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I do a fair amount of arbitration work. In response to a suggestion from a colleague, I posted a response to a questionnaire published by an international arbitration group; the response indicates my general preferences for managing arbitration proceedings.

(In a nutshell:  In my view, an arbitration case should be managed as a joint business project, and not as an extended tennis match — or boxing match — between the lawyers. [This of course assumes that the parties feel that way too, which they might not.]  My response  to Item 16 summarizes some of my specific preferences about how to manage a case in that way.)

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Emory University has named an award for excellence in teaching transactional law and skills after Tina Stark. From the press release:

Tina L. Stark, the founding director of Emory Law’s Center for Transactional Law and Practice and the author of the ground­breaking textbook “Drafting Contracts:  How and Why Lawyers Do What They Do,” has worked tirelessly to assure that law students have the opportunity to graduate as practice-ready transactional attorneys.

Through her enthusiasm and perseverance, and with considerable grace and vision, she has nurtured the efforts of transactional law and skills educators the world over.

(Extra paragraphing added.)

Tina is a friend and mentor; it's a richly-deserved honor.

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When contract drafters can't agree on a standard of performance (or can't express the standard in words), they often kick the can down the road by stating that the party in question must make  "com­mer­ci­al­ly reasonable efforts."  But what exactly does the quoted term mean?   A holding by the Delaware chancery court suggests that the Indian-English expression "do the needful" might be a useful short­hand reference. See Williams Cos. v. Energy Transfer Equity, L.P., No. 12168-VCG (Del. Ch. Ct. June 24, 2016); see also the annotation to the Common Draft definition of commercially reasonable.

  • The case involved a multi-billion-dollar oil industry merger agreement in which a buyer was to acquire the assets of a seller.
  • The agreement gave the seller an "out" from the deal:  The seller would not have to close the deal if it did not get a favorable opinion from its own tax counsel  (as opposed to, say, getting an opinion from an independent expert) about the deal's expected tax consequences.
  • The agreement, though, also required the seller to use commercially reasonable efforts to get a favorable opinion.
  • After the merger agreement was signed, the market price of crude oil collapsed. This brought with it a drastic drop in the value of the seller's assets, making the deal much less attractive to the buyer.
  • The buyer ended up backing out of the deal, citing newly-discovered concerns about the expected tax consequences.  The seller tried to assuage the buyer's new concerns; when that failed, the seller sued the buyer for breach of contract. The seller alleged, among other things, that the buyer had failed to honor its commitment to use commercially reasonable efforts to obtain a favorable tax opinion.

The chancery court noted that the merger agreement did not define "commercially reasonable efforts"; it found that:

… by agreeing to make “commercially reasonable efforts” to achieve the 721 Opinion, the Partnership [i.e., the seller] necessarily submitted itself to an objective standard—that is, it bound itself to do those things objectively reasonable to produce the desired 721 Opinion, in the context of the agreement reached by the parties.

Williams Cos., slip op. at 46 (emphasis added). The court held that, in view of the facts of the case, the buyer had not breached its obligation to use commercially reasonable efforts.

I'll be updating the annotation to the Common Draft definition of commercially reasonable to include a reference to this case.

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A company (let's call it "Lead Source") signed an agreement to work with a call-center serv­ice provider ("Call Center").

  • The goal was for Lead Source to help Call Center land the business of a par­tic­u­lar cust­om­er ("Customer").
  • In return, Call Center was to pay Lead Source a 5% comm­is­sion on the revenue that Call Center received from Customer during term of the contract between Call Center and Cust­om­er "and any renewals pursuant thereto." (Emphasis added.)

Customer signed a three-year contract with Call Center. For those three years, Call Center paid Lead Source a 5% com­mis­sion on its revenue from Customer, as agreed.

When the three-year contract between Call Center and Customer was ending, Call Center and Customer could have extended or renewed the contract. But they didn't do either.  Instead, they neg­o­ti­a­ted a new contract, which expressly stated that it "supersede[d] and replace[d]" the old one.

(According to the appeals court, the two con­tracts between Call Center and Customer were sub­stan­ti­al­ly similar in their terms, and the two even shared a misspelling.)

Call Center then stopped paying commissions to Lead Source, claiming that it was no longer required to do so because Call Center and Customer didn't renew their original contract.  Lead Source said otherwise, claiming that the new contract between Call Center and Customer was indeed a renewal of the old contract. A lawsuit ensued.

Both the trial court and the appeals court agreed with Call Center that the agreement between Call Center and Lead Source was unambiguous: Lead Source was to be paid com­mis­sions only on renewals of the contract between Call Center and Customer — and that contract wasn't renewed. See Gateway Customer Solu­tions, LLC v. GC Serv. L.P., No. 15-1878 (8th Cir. June 10, 2016) (affirming summary judgment).

Lessons for drafters:

  1. Look to the underlying business reality, and plan for the possibility that your counterparty might try to take advantage of (what you might think of as) loopholes in your agreement.
  2. If you're going to be paid commissions for revenue that gets generated long after you help to put the deal in place, you should anticipate that the party paying you might want to stop paying, on grounds that you supposedly "didn't earn it." (I've heard sales people refer to this as getting paid on "farmed revenue.")
  3. One possible comp­rom­ise might be to structure the commission agreement so that you continue to be paid farther into the future, but at a decreasing rate as time goes on, until at some point the commission payments stop altogether. (This will have the advantage of keeping you and/or your sales people looking for new business and not simply coasting on the commissions from old deals.)
  4. The appeals court ended its analysis with a useful reminder: "Because we agree with the district court that the relevant contract provisions are not ambiguous, we may not consider extrinsic evidence, nor does the doctrine of contra proferentum [sic; contra proferentem] apply (construing a contract in favor of the non-drafter)." Id., slip op. at 5-6 (citation omitted).
  5. There's one more thing that's not apparent from this case: Your business people might trust their counterparts on the other side. But that really means they trust the specific individuals with whom they've been dealing. If a "crunch time" were to come, those trustworthy individuals might not still be there; they might have been promoted, or left the company, or even died.  Their replacements might be folks whom you couldn't trust as far as you could throw them.  So it's best to plan accordingly.
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Our old friend DataTreasury Corporation ("DTC") had a bad day yesterday. See below for drafting tips that might have produced a different result.

Here's a simplified summary of what ruined DTC's day:

  • In 2005, DTC granted a fully-paid-up patent license to the giant bank JP Morgan Chase ("Chase"), in settlement of an infringement lawsuit that DTC had brought against Chase.
  • Under the license agreement, Chase agreed to pay (in install­ments) a flat fee of $70 million.
  • The license agreement included a most-favored-licensee provision that required DTC (i) to notify Chase of any other licenses granted, (ii) to provide Chase with a copy of the other license agreement(s), and (iii) to give Chase the benefit of any more-favorable license terms in those other licenses.
  • More than seven years later, in 2012, DTC granted the much-smaller Cathay General Bancorp a paid-up license in exchange for a much-lower flat license fee — and under those terms, Chase's paid-up license fee would have been only $1 million. DTC failed to notify Chase or to provide it with a copy of the Cathay General license agreement until the litigation. This apparently was not the only time that DTC had granted more-favorable terms without complying with the Chase agreement's notification requirement.
  • Shortly afterwards, Chase sued DTC for breach of contract.  The trial court held, and yesterday the Fifth Circuit agreed, that DTC owed Chase a refund of the $69 million difference between the license fee that Chase had paid and the license fee it would have paid under the terms granted to Cathay General.

See JP Morgan Chase Bank, N.A. v. DataTreasury Corp., No. 15-4095 (5th Cir. May 19, 2016), affirming  79 F. Supp. 3d 643 (E.D. Tex 2015) (granting Chase's motion for summary judgment).

Here's the text of the relevant part of the most-favored-licensee ("MFL") provision, which is also known as a most-favored-nation ("MFN") or most-favored-customer ("MFC") provision:

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. ...

Id., slip op. at 4 (extra paragraphing and bullets added).

Drafting tips: What could DTC have done differently? The Fifth Circuit had some suggestions:

  1. set specific "apples to apples" requirements for the MFL provision to kick in — for example, the new licensee would have to be of at least a specified size, or a specified revenue level, or a specified volume of licensed products or services. DTC argued that such requirements should be implied in its Chase license, but the courts didn't agree; and/or
  2. put a "sunset" on the MFL provision, so that after (let's say) two years, or four years, or whatever, DTC would have been free to grant licenses on whatever terms it wanted without having to give the same terms to Chase; and/or
  3. tie the amount of the paid-up fee to the remaining life of the patent.

See id., slip op. at 21.

DTC could also have put in place an internal process to cross-check each proposed post-Chase license agreement against the Chase license agree­ment itself, and also against all other license agree­ments with MFL provisions, to verify that those MFL provisions weren't about to be breached. That, of course, might have been an expensive operational burden.

I'm going to add this story to the Common Draft reading notes, to go along with the story about Oracle getting hit for nearly $200 million for violating the MFC clause in its contract with the U.S. Government. (The Common Draft reading notes include links to further reading about most-favored-X provisions.)

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