Legal

As promised I’ve posted Contracts are relationships as the first in a new series of posts about contracts on the Extra Eagle Blog

One of the biggest mistakes people make about contracts are that they are documents. It is an easy mistake to make. After all large parts of the legal profession have been feeding us this story for at least a century even though they all learn otherwise in their first class of Contract Law 101 in law school. read more

Ringtones, ringtones, ringtones. Since Steve Jobs announced the ringtones for the iPhone some days ago lots of people have been talking about ringtones and how immoral the iTunes approach to ringtones is. And it is ridiculous. However it is not illegal, but then again neither is going around iTunes using the various hacks that are out there.

What you are seeing are the record industry desperately trying to find a new revenue model. Who knows, they might even see this as a way of reaching a younger audience that perhaps does not even consider ever paying for music now a days. I can see that selling ringtones to this teenage market is probably not a bad move from their point of view.

However a slightly more devious thing that I’m pretty sure their legal departments are doing is to create some kind of legal precedent that might eventually lead to ringtones not being fair use of your own music.

How can this be done you might ask? Well law in the the English speaking world is not just the tomes of statutes that congress or parliament make up after receiving sufficient campaign contributions by someone.

The basics of law at least in common law countries is the Reasonable Person. The idea is what would a normal reasonable person on the street (in UK law tradition people talk about the The man on the clapham omnibus) think.

Legislators (Congress, Parliament etc.) codify laws officially to standardize this, but more often probably to justify their own existence. In common law Judges are meant to uncover and document the unwritten law as thought by the Reasonable Person through their rulings.

Now what would a reasonable person think about ringtones? People are justifiably upset that they have to pay 99c on top of what they have already paid for the song. Thus if this went to a court a judge should in theory at least rule based on a combination of existing copyright law and the expectations of a reasonable person as this is (the recording companies say) new territory.

The recording industry lawyers are contrary to prior evidence probably not stupid, however they are desperate. What they are trying to do in separating normal music sales from ringtones is two fold. They are trying to first of all change the perception of the reasonable person, secondly they are trying to create the illusion of a whole new industry in the need of protection, so they can eventually go to their buddies in congress (and yes both parties are equally guilty here) and legislate around this annoying reasonable person.

A good and important ruling was made the other day in the 9th Circuit Court in the US about amending contract terms. It is important for anyone who has a Terms of Service, User Agreement or similar on their site to understand this and what it means for them.

In a nutshell the ruling says that you can’t just go changing user agreements and expect the changes to be valid, even if you say in your original user agreement that you can change it whenever you want.

An example of one of these terms that likely isn’t valid anymore is in the “Basecamp Terms of Service”:

37signals reserves the right to update and change the Terms of Service from time to time without notice. Any new features that augment or enhance the current Service, including the release of new tools and resources, shall be subject to the Terms of Service. Continued use of the Service after any such changes shall constitute your consent to such changes. You can review the most current version of the Terms of Service at any time at: http://www.basecamphq.com/terms.html

While 37 Signals are generally considered good guys by most people (including me) and therefore probably wont ever have a problem due to this, it would only take one irate customer and one small contract change to cause problems.

The problem here is while the court said you can theoretically make changes, the burden of proof that the other party has read the updated agreement is really on you the web service operator and not on your users. Therefore making it the user’s responsibility as 37 Signals does above to monitor this is not OK. A couple of approaches would be to email the users every time you make a change, you could also force the users to accept the new agreement on login like PayPal does.

What I think is important here is that the ruling basically says what I’ve been saying all along about contracts. Plain english rules written by the parties involved and not lawyers is what is important. Don’t try to outwit anyone and most importantly don’t do things unilaterally.

There are no such things as magic clauses like the above that magically lets you ignore the fundamentals of contract law. No matter what the lawyer says if you or the other party don’t understand the contract it is not a contract. It is an agreement, and you can not be in agreement if you do not understand what you are agreeing to.

For more on this ruling see CL&P Blog, Eric Goldman and AdamsDrafting.

For the basics of Contract Law read my article Pragmatic Contract Law for Entrepreneurs, it really isn’t particularly difficult to understand.

Also while you’re at it, why don’t you go register for the Agree2 2nd beta. We will are trying to make this apparently complex subject simple for anyone to understand.

Note, this is all US related. You should probably skip the headache it’s certain to give you if you are not US based.

I have long been a proponent of LLC’s for most startups. See for example Why the LLC is the Ruby on Rails of legal entities. However there are times that S-Corporations may be better. I have an S-Corp for personal stuff such as consulting etc and LLC for my actual startup.

Remember here that you should separate your personal tax planning from your startup’s tax planning if you are multiple partners.

Lonnie asked me in a comment to the above article:

I have read lots and lots of material and still can’t decide what to do. If I am not looking for VC then should I go LLC ? What about taxes? I have read that the SCorp offers more savings. Thanks for your help.

Surely we should understand these identity technologies for our new hot web 2.0 app. This is most likely something you have thought if you have a web application. The easy counter statement I would like to give you is don’t you already maintain the required identity for your application?

This post is the second part of The truth about identity.

The fact is you probably already have all the necessary identification technology you will ever need in your application. There might actually be a case for removing some of these identifying factors without causing you any further risk, but with the added benefit of lowering the cost/hassle to your users/customers.

For the sake of simplicity I will define Web 2.0 apps here as web apps with the purpose of creating, managing and collaborating on electronic information. I will cover identity in e-commerce in the next part of the series, so this is about the identity necessary for the core purpose of your web application. While there are financial web 2.0 applications out there, the risk levels are a bit different – see further discussion a later piece.

So lets examine the identity requirements here. Remember my definition above of a web 2.0 app. There are two separate types of identity needed to fulfill this.