Category Archives: Contract drafting

Do no evil …drafting

Four_wise_monkeysEarlier this week, Google invited us to sell them our patents. In their words, “the Patent Purchase Promotion is an experimental marketplace for patents that’s simple, easy to use, and fast.”

Apparently, selling your patents (but only your US patents) to Google will ensure that the patents don’t end up in the hands of “patent trolls”. All transactions are to be handled in a standardised way, using a Patent Purchase Agreement whose terms can be found here. In FAQs that accompany the promotion, Google declares:

…we aren’t going to negotiate with anyone. You set the price, we set the terms, and if things work out, we get you paid by the end of summer.”

Others have commented on whether you should take Google up on their offer, eg see this article: Google Says Trust Us and Sell Us Your Patents. (IP Draughts has just mis-typed this in a Google search, and found some web pages on the subject “Google Says Trust Us and Sell Us Your Parents”, which is quite a different promotional opportunity.)

Google asks us to remember that:

…this program is an experiment (think of it like a 20 percent project for Google’s patent lawyers)

And they emphasise that:

There’s some fine print that you absolutely want to make sure you fully understand before participating, and we encourage [you] to speak with an attorney.

So, what does this attorney think of the fine print?

The drafting of the Patent Purchase Agreement is so “experimental” as to make IP Draughts suspect that the promotion is not serious. It shows signs of being a rush job, performed by incompetent staff. Let’s be slightly charitable and say that the patent department didn’t have time to involve the legal department in the drafting. IP Draughts suggests a new research project for Google’s “patent lawyers”: learn how to draft contracts. Note to IP Draughts’ staff: if you ever draft something as terrible as this document, you won’t have a future with the firm. Yes, it really is that bad. Let’s take a few examples. Each one on its own might not be a sacking offence, but cumulatively they amount to gross misconduct.

  • the missing “not”

Agreement NonTransferable. The Seller may assign or otherwise transfer this Agreement, or any rights or obligations under this Agreement, to any third party without the prior written consent of Google.

  • the missing sentence

Governing Law; Venue/Jurisdiction. This Agreement will be interpreted, construed, and enforced in all respects in accordance with the laws of the State of California, without reference to its choice of law principles to the contrary. Seller irrevocably consents to the jurisdiction and venue of the courts identified in the preceding sentence in connection with any action, suit, proceeding, or claim arising under or by reason of this Agreement.

  • cutting and pasting text from another document. Badly. Eg section 5.1, which refers to the “Delivery Date”, or section 5.2 which refers to the “Closing” and the “Closing Date”. In all of these cases, IP Draughts suspects that the defined term “Effective Date” may have been what the drafter intended to use, if he had taken the time to clean up the draft.
  • double definitions, and confusion over whether the defined term should be “Seller’s Patent” (section 1.1) or “Seller’s Patent(s)” (section 2). This mental confusion results in some horrible phrases, such as “any of the Seller’s Patent”.
  • misuse of defined terms, eg section 6.6, which should refer to “Seller’s Patent” not “the Patents”
  • turgid or error-strewn drafting, eg:

…necessary or desirable for effecting completely the consummation of the transactions contemplated hereby

…represents and warrants to Google as follows that as of the Effective Date and as of Closing

  • use of the future-perfect tense (for goodness sake) and multiple verb pile-up:

Upon the Effective Date, Seller …shall have caused its Affiliates to sell, assign, transfer and convey to Google …

  • incorrect cross-references, eg section 7.2 cross-refers to section 3.4, which doesn’t exist.

The above examples focus on mistakes and the very worst kind of drafting. The document also contains plenty of examples of drafting that IP Draughts considers to be unacceptable, but not quite as bad as in the bullet points above. In the following examples, the point that (most) concerns IP Draughts is highlighted in bold text:

restrictions and encumbrances including without limitation any pledge, charge [etc] …or other restrictions and encumbrances (collectively, “Restrictions and Encumbrances”)

The Seller’s Patent has never been found invalid …

NEGLIGENCE (WHETHER ACTIVE, PASSIVE OR IMPUTED) … FOR COVER OR FOR ANY INCIDENTAL…

And there are plenty more.

There are also points of substance in the agreement that should concern any seller. Some of these indicate half-baked thinking on the part of the drafters, including the ridiculously elaborate warranty in section 6.3 which provides that, in respect of any licenses that the seller has previously granted under the patent:

…each such license is nontransferable (except solely in the context of acquisition of the respective licensee and in that case, the scope of each such license or rights in the Patents is limited to the activities of the licensee prior to the acquisition)

Or the provision that the seller can inform its existing licensees that it has sold the patent “provided that the Seller shall not identify Google”.

In its FAQs and other documents describing the promotion, Google emphasises “simplifying the process”, “better experiences for sellers”, “removing complications”, and “keeping it simple”. Yet the core document of the transaction fails to live up to these ambitions. This just doesn’t make sense. IP Draughts’ conclusion is that Google isn’t serious about this exercise, and that it has been dreamt up as a PR stunt on short notice. Either that, or Google’s competent contract drafter(s) didn’t get the memo.

 

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Subject to the jurisdiction of the English courts: exclusive?

inclusiveA small, but important, contract-drafting point: imagine a contract clause that says that disputes will be subject to the jurisdiction of the English courts. Should we interpret this to mean that the English courts will have exclusive jurisdiction, or might it mean that the English courts have only non-exclusive jurisdiction?

A well-drafted contract will state explicitly which law and jurisdiction governs the contract, and whether the jurisdiction is exclusive or non-exclusive.

If the contract states that English jurisdiction is exclusive, the parties must go to the English courts. If a party starts an action in another court (let’s say in China), the English court may order that party to stop proceeding in the Chinese courts. If the order is not complied with, the English court may commit the non-complying party to prison for contempt of court.

If the contract states that English jurisdiction is non-exclusive, a party can ask an English, Chinese or any other court to hear the case. An English court is likely to accept, based on the jurisdiction clause. If there is no jurisdiction clause at all, an English court might accept jurisdiction simply because the contract states that English law applies. A Chinese court might accept, eg if there is a strong connection with China in relation to the parties, the place of execution of the contract, or the place of performance of the contract.The first court to hear an action over the contract may issue an order to prevent a party from starting an action in another court. This would be on the grounds that the first court is “seised” of the action, and not because of the (non-exclusive) jurisdiction clause.

csav2A recent case in the English Court of Appeal illustrates these points. Hin-Pro International Logistics Limited v Compania Sud Americana De Vapores S.A. [2015] EWCA Civ 401, was reported on BAILII last week.

The case concerned a shipping contract – a bill of lading. Cargo was carried by sea from China to Venezuela. The claim was that the cargo had been released without production of the original bills. The relevant part of the jurisdiction clause read as follows:

This Bill of Lading and any claim or dispute arising hereunder shall be subject to English law and the jurisdiction of the English High Court of Justice in London. If, notwithstanding the foregoing, any proceedings are commenced in another jurisdiction, such proceeding shall be referred to ordinary courts of law.

The Court of Appeal interpreted this clause as giving exclusive jurisdiction to the English courts, even though the word “exclusive” does not appear in the clause. The court reviewed a substantial body of case law that supported this conclusion.

Hin-Pro’s counsel argued that the second sentence of the clause showed that the parties accepted that they could start an action elsewhere, but the court disagreed. This sentence was concerned more with the situation where another country’s court did not accept the exclusive jurisdiction clause. It did not affect the interpretation of the first sentence by the English courts.

The interpretation point is clear, at least for the English courts. However, best practice in contract drafting requires you to state explicitly whether the jurisdiction is exclusive:

  • for the sake of clarity among the parties, not all of whom will have read the English case law
  • to avoid court disputes
  • to cater for the possibility that other courts may not agree with the English Court of Appeal (eg the UK Supreme Court, or a foreign court).

If this blog had any sense of decorum, it would stop there. However, IP Draughts cannot resist mentioning some other points that come up in the judgment.

  1. Catch me if you can. One of the parties in this case, Hin-Pro, was a Chinese company. It started court proceedings in China. At first instance in the English High Court, the judge ordered that Hin-Pro cease participation in the Chinese court proceedings because of the exclusive jurisdiction clause. Hin-Pro’s sole director was a Miss Su Wei. Apparently she ignored the order. The English judge committed her to prison for 3 months for contempt of court. As the Court of Appeal drily noted: “Miss Wei has not yet been apprehended.”
  2. csavContra proferentem rule. The contract was drafted by the other party, known as CSAV. CSAV is a long-established shipping company. The Court of Appeal considered whether the contra proferentem rule might assist Hin-Pro. In certain circumstances, this rule requires that an ambiguous contract term be interpreted against the interests of the party who drafted it. A version of this rule, in the US, seems to have led to a boilerplate clause being included in many US contracts, that states that the contract is a joint drafting effort and it should not be interpreted strictly against either party. The court’s conclusion was that the rule didn’t assist Hin-Pro in this case, for a variety of reasons, not least because the clause was not ambiguous, and it could benefit either party.
  3. No understand English? Hin-Pro’s counsel argued that many of the users of the contract would not have English as their first language, and many would understand the clause as granting non-exclusive jurisdiction. The Court of Appeal disagreed:

I do not accept Hin-Pro’s submission that the fact that the bills of lading will probably be issued to companies staffed by those whose first language is not English should affect the way in which they are to be interpreted, or that the court should endeavour to determine what the words would mean to a person in that category. This would be an exercise fraught with difficulty, not least because it would, potentially, produce different results according to the non-English first language chosen, and require a determination, in many cases incapable of ready resolution, of which first language the reasonable man is to be taken as speaking. In agreeing in English to an English law contract the parties must be taken to have agreed that it shall be interpreted with all the nuances of the English language and in the way that a speaker whose first or only language was English would do so.

But which version of the English language should Miss Wei be taken to understand? UK, US, Australian? IP Draughts has doubts over whether an intimate knowledge of idiomatic English helps you to know whether “subject to the jurisdiction” means exclusive or non-exclusive jurisdiction.

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Managing the negotiation of multi-party research agreements

herding catsIP Draughts was recently instructed to assist a university client with the drafting and negotiation of a research collaboration agreement between 33 parties. He offers the following suggestions for managing a process of this kind, based on this and earlier experiences. The suggestions assume that you or your client are responsible for leading and managing the negotiations.

These suggestions could be relevant to many kinds of multi-party agreement. It so happens that, in the present case, the research is funded by the European Commission under the Horizon 2020 funding programme. Under the funding rules, the parties are required to enter into a consortium agreement (another name for a research collaboration agreement) before the funding agreement is signed. IP Draughts’ client, as Coordinator of the project, has the responsibility to ensure that this happens.

horizon 2020None of the suggestions is revolutionary. What is important, in IP Draughts’ view, is following a negotiation process that is adapted for negotiating with large numbers of parties, communicating well with the parties, having a clear timetable for the different stages of the negotiations, and allocating sufficient time and resources to ensure that the process is followed through to a conclusion.

  1. Establish a timetable and process. Work backward from the date when the agreement must be signed. Split the available time into blocks that give a sufficient period for each round of negotiations. Make sure enough time is allowed to prepare the first draft and to prepare comments on that first draft. It may be possible to reduce the time allowed for later rounds. Produce a written timetable and try to get it agreed by the parties.This will have two desirable effects: (1) it will inspire confidence that you are managing the process properly; and (2) it will enable you to keep the negotiations “on track”, and make it easier for you to disregard comments that are not made on time.
  2. Use a well-regarded template agreement. If possible, and if the client agrees that it is appropriate, base your draft agreement on a template that is commonly-used in the industry sector. Doing this, and telling the parties that you are doing this, should help to reassure them that they don’t need to “reinvent the wheel” by makingdesca lots of comments on the draft. You are trying to minimise a negotiation process that has the potential to be very unwieldy with large numbers of parties. In the present case, the parties have agreed to base the consortium agreement on an industry template known as the DESCA agreement. It is not perfect (and IP Draughts spent time cleaning up some of its style and content) but using it is likely to be more productive, in the present case, than producing a better but unfamiliar document.
  3. Spend time on the first draft. Don’t be rushed by colleagues who have no idea what goes into an agreement of this kind, into sending out a first draft that has not been carefully thought through (eg a template agreement that has not been adapted to the circumstances of the project). Be willing to use some of the precious negotiation timetable to get the first draft right. You are trying to manage a negotiation process that could easily get out of hand with numerous parties from different countries. Sending out a good first draft should reduce the volume of comments. Developing a good draft depends on taking detailed instructions from the client, eg on issues such as project content, governance, and IP issues.
  4. Communicate. Explain the drafting and negotiation process to the parties, and keep explaining as you go along. Make it seem reasonable (which of course it will be). Tell them what to expect, and deliver against those expectations. Try to make sure that you are communicating with the right people – ask each party to provide the name and contact details of the person who will be leading the contractual negotiations, eg a lawyer or contracts manager.
  5. Establish a workable review process. In the present case, getting back 32 marked-up drafts of the agreement would be a logistical nightmare. Consider sending out a comments table, on which you summarise each clause of the draft agreement (perhaps identifying any deviations from the template on which it is based) and have a blank column of the table on which you invite parties to insert their comments, instead of producing a new draft. Confirm that you will do your best to address comments, as long as they are consistent with the objectives of the consortium. This approach should have two desirable effects: (1) limiting the number of comments, eg on drafting points (it is very tempting to make drafting comments when you are marking up a draft), and (2) giving you greater flexibility to draft wording to reflect the principles, rather than feeling obliged to accept specific drafting, which will sometimes be sub-optimal or inconsistent with the drafting style of the rest of the document.
  6. Try to set expectations for later rounds of comments. After the first set of comments has been received and assessed, and second draft of the agreement is issued, ask people to limit their further comments to essential points, with a view to reducing the volume of comments at each round. This won’t always work, as some parties may just keep plugging away for all of their points to be accepted, but at least you can try. It may help to set this expectation by explaining it to the parties at the outset of the negotiation process.
  7. Build in time at the end. No matter how strictly you try to enforce a timetable, there will always be someone who doesn’t follow it, or who insists on points even if you think they are not workable or consistent with the larger picture (eg if other parties have made comments that contradicts those points). You may need a few days leeway before the hard deadline, to resolve any last minute issues. On a different point, you need to build in time for getting the agreement signed. Some parties may say things like “our only authorised signatory is on holiday and won’t be back for a week”.
  8. sign hereAgree the signing process in advance. It is good to explain to people what they must do to sign and return the agreement, so that there are no misunderstandings or disagreements over whether a party has formally entered into the agreement. A common method is to get each party to apply an ink signature to a copy of the final agreement (which has probably been circulated by the lead party in an uneditable pdf version), scan the signature page into the computer, and email an electronic copy of that signature page to the lead party. It might be intended, for example, that an organision makes an unconditional offer to enter into the agreement when it sends that electronic copy to the coordinating party’s representative by email, and that the agreement as a whole comes into effect when the coordinator’s representative sends out an email to all parties, confirming that he has received signed copies from all of them. At least under English law, the key point is to agree (expressly or by implication) what the process will be. See this Law Society practice note on signing agreements by virtual means. English law is usually flexible (at least in the case of agreements under hand) as to how the parties formally enter into a contract. In some cases it may also be desirable to agree with the other parties, at the start of the negotiations, what will happen if some but not all of them sign. Can the agreement go ahead if a few people don’t sign? Should a  mechanism for this be written into the collaboration agreement? That won’t work in the present case, as all parties must enter into the consortium agreement before the funding agreement is signed.

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Royalty-stacking clauses

When negotiating royalty-stacking clauses, make sure you don't get fleeced!

When negotiating royalty-stacking clauses, make sure you don’t get fleeced!

One of the pleasures of teaching is learning from your audience. This happened in abundance recently when IP Draughts, presently in Australia, delivered his advanced IP licensing course to a group of in-house lawyers and licensing managers. In fact, he delivered the course twice to the same organisation: last Friday to a team in their close-to-Sydney office, and yesterday to another team in their close-to-Melbourne office.

IP Draughts’ knowledge of Australian suburbs has increased greatly, but this posting will focus on legal issues rather than the architecture of Melbourne bungalows, or the surprise felt by a Brit who learns that St Kilda is close to Richmond.

Royalty-stacking refers to the situation where a licensee must pay royalties to multiple parties in order to commercialise a product. The royalties are said to be stacked, one on top of another. A licensee may seek to negotiate a clause in his first licence agreement, stating that if he has to pay a royalty to another IP owner, the royalties payable under the first licence agreement will be reduced. These clauses are known as royalty-stacking clauses.

Two key issues arise when such clauses are negotiated:

  1. In what circumstances will the clause operate. In particular, is its operation limited to the situation where the licensee must obtain the third party licence in order to practise the intellectual property licensed under the first agreement? Alternatively, may the clause apply even where the third party licence relates to “add-on” technology that is not strictly required in order to practise the licensed IP under the first agreement but which is useful for the final marketed product? Usually, a licensor will wish to limit the clause to the first of these alternatives. An example of the latter alternative might be where the first licence is in respect of a pharmaceutical drug, and the licensee combines the drug with a drug-delivery technology, licensed under the second agreement.
  2. What is the formula for making deductions from the first royalty? Is all or only a part of the third party royalty deducted (eg 50%)? Is it deducted from net sales or directly from the first royalty? Is it subject to a cap or floor, eg that the first royalty should not be reduced by more than 50%?

Licence agreements vary significantly in how they address these issues, and not all licence agreements have royalty-stacking clauses. In IP Draughts’ experience, some parties negotiate tailored clauses while others rely on what they perceive to be a “standard” clause, culled from some earlier agreement or templeate.

Whatever the clause says, if enough money is at stake its correct interpretation may be litigated: see the leading UK case of Cambridge Antibody Technology v Abbott, decided in about 2003 (look it up on Google) which concerned a royalty-stacking clause in a licence agreement in respect of the market-leading product known as HUMIRA.

In IP Draughts’ Australian talks, several interesting points came up in discussion that he had not fully considered before. From a licensor’s perspective:

  1. Should the licensee be required to satisfy the first licensor that he needed to take the second licence and that the terms of the second licence were appropriate? Should the first licensor be involved in the negotiation of the second license between the second licensor and the licensee, to ensure that the first licensor is not financially disadvantaged? (IP Draughts perceives a danger that if this is insisted upon, it may make the licensee inclined to put more of the onus on the first licensor to “sort out” third party IP problems.)
  2. Should the first licensor have a right to audit the terms of the second licence to ensure that the correct deductions have been made? How will this be affected by the confidentiality terms of the second licence? Will the second licensee be willing to have the terms of its agreement disclosed to the first licensor?
  3. Do these royalty stacking clauses make the assumption that deductions have to be made from the “first” licence agreement (in which the clause appears)? Are there situations in which it should be the other way around, ie any deductions should be made from the other licence agreement?

To IP Draughts’ mind, these are all good questions, which are not always addressed in negotiations. Readers, what is your experience? Should these clauses get more tailored negotiation than they typically receive at present? How, in your view, should they be structured? Should they be included at all?

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