In 2006, Capco Energy, Inc. bought some oil and gas rights in the Gulf of Mexico from Tana Exploration Co. Before the contract was signed, seller Capco provided buyer Tana with some geophysical analysis that it had commissioned from an engineering company.

In the contract, Capco the buyer acknowledged that Tana the seller made no warranties about the geophysical information. Capco also agreed that it would rely on solely on its own independent due-diligence investigation and not on any warranties outside the contract itself.

It turned out, though, that there wasn’t as much oil there as everyone had thought. Capco the buyer sued everyone in sight for fraud (among other things).

Capco had no luck with its lawsuit: The court granted summary judgment dismissing its claim. The appeals court affirmed, distinguishing prior cases in which buyers had not expressly disclaimed reliance:

Here, not only does the [contract] provide that [seller] Tana expressly disclaimed any representation of accuracy with respect to previous information provided to [buyer] Capco, but also Capco specifically represented in the PSA that it had relied solely on its own due diligence investigation and had not relied on any representations made by Tana ….

Because the PSA contains a clear intent to disclaim reliance, the lower courts correctly held that Capco is unable to claim fraudulent inducement based on the prior representations of Tana ….

Amco Energy, Inc. f.k.a. Capco Energy, Inc. v. Tana Exploration Co., No. 11-20264, slip op. at 15-17 (5th Cir. Jan. 30, 2012) (affirming summary judgment dismissing claims) (extra paragraphing added).

See also: (list is automatically generated)

• Why the fraud claim is the lawyer’s weapon of choice in lawsuits over failed technology projects
• Warranty disclaimers for UK transactions should also disclaim “conditions” – oil seller fails to do so, leaves itself open to $3MM damage award

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Planning and execution seldom come naturally to 13-year-old Boy Scouts. When I help Scouts from my parish’s troop with their merit badge work, I like to bore them with five aphorisms from the business world (some of which I made up myself):

• To fail to plan is to plan to fail.
• Plan the work, then work the plan.
• How do you eat an elephant? One bite at a time.
• What do you call a plan that doesn’t have milestones and target dates? A daydream.
• What do you call a plan that isn’t in writing? It’s still a daydream.

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Unilateral-amendment provisions are common …

You’ve surely seen this in the fine print of (say) a credit-card company contract. The contract has a unilateral-amendment provision. That provision gives the credit-card company the right to change the contract terms at any time by giving you written notice. If you keep using the credit card after that, you’re bound by the changed terms.

The same kind of language shows up in Web-site terms of service — such as WordPress’s otherwise-admirable model terms of service; in bank customer agreements; and many other types of contract.

… but might invalidate the contract’s arbitration provision

This kind of contract often includes an arbitration requirement that prohibits the consumer from suing the credit-card company. If you have a dispute, you have to submit the dispute to arbitration. That’s not a universally-popular option.

The arbitration requirement might be unenforceable, though, if the company can unilaterally amend the contract — and thus the arbitration provision — even as to existing disputes.

24 Hour Fitness learned this the hard way

The Fifth Circuit held that Texas law requires such a result in a case involving 24 Hour Fitness. The arbitration provision was in an employee handbook, not a contract per se, but that provision was an agreement to arbitrate (and had to be, otherwise it wouldn’t have been enforceable at all).

The problem for 24 Hour Fitness was that it retained the right to modify the employee handbook at any time — and there was no exception for the arbitration provision. Thus, the Fifth Circuit said:

Carey argues that the arbitration clause in the Handbook is illusory because the Change-in-Terms Clause would allow 24 Hour Fitness to unilaterally avoid its promise to arbitrate by modifying the Handbook. The Acknowledgment gives 24 Hour Fitness the “right to revise, delete, and add to the employee handbook” in which the arbitration provision is located.

As in Morrison, there is no “Halliburton type savings clause” in the Acknowledgment that limits 24 Hour Fitness’s ability to make retroactive modifications to the arbitration provision.

If a 24 Hour Fitness employee sought to invoke arbitration with the company pursuant to the agreement, nothing would prevent 24 Hour Fitness from changing the agreement and making those changes applicable to that pending dispute if it determined that arbitration was no longer in its interest.

In effect, the agreement allows 24 Hour Fitness to hold its employees to the promise to arbitrate while reserving its own escape hatch.

The appellate court upheld a trial-court ruling that the arbitration provision was unenforceable. Carey v. 24 Hour Fitness USA, Inc., No. 10-20845, slip op. at 6 (5th Cir. Jan. 24, 2012) (affirming denial of motion to compel arbitration; emphasis and extra paragraphing added, citations and internal quotation marks omitted).

Model contract language for a Halliburton exception

The lesson for contract drafters here is: If you’re going to include a unilateral-amendment provisions, include a carve-out for dispute-resolution requirements. Here’s some language I’ve used:

AMENDMENTS – UNILATERAL – DISPUTE-RESOLUTION PROVISIONS

For the avoidance of doubt, no unilateral amendment will retroactively modify agreed dispute-resolution provisions of this Agreement, if any — including for example arbitration provisions — for then-pending disputes unless the parties expressly agree otherwise.

See also: (list is automatically generated)

• Arbitration-clause notes are now on-line

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You’ve probably seen contracts containing “renewal” options. Examples include lease agreements, software maintenance agreements, and the like. (Some examples are included at the end of this posting.)

I’ve long had a vague preference for describing such a right as an “extension” option. My concern was that a creative trial counsel might try to argue that a “renewal” option had the effect of sending the parties back to Square One in respect of some relevant right or obligation.

It seems that my concern was not unwarranted: In a case from this past week, the Eighth Circuit affirmed a declaratory judgment that a particular lease-extension option, expressly labeled as such, was really an option to renew — and thus under Minnesota law the parties would have to negotiate the terms and conditions of the renewal. See Camelot LLC v. AMC ShowPlace Theatres, Inc., No. 11-1767 (8th Cir. Jan. 18, 2012) (affirming declaratory judgment).

So one lesson is: If you don’t want to have to renegotiate the terms of a contract when you extend it, you might want to use the word “extension” and not the word “renewal.”

But even that might not save you, because of the mystifying way that the Eighth Circuit transmuted an option to extend into a negotiable option to renew.

In this case, AMC was the tenant on the lease agreement. The extension option was expressly labeled entitled “OPTION TO EXTEND” and read as follows:

[T]his Lease [will be] extended on the same terms and conditions set forth herein, except that . . . (ii) no Rent concessions, abatements, lease buyouts, tenant allowances or limitations on tax or expense pass-throughs granted with respect to the Lease Term hereof shall be applicable to any Option Period, (iii) Minimum Rent for each Option Period shall be as shown above.

Id., slip op. at 2. The court, though, concluded that this was not an option to extend but an option to renew. I’m not going to try to explain the court’s rationale, set forth in the opinion at pp. 2-5, because it makes no sense whatsoever I don’t understand it. [UPDATE: I think I now understand; see below.] (The most-parsimonious explanation might be that AMC got home-towned.)

The end result does validate my long-held (and only slightly-cynical) view that trial counsel, looking for the win, will try to make just about any argument that remotely passes the red-face test — because it just might work. Contract drafters and reviewers have a never-ended challenge in trying to anticipate and head off such arguments.

UPDATE: I think I’m starting to understand.

1. The contract included several provisions whose text was, literally, “Intentionally omitted.” That is, the parties apparently deleted the original text of those provisions and substituted the words “In­ten­tion­ally omitted.” (This was probably so that they wouldn’t have to renumber subsequent provisions.)

2. The court went along with the landlord’s argument that (a) those intentional deletions amounted to an affirmative grant of “[r]ent concessions … lease buyouts … or limitations on tax or ex­pense pass-throughs”; (b) that so-called “grant” was thus supposed to be ungranted during the extension period; but (c) the post-ungranting terms of the intentionally-omitted provisions could not be determined; therefore (d) those parts of the contract were indeterminate and had to be negotiated.

That still makes zero sense. The parties didn’t agree to temporarily suspend or modify certain provisions and then restore those provisions during any extension term. No, what they did was agree to delete those provisions in their entirety. If you ask me, AMC had it exactly right, and the court simply blew it.

With the marvelous benefit of 20-20 hindsight, AMC’s lease negotiators might have been better off if the lease-extension provision had said that “… (ii) no Rent concessions, abatements, lease buyouts, tenant allowances or limitations on tax or expense pass-throughs granted stated in this Agreement with respect to the Lease Term hereof, if any, shall be applicable to any Option Period ….”

But I can’t help but wonder whether the court would still have come out favoring the local landlord over the national theater chain.

UPDATE 2: Ken Adams at Koncision has a slightly-different take on this case.

Examples of language to extend the term of a contract

Here’s some language I might use to extend the term of a contract:

Except to the extent (if any) otherwise provided in this Agreement, [Party name] may extend the term of this Agreement (subject to the “Termina­tion” sections below), on the same terms and conditions as in effect just before the then-current end of the term, for [up to X successive periods of Y months each] by providing written notice to [Party name] no later than [Z days before the then-current end of the term].

[Party name] may not extend the term of this Agreement if at the time of its notice of extension it is in in material breach of this Agreement.

Except to the extent (if any) otherwise provided in this Agreement, the term of this Agreement will be automatically extended for successive one-year periods (subject to the “Termination” sections below), on the same terms and conditions as in effect immediately prior to the then-current expiration date, unless either party gives the other notice of non-extension at least three months before the then-current expiration date.

The term of this Agreement will not be automatically extended if, at the then-current expiration of the term, [party name] is in material breach of this Agreement.

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Forget all those self-anointed contract drafting gurus who claim that drafters should write short sentences and short paragraphs. You should do instead as the drafters did in the warranty provision reproduced below, which is excerpted from a Collaborative Research and License Agreement between Pfizer and Rigel Pharmaceuticals:

9.2.12 PATENTS AND TRADEMARKS. To the best of its knowledge (but without having conducted any special investigation), Rigel owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes (including technology currently licensed from Stanford University) necessary for its business as now conducted and as proposed to be conducted without any conflict with, or infringement of the rights of, others. Rigel currently licenses certain technology from Stanford University (the “Licensed Technology”) on an “as is” basis, with no representation or warranty from Stanford University that such technology does not infringe the proprietary rights of others. To Rigel’s knowledge, Rigel has not, as of the date hereof, received any claims from any third party alleging that the use of the Licensed Technology infringes the proprietary rights of such party. Except for agreements with its own employees or consultants and standard end-user license agreements, there are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is Rigel bound by or a party to any options, licenses, or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes of any other person or entity, other than the license agreements with Janssen Pharmaceutica N.V., Stanford University, SUNY, and BASF. Rigel has not received any communications alleging that Rigel has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets, or other proprietary rights or processes of any other person or entity. Rigel is not aware that any of its employees is obligated under any contract (including licenses, covenants, or commitments of any nature) or other agreement, or subject to any judgment, decree, or order of any court or administrative agency, that would interfere with the use of such employee’s best efforts to promote the interests of Rigel or that would conflict with Rigel’s business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of Rigel’s business by the employees of Rigel, nor the conduct of Rigel’s business as proposed, will, to the best of Rigel’s knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant, or instrument under which any of such employees is now obligated. Rigel is not aware of any violation by a third party of any of Rigel’s patents, licenses, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights.

Think about all the advantages of having such a long provision:

• When your client reads a provision like the one above, she’ll be impressed by your lawyering skills, and happy to be paying your fees to support the creation of a true work of art.

• Your client isn’t that interested in getting the deal to signature quickly, so it won’t bother her that the dense verbiage will take longer for everyone to review, edit, and sign off on.

• The other side’s contract reviewer, lulled by the MEGO effect (“mine eyes glaze over”), might unwittingly skip over the problematic phrase that you (inadvertently?) buried in the middle of the paragraph. Don’t fret — surely your counterpart won’t think you were trying to pull a fast one on him.

• Nor will your counterpart object to spending a lot of time puzzling over long sentences and paragraphs; it means more billable hours for him.

• Your firm’s managing partner will thank you for using such a dense writing style — using less white space in a contract draft means you need less paper and toner to print it out, and those things aren’t free. And “readability” is such a vague, subjective thing; in contrast, the cost savings you achieve by printing fewer pages are easily measured, and will be noticed and rewarded.

• If the signed contract ever has to go to litigation, the judge’s law clerk will be glad to have a fine specimen to study, to help fill those endless idle hours in chambers.

In short, by no means should you ever consider breaking up a long paragraph like the above into shorter ones, such as the following:

9.2.12 PATENTS AND TRADEMARKS.

(a) To the best of its knowledge (but without having conducted any special investigation), Rigel owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes (including technology currently licensed from Stanford University) necessary for its business as now conducted and as proposed to be conducted without any conflict with, or infringement of the rights of, others. [Non-satirical aside: This paragraph could still be broken up even further into two or even three sentences.]

(b) Rigel currently licenses certain technology from Stanford University (the “Licensed Technology”) on an “as is” basis, with no representation or warranty from Stanford University that such technology does not infringe the proprietary rights of others. [Non-satirical aside: I would have added the word "although" just before the phrase "on an 'as is' basis"; otherwise Rigel is warranting that it doesn't have any guarantees from Stanford, which is an odd thing to promise.]

(c) To Rigel’s knowledge, Rigel has not, as of the date hereof, received any claims from any third party alleging that the use of the Licensed Technology infringes the proprietary rights of such party.

[etc., etc.]

For that matter, don’t even consider merely adding subdivision lettering, and perhaps pilcrows a.k.a. paragraph marks (¶), to serve as visual guideposts, like this:

9.2.12 PATENTS AND TRADEMARKS. ¶ (a) To the best of its knowledge (but without having conducted any special investigation), Rigel owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes (including technology currently licensed from Stanford University) necessary for its business as now conducted and as proposed to be conducted without any conflict with, or infringement of the rights of, others. ¶ (b) Rigel currently licenses certain technology from Stanford University (the “Licensed Technology”) on an “as is” basis, with no representation or warranty from Stanford University that such technology does not infringe the proprietary rights of others. ¶ (c) To Rigel’s knowledge, Rigel has not, as of the date hereof, received any claims from any third party alleging that the use of the Licensed Technology infringes the proprietary rights of such party. [etc., etc.]

Remember, lawyers have drafted contracts with long, hard-to-read paragraphs since time immemorial. That alone justifies our continuing to do so.

Bonus tip: Challenges to this or any other established practice can be easily met by closing your eyes, sticking your fingers in your ears, and chanting, “we’ve always done it that way; we’ve always done it that way ….”

Lest there be any doubt, the foregoing is a satire.

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This case will go into a lot of brief banks — and will probably be cited by companies telling patent trolls to get lost.

MarcTec LLC sued Johnson & Johnson and its Cordis subsidiary. The lawsuit alleged that a coronary-artery stent manufactured by Cordis infringed two patents owned by MarcTec.

There was just one minor problem: When the inventor was negotiating with the patent examiner to have the patent application “allowed,” the inventor had (metaphorically) drawn a line in the sand as to what did or did not constitute infringement. The Cordis stent was clearly on the non-infringing side of the line.

That seems not to have deterred MarcTec: Its counsel put an expert witness on the stand to “explain” why the Cordis stent really did infringe after all. The trial judge didn’t buy the “explanation,” which seems to have struck him as a mix of speculation and wishful thinking.

The trial judge held that MarcTec had brought a frivolous claim, based on a manifestly-unreasonable assertion of infringement, and continued to pursue the claim in bad faith even after it should have been clear that the claim was meritless. The trial judge declared the case “exceptional” and awarded the defendants some $4.7 million in attorneys’ fees and expenses. The appeals court affirmed. MarcTec LLC v. Johnson & Johnson, No. 2010-1285 (Fed. Cir. Jan. 3, 2012).

See also: (list is automatically generated)

• DataTreasury v. U.S. Bancorp $27 million patent infringement verdict – useful links, a partial defense win, and the patent owner’s bloody-shirt jury argument
• A patent owner’s lawyer waves the flag for the jury – or is it the bloody shirt?

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An appeals court has overturned a $66 million jury verdict against Federal Express for breach of contract. Its principal reason was that that the alleged contract, wasn’t. But the appeals court didn’t stop there: In an opinion by Judge Richard Posner, himself a renowned legal-economics scholar, the court categorically rejected the testimony of the plaintiff’s damages expert, one Lawrence D. Morriss — and, between the lines, excoriated the trial judge for allowing Morriss to testify at all. After methodically explaining why it regarded Morriss’s testimony as worthless, and why the trial judge should have caught the problems himself, the court acidly summarized:

This is not nitpicking. Morriss’s regression [analysis] had as many bloody wounds as Julius Caesar when he was stabbed 23 times by the Roman Senators led by Brutus.

We have gone on at such length about the deficiencies of the regression analysis in order to remind district judges that, painful as it may be, it is their responsibility to screen expert testimony, however technical; we have suggested aids to the discharge of that responsibility.

The re­spon­si­bil­ity is especially great in a jury trial, since jurors on average have an even lower comfort level with technical evidence than judges.

The examination and cross-examination of Morriss were perfunctory and must have struck most, maybe all, of the jurors as gibberish.

It became apparent at the oral argument of the appeal that even ATA’s lawyer did not understand Morriss’s analysis; he could not answer our questions about it but could only refer us to Morriss’s testimony.

And like ATA’s lawyer, FedEx’s lawyer, both at the trial and in his appellate briefs and at argument, could only parrot his expert. … it is no surprise that, having decided that ATA should win, the jury simply awarded the exact figure that ATA had asked for in damages.

If a party’s lawyer cannot understand the testimony of the party’s own expert, the testimony should be withheld from the jury.

Evidence unintelligible to the trier or triers of fact has no place in a trial.

ATA Airlines, Inc. v. Federal Express Corp., No. 11-1382 (7th Cir. Dec. 27, 2011) (Pos­ner, J.) (reversing denial of judgment as a matter of law and remanding with instructions to dismiss plaintiff’s case with prejudice) (extra paragraphing added).

As if that weren’t enough of a rebuke to the trial judge, the other judges on the panel were Chief Judge Frank Easterbrook, himself a noted authority on legal economics, and Judge Diane Wood, who was recently short-listed for the Supreme Court vacancy that ended up going to now-Justice Elena Kagan.

This one is going to be quoted in law-school remedies classes, and cited by defense counsel, for a long time.

See also: (list is automatically generated)

• Defendant tries to compel arbitration after trial judge adopts plaintiff’s contract interpretation – no dice, says Fifth Circuit
• Hot-tubbing the expert witnesses – the latest Australian import

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A writer involved in creating the 1972 version of the Ghost Rider comic-book character signed away his rights in the character when he endorsed a payment check containing language to that effect — so ruled a U.S. district judge in New York yesterday.

As a result, the writer, Gary Friedrich, will not be able to demand compensation for use of the character in the Nicholas Cage movie(s) of the same name.

State law generally governs matters like this, so it’s worth doing your homework (or consulting an attorney) if you ever encounter a similar issue.

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Adapted from a comment I posted in response to a query at Hacker News:

• In your statements of work, be as explicit and detailed as you possibly can in stating assumptions — especially assumptions about what the customer is supposed to provide and/or do. Drill down to a suitable depth, even if it seems silly. If you’re assuming the customer will have 110 volt AC power, consider saying so.

• Keep the customer informed — no one likes surprises.

• Make a habit of sending short, just-the-facts-ma’am email summaries confirming oral discussions — they can be incredibly useful in the event of later finger-pointing and “why didn’t you tell me X?” accusations.

• In the same vein, seriously consider never deleting any email to or from a customer or otherwise relating to a job.

• Consider treating development of the specification as a separate, separately-priced deliverable.

• Consider providing an “extension of time budget” in the contract — that is, you’ve got X days of extension budget that you can allocate to individual deadlines as you see fit, with a max extension of Y days for any single deadline.

• Watch out for IP-ownership provisions; try to make sure you get the right to continue using general knowledge, tools, non-customer-specific code, etc., for other projects.

• Be extremely careful using FOSS (free / open-source) software — the customer will be really PO’d if it has to release the source code to its product. Microsoft had to do that a couple of years ago because one of its consultants included GPL code; see this blog posting by Silicon Valley lawyer Mark Radcliffe for details.

• In the contract, try very hard to (1) exclude consequential damages, and (2) limit your liability to X or 2X or even 3X, where X is the amount you’re paid. If the customer balks, you can respond that you’re selling services, not business insurance, and that uncapped liability will have to carry a higher price.

• Investigate whether you can get professional-liability insurance (errors & omissions or “E&O”). If so, try to have a separate cap for your contract liability in the amount of your coverage — that is, your liability won’t exceed 2X, where X is the amount you were paid, or your policy limits, whichever is less.

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In last week’s BPI v. IEC case from the Seventh Circuit, a letter of intent between two parties contained a disclaimer of any intent to enter into a binding contract. That disclaimer was enough to bar one party from suing the other for breach of contract, and also to kill the plaintiff’s claim for promissory fraud.

Disclaimer in letter of intent kills breach-of-contract claim

The specific facts of the case aren’t remarkable: Two parties entered into a letter of intent stating that they wanted to explore the possibility of doing some business together. The letter of intent included language stating that the LOI was not intended to be a binding contract. One party walked away; the other sued — for breach of contract.

The lower court granted summary judgment in favor of the defendant. On appeal, the legendary judge Richard Posner remarked that “when a document says it isn’t a contract, it isn’t a contract.” BPI Energy Holdings, Inc., v. IEC (Montgomery) LLC, No. 10-3871, slip. op. at 7 (7th Cir. Dec. 8, 2011) (affirming summary judgment in favor of defendant IEC).

No promissory fraud: Reliance was reckless

The appeals court also affirmed the lower court’s rejection of the unhappy party’s claim of promissory fraud. In essence, such a claim alleges that the defendant party never intended to go through with the contemplated transaction, but was just stringing the other party along. Judge Posner eviscerated that claim as well, stating that the plaintiff had been reckless in presuming to rely on a so-called promise that was expressly made non-binding:

There had been no agreement on the terms of the gas extraction leases that Drummond would be granting to BPI. It is reckless to rely on an agreement expressly stated to be nonbinding. Such a statement is equivalent to saying “you rely at your peril.” You know there is a risk and decide to gamble. If you lose the gamble, you have only yourself to blame.

Id. at 13-14 (bold-faced emphasis added).

Judge Posner was also mindful of the commercial realities facing business people:

To look at the question from another angle, how can a firm that wants to retain its freedom to change course avoid a suit for fraud if a warning not to rely, or (as in this case) equivalent language, in a preliminary agreement can be ignored?

Id. at 14.

Lesson learned: If you’re signing a letter of intent that says it’s non-binding, and the other side decides to walk away, you shouldn’t be too confident that a court will have any sympathy. If you want the LOI to be binding, in whole or in part, you won’t want to agree to the non-binding disclaimer.

See also: (list is automatically generated)

• Letters of intent: their highest and best use is disavowing a binding contract
• Back-and-forth negotiation emails can add up to a binding contract even without a signed final document, says UK court

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