One of the key points that comes up from time to time, is in profit participation or back end compensation, whether one should negotiate for what is known as most favored nations clause.
It is tempting to seek a provision requiring the participant to be treated on the same basis as some other participant, especially the producer, thereby assuring a particular level of treatment for the participant while avoiding lengthy negotiations. However, there are pitfalls to this approach. Certain participants, particularly producers, may have cross-collateralization provisions, abandonment provisions, and over budget penalty provisions.
In each instance, by relying upon the definition of another participant, the party may be subjected to undesirable reductions in his profit participation.
As such, it is recommended to carefully assess all dynamics before deciding to negotiate most favored nations clause in profit participation agreements.
Article by Dorisa Shahmirzai, Esq.
Founding Entertainment Attorney at IP Law Click