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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 in the US.  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.  It is also critical reading for anyone with agreements governing UK (and EU) distributors.

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:  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 the client at greater risk.

Introduction

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.

On May 4th I will be participating on the panel “Media Asset Valuation 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.  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 (and therefore value) on media assets.  Ping me for more information.

Ping me .  For the fun of it, try Twitter:  globalcapjcr

So this is not strictly about transactions and strategy–unless some clever VC is out there realizing that we international road warriors who do not have unlimited expense accounts are a huge business opportunity.

In spite of spending most of my professional career the last zillion years on digital convergence, I keep coming up against its limits–reminding me that no matter what we say, it is not ready for prime time.

I am changing jurisdictions in Europe for the next three weeks, much of it for vacation but, hey, work will call.  This move means that:

1.  I have to re-forward all of my US phones to another line in that new jurisdiction–and get our IT department to doublecheck it all back in the US.

2.  I have to get a DIFFERENT SIM card for this jurisdiction.

3.  I have to pay for Internet access either by the minute or by taking out a loan for “all you can eat” (and we know how tough it is to get a loan these days).

4.  No matter what I do, my firm will pay a gazillion dollars for the calls to/from Europe and the text messages.

OK, OK.  It’s still Europe and therefore still pretty.

And while I am grousing:  Just when will we get vacation parity?

OK, OK, so it is a bit of an overstatement but the fabulous weather Thursday through today (Saturday)–crucial holiday shopping time–meant that many, many people were out shopping.  This is a good thing for this economy.  It is not only the objective increase in spending but also the psychological impact tat becomes self-reinforcing:  When people see a lot of people out, they feel better about the economy.

No, I don’t think that Pollyanna lives in Milan.

European economy

December 2008

If street traffic in Milan’s fashion district is any indication, the meltdown is reaching Via Montenapoleone. Even the Russians–ever reliable buyers–seem to have moved elsewhere. Of course, it has not helped that we have three weeks of rain. On the other side of my world, I heard that Malibu got snow.

Transactions & Strategy

December 2008

This is a blog page in case you got confused on the navigation through wordpress.  Who doesn’t?

Hello world!

December 2008

This is the first entry of this new blog–Transactions & Strategy, a place meant for those who want to explore the various intersections of transactions, strategy and law–especially internationally.  I am writing this one from Milan but we have offices in California and Colorado and soon possibly in Washington, DC.

Transactions:  licenses, M&A, distribution networks–you get the picture.

Strategy:  Not all transactions are guided by strategy.  How does a transaction (re)shape strategy?

Law:  This ought not to be the domain of the lawyers speaking a secret language.  This is an attempt to bring the legal issues back into the strategic discussion.

Finally, this is a place to discuss what’s happening in these areas.  For example, I am seeing here in Milan that the financial meltdown is echoing throughout the banking and private equity worlds here.  It is the single topic of dinner conversation–well, that and the worry that the downturn will cause the authorities to ratchet up efforts to collect more taxes.