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…)
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…)
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…)
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.
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.
California Commissioned Employees Must Have a Written Employment Contract
Effective January 1, 2013, every employee in California who is compensated, entirely or partially, by commission must have a written employment contract that states the method by which commissions will be computed and paid.
Labor Code Section 2571(a) says:
By January 1, 2013, whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.
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.
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.
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.
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…)
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.
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.) 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…)
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…)
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.
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:
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…)
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] 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…)
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
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…)
Ten Tips for Success in the U.S.
Having helped more than a dozen foreign companies set up operations here during the past few years, I am pleased to offer “Ten Tips for Success in the U.S.” on the Downloads page – just Sign Up for Free Downloads using the drop-down list in the sidebar.
Here are the titles of the ten tips, which are discussed in greater detail in the document:
- Work with complementary businesses that are already established here
- Manage overseas personnel on the principle “trust but verify”
- Form your corporation or limited liability company properly
- Be ready for a legal system that is different from the one back home
- Identify and protect intellectual property (IP) that is used here
- Develop detailed employee and independent contractor agreements
- Choose an accountant with international tax experience
- Be prepared to obtain a federal employer identification number
- Conduct due diligence on potential investors
- Agree on business terms before you prepare a written agreement
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.
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).
Top Ten Legal Tips for Independent Contractors
I just made available on the Downloads page (sign up using the drop-down list in the sidebar) “Top Ten Legal Tips for Independent Contractors,” a document that describes how independent contractors can avoid exposing themselves to unnecessary legal risks.
Here are the titles of the ten tips, which are discussed in greater detail in the document:
- Choose the right type of legal entity for your business
- If you choose a corporation or LLC, comply with applicable formalities
- Buy the right types and amounts of insurance
- Identify and protect your intellectual property
- Use your form of client agreement whenever possible
- Be careful when assigning or waiving intellectual property rights
- Be careful when collaborating or subcontracting
- Be careful with nondisclosure / confidentiality agreements
- Avoid oral agreements whenever possible
- Understand what distinguishes independent contractors from employees
For more information about distinguishing independent contractors from employees (tip 10), please see Avoiding the “Independent Contractor” Trap.
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.
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!
Termination Tips
Employment terminations are difficult for both managers and employees. Because of the sensitivities involved and the desire to avoid litigation, managers should take special care in drafting the severance agreement and release and in conducting the termination meeting.
For California employers, one of the most important contract provisions is to require that the employee waive all rights under Section 1542 of the California Civil Code. This Section, which is well-known to attorneys but not necessarily to business managers, states: “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.”
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.
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.
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.
