Well, Jeez, we, along with many other boutique firms, have been doing that for years!  Why wouldn’t Microsoft turn to the smaller firms?  (OK, it’s a rhetorical question.)

The Details.

In mid February, Microsoft announced that it was creating another LPO outsourcing deal with an Indian firm with which it has been doing work for some five years.  The earlier deal—which will continue—related to IP work (including, for example, patent renewals).  In this case, the public statements indicate that the outsourced lawyers will do legal research but there are some reports that they will also draft documents.

Most notable, however, is not that they are doing this, but that their provider already operates one of the centers in the US.  The second one will be created in the UK, potentially in the North.  Lawyers, expect competition.

The LPO outsourcing looks like it is part of a budget cut, dropping the $900 million legal budget by 15% over two years.  If we assume, somewhat arbitrarily, that lawyers and staff average $100,000 per year in salaries, overhead and benefits, then that would represent about 1,350 attorneys and staff.

Microsoft is not the only company to outsource LPO.  Indeed, many large law firms take advantage of a kind of “cost arbitrage” by using lower-cost lawyers in other jurisdictions, typically to maintain margins rather than provide dramatic fee reductions to clients (though some bar associations are trying to change that structure).  Microsoft is among the first and the biggest to announce the plan.

So What?

First of all, this development is neither bad nor good;  it just is, but it will have ramifications.  This kind of onshoring means, very simply, that the legal fees will be less expensive for the large clients because, among other things, the lawyers themselves will be paid less.  This will ripple through the market.  Fast.  With Microsoft making this announcement, we can expect that large clients of the large law firms will increase the pressure on those firms to cut costs—and this time they will succeed because (1) they can point to Microsoft as a case study and (2) they can turn to these kinds of LPO providers.  Ah, the benefits of competition.

Connect the dots with other legal cost-cutting initiatives by, for example, Levi Strauss and Pfizer.  Levi Strauss just announced a deal with its outside counsel, Orrick, for an annual fee (paid in monthly installments) covering a vast range of legal work.  Pfizer has been doing the same for over a year, though with a larger number of firms.

But from our perspective as a boutique law firm with a lot of experience with “alternative fee structures,” here is where it gets interesting:  The LPO firm rates that we have heard are within line with our usual rates and above our alternative fee structure rates.  The costs are higher on a project basis—i.e., fee charged for drafting, say, an agreement v. charging for total hours for such work.  We may be getting the wrong information on the LPO fees, but it is not unreasonable to use them as the basis for comparison.

The difference, of course, is the marketing prominence of such firms—i.e., clients are aware of them.  Second, for the larger clients, using one source for such legal services reduces transaction costs.

So, perhaps one more nail in the coffin of the hourly fee structure?  We can only hope.

James C. Roberts III is the Managing Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group.  He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the distant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

The Details.

Two companies entered into an LOI under Delaware law and one of the two claimed that the other party did not act in good faith in accordance with the terms of the LOI and breached the exclusivity and confidentiality provisions.  Please note that this was a decision only for a preliminary injunction.

In the second situation (this one an appeals court decision in Georgia), a company with a good idea (and some code) approached a couple of other companies about developing and selling a software product based on that idea and code.  The first sale would be to a large insurance company known by all of the parties.  So, the parties signed NDAs.  Well, oops:  Two parties decided to create their own product that was pretty similar to what was being developed and they went on to try to sell it as planned.  But guess what?  Both the trial court and the court of appeals held that there was no breach of the NDA (which was itself badly drafted, according to the court).

So What?

So, when it comes to an LOI, it is not an unenforceable “agreement to agree” but an actual agreement with specified rights and obligations.  As the Delaware opinion stated, parties “[. . .] enter into [LOIs] for a reason.  They don’t enter into them because they are gossamer and can be disregarded whenever situations change.  They enter into them because they create rights.”  What to do?  Well, this court opinion says that parties can specify what is binding and what is not binding.  Naturally, the opinion applies only to Delaware law but its principles extend to just about any LOI or term sheet.  In particular, once a document is found to be an agreement, then covenants of “good faith” are incorporated into the deal.  Pay attention.

As to NDAs, too little attention is paid to their precise terms—in other words, someone exhumes an earlier version and replaces the names of the parties.  This is not smart.  For example, specify—and we mean really specify—the purpose(s) to which the confidential information can be used.  Define “confidential information” so that the person providing that material can control the information.  This also means that one needs to make it clear whether or not copies of the confidential information can be provided and who has access to that information.

OK, OK, so we sound like a broken record:  Pay attention to the agreements and, almost as obvious, make sure that the behavior of both (or all) parties comports not just with the agreements but also to expectations.  Agreements are only a part of the relationship;  behavior is another large part.

James C. Roberts III (jcrext@globalcaplaw.com) is the Managing Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group.  He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office for Global Capital.  Mr. Roberts speaks English and French.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

Global Capital (www.globalcaplaw.com) counsels domestic and international clients on legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

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 are 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.

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?

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.)

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.

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.

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.

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 4^th 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 4^th through May 7^th 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.