Category Archives: Contracts

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Will the SEC Target Your Company’s Confidentiality Agreement?

The Securities Exchange Commission (SEC) has been ramping up its review of confidentiality provisions that affect its enforcement efforts and on the rights of whistleblowers. In fact, the agency has even requested copies of several companies’ employment contracts, non-disclosure agreements, and other documents that have been signed by employees over the past several years. The SEC is looking for any agreements that have a “chilling effect” on an employee’s ability to bring allegations of wrongdoing to its attention.

On April 1, 2015, the SEC filed an enforcement action against KBR, Inc. and directed at the contractual provisions it believes discourages whistleblowing activity. KBR used a form confidentiality statement in internal investigations pursuant to the company’s Code of Business Conduct Investigation Procedures Manual. The confidentiality statement, which witnesses were required to sign at the beginning of an interview, contained the following language:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC alleged this language violated SEC Rule 21F-17(a) which provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.” The goal of Rule 21F-17(a) is to promote the reporting of potential unlawful conduct to the SEC.

This action was resolved by an Order whereby KBR consented to revise the language and to pay $130,000. It is important to note that there was no evidence that the language at issue had ever deterred or prevented an employee from making a report to the SEC or others. The SEC merely reasoned that the language had a chilling effect on whistleblowing efforts.

KBR consented to settling this matter without admitting or denying the charges. It also agreed to amend its confidentiality agreement by using the following language approved in this case by the SEC:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.

Takeaway Points

The SEC is focused on taking enforcement action against company contracts that contain language that have a chilling effect on whistleblowing. Your company should take immediate action to review your employment contracts, confidentiality agreements and other types of agreements to determine if they contain language that the SEC may find has the effect of impeding an employee’s ability to report possible violations to government agencies.

This case gives businesses some insight as to what the SEC considers as acceptable language in confidentiality agreements. Of course, this language may not be applicable in every situation and where the language is placed may prove to be important at some point, but for now the KBR Order is the only example we have of language that the SEC deems acceptable.

If you have questions or concerns regarding the language used in your employment contracts, contact us today to schedule an initial consultation. Leslie S. Marell has been practicing business and commercial law for over 25 years. She is established in private practice and has extensive legal experience counseling companies in the areas of business contracts and transactions, purchasing, sales, marketing, computer and technology law, employment law and day to day legal matters. Let us provide your company the advice and guidance you need.

 

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If you don’t Understand your Contract, It can be Costly!

You have probably heard that is it important to thoroughly read a contract before you sign it. However, reading it is only half of it – you must also make sure you understand your rights and obligations under it. Whether this means you confer with an attorney or read the contract five times over, it is essential.

Joe Wickline, a coach for the University of Texas football team, may have learned this lesson the hard way. Texas University hired Wickline in 2014 as its offensive line coach and offensive coordinator. When Wickline was hired, he was still under contract with Oklahoma State University (OSU). The OSU agreement permitted Wickline to leave without penalty, but only if certain requirements had been met. OSU believed that Wickline had not met the required conditions for leaving and filed a breach of contract lawsuit against Wickline seeking $600,000 in damages. Wickline filed a countersuit against OSU in a Texas court.

Wickline’s countersuit was dismissed by the Texas judge due to a provision in the contract that required all litigation to be filed in Payne County, Oklahoma. The lawsuit filed by OSU for breach of contract was filed in Payne County and is still pending. In short, OSU seeks to prove that Wickline is not controlling the play calls for the Longhorns. If this can be established, OSU will recover the damages it seeks because Wickline will have made a lateral move to Texas and failed to take a promotion with “play-calling duties,” as required to avoid penalty in his contract with OSU. Thus far, the University of Texas has not been named as a defendant in the lawsuit.

It remains to be seen whether Wickline met the requirements for terminating his OSU contract, but his case demonstrates how costly it can be if you do not understand your rights and duties under a contract.

If you are entering a contract and you are not sure you fully understand all of its terms and conditions, let Leslie S. Marell assist you. We serve as general counsel to clients who do not require, or choose not to employ, a full-time lawyer in-house. Call today to schedule your initial consultation.

 

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How Does the CISG Differ from the UCC?

Hopefully you have read our previous blog titled “Contracts for the Sale of Goods & the CISG.” This blog will focus on some of the key differences between the United Nations Convention on the International Sale of Goods (CISG) and the Uniform Commercial Code (UCC). When the CISG is applied, the parties often make inaccurate assumptions regarding the existence of a contract between them. For example:

  • The contract may be declared invalid due to its indefiniteness if neither the price nor a formula for calculating the price is set forth. This can be fatal to the contract under the CISG but not under the UCC. If the court must determine the price under the CISG, it will declare the price to be the price charged at the time of conclusion, not the reasonable price standard at the time of delivery that is applied under the UCC.
  • Under the CISG, a revocable offer becomes irrevocable when the offeree mails its acceptance or if the offeree relies on the offer. This gives rise to a potential claim for full contractual damages rather than simply a reliance interest or other quasi-contractual or equitable remedy.
  • If the offer sets a deadline by which it must be accepted, under the CISG the offer is irrevocable until that date. In contrast, the UCC provides that an offer is revocable until it is accepted, with certain strict exceptions.
  • The CISG, in contrast to the UCC, doesn’t require the contract to be in writing or meet any other requirements as to form. In fact, the CISG allows a contract to be proved by any means, including witness testimony.
  • Under the CISG, if the offer and acceptance do not match perfectly (which often occurs when each party uses their own standard forms), the acceptance will be treated as a counter-offer which is often deemed accepted by performance of the contract. This can result in the seller’s terms being applied to the purchase and sale under the CISG, which should be motivation for buyers to opt-out of the CISG. Under the UCC, only the terms that both parties have agreed to will be included in the contract.

Finally, U.S. businesses have a better understanding of what to expect under the UCC because there is extensive case law interpreting it. To ensure that the UCC applies to your international contracts for the sale of goods, make sure your contracts specifically and explicitly exclude the CISG.

To ensure that your contract provides you with the most protection available, contact Leslie S. Marell to schedule an appointment. Our office is located in Torrance, California, but we proudly serve businesses of all sizes from all over the country.

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Contracts for the Sale of Goods & the CISG

If you have not heard of the United Nations Convention on the International Sale of Goods (CISG) and you conduct business in different countries, you need to read this blog! Many American businesses are shocked when they learn that the CISG and not the UCC may be the applicable law to their contracts when dealing with out of country suppliers/ customers. The CISG has been ratified by the United States, making it qualify as American federal law (and therefore pre-empting state law). Thus, unless the CISG is specifically excluded from a contract that falls within its scope, it (and not the UCC) is the applicable law.

What type of contract falls within the CISG’s scope? In short, any agreement for the sale of goods between parties who have their place of business in different countries that are parties to the CISG (CISG Parties). Determining a parties “place of business” is not always easy. For instance, a US buyer that enters a contract for goods manufactured overseas with a distributor incorporated and with offices in the US may be within the CISG’s scope. Additionally, the CISG can apply in the domestic sale of goods if the parties’ places of business are not in the same country. This would occur in the case of an agreement between a US buyer and a foreign seller for goods to be delivered from the seller’s US store or warehouse.

In determining if a contract is for the sale of goods, it does not have to be solely for the sale of goods. The agreement must concern “predominantly” the sale of goods and not services. This means that an agreement for the sale of goods to be manufactured can fall within the CISG’s scope. An exception can occur if the buyer supplies a “substantial” portion of the materials necessary to manufacture the goods. Additionally, the sale of stocks, investment securities, negotiable instruments and money do not fall within the scope of the CISG.

If the parties want to ensure that the CISG does not apply to their contract, they must include an express statement excluding its application. The statement must be more than saying the contract will be governed by a specific state’s law because the CISG is considered state law. Thus, the contract should specifically declare that the CISG does not apply to the contract.

If the parties wish to opt-out of certain provisions of the CISG but not others, the contract must specifically outline the partial opt-out terms. Also, if the parties to a contract for services or for a mix of goods and services wish to opt-in for the CISG to be applied, they are generally allowed to do so by specifically stating so in the contract.

For more information regarding how the CISG differs from the UCC, please read our next blog or contact Leslie S. Marell to schedule your initial consultation.

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Contracts: Reading, Understanding & Breach

You have often heard that you should read a contract before you sign it. While this is true, the better advice is to make sure you understand the contract before you sign it. Many attorneys love to use fanciful legal jargon that can make it difficult to fully understand the terms and conditions in the contract. As a result, a breach of contract action is often the result of inadvertent failures because the party either failed to read or understand its obligations.

Breach of Contract

The most common type of breach of contract disputes is one that looks back at past actions or inactions. For example, a party failed to perform a duty required by the contract or the party took an action that is prohibited by the agreement. It is important to note that either action or inaction may be the basis of a breach of the contract lawsuit.

It is also possible for a breach to be forward-looking. This is often referred to as an “anticipatory breach” and it occurs when one of the parties either states its intention not to perform, or more frequently, does something to indicate that it will not perform its contractual obligations in the future. Although the time for performance has not arrived, the expression of the party’s intent not to perform can be sufficient to constitute a present breach of contract.

Responding to a Breach

If you are the non-breaching party, you should immediately consider how to minimize your damages. This is crucial because all parties to a contract have the duty to mitigate damages. In other words, you can’t sit back and let your damages mount if there are steps you can reasonably take to lessen them.

Before you suspend your own performance under the contract in response to the other party’s breach, you should have a knowledgeable business attorney review the agreement. It is important to determine whether the other party’s breach is a material or non-material breach. You should also gather and maintain all documentation and other evidence that the breach of contract occurred and your damages suffered as a result.

Litigating Breach of Contract Claims

Lawsuits can often be avoided with open communication. When a breach first occurs, having a clear discussion with the other party will often lead to you finding a way to cure the breach and move forward – saving everyone time and money.

If the dispute cannot be resolved, you will want to review the contract to determine if it has a dispute resolution clause which determines how the dispute will be resolved. You will also want to confer with your attorney regarding any clauses that govern what damages are recoverable in the event of a breach.

If you are entering into a contract and you need assistance understanding what the terms and conditions of the agreement actually mean, call Leslie S. Marell to schedule an initial consultation. She has been practicing business and commercial law for over 25 years. Leslie is established in private practice and has extensive legal experience counseling companies in the areas of business contracts and transactions, purchasing, sales, marketing, computer and technology law, employment law and day to day legal matters. Let us provide your company the advice and guidance you need.

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How to Effectively Manage Your Contracts

If your entity has a wide variety of contracts, it can be a difficult task to manage them all. There are a variety of comprehensive contract management programs that can make the process easier for you. Consider the following tips:

Identify the Contracts

Before you can decide what type of contract management program will work best for your entity, you should first identify the types of contracts your organization enters into. For example, purchase orders, sales contracts, master agreements, service contracts, mortgages, real estate leases, equipment rentals, software and other intellectual property licenses, assignments and all other types of written agreement that legally bind your entity is a contract.

Once you have identified the types of contracts you will need to manage, you should also identify all of the parties your entity is working with. This includes vendors, suppliers, independent contractors, finance companies and banks, landlords, distributors, independent sales representatives, and companies with whom you have alliances. This will help you get a better overall picture of your contractual obligations.

Proactive Problem-Solving

Serious consequences can result from the mismanagement of contracts, so it is important to anticipate the problems you hope to solve by establishing a contract management system. Create some “best practices” to follow to help ensure you avoid problems. For example, if your contracts have automatic renewals, create a system for tracking which agreements will be automatically renewed and docket the deadlines for providing notice of termination if needed. You should also be tracking deadlines, payment dates and other important dates to ensure you are meeting your contractual obligations.

You should also establish a procedure for the review and approval of contracts. This includes having your legal counsel routinely review the required standard contract terms.

Contract Management Programs

A contract management program will provide organization and rules for how your entity’s contracts should be handled. For example, your contract management program should:

  • Categorize the types of contracts covered
  • Detail the personnel with authority to enter into binding contracts for the entity
  • Link contracts with appropriate budgets
  • Establish the standards for when required review of a contract must occur (such as when a minimum dollar amount is involved) – this includes setting standards for when the entity’s attorney should conduct the review
  • Identify the contractual forms or templates that may be used without prior approval
  • Outline any standard contract terms that must be met such as insurance requirements
  • Specify where the originals of the contracts must be filed and maintained

Contract Management Software

The days of using an excel spreadsheet to manage your contracts are over. There are a wide variety of affordable contract management software programs available that will save you time and meet your needs. These prepackaged programs are often more effective and functional than user-developed programs. Additionally, it is always helpful to have customer support and updates available if needed.

Work now to Make Life Easier Going Forward

You may feel overwhelmed by the thought of managing your contracts, but with diligent effort now, you will reap your reward going forward. Once all of the contracts are in the system and your agreements are organized, you will save time, money and be able to monitor the quality of the products and services provided to your entity.

If you need assistance with contractual or other business-related matters, contact Leslie S. Marell to schedule an initial consultation.

 

 

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What You need to Know about the “Automatic Renewal” Clause

If you have entered into a contract that is no longer meeting your needs and you call to cancel the agreement, you may be surprised to learn that you are bound by the contract to continue paying the other party for the same amount of time as the original term of the contract. How does this happen? The terms and conditions of certain contracts contain an “automatic renewal” clause. This type of provision is also referred to as an “evergreen clause.”

An example of an automatic renewal clause is something along these lines:

All terms contained herein will automatically renew for the same length of time as the initial term of the contract unless either party provides the other with at least thirty (30) days written notice of termination of the contract prior to the expiration of the current term.

In other words, unless you notify the other party in writing at least 30 days before the current contract term expires that you do not want to renew the contract, the agreement is automatically renewed. An evergreen clause can be found in a variety of types of contracts, especially service, supply and distribution agreements.

So, is an automatic renewal enforceable? Like most things in life, “it depends.” Many courts strictly construe this type of contractual language in commercial contracts that do not involve a consumer. If the language is clear and unambiguous, the court is likely to consider it enforceable and extend the agreement for another term if proper and timely notice to cancel is not given.

Several states have passed laws attempting to make the use of automatic renewal clauses more difficult. Many require the evergreen clause to be in all bolded and capitalized letters in order to make the provision more conspicuous. Some states go further and require the party attempting to enforce the automatic renewal to provide an advance reminder to the other party that the automatic renewal date is approaching. Failure to comply with the statutory requirements can render an automatic renewal clause unenforceable.

If you have questions regarding business law matters, contact us today to schedule an initial consultation. Leslie S. Marell has been practicing business and commercial law for over 25 years. She is established in private practice and has extensive legal experience counseling companies in the areas of business contracts and transactions, purchasing, sales, marketing, computer and technology law, employment law and day to day legal matters. Let us provide your company the advice and guidance you need.

 

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Do You Need to Escape a Contract?

If you are bound by a contract that is no longer working for you, it is important to review the term and termination clauses in the agreement. The term of a contract is the amount of time it remains effective. The termination clauses outline the various ways the contract can end.

Term of the Contract

Most contracts set forth the “effective date” or the start date of the contract and a “termination date” which is the date the contract expires. It is common for an agreement to provide ways the contract can be renewed, which means that a new term for the contract is established for a set period of time. It is important to note that if your contract contains an automatic renewal clause, the agreement will be automatically renewed unless one of the parties provides notice of its intent to terminate the contract.

It is imperative that you understand the term of your contracts and your termination and renewal options. You should schedule the termination date and any deadlines for giving notice of your intent to terminate to avoid automatic renewal. You don’t want to miss your opportunity to escape a burdensome contract by missing this deadline!

Contract Termination

It is important to understand the termination provisions of your contract. The simplest way to end a contract is “without cause,” which means the terminating party does not provide a reason for the termination. You must typically provide written notice of termination to the other party.

Particularly from the Buyer perspective, it is extremely important that you negotiate such a termination without cause provision into your contract. If you no longer require the goods or services and therefore, wish to terminate the contract, this clause is one of the few mechanism that permits you to do so. Even if you have a legitimate business reason to terminate, contract law does not permit you to do so without an express provision in your contract giving you that right.

Your contract may also outline how to terminate the contract “with cause,” which means either party can end the contract if certain specified events occur. Depending on the event, the contract may allow the other party an opportunity to “cure” the event and avoid termination. Otherwise, the termination for cause can be immediately effective upon notice to the other party. It is common for termination with cause to result in a dispute over whether or not cause actually existed or if it was properly cured. Thus, if you intend to terminate a contract for cause, it is imperative that you carefully document the reasons for cause and record all events that provide you with cause to terminate. Finally, you should note that there may be certain obligations that extend past the termination of the contract, such as confidentiality provisions.

If you are considering terminating an existing contract, call Leslie Marell for help in reviewing the requirements of the term and termination clauses.

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Contract Tips for Avoiding Data Breaches – Part 2

Hopefully you have read our first blog on this topic titled Contract Tips for Avoiding Data Breaches – Part 1.” Below are more contractual provisions you should consider implementing into your vendor agreements to help ensure your confidential data is protected.

Notification Requirements

If there is a breach in security or any impermissible uses of the information, the vendor should be required to provide you with immediate notification. You may want to have the ability to investigate the breach with your own resources either on-site or remotely. Also, you will want to include a provision requiring the vendor to notify you of any governmental or other third-party requests for disclosure of information.

Subcontractors

If subcontractors are used by the vendor, you may want to be notified of or have the right to approve the use of third-parties. You may want to have access to the third-party’s security protocols and certifications.

Data Center Location

The contract should specify the geographical location of the data center. You should consult with your attorney regarding whether this could subject you to the jurisdiction of that location.

Service Level Agreements

If you have negotiated certain guarantees for access or scheduled maintenance during times that will result in minimal disruption, your contract should provide for specified monetary credits for the failure to meet such service level requirements.

Indemnification

Your contract should set forth liability limitations and the vendor’s obligation to indemnify your business for harm caused to third-parties by the vendor’s breach of confidentiality obligations, noncompliance with the law, or other similar types of conduct.

Data Breach Insurance

The contract should require the vendor to obtain adequate cyber-insurance that covers both the loss of data and the costs of responding to a data breach, which should include reasonable attorney’s fees.

There are several other contractual provisions that may be necessary for your industry or unique needs. If you are interested in learning more about protecting your business with your vendor contracts or how we can assist you with other business-related matters, contact Leslie S. Marell today.

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Contract Tips for Avoiding Data Breaches – Part 1

There has been widespread concern throughout every industry about how to safeguard and protect confidential information from data breaches. Cybercrime is becoming one of the top concerns for the Federal Bureau of Investigation (FBI). Robert Mueller, FBI director, has stated that “[t]here are only two types of companies: those that have been hacked, and those that will be. Even that is merging into one category: those that have been hacked and will be again.”

The damage that can result from a data breach can range from business interruption and damage to your company’s reputation to lawsuits and regulatory fines. As a result, your business should mitigate its exposure by implementing formal policies and procedures, incorporating security technologies, training employees and buying cyber insurance. It is also important to consider steps you can take in negotiating, drafting and renewing your company’s contracts to prevent and avoid data breaches.

Pre-Contract Due Diligence

When you are considering using a third-party vendor that may house or otherwise have access to protected data, you should conduct due diligence in determining any security issues that should be resolved through the contracting process. It is effective to address this issue while you have maximum leverage before the contract is signed. You may want to require limited access to your systems or network, or even have a specific person with the vendor assigned to safeguard confidentiality and integrity.

Contractual Agreement

It is imperative that the contract clearly states who owns the information. Depending on your industry, the vendor may have full control over the data and have notification obligations under the law if it leaves its control, but you want to maintain ownership of the information. You may also want to include contractual language that:

  • limits how the data may be used
  • requires the vendor to return or destroy all of the data in the vendor’s possession upon termination of the contract
  • allows you to request confirmation that certain certifications or third-party reviews of the vendor’s system has occurred
  • provides for the encryption of data when it is being transferred or when not being used
  • requires background checks on employees with access to your protected information
  • provides that security updates and patches will be applied as necessary
  • sets forth any additional security measures that may be necessary (such as security code or card required for access to the data center)

The above are the initial considerations for protecting your digital data in vendor contracts. Our next blog will continue discussing this topic and cover more in-depth contractual provisions to include in your vendor agreements, so please check back.

To ensure that your vendor contracts provide you with the most protection from liability available, contact Leslie S. Marell to schedule an appointment. Our office is located in Torrance, California, but we proudly serve businesses of all sizes from all over the country.