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

Abstract

Many settlement contracts in litigation involving multiple plaintiffs (or multiple defendants) in- clude “most-favored-nation” (MFN) clauses. If an early settlement includes an MFN and the defendant settles later with another plaintiff for more money, the early settlers receive these terms too. If the defendant knows the aggregate distribution of expected awards but cannot discriminate among the privately informed plaintiffs, then MFNs avoid costly delay. Plaintiffs with weak cases settle early rather than on the courthouse steps. The effects of MFNs on the settlement terms, plaintiffs’ welfare, litigation rates, and the defendant’s ex ante incentives are considered and alternative explanations are explored.