Sidestepping a contentious contract issue with the notion of working it out in litigation is a standard strategy, but you don’t often find examples of it in the wild.
That’s why I noted with interest oral argument before the Supreme Court on January 16 in Quanta v. LG, as case dealing with patent exhaustion. (Click here for the transcript.) I’m not going to touch with a barge-pole the substance of this dispute. Instead, I’ve pasted below Chief Justice Roberts’s comments to the effect that the parties could have worded the contract so as to avoid the dispute entirely:
CHIEF JUSTICE ROBERTS: So the parties are unwilling to spell out exactly how this is going to work out in their contract, and each side, it prefers to take their chances on how the Federal Circuit’s going to rule. It’s easier to sell these things if they’re not encumbered by these additional license requirements and the manufacturer presumably gets a lot more, but there’s a lot of uncertainty, uncertainty that could have been cured by how the contract was drafted, and people prefer to live with that uncertainty and litigate rather than clear it up in the contract.
MS. MAHONEY: Well, I think that this Court’s ruling would certainly make things clear, but I think that the language of the contract recognizes that the—specifically says that, notwithstanding anything to the contrary, the ordinary operation of patent exhaustion is supposed to apply here. In other words, I think Intel knew—
CHIEF JUSTICE ROBERTS: Fine, and the person who wrote that provision knows that the question of how the patent-exhaustion doctrine applies is the subject of great confusion, so much confusion that the Supreme Court’s going to have to decide it, and yet they put that in there rather than spelling out in the contract exactly which they had in mind, whether or not you could impose these further restrictions or couldn’t.
Of course, whether it’s best to tackle an issue head-on or take your chances on the possibility of litigation requires in each case a cost-benefit analysis. Who knows how that would have worked out in this case.
“Of course, whether it’s best to tackle an issue head-on or take your chances on the possibility of litigation requires in each case a cost-benefit analysis.”
Yup. Business people frequently would much rather get the ink on the signature line and gamble that the contract will never go to court. Percentage-wise, often that’s not a bad bet. A lot of outside counsel don’t realize that (I used to be one of them).
Ken’s comment is a very interesting one and it goes to the heart of some of my daily frustrations. How are you supposed to effectively manage risk through contracts when the cost-benefit analysis always goes against you?
Not that there’s any real analysis that goes on here, it’s just a matter of “if we’re going to make money, we’re going to go ahead regardless of what Mike says”.