Summary: Every corporate lawyer has drafted “best efforts” and similar contract provisions but often without much thought to the meaning and most certainly without a lot of guidance from US case law. Now the UK High Court has provided some guidance, with some particularity. Equally interesting, the opinion clearly indicates that at least that court will go beyond the four corners of the document and look at the conduct of the distributor relative to overall conditions of and business efforts in the relevant industry. This makes sense, insofar as “reasonable” requires some examination of the real world. In the end, this opinion helps. Somewhat. And why? Because important phrases with little meaning to the drafting lawyers now have to obtain more substance within the agreement itself. This also gets to our drafting philosophy—that a contract is also a roadmap for the non-lawyers to use in guiding the relationship.
The Details.
What corporate lawyer hasn’t drafted a “best efforts,” “reasonable efforts” or “commercially reasonable efforts” contract provision? And what such lawyer hasn’t scratched his or her head about the legal meaning of these phrases? Oddly enough, there is not much guidance from US case law. So now, we have the UK High Court offering a pretty detailed analysis of the UK law equivalent—“reasonable endeavours.”
The case is CEP Holdings Ltd & CEP Claddings Ltd v Steni AS. Basically, Steni manufactured cladding (building siding) distributed in the UK by CEP and they terminated the distribution agreement on the grounds that CEP had breached the “reasonable endeavours” provisions of that agreement. The distributors sued them for the termination. (UK and EU distribution agreements are notoriously difficult to terminate but we will not discuss that part of the larger context here.)
Clean Up Your Act. Well, the court disagreed that the supplier had been in the wrong after the court looked at the business conduct of CEP. Interestingly, the court took note of the sales performance during an up market: The relevant market went up roughly 18% while CEP sales declined roughly 62%. The court noted that much of the decline was attributable to a “lack of an adequately structured, and directed, sales and marketing organization[.]” To the facts of the case, the court pointed out that everything rested on one man and internal processes were pretty informal. In our view, it looks like the court did not like the sloppiness of the distributor as well as the lack of communications (rolling sales reports are mentioned).
The opinion included some guidance in the abstract. In a nutshell: Plan; promote, monitor, communicate (with your supplier); and improve your sales team if things go bad. Probably paramount among these matters is regular and meaningful communications with the supplier (e.g., rolling sales reports).
So What?
Let’s look at the consequences—i.e., what should be drafted. Perhaps the agreement should specify just what those “commercially reasonable efforts” are and are not. In other words, one could include language that says something to the effect that “such efforts do not include the preparation of reports beyond those specified in this Agreement or promotional efforts beyond those normally conducted by Distributor.” Put in the positive, one could include an attachment that enumerates the specific marketing efforts to be undertaken.
Communications is often handled in US agreements by a reporting provision that spells out in some detail the sorts of reports needed by the supplier on a regular basis. This begs the question, then, whether that provision needs to be expressly tied to the “commercially reasonable” standard, as suggested in the language above.
A “contrarian” approach for domestic agreements might be to leave everything out and rely upon a comparison by the courts to the outside world, thereby leaving the definition of “reasonableness” to the court. This may make some sense. The absence of case law may support this proposition. Moreover, the courts are notoriously reluctant to look at specific business practices and an industry as a whole (excluding for the moment egregious corporate behavior in other areas).
We, however, would be disinclined to take the contrarian approach. Better to specify (in an attachment) the marketing efforts to be undertaken. However, in California, there may be a risk of an “accidental franchise” if the supplier imposes too many conditions, including, for example, both a marketing plan and employee training. (We’re just as surprised as you are about that one, by the way.) That is one of the reasons that we like such efforts to be tied to the normal marketing efforts of the Distributor.
It’s a Small World. And besides, many distribution agreements now cross borders and jurisdictions. Many companies have distributors in the UK or elsewhere in the EU. They will be affected by this decision. And they should be. True, this opinion does not carry much (if any, by some views) weight in this country for domestic agreements. That fact does not mean that its utility as a guide for drafting should be ignored. And there are many agreements already in existence guiding UK and EU relationships with the vague language now subject to scrutiny under this case.
Contract as Roadmap. You have heard us before say that a contract should be a roadmap for non-lawyers responsible for maintaining the relationship. An attachment that elaborates—or gives the right and responsibility to the parties to elaborate—marketing (including co-marketing) efforts goes a fair amount of the way towards achieving just that goal.
Summary: The Federal Trade Commission just issued regulations that, in essence, require bloggers (among others) to disclose any “material connections” between advertisers and endorsers. No one should be surprised: Restrictions on endorsements have been around for a very loooong time, consistent with the FTC principles of truth in advertising. It remains to be seen exactly what will be sufficient disclosure but it should not be a problem. The regulations also update (the first since 1980) the regulations for other endorsers, including celebrities. (Read the release at www.ftc.gov/opa/2009/10/endortest.shtm.)
The Details.
You’ve probably read a blog that raves about some new gadget. It may well be that that the blogger has cut a deal with the manufacturer of that gadget—whether payment or simply receipt of one of the gadgets. And yet, you as the reader had no idea of that connection.
Well, that part—your lack of knowledge of any link—is about to change. The FTC now requires a blogger to disclose any material connections. The FTC went to great lengths in its notice in the Federal Register to discuss public comments and to provide examples (seewww.ftc.gov/os/2009/10/091005endorsementguidesfnnotice.pdf).
So What?
So we read about great gnashing of teeth and rending of hair among bloggers. It might be that these regulations touch an nerve of libertarianism incipient in the digital world. Or it could be that more than a few bloggers make at least beer money (and perhaps even a living) from these endorsements. It turns out that there are sites you can visit and sign up for such endorsements, which makes it easier.
But, putting that aside, perhaps it is as it should be. Blogging is just another means of communicating—a medium, to use an arcane word. Shouldn’t users trust opinions that are not based on payment or special favors?
What To Do?
But let’s put aside all of the polemics and just look at what has to be done. Look at Example #7 on page 79 of the FTC notice we mentioned above (seewww.ftc.gov/os/2009/10/091005endorsementguidesfnnotice.pdf and go to p. 79). Referring to a video game blogger who received a free game to review, the FTC says:
Accordingly, the blogger should clearly and conspicuously disclose that he received the gaming system free of charge.
Not much help. But thinking about the FTC’s long tradition, it is helpful. They hate—and will often pursue—those who bury the disclosure in fine print. Moreover, they specify that the type of material connection—in this case, receipt of a free copy of the game—must be disclosed.
Soooo, trying something like the following will probably work:
“[Name of Blogger] received a free copy of the Lawyers in Love video game reviewed below”, in the same size font as used throughout the blog and near the introduction or above the fold. But, truthfully, we don’t know yet (and if you do, then let us know).
Think about it this way: What would you want to know and where would you want it to be on the website?
Summary: In response to the FTC Staff Report (on which we blogged earlier), online advertising industry associations joined together and came out with their own principles to improve the data collection and use principles of the online experience. In essence, it is a last-ditch effort by the industry to keep its role of self-regulation. You can read the entire report at www.iab.net/behavioral-advertisingprinciples.
The online advertising industry has responded to the February 2009 FTC Staff Report on the topic (which is called “behavioral advertising”). Here is a summary of the main principles in our words (not theirs):
- The Education Principle—an 18-month campaign to educate consumers.
- The Transparency Principle—which mandates clear and easily accessible data collection and use practices and changes to websites.
- The Consumer Control Principle—enhanced options for determining which and how data are collected. It is expected that a “data consent” toolbar will be created for a broad range of online providers (ISPs, browsers, publishers) that will enable consumers to consent to data collection. There will also be steps to “de-identify” the data.
- The Data Security Principle—essentially a data security and retention policy to improve security of the data and limit the period such data are retained.
- The Material Changes Principle—requiring consumer consent to any material changes to privacy and use policies. If successful, this will address one of the principal concerns of the FTC, which is the now-current practice of empowering online providers (e.g., publishers) to change their TOUs, etc., with retroactive application. This is something courts have now found invalid in such online agreements, too.
- The Sensitive Data Principle—addresses concerns for data from sensitive groups—e.g., children—and sensitive data—e.g., health and financial records.
- The Accountability Principle—should be the implementing programs for these principles and disciplinary procedures.
So What?
One thing is clear: the online agreements that govern the use of websites are now in the crosshairs—meaning that those agreements should be revised now. The FTC Staff Report provides pretty good guidance on what to include and what to exclude.
The industry report is something more abstract but it also has some gems that can provide some great innovations for new practices. Among them, the “data consent” toolbar is a good idea.
In addition to that idea, we really like the idea of steps to “de-identify” the data. In fact, we think that this is probably the most important step forward. Those data can be tremendously powerful in that form. That is the fulcrum point—and where fortunes will be made. And some lost, too.
(See some TOUs, etc., we have drafted: www.npbn.com and www.photospin.com for some examples.)
Oops. No Blog Entries.
July 2009
My apologies for not posting for many weeks but everyone knows that life sometimes gets in the way of one’s plans. In this case, I got the Swine Flu while abroad. Fortunately, the version infecting me was not virulent but just long-lasting and I have been advised to take it easy. A little tough when taking care of an ailing parent on boths sides of the family–including serious surgery (successful) for one of them.
Yes, I know that most people might prefer not knowing anything about the life of the blogger, which is generally my rule. Well, no, actually it is a guideline (brownie points if you can identify the movie where that line was first uttered).
Coming soon:
Some comments on the new industry “principles” for online advertising data collection in response to the FTC staff report in February.
Developments in the concept of a “transformative” work.
Social media policies for corporations.
A link to an article on the state of the VC world (full disclosure: I am quoted in it, but it is also a good article).
And probably a few other topics that have caught our interest here at Global Capital.
Now back to medically-mandated “taking it easy.” Yeah. Right.
Summary: Yes, it’s true: We seem to spend an undue amount of blogging space on Terms of Use. But that’s because they keep popping up as being badly drafted and abused. Now, Financial Times is suing the Blackstone Group in New York court for what FT claims is the use of a single subscription by many people in the Blackstone Group. In any event, if this case goes to court it will hinge on how well the TOU was drafted. But really, this issue is going to court? Where does hubris end? And we mean the hubris of Blackstone: Just pay the damages.
The Financial Times claims that the Blackstone Group circulated the login and password of one subscription to its paid-content site to many others in the group. A single subscription costs about $300; multiple “seat” licenses result in a small discount on that price. So, we are talking about, what?, perhaps a maximum of $100,000 of lost revenue from FT?
So What?
So, first, we did a quick scan of the TOU for www.ft.com and, guess what: We could not find any restriction to a single user. Now, true, we read it pretty quickly, but we probably spent 300 times the amount of time that a subscriber spends on reading a TOU. Also true that a subscriber might get a different TOU after placing the order (which we did not do).
But, that just raises a few points:
- FT might not have a case, at least on a breach of contract theory.
- Whatever case they may have, they might find it further weakened because the TOU is so dense that it amounts to a fine print contract.
- They will get in trouble if the courts bother to rely upon recent case law pretty much throwing out TOUs as “illusory,” as the court made clear in Harris v. Blockbuster. And, the FT TOU includes exactly the provision the judge did not like in Blockbuster—and the same provision that the FTC staff has said is a bozo no-no. That is the provision that permits the publisher to make changes to the agreement that are retroactively effective.
Something Else Going On?
Is this akin to the AP’s announced assault on misuse of its copyrighted material? In other words, is FT damning the torpedos (OK, wrong metaphor, perhaps: This isn’t a naval engagement) and trying to make case law and send a signal to the rest of the world about protecting its revenue stream from paid content? If yes, then it’s a good move.
So What? Part Deux
So, if that is the case, then FT should clean up its own act. Everyone should clean up each TOU for which he or she or it is responsible. If you want people to comply with them, include a summary page at the outset that includes the essential points. Then include the legalese. OK, we’ll brag. We’ve drafted a few: Try www.photospin.com and www.npbn.com to see the introductions. (Full disclosure may seem a little obvious here: They are both clients.)
Apart from that re-drafting exercise, expect more TOUs to be attacked–or defended, as the case may be. They almost invariably violate the basic principles against “fine print” contracts built on the case law by the FTC (and others) over decades. Now, they have an important role to play in protecting revenue from paid content–which, is after all, seen to be part of the future of newspapers.
Blockbuster Breaks TOUs
May 2009
Summary: You might not have read it here first but you have read it here often: Courts are taking on—and deciding against—what they consider to be unfair terms in EULAs or TOUs. In this case, it was the federal district court for Northern Texas, finding that the arbitration clause was illusory. It is important to note that this case, in our opinion, does not stand alone but adds more case law attacking the terms of these online agreements. These cases are—and in particular this case is—consistent with one of the principal points central to the new FTC staff guidelines. The message: Complicated TOUs put clients at greater risk.
In Harris v. Blockbuster, the court for the Northern District of Texas held that the arbitration provision of the online agreement for the use of Blockbuster was illusory. Dicta suggest even broader implications for the decision, but that alone was enough to cause some concern (we do not yet know if there will be an appeal, though it is probable).
As far as the court was concerned the main problem with Blockbuster’s online agreement was sort of a double-whammy. The agreement stated that Blockbuster could change the provisions at any time—which would, of course, mean that changes with retroactive effect would, in the opinion of Blockbuster, be enforceable. In this case, some disputes arose and Blockbuster then added an arbitration provision, which was to apply retroactively and thus eliminate much of the risk (from a trial).
So What?
So, online agreements (what we call EULAs and TOUs) with retroactive changes inserting (or affecting) arbitration provisions will run afoul of this opinion—of course, in that district. Moreover, the opinion carries some weight with other claims about online agreements. Many online agreements—perhaps a majority, perhaps many more—have such provisions enabling the publisher (in this case Blockbuster) the right to make retroactive changes to the terms. Suddenly, then (if you believe in Chicken Little), these provisions are at risk.
Ammunition & Guidance. Really, though, the opinion builds on a string of previous opinions that, taken together, provide both substantial ammunition for plaintiffs’ assaults on these agreements and, if you think about it, guidance on what to include—and exclude—from online agreements.
It is not necessarily a bad thing. The FTC staff report gives pretty clear guidance on what can be done: If a party wants a right to changes, then they should not be retroactive and the user must have some kind of right to agree (or not) to those changes going forward.
This is not some rogue court. The cases cited include some in the Fifth Circuit and some in Texas itself. With some serious contortions and impressive legal reasoning, one could distinguish this case from the facts and holdings of those precedents. But it is not so simple.
In just the last several years, quite a few courts have taken on the online agreements. They include courts in the Ninth Circuit and in Pennsylvania. The reasoning can be distinguished but not here. They all come to a smell test: Does this really smell like a contract?
These cases fall within an even longer line of opinions regarding the nature of agreements between corporations and consumers. As the FTC staff report pointed out (with copious footnotes), “fine print” cases have a long history. And it is a history where the “victor” has swung from the consumer to corporations and back. Now, with the new administration, with the FTC’s stiffer attitude about consumer rights (rightly or wrongly), and with these cases, we can expect history’s pendulum to swing the other way.
Conclusion
Write “Gooder.” These agreements do not have to be so dense and they do not have to have such onerous terms. The right of retroactive modification was a term just waiting to be shot down. Too often, lawyers just copy and paste a TOU from another site. Or, perhaps they have to justify their legal fees on a topic that is perceived by clients as unimportant boilerplate. Whatever the reason, this case should be a shot across the bow that attorneys put their clients at greater risk with such legal intricacies as we now see in EULAs.
Perhaps we’ll get some online agreements that are actually well-drafted; that do not read like fine print; and that provide better terms. But then, we believe in the Easter Bunny, too.
Summary: It is true that we will continue to pound on one of our more popular themes–the ever-increasing value of the ever-increasing piles of data from Internet usage. Now comes research on the value of Google Trends, in this case to track changes in economic activity or consumer preferences as they happen.
File this not under “We told you so” but “We will continue to tell you so.” This is about data–how Internet usage data can be mined, sliced, diced and mashed up for valuable insights. Someday, of course, someone will address the (trickier) question of making money from it. (Oh, details, details, details.)
First, a goldmine of a resource. Go to Google Trends (http://www.google.com/trends) to see what search terms people are using (your own name will probably not register, unless you are, oh, Steve Jobs). You can also use more advanced analytic techniques at Google Insights for Research (http://www.google.com/insights/search/#). This is real-time stuff. And, get ready for this: You can download it as a CSV file.
Berkeley professor Hal Varian (also wearing a second hat of Chief Economist at Google) and Google colleague Hyunyoung Choi wrote a paper on predicting the present (clever twist, that) and on their blog, happily quoting Yoga Berra as to predicting the future. (The article can be found at the Google Research blog at http://googleresearch.blogspot.com/2009/04/predicting-present-with-google-trends.html.)
They correlated search term volume with statistics gathered on economic activity by other sources unrelated to search engines. For example, they matched the search for certain real estate terms against home sale volumes (reported from another source). Another example is the search for travel destinations against reported arrivals. True, their model requires a certain amount of “re-jiggering” but not so much as to make the results suspect. Their “modifications” look to be within the norm of statistical analysis. Nonetheless, the results are stunning.
The point is not so much getting data that are exceptionally precise but rather to give relatively accurate directional results and to improve the reliability and precision of subsequent models. For the corporate user, then, the directional results can be compelling because they are certainly accurate enough for strategic purposes. In other words, the predictive power is sufficient to understand probable upturns or downturns within a few percentage points but not so great that you can get an accuracy of, say, three per cent. Hence the use of the word “strategic” above. In addition, it should be emphasized that it looks like the predictive power is short term.
On May 4th I will be participating on the panel “Valuing Media Assets in a Down Market” as part of the Media, Money & Technology Symposium of the DigitalHollywood 09 conference, May 4th through May 7th in Santa Monica. The conference will be held at the Loews Santa Monica Beach Hotel. http://www.digitalhollywood.com.
I will be discussing some of the due diligence minefields, especially in licensing agreements that serve as the basis for ownership claims on (and therefore value of) media assets.
Ping me for more information. You can also try me on Twitter at globalcapjcr.
Summary: We just posted this entry on digitaldumonde.wordpress.com, but it is worth posting here, as well, because simple things like technical glitches that affect the utility of new digital initiatives will crimp their success in the long-run–and that will affect the investments of your clients. Lawyers normally do not look at the GUIs of their clients (or those on the other side) but perhaps they should. Anyway, here it is:
Stop this nonsense about completely cryptic methods of sharing and interconnecting, especially through (and to) Twitter. 917 people posing the same question should raise some eyebrows.
I am truly annoyed. Furniture-throwing kind of annoyed. I just spent an hour trying to get Twitterfeed to work, which required me to create a NEW OpenID ID (no, they would not accept my usual one) and still it would not permit me to post my blogs to Twitter and the help pages took me to another place (Get Satisfaction) where I had to get ANOTHER ID to post my question-and I was one of 917 people with the same question.
My comments here should indict four groups of people and their management teams and their VC backers: Twitter, Twitterfeed, OpenID and Get Satisfaction. Stop it. Now. I won’t even get started on Tweetdeck. Or Twitterberry. Oh yes, and FeedValidator. It is simply evil. Unless you have a degree in computer science.
What is it with the technology world and GUIs and help pages??????????????????? Is it some supercilious sense of superiority???????????? Is it supposed to be some kind of computer science exam when you go to the page on why your feed won’t parse on Twitterfeed? When will they figure out that 99.999999 % of us DO NOT WANT TO SPEND OUR LIVES TRYING TO FIGURE THIS STUFF OUT???!!!! And I do not want to pay for our IT department to spend one minute on it. Stop it. Now.
Note to Get Satisfaction and OpenID: Translate your sites into Romanian or Urdu. It would be just as useful to me in those languages as it is in English.
Note to Venture Capitalists: If you can figure out Twitterfeed, it does not mean it will be successful. Try out its GUI on someone on, say, Main Street (or its equivalent) in Merced, not on Sandhill Road. For brownie points, try the GUI of Get Satisfaction or OpenID. Come on.
Facebook as an Object Lesson. The reason that Facebook is so successful (not to mention LinkedIn) is that its GUI is really, really, really simple. What’s the number of users: 220 million? Twitter is fast catching on but it is sort of like a Microsoft product: No one knows how to use all the horsepower inherent in the apps. Very nearly 100% of the users only know how to post tweets and NOTHING ELSE. Very nearly 100% of the Facebook users know how to use everything on their profiles.
Now, true, Facebook’s GUI is kind of dumbed down. So it is not a model for Twitter but it ought to be an object lesson.
I have been in the business (technology) since 1989. I am not stupid. For most of that time I have considered myself a beta testing group of one person. It is simple: If I don’t get it then something like 90% of the desired market will not get it. And you know what? My track record has been pretty impressive.
OK, so my blogs are not read by gejillions. But they are accessible to anyone with an Internet connection. And they do not have to go to OpenID and create an ID through my vidloop.com. and Twitterfeed cannot parse them and someone in Nairobi can read what I write. WHAT IS GOING ON??
So What (from a legal perspective)?
We (you know, the royal we) do not know what to say from a legal perspective. It is not as if this ranting should change agreements. It might crimp the style of those of you who wish to use these new features but abandon them when it gets as insane as this experience. We just don’t know. But maybe you do. Anyway, to continue:
Note to Twitter, Twitterfeed, OpenID and Get Satisfaction. Pack a bag and go to Cincinnati. Knock on the door of Proctor & Gamble and ask for help on determining consumer preferences for GUI design and, just as important, your help pages. Help pages should solve the problem and if they do not, have a backup plan-for example, a screen capture button.
Anyone tried some of the Google apps? What about Google Voice? It isn;t a great GUI but, you know what???? It works.
Better yet, call up Apple. They’ll help.
GUI design has been a science for over a decade. Now make it an art for the masses. Quickly. Your competitors will overtake you.
Or I might start throwing furniture. Along with the limited partners of the venture funds.
And remember this and only this if your brain has been addled by these efforts: I was one of 917 people who posted the same question about parsing twitterfeed URLs. Shame on you.
We are not exactly sure where to categorize this one, but you probably missed the news on April 14th while you were frantic about your taxes . . .
The Camel Reproduction Centre (yes, spelled that way) in Dubai announced that it had cloned the first camel, a girl born on April 14th. They used the same techniques that produced Dolly the Sheep. OK, quick quiz: When was Dolly born? (Answer at the end.)
We at Globalgeneralcounsel are supposed to pontificate on the legal ramifications (and we will, promise) but there are other points to raise.
First, the blog comments to the articles are somewhat incredulous. It seems that some just could not believe it. A late April Fool’s Day joke? For example, at Boston.com, one blogger wrote “Somebody’s gotta be making this stuff up. [. . .] Has The Onion secretly seized the Globe newsroom while New England slept?” http://www.boston.com/news/world/middleeast/articles/2009/04/15/its_a_girl_scientists_in_dubai_claim_first_cloned_camel/
We don’t see it that way.
Development Plans Yield Results.
The success speaks to the impact of the modernization program in Dubai over the last twenty years. The sheik has brought formidable resources to bear on development and this is some of the fruit.
No comment on whether such development is right or wrong or whether cloning if right or wrong. That is irrelevant to this discussion; those who wish to argue either of those points can find another blog. The point is that they have done it. The name alone should given an indication: the camel has been named “Injaz,” which means “achievement” in Arabic. And camel cloning is not the only place where such development has accelerated. One of our lawyers has a friend who is a French plastic surgeon who commutes to Dubai several times a month for her practice. And note the “her” in that sentence. Most of her clients are men.
The Economy Counts.
Cloning a camel has important economic aspects. We would venture a guess that population growth in the region is outstripping “natural” camel-breeding output and therefore putting pressure on camel milk supplies. Apparently the breeding to date has been to develop racing camels, evidently at the expense of camels reared to produce milk (but we are guessing here).
Oh, yes: The Legal Implications
Those who are clever and quick may beat a path to the doors of the centre to license the capabilities. It would be very interesting to figure out what law would apply. If Islamic law applies, then just how does it affect issues of cloning? And what sort of licensing would be permitted?
The answer to when Dolly was born? 13 years ago. 1996.
