Settlement of the Week: Verizon & Vonage Settle Using Contingent Agreements and Charitable Contributions
The Washington Post reports today that Patent Deal May be Charitable Agreement. Excerpt below:
Patent disputes rarely end up helping charities, but two local organizations could get sizable donations from the resolution of a year-long legal battle between Verizon and Vonage.
As part of the settlement reached last week between the two companies, a total of $2.5 million will be given to five educational nonprofit organizations, two of which are based in the District [of Columbia]. . . . .
If Vonage loses its rehearing on either of the patents in question, it will pay $120 million, including $2.5 million for the charities. If it wins, it will pay Verizon $80 million, and nothing will go toward charities.
Both companies said the idea of giving money to charities came up during settlement negotiations.
This settlement takes advantage of two settlement tools that every lawyer, IP or not, should have in his/her negotiation tool box.
The first tool is the use of contingent agreements to hedge against gains or losses that can only flow from future events. Here the parties made both the charitable contributions and the higher Vonage pay-out contingent upon Verizon defeating Vonage's motion for rehearing on either of the two patents at issue.
As M.I.T. and Harvard Professor Lawrence Suskind has written in Why Technology Negotiations are Different:
One novel way to accept uncertainty is through contingent agreements—promises that negotiators add to a contract to reduce risk. An agreement might include a table that accounts for many future scenarios, including different prices, deadlines, and obligations to perform.
Contingencies add complexity and incur the wrath of general counsel; they also make it difficult to book the value of the deal (and allocate bonuses) when the agreement is signed. Nevertheless, when uncertainty is high, parties will be best served by spelling out "who gets what" under a variety of scenarios.
Contingent agreements in the litigation context are also used to control for uncertainty. Here the parties are wagering on the Court's decision on Vonage's upcoming motion for a rehearing on either of the two patents at issue. And you thought gambling was illegal in our nation's capital./*
This agreement also builds in whatever tax advantages and benefits to corporate good will that flow from making charitable contributions. These corporations likely have already planned their charitable giving for the year and may well have "re-purposed" those funds to help them settle the litigation.
I rely on any tax expert who drops by this post to answer the question about the tax benefits that would flow from this agreement.
There is one thing I can tell you as a full-time mediator.
The next time you're engaged in litigation with this much at stake, ask Vonage or Verizon who it is that brokered this deal. It's not rocket science, but it shows a level of creativity and ability to persuade that is frankly rare. I, for instance, have suggested charitable contributions and contingent agreements on many occasions. I have not, however, succeeded in convincing the parties that they make good sense.
So I defer to and tip my hat in praise of the mediator and negotiators who can later tell some great war stories about how this deal ended up on the pages of the Washington Post.
Good work!
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/* Note: most states and the District of Columbia outlaw wagering on games of chance, not on games of skill.
