Constructive Ambiguity: IP Licenses as a Case Study

Abstract

Ambiguity in contracts is often perceived as undesirable. Yet, a certain level of ambiguity can have significant virtues: reducing transaction costs associated with foreseeing and negotiating remote contingencies; facilitating the closing of efficient transactions that would not otherwise close; increasing the adaptability and "anti-fragility" of contracts in face of unforeseen developments; and preserving trust between the parties.

Our analysis shows that certain types of contracts are more likely to benefit from a certain degree of ambiguity. Relying on multi-disciplinary literature, we offer a systematic analysis of ambiguity's merits and identify three principal transaction features that are positively correlated with those virtues: (1) long duration; (2) relational nature; and (3) complexity and uncertainty of the transaction and the relevant markets. As a case study, we closely look at IP licenses negotiated between sophisticated parties. Our examination reveals the prevalence of the foregoing traits in such agreements, and demonstrates their tight link to the unique attributes of intellectual property. We hence conclude that IP licenses constitute paradigmatic candidates for "constructive ambiguity".

We further demonstrate that within a specific transaction, ambiguity may be more warranted with respect to certain types of provisions and topics, and propose new guidelines for addressing ambiguity in a given contract. Our proposal is based on a distinction between core and periphery, which we measure against three parameters: (1) probability; (2) significance; and (3) timing. When, from an ex-ante perspective, the relevant provision concerns the core aspects of the transaction, ambiguity is generally unwarranted and its ex-post treatment by courts should be less tolerant. Yet, when the provision is closer to the periphery of the transaction, ambiguity is often efficient, and courts reviewing the contract ex post should treat it more liberally. While our model addresses ambiguity in IP licenses as its case study, it can have broader implications for contract law in general.

Keywords: contracts, intellectual property, patents, copyright, licensing, ambiguity, technology transactions