with one claimant. The settlement agreement provides that if the defendant later settles with another comparable claimant on more favorable terms, the original claimant will receive some or all of the benefit of those improved terms.

Suppose a defendant faces claims from ten plaintiffs arising out of the same water loss. The defendant offers the first plaintiff $100,000 to settle. That plaintiff may be concerned that the defendant will later pay another plaintiff $150,000 to settle a substantially similar claim.

An MFN provision can address that concern. If the defendant later pays a comparable plaintiff $150,000, the provision may require the defendant to pay the original plaintiff an additional $50,000.

The first plaintiff receives protection against the fear that settling early means settling too cheaply.

Why Would Anyone Agree to This?

At first glance, an MFN provision may appear to benefit only the party receiving the protection. That is not necessarily the case.

A claimant may be reluctant to settle early because the claimant lacks information. The claimant may not know what other parties have demanded, what the defendant is prepared to pay, or how the defendant values similar claims.

The MFN provision can reduce that uncertainty.

It allows the claimant to say, in substance, “I will settle now, provided that I am protected if you later offer a better deal to someone in the same position.”

That protection may make an early settlement possible.

The provision can also benefit the defendant. A defendant facing numerous claims may want to begin resolving them without waiting until every claimant is ready to negotiate. An MFN provision can encourage early participation by reassuring claimants that they will not necessarily be penalized for settling first.

The defendant effectively trades some future negotiating flexibility for greater settlement certainty in the present.

When Might an MFN Provision Be Useful?

An MFN provision is most likely to be useful when a dispute involves multiple parties whose claims or exposures are sufficiently similar to permit a meaningful comparison.

Potential examples include:

1. Multiple plaintiffs damaged from the same occurrence
2. Multiple property owners affected by the same fire, construction event, environmental condition, or defective product
3. Several insurers pursuing subrogation claims arising from the same loss
4. Multiple defendants seeking settlements or releases from the same claimant
5. Mass tort, antitrust, class action, or coordinated litigation
6. Repetitive commercial claims arising from the same contract language or business practice
7. Multiple lienholders or reimbursement claimants asserting rights to portions of the same recovery

The key is comparability.

An MFN provision becomes difficult to administer when the underlying claims are materially different. Two claims may arise from the same accident but involve very different damages, defenses, evidentiary issues, litigation expenses, policy limits, or procedural postures.

For that reason, the real drafting challenge is often not deciding whether to include an MFN provision. It is defining when another settlement is sufficiently comparable to trigger it.

The Subrogation Connection

MFN provisions can be particularly interesting in subrogation matters because subrogation frequently involves multiple parties, overlapping claims, limited settlement funds, and unequal access to information.

Consider a large property loss affecting several neighboring businesses.

Each business submits a claim to its own insurer. After paying their respective insureds, several carriers pursue subrogation claims against the same allegedly responsible contractor.

The contractor may want to settle the subrogation claims one at a time. An insurer considering an early settlement may worry that another carrier will later obtain a better percentage of its paid loss.

An MFN provision might provide that if the contractor later settles a comparable subrogation claim for a greater percentage of the claimant’s recoverable damages, the first insurer will receive an equivalent adjustment.

The comparison could be based on a percentage rather than a fixed dollar amount. That distinction is important because the carriers may have paid different amounts.

Suppose Insurer A has a $500,000 subrogation claim and accepts $200,000, representing 40 percent of its claimed damages.

Insurer B has a $1 million claim. If the defendant later pays Insurer B $500,000, representing 50 percent of its claim, an MFN provision could require an additional payment to Insurer A sufficient to bring its recovery to the same 50 percent level.

In that example, Insurer A would receive an additional $50,000.

The concept can also operate in the opposite direction.

Suppose a subrogating insurer is pursuing several potentially responsible defendants. One defendant may agree to settle only if it receives assurance that a similarly situated defendant will not later obtain a materially more favorable release for a smaller contribution.

A carefully drafted MFN provision could protect that early settling defendant by requiring an adjustment if the insurer later resolves an equivalent claim against another defendant on more favorable terms.

MFN protection is not inherently limited to plaintiffs or claimants. The protection can be negotiated for whichever party is concerned that later settlements may provide better treatment to comparable participants.

The Benefits

For the protected party, an MFN provision can provide confidence that an early settlement will not result in materially worse treatment.

It can also reduce the temptation to delay.

Without an MFN provision, a party may wait to see what everyone else receives. When every participant adopts that strategy, productive settlement discussions can stall.

For the party granting the protection, the provision may help establish settlement momentum. Resolving the first claim can encourage additional negotiations, reduce litigation expenses, narrow the dispute, and create a framework for future settlements.

An MFN provision may also promote consistency. In matters involving similarly situated parties, unexplained differences among settlements can create distrust and interfere with the resolution of the remaining claims.

The Risks

An MFN provision is not automatically beneficial in every case.

For the party granting it, the most significant risk is the loss of future negotiating flexibility.

A later claim may become more expensive because of newly discovered evidence, an adverse ruling, an approaching trial date, increased litigation costs, or a change in the perceived exposure.

The party may have a legitimate reason to pay more later. A broadly written MFN provision could nevertheless require additional payments to every earlier settling party.

This can create a multiplying effect.

Suppose a defendant settles with 100 claimants for $50,000 each under agreements containing MFN provisions. If the defendant later pays one comparable claimant $60,000, it may owe an additional $10,000 to each of the original 100 claimants.

A single $10,000 increase could therefore create an additional $1 million obligation.

That potential exposure may discourage a defendant from making a higher offer even when the offer would resolve a particularly difficult claim.

There are risks for the protected party as well.

The protection may be narrower than expected. A later settlement may include nonmonetary consideration, a structured payment, a confidentiality obligation, a broader release, a separate business agreement, or the compromise of unrelated claims.

Determining whether that later agreement is actually “more favorable” may become a new dispute.

The parties may resolve the original litigation only to find themselves litigating the meaning of the settlement agreement.

What Should the Provision Address?

A useful MFN provision should do more than say that one party is entitled to any better deal given to someone else. It should address several important issues.

The comparison group
The agreement should define which other parties or claims count. Does the provision apply to every claimant, only specifically named claimants, only parties asserting claims arising from the same occurrence, or only parties with substantially similar damages and legal positions?

The covered terms
The provision should state whether it applies only to monetary payments or also to other settlement terms. Those terms might include payment timing, releases, confidentiality obligations, indemnity provisions, attorney’s fees, interest, costs, admissions, or other forms of consideration.

The method of comparison
The parties should decide how the settlements will be compared.

• Gross settlement amount
• Net settlement amount
• Percentage of the claimant’s alleged damages
• Percentage of documented insurance payments
• Percentage of legally recoverable damages
• Percentage of an agreed claim valuation

This is particularly important in subrogation matters involving claims of different sizes. A carrier that paid $1 million should not necessarily be compared with a carrier that paid $100,000 based solely on the total settlement amount.

The time period
An MFN obligation should ordinarily have a defined beginning and ending date. An unlimited obligation may create uncertainty long after the underlying litigation has concluded.

Exceptions
The agreement may exclude settlements affected by unique circumstances. Possible exclusions might include:

1. Materially different evidence or damages
2. Different liability defenses
3. Policy-limit issues
4. Insolvency or collectability concerns
5. Sanctions or attorney’s fees
6. Separate contractual rights
7. Nonmonetary consideration
8. An adverse court ruling entered after the original settlement
9. A materially different procedural posture
10. Claims involving substantially greater litigation expenses

Notice
The provision should explain whether the party granting the protection must disclose later settlements, when notice must be provided, and what information must be included. Without a notice requirement, the protected party may have no practical way to determine whether the provision has been triggered.

Confidentiality
The disclosure obligation must be coordinated with the confidentiality provisions in both the original and subsequent settlements. Otherwise, one agreement may require disclosure while another agreement prohibits it. The parties may address this issue by permitting redacted disclosures, limiting the information to settlement amounts and relevant terms, or allowing disclosure only to counsel.

The remedy
The agreement should state what happens when the provision is triggered. Possible remedies include:

1. An automatic additional payment
2. A percentage adjustment
3. A right to elect the later settlement terms
4. A reopening of negotiations
5. Modification of specific release or payment provisions

Dispute resolution
The parties may also wish to specify how disagreements over comparability will be resolved. Options may include negotiation, mediation, expedited arbitration, or an application to a court retaining jurisdiction over the settlement agreement.

A Sample Most Favored Nations Provision

The following provision is intended only as an illustrative starting point. It would need to be tailored to the facts, governing law, settlement structure, and particular risks of the matter.

Most Favored Nations Protection

If, during the period beginning on the Effective Date and ending twelve months thereafter, the Defendant enters into a settlement with another party arising from the same occurrence and involving a claim that is substantially comparable to the Claim resolved by this Agreement, and if that settlement provides the other party with a greater percentage recovery on its documented and legally recoverable payments than the percentage recovery provided to the Claimant under this Agreement, the Defendant shall pay the Claimant an additional amount sufficient to provide the Claimant with the same percentage recovery.

For purposes of this provision, claims shall be considered substantially comparable only if they involve materially similar liability issues, defenses, categories of damages, evidentiary support, procedural posture, and collectability. Settlements involving materially different facts, separate contractual claims, sanctions, attorney’s fees, policy-limit considerations, insolvency, confidential business consideration, or nonmonetary relief shall not trigger this provision.

Within fifteen days after entering into a settlement that may trigger this provision, the Defendant shall provide written notice to the Claimant describing the information reasonably necessary to evaluate whether an additional payment is required. The Defendant may redact privileged information, personal identifying information, and information unrelated to the comparison required by this provision.

Any additional payment required under this provision shall be made within thirty days after the amount becomes determinable. A dispute concerning the application of this provision shall be submitted to confidential mediation before either party initiates litigation.

One Important Drafting Choice

There are at least two ways to structure the operative protection.

The first is an automatic adjustment.

If a later party receives a better monetary settlement, the earlier party automatically receives the difference or another defined adjustment.

The second is an election right.

If a later party receives better terms, the earlier party may elect to replace specified terms of its agreement with the corresponding terms of the later agreement.

The automatic adjustment may be easier to administer when the only variable is money.

The election model may be more appropriate when settlements contain a combination of payment terms, release language, confidentiality obligations, indemnity provisions, or other forms of consideration.

Even then, allowing a party to select only the favorable portions of a later settlement can create an unfair result.

The later party may have received more money because it accepted a broader release, agreed to stricter confidentiality requirements, waived additional claims, or assumed obligations that were not included in the earlier agreement.

A well-drafted MFN provision should therefore address whether the protected party may select individual favorable terms or must accept the later settlement as an entire package.

Questions to Ask Before Proposing an MFN Provision

Before proposing or accepting an MFN provision, counsel should consider several practical questions.

1. Are the claims actually comparable?
2. How will the parties measure whether one settlement is more favorable?
3. Does the provision apply only to money or to every material settlement term?
4. What later settlements will be excluded?
5. How long will the protection remain in effect?
6. How will the protected party learn about later settlements?
7. Can the notice obligation coexist with confidentiality requirements?
8. What happens if the later settlement includes nonmonetary consideration?
9. Could a small increase in one later settlement trigger substantial aggregate liability?
10. How will disagreements concerning the provision be resolved?

The answers will depend on the particular case.

A narrowly drafted provision may provide meaningful protection without unduly restricting future settlements. A vague or overly broad provision may create uncertainty and discourage the very settlements the parties are trying to promote.

The Takeaway

A most favored nations provision is ultimately a mechanism for allocating the risk of going first.

The protected party accepts the certainty of settling now while retaining some protection against the possibility that a comparable party will receive a better deal later.

The party granting the protection gains the opportunity to secure an early settlement but assumes the risk that future concessions may have to be extended to the earlier settler.

It is not appropriate for every case.

It may be unnecessary when there is only one claimant, when the claims are too different to compare, or when the granting party must preserve maximum flexibility for future negotiations.

In the right multiparty dispute, however, it can overcome one of the most common obstacles to an early resolution.

Nobody wants to be the first party to settle and then discover that everyone who waited received a better deal.

The numbers in a subrogation settlement may look very different from a Hollywood salary, but the underlying concern is often the same.

A party is willing to make a deal today. It simply wants some assurance that it will not regret going first tomorrow.