The Myth of Certainty

Do your clients believe what you tell them ' especially when you say that an agreement is all right to sign, or to use on their e-commerce Web sites?

If they do, then you may well be lucky, because ' you may be surprised to learn ' counsel doing such advising often doesn't share their clients' confidence.

As our legal system and business deals have become more complex, a business attorney must be cautious to do his or her best to try to cross every proverbial t and dot every proverbial i ' because somewhere in the document there may well be an “uncrossed t” or an “ undotted i” to confound the interpretation of that perhaps all-important document.

But in the constantly evolving world of e-commerce, legal contracts may be no more credible than tidbits found in the muck of online fact, fiction and plain nonsense that make sites such as Snopes.com so vital to separating Internet reality from Internet fraud. The truth is that no matter how well an attorney writes a contract, or Web site terms and conditions, another attorney can usually find a way to attack what the first one wrote.

Sometimes the attack will simply be an attempt to try to get a client out of the contract, while other times the attack is intended to try to force a nuisance settlement (because settling is cheaper than the costs of litigating, even when a plaintiff is right). Perhaps the goal is to use the law to change the original deal in a way that did not succeed in the business negotiations. In all these cases, the businessperson may be disappointed that the expensive and carefully created contract did not prevent this further agitation.

Attorneys Are Advisers, Not Oracles

But why doesn't a contract stop the wrangling? In my experience, too often clients see a legal sign-off as the equivalent of an insurance policy ' not only against claims from the opposing party but, more important, also as insurance against having to pay future legal fees on the same deal, especially to defeat such claims. Much like a “black box” or mythological oracle, today a legal review is imbued with a much greater significance and accuracy than it should be afforded, especially since the legal concerns may be totally foreign to the client (and who feels that he or she cannot, therefore, comment on them). For larger corporate clients that require a legal-department approval before a contract has been signed, mandatory wordsmithing often becomes a perfunctory step equated with spell checking, printing and adding a copyright legend.

Instead, the final legal review should be a joint effort of client and attorney to determine whether the document makes sense, not only as a legal contract, but also as a business proposition and marketing tool for the e-commerce firm. The client should verify that the business terms are used and applied as intended, and that nothing is missing, while the attorney should check the document for consistency, both internally (i.e., sections 3 and 13 do not contradict each other, and that kind of thing), and externally, particularly with the law. The former point is especially true in e-commerce, in which the lawyer may not be familiar with the fine points of how deals involving online firms work economically.

Purely from the perspective of avoiding future legal fees, this common overreliance on the part of clients on the ability of counsel to deter frivolous litigation, as well as for drafting and negotiation of business terms, is a general problem in contract law. It is especially pervasive in e-commerce, where so many legal issues are truly uncertain ' not only is the answer to a question that arises unclear, but the very question itself also may not have been reasonably foreseeable at the time the contract, or when the terms and conditions were written. At a time when the legal and cultural standards for online behavior continue to evolve, and legal counseling involves as much judgment as knowledge of law, giving good legal advice is as much of an art as it is a science ' no matter how much a client may want to believe that legal counsel offers more than it can offer, in many ways.

Similarly, in a world with literally thousands of books of federal and state laws, there is often a difference between how a law should be applied, as it is written, and how it is likely to actually be applied in practice. Has anyone been cited for spitting in public recently (or, to move to the 21st century, for Web surfing at an unprotected Internet hot spot)? While an attorney must point out exactly what the law says, and point out the risks to clients who may choose to do otherwise nonetheless, he or she must also provide the practical judgment of advising a client on what to do to advance the client's best interests, and the risks of pushing the envelope of the law (or sometimes even going beyond it, if the client so chooses, with an understanding of the risks).

Everyone Must Read
Contracts Thoroughly

Even worse, though, is the common client perception that he or she does not have to read a legal document because the attorney has been paid to do so, which ignores the fact that the attorney may not be involved in the business operations and therefore may not understand all of the contract's implications. Without a day-to-day knowledge of a cutting-edge business model, counsel may not understand how the e-commerce firm's business operates in ways that could affect the interpretation or validity of the legal language in that document. In addition, the attorney simply may never see the financial implementation of what he or she has written. For example, a client requested a license with a royalty applicable to a narrow category of sales ' and then let its clerical staff erroneously apply it to all sales, leading to a major audit and tax problem when the excess royalty deductions were discovered.

'It's All Black and White'; Oh, Yeah?

To see how this attitude of “the attorney knows best” plays out in contracts, let's begin with what is generally the most “black and white” section of an agreement: the financial terms. Frequently, business executives know exactly what they have in mind when they propose term sheets for business deals to reach the required “meeting of the minds” before incurring costs to turn them into a legal document.

Unfortunately, far too often, what is in the mind of the person on the “receiving” end of a contract and how he or she perceives conditions ' and, those perceptions must, after all, be met ' may well be totally different from what is intended by the party who proposed the contract and the particular conditions at issue. This is especially true if the contract involves complex formulas for computing payments, or relies on financial assumptions that must be built into the contract by a draftsperson who may not fully understand the presence of these formulas and assumptions, much less have a grasp on and command of how to write them.

The Accounting 'GAAP'

Let's look at an example. While attorneys themselves perceive the widely used standard of Generally Accepted Accounting Principles, or GAAP, as its own “black box” for explaining how financial data should be presented, the GAAP standard has its own nuances of interpretation (see, the Web site of the Financial Accounting Standards Board (“FASB”) at www.fasb.org). A simple search on the terms judgment and interpretation at www.fasb.org reveals many instructions to apply “professional judgment” when using the accounting rules. For that reason, a law-school tax professor once told me that the correct answer for an advocate (whether a tax attorney or accountant) to the question, “What is two plus two?” is, “What do you want it to be?” (rather than simply “four”).

More concretely, a business description of a payment term, such as net of expenses, may involve matters of judgment on which particular expenses are eligible to be subtracted (rather than treated as capitalized overhead), and what charges the parties to the deal actually agreed should apply. Of course, this wariness of numbers is nothing new ' even in the 19th century, Mark Twain quoted English politician Benjamin Disraeli's pithy epithet: “There are three kinds of lies: lies, damned lies, and statistics.”

You Get What You Pay for ' Really

Of course, these questions could have been addressed when the contract was drafted by attaching a detailed exhibit ' and should have been settled, if the parties had been willing to incur legal and accounting fees, invest their own time in a project all would readily agree is critically important, anticipate every possible disputed interpretation and create examples, and hammer out a deal on questions that may otherwise never have arisen. Few clients, if any, are likely to authorize such expense, nor is it necessary in most cases, if the parties had a common understanding and good working relationship to resolve issues of interpretation without need for counsel. In other words, the client's reasonable expectation that he or she should not need legal assistance over something that may well be in his or her own area of expertise, an accounting question, for example, could be far less certain than it seemed when the deal was originally signed.

Before-the-Fact Holds More Water
Than After-the-Fact ' Probably

e-Commerce accounting questions simply create another area of uncertainty because the field is, generally, still too young to point to any understanding in the business of how these questions are to be resolved. Because any area in which judgment must be applied can create an opportunity for an attorney to challenge a contract rather than honor its terms, a business seeking to eliminate that ambiguity, in advance, must commit its own time and incur the legal fees necessary to root out all such potential. After 24 years of writing business agreements, I doubt that any amount of effort and money can give that certainty ' and especially not in a field where the possible questions are still evolving.

After the fact, of course, the flexibility of the English language provides plenty of opportunity to challenge virtually any interpretation of contractual language; the party challenging a contract need not have legal or factual certainty for its challenge, but only enough to get by the risk of sanctions and a summary-judgment motion. After that, the other side must choose between the cost of fighting over issues that often (in e-commerce) are neither clear nor legally settled, and/or require expertise and expense to demonstrate to a judge or jury. As a result, even after paying legal fees, the client is faced with making a financial (rather than legal) decision about whether to settle (assuming that settlement will not compromise the firm's long-term values and business plan, such as by undermining its intellectual-property assets, or business ethics).

Adding Plain Old Anxiety
To Plain Old Worry

If something as concrete as the financial section of a contract is filled with ambiguity, then consider how much easier it is to find such stress-inducing uncertainty in language about developing intellectual property rights, or the methods of exploiting them. All the same considerations about the difficulty, if not impossibility, of looking to industry standards and consensus apply all the more forcefully here. The point of this article is not to list all the unknown areas of the law relating to intellectual property in online commerce, or legal issues in e-commerce; indeed, simply looking at the headlines in the archives of this publication and its sibling newsletters, along with the latest articles in the technology section of the business press, will certainly allow that.

As long as entrepreneurs rush to bring inventions to the market to gain competitive advantage, legal questions about ownership and the right to use new technologies may never be fully answered (at least until litigated or resolved in further negotiations). As a result, no online business can ever comfortably assume that its legal needs are fully paid for and unlikely to arise again. While this perhaps is a boon to business and IP attorneys who, for instance, will actually be needed during the current recession, unlike their real-estate colleagues, it is of no comfort to business planners or CFOs who need cost certainty for planning and cash-flow needs (and who would rather spend scarce cash to develop or finance new business, rather than spend it on an overhead cost).

Going Online Often Stands
'Tradition' on Its Head

But the scope of legal uncertainty goes far beyond the technical limits of intellectual property law and the rights to use cutting-edge technologies or determining ownership of knowledge that can generate revenue. Online, traditional business principles become very untraditional questions. Witness the recent imbroglio involving well known Web sites' apparent grabs for ownership of user-generated content at Facebook.com and Adobe. Often, those questions implicate use of entirely separate bodies of law in an e-commerce context, such as the ongoing challenges of protecting privacy rights and confidential information against those with financial motivation to find holes through which to steal it.

e-Commerce attorneys must also deal with regulators' interest in how they market their sites through increasingly more effective techniques, such as the Federal Trade Commission's ongoing scrutiny of behavioral advertising, which relies on quiet monitoring of consumers' online activity and combining it with other tracking data to profile customers. A few online firms' sloppiness in handling privacy issues has made multistate privacy compliance its own business.

Also, the development of online worlds such as Second Life has led to the creation of virtual law offices, practicing virtual law in the online world ' creating a situation of “uncertainty squared,” a twist on traditional choice-of-law problems. Those of us left in the here and now have to reason through not only what current U.S. law would say on the issue of the effect of the agreements for participation in Second Life, but also what “Linden Law” may say on the particular question at hand.

(Editor's note: For more on virtual worlds and the law, see, “A Passport to Virtual Worlds” (www.ljnonline.com/issues/ljn_internetlaw/6_6/news/150608-1.html) and “Where the Law Stands on Virtual Property,” (www.ljnonline.com/issues/ljn_internetlaw/6_5/news/150452-1.html) in the June 2008 and May 2008 editions of Internet Law & Strategy, respectively; and “Ways to Avoid Electronic Contract Killers in Second Life,” in the December 2007 edition of LJN's Equipment Leasing Newsletter, (www.ljnonline.com/issues/ljn_equipleasing/26_11/news/149743-1.html).)

Even More Twists

Other recent developments in online activity have created the same problem of uncertainty for decision-makers, without the burden of having to create a cyberpersona. For example, in the pre-recession days when firms could raise money from investors, firms and their counsel alike pored over securities offering documents to comply with complex but highly detailed Securities and Exchange Commission (“SEC”) rules. As long as all statements in the offering documents were true, the top folks at the firm could be reasonably comfortable that they could defeat the inevitable lawsuit from a disappointed investor whose returns did not meet his or her expectations.

Some Welcome Comments from the SEC

However, the SEC recently provided updated guidance on its rules on using Web sites to provide information to investors (see, www.sec.gov/rules/interp/2008/34-58288.pdf). (The SEC had previously provided guidance on application of other aspects of securities law to Internet activity, in 2005 and 2000.) In other words, what has historically been perhaps the most “button-downed” area of corporate law ' disclosure to investors in public companies ' now has a new set of rules (although they are intended to clarify existing law as applied to a new medium, rather than to change the law, other than changing a prior interpretive position to recognize the permissibility of Web-site disclosure).

Nonetheless, the SEC noted, in footnote 6, that: “We do not view the guidance in this release as a delineation of the outer limits of how technology can or should be used on company Web sites.” Therefore, an area that had once been settled, albeit unsatisfactorily with the advent of increasing Internet use, now will require additional, specialized legal review that had not necessarily been required in the past.

(Editor's note: For more on the SEC's guidelines, see, “SEC Guidance on Company Web Site Use,” in the November edition of e-Commerce Law & Strategy, at www.ljnonline.com/issues/ljn_ecommerce/25_7/news/151227-1.html.)

Ah, Yes, My 'Friend';
Social Networking Web Sites

Similarly, the same SEC guidance addressed another increasing source of gray hair for corporate counsel: the explosion of social-networking sites, now used (or misused) in business contexts (such as the hot-at-the-moment site Twitter.com, as well as the more “traditional” Facebook.com, or LinkedIn.com and the omnipresent corporate blogs).

Again, corporate counsel must develop rules on the fly to keep up with developments online. That is not new ' as I have long written in this newsletter, e-commerce and technology law usually involve applying traditional principles with traditional ways of thinking, but in new contexts, rather than making “new law.”

Nonetheless, it has become increasingly harder to satisfy a client's request for comfort in application of the law to its business plans that involve online activity.

(Editor's note: For more on social networking and e-commerce, see, “Lawful Data-Mining of Social Networks” on page 1 of this issue, and “Social Networking and Litigation,” in the January edition of e-Commerce Law & Strategy, at www.ljnonline.com/issues/ljn_ecommerce/ 25_9/news/151577-1.html.)

Not Oracles, But Still Necessary

All of this leads to the one area of certainty in e-commerce law that will not change: the need for the seasoned judgment of counsel to bridge these gaps between where the law is clear, where it is unknown and the need for immediate action that falls between them.

The challenge for e-commerce businesses and their counsel is to identify where on that spectrum a particular issue lies. Is the attorney certain and using his or her best judgment to make the best business decision based on the law as it is?