Instructions:

1. The exam consists of 7 pages, including this cover sheet. Please check now that your copy is complete.
   
   
2. Your exam is due 8 hours after you pick it up, or at 6 pm on Tuesday, December 20, whichever is earlier. You must return your exam in person, and must return your copy of the exam questions at the same time. If during the exam you have any questions regarding its administration, you should contact the office of Registration Services.
   
   
3. The exam is open book; you are free to consult any written or electronic materials and are expected to have all assigned course materials available. Additional research is discouraged, and is unlikely to improve your exam performance.
   
   
4. Please follow the instructions for each question carefully. If your answers depend on facts not provided in the question, say so; and state clearly any additional assumptions you are making.
   
   
5. There are two questions on the exam, each with a separate 1000-word limit. To ensure compliance with the word limit, you must provide a word count for each question. You may not use any leftover space from one question in answering another; any attempt to use shorthand or nonstandard abbreviations will be counted as if full words were used. Answers exceeding the word limit will be penalized by reducing their score in proportion to the excess.
   
   
6. To ensure that you receive full credit for your answers, please be sure to
   
   • write or print your exam number on each page of your exam;
   • begin your answer to each question on a new sheet of paper;
   • use double spacing and adequate margins, so that I have enough room to make notations when grading your exam.
   
   
7. I recommend that you spend about 2 hours reading the exam, thinking about your answer, and outlining your response. Writing the exam should take no more than 4 hours. This leaves 1 hour to edit and proofread your answer and 1 hour for eating, traveling, etc.
   
   
8. I will notify you when grades are ready and will post model answers on the class website as soon as possible after that.
   
   
9. Good luck on the exam, and have a good holiday.
   
   

QUESTION 1:  (50% of exam, 1000 word limit).

In early 2005, Midwest City condemned land lying west of the city airport. It planned to sell the land, at a discount, to companies that would offer significant growth opportunities for the local economy. In March of that year, the City’s Mayor, Abe Froman, approached GrainBelt, a food processor looking to expand its operations in the Midwest. For the past 20 years, most of GrainBelt’s consumers have been located in Canada and the Northeast.

If it moved to the City, GrainBelt projected to employ over 10,000 local residents. The company was initially reluctant to make the move, however, due to the City’s relatively high local tax rate. The City responded by making significant tax and zoning concessions, including a 10-year, 50% property tax abatement that would save GrainBelt about $20 million per year. Together, the tax savings and the discount on the purchase price of the land made the move to City attractive to GrainBelt; and the company resolved to open a new production facility there. In a press release announcing the move, the company’s president stated: “The move to Midwest City will not only allow our company to tap a new market, but will also raise the standard of living in this historically depressed area. Over the next ten years, our company will become one of the City’s leading employers, contributing to the well-being of individual workers and the fiscal stability of the city government. Roads will be built, children will be educated, and the homeless will find shelter. All this is possible because of our move to Midwest City, and because of the wonders of grain. With grain, all things are possible.”

Construction of the new facility began in May 2005 and was scheduled for completion by August 2006. GrainBelt immediately approached various suppliers of yeast, grains, purified water, and other supplies. Hoping to obtain a volume discount on fortified wheat flour, GrainBelt contacted Tasty Wheat, a moderate-sized midwestern producer. GrainBelt needed 10 tons of the flour each month. Tasty was happy to supply that quantity, because when its factory was producing 10 tons per month, the firm’s per-unit costs were at their lowest ($7K per ton). When it produced less than 10 tons, its equipment was under-utilized; when it produced more than 10 tons, equipment and employees were overworked. (For example, Tasty’s monthly per ton costs rose to $8,000 when it produced 12 tons, $9,000 when it produced 14 tons, and $10,000 when it produced 15 tons. It was prohibitively costly, however, to produce more than 15 tons per month, given the size of its plant.)

On November 15, 2005, Tasty’s vice president, Sloane Peterson, faxed a letter to GrainBelt’s president, Ed Rooney, proposing to sell the flour at a price of $8,000 per ton, a 20% discount off the price then prevailing in the marketplace. The letter stated: “Tasty Wheat is happy to offer these terms in exchange for a wheat flour commitment of 36 months.” Upon receiving the fax, Rooney phoned Peterson, and in the course of their ensuing conversation, stated that the terms “looked good.” The following week, Tasty entered grain supply contracts with three grain distributors. Under these contracts, Tasty would pay $5,000 per ton of wheat (the prevailing market price) for 36 months.

Two weeks after receiving the fax, however, Rooney returned to Tasty, requesting a larger discount on the flour. Peterson refused, saying, “You can’t do this, Ed. We have a contract.” Rooney responded, “What contract?” He hung up and faxed Peterson a one-line letter stating that GrainBelt’s relationship with Tasty was at an end. Subsequently, GrainBelt entered a new supply contract with Yummy Kernel, one of Tasty Wheat’s competitors. Yummy was willing to quote a price of $7,500 per ton for the same kind of flour.

Tasty immediately took steps to find an alternative buyer for its flour. After three weeks of effort, it had lined up five different buyers, each agreeing to buy 2 tons of flour per month for the next 12 months, at a price of $9,000 per ton. It was impossible to find buyers who would commit to contracts with a longer duration. Because of this, Tasty terminated the 36-month contracts with its own grain distributors. Although these distributors subsequently entered equivalent distribution contracts, at a price of $5,000 per ton of wheat, they have filed contract-breach suits against Tasty. Faced with these suits, as well as its own losses, Tasty filed its own contract-breach suit against GrainBelt.

Then, in January 2006, with these suits pending, the provinces of Ontario and Quebec in Canada enacted regulations prohibiting the importation of processed breads made from genetically modified grain products. The U.S. Secretary of Agriculture and the U.S. Trade Representative immediately held a press conference to announce that if these regulations were not withdrawn the U.S. would file a complaint against Canada in the World Trade Organization. Canada is still home to most of GrainBelt’s consumers; and these regulations, if they remain in effect, will force the company to slash its production by 50% and lay off half of its workers.

In response to these developments, Ed Rooney asked GrainBelt’s long range planning department to present an emergency report analyzing the business risks arising out of the new Canadian regulations. The report, drawn up hastily over a two-week period, suggested that the WTO dispute was both uncertain in outcome and unlikely to be resolved for at least a year. It concluded that GrainBelt risked bankruptcy if the company failed to diversify its customer base so as not to be so dependent on a single national market.

Upon reading and considering the report, Rooney announced at a boisterous stockholder’s meeting, at which there were calls for his resignation, that the firm intended to move the majority of its operations to California. With this new location, it expected to gain access to larger markets in the Western U.S., Mexico, and possibly Japan. Back in Midwest City, however, Mayor Abe Froman heard the reports of this announcement and became incensed. He ordered the City’s legal department to file suit, and to seek an injunction preventing GrainBelt from abandoning its plant.

You are chief counsel to GrainBelt. Ed Rooney is getting worried about the company’s legal position, as well as about his own job, and asks you for a confidential memo outlining GrainBelt’s potential liability in the above matters. You have only a few hours to complete the memo. Get going. 

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QUESTION 2:  (50% of exam, 1000 word limit)

In 2001, Jake Santos and Judith Tufts, two computer science Ph.D. candidates at MIT, developed the Linker software program. Linker interfaces with an Internet browser program and, for any given webpage, creates a link between (I) significant words and other terms on the page and (ii) other internet resources that address the same words or terms. Santos and Tufts licensed Linker to several companies, becoming wealthy beyond the dreams of their fellow grad students and techno-geeks. This experience led Santos to develop an interest in the law, and in 2003, he applied and was admitted to Columbia Law School. The partners anticipated that the 1L year would be quite distracting for Santos, and so before he enrolled at Columbia, he and Tufts structured the Linker business as a corporation in which Santos and Tufts were sole owners but Tufts was the president and chief operating officer. Under this arrangement, Tufts ran the business but needed Santos’ approval for unusual transactions.

In late 2003, Linker was approached by Netsoft, Microscape, and Godzilla, three large diversified software companies. Each of the three offered a princely sum to buy the Linker software and related intellectual property. For her part, Tufts leaned toward Microscape, whose browser, Internet Destroyer (ID), appeared to hold a dominant market share. On November 1, 2003, Linker and Microscape signed a document, stating that “the parties agree to negotiate in good faith to sell the Linker software to Microscape for $5 million on February 1, 2004. Linker will secure shareholder approval of the transaction. Microscape will secure adequate financing.” Tufts then contacted Santos, who agreed that it was time to sell the Linker software, and that he was willing to sell to Microscape, but suggested that Tufts “shop around” to be sure that they were receiving the best offer.

On December 1, in pursuance of the partners’ agreed strategy, Tufts approached Netsoft. The president, Norman Bates, made a particularly strong case, arguing that Linker had the brightest future at his firm. He presented statistics showing that Netsoft’s share of the internet browser market was gaining on Microscape’s, and that industry analysts were unanimous in their prediction that Netsoft would soon dominate the market. Believing Netsoft offered the greatest exposure for Linker, Tufts called Santos, asking for approval to sell their firm. Santos consented, but insisted that he and Tufts receive a share of Netsoft’s future profits from using Linker. This demand set off two weeks of intense negotiations. Tufts initially demanded a share of revenues generated by Linker. Netsoft, in turn, demanded discretion to decide best how to deploy Linker. It might want to sell the software to users of its own browser program, Boggler. Alternatively, it might want to bundle Linker with Boggler and distribute the package free to users of Netsoft’s other software. On December 24, the parties finally reached agreement. Netsoft agreed to share a percentage of royalties from its use of Linker. Tufts agreed to give Netsoft full discretion in deciding how best to use the Linker software. With the holidays coming, the parties agreed to commit their agreement to writing on January 2, 2004.

When they met on January 2, Santos, Tufts, and Bates memorialized their agreement as follows: “Tufts and Santos hereby transfer the Linker software system to Netsoft in exchange for $2 million plus a fair royalty, based on future revenues generated by the Linker software system. Netsoft will deliver $2 million to Tufts and Santos on January 31, 2004.”

After a celebratory party at the West End, Tufts returned to his apartment to find fifteen voice messages from Jane Barksdale, president of Microscape. Barksdale indicated that she had obtained the necessary financing and was ready to conclude the sale on February 1, 2004. The next morning, Tufts returned the calls and told her that the deal was off. Barksdale was irate; between a stream of creative epithets, Tufts could make out the words, “we’ll see you in court.”

A year passed without a lawsuit. Santos graduated from law school and began a demanding internship at a public interest law firm. Then, something more dramatic occurred: the browser bubble burst. To make matters worse, Netsoft was hit with an antitrust suit alleging that it had engaged in unlawful conduct to protect its dominant position in the browser market. One more bit of bad news came a few weeks later, when newspapers reported that Microscape had released its source code to the public, allowing anyone in the world to develop a browser that could compete with Netsoft’s Boggler.

Sensing a crisis in the making, Netsoft reevaluated its browser business. It concluded that it needed to reconstruct Boggler to be more user-friendly and to perform a wider range of video, voice, and other functions. It also realized that the reconstructed version of Boggler would perform 95% of the functions offered by the Linker system. Moreover, Linker hadn’t been very popular; Netsoft’s own marketing surveys indicated that only 10% of Boggler users took advantage of Linker. In the interest of reconfiguring its business, reducing costs, and adopting a forward-looking business strategy, Netsoft announced on May 5, 2005, that it was abandoning efforts to market Linker. It never paid any royalties at all under the January 2004 agreement.

When it rains, it pours. Two days after Netsoft’s announcement, Microscape filed suit against Tufts and Santos, alleging breach of contract. Tufts and Santos have contacted you, their legal counsel. They have asked you to prepare a two- part memo that advises them how to proceed. In the first part of the memo, they would like you to analyze their potential claims against Netsoft, and Microscape’s potential claims against them. In the second part of the memo, they would like you to discuss strategies for ending the dispute and, if possible, entering into a new contract with Microscape. With Netsoft’s repositioning of Boggler, it appears that Microscape may be the best remaining strategic partner for Linker, and Barksdale has not actually said anything to indicate that she is no longer interested in acquiring the Linker software. The experience of the last few years, however, causes Santos and Tufts to wonder whether a differently structured contract might reduce the chances of further disputes arising in the future.

 

END OF EXAM