Workshop on Contract Drafting and Patent Licensing Matthew Just, Esq. 8 March 2008

Workshop Outline Introduction to Drafting Contract Language Principles of Contract Interpretation Contract Drafting Basics Contract Elements in Detail Boilerplate Provisions Patent Licensing Solution to the Patent Licensing Scenario Final Thoughts

1. Introduction to Contract Drafting What is the goal of contract drafting? How can a contract be precise? Who should draft the contract? What is the goal of contract drafting? Describe with precision the meeting of the minds How can a contract be precise? Accurate, complete, exact, bullet-proof Who should draft the contract? YOU! Contribute anyway.

2. Contract Language What makes contract language “special”? Mixture of languages Desire to avoid ambiguity Habit Pressure to conform

Examples of Unusual Language Doublets and Triplets Deeming Here-, there-, and where- words Other old-fashioned language

Obligations, Authorisations and Conditions Avoid the overuse of “shall” Use “will” to state a future fact Use “shall” to state an obligation Use “may” to state an option or a right Use “must” to state a condition precedent

Special Issues for Chinese Writers Articles (a, an, the) Tense Grammar (particularly prepositions) Punctuation (Over)Use of Chinese-English dictionaries

Characteristics of Plain English Short sentences Definite, concrete, everyday language The active voice Tabular presentation of complex information Separate paragraphs and sections, with headings, for separate concepts The absence of highly legal jargon or highly technical business terminology and use of Latin or other foreign languages The absence of double or multiple negative The use of multiple columns of text if the font is small

Benefits of Drafting in Plain English Increased Efficiency and Understanding Fewer Errors Positive Image for the Legal Profession Compliance with statutory Requirements BUT: There is resistance! Mention controversy

3. Principles of Contract Interpretation The document must be read as a whole The Literal and Golden Rules Ut res magis valeat quam pereat Contra Proferentem Noscitur a sociis

Principles of Contract Interpretation Ejusdem generis Expressio unius est exclusio alterius Commercial (purposive) Purpose UCC §3-114 on Contradictory terms. Not really rules as such. Principles is more accurate. Textual approach  Determine meaning from words rather than external evidence

4. Structure of a Contract Title Introductory paragraph Preamble / Recitals / WHEREAS Clauses Definitions Operative Clauses Representations, warranties, covenants, indemnities, guaranties, releases Events of default and remedies Boilerplate Signature Block Exhibits and Attachments The following guidelines explain the organization of transactional documents: General provisions before specific ones Important, central provisions before others Rules before exceptions Separate provisions or sub-sections for each concept Technical, boilerplate, and miscellaneous provisions located last, before the signature blocks Next look at title, introductory paragraph, recitals, definitions, and signature block

Titles All CAPITAL letters Centered and Underlined Use a generic term

Introductory Paragraph Example: This Agreement (hereinafter referred to as the "Agreement") is made by and between XYZ Inc. (hereinafter referred to as "Licensor"), a corporation with principal offices at 1 Main Street, Buffalo, New York, and ABC Company, a limited company with principal offices at 250 Zhong Zhen Road, Taipei, Taiwan (hereinafter referred to as "Licensee").

Preamble / Recitals WHEREAS … Facts about: Relationship and goals of the parties Nature of the transaction Other related transactional documents … The parties agree as follows:

Definitions Inclusive: “Intellectual Property” means intellectual property as that term is generally used and includes all patents, copyrights, and trademarks. Exclusive: “Intellectual property” means patents, copyrights, and trademarks. Separate section (sorted alphabetically) or first time they are used (shorter agreements) Distinguished from normal words by Initial Caps or ALL CAPS No substantive provisions in this section!

Signature Block The Parties agree to the terms of this Agreement above. Licensor XYZ Inc. By: ________ Name: John Smith Title: President Licensee ABC Company A Limited Company By: __________ Name: Kevin Chang Title: Owner

5. Contract Elements in Detail Representations and Warranties Covenants Conditions Precedent Remedies Language to soften provisions

Representations and Warranties Distinction is not normally important They tend to be coupled: “Party represents and warrants that…” Creates a snapshot of the facts Important for assigning risk and due diligence Drafted in present or past tense

Covenants Affirmative covenants Negative (Restrictive) covenants Financial covenants Example: “Licensee shall pay Licensor a royalty of five percent (5%) of Licensee's selling price for each Licensed Product manufactured, used, or sold by Licensee in the Territory or imported by Licensee into the Territory.” Note also, carveouts and baskets Look into the future

Conditions Precedent Requirements that must be satisfied before a party has to perform or before the contract is enforceable Simultaneous Closing vs. Delayed Closing Note also common types of conditions precedent

Remedy Provisions Triggering Event  Remedy Four types Termination Acceleration Indemnification Liquidated Damages

Remedy: Termination “In the event Operator defaults in the performance of any covenant or agreement made hereunder, as to payments of amounts due hereunder or otherwise, and such defaults are not remedied to the Supplier’s satisfaction within ten (10) days after notice of such defaults, the Supplier may thereupon terminate this agreement and all rights hereunder of the Operator but such termination shall not affect the obligations of the Operator to take action or abstain from taking action after termination hereof, in accordance with this agreement.”

Remedy: Acceleration “Whenever, within the sole judgment of Seller, the credit standing of Buyer shall become impaired, Seller shall have the right to demand that the remaining portion of the contract be fully performed within ten (10) days.”

Remedy: Indemnification Breaching party indemnifies (pays back) innocent party for all costs, damages and losses suffered as a result of the breach Could be limited by baskets or caps.

Remedy: Liquidated Damages Specific payment upon occurrence of certain event. Could be unenforceable (a penalty): Is the actual damage from breach difficult to calculate? Was a good faith effort made to estimate the damage?

Softening Remedies Materiality “[Breach]…in any material respect.” Grace (cure) Periods

Softening Contract Provisions Good Faith Reasonable Efforts Diligent Efforts Best Efforts Stronger Lots to say about best efforts

6. Boilerplate Provisions What does “boilerplate” mean? Miscellaneous Pre-litigation planning NOT unimportant!

Arbitration Why go to arbitration? Example Clause: “Any controversy or claim arising out of or relating to this Agreement, or its breach, is to be settled by arbitration administered by [organization] in accordance with its [subject matter] Rules.” Arbitration or Mediation?

Choice of Law ALWAYS include this provision Which law should you choose? Example: “This Agreement and the rights and obligations of the parties hereunder shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York, without regard to its choice of laws principles.” Important for things like SOL Minimum contacts!

Consent to Jurisdiction Choice of forum provision Example: “Each party shall submit to any court of competent jurisdiction for purposes of the enforcement of any award, order or judgment. Any award, order or judgment pursuant to arbitration is final and may be entered and enforced in any court of competent jurisdiction.” Prevents forum shopping Example does not really choose a forum.

Waiver to Trial by Jury Why waive the right to a jury? Clause must be: Binding on both parties Conspicuous – bold or CAPS Juries are a bit of a wild card Often considered unnecessary for civil actions. Might favour local resident or underdog (or patriot)

Counterparts Contract may be executed separately by parties Common for international agreements

Headings What is the proper function of headings? Example: “The descriptive headings of the Articles, Sections and subsections of this Agreement are for convenience only, do not constitute a part of this Agreement, and do not affect this Agreement’s construction or interpretation.” User-friendliness vs. courts

Severability Remove (sever) void provision and interpret the remainder Remainder must still represent the bargain Court finds bad clause. Without severability, whole contract would be void

Integration The contract is the whole agreement No other oral or written promises Invokes the Parol Evidence Rule

Waivers No Oral Waivers Effect of failure or delay to enforce rights Written waivers are limited to one occasion Real world: people give more flexibility than contracts Waive rights when there is a minor breach (e.g. delay) Effect of this could be serious though – implied waiver or estoppel action Provision deals with waivers so that waiving party is safe

Amendments In Writing Signed Identify the original agreement Example: “The parties may amend this Agreement only by a written agreement, signed by the parties, that identifies itself as an amendment to this Agreement.”

Assignment and Delegation Assignment of rights or delegation of duties to a third party Only with prior written consent from other party Issue of control – important to know who you are dealing with Example in handout is very liberal  “That party shall not unreasonably withhold its consent

Costs and Expenses Parties cover their own expenses unless otherwise stated. Minor, but it avoids arguments

Further Assurances Attempts to deal with unforeseen circumstances Example: “The parties agree to do such further acts and things and to execute and deliver such additional agreements and instruments as may be reasonably necessary to give effect to the purposes of this Agreement and the parties’ agreements hereunder.”

7. Patent Licensing What is a license? Types of Licenses Exclusive License Non-Exclusive License Paid-Up License Running Royalty License Cross License Granting party gives permission to do something it could otherwise prohibit. In other words, promise not to sue.

Structure of a License Agreement Title Introductory Paragraph Preamble / Recitals Definitions Grant Royalties Representations and Warranties Term and Termination Boilerplate provisions Signature Block

Definitions Licensed Patents Licensed Products Territory

Patent Marking Why is marking important? Licensor may ask to inspect Licensee’s products Gives infringers constructive notice of the patent Example includes prior written notice

Patent Enforcement Who should sue infringers? Do we always want to sue infringers? How should the court award (compensation) be distributed? Future Licensing / negotiating tool for Licensor De Minimus is not worth the bother (threat should be enough)

Representations and Warranties What should the Licensor promise? That the patent is valid? That the Licensor can grant a license? That there are no rights of third parties? What should the Licensee promise? Paying Royalties? Best efforts in selling product?

Improvements Licensor’s Improvement Licensee’s Improvement Can the Licensee use it? Additional Fee? Licensee’s Improvement Can Licensor use it? If so, to what extent? If patentable, who gets the new patent?

Indemnification Licensor may want to be indemnified against tort actions in relation to use of the final product Licensee indemnification depends of bargaining power Large licensee buying license from small inventor may be able to get indemnification against other patent claims

Royalty Rate Agreed on in negotiations and put into contract If disputed, Georgia-Pacific 15 factors may be relevant Factors are on pages 26-27. They are very broad.

8. Solution to the Patent License Scenario Exclusive or non-exclusive? Paid-up or Running Royalty? Territory? Improvements? What if a dispute arises?

9. Final Thoughts: Precedents Where can we find precedents? Use multiple, relevant precedents Get first and final drafts Think before copying

9. Final Thoughts on Contract Drafting