What are Liquidated Damages?
This post explains the meaning of the legal term “liquidated damages“. It is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology .
Sometimes a contract specifies an amount that a party must pay for breaching that contract. The legal terms for that amount is liquidated damages.
(more…)What Does “Represent and Warrant” Mean?
This post discusses the meaning of the phrase “represent and warrant“. This is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology.
Distinguishing Representations from Warranties
To understand what the contractual phrase “represent and warrant” means, we need to know what representations and warranties are.
(more…)Protect Your IP when You Hire a Freelancer
This post explains how to make sure that you own work product and intellectual property (IP) when you use a freelancer service. Most of the following first appeared on Quora. Please see How can I protect my source code and its Intellectual Property Right while working with a very large team of remote freelancers (Upwork and Fiverr etc)? Are freelancing platforms ensuring IP protection?
When you use a freelancing platform, you need to ensure that you have an agreement with each freelancer. And that agreement must assign to you all work product and all intellectual property rights.
(more…)Non-solicitation Provision Overturned in California
It is common knowledge that California generally prohibits post-employment non-compete provisions. However, people know far less about law pertaining to post-employment non-solicitation provisions.
In this post, I will describe existing post-employment non-compete and non-solicitation case law. Then I will discuss a recent case that may signal a new direction.
Background – Non-competition Provisions Disfavored
Business and Professions Code Section 16600Â is the statutory basis for California’s post-employment non-compete prohibition: (more…)
What Is a Smart Contract?
The term ” smart contract ” has been appearing a lot, lately. (A recent Google search returned more than 4 million hits!) But there is confusion and misunderstanding concerning what this term means.
This post explains what smart contracts are, and what they are not. (more…)
What Does ” Reserved ” Mean in a Contract?
In this post I will explain why one sometimes sees ” Reserved ” in a section of a contract. I first presented this information in a Quora answer. Please see What is a “Reserved†clause in a contract?
Sometimes Sections are Deleted from Contracts
Sometimes (especially in olden days), when one no longer needed a Section in a contract, the lawyer drafting or revising the contract didn’t want to remove that Section entirely. The reason for this reluctance? Removal would require changing the numbering of the following Sections. (more…)
Blame Your Lawyer – An Underappreciated Legal Service
In this post I will explain why, sometimes, it can be helpful to blame your lawyer for something that really is not the lawyer’s fault.
In my experience, this situation typically arises when a client is negotiating business terms with a counterparty. (more…)
Important Independent Contractor Agreement Provisions
I am writing this post because of a Quora question that I answered. Please see What are the most important provisions in an independent contractor agreement?
Independent Contractor Agreement Business Terms
As concerns business terms, the most important provisions in an independent contractor agreement pertain to the following. (more…)
Assignment and Delegation in Contract Law
Assignment and delegation are terms that have specific meanings in U.S. contract law. I am basing this post on a Quora answer that I wrote recently. Please see What are assignment and delegation in contract law?
In contract law, “assignment†can have a narrower meaning and a broader meaning. To start, I will discuss the narrower meaning. (more…)
Consumer Review Protection Now Part of Federal Law
Consumer review protection now is part of federal law. Specifically, in December 2016, Congress passed, and then-President Obama signed, the Consumer Review Fairness Act of 2016, 15 USC Section 45b.
Interestingly, this law has some similarities to – but is more detailed than – a law that California put into effect about two years earlier. See Consumer Non-disparagement Clauses Nixed in California. However, the federal law applies only to consumer reviews that involve interstate commerce. (more…)
Constructive Notice Makes Sense – Here’s Why
This post is about a legal concept, constructive notice.
Its origin is a Quora answer that I provided. Please see If nobody reads the Terms of Service then how can they legally be acceptable as a disclaimer? (more…)
Hyperlink in Email Can Create Binding Terms
In Online Terms can be Binding, even if You don’t have to Click!, I discussed enforceability of a website’s “browsewrap” terms of service. This post discusses how an email hyperlink can create binding contractual terms.
Lawsuit Brought in New York
Elizabeth Starkey filed suit in the U.S. District Court for the Southern District of New York against travel company G Adventures, Inc. The suit alleged that a G Adventures employee sexually assaulted Starkey during a vacation trip. (more…)
FTC Says Gag Clauses Violate Federal Law
Last year, I wrote about a California law that prohibits non-disparagement clauses in consumer contracts. (See Consumer Non-disparagement Clauses Nixed in California.) Recently, the Federal Trade Commission took the position that such “gag clauses“ violate federal law, as well.
Roca Labs’ Obesity Treatment
Roca Labs, Inc. claims that it has an alternative to bariatric surgery as a treatment for obesity. Roca says that its “proprietary regimen decreases hunger motivation, decreases urge to eat, and reduces gastric capacity by 45% to 65%.” (more…)
What is an Operating Agreement?
I have used the term “operating agreement” in quite a few of this blog’s posts. However none of those posts explains in detail what a limited liability company (LLC) operating agreement must contain. This post provides that information.
The required contents of an operating agreement depend on the state in which the LLC is formed.
Operating Agreement – California
In California, where I practice, the definition of an operating agreement is set forth in Corporations Code Section 17701.02(s). (more…)
Why do legal documents use Shall rather than Will?
This post, about why many legal documents use Shall rather than Will, is based on a Quora answer that I wrote. See Why was “should” substituted for “would” in the 1800s? For example, why did people say, “I should like to have some pie” rather than “I would like to have some pie”?
Future Tense – Shall vs. Will
Although few people other than linguists are aware of the following, proper use of shall or will in the future tense depends on whether the subject is the first, second or third person. For example: (more…)
Who Is Bound by a Pre-incorporation Contract?
This post about entering into a pre-incorporation contract is based on a question I answered on Avvo. See Can I legally speak as my company in things like terms & conditions if I have not officially registered the company yet?
The term “pre-incorporation contract” properly should apply only to corporations, because that is the only type of business entity that is incorporated. Other types of business entities, such as limited liability companies (LLCs), are formed, rather than incorporated. However, as is discussed below, a pre-formation contract (in California, at least) is treated like a pre-incorporation contract. See 02 Development, LLC v. 607 South Park, LLC . (more…)
Can Parties Enter Into a Perpetual Contract?
This post is about whether parties may enter into a perpetual contract (one that never ends).
It is adapted from my answer to a question on Quora. See Is it possible to structure a contract with no end date?
It turns out the the answer depends, to some extent, on which state’s law applies. (more…)
Good Faith and Fair Dealing – Part of Every California Contract
This post discusses and explains the covenant of good faith and fair dealing.
For decades, courts have held that this covenant is implied in every California contract.
Purpose of Good Faith and Fair Dealing
In 1942, the California Supreme Court stated that “in every contract there exists an implied covenant of good faith and fair dealing.” The intent of this covenant is that “neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract“. (Universal Sales Corporation v. California Press Manufacturing – emphasis added.) (more…)
Under RULLCA Operating Agreements Have Limits
At the beginning of this year, the California Revised Uniform Limited Liability Company Act (RULLCA) took effect. (See RULLCA Brings New LLC Laws to California in 2014.) This post discusses how under RULLCA operating agreements for LLCs have a wide variety of limits.
RULLCA operating agreements‘ limits are addressed in Corporations Code Section 17701.10. Unfortunately, that section’s discussion of mandatory provisions is pretty difficult to understand for the following reasons. (more…)
How to Perfect an Intellectual Property Security Interest
Copyright Office Document Cover Sheet
Last week I explained what a security interest is and how it can be perfected, i.e., made effective against third parties. (See What is a Security Interest, and Why Should I Care?) This post discusses how to perfect an intellectual property security interest.
To recap, a security interest is an interest in an asset (the “collateral”) intended to secure performance of an obligation. Typically, that obligation is payment of a debt. Perfection typically consists of filing, with one of more secretaries of state, documents that identify the debtor, the creditor and the collateral. (more…)
What is a Security Interest, and Why Should I Care?
Form UCC-1
This post explains what a security interest is, how it is used, and why it is significant.
A security interest is an interest in an asset that is intended to secure performance of an obligation. Typically, the obligation that is secured is payment of a debt.
Terminology: The person who owes money is called the debtor. The person to whom money is owed is the creditor.
Many of us grant a security interest when we buy a house. In exchange for providing money for the purchase, the lender receives a mortgage (or, in California, a deed of trust). This is a type of security interest. (more…)
Consumer Non-disparagement Clauses Nixed in California
Earlier this month, Governor Brown approved California Assembly Bill No. 2365. This bill added Civil Code Section 1670.8, which prohibits non-disparagement clauses in consumer contracts.
Statute Prohibits Non-disparagement Clauses
Core protections are set forth in Subsection (a) of that statute. (more…)
LLCs: Why an Operating Agreement is Important
This post discusses why an operating agreement is important for every limited liability company (LLC). It expands upon an answer I provided on Quora several months ago. (See In simple terms, why are operating agreements important?)
An operating agreement is an agreement among the members of an LLC. It addresses relations among the members and how the LLC will conduct its affairs. (more…)
Browsewrap Agreements Must Be Brought to Users’ Attention
In Online Terms can be Binding, even if You don’t have to Click!, I compared the enforceability of clickwrap and browsewrap agreements. This post discusses Nguyen v. Barnes & Noble, in which the U.S. Court of Appeals for the Ninth Circuit recently examined notice requirements for browsewrap agreements to be enforced.
Plaintiff Nguyen filed a class action lawsuit against Barnes & Noble because it had cancelled his online order for a Hewlett-Packard Touchpad tablet computer. (more…)
What Does Non-binding Mean and Why Should I Care?
This post discusses the meaning of non-binding with respect to a letter of intent (LOI) or a memorandum of understanding (MOU). (Non-binding has a similar meaning in other legal contexts, such as legislation or arbitration, but I will not discuss those contexts here.)
Although I will refer to solely an LOI in the remainder of this post, the following pertains to an MOU, as well.
Please note that whereas “memorandum of understanding” and “letter of intent” are the terms typically used in the U.S., the corresponding term in the U.K. is “heads of terms“. (more…)
Negotiating Software Licenses – What Really Counts
This post addresses the most important issues that are raised in negotiating software licenses.
I will assume that parties have agreed on pricing. (Otherwise, there is no point negotiating license terms!) In addition, I will ignore the lengthy legal “boilerplate” that appears in most software license agreements.
Four Critical Issues in Negotiating Software Licenses
In my experience, there are four issues that must be examined closely, and often result in much discussion, when negotiating software licenses. (more…)
Can I Save Money by Preparing a Contract for My Lawyer to Review?
This post is inspired by a Quora question that I answered. Q. Can I save money by preparing a contract for my lawyer to review?
A. No. Here is an explanation of why not.
Clients sometimes think that if they do the work to prepare the first draft of an agreement, they can save money because a lawyer will need less time to complete the agreement.
How Should I Use a Fictitious Business Name?
This post is adapted from my answer to a Quora question about use of a fictitious business name (FBN): Q. Must an LLC with a fictitious business name display the LLC name on its website?
A. In my opinion, an entity’s proper name and complete identification should be provided in every agreement. Agreements include website terms of service. Example showing how to include both the entity name and the FBN:
[Company Name], LLC, a California limited liability company doing business as [Fictitious Business Name], with a place of business at [address]
Limitation of Liability and Confidentiality Provisions in Tech Contracts
This post is based on a question about limitation of liability that I answered on Quora.
Q. Why do technology contracts often carve breach of confidentiality out of the limitation of liability?
A. I’m going to start by broadening the discussion, a bit.
First, the carve-outs typically modify both limitation of liability and limitation of damages. So, whereas an agreement might include provisions both limiting? the total (dollar) amount of liability and liability for consequential damages, such limitations will not apply to the carved-out subject matter.
When a Handshake Deal Isn’t Really a Handshake Deal
Last week Y Combinator announced The Handshake Deal Protocol [no longer available online – apparently because of the Protocol’s shortcomings discussed below]. A “handshake deal” is an oral commitment to a funding transaction between a startup’s founders and an investor. This sometimes is considered necessary in Silicon Valley because, in the world of startups, one must move quickly.
As Y Combinator notes, however, a handshake deal can create problems:
Unfortunately, things don’t work as smoothly in Silicon Valley as among diamond dealers. This is not a closed community of pros who deal with one another day after day. Many participants in the funding market are noobs, and some are dishonest.
What are “Best Efforts”?
Contracts sometimes require that a party use its “best efforts” to carry out its obligations. (This is in contrast to, for example, “commercially reasonable efforts”.) Last month, in California Pines Property Owners Assn. v. Pedotti, the California Court of Appeal for the Third District provided a definition of “best efforts”. (more…)
How Can I Make Sure I Receive My Full Royalty?
Intellectual property license agreements often include a provision by which the licensor is paid a royalty that is calculated as a percentage of the revenue received by the licensee from licensed products. Given that licensees have a financial incentive to reduce the amount of revenue that is reported*, the prudent licensor includes an audit provision in the license agreement.
The audit provision typically:
- Specifies the frequency and nature of audits that may be conducted;
- Provides that the licensee will pay any underpayment amount that is discovered plus interest; and
- Obligates the licensor to pay for the audit unless the underpayment exceeds X% of the royalty that was due, in which case the licensee must reimburse the licensor for the cost of the audit.
Why Does the Other Party Want to Apply NY Law?
This post is based on a question that I answered on OnStartups. Q. I’m in the process of closing a deal with a new client, and the only sticking point is the choice of applicable law. I am located in state A, the client in state B. My contract says it will be governed by the law of state A. The client wants to change this to New York. Why? Would doing so open my company up to any unintended side effects/liabilities (e.g., taxes)?
New Feature: Ridiculous Contract Provisions
With this post I am inaugurating a new feature that I expect will appear from time to time: Ridiculous contract provisions that I have run across. Today’s post is based on an agreement that I recently reviewed for a client.
The agreement provides standard terms and conditions by which a large utility in the Eastern United States works with its suppliers of products and services. The sentence in question says:
No change, amendment or modification of any of the provisions of this Contract will be binding unless in writing that identifies itself as an amendment to this Contract and that is issued by Company.
In other words, the Company apparently believes that the only requirement for an amendment should be that the Company issued it – irrespective of whether the supplier agrees to the change! Enough said….
Photo credit: iStockphoto
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
What is a Letter of Intent?
Today I answered a Quora question about what a letter of intent is and what it should contain. The question and my answer (each edited slightly) are reproduced below.
Q. What is a letter of intent? What are the legal implications of a letter of intent? What is the purpose? Which elements minimally comprise a letter of intent?
Here’s an Arbitration Provision I Like!
I’m not a big fan of mandatory arbitration clauses in contracts: Although arbitration is likely to proceed more quickly than litigation (other than small-claims cases), it is not necessarily less expensive. However, I recently saw an arbitration clause that I like quite a bit.
Linden Research, Inc., developer of the Second Life multi-user online service, includes the following in its Terms of Service (emphasis added):
What Makes a Contract Easy to Read?
A client had been using a form of independent contractor agreement for years and was concerned that the existing agreement did not fully meet the client’s legal needs. I said that I could adapt my form of agreement more cost-effectively than I could fix the client’s agreement. When I did so, I realized that the agreement I provided was much easier to read (aside from being legally tighter and more complete).
What makes the new agreement easier to read? First, it has about 20% fewer words, because I try to make each point once, avoiding the needlessly repetitive words and phrases that lawyers traditionally have delivered.
What is the Difference between Termination and Expiration?
Many people (indeed, too many lawyers) are not aware of the difference between termination of an agreement and expiration of an agreement. This post explains that difference and discusses why it matters.
Expiration is the ending of an agreement pursuant to its terms without any action by a party to the agreement. Expiration commonly occurs at the end of a defined period of time – for example, a lease may expire at the end of one year. Expiration may be linked to other events, however. For example, a patent license agreement may expire when the underlying patent expires.
Termination is the ending of an agreement as the result of an action taken by a party to the agreement. For example, an agreement may provide that either party may terminate it upon ten days’ written notice if the other party breaches the agreement and does not cure the breach during the ten-day notice period.
Why the difference matters: A carefully drafted agreement may specify that a party’s rights after expiration differ from its rights after termination. For example, one of my clients has a license agreement under which the client incorporates pieces from a popular board game into jewelry. If the agreement expires, the client may sell off any remaining inventory during the 60-day period following expiration. In contrast, if the agreement is terminated by the licensor for breach by the licensee, there is no sell-off period.
Photo credit: Lars Sundstrom via stock.xchng [Links removed because no longer valid.]
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Sometimes You *Shouldn’t* Assign All Rights
I have written, on several occasions, about the importance of assigning copyrights (and other intellectual property rights) when work is done by an independent contractor. (See, e.g., Independent Contractors: How to Assign Copyrights.) Sometimes, however – as suggested in a comment to What is a Derivative Work, and Why should I Care? – it is appropriate not to assign all rights.
Stupid Provision Pops Up in NDAs
Twice during the past week clients have asked me to review (someone else’s) nondisclosure agreements (NDAs) that contain a stupid provision of a type that I had not seen for years. That provision is as follows:
RECIPIENT shall not be liable for inadvertent disclosure or use of CONFIDENTIAL INFORMATION nor for unauthorized disclosure or use by persons who are or who have been in its employ or with whom it has contracted provided that it uses the same degree of care in safeguarding such CONFIDENTIAL INFORMATION as it uses for its own CONFIDENTIAL INFORMATION of like importance.
I consider the provision stupid for the following reasons: (more…)
Which Party Should Prepare the Contract?
In routine commercial transactions, at least one of the parties typically presents a standard-form agreement. But in other situations – perhaps a one-off business relationship, or settlement of a dispute – a new contract must be developed. A question then arises: Which party should prepare the contract?
This is what I tell my clients: (more…)
Are International Contracts Effective and Enforceable?
Flag of England (Yes, fellow Americans, there is an English flag separate from the UK flag – do you see the relationship?)
This post reproduces, almost verbatim, a Quora question and my answer. Q. How effective and enforceable are contracts between parties located in the United States and England?
A. Such agreements can be effective and enforced – agreements between parties in different countries are entered into routinely. (more…)
Three Ways to Protect Yourself when Developing Software Offshore
Many startups have software developed offshore to save money. There is good reason to be concerned, however, about loss of money or, even worse, loss of intellectual property when a developer is located half-way around the world. This post discusses ways to minimize those concerns.
I recommend the following:
- Ensure that the agreement with your overseas developer assigns all rights to the software (including all intellectual property rights) to you.
- Don’t send your “family jewels” offshore. For any portion of the development that requires disclosure of your most important trade secrets, use a local developer.
- Time deliverables and payments such that you never will be too severely financially exposed. If your relationship with the developer sours, you can go somewhere else without a catastrophic financial loss.
If you take care of these three points properly, everything else should be pretty routine.
Photo credit: Rajesh Sundaram via stock.xchng
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Wikileaks and Apple – an Opinion
The following is taken almost verbatim from my answer to a Quora question and the comments that followed. Q. Was the WikiLeaks iPhone app really violating the Apple App Store “Terms of Service”? Apple spokesperson stated that ?Apps must comply with local laws and may not put an individual or group in harm?s way.? Is that actually the case?
A. Yes (in my opinion). Section 3.2(b) of the iPhone Developer Program License Agreement says:
You will not use the Apple Software or any services for any unlawful or illegal activity, nor to develop any Application which would commit or facilitate the commission of a crime, or other tortious, unlawful or illegal act[.]
Which Protections Should be Included in Online Terms of Use?
This post is based on my response to a LawPivot question from an entrepreneur who wanted to know which protective provisions should be included in his website’s terms of use.
The provisions that bear most closely on protecting website owners include those pertaining to:
- Disclaimer of warranties made by the owner
- Limitations on the extent of the owner’s liability
- Users’ warranties, especially as concerns any information that they may post
- Users’ acceptable behavior policies, which set the stage for . . .
- The owner’s right, in its sole discretion, to terminate use privileges
- Users’ obligation to indemnify the website owner against liabilities that result from user activities
- A requirement that any lawsuit related to the website be brought at a venue that is convenient for the owner
- An arbitration provision as a way to avoid litigation (though I am not a big fan of arbitration because it can be expensive and precludes small-claims court, which can be relatively quick and inexpensive)
International Contracts: Choice of Law when the Parties Disagree
This post concerning international contracts is based on an OnStartups.com question (edited here) that I answered a few minutes ago. Q. I am drafting a website-development agreement with a firm in India. I am in Australia. I prefer that the agreement be governed by Australian law, but the developer prefers Indian law. What is normally done in similar circumstances?
A. Several thoughts based on my experience international contracts: (more…)
Changing Online Terms of Use: How Detailed Must Notice Be?
In “Changing Online Terms of Use? Be Sure to Give Notice First!“, I explained that if you are going to change a website’s terms of use, you first need to provide notice that the terms have been changed and explain how they have been changed. This post – based on a Quora question and my answer – discusses how detailed the notice must be.
Unfortunately, there are no definitive rules regarding the level of detail that the notice must contain. I have two guidelines that I like to follow.
Who Can Sign a Contract for an LLC?
Several months ago, I answered the question Who Can Sign Contracts for a Corporation? This post addresses who can sign a contract for a limited liability company (LLC).
Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
The LLC’s Articles of Organization may address who can sign a contract, but this rarely occurs. The subject is more likely to be addressed in the Operating Agreement.
Present Assignment is Important for Patents, Too
In “Copyright: Why You Need Presence of Mind about Present Assignments“, I wrote about why copyright assignments should be expressed as present assignments (e.g., “I hereby assign”) rather than obligations to assign in the future (e.g., “I hereby agree to assign”). This suggestion applies to assignment of patents, too.
A researcher at Stanford University, in collaboration with Roche predecessor Cetus, developed methods for quantifying Human Immunodeficiency Virus in human blood samples, and correlating those measurements to the therapeutic effectiveness of antiretroviral drugs.
Why did both the President and the Secretary of the Corporation Sign that Document?
Contracts and other documents usually are signed on behalf of a party by a single representative (see Who Can Sign a Contract for a Corporation?). However, at least in California, important documents often are signed on behalf of a corporation by two officers, such as the President and the Secretary. This post explains the reason for two signatures.
Corporations Code Section 313 says, in relevant part (emphasis added) that: (more…)
What is a Sublicense Agreement?
This post is based on a LinkedIn question that I answered recently. (The Q&A no longer are available at LinkedIn, which has discontinued that feature.)Â Q. What is a sublicense agreement?
A. A license is an agreement by which the owner (the licensor) of something (in the case of the LinkedIn question, a trademark) grants, to someone else (the licensee), rights that are less that all of the rights to that thing. “Licensing 101“, and the download to which it refers, provide basic information about licensing. (more…)
Why Your Lawyer Need Not Sign an NDA
Once in a while, when I send an engagement letter, the prospective client wants to add confidentiality provisions to protect its trade secrets. The following is the explanation that I provide as to why such provisions – let alone a separate nondisclosure agreement (NDA) – are not required in an attorney’s engagement letter.
California Business and Professions Code Section 6068 specifies the fundamental obligations of an attorney. Subsection (e)(1) states that each attorney must “maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.” (Emphasis added.) Attorneys in other states have similar obligations.
Copyright: Why You Need Presence of Mind about Present Assignments
In Independent Contractors: How to Assign Copyrights, I provided sample language for an independent contractor’s assignment of copyrights to a client. This post explains why the present assignment aspect of that language is critical.
Here (with emphasis added) is the relevant portion of the pivotal sentence:
Contractor hereby irrevocably assigns, transfers and conveys to Client all of its right, title and interest in and to the Deliverables, including complete, unconditional and worldwide ownership of all intellectual property rights in any draft or final version of the Deliverables.
How to Assign a Patent Application to Your Startup
Detail from an illustration of a machine by Leonardo da Vinci
Your invention is so novel and non-obvious that you have submitted a patent application to the U.S. Patent and Trademark Office. Good for you!
Furthermore, you have formed a legal entity to turn the patent, once it issues, into a revenue stream. (See Should I form an LLC or a corporation?)
This post explains how you can assign the patent application to your new entity so your startup company can begin conducting business. (more…)
Make Sure that Your Release Means What It Says
Title page from the California Civil Code enacted in 1872 and published in 1880
I recently prepared a Stock Redemption Agreement pursuant to which one of the founders would leave a corporation (my client). The agreement included a General Release by which the parties would release one another from all liability. The corporation’s CEO had a difficult time understanding the need for, and the significance of, a provision that cited a particular Section of the California Civil Code.
California Civil Code Section 1542 says:
A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor. (more…)
How Can I Switch from a Sole Proprietorship to a Corporation?
This post is based on (and is an edited version of) a Quora question and my answer. Q. How do you switch from a sole proprietorship to a corporation? You do, of course, want to keep all your intellectual property and brand and street cred and so on. Can you treat that as equity?
A. Yes, you can treat the assets of your sole proprietorship as the consideration for which your shares are issued. You need to create an agreement by which you (as an individual) assign those assets (including the intellectual property rights therein) to the corporation. This is, of course, a friendly transaction, so the assignment agreement can be simple – no need for endless pages of legal boilerplate to protect against litigation that never will occur.
Related post: How to Assign a Patent Application to Your Startup Company
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
What Should We Put in an Employment Offer Letter?
From time to time, clients ask me to review their current form of employment offer letter.
As a result, I am writing this post. It is a summary of what I believe every offer letter should convey to the prospective employee from the business and legal perspectives.
Offer Letter Business Terms
From the business perspective, the letter should lay out the most important characteristics of the position: (more…)
Using Someone Else’s Agreement Might Be a Mistake
Earlier this week, I was called by a professional services provider (“Chelsea”) who was interested in my services. Chelsea had presented a confidentiality agreement – which she had found somewhere – to a prospective client for a large project. The prospect marked up the agreement pretty heavily, in ways Chelsea did not understand, and she wanted to make sure that her legal interests were protected.
I asked Chelsea to forward the marked-up agreement to me so I could see how much work I would have to do to help her. Within one minute, I could see the source of the problem. I called Chelsea. An edited transcript of our conversation follows:
Open Source Developer Wins Big – But Can He Collect?
BusyBox Logo
Erik Anderson developed certain software that he contributed to BusyBox, a compact set of embedded Linux utilities licensed under the GNU General Public License, Version 2 (the “GPL”). In October 2008, Anderson registered a copyright on the code that he contributed.
On September 2, 2009, Anderson’s counsel notified Westinghouse that it was infringing Anderson’s copyright because it was distributing BusyBox – both integrated into Westinghouse televisions and separately with other software – on terms that are more restrictive than the GPL. Westinghouse continued infringing Anderson’s copyright.
Anderson and the Software Freedom Conservancy brought suit against Westinghouse and 13 other defendants on December 14, 2009. Westinghouse initially mounted a defense, but stopped participating in the suit when it filed for bankruptcy.
You May Be Able to Cancel that Contract – If You’re a Consumer
One of the great legal myths in some circles is that anyone can cancel any contract within a certain number of days of entering into it. That’s just not true – though you may have cancellation rights under certain circumstances if you are a consumer (rather than a business).
In California, those rights have been summarized by the Department of Consumer Affairs’ “Consumer Transactions with Statutory Contract Cancellation Rights: Legal Guide K-6“.
Some of the more interesting points made in the Guide:
- There is no cancellation period for automobile sales and leases.
- There is an indefinite cancellation period for dance studio services and pre-need funeral contracts.
- There is a 30-day cancellation period for mail or telephone sales orders that have not been filled.
The second portion of the Guide discusses general contract cancellation rights based on circumstances such as fraud, duress, undue influence, or illegality.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Who Can Sign Contracts for a Corporation?
A couple of weeks ago, I answered a question on Avvo about who can sign contracts on behalf of a corporation. This issue comes up from time to time, so I will discuss it at some length in this post.
Authorization to sign contracts is addressed in the corporation’s bylaws and / or in resolutions of the board of directors. (more…)
Should I Initial Every Page when I Sign an Agreement?
When my European clients execute agreements, they routinely initial every page, usually at the bottom, in addition to signing at the signature blocks. Here in the U.S., I see that approach rarely; it is customary merely to sign at the signature blocks.
Several weeks ago I posted a LinkedIn question about this difference. [September 2013 update: Link to question no longer available because LinkedIn removed its Q&A feature.] Here are some of the insights that I gained from my colleagues:
If You See a Contract Like This, DON’T SIGN IT!
An acquaintance recently showed be one of the worst contracts I have ever seen – one of the worst in the sense of unfair and unbalanced, and perhaps even unconscionable.
The company in question provides contract personnel for IT projects. Here is the agreement that candidates have to sign to be proposed for a client’s project [emphasis added]: (more…)
Can Personal Creditors Threaten My LLC?
I recently answered an Avvo question about whether personal financial problems would create trouble for the LLC that an individual was forming. The question and answer, substantially edited, are provided below.
Q. I am starting a new company. I wish to establish an LLC. I had a recent foreclosure and they are coming at me for 70k on a 3rd against the property. I also have a credit card judgment for 18k and 30k of other outstanding debt. Question is whether an LLC can protect me. I have investors placing 50-100k in this project and i cannot have any issues moving forward. [Emphasis added.] (more…)
Why does our Operating Agreement have a Spousal Consent?
I recently received questions about whether and why Spousal Consents are necessary with respect to certain business-ownership agreements. Here is a summary of the most important points that you need to know.
California is a community property state. If, during marriage, an individual acquires an interest in a business, the individual’s spouse has a community-property interest in that business.
IP Indemnification: Who Will Be There to Satisfy the Obligation?
Almost a year ago, I posted IP Warranties and Indemnification: How Much is Reasonable? This post addresses a related subject: If you get the other party to agree to indemnify you, who will be around to satisfy the obligation?
A client is in the process of acquiring all of the rights to certain software, which was developed by several recent college graduates who formed a limited liability company (LLC). The client knew to ask for indemnification against claims that the software infringes any third party’s intellectual property rights.
What the client had not thought about, however, was whether the LLC could satisfy the indemnification obligation – which is unlikely, given that the LLC probably (a) has few assets and (b) will be dissolved once the transaction is consummated.
Accordingly, I recommended that we include in the agreement the LLC members’ covenant to satisfy the indemnification obligation if the LLC, itself, doesn’t. The members may be unhappy, but if they want the transaction badly enough, they will agree.
Lesson: An indemnification obligation is only as valuable as the party takes it on.
Photo credit: Anna H-G via stock.xchng
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Watch Out for “You Don’t Own It until You Pay”
A start-up entrepreneur recently told me about the agreement he signed with the developer of his website. The agreement has what I consider, from the entrepreneur’s perspective, a most pernicious provision: Ownership of the website, and its intellectual property rights, does not pass from the developer to his client until the fee is paid in full.
I understand why developers like this type of provision: It gives them extra leverage to ensure that they are paid. (more…)
Back to the Future? No, Back to the Past – Ancient NDA Discovered
A client recently was given, and asked me to review, a nondisclosure agreement that made me chuckle because it looked like something left over from decades ago. I was especially surprised because this NDA came from a well-known computer-products company.
Some of the document’s more endearing qualities: (more…)
No, You Can’t Just Scrape Someone Else’s Website
The following question was posed recently on LinkedIn: Let’s say that I want to scrape amazon’s and ebay’s product reviews and use on another site? I want to understand the legal fall-out that may happen in doing so.
Here, slightly edited, is the answer that I provided:
- You would be committing copyright infringement.
- You would be breaching Amazon’s Conditions of Use, which expressly prohibit “any use of data mining, robots, or similar data gathering and extraction tools”.
- Similarly, you would be breaching ebay’s User Agreement, which says that “You agree that you will not use any robot, spider, scraper, or other automated means to access the sites for any purpose without our express handwritten permission.”
- Other companies’ sites with well-thought-out terms of use have similar prohibitions.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
Open Source Developer Prevails in Copyright Infringement Suit
A federal court of appeals held in 2008 that an open source developer case sue for copyright infringement despite the breadth of the open source license. The closely-watched case recently settled, meaning that the opinion may well be cited for many years to come.
Plaintiff Robert Jacobsen holds a copyright to certain computer programming code that he makes available for public download for free pursuant to the Artistic License, an open source license.
Defendants Matthew Katzer and Kamind Associates, Inc. develop commercial software products for the model train industry and hobbyists. Defendants copied certain materials from Jacobsen’s website and incorporated them into one of their software packages without following the terms of the Artistic License. Jacobsen sued for copyright infringement and moved for a preliminary injunction.
Online Terms can be Binding, even if You don’t have to Click!
This past December, a Missouri Court of Appeals held that a user was bound by a website’s terms and conditions, even though she was not obligated to click to signify assent to those terms (Major v. ServiceMagic, Inc.).
The court noted that where a user is obligated to click to signify agreement to terms, such “clickwrap” agreements are routinely enforced. Where clicking is not required, a site’s “browsewrap” agreement usually will be upheld if the user has actual or constructive knowledge of the terms and conditions before using the site.
Failure to Encrypt Passwords Leads to Class Action Lawsuit
On December 28, 2009, RockYou, Inc., a developer of applications for Facebook and other social networks, was sued in the U.S. District Court for the Northern District of California. The class action complaint alleges failure to encrypt users’ e-mail addresses and passwords and was filed shortly after a hacker copied that information for 32 million RockYou users. (more…)
Which state’s law matters for employment contract questions?
I recently learned that one of my LinkedIn answers in Employment and Labor Law [no longer available at LinkedIn because this feature was discontinued]Â was selected as the Best Answer. The question and my answer are reproduced below.
Question: Which state law matters for employment contract questions (for the CEO of a firm), the law of the state of incorporation or the law of the state where the headquarters are located? (more…)
How High an Interest Rate Can I Charge?
I recently had a conversation with an attorney in Louisiana, who mentioned that in that state, the annual interest rate on a promissory note was limited to 12%. I told him that in California story is much different.
Article 15 (Usury) of the California Constitution states (simplifying a bit) that the annual interest rate on a loan or forbearance (refraining from requiring payment for a period of time) is limited as follows:
- If arising from money or goods supplied for personal, family or household purposes, the maximum interest rate is 10%.
- If arising from money or goods supplied other than for personal, family or household purposes, the maximum interest rate is the greater of (a) 10% or (b) 5% plus the rate charged by the Federal Reserve Bank of San Francisco on advances to its member banks.
- If the agreement between the parties does not specify an interest rate, it will be 7%.
Can we kick one of the members out of our LLC?
I recently ran across a situation where several members of a limited liability company wanted to get rid of a fellow member whose disruptive behavior was harming the LLC, but they did not know whether or how they could kick him out.
The section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
California Corporations Code Sections 17706.02(b) and (c) say that an LLC operating agreement may provide for dissociation of a member. Upon dissociation, the member loses the right to participate in the LLC’s activities and holds any transferable interest in the LLC as a transferee. (more…)
Contracts with Minors can Lead to Major Problems
I recently was consulted concerning contracts with minors. In the first case, a teenager wanted to start a business. In the second, a father wanted his child to become a member of his limited liability company (LLC).
Here is an overview of California law concerning contracts with minors.
A minor is an individual who is under 18 years of age. An adult is an individual who is 18 years of age or older. Family Code Sections 6500-6501
Subject to certain exceptions (some of which are far-reaching, such as those precluding contracts related to real property or personal property not in the minor’s immediate possession or control), minors may enter into agreements. Family Code Sections 6700-6701
However, the minor generally may disaffirm (reject) the agreement before reaching majority, or during a reasonable time thereafter. Family Code Sections 6710-6713
Can I Create my Standard-form Contract by Starting with Someone Else’s?
This question was asked a few days ago (in different form) on LinkedIn. [Please note that the question is no longer available online because LinkedIn removed its Q&A feature.] The question was whether one can create a standard-form contract by starting with someone else’s standard-form contract.
The following is an edited version of the answer that I provided:
Case Outcome Depends on Facts
As is always the case with alleged copyright infringement, the outcome of the case will depend on the facts.
Do I really need a lawyer to review this contract?
I have wanted to write this post for several months, but until now I have held off because of concern that it would come across as a lawyer saying “buy my services”. Today, though, a conversation with a client drove home how important this topic is.
On several occasions, clients have asked me to dig them out of trouble that occurred because they had entered into agreements without the advice of legal counsel. Some examples:
Foreign Suppliers Beware: Five Contract “Gotchas” when Adapting Your Agreements
A couple of months ago, I posted International Business and Agreements: Learning about Legal Culture. This is a follow-up that discusses certain common problems when foreign suppliers bring their standard-form agreements to the U.S.
Filling in Gaps
During the past several years, I have helped quite a few foreign technology suppliers adapt their standard-form agreements for use in the U.S. The agreements that they use back home (translated to English, as required) are quaint by U.S. standards. There is a lot of white space, and fonts tend to be large. Furthermore, while the agreements specify business terms in detail, they address many legal provisions in a cursory fashion or not at all. (more…)
Oral Agreements – You’re Just Asking for Trouble
Samuel Goldwyn
As concerns oral agreements, the statement that “a verbal [sic] contract isn’t worth the paper it’s written on” erroneously attributed to Samuel Goldwyn actually is pretty close to the mark.
Sometimes I am asked whether oral agreements (as contrasted to those that are written) are enforceable. This post will answer that question but will explain why, even when oral agreements are enforceable, they should be put in written form, anyway.
Oral Agreements Generally Enforceable
Generally, oral agreements are enforceable in California. There are, though, many exceptions. For example, agreements for the sale of land or any agreements to the extent that they will require performance after one year must be in writing (Civil Code Section 1624), as must premarital agreements (“prenups”) (Family Code Section 1611). Also, written agreements generally may be amended only in writing and not orally (Civil Code Section1698).
Resolving Small-business Disputes: The 50-50 Deadlock
On occasion when I help a client form a new corporation or limited liability company (LLC), the company will have two owners, each owning 50% of the company.
A major risk with 50-50 ownership is that disagreement on an important issue can deadlock the company. In an extreme situation, the dispute might even put the company out of business!
Can I Form an LLC without a Lawyer?
Recently, several start-up entrepreneurs have asked me whether they can form a limited liability company – LLC – without a lawyer available to help. The following answer reflects practices in California.
Filing Articles of Organization for an LLC without a Lawyer is Easy
The first step, filing Articles of Organization with the Secretary of State, is easy – no lawyer is required. (Unless you want expedited turnaround, in which case a lawyer who has an existing relationship with a commercial filing service in Sacramento is invaluable.)
Pre-formation Contracts: Avoiding Personal Liability
This post is based on my answer to a LinkedIn question [before the LinkedIn Answers feature was terminated] – the answer would be similar for a contract entered into before a corporation, rather than LLC, is formed:
I signed a lease for office space one day before my LLC became active. Am I personally responsible for the lease? (more…)
Limiting Liability when You are the One Being Paid
From time to time, I answer questions – typically about the law or about startups – on LinkedIn. Recently I answered the following question:
What is the best way [in a contract] to limit liability when you’re the party receiving payment?
I believe the answer will be helpful to any supplier of goods or services, so I am reproducing it here in slightly edited form.
International Business and Agreements: Learning about Legal Culture
Over the years I have negotiated a number of international agreements, typically representing domestic clients. My more recent work with EU-based clients, however, has given me additional insights about the U.S. and other legal systems.
These clients have established technology businesses in Europe. Each recently set up operations here in the Bay Area and asked that I adapt existing agreements for use in the U.S. As I work with these clients, two differences between the U.S. and the European Union jump out at me.
Length of Agreements
First, in the U.S. we often have longer agreements. European contracts tend to rely on, and implicitly or explicitly incorporate, detailed statutory provisions that do not exist here in the U.S. Furthermore, agreements here tend to include more business details and legal protections in case the relationship sours and ends up in litigation. For example, one client shared its existing reseller agreement. I found the document charming in its brevity and the abundance of white space on the page. By the time I added everything that is considered normal here in the U.S., the new version had four times as many words!
Teaming Agreements Teem with Issues
Separately, two clients asked me to review “teaming agreements” that had been presented to them. In each instance, the client was proposing to “team” with another company that had complementary expertise so they could carry out, jointly, a sophisticated technical project for a customer.
A brief aside: I prefer the term “teaming” to “partnering”, which often is used by technology companies to emphasize how closely they will work with one another. My concern about “partnering” is that the term suggests the companies may be partners rather than independent contractors, potentially sharing unlimited legal liability for their joint business activities. Fortunately, my clients avoided that trap.
IP Warranties and Indemnification: How Much is Reasonable?
Knowledgeable licensees of intellectual property (IP) seek indemnification protection to ensure that the licensed IP legitimately belongs to the licensor and not to a third party. This post explores the interplay between indemnification provisions and IP warranties.
While indemnification provisions vary from contract to contract, the following is illustrative:
Licensor will defend, indemnify and hold Licensee harmless from all costs, expenses, and damages arising from any third-party claim alleging that the Licensed IP infringes any patent or copyright or misappropriates any trade secret (a “Claim”), provided that Licensee has given Licensor prompt notice of the Claim, allows Licensor sole control of the defense of the Claim and of all negotiations for its settlement or compromise, and cooperates in all reasonable ways with Licensor’s defense or settlement of the Claim. If a Claim results in an injunction precluding Licensee’s use of the Licensed IP, Licensor will, at its option and expense, either (a) procure for Licensee the right to continue the enjoined use, or (b) replace or modify the Licensed IP so it is no longer subject to the injunction. If Licensor, after all commercially reasonable efforts, is unable to perform under either option (a) or (b) above, then Licensor will refund to Licensee an amount equal to the remaining undepreciated/unamortized value of the Licensed IP carried on Licensee’s books for U. S. federal income tax purposes as of the date that use of the Licensed IP was enjoined.
A Practical Guide to GPL Compliance
I am pleased to make available on this blog’s Downloads page “A Practical Guide to GPL Compliance”, published by the Software Freedom Law Center.
In my opinion, this is a must read for anyone who is preparing or distributing software that is governed by the GPL.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
Negotiation: When What You Hold Can Make the Other Guy Fold
A couple of years ago I had one of my greatest thrills as an attorney.
My client owns several patents covering ways to improve the efficiency of certain types of lasers. We had succeeded in licensing a large company for one field of use. We were trying to sign up another company for a second field of use.
All business and legal issues had been resolved when, at the last minute, the licensee’s General Counsel demanded that my client convey, in addition to the patent license, certain broadly-defined rights to my client’s know-how. We refused, explaining that know-how never was part of the discussion, and if my client ever was interested in conveying know-how, it would come at a price. The parties then reached final agreement without the know-how provision.
How detailed should a legal document be?
This topic was suggested by Tim Greene at FizzTalk based on a comment posted at the LinkedIn Legal Blogging group.
In my experience, a document’s level of detail should be driven by the nature of the business transaction and the parties’ relationship. I will give some examples both from in-house work and from my private practice that pertain to agreements with independent contractors.
Long and Detailed
When I was VP and Legal Counsel at Visa, I negotiated hundreds of contracts. Given that most were for IT products or services, a lot of money often was at stake, especially if a relationship was to continue for a period of years.
Accordingly, I prepared a series of detailed standard-form agreements – typically 15-20 pages – that served as a starting point. To minimize the amount of negotiation that would be required, the agreements were reasonably balanced, yet they, nevertheless, protected my client’s essential business and legal interests.
The agreements were long, but the length was justified by (a) the size of the deals and (b) the fact that each standard-form agreement would be used many times in the future, with minor revisions as required.
Beware the Unintended Partnership
This post uses a real-life example to explain how an unintended partnership is created and why it can be a problem.
Client was one of two founders of a website. She provided content; Co-founder developed, maintained and promoted the site.
Client and Co-founder had been working together for three months when Co-founder presented a business agreement that had been prepared by his paralegal friend. Client asked that I review the agreement on her behalf.
I saw right away a problem that frequently arises in this situation: The parties were characterized as participating in a joint venture under which they would split earnings from the site. The problem arises because under California Corporations Code Section 16202(c)(3), subject to certain exceptions (see discussion below), “[a] person who receives a share of the profits of a business is presumed to be a partner in the business”. This is true even if the parties did not intend to form a partnership (Section 16202[a]), in which case they have created an unintended partnership.
Employee Proprietary Rights Agreements – Be Careful
Some companies force employees to sign proprietary rights agreements under which the employee automatically assigns to the company any patent applications that the employee files within one year following separation from the company. I have always considered these provisions unjustifiable. California law apparently has reached the same conclusion.
Applied Materials Made a Mistake
In Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., et al., 630 F.Supp.2d 1084 (2009), the U.S. District Court for the Northern District of California held that such a provision is unlawful. (more…)
Need a Sample Confidentiality Agreement / NDA?
I am pleased to make available as Free Downloads on the Downloads page the sample Mutual and Unilateral Nondisclosure Agreements that I originally made available via Legal OnRamp.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
Buy-sell Agreement Objectives and Issues
The founder of a company asked me whether he needs a buy-sell agreement. Having granted shares to key personnel, he wanted to make sure that a departure from the team did not jeopardize the company’s operations.
A buy-sell agreement can apply to any type of closely-held business (one in which ownership and voting control are concentrated in the hands of a few investors). I will refer, below, to shareholders of a corporation. However, most of the following information applies equally to members of a limited liability company and partners in a partnership. (more…)
Work Made for Hire – a Term Made for Confusion
As Alexander Pope wrote in An Essay on Criticism (1711), “A little Learning is a dang’rous Thing“. That certainly pertains to the legal concept of a “work made for hire” (WMFH).
People who have some knowledge of WMFH typically believe that it means the transfer of all rights in a work from the creator to a purchaser. So, for example, if an independent contractor writes software for a company, then according to this belief, the company will own all rights to the software if the parties’ contract says the software is a work made for hire. This belief is wrong! The following is an explanation of what work made for hire really means under copyright law and how parties actually can arrange for transfer of all rights in a work.
(more…)
Best Practices in Drafting Software Contracts
On May 19, the American Law Institute approved the Proposed Final Draft of the Principles of the Law of Software Contracts. The 305-page document presents best practices that should be taken into account when drafting software contracts.
Implications of the Principles for Drafting Software Contracts
Here are some implications of the Principles that I find most interesting: (more…)
Top Ten IP Mistakes of Small to Mid-Size Tech Companies
On June 18, I will make a presentation to the East Bay MashEx. The title: “The Top Ten Intellectual Property Mistakes of Small to Mid-Size Technology Companies”. (The handout is available as a Free Download on the Downloads page.)
Here are the mistakes that I will talk about:
- Failing to use employee invention agreements
- Assuming that the company owns contractors’ work product
- Using another company’s license agreement
- Thinking that patents are the only IP that matters
- Filing for a provisional patent before the scope of the invention is clear
- Treating the federal government like non-government infringers
- Neglecting to identify and protect trade secrets
- Believing that “open source” means “no restrictions”
- Giving the “family jewels” to an overseas supplier
- Registering the wrong entity as the owner of IP
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
Choice of Law and Non-Compete Provisions
This post describes the fascinating interaction between a contract’s choice of law and non-compete provisions in a matter that I worked on.
A longtime client received an acquisition offer from a large, publicly-held company (“Acquirer”). Once the acquisition closed, the client’s founder (“Founder”) would become a management-level employee of Acquirer.
Concern about Non-compete Provision
Although Acquirer’s proposed employment agreement generally was acceptable, Founder was concerned about its non-compete provision. That provision stated that for one year following termination of his employment, Founder would not “engage in any business activities that are competitive with the business activities of [Acquirer] or those of its subsidiary or parent companies”.
The problem was that the business of Acquirer and its affiliates was vast, and Founder’s expertise was industry-specific. In effect, Founder would not be able to work elsewhere. (more…)
Negotiating Executive Employment Agreements
In the U.S., most employment is “at will”. This means that either the employer or the employee can terminate the employment at any time, for any legitimate, non-discriminatory reason, with or without cause. The typical senior executive, in contrast, has an employment agreement that runs for a number of years and allows termination only for cause. The reason: Attracting and retaining key executives is critical for any company’s success.
By the time I am called in, the parties usually are at or near agreement on salary and the amount of equity compensation (stock options or grants). In addition, the employer’s benefits program usually is well-defined. I have found that most of the negotiation effort goes into the following provisions:
Changing Online Terms of Use? Be Sure to Give Notice First!
Let’s assume that you have a website with great content. When users sign up, they eagerly click the “I agree” button to accept your standard terms of use. In those terms, you give yourself the right to make future changes to the terms of use via the following provision:
“We may change these terms of use at any time by revising them on our website. You agree to be bound by any such revisions. Therefore, you should review these terms periodically. If you do not agree with any revision, you must stop using our website.”
Changes to Terms of Use Require Notice
This approach is routine on the web and, until recently, was considered by many to have precisely the effect that was intended. In 2007, however, the United States Court of Appeals for the Ninth Circuit (which has jurisdiction over federal cases in the Western U.S.) stated that website owners must do more than just change terms of use online if they want the changes to take effect for existing users.
Will that NDA’s Residuals Clause Cost You Your Trade Secrets?
Anyone who has worked in technology is familiar with nondisclosure agreements (NDAs). Differences among NDAs usually are small; they tend to cover the same territory in similar ways. However, NDAs from large companies often contain what I consider a most pernicious provision: A ” residuals clause “.
Residuals Clause Explained
A residuals clause excludes from confidentiality obligations information that the recipient’s personnel retain in their memories. Here is a typical provision, from the Microsoft Confidentiality Agreement for Licensing Discussions [document no longer available online]: (more…)
Researching the Opposing Party: Forewarned is Forearmed
When I prepare to negotiate an agreement for a client, I start by researching the other party so I can gain insights that might help me represent my client more effectively. The obvious starting point is the website for the other party, where I can quickly understand its business and see who its executives are. But I also look for legal information that typically is available only elsewhere.
Every state has a searchable database of the businesses that have registered with that state, either because the business was formed there or because it was formed elsewhere and registered to do business in the state. Each state includes in its database, at a minimum, information about the corporations and limited liability companies. Most states include information about other types of business entities, too.
