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Damages for Willful Patent Infringement

If a patentee prevails in a suit for infringement, he or she will be entitled to damages in an amount that is deemed adequate to compensate him or her for the infringement but in no event less than a reasonable royalty for the use of the invention by the infringer, together with interest and costs as fixed by the court. 35 U.S.C.A. § 284.  It should be noted, however, that monetary damages for infringement cannot be recovered unless and until the infringer has been put on notice about the infringement and notice may be provided by actually notifying the infringer, filing an action for infringement, or marking the product (or its packaging where marking the product is impractical) with the word “patent” or the abbreviation “pat.,” together with the patent number. 35 U.S.C.A. § 287(a). The concept of “marking” does not apply to methods since there is generally nothing that can be marked. American Medical Systems, Inc. v. Medical Engineering Corp., 6 F.3d 1523, 1538, 28 U.S.P.Q.2d 1321 (Fed. Cir. 1993) (note that products can often be claimed as methods).  Software can be marked in the software code and accompanying documentation, and websites are “tangible items” that also can, and therefore must, be marked to provide the notice required by the marking statute.  Soverain Software LLC v., Inc., 383 F. Supp. 2d 904, 79 U.S.P.Q.2d 1208 (E.D. Tex. 2005). Any person is allowed to assert an action for “false marking,” including falsely marking or indicating in advertising in connection with any article that a patent application is pending; however, a finding of liability requires a purpose of deceiving the public. A fine of not more than $500 is provided for “every such offense.” 35 U.S.C.A. § 292.

The measure of damages in an infringement action will be determined with reference to the lost profits of the patentee. Lost profits in an infringement action may take three different forms: lost profits from potential sales which were lost to actual sales made by the infringer; lost profits from price reductions which the patentee was forced to make in response to competition from the infringer; and lost profits from any projected lost sales, including the inability of the patentee to raise its prices due to competition from the infringer and a reduction in the rate of the patentee’s sales growth after the initial infringement. Lam Inc. v. Johns-Manville Corp., 718 F.2d 1056, 1065-68 (Fed. Cir. 1983). An award of projected lost profits is proper and not speculative in a two-supplier market if the patent owner can show its sales growth rate decreased during the infringement period and that it had a higher growth rate before and after the infringement period. Lam Inc. v. Johns-Manville, 718 F.2d at 1067.

Additionally, a finding of “willful infringement” allows award of both reasonable attorney’s fees and enhanced damages to the plaintiff. See e.g., Minks v. Polaris Industries, Inc., 546 F.3d 1364, 89 U.S.P.Q.2d 1102 (Fed. Cir. 2008). Actual damages may be assessed either by judge or jury. In either case, if infringement was willful, the judge may enhance the damages award to an amount up to three times the actual damages. See 35 U.S.C.A. § 284; Minks v. Polaris Industries, Inc., 546 F.3d 1364, 89 U.S.P.Q.2d 1102 (Fed. Cir. 2008).

In Liquid Dynamics Corp. v. Vaughan Co., Inc., 449 F.3d 1209, 79 U.S.P.Q.2d 1094, 70 Fed. R. Evid. Serv. 315 (Fed. Cir. 2006), the court set out the standard for determining willful patent infringement as follows:

“A finding of willful infringement is made after considering the totality of the circumstances … Courts consider several factors when determining whether an infringer has acted in bad faith and whether damages should be increased. They include: “(1) whether the infringer deliberately copies the ideas or designs of another; (2) whether the infringer, when he knew of the other’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed; … (3) the infringer’s behavior as a party to the litigation”; (4) “defendant’s size and financial condition”; (5) “closeness of the case”; (6) “duration of defendant’s misconduct”; (7) “remedial action by the defendant”; (8) “defendant’s motivation for harm”; (9) “whether defendant attempted to conceal its misconduct.” … Good faith may normally be shown by obtaining the advice of legal counsel as to infringement or patent validity. … If counsel’s opinion is found to be incompetent, however, a fact finder may discount its usefulness in determining a party’s good faith. [Citations omitted by author.]”

On August 20, 2007, in a unanimous en banc opinion In re Seagate Technology, LLC, 497 F.3d 1360, 83 U.S.P.Q.2d 1865 (Fed. Cir. 2007), the Court of Appeals for the Federal Circuit overruled its 1983 decision in Underwater Devices Inc. v. Morrison-Knudsen Co., Inc., 717 F.2d 1380, 219 U.S.P.Q. 569 (Fed. Cir. 1983) (overruled by, In re Seagate Technology, LLC, 497 F.3d 1360, 83 U.S.P.Q.2d 1865 (Fed. Cir. 2007)) and established a new standard of proof for demonstrating willful patent infringement. In reaching its decision, the Federal Circuit reviewed the “affirmative duty of due care” standard established in Underwater that required that once a party had notice of a patentee’s rights the party had an affirmative duty of care to avoid infringing the patent. In order to comply with this duty many companies sought and obtained an opinion of counsel that the patent was either invalid or not infringed. In the Seagate case, however, the Federal Circuit adopted a new rule that calls for a showing of “objective recklessness” in order to prove willful infringement. Specifically, the Federal Circuit stated that “a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent” and that “the patentee must also demonstrate that the objectively-defined risk was either known or so obvious that it should have been known to the accused infringer.”

At the same time, the Federal Circuit held that when an accused infringer offers an opinion of counsel as part of a defense against a claim of infringement, there would be a waiver of the attorney-client privilege and work product protection as to the counsel rendering the opinion but not as to the trial counsel of the accused counsel so long as trial counsel is different. Interestingly, the Federal Circuit noted that since it was abandoning the “affirmative duty of due care” an accused infringer no longer had an affirmative obligation to obtain an opinion of counsel regarding the infringement issue.

The U.S. Supreme Court disapproved the Federal Circuit’s teaching regarding enhanced damages awards for willful infringement in Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923, 118 U.S.P.Q.2d 1761 (2016). The Court explained that pursuant to In re Seagate Technology, LLC, 497 F.3d 1360, 83 U.S.P.Q.2d 1865 (Fed. Cir. 2007) (abrogated by, Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923, 118 U.S.P.Q.2d 1761 (2016)) (en banc), “a patent owner must first show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent…. Second, the patentee must demonstrate, again by clear and convincing evidence, that the risk of infringement was either known or so obvious that it should have been known to the accused infringer.” Halo, 2016 WL 3221515. The Court explained that the Federal Circuit’s structured formula imposed a rigidity Congress had not chosen. Additionally, the statute did not specify the requirement of proof by clear and convincing evidence. Therefore, the Federal Circuit’s formula prevented trial courts from enhancing damages in some of the most egregious cases. The U.S. Supreme Court instructed that enhanced damages were to be granted on facts shown by a preponderance of the evidence pursuant to the trial courts’ discretion. Trial courts must explain their reasoning, but that was to be reviewed for an abuse of discretion.

For further discussion, see Patents (§§196.1 et seq.) in Business Transactions Solution on WESTLAW.


Reexamination of Issued Patents

After a patent has been issued, any person, including the patentee, may request reexamination of the patent by the Patent and Trademark Office in order to verify its validity. In addition, reexamination can be ordered by the Patent Office itself. Reexamination can be a valuable procedure when one wants to test the validity of a patent prior to bringing an action for infringement, or before taking some action (e.g., commencing use of a similar process or machine) which might precipitate an infringement action by the patentee. However, post-grant review has often proven to be quite complex and controversial and a number of attempts have previously been made to make the process more efficient, including multiple efforts to reform the reexamination process which often proved to be quite costly and time-consuming given that the initial decision of patent examiners was almost invariably appealed to the Patent Board.

Recognizing these problems, the America Invents Act, which came into effect in September of 2011, amended ex parte and inter partes reexamination.  Under the amended ex parte reexamination procedures, the Director is allowed to institute a reexamination on the Director’s own initiative if a substantial new question of patentability is raised by patents or publications.  The America Invents Act also converts inter partes reexamination from an examinational to an adjudicative proceeding and renamed the proceeding “inter partes review.”  The Act raised the standard a petitioner must meet before the Director institutes inter partes review.  Specifically, the petitioner must show “that there is reasonable likelihood that the petitioner would prevail with respect to at least one of the claims challenged.” The Director’s refusal to institute a review is unappealable.  A petition may attack a patent only on the basis of a defect under 35 U.S.C.A. §§ 102 and 103; the defect must be supported by “prior art consisting of patents or printed publications.” 35 U.S.C.A. § 311.  The U.S. Supreme Court considered the inter partes review procedure in Cuozzo Speed Technologies, LLC v. Lee, 136 S. Ct. 2131, 119 U.S.P.Q.2d 1065 (2016) and supported the right of Patent Office to set legal standards for use in constructing patents within review proceedings.

The America Invents Act also created a new post-grant opposition procedure that can be utilized during the first nine months after the grant of a patent or issue of a reissue patent. Unlike reexamination proceedings, which provide only a limited basis on which to consider whether a patent should have issued, the post-grant review proceeding permits a challenge on any ground related to invalidity under section 282 of Title 35; however, the petition must include detailed explanation and support and the petition must be made available to the public promptly after filing.  The patent-holder has the right to file a preliminary response stating why a reexamination proceeding is unwarranted. The Director may only institute a reexamination proceeding if one of two standards is met. First, the information in the petition (if not rebutted) “would demonstrate that it is more likely than not that at least 1 of the claims challenged in the petition is unpatentable.” Second, “the petition raises a novel or unsettled legal question that is important to other patents or patent applications.” 35 U.S.C.A. § 324. The Director’s decision not to institute such a proceeding is not appealable.  The intent of the post-grant review process is to enable early challenges to patents, while still protecting the rights of inventors and patent owners against new patent challenges unbounded in time and scope. In utilizing the post-grant review process, petitioners, real parties in interest, and their privies are precluded from improperly mounting multiple challenges to a patent, or initiating challenges after filing a civil action challenging the validity a claim in the patent. Further, a final decision in a post-grant review process will prevent the petitioner, a real party in interest, or its privy from challenging any patent claim on a ground that was raised in the post-grant review process. The post-grant review procedure is not intended, however, to inhibit patent owners from pursuing the various avenues of enforcement of their rights under a patent, and the amendment makes clear that the filing or institution of a post-grant review proceeding does not limit a patent owner from commencing such actions. Given the short time period available for initiating post-grant opposition procedures, it is incumbent for companies to carefully monitor the patent activities of competitors and the record of patent grants.

The America Invents Act also made several other anticipated improvements to “inter parties” review. For example, prior to the enactment of the America Invents Act, if the new references were found to be more relevant than the references previously cited by the examiner and presented “a significant new question of patentability,” a reexamination proceeding was conducted in the Patent Office similar to the original examination. However, the America Invents Act raised the threshold for initiating such a review from “a substantial new question of patentability” to “a reasonable likelihood that the requestor would prevail” with respect to at least one of the challenged claims.

During the reexamination proceeding, the patent owner has the right to file a statement arguing the new question of patentability and to amend the claims to further distinguish them from the new references. The reexamination procedure enables a patent infringer or any other interested party to contest the validity of a patent without litigation. Within the request for reexamination the infringer or other third party may present arguments of why the claims of the patent are invalid or unpatentable over the new references and may reply to the patent owner’s statement. However, after the reexamination proceeding begins, the third party cannot participate further, such as by responding to amendments or attending interviews with the examiner. However, the third party is sent copies of all office actions and amendments.

The America Invents Act expanded the category of documents that may be cited in a reexamination proceeding to include written statements of the patent owner that have been filed in a proceeding before a federal court or the Patent Office regarding the scope of claims. This addition counteracts the ability of patent owners to offer differing interpretations of prior art in different proceedings. These written statements, which include documents, pleadings or evidence from proceedings that address the patent owner’s statements, cannot be considered for any purpose other than to determine the proper meaning of the claims that are the subject of the request in a proceeding.

The America Invents Act included provisions estopping a party from raising, in a subsequent Patent Office proceeding, any issue that it raised or reasonably could have raised in the inter partes review. In addition, the America Invents Act imposed on petitioners the burden of proving that a patent is invalid by a preponderance of the evidence in inter partes review and also imposed time limits on litigation and permits limited discovery. Under the America Invents Act, inter partes review must be completed within one year of when the proceeding is instituted, except that the Patent Office can extend this deadline by six months for good cause. The results of any reexamination will be set out by the Patent Office in a certificate, which describes the new content of the patent.  For further discussion, see Patents (§§196.1 et seq.) in Business Transactions Solution on WESTLAW.


Cross-Border Comparison of Directors’ Fiduciary Duties

Directors around the world are expected to carry out their duties in accordance with applicable local standards of care and fiduciary responsibility; however, the specifics are not uniform and each jurisdiction has its own set of laws, norms and customs.  With respect to directors of companies in the United States, the Corporate Director’s Guidebook (Fifth Edition) succinctly describes the baseline standard for director conduct as requiring that directors discharge their duties in good faith and in a manner that they reasonably believe to be in the best interests of the corporation.  Directors owe a duty of care and a duty of loyalty to the corporation in discharging their obligations. As such, it is important that a prospective director consider whether or not he or she has the requisite experience to understand and participate in the deliberations of the board, as well as the time that is required in order for him or her to properly monitor and review the activities of the corporation. In addition, a prospective director who may become involved in business dealings with the corporation which may give rise to a conflict of interest must be prepared to fully disclose the nature of his or her interest and submit the transaction to a vote of the board of directors or, in some cases, the shareholders of the corporation.

While the duty of care and the duty of loyalty are the most well-known and widely discussed and analyzed legal obligations of US directors, the Corporate Director’s Guidebook (Fifth Edition) lists the following additional obligations that should be carefully understood by directors:

  • Directors have a “duty of disclosure” which includes an obligation to take reasonable steps to ensure that shareholders are furnished with all relevant material information known to the directors when they present shareholders with a voting or investment decision. In addition, in the course of deliberation regarding decisions relating to the corporation director have duty to communicate relevant information to their fellow directors and management.
  • Directors have a “duty of confidentiality” that requires that they refrain from public disclosure of all matters involving the corporation. The board should establish, and individual directors should abide by the terms of, confidentiality, insider trading and disclosure policies.
  • Directors have a duty to establish and monitor programs for identifying financial, industry and other business risks and for managing such risks to protect the assets and reputation of the corporation.
  • Directors have a duty to establish and monitor programs for ensuring that the corporation and its managers and employees comply with all legal requirements in the various jurisdictions in which corporation is conducting business activities.
  • Director of public companies have a duty to establish and follow appropriate procedures for ensuring that the corporation’s disclosure documents (e.g., annual reports, quarterly reports, current reports, proxy statements, prospectuses, and earnings releases) fairly present material information about the corporation and its business, financial condition, results, and prospects.
  • Directors have a duty to ensure that the activities of the corporation comply with relevant laws and regulations pertaining to employee safety, health and environmental protection and product safety. While this duty overlaps with the duties mentioned above relating to compliance programs the areas of concern are particular important because of their potential impact on the health and morale of employees and general business reputation of the company.
  • Directors have a duty to monitor the activities of officers and employees of the corporation with respect to participation in governmental processes, particularly efforts to influence legislative activities and/or the content and tone of regulations and activities designed to either encourage or prevent governmental action. Lobbying activities, including political contributions, can directly impact the reputation of the corporation and when carried out must be done in a manner that complies with applicable laws and regulations.
  • Directors have a duty to anticipate the unexpected and develop crisis management programs that can be quickly implemented upon the occurrence of a crisis event with respect to the corporation and its operations such as a natural disaster, terrorist activities, civil unrest or a significant adverse corporate development (e.g., a massive product recall or a infringement lawsuit by a third party threatening the validity of the corporation’s key patent rights).
  • Directors have a duty to act fairly and with the utmost integrity in overseeing deliberations regarding significant corporate events such as change-in-control transactions (e.g., proposed sale of the corporation) and election contests.
  • Directors have special duties of care during times when the corporation is experiencing financial distress and must be mindful of their expanded obligations beyond shareholders to include creditors and to do their best to ensure that the corporation is able to fulfill its legal obligations to all interested stakeholders.

Many of the duties described above are based on the federal securities laws and are particularly applicable to directors of public companies.

Outside of the US, the path for the development of the concept of directors having fiduciary duties has varied from jurisdiction to jurisdiction and the concept is still quite new in many countries.  The rationale for fiduciary duties is best understood from the experience in the US and the United Kingdom, both common law countries, where corporations arose as a means for separating ownership and management and it became clear that some legal framework was needed for the shareholders, as the owners of the corporation, to enforce standards of conduct upon the managers of the corporation.  The answer was to view the directors and officers of the corporation as trustees and as trustees these persons had a common law duty to act in the best interests of the shareholders, who were the beneficiaries of the corporation.  Eventually civil law jurisdictions, such as Germany, integrated concepts similar to fiduciary duty into their statutes and courts in those countries have developed those concepts through case law.  Emerging markets such as China often began by focusing on director conduct (e.g., having “high morals”, avoiding corruption and being “hardworking”) but eventually moved toward standards that emphasized protecting the lawful rights and interests of the corporation, its shareholders and others.

Today most countries around the world, regardless of their stage of economic development or their bias toward common or civil law, have laid out basic principles of fiduciary-type duties for directors and suggested skills, practices and processes that are likely necessary in order for director to effectively discharge their duties.  However, each jurisdiction is different and all of the following questions should be considered before selecting a foreign corporate entity for use as a subsidiary or the home for an international joint venture with a local partner:

  • What is the legal role of the board (or boards) of directors? Does the board collectively have responsibilities that are distinct from those of the directors individually?
  • Can the directors and/or the board (or boards) delegate any of their duties and if so, which ones and to whom, and are there any conditions attached to this delegation in terms of retaining overall responsibility for the action (or inaction) by the delegate?
  • What are the legal standards governing the conduct of directors in the performance of their fiduciary duties and do those standards incorporate a care/prudence element or equivalent (civil law) concepts?
  • Do these standards include good faith, ‘honesty of purpose’ elements and/or strictures against self-dealing or self-enrichment at a cost to the corporation and/or prohibitions on utilizing corporate opportunities for directors?
  • Is there jurisprudence that avoids “second-guessing” director conduct with the benefit of hindsight designed to limit judicial (or regulatory intervention that might chill legitimate business activity (e.g. the business judgment rule)? In other words, are decisions of the directors protected, provided that they have exercised their fiduciary duty and duty of care?
  • Are there any initiatives to codify (and/or simplify) the duties of a director? Is there any jurisprudence on how the courts have interpreted these codes or statutory provisions and, if so, have these led to contemporary governance best practice ideas being imported into court decisions?
  • Who can bring an enforcement action for a breach of duties by a director? Does the law entertain the concept of a derivative suit (an action brought by shareholders on behalf of the company) or is some form of private action available?
  • Can directors be held liable personally for a breach of their duties and, if so, can the company indemnify them and may the company, in turn, obtain insurance and are there limits imposed by statute or otherwise on the indemnity or insurance coverage (e.g. in cases of misrepresentation or fraud)?

The questions above are based on H. Gregory, C. Hansell and L. Hazell, “Comparative Analysis of Fiduciary Duty Papers”, International Developments Subcommittee of the Corporate Governance Committee of the American Bar Association Section of Business Law (2007), and a fuller discussion of cross-border comparison of directors’ fiduciary duties can be found in the article at § 33:252 of Business Transactions Solution on WESTLAW.


Federal Warranty Law

Products are generally marketed with, and supported by, various affirmative assertions from the seller with respect to certain characteristics of quality, safety, performance, and durability. These assertions, usually referred to as “warranties,” may be provided in written or oral form, although they are most commonly found in advertisements, brochures, and specification sheets. In fact, a warranty may also be derived from representations of the product in models and pictures.  Regardless of their form, warranties or guarantees are important promises by manufacturers or sellers to stand behind the products that they offer to consumers.

Whenever a transaction involving the sales of goods occurs, the parties must be mindful of various types of warranties codified in the general law of sales appearing in the Uniform Commercial Code (“UCC”), including the implied warranty of merchantability; the implied warranty of fitness for particular purpose; and any express warranties provided by the seller in connection with the sale of the specific goods or equipment, typically through affirmative written and oral statements regarding the quality of the items. While implied warranties, subject to applicable regulations, will often be modified or excluded, express warranties generally will be included to some extent in each transaction, primarily as a means of inducing customers to purchase the goods or equipment. As such, care must be taken in drafting such warranties and in designing appropriate remedies and rights for any breach thereof. For complete discussion of warranties under the UCC, see Sale of Goods (§§ 120:1 et seq.).

When writing a commercial or consumer product warranty the manufacturer or seller is faced with a complex set of decisions in determining what type, if any, written warranty to offer. Principally, these decisions will involve determining what combination of implied and express warranties to offer; determining whether to offer a full or limited warranty or multiple warranties on various parts of the product; and determining which disclaimers or limitations to include in the warranty. These issues arise in any sale of goods transaction; however, the focus of this chapter is on consumer product warranties.

Warranty provisions for a consumer sales transaction should be carefully drafted and the provisions should take into account not only the applicable legal requirements but also the business elements associated with providing warranty services to consumer customers. The essential elements of any warranty include each of the following:

  • Identification of the parties to the warranty agreement. This should include the name and address of the party offering the warranty and a description of the parties who may be entitled to the benefits of the warranty. The party providing the warranty should address the availability of the warranty to persons other than the original consumer purchaser or lessee and any conditions that need to be satisfied in order for the warranty rights to be transferred to any third parties.
  • Clear identification and description of the goods and related parts that will be covered by the warranty and, if appropriate, clear highlighting of any characteristics or components that are excluded from warranty coverage.
  • A clear and complete description of the warranties provided with respect to the covered goods and parts (e.g., the goods shall perform in accordance with the specifications etc.). In addition, the warranty statement should also include a clear and complete description of any actions or conditions that may invalidate the warranty, such as the failure of the consumer to use the goods in a certain manner or defects caused by any unauthorized service or repair of the goods.
  • A description of the remedies offered in the event that a covered good or part is found to be defective, malfunctions or otherwise fails to perform in accordance with the written warranty. In most cases, the warrantor will agree to replace or repair the covered items within a specified period of time; however, in limited circumstances, the warrantor may be willing to provide a refund of the purchase price.
  • Disclosure of the procedures that should be followed by the consumer to exercise its warranty rights, including identification of parties authorized to perform warranty services on behalf of the warrantor. The procedures should address the manner in which the covered goods are returned for warranty service, the amount of time that the warrantor will have to complete the warranty service and the procedures for returning the new or repaired items to the consumer purchaser. If the consumer purchase is required to bear any expenses, these should be clearly stated in the contract.
  • Disclose of the duration of the warranty and a clear description of the procedure for determining when the warranty period begins and ends. If any registration of the covered items is required, a statement to this effect should be conspicuously included along with clear procedures for completing the registration.
  • A description of dispute resolution procedures that can be used to resolve any questions regarding the performance of the covered goods and the warrantor’s fulfillment of its obligations with respect to providing warranty coverage.

Warranty provisions in consumer sales and lease agreements typically include additional language to address various legal requirements and risk-allocation issues. For example, the warranty should include any language mandated by applicable state law, such as a statement to the effect that certain states do not permit limitations on the duration of any implied warranties or the exclusion or limitation of certain types of remedies. In turn, state laws notwithstanding, the warrantor will almost always seek to exclude or limit incidental and consequential damages and cap the warrantor’s overall liability with respect to warranty claims at the amount actually paid by the consumer purchaser for the covered items.

In response to the widespread misuse by merchants of express warranties and disclaimers, Congress enacted the Magnuson-Moss Warranty Federal Trade Commission Improvement Act of 1975. [15 U.S.C.A. §§ 2301 et seq.; referred to as “the Magnuson-Moss Warranty Act” or “the Federal Act”] The Federal Act is based on the premise that suppliers of consumer goods vigorously use written express warranties as advertising and merchandising devices. If these warranties are to be used, they must meet federal standards in terms of disclosure and remedies provided to an aggrieved consumer.

The Magnuson-Moss Warranty Act regulates service contracts and written warranties on “consumer products” that are distributed in interstate commerce and mandates certain guidelines in connection with written warranties, regulates their disclosure to consumers, restricts conditions on warranties, imposes different requirements for “full” or “limited” warranties, and restricts the ability to disclaim or modify implied warranties.  The Federal Act does not require the tendering of a warranty on any product. However, if a written warranty is actually given to the consumer, the warranty and the services connected with it must meet certain specifications as implemented by the rules of the Federal Trade Commission (“FTC”). [16 C.F.R. Pt. 700 to 703]

The rules governing the contents of warranties [15 U.S.C.A. § 2303] apply only to warranties pertaining to consumer products costing the consumer more than $5; however, FTC rules regarding disclosure of written warranty terms [16 C.F.R. §§ 701.1 et seq.] and presale availability of warranty terms [16 C.F.R. §§ 702.1 et seq.] apply only to warranties pertaining to products costing the consumer more than $15. [16 C.F.R. §§ 701.2702.3]  Certain of the provisions dealing with designation of written warranties [15 U.S.C.A. § 2303] apply only to warranties pertaining to products costing the consumer more than $10. [15 U.S.C.A. § 2303(d)]

Consumers are given a federal cause of action for damages resulting from violation of the Federal Act or of a warranty or service contract regulated by the Federal Act, on which they may sue in an appropriate state or federal court. [15 U.S.C.A. § 2310(d)]  Given the legal requirements associated with warranties and the importance from a marketing perspective of issuing and servicing warranties in a lawful manner it is recommended that managers and other personnel responsible for warranties and service contracts offered by their companies familiarize themselves with the information and guidelines in the FTC publication called “A Businessperson’s Guide to Federal Warranty Law”.

When a company offers a product for sale, it should have a standard operating policy which describes the procedures for standing behind its products following their sale. The policy should be reviewed periodically for consistency with all product warranties and applicable law. When formulating a warranty policy, significant attention should be given to the business needs of the client, not just the requirements of the law. A warranty policy serves as a sales tool as well as a means to consciously allocate risk between a seller and a buyer for defective products. A poorly drafted warranty can reduce the sales potential for the company client as well as unnecessarily increase the risk of loss. With appropriate care in the warranty review, the attorney for the company can provide a very valuable service.  For further discussion on warranty law issues and practice tools, see Consumer Warranties (§§ 140:1 et seq.) in Business Transactions Solution on WESTLAW, which includes an executive summary for clients regarding federal warranty law (§ 140:61).


Contract Management Procedures are Essential for Good Contracts and Monitoring Clients’ Duties and Responsibilities

Contract management, sometimes referred to as contract administration, refers to the processes and procedures that companies may implement in order to manage the negotiation, execution, performance, modification and termination of contracts with various parties including customers, vendors, distributors, contractors and employees.  While business people often dismiss contract preparation as “lawyer’s work” that has little or nothing to do with the important aspects of the working relationship between the contractual parties, contracting is actually one of the crucial activities in determining the success of any business arrangement.  While the essential steps in the contracting process will vary depending on the type and scope of the transaction, and the point at which counsel is brought into the discussions, contract formation and management typically involves most or all of the following:

  • Investigation of the business and legal background for the particular transaction and determination of the role that counsel is expected to play in the contracting process.
  • Identification of the contracts and related documents required to complete the transaction and establishment of a time and responsibility schedule for drafting, review, discussion, revision and completion of all of the required items.
  • Review and evaluation of the related contracts and existing obligations of the company that might be impacted by the specific contract currently under discussion.
  • Collection and review of information regarding the business and legal affairs of the other party to the proposed transaction.
  • Preparation of the initial draft of each of the required contracts and related documents or, in cases where the opposite party is responsible for drafting, review of the initial draft of such items prepared by the opposite party.
  • Discussion of necessary changes in the initial drafts, negotiation of the same and preparation of the final drafts of the contracts and related documents for signature.
  • Preparation for, and completion of, the closing of the transaction at which time all contracts and related documents are executed and exchanged and any required performance at the closing (e.g., cash payments) is completed.
  • Ongoing review of the performance of each of the parties under the terms of the contract, at least in those cases where the contract is long-term and calls for continuous performance over an extended period of time.

The timing and sequence of these steps may be impacted by other conditions unique to the transaction.  For example, while the parties may quickly reach agreement on the content of the contracts, the actual closing may be deferred pending receipt of approvals from governmental officials or completion and delivery of various reports and opinions from third parties.

This month’s supplement to Business Transactions Solution on WESTLAW includes a new chapter on Contract Management (§§ 227:1 et seq.) that covers the creation and use of procedures relating to negotiation, formation and management of effective and enforceable contracts.  The chapter describes the essential steps in the contracting process; investigation of business and legal issues; defining the role of counsel in the contracting process; and establishment and administration of a contract review and signature authority policy.  The specialty forms library includes various forms for use in creating and administering a corporate contracting program including policies and procedures for negotiating and entering into contracts or leases, a contract review summary, procedures for review and approval of proposed contracts, a memorandum to officers, managers, and employees regarding contract review and approval procedures; and a memorandum from the general counsel to members of the corporate legal department regarding guidelines to be followed for effective contract management. The chapter also includes a contract formation and administration checklist, client executive summaries regarding contract management and basic procedures for contract review and approval, a slide deck presentation on contract management to be used for law firm and department training purposes and a memorandum on steps that attorneys can take to develop their own library of forms in order to be a more efficient contract drafter. For issues relating to drafting of particular types of contracts, reference should be made to the materials for the specific transaction in which such contracts are commonly used. Related information is included in Contract Formation and Performance (§§ 100:1 et seq.), Compliance Programs (§§ 223:1 et seq.) and Records Retention (§§ 228:1 et seq.).