Tag: Contracts

NLRB Issues Memo on Non-competes Violating NLRA

On May 30, 2023, Jennifer Abruzzo, the general counsel for the National Labor Relations Board (NLRB), issued a memorandum declaring that non-compete agreements for non-supervisory employees violates the National Labor Relations Act. The memo explains that having a non-compete chills employees’ Section 7 rights when it comes to demanding better wages. The ­theory goes that employees cannot threaten to resign for better conditions because they have nowhere to go. Non-compete agreements also prohibit employees from seeking better working conditions with competitors and/or soliciting coworkers to leave with them for a local competitor.

Experts have yet to weigh in, but ultimately this issue will be decided by the federal courts. As an employer, if you employ any non-supervisory employees that are subject to a non-compete agreement, an unfair labor practice charge could be filed, and it appears the NLRB would lean towards invalidating the agreement, though all evidence would have to be taken into consideration.

© 2023 Jones Walker LLP

For more Employment Legal News, click here to visit the National  Law Review.

Practical and Legal Considerations for Extending Cash Runway in a Changing Economy

The funding environment for emerging companies has fundamentally shifted in 2022 for both venture capital and IPOs, particularly after a banner year in 2021. Whether these headwinds suggest significant economic changes or a return to previous valuation levels, companies need to be realistic about adapting their business processes to ensure they have sufficient cash runway to succeed through the next 2-3 years.

This article provides a comprehensive set of tactics that can be used to extend cash runway, both on the revenue/funding and cost side. It also addresses areas of liability for companies and their directors that can emerge as companies change business behaviors during periods of reduced liquidity.

Ways to Improve and Extend Cash Runway

Understanding Your Cash Runway

Cash runway refers to the number of months a company can continue operations before it runs out of money. The runway can be extended by increasing revenue or raising capital, but in a down economy, people have less disposable income and corporations are more conservative with their funds. Therefore companies should instead focus on cutting operating costs to ensure their cash can sustain over longer periods.

As a starting point, companies can evaluate their business models to determine expected cash runway based on factors such as how valuations are currently being determined, total cash available, burn rate, and revenue projections. This will help guide the actions to pursue by answering questions such as:

  1. Is the company currently profitable?
  2. Will the company be profitable with expected revenue growth even if no more outside funding is brought in?
  3. Is there enough cash runway to demonstrate results sufficient to raise the next round at an appropriate valuation?

Even if companies expect to have sufficient cash runway to make it through a potential economic downturn, tactics such as reducing or minimizing growth in headcount, advertising spend, etc. can be implemented as part of a holistic strategy to stay lean while focusing on the fundamentals of business model/product-market fit.

Examining Alternative Sources of Financing

Even though traditional venture capital and IPO financing options have become more difficult to achieve with desired valuations, companies still have various other options to increase funding and extend runway. Our colleagues provided an excellent analysis of many of these options, which are highlighted in the discussion below.

Expanding Your Investor Base to Fund Cash Flow Needs

The goal is to survive now, excel later; and companies should be open to lower valuations in the short term. This can create flexibility to circle back with investors who may have been open to an earlier round but not at the specific terms at that time. Of course, to have a more productive discussion, it will be helpful to explain to these investors how the business model has been adapted for the current environment in order to demonstrate that the new valuation is tied to clear milestones and future success.

Strategic investors and other corporate investors can also be helpful, acting as untapped resources or collaborators to help drive forward milestone achievements. Companies should understand how their business model fits with the investor’s customer base, and use the relationship to improve their overall position with investors and customers to increase both funding and revenue to extend runway.1

If the next step for a company is to IPO, consider crossover or other hybrid investors, understanding that much of the cash deployment in 2022 is slowing down.

Exploring Venture Debt

If a company has previously received venture funding, venture debt can be a useful tool to bridge forward to future funding or milestones. Venture debt is essentially a loan designed for early stage, high growth startups who have already secured venture financing. It is effective for targeting growth over profitability, and should be used in a deliberate manner to achieve specific goals. The typical 3-5 year timeline for venture debt can fit well with the goal of extending cash runway beyond a currently expected downturn.

Receivables/Revenue-Based Financing and Cash Up Front on Multi-Year Contracts

Where companies have revenue streams from customers — especially consistent, recurring revenue — this can be used in various ways to increase short-term funds, such as through receivables financing or cash up front on long-term contracts. However, companies should take such actions with the understanding that future investors may perceive the business model differently when the recurring revenue is being used for these purposes rather than typical investment in growth.

Receivable/revenue-based financing allows for borrowing against the asset value represented by revenue streams and takes multiple forms, including invoice discounting and factoring. When evaluating these options, companies should make sure that the terms of the deal make sense with runway extension goals and consider how consistent current revenue streams are expected to be over the deal term. In addition, companies should be aware of how customers may perceive the idea of their invoices being used for financing and be prepared for any negative consequences from such perceptions.

Revenue-based financing is a relatively new financing model, so companies should be more proactive in structuring deals. These financings can be particularly useful for Software-as-a-Service (SaaS) and other recurring revenue companies because they can “securitize the revenue being generated by a company and then lend capital against that theoretical security.”2

Cash up front on multi-year contracts improves the company’s cash position, and can help expand the base where customers have sufficient capital to deliver up front with more favorable pricing. As a practical matter, these arrangements may result in more resources devoted to servicing customers and reduce the stability represented by recurring revenue, and so should be implemented in a manner that remains aligned with overall goal of improving product-market fit over the course of the extended runway.

Shared Earning Agreements

A shared earning agreement is an agreement between investors and founders that entitles investors to future earnings of the company, and often allow investors to capture a share of founders’ earnings. These may be well suited for relatively early stage companies that plan to focus on profitability rather than growth, due to the nature of prioritizing growth in the latter.

Government Loans, Grants, and Tax Credits

U.S. Small Business Administration (SBA) loans and grants can be helpful, particularly in the short term. SBA loans generally have favorable financing terms, and together with grants can help companies direct resources to specific business goals including capital expenditures that may be needed to reach the next milestone. Similarly, tax credits, including R&D tax credits, should be considered whenever applicable as an easy way to offset the costs.

Customer Payments

Customers can be a lifeline for companies during an economic downturn, with the prioritization of current customers one way companies can maintain control over their cash flow. Regular checks of Accounts Receivable will ensure that customers are making their payments promptly according to their contracts. While this can be time-consuming and repetitive, automating Accounts Receivable can streamline tasks such as approving invoices and receiving payments from customers to create a quicker process. Maintenance of Accounts Receivable provides a consistent flow of cash, which in turn extends runway.

To increase immediate cash flow companies should consider requiring longer contracts to be paid in full upon delivery, allowing the company to collect cash up front and add certainty to revenue over time. This may be hard to come by as customers are also affected by the economic downturn, but incentivizing payments by offering discounts can offset reluctance. Customers are often concerned with locking in a company’s services or product and saving on cost, with discounts serving as an easy solution. While they can create a steady cash flow, it may not be sustainable for longer cash runways. Despite their attractive value, companies should use care when offering discounts for early payments. Discounts result in lower payments than initially agreed upon, so companies should consider how long of a runway they require and whether the discounted price can sustain a runway of such length.

Vendor Payments

One area where companies can strategize and cut costs is vendor payments. By delaying payments to vendors, companies can temporarily preserve cash balance and extend cash runway. Companies must review their vendor agreements to evaluate the potential practical and legal ramifications of this strategy. If the vendor agreements contain incentives for early payments or penalties for late payments, then such strategy should not be employed. Rather, companies can try to negotiate with vendors for an updated, extended repayment schedule that permits the company to hold on to their cash for longer. Alternatively, companies can negotiate with vendors for delayed payments without penalty. Often vendors would prefer to compromise rather than lose out on customers, especially in a down economy.

Lastly, companies can seek out vendors who are willing to accept products and services as the form of payment as opposed to cash. Because the calculation for cash runway only takes into account actual cash that companies have on hand, products and services they provide do not factor into the calculation. As such, companies can exchange products and services for the products and services that their vendors provide, thereby reserving their cash and extending their cash runway.

Bank Covenants

In exercising the various strategies above, it is important to be mindful of your existing bank covenants if your company has a lending facility in place. There are often covenants restricting the amount of debt a borrower can carry, requiring the maintenance of a certain level of cash flow, and cross default provisions automatically defaulting a borrower if it defaults under separate agreements with third parties. Understanding your bank covenants and default provisions will help you to stay out of default with your lender and avoid an early call on your loan and resulting drain on you cash position.

Employee Considerations

As discussed extensively in our first article Employment Dos and Don’ts When Implementing Workforce Reductions, the possibility of an economic downturn not only will have an impact on your customer base, but your workforce as well. Employees desire stability, and the below options can help keep your employees engaged.

Providing Equity as a Substitute for Additional Compensation.

Employees might come to expect cash bonuses and pay raises throughout their tenure with an employer; in a more difficult economic period this may further strain a business’s cash flow. One alternative to such cash-based payments is the granting of equity, such as options or restricted stock. This type of compensation affords employees the prospect of long-term appreciation in value and promotes talent retention, while preserving capital in the immediate term. Further, to the employee holding equity is to have “skin in the game” – the employee now has an ownership stake in the company and their work takes on increasing importance to the success of the company.

To be sure, the company’s management and principal owners should consider how much control they are ceding to these new minority equity holders. The company must also ensure such equity issuances comply with securities laws – including by structuring the offering to fit within an exemption from registration of the offering. Additionally, if a downturn in the company’s business results in a drop in the value of the equity being offered, the company should consider conducting a new 409A valuation. Doing so may set a lower exercise price for existing options, thus reducing the eventual cost to employees to exercise their options and furnishing additional, material compensation to employees without further burdening cash flow.

Transitioning Select Employees to Part-Time.

Paying the salaries of employees can be a major burden on a business’s cash flow, and yet one should be wary of resorting to laying off employees to conserve cash flow in a downturn. On the other hand, if a business were to miss a payroll its officers and directors could face personal liability for unpaid wages. One means of reducing a business’s wage commitments while retaining (and paying) existing employees is to transition certain employees to part-time status. In addition to producing immediate cash flow benefits, this strategy enables a business to retain key talent and avoid the cost of replacing the employees in the future. However, this transition to part-time employees comes with important considerations.

Part-time employees are often eligible for overtime pay and must receive the higher of the federal or state minimum hourly wage. And if transitioned employees are subject to restrictive covenants, such as a non-competition agreement, they might argue their change in status should release them from such restrictions. Particularly since the COVID-19 pandemic, courts have shown reluctance to enforce non-competes in the context of similar changes in work status when the provision is unreasonable or enforcement is against the public interest.

Director Liability in Insolvency

Insolvency and Duties to Creditors

There may be circumstances where insolvency is the only plausible result. A corporation has fiduciary duties to stockholders when solvent, but when a corporation becomes insolvent it additionally owes such duties to creditors. When insolvent, a corporation’s fiduciary duties do not shift from stockholders to creditors, but expand to encompass all of the corporation’s residual claimants, which include creditors. Courts define “insolvency” as the point at which a corporation is unable to pay its debts as they become due in the ordinary course of business, but the “zone of insolvency” occurs some time before then. There is no clear line delineating when a solvent company enters the zone of insolvency, but fiduciaries should assume they are in this zone if (1) the corporation’s liabilities exceed its assets, (2) the corporation is unable to pay its debts as they become due, or (3) the corporation faces an unreasonable risk of insolvency.

Multiple courts have held that upon reaching the “zone of insolvency,” a corporation has fiduciary duties to creditors. However, in 2007 the Delaware Supreme Court held that there is no change in fiduciary duties for a corporation upon transitioning from “solvent” to the “zone of insolvency.” Under this precedent, creditors do not have standing to pursue derivative breach of fiduciary duty claims against the corporation until it is actually insolvent. Once the corporation is insolvent, however, creditors can bring claims such as for fraudulent transfers of assets and for failure to pursue valid claims, including those against a corporation’s own directors and officers. To be sure, the Delaware Court of Chancery clarified that a corporation’s directors cannot be held liable for “continuing to operate [an] insolvent entity in the good faith belief that they may achieve profitability, even if their decisions ultimately lead to greater losses for creditors,” along with other caveats to the general fiduciary duty rule. Still, in light of the ambiguity in case law on the subject, a corporation ought to proceed carefully and understand its potential duties when approaching and reaching insolvency.

1 Diamond, Brandee and Lehot, Louis, Is it Time to Consider Alternative Financing Strategies?, Foley & Lardner LLP (July 18, 2022)

2 Rush, Thomas, Revenue-based financing: The next step for private equity and early-stage investment, TechCrunch (January 6, 2021)

Article By Natasha Allen, David W. Kantaros, Nikhil T. Pradhan, and Graham P. MacEwan of Foley & Lardner LLP

For more financial institutions and banking legal news, click here to visit the National Law Review.

© 2022 Foley & Lardner LLP

How Outdoor Sports and Recreation Operations Can Legally Protect Themselves in a Post COVID-19 Environment

There is a world history of pandemics that, at one point or another, crippled civilizations or dynasties.  In America’s more recent history, our country has experienced the Spanish Flu (1918 – 1920), the Asian Flu (1957 – 1958), and the H1N1 Swine Flu (2009 – 2010).  Though the Swine Flu is in our society’s most recent memory, the current Coronavirus infection and death numbers have already surpassed the total Swine Flu infection and death numbers.  The Coronavirus (COVID-19) has wreaked havoc on Americans and their interactions with each other because of the rapid rate at which the virus spreads.  Businesses have been impacted due to governmental orders to temporarily close or greatly reduce their services.  But with proper action, the spread of the virus will slow, the economy will rebound, and people will return to the extracurricular activities they enjoy.

As our country presses forward, the Coronavirus will change the way business owners conduct business – including operators in the outdoor sports and recreation business.

On May 5, 2020, North Carolina Governor Roy Cooper signed Executive Order No. 138 (the “Order”), which modifies Executive Order No. 121 (also known as The North Carolina “Stay at Home” Order).  The Order signaled the beginning of Phase 1, effective 5:00 p.m. on May 8, 2020, and the gradual reopening of North Carolina.  On May 20, 2020, Governor Cooper signed Executive Order No. 141, which outlines “Phase 2” of reopening North Carolina and will begin on May 22, 2020, at 5:00 p.m. (also known as the North Carolina “Safer at Home” Order).  The Order removes the distinction between essential and non-essential businesses, which were defined in Executive Order No. 121, thus allowing many businesses originally deemed non-essential to reopen.  Additionally, the Order explicitly provides that outdoor activities are allowed and that day camps and programs for children and teens are permitted to resume if they are able to adhere to certain guidelines and social distancing requirements.  Phase 2 allows for overnight camps for children and teens to resume, also as long as requirements are met.  As North Carolina moves through Phase 1 and into Phase 2, several state parks will reopen to the public.  Phase 2 does not permit Mass Gatherings of more than ten people indoors or more than twenty-five people outdoors nor does it allow for indoor fitness facilities to reopen.  Please click HERE for a summary of what Phase 2 allows and does not allow.

As outdoor sports and recreation businesses prepare to eventually reopen, business owners should evaluate their legal documents to determine if the business is adequately protected in the event of this continuing pandemic or another pandemic.  Two items to consider are the contractual language in event contracts and liability waivers.

Update Contractual Language Regarding Event Cancellation or Postponement

Outdoor sports and recreation businesses that provide services such as race organization, adventure vacations, guided excursions, exhibition management, or outdoor recreation conference organization have been forced to cancel or postpone events if the event was scheduled to take place during one of the many state or local government orders to shut down.

Businesses that plan these events often expend costs associated with the event as the planning progresses.  In light of the Coronavirus, most businesses should revise their contractual language involving event production, especially in cases where there is a “no refund” policy.

If the current contractual language does not address governmental orders related to government-ordered shutdowns, pandemics, or does not contain a force majeure provision, then the contract likely should be revised to include such provisions.

The contractual language that addresses pandemics and governmental orders to shut down can help limit the business’s financial liability in the event of event cancellation or postponement due to a future pandemic or governmental order to shut down.

Update Liability Waivers

Outdoor sports and recreational activities come with inherent risks for participants and sometimes even for event spectators.  When a participant or spectator gets injured during the activity, there is potential liability exposure to the other participants, the event organizers, and the activity providers.  Liability exposure is greatly reduced with a proper liability waiver signed by the participant or agreed to by the spectator before the activity begins.

There are several key components to an effective liability waiver.  One such component is the assumption of risk provision.  This provision identifies (1) the activity at hand, (2) the inherent risks associated with engaging in or observing such activity, and (3) that these risks cannot be eliminated no matter the level of care taken to avoid injury.

In light of the Coronavirus, outdoor sports and recreation business owners should examine the assumption of risk provision in their liability waivers.  They should seek legal guidance in adding language to provide that participants are at risk of coming into contact with certain communicable diseases or viruses similar to COVID-19.  The waiver should also be updated to reflect that participants agree to waive claims arising from injury, illness, or death associated with these assumed risks.

Many runners and tri-athletes are looking eagerly to the day when they will once again be allowed to sign up for and compete in races and events. Others are awaiting the return of guided white-water rafting trips, lazy days floating on a tube down a local river, or visiting an adventure center to challenge themselves on a ropes or zip line course.  Owners of these outdoor sports and recreation operations should use this time to get their documents in order to protect themselves against potential future lost revenue or liability in the event of another pandemic or if a government order to shut down occurs.

© 2020 Ward and Smith, P.A.. All Rights Reserved.

For more on the return of sports, see the National Law Review Entertainment, Art & Sports law section.

Can the Government Really Shut Down My Business and Make Me Stay Home? Questions Answered Relating to Declarations of Emergency Due to Coronavirus

As companies face shutdowns and citizens are encouraged to stay home due to the coronavirus (COVID-19), businesses and people may be asking questions, such as can the government really do that? Those who followed China’s response to the outbreak—which involved using martial law to keep millions of citizens in their home—would have seen references in those stories western democracies being unable to use such extreme measures. Yet, it may now seem to some that our own democratic leaders are doing just that (and should be). Can they?

The short answer is yes, they can.

But fear not, because you are not likely to see tanks rolling down the streets enforcing martial law. There remain strong protections for citizens, even in times like these, preventing arbitrary government action. Unlike the famous Dunder Mifflin manager Michael Scott “declaring” bankruptcy in a building parking lot, when Governor Murphy declared a state of emergency in New Jersey he did not simply open the window of his office, shout “this is an emergency!” and then start issuing a list of edicts. His authority, and that of any executive, is restricted by the laws authorizing such a declaration.

A brief review from civics class:

To prevent abuse, the power to make laws, enforce laws, and interpret laws are separated into three branches, i.e., the legislative, executive, and judicial branches. That means the governor cannot simply do what he wants (like a king or dictator), even if he feels those actions are best for the people. He must do only those things which comply with the laws enacted by the legislature (as interpreted by judges). So upon declaring a state of emergency, Governor Murphy—and any other executive declaring an emergency—issued a series of executive orders invoking specific New Jersey legislative enactments. Those statutes pre-authorized the executive branch (which the Governor heads) to take certain, specific actions when the state is facing an emergency.

Most declarations of emergency in recent memory pertain to snowstorms or hurricanes. In those instances, the State invoked more familiar provisions of the statutes governing declarations of emergency, including freeing up money earmarked for emergency use; calling on the national guard to help with the effects of the storm; and allowing the police to redirect traffic. But the Governor’s statutory powers during an emergency are broad, flexible, and include the ability to “make such orders. . . as may be necessary adequately to meet the various problems presented by any emergency,” including “[t]he designation of vehicles and persons permitted to move during. . . emergency,” “[t]he conduct of the civilian population during the threat of and imminence of danger or any emergency,” and “[o]n any matter that may be necessary to protect the health, safety and welfare of the people. . . .”  N.J. S.A. App. A:9-45.  Violations of these orders are considered a disorderly person offense and may be punished by up to 6 months imprisonment, a $1,000 fine, or both.

In response to coronavirus questions:

Governor Murphy also invoked a provision of New Jersey law not implicated by other types of natural disaster called the “Emergency Health Powers Act,” which provided additional authorization for control over medical facilities, the distributions of medical resources, and authority to “identify areas that are or may be dangerous to the public health” and cause “movement of persons within that area to be restricted, if such action is reasonable and necessary to respond to the public health emergency.” N.J.S.A. § 26:13-9. The same law allows the State to “[r]equire the vaccination of persons as protection against infectious disease;” and although the vaccine cannot be “administered without obtaining the informed consent of the person to be vaccinated,” the state may require quarantine for “persons who are unable or unwilling to undergo vaccination. . . .” N.J.S.A. § 26:13-14. And the same law states that no public entity or its agents are “liable for an injury caused by any act or omission in connection with a public health emergency, or preparatory activities. . . .” N.J.S.A. § 26:13-19

So, can the government shut down your business and make you stay home?

Yes. And they can vaccinate you, quarantine you, and are immune from suit for doing any of those things.

There are, however, other avenues and considerations of which businesses and employees should be aware during these times. Many contracts contain force majeure clauses, which businesses should analyze to determine if they apply to coronavirus-related shutdowns, especially those mandated by the Governor’s recent executive order. Others may consider whether they have insurance coverage for a business interruption caused by the government-mandated shutdown. Employees and employers alike should keep abreast of the changing legal landscape surrounding paid sick leave.

©2020 Norris McLaughlin P.A., All Rights Reserved

How to Write Gender-Neutral Contracts

“Men” is not synonymous to “person”, nor does “he” mean “she.”  It is important for contractual language to be not only precise but also accurate.  Many agreements govern multiple individuals, some of whose gender is unclear or variable.  This article will give you advice and guidance on how to adjust contract language to be gender-neutral.  As society moves towards treating all genders equally, legal contracts should too.

What is gender?

Gender is the socially constructed characteristics of “male” and “female” and includes norms, roles, and relationships of and between groups of men and women.

What is gender-neutral?

Merriam-Webster defines gender-neutral as “not referring to either sex but only to people in general.”

Why it matters:

Conversations around gender and gender-neutrality are becoming more and more mainstream.  Thomson Reuters reported that in the past year (2018), there has been an increase in the number of clients requesting gender-neutral documents.  Startups are at the forefront of change and industry disruption, so it is logical that they stay ahead of the trend.

As you operate business, there are a number of form contracts that you will use regularly.  These form contracts are agreements your attorney drafts with brackets and spaces for you to update depending on each use.  For example, common form contracts include (1) Employee Offer Letters, (2) Confidentiality, Nondisclosure, and Assignment of Inventions Agreements, (3) Equity Incentive Plan, (4) Stock Option Grants, and (5) Restricted Stock Purchase Agreement.

Traditionally, these form contracts used masculine pronouns.  It used to be that progressive contracts simply did not use “he” but rather “she” or “he or she.”  As Thomson Reuters reported:

“In the old days it was almost certain that your senior employees would be men; a contract would be drafted accordingly, and then the ladies would be given a metaphorical pat on the head by including in the boilerplate the reassurance that references to the male gender should be interpreted to include the female.”

Now, the shift towards non-gendered pronouns and away from binary choices of “he” or “she” means attorneys need to adopt new drafting techniques.  As entrepreneurs and leaders of your own business, you can encourage this shift.

What to do:

Replace the masculine pronoun with an article, for example using “the position” in place of “his position”

  1.  Use a neutral word or phrase such as “person” or “individual”

  2. Define the term and repeat that noun

  3. Rewrite the sentence in order to eliminate the pronoun completely

What to be wary of (for now):

  1. Using the singular “they” and its other grammatical forms to refer to indefinite pronouns and singular nouns, for example using “they” in place of “she” and “them,” “themselves,” and “their” in place of “her,” “herself,” and “hers.”

    1. Part of drafting a contract is using precise language.  While there is rising social acceptance of the use of singular “they,” a court has not ruled on its interpretation in contracts.  Likely, it will take legal precedent in Delaware interpreting such use to accept the use of the singular “they.”

    2. This same logic applies to the use of the singular “ze.”

  2. Using the plural “they.”

    1. Similarly, the use of the plural can be misleading.  For an employment offer letter, for instance, the offer is not to a number of people but rather to one individual.

  3. A catch-all clause like “Unless the context otherwise requires, a reference to one gender shall include reference to the other genders”

    1. It was offensive when the use of male pronouns were supposed to encompass women and men. Such use effectively reinforced gender stereotypes.  It is equally offensive when it is used to refer to all genders.

Gender neutrality facilitates accurate, precise contracts.  It is important that an individual who is subject to a contract feel as though the contract applies to that individual.  In addition, that individual should also feel respected.

©1994-2019 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

ARTICLE BY Kati I. Pajak of Mintz.

Building Smart Contracts Trust in 2017: Lawyer’s Role

Smart ContractsIn 2016 we saw a flurry of discussion, a lot of interest, and a little bit of actual experimentation with smart contracts, the computer programs that automatically execute the terms of a contract on a blockchain. What do we need to firmly launch smart contracts into the mainstream and what is the lawyer’s role? A recent article in Coindesk by executives at Tezos argues that we need to conquer three remaining barriers: 1) implementation of formal verification of the smart contract code—a mathematical technique of verifying the integrity of software code; 2) enablement of transparency of the smart contract code by using interpreted code rather than compiled code (a concept meaningful to developers that permits them to more easily inspect code on the blockchain); and 3) development of clear governance mechanisms for the smart contract.

The first two barriers must be solved by software developers. It’s the last item—development of clear governance mechanisms—that will require joining the lawyer’s legal skills with the software developer’s coding skill. Software on the blockchain is immutable, but there has to be a mechanism for correction of the inevitable software error. Here is where the lawyer will tailor the governance processes learned so well in significant outsourcing transactions: governance and committee structure, issue escalation procedures, and change request process. Smart contracts are intended to be part of real contracts, and we lawyers already know the building blocks of well-crafted contracts. Here’s to 2017!

ARTICLE BY Susan P. Altman of K & L Gates

Copyright 2017 K & L Gates

Browsewrap Agreement Held Unenforceable – Website Designers Take Note!

browsewrap agreementIn Nghiem v Dick’s Sporting Goods, Inc., No. 16-00097 (C.D. Cal. July 5, 2016), the Central District of California held browsewrap terms to be unenforceable because the hyperlink to the terms was “sandwiched” between two links near the bottom of the third column of links in a website footer.  Website developers – and their lawyers – should take note of this case, part of an emerging trend of judicial scrutiny over how browsewrap terms are presented. Courts have, in many instances, refused to enforce browsewraps due to a finding of a lack of user notice and assent. In this case, the most recent example of a court’s specific analysis of website design, a court suggests that what has become a fairly standard approach to browsewrap presentment fails to achieve the intended purpose.

In Nghiem, the plaintiff brought claims under the Telephone Consumer Protection Act (TCPA) seeking statutory damages and an order certifying a class action.  The defendant Dick’s Sporting Goods (DSG) moved to compel arbitration based upon the DSG’s website terms of use.  The court denied the defendant’s motion, ruling that the plaintiff had no knowledge of the website terms and was not bound by the arbitration clause contained in DSG’s browewrap agreement.

The terms of use on DSG’s website were not presented in the typical clickthrough arrangement, where users are expressly presented with and required to assent to the terms before completing a purchase or registration.  Rather, DSG’s terms were presented as a browsewrap agreement, where a website’s terms and conditions are posted on the website via a hyperlink at the bottom of the screen and users are presumed to manifest assent to the terms by use of the website.

The district court noted that browsewrap agreements are enforced with “reluctance,” and only when a consumer has “actual or constructive knowledge of a website’s terms and conditions.”  Interestingly, DSG argued that because the plaintiff was an attorney whose former firm handled TCPA cases (including litigation against DSG), he should be charged with knowledge of the terms and arbitration clause.  The court rejected the argument that the plaintiff should be deemed to have actual knowledge of its terms based upon his vocation:

“[A]ctual knowledge is not something to be ‘safely assumed,’ as Defendants would have it, based on a plaintiff’s occupation. Instead, Defendants were required to put forth ‘evidence’ that Plaintiff had ‘actual knowledge of the agreement’ at issue. Defendants’ speculation regarding whether Nghiem reviewed, at some point in the past, DSG’s website Terms of Use is insufficient to meet this standard.” [citations omitted].

The court performed a detailed review of the website design to determine whether the plaintiff gained constructive knowledge of the website terms based upon, among other considerations, the placement of the link to the terms.  The court noted that DSG’s terms appeared at the bottom in the website footer of the home page (and on the page about its mobile alerts), and within a grouping of 27 other hyperlinks arranged in four columns that covered a variety of diverse topics (e.g., careers, gift cards, find a store, etc.).  The court noted that the hyperlink to the terms was “sandwiched between ‘Only at DICK’s’ and ‘California Disclosures’, near the bottom of the third column of links.”  As such, the court ruled that the placement was not conspicuous enough alone to put consumers on inquiry notice of the terms.

The ruling was not necessarily surprising in light of other recent decisions examining browsewrap agreements. For example, a recent California appellate court decision affirmed a ruling denying a motion to compel arbitration based upon website terms that were only viewable at the bottom of each page via a capitalized and underlined hyperlink (“TERMS OF USE”).  The hyperlink was displayed in a light green typeface on the site’s lime green background, and was among 14 other hyperlinks of the same color, font and size. (See Long v. Provide Commerce, Inc., 200 Cal. Rptr. 3d 117 (Cal. App. 2016)). The appellate court followed well-known precedent in reaching its holding.  See e.g., Nguyen v. Barnes & Noble, Inc., 763 F.3d 1171, 1178-79 (9th Cir. 2014) (“[W]here a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on—without more—is insufficient to give rise to constructive notice”); Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002) (declining to enforce an arbitration provision contained in a software licensing browsewrap agreement where the hyperlink to the agreement appeared on “a submerged screen” below the “Download” button that the plaintiffs clicked to initiate the download).

These recent cases should prompt companies to reexamine electronic contracting practices to ensure that consumers are offered notice sufficient to understand that use of a website will constitute agreement to the terms. One solution is the use of clickthrough agreements, which are generally upheld based upon now fairly-standard procedures for gaining notice and assent during user registration or purchase confirmation.  Ultimately, however, in designing a site, companies must balance concerns for user flow with the protections that come with an enforceable terms of use (though, it should be noted that in May 2016 the CFPB proposed a rule that would prohibit mandatory arbitration clauses that prevent class actions).

ARTICLE BY Jeffrey D Neuburger of Proskauer Rose LLP

© 2016 Proskauer Rose LLP.

Brexit: Keep Calm and Carry On

As the country recovers from the shock outcome of last Thursday’s Referendum, the question which Restructuring professionals must now consider is “what does Brexit mean for me?”. The truth is that nobody really knows. The Referendum decision is not legally binding on the UK Government and the process of the UK leaving the EU will only start once the UK has served formal notice on the EU pursuant to Article 50 of the Treaty on the European Union. This will start a two year negotiation period to effect Brexit. In the meantime, the UK remains a member of the EU and EU law continues to apply.

Brexit, EU Referendum

So, in some respects it is very much business as usual for now, but on the basis that David Cameron’s successor will give notice to leave the EU, we recommend that clients start considering the consequences of Brexit now. Preparation for those consequences may include looking at the following:

Contract Reviews – Many contracts refer to an array of EU laws, regulators and territories which should be reviewed to determine how Brexit may/will impact. Can the contract be varied to mitigate the impact of Brexit? What is the potential impact on the contract price being linked to Sterling, the Euro or the Dollar? Does the governing law clause need amending? Will Brexit result in a breach of contract? Whilst unlikely, can force majeure or material adverse effect clauses be relied upon? How can the contract be future-proofed?

Financing and security reviews – Brexit caused turmoil in the markets initially and led to a reduction in the UK’s credit score rating and a significant devaluing of sterling. Before the Referendum, warnings of a post Brexit recession were rife. Is your business/customer at risk of breaching its financial covenants as a consequence of Brexit? Do those facilities and security need to be reviewed and changes made to protect the position?

Vulnerability to Brexit – Brexit is going to impact some more than others. How much do you or your clients/customers trade with other EU countries? How will your supply chain be affected? Do you currently benefit from EU funding? Is the tax efficiency of your business based on EU law? Does your business benefit from EU emission allowances? Will you need a licence or other authorisation to trade in the EU?

Public Policy – The UK will have to review where domestic legislation may need to be amended to take account of Brexit. It will be important to businesses to understand what changes are likely to be coming down the line. Many of the legal changes will be driven by policy decisions made in London and/or Brussels in particular. Keeping on top of these Policy decisions may allow businesses to position themselves to benefit from or at least mitigate the effects of legislative change. Do you need to engage with public policy professionals to assist in lobbying for changes which will have a positive impact on your business?

International Trade Arrangements – To what extent does your business involve the supply of goods between the UK and other EU member states? How will your business be impacted by the potential imposition of tariffs and other trade barriers restricting the free movement of goods post-Brexit?

Immigration and employment– What nationality are your employees? How will your ability to recruit/second employees be affected and will any parts of your business have to be downsized?

Communication – To what extent do you need to make any public statements or disclosures in relation to the impact of Brexit on your business. What is your strategy for communicating the impact of Brexit with your staff?

Other issues will arise as the full impact of Brexit unravels over the coming weeks and months.

ARTICLE BY John Alderton & Caroline Castle of Squire Patton Boggs (US) LLP

© Copyright 2016 Squire Patton Boggs (US) LLP

Contract Corner: Key Considerations in Understanding and Negotiating IT Agreements

When entering into IT agreements with vendors, it is important to understand the type of agreement being negotiated, the services being provided, and who will be using the services within your organization. The category of “IT agreements” generally includes cloud application agreements, service agreements, installed applications, and online presence management. When negotiating IT agreements, the legal team should work closely with the business and IT teams to ensure that the correct level of importance is placed on the agreement and that provisions are added or revised in a way that clarifies the parties’ responsibilities in connection with the services being provided and also addresses the potential unwinding of the relationship. To provide maximum clarity and flexibility in connection with purchased IT services, consider the following key provisions when negotiating IT agreements:

  • Performance Standards (or “teeth”)

    Performance standards are critically important, but it is difficult to know where standards should be set and what services are most critical without consulting with your IT group. The IT group can help determine how critical the services are and build appropriate performance standards around the applicable services. Types of performance standards include quality assurance, service levels and credits (which often include measurement and monitoring and notice of performance issues), and customer satisfaction surveys.

  • Term

    Consider the benefits versus the risks of including a long multiyear initial term and automatic renewal terms. Vendors love a long term and often offer pricing concessions to lock in long terms, but a long term can significantly increase risk to the customer if the relationship goes south. Some companies prefer automatic renewal because there is less paperwork, but others view automatic renewal as another milestone that needs to be managed and a potential risk if the relationship with the vendor is strained.

  • Termination and Termination Assistance

    Consider including a termination for convenience clause. Termination for convenience provides an easier mechanism for unwinding a deal when a vendor is not knocking it out of the park, especially if the vendor’s obligations are not clear. Customers should also strongly consider negotiating for termination assistance services to further mitigate the risks associated with unwinding an unsatisfactory deal. If the IT services include storage or processing of customer data, termination assistance provisions should include return and migration of customer data and require the current vendor to cooperate with the new vendor. Specific disengagement plans can be negotiated up front if necessary.

  • Data Protection

    Language should be added to protect all data provided in connection with the use of the services. This language can include security obligations (remember, this is not insurance), obligations to mitigate or cover the costs associated with data breaches, a duty to notify, and rights to audit and review security representations.

  • Proprietary Rights

    If proprietary rights are important to the agreement—for instance, if a vendor is developing new technology or using important customer technology—make sure that the contractual language around proprietary rights clearly states who owns the core technology and any improvements, interfacing elements, and data.

  • Cyber-Liability Insurance

    Add provisions that require the vendor to maintain adequate cyber-liability insurance, especially if the vendor is storing or processing customer data.

  • Representations and Warranties

    Consider adding situational representations and warranties (e.g., PCI compliance or EU Data Privacy compliance) applicable to particular services being provided, in addition to standard representations and warranties for IT agreements, such as conformance with specifications. For each representation and warranty, consider the remedy that should apply in the event that it is breached.

  • Indemnification

    The vendor should agree, at minimum, to indemnify the customer for third-party claims related to the services being provided.

  • Limitation of Liability

    If the vendor negotiates for a limitation of liability provision, make sure appropriate exclusions for confidentiality, data breach, and indemnification are negotiated. It is also important for these exclusions to be carved out of standard limitations on indirect, special, and consequential damages, because many of the losses associated with confidentiality, data breaches, and indemnification claims might otherwise be barred by such provisions.

ARTICLE BY Emily R. Lowe & Glen W. Rectenwald of Morgan, Lewis & Bockius LLP

Copyright © 2015 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Meeting of the Minds at the Inbox: Some Pitfalls of Contracting via Email

This issue comes up regularly when informality creeps into negotiations conducted electronically, bringing up the age-old problem that has likely been argued before judges for centuries: one party thinks “we have a deal,” the other thinks “we’re still negotiating.”  While email can be useful in many contract negotiations, care should be taken to avoid having to run to court to ask a judge to interpret an agreement or enforce a so-called “done deal.”

With limited exceptions, under the federal electronic signature law, 15 U.S.C. § 7001, and, as adopted by the vast majority of states, the Uniform Electronic Transactions Act (UETA), most signatures, contracts and other record relating to any transaction may not be denied legal effect solely because they arein electronic form.  Still, a signed email message does not necessarily evidence intent to electronically sign the document attached to the email. Whether a party has electronically signed an attached document depends on the circumstances, including whether the attached document was intended to be a draft or final version.

There have been a number of recent cases on this issue,  but the bottom-line, practical takeaways are as follows:

  • Consider an express statement in the agreement that performance is not a means of acceptance and that the agreement must be signed by both parties to be effective.

  • If you do not believe the agreement is final and accepted, do not begin to perform under the agreement unless there is an express written (email is ok) agreement by the parties that performance has begun but the contract is still being negotiated.

  • When exchanging emails relating to an agreement, be prudent when using certain loaded terms such as “offer,” “accept,” “amendment,” “promise,” or “signed” or  phrases of assent (e.g., “I’m ok with that”, “Agreed”) without limitations or a clear explanation of intent.

  • Terms of proposed agreements communicated via email should explicitly state that they are subject to any relevant conditions, as well as to the further review and comment of the sender’s clients and/or colleagues. To avoid ambiguity, to the extent finalizing an agreement is subject to a contingency (e.g., upper management or outside approval, or a separate side document signed by both parties), be clear about that in any email exchange that contains near-final versions of the agreement.

  • Parties wishing to close the deal with an attachment should mutually confirm their intent and verify assent when the terms of a final agreement come together.

  • While it is good practice to include standard email disclaimers that say that the terms of an email are not an offer capable of acceptance and do not evidence an intention to enter into any contract, do not rely on this disclaimer to prevent an email exchange – which otherwise has all the indicia of a final agreement – from being considered binding.

  • Exercise extreme caution when using text messaging for contract negotiations – the increased informality, as well as the inability to attach a final document to a text, is likely to lead to disputes down the road.

While courts have clearly become more comfortable with today’s more informal, electronic methods of contracting, judges still examine the parties’ communications closely to see if an enforceable agreement has been reached.

Now, for those who are really interested in this subject and want more, here comes the case discussion….

Last month, a Washington D.C. district court jury found in favor of MSNBC host Ed Schultz in a lawsuit filed by a former business partner who had claimed that the parties had formed a partnership to develop a television show and share in the profits based, in part, upon a series of emails that purported to form a binding agreement.  See Queen v. Schultz, 2014 WL 1328338 (D.C. Cir. Apr. 4, 2014), on remand, No. 11-00871 (D. D.C. Jury Verdict May 18, 2015).  And, earlier last month, a New York appellate court ruled that emails between a decedent and a co-owner of real property did not evince an intent of the co-owner to transfer the parcel to the decedent’s sole ownership because, even though the parties discussed the future intention to do so, the material term of consideration for such a transfer was fatally absent.  See Matter of Wyman, 2015 NY Slip Op 03908 (N.Y. App. Div., 3rd Dept. May 7, 2015).  Another recent example includes Tindall Corp. v. Mondelēz Int’l, Inc., No. 14-05196 (N.D. Ill. Mar. 3, 2015), where a court, on a motion to dismiss, had to decide whether a series of ambiguous emails that contained detailed proposals and were a follow-up to multiple communications and meetings over the course of a year created a binding contract or rather, whether this was an example of fizzled negotiations, indefinite promises and unreasonable reliance.  The court rejected the defendant’s argument that the parties anticipated execution of a memorialized contract in the future and that it “strains belief that these two companies would contract in such a cavalier manner,” particularly since the speed of the project may have required that formalities be overlooked.

Enforceability of Electronic Signatures

A Minnesota appellate court decision from last year highlights that, unless circumstances indicate otherwise, parties cannot assume that an agreement attached to an email memorializing discussions is final, absent a signature by both parties.  See SN4, LLC v. Anchor Bank, fsb, 848 N.W.2d 559 (Minn. App. 2014) (unpublished). The court found although the bank representatives intended to electronically sign their e-mail messages, the evidence was insufficient to establish that they intended to electronically sign the attached agreement or that the attached document was intended to be a final version (“Can you confirm that the agreements with [the bank] are satisfactory[?] If so, can you have your client sign and I will have my client sign.”).

A California decision brings up similar contracting issues. In JBB Investment Partners, Ltd. v. Fair, 182 Cal. Rptr. 974 (Cal. App. 2014), the appellate court reversed a trial court’s finding that a party that entered his name at the end of an email agreeing to settlement terms electronic “signed” off on the deal under California law. The facts in JBB Investmentoffered a close case – with the defendant sending multiple emails and text messages with replies such as “We clearly have an agreement” and that he “agree[d] with [plaintiff’s counsel’s] terms” – yet, the court found it wasn’t clear as to whether that agreement was merely a rough proposal or an enforceable final settlement.  It was clear that the emailed offer was conditioned on a formal writing (“[t]he Settlement paperwork would be drafted . . .”).

Performance as Acceptance

Another pitfall of contracting via email occurs when parties begin performance prior to executing the governing agreement – under the assumption that a formal deal “will get done.”  If the draft agreement contains terms that are unfavorable to a party and that party performs, but the agreement is never executed, that party may have to live with those unfavorable terms. In DC Media Capital, LLC v. Imagine Fulfillment Services, LLC, 2013 WL 46652 (Cal. App. Aug. 30, 2013) (unpublished), a California appellate court held that a contract electronically sent by a customer to a vendor and not signed by either party was nevertheless enforceable where there was performance by the offeree.  The court held that the defendant’s performance was acceptance of the contract, particularly because the agreement did not specifically preclude acceptance by performance and expressly require a signature to be effective.

ARTICLE BY Jeffrey D Neuburger of Proskauer Rose LLP
© 2015 Proskauer Rose LLP.