In the late nineteenth century, publishing syndicates like the Western Newspaper Union began to distribute news stories, editorials and advertisements to local newspapers on prefabricated steel plates – a convenience that eliminated the papers’ need to typeset this text manually. The plates were nicknamed “boilerplate” because they resembled the pressed steel plates that adorned boilers and pressure vessels. Gradually, the term boilerplate came to represent any text that is intended to be used without change. Today, it is used to refer to contractual terms, often appearing at the end of an agreement, that are viewed as standardized and routine.Footnote ¹ Very few non-lawyers bother to read the boilerplate in an agreement, and its drafting and review are often delegated to junior lawyers or to nobody at all.Footnote ²

Yet the “boilerplate” clauses in an agreement can become critical, and sometimes make the difference between breach and compliance with the more “interesting” provisions of the agreement. In this chapter we will explore some of the boilerplate clauses in a typical intellectual property (IP) licensing agreement and their variants and implications.

13.1 Front Matter

Every agreement begins with a formulaic recitation of some key information. Below, we briefly review these seemingly routine but important features of agreements.

13.1.4 Recitals

After the introductory paragraph listing the parties, their addresses and the effective date of the agreement, many agreements contain one or more paragraphs beginning with “Whereas, … ” These “whereas clauses” are known as the recitals of an agreement. Recitals are nonoperative text – they do not (or should not) create contractual obligations. Rather, they set the stage for the agreement that is to come. As Cynthia Cannady explains, recitals “serve the purpose of helping a reader get oriented before plunging into the material terms of the agreement” and “provide background information that makes it easier to read and understand the material terms of the agreement.”Footnote ³

Because recitals are not intended to create binding contractual obligations, drafters should be careful to avoid the explicit or implicit inclusion of obligations, representations or warranties in the recitals. For example, statements like this should be avoided:

WHEREAS, Licensor owns all right, title and interest in and to the cartoon character Dizzy Duck; and

WHEREAS, Licensee wishes to obtain an exclusive license to reproduce and display Dizzy Duck on school supplies;

The above recital could cause problems for both the licensor and the licensee. Why? Because it could be interpreted as a representation by the licensor that it actually does own these rights (without the knowledge-based and other limitations contained in the actual representations and warranties later in the agreement), and because it could be interpreted as an acknowledgment by the licensee that the licensor actually does own these rights – a fact that the licensee may wish to challenge later. Below is a preferable set of recitals that frames the proposed transaction between the parties:

WHEREAS, Licensor conducts an active licensing program for rights in the cartoon character Dizzy Duck; and

WHEREAS, Licensee wishes to obtain an exclusive license to reproduce and display Dizzy Duck on school supplies; …

Or consider the equipment leasing agreement litigated in Thomson Electric Welding Co. v. Peerless Wire Fence Co., 190 Mich. 496 (1916). The agreement related to the lease of electric welding machines for a term lasting “until the expiration of all the letters patent of the United States now or hereafter owned by the lessor, the inventions of which are or shall be embodied in said apparatus, or at any time involved in the use thereof.” The recitals listed 111 of the lessor’s patents covering the leased equipment. When the lessee returned the equipment after the expiration of the last of these 111 patents, the lessor claimed that it held additional patents covering the leased equipment, and that the lease was not yet expired. Accordingly, the lessor sued for remaining lease payments through the expiration of the last of these other, unlisted patents. The Michigan Supreme Court, reviewing the recital in question, considered the doctrine of “estoppel by recital” and held that “general and unlimited terms are restrained and limited by particular recitals when used in connection with them, and recitals, as well as operative clauses, should be considered as a part of the whole.” As a result, the licensor was estopped from claiming that the lease ran beyond the expiration of the 111 patents listed in the recital.

Figure 13.1 Elihu Thomson, founder of the Thomson Electric Welding Co., was one of the late nineteenth century’s greatest inventors, with nearly 700 patents to his name. In addition to arc welding, he developed important advances in the fields of arc lighting. Another company founded by Thomson eventually merged with Edison Electric to become the General Electric Company.

13.2 Definitions

Every agreement contains a number of defined terms, capitalized words that, when used throughout the agreement, have the meanings ascribed specifically to them, rather than definitions that might arise from common usage or dictionaries. The definitions are among the most important elements of any agreement. As we have seen in the preceding chapters, terms such as “Licensed Rights,” “Net Sales” and “Field of Use” define the very nature of the legal and financial arrangement between the parties.

Definitions may be scattered throughout the text and defined “inline” or “in context,” as they are in the example of the introductory clause above. Or they may be listed – usually alphabetically – in a separate section of the agreement that appears at the beginning or end of the operative text of the agreement.Footnote ⁴ The placement and style of the definitions is a matter of drafting preference, but wherever they are located, definitions should be as clear and unambiguous as possible.

13.3 Assignment

At the end of each agreement is often a section labeled “General Terms” or “Miscellaneous.” These are the true “boilerplate” terms that cause eyes to glaze over. Or are they? Some provisions in this Miscellaneous section often get significant attention. One of the most prominent of these is the assignment clause.

13.3.2 The Right to Assign IP Licenses

Notwithstanding the general rules of contract assignment noted in Section 13.3.1, IP licenses have long been treated as special cases under federal common law. As early as 1852, the Supreme Court recognized the rule that patent licensing agreements are personal and not assignable unless expressly made so (Troy Iron & Nail Factory v. Corning, 55 U.S. (14 How.) 193, 14 L. Ed. 383 (1852)).

Over the years this rule has evolved to differentiate between exclusive and nonexclusive IP licenses. In general, “It is well settled that a non-exclusive licensee of a patent has only a personal and not a property interest in the patent and that this personal right cannot be assigned unless the patent owner authorizes the assignment or the license itself permits assignment” (Gilson v. Republic of Ireland, 787 F.2d 655, 658 (D.C.Cir.1986)).

The Ninth Circuit in Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996) explains the policy rationale for this rule as follows:

Allowing free assignability … of nonexclusive patent licenses would undermine the reward that encourages invention because a party seeking to use the patented invention could either seek a license from the patent holder or seek an assignment of an existing patent license from a licensee. In essence, every licensee would become a potential competitor with the licensor-patent holder in the market for licenses under the patents. And while the patent holder could presumably control the absolute number of licenses in existence under a free-assignability regime, it would lose the very important ability to control the identity of its licensees. Thus, any license a patent holder granted – even to the smallest firm in the product market most remote from its own – would be fraught with the danger that the licensee would assign it to the patent holder’s most serious competitor, a party whom the patent holder itself might be absolutely unwilling to license. As a practical matter, free assignability of patent licenses might spell the end to paid-up licenses … Few patent holders would be willing to grant a license in return for a one-time lump-sum payment, rather than for per-use royalties, if the license could be assigned to a completely different company which might make far greater use of the patented invention than could the original licensee.

Figure 13.2 The Supreme Court’s 1852 decision in Troy Iron & Nail first established that patent licensing agreements are not assignable.

For similar reasons, the rule against assignment of nonexclusive patent licenses has also been applied to nonexclusive copyright licensesFootnote ⁵ and trademark licenses.Footnote ⁶

But exclusive licenses, at least in some cases, have been treated differently, as they have been construed as conveyances of IP ownership – a right that is generally amenable to free alienability by its holder.Footnote ⁷

13.3.3 Assignment of Licenses in M&A Transactions

One of the most contentious issues relating to the assignment of IP licensing agreements arises in the context of corporate acquisitions. Specifically, what is the effect of an acquisition of a company (often called the “target” company) on licensing agreements to which it is a party? Does a corporate acquisition constitute an assignment of the target company’s IP licenses? And, if so, is such an assignment prohibited under applicable law?

The answer depends, in large part, on the structure through which an acquisition is effected. There are three basic forms of corporate acquisition: asset acquisitions, stock acquisitions and mergers. Parties choose the form of an acquisition for a range of tax, accounting, liability and other reasons. Treatment of IP licensing agreements is rarely an overriding consideration in choosing the form of such a transaction. Nevertheless, the choice of acquisition structure can have a significant effect on IP licensing agreements, which must often (unfortunately) be sorted out after the acquisition takes place.

In asset acquisitions, the acquiring company purchases some or all of the target company’s assets and properties, including agreements and other IP rights, directly from the target company. In this case, the target company expressly assigns these licensing agreements to the acquirer along with its other assets. To the extent that applicable law prohibits such assignments, and they are not expressly permitted under the terms of the agreements themselves, then the target company must obtain the permission of the licensor in order to make such assignments.

Stock acquisitions involve an acquirer’s purchase of a target company’s stock from its prior owners. In this model, the corporate identity of the target company is unaffected by the acquisition; it remains a party to whatever agreements were in place prior to the acquisition. Thus, no assignment is generally recognized, and no consent is required from the licensor.

Mergers are statutory devices that enable an acquiror to absorb a target company into itself or into a subsidiary. After the merger, the target company no longer exists in its prior form, which is where things get complicated in terms of agreement assignment. There are three general types of merger transactions: direct mergers, forward triangular mergers and reverse triangular mergers. In a direct merger, the acquiror merges the target company directly into itself. In a forward triangular merger, the acquiror forms a wholly owned subsidiary into which it merges the target company. In a reverse triangular merger, the acquiror forms a wholly owned subsidiary that merges into the target company. After a direct merger and a forward triangular merger, the target company no longer exists. All of its assets and liabilities are absorbed, respectively, into the acquiror or its wholly owned subsidiary. In a reverse triangular merger, the target survives the merger as a wholly owned subsidiary of the acquirer. These three transaction types are illustrated in Figure 13.3.

Figure 13.3 Asset acquisitions, stock acquisitions and mergers.

Given these different structural outcomes, there is some debate, and inconsistency in the case law, regarding whether an IP licensing agreement can be assumed by the “surviving” company following the merger without the consent of the licensor.Footnote ⁸ In both a direct and a forward triangular merger the target company (licensee) is no longer in existence, so there is considerable doubt whether its licenses can be assigned to the surviving company without the licensor’s consent. The best structure for allowing the assumption is the reverse triangular merger, in which the target company (the licensee) remains intact, though with a new owner. At least in Delaware, where many important mergers and acquisitions (M&A) decisions are reached, the courts have found that a reverse triangular merger does not result in an assignment of the target company’s IP licenses.Footnote ⁹

13.3.5 Transfers of Rights

Most of the above considerations relating to assignments concern the licensee and whether it may pass on to an acquiring entity the rights that it has received from the licensor. But a related topic concerns the licensor. Specifically, if a licensor assigns or transfers IP rights that it has previously licensed, what is the effect on existing licensees? As discussed in Section 3.5, an IP license generally runs with the underlying IP.

But what about the multitude of other contractual obligations contained in a licensing agreement? Licensor obligations relating to service, maintenance, technical assistance, indemnification and confidentiality are not likely to constitute part of the core license property interest, so what happens to them when the licensor transfers the underlying IP to a new owner?

One theory is that the original licensor remains obligated to perform its contractual obligations so long as they have not been assigned to someone else. Thus, if the original licensor does not assign a licensing agreement to the acquirer of the underlying IP, the original licensor is still required to perform these obligations. But this requirement may be cold comfort to the licensee, as the original licensor may have few remaining assets with which to perform those obligations. The licensee might prefer that the new owner of the underlying IP be obligated to perform the original licensor’s commitments. To that end, a clause is sometimes included in the assignment section relating to transfer.

Example: Transfer of Rights

Each party shall ensure that any purchaser, assignee, transferee or exclusive licensee of any of the intellectual property rights underlying the licenses and covenants granted herein (“Transferee”) shall be bound by all terms and conditions contained in this Agreement, and shall require that such Transferee confirm in writing prior to any such sale, assignment, transfer or exclusive license (“Transfer”), as a condition thereof, that the licenses and other rights granted hereunder shall not be affected or diminished in any manner by such Transfer nor subject to any increased or payment or other obligation.

The following case brings together many of the issues and themes discussed above with regard to the assignment of IP licensing agreements and anti-assignment clauses.

PPG Industries, Inc. v. Guardian Industries Corp.

597 F.2d 1090 (6th Cir. 1979)

LIVELY, CIRCUIT JUDGE

The question in this case is whether the surviving or resultant corporation in a statutory merger acquires patent license rights of the constituent corporations.

Prior to 1964 both PPG and Permaglass, Inc., were engaged in fabrication of glass products which required that sheets of glass be shaped for particular uses. Independently of each other the two fabricators developed similar processes which involved “floating glass on a bed of gas, while it was being heated and bent.” This process is known in the industry as “gas hearth technology” and “air float technology”; the two terms are interchangeable. After a period of negotiations PPG and Permaglass entered into an agreement on January 1, 1964 whereby each granted rights to the other under “gas hearth system” patents already issued and in the process of prosecution. The purpose of the agreement was set forth in the preamble as follows:

WHEREAS, PPG is desirous of acquiring from PERMAGLASS a world-wide exclusive license with right to sublicense others under PERMAGLASS Technical Data and PERMAGLASS Patent Rights, subject only to reservation by PERMAGLASS of non-exclusive rights thereunder; and

WHEREAS, PERMAGLASS is desirous of obtaining a nonexclusive license to use Gas Hearth Systems under PPG Patent Rights, excepting in the Dominion of Canada.

This purpose was accomplished in the two sections of the agreement quoted below:

Section 3. Grant from Permaglass to PPG

1. 3.1 Subject to the reservation set forth in Subsection 3.3 below, PERMAGLASS hereby grants to PPG an exclusive license, with right of sublicense, to use PERMAGLASS Technical Data in Gas Hearth Systems throughout the United States of America, its territories and possessions, and all countries of the world foreign thereto.

2. 3.2 Subject to the reservation set forth in Subsection 3.3 below, PERMAGLASS hereby grants to PPG an unlimited exclusive license, with right of sublicense, under PERMAGLASS Patent Rights.

3. 3.3 The licenses granted to PPG under Subsections 3.1 and 3.2 above shall be subject to the reservation of a non-exclusive, non-transferable, royalty-free, world-wide right and license for the benefit and use of PERMAGLASS.

Section 4. Grant from PPG to Permaglass

1. 4.1 PPG hereby grants to PERMAGLASS a non-exclusive, non-transferable, royalty-free right and license to heat, bend, thermally temper and/or anneal glass using Gas Hearth Systems under PPG Patent Rights, excepting in the Dominion of Canada, and to use or sell glass articles produced thereby, but no license, express or implied, is hereby granted to PERMAGLASS under any claim of any PPG patent expressly covering any coating method, coating composition, or coated article.

Assignability of the agreement and of the license granted to Permaglass and termination of the license granted to Permaglass were covered in the following language:

Section 9. Assignability

1. 9.1 This Agreement shall be assignable by PPG to any successor of the entire flat glass business of PPG but shall otherwise be non-assignable except with the consent of PERMAGLASS first obtained in writing.

2. 9.2 This Agreement and the license granted by PPG to PERMAGLASS hereunder shall be personal to PERMAGLASS and non-assignable except with the consent of PPG first obtained in writing.

Section 11. Termination

1. 11.2 In the event that a majority of the voting stock of PERMAGLASS shall at any time become owned or controlled directly or indirectly by a manufacturer of automobiles or a manufacturer or fabricator of glass other than the present owners, the license granted to PERMAGLASS under Subsection 4.1 shall terminate forthwith.

Eleven patents are involved in this suit. In Section 9.1 and 9.2 assignability was treated somewhat differently as between the parties, and the Section 11.2 provisions with regard to termination apply only to the license granted to Permaglass.

As of December 1969 Permaglass was merged into Guardian … Guardian was engaged primarily in the business of fabricating and distributing windshields for automobiles and trucks. It had decided to construct a facility to manufacture raw glass and the capacity of that facility would be greater than its own requirements. Permaglass had no glass manufacturing capability and it was contemplated that its operations would utilize a large part of the excess output of the proposed Guardian facility.

Figure 13.4 Guardian Glass got its start as a manufacturer of automotive windshields.

Shortly after the merger was consummated PPG filed the present action, claiming infringement by Guardian in the use of apparatus and processes described and claimed in eleven patents which were identified by number and origin. The eleven patents were covered by the terms of the 1964 agreement. PPG asserted that it became the exclusive licensee of the nine patents which originated with Permaglass under the 1964 agreement and that the rights reserved by Permaglass were personal to it and non-transferable and non-assignable. PPG also claimed that Guardian had no rights with respect to the two patents which had originated with PPG because the license under these patents was personal to Permaglass and non-transferable and non-assignable except with the permission of PPG. In addition it claimed that the license with respect to these two patents had terminated under the provisions of Section 11.2 by reason of the merger.

One of the defenses pled by Guardian … was that it was a licensee of the patents in suit. It described the merger with Permaglass and claimed it “had succeeded to all rights, powers, ownerships, etc., of Permaglass, and as Permaglass’ successor, defendant is legally entitled to operate in place of Permaglass under the January 1, 1964 agreement between Permaglass and plaintiff, free of any claim of infringement of the patents …”

After holding an evidentiary hearing the district court concluded that the parties to the 1964 agreement did not intend that the rights reserved by Permaglass in its nine patents or the rights assigned to Permaglass in the two PPG patents would not pass to a successor corporation by way of merger. The court held that there had been no assignment or transfer of the rights by Permaglass, but rather that Guardian acquired these rights by operation of law under the merger statutes of Ohio and Delaware. The provisions of the 1964 agreement making the license rights of Permaglass non-assignable and non-transferable were held not to apply because of the “continuity of interest inherent in a statutory merger that distinguishes it from the ordinary assignment or transfer case.”

Questions with respect to the assignability of a patent license are controlled by federal law. It has long been held by federal courts that agreements granting patent licenses are personal and not assignable unless expressly made so. This has been the rule at least since 1852 when the Supreme Court decided Troy Iron & Nail v. Corning, 14 L. Ed. 383 (1852). The district court recognized this rule in the present case, but concluded that where patent licenses are claimed to pass by operation of law to the resultant or surviving corporation in a statutory merger there has been no assignment or transfer.

There appear to be no reported cases where the precise issue in this case has been decided. At least two treatises contain the statement that rights under a patent license owned by a constituent corporation pass to the consolidated corporation in the case of a consolidation, W. Fletcher, Cyclopedia of the Law of Corporations § 7089 (revised ed. 1973); and to the new or resultant corporation in the case of a merger, A. Deller, Walker on Patents § 409 (2d ed. 1965). However, the cases cited in support of these statements by the commentators do not actually provide such support because their facts take them outside the general rule of non-assignability. Both texts rely on the decision in Hartford-Empire Co. v. Demuth Glass Works, Inc., 19 F. Supp. 626 (E.D.N.Y.1937). The agreement involved in that case specified that the patent license was assignable and its assignability was not an issue. Clearly the statement in the Hartford-Empire opinion that the merger conveyed to the new corporation the patent licenses owned by the old corporation results from the fact that the licenses in question were expressly made assignable, not from any general principle that such licenses pass to the resultant corporation where there is a merger. It is also noteworthy that the surviving corporation following the merger in Hartford-Empire was the original licensee, whereas in the present case the original licensee was merged into Guardian, which was the survivor.

Guardian relies on two classes of cases where rights of a constituent corporation have been held to pass by merger to the resultant corporation even though such rights are not otherwise assignable or transferable. It points out that the courts have consistently held that “shop rights” do pass in a statutory merger. A shop right is an implied license which accrues to an employer in cases where an employee has perfected a patentable device while working for the employer. Though the employee is the owner of the patent he is estopped from claiming infringement by the employer. This estoppel arises from the fact that the patent work has been done on the employer’s time and that the employer has furnished materials for the experiments and financial backing to the employee.

The rule that prevents an employee-inventor from claiming infringement against a successor to the entire business and good will of his employer is but one feature of the broad doctrine of estoppel which underlies the shop right cases. No element of estoppel exists in the present case. The license rights of Permaglass did not arise by implication. They were bargained for at arms length and the agreement which defines the rights of the parties provides that Permaglass received non-transferable, non-assignable personal licenses. We do not believe that the express prohibition against assignment and transfer in a written instrument may be held ineffective by analogy to a rule based on estoppel in situations where there is no written contract and the rights of the parties have arisen by implication because of their past relationship.

The other group of cases which the district court and Guardian found to be analogous hold that the resultant corporation in a merger succeeds to the rights of the constituent corporations under real estate leases. The most obvious difficulty in drawing an analogy between the lease cases and those concerning patent licenses is that a lease is an interest in real property. As such, it is subject to the deep-rooted policy against restraints on alienation. [There] is no similar policy which is offended by the decision of a patent owner to make a license under his patent personal to the licensee, and non-assignable and non-transferable. In fact the law treats a license as if it contained these restrictions in the absence of express provisions to the contrary.

We conclude that the district court misconceived the intent of the parties to the 1964 agreement. We believe the district court put the burden on the wrong party in stating:

Because the parties failed to provide that Permaglass’ rights under the 1964 license agreement would not pass to the corporation surviving a merger, the Court finds that Guardian succeeded to Permaglass’ license

The agreement provides with respect to the license which Permaglass granted to PPG that Permaglass reserved “a non-exclusive, non-transferable, royalty-free, world-wide right and license for the benefit and use of Permaglass.” Similarly, with respect to its own two patents, PPG granted to Permaglass “a non-exclusive, non-transferable, royalty-free right and license …” Further, the agreement provides that both it and the license granted to Permaglass “shall be personal to PERMAGLASS and non-assignable except with the consent of PPG first obtained in writing.”

The quoted language from Sections 3, 4 and 9 of the 1964 agreement evinces an intent that only Permaglass was to enjoy the privileges of licensee. If the parties had intended an exception in the event of a merger, it would have been a simple matter to have so provided in the agreement. Guardian contends such an exception is not necessary since it is universally recognized that patent licenses pass from a licensee to the resultant corporation in case of a merger. This does not appear to be the case. We conclude that if the parties had intended an exception in case of a merger to the provisions against assignment and transfer they would have included it in the agreement.

Thus, Sections 3, 4 and 9 of the 1964 agreement between PPG and Permaglass show an intent that the licenses held by Permaglass in the eleven patents in suit not be transferable. While this conclusion disposes of the license defense as to all eleven patents, it should be noted that Guardian’s claim to licenses under the two patents which originated with PPG is also defeated by Section 11.2 of the 1964 agreement. This section addresses a different concern from that addressed in Sections 3, 4 and 9. The restrictions on transferability and assignability in those sections prevent the patent licenses from becoming the property of third parties. The termination clause, however, provides that Permaglass’ license with respect to the two PPG patents will terminate if the ownership of a majority of the voting stock of Permaglass passes from the 1964 stockholders to designated classes of persons, even though the licenses themselves might never have changed hands.

Apparently PPG was willing for Permaglass to continue as licensee under the nine patents even though ownership of its stock might change. These patents originated with Permaglass and so long as Permaglass continued to use the licenses for its own benefit a mere change in ownership of Permaglass stock would not nullify the licenses. Only a transfer or assignment would cause a termination. However, the agreement provides for termination with respect to the two original PPG patents in the event of an indirect takeover of Permaglass by a change in the ownership of a majority of its stock. The fact that PPG sought and obtained a stricter provision with respect to the two patents which it originally owned in no way indicates an intention to permit transfer of licenses under the other nine in case of a merger. None of the eleven licenses was transferable; but two of them, those involving PPG’s own development in the field of gas hearth technology, were not to continue even for the benefit of the licensee if it came under the control of a manufacturer of automobiles or a competitor of PPG in the glass industry “other than the present owners” of Permaglass. A consistency among the provisions of the agreement is discernible when the different origins of the various patents are considered.

Notes and Questions

1. The federal common law of IP licenses. As noted above, courts have long held that questions of assignability of copyright and patent licenses are matters of federal law rather than state contract law. Is there a federal law of contract? Why don’t federal courts defer to the state contract laws that otherwise govern copyright and patent licensing agreements?

Contrast this approach with trademark licenses, which have generally been treated as governed by state contract law, notwithstanding the presence of federally registered trademarks. Tap Publications, Inc. v. Chinese Yellowpages (New York), Inc., 925 F. Supp. 212 (S.D.N.Y. 1996) (“The mere fact that a trademark was the subject of the contract does not convert a state-law breach of contract issue into a federal Lanham Act claim”). What might account for this difference in treatment?

2. Exclusive vs. nonexclusive. As discussed in Everex (Section 13.3.1), the general rule permits exclusive licensees to assign their rights under an IP license, but prohibits nonexclusive licensees from doing so. Do you agree with the rationale for making this distinction? Why isn’t a nonexclusive licensee treated like the holder of the copyright in a book? The owner of a copy of the book may freely sell it in competition with the copyright holder’s ability to sell a new copy. Why should a nonexclusive licensee’s ability to compete with the granting of new licensees by the rights holder prevent its assignment of a nonexclusive license?

3. Remedies. In PPG, did Permaglass’s violation of the anti-assignment clause mean that the transfer to Guardian was ineffective, or simply that Permaglass breached the contract, giving PPG a right to seek damages and/or terminate for breach?

As noted in Drafting Note 3 of Section 13.3.4, § 322(2)(b) of the Restatement (Second) of Contracts provides that a “contract term prohibiting assignment of rights under the contract … gives the obligor a right to damages for breach of the terms forbidding assignment but does not render the assignment ineffective.” Is this rule sensible? What are the implications of prohibiting assignments outright? Consider the potential impact on M&A transactions.

If the Restatement rule had applied in PPG, how would PPG’s infringement claim have been affected?

4. Change of control. PPG also illustrates the operation of a change of control clause. How is such a clause different than an anti-assignment clause? In PPG, Permaglass underwent a forward merger after which it was subsumed into Guardian. Would the result have been different if Guardian acquired Permaglass through a reverse triangular merger? Why? Isn’t this merely form over substance?

An alternative approach was proposed in Section 503(2)(3) of UCITA. It provided that the prohibited assignment would be ineffective. This addresses some of the concerns with the Restatement approach, but introduces issues of its own. For example, if the assignment of a license is ineffective, who is left with the license after the transaction? One might assume it is the original licensee, but what if that entity is merged out of existence or exists only as a shell?

In First Nationwide Bank v. Florida Software Services, 770 F. Supp. 1537 (M.D. Fla. 1991), a software licensing agreement contained a clause that deemed the transfer of more than 60 percent of the stock of the licensee to constitute an attempted transfer of the agreement, giving FSS, the licensor, a right to terminate the license. During the Savings and Loan Crisis of 1988, two licensee banks were put into receivership and then acquired by First Nationwide under a federal bailout program. In response, FSS threatened to terminate the licensing agreements unless First Nationwide paid it new license fees amounting to nearly $2 million. Though the change in control clause was clear, the court declined to enforce it, reasoning that doing so would be against public policy, and going so far as to call FSS’s approach “extortion.” Is this a fair characterization? Should courts have the discretion to disregard such provisions? If so, under what circumstances?

5. Shop rights. The court in PPG distinguishes cases holding that shop rights transfer upon a merger. How are shop rights different than license rights, and why does this distinction make a difference in the context of mergers?

13.4 Patent Marking

Section 237(a) of the U.S. Patent Act provides that if a patent owner wishes to recover damages for infringing activity before it formally notifies the infringer, it must mark each patented article with the relevant patent number:

Today, Section 237(a) has been amended to provide for “marking” via product packaging, documentation or internet site. But for some products, physical stamping of patent numbers on metal or plastic is still done. Accordingly, patent licensing agreements that involve the sale of products often require the licensee to mark all licensed products with the licensed patent numbers. Below is an example of such a clause.

Trademark licenses often contain similar provisions, along with detailed requirements for the size, placement and color of a licensed mark. These requirements are discussed in Section 15.4. Affixing a copyright notice to a copyrighted work is not legally required, but also often required in licensing agreements (see, e.g., Sections 19.1 and Sections 19.2 regarding required contractual notices for online content and software).

Figure 13.5 Historically, patented articles were marked with applicable patent numbers.

13.5 Compliance with Laws

Different attorneys take different positions about the compliance with laws clause that appears in almost every agreement. In its most basic form, the provision can be stated in a single sentence.

While a contractual commitment such as the one above does not make compliance with applicable laws any more or less mandatory, it does establish that a party that fails to comply with applicable laws can be found to be in breach of contract, in addition to any liability that the noncomplying party may have to regulatory or enforcement authorities. Without such an obligation, it is not at all clear that a party’s violation of local health or safety regulations, tax withholding requirements, import duties, data privacy requirements or any of a thousand other legal and regulatory requirements would constitute a breach, or that the other party would have any contractual recourse for such a violation. In fact, the other party might even be implicated in the violation. Thus, the compliance with laws clause is both a useful statement of the parties’ mutual intention to abide by the law, and their expectation that the other party will do so as well.

Some contract drafters, however, feel the need to explicitly enumerate a long string of laws, rules and regulations with which the parties will comply. Typical areas recited in this manner include anti-bribery regulations, export restrictions, currency controls, anti-money-laundering rules, antidiscrimination laws, and data security and privacy rules. Strictly speaking, it is not necessary to enumerate any particular area of legal compliance unless one party wishes to receive notifications or otherwise to be involved in the other party’s compliance efforts (as is sometimes the case with regulatory approvals sought for food and drug products), or if one party requires the assistance of the other party to achieve compliance (which is sometimes the case with respect to international payments).

In addition to legal requirements, the parties may wish to require compliance with extralegal best practices, licensure requirements, accounting and other professional standards, conflicts of interest rules, sustainability certifications, diversity goals, codes of conduct and codes of ethics. For example, firms such as Walmart have adopted strict standards for their supply chain partners that prohibit a range of practices, whether or not illegal in the partner’s country, including prohibitions on forced and child labor, unsafe working conditions and excessive working hours and assurances of fair compensation, environmentally sustainable practices and the availability of collective bargaining.Footnote ¹²

Because one party may be implicated in the violation of law by the other party, it is prudent to ensure that the violating party indemnifies the other for such violations. Assuming that an agreement contains a general indemnification provision (see Section 10.3), the compliance with law provision may simply reference the general indemnification provision of the agreement.

13.6 Force Majeure

The concept of force majeure – literally “superior force” – has its origins in Roman law. It refers to an event beyond the control of a party that prevents that party from performing its contractual obligations. The doctrine is recognized under both the civil law and the common law, and is related to other doctrines that excuse contractual performance including impossibility, impracticability and frustration of purpose. Nevertheless, force majeure today is largely a contractual construct that is defined by the language of the agreement.

Force majeure is typically defined as an event that is beyond reasonable control of the affected party, was not reasonably foreseeable, has an impact that cannot be avoided through the exercise of reasonable efforts, and materially impedes a party’s ability to perform its contractual obligations. Performance must typically be impossible or impractical in light of the event, not simply more burdensome. For example, an increase in the price of supplies or labor, by itself, would generally not qualify as an event of force majeure, as parties are expected to take price fluctuations into account when negotiating contractual commitments.

In addition to establishing the characteristics of a force majeure event, many force majeure clauses provide a list of force majeure events (see the example below). Depending on the language of the clause, the list may be exhaustive or nonexhaustive. Some clauses also include a generic “catch-all” phrase such as “any other events or circumstances beyond the reasonable control of the parties.” Other clauses may include a list of excluded events that do not constitute force majeure, such as financial hardship.

In some jurisdictions, including New York, courts will excuse performance on the basis of force majeure only if the force majeure clause specifically names the type of event that prevented a party from performing, even if the clause otherwise contains an expansive catch-all phrase.Footnote ¹³ Courts may also refuse to excuse a party’s performance on the basis of force majeure if an event was foreseeable or known at the time that the agreement was executed, especially if the event is not specifically listed in the force majeure clause.

If a force majeure event has occurred within the meaning of the contractual definition, and a party cannot perform its obligations, a typical force majeure clause excuses that party’s performance for the duration of the force majeure event. Some clauses set forth additional requirements on the party whose performance is excused, such as a duty to mitigate damages or to resume performance as soon as possible.

13.7 Merger and Entire Agreement

As discussed in Section 7.3, the court in Permanence Corp. v. Kennametal, Inc., 725 F. Supp. 907 (E.D. Mich. 1989) partially based its refusal to imply an obligation of best efforts on the licensee on the fact that the licensing agreement in question contained a “merger” or “integration” clause, which stated that the written agreement “contains the entire agreement of the parties.” Such clauses are practically de rigueur in agreements today, but that does not reduce their value.

13.8 No Waiver

The equitable doctrine of waiver is an affirmative defense whereby a party accused of a wrong may claim that it should not be held liable for that wrong because the accusing party has previously failed to seek redress for the same wrong, effectively waiving its right to do so. The waiver defense arises in connection with IP licensing agreements when one party has neglected to declare a breach of the agreement after repeated failures of performance by the other party. For example, if a licensee repeatedly pays its quarterly royalties more than sixty days after the date due, and the licensor fails to assert a breach, then the licensor may inadvertently waive its right to assert a breach for late payment.

To avoid this result, parties have taken to including “no waiver” clauses in their agreements along the following lines.

Notwithstanding the inclusion of such a clause, a court might still recognize a breaching party’s waiver defense based on applicable precedent. The issue was addressed by the Eighth Circuit in Klipsch Inc. v. WWR Technology Inc., 127 F.3d 729 (8th Cir. 1997):

The District Court found that under Indiana law the existence of the non-waiver provisions does not prohibit WWR from asserting the defense of waiver…

Klipsch relies upon the Indiana Supreme Court’s decision in Van Bibber v. Norris, 419 N.E.2d 115 (Ind. 1981), to support its argument that the non-waiver provision in the License Agreement prevents WWR from asserting the defense of waiver. In Van Bibber, the parties entered into an installment sale security agreement, which provided for debtor’s purchase of a mobile home from seller. During the course of the agreement, seller’s bank accepted numerous late payments from debtor, without declaring a default. In the sixth year of the security agreement, however, after an untimely payment, the bank declared a default and repossessed the mobile home. The trial court found that the bank, through its pattern of accepting late payments, had waived its right to enforce strict compliance with the terms of the security agreement. The Indiana Supreme Court reversed, holding that the trial court improperly had ignored the security agreement’s non-waiver clause, which prevented the acceptance of late payments from acting as a waiver of the bank’s right to strictly enforce the terms of the agreement.

We hold that Van Bibber does prevent WWR from successfully asserting its waiver defense. The District Court noted that “[a] broad interpretation of Van Bibber would bar WWR’s waiver argument,” but found “that such a broad interpretation would be improper.” The District Court reasoned that language in Van Bibber strongly indicated that the Indiana Commercial Code compelled that court’s holding, and that Indiana cases decided since Van Bibber extend its holding only to cases involving non-waiver clauses in the mortgage context. We believe that the language in Van Bibber is sufficiently expansive to apply to this case. The specific purpose of the non-waiver clause as stated in Van Bibber, “avoiding the risk of waiver by notifying the debtor in a contract term that the secured party’s acceptance of late payments cannot be relied on as treating the time provisions as modified or waived,” seems equally germane to the present case. If the parties’ License Agreement “is to be truly effective according to its terms, we must conclude that [Klipsch] did not waive its rights to demand strict compliance and to pursue its contract and statutory remedies.”

13.9 Severability

Despite, or sometimes because of, the best efforts of contract attorneys, courts may sometimes find certain provisions of an agreement to be invalid. The invalidity of agreement terms can, as we will see, arise from bankruptcy law, antitrust law, the laws surrounding IP misuse and various other theories.

If an agreement provision is found by a court to be invalid, a question arises regarding the effect of that invalid clause on the rest of the agreement. Does one bad apple spoil the barrel? Or should the invalid clause be surgically excised from the agreement, so that its remaining, inoffensive provisions continue in effect? Courts have wrestled with this question over the years, and in many cases have come up with answers (e.g., patent or copyright misuse generally invalidates the entire agreement – see Chapter 24).

But in an effort to avoid the uncertainty of judicial determinations, attorneys have developed contractual mechanisms to save the rest of their agreements after one provision is found to be invalid. This is known as the severability clause.

In the above example, clause (a) seeks to save other terms of the Agreement when one term is found invalid. Clause (b) seeks to reform the offending clause itself to make it as enforceable as possible. For example, a court might find that the parties’ ten-year noncompetition covenant is unreasonably lengthy. Instead of deleting the noncompetition covenant entirely, the parties here invite the court to substitute the original ten-year term with a shorter, more reasonable, one.

One relatively uncommon twist on the severability clause is the so-called essentiality clause. If a particular clause of an agreement is considered to be essential to the parties’ bargain, then the invalidation of that clause could disrupt the commercial value of the agreement to one or both parties. Thus, the agreement may specify that if the essential clause is found to be invalid or unenforceable, then the entire agreement will terminate at the option of one or both of the parties.

Such clauses are rare,Footnote ¹⁴ probably for a number of reasons. For one, they draw attention to a potentially invalid or illegal clause. Second, they provide an incentive for a party wishing to terminate the agreement to challenge the legality of the essential clause.

13.10 Order of Precedence and Amendment

In some cases parties will execute a variety of documents in connection with a single large transaction or series of related transactions. In addition to one or more IP licensing agreements, parties may execute service, consulting, supply, manufacturing, sponsored research, distribution, resale, agency, marketing, advertising, employment, investment and a range of other agreements, as well as multiple statements of work, service orders, purchase orders, affidavits and the like. Not surprisingly, this barrage of documents sometimes includes conflicting and contradictory terms. For example, an IP licensing agreement may call for indemnification for patent claims up to certain limits, while a related statement of work may include an uncapped indemnity and a purchase order may disclaim any responsibility for IP infringement at all. This situation resembles the classic contractual “battle of the forms,” with the added twist that many of the contradictory documents are signed and negotiated agreements, rather than preprinted stock forms.

To address this problem, parties often include a clause relating to the order of precedence of the many different agreements included in their transaction. That is, in the event of a conflict, they specify which document takes precedence over the others.

13.11 Mutual Negotiation

There is an ancient rule of contract interpretation – contra proferentem – that states that ambiguities in a contract are resolved in favor of the nondrafting party. That is, if a contractual clause is ambiguous or incomplete, the fault lies with the drafter, and the drafter should not get the benefit of an ambiguity or omission that it could have avoided. As succinctly put by Henry Smith, “The drafter is presumed to be the cheapest cost avoider.”Footnote ¹⁶

But even if one party produces the first draft, most complex agreements today are reviewed and negotiated by counsel for both parties. Should the party that produced the first draft be placed at a perpetual disadvantage when a contract is interpreted? Or should careful records be kept of who drafted the final version of each provision in the agreement? To avoid these headaches, many agreements contain a short clause that places responsibility for drafting the agreement on both parties.

13.12 Notices

Much of the day-to-day management of contracts occurs via telephone, email or in-person meetings. But when official notification is required under an agreement – notice of breach, termination, achievement of milestones, etc. – the only prudent practice is to require that such notices be in writing and physically delivered.

Drafting Notes

1. [1] Designated recipient – bearing in mind that many IP licensing agreements continue for years, it is useful to identify the recipient of legal notice by position rather than name. For example, “Chief Financial Officer,” “Project X Contract Manager,” “General Counsel,” rather than “Jane Smith,” who may have left the company the year before notice was sent.

2. [2] Counsel copy – whether or not justified, there is a general belief that law firm partners are more likely to remain in their positions than corporate executives. As a result, external counsel are often listed as “copy to” addressees of formal legal notices. Another reason to include counsel (external or internal) on official notices is to ensure that someone who understands the meaning of the notice will receive and act on it in a timely fashion. In many cases the “copy to” notice does not constitute official Notice under an agreement.

3. [3] Electronic mail – in today’s connected world it seems quaintly archaic to require that formal legal notice be given by certified mail or FedEx. Why not email, which is the main means of business communication today? There are many reasons. First, email is linked to an individual. If that individual leaves the employ of the relevant company, odds are good that the notice will never be delivered. Second, email is not always reliable. It can be filtered and redirected to spam folders. It can also be deleted inadvertently far more easily than a FedEx package. Third, a physical, signed document carries more weight and draws more attention than yet another email, which can get lost in the inbox of a busy executive. Finally, email can easily be misaddressed. Thus, the requirement to send a physical letter serves to protect the sender as well as the recipient.

4. [4] Effective upon receipt – if electronic or other means are accepted as suitable for delivering official notice, then notice should be effective at the time that the message was received (i.e., there is little need for a delay, as there is for a mailed copy).

5. [5] Changing notice addresses – every agreement should contain some provision for changing or updating the individuals and addresses to be used for notice, but regrettably few parties avail themselves of the opportunity to make such updates.

Finally, for transactions involving multiple documents (e.g., license agreements, maintenance agreements, services agreements), it is useful to ensure that all notice provisions are consistent. This is particularly important when drafting has been split up among different counsel. Consider stating the notice provision in the main transaction agreement and incorporating it by reference elsewhere.

Figure 13.6 Many older agreements still provide for official notice by Telex or teletype machine. This technology was a fixture in business offices from the 1950s to the 1970s and preceded the facsimile or fax machine.

13.13 Interpretation

Some agreements set forth a set of rules by which the contractual language will be interpreted, should the need for interpretation arise. While these rules may seem obvious or trivial, each is the result of actual disputes between parties over the years.