Workshop on Contract

Drafting and Patent Licensing

Matthew Just, Esq.

8 March 2008
 Workshop Outline
1. Introduction to Drafting
2. Contract Language
3. Principles of Contract Interpretation
4. Contract Drafting Basics
5. Contract Elements in Detail
6. Boilerplate Provisions
7. Patent Licensing
8. Solution to the Patent Licensing Scenario
9. 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”?

• 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”

 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
• Articles (a, an, the)
• Tense
• Grammar (particularly prepositions)
• Punctuation
• (Over)Use of Chinese-English dictionaries
 Characteristics of Plain English
1. Short sentences
2. Definite, concrete, everyday language
3. The active voice
4. Tabular presentation of complex information
5. Separate paragraphs and sections, with headings, for
separate concepts
6. The absence of highly legal jargon or highly technical
business terminology and use of Latin or other foreign
languages
7. The absence of double or multiple negative
8. The use of multiple columns of text if the font is small
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!

 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
• 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. ABC Company

By: ________ A Limited Company
Name: John Smith By: __________
Title: President Name: Kevin Chang
Title: Owner
 5. Contract Elements in Detail
• Representations and Warranties

• Covenants

• Conditions Precedent

• Remedies

• 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
Good Faith

Reasonable Efforts
Stronger

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
• 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
• 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