Workshop on Contract
Drafting and Patent Licensing
Matthew Just, Esq.
8 March 2008
Workshop Outline
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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?
2. Contract Language
What makes contract language “special”?
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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”
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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
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Articles (a, an, the)
Tense
Grammar (particularly prepositions)
Punctuation
(Over)Use of Chinese-English dictionaries
Characteristics of Plain English
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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
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Increased Efficiency and Understanding
Fewer Errors
Positive Image for the Legal Profession
Compliance with statutory Requirements
• BUT: There is resistance!
3. Principles of Contract
Interpretation
I.
The document must be read as a whole
II.
The Literal and Golden Rules
III. Ut res magis valeat quam pereat
IV. Contra Proferentem
V.
Noscitur a sociis
Principles of Contract Interpretation
VI. Ejusdem generis
VII. Expressio unius est exclusio alterius
VIII. Commercial (purposive) Purpose
IX. UCC §3-114 on Contradictory terms.
4. Structure of a Contract
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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
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.
Signature Block
The Parties agree to the terms of this
Agreement above.
Licensor
Licensee
XYZ Inc.
By: ________
Name: John Smith
Title: President
ABC Company
A Limited Company
By: __________
Name: Kevin Chang
Title: Owner
5. Contract Elements in Detail
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Representations and Warranties
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Covenants
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Conditions Precedent
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Remedies
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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.”
Conditions Precedent
• Requirements that must be satisfied
before a party has to perform or before the
contract is enforceable
• Simultaneous Closing vs. Delayed Closing
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
Stronger
Good Faith
Reasonable Efforts
Diligent Efforts
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.”
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.”
Waiver to Trial by Jury
• Why waive the right to a jury?
Clause must be:
• Binding on both parties
• Conspicuous – bold or CAPS
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.”
Severability
• Remove (sever) void provision and
interpret the remainder
• Remainder must still represent the bargain
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
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
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
Structure of a License Agreement
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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
Patent Enforcement
• Who should sue infringers?
• Do we always want to sue infringers?
• How should the court award
(compensation) be distributed?
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
– 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
Royalty Rate
• Agreed on in negotiations and put into
contract
• If disputed, Georgia-Pacific 15 factors may
be relevant
8. Solution to the Patent License
Scenario
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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