[Update: the decision discussed below was reversed by the First Circuit in October 2009. Decision here]
So, you have a great little business, and a large company wants to acquire it. The buyer argues that payment for your company should be determined by an “earn-out” — the buyer’s sales of your product will determine the purchase price (in whole or in part) based on an agreed-upon formula. “Perfectly normal,” your lawyer assures you. “Seen it done in 8 acquisitions out of 10,” he says. You say nothing – your lawyer knows the ropes, right?
But, as Massachusetts federal district court Judge William Young made clear in his recent decision in Sonoran Scanners v. PerkinElmer, if you (the seller, in this case tiny Sonoran Scanners) expect the buyer (in this case the much larger PerkinElmer) to market your product (leading to sales and payments to you under the earn-out formula), you’d better make sure that the contract spells out the actions the buyer is expected to take to promote the product. Otherwise, you risk the fate that Sonoran Scanners experienced after it sold its business to PerkinElmer – PerkinElmer did little or nothing to promote the product properly during the five year earn-out period, sales were almost zilch, and in the end Sonoran Scanners was paid nothing.
It’s true that sometime you just gotta sell, and you have to take what you can get. That may have been the situation in this case – the decision doesn’t tell us. But if that’s not the case, it’s just not enough to assume that the buyer will promote your product, and if it doesn’t help much to argue breach based on “implied” contractual terms, breach of “good faith,” and other “soft” legal theories, as Sonoran Scanners did in this case. In all but the most extreme cases, “implied” will get you nowhere – if the judge doesn’t throw your claims out of court before trial (as Judge Young did to the plaintiff in this case), the jury almost certainly will. Why do you have to argue “implied” contract terms , most jurors will ask. If you were counting on the buyer of your company to make an effort to sell your product after the acquisition, why wasn’t it express?
Bottom line: avoid earn-outs when possible, but if you can’t make sure you have a good, strong contract, in black ink on white paper (preferably in a bold, large font), that nobody can misread, misinterpret or deny. That contract should state as precisely as possible what the buyer will do to promote and sell your product during the earn-out period. Most sellers know this, but sometimes the opportunity to sell a business for what the seller naively hopes will be a big payday if all goes well, when combined with the hard-nosed negotiating tactics of many buyers, can blind the seller to the risks of assuming the buyer will act in the seller’s best interests.
Judge Young’s decision in PerkinElmer is a good guide to the law in this area. As usual, Judge Young does a thorough job of analyzing the issues and educating businesspeople on what they can expect if they’re forced to go to court in this situation. In the end, Judge Young left Sonoran Scanners with a couple of minor claims, but 90 percent of Sonoran’s case was dismissed before trial on summary judgment. It would be surprising if the case doesn’t settle at this point, with PerkinElmer holding the stronger hand.
When old engineers (and old lawyers) sit around decades from now reminiscing about patent and antitrust law in the late 1990s and early 2000s, the name of Rambus is sure to come up. The topic will not be the Rambus DRAM (or RDRAM) chip technologies, but rather the massive volume of litigation that Rambus set off as result of its alleged “patent hold-up” actions and its patent enforcement efforts.
Rambus, the lawyers on either side of its many cases, the courts, antitrust experts and economists, and of course investors in Rambus’ stock (a particularly loyal and attentive group), have debated the pros and cons and nuances of these lawsuits for years, and during this season (late 2008) an important and timely Rambus case is taking a run at the Supreme Court.
The FTC adminstrative action against Rambus, which bothAndy Updegroveand Ihave written about at length in the past, involves somewhat arcane issues of single-firm conduct under Section 2 of the Sherman Act. However, the case also exists at a level that doesn’t require a degree in law and economics to understand – Rambus is accused of of withholding from an important standards-setting organization (SSO) the fact that it had pending patent applications, resulting in adoption of the Rambus technology as a standard, following which Rambus used it patents to “hold up” the industry for unreasonable royalties.
What a wonderful blend of issues for lawyers and economists to dive into: patent law, antitrust law, conspiracies to deceive, very large sums of money (in the form of royalties potentially owed to Rambus by industry players), and all of this during the technology and stock market vortex of the 1990s and 2000s. Is it any wonder that Rambus’ litigation has attracted so much attention?
In context, the Federal Trade Commission case has been just one of many fronts on which Rambus has been forced to battle. As discussed here, the Federal Trade Commission found that Rambus’ actions toward the SSO was deceptive and violated the antitrust laws by enabling Rambus to gain monopoly power. The Court of Appeals for the D.C. Circuit reversed the FTC early this year on highly technical legal grounds that involved what some observers thought was a misapplication of the antitrust laws. However, no matter which side you’re on, it’s difficult to deny that the case raises legal issues that could benefit from clarification by the Supreme Court. Now, the FTC has asked the Supreme Court to review the case.
Persuading the Supreme Court to review a case is harder than getting into Harvard. In its most recent term the Court decided about 70 cases, out of over 7,000 appealed. However, like admissions at Harvard, the odds aren’t quite so bad once you eliminate the cases that had no chance of review and shouldn’t have been appealed in the first place – in effect “Hail Mary” appeals.
Many people are hopeful that the FTC/Rambus case will be accepted by the Court. The FTC/Rambus case certainly falls within the “first in class, perfect SAT scores” category, to stretch the analogy. This is a rare opportunity, these advocates believe, for the Court to clarify the law of “single firm” monopoly conduct. And, the standards setting industry believes that the case presents critical issues necessary to the health of standards setting, an area of domestic and international cooperation whose importance is hard to overstate. On the opposite side of the case, Rambus advocates argue that Rambus is the victim of a government witch hunt that lacks any merit, and conclude that the D.C. Circuit was correct to reverse the FTC and set matters straight.
I’ve set up an FTC v. Rambus certiorari petition group page on scribed.com to collect filings on this appeal. The first step for the FTC, of course, is to persuade the USSC to take the case. At present, the Rambus group pageholds the D.C. Circuit decision, the FTC’s cert petition, and the amici briefs that have been filed to date.
In addition to the petition of various companies urging the Court to take the case (Hewlett Packard, Cisco, Sun and Oracle), the Rambus group page holds the petition filed by our firm last week, which was written by Andy Updegrove. The SSO petition was written on behalf of 19 standards setting organizations representing over 13,000 members, and it emphasizes the practical importance of this appeal – its importance to the “law of SSOs”, for lack of a better term.
Will the Court take this case? We should know soon. I’ll continue to add amici petitions and, of course, Rambus’s opposition to the request for Supreme Court review, which will be forthcoming soon, to the Rambus group page, as they appear.
My partners Andy Updegrove, Peter Moldave and I attended this celebration of the sixth anniversary of Creative Commons at Harvard the evening of Friday, December 13, 2008. We could have waited a few days and watched the event on YouTube, but then we would have missed the cold weather, the greatest ice storm in modern Massachusetts history, the difficult parking and, well ….
It was actually a great deal of fun, and looking around the room at the 150 or so people that attended there appeared to be relatively few lawyers, a fact that made us feel superior, as if we were really part of the Harvard cognoscenti, which of course we aren’t. (How could we tell there weren’t many lawyers there? – the number of people who had that useless, predatory look common to lawyers was minimal.)
Speakers were: Jonathan Zittrain, moderator, panelists James Boyle, Lawrence Lessig and Molly S. Van Houweling, and Special Guests Elena Kagan and Charles Nesson.
Massachusetts Superior Court Judge Ernest Murphy won a $2 million libel verdict against the Boston Herald after the Herald incorrectly reported that he had said that a 14 year old female rape victim should “get over it.”
Here are quotes from the letters, taken from the SJC reprimand. The letters proposed a meeting between Judge Murphy and Patrick Purcell, were hand-written on Superior Court stationery, and proposed a luncheon meeting between Murphy, Purcell and (presumably) the Herald’s insurer. The letter went on to tell Purcell –
to “have one person … at the meeting…. Under NO circumstances should you involve [counsel in the lawsuit] in this meeting…. You will bring to that meeting a cashier’s check, payable to me, in the sum of $3,260,000. No check, no meeting.” In the postscript, the judge writes that it would be “a mistake … to show this letter to anyone other than the gentleman whose authorized signature will be affixed to the check in question. In fact, a BIG mistake.”
The letter of March 18, 2005, states, “[Y]ou have a ZERO chance of reversing my jury verdict on appeal. Anyone who is counselling you to the contrary … is WRONG. Not 5% … ZERO. AND … I will NEVER, that is as in NEVER, shave a dime from what you owe me….” (Emphasis in original.)
OF course, Purcell did show these letters to his lawyer, the meeting never took place, the Herald published the letters in the paper, and the Herald filed a complaint with the Commission on Judicial Conduct, leading eventually to the SJC reprimand.
All of which leads to a few questions:
Really Judge, did you really think that Patrick wouldn’t show these letters to his lawyer? Really!
Did you think it might send the wrong message for a judge to use official stationery for personal business? Not once, but twice? Did you think that this might be perceived as a misuse of the power of your office? Really!!
Really Judge Murphy, did you think that writing a letter of this nature would reflect positively on the integrity and prestige of the Massachusetts judiciary? Did it occur to you that these letters might come across as being, well, sorta creepy?
Did it occur to you that it might be perceived as a misuse of the enormous power wielded by a judge to suggest that the party you had sued could not prevail on appeal? Could that have suggested that you had some influence with the appeals process, or might be able to affect the outcome in some manner? Really!!
Really Judge Murphy, you claimed not to know that the Code of Judicial Conduct contained an express prohibition against use of judicial stationery for personal purposes, but as a judge haven’t you heard the expression, “ignorance of the law is no excuse”? Really!
You suggested that Purcell meet you at the Union Club of Boston, one of our fair city’s oldest and “woodiest” men’s clubs, which was formed in 1963 and didn’t allow women members until 1980? Didn’t you think this might be viewed as a bit of a cliche? Why not the McDonalds on Washington Street? Really!
Oh, and really Judge Murphy, didn’t it occur to you that the Boston Herald might publish these letters for all the world to see? After all, the Herald is a newspaper with a reputation for being very aggressive, so didn’t you think that they would eat this up and use this to publically embarrass you? Really!?!
Here is number 1, which I assume even under the English version of “top ten” lists is the “winner.” –
What’s in a name? A nine-year-old girl involved in a custody hearing in New Zealand drew international attention for her name: “Talula Does The Hula From Hawaii”. The judge decided that the name was a form of abuse and ordered the girl placed under the guardianship of the court. The judge noted that it was part of a wider phenomenon; other eccentric names given to children in New Zealand in recent times included “Number 16 Bus Shelter” and, for twins, “Benson” and “Hedges” and “Fish” and “Chips”.
This site is hosted by Gesmer Updegrove LLP, a technology law firm based in Boston, Massachusetts. You can find a summary of our services here. To learn how GU can help you, contact: Lee Gesmer
