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A company (let's call it "Lead Source") signed an agreement to work with a call-center serv­ice provider ("Call Center").

  • The goal was for Lead Source to help Call Center land the business of a par­tic­u­lar cust­om­er ("Customer").
  • In return, Call Center was to pay Lead Source a 5% comm­is­sion on the revenue that Call Center received from Customer during term of the contract between Call Center and Cust­om­er "and any renewals pursuant thereto." (Emphasis added.)

Customer signed a three-year contract with Call Center. For those three years, Call Center paid Lead Source a 5% com­mis­sion on its revenue from Customer, as agreed.

When the three-year contract between Call Center and Customer was ending, Call Center and Customer could have extended or renewed the contract. But they didn't do either.  Instead, they neg­o­ti­a­ted a new contract, which expressly stated that it "supersede[d] and replace[d]" the old one.

(According to the appeals court, the two con­tracts between Call Center and Customer were sub­stan­ti­al­ly similar in their terms, and the two even shared a misspelling.)

Call Center then stopped paying commissions to Lead Source, claiming that it was no longer required to do so because Call Center and Customer didn't renew their original contract.  Lead Source said otherwise, claiming that the new contract between Call Center and Customer was indeed a renewal of the old contract. A lawsuit ensued.

Both the trial court and the appeals court agreed with Call Center that the agreement between Call Center and Lead Source was unambiguous: Lead Source was to be paid com­mis­sions only on renewals of the contract between Call Center and Customer — and that contract wasn't renewed. See Gateway Customer Solu­tions, LLC v. GC Serv. L.P., No. 15-1878 (8th Cir. June 10, 2016) (affirming summary judgment).

Lessons for drafters:

  1. Look to the underlying business reality, and plan for the possibility that your counterparty might try to take advantage of (what you might think of as) loopholes in your agreement.
  2. If you're going to be paid commissions for revenue that gets generated long after you help to put the deal in place, you should anticipate that the party paying you might want to stop paying, on grounds that you supposedly "didn't earn it." (I've heard sales people refer to this as getting paid on "farmed revenue.")
  3. One possible comp­rom­ise might be to structure the commission agreement so that you continue to be paid farther into the future, but at a decreasing rate as time goes on, until at some point the commission payments stop altogether. (This will have the advantage of keeping you and/or your sales people looking for new business and not simply coasting on the commissions from old deals.)
  4. The appeals court ended its analysis with a useful reminder: "Because we agree with the district court that the relevant contract provisions are not ambiguous, we may not consider extrinsic evidence, nor does the doctrine of contra proferentum [sic; contra proferentem] apply (construing a contract in favor of the non-drafter)." Id., slip op. at 5-6 (citation omitted).
  5. There's one more thing that's not apparent from this case: Your business people might trust their counterparts on the other side. But that really means they trust the specific individuals with whom they've been dealing. If a "crunch time" were to come, those trustworthy individuals might not still be there; they might have been promoted, or left the company, or even died.  Their replacements might be folks whom you couldn't trust as far as you could throw them.  So it's best to plan accordingly.
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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.

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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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