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Yes . . . Most Favored Customer Provisions Are Enforceable

Many practitioners argue that "most favored customer" provisions in license agreements are impossible to enforce as the terms of every license are different thus thwarting a claim by a party that it is entitled to receive a lower price offered to another customer.

JP Morgan Chase Bank, N.A. v. DataTreasury Corporation, 823 F.3d 1006 (5th Cir. 2016) illustrates the fallacy of this belief.

In 2005, DataTreasury Corporation (“DTC”) granted a fully-paid-up patent license to JP Morgan Chase (“JPM”) under which JPM agreed to pay a flat fee of $70 million. The license agreement included a most-favored-licensee provision that required DTC:

(i) to notify JPM of any other licenses granted,

(ii) to provide JPM with a copy of the other license agreement, and (iii) to give JPM the benefit of any more-favorable license terms in those other licenses.

In 2012, DTC granted a much-smaller company a paid-up license in exchange for a much-lower flat license fee. Under the terms granted to the smaller company, JPM’s paid-up license fee would have been only $1 million.

DTC failed to notify JPM or to provide JPM with a copy of the license agreement until the litigation, causing JPM to sue DTC for breach of contract.

The trial court held that DTC owed JPM $69 million (the difference between the license fee that JPM had paid and the license fee it would have paid under the terms granted to the other customer).

The relevant language of JPM's license agreement with DTC provided:

"9. Most Favored Licensee. If DTC grants to any other Person a license to any of the Licensed Patents, it will so notify JPMC, and JPMC will be entitled to the benefit of any and all more favorable terms with respect to such Licensed Patents ….” The court's decision was not a one-time occurrence or a decision by a rogue court. Oracle paid approximately $200 million in 2011 to settle a U.S. Government lawsuit alleging that Oracle had breached an MFC clause in its federal-government contract. The whistleblower employee who reported the alleged breach received $40 million.

Licensors should seek to limit their risk by:

  • Drafting the MFC clause very narrowly to clearly state when the MFC will apply:

  • for the identical volumes of identical services/products to be provided in the same timeframe. (DTC argued that such requirements should be implied in its license with JPM, but the court disagreed.)

  • for identical terms and conditions.

  • Limiting the MFC provision to a set period of time.

  • Developing and implementing written procedures for complying with the MFC provision

Licensees should:

  • Impose a self-reporting requirement on the licensor.

  • Include an audit right within the license.

  • Reject any attempt by the licensor to narrowly draft the governing language to prevent the licensee from obtaining the benefit of the bargain.

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