And if You Didn’t Get a Provision Put into a Written Contract, Don’t Assume it’s Enforceably “There”
At the IP Breakdown, we blog about trademarks, copyrights, patents, trade secrets, privacy, the Stored Communication Act, and other stuff like that, because “IP” is in our name—and “IP” means whatever we dangwell think it means. But even we would have to agree that “IP” doesn’t mean contracts. Yet, this post will be about contracts and not about “IP.” Let me explain.
If I had to guess, I’d say about half of all IP disputes involve, directly or indirectly, a contract. For example, the parties may have entered into a license, and the licensor now accuses the licensee of exceeding the scope of the license, which, if true, means the licensee is an infringer. But knowing whether the licensee is inside or outside the license’s scope will depend on plain old contract law. For another example, the licensor may accuse the licensee of failing to pay royalties. That’s not infringement—it’s just a breach of contract, but it’s a breach that depends on pre-existing IP rights.
This recent Tennessee Supreme Court decision reminds us that contractual language matters, and you can’t expect to be saved from bad, one-sided provisions—at least, not in Tennessee.
The case is Individual Healthcare Specialists, Inc. v. BlueCross BlueShield of Tennessee, Inc.. BlueCross used to engage independent agents to sell certain healthcare plans, with the agencies receiving commissions for their efforts. The agency agreement between the parties gave BlueCross the right to change the commissions rates from time to time, without the agencies’ approval.40It’s more complicated than this. The contracting agencies themselves had sub-agents. One point of contention was BlueCross’ attempt to cut the agencies out and work directly with the sub-agents. Until 2011, every time BlueCross did this, it made clear in the new schedule that the new commission rates apply only to sales made after the new commission schedule became effective. Which only seems fair. Otherwise, BlueCross would be retroactively reducing commissions. The point of a commission, after all, is to encourage sales. Reducing the commission rate after the sale undermines that. Indeed, the mere possibility that commission rates could be reduced after sales undermines the point of commissions.
But in 2011, BlueCross made the new commission schedule applicable to all sales, no matter when made. BlueCross said this was necessitated by the Affordable Care Act41Apparently by fixing the medical loss ratio at 80–20, leaving less room for commission payments., but the plaintiff wasn’t interested in the reasons. As far as it was concerned, BlueCross was stuck paying the old commission rates for the old sales—problems caused by changes in the law was BlueCross’ problem, not the agencies’.
Did the agency agreement say BlueCross couldn’t make commission rates retroactive? Well, no. Of course, it didn’t say BlueCross could, either. The plaintiff had two main arguments for why BlueCross was obligated to pay old rates for old sales, and they’re both pretty good:
1. Until 2011, BlueCross had always explicitly limited new rates to new sales, showing that BlueCross understood this to be a contractual limitation on its ability to set new rates.42Counterargument: why did BlueCross feel it had to be explicit about this limitation? Doesn’t that imply the opposite, i.e., rates would be retroactive without the explicit language and thus retroactivity was not only possible but the natural state of affairs.
2. Those involved in the negotiations of the agency agreement understood that new commission rates could never be retroactive.43Too bad they didn’t put that in the written contract.
The trial court and the intermediate court were persuaded by these arguments, especially by the second argument. Correspondence between BlueCross and the agency during contract negotiations persuasively showed the parties’ apparently mutual understanding that new commission rates would not be applied retroactively. The agency’s president was particularly concerned about this and specifically asked about it during negotiations. And he received satisfactory assurances.44I’m reading between the lines a bit here, since the Tennessee Supreme Court is a bit vague about this important evidence—perhaps to make the point that it really doesn’t matter what the evidence said—but it’s safe to assume that, to persuade the trial court, the evidence had to be powerful.
Not Every Integral Is Integrated
The Tennessee Supreme Court reversed. It held that, in an “integrated” written contract, evidence from outside the written contract cannot be used to add, remove or modify any terms found in the written contract. Thus, even if the plaintiff’s president and BlueCross’ negotiator agreed—in a written email!—that new commission rates could never be applied retroactively45Which might or might not be what happened—it doesn’t really matter., the provision will not be read into the written contract the parties actually signed. This is known as the “Parol46Olde lawe Frenche for ”oral.“ Evidence Rule,” even though it’s not limited to “parol” and isn’t really a rule of evidence.47I swear that about one-third of law is just resisting the ordinary meaning of words. Another one-third is overcoming that so everyone else can understand what you’re saying.
What’s an “integrated” contract? That’s key. The Parol Evidence Rule applies only to contracts that are both integrated and written. A contract is integrated if the written contract is intended to be the final word on the subject matter of the contract. It’s usually in a provision near the end—you know, the “boilerplate” part that no one reads—that’s captioned something like, “Entire Agreement.” It might go something like this:
“This Agreement sets forth the full and complete understanding of the Parties.”
It might also add something like this:
“All prior and contemporaneous discussions and agreements are merged into this Agreement.”
This is a signal that, if the written contract48Technically, not a “contract.” A better term is “instrument.” A contract is by definition enforceable, regardless of how it’s formed. you’re about to sign isn’t what you expected, you’d better not sign that contract. This little “boilerplate” provision will steamroll all your expectations, including things you thought were written agreements, if they’re about the subject matter of the written contract that you’re about to sign.
When the Parties’ Mutual Understanding Isn’t a Contract
That’s what happened in Individual Healthcare Specialists. The plaintiff’s CEO had these long written correspondence with BlueCross’ negotiators and got them to say that, of course, BlueCross would never apply new commission rates retroactively, that would be stupid.49I think. Again, it’s hard to tell from the opinion. But that provision was never put into the written contract, and, so, it wasn’t part of the parties’ agreement. Instead, the written, signed contract said what it had always said: BlueCross could adjust commissions, without further qualification.
If I could venture some criticism, I’m not sure silence on the issue means that commission could be retroactive.50Again, we’re missing several pieces of the puzzle. Earlier in the case, the trial court held that the relevant contractual provision unambiguously permitted retroactive application of new commission rates, but the opinion doesn’t set out the relevant contractual language. I suppose we could just take the trial court’s word for it, as the Tennessee Supreme Court seems to. It seems to me it could just as easily be the opposite. Retroactivity is much more surprising than the alternative, so silence could just as easily mean that the commission changes couldn’t be retroactive. Interestingly, you wouldn’t need to rely on the pre-contract correspondence to make this case, just point out the purpose of commissions and how retroactive changes to commissions undermines that purpose. The Parole Evidence Rule wouldn’t need to be invoked. I wonder, actually, if the Tennessee Supreme Court didn’t fall into its own trap: that the Court read retroactivity into the contract precisely because the plaintiff had raised the issue but failed to get it put into the final written contract. In other words, I wonder if the Court looked to outside evidence in order to read retroactivity into a contract that was otherwise silent on the issue.
Now, even though the Parole Evidence Rule prevents the use of outside evidence to add, alter or remove51Er, “vary, contradict or supplement.” a term from a written, integrated contract, you can use outside evidence to help clarify ambiguous provision. Had the trial court found the provision relating to BlueCross’ right to change commission rates to be ambiguous, perhaps we could’ve applied pre-contract correspondence to that issue, after all. But it it didn’t, so we apparently can’t.
Open to Interpretation
But there was another issue where this rule applied. After BlueCross terminated the agreement, it started to pay the plaintiff’s subagents directly, cutting plaintiff out of the process. According to the contract, BlueCross could only do this if the plaintiff was either not able or not entitled to receive the commissions. BlueCross argued that, once it terminated the contract, the plaintiff was no longer “entitled” to receive the commissions—which is circular reasoning, but whatever. Now, the contract certainly seems to give the plaintiff the right to continue to receive commissions for existing policies, even after termination. But apparently someone thinks this is ambiguous, so we’re off to examine the pre-contract negotiations.52To be fair to the Tennessee Supreme Court, I don’t think the Court really thought the contractual language was all that ambiguous, but looking at the outside evidence was harmless because it just confirmed the common-sense conclusion.
Fortunately, this outside evidence doesn’t alter the common-sense conclusion. During negotiations, the parties acknowledged that the point of funneling all commissions through the plaintiff was to compensate plaintiff for managing the subagents. The plaintiff could retain a portion of those commissions to compensate itself for the administrative costs and bother.
So, next time, I’m going to apply these holdings of Individual Healthcare Specialists to a hypothetical software contract, so you can see how it would affect a fairly typical license agreement.
Until then, thanks for reading!