A federal appeals court has ruled that, at least under Massachusetts law, a company that acquired another company’s technology assets, for cash plus an earn-out, was obligated to use reasonable efforts to promote the tech­nology, so that the seller would have a shot at the earn-out payments. See this Law.com article about the First Circuit’s Sonora Scanners case, re­vers­ing and remanding a summary judgment in favor of the acquiring company (discussed on another point in this posting).

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Dallas corporate lawyer Byron Egan has long been famous for the treatise-like articles he produces for his continuing-legal-education talks. His firm, Jackson Walker, has posted a heavily-annotated paper, totaling nearly 200 pages, on the Sarbanes-Oxley Act and how it affects various aspects of M&A work. The paper also has a couple of useful forms in the appendix, along with links to some of his other tomes.

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A patent-infringement warranty in a contract can be a decidedly non-trivial matter, because:

• You can infringe a patent * without knowing it, indeed without even knowing that the patent exists;
• You can infringe a patent that didn’t exist when you did your product-design work — that can happen if the patent application was still pending when you did your design work, and the patent issued afterwards;
• You can’t manage compliance with a patent infringement warranty merely by making sure your people do their own work.

* Generally, infringement of a patent consists of (1) making, using, offering, or selling • a product or service • that comes within the scope • of any one of the claims of the patent; or (2) by inducing others to do so; or (3) by ‘contributing’ to such action by others.

If you’re asked to give a patent infringement warranty for your product or service, you’ll definitely want to consult patent counsel. You and your counsel might decide you need to commission a patent search and have the counsel provide you with a clearance opinion. That will usually involve non-trivial calendar time and expenses, which of course might have to be factored into your pricing and scheduling for the contract.

In contrast, copyright- and trade-secret warranties are comparatively easy for a provider to manage. Generally speaking, demonstrably doing one’s own work, without improperly “borrowing” from others — that is, proving independent creation — should defeat claims of copyright infringement or trade-secret misappropriation. (FOOTNOTE: Proof of independent creation is great to have, but it’s not necessarily required to prevail against copyright-infringement or trade-secret-misappropriation claims.)

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Amazon.com is dropping its online marketing affiliates in North Carolina and Rhode Island.  It did so to avoid having to deal with recent sales-tax legislation in Rhode Island and North Carolina. These bills would require Amazon and other companies to collect sales tax for in-state sales if they had any online marketing affiliates in the state. Amazon is disputing the constitutionality of the new provisions. (For a more extensive background discussion, including comments from representatives of the affiliates, see the two linked articles above, from the Wall Street Journal.)

I was curious whether Amazon’s affiliate agreement allowed it to terminate this way.  The answer seems to be "yes."  I used The Wayback Machine to look up a March 2006 version of the Amazon affiliate agreement.  It says in paragraph 12, "Either you or we may terminate this Agreement at any time, with or without cause, by giving the other party written notice of termination." Amazon is probably glad someone on their legal team thought to include that language.

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Pillsbury Winthrop lawyer Sanjay Jose Mullick writes about laws restricting the possession of encryption technology, and the surprising possible consequences if those laws were to trap a traveler carrying a laptop computer or a smartphone such as the Blackberry or iPhone.

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Intuit, maker of Quicken and TurboTax, has apparently signed a patent license agreement, which it estimates as being worth $120 million over ten years, with Intellectual Ventures, a leading ‘non-practicing entity.’ (Some call Intellectual Ventures a ‘patent troll‘; the company’s home page speaks in terms of its “Invention Capital™ network”). For more details and commentary by industry observers, see this story by Zusha Elinson in today’s The Recorder.

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“Wow, this is a long contract!” Most lawyers have heard this from clients or counterparties.

True, sometimes contracts run too long because of overlawyering, where the drafter(s) try to cover every conceivable issue.

But too close a focus on contract length may obscure the more-important issue: contract readability.

This isn’t just a question of aesthetic taste. The more difficult a draft contract is to read and understand, the more time-consuming the review process, which delays the deal (and increases the legal expense).

Readability has little to do with how many pages a contract runs. Many negotiators would rather read a somewhat-longer contract, consisting of short, understandable sentences and paragraphs, than a shorter contract composed of dense, convoluted clauses.

(Short sentences and paragraphs also make it easier to cut out unneeded verbiage, as well as to save your work for later ‘mix and match’ reuse.)

So the better way to draft a contract is to write as many short sentences and paragraphs as are needed to cover the subject.

Even if the resulting draft happens to take up a few extra pages, your client will thank you for it.

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You have to wonder whether to feel sorry for the loan broker in Wheeler vs. Blumling. This broker found a business loan for a customer, and then went along with the lender’s insistence that the broker himself sign a guaranty. Unfortunately, things went badly awry (including the indictment of one of the borrower’s business associates for wire fraud), and the lender sued the broker and others for repayment.

(Interestingly, the loan bore interest at what the appeals court described as the “breathtaking” rate of 1,000% per annum.)

The broker tried to escape liability on his guaranty by claiming he had an oral understanding with the lender. It didn’t work; the court had no trouble holding that the broker was bound by his written obligation:

… [The broker's] evidence does not support a modification of the agreement, but rather consists of assertions of prior oral negotiations that contradict the written instrument he executed. …

[The broker] wants to contradict particular terms of a contract which has already been performed on [the lender's] side and of which [the broker] has already enjoyed the benefits (fleeting though they were). This is exactly what the parol evidence rule forecloses.

Wheeling v. Blumling, No. 07-1992, slip op. at 8-9 (1st Cir. Mar. 25, 2008).

What surprises me most about this case is that the court didn’t hammer the loan broker and his lawyer for making the oral-modification argument in the first place. From the facts reported in the appeals-court opinion, it looks to me like the argument was … thin (at best), and that there was no good reason for the broker’s lawyer to have made the lender spend extra time and money enforcing his rights. Maybe there’s more to it than that; I sure hope so.

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From the March 30 NY Times Magazine’s interview with Paul O’Neill, former secretary of the Treasury:

[NYT:] It’s so hard to understand how the subprime mortgage crisis has triggered a financial crisis of global proportions. [Paul O'Neill:] If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles; that’s basically what we’ve got there.

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Today’s WSJ ($) reports that, in the trial of two former Adelphia executives, an email and witness testimony have implicated Adelphia vendors Motorola and Scientific-Atlanta as “allegedly help[ing] Adelphia cook its books.”

According to [prosecution witness Jarmes R.] Brown’s testimony in U.S. District Court in Manhattan, Adelphia in mid-2000 realized it was going to miss its earnings targets, in part because of higher-than-expected expenses related to the rollout of new set-top converter boxes — the equipment that generally sits on top of cable subscribers’ televisions — that it had purchased from Motorola and Scientific-Atlanta.

Mr. Brown testified that Timothy Rigas, one of the former Adelphia executives on trial, suggested capitalizing the marketing and advertising expenses associated with the rollout of the equipment. That would stretch out the expenses and boost Adelphia’s earnings.

The article notes that “the Securities and Exchange Commission has taken a harder line on suppliers, customers, bankers and others who knowingly helped companies commit accounting fraud.”

See also SEC Hammers Company’s Customers for Securities-Fraud Participation.

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