The Perils of Providing for Entry into a Contract on “Customary” Terms

In this September 2006 blog post I examined the phrase form and substance, as in “an opinion of counsel in form and substance satisfactory to the Buyer.” That phrase, along with the variant form and content, is found in language of obligation requiring the parties to enter into a given contract or requiring one or more parties to deliver a given document. It’s also found in conditions.

In that previous post, I concluded that the phrase is dispensable. I also said, “if you want to avoid any pre-closing haggling, your safest bet would be to attach the document in question as an exhibit.” That’s because when form and substance is modified by the word satisfactory, the parties could end up arguing whether what one side in a transaction regarded as satisfactory was in fact unreasonable and therefore inconsistent with the obligation of good faith and fair dealing imposed on each party to a contract.

In addition to modifying the word satisfactory, the phrase form and substance is also used with the word customary, as in “an assumption agreement in form and substance customary in commercial mortgage defeasance transactions.” In this context, the word customary too might engender uncertainty, in that in any given context it might be far from clear what custom requires, or at least a court might conclude that that’s the case.

That this is a real risk is evident from an opinion issued this week by the U.S. District Court for the District of Minnesota.

Background

The case in question is Gander Mountain Company v. Cabela’s, Inc., No. 04-CV-3125 (D. Minn. July 10, 2007). (Click here for a copy; my thanks go to the reader who told me about this case.) It involves a dispute between two business rivals, plaintiff Gander Mountain and defendant Cabela’s, over whether Gander Mountain may use its trademarks in marketing directly to consumers, including over the Internet, through mail-order catalogs, and through television “infomercials.”

The action arose out of a transaction that occurred in 1996, when Gander Mountain was experiencing severe financial difficulties and was about to file for bankruptcy. The transaction consisted of several components:

• Cabela’s purchased all the assets of Gander Mountain’s catalog division.
• The parties entered into a noncompetition agreement in which Gander Mountain agreed not to compete with Cabela’s in the direct-marketing business for a period of seven years, which meant that during that period it could only sell through its retail stores.
• Cabela’s purchased from Gander Mountain a four-year license that in effect precluded both Gander Mountain and Cabela’s from using Gander Mountain’s trademarks.
• Most importantly for purposes of the lawsuit, the noncompetition agreement also contained a contingent trademark license (the “CTL”) that specified that if Gander Mountain resumed direct marketing after the seven-year noncompete period, Cabela’s would be entitled to purchase for $1,000 a perpetual, exclusive license to Gander Mountain’s trademarks.

The CTL provided in pertinent part as follows:

3. Contingent Trademark License. (a) In the event Gander Mountain is engaged in active steps to reenter the Direct Marketing Business after the expiration of the seven-year noncompetition period provided in Section 2, then Gander Mountain shall notify Cabela’s in writing and Cabela’s shall have the right to purchase from Gander Mountain for the sum of $1,000 a perpetual, exclusive license free and clear of all Liens to use the Trademarks in connection with its Direct Marketing Business …. Such license shall be evidenced by a separate written agreement in form and content customary to licenses of the type described above ….

Gander Mountain did reenter the direct-marketing business, but it refused to grant Cabela’s the license provided for in the CTL, on the grounds that the CTL was unenforceable. Cabela’s claimed that the CTL was enforceable, and it brought counterclaims seeking to enforce the CTL. (Those counterclaims were the only claims remaining in this action, as the court had previously dismissed Gander Mountain’s complaint.) Gander Mountain moved for summary judgment.

The Court’s Analysis

In considering Gander Mountain’s motion, the court examined the meaning of the words “evidenced by a separate written agreement in form and content customary to licenses of the type described above.”

According to Gander Mountain, this referred to what is customary to perpetual, exclusive trademark licenses generally. By contrast, Cabela’s argued that this referred to what is customary in trademark licenses issued by Gander Mountain to Cabela’s, namely the 1996 trademark license agreement. Based on its analysis of the contract language, the court agreed with Gander Mountain’s interpretation.

The court then went on to consider whether the parties had agreed on what terms are customary to perpetual, exclusive trademark licenses. It concluded that Cabela’s had failed to offer any evidence on that score and so had failed to contradict Gander Mountain’s claim that the parties had simply failed to reach a meeting of the minds on what form and content the perpetual, exclusive trademark license would take.

Gander Mountain claimed that because the parties had not agreed on the form and content of the perpetual, exclusive trademark license, the CTL was nothing more than an agreement to agree. By contrast, Cabela’s argued that failure to agree on one or more terms in a contract was not necessarily fatal to enforcement of that contract, that the CTL was definite in most details and the court could fill in the missing terms.

The court acknowledged that the parties had agreed to a number of the terms, including those that were presumably the most important, namely the price, term, and nature of the license. But it stated that under Wisconsin law a court cannot simply fill in any missing terms, particularly when, as in this case, the parties couldn’t even agree what issues were customarily addressed in a perpetual, exclusive trademark license, much less how those issues were addressed.

Based on its analysis, the court granted Gander Mountain’s motion for summary judgment and dismissed Cabela’s counterclaims.

My Trademark-Licensing Analysis

I find myself less convinced by Gander Mountain’s arguments than the court was.

Consider the meaning of “licenses of the type described above.” I agree that Cabela’s interpretation—that this referred to the 1996 trademark license agreement between the parties—is entirely unconvincing. But I don’t find much more convincing Gander Mountain’s assertion that it refers to perpetual, exclusive trademark licenses generally. Instead, I think it makes most sense to think of it as referring to perpetual, exclusive licenses granted for nominal consideration.

And bear in mind the context: When a company grants a perpetual, exclusive license for $1,000, would seem that it’s kissing its trademarks good-bye.

Indeed, Cabela’s claimed that it had originally wanted to purchase Gander Mountain’s trademarks outright, but that the parties had realized that Gander Mountain needed to retain ownership of the trademarks in order to liquidate its remaining assets. As an alternative to sale of the trademarks, the parties had structured the agreement to include a four-year license to the trademarks, with an option for Cabela’s to purchase a perpetual license to the trademarks at the end of the seven-year noncompetition term.

If the CTL was intended to have the same effect as a sale, it wouldn’t make sense to expect it to contain any meaningful additional terms. Gander Mountain was handing over its trademarks for nominal additional consideration, and it wouldn’t be reasonable for it to claim that it had any expectation that it would see them again. So it would seem that the court handed Gander Mountain a windfall.

Relevance for Purposes of Contract Drafting

But this isn’t The Trademark Blog, and I’m no licensing expert, so you may cheerfully disregard my thoughts on trademark licensing.

Instead, for our purposes all that matters is that the court found too vague an obligation expressed in terms of what would customarily be found in a given kind of agreement. Other courts might find comparable language in other contracts to be similarly flawed.

But I wouldn’t suggest that you eradicate from your contracts the concept of form and substance customary, as this standard has its uses:

• It can be useful to defer to a later time finalizing given documentation, particularly when a non-party is involved—that’s why this standard is perhaps most often applied to opinions of counsel.
• The risks might be minimal if the standard is used in the context of a cookie-cutter deal, such as a bank loan—previous transactions may well have served to establish a course of dealing with respect to a given agreement or other document.
• In any given context, circumstances relating to entry into an agreement or delivery of a document down the road may be sufficiently murky that even with the best will in the world the parties wouldn’t be able to finalize in advance the agreement or other document.

But I would change the wording. For instance, instead of saying “an assumption agreement in form and substance customary in commercial mortgage defeasance transactions,” I’d say “an assumption agreement containing terms customary in commercial mortgage defeasance transactions.”

On the other hand, if the context is anything other than utterly routine and the parties are in a position to finalize the agreement or document before the underlying agreement is signed, then they should do so. It would serve to reduce the risk of later disagreement.

For what it’s worth, in public-company contracts the phrase form and substance customary occurs relatively rarely. I searched the SEC’s EDGAR database for contracts filed in the past five years that contain agreement in form and substance customary or agreement in form and content customary. I found only 17.