For most of the larger multichannel video-programming distributors (MVPDs), the use of a most favored nations (MFN) clause has become ubiquitous. The typical clause is meant to protect a distributor by providing that if a programmer grants more favorable treatment to any other distributor, then the programmer will provide the same favorable terms to the distributor. But the divergence between how distributors interpret the application of the clause from that of programmers raises the question of just how effective the clause is in protecting them.
In theory, MFN clauses are designed as a safety net, guaranteeing that a programmer will never treat the distributor less favorably than any other distributor of its programming. However, in practice, almost all such clauses contain “triggers” or qualifying language which reduce their application. For example, such clauses generally prohibit a programmer from offering more favorable terms to any other distributor that delivers the service to fewer subscribers. That standard is fairly straightforward.
But in other cases, the standard is often ambiguous. Many distribution agreements require the contracts to be “taken as a whole” in determining whether one distribution agreement is more favorable than another. Depending upon how creative a programmer wants to be, this can be interpreted many ways, and not necessarily in accordance with the spirit of the MFN clause.
What can be done about closing the perception gap and ensuring that distributors are receiving the benefit of their bargain? There are several solutions. First, if there are matters which are deemed to be vital to a distributor, that party should not rely on an MFN clause to secure its rights. Rather, it should spend the time to negotiate an explicit grant of the necessary rights in the agreement. Second, if there are matters which a distributor considers vital to its interests but which the programmer refuses to deal with other than on an MFN basis, such matters should be dealt with separate and apart from the typical omnibus MFN clause.
For example, if obtaining interactive or HDTV rights to a service is important enough, deal with this in a separate section where the MFN grant is made unconditional. By dealing with vital matters in this way, the distributor will avoid having to litigate with the programmer about whether or not conditions exist which trigger the application of the distributor’s MFN protections. Third, the distributor should ensure that it has a right to audit programmer MFN compliance.
Fourth, distributors should audit at least one or two programmers each year. Once word gets out that the distributor is serious enough about safeguarding its rights to actually conduct audits, the more vigilant programmers will be. Breaches related to the undercalculation of license fees will often trigger contractual late-payment penalties which safeguard the economic interest of the distributor. But what of MFN breaches that relate to so-called “non-economic” terms such as video-on-demand, interactive and HDTV rights? This leads to the fifth solution, which is to include a provision that MFN breaches for noneconomic benefits will result in a reduction in the license fees to the programmer. If a distributor has enough leverage, perhaps this reduction can even be made retroactive to the contract term’s effective date.