The Why of Privacy: 4 Reasons Privacy Matters to People, and Why Companies Need to Know Them

Posted on by
Reply

While almost all companies collect and use their customers, visitors and users’ personal information, primarily online and through in-person customer interactions such as point-of-sale transactions, the privacy landscape is in a near-constant state of turbulence and flux. There is the steady flow of data breach reports affecting companies of almost every size and market segment. New data privacy laws, rules and regulations continue to be introduced and enacted around the world, such as the US-EU Privacy Shield program, the EU General Data Protection Regulation (GDPR), and Argentina’s draft Data Protection Bill, placing new legal obligations and restrictions on the collection and use of personal information. Challenges continue to be raised against laws which are perceived to overreach or conflict with privacy rights, such as the continued challenges to the Privacy Shield program and EU’s Model Contract Clauses.

The one constant in this turbulent landscape is that consumers’ awareness of data privacy and security continues to grow. Given this, it is important to step back from the day-to-day privacy developments and look at a more fundamental question. It is axiomatic in the world of privacy that privacy matters to people, but why it matters is more complicated. People often argue about why privacy is important to individuals, but there is no “one-size-fits-all” answer. Privacy matters to different people in different ways, so there are many equally valid reasons why privacy is important to individuals.

Understanding the “why of privacy” is also critically important to businesses and other organizations. By now, most companies understand the importance of providing notice of their privacy collection practices and choice with respect to the use of collected information. A company collecting, processing and/or controlling personal information that understands the reasons privacy matters to the data subjects whose data they collect and use can design more effective privacy practices and policies attuned to the needs of their data subjects, such as by creating customer privacy profiles for use in product design and testing.  This follows the “privacy by design” framework advocated by the Federal Trade Commission and helps increase trust in the company’s commitment to data privacy and security, which is critical to the success of every company in today’s world and can provide a competitive advantage.

The reason why privacy matters differs from person to person. However, I believe these reasons can be grouped into four core categories: (1) privacy is a right, (2) privacy is an entitlement, (3) privacy is an expectation, and (4) privacy is a commodity. I’ll explore each of them in turn.

Privacy is a Right

Persons falling into this first category value privacy as an irrevocable right guaranteed to all. People living in countries with constitutional data privacy protections often fall into this category. For example, the European Union Charter of Fundamental Rights recognizes the right to data protection and the right to privacy as fundamental human rights. In some countries, it has been implied through interpretation of constitutional and legal rights, such as the right to privacy found by the U.S. Supreme Court and the right to privacy recognized under the Canadian Charter of Rights and Freedoms even though it does not specifically mention privacy. In August 2017, a unanimous Supreme Court of India held that privacy is a fundamental right as an integral part of the Right to Life and Personal Liberty guaranteed under Article 21 of the Constitution of India.  The 1948 United Nations’ Universal Declaration of Human Rights states that people have a fundamental human right not to “be subjected to arbitrary interference with their privacy, family, home or correspondence.”

  • People in this category are more likely to take a very rigid view of privacy trumping all other interests, including business interests, and may be less willing to “trade” any of their privacy for other benefits such as increased security.
  • People in this category tend to expect that any consent given to use personal information must be clear, unambiguous, express, and fully revocable and that use of the information must be specifically limited to the grant of rights or as otherwise expressly permitted by law, which creates a significant burden for businesses and other organizations collecting and using personal information.
  • Privacy as a right is an individual view– the rights of the individuals to protect their personal information are paramount to almost all other rights by others to use or access that personal information.

Privacy is an Entitlement

Persons falling into this second category value privacy as something to which they are entitled under laws, rules and regulations applicable to them. There are many laws, either comprehensive data privacy laws such as Canada’s PIPEDA or sectoral laws such as the privacy laws enacted in the United States, whose prohibitions or restrictions on privacy practices may be viewed by individuals as creating privacy obligations to which they are entitled. An example is the U.S. Children’s Online Privacy Protection Act, which among other things prohibits the collection of personal information from children under 13 without verifiable parental consent. Some parents view COPPA as creating an entitlement for their children to be left alone unless the parent consents to the collection of personal information from their children.

  • Similar to privacy as a right, people in this category are likely to view privacy as trumping other interests, including business interests, and may be less willing to give up privacy for other benefits.
  • They tend to expect that any consent given to use personal information must be fully compliant with legal requirements, and that use of the information must be specifically limited to those use rights expressly permitted by law, which creates a burden for businesses and other organizations collecting and using personal information.
  • As with privacy as a right, privacy as an entitlement is an individual view, where a individual’s entitlement to privacy outweighs other interests in a person’s personal information.
  • A key differentiator between privacy as a right and privacy as an entitlement is that an entitlement can be revoked, e.g., through changes to the law, whereas a right is irrevocable. While some might argue that a judicially-recognized right to privacy should be an expectation, I believe that the recognition by a country’s supreme court that privacy is a right, which is unlikely to be overturned or legislatively reversed, should be considered a right.

Privacy is an Expectation

Persons falling into this third category value privacy as something they expect to receive, whether or not they have a right or entitlement to it. New technologies (such as drones and biometric identifiers) and practices (such as marketing strategies) tend to be ahead of laws specifically governing them, and people in this category expect to receive privacy protections regardless of whether existing laws or other rights cover the technology or practice. They may also expect societal norms with respect to privacy to be followed by businesses and other organizations, whether or not stricter than applicable legal requirements. There are also certain expectations of privacy that are generally recognized within a given society. For example, in the United States, many people have an expectation of privacy in their own home and other private areas such as a public bathroom stall. If a person or organization interferes with this expectation of privacy, there may be legal liability for invasion of privacy under state laws. There are other expectations of privacy on a per-situation basis, such as a private conversation between two individuals.

  • People in this category believe that third parties, such as companies and government entities, should recognize that their expectation of privacy trumps those third parties’ desire (or rights) to access and use their personal information, but also understand that the expectation of privacy has limits. For example, a person should not have an expectation of privacy in a public place (e.g., a public sidewalk), and there is no right of privacy that extends to a person’s garbage placed on the street for collection.  In the United States, there is also no expectation of privacy in the workplace.
  • An expectation of privacy can be breached by a superior interest by a third party. For example, if a court approved surveillance of someone suspected of engaging in illegal activity, any expectation of privacy that person may have that his conversations are private is superseded by the government’s interest in preventing and prosecuting crime.
  • People in this category also generally do not question or challenge the terms of a privacy policy or other agreement granting rights to use or collect their personal information. People in this category also tend to expect businesses and other organizations collecting and/or using their personal information will not unreasonably collect or use their personal information, and will respect usage opt-out requests.
  • Privacy as an expectation is a middle-of-the-road view, in which the individual view of privacy as paramount is tempered with the understanding that in some cases the general or specific value of allowing a third party to receive and use their personal information outweighs the personal interest.

Privacy is a Commodity

Persons falling into this fourth category value privacy as a commodity that they are willing to exchange for other benefits, goods or services. We live in an information economy, where data has been commoditized. To many companies a core or important part of their product or service offering (i.e., part of the general value of the product or service) or business strategy is the ability to monetize personal, aggregate, and/or anonymous data collected through its use. Companies argue that the value derived from data monetization is factored into the value and cost of the product or service. Other companies offer something of specific value, such as registering for an extended product warranty, for sharing personal information such as an email address or demographic information. Many people give businesses some rights to use their personal information simply by visiting a webpage, requesting information from them, or purchasing goods or services from them in which they agree to be bound by the company’s privacy policy or terms of use/terms of sale. We also live in a world where many people are willing to sacrifice some privacy in exchange for increased security against terrorism and other potential physical and cyber threats. People falling into this category have a strong understanding of the trade-off between privacy and other benefits.

  • People in this category are more willing to give third parties the right to use their information as long as the thing they receive in return is valuable enough to them – they view their personal information as currency. If a company or organization offers something of value, they are very likely to agree to share personal information with that company or organization. These are the kind of people who don’t really care that they’re receiving targeted ads while surfing online.
  • Conversely, if they do not believe they are receiving value in return for their personal information, people in this category are more likely not to share their information.
  • Privacy as a commodity is a transactional view, meaning that the an individual is willing to allow a third party to receive and use their personal information if the general or specific value of allowing that third party to receive and use the information outweighs their personal interest in keeping their information.
  • It may require a greater transfer of value to convince someone viewing privacy as a right, entitlement or expectation to treat it as a commodity.

 

As a closing thought, these four reasons why privacy matters to people are not mutually exclusive, meaning that there are additional sub-categories of people for whom two or more of these reasons are important. For example, it is possible for someone to view privacy as both an entitlement and a commodity. Such a person would expect that while they have the ability to exchange their personal information for something of value, it must always be a voluntary exchange – they would reject any need to trade away their personal information. Businesses who take the time to understand the “why of privacy” will find themselves better positioned to create sample customer profiles based on their customers’ privacy values, leading to more robust privacy practices, processes and policies and a potential competitive advantage on privacy in the marketplace.

Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He specializes in transactional agreements, technology/software/e-commerce, privacy, marketing and practical risk management. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric enjoys reading and implementing and integrating connected home technologies and dabbles in voice-over work.

Use the Right Intellectual Property Contract Terms To Protect Against IP Risk

Posted on by
Reply

In most technology and service agreements, one or both parties use or license the other party’s intellectual property (IP), or one party uses or licenses its own intellectual property for the other party’s benefit. However, using or benefiting from another party’s IP carries certain risks, including the risk of an infringement claim, ownership or licensing disputes, open source software, and risks arising from a bankruptcy of the IP owner/licensor.  Where managing the risks from that IP usage is important, having the right contract clauses in place to shift and mitigate this risk can be critical.

There are a number of contract clauses that can be employed to manage and shift IP risk. Two contract clauses in particular – the IP representation/warranty and the IP indemnity – may seem complimentary but can expose a party to unintended liability if used together.

IP Representation/Warranty and IP Indemnity

There are two clauses which can shift the risk of intellectual property infringement – an express representation/warranty of non-infringement and an indemnity against non-infringement. (I will not cover implied warranties of non-infringement under the Uniform Commercial Code, which are very frequently disclaimed in technology and service agreements.)

A representation/warranty of non-infringement is a statement of fact (rep) or statement or promise of condition (warranty) that intellectual property licensed and/or used does not infringe the intellectual property or other proprietary rights of third parties. An IP rep/warranty may be knowledge-qualified, i.e., “to the best of [owner/licensor’s] knowledge.” An IP rep/warranty allows the IP owner/licensor to stand behind its intellectual property, and allows the IP user/licensee to assert an “innocent infringer” defense to certain IP claims. However, like other reps and warranties, there are potentially meaningful consequences if they are breached. Like other breaches of representations, a breach could give rise to a right to void the contract and rescission damages.  Like other warranties, a breach can give rise to contract remedies, a right to withhold or cease performance under the agreement, and/or a right to terminate the agreement for cause.  The user/licensee is required to prove damages resulting from a breach of an IP representation or warranty.

An intellectual property indemnification is an obligation to defend, indemnify, and hold harmless the other party from and against losses, damages, and expenses arising or resulting from a third-party IP infringement claim. (Most service providers avoid first-party IP indemnity clauses, as they are effectively an insurance clause.)  This can be a standalone IP indemnity clause, or an indemnification obligation for breaches of reps/warranties where the agreement contains an IP rep/warranty. As it’s very difficult for an IP user/licensee to determine or mitigate the risk of infringement itself, the IP indemnity allocates this risk to the owner/licensor (subject to the limitation of liability) without the need for the user/licensee to prove damages or other losses. Watch the geographic scope of the indemnity to ensure it matches where the IP will be used – if it’s limited to US patents/trademarks, for example, a user/licensee would not be protected from a claim that their use violates an EU patent. IP indemnification clauses usually include procedures for tendering a claim for defense and language governing who controls the defense, assistance provided by the indemnified party, and settlement of an indemnified claim. A major benefit of an IP indemnity is that the indemnified party does not have to incur or prove damages resulting from an IP infringement claim first; as long as an indemnified claim is brought against the indemnified party, the indemnification obligations apply. As long as the indemnifying party complies with its defense and indemnification obligations, the indemnified party does not have a right to terminate the agreement.

Service providers will often put contours around the scope of the intellectual property indemnity by including limitations to the obligation to indemnify based on certain acts or omissions of the indemnified party. These include where the user/licensee uses IP outside the scope of the license or terms; where the user/licensee modifies the IP other than as authorized by the IP owner/licensor; where the infringement claim results from the combination of the IP with other products or technology not provided by the IP owner/licensor; and where the user/licensee fails to accept or use an updated version of a product or service provided by the IP owner/licensor which has been modified to be non-infringing. Some parties also exclude IP protection where the claim results from open-source software used in their products or systems. One thing to watch for is whether the exclusions are comparative (claims are excluded “to the extent” that an exception applies) or absolute (if any of the exceptions applies, indemnification is not provided).

Savvy service providers and IP licensors understand that including both of these clauses into an agreement can have unintended consequences, such as the potential for remedy “double-dipping.” If a contract contains both an IP indemnity and IP warranty protecting Party B, and a third-party IP claim is asserted against Party B, Party B may be able to both assert a breach of rep/warranty claim and seek damages for breach of the warranty or seek to terminate the agreement for cause, while also tendering the third party claim to Party A for defense and indemnification. Because of this, many licensors and vendors will offer an IP indemnity, but not an IP warranty. However, this eliminates the ability for the user/licensee to rely on the rep/warranty as an innocent infringer. If both the rep/warranty and indemnity are used, one approach to harmonizing them is to add language to the IP warranty stating that the sole and exclusive remedy for breach of the IP warranty is indemnification pursuant to the IP indemnity. This gives the user/licensee the “innocent infringer” benefits of the IP warranty protection as well as the IP indemnity protection, while ensuring that a breach of the IP warranty does not result in a claim outside of indemnification obligations.

Other Intellectual Property Risk Protections

In addition to IP reps/warranties and IP indemnities, there are other contractual protections which can be used to protect against IP risk.

Indemnification Remedy Clause

Where infringement occurs, the IP user/licensee often wants more than just to be protected — they want the right to keep using the IP for the duration of the agreement. In the event of actual infringement, neither an IP rep/warranty nor IP indemnity forces the IP owner/licensor to remedy the infringement. This is why many agreements include an additional IP infringement remedy clause which generally commits an IP owner/licensor facing a claim or judgment of IP infringement to obtain the right to continue to use the impacted IP, to modify the IP so that it is non-infringing, or to replace the impacted IP with a non-infringing alternative. In some cases, if none of the remedies are feasible, one or both parties may be given the right to terminate the agreement; where a termination right exists, users/licensees should consider whether to ask for a prorated refund of license/usage fees for the remaining terminated period of the agreement. Watch for language on the timing of the remedy – in most cases, it’s when the indemnifying party is found to be infringing by a court of competent jurisdiction (and not when the claim is first asserted), which generally does not impact the user/licensee as the defense and indemnification obligations should apply prior to that point.

Allocation of risk (limitation of liability) Cause

While an IP indemnity and rep/warranty shifts risk to the IP owner/licensor, the amount of risk shifted is allocated between the parties through the limitation of liability clause. Is the indemnifying party willing to provide uncapped liability for its IP indemnification obligations? Some service providers have not priced unlimited liability into its fees, or is unwilling to provide uncapped liability as a policy or due to insurance limitations. The user/licensee usually wants to negotiate the broadest liability cap possible; one common compromise is to negotiate a “super-cap” for IP indemnification obligations above the base limitation on direct damages but short of uncapped.

It’s important to also look at the disclaimer of consequential damages. An indemnified claim can include consequential damages as part of the third-party claim (e.g., lost profits).  If the disclaimer of consequential damages does not specifically exclude indemnification obligations, any such damages claimed by a third party may not be indemnifiable which may not be what one or both parties want.  It’s important to note that there is a significant difference between third-party consequential damages awarded in connection with an indemnified claim, and first-party consequential damages related to an indemnified claim (e.g., the indemnifying party should not have to pay for a company’s lost profits due to an executive having to travel and participate in a deposition in connection with an indemnified claim). An exclusion to the disclaimer of consequential damages for third party damages awarded in connection with, or included in the settlement of, an indemnified claim may provide a finer point on the exclusion.

IP Ownership Clause

Another contract provision which can be leveraged to mitigate IP risk is the IP ownership clause, which addresses ownership of each party’s pre-existing IP as well as any new IP created in connection with the agreement. This clause is ideally located up front in a base agreement between the parties, but sometimes will be placed in a Statement of Work (“SOW”) or other ancillary document instead (order of precedence language in the base agreement can be critically important in that case). Ensure that each party retains ownership of its own IP (except to the extent ownership is transferred to the other party), and that each party is prohibited (to the extent permitted by law) from reverse engineering, disassembling, de-compiling, creating derivative works from, renting, selling, leasing, acting as a service bureau regarding, or otherwise attempting to learn the source code of the other party’s IP. If neither company will acquire ownership rights to the other’s IP (even IP created in connection with the agreement), make sure the ownership clause clearly covers this.  If one company will transfer ownership of developed IP (a “deliverable”) to the other, ensure the agreement clearly defines the deliverable and states that the deliverable is considered “works made for hire” as defined in the US Copyright Act, and consider adding language regarding transfer and assignment of the IP rights in and to the deliverables (which may be tied to payment for the deliverable). If a deliverable contains the developer’s pre-existing IP, consider asking for a perpetual, irrevocable, worldwide right and license to sue the pre-existing IP as part of the deliverable (this may cause the IP indemnity to survive in perpetuity).

IP Insurance Clause

Another way to mitigate and shift the risk arising from IP is through intellectual property insurance. IP insurance can be obtained through specialized policies such as a cyber liability policy and media liability policy. Coverage for IP infringement claims may not be available under comprehensive general liability (CGL) coverage – check your policy or walk through coverage with your insurance broker to ensure you understand what your IP insurance policies (or typical policies) cover and don’t cover. Users/licensees may want to ask the IP owner/licensor about IP insurance they carry, and request that the owner/licensor be obligated to maintain their insurance and protect the user/licensee under the policy, e.g., by tying the contractual limitation of liability to the policy coverage.

Open source software Clause

In many cases, companies use open source software (“OSS”) in their IP. There are a number of good reasons companies do this, including lower costs, better quality, and a large support community. As IP owners/licensors did not create the OSS they use, many will disclaim OSS from IP representations, warranties, and indemnities. However, there are risks to OSS usage. For example, under some OSS license types, software which uses OSS governed by one of those licenses becomes governed by that same license, which can include requirements to disclose the source code upon request or other limitations. Users/licensees may want to consider including an OSS representation/warranty that any IP or other deliverables provided to it will not contain open source software which has not been disclosed in the agreement or a SOW.

Rights in Bankruptcy(§ 365(n))Clause

Licensees under software license agreements have a special tool for mitigating risk arising from a bankruptcy of the software licensor. When a company enters bankruptcy, the licensee (or debtor-in-possession) has certain rights to “affirm” or “reject” the debtor’s executory contracts, including some license agreements. 11 U.S.C § 365(n) gives licensees certain rights to continue to use licensed software in the event of the bankruptcy of the software licensor. To ensure these protections are available, consider including a clause in the agreement protecting the licensee’s rights under this section.

Software Escrow Clause

Finally, consider whether to include a contractual requirement for the owner/licensor to escrow licensed software.  For more on software escrow, please see my earlier post on software escrow.

An earlier version of this post first appeared as an article on my blog,Notes from the Trenches.

Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He specializes in transactional agreements, technology/software/e-commerce, privacy, marketing, compliance and practical risk management, and is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles invoice-over work and implementing and integrating connected home technologies. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice.

Why (and What) You Need to Know About the FTC’s Endorsement Guides and FAQs

Posted on by
Reply

Endorsements are an important tool in the marketing and promotional toolbox used by both companies and individuals. A slightly paraphrased version of the FTC’s definition of an endorsement is a message, such as a statement, demonstration, or other communication, by a party not the manufacturer, provider or advertiser of a product or service which contains that third party’s opinions, beliefs, findings, or experiences regarding that product or service (which may be the same as those of the product/service manufacturer/provider or its advertiser).

LinkedIn profiles are chock full of professional endorsements and recommendations by colleagues, peers and others. Companies rely on endorsements to increase brand awareness, promote marketing communications, and drive sales. Traditionally, a company’s brand awareness or marketing message was spread through “word of mouth” by individuals who had a satisfying experience with that company’s products or services. Think back to the old 80’s Faberge Shampoo commercial with a person saying you’ll love the product and that “you’ll tell two friends, and they’ll tell two friends, and so on, and so on, and so on….” If a family member, good friend, or other trusted individual shares a positive review of or experience with a product or service, the logic is that you’ll be more inclined to learn more about it and/or give it a try based on an endorsement from a “trusted source.” Companies and their advertisers use paid celebrities as another form of trusted source to promote their products and services. More recently, a new category of trusted sources has arisen – bloggers and other online personalities, or “influencers,” who regularly provide their followers with their thoughts and opinions (often positive), including on products and services they use. Additionally, companies may seek to leverage their employees as trusted sources by asking them to re-tweet marketing messages and posts.

An unbiased endorsement based solely on a trusted source’s positive experience with the product or service is the best source of information for potential customers. But would a potential customer put the same stock in an endorsement if they knew that the trusted source providing the endorsement works for, received some tangible or intangible compensation or benefit from, or has some other material connection to the company or its advertiser whose products or services they are endorsing? For the last few years, the FTC has been paying more and more attention to online endorsers and influencers. In April 2017, the FTC sent over 90 letters to various influencers and the marketers of brands endorsed by those influencers, highlighting the requirement to clearly and conspicuously disclose any material connection between the endorser and advertiser. The FTC has also recently added to its guidance regarding online influencers, and in early September 2017 announced their first enforcement action against two individual online influencers for failing to properly disclosure their material connection with the company whose product they were endorsing. This may be just the start of more aggressive enforcement by the FTC against influencers, trusted sources, and others who do not “follow the rules” regarding endorsements.

How can companies/marketers and endorsers/influencers avoid trouble when making endorsements? As with many areas of compliance, consider a “center of the herd” approach. The animals in the center of the herd are not the ones that typically get picked off – it’s the ones out in front (e.g., those most desperate for water or who have another need to be first) and those in the rear (e.g., those not paying attention, who can’t keep up, or just don’t care). The same applies in business – the companies more likely to be fined or penalized are those who are willing to take aggressive risks to be in front of the pack, or the ones bringing up the rear due to a lack of focus on, or disregard for, compliance. The FTC has released a set of guides and FAQs to provide guidance to all parties involved with endorsements. Being familiar with these guides and FAQs, and following best practices such as the ones described at the end of this article, can help ensure both you and your company are in the “center of the herd” when it comes to endorsements.

The FTC Guides Concerning Use of Endorsements and Testimonials in Advertising

The FTC has offered guidance for decades on the issue of biased endorsements in marketing: the FTC’s Guides Concerning Use of Endorsements and Testimonials in Advertising (16 CFR Part 255) (the “Endorsement Guides“), which apply to endorsements by consumers, celebrities, experts, and organizations. The Endorsement Guides were updated in 2009 to remove the “results not typical” safe harbor disclosure in endorsements and testimonials, to address connections between endorsers and companies/marketers, and to address celebrity endorsers. While contained in the Code of Federal Regulations, they are administrative interpretations only; deceptive advertising is governed by the Federal Trade Commission Act and state deceptive trade statutes, as well as other truth-in-advertising laws.

There are four principles at the heart of the Endorsement Guides:

  1. Endorsers should only endorse products they have tried, and should only say they use a product if they were a bona fide user at the time the endorsement was given.
  2. Endorsements must be truthful and not misleading (either expressly or by implication).
  3. Endorsers and companies/marketers should only make claims about a product if they have proof substantiating those claims.
  4. Endorsers and companies/marketers must disclose a material connection between an advertiser and an endorser if the connection may result in a perceived bias in the endorsement. A “material connection” is a connection between the person endorsing the product and the company which is producing or marketing the product which might materially affect the weight or the credibility given to the endorsement by its audience, such as but not limited to a business/family relationship, receipt of a payment, or receipt of a free product.

The guides include dozens of examples of real-world situations and how each situation should be treated under the Endorsement Guides. They are worth a careful read. If you find examples that align with your own current or planned marketing strategies and activities, read them carefully to ensure you understand what behavior the FTC expects in that situation.

The FTC’s FAQ on the Endorsement Guides

Released in 2010 and updated in 2015, the FTC supplemented the Endorsement Guides with a set of frequently-asked-questions titled The FTC’s Endorsement Guides: What People Are Asking (the “Endorsement FAQs“). The Endorsement FAQs collect frequently asked questions from companies, marketers, bloggers and others and provide answers from the FTC to supplement the guidance and examples provided in the Endorsement Guides. The FTC’s answers are extremely important as they provide important insight on how the FTC would likely come down on a particular position.

In September 2017, the FTC updated and modernized the Endorsement FAQs. Some of the key changes were:

  • The FTC made clear that if an individual endorser continues to fail to make required disclosures despite warnings, it may take action against that individual endorser.
  • New FAQs were added regarding donations to charity in return for a product review; family and friends eating for free at a new restaurant; YouTubers receiving free gifts in the hopes of a review; bloggers receiving free travel to a new product launch event; Instagram posts with a tag of the brand of clothing being worn; aspirational endorsements; reciprocal endorsements (“I’ll endorse your product if you endorse mine”); bloggers located outside the US targeting a US audience; where to place disclosures in Instagram posts; whether endorsers can rely on a social media platform’s built-in disclosure functionality; where the disclosure can be placed; disclosures for summary ratings including reviewers who have a material connection; and whether an employee’s like or share of a company’s post requires an endorsement disclosure.

These recent updates, and the FTC’s “shots across the bow” of online influencers in April and September 2017, likely signal the FTC’s intention to more aggressively crack down on online influencers and others in the endorsement ecosystem (especially in the social media space) for endorsements that run afoul of the Endorsement Guides and the Endorsement FAQs or otherwise constitute deceptive advertising or trade practices.

Suggested Best Practices and Closing Thoughts

Here are some key takeaways from the Endorsement Guides and the Endorsement FAQs to keep in mind as you move forward with requesting or providing endorsements:

  • If there’s an actual, potential or perceived material connection, disclose it. If there’s a material connection between an online influencer, trusted source, or other endorser and the owner or marketer of the product/service being endorsed, e.g., an influencer is paid or receives a free product, free service, or other material benefit which may be perceived by a potential customer as biasing the endorsement, the endorsers must ensure the connection is disclosed (unless the connection is clear from the context of the endorsement). If you’re on the fence as to whether a connection is material or not, disclose that too. Remember to look at it from the correct perspective — it’s not whether the endorser thinks the received consideration affects his or her endorsement of the product or service, but whether knowing about the consideration could affect how the audience views the endorsement and/or create a perception of bias.
  • Make disclosures easy to understand (e.g., unambiguous). Disclosures such as “#partner” or “thanks to [company/advertiser]” are not sufficient as while they may disclose there’s some relationship between the endorser and the company/advertiser, they do not specify the nature of that relationship. While an endorser does not need to specify the details of the compensation received, he/she needs to disclose that the post, review or other endorsement is sponsored (as long as you’re not misleading your audience on how much compensation you received), and ensure the identity of the sponsor is clear. The Endorsement FAQs disclosures reference “#ad” or “#sponsored” as hashtags that denote that an ad, post, review, etc. is an advertisement or sponsored by the company/advertiser (don’t use “#sp” as it’s not sufficiently unambiguous). For an influencer who receives free products, saying “Thanks to [company/advertiser] for the free [product received]” may be sufficient. If you are an employee of or consultant to a company whose products or services you are endorsing, “#employee” or “#consultant” is not sufficiently unambiguous – “#ABC-Employee,” “#ABC-Ambassador,” or “#ABC-Consultant” is less ambiguous, where “ABC” is the company or brand name of the product/service you are endorsing. If you’re running an online context, ensure the disclosure clearly states it is part of a sweepstakes or contest, e.g., “#ABC_contest” or “#ABC_sweepstakes” (but not “sweeps”). Think about the hashtag from a consumer’s perspective — could they figure out the connection between the endorser and the company/advertiser within the context of the ad within no more than a second or two?
  • Make disclosures hard to miss (clear and conspicuous). Disclosures must appear clearly and conspicuously so they are hard to miss. Ensure the disclosure appears before the “more” link or button in digital marketing, and “above the fold” in printed marketing – consumers should not have to click anything or take any additional action to see the disclosure, i.e., they should not have to look for it. Make sure the disclosure stands out. Don’t put it in a string of tags/hashtags, as it’s more likely to be missed (i.e., it’s not conspicuous) – ensure it’s separated out, such as at the start of the advertisement, or in bold and separated with a divider (“|”) before the other hashtags at the end. In an image, superimpose the disclosure in a way that’s easy to notice and easy to read in the time a viewer is looking at the image. In videos, ensure the disclosure is on screen long enough to be seen, read, and understood by the viewer; for longer videos, consider repeating the disclosure at appropriate intervals. Don’t combine your name with “ad” in a hashtag as it makes the fact that the post is an advertisement easier to miss. If a social media platform offers a disclosure tool, it’s up to the endorser and the company/advertiser to ensure that the tool provides a clear and conspicuous disclosure of the material connection, otherwise they should use a different disclosure.
  • Companies/advertisers must educate and monitor their influencers, trusted sources, and other endorsers. The FTC has specifically noted that companies and their advertisers have a responsibility to educate their influencers, trusted sources, and other endorsers on the rules and requirements for making endorsements (including disclosing material connections), and for monitoring what those parties are doing from an endorsement perspective. Ensure you have a well-documented enforcement process and that it is being followed. Companies should ensure their social media/brand ambassador policies address posts and other communications by influencers and other endorsers, and provide the policies to their endorsers. Companies that do not currently have such policies should strongly consider putting them in place.
  • Remember the bigger picture – deceptive and unfair trade practices. All parties in the endorsement ecosystem should remember that the Endorsement Guides and the Endorsement FAQs are built on the foundation of the FTC Act and the FTC’s authority to regulate advertising practices, and are designed to help businesses and endorsers avoid endorsement activities that constitute deceptive or unfair advertising prohibited by the FTC Act. The concept of clear, conspicuous, and unambiguous disclosures applies to, but goes far beyond the ecosystem of, endorsements.

Finally, remember that changes to the Endorsement Guides and Endorsement FAQs are far outpaced by change in the world of online marketing. Pay attention to the release date of all FTC documents and guidance, and remember that the FTC’s answers were based on the world as of that date. If an assumption or a fact cited by the FTC in its answer is inaccurate or otherwise out of date, talk with marketing counsel as to the impact on the FTC’s stated position. If you’re looking for guidance on how to apply new technologies or marketing approaches to endorsements in a compliant fashion, think of the Endorsement Guides and Endorsement FAQs as tea leaves which can be read to help you take the temperature of how the FTC is likely to view that new technology or approach. The best thing parties in the endorsement ecosystem can do is to be familiar with the Endorsement Guides and Endorsement FAQs and use them to guide their endorsement strategy and approach to keep them in the middle of the herd from a compliance perspective.

Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He specializes in transactional agreements, technology/software/e-commerce, privacy, marketing and practical risk management. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles in voice-over work and implementing and integrating connected home technologies.

5 Proactive Steps For Employers and Businesses in a Post-Equifax World

Posted on by
Reply

Companies should proactively prepare for changes in consumer behavior and corporate responsibility.

By now, most people have heard about the massive data breach at Equifax, one of the four US credit bureaus along with Experian, TransUnion and Innovis, affecting 143 million people. Credit bureaus (also known as consumer reporting agencies) compile and keep a file containing a person’s credit history, including things like the types of credit, how long credit accounts have been open, how much available credit is utilized/available, whether bills are paid on time, late payments/collection notices/foreclosure notices, and public records such as liens and bankruptcies, as well as personal information such as Social Security Number (SSN), date of birth (DOB), and current and previous addresses. Credit bureaus make a report of a person’s credit history (their “credit report”) available to that person, and to employers and other businesses.

Employers and businesses often want to base decisions on whether to offer a person their products or services such as a loan/mortgage/credit offer, the interest rate to charge on that offer, a cell phone plan, an insurance policy, etc., or extend that person an offer of employment or a lease, on as much available relevant information as possible.  This often includes a review of that person’s credit history. Credit reporting agencies monetize accumulated credit history and associated personal information by making credit reports available to employers, insurers, service providers and other businesses for a fee, as permitted by applicable law. If an employer or business wants to obtain your credit report, they obtain your permission to access your report as required by law and ask you to provide certain sensitive personal information about you which they will use to request your report, and they pay a fee to one or more of the credit bureaus to receive a copy of your credit report.

Many employers and businesses rely on easy access to credit reports.  However, this may be one of the more likely casualties of the Equifax breach. As noted earlier, 143 million Americans may now be at risk for identity theft using their sensitive personal information from this one breach event alone. Unlike a credit card number, which can be changed in the event the data is compromised, SSNs and DOBs (which were compromised in the Equifax breach) can’t be changed. This is why the Equifax breach is so significant – unlike most previous breaches, the scale of this breach and the nature of information compromised mean that consumers will be at risk for, and must remain vigilant for, identity theft for the rest of their lives, which will likely drive changes in the way people monitor and manage their credit reports and sensitive personal information.

Most of the advice and guidance regarding the Equifax breach to date has been consumer-focused – what consumers can and should do to protect themselves in the post-Equifax world. This includes recommendations for more robust use of credit freezes currently offered by the credit bureaus and use of third party monitoring services which alert consumers to (or require the consumer’s approval for) changes in their credit report, representing a shift in the spectrum towards consumer identity protection and away from access to easy credit such as point-of-sale, “save 20% if you open an account today”-type offers requiring an instant check of your credit. It is also likely the earthquake caused by the Equifax breach will result in additional security and legal requirements not just for credit bureaus, but for all companies possessing sensitive personal information such as SSNs and DOBs, as well as industry-driven or legislatively-mandated enhanced best practices and/or new ways for consumers to help them control access to their credit reports in an effort to minimize identity theft, such as a tool to manage security freezes at all three credit bureaus simultaneously and make it easier to impose, and temporarily lift, such freezes. The Equifax breach is also likely to increase consumer acceptance of more complex login processes, such as multi-factor authentication.

Employers and businesses should start thinking about how they can and should adapt to the coming post-Equifax changes in consumer and credit bureau behavior, and increases in corporate responsibility with respect to security and collection/use of sensitive personal information. By taking proactive steps, companies can demonstrate to their employees and customers that they are sensitive to the importance of identity protection and security. Here are 5 proactive steps companies may want to consider:

1. Address consumer credit freeze/release approval in the new employee hiring process and other processes requiring a consumer credit check (such as point-of-sale credit offers).

While implementing a credit freeze will help protect a person from identity theft, it’s not without its drawbacks. As of today, these drawbacks include the need to separately implement or lift freezes on a per-credit bureau basis, and the fact that the freeze must be lifted (temporarily or permanently) before an employer or business can perform a credit check. Despite this drawback, more people will likely implement credit freezes in the post-Equifax world, which will impact companies’ ability to easily complete background checks or receive point-of-sale credit offers.

  • Employers and other businesses performing a consumer credit check should anticipate this and consider proactively modifying their credit check process by adding a question to their credit report authorization form asking whether a person has a credit freeze, or whether that person’s approval is required for the release of their credit report. If that person answers “yes,” the employer or business should have a standard exception process to work with that person to ensure the freeze is temporarily lifted, or approval for the credit check is given, so the employer or business can perform the credit check.
  • Retailers offering point-of-sale credit offers should consider ensuring their offer disclosures include a statement that people with credit freezes may not be eligible for the offer due to the inability to verify their credit history. For those businesses which use sales associates to offer point-of-sale promotions, consider requiring them to ask whether the consumer has a credit freeze in place, and if so notify them if the freeze renders them ineligible for the offer.

Employers and businesses should also know which credit bureau(s) they use for background checks, and be prepared to provide this information to make it as easy as possible for a prospective employee or customer to implement a temporary lift of the credit freeze. It may be worth having a short URL handy which can be provided to a prospective employee or customer who wants to temporarily lift their credit freeze to enable them to take advantage of the offer on the spot or at a later time.

2. Enable multi-factor authentication for access to online services and consumer portals.

Most businesses use a username and password as access credentials. Some, but not all, have moved to a more secure authentication mechanism known as multi-factor authentication. Multi-factor authentication requires a user to provide not only a username, but two or more of the following “authentication elements” to validate the user’s identity: (1) something you know (e.g., a password, the answer to a challenge question), (2) something you have (e.g., a one-time PIN or password or a code delivered specifically through the user’s mobile device), and/or (3) something you are (e.g., facial recognition or fingerprint). Each factor must be independent of the other so that knowing one factor does not reveal another. Other data, such as geolocation information or time-based access requirements, can be used as well. The most commonly-known type of multi-factor authentication is two-factor authentication, where two authentication elements (of which one is typically a password) are required. Multi-factor authentication helps reduce the chance a bad actor could successfully exploit a username and password obtained through a security breach, through phishing, or through other social engineering attack vectors. Companies can use multi-factor authentication to demonstrate to its users (and potential users) that it places a high value on security.

Some companies argue that the burden of providing additional verification does not outweigh the simplicity of a username/password, especially where the company is not collecting any sensitive personal information. However, multi-factor authentication is an industry standard in certain areas, such as under the current Payment Control Industry Data Security Standard (PCI-DSS) for companies that are required to be PCI compliant, and will likely continue to gain traction as an industry standard, or customer expectation, in other areas. The National Institute of Standards and Technology (NIST) recommends using multi-factor authentication wherever possible. For companies where multi-factor authentication is not an industry standard or legal requirement, consider offering multi-factor authentication anyway, or offering it as an enhanced security option to customers concerned about protecting access to their accounts.

3. Evaluate whether there is a true need to collect SSNs and DOBs from consumers, and/or other creative ways to validate SSN and DOB information.

Companies which collect Social Security Numbers or dates of birth from their users should consider whether the collection of this information is truly required. One of the core tenets of data privacy is the Collection Limitation principle, which advocates for limits on companies’ collection of personal data. HIPAA takes this a step further and applies a “minimum necessary standard” – companies should limit the use and disclosure of collected personal information to the minimum necessary to accomplish the intended purpose. Companies should consider following HIPAA’s “minimum necessary standard” even if they are not subject to HIPAA. With respect to sensitive personal information such as SSN and DOB, companies should look carefully at whether they truly need to collect this information, and for what purpose. If there is another way to accomplish the same goal without collecting the information, consider implementing that alternative approach. Here are two examples:

  • With respect to SSNs, instead of asking for a user’s SSN for validation purposes considering asking for the sum of the digits in their SSN,or the sum of the digits in their SSN plus the digits in their home street address.This provides a strong identity validation mechanism without the need to capture and store SSNs.
  • With respect to DOBs, if validating a user’s age (e.g., for COPPA purposes), consider whether the month and year is sufficient, and keep a flag indicating that the age information was verified instead of the month/year information itself.

4. Review and freshen (or implement) their incident response and incident communications plan(s).

To many, Equifax’s response has been a lesson in how not to manage communications regarding a security breach. Companies should take the opportunity to learn from Equifax’s missteps and review and freshen up their incident response and incident communication plan(s). For companies still without an incident response/incident communications plan, now is the time to ensure one is in place. A few things to consider:

  • According to press reports, the Equifax breach allegedly stemmed from the failure to timely implement a security update to the Apache Struts Web Framework. As part of incident response preparedness, work with IT to ensure that your company is actively monitoring for hardware/software security patches, and is applying them as quickly as possible following release.
  • There have been numerous reports regarding sales of Equifax stock valued at $1.8 million by three senior Equifax executives within days of Equifax’s discovery of the breach. While Equifax has stated that the executives were not aware of the breach, whether or not the executives (including the CFO and President of US Information Systems) had knowledge doesn’t really matter – the perception and optics of it are awful in the eyes of the public, the SEC, and state attorneys general. Consider ensuring that the entire senior team is notified immediately in the event of a security breach, and have your General Counsel or external breach counsel discuss with them the risks of continuing with any automated stock sale programs in light of the breach.

5. Consider offering credit monitoring as an employee benefit.

Finally, employers may want to consider adding credit monitoring as an employee benefit, by offering subsidized or free credit monitoring services to their employees through a partnership with a credit bureau or a third-party provider such as AllClear ID. While there are some questions as to the value of credit monitoring in protecting against identity theft, services that notify you and/or require your approval before a new account is opened can be very valuable in fighting identity theft. As the possibility of identity theft is becoming a fact of life in the 21st century, companies may find it beneficial to help their employees guard their identity. Among other benefits to companies, minimizing identity theft reduces the time employees need to take away from work, whether as PTO or lost productivity, to deal with the repercussions of having their identity stolen, and provides employees with increased peace of mind with respect to identity protection.

Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He specializes in transactional agreements, technology/software/e-commerce, privacy, marketing and practical risk management. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles in voice-over work and implementing and integrating connected home technologies.

The What, Why and How of SLAs, aka Service Level Agreements (part 2)

Posted on by
Reply

Every company uses technology vendors, such as Software-as-a-Service providers, to provide critical components of their business operations. One pervasive issue in technology vendor agreements is the vendor’s commitment to the levels of service the customer will receive.  A representation to use commercially reasonable efforts to correct product defects or nonconformity with product documentation may not be sufficient for a customer relying on a technology vendor’s service for a mission-critical portion of its business. In this situation, the vendor may offer (and/or a customer may require) a contractual commitment as to the vendor’s levels of service and performance, typically called a “Service Level Agreement” or “SLA.” Service Level Agreements (SLAs) ensure there is a meeting of the minds between a vendor and its customer on the minimum service levels to be provided by that vendor.

In Part 1 of this post, I walked through uptime and issue resolution SLAs.  In this second part, I cover other types of technology SLA commitments, SLA remedies, and other things to watch for.

Other Types of Commitments in SLAs

Other common types of SLAs in technology agreements include latency SLAs and customer service SLAs.

Latency SLAs. “Latency” is the time it takes for a server to receive a server request, process it, and send a response. For example, when you load a webpage, a server request is sent to a web server to deliver the webpage, the server processes the request, and sends a response with the code to render the page in the user’s web browser. Latency can be affected by a number of factors, including the geographic location of servers, network/Internet capacity, and server optimization. For companies using a vendor to provide services as part of its client-facing systems (e.g., an address verification service), minimizing latency to ensure a high level of performance is critical. A latency SLA is a commitment to a maximum roundtrip response time for a vendor server request. Latency SLAs typically exclude the time it takes to get from the customer’s server to the boundary of the vendor’s network, and vice versa (as this is outside of the vendor’s control).

Customer Service SLAs. In some vendor relationships, ensuring the prompt provision of customer support is a critical component of the relationship. For example, if a vendor is providing support to a customer’s clients or employees, or is providing level 2 escalation support, customer support SLA commitments may be important to the customer to ensure a high level of service.  Customer support commitments often include commitments on time to first response (the time from the submission of a request to the time an agent opens the support ticket to begin working on it); time to resolution (total time needed to resolve the issue); average speed to answer (the percent of calls answered within a maximum time, e.g., 85% of calls within 30 minutes, or percent of emails answered within a maximum time, e.g., 90% of emails within 4 business hours); and/or abandonment rate(the maximum number of calls being abandoned in queue before a support agent picks up the call).

SLA Remedies

In order to ensure the service level commitments made by a vendor have teeth, the SLA should have remedies available to the customer in the event of a failure to meet one or more SLA commitments. The remedies are often the most heavily negotiated section of the SLA. There are a variety of remedies that can be applied in the event of a SLA failure.

Service Credits. One of the more common forms of remedy is a service credit, often a percentage of fees paid by the customer for the period in which the SLA failure occurred.  For example, if a vendor fails to meet a 99.9% monthly SLA, a service credit equal to a percentage of the monthly fees paid by the customer would be applied to the next monthly invoice.  A credit is often provided on a tiered basis, up to 100% of the fees for the relevant period based on the size of the SLA miss. Vendors may want to include language ensuring that if multiple credits are available for the same reporting period (e.g., a credit for failure to meet the uptime SLA as well as the issue resolution SLA), only the greater credit will apply.  The credit is usually applied to the next invoice, or if there will be no additional invoice, paid directly to the customer.  For a service credit related to an uptime SLA commitment, instead of a percentage of fees some vendors will offer a credit equal to the fees earned by the vendor during the period of time during which the Service was unavailable during the previous measurement period (or an average of the amount during previous measurement periods), under the theory that the credit is an accurate reflection of the actual fees that would have been earned by the vendor had the service been available in compliance with the SLA.  Customers should carefully consider what fees are used to calculate the credit – customers will want this to be as inclusive as possible.

Termination. In the event of a SLA failure, another remedy commonly offered by vendors is a right to terminate. Vendors typically put restrictions around the exercise of this right, e.g., termination is the sole and exclusive remedy available; termination is limited to the service subject to the SLA failure, not the entire service agreement; it is offered on a “use it or lose it” right which can only be exercised for a period of time following the measurement period in which the SLA failure giving rise to the termination right arose; or the right to terminate is only triggered by multiple failures, such as failure to meet its SLA commitments in three (3) consecutive months or any two (2) out of three (3) consecutive calendar quarters. Customers should carefully consider whether the limits on these rights are appropriate (e.g., ensure that “sole and exclusive remedy” applies only to a SLA failure, and would not preclude the customer enforcing its rights and remedies for any other breaches of the vendor agreement; ensure a right to terminate extends to the entire service agreement if the affected service component is a significant portion of the value of the relationship to the customer; etc.)

Other creative remedies.Vendors and customers should consider whether other creative remedies for a breach of the SLA, such as waiver of fee minimums, waiver or imposition of other contractual obligations, or provision of additional services (e.g., a certain number of free hours of professional services), may be an appropriate remedy for the customer and an appropriate motivator for the vendor to meet its SLA commitments.

Closing Thoughts – Things to Watch For

  • Remember that most vendors are trying to provide as close to 100% uptime as possible, and the best possible service they can to their clients. A SLA is intended to be a floor on performance, not a ceiling.
  • Some vendors do not include a SLA in their standard service agreement, instead letting customers ask for one. In my experience, less customers will ask for a SLA than you’d think.  It’s always a good idea to ask a vendor to ensure they include their SLA with the service agreement at the outset of the contract negotiation process.
  • If the vendor will not agree to include a SLA, ask them why.
    • In some cases, vendors will not provide a SLA with credits to all but their largest clients, relying on the fact that as a multi-tenant platform all clients receive the benefit of the SLAs provided to their largest clients. In this event, customers should consider whether to fight for a direct SLA or rely on their commitments to larger clients (which commitments may change over time).
    • If you can’t get a SLA from a vendor, customers should consider whether to push for a termination for convenience right (and refund of prepaid but unaccrued fees) in the event they are dissatisfied with the service levels they are receiving from the vendor.
    • Customers should also ask whether the service is truly a mission-critical service. If not, it may be worth considering how hard to fight for the SLA, or if the customer can offer to concede the SLA to win on another open negotiation point of greater importance.
  • Customers should watch for language in the vendor agreement that gives the vendor the right to unilaterally change terms of the agreement, instead of having changes mutually agreed upon. This unilateral right is often broad enough to allow a vendor to change the terms of the SLA as well. If so, customers may seek to limit the scope to exclude the SLA, or ensure that the agreement includes a termination right as described above.

Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He specializes in transactional agreements, technology/software/e-commerce, privacy, marketing and practical risk management. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles in voice-over work and implementing and integrating connected home technologies.

The What, Why and How of SLAs, aka Service Level Agreements (part 1)

Posted on by
Reply

Every company uses technology vendors, such as Software-as-a-Service providers, to provide critical components of their business operations. One pervasive issue in technology vendor agreements is the vendor’s commitment to the levels of service the customer will receive.  A representation to use commercially reasonable efforts to correct product defects or nonconformity with product documentation may not be sufficient for a customer relying on a technology vendor’s service for a mission-critical portion of its business. In this situation, the vendor may offer (and/or a customer may require) a contractual commitment as to the vendor’s levels of service and performance, typically called a “Service Level Agreement” or “SLA.” Service Level Agreements (SLAs) ensure there is a meeting of the minds between a vendor and its customer on the minimum service levels to be provided by that vendor.

At a high level, a SLA does three things:

  1. Describes the types of minimum commitments the vendor will make with respect to levels of service provided by the vendor;
  2. Describes the metrics by which the service level commitments will be measured; and
  3. Describes the rights and remedies available to the customer if the vendor fails to meet their commitments.

In many cases, a SLA is presented as an exhibit or appendix to the vendor agreement (and not a separate agreement). In others, a SLA may be presented as a separate document available on a vendor’s website.  Think of the former as a customer-level SLA which is stated directly in (and quite often negotiated on a customer-by-customer basis as part of) the service agreement with that customer, and the latter as a service-level SLA which the vendor wants to apply equally to every user of its service.

In this two-part post, I’ll explain the contents of, reasons for, and important tips and tricks around technology SLAs.  Part 1 will cover uptime and issue resolution SLAs.  Part 2 will cover other types of technology SLA commitments, SLA remedies, and other things to watch for.

Common types of commitments in SLAs

The most common types of commitments found in technology SLAs are the uptime commitment and the issue resolution commitment.

Uptime SLA Commitment

An uptime commitment is generally provided in connection with online services, databases, and other systems or platforms (a “Service”). A technology vendor will commit to a minimum percentage of Service availability during specified measurement periods.  This percentage is typically made up of nines – e.g., 99% (“two nines”), 99.9% (“three nines”), 99.99% (“four nines”), 99.999% (“five nines”), etc.  Some SLAs will use “.5” instead of “.9”, for example, 99.5% or 99.95%”.   Uptime is typically calculated as follows:

(total minutes in the measurement period - minutes of Downtime in that period) / Total minutes in the measurement period

Definitions are key. The right definitions can make all the difference in the effectiveness of an uptime SLA commitment. Vendors may gravitate towards a narrower definition of “Downtime” (also called “Unavailability” in some SLAs) to ensure they are able to meet their uptime commitment, e.g., by excluding a slowdown that makes the Service hard (but not impossible) to use. Customers should look carefully at this definition to ensure it covers any situation in which they cannot receive substantially all of the value of the Service. For example, consider the difference between Unavailability/Downtime as a period of time during which the Service fails to respond or resolve, versus a period of time during which a material (or non-material) function of the service is unavailable. The SLA should define when the period of Unavailability/Downtime starts and ends, e.g., starting when the vendor first learns of the issue, and ending when the Service is substantially restored or a workaround is in place; customers should look at this carefully to ensure it can be objectively measured.

Mind the measurement period. Some vendors prefer a longer (e.g., quarterly) measurement period, as a longer measurement period reduces the chance a downtime event will cause a vendor to miss its uptime commitment. Customers generally want the period to be shorter, e.g., monthly.

Consider whether the uptime percentage makes sense in real numbers. Take the time to actually calculate how much downtime is allowed under the SLA – you may be surprised. For a month with 30 days:

  • 99% uptime = 432 minutes (7 hours, 12 minutes) of downtime that month
  • 99.5% uptime = 216 minutes (3 hours, 36 minutes) of downtime that month
  • 99.9% uptime = 43.2 minutes of downtime that month
  • 99.99% uptime = 4.32 minutes of downtime that month

One critical question customers should ask is whether a Service is mission-critical to its business.  If it’s not, a lower minimum uptime percentage may be acceptable for that service.

Some vendors may offer a lower uptime commitment outside of business hours, e.g., 99.9% from 6am to 10pm weekdays, and 99% all other times. Again, as long as this works for a customer’s business (e.g., the customer is not as concerned with downtime off-hours), this may be fine, but it can make it harder to calculate.

Ensure the Unavailability/Downtime exclusions are appropriate. Uptime SLAs generally exclude certain events from downtime even though the Service may not be available as a result of those events. These typically include unavailability due to a force majeure event or an event beyond the vendor’s reasonable control; unavailability due to the equipment, software, network or infrastructure of the customer or their end users; and scheduled maintenance.  Vendors will often seek to exclude a de minimisperiod of Unavailability/Downtime (e.g., less than 5/10/15 minutes), which is often tied to the internal monitoring tool used by the vendor to watch for Service unavailability/downtime. If a vendor wouldn’t know if a 4-minute outage between service pings even occurred, it would argue that the outage should not count towards the uptime commitment.

Customers should make sure there are appropriate limits to these exclusions (e.g., force majeure events are excluded provided the vendor has taken commercially reasonable steps to mitigate the effects of such events consistent with industry best practices; scheduled maintenance is excluded provided a reasonable amount of advance written notice is provided.  Customers should watch out for overbroad SLAs that try to exclude maintenance generally (including emergency maintenance).  Customers may also want to ensure uptime SLAs include a commitment to take reasonable industry-standard precautions to minimize the risk of downtime (e.g., use of no less than industry standard anti-virus and anti-malware software, firewalls, and backup power generation facilities; use of redundant infrastructure providers; etc.)

Don’t overlook SLA achievement reporting. One important thing customers should look for in a SLA is how the vendor reports on SLA achievement metrics, which can be critical to know when a remedy for a SLA failure may be available. Vendors may place the burden on the customer to provide notice of a suspected uptime SLA failure within a specified amount of time following the end of the measurement period, in which case the vendor will review uptime for that period and verify whether the failure occurred. However, without proactive metrics reporting, a customer may only have a suspicion of a SLA failure, not actual facts. Customers using a mission-critical system may want to consider asking for proactive reporting of SLA achievement within a certain amount of time following each calendar month.

Issue Resolution SLA Commitment

Of equal importance to an uptime commitment is ensuring that a Service issue (downtime or otherwise) will be resolved as quickly as possible.  Many technology SLAs include a service level commitment for resolution of Service issues, including the levels/classifications of issues that may occur, a commitment on acknowledging the issue, and a commitment on resolving the issue.  The intent of both parties should be to agree on a commitment gives customers assurances that the vendor is exerting reasonable and appropriate efforts to resolve Service issues.

Severity Levels. Issue resolution SLAs typically include from 3-5 “severity levels” of issues.  Consider the following issues:

Impact Example Classification
Critical The Service is Unavailable
High An issue causing one or more critical functions to be Unavailable or disrupting the Service, or an issue which is materially impacting performance or availability
Medium An issue causing some impact to the Service, but not materially impacting performance or availability
Low An issue causing minimal impact to the Service
Enhancement The Service is not designed to perform a desired function

Issue resolution SLAs typically use some combination of these to group issues into “severity levels.”  Some group critical and high impact issues into Severity Level 1; some do not include a severity level for enhancements, instead allowing them to be covered by a separate change order procedure (including it in the SLA may be the vendor’s way of referencing a change order procedure for enhancements). Vendors may include language giving them the right to reclassify an issue into a lower severity level with less stringent timeframes. Customers should consider ensuring whether they should have the ability to object to (and block) a reclassification if they disagree that the issue should be reclassified.

Acknowledgment Commitment. Issue resolution SLAs typically include a commitment to acknowledge the issue. As with the uptime SLA, the definition of the acknowledgment timeframe is important (when it starts and when it ends). A vendor will typically define this as the period from the time it is first notified of or becomes aware of the issue to the time the initial communication acknowledging the issue is provided to the customer.  Customers should look at the method of communication (e.g., a post to the vendor’s support page, tweet through their support Twitter account, an email, a phone call from the customer’s account representative required, etc.) and determine if a mass communication method versus a personal communication method is important.

For critical and high impact issues, vendors (especially those operating multi-tenant environments) will often not offer a specific acknowledgment commitment, instead offering something like “as soon as possible depending on the circumstances.”  The argument for this is that for a critical or high impact issue, a vendor wants all available internal resources triaging and working the problem, not reaching out to customers to tell them there is a problem. In many cases, this may be sufficient for a customer provided there is some general acknowledgment provided to a support page, support Twitter account, etc. to alert customers that there is an issue. In others, a customer may want to push for their account representative, or a vendor representative not involved in triaging the problem such as an account executive, to acknowledge the issue within a fixed amount of time, putting the burden on the vendor to ensure it has appropriate internal communication processes in place.

Resolution Commitment. Issue resolution SLAs also typically include a time commitment to resolve the issue. One important thing to focus on here is what “resolve” means.  Vendors may define it as the implementation of a permanent fix or a workaround that temporarily resolves the problem pending the permanent fix; in some cases, vendors may also define it as the commencement of a project to implement a fix.  Customers should ensure that a vendor promptly implement a permanent fix if a workaround is put in place, and that failure to do so is a failure under the SLA. Many vendors are reluctant to provide a firm issue resolution timeframe, as the time required to resolve or implement a workaround is dependent on the issue itself, and are often unwilling to negotiate the resolution commitment or commit to a fixed timeframe for resolution.  Customers should ensure the resolution commitment is reasonable and that the vendor is doing everything it can to correct issues.  For example, for critical and high impact issues, consider an issue resolution commitment of “as soon as possible using continuous diligent efforts” – as long as the vendor is working diligently and continuously to fix the issue, they’re in compliance with the SLA. For lower impact issues, consider a commitment to implement a fix or workaround in the ordinary course of business.

In part 2, I’ll cover other types of technology SLA commitments, SLA remedies, and other things to watch for.

Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He specializes in transactional agreements, technology/software/e-commerce, privacy, marketing and practical risk management. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles in voice-over work and implementing and integrating connected home technologies.

The New Revenue Recognition Standards Are Coming – Will You Be Ready?

Posted on by
Reply

Most companies measure their financial performance by the revenues and other compensation they earn through their business operations, which in many cases means the sale of goods or provision of services. Knowing when to recognize the proceeds from a sale of good or provision of services as revenue is therefore critical to financial reporting. For many years, two different rules by two different standards organizations governed revenue recognition:

  1. The Financial Accounting Standards Board (“FASB“)’s Accounting Standards Codification (“ASC“) provide US generally accepted accounting principles (“GAAP“), including those governing revenue recognition. Under the current GAAP revenue recognition rule in ASC 605, revenue recognition varies by industry and in some cases by transaction, which makes revenue recognition a complex and difficult exercise in many situations.
  2. The International Accounting Standards Board (“IASB“)’s International Accounting Standards (“IAS“) provide an international standard for financial statements and accounting. Under the current international revenue recognition rule known as IAS 18, revenue recognition also varies by industry and transaction type, but IAS 18 provides less guidance than ASC 605 making it harder for companies to recognize revenue in a consistent fashion. The IASB is the successor to the International Accounting Standards Council (“IASC“) which originally promulgated the IAS.

Beginning in 2001, the IASB began replacing the IAS with new International Financial Reporting Standards (“IFRS“). In 2002, the FASB and IASB began collaborating on developing an improved. stronger, more robust, more useful, more consistent revenue recognition standard to make revenue recognition simpler and easier to consistently apply. This collaboration bore fruit 12 years later in May 2014, when the FASB and IASB released a converged revenue recognition standard titled Revenue from Contracts with Customers, codified as ASC 606by FASB and IFRS 15by IASB. Since 2014, there have been a few amendments (and implementation delays) by the FASB and IASB, and there have been a few small areas where the standards have diverged (e.g., the definition of what “probable” means). Despite this, for the most part the goal of a unified revenue recognition standard remains intact. These new standards will go into effect in December 2017 (for ASC 606) and January 2018 (for IFRS 15). All this background can be summarized in the following table:

A tabular representation of the history behind the ASC 606 / IFRS 15 revenue recognition standard.Here’s what you need to know about the new twin revenue recognition standards (for simplicity, this analysis is based on ASC 606):

How Revenue Recognition Works Under ASC 606/IFRS 15

To recognize revenue under the new standard, companies must do 5 things: (1) identify a customer contract, (2) identify the distinct performance obligations under that contract, (3) determine the transaction price (expected revenue),(4) allocate the expected revenue to the performance obligations,and (5) recognize allocated revenue when (or as) each performance obligation is satisfied.As stated in ASC 606, “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” As we go through each step, keep this visual representation in mind:

ASC 606 Revenue Recognition DiagramStep 1 – Identify the contract(s) with a customer. The first step of the revenue recognition process is to identify a contract, i.e., an agreement creating enforceable rights and obligations among two (or more) parties. A contract must be signed or otherwise approved by the parties, must have identifiable rights and payment terms, have commercial substance, and it must be probable that one party will receive the revenue or other consideration expected from the performance of its obligations (e.g., provision of goods or services). Remember that a contract does not have to be in writing to be considered a contract for revenue recognition purposes – oral or implied contracts may satisfy these requirements.

Step 2 – Identify the contract’s distinct performance obligations. For goods and services contracts, a “performance obligation” is promise to transfer a good or provide a service to another party. A “distinct” performance obligation is one that benefits the recipient alone or with other readily available resources (e.g., delivery of a computer that is usable with power and Internet access obtained separately) and can be identified separately from other obligations under the contract (e.g., a company is delivering 5 computers, delivery of all 5 computers should be combined into a single performance obligation). A series of distinct performance obligations that are substantially similar can still be treated as individual performance obligations (e.g., delivery of a new computer at the start of each quarter during a calendar year, 4 new computers total). In a services agreement such as a SaaS contract, implementation obligations and the provision of services may be separate obligations. A SaaS company may look at its distinct performance obligation as providing a service each day during the term of the Agreement, so each day would be a distinct performance obligation.

Step 3 – Determine the transaction price.The “transaction price” is the expected payment and other consideration to be paid/provided in return for satisfaction of the performance obligations. Financial consideration can usually be grouped into fixed (stated in the contract) vs. variable (contingent on the occurrence or non-occurrence of a future event). For variable consideration, companies should look at the expected value taking into account the potential for changes in the variable payment component. If compensation for a performance obligation will be deferred, and not paid contemporaneously with the satisfaction of the performance obligation, the present value of the deferred compensation should be considered. Non-cash compensation (e.g., bartered goods or services) should be measured at fair value, or if not available the standalone selling price. Other consideration such as coupons or vouchers may need to be deducted from the transaction price. For SaaS companies that use a tiered pricing structure and monthly or annual minimums, calculating the expected revenue can be tricky (e.g., by using a probability-weighted methodology).

Step 4 – Allocate the transaction price to the performance obligations. If your contract has one performance obligation, you’re already done with this step. If not, the next step is to allocate the transaction price among each distinct performance obligation, i.e., to separate the transaction price into each discrete “piece” of consideration a party expects to receive from satisfying the associated performance obligation. This can be done by allocating the standalone selling price (i.e., the price at which the good would be sold separately) to the performance obligation, or where that standalone price is not available, the selling entity should estimate it by utilizing as many observable data points as possible to come up with the best estimate possible. ASC 606 includes examples of estimation methods. If a company provides a discount, the discount should be allocated proportionally among the expected revenue for the performance obligations to which the discount applies.

Step 5 – Recognize allocated revenue when (or as) the performance obligations are satisfied. The final step is to recognize each allocation of the transaction price as each distinct performance obligation is satisfied (i.e., the promised good or service is transferred to the recipient). For physical assets, transfer occurs when the recipient obtains control of the asset. For services, a performance obligation is satisfied when the benefits from the provider’s performance are received and utilized, the provider’s performance creates and/or enhances an asset in the recipient’s control, or the provider’s performance creates a payment right without creating an asset with an alternative use to the recipient (e.g., a company is contractually restricted from using a provided service for other purposes). Performance obligations may be satisfied on a specific date (e.g., for delivery of goods) or over a specific time period (e.g., for delivery of services). If satisfied over a time period, revenue may be recognized based on the progress towards satisfying the performance obligation.

Get Prepared Now

While it may seem like there is plenty of time to prepare for the implementation of the new revenue recognition standard, there’s a lot of work that needs to be done to be ready, including the following:

  • Learn the details.It’s important to note that this article represents a very high-level summary of the new revenue recognition standard. Having a more in-depth understanding of the new standard and how it applies to your company and its costing models/contracts is critical. There is an abundance of articles, seminars, and other publicly-available materials available on ASC 606 and IFRS 15. Also, talk with your accounting firm on what they have done as a firm to prepare, and their recommended action plan for your business – they may have some great materials they can provide to get you and your company up to speed.
  • A lot of work be done proactively. Conduct a proactive review of existing contracts, contractual obligations, and other revenue sources that may be classified as a “contract” subject to the new revenue recognition standard. Analyze each to determine the distinct performance obligations, and determine the transaction price. Work with your accountants to allocate the transaction price among the performance obligations.
  • Review (and update if necessary) contract templates.Accounting should partner with Legal and Sales to review sales proposal templates and contract templates describing or creating performance obligations. Review all standard variations of pricing offered to clients to identify any issues under the new revenue recognition standards. Consider whether warranties, returns language, or other contractual terms create distinct performance obligations and how they can be satisfied. Make any updates as necessary to ensure your templates align with the new standards going forward.
  • Create a plan. Assign a resource to manage the process of preparing for the new standard. Consider creating a cross-departmental group to meet regularly to discuss progress and assign tasks. Consider what internal education will need to be done to prepare employees and groups for the new standard, what changes to internal or third party systems may be required, what additional disclosure requirements may be required, whether internal policies will need to be updated or created, and what changes may be needed to internal processes. Secure the support of executive sponsors, such as the CFO and CEO. If you have personnel who were involved in rolling out SOX compliance in the early 2000s, talk to them about lessons learned to avoid repeating the mistakes of the past.

Eric Lambert is Assistant General Counsel and Privacy Officer at CommerceHub, a leading cloud services provider helping retailers and brands increase sales and delight shoppers through supply solutions to expand product assortment, demand solutions to promote and sell products on the channels that perform, and delivery solutions to enable rapid, on-time customer delivery. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. Eric works primarily from his home office outside of Minneapolis, Minnesota. He is a technophile and Internet evangelist/enthusiast. In his spare time, Eric dabbles in voice-over work and implementing and integrating connected home technologies.

Know and Use All the Risk Reduction Tools in Your Risk Management Toolkit

Posted on by
Reply

A central tenet of risk management is that managing the legal and business risk of a particular business opportunity or course of action involves (1) reducing risks by shifting and mitigating them as much as possible, and then (2) having an authorized decision-maker “call the ball” on whether the benefits from the opportunity or course of action outweigh the remaining risks (risk acceptance), or vice versa (risk rejection). Each company has its own tolerance for risk, and its risk tolerance evolves over time — for example, a start-up is generally more willing to take risk to land business than a mature company. A company may also have different risk tolerances for different divisions or product lines. Reducing risk to within the applicable risk tolerance can make the difference on whether the business decision-maker will accept or reject the risks from your proposed opportunity or course of action. Therefore, attorneys and business owners should use every tool in their toolkit to mitigate and shift as much risk as possible before asking the business decision-maker for approval on a certain opportunity or course of action. But all too often, risk decisions are presented to the decision-maker before risk reduction strategies are fully implemented or leveraged. Why is this?

One reason for this is the mistaken belief that reducing risk is too time-consuming, and if a quick risk management decision is needed there is no time for anything more than cursory risk reduction. However, many risk reduction strategies can be implemented quickly and in parallel, or even proactively, to minimize the time impact of risk reduction. You can also pick and choose those risk reduction strategies which “move the risk needle” the most to ensure the time you are devoting to risk reduction will generate the strongest return before a risk decision is needed. Another reason for this is a failure to know and understand all of the risk reduction tools that may be available. The less residual risk a business risk decision-maker is asked to accept, the more likely the answer will be that the potential benefits to the business outweighs the risks. Given this, it’s essential to know all of the available risk reduction tools in your toolkit.

When working with a client, supplier, vendor or business partner, one of the best risk reduction strategies is to build a strong and effective working relationship. If an issue or potential risk exposure arises, the ability to leverage your relationship to work quickly and effectively to resolve the issue, and lessen or eliminate its impact to you and your company, will pay huge dividends.

Here are 10 additional risk reduction strategies to equip your risk management toolkit:

1. Separate factual risks from perceived risks with good research and information.

Risks can be generally grouped into two categories — perceived risks and factual risks. Once the facts related to a particular risk are known, a perceived risk from an opportunity or course of action may turn out not to be a risk at all. For example, a perceived risk of doing business with a particular vendor may be the potential impact to your Payment Card Industry Data Security Standard (PCI DSS) compliance. If the facts show that the vendor will not handle any PCI data, or is already PCI compliant, the risk may not play into the risk acceptance decision. Investigate each business opportunity or course of action thoroughly to ensure you are shifting and mitigating factual risks, not perceived risks. Investigate your prospective client or partner thoroughly and as early as possible. Look at publicly available information regarding the prospective partner to better understand the risks of doing business with the business partner, including its current website and former versions, its BBB rating, its capitalization and liquidity, its litigation history through PACER and other online search tools, and (if public) its security filings. Investigate whether there is a potential for disputes or litigation around a particular business opportunity (e.g., if the technology you are seeking to acquire has been the subject of intellectual property litigation). Check business references and ask what they view as the biggest risks of doing business with that vendor.

2. Shift risk through indemnification.

One of the most common ways to shift risk is through indemnification. An indemnity is a contractual provision through which one party (the “indemnifying party”) agrees to be responsible for certain monetary costs and expenses incurred by the other party (the “indemnified party”) which arise from, result from or relate to certain acts or omissions of the indemnifying party or other indemnified acts. A party will generally indemnify, defend and hold the indemnified party harmless in connection with indemnified losses and claims. Consider whether to include an indemnity obligation for breaches of representations, warranties and covenants, breach of material obligations, breach of confidentiality/security, misappropriation or infringement of IP, and other risks your company may suffer, which will shift risk and cost to the other party if paired with the right limitation of liability and other risk allocation terms. Consider whether to use a third-party indemnity (insulation from damages and losses resulting from lawsuits and other causes of action by a third party against the indemnified party), or a first-party indemnity (insulation from damages and losses suffered directly by the indemnified party, which is essentially insurance and is often hard to get). Remember that an indemnity is only as good as the company standing behind it (this ties into parental guarantees and insurance requirements, below).

3. Shift risk through insurance requirements.

Another way to shift risk to a client, vendor or business partner is to require them to maintain certain levels of insurance during the term of the relationship (and for a period of time thereafter). This can help ensure that the other party will have the resources necessary to pay you in the event their performance (or lack thereof) under your agreement with them creates a liability on the part of your company. Ensure you are requiring the appropriate types of coverage to protect against the risks you may face under the agreement (e.g., not just a commercial general liability policy, but an errors & omissions policy, cyber liability policy, etc. Consider insisting on being added as an additional insured, and ensuring that the insurance is primary and non-contributory. Consider whether to ensure it covers ongoing and completed operations, and waives the right of subrogation against you (so the insurer cannot “step into the shoes” of the insured party by paying the claim, giving them a claim against you) and the “insured vs. insured” exclusion (so a claim by you, an additional insured, against the named insured under the policy is not excluded from coverage). Strongly consider requiring a certificate of insurance for your records evidencing the coverage.

4. Shift risk by limiting contractual liability.

Another tool for shifting risk is to set a contractual risk allocation (disclaimer of certain damages and limitation of liability for direct damages) beyond which the other party is liable. For example, consider warranty disclaimers and disclaimers of liability from certain types of behaviors, e.g., a party may disclaim any liability resulting from force majeure events and/or disclaim all warranties, express or implied, not expressly set forth in the agreement. Include an appropriate disclaimer of consequential damages and the like, and limit your direct damages (but also consider whether exceptions to the general disclaimers and limits are appropriate – consider a “second tier” of liability for direct damages of a certain type, or exclusions from the limitation of liability). Consider a liquidated damages provision for certain issues that may arise. Ensure you understand what cannot be limited under applicable law (e.g., in certain states, it’s against public policy for a party to disclaim liability for its own gross negligence or willful misconduct).

5. Shift risk by using subcontractors.

Another risk shifting approach is to utilize subcontractors for certain responsibilities where the risk associated with performing the responsibilities in-house are greater than the risk your company is willing to take. For example, suppose you are refurbishing an office which will need a considerable amount of work to bring the electrical system up to code. Instead of using your own electrician, you may choose to outsource the electrical work to a more experienced subcontractor to whom you can contractually shift the risk from performance. The risk allocation and indemnity provisions in your subcontractor agreement will be critical here. While in some cases the primary contractor may remain liable in the event of a problem causing damage or liability to a third party, the risk-shifting terms in your independent contractor agreement may help protect your company.

6. Shift risk through a parental guaranty.

If the potential counterparty or business partner is not fully capitalized, or is the subsidiary of a larger “deep pocketed” organization, consider requesting a parental guaranty. Guaranty agreements typically include a payment guaranty requiring the guarantor to stand behind the guaranteed party’s payment and indemnification obligations, and/or a performance guaranty requiring the guarantor to perform obligations under the agreement if the guaranteed party fails to perform its obligations. A guaranty ensures you can compel the guarantor to perform the guaranteed payment or performance obligations if the party with which you are contracting fails to comply with its payment and performance obligations. There are many tricky provisions in a guaranty, so ensure you use good counsel to help you construct the guaranty. The guaranty should survive the termination or expiration of the underlying agreement for as long as guaranteed obligations survive. Also, if you are considering a parental guaranty, think about whether it would make more sense to contract directly with the parent and not the subsidiary (which would eliminate the need for the guaranty).

7. Mitigate risk through internal processes.

When evaluating the impact of a business risk, consider whether the risk can be mitigated through existing or new business processes. Are there administrative, technical and physical safeguards or processes in place at your company, or that could easily be put in place, that would reduce the chance of a risk exposure? For example, suppose a contract requires that your software is free of viruses, spyware, malware, and the like. If you have existing technology in place to scan your software for viruses, or can easily put it in place, you may feel comfortable taking this risk as the risk of an exposure is mitigated. However, be careful implementing a manual process to mitigate risk — they can be prone to error as they are often dependent on employees manually adding a few tasks to their already crowded plate. Even if a manual risk mitigation process is well documented, it may just be replacing one type of risk with another.

8. Mitigate risk through third party certifications.

Another risk mitigation approach is to require your business partner or vendor to maintain and certify compliance with third party certifications or industry standards which demonstrate that the partner or vendor has implemented steps reasonably designed to protect your company against certain risk exposures. For example, if a partner or vendor will be handling personal information or sensitive confidential information, consider asking for a SOC 2 Type 2 report which is a statement of the effectiveness of a company’s non-financial controls. It’s important to require an unqualified report — a qualified report means that one or more of the controls covered by the report are not effective and the report should not be relied upon in that area. Other common certifications include ISO 27001 for information security management systems, SOC 1/SSAE16 for financial controls, and HITRUST certification for HIPAA business associates.

9. Mitigate risk through your own insurance.

Consider whether your existing or other available insurance coverage would protect you against certain risks arising from your partner/provider relationships. Review the biggest risks faced by your company (including risks impacting your partner/provider agreements) on a regular basis to determine if changes to your insurance coverage profile are warranted; your coverage should evolve as your business evolves. Understand what exclusions apply to your insurance. Consider asking your broker to walk you through your coverage on an annual basis.

10. Mitigate risk through contract provisions.

Finally, consider mitigating risk with your business partners through contractual provisions other than limitation of liability. For example, consider requiring your business partner agree to agree not to engage in risky behaviors, or to not provide you with data types you don’t want to receive (e.g., trade secrets, PCI data, HIPAA data). Include appropriate representations, warranties and covenants applicable to your business partner, and ensure yours are not overbroad. Consider your rights in the event of non-payment under the agreement. Consider whether an escrow provision would help mitigate risk. Consider rights to injunctive relief (including whether to waive posting a bond or other security, or proof of actual damages). Financial and security audit rights may be important. Ensure your business partner has implemented its own strong risk reduction strategies, such as implementing a business continuity plan/disaster recovery plan and anti-phishing training.

Eric Lambert is Assistant General Counsel and Privacy Officer at CommerceHub, a leading cloud services provider helping retailers and brands increase sales and delight shoppers through supply solutions to expand product assortment, demand solutions to promote and sell products on the channels that perform, and delivery solutions to enable rapid, on-time customer delivery. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. Eric works primarily from his home office outside of Minneapolis, Minnesota. He is a technophile and Internet evangelist/enthusiast. In his spare time, Eric dabbles in voice-over work and implementing and integrating connected home technologies.

The Wayback Machine: Portal to the Internet’s Past, and Essential Business and Legal Tool

Posted on by
Reply

 

The World Wide Web has revolutionized the world as an information communication medium, but it has one significant drawback – no long-term memory. Once a web page is updated or removed, it disappears as if it was never there. The Wayback Machine, named after Mr. Peabody’s WABAC machine from Rocky & Bullwinkle and located at http://www.archive.org/web, was conceived to give the Web a long-term memory. It is a tool for looking at previous versions of a web page by viewing different iterations captured over time. Internet enthusiasts can easily spend hours peering back in time to what web pages looked like “back in the day.” For example, Google’s November 1998 search page boasted about having 25 million indexed pages, “soon to be much bigger” – it’s likely even Google could not imagine how true that would be!

The Wayback Machine is operated by the Internet Archive, a non-profit organization created in 2001 for the purpose of building and maintaining a historical record of the Web. It has been “crawling” web pages and other Internet-accessible content for archiving purposes since 1996, serving as an “archaeological history” of websites. As of March 5, 2017, the archive contains 279 billion web pages, but not everything on the Web is preserved in the Wayback Machine. It visits web pages for archiving purposes on a periodic basis, ranging from weeks to hours depending on the website; it respects requests not to archive web pages if specified by the website owner (e.g., by using a “robots.txt” file); it also does not fully archive dynamically generated web pages, such as those with web forms or JavaScript; and it does not archive websites which require a login.

Aside from letting people look back at their favorite website’s beginnings or remember what a favorite long-dead site was all about (I still love pets.com‘s slogan, “because pets can’t drive”), there are a number of practical business and legal uses for the Wayback Machine. These include:

Business Intelligence

  • Individuals and companies can use the Wayback Machine to search for information on persons, companies and products/services, especially where the companies, products or services no longer exist or the information sought about them is no longer available online. For example, if you are looking for information about a technology, product or program offered or licensed by your company years ago, and you can’t find information about in company records (the project manager has left the company, records have been purged under the records retention policy, the company that offers it is out of business, etc.) or want to supplement what you have located so far, the Wayback Machine may have an archived version of a page from your website with the information you’re looking for.
  • Similarly, if you are researching a prospective client, partner or acquisition target, looking at the client, partner or target’s historical websites through the Wayback Machine can yield valuable information, such as details on the history and development of the company and its products/services. This information can identify topics to ask about during due diligence, and can help you identify representations, warranties and covenants for inclusion in a sales, partnership or purchase agreement.
  • If you are researching a new potential executive or potential board member, use the Wayback Machine to look at historical bios on archived websites of his or her former companies as part of a thorough due diligence process or to verify information before including it on a company website or in a securities filing.

Contracts

  • The Wayback Machine can help in locating missing copies of license agreements, e.g., for previously licensed software such as a software program or font acquired years ago. If you can’t find the agreement and the company from which it was acquired no longer has it on their website or has gone out of business, the Wayback Machine may help you locate a copy of the agreement from the archived version of the website around or following the date on which you acquired the licensed material, enabling you to ensure you understand your or your company’s rights to the licensed materials.
  • The Wayback Machine can also help locate prior versions of online agreements, such as vendor agreements. For example, if you are renewing your agreement with a large vendor who sends you a new contract available on their corporate website, and you can’t find the old version of their contract you signed years ago, use the Wayback Machine to find the old version on an archived version of their website to generate a redline against the new agreement to facilitate your review of the new agreement.

Records Retention

  • If a company is reconstructing their historical records, the Wayback Machine is a great place to start. Companies often find that their historical records are spotty, especially in the time before a formal records retention process was put in place. Companies may not have a policy to archive and save information of historical or business value, which may be lost over time. Use the Wayback Machine to find and save historical versions of website policies such as Terms of Use, Privacy Policy, Terms of Sale, and other website disclosures, as well as historical information such as bios on former executives and directors and product information.

Intellectual Property and Litigation

  • The Wayback Machine can be an excellent source of information which may be valuable or essential to a party’s position in intellectual property disputes and litigation. For example, Wayback Machine pages can be used to establish or substantiate infringing activity by a person or entity. They have also been admitted in business litigation as far back as 2003 as evidence of a parties’ course of performance.
  • Pages from the Wayback Machine have been used in patent litigation as prior art, i.e., a printed publication describing an invention which publication is shared with a third party (e.g., made available to the public) prior to the date on which the “inventor” filed for patent protection for that invention, and have been used to establish a first date of use in commerce for trademark purposes. (It’s important to note that the Wayback Machine only shows the date on which a page was archived, not the date it was first made accessible online.)
  • The Wayback Machine is also an excellent source for strategic direction in discovery or when preparing a subpoena. Reviewing a discovery or subpoena recipient’s historical websites can help refine a company’s requests for production of documents, interrogatories or other discovery requests where the subject of the request is historical or aged information. It can also help identify potential witnesses who have knowledge as to facts central to the litigation, e.g., a former employee mentioned in a historical blog post.
  • Many federal courts have admitted Wayback Machine web pages in court, in some cases requiring an affidavit authenticating the archived web page, or in other cases where an employee of the company hosting the original web page attests to its authenticity as a true and accurate reproduction of the original page – the ideal person is the person who created the original page, or has first-hand knowledge of the original page. The Internet Archive can provide an affidavit authenticating Wayback Machine printouts for a fee as described on its website, but strongly recommends that a party first request judicial notice or ask the other party to stipulate to the authenticity of printouts from the Wayback Machine (this can be a good approach in arbitration). Note that seeking to admit Wayback Machine web pages can lead to evidentiary objections such as hearsay. Attorneys may want to consider asking their expert witnesses about their familiarity with the Wayback Machine and whether they have previous experience in testifying as to Wayback Machine pages.
  • A prominent example of the Wayback Machine’s value in litigation is the Kleargear.com case. Kleargear.com instituted a provision in its Terms of Use preventing a consumer from taking any action, including posting a review, that negatively impacts the company or its reputation, and imposing a $3,500 “fine” for Kleargear’s legal fees to sue the consumer for breach of the Terms of Use. John and Jen Palmer had a negative experience purchasing a product from Kleargear.com in 2008 and left a negative review. Years later in 2012, Kleargear.com demanded payment from the Palmers of the $3,500 fine if the negative review was not removed and turned the amount over to collections when it was not paid, resulting in an impacted credit rating for the Palmers. Aside the Palmers winning the inevitable litigation they filed against Kleargear.com, the lawsuit led to legislation in California in September 2014, and federal legislation in December 2016, prohibiting anti-disparagement clauses in consumer contracts. One of the key facts in the case and in press coverage was the fact that according to the Wayback Machine’s archived Kleargear.com site from 2008, the non-disparagement clause wasn’t even part of the Terms of Use at that time (it was added to the site later on).

Business Tools

  • The Internet Archive offers useful business tools. For example, consider the Wayback Machine’s 404 error page handler. The 404 error page handler enables a website to offer an archived version of a page from the Wayback Machine if a current page is not found and an archived version exists in the Wayback Machine. This can help reduce the impact of 404 errors for websites where content of web pages does not change too quickly, and where displaying an older page is better than no page.
  • The Internet Archive also offered an archiving service called “Archive-It” which companies can use to collect, catalog, manage, store, and provide 24/7 online search of and access to archived content collections. If your company or organization wants to preserve a collection of online content, consider using this service. Users include museums and art libraries, NGOs, colleges and universities, other private companies and non-profits.

Access the Wayback Machine at http://archive.org/web. Frequently-asked questions are located at https://archive.org/legal/faq.php. If you don’t find the Wayback Machine to be a useful business and legal tool, you can at least take a stroll down Internet memory lane.

Eric Lambert is Assistant General Counsel and Privacy Officer at CommerceHub, a leading cloud services provider helping retailers and brands increase sales and delight shoppers through supply solutions to expand product assortment, demand solutions to promote and sell products on the channels that perform, and delivery solutions to enable rapid, on-time customer delivery. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. Eric works primarily from his home office outside of Minneapolis, Minnesota. He is a technophile and Internet evangelist/enthusiast. In his spare time, Eric dabbles in voice-over work and implementing and integrating connected home technologies.

6 Contract Templates Every Company Should Have at the Ready

Posted on by
Reply

One of my favorite sayings is “opportunity is equal parts luck and preparation.” In other words, being proactively prepared for an opportunity puts you in a better position to take advantage of one when it comes along. When a business opportunity arises that requires a contract or other legal document, being prepared includes having a well-written template ready to go. It can help avoid missing critical terms and points when rushing to draft a document for the opportunity, minimize the time and effort required to respond, and turn a “fire drill” into a routine but urgent request. Conducting business on a handshake agreement, or on a hastily drawn-up set of terms, to save time can backfire if the opportunity turns into a dispute. Having a well-drafted, legally binding agreement in place ensures the parties both understand their rights and obligations in connection with a business opportunity, and gives your company the protection it needs if and when the need arises.

Here are six contract templates every company should have drafted and ready for use when the opportunity arises. If your company does not have in-house counsel, consider whether having outside counsel prepare some or all of these templates for you is a worthwhile investment. If you have (or are) in-house counsel, check to ensure that you have up-to-date versions of these agreements in place. Consider whether to take this opportunity to freshen them up.

1) Mutual and unilateral NDA templates

Companies use non-disclosure agreements (aka “confidentiality agreements” or “NDAs”) for protective, contractual, and strategic purposes. NDAs ensure there are adequate (and binding) protections for your confidential information before you share it with another party. If your company has trade secrets, failing to put confidentiality obligations in place with third parties who have access to your trade secrets can cost you your trade secret protection. NDAs may also satisfy a contractual obligation to a third party (e.g., not to disclose a company’s confidential information unless the recipient is also subject to written confidentiality obligations). They can help ensure that a third party is truly interested and serious about discussions with your company. (I discussed the why, when and how of NDAs in depth in a previous LinkedIn article.) If your company and a prospective business partner want to “pull back the curtain” to share confidential information as part of discussions about a proposed relationship, you’ll want to have an NDA template ready for use.

Companies should have a minimum of two NDA template “flavors” at the ready – mutual (where both parties are providing confidential information to the other) and unilateral (where only your company is sharing confidential information). Use the template that best matches the actual disclosures occurring, and avoid putting a mutual NDA in place where you don’t expect (and don’t want) confidential information from the other party. For example, if you want to share financials and future business plans with a candidate for employment, a unilateral NDA is likely your best bet. Some companies use other flavors of NDAs as well (e.g., a specific version for M&A opportunities, one for interview candidates, etc.)

NDAs should also be drafted as fairly as possible – the last place you want to get bogged down in negotiation is over the NDA (tripping up your business discussions before they even start). Consider avoiding contentious language such as residuals clauses and first-party indemnities in your NDA templates. Also consider having your NDA template as a PDF with fillable form fields to minimize negotiation and simplify the process of completing the NDA.

2) Professional Services/Independent Contractor Agreement template

Every company, big and small, uses subcontractors, vendors and service providers (collectively, “contractors”). Contractors are often brought in where a company needs additional support or services its employees cannot provide (or want to outsource), where it needs subject matter expertise it does not have, or where it needs to temporarily augment its existing personnel or other resources. There are many benefits to using contractors, from avoiding the need to pay payroll-related costs to having the ability to “target” spend on subject matter expertise when needed. Having a written agreement in place with your contractors, and a template Independent Contractor Agreement (also called an “ICA” or “Professional Services Agreement”) ready for use, is critical to protect your company’s rights.

Most ICAs are a master set of terms governing each work engagement, and use “statements of work,” “work orders,” or “project assignments” for each discrete project (collectively, “SOWs”). Among other things, ICAs typically cover the scope of work performed; the independent contractor relationship between the parties (misclassification of independent contractors by companies is a current “hot button” issue for the IRS); testing, acceptance and ownership of deliverables; payment terms, expenses and taxes; representations, warranties and remedies around the work and/or deliverables; and insurance. SOWs generally include sections on the scope of services, in-scope and out-of-scope items, deliverables, timeline and milestones, fees (e.g., time and materials, not to exceed amount) and payment schedule, and change order procedure.

Companies may also want to consider using the core provisions of their ICA to create a set of “Vendor Terms & Conditions” that exist on a URL on the company’s domain. Companies can incorporate Vendor Terms & Conditions by reference into a vendor’s purchase order or invoice, with language ensuring a term in the Vendor Terms & Conditions governs over any conflicting terms in the vendor’s own terms, to avoid the need to negotiate every services order or contract. This can be a simple and cost-effective way to ensure a base set of standard risk allocation and other terms apply to each vendor even where the vendor spend or vendor size does not warrant the use of significant Legal or Procurement resources.

3) Employee Confidentiality and Inventions (and Non-Solicit and Non-Compete) Agreement and Employee Offer Letters

As a condition of employment, most companies require their employees (1) to maintain the confidentiality of the company’s confidential and proprietary information, and any similar information of the company’s clients, vendors and service providers, that the employee may receive or have access to during the term of his/her employment, and (2) to agree that the company owns any inventions or other “work product” created by the employee in connection with his/her employment. Some companies also require employees to agree, during the term of employment and for a period of time afterwards, not to solicit the company’s clients or employees, and/or to not compete with the company on behalf of another company (these are known collectively as “restrictive covenants”). To ensure these obligations are in place and legally enforceable, every company must have a well-drafted Employee Confidentiality and Inventions Agreement (or “ECIA”).

The ECIA is the type of agreement that is worth a little of outside employment counsel’s time to ensure it is both well-written and legally enforceable. If your company has offices or employees in multiple states, the laws around the enforceability of these types of agreements, especially restrictive covenants, differs widely. For example, in California, restrictive covenants are generally void, but in other states such as Minnesota, restrictive covenants can be enforceable if they are reasonable in time and scope and satisfy other legal requirements such as supported by consideration and supporting a legitimate employer interest. Consideration itself is an important consideration that varies from state to state — you may not be able to enforce a new (or updated) ECIA against existing employees unless it is supported by additional non-token consideration provided to the employee. Also, NDAs and partner agreements often require that a company only disclose the other party’s information to employees who have a need to know the information and are bound by written obligations of confidentiality to protect it, and a properly worded ECIA can satisfy this requirement.

Companies should also have well-drafted employee offer letters. The offer letter is signed by the company and agreed and acknowledged by the new employee, and contains both a summary of the employment terms and important protections for the company. A well-drafted and properly worded offer letter can help avoid later issues if there is dispute over terms such as the details of the employment offer or the employee’s conduct. Companies should have separate offer letter templates for exempt and non-exempt employees. Consider including, among other provisions, the start date; the title of the position and name/title of the supervising employee; the base salary and payment cycle; probation period language; information on vacation & holidays, benefits, and equity grants (if applicable); pre-employment screening requirements; and continuing obligations (e.g., there are no existing restrictive covenants that would prevent the candidate from working for the company; the candidate will not bring any confidential or proprietary data from a former employer onto company systems; etc.). Ensure the offer of employment is labeled “contingent” so that in the event of an issue, the applicant was not truthful on the employment application, you have the right to revoke it where allowed by law. Offer letters should also be reviewed by outside employment counsel to ensure they comply with the state laws applicable to your business.

4) Business Referral Agreement

Companies looking to grow their business may happen upon a person or company willing to refer potential clients to them (e.g., a company in a complimentary business whose clients may also be interested in your company’s products or services, or a person with deep connections in the industry who can facilitate introductions with executives at some of your company’s top sales targets), typically in return for a bounty per referral or a percentage of the fees earned by the company from the referred client. When a referral opportunity arises, have a business referral agreement template ready for use.

A business referral agreement typically covers the process of submitting a lead and any rights of the company receiving the lead (the “recipient”) to reject it; the time frame for the recipient to close a business transaction with the referred lead; the fees payable for referring the lead, and the payment frequency and terms; what assistance the referring company will provide to the recipient in closing the business (if any); and audit rights to ensure the referral fees paid are accurate.

As with NDAs, consider having both a mutual referral template (where both parties are referring leads to the other) and a unilateral template (where a party is referring leads to your company only).

5) Letter of Intent/Term Sheet/Memorandum of Understanding

When negotiating a new business opportunity, there is often pressure to get something on paper as quickly as possible, even before the deal is fully negotiated. One way to do this is through a letter of intent (also called an “LOI” or “term sheet”) or memorandum of understanding (“MOU”). A LOI or MOU can act as a “snapshot in time” of the anticipated terms of the definitive agreement as of that date, highlighting both where the parties have already come to agreement and where further negotiation is needed. If done incorrectly, a LOI thought to be non-binding by one party could be held to be a legally enforceable agreement. Having a properly worded LOI or MOU template at the ready can help evidence the parties’ intent to move forward with negotiations and ensure they keep the focus on finalizing the terms for, and negotiations on, a definitive agreement, while protecting your company’s rights to walk away if a definitive agreement cannot be reached.

A LOI and MOU differ primarily in form: a LOI is typically in the form of a letter, where a MOU is typically in the form of a legal agreement. LOIs and MOUs typically include terms that can be grouped into two sections:

  • Non-binding terms.These are a summary of the terms that the parties intend, as of the date of the LOI or MOU, to include in the definitive agreement. When putting non-binding terms into a LOI or MOU, consider using non-binding terms such as “would,” “should,” and “may” instead of “will” and “shall.” Also consider a catch-all provision stating that all obligations in the non-binding section are prospective only and will not apply to the parties unless and until embodied in a definitive agreement to be negotiated and signed by both parties.
  • Binding terms.Many people believe that a LOI or MOU is completely non-binding, but that’s almost always not the case. The most common binding term is a commitment by both parties to continue negotiating in good faith toward a definitive agreement, and a statement that either party may cease negotiations at any time. Other binding terms to consider for your LOI or MOU include exclusivity or standstill obligations (e.g., the parties will negotiate exclusively with the other for a period of X months); confidentiality obligations or a reference to the existing NDA in place between the parties; non-solicitation obligations; and general legal boilerplate such as choice of law and an integration clause. Also include a statement that except for any binding terms, the LOI or MOU does not create (and is not intended to create) any binding or enforceable agreement or offer. Ensure the binding and non-binding terms are in separated sections.

I prefer to use a letter of intent when it’s non-binding (e.g., as a term sheet), with our without a commitment by the parties to continue negotiating in good faith. I use a memorandum of understanding when summarizing non-binding deal terms coupled with binding obligations. Whether you use a LOI or MOU, ensure it is signed by both negotiating parties.

6) Settlement and Release Agreement

Sooner or later, your company will have a dispute with a client, customer or vendor over fees, performance of obligations, use of deliverables, etc. Most often, business disputes are resolved by the parties without the need for formal dispute resolution such as mediation, arbitration, or litigation. When a dispute is resolved, it can be important to have a settlement template ready to memorialize the parties’ full and final resolution of the dispute, and to state any obligations the parties have to each other in connection with the resolution of the dispute. Without a well-written and legally enforceable settlement and release agreement, the parties may find that the settlement of a dispute is not as full or final as originally thought if one of them seeks to enforce the settlement terms.

Settlement templates generally include a description of the dispute being settled; the consideration to resolve the dispute (e.g., waiving certain accounts receivables, payment of an amount by one party to another) and any contingencies (e.g., payment must be received within 10 days); a release by both parties of any claims related to the dispute (ensuring this is properly worded is one of the most critical parts of the settlement agreement); confidentiality language; a non-disparagement clause if appropriate; and other appropriate legal boilerplate. There are state-specific requirements for settlement and release agreements, so consider having local counsel review your template to ensure it will be enforceable.

The easiest settlement agreement template to have at the ready can be used for the resolution of run-of-the-mill business disputes such a billing dispute. For significant or complex disputes or settlements to resolve pending or threatened litigation/arbitration and releases in cases of employee terminations, consult an attorney to ensure your template fully and completely covers the complexities or nuances of the specific case.

Eric Lambert is Assistant General Counsel and Privacy Officer atCommerceHub, a leading cloud services provider helping retailers and brands increase sales and delight shoppers through supply solutions to expand product assortment, demand solutions to promote and sell products on the channels that perform, and delivery solutions to enable rapid, on-time customer delivery. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. Eric works primarily from his home office outside of Minneapolis, Minnesota. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles invoice-over work and implementing and integrating connected home technologies.