Contact lists are a classic form of “confidential information” or trade secrets.  Trade secret law is one of the few areas of intellectual property law which is not governed by federal statutes:  trade secrets and confidential information are protected by state law.  This means that the law varies from state to state.  However, most states closely follow the definitions and principles of the Uniform Trade Secrets Act and the Restatement of Torts.  According to the Restatement, a trade secret

may consist of any formula, pattern, device, or compilation of information which is used in business and which gives [the business] an opportunity to obtain an advantage over competitors who do not know or use it.

Restatement of Torts 2nd, section 757.

Written agreements and NDA’s with employees typically cover contact lists and other confidential information
Most employers require their employees to sign a written confidentiality agreement or nondisclosure agreement (NDA).  These agreements require the employee not to disclose trade secrets and confidential information, and also not to use any confidential information in any manner except for the benefit of the employer.  This includes any use in a subsequent job.  Well-drafted NDA’s will continue to be in effect even after termination, to provide continuing protection by contract.  Employees taking email lists, electronic documents, photocopies of information, customer or supplier contacts, or pricing information will be potential targets for a lawsuit for breach of contract.   If an employer suffers lost profits, or the secret status of a valuable formula or strategy is made public and devalued, the employee could be liable for tens of thousands of dollars in damages.

State laws protect confidential information and trade secrets even where there is no written agreement
While the law favors the protection of confidential information and trade secrets by written agreement, most states protect this form of intellectual property against disclosure or use, even in the absence of a written agreement.  Employees frequently assume that the lack of a written agreement means that information is free to use.  Most states have statutes on the theft or misappropriation of trade secrets.  In most states, an employer must only show that (1) the information incorporates a trade secret; (2) the employer took reasonable steps to preserve the secrecy of the trade secret; and (3) the employee misappropriated the secret or used improper means, in breach of a confidential relationship, in order to bring a successful lawsuit against the employee.

Michigan trade secret law
A famous Michigan case illustrates the dangers of employees providing confidential information to third parties.  In 1999, a website operator named Robert Lane was sued by Ford Motor Company for posting confidential documents and photographs on a website.  The confidential information was provided to Lane by current and former employees, in violation of their employment confidentiality agreements. Was Lane himself an employee, or former employee?  No.  Had he signed a written agreement with Ford Motor Company regarding its confidential information?  No.  Nevertheless, the court held that Lane had probably violated the Michigan Trade Secrets Act.  See Ford Motor Company v. Lane, 67 F. Supp. 2d 745 (E.D. Mich. 1999), for details.

Not all information disclosed in confidence may be protected
Employers typically claim that any business-related information is “confidential information” or a trade secret.  The law does not reach that far.  Information which will not be protected, even if spelled out in a written agreement, includes information which:

• enters the public domain through no wrongful act of the employee
• is received by the employee from a third party without similar restrictions regarding non-disclosure
• is furnished to a third party by the employer, without similar restrictions regarding non-disclosure
• is approved for release by written authorization of the employer
• was possessed by the employee prior to the effective date of employment, or a written agreement
• is developed by the employee independently of confidential information received during the employment relationship

Attempts by the employer to protect this information will typically fail.   Written contract terms which do not exclude these common law exemptions from coverage are against public policy and are typically not enforced by courts.

Confidential information must be maintained “confidential” to qualify for protection
The most common mistake made by employers is to require all employees to sign a confidentiality agreement or NDA, but then fail to exercise the ordinary care required to maintain the “secret” status.  Publishing “confidential information.”  The best way to meet the requirement to preserve confidentiality, is to require a written agreement with every party coming into contact with the protected information.  Allowing one employee to take a contact list to a subsequent employer will result in a loss of protected status for that information.

The cat’s out of the bag?  There still may be liability
Keeping this legal framework in mind, it might seem like a trivial exercise to avoid liability:  merely make the information public, and then it’s no longer protected under the law.  While public disclosure may result in a loss of trade secret status under the law of many states, the law may still be enforced against the wrongful discloser — and in many cases, even against a third party, where the party had reason to know that the information was considered to be a trade secret.

Written NDA’s and Confidentiality Agreements make responsibilities clear
The basic function of a contract is to clearly set out the ground rules for a commercial relationship in order to avoid costly legal disputes that might arise from different interpretations of the law.  In the confidential information and trade secret arena, there are fifty states, so there are fifty different laws, and as many or more interpretations.  Given the patchwork nature of the common-law and statutory framework in protecting business information, while employers without written agreements may ultimately be able to enforce their intellectual property rights against employees in the absence of a written agreement, it’s foolish not to have one.

Resources

• The Citizen Media Law Project:  Misappropriation of Trade Secrets
• The Citizen Media Law Project:  State Law — Trade Secrets
• Michigan Uniform Trade Secrets Act

“At will” employment is the rule, not the exception
In most cases, an employment agreement is going to be what we call an “at will” agreement: the employee is employed at the will of the employer — and can be let go at any time, at the will of the employer. What if there’s a written agreement, but it doesn’t specify whether employment is “at will”? If the employment agreement doesn’t specify that an employee can only be terminated “for cause,” then the employment agreement is “at will.” At will employment is the default in most states (Michigan included).

Some written employment agreements specify that an employee may only be terminated for cause. Barring special circumstances (such as employment under a union or other associational agreement), termination “for cause” must be spelled out in writing in the terms and conditions of the employment agreement. The employment agreement should have a termination section that indicates when an employee can be terminated “for cause,” and it should contain a definition of the causes that justify termination within the agreement. (Note to employers: acts justifying termination for cause should be clearly spelled out. This benefits the employer as well as the employee, and avoids having a court modify the employment agreement in a legal dispute.)

Employment agreements which can only be terminated for cause are frequently used in a wide variety of industries and situations. For cause agreements are used for key employees in technology companies, founders and managers in startup ventures, professionals in finance and accounting, doctors and lawyers, and employees in unionized businesses and companies. For cause employment contracts are typical where the employee has more leverage than an ordinary worker and cannot easily be replaced.

There’s no employment contract
There is always a contract between a worker and a hiring party — even if there’s no written agreement. In the absence of a written contract, employment is always “at will”: the employee can be let go immediately. Unless, of course, the employee isn’t really an employee — many business owners are shocked to find out that in the eyes of the IRS and/or the state department of labor, their ‘contractors’ are really employees, or vice versa. If you’re the employer in this situation, ‘misclassification’ of an employee as a contractor is a very expensive mistake.

“Two weeks’ notice”
Many people believe that a company or employee owes the other party “two weeks’ notice” for terminating the work relationship. That’s not a legal rule, it’s a conventional practice. “At will” employees can be escorted off the premises immediately upon notice of termination, with an arrangement to pick up their belongings at a later time. While this can come as a shock to the employee, it’s something that attorneys routinely recommend to employers as a standard employment policy, for security reasons.

It’s just not that simple. Contracts are a set of rules that spell out the parties’ mutual intentions and individual obligations for a jointly-agreed undertaking. Good contracts not only spell out the structure and the rules, they spell them out taking into account a wide variety of alternate realities — not just what everyone had in mind when they first started to negotiate and everything was kumbayah — but also how things should go under…weird circumstances. Wierd circumstances like floods, fires, earthquakes, strikes, martial law, and the US government taking over your company due to a collapse of the financial system.

Suppose you and I make a contract for me to tap-dance on your coffin on the date of your funeral, and in exchange I will receive a $1M dollar “retention bonus” (for sticking around until you are actually dead). You fulfill one of your obligations under the contract by showing up (dead), thereby providing me the necessary coffin to tap-dance upon. (And I made sure that you pre-arranged payment to me via a third party, since you wouldn’t be there to hand me my bonus check.) Just before I am about to start my tap-dance routine, the law of gravity is rescinded, causing me to fly off the earth, and causing your coffin to fly off the earth, too. I couldn’t tap-dance on your coffin, as I contracted, if I wanted to. Weird circumstances.

In writing good contracts, good contract lawyers actually spend a fair amount of time thinking along these “What are all the bad things that could go wrong?” lines. US commercial law has a doctrine for dealing with weird circumstances called “force majeure.” A force majeure term in a contract excuses either or both parties from their obligations under an agreement, because it is no longer possible to perform as promised due to circumstances beyond the parties’ control. (The great majority of professionally negotiated contracts contain a force majeure clause.)

My response to Mr. Sorkin’s argument in favor of paying the AIG rockstars used force majeure as an example of one of the many ways that a contract could be interpreted to excuse non-performance. I stated that AIG was extremely likely to be able to be excused from paying the bonuses due to the collapse of the financial system, and without breach under the actual terms of the contract — IF there were a force majeure clause in the contract to rely on. Here’s the link to my AIG bonuses / force majeure comment on the New York Times (and here’s a permalink to the comment text which I have placed here on the Arborlaw site.)

But, we don’t have to stop at force majeure, the issue which I chose. There are at least a dozen more legal theories that would support withholding those AIG bonuses. The New York Times has a pretty nice roundup of the main legal theories here: “Room for Debate: When Bonus Contracts Can Be Broken,” The New York Times (March 17, 2009), and Lawrence Cunningham makes an excellent and concise summary of the basic legal principles in an op-ed comment here: “A.I.G.’s Bonus Blackmail,” The New York Times (March 18, 2009).

Score another one for the contract attorneys (maybe).

Just a few days later, Amazon changed course, announcing that it will allow authors and publishers to decide on a book-by-book basis whether or not to allow text-to-speech functionality.

Apart from making nice and preserving existing business relationships (always good reasons), why would Amazon capitulate?

Contracts, baby, contracts.
As it turns out, the contract language in a few of the existing publishing agreements with Kindle 2 authors was worded broadly enough to cover text-to-speech rights (which meant that Amazon, in relying on the publishers’ ability to pass through the necessary rights to publish on the Kindle 2, was fine). But the majority of the publishers’ agreements with their authors did not contain terms which granted the necessary rights to the publisher, which means that the publisher did not have those rights to pass through to Aamzon. (Further, the majority of those contracts probably contain typical general-purpose copyright agreement language that states that all rights not specifically granted are reserved to the authors. If you are an author doing a book deal, those are magic words). According to the Wall Street Journal update on the Kindle 2 copyright controversy, Paul Aiken, Executive Director of the Authors Guild

said that several major publishers discovered that the contracts they had with authors didn’t give them the right to sell e-books with audio functionality. “It’s possible that the majority of the titles Amazon sells via the Kindle fell into this domain,” he said. Agents, authors and publishers will now have to review contracts and strike new licensing agreements. “It will be a process of amending tens of thousands of book contracts to include text-to-speech rights.”

What’s good about this outcome?
Contracts are good. Contracts are intended to resolve uncertainty. Neither Amazon nor the Author’s Guild will be spending their time and money using the US Federal court system to resolve whether text-to-speech is “fair use” exempted from copyright licensing requirements, or is a “public performance” falling under a copyright owner’s exclusive rights under Section 106 of the US Copyright Act. Those are interesting legal questions, but it’s a far better use of resources for Amazon and the Author’s Guild to jointly spend their money promoting the Kindle 2 and the available titles, and building the e-book market. Going forward, publishers are going to provide for the resolution of this issue in every publishing agreement with every author that they make, and authors and their agents are going to negotiate new book deals with these rights in mind.

Score one for the contract lawyers.

One of the latest features of the Kindle 2 raises a classic copyright issue: What happens when new technology impacts existing licensing deals?

Kindle 2 has a feature which reads text aloud. Authors and publishers contend that this feature creates an audio work under the US Copyright Act.

Under Section 106 of the US Copyright Act, the owner of a copyright has the exclusive rights to do and to authorize any of the following:

(1) to reproduce the copyrighted work in copies or phonorecords;

(2) to prepare derivative works based upon the copyrighted work;

(3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

(4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly;

(5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and

(6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.

17 USC s. 106. (Those links in the body of Section 106 all purposely go to the same page: the Definitions section of the US Copyright Act. That’s because the definition of a copyright term is important. The definition of copyright terms of art “as defined in the Act” is controlling — and not the ‘dictionary definition’ that the public may be familiar with.)

They don’t have the right to read a book out loud. That’s an audio right, which is derivative under copyright law.

Here are some of the questions being discussed:

• Is a license the entire contract, or is a license a subset of the entire contract, where the contract contains other terms and responsibilities? Does a license agreement continue if the license is terminated?
  

• Can a perpetual software license be terminated? If it can be terminated, what does the word ‘perpetual’ mean?

• What’s the difference, if any, between a ‘fully paid-up’ license and a ‘royalty-free’ license?

And my favorite questions of intellectual property law contract interpretation:

• Who is excluded by an “exclusive” software license? and What’s the difference, if any, between an exclusive license and a transfer of ownership? Is an exclusive license the same thing as “I promise not to license to anyone else?”
  

I’m going to write briefly about these last issues.

The term “exclusive license” frequently confuses many software companies licensing their software to multiple clients — and also frequently confuses clients of the software companies. Customers of software developers always want exclusive rights to everything being provided by a software consultant that didn’t come in a box off the shelf at Fry’s.

And sometimes software companies oblige them. Here’s the reasoning: “We won’t give this away to your competitors or anyone else — you will have an exclusive license agreement with us.” And in agreeing to this, the software company has just excluded itself from continuing to use what it thinks it has merely licensed to a single client and promised not to license to anyone else. (In many cases this can have the undesirable effect of putting the software developer in the status of an infringer by continuing to use portions of the materials it developed, in its work for its other clients.)

An exclusive license excludes the licensor
An exclusive software license excludes the licensor as well as the rest of the world. In other words, when the owner of rights in software gives an exclusive license to his customer in a software license agreement — the owner has just excluded himself from whatever rights he just gave to his customer.

To me, this use of “exclusive” is plain dictionary English and is not ambiguous (and this is where I differ from Professor Eric Goldman, who stated in his comments to the AdamsDrafting article that the meaning of “exclusive” can be ambiguous). It’s my professional opinion (and the opinion of many other software licensing attorneys) that “exclusive rights” has a special meaning in the context of a software license agreement and that the term refers to and reflects intellectual property law concepts of “exclusivity.”

All software contains intellectual property (although not all intellectual property in software is protected).

Some software is patentable or contains patents (most does not). All software is copyrightable. And apart from open source software, all software contains trade secrets. In a software license agreement, the ownership of these intellectual properties is not transferred to the customer — the use of them is licensed to the customer, on specific terms, requiring continuing compliance with the terms of the license, or the license will be terminated.

Both the US patent law and the US copyright law provide for the creator of rights (and subsequently any owner of the rights) to enjoy “exclusive” rights. In the copyright law context, the owner’s right to exclude others means that unauthorized use of the owner’s exclusive rights equals copyright infringement (except in the important case where the use is minimal enough to be protected by the law as “fair use” of the copyright). In the patent licensing world, inventors who intend to continue using their technology grant an exclusive license to their customer, but simultaneously reserve a right to use themselves. This type of license language is called a “grantback” clause. Particularly in the last case — a grant coupled with a grantback — it’s obvious that the granting back of a license to the creator is to explicitly avoid cutting off the creator’s rights in the intellectual property.

The law of mutual mistake
I see the “ambiguousness” of the word “exclusive” as maybe a reference to a common problem in dealmaking which is called “mutual mistake” in the law of contracts. Mutual mistake is a doctrine that says that a contract is void if the parties thought they had the same deal in mind, when actually the thing that was the subject of their agreement was not actually the thing they thought it was. Here’s a specific example that comes from a famous 19th century case:

Smith and Jones are farmers. Jones wants to buy a fertile cow, Rose, from Smith; and the price he is willing to pay reflects the fact that the cow is fertile. Jones and Smith make an agreement for Jones to sell Rose to Smith at the agreed-upon price. It turns out that the cow, Rose, is actually not fertile.

Both parties have made a ‘mutual’ mistake. The whole point of their agreement was the transfer of a fertile cow, not just the transfer of Rose the cow. Rose the cow turned out not to be a fertile cow. Jones would not have paid the price he paid, or agreed upon that price, for a non-fertile cow. The court found that this contract was voidable due to “mutual mistake.”

Similarly in the software development context — both the software developer and the software developer’s client may believe that an “exclusive” license only excludes everyone who is not a party to the software license agreement — in other words, that it does not exclude the software developer itself. But they use the terminology “exclusive agreement” or “exclusive software license” when what they really mean is “an exclusive license with a grantback license” or “an exclusive license where the licensor reserves rights to continue use” or more simply: “I promise not to license to anyone else.”

I’ve never seen a software license agreement considered by a court to be voidable for mutual mistake (technically, this is because this is specifically prevented by other language in most contracts which allows a court to rewrite the terms of the agreement to save the contract from being voided — sometimes called a “savings” clause or a “blue pencil” clause). Whether or not a savings clause exists, software developers who carelessly use the term “exclusive license” when they really intend to keep using the technology, are risking a court’s decision that the plain legal meaning of “exclusive license” excludes the licensor.

Careless license language and warranties of title
Now let’s extend this thought further down the line to the next set of adverse consequences.

Software development company ABC Inc. gives an “exclusive license” to their client XYZ Inc. for software developed and implemented at XYZ under the Software License Agreement between the parties. Both of them intend simply that ABC will not license this particular implementation of the software to anyone other than XYZ. However, the software license agreement doesn’t say that. Now ABC goes on to the next client and signs an agreement with FGH Inc. in which ABC “represents and warrants” that it has the ownership rights necessary to grant an exclusive license” to FGH (this is called a “warranty of title”), and the software being exclusively licensed by ABC to FGH includes the core development tools that ABC licensed to XYZ and which ABC uses in its development projects for every client.

ABC no longer has any rights to legally give away to FGH, because it transferred them all by contract to XYZ. In this case, ABC starts out from Day One in its software license agreement with FGH in breach of the contract — it is saying that it can give away rights that it does not have. If this contract lands in a court dispute, FGH will probably be able to get back every dollar paid to the software developer ABC.

“I promise not to license to anyone else”
Moral of the story: “I promise not to license this to anyone else” IS NOT the same thing as “I grant you an exclusive license.”

I get about two calls a month about contract interpretation from a software development company or a customer licensing custom developed software.

The person on the other end of the phone has typically picked up a form document called “License Agreement” from some place on the Internet like docstoc.com or has been handed a form prepared by a business attorney inexperienced in software development and intellectual property license terminology.

If questions are now being raised and a contract has already been negotiated — or signed — the answers to those questions are almost never good.

Software development is an expensive proposition: it’s worth spending 5 to 10 percent of the value of the contract (or if you are a developer, the fees from a couple of customer licenses) as “insurance” to make sure that the software license agreement says what the developer and customer think it does.

Email disclaimers as a form of “Notice”
Many of my technology and other business clients are in agreements not to disclose (NDA) certain information — with their own clients on ongoing projects, with prospective clients, with employers, with potential acquirers or partners, with business consultants or investors or venture capitalists. These NDAs typically contain a provision requiring information which is exchanged to be labeled “CONFIDENTIAL” or “PRIVILEGED”. Email communications between the parties frequently contain information covered by these agreements, and using an email disclaimer can function as “Notice” under an NDA: it can help personnel for these parties to remember that communications need to be confidential and may not be shared with parties not subject to the NDA.

In a similar vein, lawyers and other professionals (accountants, doctors) are under professional and ethical duties not to disclose client and patient information to outside parties. In the case of lawyers — we are particularly aware that communications with clients are “attorney-client communications” which are subject to an attorney-client privilege in litigation. This means that in some potential future lawsuit involving the client, communications on the matter between lawyer and client are excluded from being requested and produced to the opposing side, through routine discovery rules. However, either the client or the lawyer can lose (”waive”) the attorney-client privilege by sharing communications with ANY parties who are not part of the attorney-client relationship. One communication cc’d or forwarded by email to the wrong party, which is not marked as an attorney-client material, could open up ALL attorney-client communications for the opposing side to peruse. This is particularly critical in corporate communications involving legal representation, where there may be many different individuals communicating on behalf of a corporation (which is the “client”) with the corporation’s attorney. In these situations, an email disclaimer can serve as “Notice” and a reminder to all communicators that these emails should not under any circumstances be disclosed, or attorney-client privilege will be waived. Will an email disclaimer get the sender off the hook for losing the privilege? No. Like a cat out of the bag, a lost privilege cannot be undone. The information becomes available, and, in the case of a licensed professional, its inadvertent disclosure may constitute professional malpractice. The disclaimer is not a “forcefield” — it is a means for the sender to remind him or herself, and other involved parties, of the obligation to keep the information confidential.

Does an email disclaimer used as “notice” legally protect a communication?
Not in and of itself. Using a disclaimer is one of many actions which could potentially taken by a party to an NDA, or a lawyer safeguarding confidentiality, to minimize the threat of inadvertent or wrongful disclosure. But, any court or review panel judging the sender’s success in protecting confidential information under an NDA, or information subject to attorney-client privilege, is going to look at the facts and circumstances of the parties’ conduct surrounding the handling of the communication, rather than simply some language. The email disclaimer, if properly deployed, can serve as evidence that the parties took affirmative actions to avoid disclosure and this evidence may help in case information inadvertently or deliberately is leaked to third parties, resulting in a misappropriation of trade secrets or loss of trade secret status, or the loss of an attorney-client privilege in litigation.

Even in these circumstances, not all “notice” uses of a disclaimer in email are going to be effective for averting unintended disclosure to the wrong parties. Certainly, putting an email disclaimer in a standard signature and sending it out with all email to all recipients, does not serve to identify which communications are under a disclosure restriction or under an attorney-client privilege. If the sender does not minimize usage of the disclaimer, the confidentiality claim might be defeated, under the argument that the sender is not exercising prudence and care. The placement of the notice is also critically important. Information which is exchanged under an NDA is almost always marked “CONFIDENTIAL” at the TOP, or a cover sheet is attached to hide the contents of a document — to make the recipient aware that the information is subject to an obligation not to disclose, or a professional communications privilege.

Unfortunately, the standard use of email disclaimers is to place them at the bottom of the message along with the signature block, below the entire communication. Just as an auto company can’t claim that a buyer is held to additional terms of sale which are presented to the buyer for the first time after the documents are signed by stowing them in the glove compartment when the car is delivered — an email disclaimer is not going to be effective if it’s delivered “after the fact.” The placement of a disclaimer AFTER the information intended for protection is going to make the disclaimer useless in a legal argument that the sender took all reasonably available measures to safeguard information which is transmitted under nondisclosure or professional privilege.

Email disclaimers to claim copyright
While copyright notice has not been required since 1989 and is usually not used on communications such as email, it doesn’t hurt to use copyright ‘notice’ email disclaimers to remind the recipient of an email that there are copyright claims in communications. Strictly speaking, email may not legally be forwarded (copied) to another party under US copyright law without the sender’s permission, but many recipients reason that they can legally forward anything they receive, under a theory of “implied license.” (See this Arborlaw blog post for more information on copyright, implied license, and email forwarding.) A claim of implied license to forward or “republish” or use in some other manner can be disclaimed in writing by simply stating that there is no license to forward, duplicate or publish the content. So, this is one of the best uses of email disclaimers: as an effective notice of copyright claims, denying permission or implied license to forward or publish.

Email disclaimers as a form of “contract”
I am frequently asked whether there is some type of “magic language” that people can add to an email, to the front of an unsolicited mailed item, or whatever, which will form a contract (or reject a contract) and automatically apply and be legally binding on all interactions between the parties. In the context of this article — Doesn’t my email disclaimer operate as a contract with the recipient?

Contracts are formed when there is a valid offer and acceptance between two parties to exchange performance (payment or actions). The terms of the contract must be proposed in advance and agreed upon by both parties, either formally or informally. An agreement about a contract’s basic terms or specific language between two parties, is called a “meeting of the minds.” The exchange of promises of performance is usually called “consideration” — either payment, or the promise to do or not do something. One-sided boilerplate language (such as is found in many email disclaimers and in clickwrap and EULA agreements) does not form a contract in and of itself. There must be a proposal between the parties to exchange something for something, and the basic terms of the exchange, and any specific language, must also be proposed between the parties and subject to a “meeting of the minds.” Specific protective language will have no effect unless it is presented before the fact, rather than after the exchange has taken place.

In the case of an email disclaimer, what’s the contract? Here’s an example which will make this clear: I send you an email with a disclaimer saying “You agree you owe me $100 by receiving and reading this email and all other emails from me.” If you have already received my email without agreeing in advance to pay me $100, you will not owe me $100 simply because I said so. There is no meeting of the minds.

In most cases where email disclaimers and similar boilerplate language are being deployed, the language is presented to the other party after the fact. Even in a case where the parties do intend to form a contract, the common law and the Uniform Commercial Code (UCC) are clear that terms supplied after a contract has already been formed do not automatically become part of the contract.

It goes without saying that a written contract signed by the parties is always preferable — but as we all know, there are plenty of business deals out there, happily going forward with both parties performing their obligations, without the benefit of a written agreement. (Yes, this drives us lawyers crazy.) Here’s the rub: you might as well finalize a written contract…because it is a distinct possibility that the law will imply a contract from the parties’ actions in negotiating one, if the facts and circumstances show that the parties had reached a deal. That possibility is now a probability in Michigan.

The Michigan Court of Appeals recently held that documents exchanged by attorneys in negotiating a settlement agreement can become the settlement agreement itself — based on the wording of the correspondence between the attorneys. Plaintiff sued defendant for personal injury protection (PIP) benefits. The parties reached a settlement figure and their attorneys were faxing documents back and forth, but no agreement had been signed. The court looked closely at the attorney’s faxes: in one, the defendant’s attorney summarized the offer of settlement just received from plaintiff. In another, the plaintiff’s attorney sent a blank proposed settlement agreement to defendant’s attorney. A third fax went from defendant’s attorney to plaintiff’s attorney stating a settlement amount and agreeing to pay according to the terms and conditions set out in plaintiff’s proposed settlement agreement. Defendant’s attorney then followed up with a letter two weeks later, expressing the hope that the probate court would approve the settlement. At some time later, defendant changed its mind and did not sign. Court to defendant: “You’re done.” The appeals court held that the exchange of correspondence between the attorneys constituted written evidence of a meeting of the minds of a party (or, in this case, a party’s attorney). No signatures necessary!

Clark v State Farm Mutual Auto Ins Co (June 27, 2006, #259562, Wayne Circuit Court, LC No 03-303779-NF) (unpublished)

In the Fagin case, a Michigan court decided that a contract can shorten the period of time for starting a lawsuit–to a period much shorter than the period automatically provided by law. Fagin was an employee who consulted a lawyer and decided to bring a lawsuit after termination of his employment. Fagin had signed a standard employment agreement that contained a provision limiting his time to sue to 12 months from the date of his termination. He started the lawsuit more than a year after he was fired. The court said that he was too late–the contract he signed was effective in reducing his time to sue.

Huh? What’s a limitation period?
The “limitation period” for a lawsuit is a highly technical and frequently misunderstood concept in law. Most of the public thinks that a company or individual can bring a lawsuit pretty much any time–this myth is fueled by media reports of “new evidence” leading to murder charges, war crimes, and other criminal accusations which are sometimes re-opened or brought by a prosecutor decades after the act.

In civil lawsuits, the limitation period is a statute that cuts off the time to sue. It’s a different time length for each different type of claim. So, for example–Michigan law says that a party to a contract has a six-year limitation period to start a lawsuit for violating the terms of the contract. The statute of limitation for medical or legal malpractice is two years; for copyright infringement it is three years; for criminal copyright prosecution it is five years. While civil law limitation periods are pretty similar throughout the US, they do differ from state to state. So, it’s important to know which state’s law applies to a contract, to understand how much the time to sue has been shortened. Six years is a pretty long time to think about liability–so many employers and small companies have contracts that limit the time to sue to a much shorter period, like one year. If a contract is silent on the topic, the period provided by law automatically applies.

The court in Fagin was considering a lawsuit based on employment. Employment is a contract between two parties, whether or not there is a written agreement. The automatic limitations period would have given Fagin a full six years–except that the terms signed by Fagin contained language limiting the right to sue to only one year. (This issue is usually buried in the boring stuff near the end of the contract.) The court held that one year was reasonable (but that it wouldn’t have been, if there was not adequate time to research and file a lawsuit). How short is too short? Other Michigan employment cases have held that a limitations period of as little as six (6) months can be reasonable! This is not very much time to find and hire a lawyer–and evaluate whether there is a good case or not–and file it.

“I Didn’t Read The Contract” Didn’t Work
What about Fagin’s claim that he hadn’t read the contract completely and didn’t notice or understand the limitation language? Well, that one didn’t work. Neither did the argument that Fagin didn’t have a choice and had to sign the contract “as is”, or he would have lost the job. The court found that Fagin had been given time to read the contract and even consult a lawyer to help interpret it if he wanted. The choice to accept the job or not, with the required contract, was his. The contract even contained language that Fagin’s signature meant that he had “read and understood” the whole agreement.

Before You Sign
The Fagin case is applicable to virtually every Michigan contract a consumer, employee or businessperson will ever face. Whether you are buying a house, starting a company, or taking a new job, life involves lots of written agreements. Here are some simple tips:

1. Read a contract entirely through before you sign it. If you don’t understand something, ask a lawyer to review it before you sign it. A lawyer should review the whole contract briefly, just to make sure that other parts of the contract don’t affect the part you are worried about.

2. If you sign a contract with a short limitation period or lawsuit cutoff, make note of it. If you have any legal problems with this relationship down the road, you may need to make a decision about suing within a few weeks of the legal problem.

3. If you have a form contract you use, for others to sign, check whether it has a limitations period or is silent on the topic.

4. If you are a small business, landlord, or general contractor, consider whether all your form contracts should be revised by your attorney to shorten the limitations period, to cut off your legal exposure to lawsuits after termination.