"In contrast to previous economic eras,
intellectual property will be the primary source
of new wealth in the 21st century."
- Gregory A Piccionelli, 1989
 
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Getting The Biggest Bang For Your Legal Buck Part 2: The Importance of Good Contracts

APRIL 2009

Written agreements are the principal legal tool used around the world to create predicable business and personal relationships. It is unfortunate that most adult entertainment businesses do not have a policy of requiring that all their deals and other business relationships be properly documented in writing. Time and again I have been engaged to represent a party embroiled in an expensive legal dispute that could have easily been avoided if the parties had just invested a comparatively small amount of their time and money to negotiate, draft and execute a well-written contract.

 

But after nearly two decades of negotiating and writing hundreds of contracts, I can tell you that a properly drafted agreement can be much more than just a means to prevent or minimize litigation and other legal disputes. The ability to make and paper a good enforceable deal, or the lack of such ability, can be the difference that determines whether a company will be moderately successful or super-successful, or even whether a company survives or fails. Because of this, every entrepreneur that is serious about his or her business is well advised to take the time to understand, and I hope gain a deeper appreciation of, the importance of the use of written agreements. Here’s why.

 

Written Agreements Reduce Uncertainty.

 

The single greatest cause of disputes and litigation in a business relationship is change. For example, change in the demand for a product or service, change in economy, change in technology, change in the ownership of a company, even a change in health or marital status of a principal in a company, can all trigger a series of events that cause conflict among parties where there was none previously. Now couple changed circumstances with another problem faced by entrepreneurs, namely the problem of uncertainty, and you have the basic ingredients for a potentially expensive or even economically disastrous problem.

 

One cannot stop change from happening. Entropy is a fundamental feature of the universe. But you can do something about uncertainty. That is where written contracts are particularly useful.

 

A precise and clearly written agreement, regardless of the subject matter, can dramatically increase the certainty and predictability of business endeavors among parties by clearly setting forth what is expected of each party in all reasonably foreseeable circumstances. This benefits and serves the parties to an agreement throughout the life of the relationship and possibly beyond. For example, a well-drafted agreement will reasonably anticipate the possibility of disputes and provide a reasonable, predicable and cost-effective means for their resolution, even if the dispute was the cause for the termination of a business relationship. Additionally, a good transactional attorney experienced in drafting agreements in a particular industry will typically employ his or her experience and foresight to creatively build into agreements appropriate provisions that not only anticipate problems but that also enable his or her client to actually benefit from a breach or dispute caused by another party to the contract.

 

A well-drafted agreement will also spell out each party’s rights and obligations in clear and unambiguous terms. This is the principal means by which a good contract can prevent disputes and litigation by minimizing the likelihood of misunderstandings. For example, an effectively drafted contract will dramatically reduce the likelihood that a dispute will arise because of the parties’ differing recollections or interpretations about their original deal, a common problem in situations without a written agreement.

 

A properly drafted enforceable contract containing clear and unambiguous terms can also help resolve problems from a position of strength. Without one you could find yourself, as often happens to persons without a written agreement, in the vulnerable position of attempting to resolve a misunderstanding or address a wrongful act by the other party without sufficient legal backing.

 

The following are some more specific examples of how specific contract provisions included in appropriately drafted agreements can make some of the uncertainties of operating your business a bit more predictable and manageable.

 

  • An arbitration provision in a contract can provide you with the knowledge and peace of mind that if there is a dispute arising from the agreement you won’t have to litigate the matter in court or pay the huge costs of court litigation.

 

  • A proper “choice of venue” provision can insure that you will not have to travel to some far-flung place to enforce your rights.

 

  • In agreements that contain a revenue sharing component, proper accounting and reporting provisions can help deter wrongful actions and prevent you from getting ripped-off.

 

  • In shareholder and other agreements setting forth equity ownership interests in a company, an appropriate equity buyout provision can keep a partner’s or co-owner’s wife (or husband) out of your business in the event of the dissolution of his (or her) marriage.

 

A Good Contract Can Be A Powerful Deterrent To Legal Problems.

 

A good contract not only can anticipate and account for the possibility of prospective disputes among the parties; it can actually help prevent problems, by functioning as a self-enforcing deterrent to breaches of the agreement. One way a well-drafted agreement can accomplish this is by setting forth terms in such clear and precise language that a party contemplating a breach could not reasonably hope to rely on an alternative interpretation of the agreement to justify the breach.

 

Another frequently used means of disincentivising breaches of an agreement is the inclusion of a liquidated damages provision. In some cases, for example, circumstances might exist where one party’s breach of a particular obligation could foreseeably be particularly damaging to the other party, while at the same time the assessment of the specific amount of damages that might be caused by such a breach would be difficult and/or very costly. In such cases, the agreement might appropriately require the breaching party to pay the other party a substantial amount of money, such as $1,000,000 or more. The payment, in lieu of actual damages, are the pre-agreed “liquidated damages”.

 

Still another way to discourage intentional breaches, while also increasing the efficiency and ease of enforcing a party’s rights under an agreement, is by the inclusion of an attorney’s fees provision which requires that the losing party in a dispute arising under the agreement reimburse the prevailing party for the prevailing party’s attorney’s fees and related litigation costs. Because attorney’s fees and other costs in litigation can be quite substantial, often just the threat of having to pay the other party’s attorney’s fees and costs in the event of a dispute can act as an effective deterrent to a party contemplating an intentional breach, even if the party would have a lot to gain by such a breach of the contract. This is because a party weighing the contemplated the benefits and costs of a breach would have to consider the possibility that the other party might win in litigation brought in response to the breach. In that case, the party contemplating the breach would have to factor in the added costs associated with a potential attorney’s fees award to the other party.

 

A Written Contract Can Also Be Evidence Of Innocence In The Event Of Criminal Prosecution.

 

The benefits of putting all of your business relationships in writing extend far beyond just deterring civil litigation. Proper documentation of relationships might just also keep you out of jail.

 

Contracts can evince a contracting party’s state of mind with respect to the subject matter of the contract. This is because a contract can only be valid and enforceable if there was a “meeting of the minds” of the parties to the contract with respect to definite terms embodied in the agreement at its formation. Now, with the foregoing in mind, consider the fact that conviction for violation of a serious criminal law, such as the distribution of obscene material or child pornography requires that the prosecution prove beyond a reasonable doubt that the defendant’s acts were committed in association with a wrongful intent, what the law calls the required mens rea or a “guilty mind”. To obtain a conviction a prosecutor must prove beyond a reasonable doubt that the accused possessed the proper mens rea at the time of the alleged commission of the crime charged.

 

To see how an appropriately drafted contract can play an important role in a criminal defense, consider the following scenario in which the parties elected to forego drafting and executing an appropriate written contract. Suppose a person, who we will call Theodore Ulysses Friendly, a.k.a. “TU Friendly”, licensed 200 explicit images to you for use on your web site. Later it is discovered that one of the models that posed for a number of the photographs you purchased was only 17 years old at the time of the creation of the photos in which she is depicted. You also learn that the person who sold them to you has been indicted for creating and distributing over 1000 images of child pornography. Mr. Friendly, finding himself facing what could effectively be a life sentence, decides to cut a deal with the prosecutor in which he agrees to implicate all the webmasters to whom he licensed the images in question, including you.

 

At this point a written contract with the scum bag that includes a clear and unequivocal warranty that all the persons in the subject photos were over the age of 18 at the time of their creation certainly could have been helpful. This would be because such a written agreement would be at least some proof that you did not actually intend to distribute child pornography and therefore did not possess the requisite mens rea to be convicted of intentional distribution of child pornography. But unfortunately, continuing our example, that’s not the case because you do not have such an agreement. Instead you find yourself explaining to your criminal defense attorney “no, we didn’t have any written agreement”, which, even the most empathetic of our industry’s legal eagles still translates into “Cha-Ching”. Meanwhile, facing possible indictment for distribution of child pornography, it’s doubtful that you’re thinking about your attorney’s good fortunes in any event. Instead, the legal concept that is much more likely to be occupying your brain is “I’m screwed”.

 

Written Agreements Can Help You More Effectively And Profitably Exploit Your Company’s Assets and Abilities.

 

Failure to have appropriate contracts in place at the time that content is created can also create legal chaos down the road. For example, suppose you hire an outside, i.e., non-employee, photographer to create content for your site but neither he nor any performers he hired who are depicted in the material execute a work for hire agreement or provide you with a subsequent assignment of rights in the works. Under the copyright laws of the United States, the photographer and the performers, and not you, are the joint owners of the copyrights in the works. The same concept applies to web design, advertising copy creation, video editing, film music composition and performance, and virtually any other creative contribution to any work by independent contractors.

 

Written agreements can also enable a party to more effectively exploit content and other assets. For example, many of the larger adult content producers effectively exploit their content in virtually every available media, including via DVDs, cable and satellite distribution, web-based VOD, and mobile platforms. These companies effectuate such broad-based poly-media distribution of their content through separate agreements with each media company.

 

We’ll return to the subjects of rights acquisition documents and content licensing and exploitation agreements in greater detail in upcoming articles in this series.

 

A Written Agreement Policy Can Help Increase Company Value For Investment Or Sale Purposes.

 

Companies that have organized and properly maintained written records of all of their business relationships are usually much better positioned to attract investment capital or potential buyers of their company. This is, in part, because a potential investor or buyer will be able to more effectively determine the company’s rights and obligations if there is written documentation. Without “a paper trail” a potential investor or buyer will likely have to either trust the representations of the subject company and proceed without proper diligence or pass on the deal.

 

A Written Agreement Policy Builds A Professional Company Image.

 

Generally the more successful and professionally operated a company is, the more likely it is to require written agreements with everyone doing business with the company. This practice, or the lack thereof, is what business people and consumers alike recognize, even if only unconsciously, as an indication of the level of quality and professionalism they can expect from a company. A disciplined policy of requiring written agreements each time you establish a working relationship conveys a competent and professional image to vendors and consumers and sets your company apart from those who don’t. This benefit is particularly important for adult entertainment enterprises doing business with companies outside the industry who often tend not to take adult entertainment entrepreneurs as seriously as other business professionals.

 

A Written Agreement Policy Builds Confidence and Respect.

 

Companies that implement intelligent and predicable practices, such as the requirement of proper written agreements, provide an increased level of comfort and safety to those doing business with them. They, in turn, are also more likely to feel more secure in their recommendations of such companies to others. Companies that rigorously adhere to a disciplined written agreement policy usually find that the relatively small investment of time and capital it takes to do so pays great dividends in the valuable respect and confidence they earn from consumers and vendors alike.

 

The Critically Important Role Of Agreements For Adult Websites, Live Chat, Dating and Other Online Services.

 

An effectively written web site use or online services agreement can help diminish the likelihood that your company will be sued or become a prosecution target because of the content or functionality of your website. For example, a properly drafted “terms of use” agreement on your website can make unauthorized access of your computers and databases by minors, or even in some circumstances, by law enforcement in certain areas, a crime for which they can be prosecuted. How website agreements can do this and much more are some of the subjects I will address in the next part of “Getting The Biggest Bang For Your Legal Buck”.

 

 

1Gregory A. Piccionelli, Esq. is an experienced Internet and adult entertainment attorney. He can be reached at Piccionelli & Sarno at (310) 553-3375 or greg@piccionellisarno.com.

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