THIS CONTRACT LIMITS OUR LIABILITY – READ IT

by Anthony J. Spotora, Esq.

Have you ever seen this brief legal ditty? Sure you have. And whether you know it or not, you likely accept contracts containing this language on a weekly, maybe even daily basis.

Ever valet park your car or use the services of your local drycleaner; or, maybe you have attended an amusement park? Well then, without signing anything, you have just entered into an “adhesion contract”.

Adhesion contracts are contracts between two parties that do not allow for negotiation — it’s take it or leave it! However, can you realistically leave it? What would your options be anyway? Should you park your car elsewhere or take your clothes to a different cleaner? Won’t you just be faced with the same issue there? And what about that pocket size agreement? Will it really limit their liability? I mean really, who can even read that boilerplate it’s so small?!

And how about the long-form adhesion contract that you actually sign; a residential lease agreement, for example? Were you afforded the opportunity to negotiate its terms or, did the landlord stand in a position of such superior bargaining power that you signed it, knowing also that it would not be any different down the street?

Theoretically, the common debate relating to contracts of adhesion have reasonably focused on whether or not courts should enforce them. On the one hand, they undeniably fulfill an important role of efficiency in the marketplace. These standard form agreements can substantially reduce transaction costs by eliminating the need for buyers and sellers to negotiate the terms of every sale of goods or services. However, they may also consequently result in unjust terms being agreed to by the accepting party. Few would disagree that it is simply unfair for the seller to avoid all liability or to unilaterally give themselves the right to terminate the agreement.

So then, are these contracts enforceable?

In common law jurisdictions, these standard form agreements are treated like any other contract and a signature or other manifestation of acceptance and intent to be legally bound will bind the acceptor. This reality, however, has caused for many common law jurisdictions to develop special rules that govern such situations. As a general rule, courts in these jurisdictions will interpret the standard form agreement contra proferentem which, literally means — ‘against the proffering person.’ (cont. from e-newsletter)

Most of the United States, however, follows the Uniform Commercial Code which, similar to the common law jurisdictions mentioned above, has provisions relating specifically to standard form contracts and; when a standard form contract is found to be a contract of adhesion, it is given special scrutiny.

For a contract to be treated as a contract of adhesion, it must be:

1. Presented on a standard form and on a “take it or leave it” basis; and
2. Give the consumer no ability to negotiate because of their unequal bargaining position.

Next, the “special scrutiny” may be performed in a number of ways, a few of which are:

1. If the term was beyond the reasonable expectations of the “adhering” party, the court can find it to not be enforceable; or
2. Under the equitable principles of the Doctrine of Unconscionability, unconscionability may be found and the contract held unenforceable when there is an “absence of meaningful choice on the part of one party due to the one-sided contract provisions, together with terms which are so oppressive that no reasonable person would make them and no fair and honest person would accept them.” (Fanning v. Fritz’s Pontiac-Cadillac-Buick Inc.)

So…the good news is: recourse may be available for the underdog!

The bad news is: both parties will have to expend time and money for a court to determine if the adhesion contract is enforceable.

If it is found unenforceable, however, and in response to, “THIS CONTRACT LIMITS OUR LIABILITY”, you can say —> “OH NO IT DOESN’T!”

Many business owners require start-up or early stage capital to help realize their professional dreams. They have personally assembled each piece of their business puzzle and have invested their time, sweat and tears in an effort to significantly increase the likelihood of their business’s success. They have established a corporate entity to create a foundation to build from and to further entice potential investors. Now, the only thing they lack is —> MONEY. Calling all Angels!

Businesses in their infancy often turn to private individuals for funding. In exchange, the investor, although also often a stranger (an “Angel”), is given an equity interest in the company. Commonly, the instrument delivered to the investor in consideration of their investment meets the definition of a “security” and therefore, the business must comply with federal and state securities laws.

With the advent of the internet, it was only a matter of time before business owners utilized and in some instances, manipulated this ubiquitous vehicle to discover parties interested in funding their dreams. However, while such a means of capital acquisition remained relatively unregulated for a time, eager business owners should not confuse the fact that securities themselves have long been regulated. So, while a “Click Here to Invest” icon or similar financing webicon may not only seem appealing but quite ingenuous; potential, sometimes likely consequences should be considered.

Most commonly, when a business decides to offer securities to investors it either registers its offering or it meets and complies with the requirements of an exemption from registration under applicable securities laws. For example, whereas a business might seek to benefit from the “safe harbor” exemptions offered through Regulation D of the Securities Act of 1933, even this exemption generally requires that the offering not involve a “general solicitation” (Rule 502(c)). Essentially, this means that the business (or even a broker-dealer hired by the business) must refrain from prospecting for investors through any form of broad-based or blind solicitation or advertising.

(cont. from e-newsletter) Subsequently, and in response to the public’s growing interest in using the internet for investment purposes, the Securities and Exchange Commission (“SEC”), along with many states, have explored ways to allow for internet solicitations without each necessarily resulting in an action for “general solicitations”.

For starters, and as a means of background, when a pre-existing, substantive relationship between an issuer (or its broker-dealer) and an offeree exists, general solicitations are not typically found. The SEC first extended this principle to private offerings posted on the internet in 1996. In IPOnet, SEC No-Action Letter (Division of Corporate Finance and Market Regulation Interpretive Letter dated July 26, 1996), the SEC staff indicated that a securities dealer and underwriter could distribute questionnaires to prospective, accredited investors via the internet to determine their suitability to participate in private offerings, and that those investors may be invited to access a secured website to review private placement offerings not contemplated or commenced prior to the lapse of a sufficient period of time (a “cooling off” period) after completion of an investor’s questionnaire.

Naturally, with the increase of this issue and the more flexible measures permitted, the SEC later issued a clarifying release to circumvent business owners/website operators that began to broadly interpret their No-Action Letters so as to apply very loose qualification methods for prospective investors.

So while the good news is that the internet can be used as a source for attracting angel investors so long as it’s done according to federal and state securities laws; the possibly more notable fact to be recognized by those business owners anxious to cyber-sell some stock is this —> the SEC has focused on broker-dealer operated sites and has routinely resisted providing no-action relief to non-broker dealer website owners! Have you spoken to your attorney today?

So what happens when your business name becomes someone else’s domain name? What happens when a layman registers www.mcdonalds.com before the billion burger server commonly known as “McDonald’s” does? What about when Hasbro and an adult entertainment website both desire the rights to www.candyland.com, but the adult site beats Hasbro to the proverbial punch or; when an MTV Video Jockey purchases www.mtv.com, but then leaves MTV? What happens?

For a time, these amounted to little more than good questions. It was clear that intellectual property rights were in question, being jeopardized and/or infringed upon, but the courts had not yet faced these new age digital era issues. Naturally, litigation ensued; actually, it boomed! Consequently, it also became increasingly obvious that with more than 3,000,000 registered trademarks and service marks; more than 33,000,000 internet domain names having been registered and; with the advent of phraseology like, “cybersquatting” and “typosquatting,” these issues were not going to quickly dissipate on their own. Subsequently, a coalition of internet business, technical, academic and user communities joined forces to find a means of resolution; resolution that would be short of a future bursting at the seams with litigation.

In October 1998, the Internet Corporation for Assigned Names and Numbers (ICANN) was developed and, amongst other things, this private-sector nonprofit organization became responsible for the management and coordination of the internet domain name system (DNS). As part of its policy, ICANN enacted the Uniform Domain Name Dispute Resolution Policy (UDRP) to provide a mechanism for trademark owners to recover domain names from these recently categorized “cybersquatters”. Moreover, all domain name registrars having the authority to grant top-level domains (i.e., .com, .net, etc.) would now be required to follow the UDRP which included a streamlined “cyber arbitration” procedure to more quickly and less expensively resolve domain name ownership disputes involving trademarks.

(cont. from e-newsletter) In order to win a UDRP arbitration, the trademark owner/complainant must prove each of the following elements:

1. The domain name is identical or confusingly similar to a trademark or service mark in which the complainant has rights;
2. The domain name owner does not have any rights or legitimate interests in respect of the domain name; and
3. The domain name owner registered the domain name and is using it in “bad faith”.

If the trademark owner is successful in proving these elements, an award is granted whereby the registrar of the domain name is instructed to cancel, transfer or otherwise make changes to the domain name registration. Keep in mind, the “awards” just mentioned are the only awards available via a UDRP arbitration. There are no awards for monetary damages or otherwise.

But what if the trademark owner is unsuccessful? Is the battle simply over? The answer is “maybe”. A trademark owner may still bring legal action under the Anticybersquatting Consumer Protection Act seeking a court order to transfer the domain name as well as monetary damages for infringement. Here of course there are additional time and cost factors to be incurred by both parties as protracted litigation will now be the means to the trademark owner’s hopeful end.

In light of the examples questioned above:

1. Candyland.com is now safely in the hands of Hasbro;
2. McDonald’s made a charitable contribution at the domain holder’s request to transfer the domain name; and
3. MTV settled out of court with Video Jockey, Adam Curry.

But what of your business name? Is it being infringed upon or rather, could you be infringing upon someone else’s trademark? The ratio of 33,000,000 registered domain names to 3,000,000 registered trademarks mentioned above sheds light on the obvious possibility of a surfeit of known/unknown infringements taking place even as you read this article. And, did you know further that it is the duty of the trademark owner to monitor and protect their rights or, they stand to permanently lose them? That’s right, protect it or lose it!