Ambiguity: When Good Contracts Go Bad
Ambiguity is the number one reason why good contracts go bad. Ambiguity is the gasoline that powers the commercial litigation engine. It is the coal that’s shoveled into the furnaces that keep litigators warm and cozy at night. I know that litigation is sometimes a necessary evil—but when litigation arises from ambiguity in a contract, it is not necessary. It is sad.Case in point: the matter of The SCO Group, Inc. v. Novell, Inc. The lengthy decision, handed down by the Tenth Circuit Court of Appeals on August 24, illustrates the (expensive) perils that your company faces if it uses ambiguous agreements.
Here are the four facts you need to know about the case in order to follow along:
1. Novell sold the rights to certain software (called Unix and UnixWare) to a company called Santa Cruz. (Ok, so far so good…..)
2. The parties entered into a written asset purchase agreement (or, “APA” for short) describing the terms of the sale. (Ok, you with me so far? Good.)
3. One section of the APA stated that Santa Cruz would purchase from Novell “all rights and ownership of UNIX and UnixWare”. (Ok, so everything goes to Santa Cruz. Got it? Good, so do I.)
4. One year after the deal closed, the parties amended the APA to say that “all copyrights and trademarks, except for the copyrights and trademarks owned by Novell as of the date of the Agreement required for [Santa Cruz] to exercise its rights with respect to the acquisition of UNIX and UnixWare technologies” were excluded from the deal. (Hang on…I'm lost. Where's the aspirin?)
You follow that? Of course you didn’t. Ok, read #5 again. Get it the second time? Of course not! In fact, you can read that quote from the case several times and still not know exactly what was being sold by Novell.
I haven’t seen that level of ambiguity since I went to an exhibit of modern art at the Guggenheim Museum in '84.
Even the court described the case as involving "a complicated, multi-million dollar business transaction involving ambiguous language about which the parties offer dramatically different explanations."
News flash: one thing you never want to hear is someone describing your multi-million dollar business transaction as involving "ambiguous language" that is subject to "dramatically different explanations."
A contract should be a beautiful thing, like art. But contract drafting is not Impressionism. It is Realism. You shouldn't look at your contract and be able to say, "I don't know—what do you think it says?" If your contract means different things to different people, then you have a big (and potentially expensive) problem. Fix it before it becomes even bigger.
Avoid this situation by following these rules:
1. If a person who is reasonably knowledgeable about your industry cannot understand your contract, then your contract stinks.
2. If your contract stinks, stop using it and get a competent attorney to re-write it.
3. If your contract involves technology or intellectual property, then call an attorney who is experienced in those areas. Do NOT assume that an attorney is competent to draft a contract because he speaks well, or because she is adept at email. Similarly, don't assume that every attorney labeled with the moniker "corporate lawyer" or "business lawyer" or "IP lawyer" or (my personal favorite), "new and emerging media lawyer" knows what he or she is doing.
4. Say what you mean. If something is a license, then say, "This is a license, not a sale of software." If it is a sale, then say, "This is a sale, not a license." If you don't know the difference, then call me or email me and I'll explain the difference between the two .
5. Confucius says, "If you hire a litigator to draft your agreement for you, then you will end up in litigation." (Ok, he didn't really say that—but trust me, that's what will happen.) Use the right person for the job. Again, if you don't know who the right person would be, then drop me a line. I'll tell you what kind of attorney you need to get the job done right.
A final thought: Professor Ronald Silverman, my Property Law professor at Hofstra Law School (the most outstanding law professor I ever had), once told me, "If you can't explain it, then you don't understand it." So here's the deal: before your lawyer puts pen to paper, ask him to describe your deal to you. If it sounds ambiguous coming out of his mouth, what do you think it will look like on paper?
Posted by Bradley Gross at 9/9/2009 8:52 PM 
Categories: Intellectual Property,Licensing
Tags: intellectual property technology law
Categories: Intellectual Property,Licensing
Tags: intellectual property technology law
As always, very informative blog post. I very much agree with the contracting points at the bottom of the post.
Reply to this