Contract Drafting: It’s All in the Details

In 1881,  Dr. Joseph Lawrence invented Listerine and it remains the #1 best selling mouthwash.  Later that year, Dr. Lawrence sold the secret formulation to a pharmacist named Jordan Lambert.  The contract drafted in this exchange required Lambert to pay Dr. Lawrence a royalty  based on volumetric sales for as long as Listerine was sold.

For many years, Lambert and his successors continued to pay the royalty as promised, but in 1931 the secret formula was leaked to a medical journal and published.  Warner-Lambert continued to pay the royalties in spite of the disclosure but fifteen years later, those royalties totaled $1.5 million for the year. Warner-Lambert grew weary of paying fees on a formula that had lost its trade secret value and attempted to invalidate the agreement in 1959.

The court quickly ruled that the loss of the trade secret had no bearing on the royalties due. It held that the contract was clearly and concisely drafted and that payments were required to continue in perpetuity until  Listerine sales were discontinued. Consequently, the royalty payments continue 139 years later.

A share of these royalties came up for auction earlier this month. The winning bidder paid $561,000 for the share even though it generated only $32,000 in revenue last year.  With royalties rolling in for the foreseeable future it may still prove to be a good investment.  Even so, the story serves as a great example of lack of foresight in contracting drafting.


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