Ethical Considerations in Licensing Negotiations January 13, 2004

1. Ethical Considerations in Licensing Negotiations January 13, 2004 Cecily Anne Snyder,Vice President, Legal Affairs & Stuart J. West, P.E. Fliesler Meyer, LLP

2. Direct negotiations with the other party Communication of offers Confidentiality of client information Misrepresentations and failure to disclose material facts Ethical Issues that can Arise

3. The Rule: A lawyer can represent a client in a license negotiation with an unrepresented party and can negotiate with a represented party where consent is obtained. California Rules of Professional Conduct provide: 2-100(A) While representing a client, a member shall not communicate directly or indirectly about the subject of the representation with a party the member knows to be represented by another lawyer in the matter, unless the member has the consent of the other lawyer. Direct Negotiations Direct Negotiations

4. Interpretation: Even though a licensing negotiation is often non-adversarial in nature, obtaining consent of the other lawyer is prudent. Options/Suggestions: Ascertain from the other party whether they are represented by counsel before beginning negotiations. If represented by counsel, confirm permission to proceed with negotiation. If not represented by counsel, document inquiry and response; suggest that the party obtain counsel to avoid inadvertently creating an attorney-client relationship. Technology Survey Direct Negotiations

5. The Rule: A lawyer must pass along offers received. The State Bar Act provides: § 6068. It is the duty of an attorney to do all of the following: … (m) to respond promptly to reasonable status inquiries of clients and to keep clients reasonably informed of significant developments in matters with regard to which the attorney has agreed to provide legal services. § 6103.5(a) A member of the State Bar shall promptly communicate to the member’s clients all amounts, terms and conditions of any written offer of settlement made by or on behalf of an opposing party…. California Rules of Professional Conduct Provides: 3-500 A member shall keep a client reasonably informed about significant developments relating to the employment or representation, including promptly complying with reasonable requests for information and copies of significant documents when necessary to keep the client so informed. 3-510(A) A member shall promptly communicate to the member’s client: …(2) All amounts, terms, and conditions of any written offer of settlement made to the client in all other matters. Communication of Offers

6. Remember: Failure to communicate is the #1 complaint made against attorneys! Communication of Offers

7. Interpretation: Each licensing offer has the potential to be considered a significant development relating to representation that should be passed along. Unless the licensing is made in the context of litigation settlement, it may not fall under 3-510 as well. If it falls within 3-510(A), then it would also fall within § 6103.5(A) and failure to comply could result in the attorney being disbarred or suspended under §6100 of the State Bar Act. Options/Suggestions: Consider making licensing offers in writing, or providing term sheets, to force the other side to consult with the client. Depending on how the other side has prepared this may trigger the duty to communicate. Consult the client at every offer for instructions (onerous) or obtain a range of acceptable offers that require consultations as well as a range that do not require consultations. Prior to the negotiation thoroughly review the BATNA/WATNA with the client along with various “creative” solutions to minimize the number of consultations. Bring the decision maker with you. Communication of Offers

8. The Rule: An attorney must maintain the confidentiality of his or her client’s information. The State Bar Act provides: § 6068. It is the duty of an attorney to do all of the following: … (e) To maintain inviolate the confidence, and at every peril to himself to preserve the secrets, of his or her client.” California Evidence Code provides: § 952. As used in this article, “confidential communication between client and lawyer” means information transmitted between a client and his or her lawyer in the course of that relationship and in confidence by a means which, so far as the client is aware, discloses the information to no third person other than those who are present to further the interest of the client…” § 954. Subject to Section 912 (privilege waiver) and except as otherwise provided in this article, the client, whether or not a party, has a privilege to refuse to disclose, and to prevent another from disclosing, a confidential communication between client and lawyer…. Maintaining Client Confidentiality

9. Interpretation: Information provided by a client to an attorney during preparation for a licensing negotiation is potentially privileged. Failure to protect client confidential information could result in disciplinary proceedings. Options/Suggestions: Review with client prior to negotiation which confidential facts disclosed during the attorney-client communications can be disclosed, which facts can be disclosed if required for strategic advantage, and which facts should never be disclosed. Maintaining Client Confidentiality

10. The Rule: Attorneys should not make misrepresentations of material facts. The State Bar Act provides: § 6068. It is the duty of an attorney to do all of the following: … (d) To employ, for the purpose of maintaining the causes confided in him or her those means only as are consistent with truth, and never to seek to mislead the judge or any judicial officer by an artifice or false statement of fact or law. The ABA Model Rules provide: 4.1 In the course of representing a client a lawyer shall not knowingly: (a) make a false statement of material fact or law to a third person; or (b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6. (Confidentiality of Information) The ABA Model Code provides: DR 7-102(A)(5). In his representation of a client, a lawyer shall not: … knowingly make a false statement of law or fact. Misrepresentations

11. Interpretation: California statute does not explicitly prohibit misrepresentations in negotiations. However, the rules against misrepresentations toward tribunals could be applied more broadly. Also, the ABA Model rules and Model Code do provide that a lawyer shall not knowingly make a false statement of fact or material fact. Attorneys licensed in multiple jurisdictions could potentially be subject to a rule akin to the ABA rules. Options/Suggestions If you are a multi-jurisdiction attorney be sensitive to the potential differences between jurisdictional requirements and follow the more stringent rule. Consider the effect on your reputation in the licensing community if you engage in misrepresentations. Misrepresentations

12. Bluffing is a common tactic used in negotiation A bluff that is a lie or false statement is considered wrong. The downsides include: Can jeopardize reputation if detected. May ultimately undermine negotiating position. Misrepresentation vs. Bluffing

13. Where the other side has no right to know the true bargaining position. Limited deception is okay under the rules; outright deception should be avoided. Posturing or bluffing is okay. Limited Deception

14. Bluffing: I do not think my client will accept a royalty of 10% of net profits. Deception: My client will not accept a royalty of 10% of net profits! Example: Bluffing vs. Deception

15. Mutual trust assumes that each party will play by the same rules. Trust creates an environment where the parties are more likely to be honest and straightforward. Use of Trust

16. Developing a level of trust with the other party can be beneficial to negotiations, but… Client buy-in to that strategy is prudent. Beware disclosing confidential information. Cautions on Use of Trust

17. Cecily Anne Snyder Vice President, Legal Affairs Imaging Therapeutics, Inc. 15 Depot Square, Suite 3 Lexington, MA 02420 Tel: (781) 862-8702 E-mail: Cecily@imatx.com Stuart J. West, P.E. West & Associates A Professional Corporation 2121 North California Boulevard, Suite 290 Walnut Creek, CA 94596 Tel: (925) 465-4603 x10 E-mail: swest@west-associates.net Questions