The Licensing Corner

• Jurisdiction: United States,Federal,California
• Citation: Vol. 41 No. 2
• Publication year: 2016
• Author: JAMES C. ROBERTS III
• topic: Business of Law,Contracts,Intellectual Property,Mergers and Acquisitions,Civil Procedure,Technology

The Licensing Corner

JAMES C. ROBERTS III

Global Capital Law Group PC

OOPS. YOUR TERM SHEET IS A CONTRACT.

Introduction

Technology and M&A lawyers feel pretty confident about drafting term sheets and letters of intent (LOI), but a few recent cases might startle those lawyers enough to have them scramble for a copy of Restatement (Second) of Contracts. Permit me to provide some practice pointers about term sheets arising from these cases.¹

In SIGA v. PharmAthene, the Delaware Supreme Court found that an agreement had been reached regarding a letter of intent. However, the 9th Circuit in Atlantique v. Ion Media held that a term sheet did not rise to an agreement.² In both cases, the opinions rested not only on analyzing the language but also on related documents - e.g., a license agreement in the SIGA case and email exchanges in the Ion case.³

In many ways the SIGA outcome was not too surprising, given that the muddied waters of LOIs themselves make the task of discerning the intent of the parties arduous. In the Ion case, the court relied heavily on the email exchange between the parties in which the "protocol" for signing the term sheet was made clear. As that protocol was not followed, no agreement was formed. What's interesting - and scary - is that the negative inference would mean that the term sheet would have formed a contract if the parties had followed that protocol.⁴

Binding/Non-binding is Not a Binary Choice

As a general rule, most lawyers assume there is a binary choice: Is the document binding or non-binding? Many lawyers then conclude that a disclaimer is sufficient protection - e.g., "This document is non-binding and for guidance only." (We usually see documents that do not even include that simple statement.) And that is the end of that.

Sadly, not so. Term sheets, even with a disclaimer, often do not follow the explicit choice. They will include provisions that are pretty clearly intended to be obligations - such as non-disclosure and "no shop" clauses along with other provisions that should be non-binding. Term sheets sometimes include choice of law and venue. They'll include "obligation" language such as "shall" and "will." Muddy waters indeed.

Term Sheets as Roadmaps in "Relationship" Negotiations

Term sheets are most useful in negotiating certain "relationship" agreements and venture investments - i.e., deals in which the negotiations are either for a commercial relationship such as a technology license, distribution or strategic alliance or a stock purchase and investment. In other contexts, such as complicated M&A transactions, a LOI may be more suitable because of the complexity.

Our default position is that term sheets should be non-binding. Completely non-binding. A term sheet serves as a roadmap for the lawyers to draft the definitive agreement. Starting with that position, one can add the clear disclaimer (in big bold print). One approach is a disclaimer something to the effect of:

The terms included in this term sheet are for guidance only in discussions to complete a definitive agreement that will be binding only once both parties have signed such...