Category Archives: Contract drafting

A fresh look at indemnities

have a goFollowing last week’s post about indemnities, IP Draughts has had a go at drafting an indemnity clause from first principles, without ‘cutting and pasting’ any traditional indemnity language. His attempt can be found here.

Some points to note:

  1. The core parts of the indemnity are in clauses 1.1 and 1.2. These clauses simply use the term “indemnify” and avoid wording such as “hold harmless and defend”. Instead, the scope of the indemnity is explained in later clauses.
  2. The indemnities are designed to place responsibility on a licensee of intellectual property to indemnify the licensor, except where the liability arises from the licensor’s breach of contractual warranties (in which case the licensor indemnifies the licensee). For example, the indemnity under clause 1.1 would operate if the licensee sells a defective licensed product, his customer is injured and the customer brings a claim against the licensor.
  3. The defined term “Commercialising Entities” broadens the reach of the indemnity beyond that of many indemnities, and IP Draughts is in two minds about this aspect. It might be argued that, as the indemnity covers claims made against the licensee by third parties, it is unnecessary to spell out who those third parties might be, eg by referring to ebaythe indemnity covering use of a licensed product by people far down the supply chain, eg the child of someone who buys a licensed product on eBay from the licensee’s customer. However, an alternative view is that if the indemnity is intended to cover all liabilities that may arise from the use of the product, it is best to be explicit about this aspect. IP Draughts would be interested to hear readers’ views.
  4. The most ‘novel’ aspect of this indemnity clause is probably clause 1.4, which seeks to address questions of interpretation that have probably been the subject of reported cases, as can be seen from the case references in Contractual Indemnities by Wayne Courtney, an excellent book that was reviewed in last week’s blog posting.
  5. Clauses 1.5 and 1.6 address points that are sometimes covered in detailed indemnity clauses. IP Draughts is grateful to his friend and former colleague, Matthew Warren of Bristows, for sending him a very detailed indemnity clause after reading last week’s blog posting, which provided a convenient shortcut to drafting these terms. IP Draughts has filleted most of the ideas from Matthew’s clause but used simpler, and probably less watertight, language. Some points have been omitted, eg an obligation of confidentiality on the indemnifier with respect information learnt from the beneficiary. This point might be covered in a separate confidentiality clause of the agreement. Similarly, if it is intended to give officers and employees personal rights to enforce the indemnity, a separate ‘third party rights’ clause should make this point clear.

Clearly, there is a great deal of detail in the attached wording, even with the simplified wording that IP Draughts has used, and in several cases there are choices to be made by the drafter, eg whether to include an obligation to mitigate losses under clause 1.5(c). There are, no doubt, other points of interpretation and litigation practice that could be addressed.

What do you think of the clause?

 

 

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Indemnifying the damnified

contractual indemnitiesContractual Indemnities (by Wayne Courtney, Hart Publishing 2014) is an excellent book. It draws upon the PhD thesis of its author, who is a former practising lawyer and is now a Senior Lecturer and Associate Dean of the Law Faculty at the University of Sydney.

Regular readers of this blog will be familiar with the frustration that IP Draughts feels about the typical drafting of indemnities – a frustration that is shared by others whom IP Draughts respects, including contract drafting guru Ken Adams. See some of his commentaries on indemnities here.

Indemnities are often drafted with complex wording and long sentences, so that it is difficult to glean their precise meaning. The reasons for this complexity are various and include:

  1. Broad in scope. Indemnities are typically drafted so as to be broad in scope, and the lawyer sees their task as one of trying to be comprehensive and avoiding loopholes. In some market sectors, eg M&A, there are no prizes for simplifying indemnity wording, only potential claims against the lawyer’s professional indemnity policy if the lawyer’s original drafting fails to achieve the financial result desired by the client.
  2. Difficult issues. It is difficult, even for lawyers, to think through all the legal and practical implications of an indemnification obligation. In the heat of urgent negotiations, it is tempting to use wording that one has seen before, and that seems to cover all the bases.
  3. dryTheoretical. Indemnities are concerned with risk allocation, rather than operational issues such as price and performance obligations. The subject matter can seem very dry and theoretical and, frankly, boring. This combination of theoretical and legal subject-matter tends to make commercial clients run a mile, and leave the drafting and negotiation to their lawyers. As a result, there is less pressure to make the drafting straightforward and understandable.
  4. Case law. There is an extensive body of case law on the interpretation of indemnities. Unfortunately, the case law has not made the drafter’s job any easier; rather it has served to illustrate the many issues of interpretation that are thrown up by indemnity language and the different ways that judges can “jump” when presented with a set of facts about a commercial relationship.

In passing, IP Draughts considers that one of the problems with judges interpreting indemnities is that they often lack experience of drafting and negotiating them. In the UK and, one suspects, many other countries, judges are drawn from the ranks of courtroom advocates, who tend to be a different group from those who draft and negotiate commercial contracts. Increasingly, IP Draughts wonders whether the courts – even highly-respected commercial courts such as those in England and Wales – are the best place to decide matters of interpretation.

Be that as it may, Wayne Courtney has done a very good job of distilling centuries of English and Commonwealth case law on indemnities into a narrative that sets out the main principles of interpretation. His experiences as a practising lawyer and as an academic have undoubtedly contributed to making this a useful work.

aqua vitaeIP Draughts has only two significant criticisms of the text. First, that he would have liked even more distillation of the messy, impure fluid of authorities. He feels it should be possible to keep reducing the liquid down over time, into an aqua vitae of principles that are simple to apply when drafting indemnities. Perhaps this will be Wayne’s life’s work and, by the time of the third edition of this estimable book, the main text will be 150-200 pages, rather than the 302 pages it currently takes to cover the subject.

For example, there is a discussion (at section 7-7) of whether the indemnifier has an obligation to defend an action that is brought against the indemnified party, and is within the scope of the indemnity. It seems to IP Draughts that this question is intimately linked to the questions of whether the indemnity is preventive, and whether it covers claims as well as ultimately liability. These questions are discussed in other chapters. It seems to IP Draughts that these various points, which are each discussed in a useful and authoritative way but in isolation from one another, could be combined and distilled into a master-scheme of analysis.

IP Draughts’ second criticism is that Wayne doesn’t offer any indemnity language to address the main points that he has discussed in the text.

Highlighting a few of those points:

  1. damnifyIndemnities can be interpreted as “preventive” (requiring the indemnifier to ensure that the indemnified person does not suffer a loss) or “compensatory” (requiring the indemnifier to make good any loss that the indemnified person has suffered – referred to in the text as “damnification” – a wonderful word). Often, the courts will adopt a preventive interpretation. This does not seem to depend on using words such as “hold harmless” although, having read the book, IP Draughts suspects that the lawyers’ practice of using this phrase may have its roots in a desire to make the indemnity preventive in scope. There are better ways, in IP Draughts’ view, of making this point clear, than using a formulaic and unclear phrase such as “hold harmless”. (Incidentally, Wayne discusses and dismisses the idea that a preventive interpretation was to be found in the courts of equity, while a compensatory interpretation was to be found in the courts of law, prior to the merger of those courts under the Judicature Acts of 1875.)
  2. It is not always clear, from the wording of the indemnity, whether it applies to all or just some of the following: (a) third party claims against the indemnified party, (b) losses suffered by the indemnified party as a result of the indemnifier’s breach of contract, and (c) claims that might otherwise by brought by the indemnifer against the indemnified party, eg for breach of contract – this type of indemnity is effectively an exclusion clause.
  3. Whether the wrongdoing of the indemnified party cancels or qualifies the indemnity, eg if they are negligent.
  4. Whether claims that have not yet resulted in a liabilty are in some way covered by the indemnity.
  5. Whether costs are recoverable.
  6. Whether an indemnity that covers the same ground as a liability for breach of contract (eg where the contract includes an indemnity against breach of a warranty) can be broader in scope than the underlying breach of contract claim, or is subject to the same limitations and qualifications (eg as to causation, remoteness and mitigation). Wayne discusses the different viewpoints on this subject, eg that an indemnity provides an “agreed damages” mechanism that overrides the usual contract law rules (similar in effect to liquidated damages), but concludes that there are relatively few clear cases that support this analysis of the effect of indemnities, and that each clause must be construed individually. IP Draughts is reassured to hear this conclusion. He has encountered this “agreed damages” approach in the world of M&A and has long wondered where it came from.  More generally, IP Draughts has encountered commonly-held assumptions about the legal effect of contract terms in the world of M&A that are not always obvious to those whose contract experience has been in another market sector, and he wonders whether an element of “group think” has developed in that closed world.

IP Draughts may attempt some drafting of indemnities from first principles and with these points in mind, in a later blog posting. Most of these points are familiar, but some of them, eg the distinction between preventive and compensatory indemnities, have been brought into sharper relief by the book’s analysis.

 

 

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Get up, stand up, stand up for your IP rights

marleyEarlier this week, in the English High Court, a decision was handed down about whether copyright in various Bob Marley songs, including No Woman No Cry, transferred under a 1992 agreement. See BSI Enterprises Limited v Blue Mountain Music Limited [2014] EWHC 1690 (Ch), issued on 4 June 2014. The case involves the interpretation of a definition in an IP agreement, but there is nothing very remarkable about the judge’s decision. The case is mainly interesting for its facts.

Those facts are messy and complex and involve:

  1. Bob Marley writing songs but claiming that others wrote them, apparently to get around contractual obligations to a publisher. This is referred to in the case as the Misattribution Ploy.
  2. Chris Blackwell of Island Records giving evidence in a 2006 court case that certain songs were excluded from a 1992 agreement under which the Marley oeuvre was sold to Island Records. By implication, if he was correct, copyright in those songs remained with the seller. In the present case, Mr Blackwell again gave evidence, and said that he was mistaken on this point in his earlier evidence.
  3. As a result of that statement in 2006, the first claimant entered into an agreement to acquire the copyright in these and some other Bob Marley songs from the seller, and then licensed them to the second claimant.
  4. In the present case, the claimants sought a declaration that they were the owner and licensee respectively, of the copyright in the songs in question.

The outcome of this case depended on interpreting the definition of Composition and Catalogue in the 1992 agreement. More on that below.  But first, Chris Blackwell’s evidence in the earlier case, that certain songs were excluded from the 1992 agreement.  He now considered that he had been mistaken on this point, and explained that he had been tired after giving evidence for a couple of days.  The judge in the present case accepted that explanation and in any event thought Mr Blackwell’s opinion on the interpretation of the 1992 agreement was not relevant. This was a matter for the judge to decide.

The definition of Composition and Catalogue read as follows. I have highlighted some of the key passages in bold text:

1.8 ‘Composition’ and ‘Catalogue.’ The term ‘Catalogue’ shall mean all presently-existing musical compositions, or portions thereof, including cues, domestic or foreign, whether originally claimed or registered as a musical composition or as a part of a dramatic-musical work, consisting of lyrics and/or music whether or not registered in the United States Copyright Office or elsewhere, whether published or unpublished, written recorded by Robert N. Marley, Winston Peter McIntosh and/or Neville Livingstone, and/or certain musical compositions written or composed by Alfonso Pyfrom and/or Jimmy Norman (which were recorded by any of Robert N. Marley, Winston Peter McIntosh and/or Neville Livingstone), under their own names or under any pseudonyms, individually or as part of any collaboration between or among any of them or others (individually a ‘Composition’ and collectively the ‘Compositions’) and all right, title and interest in and to such Compositions, including all copyrights and renewals and extensions of copyrights thereto in all jurisdictions throughout the Universe, to the extent such compositions, copyrights, renewals and extensions are owned, controlled or administered, in whole or in part, by any member of Seller or by Seller’s Music Publishing Business as of the Closing Date, or from which any member of Seller or Seller’s Music Publishing Business receives income, including, but not by way of limitation, the Catalogue listed on Schedule 2 attached hereto. In furtherance of the foregoing, and not by way of limitation, the Compositions also include all musical compositions owned by Seller which were recorded by Robert N Marley (whether alone or in combination with any other artists).

The claimants argued that, because the songs in question had not been listed in Schedule 2, and because this was (they said) a deliberate omission, they were not subject to the 1992 agreement. The claimants’ counsel tried to argue that it was clear that there had been a deliberate omission, and that this was part of the factual matrix that should be taken into account when interpreting the wording of the 1992 agreement.

The judge preferred to find the meaning from the wording of the 1992 agreement itself. The definition did not limit itself to the songs listed in Schedule 2.  The above-quoted wording made clear “almost to the point of redundant repetition” that all Bob Marley songs were included in the definition, whether or not they were listed in Schedule 2. IP Draughts takes issue with the judge’s use of the word “almost”. The above wording goes well beyond the point of redundant repetition.

If any point of general legal interest arises from this case it is simply the following, well-known point: the English courts are very reluctant to allow evidence of what the parties might or might not have intended to influence their interpretation of a contract.  What matters is what a third party would understand the words used in the contract to mean.

simon saysRegrettably, the judge did not opine on whether a contract drafter who uses the term “including” needs to add words such as “without limitation” or, as in this case, the words “but not by way of limitation” in order to avoid an argument that the list that follows the word “including” could narrow the general sense of what goes before the word “including”. It is very common for contract drafters to use additional words of this kind, though leading contract drafting expert Ken Adams considers that such additions are unnecessary. As with many things that Simon Ken says, IP Draughts is coming round to his view, but has not quite got there yet, and still sometimes includes an interpretation provision in his contracts, stating that “including”, when used in the contract, means “including without limitation”.

 

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Introducing Background IP to a research project: what does it mean?

unknownClauses that deal with “Background IP” are very familiar in research collaboration agreements. Consider the following example, taken from a draft agreement that IP Draughts was asked to review earlier this week. It is a typical example of its kind. Both the clauses and related definitions are set out below.

“Background IPR” means all Intellectual Property Rights owned by or licensed to a Project Partner at the start of the Project;

“Intellectual Property Rights” or “IPR” means all industrial and intellectual property rights including patents, utility models, rights in inventions, registered designs, rights in designs, trademarks, copyright and neighbouring rights, database rights, moral rights, trade secrets, and rights in confidential information and know-how (all whether registered or unregistered and including any renewals and extensions thereof) and all rights or forms of protection having equivalent or similar effect to any of these which may subsist anywhere in the world and applications for registrations of any of the foregoing;

The Project Manager and the Representative shall be responsible for identifying and agreeing in writing on behalf of the Parties any Background Intellectual Property used, or to be used, in the course of the Project and the owner of the same, prior to or as soon as reasonably practicable following its disclosure in the course of the Project;

Each Party acknowledges that a Project Partner’s Background IPR may be required to be accessed by the other Project Partners in order to undertake the Project and to use a Project Partner’s own Foreground IPR (“Relevant Background IPR”).

Each Party hereby grants to each of the Project Partners an irrevocable, non-exclusive, perpetual and royalty-free licence to:

(a) use its Relevant Background IPR during the term of the Project for the purpose of carrying out the Project; and

(b) use its Relevant Background IPR after the term of the Project strictly for the purpose of using a Project Partner’s own Foreground IPR.

The above clauses may be a little more elaborate than some that IP Draughts has seen, but they are similar in effect to many that are in circulation. Readers may spot some general drafting issues in the above wording, but that is not the point of this post. IP Draughts has chosen this wording as representative of a class of clauses that deal with background IP, and not with a view to criticising the specific agreement.

Let’s take a couple of examples, and test them against the wording. In both cases, assume that the contracting party is a university:

  1. Software. One of the university’s academics uses in the collaboration some software that a colleague generated prior to the start of the collaboration. The university has not done any due diligence on who owns any IP in that software, but at least some of the IP is likely to belong to the university as the employer of the individuals who wrote the lines of code. The university intends to form a spin-out company that will obtain an assignment of the party’s IP (such as it is) in the software.
  2. Scientific technique. The university uses in the collaboration a technique for radio-labelling the molecules that are the subject of the collaboration.  The university’s principal investigator believes that he invented the technique, but neither he nor the university has sought to patent the technique and, unbeknown to them, another institution has already patented it so it is unlikely that the university would be able to patent it anyway.

How are these examples affected by the contractual obligations quoted above?

Software

In the case of the software, what is being “used” in the collaboration is an intangible product – software.  It is not being made available to the other parties. It is probably protected by copyright in the lines of code, and perhaps as confidential information. However, there is every chance that this IPR may be overlooked by the parties, as the academic mistakenly believes that, because the software implements ideas that have been published in an academic paper, it is freely available for use by anyone and not protected.

Therefore, there is likely to be some Background IPR in the software. But it is debatable whether this IPR (as distinct from the software itself) has been “used” in the collaboration. Note that the definition of Background IPR does not include information or software as such, and there is no other defined term such as Background Information, which sometimes appears in agreements of this kind.

If this Background IPR has been used, it is debatable whether the other parties need access to it.  Perhaps they would like to have access to the software, to validate work done in the project or do further work, in which case they will also need a licence under the Background IPR.  But this is all highly speculative, based on the facts described above.

If it turns out that the other parties do need a licence to use the software, this could be problematic for the university, if it has plans to hive the software off into a spin-out company. If the university or the investors in the spin-out company manage to spot the issue in their IP due diligence, it may be necessary to carve out free licences to the other collaborating parties as required by the above clauses, which may dilute the value of the software as an asset of the company.

Scientific technique

We might speculate that the other collaborating parties will need to use, in subsequent development or commercialisation work, the radio-labelling technique that the university has used in the collaboration.

It is doubtful whether the university has any Background IPR in the technique, as it has not patented it, but certain aspects may be protected as confidential information. The technique as such is pure information and not within the definition of Background IPR.

Let us assume that, despite these technical points, the parties identify the technique as the university’s Background IPR. Now the university must license the technique to the other collaborators. But in fact, the only real IPR protecting the technique is a patent that is owned by someone else, which the parties are not even aware of when they record the technique as the university’s Background IPR.

Is the university liable if the patent owner sues the other parties when they use the technique? The above clauses don’t include any express IP warranties, but might such a term be implied? Which law is the contract made under? Many international research collaboration agreements are made under Belgian law.  What does Belgian law have to say about implied warranties in an IP licence?

Observations

pieIn IP Draughts’ view, many of the clauses that are seen in research collaboration agreements on the subject of Background IPR are of doubtful value. They seem to be there to establish a general principle, rather than provide specific legal protection, and sometimes the wording raises more issues than it settles.  Issues that may arise include:

  1. The agreement may provide a mechanism for identifying Background.  In practice what the parties are likely to do (particularly if the people doing the identification are scientists rather than IP specialists) is identify background information -techniques, software, etc – rather than items of intellectual property. Sometimes the wording of the agreement doesn’t distinguish between the two.
  2. Universities typically don’t do due diligence on background IPR before conducting a research project.
  3. What the user of Foreground IPR is typically interested in is not being prevented from using the Foreground IPR because someone owns some Background IPR. That is fine in principle, but if the parties cannot realistically identify the Background IPR that they are concerned about, any “licence” to unidentified Background IPR is rather notional. Perhaps it would be better to include a simple obligation on the parties not to sue one another for infringement of Background IPR if that infringement occurs in the context of using or exploiting Foreground IPR.
  4. In addition, perhaps a distinction should be made between use of Background IPR in further R&D activity, and use in commercialisation. There may be stronger arguments for asking for financial terms in any licence, if the IPR is used in comercialisation.
  5. There is also the issue of what happens if the Background IPR cannot be licensed because it is “tied up” elsewhere, eg by an exclusive licence or assignment.  Sometimes, the licence clause will only require a party to license if it is free do so.  But this begs the question of whether a party is allowed to tie up their Background IP after the collaboration agreement has started, eg by assigning it to a spin-out company.

theoryIt is understandable that parties, or their IP advisers, may be concerned that the assertion of rights to Background IPR presents a risk to the commercialisation of Foreground IPR. How real or theoretical that risk is will vary depending on the parties and the technologies concerned. When dealing with university parties, the risk seems likely to be lower than with some commercial companies.

IP Draughts has not come to any settled view on how best to deal with these issues (and part of the problem may be the use of “one size fits all” clauses on Background IPR) but he is tentatively moving in the direction of thinking that a very limited licence, similar to a “covenant not to sue” approach, may be the right way forward. For example, something along the following lines – but this is not final wording!

The parties acknowledge that the performance of the Project, or the use of Foreground Intellectual Property as contemplated by this Agreement (together, “Permitted Activities”), may infringe a party’s Background Intellectual Property. The Parties’ Principal Investigators have identified in Schedule 1 any significant Background Information that they think will be used in the Project, and any Background Intellectual Property that they are aware of (but without conducting any searches or investigations) which they consider likely to be infringed when conducting Permitted Activities.

If a Party considers that it needs access to another Party’s Background Information or Background Intellectual Property in order to conduct Permitted Activities, it will so notify the other Party and those Parties will discuss in good faith whether such access will be given and on what terms.  Where access is given for research and development activities, it will generally be given without charge.

MM910001107This wording is work-in-progress, and may well be revised in light of readers’ comments. A key difference from the wording quoted at the beginning of this article is the lack of definite and immediate licences to Background IPR. Sometimes, it will be appropriate to include such licences in the collaboration agreement. But is it right to include them as a default position in a template agreement? IP Draughts is not sure, and would welcome any suggestions.

 

 

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