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Category: Contract Law & Beyond

10

Drafting a Group Blog Operating Agreement

special_large.gifConcurring Opinions organized as an LLC some months ago, for all the obvious reasons. But filing papers with the Secretary of State doesn’t begin to answer the legal issues that arise when people come together to blog. Indeed, it creates a host of new ones. Over the last few months, to solve the problems that becoming a legal entity creates, we have been working to finalize our operating agreement, tailored to the unique needs of blogging. Now that we’re done, I thought I’d share a few thoughts about the major issues we considered, and the solutions that we settled on. I’m going to be a little bit general here, and, as always, nothing about this post constitutes legal advice, on the off chance you were in the market for it. To preempt the objection that considering the pittance of money that we get from advertising, most of this is overkill, I would just respond: they probably used to think that at Google too. (Or, more humbly and accurately, if it is worth doing, it is worth doing right).

1. Governance: We decided to go with a member-operated entity (rather than the formal route of having officers). This seemed like an overdetermined choice. But it leaves some big questions on the table: what kind of majorities do you need for which kinds of decisions; how many members constitute a quorum; do all members get equal votes? We decided on super-majority rules for every decision, and permitted voting by email with a “quorum” defined as participation in the email “meeting” within a set period of time. We also decided on equal voting shares for existing members.

2. Exit: So there you are, blogging away as a member of an LLC, and one of your members decides to sell his or her stake to an outsider, who chooses to blog on (the horror!) international law instead of privacy, or simply write multiple posts about Jennifer Aniston or other trivial sundries. Can you stop this nightmare before it starts? With difficulty. Transfer restrictions must be reasonable, which means (generally) that you need to draft an LLC buy-out as an alternative to an outside sale that provides a fair estimate of the worth of a stake in the entity. That isn’t an easy to problem to solve. We started with a six month revenue figure and backed into a valuation: I’m sure that there are better options available. Similarly, we made provisions for non-voluntary exit (i.e., removing a member) with an appropriate valuation and notice provisions. This is a sensitive drafting problem, but a necessary one in a world where people sometimes simply get tired of blogging.

3. Intellectual Property: Does the blog own the posts, or do the authors? If the former, then you’ve got multiple problems: what about guests? Who will control licensing? If the latter, you’ve got to worry about protecting the Blog’s marks (such as they are), and also make sure that you set up a licensing system within the operating agreement. We settled on a scheme were the authors retained IP rights, except that the Blog will own its own marks, such as they are.

4. Distribution of Profits: The options here are legion, and fraught with potential hard feelings. Starting with the presumption that most blog LLCs will want to be taxed like partnerships, the legal problem is to find a way to distribute revenue in rough proportion to contributions to the operation of the company. I’ve heard other blogs have very complicated formula to distribute cash, like, say, dividing the total numbers of words posted by some denominator and then creating an index productivity score. This seems to me to create bad incentives to overwrite, in a medium where omitting needless words is valued. So, we went with a three-track system: a threshold number of posts to receive any distributions, coupled with an incentive bonus for the percentage of total posts over that threshold, and finally something extra for administrative service. The devil is in the details.

5. Negotiation: In a blog of our size (seven permanent members) it wasn’t terribly difficult to reach an agreement, although seven lawyers means lots of line editing and persnickety (but useful) language nits. We did have the help of a lawyer’s basic draft agreement to get us along the way, and if you are trying to do this without a law degree, I think you should hire a lawyer. Generally, if you go lawyer-free, I’d recommend appointing a smaller committee of the whole to flesh out the issues, appointing a drafter, and then have that person be responsible for incorporating changes into the master document.

I know that most law professors who blog with others think of this as sort of a hobby/professional sidelight. To the extent they’ve thought about governance issues, they’ve probably done so in the context of a revenue discussion, where the “owner” has told the other editors, perhaps with some input, about how the money will flow. This is a fine model if you think of yourself as an employee (and it shifts most real risk to the “owner” and his or her homeowner’s policy). But I doubt that many folks on group blogs have thought much about whether they should have a right to compensation if they are removed as a contributor, or whether they should get a veto on adding new members. Or what were to happen if a co-blogger tried to prevent them from syndicating “their” posts with another outlet. Or whether blog-related business opportunities must be shared with co-bloggers?

Airing these issues is one of the big benefits to sitting down and drafting an operating agreement. That is, formalizing the legal status of a blog, whether in an LLC or not, has benefits apart from merely shielding members’ assets. Talking together about governance helps to get everyone’s expectations out in the open, and generates good will and emotional investment into the enterprise. If blogs are going to mature to be permanent institutional parts of the media/academic/legal marketplace, as so many predict, people should get serious about how they are run. A good agreement is the place to start.

(Image Credit: These folks, who will make it all look pretty.)

5

Markets in Female Talk and Markets in Markets

I love Intrade. For example, I have stopped paying that much attention to political polls. When something happens, I click over to Intrade to see what the markets have to say about Romeny’s prospects of getting the nod (currently trading at about 23) or Obama’s continuing plunge from grace (his share price has gone from a July high of about 38 to about 13 today). I was recently explaining these markets to my mother-in-law who asked, “So it is just gambling, right?” Well, sort of, I replied. However, there are also reasons that investors would want to buy shares in, say, a Clinton victory as a way of hedging against political risk. I explained that politics might be like the weather — a random event that can create real costs for a business — and buying rights to payment in the event of bad weather allows you to get rid of some risk. I felt that I had made the whole thing sound very hip, serious, and respectable at the same time.

womentalk.pngThen today I noticed that Intrade has been selling a contract on whether or not the next publicized study of adult talkativeness will find that women are at least 10% more talkative than men. As you can see, there was a bit of initial price fluctuation, with the market pushing the price of female chatter up to about 85, but things have since settled down to the current price of about 75.

I have to confess that I am a bit stumped on how one would use this as a hedging device. What exactly is the risk that one is trying to avoid here? It turns out that the market was suggested by Robin Hanson, of Oxford’s Future of Humanity Institute and George Mason University. This fact doesn’t help me see any real financial use for this contract, but it does show the power of the market to satisfy even the demand of academics for markets in odd things.

0

Law Talk: Markovits on Contracts of Adhesion

In this week’s episode I speak with Professor Daniel Markovits of the Yale Law School. Daniel writes in a variety of areas including the philosophy of law, the theory of toleration, and — most importantly — the theory of contract law. In 2004, Daniel published an ambitious article in the Yale Law Journal“Contract and Collaboration” — in which he sought to offer a new theory of contractual liability based on the integrative and pro-social effects of contracts. He is now at work on a project that applies his collaborative theory of contract to the perennial problem of contracts of adhesion. The result, as you can hear in this episode, is a critique of contracts of adhesion that is unrelated to the traditional complaints of unequal bargaining power and substantive unfairness.

You can subscribe to “Law Talk” using iTunes or Feedburner. You can also visit the “Law Talk” page at the iTunes store. For previous episodes of Law Talk at Co-Op click here.

5

The Empire Strikes Back

SamAndBritannia.bmpLast Friday and Saturday, I attended a wonderful workshop at Georgetown hosted by Greg Klass on contracts and the philosophy of promising. It was fun to finally meet some of the folks whose work I have been reading for the last couple of years, as well as to meet some new people. At the end of the conference, I had a brief exchange with one of the other people that has had me thinking. One of us — I think it was him — observed that the last several years seems to have seen a revival of interest in contracts and the philosophy of promising. I think this is true. My admittedly extremely impressionistic sense is that, with a few exceptions, after Fried’s Contract as Promise — which has few defenders; including it would seem Fried himself — interest in the morality of promising as a basis for understanding contract was largely eclipsed by other debates in contact scholarship, such as the clash between economic theorists and their critics. Such no longer seems to be the case. Promise, it would seem, is back. Why?

For my part, I thank the British Empire. If you look at contracts scholarship in the UK and the Commonwealth, what you see is that promise never quite fell into the disrepute there that was heaped upon it within American legal theory. Grant Gilmore and before him the Legal Realists just didn’t happen in Britain. To be sure, British and Commonwealth scholars have always been aware of what the Realists and their progeny have been doing, but they haven’t felt called upon to be quite as impressed by it as have American legal thinkers. In Canada, for example, legal formalism was still thinkable as a serious philosophical approach to the law, providing a base from which the work of Ernest Weinrib and other neo-formalists to infiltrate south of the border. As an initial matter, contract doctrine is structured around promising, something that formalism allows one to take seriously. Likewise, it is striking that many of those doing work on contract and the philosophy of promising, even in the United States, trace their intellectual pedigrees back not to Charles Fried and Harvard but rather to Joseph Raz and Oxford. Indeed, at one point in the workshop one of the presenters turned to me and asked, “So are you a Raz student as well.” I admitted to being a sympathetic but had to confess my humbler intellectual origins. “As a child,” I said, “I was taught contracts by Crits at Harvard.” The field of promising, however, having been trampled over by successive invasions of Goths, Visigoths, Vandals, Realists, Gilmore-quoters, Crits, and legal economists, it would seem is being slowly reclaimed for the Empire.

0

Law Talk: Gordon Smith and Contracts as Organizations

This week I speak with Professor D. Gordon Smith of BYU Law School (and, of course, The Conglomerate). In this week’s episode, we discuss Gordon’s paper “Contracts as Organizations” (with Brayden King), now up on SSRN. Essentially, Gordon is proposing an emperical research agenda for the study of contracts. By “contracts,” Gordon really does mean “contracts,” not contract law or contract dispute resolution. His argument is that we can use ideas from sociology and organization theory to think about contracts as a species of organization, a move that he claims opens up new possibilities in terms not only of how we answer questions about the process of contracting but also what questions we ask. Enjoy!

You can subscribe to “Law Talk” using iTunes or Feedburner. You can also visit the “Law Talk” page at the iTunes store. For previous episodes of Law Talk at Co-Op click here.

1

Article 9, Asset Securitization, and the Great Depression

forgottenman.jpgI’ve been reading Amity Shlaes’s wonderful book The Forgotten Man: A New History of the Great Depression, which provides some great story-telling and a richly deserved economic send-up of the New Deal. She illustrates the illogic of many New Deal policies — such as the NRA’s attempt to deal with the monetary problem of deflation through price controls — as well as the sheer contradictory ad hocery Roosevelt’s “bold, ceaseless, experimentation.” Her main thesis seems to be that the New Deal never actually had an economic — as opposed to an electoral and political — logic. To the extent that it was Keynsian it was Keynsian mainly by accident.

Along the way, she rehabilitates some of the class villains of the 1930s and their pre-Crash shenanigans, among them the use of holding companies by utilities. In the traditional story, the captains of industry in the 1920s used holding companies to manipulate stock prices to reap huge profits at the expense of naive investors who found themselves bilked when the market crashed in 1929.

Shlaes has a different story.

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5

Carbon Offsets, Contract, and Complicity

CarbonEmissions.jpgThe Washington Post ran a front page story earlier this week on the wild and unregulated world of carbon offset markets. The basic idea is that one purchases some off set — either in the form of technological development or contracts not to emit — for one’s own carbon emissions so that one’s over all carbon footprint is zero. This is just the sort of environmentalism that makes my free-market-contracts-prof’s heart go pitter patter. The regulators, however, are now snooping around. As The Post reports:

Critics say that offset sellers usually have good motives. But the market is confusing enough that, this month, the Federal Trade Commission said it would look into whether consumers are being adequately protected.

“It’s just like the Wild West,” said Frank O’Donnell of the group Clean Air Watch. “There are no controls, no standards.”

Having grown-up in the West, I object to “Wild West” as a term of regulatory derision, but it strikes me that there is a deeper problem here, namely what exactly is it that a person is trying to get when they do a carbon offset.

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1

Debt, Status, and Fatherhood

penguin.jpgProfessor Maldonado’s thoughtful post on fathers reminds of me of one area where the distinction between status and contract in the family still has a huge bite: Debt. In particular the debts created by child support obligations.

Most debts are created in one of two ways. The first method is by contract. I borrow money, I buy on credit, I breach a contract that gives rise to damages, etc. The second method is by committing some tort that gives rise to an award of damages. Interestingly, once these debts are reduced to a sum certain they are more or less treated in the same way. The failure to pay the debt is not a crime. Furthermore, we do not generally allow injunctive relief for debt collection. (In other words, a court will not order a debtor to pay on pain of contempt.) By and large, the debts are even treated in comparable ways in bankruptcy.

Not so for debts of child support. In some jurisdictions failure to pay child support is a crime. Child support debts receive preferred treatment in bankruptcy. In the Old Dominion they try to hit deadbeat dads were they really live, revoking their hunting licences if they refuse to pay. Indeed, some courts have even upheld injunctions requiring unemployed fathers to accept offered employment so as to comply with child support obligations, claims that such work-on-pain-of-contempt-and-imprisonment violates the Thirteenth Amendment’s prohibition on “involuntary servitude” notwithstanding. In short, we treat the debts created by the status of “fatherhood” as being quite different than the debts created by contract or even by harm to others.

I’m not sure what to make of this. Mainly, I suspect that it simply reflects the desire to protect the rights’ of children to the economic support of their parents. But it is more than that. For example, other debts for the benefit of children — say those created by contract such as insurance policies — are not given anything like the same kind of treatment. In other words, it is not simply about making sure that kids get paid. Rather, I suspect that Maine’s claim about the progress of the law notwithstanding, we view a father’s obligation of economic support as changing his status. He is not simply a citizen with a debt. He is a father, something different than an ordinary person, and thus subject to certain intrinsic obligations. In this sense, I think, the law insists that fathers are more than simply income sources. They certainly are not treated like other income sources. Rather, the law insists that the failure to support one’s children is an action of particular blameworthiness that we are willing to accept extra costs to avert and that we are willing to punish with greater severity than other kinds of non-payment of debt. This doesn’t respond to the sorts of concerns raised by Professor Maldonado’s post, of course, but it does suggest that we are willing to treat the obligations of fatherhood as being more than accidental to one’s legal personhood.

Fathers aren’t like everyone else.

4

Politics, Private Space, and Total Persuasion

persuasion.jpg

A lunch today with a colleague at another school, coupled with an article in the Wall Street Journal, has brought me to back to a topic I blogged about back in January: Total Persuasion. As I suggested, there are analogies to be drawn between the government’s defunct secret possibly ongoing program to gather reams of information about its citizens and corporations’ desire to grab consumer mind-share by every persuasive avenue possible. Indeed, we’re rapidly approaching a time when it will be exceedingly difficult for the law to draw lines between advertising and not-advertising; between fraud and persuasion; and between censorship and consumer protection.

These claims are easy to overdraw, so let me give you an example and a theory to help set the stage for the discussion. In today’s Journal, John McKinnon has a interesting article about Sara Taylor’s decision to leave her job as the White House’s political director to join the private sector. Taylor is an expert in microtargeting, a marketing technique developed by corporations to segment their consumer markets by mining data to learn more about the structure of consumer’s preferences. According to McKinnon, microtargeting was “honed” by political operations to “more effectively zero in on voters’ emotion triggers,” and uncover groups of voters that are susceptible to future efforts. Taylor sees a “big future” for taking such political lessons back to the corporate world by “helping corporations focus on potential customers’ . . . feelings about buying a product or service.”

There are some roadblocks in this prosperous path, as the article points out. Most salient, businesses are “more constrained in the claims they can make” than politicians, presumably by the law of fraud (in its various guises). But there is a solution to this problem: encourage consumers to make their own persuasive advertising by creating “social networks around products and brands . . .” In the future, we should anticipate that such social persuasion will become an increasingly prevalent aspect of corporate marketing efforts, just as politicians have worked to co-opt social networking sites for their own ends.

Why? Because consumers have fewer defenses to social persuasion, and aren’t cynical about it yet. Moreover, social persuasion is probably less subject to legal sanction in the general case (indeed, it may be immune under circumstances where the same language if spoken by the corporation would be actionable). It is also, obviously, cheaper to produce. The downside (loss of control over message) is probably something that corporations will learn to live with. (I thank my lunch companion for pointing this problem out to me!)

What’s wrong with a society in which most speech that you hear is designed to persuade you to consume? When framed that way, some might immediately respond: nothing! After all, no one is being compelled to any particular purchase. If the consumer market is efficient, and consumers had a taste not to consume, wouldn’t savvy marketers satisfy the taste with a unpersuasive campaign? (The idea is silly on its face, but isn’t it sort of what Saturn and Berkshire Hathaway were/are up to?) Even assuming that the consumer product market is somehow irrational, marketers would presumably compete to satisfy whatever inefficient desires are extant.

But I doubt that market rhetoric is going to provide satisfying answers to whether the law should work to hinder a total persuasion society. I haven’t fully thought this issue through, but my starting point is an essay by Jonathan Franzen called Imperial Bedroom, in his book How to Be Alone. Franzen attacks privacy advocates for focusing on privacy as just problem of being from free from others’ (corporations, the government, space aliens, the U.N., etc.) prying eyes and grasping hands.

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