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

2. 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

3. 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.

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

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

6. 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

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

8. 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

9. 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

10. 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

11. 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

12. 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

13. Titles
All CAPITAL letters
Centered and Underlined
Use a generic term

14. 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").

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

16. 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!

17. 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

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

19. 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

20. 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

21. 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

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

23. 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.”

24. 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.”

25. 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.

26. 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?

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

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

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

30. 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?

31. 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!

32. 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.

33. 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)

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

35. 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

36. 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

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

38. 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

39. 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.”

40. 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

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

42. 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.”

43. 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.

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

45. Definitions
Licensed Patents
Licensed Products
Territory

46. 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

47. 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)

48. 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?

49. 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?

50. 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

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

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

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

54. 9. Final Thoughts on Contract Drafting