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(If you’re reading this on the front page of the blog, click on the post title to see the post with a table of contents.)

Save the date: LES negotiation workshop

  • What: “The Art of Negotiation and Dealing with Unexpected Surprises” – a workshop by the Licensing Executives Society’s Houston chapter.
  • When: Tuesday October 18, 2016, 5:00pm to 7:30pm
  • Where: Houston Technology Center, 410 Pierce.

More information to come.

Bound by an unsigned contract draft

Suppose that:

  • Alice sends Bob a draft of a contract so that Bob’s attorney can review the draft.
  • Bob signs the draft, without modifying it, and returns it to Alice.
  • The parties perform their obligations under the contract.
  • Later, in litigation, the parties are unable to find any copy of the contract that was signed by Alice.

Under classic offer-and-acceptance doctrine, Alice might very well be bound to the terms of her contract draft anyway, even if she never did sign the contract. Consider this real-world example:

  • A party to a lawsuit drafted a settlement agreement and sent it to the other party, which signed the draft as-is and returned it.
  • In a later, unrelated lawsuit, the parties could not find any copy of the settlement agreement that had been signed by the drafting party itself; the parties, though, had complied with the terms of the settlement agreement.
  • In the later, unrelated lawsuit, a court held that the settlement agreement was binding on the drafting party — even though the drafting party itself had not signed that agreement — and so the drafting party’s unrelated claims against the other party were barred by the sweeping release language in the settlement agreement.

See Baker Hughes Inc. v. S&S Chemical, LLC, No. 15-2413, slip op. at 9-11 (6th Cir. Sept. 2, 2016). The result might have been different if the draft contract itself had expressly stated that Alice’s offer in the draft was conditioned on both parties’ signing the document. See id., slip op. at 10.

Oops: A sweeping release kills a confidentiality agreement

A Sixth Circuit case illustrates the sweeping effect that might be given to a broad general-type release:

  • Bruce Stevens worked for Baker Petrolite Corporation and its predecessor for approximately seven years. When his employment ended, Stevens signed a contract in which he promised to maintain the confidentiality of Baker Petrolite’s trade secrets.
  • Baker Petrolite and its parent company, Baker Hughes Incorporated (collectively, Baker), sued Stevens 18 years after the contract was signed, alleging a breach of their confidentiality agreement.
  • Stevens’s defense, and the outcome of this case, hinges on the validity of a broadly worded settlement agreement that was purportedly reached in the interim as a result of an unrelated lawsuit between the parties [about unpaid compensation].
  • Relying on this settlement agreement, the district court entered judgment in favor of Stevens. For the reasons set forth below, we AFFIRM the judgment of the district court.

Baker Hughes Inc. v. S&S Chemical, LLC, No. 15-2413, slip op. at 2 (6th Cir. Sept. 2, 2016) (extra paragraphing and bullets added). The release language quoted by the court was the following:

Except for the obligations set forth in this Agreement, Baker hereby fully and forever remises, releases and discharges Stevens and his attorneys, agents, heirs, executors, administrators, predecessors, successors and assigns (collectively referred to as the “Stevens Release Parties”),

of and from any and all claims, demands, agreements, contracts, covenants, suits, actions, causes of action, obligations, controversies, debts, costs, expenses, damages, judgments, losses and liabilities,

of whatever kind or nature, in law, equity or otherwise,

whether known or unknown, concealed or hidden,

against any of the Stevens Released Parties which Baker has had, may have had or now has, to and including the date of this Agreement.

It is the intention of the parties to this Agreement that the foregoing general releases shall be effective as a bar to all actions, causes of action, suits, claims or demands of every kind, nature or character whatsoever, known or unknown, suspected or unsuspected, fixed or contingent, referred to above. …

Id., slip op. at 3 (paragraphing edited, emphasis added, ellipsis marks by the court).

Oops: Subcontractor’s quotation, by being mentioned in contractor’s purchase order, is deemed incorporated by reference

In a California case:

  • A prime contractor issued a purchase order to a subcontractor. The purchase order mentioned, but did not expressly incorporate by reference, a sales quotation that the subcontractor had previously sent to the prime contractor.
  • Further down in the purchase order, though, the P.O. language referred to “the contract documents described above or otherwise incorporated herein ….” (Emphasis added.)
  • Applying the contra proferentem rule of contract interpretation — and therefore construing the quoted term against the prime contractor — the court held that the “described above or otherwise incorporated” term had the effect of incorporating the subcontractor’s sales quotation by reference into the purchase order.

See Watson Bowman Acme Corp. v. RGW Construction, Inc., No. F070067, slip op. at 18, 21-22 (Cal. App. Aug. 9, 2016) (affirming, in pertinent part, judgment on jury verdict awarding damages to subcontractor).

Ambiguity: The Fifth Circuit causes a double-take

From a Fifth Circuit’s opinion:

We reject this [argument] as either an accurate characterization of the current state of preemption law or, if viewed as an original matter, as something that should make a difference in the equivalency analysis.

GlobeRanger Corp. v. Software AG United States of America Inc., No. 15-10121, slip op. at 13 (5th Cir. Sept. 7, 2016) (affirming $15 million judgment on jury verdict of trade-secret misappropriation).

PROBLEM: At first glance, the first part of this sentence seems to be saying that the court rejects the appellant’s argument because the argument accurately characterizes the current state of the law. That, though, would of course make no sense.

POSSIBLE REWRITE: This sentence might have been rephrased (and streamlined) as, for example:

This argument mischaracterizes preemption law and does not justify changing the equivalency analysis.

Ambiguity: A startling discovery in the Mexican desert

From the Wall Street Journal:

Two years ago, a California aluminum executive commissioned a pilot to fly over a Mexican town at the foot of the Sierra Gorda mountains, and snap aerial photos of a remote desert factory. He made a startling discovery.

(Emphasis added.)

QUESTION: Who made the startling discovery — the California aluminum executive, or the pilot? It likely was the latter, but not necessarily (the executive might have flown with the pilot as a passenger).

In a contract, such an ambiguity might be undesirable, not least because it likely would be construed against the drafter under the contra proferentem principle.

In any case, as drafters, that’s a conversation we don’t want to have (as one of my students put it a few semesters ago).

Achieving crisper prose

See LawProse Lesson #261: Tinkering for tightening, which offers some excellent suggestions and examples of things you can do to tighten up your prose.

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Contract drafting tips: Sept. 2, 2016

(If you’re reading this on the front page of the blog, click on the post title to see the post with a table of contents.)

Verizon-Yahoo fail: Don’t use “substituted for” if you mean “replaced by”

Many young drafters incorrectly use sub­sti­­tu­ted for instead of re­placed by.  As an ex­ample, look at section 1.03(b) of the stock pur­chase agree­ment un­der which Verizon is to acquire Yahoo’s op­er­a­ting business (which I’m reviewing in the course of drafting some new sections for the Common Draft contract deskbook):

  • That section of the Verizon-Yahoo contract makes it clear that Yahoo’s employees are to have their existing restricted-stock unit awards, or “RSUs,” replaced by Verizon RSUs.
  • But the contract language erroneously says that each Yahoo RSU is to be “substituted for” a Verizon RSU (emphasis added).

Unfortunately, what this contract language says is exactly the op­pos­ite of what’s supposed to happen in the deal.  The Merriam-Webster on­line dict­ion­a­ry defines substitute as: “1 to put in the place of an­oth­er[;] 2 to take the place of another <Honey can substitute for sugar in the recipe.>” So section 1.03(b) is back­wards; it should say instead that a Ver­i­zon RSU is to be substituted for each Yahoo RSU, not the other way around.  Or even better:  The section could say that each Yahoo RSU is to be replaced by (or re­placed with) a Veri­zon RSU.

According to the press release, the parties were represented by top-flight law firms:  Wachtell; Gibson Dunn; Covington; Winston & Strawn; Skadden; Wilson Sonsini; and Cravath.

Trump campaign fail: Give some thought to how the contract might read if made public

From Vox.com (with extensive excerpts): Apparently if you want to volunteer for the Donald Trump campaign, you must electronically sign a really-egregious nondisclosure agreement that prohibits you from criticizing Trump, his family, his business, etc., for the rest of your life. The NDA seems to have been drafted by lawyers wearing horse blinders who myopically considered only the purely-legal issues, with nary a thought to the likely real-world political- and public-relations consequences.

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Contract drafting tips from recent cases

(If you’re reading this post on the front page of the blog, click on the post title to see it with a table of contents.)

Employers: Be sure your arbitration agreement is actually binding — it might not be if it’s in a “policy”

Here’s a drafting lesson from a California court of appeal:

The question in this case is whether an arbitration provision in an employee handbook is legally enforceable.

  • The employee handbook containing the arbitration provision included a welcome letter as the first page, which stated, “[T]his handbook is not intended to be a contract (express or implied), nor is it intended to otherwise create any legally enforceable obligations on the part of the Company or its employees.”
  • The employee signed a form acknowledging she had received the handbook, which mentioned the arbitration provision as one of the “policies, practices, and procedures” of the company.
  • The acknowledgement form did not state that the employee agreed to the arbitration provision, and expressly recognized that the employee had not read the handbook at the time she signed the form.

Under these circumstances, we find that the arbitration provision in the employee handbook did not create an enforceable agreement to arbitrate.

We therefore affirm the trial court?s denial of the employer?s petition to compel arbitration.

Esparza v. Sand & Sea, Inc., No. B268420, slip op. at 2 (Cal. App. Aug. 22, 2016) (emphasis, extra paragraphing, and bullets added).

I’ve added this case to the commentary to the Common Draft arbitration provisions.

The client might not care about the other side’s onerous contract term

In my contract-drafting class next week, I’ll be using a prop that I’ve received in the U.S. Mail. The prop is a notice from the bank that issued the credit cards my wife and I use. The notice informed us that certain interest rates and fees would be increasing. For example:

  • The annual percentage rate (APR) for cash advances went from 19.49% to 25.24%. In the future, the APR would be determined by adding 21.74% (vice the former 15.99%) to the prime rate.
  • The up-front transaction fee for cash advances went from 3% to 5% of the amount of the cash advance (or $10, whichever is greater). This is in addition to the interest charges, mind you.

Leaving aside the political debate about high interest rates and fees, I plan to show the notice to my students to illustrate two points:

  1. My wife and I don’t care what the bank charges for cash advances, because we never take cash advances. The notice could also have said that the interest rate would go to 100% if our minor children dropped out of school; we wouldn’t have cared about that, either (because our kids are both adults and college graduates). This principle is worth remembering when reviewing another party’s onerous contract draft.
  2. BUT: Circumstances can change, in which case (what used to be) a meaningless contract provision can become painfully relevant.

The parentheticals-generating machine runs wild …

See this portion of an 11th Circuit opinion:

Ex-Husband dodged, delayed, and opposed Ex-Wife’s unrelenting efforts to obtain discovery in support of her claim, and their red in tooth and claw feud played out in countries around the world, including Cyprus, Latvia, Switzerland, the British Virgin Islands (“BVI”), the Commonwealth of the Bahamas (“Bahamas”), and the United States of America. In the United States, Ex-Wife sought information from Gabriella Pugh (“Ms. Pugh”) and her employer in Atlanta, Georgia—Appellant Trident Corporate Services, Inc. (“Trident Atlanta”)—that she expected would reveal Ex-Husband’s beneficial ownership of Bahamian corporation, Tripleton International Limited (“Tripleton”). When met with resistance, Ex-Wife initiated a § 1782 action in the Atlanta division of the District Court on July 25, 2013. Ex-Wife filed substantial evidence in support of her “Ex Parte Application for Judicial Assistance” (“Application”), including a lengthy and detailed declaration from her attorney, Dmitry Lovyrev (“Lovyrev”). On referral, the Magistrate Judge granted the ex parte Application and authorized service of two subpoenas (“Ex Parte MJ Order”).

The subpoena issued to Trident Atlanta (“Subpoena”): (a) referenced Tripleton, and other Bahamian corporations, including Guardian Nominees (Bahamas) Limited (“Guardian Bahamas”) and Trident Corporate Services (Bahamas) Limited (“Trident Bahamas”); (b) ….

Hat tip: @Greg651 via Marilyn Bush LeLeiko (“@LawWriting”). As @Greg651 said, “Thank god for these parentheticals, otherwise I’d have no idea what Bahamas or Ms. Pugh were in reference to.”

Ms LeLeiko adds: ‘When NOT to use parenthetical defined term: “The subpoena issued to Trident Atlanta (“Subpoena”): . . .’

Botched idioms

See 7 (sic; Seven) idioms almost everyone gets wrong (hat tip: Marilyn Bush LeLeiko).

I’ll add my own:  When people criticize (let’s say) President Obama because of something they think he should have prevented, the correct term is that it happened on his watch (it’s a Navy term), and not under his watch (which implies, probably incorrectly, that he was devoting any time and attention to it).

A new agreement can wipe out favorable provisions in an old agreement

In this case, the facts of the business transaction aren’t especially important, but the result is a reminder that signing a new Contract B while Contract A is still in place can result in wiping out some or all of the legal rights in Contract A. That happened in HDRE Bus. Partners Ltd. Grp., L.L.C. v. RARE Hosp. Int’l, Inc., No. 15-30487 (5th Cir. Aug. 19, 2016):

  • A landlord brought suit against a tenant for al­leg­ed­ly violating the lease agreement.
  • The lease agreement stated in part that in any dispute, the pre­vail­ing party would be able to recover its attorney fees. (See the Common Draft attorney-fee provisions and commentary.)
  • The tenant was able to get the dist­rict court to dismiss the lawsuit and to award the tenant its attorney fees under the prevailing-party provision in the lease agreement.
  • The Fifth Circuit reversed the award of at­tor­ney fees to the ten­ant, because the jury had found that the parties had entered into a “novation”; the appeals court said that the parties’ new agree­ment replaced the lease agreement and thereby wiped out the at­torney-fee provision in the latter.

For additional cases in which this occurred, see the Common Draft annotation.

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The rule (OK, a guideline): Don’t ask the other side to agree to something that you wouldn’t accept if the roles were reversed.

This week, I helped a client negotiate changes to a prospective cus­tomer’s standard nondisclosure agreement [1]. The form included a statement that my client consented, in advance, to the entry of an in­junction if my client breached the NDA’s confidentiality obligations; the form also waived any requirement that the customer post a bond as a prerequisite to obtaining an injunction against my client [2].

I asked that both provisions be deleted. The customer’s lawyer (who was fairly junior but knew her stuff) and I went back and forth for a few minutes about those issues.

The customer’s lawyer finally asked me: If I were representing her client, wouldn’t I ask for a bond waiver too? I said no, I wouldn’t; I explained that:

  • I un­der­stood why she wanted a bond waiver, but we can’t know in ad­vance what the circumstances might be; a one-size-fits-all solu­tion would be too dangerous here;
  • That’s why the law calls for judges to exercise discretion, taking all the circumstances into account, in deciding (A) whether or not to grant an injunction at all, and (B) if so, how much the bond should be.

So let’s just allow the law to work, I argued.  Happily, the customer’s lawyer tentatively agreed to delete the bond waiver (subject to checking with her business people).

Her question, about what I would do in her shoes, reminded me: As I’ve recounted before, when I was general counsel for a software com­pany, our standard software license agreement was quite cus­tomer-friendly, in ways that we knew we could sup­port. That paid off, not just in getting our deals closed more quickly, but also on a couple of occasions when we were acquiring soft­ware licenses from other companies. On each of those occasions, the other company agreed that, instead of negotiating their one-sided license agree­­ment form, we could just use our form, because with that form we were equally happy being on either side of the agreement. That worked for the other companies, and as a result, we were able to get to signa­ture much sooner [3].

Notes

[1] See the Common Draft confidentiality-agreement checklist, which links to contract clauses with extensive annotations and commentary.

[2] See the Common Draft injunctive-relief provisions, especially the bond waiver clause and its commentary.

[3] In 2009, it was reported [the link is now dead] that an unidenti­fied company had had its sell-side negotiators review the standard contract forms used by the company’s buy-siders, and vice versa — and that each group of negotiators became “apoplectic” about the terms that their colleagues were demanding.

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Sign up now for IP & Licensing Basics, a great one-day course from the Licensing Executives Society USA/Canada, a non-profit association of lawyers and other professionals in technology transfer. The course is for lawyers and non-lawyers alike; it includes an enjoyable license-negotiation exercise. I’m on the Houston chapter’s leadership team and will be teaching one segment of the course again.

Registration info

 

 

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