On Contracts

Get a load of the long, complex contract clauses “reproduced” in this week’s Merck v. Bayer decision concerning whether talc-litigation liabilities were transferred in Merck’s 2014 asset sale of its Claritin, Coppertone, and Dr. Scholl’s product lines for some $14 billion. The Delaware chancery court concluded that the relevant contract provisions were “clear and unambiguous” and that Bayer’s interpretation was “the only reasonable one” (slip op. at 2). But that’s sure as hell not obvious at a glance from the court’s reproduction of the language in question, copied from the court’s opinion:

2.6. Assumption of Liabilities. Effective as of the Closing, neither Seller nor any of its Affiliates shall have any liability or obligation with respect to, and Buyer shall assume and thereafter pay, perform and discharge when due, all liabilities and obligations of Seller and its Affiliates, whether relating to periods prior to, on, or after the Closing, to the extent related to or arising from, the Transferred Consumer Care Assets, the Consumer Care Business, the Transferred Rx Product Assets, the Rx Product Business and/or the Conveyed Sites, other than the Retained Liabilities (collectively, the “Assumed Liabilities”) (provided that, notwithstanding anything to the contrary in this Section 2.6, (i) any liabilities or obligations of the Companies or any of their Subsidiaries shall not constitute Assumed Liabilities, it being acknowledged and agreed that such liabilities or obligations (other than Retained Liabilities) shall remain the liabilities or obligations, as applicable, of the Companies or their applicable Subsidiaries immediately after the Closing, and (ii) nothing in this Section 2.6 shall affect Buyer’s rights pursuant to Article X), including, without limitation: . . . (e) any obligations or liabilities to the extent relating to the Consumer Care Business in connection with any Litigation, other than Retained Liabilities; . . . and (h) the obligations and liabilities set forth in Section 2.6(h) of the Seller Disclosure Schedule.

2.7. Retained Liabilities. Seller shall, without any further responsibility or liability of, or recourse to, Buyer, or any of Buyer’s directors, shareholders, officers, employees, agents, consultants, representatives, Affiliates, successors or assigns (including the Companies and their Subsidiaries), absolutely and irrevocably assume and be solely liable and responsible for the following obligations and liabilities (the “Retained Liabilities”); it being understood that nothing in this Section 2.7 shall affect Buyer’s rights pursuant to Article X: (a) all obligations and liabilities to the extent relating to or arising out of the Retained Assets; (b) any Taxes for which Seller is responsible under Section 6.1 of this Agreement; (c) all obligations and liabilities for which Seller or its Affiliates are made responsible pursuant to the terms of this Agreement or the Ancillary Documents; (d) the obligations and liabilities set forth in Section 2.7(d) of the Seller Disclosure Schedule (the “Section 2.7(d) Liabilities”); and (e) the China Obligations.

And for the retained liabilities, in Section 2.7(d) of the Seller Disclosure Schedule:

1.  Any product liability or similar claim for injury to a Person or property that allegedly arises out of or is based upon any express or implied representation, warranty, agreement or guaranty made by the Transferred Business, Seller or its Affiliates, or any of the Companies or their Subsidiaries, or by reason of the alleged improper performance or malfunctioning of a product, improper design or manufacture, failure to adequately package, label or warn of hazards or other related product defects of any products at any time manufactured, marketed or sold by the Companies or their Subsidiaries or otherwise in connection with the Transferred Business, in each case to the extent arising out of or relating to periods prior to the Closing.

2.  Any liability or obligation of the Transferred Business, Seller or any of its Affiliates, or any of the Companies or their Subsidiaries, which is related to or associated with the failure, alleged failure or purported failure of a product to comply with applicable labeling, false or misleading advertising or consumer protection Laws, including California’s Proposition 65 (California Health & Safety Code Section 25249.6 et. seq.), in each case to the extent arising out of or relating to periods prior to the Closing.

What a godawful mess.

In contrast, the drafters of the contract had used (relatively) short, single-subject paragraphs.

The setting: A company’s option-agreement form allowed the company to repurchase the relevant ownership interests “during the six (6) month period following (x) the (i) [t]ermination of [the employee’s] employment with the [company] for any reason . . . and (y) a Restrictive Covenant Breach.” (Emphasis added.) The company tried to exercise its repurchase option after an employee left, but the employee countered that the repurchase right would be triggered only if both the employment ended and the employee breached a restrictive covenant.

The holding: The Delaware supreme court — after extensively reviewing state- and federal case law — affirmed the chancery court’s holding; the supreme court concluded that in context, the word “and” in the option agreement was equivalent to “or”; that is, it was disjunctive, not conjunctive. See Weinberg v. Waystar, Inc., No. 274, 2022 (Mar. 16, 2023).

Drafting lesson: This costly litigation could have been avoided if the drafter(s) had used a few extra words to reduce reader workload to get a disjunctive, “or” meaning:

• “during the six-month period after the occurrence of any one or more of the following: (x) the (i) [t]ermination of [the employee’s employment … and (y) a Restrictive Covenant Breach.”

Or to get a conjunctive, “and” meaning:

• “if both of the following have occurred, then during the six-month period after the latest such occurrence: (x) the (i) [t]ermination of [the employee’s employment … and (y) a Restrictive Covenant Breach.”

In my Contract Drafting class tomorrow I’ll be discussing the Formal Opinion 503 issued this month by the ABA’s Standing Committee on Ethics and Professional Responsibility.

(The hypothetical) facts below are those of a semester-long simulation in which students are to assume that they represent a small data-analysis company, “MathWhiz,” in dealing with a giant oil company, “Gigunda Energy.”)

FACTS:

1. You represent MathWhiz in a contract negotiation with Gigunda Energy.
2. Gigunda’s lawyer, Ginny, sends you an email.
3. The “cc” line of Ginny’s email includes Gerry, a Gigunda business person.

QUESTION: Can you do a Reply to All email — including Gerry, the Gigunda business person — without violating Rule 4.2 of the ABA Model Rules of Professional Conduct, which prohibits a party’s lawyer from communicating directly with another represented party about the subject of the representation?

POSSIBLE ANSWER: The ABA’s newly-issued Formal Opinion 503 says “yes, unless ….”:

In the absence of special circumstances, lawyers who copy their clients on an electronic communication sent to counsel representing another person in the matter impliedly consent to receiving counsel’s “reply all” to the communication.

Thus, unless that result is intended, lawyers should not copy their clients on electronic communications to such counsel; instead, lawyers should separately forward these communications to their clients.

Alternatively, lawyers may communicate in advance to receiving counsel that they do not consent to receiving counsel replying all, which would override the presumption of implied consent.

Two large companies settled a bitter contract-related dispute, but one of them later sued the other, seeking to set aside the settlement agreement on grounds of fraud (among others). The Supreme Court of Texas agreed with the defendants that the fraud claim was barred by an express disclaimer of reliance in the parties’ previous settlement agreement — and the supreme court also held that it was not inappropriate for the trial court to award attorney fees and costs to the defendants:

By asserting claims it had agreed never to assert, Petrobras broke the promise it made in the settlement agreement and caused Astra to incur substantial fees and costs to enforce that promise. We conclude the trial court did not abuse its discretion by awarding Astra its fees and costs.

Transcor Astra Group S.A. v. Petrobras America Inc., No. 20-0932, slip op. at 34 (Tex. Apr. 29, 2022) (reversing court of appeals and reinstating trial court’s summary judgment).