One Word in Contract Boilerplate Could Cost $1 billion. That’s a Lot More Than The Legal Fees. And All for a Doll.

August 2010

Summary:  Raise your hand if you have read or drafted an agreement with:

(a)        A proprietary rights assignment provision;

(b)        A provision with a long list of examples or other “things” assigned;  or

(c)        Both.

Well, the 9th Circuit just yanked from Mattel its claim for roughly $1,000,000,000 (that’s a billion dollars) in its slugfest with MGA over IP infringement arising from the Bratz doll.  That decision turns in part on scrutinizing the assignment language in an employment agreement (I admit:  The entire opinion did not turn on just one word).  The court looked at the meaning of one word:  “inventions.”  Then the court looked at the list of terms that were supposed to explain that word in that provision.

As many lawyers who draft agreements will see, that word—and the list used to explain that word—is what most lawyers find in their templates for assignment provisions.  Call it boilerplate.  In the future, call it a drafting mistake not to pay attention more closely to that metal.  And remember ejusdem generis from your 1st-year contracts class.

(As of the date of this post the opinion had not been provided a standard citation.  You can find it at http://bit.ly/bdqtrQ.)

There is some “messy” language about the application of California Labor Code Section 2870.  I think that the court got the analysis wrong (but it’s largely in footnotes).  We’ll comment in passing on this point.  Also, the court applied its own (and widely disliked) Apple v. Microsoft “extrinsic/intrinsic” test for infringement.  We’ll save that for another lawyer to address.

By the way, this post is not about the case itself but about its lessons for lawyers and their clients about agreements.  And one lesson is:  Make sure that the language really, really covers what you want covered.

Introduction

OK, so a Mattel employee quits Mattel and joins another company and there makes a doll that becomes the “Bratz” toy line that whacks Barbie in the marketplace.  (MGA eventually acquires the rights.)  Mattel sues MGA in federal district court, claiming, among other things, that the employee had assigned all his rights by operation of the proprietary rights assignment provision in his employment agreement.  The district court agrees and finds for Mattel (and on several other bases not relevant to this post).  MGA appeals and the 9th Circuit Court of Appeals vacates the judgment (for all that money) and remands (sends it back) to the district court.  Technically, the Court chastised the lower court for failing to take into account more evidence on critical points and to make findings of fact on these matters.  So, if it goes to back to that court (rather than gets resolved through settlement), then we can expect a more robust discussion of these matters.

It’s Just a Word.  Welllll . . ..  Can You Say “Ejusdem Generis” (and pronounce it properly)?

Reviewing the agreement on a de novo basis (never a good sign for the lower court), the 9th Circuit quotes some of the relevant language from that assignment provision:

I agree to communicate to the Company as promptly and fully as practicable all inventions (as defined below) conceived or reduced to practice by me (alone or jointly by others) at any time during my employment by the Company. I hereby assign to the Company . . . all my right, title and interest in such inventions, and all my right, title and interest in any patents, copyrights, patent applications or copyright applications based thereon. (Emphasis added.) At 10532-3.

The opinion then quotes the contract definition of inventions:

[T]he term ‘inventions’ includes, but is not limited to, all discoveries, improvements, processes, developments, designs, know-how, data computer programs and formulae, whether patentable or unpatentable.” At 10533.

(We regularly see a definition that doubles and even triples that list.)

The Court looks at whether or not the word “inventions” includes “ideas.”  And without even mentioning the age-old phrase, ejusdem generis, the Court at least quotes one application of the hoary rule:  “[C]ourts avoid constructions that would make “a particular item in a series . . . markedly dissimilar to other items on the same list[.]”  At 10533.  Just before that quote from a previous case, the Court notes that “ideas” differ quite a bit from the list in the agreement.  (Note to readers:  Make the comparison yourself).

Oops. I’ll bet the lawyer who wrote that agreement is squirming;  I’ll double up on the bet that Mattel and MGA lawyers are now digging through their files on all employment agreements.  Uh-oh.  (And I’ll triple that bet by arguing that most other lawyers who draft those types of agreements—and clients who use those agreements—have not yet started to pay attention. But wait:  I’m not a betting man.)

Yikes!  It gets worse.  The Court later takes note that Mattel actually signed agreements with other employees (and probably independent contractors) by which inventions and ideas are assigned.  Uh-oh.  I think some lawyers may be looking to create an ABA Lawyer Protection Program.  Or perhaps look for a career in another industry.

So What?

The Royal We empathize with the Mattel lawyers.  That language is in so many agreements in the technology world that it has become boilerplate not closely scrutinized.  Many lawyers assume that those at the client with technical expertise have vetted the applicability of that language.  Budget and time pressures from the client often force a lawyer into a kind of “issue triage,” relying upon the wisdom presumably intrinsic in the language having been applied without challenge in thousands of previous uses of that provision.

None of this makes it right.  Every lawyer should know that ejusdem generis compels one to use clear drafting to specify precisely what is to be covered.  One simple way of explaining one application of that rule is that the more items are added to the list then the narrower the applicability of that list.  Don’t quote me, though.  Say what you mean in the language.  If the employee is not going to be involved in, say, computer programming or databases then why would one include “data computer programs and formulae?”

And every client should check this language to make sure that it is clear in what it actually covers.  Is it ideas and inventions?  Now, We are not convinced that ideas can indeed be assigned (it depends upon the jurisdiction).  But that’s a discussion a client should have with its lawyer.  And that’s a discussion for which the client should happily pay the legal fees.  Is it worth the risk of losing a billion dollars in damages to save a few thousand dollars?

Wait, There’s More.

We are truly baffled that the Court did not address in more detail the applicability of California Labor Code Section 2870.  Perhaps it was briefed and perhaps the lower court did not find it necessary to address the issue.  Quoting again from the 9th Circuit opinion

shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities or trade secret information except for those inventions that either (1) relate at the time of conception or reduction to practice of the invention to the employer’s business . . . or (2) result from any work performed by the employee for the employer.’ ” Footnote 5 at 10538 (Emphasis added in blog post)

As far as we can tell, the exceptions to that rule should protect Mattel.  Mattel made Barbie.  The employee was working on Barbie.  Uh-huh.

Whatever the outcome of the case, the reasoning of the opinion should get lawyers who draft to sharpen their pencils.  And re-read their notes from 1st-year contracts classes.

Our thanks to the legal eagles at Law.com whose Corporate Counsel newsletter alerted us to another development in this case.

James C. Roberts III is the Man(www.globalcaplaw.com)aging Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group. He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the dist(www.globalcapstrat.com).ant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.  You can reach him at jcrext@globalcaplaw.com.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

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