AS-IS Blog

Using Contracts to Deal with Unknowns: Part 2 –“Unknown Unknowns” (Technology Law Letter #9)

2009-10-23T19:50:09Z

In the previous issue of this newsletter, I discussed how to use contracts to protect against “known unknowns,” those events and circumstances for which you know the general category of uncertainty, but not the outcome.

This article covers “unknown unknowns,” those events and circumstances that you cannot foresee.

Here are several approaches to deal with unknown unknowns in a contract relationship:

1. Representations, warranties and indemnification approach. The previous issue of this newsletter defined and discussed how representations, warranties and indemnities can be used in a contract to protect you against known unknowns. By drafting representations, warranties and indemnification broadly, you often can cover many unknown unknowns as well.

For example, indemnification could cover very broadly “any act or omission of the other party in connection with the relationship or the contract.” That of course does not cover events or circumstances beyond the other party’s acts or omissions (such as a change in government regulations). It also does not cover all threats to the existence of a party (such as bankruptcy of a company or death of an individual), which may be covered by bankruptcy, trusts & estates and family law, as I discussed before.

2. Procedural approach. Some unknown unknowns can be dealt with by adding procedural provisions to your contracts: escalation, mediation or arbitration. (These provisions work for known unknowns too. I see them often in deals with high complexity or high uncertainty.)

In essence, the parties control their own mechanisms for resolving disputes, to avoid going to court over unexpected circumstances.

Escalation mechanisms provide a means for the parties to raise (or “escalate”) issues from the working group level to the senior executive level, with the assumption that senior business people can defuse potential lawsuits.

Mediation uses a third party to help the parties understand their differences and negotiate a resolution.

Arbitration uses a privately hired third party (often a retired judge) to resolve disputes outside of the public court system. Often, to provide greater certainty, the arbitration clause can limit the arbitrator’s power and authority, such as limiting the scope of document discovery or ability to impose non-monetary penalties (injunctions).

3. Substitution of parties approach. You can seek to substitute someone else in the relationship in place of the original (non-performing) party. For example, permitting a contract to be sold and assigned to someone else enables a third party to assume the performance obligations and step into the shoes of the non-performer.

A third party guarantee has a similar effect, but it generally covers only the payment of money – the third party’s money (the guarantor’s) effectively replaces the money of the non-per-former. Insurance can also serve this purpose to a limited extent. See my article, “Contract Provisions for Troubled Times: Part 3 – How Third Parties Can Assure Performance” (Technology Law Letter #3). This can be a good strategy, unless the guarantor cannot fulfill its commitments or ceases to exist.

4. Hedging approach. You may choose to deal with more than one party.

In the field of procurement, this means finding a second source. If one of the parties ceases to exist, you have limited your downside and can obtain performance from others.

Of course, the 2008 economic meltdown demonstrates that there can be nowhere to hide if all the players in the industry sink at the same time.

A similar approach is to have a contract with a major vendor, but separately make a small investment in a new, unproven technology provider. Although the main contract should fully cover the parties’ relationship, the relationship with the small newcomer provides a hedge against unknown shifts in technology or unexpected problems with the major supplier. It also might deter the major supplier from demanding unreasonable prices.

5. Robust “we’ll-deal-with-it” approach. Instead of trying to predict future outcomes, focus on becoming a robust, resilient player. Examples of good defenses against the unexpected include:

Developing contingency plans to address categories of risks.
Creating a culture of resilience and resourcefulness that recognizes that tech-nology, the business and the market are constantly changing, and that any obstacle will be worked around and overcome.
Emphasizing flexibility and speed of execution.
Developing strategic relationships with industry organizations and market leaders.

For more examples of unknown unknowns, see the book The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb .

It’s impossible to foresee every event that can affect a contract. The five approaches above will help you overcome circumstances that you cannot foresee.

Using Contracts to Deal with Unknowns: Part 1 –“Known Unknowns” (Technology Law Letter #8)

2009-09-23T16:22:29Z

Issue #8 of Harry Boadwee’s Technology Law Letter is available. This month’s lead article is: Using Contracts to Deal with Unknowns: Part 1 –“Known Unknowns.” Next month, Part 2 will cover “Unknown Unknowns.”

For a free subscription, please visit www.BoadweeLaw.com/subscribe.

I welcome your comments and suggestions!

Enter the Hyperwrap Agreement: A New Page in Online Contracts

2009-09-29T05:25:39Z

Software and internet contracts for years have been created by means of “shrinkwrap,” “clickwrap” and even “browsewrap” agreements (although the enforceability of “browsewrap” agreements is somewhat doubtful).

Two recent cases from Illinois courts now recognize a type of contract called a “hyperwrap” agreement. For the business implications, you can scroll to the bottom of this posting.

As everyone knows, contracts for software and web sites can be very long, with pages and pages of text. These contracts are often displayed where space is at a premium - e.g., on order forms or web site registration pages. In the past, many of these pages used a “scroll box” which displays the text of the contract in a separate window with a scroll bar. The user had to move the scroll bar up and down to see the entire text of the contract. Scroll boxes require programming to develop and maintain. By contrast, it is much simpler to use a hyperlink to a second web page with the contract terms.

The issue facing the courts in these cases was whether displaying a hyperlink to the terms on another page was conspicuous enough. In other words, were the contract terms hidden from the user (similar to terms hidden in extremely small “mouse” type), or were they visible enough that the party should have seen and read them? The courts held that the terms were visible enough because a hyperlink is like turning the page of a paper contract.

In both cases, although the hyperlink was repeated several times to the customer before acceptance, this was not the deciding factor.

Instead, both courts focused on the fact that the blue hyperlink could be easily distinguished from the background text.

In the leading case, Hubbert v. Dell Corp., 359 Ill. App. 3d 976 (5th Dist. 2005), the court stated that “[t]he blue hyperlinks … should be treated the same as a multipage written paper contract. The blue hyperlink simply takes a person to another page of the contract, similar to turning the page of a written paper contract. … [T]he hyperlink’s contrasting blue type makes it conspicuous. Common sense dictates that because the plaintiffs were purchasing computers online, they were not novices when using computers. A person using a computer quickly learns that more information is available by clicking on a blue hyperlink.”

The recent case, PDC Laboratories Inc. v. Hach Co., No. 09-1110 (C.D. Ill., Aug. 25, 2009) hailed Hubbert as “the leading authority in ‘hyperwrap’ cases.” It went on to state: “this contrasting text is sufficient to be considered conspicuous … because it is not the repetition of the display of a term that is determinative but the contrast of a term.”

The courts explicitly recognized the metaphor that clicking on a hyperlink is like turning a page. Thomas O’Toole, in the Ecommerce and Tech Law Blog observed that “if you embrace the metaphor that hyperlinks are the customary way of ‘turning a page’ online, then it doesn’t seem unfair at all to expect parties to ‘turn’ each ‘page’ of their online contracts.”

In other words, good user interface design actually aligns with the right legal result.

Hubbert and PDC leave open a question concerning contract acceptance. Under these cases, hyperwrap agreements lie on a spectrum between browsewrap agreements (which have no separate acceptance mechanism), and clickwrap agreements (which have a separate and explicit mechanism for acceptance, such as checking a box or pressing an “I Accept” button). The PDC court expressly distinguished the clickwrap cases. However, in both Hubbert and PDC there was a mechanism to highlight to the customer that the terms would be binding. In Hubbert, most of the order forms in dispute had a separate notice that said “All sales are subject to Dell’s Term[s] and Conditions of Sale.” In PDC, the terms were specifically referenced in the final step of the order process which said, “STEP 4 of 4: Review terms, add any comments, and submit order.”

What these cases mean for business people:

It is acceptable to place contract terms on a separate page if they can be easily found via a hyperlink.

The hyperlink needs to be obvious in a customary way, like a paper page-turn. At a minimum, a standard blue hyperlink appears to be acceptable. However, some creative designers prefer other hyperlink designs, and those alternative designs may not be acceptable. Better to use the standard hyperlinking display conventions where possible. Keep this in mind also with paper documents that use hyperlinks to incorporate terms.

For acceptance, it is best to use a “clickwrap” mechanism, such as checking a box or pressing an “I Accept” button. However, it appears that courts are becoming receptive to other methods of bringing the terms and conditions to the attention of the other party, particularly if they are emphasized in the proper place in the contracting process.

The Three Critical Negotiations in Any Contract (Technology Law Letter #7)

2009-07-27T21:13:14Z

Issue #7 of Harry Boadwee’s Technology Law Letter is now available.

The lead article is: The Three Critical Negotiations in Any Contract.

For a free subscription, please visit www.BoadweeLaw.com/subscribe.

I welcome your comments and suggestions!

The Most Useful Contract Provision? (Technology Law Letter #6)

2009-05-29T20:13:42Z

What’s the most useful clause in a contract?

Find out my view in the latest edition of Harry Boadwee’s Technology Law Letter. I also discuss the launch of my new online Technology Contracts Glossary.

For a free subscription, please visit www.BoadweeLaw.com/subscribe.

I welcome your comments and suggestions!

Should You Sign Your Term Sheets? The Power of Commitment and Consistency (Technology Law Letter #5)

2009-04-22T17:59:55Z

Issue #5 of Harry Boadwee’s Technology Law Letter is now available.

The lead article is: Should You Sign Your Term Sheets? The Power of Commitment and Consistency.

For a free subscription, please visit www.BoadweeLaw.com/subscribe.

I welcome your comments and suggestions!

Contract Provisions for Troubled Times: Myths and Realities of Bankruptcy (Technology Law Letter #4)

2009-03-23T22:52:22Z

Issue #4 of Harry Boadwee’s Technology Law Letter is now available.

The lead article is: Contract Provisions for Troubled Times: Part 4 - Myths and Realities of Bankruptcy. For a free subscription, please visit www.BoadweeLaw.com/subscribe.

I welcome your comments and suggestions!

Big Ideas in Business and Law

2009-03-17T23:48:55Z

Here are some of the big ideas in business over the past 100 years, according to a short feature in BusinessWeek. Many were fads, but most — even the early ones — have had staying power:

Open Innovation - 2000
Reengineering - 19990
Outsourcing - 1989
Six Sigma - 1987
360-Degree Performance Reviews - 1973
Scenario Planning - 1967
Lean Manufacturing - 1950’s
Skunk Works - 1943
Brand Management - 1931
Market Segmentation - 1920
The Assembly Line - 1910

I haven’t found a comparable list of ideas in Law, but I’m intrigued by a book, The Little Book of Big Ideas: Law by Robert Hockett, forthcoming this spring.

An Amazingly Critical Software Program for Super-Sized Datasets

2009-03-17T23:20:20Z

How much would you pay for this software program:

It determines what 300 million Yahoo users see each month, and helps Yahoo customize its home page content.
Facebook uses it to manage 40 billion stored photographs.
Microsoft changed its internal policies so that its team could develop on this software

The software is Hadoop, named after a stuffed toy elephant. Hadoop was developed by a consultant, Doug Cutting, based on papers published by Google concerning its extremely valuable MapReduce technology. According to Google, MapReduce is used to distribute searches and information-intensive processing across batteries of commodity computers, and is intended to enable even inexperienced programmers to easily use a large distributed system — terabytes of data on thousands of machines.

The price is zero — it is open source under the relatively lenient Apache License.

[Source: "Hadoop, a Free Software Program Finds Uses beyond Search, by Ashee Vance, The New York Times, March 17, 2009. The name "Hadoop" and depictions of the Hadoop logo and mascot are reserved for use by The Apache Software Foundation.]

Contract Provisions for Troubled Times - How Third Parties Can Assure Performance (Technology Law Letter #3)

2009-02-25T21:50:32Z

Issue #3 of Harry Boadwee’s Technology Law Letter is now available.

The lead article is: Contract Provisions for Troubled Times: Part 3 - How Third Parties Can Assure Performance.

For a free subscription, please visit www.BoadweeLaw.com/subscribe.

I welcome your comments and suggestions!

Contract Provisions for Troubled Times: Making Sure the Other Party Performs (Technology Law Letter #2)

2009-01-26T16:51:50Z

Issue #2 of Harry Boadwee’s Technology Law Letter is now available.

The lead article is: Contract Provisions for Troubled Times: Part 2 - Making Sure the Other Party Performs.

For a free subscription, please visit www.BoadweeLaw.com/subscribe.

I welcome your comments and suggestions!

Annual Legal Checkup for Web Sites and Services

2009-01-07T00:19:26Z

With the new year, you should review your web sites and offerings to see if they need any updates on the legal side.

Consider this 6 point list. These are the most common updates I see, not a complete list. Your business may need more.

Updating the site’s copyright notice to include the new year, if you are creating new content this year. If you continue to publish content from prior years, you’ll want to include those prior years too. For example, you might update “Copyright © 2006-2008 YourCompanyName, Inc.” to “Copyright © 2006-2009 YourCompanyName, Inc.”
Revising your site’s terms of use to reflect any changes in your offerings, terms, conditions and pricing.
Updating your privacy policy to reflect any new data collected or changes in your privacy practices, such as using cookies or web beacons.
If your site includes user generated content, you may want to register your company as a designated agent with the U.S. Copyright Office per the Digital Millennium Copyright Act (DMCA). See my previous posting on Business Tips for Providers of User-generated Content.
If you are planning to use new distribution channels, such as an affiliate program, you should start considering what rights and support you’ll need to provide to your new channels. For example, you may need separate legal documents, policies and web pages to support them.
Think about whether you need to upgrade your insurance. For example, if your business has changed, you may need to raise your policy limits, or even consider obtaining media liability insurance, errors & omissions insurance or umbrella coverage. If your company plans to work with large corporations, keep in mind that large companies often require smaller partners to hold insurance policies, to reduce the risk of claims against the large company’s “deep pockets.” Speak to a good commercial insurance agent to get a better understanding of the policy coverages and costs.

Lifting the Lid on Open Source Hardware

2008-12-16T17:36:07Z

Clive Thompson describes how an Italian group applied open source principles to hardware for the Arduino microcontroller circuit board, a device that can monitor and respond to sensors, control small motors and the like. Over 50,000 units have been sold worldwide since mass production began.

This is NOT open source software that runs inside of the hardware. Instead, the Arduino group is open-sourcing all of the schematics and hardware design files for its circuit board, in addition to the software for it. Anyone is free to build or modify their own hardware based on these schematics and designs. It’s another example of the trend among tech-savvy consumers to reverse engineer, hack and customize their consumer devices (such as iPhones, Tivo’s and Furby toys).

Although open sourcing is well established for software, it would be considered heresy or even suicide in the hardware business.

How can the Arduino group take this approach?

They are academics in Italy, and want to build a reputation. They don’t answer to a board of directors or shareholders.
Manufacturing is now a commodity, and it’s extremely easy for foreign low-cost manufacturers to knock off any hardware. The Arduino approach beats the counterfeiters at their own game, by treating ALL manufacturing as a commodity.
The Arduino circuit board is a low-function simple device. In isolation, it doesn’t provide a huge value-add.
The hardware designs are licensed under an open license that requires all user modifications and improvements to be licensed under the same license terms. Specifically, the license to the hardware designs is a Creative Commons “Attribution - Share Alike” license. This Share Alike condition is the dreaded “reciprocity clause” that concerns many businesses. It prevents other businesses from making proprietary modifications, and taking all the value of an improved device.
The group reserved to itself a critical piece of intellectual property, namely the trademark and trade name ARDUINO, so that the Arduino group can make sure its brand is not harmed by low-quality copies of its circuit board.
Hobbyists and others contribute bug fixes and improvements without pay, and the Arduino group receives early learning of new and unique uses of the hardware.

The article describes two economic models:

“Sell your expertise as the inventor,” in the form of consulting and support. This is a familiar open-source model, long used in the software world by companies such as Red Hat, a major supplier of the Linux open source operating system.
“Sell your device by trying to keep ahead of the competition.” This it the age-old time-to-market strategy. Thompson’s article points out that, in practice, the foreign knock-offs using the Arduino open source schematics and designs have low quality. The Arduino group stays on top of of the competition by developing know-how that keeps it ahead of others.

Thompson presents a tantalizing vision going forward. The media have evolved from one-way offline broadcasts into vast collaborative communities (e.g., blogs and their readers’ comments; WikiPedia). Similarly, hardware design will become community-driven, with the actual fabrication of hardware becoming a mere commodity.

The Arduino project is an interesting first step, but there is still a long way to go.

(Source: Build It. Share It. Profit. Can Open Source Hardware Work? by Clive Thompson, Wired Magazine)

New wiki directory of Fortune 500 blogs and twitter accounts

2008-11-20T17:00:53Z

Search Engine Land uncovers on a new wiki containing a directory of blogs and twitter accounts used by Fortune 500 companies.

The Fortune 500 Business Blogging Wiki is located here. It began as collaborative project between Chris Anderson of Wired Magazine and Ross Mayfield of Socialtext.

Just Launched: Harry Boadwee’s Technology Law Letter

2009-01-26T16:53:05Z

I’ve just launched my newsletter, Harry Boadwee’s Technology Law Letter.

The lead article is titled: Contract Provisions for Troubled Times: Part 1 - Getting Paid.

To subscribe, please sign up on the form on my blog, or on the home page of my web site.

I welcome your comments and suggestions!