Category Archives: Commercial negotiation

Are legal details a waste of time in IP contracts?

Dancing on a pin is doing my head in!

Dancing on a pin is doing my head in!

A commenter on this blog recently challenged the idea that legal details matter in contracts.  The broad point he was making, which is one that IP Draughts has heard before from lawyers as well as commercial clients, was that most contract disputes are fact-based and do not turn on subtle legal points such as whether affiliates are parties to an agreement.

Some obvious points in favour of this argument include the following:

  1. No dispute. Most contracts do not result in disputes.  Therefore, for most contracts, subtle arguments about contract wording and structure may not matter.  Counter-argument: precise, accurate legal drafting helps to make the parties’ rights and obligations clear, which may reduce the likelihood of the parties getting into a disagreement in the first place.  Also, if you base your approach on an assumption that there will be no litigation, what is the point of having a detailed, written contract at all, as distinct from a quick email summary of price and work to remind the commercial parties what they have agreed?
  2. No litigation. Where contracts do result in disputes, those disputes are mostly resolved without litigation, or are settled before the court makes a final decision, so technical legal arguments that might be raised in court are unlikely to make much different to such contracts. Counter-argument: in IP Draughts’ experience, commercial clients ask for a legal opinion on the merits of their dispute, long before the parties get to the point of actively considering litigation.  Often, such opinions include advice on the interpretation of detailed contract wording. The legal opinion provides a context to the parties’ commercial negotiations, and may be cited in the negotiations. 
  3. Outcome often not based on wording. Even where contract disputes do reach court, it is relatively rare for the court’s decision to turn on the interpretation of detailed wording.  Often, disputes turn on the facts of the case – who did what, or said what, to whom – and are influenced by the court’s assessment of who it believes and who has “right” on their side. Counter-argument: True, there are many reasons why a party wins or loses a court case, and sometimes the strict wording of the contract is not the reason.  Nevertheless, there are sufficient instances of the courts applying a narrow focus on the wording of the contract to make getting that wording right an important part of the contract lawyer’s job.

In the IP world, a classic example of the court focussing on the detailed wording is the 2011 US Supreme Court case of Stanford v Roche, reported on this blog here. In a nutshell, Stanford University lost ownership of an employee’s invention because its agreement with the inventor used the phrase “agrees to assign” rather than “hereby assigns”.  A majority of the Supreme Court considered this wording to be critical, though a minority of the court disagreed, noting that there were only “slight linguistic differences” between the two phrases.

The iceberg that sank the Titanic

The iceberg that sank the Titanic

More generally, IP Draughts considers that taking pains to get the drafting right is likely to be symptomatic of a careful approach to all the legal aspects of contracts, including record-keeping (it is dismaying how many commercial clients can’t find the signed originals of their contracts and don’t seem to regard this as important), giving valid notices of breach or termination, being prompt and systematic in the enforcement of rights, and putting together a robust case for trial.

In summary, it should worry you as a commercial party if your contract is not well-drafted, as this may be the visible part of a legal iceberg that could do great damage to your business.

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Filed under Commercial negotiation, Contract drafting

Drafting clinical trial agreements

management forumLast week, IP Draughts participated in Management Forum’s 30th anniversary conference, Promoting Synergies Across Life Sciences by giving his all-day course on Drafting and Negotiating Clinical Trial Agreements.  His colleagues Paul and Mario were there too, giving a presentation on confidentiality agreements, which seemed to be going well when IP Draughts briefly attended.

IP Draughts enjoys speaking at Management Forum events, mainly because their representatives are a pleasure to work with.

bendallIP Draughts runs this course as a double act with the excellent Christine Bendall, who is now a regulatory consultant in the pharmaceutical sector, but earlier in her career was an IP lawyer and a partner at CMS Cameron McKenna.  Christine is also a speaker on the UCL IP transactions course and she has advised some of IP Draughts’ clients on regulatory matters.

Drafting and negotiation points from the course include:

  • Clinical trial agreements are essentially technical services agreements.  Industry practice affects their terms, but what makes them unique is the regulatory framework for products that will be administered to humans.
  • The regulations vary, depending on the product, its applications, where the trials are taking place and where the eventual product will be marketed.  Careful thought needs to be given to whether the agreement has the right terms to reflect the particular mix of regulations that apply in the individual case.  It will generally not be sufficient to pull a generic template agreement from the computer and expect it to “work” in an individual case.  The drafter should work with regulatory colleagues to ensure that the agreement is suitable tailored.
  • As well as life sciences regulation, these agreements often include terms dealing with other aspects of regulatory compliance, eg data protection, freedom of information, and bribery.  Agreements with international sponsors often ask the trial site to comply with overseas laws with which they are unlikely to be familiar, and which may not be strictly relevant, eg the US Foreign Corrupt Practices Act and the US Sunshine Act.
  • In the UK, most trials in NHS hospitals are conducted under one of the NHS standard clinical trial agreements.  Unfortunately, those agreements are not well drafted and they include some bizarre terms, eg a limit of liability for wilful default of twice the contract price.  Some other countries have “standard” agreements but the extent to which they are used in practice varies.
  • Clinical trial agreements raise basic contract issues such as who will the parties be (eg the investigator or their employer) as well more sophisticated points such as indemnities, publication rights, and intellectual property ownership and use.
Before the days of pharmaceutical regulation...

Before the days of pharmaceutical regulation…

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Filed under Commercial negotiation, courses and training, Intellectual Property

What is the primary role of a contract manager?

how to sellDo you believe that contract managers are there to strike a good deal? Or to protect the organisation from risk? Or to make sure that the contract wording reflects the deal that has been struck?  Or to advise senior management of the implications of the contract?  Or to be an internal champion and advocate for “best practice” in the structuring and negotiation of contracts? Or all or none of the above?

Does your organisation give the contract manager the power to veto deals? To refuse onerous liability terms?  To certify whether deal terms comply with company policies and accept or reject contracts accordingly?  Or are they there as a facilitator and coordinator, with the real power resting elsewhere?

Do you expect the contract manager to be skilled at marketing, negotiation, contract drafting, handling legal and regulatory issues, understanding the technology, products or services at issue, and generally being the representative “face” of the organisation?  Or is their role limited to only some of these areas? Do you provide in-depth training to allow the contract manager to excell at all of their allotted roles?  Who is responsible for the areas that the contract manager is not expected to cover?

Most importantly of all, have you told your contract manager what you expect them to do, and how you expect them to do it?  Or do you assume that they are a skilled professional, that they must know what they are doing, and if they are unclear as to their responsibilities it is up to them to tell you?  Do you judge them on whether they make their internal “customers” happy, regardless of whether they are protecting the organisation?  Or do they also have a responsibility to protect the organisation, that other voices in the organisation may not have? Do you support them in making unpopular decisions? How do you weed out the mediocre and the incompetent, while rewarding and encouraging the excellent? In fact, do you have any objective criteria for assessing performance?

In some organisations, people know what they are expected to do, are given realistic goals and assessed against those goals.  In others, people seem to do what they do because they have always done it that way, and because no-one is looking critically at the role or performance in the role.

In the area of contract management, several factors conspire to make it difficult to assess whether a good job has been done.  These include:

  • organisations that do not have clear policies or guidance on acceptable or unacceptable deal terms
  • expediencysenior management who decide, on grounds of expediency, to go ahead with a deal even if it doesn’t comply with the policies or guidance (if they exist) or against the recommendation of the contract manager.  This may be done, for example, because the CEO wants to hit a sales target, or because a university president wants to keep a powerful professor happy
  • organisations where the only expertise in contracts resides with the contract managers, and not with senior management, so contracts do not get critically reviewed at a senior level.  IP Draughts recalls a shocking conversation with a university vice-president in charge of the university’s commercialisation activities, where the VP stated that he didn’t like looking at contracts
  • heavy workloads for the contract manager that make it impossible to undertake a thorough review and processing of all contracts
  • under-resourced contracts departments that don’t have the ability to hire outside professionals to fill in the gaps of knowledge and expertise within the department

The answer to many of these problems is planning.  In IP Draughts’ view, in well-run organisations that enter into contracts:

  1. Someone in senior management will have responsibility for managing the contracts managers and setting ground rules.  They don’t need to be a contracts specialist, and probably they won’t be, but they need to take seriously their responsibilities in this area, and ensure they have the necessary knowledge to oversee this area of specialisation.  They need to be someone with real power in the organisation (probably not someone who has been moved sideways to ease them out of another role) and they should generally support and back up their contract managers in internal negotiations.
  2. Oliver broke an unwritten policy guideline by asking for more?

    Oliver broke an unwritten policy guideline by asking for more

    The organisation will have written guidelines on preferred and unacceptable terms.  Those guidelines will be understood by both contracts managers and senior management, and will generally be followed.  There may be cases where they are not followed, but this should be the exception rather than the rule.

  3. If the workload of the contract manager is too heavy to give full attention to all contracts, the organisation must either (a) promptly recruit the necessary number of managers and/or (b) institute a triage system, under which contracts are risk-assessed and allocated to different types of contract review (or no review at all, if that is considered appropriate).  High value and high risk contracts should be given whatever resource they need, including external legal and regulatory support if required. The risk assessment should be reviewed periodically, and refined if necessary, but the assessor should be given space to make some mistakes.
  4. The terms of signed contracts should be reviewed periodically to inform (a) whether the guidelines are being followed, (b) whether the guidelines should be revised, and (c) the performance of the contract managers against those guidelines
  5. Contracts managers should have regular reviews of their performance, as should the senior manager mentioned in point 1 above.  Best practice should be encouraged and rewarded.
  6. When resourcing contracts departments, a sufficient proportion of the resourcing should go into the above areas, rather than just the front-line firefighting.

Are these the right areas on which to focus?  Are they realistic?  Your comments, as ever, are welcomed.

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Filed under Commercial negotiation

When should a purchaser indemnify a supplier?

safety firstSupppliers of goods and services sometimes require their business customers to indemnify them against third party claims arising from the use of those goods and services.

IP Draughts has reviewed several contracts recently where strong indemnity terms have been included.  This seems to be a trend; IP Draughts doesn’t recall so many contracts having such strong terms in the past, but maybe his memory is failing.  Recent examples to cross IP Draughts’ desk have included the terms of business of two companies that provide IP strategy services, and the master services agreements of several CROs – Clinical Research Organisations – that provide services supporting the clinical development of pharmaceutical products.

Professional services

Whether any indemnity is included in a commercial contract is a matter of commercial policy, which may be informed by practice in the relevant industry sector.  For instance, the standard terms of engagement of Anderson Law LLP do not ask clients to indemnify the firm against third party claims arising from the use of any legal advice that the firm provides to the client.  Perhaps we are behind the times in using a very simple engagement letter.

By contrast, IP Draughts has recently advised a client that wanted to consider some tax advice that a top 4 accountancy firm had prepared for another organisation.  Before being given access to this advice, the client was required to sign a 6-page letter of indemnity that included terms such as the following:

indemnity (3)

accountantsYou might think that requiring a 6-page indemnity before being given access to some basic tax advice is overkill; I couldn’t possibly comment.

Intellectual property licensing

IP Draughts has for many years included in licence agreements drafted for universities a provision under which the licensee indemnifies the university against claims by the licensee’s customers and others.  A rationale for such a provision is that the licensee is the one that is developing commercial products and that has a business relationship with its customers; it is inappropriate that a university, funded by the public purse, should be exposed to this type of commercial risk.

By contrast, many commercial software licence agreements include a provision in which the licensor indemnifies the licensee against claims from third parties alleging infringement of intellectual property.

Thus, there is not a single approach to indemnities in IP licensing transactions; it all depends on the circumstances of the parties, relevant industry practice, and the individual deal.

Technical and project management services

Coming back to the example of CRO agreements, a recent agreement included the following indemnity:

Customer shall defend, indemnify and hold harmless CRO, its Affiliates and their respective officers, directors, employees and agents (“CRO Group”) from and against all Losses arising from Claims arising from or related to …Customer’s or any other person’s use, consumption, sale, distribution or marketing of such Study Materials

This indemnity was qualified in the situation where the liability could be shown to have resulted from the CRO’s default.  The general principle, though, is that the CRO seeks an indemnity in respect of downstream use of the pharmaceutical product in respect of which the CRO provided services.

Similarly, in some terms that IP Draughts reviewed recently, a supplier of IP strategy services included the following provision:

The Client shall indemnify Supplier and each of its partners and associates (each of the foregoing an “Indemnified Person”) against any and all actions, claims, losses, liabilities, damages, costs, charges and expenses which it or they may suffer or incur in any jurisdiction or which may be made or taken against them relating to or arising out of or in connection with, directly or indirectly and to the extent lawful, the consulting services or any Indemnified Person’s role in connection therewith … save, in each case, to the extent that the same shall have resulted from a breach of the terms of the agreement by Supplier or from any Indemnified Person’s fraud, negligence or wilful default or a material breach by any such Indemnified Person of any law applying to such person.

insureIn IP Draughts’ view, there is no overwhelming logic that says that service providers should be indemnified by their clients.  There is a point of view that professional indemnity insurance is there to deal with the remote risk of third parties suing a service provider, and therefore indemnities should not be needed (assuming the service provider is insured).

Provisions of this kind seek to allocate risk in a particular way.  Equally, IP Draughts has seen consultancy agreements prepared by investors on behalf of spin-out companies where the risk allocation is in the other direction, and the client company seeks an indemnity from the consultant in respect of liabilities arising from the use of the output of the consultant’s services.  IP Draughts has always thought such a provision to be harsh and inappropriate when dealing with individual academics, and that including such a provision reflects a particular mindset among some investors, based on a mathematical approach to risk analysis that is out of place when dealing with technology start-up companies.

too lateAs mentioned already, IP Draughts is seeing a trend towards service providers seeking strong indemnities from their clients and customers.   He wonders whether this trend is based on anything more than herd instinct. Over the years he has seen many other instances of changes in “standard” contract wording that appear to be based on general trends and little more. Examples include confidentiality obligations that require orally-disclosed information to be confirmed in writing, royalty terms in patent licence agreements that limit royalties on patent applications to application that are no more than X years old,  and audit clauses that limit the right of audit to a year or two after the payment was made.

Readers, are you aware of any compelling reason why indemnities by customers are becoming more prevalent in commercial contracts?  Or is IP Draughts’ perception based on a random blip in the contracts he has seen, and not part of a wider trend?  And do we need these provisions or are they another example of unnecessary complexity in contracts?

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Filed under Commercial negotiation, Contract drafting