Skype Stock Options Flap

July 9, 2011

Interesting column earlier this week by Steven Davidoff in the NY Times’ DealBook column on the seeming differences between venture capital firms and private equity groups.  It seems that just before its sale to Microsoft, Skype, which was then controlled by the private equity firm Silver Lake, gave notice to Yee Lee, a former employee, of its intent to exercise its right to repurchase at their exercise price shares of stock that might be acquired by Lee upon his exercise of vested stock option awards.  The situation received widespread attention in Silicon Valley following Lee’s rant on his FrameThink blog about how the practice was contrary to start-up company norms, at least by Silicon Valley standards, and the rant was subsequently picked up on by a writer at Fortune magazine.  Davidoff concluded that Silver Lake’s emphasis on maximizing every dollar even at the expense of its reputation for fairness being pilloried provided a key contrast with the focus by VCs on entrepreneurial creative and relationship economics.  Skimming the reader comments propmpted by the former employee’s blog post and the DealBook post, makes clear that such distinctions may be more in the eyes of the beholder than real. 

The same is true with whether the practice engaged in by Skype with its stock options repurchase program is typical.  From my own experience, it appears atypical and counter to the goal of employee retention, at least if the way the options agreement clauses work in practice was not made clear to subject employees.  Had they been aware of the potentially aggressive approach to repurchase employees may have chosen to stay longer (or, of course, possibly not have joined Skype in the first place).  You have to read the letter — Lee has handily posted the letter — that Skype sent to Lee to appreciate the almost comical nature of the situation.  Davidoff makes the point that sympathy is difficult where the employee did not ay close enough attention to the specifics of the underlying contract.  That may be partially true, but when one doesn’t read the contract and finds out that things were not really as one expected, that is sometimes as much about the abnormality of a situation as it is about making carefree assumptions.

Twitpic User Terms Brouhaha

June 21, 2011

As noted in an earlier post on TechRazor, in the online realm website and app terms and conditions merit barely a yawn from most users.  Interesting then that a recent business deal announced last month between Twitpic and World Entertainment News (WEN) garnered so much pushback from the Twittersphere.   Under the deal, WEN was designated as Twitpic’s exclusive photo agency partner. 

 The catch for users of Twitpic, an immensely popular application used to attach pictures to Twitter posts, is that the fine print of the user terms grants broad rights to Twitpic to pretty much do whatever Twitpic desires with uploaded images, including to profit off of them.  Specifically:

“By uploading content to Twitpic you give Twitpic permission to use or distribute your content on or affiliated sites.  . . . [B]y submitting Content to Twitpic, you hereby grant Twitpic a worldwide, non-exclusive, royalty-free, sublicenseable and transferable license to use, reproduce, distribute, prepare derivative works of, display, and perform the Content in connection with the Service and Twitpic’s (and its successors’ and affiliates’) business, including without limitation for promoting and redistributing part or all of the Service (and derivative works thereof) in any media formats and through any media channels.”

Twitter users, especially professional photographers, rebelled and WEN’s CEO did not really help the situation by later stating that WEN was only interested in photos posted by celebrity users.  So, sometimes the fine print contains traps for the unwary that can snag many.

For more on this tempest, see Joshua Brustein’s recent piece about this in the NY Times and a follow up piece a week or so later by Paul Boutin.

Apple’s SDK for Apps: When Are Clickwraps Worth Paying Attention To?

March 10, 2010

Catching my attention this week was a recent post on the Deeplinks blog of the Electronic Frontier Foundation (EFF), which sounded an alarm about the one-sided nature of Apple’s license agreement for the software development kit (SDK) for iPhone apps.  The EFF can reliably be counted on to frame issues of electronic rights in a manner most benefitting the user community and this perspective is usually very helpful in understanding related issues.  While Apple’s SDK license is certainly written favorably to Apple, whether this should be viewed as particularly unfair or not is probably in the eyes of the beholder.  You can read the post here:

I think the more interesting aspect in this commentary is the implication that apps developers should be surprised by any of these revelations of the license terms that they presumably voluntarily agreed to when they clicked their acceptance to them.  Granted, it is all too common to glide through the fine print packed into online terms, and maybe momentarily pause before clicking acceptance.  We’ve all done it, including this writer, simply because the consensus view (which also happens to be true enough in most situations) is that the risks posed by agreeing to the expected “plain vanilla” terms of the clickwrap are almost always never greater than the benefits to be obtained by agreeing to the terms.  Certainly in the consumer context this is very often the case (even with the risks of buried “opt ins” to ad server programs, among other annoyances).  Much of the time the same can be said of clickwraps in the commercial context. 

The difficulty then is to know what exceptions justify taking a harder look at the details of clickwrap terms before taking the “I Accept” plunge.  Unfortunately, there are no objective rules here because these agreements are not uniform and too many variables are almost always at play from both the licensor and licensee perspectives.  So, what to do?  My rule of thumb is that if the clickwrap involves your use of or access to something (whether it be an application or otherwise) that is critical to the ongoing stability or continued operation of some key business activity of yours and the object of the clickwrap will be used on a regular basis in the business, then you are well advised to have a hard look at the clickwrap to make sure it can be comfortably adhered to, and, if not, to see if the proponent of the clickwrap has an alternative means of allowing access to the desired application or thing.  This goes back to the fundamental risk calculus related to assessing the potential consequences if one is wrong about a key assumption and, if so, whether your business would thereby be placed in significant jeopardy.  In addition, my general approach is almost always to at least skim such agreements before clicking acceptance to make sure that nothing obviously problematic jumps off the screen.

So, if you’re with a software development organization planning to participate in the apps ecosystem for Apple’s iPhone or Google’s Android (or, really, any other mobile devices) as a key component of your business plan, then getting comfortable with (or at least being aware of) the scope and details of the applicable SDK license terms is something that should be dealt with at the outset rather than on the back end once your wagon is hitched to that star.

Hines v. Notice of Browsewrap Terms Must be Conspicuous

November 30, 2009

As the volume of online transaction activity continues to grow, it is not surprising that so called “browsewrap” agreements – essentially, terms and conditions that a site user is presumed to have agreed to merely by accessing a website — have garnered more scrutiny by consumers and, ultimately, within the courts.  What is surprising is that website operators continue to overlook basic elements to ensure that such agreements are enforceable.  The recent case of Hines v., Inc., Case 1:090-CV-00991-SJ-RLM (Sept. 8, 2009  E.D.N.Y.), is a case in point.


Ms. Hines purchased a vacuum cleaner through Overstock’s website and upon later returning it was charged a restocking fee.  Upon objecting to this charge, Overstock pointed to the Terms and Conditions posted on its website, which included the statement that “Entering this Site will constitute your acceptance of these Terms and Conditions” – notwithstanding that a user has to actually visit the Terms and Conditions to become aware of this statement.  The same with a mandatory arbitration clause buried within the Terms, which specified Salt Lake City, Utah as the place of arbitration.  The Hines court regarded Overstock’s contentions with skepticism and ultimately determined that the placement of the Terms and the configuration of the website’s purchasing process worked against Overstock.

Common Sense vs. Hindsight?

In hindsight it may seem readily apparent that it would be unfair to hold a site user accountable for website terms, such as a mandatory restocking fee or an arbitration clause, about which the user was not made aware prior to completing a transaction through the site.  Many websites have traditionally posted somewhere on them “Website Terms” or the like with the expectation that such terms provide a measure of protection even if a site user never actually visits those terms.  For sites that are principally informational in nature, basically, an online brochure, this has long been regarded as sufficient.  However, the more interactive a site is, es[ecially if a transaction of any sort is being conducted, requiring some affirmative assent to the website terms by the site user is imperative if the site operator is to have a realistic expectation of enforcing those terms. 

Most of this seems common sense in terms of basic procedural fairness, which dictates that some meaningful notice have been provided.  Website operators have a great deal of latitude in terms of how they contract with their users and many of the procedural battles over the enforceability of online contracts have long ago been decided on traditional contract principles despite the online context.  On the Overstock site the Terms and Conditions were posted at the bottom of the site and below the fold or the typical viewer window and required a user to scroll down to even take notice that the terms were present.  During the purchasing process, although several screens prompted various responses or information from Ms. Hines at no point was she prompted to acknowledge the Terms themselves.  Thus, as the Hines court noted “[v]ery little is required to form a contract nowadays – but [the Overstock notice procedure] alone does not suffice.”

The Takeaway

So, website operator beware!  If you use  a browsewrap agreement without more for important terms upon which you expect to rely in the event of a dispute, you are taking a big risk.  Unless you can show some evidence of actual notice of the website’s terms by the user, the user will likely be able to skate by without liability because of insufficient notice.  While this is much clearer for transaction-oriented websites, it will likely tilt that way for purely informational sites as well.

 Link to DecisionHines v. Overstock

Cincom v. Novelis: Federal Copyright Law Trumps State Merger Law

September 28, 2009

Contract boiler plate – or the lack thereof – can be an Achilles heel in a software licensing transaction.  Case in point:  Cincom Systems, Inc. v. Novelis Corp., No. 07-4142 (6th Cir. Sept. 25, 2009).  Affirming the decision of the lower federal court, the U.S. Sixth Circuit Court of Appeals last week held that copyright infringement occurred where there was a failure to obtain the software licensor’s consent to an assignment of a software license agreement that resulted by operation of law under the Ohio merger statute.

This is true even though Cincom’s software continued to be used in the same business operation, at the same facility and on the same computer system as before the merger.  In 2003, Alcan Ohio completed an internal reorganization through a series of mergers in which its operations in Oswego, New York where the Cincom software had been used, ultimately was spun off into a new company, later renamed Novelis Corporation.  The license agreement between Cincom and Alcan Ohio stated that the license was personal to Alcan Ohio, that it was non-transferable and that no transfer was permitted without the prior written approval of Cincom. 

Novelis, as the successor to the subject portion of the former Alcan Ohio business, believed that the Ohio merger statute should control whether a transfer took place.  By Novelis’ reasoning, a transfer by operation of law and the vesting of the former entity’s license rights in Novelis was not the type of transfer sought to be prohibited under the license agreement.  While this might be true with other property, the Sixth Circuit agreed with the lower court that this is not the case with respect to copyrights or patents, transfers of which are controlled by federal law.  Bottom line:  if any entity other than the authorized licensee holds the license without permission of the licensor then the licensor’s copyright has been infringed.

While the assignability of license rights is always a matter of negotiation, assignment clauses in software license agreements frequently include terms that expressly allow assignment to a successor in interest to the business unit that originally licensed the software.  Where such language is not present, counsel reviewing a contract after the fact in preparation for a merger will sometimes take comfort that an assignment of a property interest by merger is one that occurs by operation of law and, thus, third party consent, if otherwise necessary, is not normally required absent an express prohibition against assignment or transfer by operation of law.  Such comfort is misplaced if licenses of patents and copyrights are involved.  In this context, silence is anything but golden and unless you include express permission in the license or obtain consent, copyright infringement will occur.    

Link to Decision: