Constructive Ambiguity: IP Licenses as a Case Study

Ambiguity in contracts is often perceived as undesirable. A certain level of ambiguity, however, 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 the face of unforeseen developments; and preserving trust between the parties. Some contracts are more likely to benefit from a certain degree of ambiguity. Relying on multi-disciplinary literature, this Article systematically analyzes ambiguity’s merits and identifies three principal features of transactions that are positively correlated to the virtues of ambiguity: (1) long duration, (2) relational nature, and (3) complexity and uncertainty of the transaction and the relevant markets. As a case study, this Article considers intellectual property (IP) licenses negotiated between sophisticated parties. IP license agreements exhibit the above three transactional features, which are tightly linked to the unique attributes of intellectual property, including its non-rival nature, tacit knowledge surrounding formal IP rights, and significant uncertainty embedded in IP rights and markets. This Article thus concludes that IP licenses constitute paradigmatic candidates for “constructive ambiguity.” This Article further demonstrates that within a specific transaction ambiguity may be more effective for certain types of provisions and topics and proposes new guidelines for addressing ambiguity in a given contract. This Article’s proposal is based on a distinction between core and periphery issues, which it measures using 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 courts’ ex post treatment of it 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 should treat it more liberally. While the proposed model addresses ambiguity in IP licenses as its case study, it can have broader implications for contract law in general.