Sunday, July 06, 2003

THE LIMITS OF TRANSACTION LAWYERS We aren't perfect. We can't do everything. We can't stop time, speed up the harvest or teleport you off this rock. No matter how good a contract we prepare, it won't prevent bad faith, insane interpretation or a claim that you aren't performing despite your clear adherence to the strict terms of the agreement. Here's a good example from the world of intellectual property licensing.

Video game maker Activision has sued Viacom over its $20 million purchase of the right to make Star Trek video games. From the Reuters report:
In the complaint filed in Superior Court in Los Angeles on Monday, Activision said Viacom's "critical failure to perform" included not releasing "Star Trek" films from 1998-2002 and allegedly deciding recently not to make any more "Star Trek" films or TV shows.
I haven't read the contract, but based on the allegations made public, I suspect that there was no obligation on the part of Viacom (parent of Paramount) to release more Star Trek movies or to keep Deep Space Nine or Voyager on the air. Chances are, Activision contracted for the exclusive right to make Star Trek video games, and the only real limitation on Viacom was not to license video game rights to anyone else. Activision probably never considered what would happen if the Star Trek name lost some of its luster. After all, in 1998, there were two Trek series on the air, and the movie Star Trek: Insurrection was a big disappointment, yet Activision still negotiated to pay $20M. The franchise was still believed to be powerful and it was futile to resist it.

Years later, circumstances changed in a way not envisioned by the business principals or their counsel. While one might argue that Activision should have negotiated a terminiation right if Viacom ran the franchise into the ground, I can't imagine what the standards would have been. Certainly I'd have advised Viacom to refuse any vague standard regarding dilution of the Star Trek mark or degredation of its value, or any more specific standard requiring movies to be produced every so many years (after all, you'd have contracting issues with temperamental actors as well other unknowns surrounding availability of cast, crew and release dates).

So, what happened, I suspect, is that these issues were not addressed and Activision determined later that it was wrong to agree to pay $20 million, especially after the dismal performance of Star Trek: Nemesis and the announcement by Patrick Stewart that he was through with Star Trek. I doubt any reasonable laywer would have allowed a licensee to terminate upon the occurrence of these events.

Determination of price is always an allocation of risks: to the buyer who agrees to pay more than something is worth, to the seller who accepts less. Imagine if the latest Star Trek movie had been a big hit and nominated for Oscars and the television show Enterprise was a consistent top 10 show, then surely Viacom would feel it had asked for too little from Activision.

It comes down to this: no matter how tight your contract is, if one party believes it made a horribly bad deal, it will try to get out. I suspect that's what's happening here.

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