The “favored nations” or “most favored nations” or “MFN” concept/clause, while not omnipresent in entertainment contracts, certainly gets its fair share of use. This post will explore the purpose and operation of FN and MFN (there is a (slight) difference!). (A note on spelling: Canadian usage prefers “favoured”, but in order to maximize our appearance in search results, this post will use the American spelling of “favored”.)

Background

Favored nations clauses are relatively simple to describe: they are a contractual commitment that no other relevant party will receive “better” (or more advantageous) terms from the party making the commitment. In the entertainment industries, they appear most often in three contexts: in music licensing arrangements; in film/TV/theatre actor deals; and in investment agreements (e.g., where an investor is providing funds for an entertainment project). The music licensing context provides perhaps the most straight-forward illustration of how a favored nations clause operates. Imagine a producer wants to license a song for use in their movie – to keep things simple, we will assume a single publisher owns all publishing rights in the composition and a single record company owns all rights in the sound recording. The license agreements that the producer enters into with the publisher and the record company will almost certainly contain a favored nations clause, which will look something like this (taken from an actual sync license!):

“no co-publisher of the Composition and no master recording owner of the Composition shall receive proportionately more favorable remuneration of any kind including, but not limited to, the Fee.  In the event that you pay our co-publisher and/or the master recording owner of the Composition a higher pro-rata fee than the Fee paid to us hereunder, you shall pay to us the difference between such higher pro-rata fee and that Fee paid to us”

In other words, if you’re paying the publisher $5,000, you can’t pay the record company $7,500 – or you can, but then you have to pay the publisher another $2,500 so that they get equal treatment. Of course, FN/MFN clauses can be much simpler (“on terms no less favorable than those accorded to any other [actor/investor]“) or much more complicated (as we’ll see below).

Favored nations clauses are particularly useful when dealing with relatively large groups of counterparties who are similarly situated – which is why they are employed so often in the actor and investor contexts. For example, when a producer is dealing with a group of actors each of whom have approximately equal screentime and bargaining power, or with investors who are all providing roughly the same amount of funds at the same time in order to finance a production. The favored nations clause offers the advantages of efficiency and protection from structural negotiating disadvantages such as lack of complete information and disparities in bargaining power. For the actor/investor, because they don’t have full knowledge of the deal terms that other actors/investors are obtaining in their negotiations with the producer, the favored nations clause offers the comfort of knowing they are being treated at least as good as (or no worse than) their peers. For the producer, offering a favored nations commitment means that they don’t have to maintain multiple sets of negotiations over the same terms (e.g., the definition of “net profits”), but rather can simply negotiate with the best-placed counterparty and then apply the agreed-upon term to all parties.

A Digression on Terminology

Earlier I mentioned a slight distinction between “favored nations” and “most favored nations” – though the distinction is not always drawn, it’s useful to highlight it; while the two terms can be (and often are) used interchangeably, they can also be used to contrast quite different situations. “Most favored nations” (or MFN) is best used to describe the treatment given to a particular individual – it is a form of protection accorded to a single counterparty, to assure them that no similarly-situated counterparty is getting a better deal than they are. “Favored nations” is best used to describe the treatment given to a group of people – it is a form of protection accorded to a set of counterparties. To illustrate: it is entirely possible/acceptable to have only oneperson on a production get the benefit of a “most favored nations”/MFN clause (e.g., your highest paid actor); it makes better sense to use “favored nations” when you’re describing everyone within a particular group (e.g., all of your actors are being given “favored nations” protection with respect to on-set perquisites). That being said, for the balance of this post and in order to avoid clunky repetition, I’ll use “favored nations” to cover both situations.

Two Kinds of Scope

When drafting favored nations clauses, “scope” is important – but scope in this context has two different connotations: scope as it relates to which terms of the contract the favored nations protection applies to, and scope as it relates to the class of peers or comparators against whom the favored nations protection will be measured. I’ll address both connotations in turn.

Scope re Terms

It is critical for the parties in a favored nations arrangement to specify which terms of the contract are affected by the favored nations protection. There will inevitably be tension here: the party benefiting from the favored nations protection will want to cast the scope of it as widely as possible, while the party granting the favored nations protection will want its scope to be as narrow as possible. Here is a partial list indicating how many potential aspects of an actor’s deal could be subject to favored nations protection:

  • the amount of the actor’s fixed fee for services
  • the timing of the payment of the actor’s fee
  • on-set perqs (e.g., size of dressing room, amenities in dressing room)
  • off-set perqs (e.g., invitations and travel to premieres)
  • travel arrangements (e.g., business class airfare vs economy class)
  • accommodations (e.g., size, location and amenities of hotel lodgings)
  • presence, thresholds and quantum of box office bonuses
  • presence, quantum and definition of “net profits”
  • participation in ancillary revenue streams (e.g., merchandising)
  • on-screen and paid ad credits (e.g., size, placement, prominence, duration, etc.)

As the foregoing should serve to illustrate, an open-ended commitment to “favored nations” protection can be the starting point for an awful lot of headaches down the road if the scope of its application is not spelled out. Similarly, saying something as generic as “compensation” or “credit” is subject to favored nations protection is a recipe for potential disputes.

Scope re Comparables

Consideration must also be given to which contracts will serve as the standard against which the favored nations commitment is measured. For example, is the actor being given favored nations protection as compared to all other actors on the project, or as compared to all other “above-the-line” participants on the project (e.g., what if the director gets a better definition of “net profits”) or some other sub-set of individuals? Producers may want to create different pools of comparatives so as to ensure that they don’t inadvertently accord benefits which should be reserved for a particular class of counterparties – maybe the actors playing the roles of the two lead characters have star wattage an order of magnitude brighter than anyone else on the project and so their treatment needs to be carved out of everyone else’s favored nations clause. Or, when dealing with investors, there are five investors in a film who are each investing $50,000, and then another three investors who are each investing $250,000 – the producer may want to accord each investor favored nations protection only vis-a-vis the other investors at their tier of investment.

Enforcement

Enforcing favored nations clauses is notoriously difficult: the same informational disadvantage which leads parties to want favored nations protection in the first place means that they have difficulty ever knowing whether their entitlement to protection has been triggered by someone getting a better deal. Contract provisions might also be subject to confidentiality obligations, meaning that counterparties are restricted from sharing the terms of their deal with each other (though the ability to share such information for “policing” purposes might be carved out of the confidentiality obligation). In cases where a collection account is used, examination of the entitlements of the various parties may reveal discrepancies which indicate a breach. In some circumstances, it may be that the only way to reveal the breach of a favored nations clause is to undertake an audit of the books and records of the production company, or via disclosure in the course of a lawsuit.

Conclusion

Whether favored nations provisions should be included in one or more contracts on a project will be a function of a variety of considerations: bargaining power, legal budget, number of counterparties, etc. The favored nations clause can be a useful device for both parties to a contract, though it comes weighted with risks – which can be ameliorated by careful drafting.