A Recital of Consideration
I start my first year contracts course with consideration. For the first time, I’m also teaching a contracts drafting course. Based upon the contracts drafting texts that I reviewed, the general consensus seems to be that recitals of consideration are basically pointless. While I think that’s somewhat true in that they don’t contain performance obligations, it’s misleading, too. Courts not only consider recitals in construing clauses and the parties’ intent, a recital of consideration may create a rebuttable presumption or may estop a party from claiming lack of consideration. In other words, in some cases, it can save a party from a claim that consideration was insufficient.
A recent case involving a patent assignment, Network Protection Sciences v. Fortinet, 2013 WL 4479336 (N.D. Cal 2013), seemed to go even further when the court, applying Texas law, held that a recital was conclusive. The recital in question stated that the patent was assigned “for good and valuable consideration, the receipt of which is hereby acknowledged.” The party contesting the assignment argued that it was invalid because it was “beyond dispute” that no consideration was paid for it. The court, applying Texas law, rejected that argument finding the recital conclusive and that “(e)ven if no actual consideration were paid…NPS’s agreement to be bound by the choice-of-law provision would be deemed adequate consideration.” In other words, according to the court, the recital is conclusive with respect to the issue of whether there was consideration for the assignment but even if it weren’t, agreeing to the choice of law provision was sufficient consideration. Is this the law in Texas, is it unique to Texas, or did the judge make new law? Any contracts profs care to weigh in?
In any event, it seems that consideration wasn’t the way to go anyway because (although the parties didn’t raise the issue) the assignment seems to fall under Restatement section 332 regarding gratuitous assignments that are irrevocable if signed and delivered to the assignor. This makes sense to me because a written assignment can affect third parties who rely upon it.
The case is also noteworthy because it opens with a quote from a recent NYT oped, coauthored by Santa Clara law prof Colleen Chien, which discusses the problem of “patent trolls” (companies that buy up patents with the intent to sue for infringement, rather than to practice the patented invention). The court’s decision denying the defendant’s motion to dismiss the patent infringement action was a bit disappointing given the way it began its opinion and the less-than-admirable behavior of the plaintiffs and their trollish behavior in pursuing the action. Where are the activist judges when you need them?
[Nancy Kim]