by Eric Zukoski
Teach Your Children
The Texas Music Project (www.texasmusicproject.org), a 501(c)(3) recognized by the Texas state legislature for its support of music education in Texas schools, and for which this writer’s law firm served as general and intellectual property counsel, produced a series of compilation CD’s featuring Texas artists. The first of these, Don’t Mess With Texas Music Volume I, became the best-selling compilation of Texas music in history, raising nearly $500,000 for music education in historically disadvantaged schools. The key to the album’s success was the participation of legendary Texas artists—artists with the kind of stature that they go by only one name—Waylon, Willie, Stevie, Beyoncé, ZZ (okay, “ZZ” might be two names, I am not really sure). Yet as a start-up charity, let alone a novice at the record business, landing artists of this stature should have been an insurmountable task. However, aside from Texas having more Grammy winners than any other state, the one factor that was more instrumental to getting the CD produced than anything else—so much so that it probably deserved its own album credit—was the MFN or “most favored nation” provision.
Wide Open Spaces
Producing a compilation CD requires (1) a master use license from each of the controlling record labels, (2) mechanical licenses from each of the publishers that control the underlying compositions, and (3) AFM and SAG-AFTRA re-use waivers. Like most entertainment deals, music license negotiations start with a deal memorandum containing proposed deal terms in bullet point form. However, the Texas Music Project was asking for gratis licenses—so where the bullet points would usually convey what the record label or music publisher was getting in return for their participation, we had only big blank spaces. This is where MFN came in.
Just the Two of Us
Most Favored Nation treaties became widespread beginning in the 18th century, such as in the Jay Treaty of 1794 between the U.S. and Britain, and required in their most basic form that if a country granted trade terms more favorable to another country, it would grant the same terms to the country with which it had a most favored nation treaty agreement. Although MFN provisions have made their way sporadically into some intellectual property agreements such as music licenses, they are rather rare. However, their primary benefits—overcoming a lack of negotiating strength, serving as a remedy for incomplete information, and providing a self-policing contractual deterrent where enforcement is difficult or expensive—suggest that they may be helpful in other industries and applications.
A Matter of Trust
As a start-up charity, the Texas Music Project lacked the negotiating strength, the track record, and the funds to secure artists of the stature necessary to achieve substantial sales. Once the Texas Music Project secured Willie’s participation, however (thanks to Willie’s charitable nature and a winning poker hand), it became possible to secure other “one name” artists—so long as they were promised the most favorable rate and terms given to anyone else on the album. Thus, the MFN provision effectively leveled the bargaining power and also served as a substitute for the normal licensor’s due diligence that would otherwise go into this type of agreement. And since the licenses were gratis and the labels and publishers therefore did not want to spend substantial time and resources on enforcement, a promise that each and every one of the 100 or so licenses for the album would be on an MFN-rates-and-terms basis was a sufficient deterrent that typical license enforcement was not necessary.
No specific wording is required, and the most favored nation promise can apply to the rate, the terms, particular terms, or a combination. An MFN provision that establishes prices directly charged to consumers should be reviewed for anti-trust considerations, but other than this scenario the industries, applications, and agreements where an MFN provision might prove beneficial for all parties is limited only by the imagination of the players involved.
Eric Zukoski as a partner at Quilling, Selander, Lownds, Winslett & Moser, P.C. and is currently on the Entertainment, Art, and Sports Law Council. He can be reached at firstname.lastname@example.org