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Solutions to Pandemic Patent License
Problems: Impracticability,
Frustration, Impossibility and Force
Majeure for IP Lawyers
June 25, 2020
Litigation Webinar Series
DJ Healey
But first…
• …A word from our General Counsel– This presentation and talk are to promote discussion and
professional development on the topics discussed.
– This presentation and talk are not legal advice.
– And this presentation and talk do not represent the opinions of
Fish & Richardson P.C., or any of its clients, or even mine!
– Please do not cite this presentation in a brief or use it in court.
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Pandemic Problems in IP?
• Force Majeure clauses seem routine in trademark licenses, but not as common in
“bare” patent or copyright licenses.
• Trade secret NDAs and licenses commonly have a species of force majeure built in to
them: the obligation expires when the trade secret ceases to exist due to no fault of
either party.
• Choice of law and contract language will be deciding factors in many cases.
• Where no contract clause, in many IP contracts the Restatement (Second) of
Contracts or a state or national statute likely is probative (or even controlling).
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Pandemic Problems in IP?
• But patent, trade secret and copyright license are still susceptible to
pandemic problems: Government trends post-pandemic nationalism?
– Increased restrictions on technology transfers.
– Increased currency controls.
– Government and/or market currency devaluation.
– Expansion of impossibility, impracticability statutes and case law.
– Expansion of “abuse of dominant position” rules.
– Increased taxes.
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“Act of God” - As a Legal Concept
California Civil Code Section 3526. CA Civ Code § 3526 (2017)
“No man is responsible for that which no man can control.”
Only applies where the sole proximate cause is an unforeseeable Act of God – it will not
apply where foreseeability permits for precaution.
Only applies where a party’s conduct had a role in causing the problem.
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Contract Defenses For A Pandemic
• Force Majeure (Impossibility)(Frustration):
– Performance is impossible in light of enumerated circumstances in the contract
that are not the fault of either party but which prevent one party from fulfilling its
obligations.
– Destruction of object or means of performance.
• Impracticability (Futility)(Frustration):
– Restatement § 261 of Contracts, UCC § 2-615, 616, COGSA Art. 79, UNIDROT
Article 7, unforeseen, uncontrollable circumstances frustrate object or timing of
contract. Also state and foreign statutes, Cal. Civil Code - CIV § 1511-1513,
3526, German Civil Code Sections 275, 313.
• Excuse (Prior Breach):
– The other party’s failure to perform excuses reciprocal performance (as in other
contract cases…)
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1) Unforeseeability
• Unforeseeability is typically required by force majeure.
• Unforeseeability is always* required by UCC impracticability, restatement, and
statutes.
– Depends on sophistication of the parties.
– Reviewed in context of the industry/contract.
• Regulatory example:
– Parties in regulated industries are expected to know the regulations.
– Regulations are subject to change.
– Some states hold extent of regulatory changes are foreseeable.
– Some consider if a contract shows awareness of regulatory issues.
– Contract terms limit operation of common law/Restatement.
Drummond Coal Sales, Inc. v. Kinder Morgan Operating LP “C”, 2017 WL 3149442 (N.D.
Ala 2017)
* Of course, in law always means almost always…
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2) Impossibility
• Objective impossibility is the test. Drummond Coal Sales, Inc., 2017 WL 3149442 *6.
• Destruction of the subject matter of the contract or the means of performance makes
performance objectively impossible. Kel Kim Corp. v. Cent. Markets, Inc., 519 N.E.2d 295,
296 (1987).
• Requires that a party “must demonstrate that it took virtually every action within its
powers to perform its duties under the contract.” Kama Rippa Music, Inc. v. Schekeryk,
510 F.2d 837, 842 (2d. Cir. 1975).
• Where substantial performance is possible, not excused. United Equities Co. v. First
Nat. City Bank,19 UCC Rep. Serv. 510 (N.Y.App.Div. 1976), aff’d., 363 N.E.2d 1385 (Ct. App.
1977).
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Contracting Against the Unknowable: Force Majeure
• Force majeure clauses are strictly construed as they undo the contract.
Kel Kim, 519 N.E. 2d at 296-97.
• Clauses “…are confined to things of the same kind or nature as the
particular matters mentioned.” Kel Kim, 519 N.E. 2d at 297.
• United Equities Co. v. First Nat. City Bank,19 UCC Rep. Serv. 510
(N.Y.App.Div. 1976):
“…[A] force majeure clause should be interpreted consistently with its
function as a Force majeure clause. The purpose of a force majeure
clause is to limit damages in a case where the reasonable expectation of
the parties and the performance of the contract have been frustrated by
circumstances beyond the control of the parties.” (citations omitted)
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“Force Majeure” and Other Defenses
• Force majeure clauses must be analyzed under the law of the
jurisdiction that governs the contract.
• Form contract force majeure terms are generally very one-sided and
onerous.
• Force majeure clause may pre-empt or narrow common law/restatement
defenses.
• UCC “battle of the forms” can negate UCC force majeure clause (as well
as other protections).
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Force Majeure: Cooperation in a Crisis?
• Force majeure clause may excuse performance if there is an Act of
Nature or Act of Government that makes performance on the terms
promised impossible, but may also require the “Party whose
performance is inhibited …use reasonable efforts to overcome the
effect of such force majeure or perform as promptly as practicable
thereafter.”
• Tougher question might be, what is the duty of the non-breaching party
to accept performance? (Compare UCC 2-616)
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Force Majeure Clause in a Patent License?
• Many patent licenses do not have force majeure clauses.
– Where the only economic deal is to pay a royalty on goods as sold, there may not be need for force
majeure.
– Patent pool contracts to license for implementation of a standard typically are “pay as you go”, and
do not have or need force majeure clauses.
• Patent licenses typically do have “merger and integration clauses”
– Rules of evidence of contract interpretation in some states will bar extrinsic evidence or evidence of
intent of the bargain.
– In other jurisdictions circumstances surrounding the contract can be used to interpret the terms.
– Force majeure clause ensures concept survives merger in final agreement.
• But many patent licenses are economic bargains:
– Upfront or minimum payments required to encourage development and distribution.
– Projected sales used to calculate a set periodic payment assuming a range of sales.
– Lump sum payment on projected sales.
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Force Majeure Clause Samples: Commercial Contract
• Force majeure typically defined as,
– “…without limitation, any act of God or of a public enemy or terrorist act, labor
troubles, strikes, lockouts, riots, nonavailability of machinery, embargoes,
blockades or interventions or expropriations by government or governmental
authorities, interference by civil or military authorities or other civil unrest, [or]
failure or delay of manufacturers or suppliers to deliver machinery or equipment....”
– Applying N.Y., the court held it to be inapplicable when regulation increased
overtime such that the market was wiped out. Drummond Coal Sales, Inc., 2017
WL 3149442 at * 8.
– Impossibility, impracticability, and frustration of purpose might be preempted or
limited by the contract.
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Force Majeure Clause: Ejusdem Generis
• General language of excuse are not to be given the most expansive
meaning possible, but are only applied to the same general kind or
class as those specifically mentioned. Kel Kim, 516 N.Y.S.2d at 806.
• Catch-all language following enumerated events only fills any gray area
around those words.
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Force Majeure Clause: Drafting Tip
• To write a broader force majuere clause, start with the general and
then make clear specific events are non-exclusive examples.
• Alternatively, adopt expressly UCC 2-615, 616 or Restatement 261, 263
or some other statute.
• Consider effect of merger and integration clause.
• Consider choice of law:
– NY law is much tougher than California law.
– UK law is tougher than NY law.
– Civil law countries will likely have a statute on point.
– International treaties may also have choice of law clause: e.g., UNITED
NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL
SALE OF GOODS, Art. 79.
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Excuse: First Breach Rule• If a party breaches the contract, then other party’s performance is excused by the
breach.
• Drummond, 2017 WL 3149442, example (motion to dismiss):
– Parties had contract for transportation of coal from a harbor-RR terminal.
– Contract required coal supplier deliver at least X and pay RR transportation cost if failed to meet
minimum.
– Over time, EPA regulations became so hard on coal that demand dropped to zero, and coal supplier
stopped deliveries.
– Coal supplier paid transportation cost as demand declined, but stopped when RR reduced capacity
at terminal to less than the minimum.
– Court rejected defenses based on regulatory changes as foreseeable in the context of the contract
as interpreted under NY law.
– But held coal supplier could be excused from performance/payment once the RR failed to provide
sufficient facilities to handle contract minimums. (ultimately, however, RR won on MSJ).
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Impossible, Mistaken, or Illegal from Inception
• If a contract never could have been performed, then it may be unenforceable as
impossible: e.g., fulfillment of non-existent condition precedent.
• If a contract is based on a mutual mistake of fact then it is unenforceable because
consent is ineffective.
• If a contract is illegal it is unenforceable.
• In these situations the court will not enforce the contract either for complete
performance or damages, rather restitution is the remedy.
• CONTRAST this to UCC and Restatement where modified performance can be
required.
See generally Orlando v. Carolina Casualty Ins. Co., 2007 WL 2155708 (E.D. Cal. 2007)
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Restatement (Second) of Contracts § 261 (1981)
• “Where, after a contract is made, a party’s performance is made impracticable
without his fault by the occurrence of an event the non-occurrence of which was a
basic assumption on which the contract was made, his duty to render that
performance is discharged, unless the language or the circumstances indicate the
contrary.”
• But see: comment (a), “Even though a party, in assuming a duty, has not qualified the
language of his undertaking, a court may relieve him of that duty if performance has
unexpectedly become impracticable as a result of a supervening event (see
Introductory Note to this Chapter).”
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§ 264 Prevention by Governmental Regulation or Order
• Restatement is much more accommodating than force majeure or UCC or NY law in
that it accommodates regulatory changes and changes in the law:
– “If the performance of a duty is made impracticable by having to comply with a domestic or foreign
governmental regulation or order, that regulation or order is an event the non-occurrence of which
was a basic assumption on which the contract was made.”
– Comment(a) “………Therefore, if supervening governmental action prohibits a performance or
imposes requirements that make it impracticable, the duty to render that performance is
discharged, subject to the qualifications stated in § 261. The fact that it is still possible for a party to
perform if he is willing to break the law and risk the consequences does not bar him from claiming
discharge. The rule stated in this Section does not apply if the language or the circumstances
indicate the contrary…….”
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UNIDROT Principles
• UNIDROIT Principles of International Commercial Contracts (UPICC), ARTICLE 7.1.7
(‘international restatement’ not treaty):
– (1) Non-performance by a party is excused if that party proves that the non-performance was due
to an impediment beyond its control and that it could not reasonably be expected to have taken the
impediment into account at the time of the conclusion of the contract or to have avoided or
overcome it or its consequences.
– (2) When the impediment is only temporary, the excuse shall have effect for such period as is
reasonable having regard to the effect of the impediment on the performance of the contract.
– (3) The party who fails to perform must give notice to the other party of the impediment and its
effect on its ability to perform. If the notice is not received by the other party within a reasonable
time after the party who fails to perform knew or ought to have known of the impediment, it is liable
for damages resulting from such non-receipt.
– (4) Nothing in this article prevents a party from exercising a right to terminate the contract or to
withhold performance or request interest on money due.
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Statutes and Treaties, Examples
• California Code, Civil Code § 1511, et seq., § 3526
• UCC § 2-615. Failure of Presupposed Conditions
• Article 79 UN International Treaty Commercial transactions
– “A party is not liable for a failure to perform any of his obligations if he proves
that the failure was due to an impediment beyond his control and that he could
not reasonably be expected to have taken the impediment into account at the
time of the conclusion of the contract or to have avoided or overcome it, or its
consequences.”
• Foreign statutes, e.g. German Civil Code 275 (Impossibility), 313
(Modification for unforeseen circumstances); Dutch Civil Code Article
6.75 (force majeure); French Civil Code Article 1148 (force majeure);
Italian Civil Code Article 1256 (Impossibility), etc.
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§ 2-615. Failure of Presupposed Conditions: Modify Not
Nullify?
(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with
paragraphs (b) and (c) is not a breach of his duty under a contract for sale if
performance as agreed has been made impracticable by the occurrence of a
contingency the non-occurrence of which was a basic assumption on which the
contract was made or by compliance in good faith with any applicable foreign or
domestic governmental regulation or order whether or not it later proves to be
invalid.
(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s
capacity to perform, he must allocate production and deliveries among his
customers but may at his option include regular customers not then under contract
as well as his own requirements for further manufacture. He may so allocate in any
manner which is fair and reasonable.
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TX UCC § 2.616 Buyer’s Rights
(a) Where the buyer receives notification of a material or indefinite delay or an allocation
justified under the preceding section he may by written notification to the seller as to any
delivery concerned, and where the prospective deficiency substantially impairs the value of the
whole contract under the provisions of this chapter relating to breach of installment contracts
(Section 2.612), then also as to the whole,
(1) terminate …; or
(2) modify the contract by agreeing to … substitution;
(b) If after receipt of such notification from the seller the buyer fails so to modify the contract
within a reasonable time not exceeding thirty days the contract lapses ...
(c) The provisions of this section may not be negated by agreement except insofar as the
seller has assumed a greater obligation under the preceding section.
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“Hell or High Water Clause”
• A clause in a contract that requires payment regardless of circumstances.
• They are enforceable among sophisticated parties in most but not all jurisdictions.
• “Courts have uniformly given full force and effect to ‘hell and high water’ clauses in
the face of various kinds of defaults by the party seeking to enforce them.” In re O.P.M.
Leasing Servs., Inc., 21 B.R. 993, 1006–07 (Bankr.S.D.N.Y.1982).
• In the absence of fraud, the lessor's performance, or any other fact that a lessee might
submit in opposition to summary judgment, is irrelevant. See Colo. Interstate Corp. v.
CIT Group Equip. Fin., Inc., 993 F.2d 743, 749 (10th Cir.1993); O.P.M., 21 B.R. at 1007;
Williston § 53.28
• But in OPM, court held it wiped out even fraud defenses.
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