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Progressive Reduction, Progressive Disclosure and Legal Disclosures – Incompatible?

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Progressive Disclosure and Progressive Reduction are two common user experience (UX) techniques in website and application design.  Both reduce the amount of information provided by default to a user, which can be very useful when you have a small amount of screen real estate available on a website or in an application or striving for a clean user interface.  Both are designed to favor selective content disclosure over mouse clicks (it takes more clicks to view all of the information, but many people may not need to see the additional information and therefore won’t need the clicks).

Progressive Disclosure stack ranks information, features and options by usage, and breaks the display of the information, features and options onto multiple screens so that only the most commonly used or popular items appear by default.  The intent of Progressive Disclosure is to simplify the user interface and avoid overwhelming a user with information, features and options on a single screen (which results in a bad user experience).  Common examples of Progressive Disclosure in apps and on websites are “Learn More” links and expandable/collapsible data elements that are collapsed by default but expandable by the user. An example of Progressive Disclosure in the legal context is a “layered” privacy policy with an initial summary and links to the longer, full privacy policy.

Progressive Reduction uses user profiles and other information or options to progressively reduce content elements based on time or usage.  As the user becomes more familiar with the website or app (or as more time passes), the design can be simplified and reduced, as the assumption is that the user will still understand what to do.  For example, suppose a website has a prominent “Change Your Preferences” button with an icon.  As a user becomes more familiar with that button, it can be reduced to a “Preferences” button with an icon, and then just the icon.  Another example is expandable/collapsible data elements that are expanded by default, where if the user collapses them the website or application will remember the user’s preference and collapse them by default thereafter.

The Federal Trade Commission and state Attorneys General expect websites and apps to have “clear and conspicuous” and “legible and understandable” legal disclosures to avoid deceptive trade practice claims.  Requiring a click to access important disclosures is neither clear nor conspicuous to a user.  Thus, the concepts of Progressive Disclosure and Progressive Reduction seem to conflict with proper legal disclosures.  So can they coexist?  The answer is yes, but not for (1) the critical elements of the initial disclosure, and (2) information you are legally obligated to present to the user.

An initial website legal disclosure (e.g., special terms regarding a product, automatic renewal terms, etc.) must be clear, conspicuous, legible and understandable, as the FTC and state AGs expect. Progressive Disclosure and Progressive Reduction should not be used for the initial disclosure, and should never be used to break apart a legal agreement such as click-through terms. (If space is a concern, an attorney should try to make the disclosure as concise as possible, or use a scroll box with a greyed-out checkbox for consent or greyed-out “continue” button until the consumer scrolls to the bottom of the scroll box.)  For legal policies posted on a website, using a layered approach is a common way to apply principles of Progressive Disclosure.

In some cases, there are supplemental references to or confirmations of the initial disclosure, such as in an order confirmation email, or online notices of a policy change previously communicated by email or postal mail.  The supplemental references to, or confirmations of, a website legal disclosure are generally used to remind the consumer what they have agreed to, which can help defend against a claim that the disclosure was not clearly or conspicuously provided.  In some circumstances, such as with auto-renewing subscriptions in California, the full initial disclosure must be provided in the supplemental disclosure.  However, where there is no legal requirement to do so, Progressive Disclosure can be applied to the supplemental disclosure as long as the terms initially displayed are the ones for which the consumer would most expect to be reminded, i.e., the most critical terms.

A strong partnership with the User Experience team is critical to ensuring that legal disclosures are properly presented in websites and apps.  Demonstrating an understanding of UX concepts, and how to strike the right balance with legal disclosure requirements, strengthens their view of counsel as a valued business partner and problem solver.

Make Your Unsubscribe Process Work For You

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When a consumer wants to no longer receive marketing communications from your company, both US anti-spam law (CAN-SPAM) and Canada anti-spam law (CASL) require you to provide a simple, easy-to-use unsubscribe mechanism.  No one these days questions the importance of offering an unsubscribe link to recipients of commercial emails – failing to do so is one of the easier ways to get in trouble for noncompliance.  However, I’ve seen many companies make the process too easy or unclear.  Some use a one-click unsubscribe; others don’t provide a good experience for those seeking to change their marketing preferences.

Here are some simple guidelines on good hygiene for your unsubscribe process:

  • Consider using an unsubscribe/manage preferences page, not a one-click unsubscribe. One-click unsubscribe means that as soon as a consumer clicks unsubscribe, it’s done and that consumer marketing record is off-limits.  As an alternative, consider a landing page through which a consumer can choose from “layers” of unsubscribe options (e.g., unsubscribe from emails about Product X, unsubscribe from emails from Product Division Alpha, unsubscribe from all emails from Company), and/or manage their communication preferences.  A person may initially think they want to unsubscribe, but on arriving at the page may instead realize he/she only wants to change or update their communication preferences to still receive some (but not all) communications.  The complexity of the page should be driven by the available “layered” choices (if simple, use radio buttons; if complex, use separate sections for each choice with sub-options).  You must allow the page visitor to take a final action from that page – you cannot use more than a single page plus the original click for unsubscribe requests.  (You can include a link to a separate “manage preferences” page if preferred.)
  • Design unsubscribe functionality to the principles of Simplicity, Clarity, Choice and Experience. Make it easy (but not too easy) for a consumer to opt out – you cannot make page visitors jump through hoops, and cannot ask them for additional personal information (other than email address) in order to unsubscribe.  Ensure disclosures and the unsubscribe process are clear to the reasonable consumer.  Provide alternatives to opting out (changes to frequency, content, or receipt point).  Provide a good experience and ensure they leave on good terms.
  • Clarify that they’ll still receive transactional emails. Where a page visitor can select to unsubscribe from all marketing emails, if appropriate consider language clarifying that they are unsubscribing from receiving all promotional emails, and that they’ll still receive transactional and relationship emails such as order confirmations and shipping notifications.
  • Humanize the unsubscribe notice. Use the unsubscribe process to remind the page visitor that they are working with a company, not an automated computer system.  Include your company’s branding on the unsubscribe/manage preferences page(s).
  • Ask for feedback after confirming the unsubscribe or change in preferences. Lastly, consider asking for feedback about why they are unsubscribing or changing their preferences, AFTER you have confirmed the unsubscribe or preference change.  This data can provide useful metrics to your organization to help shape your email and omni-channel marketing strategy.

Be the King of your CASL Marketing Compliance

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Marketing campaigns, including both print marketing (such as flyers) and electronic marketing (such as emails and paid search campaigns), are critical drivers of business. The United States and Canada are two of the many countries which have enacted laws attempting to balance the right of businesses to use electronic marketing with restrictions and requirements for sending certain forms of commercial electronic messaging to curb unsavory business practices. Marketing messages must comply with the US CAN-SPAM Act (for email messages sent to US recipients) and CASL (for commercial electronic messages sent to Canadian recipients). Otherwise, businesses may face fines, litigation, and/or distracting and costly government investigations. Applying CAN-SPAM processes to Canadian recipients is a dangerous approach, as CASL is considerably broader in scope than CAN-SPAM. This note provides an overview of some of the core differences between CAN-SPAM and CASL to help you start to understand the compliance requirements.

What are CAN-SPAM and CASL? CAN-SPAM (the Controlling the Assault of Non-Solicited Pornography And Marketing Act) is a US law with associated regulations enacted in 2003 regulating the sending of commercial email messages. CASL (“Canada’s Anti-Spam Law”) is a Canadian law regulating commercial electronic messages effective July 1, 2014.

What types of messaging are covered? CAN-SPAM and CASL both apply to marketing communications, but CASL has a broader scope. CAN-SPAM applies to email messages where the primary purpose is the commercial advertisement or promotion of a commercial product or service. Emails were the focus of online marketing practices in 2003 when CAN-SPAM was enacted, and it has not been expanded to cover other types of commercial electronic messages. CASL applies to any electronic message sent to an electronic address, where the intent is to encourage the recipient to participate in a commercial activity. Under CASL, these electronic messages are called “commercial electronic messages” or “CEMs”. Examples of CEMs are emails, videos, SMS/MMS messages, instant messages, software or system tray pop-up messages, and social media messages.

When can I send marketing communications under CAN-SPAM? You do not need prior consent to send a commercial email under CAN-SPAM. You can send an unsolicited commercial email under CAN-SPAM unless the recipient has told you he/she does not want to receive them. However, it is considered an industry best practice to use opt-in lists for marketing communications. One important exception is that you can’t send a commercial email to certain email addresses provided by wireless carriers (e.g., vtext.com or sprintpcs.com) without express consent to do so. A “transactional or relationship” message is excluded from CAN-SPAM requirements as long as it’s not primarily commercial in nature. Commercial email messages sent under CAN-SPAM must comply with certain requirements such as identification of the sender and initiator of the message (including physical postal address); no false, deceptive or misleading header information; identification of the message as an advertisement unless the recipient has opted in to receive it; and notice of the right to opt out, and a working unsubscribe mechanism (see the statute and implementing regulations for full requirements).

When can I send marketing communications under CASL? Under CASL, you can only send a marketing communication to a Canadian computer, email address, or network if you have express consent (or in some circumstances, implied consent) to send it, with very limited exceptions. The requirement for consent before sending the message is the most important difference between CASL and CAN-SPAM. A commercial electronic message sent in compliance with CASL must include identification of each sender (there can be more than one); each sender’s contact information; and a free unsubscribe mechanism (see the statute and implementing regulations for full requirements). There are some limited categories of CEMs excluded from all or some of CASL’s requirements (for example, quotes or estimates requested by a recipient are excepted from CASL’s consent requirements only, but still require compliance with CASL’s identification, contact information, and unsubscribe requirements). CASL also covers other topics such as installation of computer software.

Do I need consent to send a commercial electronic message? Under CAN-SPAM, you don’t need express or implied consent before sending a commercial message (but it is an industry best practice to only send marketing messages to opt-in recipients). Under CASL, you need express consent (or in limited circumstances, implied consent) first. When asking for express consent under CASL (e.g., on a web page visited by a Canadian resident), you must disclose (a) that the communication is from your company, including a mailing address and either phone number, email address or web address; (b) the purpose for which consent is being sought; and (c) a statement that the person can withdraw consent. Remember that under CASL you can’t send an email asking for consent (as that email would violate CASL). Consents should be obtained through other means, e.g., during the website checkout process, via checked boxes on paper forms, etc. There is an exception to the consent requirement providing an implied consent for business relationships existing as of July 1, 2014, but that only lasts for 3 years and you still need to comply with all other CASL requirements when sending messages under that implied consent.

What is the difference between express and implied consent? Express consent is clearly and unambiguously stated, where implied consent is inferred from behavior and situational circumstances. When you take an affirmative action to clearly and unambiguously give consent, such as checking a box or signing your name, you are providing express consent. If you don’t uncheck a box indicating you wish to receive marketing communications, or you give your business card to someone, your consent to receive marketing communications is inferred, and you have provided implied consent. (Only certain types of implied consent are acceptable under CASL – see the statute for specifics.) Under CAN-SPAM, there is implied consent to send an unsolicited message unless the recipient has opted out of receiving it.

What should I do if I cannot tell where a person is from when asking for the right to market to them?  If you believe your campaign is likely to include Canadian recipients (e.g., it includes some .ca addresses), consider whether to follow CASL’s requirements for the Canadian recipients in the campaign. If you use a form to collect email addresses which will be used to send commercial electronic messages, please consider whether to require consent, or to pop up a consent box if the email address is a .ca address. If the form is on a Canada-specific page, you should always obtain consent.

The effective date of CASL is almost here, so don’t delay any further if you haven’t been paying attention to whether your electronic marketing strategy in Canada is CASL compliant. Failure to properly CASL could put your business in check.

The Pain of Preference Payments

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Bankruptcy is boon to debtors in trouble, and a pain for creditors of those debtors.  You provide goods or services to a company only to find that their receivable is noncollectable once that company enters bankruptcy, and if you’re lucky if you receive cents on the dollar on the amount owed.  However, preference payments can sting even worse.  This blog entry gives an overview of preference payments and the common defenses.

Section 547 of the Bankruptcy Code allows a bankruptcy trustee (or a debtor-in-possession under Chapter 11) to “recapture,” or invalidate, payments made by the debtor for the benefit of a creditor during the 90 day period prior to the date the bankruptcy petition was filed (the “preference period”), regardless of whether the debtor received anything in return for the payment.  This is called a “preference payment,” so named because one of the goals of bankruptcy is to promote equality of distribution of assets to similarly-situated creditors, and to prevent a debtor from paying off its preferred creditors before filing for bankruptcy leaving basically nothing for the other creditors. There are certain requirements for a preference payment, e.g., that the payment was for an “antecedent” debt (the payment to the creditor followed provision of the goods and services to the debtor), and that the payment was made when the debtor was insolvent (there is a presumption of insolvency during the 90-day preference period).

Once a bankruptcy is filed, the trustee will often look at payments made by the debtor during the preference period, and will send demand letters (or complaints) seeking repayment of the alleged preference payments from creditors. These are the letters and court actions that vex many companies.  In some cases, repaying the alleged preference payment is more economical to a company than fighting it out with the trustee, resulting in attorneys’ fees and distractions for internal personnel.  However, companies can, and often do, fight back against preference payment recapture demands.  The Bankruptcy Code includes a number of defenses to a trustee’s attempted recapture of preference payments.  The three most common of these are:

  • Ordinary Course of Business Defense.  Under Section 547(c)(2) of the Bankruptcy Code, if a payment was made in the “ordinary course of business,” the recipient of the payment can avoid the obligation to return the payment.  (The reasoning for this is that if a payment was made in the ordinary course, there’s nothing preferential about it.)  A payment was made in the “ordinary course of business” if the creditor can prove (it has the burden of proof here) that the alleged preference payment was made either (a) consistent with the parties general business practices, such as the parties’ course of dealing; amount, timing and circumstances of previous payments; and contractual terms (the “Subjective Test”), or (b) consistent with common industry practice (the “Objective Test”). If you don’t have a payment history, you may not be able to use this exception. A trustee will likely give greater credibility to contractual terms where there’s a long history between the parties.  If that doesn’t exist, look to the actual payment history, not just the contractual terms.  The more consistency you have in your accounts payable practices with your partners and suppliers and the less “one-off” exceptions you allow, and the farther back your history goes, the easier it will likely be for you to claim the ordinary course defense. Good record-keeping is essential here.  It’s unclear whether payments made pursuant to an installment plan would be considered made in the ordinary course of business.
  • Contemporaneous New Value Defense.  Under Section 547(c)(1), if a payment by the debtor is substantially contemporaneous with the provision of “new value” by the creditor, the party receiving that payment can avoid the obligation to return the payment.  If the payment is essentially offset by new value contemporaneously provided to the debtor, the debtor’s estate is unaffected and thus there just a payment (but not a preferential payment).  A good example of this is a purchase of goods by check or cash – if the debtor paid $1,000 by check and received $1,000 in office supplies on a one-off purchase, the contemporaneous new value of office supplies received by the debtor offsets the $1,000 payment to the creditor.  To assert this defense, you must demonstrate (1) that the parties intended for the exchange of payment for value to be contemporaneous; (2) that the exchange was in fact contemporaneous; and (3) that the exchange was for new value.  If you’re concerned that a vendor may be in financial trouble, one approach is to restructure payment terms to provide for contemporaneous exchanges to better enable you to assert this defense later on.
  • Subsequent New Value Defense.  Under Section 547(c)(4) of the Bankruptcy Code, if following receipt of a preference payment a company provides new value to the debtor in the form of subsequent goods or services during the preference period, the amount of that “new value” can offset the corresponding amount of a prior preference payment.   For example, if you receive a preference payment of $10,000 sixty days prior to bankruptcy, and provide new services valued at $6,000 thirty days prior to bankruptcy (for which you do not receive another payment prior to bankruptcy), the $10,000 preference payment is offset by the $6,000 in new value, leaving a remaining preference amount of $4,000.  Credit cannot be carried forward; if there is a new payment in any amount after new value is provided but before the bankruptcy filing date, the new value is extinguished for the purposes of this defense.  This defense primarily differs from the contemporaneous new value defense in that the new value is not contemporaneous with the alleged preference payment.

One other important defense to consider is that it’s only a preference payment if made in the preference period.  For any payments made close to the 90-day mark, it may be worth a careful review of when the payment was received. In a number of courts, a “date of delivery” rule is used when determining the date of a payment for preference purposes.  Also note that for insiders of the debtor, the preference period is 1 year.

Two closing thoughts.  The possibility of recapture of preference payments shouldn’t automatically preclude you from doing business with companies which may not be fully financially stable – it’s often better to have the money and have to potentially return it than to never have it at all.  Finally, there are a lot of additional nuances to dealing with preference payment claims and litigation – consider talking with bankruptcy counsel to ensure you know your rights and defenses.

What’s the Point of a “Termination on Bankruptcy or Insolvency” Clause?

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Almost every contract drafted today contains a clause allowing for a party to terminate the agreement if the other party files for bankruptcy, is forced into bankruptcy by a third party (involuntary bankruptcy), makes an assignment for the benefit of creditors, becomes or admits to being insolvent or generally unable to pay its debts when due, breaches a covenant related to financial condition, ceases to do business, etc.  This type of clause is commonly known as an ipso facto clause.  Ipso facto is Latin for “by the fact itself,” and means that the occurrence of something is a direct consequence and effect of the action in question.  The action is the bankruptcy or insolvency of Party A, and the occurrence is the right to terminate by Party B.  This clause is considered “boilerplate” in most contracts, and is rarely negotiated (or even discussed).  However, attorneys and business persons alike should be very careful in relying on the right to terminate in this clause, as it’s generally unenforceable.

State law generally governs whether a contract is enforceable or non-enforceable.  However, one very big exception to that rule is the federal law governing bankruptcies (Title 11 of the United States Code, known as the “Bankruptcy Code”).  One of the primary goals of federal bankruptcy law is to allow a debtor to reorganize their business.  In order to do that, the Bankruptcy Code overrides state enforcement of ipso facto clauses and invalidates them (in most cases) as a matter of federal law.  Section 365(e)(1) of the Bankruptcy Code states that an “executory contract” (i.e., a contract where there’s still performance obligations outstanding) may not be terminated following commencement of bankruptcy solely because of a termination right based on the insolvency or financial condition of the debtor at any time before the closing of the bankruptcy.  In other words, you generally can’t exercise an ipso facto clause under federal bankruptcy law once a bankruptcy starts, no matter what the contract says.  (Another clause, Section 541(c), states that a property interest becomes property of the estate upon commencement of bankruptcy, meaning that the property interest can’t be terminated by an ipso facto clause.)  Once bankruptcy starts and while it’s underway, only the trustee of the debtor can assume or reject an executory contract – it’s out of your hands.

Ipso facto clauses have remained in agreements through the years even though they’re no longer very useful, like a contract’s version of a human appendix.  There’s actually a few good reasons to keep them around.  It’s important to remember that the clause’s unenforceability under federal law is tied to the actual commencement of bankruptcy; if that never happens, the clause is still enforceable, or at least potentially usable as a saber that can be rattled.  (Keep in mind that if you terminate under the clause and then bankruptcy is filed, the debtor may try to petition the court to reinstate the agreement and rescind the termination, similar to a “preference payment.”)  There are also a couple of limited exceptions under Section 365(e)(2) of the Bankruptcy Code, such as where applicable law excuses the other party from accepting performance (whether or not the contract prohibits or restricts the assignment or delegation), and that party doesn’t consent to the assumption or assignment, e.g., the debtor is was commissioned to paint a mural based on his expertise – the building owner doesn’t have to accept the trustee’s paint job as a substitute.  Finally, it’s always possible the Bankruptcy Code could be changed in the future to allow for the enforcement of ipso facto clauses under state law, perhaps through an expansion of the exceptions under Section 365(e)(2).

Representations, Warranties and Covenants

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Many attorneys use representations, warranties and/or covenants as a single grouped concept, e.g., “represents, warrants and covenants” or “represents and warrants.”  Some tend to view them as synonymous terms.  However, they’re not meant to be interchangeable – each is separate and distinct from the other, has different temporal characteristics, and has different remedies.  Understanding the differences between them and using them appropriately can be important to ensure that the right remedies attach to the right terms in an agreement.  Using these terms properly also helps attorneys be as clear as possible in their agreements, which can be very important if non-attorneys are reading or reviewing them.

Representations are statements of past or present fact or circumstance.  It’s a contractual statement that a fact or circumstance is presently true, and/or has been true in the past.  An example of a representation is “the execution of this Agreement does not conflict with any obligation to which the party is currently bound.”  This is a present statement of fact — signing the agreement by that party will not result in a breach of another agreement.  Representations are generally included in an agreement to induce a party to enter into an agreement in the first place (without representations as to certain present circumstances and/or past facts, the other party wouldn’t execute the agreement), and are either true or not at the time the representation is made.  This is why breach of a representations gives rise to a remedy that breach of warranty or covenant does not – breach of a representation may give rise to a right by the non-breaching party to void the entire agreement, under such theories as fraudulent misrepresentation or fraudulent inducement to contract.  The non-breaching party may be able to recover “rescission” damages to put it in the position it was in prior to execution of the agreement (e.g., repayment of fees paid). The damages available for breach of a representation is an important reason why using “represents and warrants” or “represents, warrants and covenants” too liberally can lead to unintended consequences.

Warranties are statements of current and future condition.  It’s a contractual statement that a condition is, and/or will be, true for a period of time (often the term of the agreement).  An example of a warranty is “the software licensed hereunder conforms in all material respect to its documentation.”  This is a statement of current and future condition – the software licensed in the agreement are in conformance to the software documentation.  The statement may be true at the time the warranty is made, but may be breached during the course of the agreement (e.g., if a maintenance release breaks something).  In the event of a breach of warranty, the non-breaching party may be entitled to damages resulting from the breach, and in many cases a contract will provide for specific remedies in connection with a breach of warranty (e.g., commercially reasonable efforts to repair). However, unlike a representation, a breach of warranty does not give rise to a right to void the contract.

Covenants are promises of future action or inaction.  It’s a contractual statement that a party will do, or will not do, something during a period of time (often the term of the agreement).  An example of a positive contractual covenant is “Party A shall issue a press release announcing the relationship within 30 calendar days of the Effective Date”; an example of a negative covenant is “Party A shall not issue a press release or make any public statement regarding the terms of the Agreement during the term of this Agreement.”  The action or inaction will occur in the future, not at the time the covenant is made.  In the event of a breach of a covenant, in addition to damages for breach of contract, if the covenant is material enough it could excuse the future performance of the non-breaching party (e.g., the breach of covenant frustrates the purpose of the agreement such that continued performance no longer matters).  Further, unlike the breach of a representation or warranty, the breach of a covenant may give rise to injunctive relief.

Feedback on feedback clauses

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A feedback clause generally gives a party a right and license to use ideas, comments, suggestions or similar feedback provided by the other party. Companies that offer products and services like these clauses because they allow the company way to learn information that can help them continue to improve their offerings.  The standard argument in support of this type of clause is that it’s important to a product or service provider to ensure that simply discussing products in development with a client does not jeopardize their ability to use information they learn during that discussion.  While that’s not unreasonable, there are a few different flavors of feedback clauses – the taste depends on which side of the fence you’re on.

As noted above, a typical feedback clause gives a party defines “Feedback” (e.g., any ideas, comments, suggestions or similar feedback provided by one party to the other); indicates that the provision of feedback is completely voluntary; and provides some grant of rights to the receiving party to use feedback.  Think of this as the “base.”  There are things you can “mix into” the base to change or enhance it, including a feedback trumps confidentiality provision, a feedback ownership provision, and/or a feedback warranty provision. If you’re on the receiving end of feedback, these mix-ins may be worth considering adding into a base clause.  If you are on the disclosing end, these may be real causes for concern.  (If you’d like a copy of my standard mix-in clauses, send me an email.)

Feedback trumps confidentiality.  This mix-in states that any feedback provided, even if designated as confidential by the disclosing party, does not create any confidentiality obligation for the receiving party absent a separate written agreement, and the receiving party is free to use it the feedback without obligation or limitation.  To the recipient, this ensures that any feedback can be freely used if provided by a recipient, regardless of confidentiality obligations under the Agreement.  To the discloser, this can result in a “back door” around confidentiality.

Feedback ownership.  This mix-in states that the disclosing party agrees to transfer all right, title and interest in and to feedback to the receiving Party.  To the recipient, this ensures that they do not have to worry about creating derivative works of materials owned by a third party by using feedback.  To the discloser, this can result in an inadvertent surrender of its own rights to any of its underlying proprietary information disclosed as feedback to a third party.

Feedback warranty.  This mix-in is a warranty that the feedback does not infringe third party IP rights, is not subject to open source licensing obligations, and does not require payment of third party licensing fees.  To the recipient, this can give some important protections if the recipient uses the feedback.  To the discloser, this creates contractual representations for providing feedback, for which contractual damages may rise if the discloser breaches the warranty.

Here is my own base feedback clause where I represent MyCo (I flip this around and add in mix-ins on a case-by-case basis if warranted).  It requires designation of feedback as such, and protects confidential information if inadvertently provided with feedback:

“The Parties acknowledge that MyCo may from time to time provide YourCo with ideas, comments, suggestions, or other feedback on the features or functionality of YourCo’s product offerings which is designated by the disclosing party as “Feedback” in writing on any written feedback, or contemporaneously with disclosure if disclosed orally (collectively, “Feedback”).  The Parties agree and acknowledge that any Feedback is provided voluntarily by MyCo.  In the event MyCo provides YourCo with Feedback, MyCo hereby grants to YourCo a perpetual, royalty-free, worldwide right to use such Feedback for the limited purpose of improving and creating derivative works of YourCo’s Products (notwithstanding the foregoing, the foregoing right shall not apply or extend to any portion of Feedback provided by MyCo which is MyCo’s Confidential Information, MyCo Technology or MyCo Materials), and the obligations of confidentiality set forth in this Agreement shall supersede and have priority over any Feedback usage rights.”

Finally, one of the most important things you can do regarding feedback is educate your business teams on what to watch out for when sharing feedback with a contractual partner – as in many areas, sound business practices can go a long way towards ensuring reliance on the legal language never becomes a necessity.

How effective is your contract’s Effective Date?

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It’s usually one of the first things in an agreement – the Effective Date.   The Effective Date is sometimes defined as a specific date, e.g., “This Agreement, effective as of October 21, 2013 (the ‘Effective Date’)…”  In other cases, a contract becomes effective once signed by both parties.  In that situation, most attorneys contractually define the Effective Date of an agreement as “the date last written below”, put a “Dated” line in the signature block, and don’t think twice about it.  It’s worth a second look.  The Effective Date can be critical to a company for a number of reasons, incuding revenue recognition and performance of contractual obligations tied to it.

In an era where exchanging signature copies or signature pages via PDF (or more rarely these days, fax) followed by an exchange of signed originals is more common, using “the date last written below” to define the Effective Date can have unintended consequences.  In many cases, once the parties have exchanged signed copies by PDF, performance begins and they leave it to the contract administrators to follow up with originals if requested by one or both parties.  But when the originals are signed by the parties, they can create a new Effective Date for the agreement.  This is because of the integration clause in the agreement boilerplate – an argument can be made that the newly signed original version of the agreement supersedes the previously signed PDF version of the agreement, creating a new Effective Date.

For example, suppose you have an agreement where the initial term runs for 1 year from the Effective Date, subject to automatic renewal for subsequent 1-year terms unless a party provides notice of non-renewal at least 30 calendar days prior to the end of the term.  Suppose the date of last execution by PDF was January 1, 2014, and the date of last execution of the originals was January 9, 2014.  Party A is hoping for a renewal as the minimums under the Agreement double in year 2, but Party B sends notice of nonrenewal on December 4, 2014.  Party A claims that the notice is invalid as improperly given, since it was received less than 30 days prior to December 31, 2014 (the end of the initial term).  However, Party B claims that Party A is relying on the wrong Effective Date, and matinains that the correct Effective Date is January 9 (the date last written on the originals), and thus notice of non-renewal was properly given.

A few years ago, I made two changes to my contract templates to eliminate the possibility of this problem.  First, I redefined the Effective Date as “the date on which this Agreement first becomes fully executed by all Parties hereto.”  Second, I added two date lines to the signature block – “Date PDF or Facsimile Signed” and “Date Original Signed.”  This approach ensures that even if originals are exchanged after PDFs, the date on which the agreement first became fully executed will be the Effective Date, and the signature block in the agreement will show clearly when a PDF or fax version was signed versus when an original was signed.  This makes it easier for not only attorneys to determine the correct Effective Date of an agreement, but for contract administrators, business owners, and others to ensure that they are recognizing revenue, and tracking and measuring performance, under the Agreement from the correct Effective Date. By implementing a more robust definition of the Effective Date in an agreement, parties can ensure that what is often considered a standard term doesn’t become a point of contention later on.

Risk Management 101

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Risk management is, whether actively or passively, an ongoing process at all levels of an organization, one that can lead a company down the path to prosperity or ruin.  Any time someone asks, out loud or to themselves, “What if…,” “That could mean…,” “That might cause…,” “Have we considered…,”, or the like, they’re engaging in risk management.  Attorneys, whether in-house or in private practice, practice risk management in their daily activities – the core of our job is to facilitate our client’s business objectives while managing legal risk (attorneys are often viewed as the “de facto” risk management group within an organization).  Moreover, effectively managing risks can be a lot more difficult in practice than it sounds in theory. Fostering a culture throughout an organization that embraces, rather than shies away from, risk management (understanding what potential risks are, being able to identify them, knowing who should make risk management decisions, and making reasoned decisions) is critical to the success of any company.

At its core, “risk management” in the business and legal context can be defined as “the process of identifying, analyzing, and determining how to handle risks that may result from a proposed course of action or inaction.”  In other words, it’s the process of weighing both the positive and negative consequences from any particular course of action in making business and legal decisions. I use the following in my business discussions to summarize the importance of good risk management practices:  “It’s much easier to stop a snowball from rolling the wrong way while it’s still at the top of the hill.”

There are four core parts of risk management – (1) understanding what “risks” need to be managed, (2) identifying manageable risks during day-to-day business activities, (3) determining who makes risk management decisions, and (4) making risk management decisions.  I’ll save a detailed analysis of each for a broader article, but provide an overview and some basic guidance here.

Understanding the risk.  Risk management isn’t “avoiding all risk” – risk is an important part of business.  (There is an old AIG slogan – “the greatest risk is not taking one.”)  The trick is to manage risk to a level acceptable to the company.  Every company has a different tolerance for risk – e.g., start-ups may be willing to take more risk than a well-established company. Understanding what risks must be managed and an appropriate risk tolerance level is something that senior management (with the advice and guidance of internal or external attorneys) must determine, and must re-evaluate over time as the company grows and changes. The main types of risks that companies face on a day-to-day basis are (1) revenue risks (getting the business versus lost opportunity); (2) precedent-setting risks (the slippery slope); (3) legal risks; and (4) operational risks (writing checks the company can’t cash).

Identifying the risk.  If you remember anything after reading this, let it be this – you can’t make a risk management decision if you can’t identify and escalate the risk that needs to be managed.  Many companies are equipped to manage a risk, but don’t have good processes or training on how to spot them in the first place.  Company personnel – whether attorneys, sales team members, business owners, or any other employee, contractor, or advisor – must learn to spot risks associated with a proposed or ongoing course of action or inaction and escalate them internally (e.g., to their manager, to a designated risk management officer or team, etc.).  Managers should be responsible for educating their teams on spotting and escalating risks, and this should be a core component of any corporate-wide risk management training.

Approving the risk.  Once a risk has been identified, the next step is to determine the right approver of a risk management decision.  One of the hardest aspects of an effective risk management culture is getting someone to make a risk management decision, which is why effective risk management approval structure is essential.  Everyone is willing to take credit for a good risk management decision – no one wants to take the blame if the risk exposure actually happens.  If people fear they’ll be “thrown under the bus” for bad risk management decisions (whether that person is the presenter or the approver), establishing a robust risk management culture is not going to succeed.  Companies should consider assigning roles for approval of certain risks, discouraging/punishing individuals who do not follow the proper approval process, keeping good records of risk management approvals, and ensuring that individuals who make informed, well-analyzed risk management decisions aren’t thrown under the bus if the risk exposure ultimately occurs. (If proper risk management practices are followed, the realization of a risk exposure should not result in a “witch hunt” to find someone to blame, but should result in a re-analysis of the risk management decision to see if other “hindsight” data points would have affected the risk management decision and determine if changes to the risk profile of the company and/or risk management practices are appropriate.)

Making the risk management decision.  There are four things a company can with an identified risk – avoid it (don’t take the proposed course of action or inaction); mitigate it (implement new processes, obtain insurance, or take some other action to control the risk exposure) shift it (make another party responsible for the risk exposure, e.g., through a contractual indemnity and hold harmless); or accept it (proceed with the action or inaction knowing what might happen).  Each of these is a completely valid risk management decision, and they can be used individually or in combination once the identified risk has been evaluated (i.e., both the benefits and risks of a particular course of action or inaction should be presented to the appropriate decision-maker).  There are only two “bad” risk management choices – (1) accepting the risk because of a perceived need on the part of the business to “act quickly” and not take the necessary time to evaluate and manage the risk, and (2) accepting the risk because the risk was never identified in the first place.

How to Spot an “A Player”

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One concept used nearly universally by companies is that of the “A player.” Companies love to tout their efforts to hire and retain A players, and improve B and C players to A player status; it’s often core to a company’s talent management efforts. The problem is, in most companies it’s really just talk. The reason? Most companies and managers don’t know how to routinely spot an A player in their midst, or during interviews. That’s because most A players aren’t the ones touting themselves as A players – they let their actions speak for themselves, and expect to be recognized and rewarded as a result. It’s often when companies and managers overlook the accomplishments and contributions of A players, or A players feel that they are being overwhelmed by the performance of the B/C players around them, that they feel underappreciated and elect to take their talents elsewhere (they’re the ones who can most easily obtain other employment). An A player’s departure can reveal other problems within a company that are considerably more costly to rectify than keeping the A player happy, employed, and contributing to the success of the company.

Here are three core traits I believe most A players share, but many HR departments and managers tend to overlook:

  • They’re smart workers (not just hard workers). One major reason it’s often hard to spot an A player is that companies tend to equate working harder with A players. A players don’t just work hard – they work smart. They work very efficiently, seek to create replicable, optimized processes for accomplishing work, and often leverage technology to generate more high quality work product in less time. Companies like to promote a good work-life balance, but often look at the employees who prioritize work first above all else as the top performers. A players often achieve a good work-life balance by working smarter, while still turning out more than their share of work product and results. (They’re also often the ones working late or on weekends, but using technology to be efficient about it so it minimizes intrusion into their personal time.)
  • They share ideas without always seeking recognition. A players are often the ones who don’t stay in their wheelhouse – they often are the ones who get to know the areas of the business outside of their normal job functions, as they believe that a full understanding of the business is critical to their success. If they have ideas or suggestions for another department based on their insights or expertise, they’re often not shy about sharing them, but don’t always seek recognition for the idea – they’re happy to contribute process improvements and other ideas simply because it could help the company. They’re often some of the most loyal company employees with firm grasps of the company’s value proposition.
  • They spot and fix the small problems before they grow. A players often have a strong ability to see the root of a problem, not just the problem. They tend to be adept at spotting business disconnects, business decisions based on faulty or missing facts or assumptions, and the like. They tend to recognize that big problems have small beginnings, and seek to be the one to stop the problem before it starts.

By working smarter (not harder), sharing ideas, and helping to spot and fix problems (whether or not in their area), A players also have the tendency to mask the poor performance of the B/C players around them. This can lead companies into thinking that their overall employee base is operating at a higher level than they really are. It’s often when an A player departs that many more problems start coming to light – sometimes taking weeks or months – for which the A player had been compensating while he/she was still employed. It can often require considerably more attention and resources than a company realizes to clean up the messes uncovered by an A player’s departure.

Any effort by a company to build and retain a large pool of A players, and by managers to identify the A players on their team, must start with knowing how to spot them. Companies should look to these traits, and others, to try to spot the diamonds in the rough. Only then can they truly promote and seek to retain the rank-and-file employees that provide the greatest ROI, both tangibly and intangibly, to the company.