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In my contract-drafting course we recently talked about how nowadays parties often circulate just signature pages to be signed, and the importance of making sure that the signed version is identified (e.g., with a running header). In a recent Delaware chancery court case, both a privately-held cosmetics company (“theBalm Cosmetics”) and its (former) VP of sales — but mainly the VP — did just about everything wrong in negotiating and signing an agreement to give the VP some equity in the company.

The lawsuit happened because, after leaving the company, the VP sued to compel the company to give her the equity that she claimed was due to her under the “signed” agreement. But the parties, after sending revised drafts back and forth, had apparently signed signature pages for different versions of the agreement. 

The problem was that the two versions contained seriously-different provisions on a critical issue (a post-employment non-competition covenant). Importantly, the parties never did agree on the terms of the noncompete, according to the court. Neither party had any decent paper trail to help the court figure out what happened (not even emails or texts). The only partial paper trail was in the email and document files of White & Case, a major NYC law firm that had drafted the equity agreement on behalf of the company. But the White & Case attorney had worked only with a company representative, not with the VP or her lawyer — and interestingly, the VP couldn’t even remember the name of either her lawyer or the lawyer’s firm.

Here’s the critical point:

So, how did Kotler [the sales VP] come to have a fully executed warrant in her possession that contained her narrow [non-compete] language? From the preponderance of the evidence, the best explanation I can muster is that Kotler printed her modified September 25 Draft from her computer [purportedly based on a conversation of that date with a company representative], added her own signature and attached [the company CEO’s signed] September 17 signature page. She then kept the document in her files, but did not circulate it or discuss it with anyone at the Company.

To be clear, Kotler’s purported fully executed warrant permits her to compete immediately after ending her consulting relationship with the Company while maintaining her warrant rights. In other words, Kotler’s [non-compete] provision effectively gave the Company zero protection. It is not surprising, then, that there is no evidence—beyond Kotler’s “fully executed” warrant—that the Company ever agreed to Kotler’s version of the non-compete.

(Emphasis added.)

The court (after a bench trial) concluded that the former VP had failed to prove that the parties had reached a meeting of the minds about the purported agreement to give her equity in the company; the court awarded judgment for the company.

My thought was:  Why didn’t this mixing-and-matching of signature pages constitute fraud on the part of the former VP? Apparently the same thought occurred to the company, but the court declined to reach the company’s fraud defense, saying, “I need not grapple with the competing evidence regarding Kotler’s mental state, or mens rea, as these events unfolded.”

The case is Kotler v. Shipman Assoc., LLC, No. 2017-0457-JRS (Del. Ch. Aug. 27, 2019). (Hat tip: Gwenn Barney and Lori Smith of White & Williams.)

Drafting lessons:  If you’re going to exchange signature pages:

  1. put a version identifier in a running header on every page — I prefer a hand-typed date and time, e.g., “VER. 2019-09-08 18:00 CDT” — and

  2. if you send out a signature page with your client’s signature, make sure you get the other side’s signed signature page back as well, and that the two versions match.

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In response to feedback from colleagues, I’ve tweaked my attorney-client master engagement agreement form and set it up so that any licensed attorney is free to use it (modified if desired) in his or her own practice, possibly by doing a short-form email agreement in the same way that I do with my clients. Of course, the agreement form is published “AS IS, WITH ALL FAULTS”; if a lawyer uses it, that doesn’t mean that the lawyer’s client is in any kind of attorney-client rela­tion­ship or other relationship with me. (Feedback and suggestions are most welcome; I’ll assume I’m free to use them unless otherwise specified.)

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In a recent Texas case, two sophisticated parties in the oil and gas busi­ness — let’s call them Alpha and Bravo — were negotiating a contract.

  • Alpha’s first draft provided that Bravo could not assign the contract without Alpha’s consent, which Alpha would not unreasonably with­hold. (NB: It’s pretty unusual for a drafting party to volunteer to submit to such a restriction in its own draft.)
  • Later, however, Alpha revised its draft, deleting the no-unreasonable-withholding restriction, so that the new draft simply stated that Bravo could not assign the contract without Alpha’s express prior written consent, period.
  • Bravo objected to the deletion, but Alpha held firm; the contract, as signed, did not include the requirement that Alpha not unreasonably withhold its consent to assignment by Bravo.
  • Later, Bravo wanted to assign the contract to a third party. Alpha refused consent. (Bravo had declined Alpha’s request that Bravo buy out Alpha’s interest for $5 million.) Bravo’s incipient deal with the third party fell through.

After a jury trial, Bravo won a $31 million judgment against Alpha, but the court of appeals sided with Alpha — and the Supreme Court of Texas reached the same result, holding that the contract unambiguously allowed Alpha to withhold its consent to Bravo’s assignment without restriction:

We conclude that the express language of the consent-to-assign pro­vi­sion can be construed with only one certain and definite interpretation—a consent obligation only as to Barrow-Shaver and no qualifications as to Carrizo’s right to withhold consent.

Barrow-Shaver Resources Co. v Carrizo Oil & Gas, Inc., No. 17-0332, slip op. at 16 (Tex. June 28, 2019) (affirming court of appeals’ reversal of trial-court judgment on jury verdict) (emphasis added). The court noted similar holdings by Texas appeals courts. See id. at 32-33 (citing cases).

The supreme court also rejected Bravo’s attempt to use evidence of industry custom about the supposed meaning of the term “consent” to imply a rea­son­able­ness requirement:

JUSTICE GUZMAN’s use of industry custom to imply a reasonableness obligation into the consent-to-assign provision, see post at _, is a veiled attempt to use industry custom and usage to create a covenant of rea­son­able­ness and good faith applicable, at a minimum, to farmout agreements and probably to every contract with a consent provision, if not every con­tract of any type. Using industry custom in the manner JUSTICE GUZMAN proposes would open the door to litigating the meaning of every term in every contract and any obligation not in a contract, creating lucrative busi­ness opportunities for so-called experts in every industry and al­low­ing juries to imply obligations to which parties did not agree.

Id., slip op. at 25 (emphasis added) (responding to a three-justice dissent).

Finally, the supreme court held that in this particular situation, Bravo was not justified in relying on oral representations, by a representative of Alpha, that consent would be granted; the court noted the “red flags” that pre­clu­ded justifiable reliance:

Without even having to reach the parties’ substantive negotiations, we point out the following red flags: (1) the farmout agreement imposed an unambiguous obligation on [Bravo] and imposed no obligation on [Alpha]; (2) the oral representations contradicted the clear and un­am­big­u­ous consent provision; (3) both [Bravo] and [Alpha] were soph­is­ti­ca­ted oil and gas companies, so [Bravo] should have understood that the oral representations had no bearing on the contract’s express lang­uage; (4) [Bravo’s] representative’s extensive experience in the oil and gas industry—specifically, thirty-three years of experience; (5) the fact that negotiations took place at arm’s length to create an agree­ment other than a form agreement; (6) the parties knew utilizing con­sent-to-assign provisions is a common industry practice; and (7) the sub­stance of the representation was inherently unverifiable because it con­veyed a vague intent for someone else to do something sometime in the future under some circumstances not yet known.

A similarly situated “savvy participant” would have recognized that [Alpha] could change its mind, if [Alpha’s representative] Laufer’s representations were binding at all, and would have weighed the risk of that happening before ent­ering into the agreement. … Instead, [Bravo] chose to rely blindly on [Alpha’s] representations when the contract provision clearly entitled [Alpha] to withhold its consent, thereby preventing an assignment. Here, Laufer’s vague and general statements indicating that [Alpha] would give its consent were merely Laufer’s representations of [Alpha’s] future in­ten­tions, statements that were inherently unverifiable, which should have been a red flag to [Bravo] not to accept them blindly. We con­clude that there are sufficient red flags in the entirety of the cir­cum­stances surrounding the farmout agreement’s formation to negate just­i­fi­able reliance on [Alpha’s] oral representations as a matter of law.

Id. at 50-51 (citation and parenthetical omitted).

Drafting lesson: If you’re in Bravo’s shoes in Texas, and you want to be sure Alpha won’t unreasonably withhold its consent to your assigning the contract, then you’d better negotiate such an obligation into the contract itself. In some other states — in some circumstances — you might be able to argue that there is indeed an implied obligation of reasonableness in granting or withholding consent. But that’s a much tougher sell in Texas.

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When drafting a services agreement, it can be a big mistake for a customer to fail to establish clear lines of responsibility about who will obtain any third-party authorizations that might be needed. A California business owner got an expensive lesson on that subject when he hired a Web developer to revamp the business’s Website. The revamped Website included three copyrighted photographs that had been taken, and were owned, by a professional photographer, who filed suit for copyright infringement.

The business owner claimed that he had thought that the Web developer would take care of obtaining any necessary copyright clearances.  Evidently, however, the trial judge and jury were not impressed: the jury found the business owner liable for contributing to the copyright infringement and awarded maximum statutory damages of $150,000 for each of the three photographs, plus attorney fees and other amounts, for a total of more than $636,000; the appeals court affirmed the judgment.

The case: Erickson Productions, Inc. v. Kast, No. 15-16801 (9th Cir. Apr. 16, 2019); proceedings below, e.g., No. 5:13-cv-05472-HRL (N.D. Cal. May 21, 2018).

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When you draft an exclusion of consequential damages, do you exclude “lost profits”?  In a Seventh Circuit case, a manufacturer’s contract with a distributor contained just such an exclusion of lost profits — but it did not specify that this referred to lost profits from collateral business transactions. As a result, the court affirmed a judgment that:

  1. under the circumstances of the case, lost profits were the only remedy available for breach (because the defendant manufacturer had so argued and thus had waived any contention otherwise);
  2. the exclusion of lost profits therefore caused the contract’s limited remedy to fail of its intended purpose; and so,
  3. under Wisconsin’s arguably-outdated interpretation of the UCC, all remedies under article 2 (sales) were therefore available to the plaintiff.

Sanchelima Int’l, Inc. v. Walker Stainless Equipment Co., No. 18-1823, slip op. (7th Cir. Apr. 10, 2019).

The Seventh Circuit did not address case law from other jurisdictions, e.g., New York, where courts held that lost profits from the contemplated transaction were direct damages, not consequential damages, and thus were not encompassed by an exclusion of lost-profits consequential damages. See, e.g., Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799, 11 N.E.3d 676, 988 N.Y.S.2d 527 (2014), where New York’s highest court held that, on the facts of the case, “lost profits were the direct and probable result of a breach of the parties’ agreement and thus constitute general damages” (emphasis added, citations omitted), and thus were not barred by a limitation-of-liability clause.  (For additional citations, see the Common Draft commentary on that point [self-cite].)

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