Often one party to a contract is allowed to act only with the consent of the other party, “not to be unreasonably withheld.”
A common context in this regard is the right to assign an agreement. The language used is typically, “[Party A] may not assign this Agreement without the consent of [Party B], such consent not to be unreasonably withheld.”
So what happens if Party B unreasonably withholds consent? Does the refusal then automagically become consent, such that Party A is free to assign away?
In other words, is the “such consent” proviso a condition to the right to assign? Or is the refusal of consent a breach of contract on the part of Party B but otherwise provides no meaningful remedy for Party A? After all, what would the damages be for breach of the reasonableness obligation?
Redline is a dynamic collaboration environment for a select cadre of lawyers worldwide, and a powerful knowledge management platform.Watch the trailer Lawyers with Mojo or click here to learn more.
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The intended audience for this post is licensed and practicing lawyers, not laypersons seeking legal advice for their situation. If you are not a lawyer, hire one before using or relying on any information contained here. This post is: (1) informational only and not intended as advertising or as solicitation for legal services, (2) not intended to render legal advice to you, and (3) not a substitute for obtaining legal advice from a qualified attorney to assess your exact situation. The information here is subject to change and may not be applicable or correct in your jurisdiction.
Genius crowdsources song lyrics by soliciting individual contributors to post their interpretations of the words they hear in songs. Google rather blatantly copied Genius’ crowdsourced lyrics for display at the top of Google search results, as proven by Google’s replication of Genius-coded digital watermarks. Genius alleges violation of the Genius Terms of Service which plainly forbid that which Google did. Genuis claims a massive drop in ad revenue caused by a plummeting of the numbers of users visiting the Genius sites as a result of Google’s actions.
Genius brought breach of contract and unfair competition claims against Google in New York state court. Google sought removal to federal court, claiming that Genius’ claims are redressable only via copyright, and only US district courts have jurisdiction for copyright claims. The US District Court for the Eastern District of New York granted the motion to remove the case from state court, refused remand, and promptly dismissed the claims with prejudice, on grounds of copyright preemption.
The Second Circuit Court of Appeals, in an unpublished opinion (ML Genius Holdings LLC v Google LLC, 2022), affirmed the ruling, and in the process called into question the enforceability of any contract governing the supply or exchange of data or information.
The appellate court did so on the basis of US Copyright Act statutory preemption, citing section 301 of the US Copyright Act. This statute mandates that any state law claim or cause of action which is “equivalent to any of the exclusive rights” of copyright is preempted and abolished. The appellate court held that the prohibition in the Genius ToS on the copying of song lyrics isn’t “qualitatively different” from a copyright claim, thus rendering the ToS completely unenforceable.
Under this reasoning, a claim for breach of a non-disclosure agreement would not be qualitatively different from a copyright claim, either. And if the information at issue is not copyrightable, there’s nothing that can be done to prevent or remedy the misuse of that information. In the words of Professor Rub: “It would be absurd for a court to say that a corporate nondisclosure agreement about sensitive financial data is void because the contract prevents the copying or reproduction of that data.”
Five other US circuit courts of appeal had held that a breach of contract claim is not preempted, due to the “extra element” of mutual consideration upholding the promised exchange. This required element of any breach of contract claim renders the claim not “equivalent” to a copyright claim.
Genius has petitioned the US Supreme Court to hear an appeal. Because of the circuit split, chances are decent that the Court will hear it.
In the meantime, avoid designating New York (or Connecticut or Vermont) law or courts in your confidentiality agreements. If the claim is based on the unauthorized use, reproduction or distribution of information, data, or works, the claim rises or falls exclusively as a matter of copyright. Contract law ceases to matter if the subject matter of the contract is content.
Further strategies and workaround clauses in this context can be found here at Redline.
Redline is a dynamic collaboration environment for a select cadre of lawyers worldwide, and a powerful knowledge management platform.Watch the trailer Lawyers with Mojo or click here to learn more.
The intended audience for this post is licensed and practicing lawyers, not laypersons seeking legal advice for their situation. If you are not a lawyer, hire one before using or relying on any information contained here. This post is: (1) informational only and not intended as advertising or as solicitation for legal services, (2) not intended to render legal advice to you, and (3) not a substitute for obtaining legal advice from a qualified attorney to assess your exact situation. The information here is subject to change and may not be applicable or correct in your jurisdiction.
Nearly all NDAs and confidentiality provisions exclude from the confidentiality and restricted use obligations information that is or becomes “public,” “publicly available,” or “publicly known.”
Contract drafting guru Ken Adams has given his imprimatur to the “is or becomes public” formulation. His preferred version of this exclusion is any information that is “already public when the Disclosing Party discloses it to the Recipient or becomes public (other than as a result of breach of this agreement by the Recipient) after the Disclosing Party discloses it to the Recipient.”
But is the “public” characterization the appropriate standard when it comes to the protection of trade secrets? The Uniform Trade Secrets Act defines a trade secret as any information that “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.”
The relevant standard is whether the information is known, not among the general public, but among those who can derive value or advantage from its use or disclosure—that is, competitors. This can be quite a narrow group indeed; much narrower than the “public.”
For example, in the recent case of Masimo Corp. v. True Wearables, Inc. (Fed. Cir. 2022), the Federal Circuit Court of Appeals affirmed the district court’s determination that an algorithm for determining optimizations for various medical devices was likely a protectable trade secret—notwithstanding that the algorithm had been the subject of a IEEE conference paper, cited 1200 times, and had been disclosed in statistics textbooks since the 1960s.
The fact that the trade secret has been revealed in some publication somewhere does not necessarily compel a finding that the information cannot maintain its status as a trade secret for a party in an entirely different field from the one to which the publication was addressed.
We need not decide the precise boundaries of the class of persons who could obtain economic value from the disclosure of the [algorithm]. In analogous cases, such persons have been described as those falling within the class of ‘business competitors or others to whom the information would have some economic value.’
Continuing a line of inquiry that demonstrates how most NDAs fail to adequately protect trade secrets (eg here, here, and here), the lawyers of Redline have proposed a new articulation of this confidentiality exception, along with redlined variations. Enter the fray here.
The intended audience for this post is licensed and practicing lawyers, not laypersons seeking legal advice for their situation. If you are not a lawyer, hire one before using or relying on any information contained here. This post is: (1) informational only and not intended as advertising or as solicitation for legal services, (2) not intended to render legal advice to you, and (3) not a substitute for obtaining legal advice from a qualified attorney to assess your exact situation. The information here is subject to change and may not be applicable or correct in your jurisdiction. The views and opinions expressed here are Sean’s alone and do not necessarily represent the positions of Sean’s present or former employers, law firms, or clients.
Let’s say that you’re the deal lawyer representing a California company in contract negotiations with a New York company. Your client insists on designating California law as the operative body of law that governs the agreement and any related disputes, and on mandating that all disputes be resolved in a California state or federal court.
You negotiate hard for your client’s objective, but the other side is equally determined to designate New York law and New York courts. Your client lacks bargaining leverage to force the issue. Eventually, the other side carries the day on this battle, and your client is forced to accept the designation of New York law and courts in the contract.
Is there a way to accept such an outcome and nevertheless prevail on this issue, such that your client can in fact initiate litigation in California under California law notwithstanding?
In representing tech suppliers, service providers and developers, we often come across “time is of the essence” clauses in customer contracts that purport to apply to some or all obligations of the agreement. An example is, “Time is of the essence with respect to Developer’s compliance with all deliverable milestones.”
It’s tempting to ignore such clauses, in favor of “picking your battles” and focusing on clauses of more obvious import like the liability caps. But that could be a mistake. The point of a “time is of the essence” clause is to allow the customer to claim a right of termination, or even rescission, of the agreement if the vendor is merely an hour late in delivery.
As a general matter of contract law, failure to meet a deadline is not grounds for discharge of the other party’s duties, although such failure may give rise to claim of damages to compensate for the delay. A time of the essence clause is an attempt to change that dynamic; to enhance leverage in the case of delays, via a rescission threat. Can it work? Possibly.
Strategies for dealing with essence clause negotiations and related work product available here.
The intended audience for this post is licensed and practicing lawyers, not laypersons seeking legal advice for their situation. If you are not a lawyer, hire one before using or relying on any information contained here. This post is: (1) informational only and not intended as advertising or as solicitation for legal services, (2) not intended to render legal advice to you, and (3) not a substitute for obtaining legal advice from a qualified attorney to assess your exact situation. The information here is subject to change and may not be applicable or correct in your jurisdiction. The views and opinions expressed here are Sean’s alone and do not necessarily represent the positions of Sean’s present or former employers, law firms, or clients.
The Software Freedom Conservancy Inc. has sued Vizio, Inc., a manufacturer of televisions with computing capabilities, in California state court. The SFC has accused Vizio of distributing software derived from code licensed under the General Public License v2, without complying with the copyleft obligations of that license.
Intriguingly, SFC is asserting a breach of contract claim, not a copyright infringement claim. SFC does not own the copyright to the Linux kernel, the open source software at issue in this case.
So how can SFC accuse Vizio of breaching a contract it never had with Vizio?
As a consumer of the Vizio product, SFC maintains that it is an intended third-party beneficiary of the GPL “contract” between the copyright owners of the Linux kernel, on the one hand, and those who take, copy and distribute code derived from it, on the other (ie Vizio). As an intended third party beneficiary, SFC is entitled to enforce the contract as if it is a direct party.
The remedy that SFC is seeking? Specific performance of the obligation to release the “full source code corresponding to the executable code resident on Vizio’s devices covered by the GPL agreements.”
Specific performance of the source code disclosure obligation is the holy grail of the FOSS movement, and now there’s a plausible path towards it.
That’s the sound of distant thunder.
Needless to say, if SFC is successful here, and consumers have standing to enforce copyleft open source licenses—and compel the production of source code of derivative works—the consequences will be non-trivial.
