Source: https://thelegalintelligencer.typepad.com/tli/elizabeth-j-goldstein/
Timestamp: 2019-04-22 05:14:52+00:00

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You think texting while driving can be dangerous. Well, one employee’s two-word text cost his company more than $1 million in contract damages. This is because his text was found to amend the original contract.
The case, CX Digital Media v. Smoking Everywhere Inc., 2011 WL 1102782 (S.D. Fla. March 23, 2011), centered on a contract between an Internet lead generation company and a company that sold electronic cigarettes. The original contract was a standard written contract with an amendment clause providing that the contract could only be changed “by a subsequent writing signed by both parties.” The contract provided that the cigarette company would pay the lead generation company $45 for each sale of a free trial kit for a maximum of 200 sales a day.
Pedram Soltani, the account manager for the lead generation company contacted the vice president of advertising of the cigarette company, Nick Tairis, via text message, about increasing the number of leads per day.
Soltani (2:50:08 p.m.): We can do 2000 orders/day by Friday if I have your blessing.
Soltani (2:52:13 p.m.): Those 2000 leads are going to be generated by our best affiliate and he’s legit.
On the same day as the above text, the lead generation company started to substantially increase the number of leads funneled to the cigarette company. During the month of the text, the average sales increased by more than 1,000 from the previous month.
The lead generation fee for the two months after the ceiling on the number of leads was lifted was $1,339,419. The cigarette company refused to pay this amount, arguing that the original contract limiting leads to 200 a day was still in effect, and that the text did not modify the limit because no amendment had been signed by both parties. However, the court disagreed. It found, applying Delaware law, that the parties had implicitly agreed not to require that the amendment be signed by both parties. Even if the texts were not seen to modify the amendment provision, the court determined that since the lead generation company materially changed its position based upon the agreed-upon amendment by providing more leads, the cigarette company would be estopped from raising the amendment prohibition.
This case illustrates an intractable drafting problem. No matter how you beef up your no-amendments provision, the court can always find that future conduct amends the provision. Some commentators have suggested providing that a specific person must sign the amendment, that the amendment must be labeled as such, or that the amendment must be accompanied by a corporate resolution approving the amendment to be effective. Nevertheless, all of these requirements can later be held to be amended by conduct, so they do not provide a completely effective solution.
New York and California have enacted statutes that enforce no oral modification provisions in contracts. See Cal. Civ. Code §1698; N.Y. Gen. Oblig. L. §15-301. However, courts have found that the contracts can still be orally modified in violation of the written contract and, seemingly, the statute. See Weschler v. Hunt Health Systems, 186 F.Supp. 2d. 402 (SDNY 2002).
With no way to draft around the subsequent modification provision, we need to warn our clients to be careful about texting about contract terms. Otherwise, they may find after a couple of key strokes or a short chat with Siri that their contract has been significantly changed.
Elizabeth J. Goldstein is a member of the business group at Dilworth Paxson. Readers can contact her via email and follow her on Twitter.
This posting is for informational purposes and should not be construed or interpreted as either legal advice on any matter or as in any way creating an attorney-client relationship.
Vulcan argued that a business combination “between” the parties must be a friendly one. The court lent credence to this interpretation by proposing an extreme example. The court explained that a “transaction between A and B involving the sale of A’s house” cannot be reasonably interpreted to mean that B can murder A to obtain the house. Vulcan also argued that because “between” immediately followed “transaction,” it only modified this word and not “business combination.” This placement suggests that there must be a voluntary transaction between the parties with affirmative participation by both parties rather than unilateral participation by one.
However, the court also recognized that Martin Marietta had a valid argument that the relevant provision did not provide that the contemplated transaction had to be negotiated or mutually agreeable to the parties. Moreover, if the parties would have included a standstill provision, the parties would have been prohibited from launching a hostile takeover while friendly merger talks proceeded. Thus, “between” could also be plausibly read to only require the eventual combination of the two parties’ assets.
The court also struggled to find a singular meaning of a “business combination transaction.” It rejected statutory definitions offered by both parties, finding that neither party intended to incorporate these formal definitions into the NDA. When looking at the “plain meaning,” the court found a multitude of definitions. Ruling that both “between” and “business combination transaction” could plausibly be interpreted both as Martin Marietta and Vulcan had suggested, the court ruled that the phrase was ambiguous. The court examined how the negotiation history of the parties evidenced the intent of the parties. The court found relevant that Martin Marietta’s general counsel’s negotiated revisions to the NDA all strengthen the confidentiality provision. In addition, the court cited Martin Marietta’s own pre-takeover behavior as supporting an interpretation that “business combination transaction between the parties” did not include hostile bids. When Martin Marietta decided to launch a hostile bid, it took actions signaling that it believed it would be in breach of the NDA by using the exchange documents. Namely, Martin Marietta’s general counsel attempted to gather all of the exchange documents and put them in her office. She told company employees and consultants not to use these documents for the takeover bid. The court, finding that pre- and post- negotiation behavior of the parties supported that the exchange documents were only intended to be used to support friendly transactions, ruled that Martin Marietta breached the agreement by using the exchange documents in aid of the hostile takeover. To remedy the situation, it enjoined Martin Marietta from taking steps to unilaterally acquire Vulcan for four months.
One lesson learned from this case is to be careful what you use as your base document to draft your agreement. In this case, Martin Marietta’s general counsel proposed the first draft of the NDA, basing it on a prior confidentiality agreement between the parties relating to an asset swap transaction. Both counsel apparently missed that an NDA for a possible merger should have an added provision relating to standstills. In this case, it would have been better to start fresh by reviewing some model form NDA agreements specifically drafted for potential merger agreements. A second lesson is to try to minimize actions and words that can later be construed by the opposing party as an admission that you are in violation of the agreement. As one famous Vulcan might put it, to do otherwise would be most illogical.
Apparently, ESPN knew long before Faith Hill belted out her NBC opening number that we’d all been waiting all day for Sunday night – and not for baseball. The case of ESPN v. Office of the Commissioner of Baseball, 76 F. Supp.2d 383 (S.D.N.Y. 1999), tells an interesting contractual tale. The contract between ESPN and MLB required ESPN to broadcast a baseball game every Sunday night. ESPN could pre-empt this schedule “for an event of significant viewer interest” if MLB gave its consent. MLB could not unreasonably withhold this consent.
In January 1998, ESPN requested MLB’s approval to broadcast several NFL games on Sunday night in lieu of baseball games. The baseball games would then be moved to ESPN2 per the parties’ contract. MLB refused to grant its permission for the switch. However, ESPN went ahead and broadcast the NFL games anyway. MLB refused to allow ESPN to broadcast the baseball games on ESPN2.
The same series of events occurred in January 1999. ESPN sought permission to move several Sunday night baseball games to ESPN2 so it could broadcast Sunday night NFL games on ESPN. MLB refused. In April 1999, MLB terminated its contract with ESPN, alleging breach of contract based upon ESPN’s decision to broadcast Sunday night NFL games. In the lawsuit, the parties disputed whether past conduct, including a prior written contract between the parties, was admissible to assist a jury in interpreting the contract provision in dispute, the provision requiring MLB not to unreasonably withhold its permission for ESPN to broadcast something other than baseball on Sunday nights.
MLB argued that ESPN could not introduce the prior written contract because of the current contract’s merger clause. The court, however, disagreed. It concluded that while the merger clause prevented the prior written agreement from being considered part of the agreement, it could be used to discern the meaning of an ambiguous contract term. Thus, the prior written agreement was admissible at trial to shed light on the meaning of the disputed provision.
Whether or not such a clause would effectively prevent a court from relying on extrinsic evidence where it finds the contract language ambiguous or unclear is problematic, however. The suggested language might well be effective to preclude additions or qualifications to the present agreement, but “interpretation” would be difficult to eliminate where a court is seeking guidance, in construing a doubtful term.
In any event, when parties seek to use a prior course of dealings to avoid contractual duties or to unreasonably withhold approval of the other party’s request for relief from an onerous term, perhaps the question should be: Are you ready for some litigation?
Imagine your physician practicing medicine identically to the doctors in Charles Dickens’ time. Ridiculous, right? However, we lawyers are still drafting contracts virtually identically to the solicitors who practiced in the days of Bleak House. I recently had the opportunity to interview Kingsley Martin, an attorney who is the CEO of Kiiac (pronounced kayak), a company that is harnessing the power of computing to create contract checklists for entire agreements and individual clauses.
Kiiac’s software can review a large sample set of agreements and identify the core, standard language and distinguish deal-specific terms. During our interview, Martin used a merger agreement as an example. Kiiac’s software has determined that there about 350 common clauses found in merger agreements. It is impossible for lawyers to keep all of these in their heads. Inevitably, lawyers will leave out key terms or put in duplicative or overlapping terms. Kiiac’s software application can review a draft agreement and compare its terms against the 350 standard merger provisions. It will indicate to the lawyer both possible additional terms and duplicative terms. The text of the reviewed agreement is color-coded. Black text means the text is commonly found in merger agreements, while red text delineates text that diverges from the standard agreement.
Martin has found that commercial clauses across agreements are strikingly similar, frequently using the same terms of art or common phrases. Additional analysis shows they share common sub-elements. Clauses, thus, can be viewed like agreements as checklists of elements, detailing mandatory and optional clauses. For example, the Nondisclosure Obligation in a confidentiality agreement can be viewed as containing four elements: (1) confidentiality, (2) non-use, (3) nondisclosure, and (4) protection of information.
Some contract terms with the most common text and frequent variations can be found for free at Kiiac’s website, www.contractstandards.com. These clauses create a checklist of elements detailing required and optional clause terms. Thus, Kiiac offers checklists at the macro and micro levels of contract drafting. It also automates template building, which should add to drafting efficiency.
Kiiac is working on analyzing all commercial agreements. Currently, it provides an interesting table on its website comparing and contrasting provisions among agreements. When agreements are compared this way, historical drafting idiosyncrasies are unearthed that can be corrected. For instance, almost all finance agreements have a representation and warranty concerning indebtedness. However, many acquisition agreements do not. This is a glaring omission, since the acquiring company should be as concerned with outstanding loans as a company providing financing.
A few lawyers have been critical of Kiiac’s contract analysis application because it indicates what language is prevalent but does not guarantee that the language is clear. However, the software performs an essential task, albeit one that could not be performed until now. With Kiiac, attorneys have the full anatomy of commercial contracts at their disposal. I predict that one day it will be malpractice not to use this type of software to draft and review contracts. This software, however, does not end the need for lawyers. Lawyers still must determine which clauses should be used in which contract and ultimately how these provisions should be drafted and interpreted. Nevertheless, it is inarguable that the computer is a powerful computational engine that can aid lawyers in drafting smarter agreements but does not allow lawyers to put themselves on autopilot. Now, excuse me while I fire up David Copperfield on my Kindle.
The case between Prince and a perfume company had not been going well. The action arose from a celebrity endorsement deal with the company for a perfume named after Prince’s album, “3121.” Prince had failed to appear in court when ordered to do so after his lawyer had withdrawn from the case. This led to a default judgment against him and his affiliated companies. Now, the only thing left for Prince to litigate was how much he and his affiliate companies were going to have to pay in damages.
Last week it was reported that a court ordered Prince to pay almost $4 million to the perfume company. The $4 million relates to out-of-pocket expenses that the perfume company paid to develop the product. Prince was not a party to the contract, but signed an inducement letter that was incorporated into the endorsement agreement. In the letter, Prince promised to promote the perfume during his next concert tour. This is a fraud case, but it teaches an important point about the strategic use of repudiation of a contract.
On Dec. 1, 2006, Prince signed the inducement letter. The very next day, Prince informed the perfume maker that he would not give interviews for the launch party or provide a photo for the press release announcing the product. Thus, Prince argued that all of the defendant’s out-of-pocket expenses after Dec. 2, 2006, could not be based upon the perfume maker’s reliance upon Prince’s promises to promote the fragrance. The court, however, found that because Prince’s company, which licensed Prince's name, likeness and “3121” album title and mark in connection with the fragrance products, had continually reassured the perfume company after Dec. 2, 2006, that Prince would in fact assist in the promotion of the perfume, that date was not an appropriate cut-off date for the perfume maker’s damages. Thus, the court awarded the full $4 million claimed by the perfume company for its out-of-pocket expenses.
When we represent clients, it is often our first instinct to try to get them to act reasonably when they are in the wrong. Following this instinct, we try to assure the other party that our client will meet its contractual obligations. In hindsight, Prince would have been better off if he and his affiliated companies communicated clearly and decisively to the perfume company the decision to repudiate the contract.
The next time you are dealing with a client whom you believe may ultimately not live up to the client’s end of the bargain, you should consider whether repudiation or rescission would be a more optimal strategy than seeking to reassure the other party that your client will meet its contractual obligations. Strategic use of repudiation or rescission may lessen the ultimate amount of damages your client will pay in the future. Reviewing Prince’s actions in the perfume deal and in the lawsuit, it does not seem like Prince uses a great deal of forethought and strategy in addressing the business issues in his life. This lack of planning and strategy has led to some expensive mistakes in the case at hand. It looks like Prince will not be partying like it is 1999 anytime soon.
Elizabeth J. Goldstein is a member of the business group at Dilworth Paxson. Readers can contact Goldstein via email and follow her on Twitter.
Once a year, when traffic clogs the downtown streets of Carlisle, Pa., and makes it impossible to get a table at my favorite Saturday morning breakfast spot, I realize that the annual Corvette show has come to town. Though I’m not sure what inspires such devotion to one particular model of car, I guess it is not surprising that such passion could ignite a contentious bit of litigation. In 1978, Chevrolet produced its first special edition Corvette. It was modeled after the Corvette that was to serve as the pace car at the Indianapolis 500 race that year. Buyers deemed the cars immediately collectible and the price quickly shot up to $10,000 more than the list price of $13,653. Chevy initially planned to limit production to 300 units; however, demand was so high that Chevrolet decided to build 6,502 units, one for each of its dealerships. The scarcity of the pace car model probably explains why a case was brought by a disappointed buyer against a dealership in New York.
The dealer defended the claim by alleging that he orally told the buyer that the sale was contingent upon the original buyer canceling the purchase of the car. The buyer argued that such parol (extrinsic) evidence was impermissible based upon the merger clause. The court rejected the buyer’s argument, finding that the seller sought to use the parol evidence to establish a condition precedent to the agreement. Since the merger clause would only be effective if the agreement were in force, it had no effect where the court found that a necessary condition precedent was not met. Thus, the court found that the dealer’s parol evidence relating to a prior buyer’s canceled purchase of the pace car was admissible in the breach of contract action.
Interestingly, a New York court refused to apply the same reasoning in a real estate case. (See Torres v. D’Alesso, 910 N.Y.S. 2d 1 (N.Y. App. Div. 2010).) Other courts, however, have applied the same reasoning in real estate cases. (See e.g. Luther Williams Jr. Inc. v. Johnson, 229 A.2d 163 (D.C. 1967).) The Restatement of Contracts also provides that parol evidence may be admissible to establish that a written contract is not effective because of a failure of a condition precedent. Restatement (Second) of Contracts, Section 217 (1981), Restatement of Contracts, 241(1932).
The addition of that sentence to the buyer’s contract in Tropical Leasing would have precluded the argument and likely would have made the plaintiff the proud owner of a 1967 pace car model Corvette. Maybe I’ll look for one at this year’s annual show just to see what a good investment that car would have been.
This post is part of a series on using checklists to ensure accuracy in contracts. Here is the first part.
Every well-constructed contract has a provision just as pivotal as the Jesus nut: the merger provision, also known as the integration clause. Without it, the entire contract can be decimated by one party’s assertion that a promise or representation outside the agreement contradicts what exists in the contract. That promise or representation, which can be oral or written, can dramatically change the character of the agreement. A contract for 10 pairs of shoes is now for 10,000 pairs. A contract for real estate in as-is condition is now warranted by the seller to be free from pollutants. The merger clause is the only defense against these dramatic changes and the all-too-human temptation to try to rewrite the contract post-hoc after many of the risks have played themselves out. Oil prices have tripled after the seller has agreed to the price-fixed contract. The intellectual property licensed has failed to obtain FDA approval. In the next several blog entries, I will be discussing the drafting of the merger clause. Today’s post focuses on how to handle merger clauses in amendments.
In my family, shopping is our only sport. Thus, I was disappointed to learn that a missing merger clause in an amendment to a lease may be the reason my car must ford a river and drive more than 45 minutes to get to the nearest Sam’s Club. This is a major inconvenience when I want to get a case of pretzel dogs for my carbs-fest après-Passover. A Sam’s Club was actually planned about 15 minutes from me in a shopping center that once had a Giant. I know this because the case was reported as Giant Food Stores v. THF Silver Spring Development 959 A.2d 438 (Pa. Super. 2008), appeal denied, 972 A.2d 522 (Pa. 2009).
The original lease between the Giant and the shopping center restricted the landlord from allowing a supermarket in addition to Giant from operating in the shopping center. However, the restriction lapsed if Giant no longer operated a supermarket in the shopping center. When the Giant moved out of the shopping center and found two replacement tenants to sublease its space, the shopping center and Giant entered into a first letter agreement that confirmed the parties’ intention to enter into a legally binding agreement in the future which would approve the sublease and reinstate the supermarket restriction placed on the shopping center, but without the requirement that Giant operate a supermarket in the shopping center.
The lease amendment stated that all terms not inconsistent with the amendment would remain as part of the agreement.
The Pennsylvania Superior Court found that the lease’s merger clause could only be read to exclude written agreements made prior to the execution of the lease; thus, the trial court was permitted to consider the two letter agreements along with the lease amendment. The lesson from this case is two-fold. One, you need to think through the boilerplate in every agreement and amendment. Two, for merger clauses, you need to think through the subject of the first sentence (i.e., “This Agreement contains the entire agreement”). You need to expand the subject to reference all relevant agreements.
For instance, if an employment agreement and intellectual property agreement are going to be signed together, both documents should be referenced in each merger clause. When several related agreements will be signed contemporaneously, the merger clauses should be the same in each. If there are several documents that need to be incorporated into the merger clause, one can use a defined term such as “Deal Documents” or “Transaction Documents.” While it is questionable in this case whether the shopping center would have really excluded the two letter agreements as part of the transaction, if it had thought through this issue at the time it drafted the lease amendment, it would be preferable to make a deliberate decision concerning this issue when drafting the document rather than leaving this issue to chance down the road. In addition, it is likely that the lawyer is going to be the one blamed for not addressing this issue in the contract. At least that’s who I am blaming when I have to drive across the Susquehanna to shop at Sam’s Club.
q Is a merger clause needed?
q What agreements should be referenced in first sentence?
Elizabeth J. Goldstein is a member of the business group at Dilworth Paxson. Readers can contact Ms. Goldstein via email and follow her on Twitter.
This posting is for informational purposes and should not be construed or interpreted as either legal advice on any matter or as in any way creating an attorney/client relationship.
Atul Guwande in “The Checklist Mainfesto: How to Get Things Right” shares the story of how a checklist he created for surgeons and nurses to use together in the operating room saved lives and reduced errors. His inspiration was the pilot’s takeoff checklist started by Boeing Corp. Boeing had built a state-of-the-art long-range bomber, Model 299. In 1935, it was competing with Martin and Douglas for new military contracts. On Oct. 30 of that year, the Army held a flying contest to compare the two companies’ new bomber models. Boeing’s plane was the sure favorite. It could fly faster than all previous bombers, carry five times more bombs than the Army specifications required, and travel twice as fast as the current models. To everyone’s surprise, the plane crashed in a fiery ball quickly after takeoff. The pilot and one crew member died in the crash. It was believed that pilot error was the cause of the crash. Boeing’s best test pilots concluded from the crash that a plane as complex as the Model 299 was too complex to be operated by memory alone. As a result, Boeing test pilots developed a flight takeoff checklist. The original takeoff checklist was short, about the size of an index card.
Guwande interviewed Daniel Boorman from Boeing on the subject of what makes a good checklist. Boorman said that checklists should be precise and should not cover every step. A checklist cannot be used to fly a plane. They are to be used by professionals to remind themselves of critical steps they may miss. They aid professionals with remembering how to handle complex tasks. It should feature items that are important but that are sometimes overlooked.
Checklists can be designed as a DO-CONFIRM checklist or a READ-DO checklist. For a DO-CONFIRM checklist, one does one’s job and then stops, reviews the checklist and determines that one has completed the tasks on the checklist. In contrast, one reviews each task of a READ-DO checklist and then completes it in turn. It works similar to a recipe. I will create checklists for this blog that are DO-CONFIRM checklists. I believe lawyers will likely refer to the checklists after they have completed their first draft of the agreement or after they review the first draft proposed by the other party.
The aim of this series will be to provide checklists on a weekly basis for the basic structure of contract and general provisions as well as specific provisions of frequent commercial agreements. As discussed above, the checklists are not intended to give a layperson or lawyer enough to draft an entire agreement or provision. They are meant to assist people in understanding key considerations that may get overlooked in the complex process of negotiating and drafting a commercial contract. I will start with the ubiquitous boilerplate, because this is a feature of every agreement. Plus, many of us were not taught how to draft these provisions. It is presumed that we know what boilerplate to include and what should be in the boilerplate. However, as you will see, boilerplate cannot be done by rote to the degree one might assume. There are nuances and complexities that one must consider. Today, to get started, we will consider a more basic question – how to handle multi-agreement transactions.
The checklists will generally address U.S. law except Louisiana with an emphasis in Pennsylvania and New Jersey law. However, as every practitioner knows, the law in each state varies. These checklists may not address the differences presented among different states’ laws, which can present important considerations that are not contained in the checklists presented.
Multiple-deal documents can invite mischief, both intended and unintended. In one deal, I was hired to attempt to unwind after it was executed related to the refinancing of a company’s real estate. At the closing, the company’s president sent an extra signature page around the table. Unbeknownst to my client, by signing this signature page, she purportedly agreed to an accelerated buy-out of the president’s stock. The president quit the very next day. Even when there are no bad actors, clients often sign blank signature pages at closings with no realization of what they have signed. Thus, they do not stop to ask their lawyers any questions. They just choose to rely solely on the lawyer’s assurances that the documents are acceptable. Only if a problem arises later will the client appreciate what he or she signed. In fact, the client may be quite surprised to learn what the client’s lawyer found to be an acceptable level of risk.
Ken Adams in “A Manual of Style for Contract Drafting” recommends two strategies to address the problem of unidentified signature pages traveling around the closing table: (1) refer to the type of the agreement in the concluding clause or (2) on the footer of the signature page state the title of the agreement and date of agreement. I prefer the latter solution. The footer clearly identifies the document.
One problem with multiple-deal documents is inconsistent boilerplate. The most problematic inconsistencies will lie if the agreements do not consistently choose (1) between litigation and arbitration and (2) the same venue to resolve the matter. Also, if the agreements do not choose one forum’s law for resolving disputes, one party may engage in forum shopping or litigation may take place in two jurisdictions.
q Consistent choice of law.
q Signature pages identify agreement (via conducting clause or footer).
Elizabeth J. Goldstein is a member of the business group at Dilworth Paxson. Contact her via email and follow her on Twitter.

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