Summary:  You might not have read it here first but you have read it here often:  Courts are taking on—and deciding against—what they consider to be unfair terms in EULAs or TOUs.  In this case, it was the federal district court for Northern Texas, finding that the arbitration clause was illusory.  It is important to note that this case, in our opinion, does not stand alone but adds more case law attacking the terms of these online agreements.  These cases are—and in particular this case is—consistent with one of the principal points central to the new FTC staff guidelines.  The message:  Complicated TOUs put clients at greater risk.

In Harris v. Blockbuster, the court for the Northern District of Texas held that the arbitration provision of the online agreement for the use of Blockbuster was illusory.  Dicta suggest even broader implications for the decision, but that alone was enough to cause some concern (we do not yet know if there will be an appeal, though it is probable).

As far as the court was concerned the main problem with Blockbuster’s online agreement was sort of a double-whammy.  The agreement stated that Blockbuster could change the provisions at any time—which would, of course, mean that changes with retroactive effect would, in the opinion of Blockbuster, be enforceable.  In this case, some disputes arose and Blockbuster then added an arbitration provision, which was to apply retroactively and thus eliminate much of the risk (from a trial).

So What?

So, online agreements (what we call EULAs and TOUs) with retroactive changes inserting (or affecting) arbitration provisions will run afoul of this opinion—of course, in that district.  Moreover, the opinion carries some weight with other claims about online agreements.  Many online agreements—perhaps a majority, perhaps many more—have such provisions enabling the publisher (in this case Blockbuster) the right to make retroactive changes to the terms.  Suddenly, then (if you believe in Chicken Little), these provisions are at risk.

Ammunition & Guidance. Really, though, the opinion builds on a string of previous opinions that, taken together, provide both substantial ammunition for plaintiffs’ assaults on these agreements and, if you think about it, guidance on what to include—and exclude—from online agreements.

It is not necessarily a bad thing.  The FTC staff report gives pretty clear guidance on what can be done:  If a party wants a right to changes, then they should not be retroactive and the user must have some kind of right to agree (or not) to those changes going forward.

This is not some rogue court.  The cases cited include some in the Fifth Circuit and some in Texas itself.  With some serious contortions and impressive legal reasoning, one could distinguish this case from the facts and holdings of those precedents.  But it is not so simple.

In just the last several years, quite a few courts have taken on the online agreements.  They include courts in the Ninth Circuit and in Pennsylvania.  The reasoning can be distinguished but not here.  They all come to a smell test:  Does this really smell like a contract?

These cases fall within an even longer line of opinions regarding the nature of agreements between corporations and consumers.  As the FTC staff report pointed out (with copious footnotes), “fine print” cases have a long history.  And it is a history where the “victor” has swung from the consumer to corporations and back.  Now, with the new administration, with the FTC’s stiffer attitude about consumer rights (rightly or wrongly), and with these cases, we can expect history’s pendulum to swing the other way.

Conclusion

Write “Gooder.” These agreements do not have to be so dense and they do not have to have such onerous terms.  The right of retroactive modification was a term just waiting to be shot down.  Too often, lawyers just copy and paste a TOU from another site.  Or, perhaps they have to justify their legal fees on a topic that is perceived by clients as unimportant boilerplate.  Whatever the reason, this case should be a shot across the bow that attorneys put their clients at greater risk with such legal intricacies as we now see in EULAs.

Perhaps we’ll get some online agreements that are actually well-drafted;  that do not read like fine print;  and that provide better terms.  But then, we believe in the Easter Bunny, too.

Summary:  Stop this nonsense about completely cryptic methods of sharing and interconnecting, especially through (and to) Twitter. 917 people posing the same question should raise some eyebrows.

I am truly annoyed.  Furniture-throwing kind of annoyed.  I just spent an hour trying to get Twitterfeed to work, which required me to create a NEW OpenID ID (no, they would not accept my usual one) and still it would not permit me to post my blogs to Twitter and the help pages took me to another place (Get Satisfaction) where I had to get ANOTHER ID to post my question-and I was one of 917 people with the same question.

My comments here should indict four groups of people and their management teams and their VC backers:  Twitter, Twitterfeed, OpenID and Get Satisfaction.  Stop it.  Now. I won’t even get started on Tweetdeck.  Or Twitterberry.  Oh yes, and FeedValidator.  It is simply evil.  Unless you have a degree in computer science.

What is it with the technology world and GUIs and help pages??????????????????? Is it some supercilious sense of superiority????????????  Is it supposed to be some kind of computer science exam when you go to the page on why your feed won’t parse on Twitterfeed?  When will they figure out that 99.999999 % of us DO NOT WANT TO SPEND OUR LIVES TRYING TO FIGURE THIS STUFF OUT???!!!! And I do not want to pay for our IT department to spend one minute on it.  Stop it.  Now.

Note to Get Satisfaction and OpenID:  Translate your sites into Romanian or Urdu.  It would be just as useful to me in those languages as it is in English.

Note to Venture Capitalists:  If you can figure out Twitterfeed, it does not mean it will be successful.  Try out its GUI on someone on, say, Main Street (or its equivalent) in Merced, not on Sandhill Road.  For brownie points, try the GUI of Get Satisfaction or OpenID. Come on.

Facebook as an Object Lesson. The reason that Facebook is so successful (not to mention LinkedIn) is that its GUI is really, really, really simple.  What’s the number of users:  220 million?  Twitter is fast catching on but it is sort of like a Microsoft product:  No one knows how to use all the horsepower inherent in the apps.  Very nearly 100% of the users only know how to post tweets and NOTHING ELSE.  Very nearly 100% of the Facebook users know how to use everything on their profiles.

Now, true, Facebook’s GUI is kind of dumbed down.  So it is not a model for Twitter but it ought to be an object lesson.

I have been in the business (technology) since 1989.  I am not stupid.  For most of that time I have considered myself a beta testing group of one person.  It is simple:  If I don’t get it then something like 90% of the desired market will not get it.  And you know what?  My track record has been pretty impressive.

OK, so my blogs are not read by gejillions.  But they are accessible to anyone with an Internet connection.  And they do not have to go to OpenID and create an ID through my vidloop.com.  and Twitterfeed cannot parse them and someone in Nairobi can read what I write.  WHAT IS GOING ON??

Note to Twitter, Twitterfeed, OpenID and Get Satisfaction.  Pack a bag and go to Cincinnati.  Knock on the door of Proctor & Gamble and ask for help on determining consumer preferences for GUI design and, just as important, your help pages.  Help pages should solve the problem and if they do not, have a backup plan-for example, a screen capture button.

Anyone tried some of the Google apps?  What about Google Voice?  It isn;t a great GUI but, you know what???? It works.

Better yet, call up Apple.  They’ll help.

GUI design has been a science for over a decade.  Now make it an art for the masses.  Quickly.  Your competitors will overtake you.

Or I might start throwing furniture.  Along with the limited partners of the venture funds.

And remember this and only this if your brain has been addled by these efforts:  I was one of 917 people who posted the same question about parsing twitterfeed URLs.  Shame on you.

Summary:  Almost everyone with a website routinely copies and pastes a pre-existing Terms of Use (TOU) and privacy policy, using them as his or her own (with a few choice words and names changed).

Well, that’s a bad idea.  The FTC has set forth new guidelines that should be followed.  And almost No sites online currently follow those guidelines.

It is not illegal not to follow them but they do make sense–and the FTC is  now paying close attention.  Here’s why:  Online advertising has been largely self-regulated, to the consternation of the FTC.  Now they have laid down their expections, with the implied “or else.”  Or else the threats of regulation may increase.

I.          Introduction.

The staff of the United States Federal Trade Commission (FTC)  recently released a report (February 12, 2009) that will directly affect the documents governing the relationship between an online content provider and viewers/consumers-Terms of Use (TOUs), End-User License Agreements (EULAs) and Privacy Policies.  The report also suggests implications for the use of private information.  Please email us at jcrext@globalcaplaw.com and a copy of the report will be sent to you, or you can find it on the site of the FTC.

The report sets forth principles for self-regulation for the online advertising industry relating to online “behavioral advertising.”  (The report defines behavioral advertising, which is set forth below under “Definition”).  Technically, it is a supplemental report, but it has the effect of finalizing the December 2007 draft “Self-Regulatory Principles for Online Behavioral Advertising.”

It should be emphasized that these are principles for self-regulation for the online advertising industry.  Arguably, this means that they are not binding, and, indeed, the report makes that clear.  However (and this is an important caveat), the principles will definitely guide the enforcement actions instituted by the FTC.  Moreover, it seems that the FTC is pre-disposed to initiate legislation in this area, which will probably codify much of what is found in these principles.  And states often look to such reports for guidance on their legislation on privacy.

In reading the footnotes, another point emerges from the report.  The FTC staff appears to believe that those who draft TOUs and privacy policies have not been keeping a close eye on the enforcement actions and decisions that the FTC staff believes to be relevant-and these include decisions that do not involve online matters but do involve clear disclosure for consumers.  In fact, the report footnotes include quotes from FTC commissioners that can be summed up as the following rule:

Policies that bury relevant information and choices for consumers in legalese will do so at their peril.

(Please note that the above rule is our language and not that of the FTC or its staff.)

II.        So What?

1.         Clean up These Documents. Dense legalese will probably not “pass muster” with the FTC.  They are keeping a close eye on this area.

2.         Consumers’ Choices Must Be Clear. Making the choices for the consumer–and then burying those choices in that dense legalese will not be acceptable.  The report notes in particular that “Check boxes” already checked are a problem.

3.         Certain Changes to Terms Must Be Affirmatively Accepted. Any material changes or “retroactive” changes (i.e., affecting policies on data already collected) must be affirmatively accepted by the site users.  Prospective changes do not (yet) need such approval but it is pretty clear that the staff leans in that direction.  This possibly means that the common technique of saying “Use of this site means acceptance of the terms” together with the “warning” that changes can be made at any time will not be acceptable by the FTC.

4.         The PII/non-PII Distinction is Diminishing. The US approach has been to try to protect “personally identifiable information” at a higher level than that which is not personally identifiable.  This differs from the European model.  Now, the FTC is moving towards the European model and this is understandable.  The staff understands that PII can often be gleaned from non-PII, which makes the distinction too porous.  In particular, the report wishes to increase the protection of data that can identify an individual machine (PC, mobile phone, etc.), while the earlier approach was to preclude identification of an individual user.

5.         Self Regulation is a Testbed and is on Probation. The FTC simply sidestepped resolving many issues, leaving it to the “industry” to try various methods.  However, one can infer that “industry” has about a year before the FTC moves towards legislation.

III.       The Report.

We have not included the entire (50+ page) Report, but we have quoted almost the entire conclusion, which summarizes the final version of the “Principles” of self-regulation.  The numbering is directly from the Report:

A. Definition

For purposes of the Principles, online behavioral advertising means the tracking of a consumer’s online activities over time – including the searches the consumer has conducted, the web pages visited, and the content viewed – in order to deliver advertising targeted to the individual consumer’s interests. This definition is not intended to include “first party” advertising, where no data is shared with third parties, or contextual advertising, where an ad is based on a single visit to a web page or single search query.

B.   Principles

1. Transparency and Consumer Control

Every website where data is collected for behavioral advertising should provide a clear, concise, consumer-friendly, and prominent statement that (1) data about consumers’ activities online is being collected at the site for use in providing advertising about products and services tailored to individual consumers’ interests, and (2) consumers can choose whether or not to have their information collected for such purpose. The website should also provide consumers with a clear, easy-to-use, and accessible method for exercising this option.  Where the data collection occurs outside the traditional website context, companies should develop alternative methods of disclosure and consumer choice that meet the standards described above (i.e., clear, prominent, easy-to-use, etc.)

2. Reasonable Security, and Limited Data Retention, for Consumer Data

Any company that collects and/or stores consumer data for behavioral advertising should provide reasonable security for that data. Consistent with data security laws and the FTC’s data security enforcement actions, such protections should be based on the sensitivity of the data, the nature of a company’s business operations, the types of risks a company faces, and the reasonable protections available to a company.  Companies should also retain data only as long as is necessary to fulfill a legitimate business or law enforcement need.

3. Affirmative Express Consent for Material Changes to Existing Privacy Promises

As the FTC has made clear in its enforcement and outreach efforts, a company must keep any promises that it makes with respect to how it will handle or protect consumer data, even if it decides to change its policies at a later date. Therefore, before a company can use previously collected data in a manner materially different from promises the company made when it collected the data, it should obtain affirmative express consent from affected consumers.  This principle would apply in a corporate merger situation to the extent that the merger creates material changes in the way the companies collect, use, and share data.

4. Affirmative Express Consent to (or Prohibition Against) Using Sensitive Data for Behavioral Advertising

Companies should collect sensitive data for behavioral advertising only after they obtain  affirmative express consent from the consumer to receive such advertising.

We are trying an experiment here. Rather than rewrite a post we have made on another of our blogs we have set forth the link below. That blog is for general counsel but the point is applicable to startups, too.

Here is a summary:

An article in The New York Times Magazine on Sunday March 14th on basketball provides an object lesson that you should own whatever data may emerge from any digital initiatives memorialized in a legal agreement.

http://globalgeneralcounsel.wordpress.com


Owning What Is Created.

March 20, 2009

This is the second in a series of posts about the landmines startups face when they skip using lawyers.  You can indeed not use a lawyer, just pay attention to what has to be done.  And, as usual, this is not legal advice.

OK, so you have a few employees and some independenet contractors–let’s say someone building your website and someone programming your nifty new mobile app.

So who owns what gets created?  The basic principle is that the person that creates something owns it, with some exceptions–among them employment or an agreement assigning rights.

You Make It, You Own it.

Generally, what employees create while employed is owned by the employer, without the need for a written agreement.  But to be safe, many companies have employees sign an assignment agreement, also known as a Proprietary Rights & Inventions Agreement.  This expressly specifies what is and is not owned by the employer.

Look at it this way.  It is rare that a company does not have employment agreements for key employees (say, the core management team).  If you are looking for venture capital, you can be certain that such agreements will be nothing short of mandatory.

For the independent contractors, the law is pretty explicit.  Typically, an agreement is necessary, one that either assigns the rights or makes it clear that the work being done is, by the nature of the engagement, owned by the party contracting the services of the independent contractor–i.e., the startup.  The latter sort of relationship and agreement is called “Work-for-hire” under federal law;  the former is usually called an “assignment agreement.”  Be careful:  usually, you cannot have a work-for-hire agreement that applies to work already started.

When it comes to the website itself and the programming, you’ll have to pay attention to just what is being owned.  Well, you say, it is the website.  Well, yes, but does the website include technology already created by the developer?  Similarly, does the programming include code written by the programmer that he or she used in a previous job?  Do you own it?

Next up:  What happens to the entrepreneur with the initial idea?

Many of our startup clients are cutting back on using legal services because they simply cannot afford it.  We understand.  We get it.

Just be careful, though, when you review the agreements yourselves or when you skip the agreements.  We cannot give legal advice here but we start a series of posts that point out a few of the potholes or, more graphically, landmines in this approach.  Whether or not you use a lawyer is up to you.  Just make sure you read and understand the terms.

We’ll start with and overview of what is called “boilerplate.”  Not all of them–let’s just start with an overview.  No, we are not trying to be pedantic:  We are trying to be prudent.

Boilerplate matters.

The bad nickname of boilerplate applies to the legal provisions typically at the end of an agreement and too many clients and lawyers give them short shrift.  They are called boilerplate because they have been so heavily negotiated over the years that their terminology, grammar and the like is pretty much settled law.

But that should not keep someone from scrutinizing them.  Because they are so heavily negotiated it means that they are very important.  They are the ones that often determine the outcome of litigation.

For example, indemnification provisions shift the burden of liability among the parties.  Typically, the one with the least market power (or economic power) ends up with the most liability.  Moreover, look closely at whether or not the indemnifying party assumes the liability of defense costs–and when those defense costs are to be paid, and whether or not they can be retrieved under certain circumstances.

One of the most important decisions to be made by the leadership of any startup company, and one which is often not given sufficient consideration, is determining what kind of company you want to be. What kind of corporate and work culture do you wish to create.

Every organization, just like every individual and every family, has its own culture which reflects its own value system, priorities, and ideals. Most of us have seen the contrasts at one time or another. In one company everyone is dressed in traditional business dress with tailored suits for women and suits and ties for men, while in another company employees can be seen working in jeans. In one company employees feel satisfied and enthusiastic about their employer, while in another company the cafeteria echoes with grumbling. One company has generous benefits while another has very few benefits.

In starting a new company you should give serious thought to what kind of culture you want to create. Will you be highly family friendly and look eventually to provide such family oriented benefits as on site daycare, or do you believe that employees should address such issues on their own? Do you want to pay your employees in the top quartile, the bottom quartile, or somewhere in between? Do you want to hire people and encourage them to stay for the long term, or are you content with consistent turnover? Do you want your staff to take ample vacation to recharge their batteries, or do you believe that vacations are more a nuisance than a valuable benefit? What kind of relationship will the founders have with staff as you grow?

Although I confess a bias in favor of creating an environment where employees thrive (which, incidentally, is a good defense against unionization), there really is no right or wrong answer. It is, however, very important that you ask yourself the critical question of “What kind of company do I want to be when I grow up” or more precisely what kind of corporate culture and work environment do I want to create in my company.

The online ad model is taking a pounding because some of the major names in the biz are not hitting their numbers and CPMs–and other metrics with which to make money are plummeting.Here’s the prediction:  It will dip for a while and then climb–fast.  And here’s why:

1.  The current dip comes from these sources and, if you ponder them for a bit, you will see that they reinforce each other:

Source One:  The contaminated economy in general.

Source Two:  The te3rrible ad-spend market, related to the lousy track record of large media companies in hitting their numbers.  (And in particular, companies with a big Internet or mobile play)

Source Three:  Advertisers still “don’t get the web.” (OK, let’s expand our brains and start saying something like:  “Advertisers don’t get the digital platforms.”)

So, you have the ad people unwilling to stick out their necks:  What they really want to do is preserve their jobs while all around them are losing their heads.

2.  The upside?

2.1 (love this numbering system, huh?):  The reach per dollar spent is pretty enormous in the digital markets.

2.2 The demographics are changing–of the ad buyers and ad placement people:  They are “digital natives.”

2.3  The production costs are nearly nil.

2.4 You can change ads on the fly and according to market response.

2.5  And the main reason:  The granularity of the demographics and the data.  It is soooo good (and getting better every day) that people do not know what to do with it.

2009 is one of those transition years–the shift of more money to new media platforms.  Ad agencies will look like geniuses because “now they get it.” But, …

It does not follow that this is advice for new investments.  A lot of people are not sanguine about start-ups and the ad-driven model.  IN other words, the fortunes have been made there.  Now it is the spread of the model to the established economy.  Advertising needs scale or depth–breadth of audience or depth in a niche audience (which, when you think about it, is really the same thing).  Venture capitalists are not looking very closely at startups with the ad-driven model.  So even if you think you are the next Google, please be prepared for a lot of rejection.

Please be prepared for a lot more going on in the new media ad world?  Digital platform ad world?

And where will that take us with the digital transformation occurring in February????

Hello world!

December 20, 2008

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