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pattern of behavior in the cerivastatin litigation: the most-favored- nation clause analyses and the secret settlement analyses.

Bayer’s announcement of the existence of a fixed schedule and the

lack of confidentiality agreements acted as a functional analog to

a

most-favored-nation

clause.

Most-favored-nation

(MFN)

clauses

are

contractual

terms

that

prevent

one

contracting

party

from

reaching

a

separate

agreement

with

another

(third)

party

on

terms

more

advantageous

for the third party than for the first.

agreements

negotiated

among

nations.

If

The term comes from trade country A has a most favored

nation agreement with country B, country A favorable trade agreement with country C. is an agreement not to settle a claim with

agrees not to provide a more In the settlement context, it a third party on better terms

than that reached with the contracting party for that party.

If the

party does reach a more favorable agreement retroactively provide the same terms to the to the MFN provision.

with a third party, party with which it

it must agreed

Using a most-favored nation clause in settlements can benefit the

defendant in addition to the party to which the defendant offers the

MFN

agreement.

Spier (2003) modeled the effect of MFN clauses on the

behavior of litigants.

She concluded

simultaneously

by

multiple

plaintiffs

that a defendant can use a MFN to

being sued commit to a

single take-it-or-leave-it-offer.

14

By including a MFN clause in

13 The increased costs of actual trial as compared with pre-trial litigation may also prompt settlement just prior to trial. One way to understand this problem is by comparison to a 14

monopolist who wants to maximize monopolists will have incentives

her income.

As

to

lower

prices

Coase (1972) over time to

explained, sell to

buyers with lower

monopoly.

But

if

valuations for high valuation

the product on customers know

which she has a that the monopolist

will

eventually lower prices, they may simply wait and not pay the initially

high price until the monopolist lowers prices.

As a result, the

monopolist may not be able to charge as much as she would

able to problem

the high-valuation customers. by including an MFN clause in

The monopolist can

the

contract.

This

otherwise be solve this credibly

commits the monopolist to not lowering would then be forced to pay additional

prices because the monopolist sums to the early buyers if she

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