If you ever sell a business, and New York law applies to the sale contract, then you might want to proactively propose a non-competition covenant for a limited period that you know you can live with — and that expressly allows you to compete after the period has expired. Otherwise, you might find yourself under an implied non-competition covenant that prohibits you in perpetuity from competing with your former company for the business of your former customers. This apparently will be the result in Bessemer Trust Co., N.A. v. Branin, Nos. 08-2462-cv(L) and 08-2677-cv(XAP) (2d Cir. Apr. 5, 2012). For a more-detailed explanation, see a write-up by Paul Freehling at the Trading Secrets blog.

See also: (list is automatically generated)

• Signed Google’s non-competition clause, then got laid off

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I’ve seen a couple of references recently to Facebook’s revised terms of service, requiring the user to agree not to use Facebook’s trademarks — including, purportedly, the term “book.”[1] (Here’s one such reference, by the Pillsbury law firm.) I wonder who will be the first to challenge that in court — for example, on grounds of failure of a condition precedent?

I think if I were challenging this provision, I might argue that the user’s agreement not to use a particular Facebook trademark implicitly rests on a condition precedent, namely that Facebook in fact has trademark rights in the stated terms. So if Facebook turned out not to have trademark rights in term “book,” then the user’s agreement not to use that term would be automat­ic­ally nullified.

There might be other arguments as well; this is the one that comes to mind right away.

[1] The actual language, though, doesn’t refer to “book” as a trademark. Here’s the language, in section 5.6: “You will not use our copyrights or trademarks (including Facebook, the Facebook and F Logos, FB, Face, Poke, Wall and 32665), or any confusingly similar marks, without our written permission.” Maybe Facebook backed off?

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Imagine that you’re interviewing a candidate for a job. Your company’s HR department has recently decreed that you have to check out all candidates’ Facebook pages to see if there’s anything there that might be a problem for the company.

You don’t want to demand that the candidate give you her password. That might create legal problems. So you say to this candidate, I need you to log into your Facebook account and browse around, right here and now, with me looking over your shoulder and telling you what to click on.

That could seriously backfire on you: It might expose you to information that, legally, you’d have been better off not knowing.

Noted hacker (in the original, good sense of the term) Reg Braithwaite explains how.

See also: (list is automatically generated)

• Your Facebook page may cost you a college admission
• Facebook “rips off” Google+ Circles — and under U.S. law, that’s probably just fine (for now)

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O’Reilly Radar blogger Jenn Webb tells us of a trial balloon floated by noted copyright scholar William F. Patry, now senior copyright counsel for Google. Patry wonders whether different types of copyrighted works should have different copyright terms.

“Creativity isn’t one size fits all — books aren’t like movies, sculptures are like poems, emails and business documents aren’t like Harry Potter books. Yet, we treat every single copyrighted work exactly the same way. That doesn’t make sense,” she quotes Patry as saying.

Webb’s blog entry includes links to a video interview and specific clips in the video.

See also: (list is automatically generated)

• Bandwidth Management to Keep Copyright Police Away

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An opinion by the New York Court of Appeals reminds drafters that, under the law of that state, a contract can be structured to absolve a service provider from liability even for its own negligence or gross negligence. The trick, according to the court, is to draft the contract so that:

1. the customer agrees to buy insurance to cover any damage or other loss that might result from the service provider’s negligence; and

2. the customer also waives the service provider’s liability, agrees to look solely to its insurer for recovery, and waives subrogation, so that the customer’s insurance company can’t come after the service provider for reimbursement of whatever the insurance company has to pay out for the damage.

This drafting approach worked for Diebold, Inc., an alarm-system company. Diebold provided backup alarm service for a bank. The bank was burglarized, allegedly because of Diebold’s gross negligence in ignoring problems with the alarm system. Diebold’s contract with the bank, though, included provisions like those enumerated above: The contract required the bank to buy insurance, and included a waiver of Diebold’s liability. As the court described the provision:

Diebold’s contract contained a clause entitled “Property Insurance and Waiver of Subrogation” where Abacus agreed to obtain insurance coverage to cover its losses in the event of a theft. The agreement between Diebold and Abacus provided that Abacus “shall look solely to its insurer for recovery of its loss and hereby waives any and all claims for such loss against Diebold” and that Abacus’ insurance policy would contain a clause providing that such waiver would not invalidate the coverage. [1]

The bank claimed that Diebold’s alleged gross negligence invalidated the limitation of liability. The court, however, held that while the exculpatory provision could not relieve Diebold for liability for gross negligence, the insurance provision and waiver of subrogation would be enforced: “A distinction must be drawn between contractual provisions which seek to exempt a party from liability and contractual provisions which in effect simply require one of the parties to the contract to provide insurance for all of the parties.” [2]

Incidentally, Diebold’s co-defendant did not have a mandatory insurance requirement in its contract, but merely left it up to the bank to decide whether to purchase insurance, nor did it include a waiver of liability and of subrogation. The court held that the co-defendant’s limitation of liability provisions could not withstand a claim (if proved) of gross negligence [3].

Comment: A contract drafter wanting to use the Diebold approach might also want to include a choice-of-law provision specifying New York law as the governing law for the contract. (Of course, other states’ law might be to the same effect.)

Comment: The court’s reasoning seems to imply that it didn’t matter which party buys the insurance — as long as the amount of the insurance wasn’t unreasonable, then it was OK to require the customer (or whoever) to look solely to the insurer for recovery of any loss that might occur.

Comment: In the real world of sales negotiations, a happy medium might be for the contract to provide:

• that the service provider’s liability is limited to X dollars, or to some formula such as X times the amount paid by the customer in the previous 12 months; and

• that the customer must purchase insurance (or self-insure) against losses in excess of the agreed limited amount, with the customer also waiving the service provider’s liability in excess of that amount.

Notes

[1] Abacus Federal Savings Bank v. ADT Security Services, Inc., No. 33 slip. op. at 4 (N.Y. Mar. 22, 2012) (affirming most grounds of dismissal of bank’s claim against alarm-system companies after burglary, but reversing as to breach-of-contract claim against one defendant) (citations, alteration marks, and internal quotation marks omitted), available at http://goo.gl/8YFL4.

[2] Id., slip op. at 6 (same parenthetical notes as above). The court went on to explain that “We have observed that gross negligence, when invoked to pierce an agreed-upon limitation of liability in a commercial contract must smack of intentional wrongdoing. It is conduct that evinces a reckless indifference to the rights of others.” Id., slip op. at 8 (same parenthetical notes as above).

[3] Id., slip op. at 4, 9 (same parenthetical notes as above).

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Here are the slides (in PDF format) for the Webinar I’ll be doing at 14:30 UTC (8:30 a.m. Houston time) this morning on “Intellectual property basics for contract professionals,” for the International Association for Contract and Commercial Management.

Revised slide deck (with copyright-term slides included)

I’ve been an IACCM member for a while now; the cost is very reasonable and the benefits are significant.

• IACCM home page

• Sign-up page for the Webinar (IACCM members only)

See also: (list is automatically generated)

• Intellectual property ownership clauses

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A commenter on Hacker News asked for confirmation that a nondisclosure agreement (“NDA”) and a non-competition covenant (“non-compete”) are not the same thing. That’s correct:

• An NDA, which parties sign to protect confidential information, typically includes restrictions on both disclosure and use of the confidential information.
• A non-compete is sometimes used as a means of enforcing an agreement’s restrictions on use of confidential information.

The non-compete says, in essence, “to help make sure you don’t use our confidential information without our permission, you agree not to compete with us at all in the following geographic area for the following time period ….”

NDAs per se hardly ever contain non-competition provisions. NDAs are commonly used to help two (or more) parties decide whether they want to do business with each other. Usually, it’s far too soon in the parties’ relationship for either of them to be making that kind of commitment.

Putting a non-compete in an NDA would be tantamount to a man and a woman being intro­duced to one another; wanting to get to know each other better; and agreeing that they’ll get a coffee later — and then the man says, oh by the way, I need for you to agree that, for the next 12 months, you won’t go out with any man except me. Imagine the woman’s reaction ….

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This semester I’ve been experimenting with a variation on “peer instruction” in the law-school course I teach (advanced contract drafting and -review). I’m still getting the hang of it and having to do extra work to develop good class-discussion questions, but the approach seems to be working well, and the students really like it.

Proponents of the approach have recently started an on-line community at www.peerinstruction.net. A Harvard University press release summarizes the approach thusly:

The PI technique relies on the power of the ‘flipped classroom.’ Information transfer (i.e., a teacher transferring knowledge to students) takes place in advance, typically through online lectures. In short, students study before rather than after class.

As a result, the classroom becomes a place for active learning, questions, and discussion. Instructors spend their time addressing students’ difficulties rather than lecturing.

While originally developed for [Professor Eric] Mazur’s introductory physics courses, PI is now used across multiple disciplines, from the sciences to the humanities.

Of course, this all presupposes that the students will actually do the reading in advance, which is not always a given ….

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The Guide is a work in progress; I provide it to students in the contract-drafting course I teach as an adjunct professor at the University of Houston Law Center.

For many of the contract clauses in the Guide, the commentary includes links to comparable provisions found in agreements in the SEC’s online EDGAR system.

An example of an annotated contract clause from the Guide is set out further down on this page.

Download the draft

The draft posted here is the working draft of February 15, 2012. You can:

• Download a free PDF, and/or

• Get the complete editable “Word” (RTF) document
(via e-junkie.com — help support the project)

Example of Common Draft annotated contract clause

Here’s an example of an annotated clause from the Common Draft Contract Review Guide:

• Download a free PDF, and/or

• Get the editable “Word” (RTF) document
(via e-junkie.com — help support the project)

IACCM Intellectual property law basics teleseminar slides

Here are the slides (PDF) for a teleseminar I did on February 9, 2012, for the International Association for Contract and Commercial Management, on “Intellectual property law basics for contracting professionals.”

The Common Draft Contract Review Guide is available above.

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In 2006, Capco Energy, Inc. bought some oil and gas rights in the Gulf of Mexico from Tana Exploration Co. Before the contract was signed, seller Capco provided buyer Tana with some geophysical analysis that it had commissioned from an engineering company.

In the contract, Capco the buyer acknowledged that Tana the seller made no warranties about the geophysical information. Capco also agreed that it would rely on solely on its own independent due-diligence investigation and not on any warranties outside the contract itself.

It turned out, though, that there wasn’t as much oil there as everyone had thought. Capco the buyer sued everyone in sight for fraud (among other things).

Capco had no luck with its lawsuit: The court granted summary judgment dismissing its claim. The appeals court affirmed, distinguishing prior cases in which buyers had not expressly disclaimed reliance:

Here, not only does the [contract] provide that [seller] Tana expressly disclaimed any representation of accuracy with respect to previous information provided to [buyer] Capco, but also Capco specifically represented in the PSA that it had relied solely on its own due diligence investigation and had not relied on any representations made by Tana ….

Because the PSA contains a clear intent to disclaim reliance, the lower courts correctly held that Capco is unable to claim fraudulent inducement based on the prior representations of Tana ….

Amco Energy, Inc. f.k.a. Capco Energy, Inc. v. Tana Exploration Co., No. 11-20264, slip op. at 15-17 (5th Cir. Jan. 30, 2012) (affirming summary judgment dismissing claims) (extra paragraphing added).

See also: (list is automatically generated)

• Why the fraud claim is the lawyer’s weapon of choice in lawsuits over failed technology projects
• Warranty disclaimers for UK transactions should also disclaim “conditions” – oil seller fails to do so, leaves itself open to $3MM damage award

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