An e-Cheapskate's Guide to Contracts

This certainty presents the practical problem that is the topic of this article ' when confronted by contract after contract, day after day, which ones should an e-commerce executive actually read, so that she can spend some time running the business requiring all those contracts, and maybe even make some money?

Contract Triage

Perhaps that question is best rephrased as a form of legal triage: Which contracts will help the most, and which could harm the business if not read? Of the flood of contracts confronting an e-commerce executive, ask:

• Which ones must be read?;
• Which ones can be put off?;
• Which ones can be delegated to other executives?; and
• Which ones can staff handle perfectly competently without involvement of ownership or senior management?

From another perspective, when can (or should) a business executive try to revise legal documents herself, and when should the firm's scarce dollars be splurged on legal help? Obviously, my choice of words suggests my conclusion: I believe that too many executives immediately jump to the conclusion that anything involving law must be done by a lawyer.

In fact, I believe that a business owner can and, indeed must, review and, if necessary, revise, perhaps the most important points of a contract before the firm's lawyer has billed even a tenth of an hour to read one word of the documents.

Lawyers Know the Law

Typically, counsel does not know all the business terms underlying an agreement, much less the specific points of any deal, so it is simply a waste of everyone's time to have counsel on both sides run their meters while the business terms are still subject to negotiation. Instead, the parties can capture their business terms in a simple document, without legal structure, such as a term sheet, or letter of intent, or even a signed and countersigned proposal. Until the parties reach that level of agreement, counsel should stand down, to be certain that a “meeting of the minds” exists. (Of course, there is a role for counsel in phrasing the business terms, pointing out gaps or inconsistencies in the deal terms, and supplying her own seasoned judgment, but that type of commentary is much less expensive than the typical intense drafting seen in negotiation of the actual deal agreement.)

Moreover, unless counsel is intimately familiar with the client's business ' particularly for e-commerce and other technology firms whose business model is developing day-by-day ' an attorney may simply not know enough about how the firm operates, day-to-day, to comment intelligently on a business deal, especially in its initial stages. Certainly, good technology counsel should have sufficient understanding of her client's business to understand and work with contract terms, but a client should not presume that its lawyer has the same degree of sophistication about the business as the client has itself.

Don't Go Too Far

On the other hand, I have seen the risks of what can happen when clients mistakenly assume their counsel has the same knowledge about clients' business as the clients themselves have. For example, our firm once handled a matter where our client was buying a business, and one of the most important assets and liabilities in that deal was a fairly expensive lease. The client had specifically negotiated terms for how to dispose of this lease going forward, which involved getting some money back if it was not possible to get out of the lease in a particular amount of time.

However, when the deal closed, the client was furious with its lawyer, because the client felt that the attorney had never asked if his client could actually keep those dates in relation to the lease ' and, as it turned out, the negotiations took so long that the time necessary to take advantage of the deal for getting out of the lease had passed. The client was frustrated that the lawyer didn't realize how long it would take to close a facility, which of course is outside a typical non-real estate lawyer's expertise and experience. When he asked, “Don't you know how long it takes to close a warehouse?” the answer was obviously no, because that is not what most lawyers do. In such a situation, counsel reasonably expects her client to highlight business terms that do not work or that create issues.

In the same vein, one of our clients was looking at an eight-digit purchase of a business that seemed like a great deal on paper. But when I read through the agreement, typical multi-page boilerplate that included the lists of assets being sold, I noticed that there was nothing in the agreement about the target's customer list. Our client had assumed that it would be included, but never specifically asked about it. When we asked seller's counsel, we learned that the book of business was not included ' and the deal died immediately (but only after thousands in legal fees).

These stories illustrate that difficulties can occur when something that was very clear and beyond a question in the client's mind wound up costing it quite a bit of money, simply because that understanding was never properly communicated to its lawyer. When a client relies entirely on its attorney to handle the contract, it forfeits the opportunity to spot critical business points that have been omitted. Counsel must think about the contract from the client's perspective, even if it is unfamiliar to her ' and the client must try to understand when counsel does not have any basis or industry experience to be able to take that perspective.

Don't Assume, Especially In Tech Business

Similarly, it is often just as important for clients to consider (and for counsel to ask) about what is not being stated in an agreement: what business terms the client assumes will be part of the deal, for instance, as reading what is presented. That kind of questioning can often reveal key business points in relation to a technology deal. The client may assume that certain terms are part of the deal, but his opponent and counsel may have an entirely different view; one of counsel's roles is to identify such differences in perception as early as possible, when they can be fixed by negotiation (and included in the closing agreements), rather than having both sides realize a fundamental difference of understanding in litigation (after the fact of an expensive loss).

Reviewing Contracts

Looking At IP in Deals

Let me next turn to specific considerations for reviewing particular types of contracts. For example, contracts involving intellectual property, and the legal requirements to protect it, can be so far removed from the experience of typical entrepreneurs that a firm whose market edge depends on working with intellectual property rights should certainly rely heavily on its law firm's expertise in such areas.

If there were ever an area in today's economy that demands specialized knowledge, especially at the intersection of law and technology, it is intellectual property law; an area with doctrines and principles containing several subspecialty practice areas with which not even skilled attorneys can always assist. A trademark specialist may have to refer patent claims to a colleague. Protection of intellectual property in international deals may require consultation with firms that have an established network of local intellectual property counsel in key countries.

Patent, Trademark and Copyright

Although the U.S. Patent and Trademark office has introduced some flexibility with filing deadlines (a late filing is now permitted for some trademark-maintenance filings, for example, with payment of a hefty late fee), patent law can be an “all or nothing” approach, especially where filing deadlines are concerned.

Also, in all three traditional areas of IP practice ' patent, trademark and copyright ' there are many technical rules that would frustrate a typical entrepreneur who does not have the same knowledge base an attorney would have developed in law school, and, more important, prior practice with government intellectual property regulators. When the risk of a mistake can be fatal ' loss of a patent, for example, or the inability to use IP rights effectively to combat infringers because of technical errors made in the registration process ' a DIY contracting approach may just cause the business to become DOA.

Personnel Issues

Another area warrants business leaders' “personnel” attention: contracts with key employees. While the legal jargon about ownership of intellectual property rights and prohibiting employees from using the company's IP should be left to the lawyers, the crucial role for an executive is simply making sure that these agreements are in place, before any employee works on a creative matter.

Many employees in technology firms are reluctant to sign any type of agreement that limits their freedom, and star performers can often get away with not signing an otherwise mandatory form. This, however, is one area where management must put its foot down, and insist that everyone sign the form as a precondition to working for the company ' beginning with themselves. What better way of showing a firm's commitment to protecting intellectual property than leading by example by letting everyone know that the owners have signed the same agreements as they require employees to sign?

Governance

Still another area in which counsel's experience may trump a business owner's common sense involves “governance” issues: How rights to control and operate a firm are allocated when forming a new business. Such concerns will not be an issue for a one-person startup, but will matter whenever a firm attracts investors whose motivations (profit) may be different from those of a founder interested in building a business for the long term, or to provide a legacy of jobs for her family. Documents describing how a firm with a complex ownership structure will be managed and run should be reviewed by counsel experienced in writing them.

Unchangeable Terms

Of course, some agreements aren't worth a person's time, because she won't be able to change them. For such “contracts of adhesion,” like many “click to accept” online agreements, or preprinted “deemed acceptance” forms, nothing can be done to change the terms, no matter how onerous, unfair or inaccurate they may be. The other side may argue that it has no authority to change what its lawyers have written in the form, or that the effort necessary to go to counsel to change it will cost too much, and take too long.

In these cases, business owners must decide whether the bad terms are truly “deal killers,” or if they can live with the terms to get the benefits of the agreement. In some cases, however, a very limited side letter may be negotiated. The concerned party is not trying to alter the form, but trying to get an agreement on a critical point ' a right to a written notice of default and opportunity to cure it, for example, or a longer grace period on payments. Another strategy for business owners to negotiate form agreements is to concede the legal points, and focus just on the best economic terms ' better pricing, or other true business points not covered by the legal boilerplate.

Marketing and Promotion

Online marketing and promotion is another area in which business owners may not have enough experience to recognize important legal points. The law of how a firm may promote itself online, through such techniques as linking to other sites, use of behavioral marketing, search engine optimization and other “black arts” is constantly evolving. Privacy rights override all these concerns. Even experienced business lawyers may not recognize these issues, or be current on how they have developed (unless, of course, they are a regular reader of e-Commerce Law and Strategy).

Financial Instruments and Products

Businesses in regulated industries must also be wary of trying to do too much without professional guidance. Anything involving the sale of insurance, investments or other financial products has for many years been highly regulated, long before anyone even dreamed of the Internet. The fact that such sales now take place online has not changed the importance of complying with such rules.

Professional Licensing

Similarly, transactions involving licensed professions, particularly medicine, are subject to rules that may be unfamiliar to the persons practicing them, and often may be counter-intuitive. Professionals who must be licensed to work ' doctors, accountants and many less well known fields that require a state certification of competency ' must strictly comply with their own state's rules on how they may advertise themselves, even if those rules may not have been updated to reflect the realities of modern commerce. Interstate practices, cross-border marketing (across states lines, and in different countries) and multidisciplinary practices that cut across traditional regulatory boundaries may require particular website disclosures, or other practice limitations.

Don't Rely on Counsel for All

In closing, perhaps the main point I hope that clients and lawyers alike learn from this article is that there are some contracts that a client must read herself, especially those requiring business and technology judgment, rather than legal expertise. Often, technology contracting entails looking at new types of business relationships, as companies and technologies develop “on the fly,” issues that counsel may not have thought of, or even recognized as a consideration, may turn out to be the most important factors in a particular deal.

Even worse, the law may often simply not have an answer to all disputes over technology issues. Some case law may be close to the problem at hand and useful by analogy (especially to guide counsel to a seasoned judgment about the best course of action, combining both legal and business insight), but clients must understand that a definitive answer is not always possible.

Conclusion

Unfortunately, some clients do not have realistic expectations in this area, especially if they have not had to deal with challenges in the past. They may even believe that because they are paying a lawyer a certain amount of money per hour, she should always have the right answer, instantly.

In reality, there is not always a “right” answer for e-commerce questions. Counsel can give various choices for a course of action, as well as suggestions and the reasons behind them, but the client herself must choose to follow those suggestions, or not. Instead, technology disputes are often best settled through judgment calls based on knowing the parameters of litigation in that topic, and combining that knowledge with an evaluation of the costs of pursuing a matter. Clients who hear that attorneys make decisions with respect to their disputes not on the basis of the law but on the basis of intuition, plus the size of the client's wallet, do not always find that to be a very palatable answer, but it is a realistic one.

In other words, tech clients must understand that even though they are running a technology company, it is still a business. The firm may have innovative, cutting-edge technology, but it still has to make a buck and turn a profit, and treat legal concerns as they would any other expense.

So, when evaluating whether a particular contract will be worth the entrepreneur's own time and effort to read and negotiate, she must use the time-honored negotiating skills of a good poker player and decide that from time to time, she can “hold 'em,” recognizing that the contract is worth the time and effort of negotiating, with a realistic likelihood that it can be improved through the business owner's attention, with the assistance of e-commerce counsel.

Stanley P. Jaskiewicz, a business lawyer, helps clients solve e-commerce, corporate, contract and technology-law problems, and is a member of e-Commerce Law & Strategy's Board of Editors. He can be reached at the Philadelphia law firm of Spector Gadon & Rosen P.C., at [email protected], or 215-241-8866.

Online, it often seems there is no end to contracts a business must e-sign. Since the ease of generating electronic documents has eliminated the cost and hassle of printing paper versions, agreements in electronic formats have proliferated ' even more than the words in the contracts themselves.

In an increasingly online world, however, it seems there is little one can do that does not require a contract, or at least a click-to-accept or terms-and-conditions agreement. Such contracts typically must be approved before proceeding to the next screen, whether to shop, to be entertained or simply to seek information.

Whether or not the e-preneur likes having to deal with these relics of the paper era, no business owner, online or off, should realistically expect to get away without reading enormous amounts of legal formalities on an almost-daily basis (or at least being held bound by them, whether she actually reads them, or not).

This certainty presents the practical problem that is the topic of this article ' when confronted by contract after contract, day after day, which ones should an e-commerce executive actually read, so that she can spend some time running the business requiring all those contracts, and maybe even make some money?

Contract Triage

Perhaps that question is best rephrased as a form of legal triage: Which contracts will help the most, and which could harm the business if not read? Of the flood of contracts confronting an e-commerce executive, ask:

• Which ones must be read?;
• Which ones can be put off?;
• Which ones can be delegated to other executives?; and
• Which ones can staff handle perfectly competently without involvement of ownership or senior management?

From another perspective, when can (or should) a business executive try to revise legal documents herself, and when should the firm's scarce dollars be splurged on legal help? Obviously, my choice of words suggests my conclusion: I believe that too many executives immediately jump to the conclusion that anything involving law must be done by a lawyer.

In fact, I believe that a business owner can and, indeed must, review and, if necessary, revise, perhaps the most important points of a contract before the firm's lawyer has billed even a tenth of an hour to read one word of the documents.

Lawyers Know the Law

Typically, counsel does not know all the business terms underlying an agreement, much less the specific points of any deal, so it is simply a waste of everyone's time to have counsel on both sides run their meters while the business terms are still subject to negotiation. Instead, the parties can capture their business terms in a simple document, without legal structure, such as a term sheet, or letter of intent, or even a signed and countersigned proposal. Until the parties reach that level of agreement, counsel should stand down, to be certain that a “meeting of the minds” exists. (Of course, there is a role for counsel in phrasing the business terms, pointing out gaps or inconsistencies in the deal terms, and supplying her own seasoned judgment, but that type of commentary is much less expensive than the typical intense drafting seen in negotiation of the actual deal agreement.)

Moreover, unless counsel is intimately familiar with the client's business ' particularly for e-commerce and other technology firms whose business model is developing day-by-day ' an attorney may simply not know enough about how the firm operates, day-to-day, to comment intelligently on a business deal, especially in its initial stages. Certainly, good technology counsel should have sufficient understanding of her client's business to understand and work with contract terms, but a client should not presume that its lawyer has the same degree of sophistication about the business as the client has itself.

Don't Go Too Far

On the other hand, I have seen the risks of what can happen when clients mistakenly assume their counsel has the same knowledge about clients' business as the clients themselves have. For example, our firm once handled a matter where our client was buying a business, and one of the most important assets and liabilities in that deal was a fairly expensive lease. The client had specifically negotiated terms for how to dispose of this lease going forward, which involved getting some money back if it was not possible to get out of the lease in a particular amount of time.

However, when the deal closed, the client was furious with its lawyer, because the client felt that the attorney had never asked if his client could actually keep those dates in relation to the lease ' and, as it turned out, the negotiations took so long that the time necessary to take advantage of the deal for getting out of the lease had passed. The client was frustrated that the lawyer didn't realize how long it would take to close a facility, which of course is outside a typical non-real estate lawyer's expertise and experience. When he asked, “Don't you know how long it takes to close a warehouse?” the answer was obviously no, because that is not what most lawyers do. In such a situation, counsel reasonably expects her client to highlight business terms that do not work or that create issues.

In the same vein, one of our clients was looking at an eight-digit purchase of a business that seemed like a great deal on paper. But when I read through the agreement, typical multi-page boilerplate that included the lists of assets being sold, I noticed that there was nothing in the agreement about the target's customer list. Our client had assumed that it would be included, but never specifically asked about it. When we asked seller's counsel, we learned that the book of business was not included ' and the deal died immediately (but only after thousands in legal fees).

These stories illustrate that difficulties can occur when something that was very clear and beyond a question in the client's mind wound up costing it quite a bit of money, simply because that understanding was never properly communicated to its lawyer. When a client relies entirely on its attorney to handle the contract, it forfeits the opportunity to spot critical business points that have been omitted. Counsel must think about the contract from the client's perspective, even if it is unfamiliar to her ' and the client must try to understand when counsel does not have any basis or industry experience to be able to take that perspective.

Don't Assume, Especially In Tech Business

Similarly, it is often just as important for clients to consider (and for counsel to ask) about what is not being stated in an agreement: what business terms the client assumes will be part of the deal, for instance, as reading what is presented. That kind of questioning can often reveal key business points in relation to a technology deal. The client may assume that certain terms are part of the deal, but his opponent and counsel may have an entirely different view; one of counsel's roles is to identify such differences in perception as early as possible, when they can be fixed by negotiation (and included in the closing agreements), rather than having both sides realize a fundamental difference of understanding in litigation (after the fact of an expensive loss).

Reviewing Contracts

Looking At IP in Deals

Let me next turn to specific considerations for reviewing particular types of contracts. For example, contracts involving intellectual property, and the legal requirements to protect it, can be so far removed from the experience of typical entrepreneurs that a firm whose market edge depends on working with intellectual property rights should certainly rely heavily on its law firm's expertise in such areas.

If there were ever an area in today's economy that demands specialized knowledge, especially at the intersection of law and technology, it is intellectual property law; an area with doctrines and principles containing several subspecialty practice areas with which not even skilled attorneys can always assist. A trademark specialist may have to refer patent claims to a colleague. Protection of intellectual property in international deals may require consultation with firms that have an established network of local intellectual property counsel in key countries.

Patent, Trademark and Copyright

Although the U.S. Patent and Trademark office has introduced some flexibility with filing deadlines (a late filing is now permitted for some trademark-maintenance filings, for example, with payment of a hefty late fee), patent law can be an “all or nothing” approach, especially where filing deadlines are concerned.

Also, in all three traditional areas of IP practice ' patent, trademark and copyright ' there are many technical rules that would frustrate a typical entrepreneur who does not have the same knowledge base an attorney would have developed in law school, and, more important, prior practice with government intellectual property regulators. When the risk of a mistake can be fatal ' loss of a patent, for example, or the inability to use IP rights effectively to combat infringers because of technical errors made in the registration process ' a DIY contracting approach may just cause the business to become DOA.

Personnel Issues

Another area warrants business leaders' “personnel” attention: contracts with key employees. While the legal jargon about ownership of intellectual property rights and prohibiting employees from using the company's IP should be left to the lawyers, the crucial role for an executive is simply making sure that these agreements are in place, before any employee works on a creative matter.

Many employees in technology firms are reluctant to sign any type of agreement that limits their freedom, and star performers can often get away with not signing an otherwise mandatory form. This, however, is one area where management must put its foot down, and insist that everyone sign the form as a precondition to working for the company ' beginning with themselves. What better way of showing a firm's commitment to protecting intellectual property than leading by example by letting everyone know that the owners have signed the same agreements as they require employees to sign?

Governance

Still another area in which counsel's experience may trump a business owner's common sense involves “governance” issues: How rights to control and operate a firm are allocated when forming a new business. Such concerns will not be an issue for a one-person startup, but will matter whenever a firm attracts investors whose motivations (profit) may be different from those of a founder interested in building a business for the long term, or to provide a legacy of jobs for her family. Documents describing how a firm with a complex ownership structure will be managed and run should be reviewed by counsel experienced in writing them.

Unchangeable Terms

Of course, some agreements aren't worth a person's time, because she won't be able to change them. For such “contracts of adhesion,” like many “click to accept” online agreements, or preprinted “deemed acceptance” forms, nothing can be done to change the terms, no matter how onerous, unfair or inaccurate they may be. The other side may argue that it has no authority to change what its lawyers have written in the form, or that the effort necessary to go to counsel to change it will cost too much, and take too long.

In these cases, business owners must decide whether the bad terms are truly “deal killers,” or if they can live with the terms to get the benefits of the agreement. In some cases, however, a very limited side letter may be negotiated. The concerned party is not trying to alter the form, but trying to get an agreement on a critical point ' a right to a written notice of default and opportunity to cure it, for example, or a longer grace period on payments. Another strategy for business owners to negotiate form agreements is to concede the legal points, and focus just on the best economic terms ' better pricing, or other true business points not covered by the legal boilerplate.

Marketing and Promotion

Online marketing and promotion is another area in which business owners may not have enough experience to recognize important legal points. The law of how a firm may promote itself online, through such techniques as linking to other sites, use of behavioral marketing, search engine optimization and other “black arts” is constantly evolving. Privacy rights override all these concerns. Even experienced business lawyers may not recognize these issues, or be current on how they have developed (unless, of course, they are a regular reader of e-Commerce Law and Strategy).

Financial Instruments and Products

Businesses in regulated industries must also be wary of trying to do too much without professional guidance. Anything involving the sale of insurance, investments or other financial products has for many years been highly regulated, long before anyone even dreamed of the Internet. The fact that such sales now take place online has not changed the importance of complying with such rules.

Professional Licensing

Similarly, transactions involving licensed professions, particularly medicine, are subject to rules that may be unfamiliar to the persons practicing them, and often may be counter-intuitive. Professionals who must be licensed to work ' doctors, accountants and many less well known fields that require a state certification of competency ' must strictly comply with their own state's rules on how they may advertise themselves, even if those rules may not have been updated to reflect the realities of modern commerce. Interstate practices, cross-border marketing (across states lines, and in different countries) and multidisciplinary practices that cut across traditional regulatory boundaries may require particular website disclosures, or other practice limitations.

Don't Rely on Counsel for All

In closing, perhaps the main point I hope that clients and lawyers alike learn from this article is that there are some contracts that a client must read herself, especially those requiring business and technology judgment, rather than legal expertise. Often, technology contracting entails looking at new types of business relationships, as companies and technologies develop “on the fly,” issues that counsel may not have thought of, or even recognized as a consideration, may turn out to be the most important factors in a particular deal.

Even worse, the law may often simply not have an answer to all disputes over technology issues. Some case law may be close to the problem at hand and useful by analogy (especially to guide counsel to a seasoned judgment about the best course of action, combining both legal and business insight), but clients must understand that a definitive answer is not always possible.

Conclusion

Unfortunately, some clients do not have realistic expectations in this area, especially if they have not had to deal with challenges in the past. They may even believe that because they are paying a lawyer a certain amount of money per hour, she should always have the right answer, instantly.

In reality, there is not always a “right” answer for e-commerce questions. Counsel can give various choices for a course of action, as well as suggestions and the reasons behind them, but the client herself must choose to follow those suggestions, or not. Instead, technology disputes are often best settled through judgment calls based on knowing the parameters of litigation in that topic, and combining that knowledge with an evaluation of the costs of pursuing a matter. Clients who hear that attorneys make decisions with respect to their disputes not on the basis of the law but on the basis of intuition, plus the size of the client's wallet, do not always find that to be a very palatable answer, but it is a realistic one.

In other words, tech clients must understand that even though they are running a technology company, it is still a business. The firm may have innovative, cutting-edge technology, but it still has to make a buck and turn a profit, and treat legal concerns as they would any other expense.

So, when evaluating whether a particular contract will be worth the entrepreneur's own time and effort to read and negotiate, she must use the time-honored negotiating skills of a good poker player and decide that from time to time, she can “hold 'em,” recognizing that the contract is worth the time and effort of negotiating, with a realistic likelihood that it can be improved through the business owner's attention, with the assistance of e-commerce counsel.

Stanley P. Jaskiewicz, a business lawyer, helps clients solve e-commerce, corporate, contract and technology-law problems, and is a member of e-Commerce Law & Strategy's Board of Editors. He can be reached at the Philadelphia law firm of Spector Gadon & Rosen P.C., at [email protected], or 215-241-8866.