Question for lawyers. Breach of contract.

livi · 12-07-2014, 07:33 AM

Could I please ask the lawyers a question regarding breach of contract.

As some of you know I have a small side business developing Medical devices. With one of our Products we have a contract/agreement with a rather small American family business. They signed an agreement to have exclusive rights to manufacture and market the device during a period of Three years. As is very common with this kind of agreement, a minimum royalty was included.

As it turns out, the American Company has not managed to reach the market at all. They claim they have not been able to manufacture the device at a low enough cost to make a net income on sales. They now want to break the agreement and feel that they have put a lot of Money into it already and therefore Think it it reasonable that they don´t have to pay the minimum royalties. Note that it has cost me a lot too during this period, not least the very expensive patent fees involved.

In my World, put simple, the minimum royalty is there for just this situation. Its the price you pay in order to get an exclusive opportunity to do your best and make Money on it without competition. Whether you succeed or not is irrelevant.

The crux is that the agreement states that any dispute is to be settled in the USA. My question is what my chances are of winning and how I go about to do this.

To make it clear, we are not in dispute regarding what is agreed upon in the contract. They simply want to break the agreement as they have not been able to market the Product.

Any help, comments or otherwise input very much appreciated.

Thanks!

ossiblue · 08:45 AM

Not a lawyer, but I'll get the ball rolling.

We need to know the wording of the agreement as it applies to a royalty. Does it specify that the royalty is simply for their use of your idea, or does it specify that they are to pay a royalty from the net income/revenue from their use of your idea (or words to that effect?) I suspect this is where the dispute arises because the wording is open to interpretation, either way. However, from your post, it appears that a royalty is expected to be paid regardless of the company making a profit. The royalty is for their right to exclusive use your product, in lieu of others, and as a payment for your "loss" of potential revenue by the exclusivity. The royalty payment should be considered part of cost of production, similar to any payment to a subcontractor or supplier.

I don't which court your case would best be decided, but I would think you have a good chance of prevailing, depending on the terms in the contract.

Perhaps you can post the exact wording of the contract with regards to the royalty so we can focus on where the dispute lies.

porsche4life · porsche4life's Garage

LJ hit it on the head regarding terms of the contract. I would say you need to get with a lawyer in the US, preferably in the state the other company is located, as this is most likely where you will bring suit.

Maybe someone on here can help you find a good lawyer...

livi · 12-07-2014, 10:29 AM

Thanks, guys!

The text goes something like this: If the royalties based on aggregate net sales does not equal or exceed the applicable Minimum Royalty amount..... ..they shall pay an amount equal to the difference..

As I mentioned this is not a question of different opinions as far as interpreting the contract. They admit to and agree to the terms but based on the fact that they have failed to commercialize the Product and hence have not made any Money, they argue that it is reasonable that they be off the hook regarding the minimum royalties.

I find it a strange way to do business. If I sign an agreement I will honor the terms whether it turns out to be a good or bad Project. I can´t just make the agreement go away as I please.

porsche4life · porsche4life's Garage

They are just trying to worm their way out of paying, when they know they are on the hook for it. A good letter from an attorney threatening legal action might be enough to get them to cough the $$ up. Unless they don't have it....

livi · 12-07-2014, 11:01 AM

Thats what I am kind of hoping for, Sid. I have so far not made an "threats" of taking legal action as I Think it should not be necessary but I am probably being naive.

porsche4life · porsche4life's Garage

Welcome to business in America... Best to find a good lawyer and keep him on retainer if you are going to be in the medical biz here.

ossiblue · 12-07-2014, 11:11 AM

Quote:

Originally Posted by porsche4life

They are just trying to worm their way out of paying, when they know they are on the hook for it. A good letter from an attorney threatening legal action might be enough to get them to cough the $$ up. Unless they don't have it....

Agree.

A letter from an attorney, written correctly, may make them think it is much less expensive to pay the royalty amount rather than face an amount based on complete beach of contract for the remaining period. Possibly, you may consider negotiating a payment for outstanding royalties in return for a mutual cancellation of the remaining years of the agreement. You get your money, they get off the hook for future obligation and lose the exclusivity of your product.

stomachmonkey · 12-07-2014, 11:11 AM

MInmum guarantee is common. It's in 90% of my contracts.

Two ways too look at this.

Fight tooth and nail for every penny which will cost you and you may never see dime one if it's an amount that breaks the bank.

Or let them out of it contingent on immediate payment of a negotiated lesser minimum.

Point being as long as you guys are in dispute they still have an exclusive meaning you are missing the opportunity to pick up new distribution and the opportunity for revenue.

Sometimes proving you were right is the wrong thing to do

porsche4life · porsche4life's Garage

Quote:

Originally Posted by stomachmonkey

Sometimes proving you were right is the wrong thing to do

Also very true. Another reason to consult legal counsel. If its going to cost 20k+ to pursue this, probably not worth it.

livi · 12-07-2014, 11:20 AM

This is very helpful guys, thanks!

stomachmonkey · 12-07-2014, 11:34 AM

FWIW, your situation is why we never do a minimum guarantee that is also an exclusive without up front money.

HardDrive · 12-07-2014, 11:34 AM

Quote:

Originally Posted by stomachmonkey

Sometimes proving you were right is the wrong thing to do

This. Pragmatism is the best course.

My cousin, Matt Hurd, is an experienced attorney with Sullivan and Cromwell. Excellent firm based in NY. They work globally. If I were in the same position, he would be the first person I called. Matt is one of the leaders of the firms Healthcare and Life Sciences Group. Tell him Josh Herrala referred you.

Sullivan & Cromwell LLP | Home

Matthew G. Hurd

McLovin · 12-07-2014, 11:57 AM

From what you said, you sound like you have a fairly straightforward winning case. Like you said, the minimum is there for this very reason.

A couple other things to look for in the contract and think about:

1. Is there an attorney's fee provision? (i.e., if you win, do you get to tack your attys fees onto the claim?) That makes a big difference in your analysis, and in future settlement negotiations. Because you have a strong case, an attys fee provision will make the other side very nervous. It raises the stakes for them - what may be a relatively small problem can blow up into a huge problem if they don't get it resolved.

2. Is the other side solvent/do they have assets? One easy way for a party to defeat a lawsuit is be be judgment-proof. Hopefully they have a real business, with some roots and assets, and are therefore forced to deal with this.

3. What does the jurisdiction and venue provision say? You said "USA" but is there something more specific? A certain state or federal court? Is it the exclusive jurisdiction? You should know where you'd be suing.

4. How much is involved? Obviously, the analysis is different if they owe you $1,000 or $1,000,000.

I'm sure HD's cousin is a good guy, but for this type of matter, I'd NOT call the Sullivan and Cromwell in New York, lol, they'd probably be one of the last firms I'd call. That's not an appropriate firm for this type of small side business matter.

MRM · 12-07-2014, 01:08 PM

Livi, If you PM me with your contact information I'll do your initial case evaluation and demand letter for free with no obligation following that if they don't give up without a fight. I just handled a similar case for an Italian tile (flooring) manufacturer. It's not rocket science but you can chew up your profits by spending money on attorneys if you aren't careful.

RANDY P · RANDY P's Garage

Quote:

Originally Posted by MRM

Livi, If you PM me with your contact information I'll do your initial demand letter for free with no obligation following that if they don't give up without a fight. I just handled a similar case for an Italian tile (flooring) manufacturer. It's not rocket science but you can chew up your profits by spending money on attorneys if you aren't careful.

winner winner chicken dinner.

livi · 12-07-2014, 01:22 PM

Superb advice. Thanks!

livi · 12-07-2014, 01:24 PM

Quote:

Originally Posted by MRM

Livi, If you PM me with your contact information I'll do your initial case evaluation and demand letter for free with no obligation following that if they don't give up without a fight. I just handled a similar case for an Italian tile (flooring) manufacturer. It's not rocket science but you can chew up your profits by spending money on attorneys if you aren't careful.

I am humbled. Wow. I will just have to talk to my partner so we agree on the manner to handle this. Thanks!

ossiblue · 12-07-2014, 01:34 PM

Quote:

Originally Posted by MRM

Livi, If you PM me with your contact information I'll do your initial case evaluation and demand letter for free with no obligation following that if they don't give up without a fight. I just handled a similar case for an Italian tile (flooring) manufacturer. It's not rocket science but you can chew up your profits by spending money on attorneys if you aren't careful.

Quote:

Originally Posted by livi

I am humbled. Wow. I will just have to talk to my partner so we agree on the manner to handle this. Thanks!

My experience has been that Pelican's are the first in line to help a fellow member out. Differences of opinion on OT or even PARF (with some very colorful exchanges), play no part in the generosity of the regular members on this board.

It's a class act by MRM, in this case, and also all around this board.

pete3799 · pete3799's Garage

I knew someone here would step up to the plate. You're a good man MRM.
Wait.......are you only doing this because he's a fluffer?