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Our old friend DataTreasury Corporation ("DTC") had a bad day yesterday. See below for drafting tips that might have produced a different result.

Here's a simplified summary of what ruined DTC's day:

  • In 2005, DTC granted a fully-paid-up patent license to the giant bank JP Morgan Chase ("Chase"), in settlement of an infringement lawsuit that DTC had brought against Chase.
  • Under the license agreement, Chase agreed to pay (in install­ments) a flat fee of $70 million.
  • The license agreement included a most-favored-licensee provision that required DTC (i) to notify Chase of any other licenses granted, (ii) to provide Chase with a copy of the other license agreement(s), and (iii) to give Chase the benefit of any more-favorable license terms in those other licenses.
  • More than seven years later, in 2012, DTC granted the much-smaller Cathay General Bancorp a paid-up license in exchange for a much-lower flat license fee — and under those terms, Chase's paid-up license fee would have been only $1 million. DTC failed to notify Chase or to provide it with a copy of the Cathay General license agreement until the litigation. This apparently was not the only time that DTC had granted more-favorable terms without complying with the Chase agreement's notification requirement.
  • Shortly afterwards, Chase sued DTC for breach of contract.  The trial court held, and yesterday the Fifth Circuit agreed, that DTC owed Chase a refund of the $69 million difference between the license fee that Chase had paid and the license fee it would have paid under the terms granted to Cathay General.

See JP Morgan Chase Bank, N.A. v. DataTreasury Corp., No. 15-4095 (5th Cir. May 19, 2016), affirming  79 F. Supp. 3d 643 (E.D. Tex 2015) (granting Chase's motion for summary judgment).

Here's the text of the relevant part of the most-favored-licensee ("MFL") provision, which is also known as a most-favored-nation ("MFN") or most-favored-customer ("MFC") provision:

9. Most Favored Licensee

If DTC grants to any other Person a license to any of the Licensed Patents,

  • it will so notify JPMC, and
  • JPMC will be entitled to the benefit of any and all more favorable terms with respect to such Licensed Patents. ...

Id., slip op. at 4 (extra paragraphing and bullets added).

Drafting tips: What could DTC have done differently? The Fifth Circuit had some suggestions:

  1. set specific "apples to apples" requirements for the MFL provision to kick in — for example, the new licensee would have to be of at least a specified size, or a specified revenue level, or a specified volume of licensed products or services. DTC argued that such requirements should be implied in its Chase license, but the courts didn't agree; and/or
  2. put a "sunset" on the MFL provision, so that after (let's say) two years, or four years, or whatever, DTC would have been free to grant licenses on whatever terms it wanted without having to give the same terms to Chase; and/or
  3. tie the amount of the paid-up fee to the remaining life of the patent.

See id., slip op. at 21.

DTC could also have put in place an internal process to cross-check each proposed post-Chase license agreement against the Chase license agree­ment itself, and also against all other license agree­ments with MFL provisions, to verify that those MFL provisions weren't about to be breached. That, of course, might have been an expensive operational burden.

I'm going to add this story to the Common Draft reading notes, to go along with the story about Oracle getting hit for nearly $200 million for violating the MFC clause in its contract with the U.S. Government. (The Common Draft reading notes include links to further reading about most-favored-X provisions.)

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A Chinese company's flouting of a U.S. arbitration award reminds us: A contract drafter's ultimate job is to position her client to get law enforcement to seize the other side's assets if the other side defaults. See Paul Wiseman, Even on US turf, culture clashes make China firms tough foes (AP.com May 16, 2016).

Excerpt:

WASHINGTON (AP) — U.S. companies have found it can be tough to do business in China. Now, as more Chinese firms invest in the United States, U.S. companies are finding it can be hard to contend with the Chinese on American turf, too.

Chinese companies can hide behind complex corporate structures. They can keep assets back home. And they can use connections to Beijing to assert immunity from America's legal system.

Consider one Texas company that thought it had scored a victory.

Five months ago, an arbitration panel awarded Tang Energy Group at least $69 million after a contract to build wind farms collapsed and left Tang fighting for survival.

The celebration didn't last long.

Read it all.

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In a decision issued last week, Massachusetts's highest court upheld a trial court's award of $44 million in damages and interest against a financial company's co-founder and CEO for breach of the implied covenant of good faith and fair dealing. The case offers lessons for contract drafters about not leaving important details up in the air.

[click to continue…]

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From a blog commenter:

If you get caught in the gravitational pull of a black hole, it makes less sense to curse the black hole than to curse yourself for coming too close to it.

If the canons of [contract] construction are stupid default values, applicable only when the drafter fails to be clear, it makes less sense to curse the canons than to curse the drafter who put the text within their gravitational ambit.

Well said — except that there will be times when, for business reasons, a contract drafter or -reviewer might make a strategic decision to sail close to the danger.

EXAMPLE 1: A contract reviewer spots an ambig­u­ous provision in another party's draft. The reviewer decides to gamble that a court would apply the principle of contra proferentem to resolve the ambiguity in her client's favor. On that basis, the reviewer decides to keep quiet and not warn the drafter about the ambiguity of the provision.

EXAMPLE 2: Alpha Corporation owns a patent for technology that improves fuel economy in internal-combustion engines.  Alpha is in negotiations to grant, to Bravo Company, a manufacturer of car engines, a license to use the technology.

Alpha wants to limit the scope of the patent license that it grants to Bravo so that Bravo may not use the patented technology in airplane engines. But Alpha doesn't want to be explicit about that limitation, because Bravo might demand for the license to include airplane engines. At a minimum, that would delay the negotiation; it also might bring down the price Bravo was willing to pay for the license.

So, Alpha crafts the granting clause to allow Bravo to use the patented tech­nology in "automobiles, trucks, tractors, and other vehicles powered by internal-combustion engines."  In doing so, Alpha is gambling on two things:

  • That a court would apply the principle of ejus­dem generis to limit the license grant as Alpha wishes, i.e., as not encompassing use of the patented technology in airplanes; and
  • that Bravo's contract reviewer won't spot that danger (to Bravo) and thus won't demand that the grant language be expanded.

(That might be a big gamble on Alpha's part, for reasons I won't go into here.)

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In my contract-drafting course a couple of weeks ago, I explained Toyota's Five Whys approach to getting to the root of business problems. Today a New York Times reporter explains how he used the same approach to help him and his wife get home for dinner regularly with their two young children. See Charles Duhigg, How Asking 5 Questions Allowed Me to Eat Dinner With My Kids (Well.Blogs.NYTimes.com March 10, 2016).

Excerpt:

We had started by identifying a problem — we never managed to have family dinner — and by using “the Five Whys” found a root cause: Our kids were taking too long to get dressed in the morning.

Before conducting this exercise, I had never suspected that there was a connection between our morning routines and our evening mealtimes.

But once we forced ourselves to ask why after why, it was clear what needed to change. ...

Id. (emphasis and extra paragraphing added).

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