The Path to Efficient Contracting

Let me begin by stating the obvious, namely, that these are my personal views, and not those of any employer, past or present.  

First, some background, for those not familiar with me or this personal blog.  I have practiced law in various in-house and law firm settings for the past 20+ years and have worked on thousands of transactions.  Generally, there are high volume and lower volume transactions. I include in the former anything from a non-disclosure agreement (NDA) to a product sales or license agreement.  I include in the latter mergers and acquisitions (M&A) transactions, collaboration or joint development agreements, patent sales and license agreements, and very large ($100MM+) capital purchases.  I focus my “rules of thumb” on high volume transactions. That said, many of these rules apply to lower volume transactions as well.  Here we go.

1. Go slow(er) to go fast(er).  Ideally, I would create a negotiation plan (or template) for any deal, excepting an NDA.  The plan (or template) would list out the key business and legal terms and indicate the opens and accepts positions. So long as the negotiating team meets the pre-approved accepts positions, the deal can be closed, and the team can move on to the next one.  In practice, this works quite well, but for counterparty “asks” sometimes either outside the scope of the plan or not fitting nicely into the four corners of the plan.  Similarly, some issues (e.g., IPR indemnity) are inherently messy, and while considerable structure can be applied here, some analysis and further negotiation will be required.  For IP transactions, e.g., technology collaboration, I would create an IP Plan, addressing the work to be performed and ownership/licensing of background and foreground IP.  The IP Plan is a specialized variant of the negotiation plan.  Unsurprisingly, the incremental benefit to having a negotiation plan is greater in more complex transactions. If licensing is planned or likely for a number of, e.g., software packages over time, a framework license agreement, with exhibits for the individual packages, can save time in the long-run (rather than negotiating each license separately). 

• Create a playbook for high volume transactions. This would entail a deeper dive into the main negotiated terms of the deals and include talking points and sample language. 

• Create a Deal Database. This would summarize key terms and give you a sense of acceptable boundaries for a given transaction. 

• Decide which inbound and outbound deals your organization will not negotiate. As a seller/licensor, PDF the document (and sign, e.g., via Docusign) or present as a click-through.  If the proposed agreement has some balance (and/or is generally reasonable), this might be a viable option.  NDAs and short-term (one year or less) product evaluation agreements are usually good candidates for this.  In theory, everything is negotiable, but in some cases the parties may agree that given the scope of the underlying business transaction the proposed terms are good enough and the benefits of negotiation are incremental at best.  Alternatively, you could decide that you will not negotiate certain terms (e.g., no IPR indemnity) unless the sales or licensing fees during the contract lifetime will exceed some dollar threshold (e.g., $1MM). 

• The Perfect is the Enemy of the Good.  Voltaire wrote, in La Beguele (1772): “Dans ses ecrits un sage Italien dit que le mieux est l’ennemi du bien …. ”  Put simply, some deals are good enough, and it is time to move on. As an example, if at issue is a short-term zero-dollar (inbound) evaluation license agreement, the license scope looks appropriate, and there are no onerous or non-sensical compliance requirements, this agreement might be good enough for me as a licensee, even without any representations or warranties or IPR indemnity. My call to action (CTA), then, is for both sides to be flexible and cognizant of the context, and business requirements, of each deal.  At the same time, a bad deal is worse than no deal. Walking away, when appropriate, is another component of efficient contracting. All of this analysis must be done with first principles in mind and early and ongoing engagement of key stakeholders and, of course, the decision maker.

• Focus on the Key Issues. This, in essence, is smart contracting.  I recall a client once asking me about a certain provision, “why should I really care?” The real question, then, is, why is a certain term important in this deal? As an attorney marking up a draft, include your rationale for the proposed change. This goes a long way toward making the negotiations more efficient.  My personal view of what matters, in the long run, is informed, in part, by experience in commercial and IP due diligence in the context of M&A transactions.  An uncapped IP indemnity might not raise a red flag, but an overly broad or insufficiently narrow license, a covenant not to use or assert might, or onerous technical support obligations might. 

• Automate Where It Makes Sense. NDAs, product evaluation agreements, product license/subscription (access) agreements, etc. are good candidates. This is more legal process operations, to my mind.  Put otherwise, I am not suggesting (yet) that artificial intelligence (AI) negotiate NDAs, etc. based on pre-set rules, but this could be an option someday.  As noted above, heavily negotiating NDAs, especially mutual ones, is not a good use of anyone’s resources, including even AI’s. 

• Engage Early and Often With Your Attorney. I have experimented with deal intake forms.  I am just as fine with a short (30 minute) conversation discussing the deal and its objective and sensitivities. 

• Beware of Precedent. Precedent, of course, cuts both ways.  There is a good deal precedent (you agreed to these terms before, and you should agree now) and bad deal precedent (yes, I agreed to this before, but this situation is different, and here’s why).  Precedent may or may not matter (much). If a number of similar transactions are planned or likely with a given customer or vendor, setting the wrong precedent is, for obvious reason, problematic. If this is a one-time or low or zero value transaction, precedent is less important. 

1. Get Unstuck (with a Hike). Pictured above is Purisima Creek Trail in the Purisima Creek Redwoods Open Space Preserve, about twenty-five miles south of San Francisco. I cannot assure contracting (or any other kinds of) epiphanies during this (or any other) hike, but different scenery (and time away from your electronic devices) will broaden your aperture and may suggest pragmatic solutions to your contracting dilemmas.  Efficient Contracting is a journey. Let’s begin.

Comments welcomed.