Contract drafting: grabbing the nearest document

kw hoursVia Ken Adams’ excellent blog, comes news of a very interesting article, The Inefficient Evolution of Merger Agreements. Written by two associate professors at US law schools, Robert Anderson and Jeffrey Manns, it describes and comments on an empirical legal research project.

The authors analysed the text of over 12,000 merger agreements that had been filed with the Securities and Exchange Commission by publicly-listed corporations between 1994 and 2014. US-listed corporations are required to provide copies of their material contracts to the SEC, which places them on its EDGAR online database.

EDGAR is a very useful source of examples of agreements, though it can be time-consuming and frustrating to find what one is looking for. Anderson (no relation to IP Draughts) and Manns used computer programs to automate their searches and to analyse the results.

edison lightThe purpose of this research was “to explore whether transactional drafting is a driven by a rational process that minimizes the cost of deal documentation and risk to clients or by an ad hoc process that increases billable hours and risk.” Guess what they found?

By comparing the wording of the agreements and using a technique known as Levenshtein distance, or edit difference, they were able to map the extent to which major US law firms used a template (precedent) when drafting a merger agreement or just grabbed a document from a recent transaction that the law firm associate thought suitable.

Their maps included those shown below. Where agreements are drafted from a single source, such as a firm precedent, the map will show lines radiating from that source. The authors’ research revealed very little of that radiation. Instead, there was evidence of documents being several generations away from an official firm precedent. For example, below is the map of contracts drafted by Sullivan & Cromwell.

sully

The authors also included a map of contracts drafted by Davis Polk, which was similar to the map shown above. In the case of one law firm, Cooley Godward, there was one clear focus point of radiation, but also a lot of non-radiation.

cooley

IP Draughts finds this paper fascinating for several reasons. First, it echoes his experience of how some clients work, when drafting IP-related agreements. They use a document that is loosely based on their official template agreement, but includes some deal-specific terms from previous transactions, which may or may not be suitable for the present transaction. Even if the added terms are desirable in principle, they were probably drafted in haste in the pressure of negotiations, or reflect a pragmatic compromise (taking account of the quirks of the person they were negotiating with) rather than an ideally-drafted clause. Over time, by starting with a document from a previous transaction, rather than going back to the official template, the documents that they use become corrupted with junk.

light bulbIt is very interesting to see major law firms, which trade on their reputation, doing exactly the same thing. The authors discuss the dynamics within law firms, including ridiculous time pressures, which may lead to an associate grabbing a familiar document rather than an official precedent. One point that is not mentioned in the article, but which IP Draughts thinks may also be relevant, is the extreme length and complexity of many agreements nowadays, which may make it difficult for a busy associate to understand fully the terms of his firm’s precedents. It may be tempting to use a document that he recently worked on; he spent many late nights negotiating that document, so there may be a comfort factor that he understands at least some parts of that document better than the official precedent.

(This is not a good excuse, by the way, for avoiding precedents that IP Draughts has drafted, which try to be concise and clear!)

The other point that IP Draughts finds very interesting in this article is its discussion of the fact that “there has been amost no empirical work on the legal drafting process in transactional law”, and that “the deal drafting process has been all but ignored by legal scholars”. IP Draughts agrees with these statements, and has ambitions to bring this type of subject to the UCL Faculty of Laws. Research at the boundary between doctrinal law and legal practice is an under-developed area, particularly in relation to commercial transactions. He has had exploratory discussions with the faculty about establishing a Contracts Institute (or similar) there, which would do a mixture of research, teaching and public engagement.

bulb dollarIf any reader knows anyone who might be interested, in principle, in funding such an initiative, (eg a major law firm, alumnus/alumna, or other benefactor) he would be very glad to hear from them. This idea is at too early a stage for us to have established structures for funding. But by way of comparison, the sponsorship opportunities for UCL’s Institute of Brand and Innovation Law can be found here.

A small example of the type of work we might do in this institute is the panel discussion that UCL will be hosting in November. Dysfunction in Contract Drafting: Are the Courts, Law Firms, and Company Law Departments Stuck in a Rut? will be held on Tuesday 8 November 2016, 18:00 – 19:30 at the UCL Events Pavillion, Main Quad, Gower Street, London WC1. The discussion will feature a distinguished panel of experts, including Ken Adams and Mr Justice Flaux (a former head of the Commercial Court in London). IP Draughts will be the moderator.

 

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Brexit clauses in contracts

brexitIt takes time to adjust to a major shock: to recover, to process the information, and to recalibrate. Three weeks after the UK electorate voted, unexpectedly, to leave the European Union, IP Draughts is starting to think more clearly about the implications of the vote for IP practice. To do so, we have to leave behind the lies, the half-truths, and the stirring of ugly emotions in the referendum campaign, in some ways very different to the political process of a general election, and instead focus on the practical.

Some plain talking is now required. Many readers of this blog will fall into a category of people who benefit from international trade, who embrace the cultures of others, and who are prosperous in absolute terms (however much we struggle to pay a large mortgage or look enviously or competitively at others who are doing better than us). We work and often socialise with others who share this perspective, both in our own country and in other countries.

To many people with this mindset – let us give them a name and, for want of a better, use one that was used disparagingly in the referendum campaign, “metropolitan elite” (otherwise known as the London and South East “bubble”) – it is unthinkable that the UK would want to leave the European Union. It would not be in our economic, security, cultural or social interests to do so.

schockBut vote to leave we have, and in processing this information we need to understand the perspectives of those who formed the majority. Of course, there is no single group of Brexiteers. But generalising helps us to focus on what needs to be done. There are the social conservatives, the older generations, the people whose lives are not international. There are those who have been suffering from stagnant salaries over the last decade, combined with worsening conditions of employment. There are those who can’t get access to good medical services or good schools.

In other words, the people that are left behind, through choice or circumstance, in the noisy, difficult, competitive but satisfying ‘global’ world that the metropolitan elite inhabits.

The UK’s new Prime Minister recently made a speech in which she recognised the concerns of the Brexiteers. We should be spending more money on new schools, hospitals and infrastructure. We should be increasing the salaries of public sector workers. In short, we should take steps that are other times would be called left-wing.

Coming back to IP (at last), IP Draughts was at a business dinner this week, sitting next to a senior German IP practitioner. The conversation naturally turned to Brexit. IP Draughts’ dinner companion was sanguine about the prospects for the EU doing a deal with with the UK that was in both parties’ interests. Yet, when pressed, he thought that free movement of people was a non-negotiable issue – it was a subject on which many Germans and other EU nationals felt very deeply. IP Draughts thought and said that this probably meant that a deal was unlikely, as control of immigration was a central theme of the Brexit campaign.

IP Draughts was left with several thoughts. First, there is the (perhaps obvious) point that IP practitioners, and professionals generally, may have more in common with their counterparts in other countries than they do with their fellow citizens who have been left behind by globalisation. Second, and more interesting, that while the metropolitan elite in the UK have had a rude shock and become more aware of the large body of people who don’t share our global perspective, our colleagues in other countries may not be so aware of this issue. This has been noticeable in some of the “advice” that Continental Europeans have given to the UK in IP Draughts’ Twitter feed. It is not that we need to think outside the box; we need to think outside the bubble.

futureTurning to IP contracts, IP Draughts and his colleagues have been thinking about how contracts might be affected by Brexit, and what terms might be included to address this issue. Of course, we don’t yet know what form Brexit will take, as it depends on a negotiation that has not yet started. But contracting parties may want to think through the range of possible implications for their contract of Britain leaving the EU, and perhaps even include a clause or two to address the issue. IP Draughts has previously mentioned on this blog some of the possible situations where contractual terms may need to be revisited. He now wonders whether we need a standard clause to address the variety of issues, many of them not easy to foresee or plan for, to address this issue in more general terms. Such a clause might, for example, provide that:

  1. If performance or interpretation of contractual obligations is substantially affected by the fact of Brexit, or by changes in law arising from Brexit, or by the actions of persons or institutions arising from Brexit or in contemplation of Brexit, then a party can notify the other party that it wishes to renegotiate or terminate the contract to take account of this.
  2. If renegotiation occurs, the objective should be (unless the parties agree otherwise) to put them in as close a position to that in which they would have been if the Brexit-related action or event had not occurred. If they can’t agree, the matter can be referred to an adjudicator who will decide on the appropriate adjustments, or conclude that there are no reasonable adjustments to take, in which case termination may be the agreed outcome.

IP Draughts has not yet drafted such a clause, but it sounds a bit like a combination of a force majeure clause and a severance clause, combined with a mechanism for referring a dispute to an expert or arbitrator under a simplified (quick and cheap) process.

As ever, readers’ thoughts on this subject are welcomed.

 

 

 

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Mr Pettifog comes out (for Brexit)

flagLast week’s partners’ tea was stressful. Mr Pettifog couldn’t stop gloating about the result of the referendum. Soon we will be released from the shackles of a jackbooted superstate, he said, mixing his metaphors.

He has been like this ever since he was strongly advised to withdraw his application to become a judge of the Unified Patent Court. He did so, to avoid public embarrassment. But he hasn’t forgiven the Dutch member of the appointments panel who is reported to have joked that Mr Pettifog had all the judicial qualities of Mr Justice Peter Smith and all the diplomatic skills of President Benoit Battistelli.

In fact, though he refuses to admit it, much of Mr Pettifog’s income depends on the UK remaining part of the European Union. His main client is an American patent troll called Randy Duke III, trollwho regularly instructs him to write obnoxious letters to small businesses across Europe, demanding compensation for infringement of his patents. The patents claim the use of a computer for preparing invoices, and are allegedly infringed by most commercial enterprises. So far, Mr Pettifog has avoided writing to any business that might be able to afford patent lawyers to challenge the validity of the patents.

Randy has told Mr Pettifog on more than one occasion that the only reason he instructs him is because London, England, is the English-speaking capital of Europe, and Mr Pettifog is the best writer of European kick-ass letters he knows. Randy has written to the senior partner of our firm, complaining about the Brexit vote, and threatening to withdraw his custom if the firm doesn’t sort it out.

brussels propertyMr Pettifog is convinced that the solution to this problem is to open a branch office of the firm in mainland Europe. It shouldn’t cost much: there will soon be a slump in Brussels property prices, reasons Mr Pettifog, as thousands of British Eurocrats leave the city and return home. Young Hope is to be sent on a fact-finding mission to Brussels, to enquire about the process for opening a law firm there. Mr Pettifog has offered to relocate to Brussels and be Chef de Protocole of the Belgian firm. Mr Pettifog has no idea what a Chef de Protocole does, but he likes the sound of the words and understands it to be a senior position.

exitAnyway, Brexit may never happen, claims Mr Pettifog. His friend in UKIP, Monty Kildare, has told him that several EU countries are about to demand a revision to the EU treaty, in which free movement of labour will be severely restricted. If that happens, the leaders of the Conservative Brexit campaign will announce this as a major victory and avoid triggering Article 50.

Some of the other partners would like to point out the errors in Mr Pettifog’s logic, but they hardly know where to start, and they are still feeling traumatised by the referendum decision. They drink their tea in gloomy silence.

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Brexit and IP transactions

eliteIP Draughts learnt this week that he was part of a metropolitan elite. Which is nice. #lookingforthepositive

Yesterday the UK electorate decided, unexpectedly, to leave the European Union. At this stage, no-one knows what will happen next, or what “leaving” actually means. The possibilities, however far-fetched some of them may be, include:

  • Change of mind. Nothing changes in the EU (except, perhaps, some face-saving remarks by EU leaders or trivial changes in law), following which the UK electorate has a change of heart and decides not to leave after all. Some point to the Irish experience with the Lisbon treaty as a precedent for this outcome.
  • Squeezing some more concessions. Negotiate real “improvements” in the way in which the EU does things, following which the UK electorate has a second vote in which they decide to remain in the EU, either in a referendum or by voting in a general election for a pro-remain political party. These improvements might be concessions for the UK alone, or general changes in the structure of the EU.
  • demographicsAssociate membership. Create a new, “associate member” category of membership of the EU, which the UK would then transfer to, and which would give associate members some exemptions from EU rules, eg on free movement of labour.
  • Leave and join EFTA. Leave the EU and join the European Free Trade Association, and therefore benefit from some but not all of the legal regime that applies in the EU, but without any special concessions for the UK. In other words, have the same relationship with the EU that Norway has as an EFTA member.
  • Leave and expand EU rights for non-EU members. Leave the EU and change the rules of the EU, so that countries that are outside the EU (ie the UK at that point) can benefit from certain aspects of the EU that are currently only available to members (eg participation in the Community Trade Mark regime). The new arrangements might be designed for, say EFTA members (if the UK decided to join that club) or might be made more broadly available to, say, European countries that are outside the EU.
  • Leave and negotiate one-off trade deals. Negotiate individual, arms-length trade treaties between the UK (as a non-EU-member) and the EU.

social-classesIt is fair to say that the Brexiteers have not focussed on IP during the pre-referendum debates. When Brexit is negotiated, IP legislation is likely to be some way down the list of priorities, after immigration, trade tariffs, and other political topics.

In the area of business regulation, much was made during the referendum campaign of so-called “Brussels red tape” but few examples were given. In one televised debate, IP Draughts heard Boris comment scornfully that the remain campaign didn’t want to change any existing EU laws, “not even the Clinical Trials Directive”, as though this was self-evidently a terrible piece of legislation. For some reason, this law seems to trigger a response in Boris, like a mood-altering drug.  The benefits to the UK economy of pan-European regulation of life-science product development seem to have passed him by.

elite2Perhaps Boris is not aware that the UK has a thriving life-science sector, the best in Europe, and that being part of the EU is a significant benefit for that sector. David Cameron seems to be aware of this, as he negotiated for the UK to have the chemistry and life-science part of the central court for the Unitary Patent.

It is impossible to know what the implications of Brexit will be for international IP transactions until the blueprint for Brexiting has been established. Nevertheless, there are some obvious risks that can be addressed when drafting IP-related agreements. They include:

  1. EU research funding. In research agreements that benefit from EU funding (eg under the Horizon 2020 programme) what will happen if the UK party ceases to receive EU funding on Brexit? Is it still obliged to do the work but not get paid for it? Or can it terminate its participation in the project? As a separate issue, what do the terms of funding say about the grant of IP rights to companies that are outside the EU? Is any preference given to EU parties?
  2. EU territory. Does the agreement grant rights to a territory defined as the European Union or the European Economic Area? What are the implications if the UK is no longer part of the EU or EEA?
  3. UK territory. Does the agreement refer to the United Kingdom? What implications are there for the agreement if Scotland decides to withdraw from the United Kingdom (but possibly try to remain in the EU)?
  4. Definition of IP. How is intellectual property defined in the agreement? Is the definition flexible enough to cater for changes to the IP system, or new types of IP, that may emerge following Brexit?
  5. Export of personal data outside EU. Sometimes, agreements have clauses that refer to the export of personal data outside the EU. Have the implications been considered of what this will mean in practical terms if the UK is no longer part of the EU?
  6. Compliance with regulations generally. Some agreements, eg clinical trial agreements, impose an obligation on a party to comply with applicable regulations. Are these obligations worded in a way that is resilient to the possibility of UK regulations being significantly different from those in the EU?
  7. Law and jurisdiction. Does the agreement have a clear law and jurisdiction clause? If not, bear in mind that if the UK is not part of the EU, the Rome and Brussels regulations will probably no longer apply to tell a UK contracting party which law and jurisdiction will govern the agreement.

This is unlikely to be a comprehensive list of contractual issues that could be affected by Brexit. If you can think of others, please suggest them in the comments below this posting.

 

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