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Posts from the ‘Business Transactions’ Category

8
Mar

Federal Warranty Law

Products are generally marketed with, and supported by, various affirmative assertions from the seller with respect to certain characteristics of quality, safety, performance, and durability. These assertions, usually referred to as “warranties,” may be provided in written or oral form, although they are most commonly found in advertisements, brochures, and specification sheets. In fact, a warranty may also be derived from representations of the product in models and pictures.  Regardless of their form, warranties or guarantees are important promises by manufacturers or sellers to stand behind the products that they offer to consumers.

Whenever a transaction involving the sales of goods occurs, the parties must be mindful of various types of warranties codified in the general law of sales appearing in the Uniform Commercial Code (“UCC”), including the implied warranty of merchantability; the implied warranty of fitness for particular purpose; and any express warranties provided by the seller in connection with the sale of the specific goods or equipment, typically through affirmative written and oral statements regarding the quality of the items. While implied warranties, subject to applicable regulations, will often be modified or excluded, express warranties generally will be included to some extent in each transaction, primarily as a means of inducing customers to purchase the goods or equipment. As such, care must be taken in drafting such warranties and in designing appropriate remedies and rights for any breach thereof. For complete discussion of warranties under the UCC, see Sale of Goods (§§ 120:1 et seq.).

When writing a commercial or consumer product warranty the manufacturer or seller is faced with a complex set of decisions in determining what type, if any, written warranty to offer. Principally, these decisions will involve determining what combination of implied and express warranties to offer; determining whether to offer a full or limited warranty or multiple warranties on various parts of the product; and determining which disclaimers or limitations to include in the warranty. These issues arise in any sale of goods transaction; however, the focus of this chapter is on consumer product warranties.

Warranty provisions for a consumer sales transaction should be carefully drafted and the provisions should take into account not only the applicable legal requirements but also the business elements associated with providing warranty services to consumer customers. The essential elements of any warranty include each of the following:

  • Identification of the parties to the warranty agreement. This should include the name and address of the party offering the warranty and a description of the parties who may be entitled to the benefits of the warranty. The party providing the warranty should address the availability of the warranty to persons other than the original consumer purchaser or lessee and any conditions that need to be satisfied in order for the warranty rights to be transferred to any third parties.
  • Clear identification and description of the goods and related parts that will be covered by the warranty and, if appropriate, clear highlighting of any characteristics or components that are excluded from warranty coverage.
  • A clear and complete description of the warranties provided with respect to the covered goods and parts (e.g., the goods shall perform in accordance with the specifications etc.). In addition, the warranty statement should also include a clear and complete description of any actions or conditions that may invalidate the warranty, such as the failure of the consumer to use the goods in a certain manner or defects caused by any unauthorized service or repair of the goods.
  • A description of the remedies offered in the event that a covered good or part is found to be defective, malfunctions or otherwise fails to perform in accordance with the written warranty. In most cases, the warrantor will agree to replace or repair the covered items within a specified period of time; however, in limited circumstances, the warrantor may be willing to provide a refund of the purchase price.
  • Disclosure of the procedures that should be followed by the consumer to exercise its warranty rights, including identification of parties authorized to perform warranty services on behalf of the warrantor. The procedures should address the manner in which the covered goods are returned for warranty service, the amount of time that the warrantor will have to complete the warranty service and the procedures for returning the new or repaired items to the consumer purchaser. If the consumer purchase is required to bear any expenses, these should be clearly stated in the contract.
  • Disclose of the duration of the warranty and a clear description of the procedure for determining when the warranty period begins and ends. If any registration of the covered items is required, a statement to this effect should be conspicuously included along with clear procedures for completing the registration.
  • A description of dispute resolution procedures that can be used to resolve any questions regarding the performance of the covered goods and the warrantor’s fulfillment of its obligations with respect to providing warranty coverage.

Warranty provisions in consumer sales and lease agreements typically include additional language to address various legal requirements and risk-allocation issues. For example, the warranty should include any language mandated by applicable state law, such as a statement to the effect that certain states do not permit limitations on the duration of any implied warranties or the exclusion or limitation of certain types of remedies. In turn, state laws notwithstanding, the warrantor will almost always seek to exclude or limit incidental and consequential damages and cap the warrantor’s overall liability with respect to warranty claims at the amount actually paid by the consumer purchaser for the covered items.

In response to the widespread misuse by merchants of express warranties and disclaimers, Congress enacted the Magnuson-Moss Warranty Federal Trade Commission Improvement Act of 1975. [15 U.S.C.A. §§ 2301 et seq.; referred to as “the Magnuson-Moss Warranty Act” or “the Federal Act”] The Federal Act is based on the premise that suppliers of consumer goods vigorously use written express warranties as advertising and merchandising devices. If these warranties are to be used, they must meet federal standards in terms of disclosure and remedies provided to an aggrieved consumer.

The Magnuson-Moss Warranty Act regulates service contracts and written warranties on “consumer products” that are distributed in interstate commerce and mandates certain guidelines in connection with written warranties, regulates their disclosure to consumers, restricts conditions on warranties, imposes different requirements for “full” or “limited” warranties, and restricts the ability to disclaim or modify implied warranties.  The Federal Act does not require the tendering of a warranty on any product. However, if a written warranty is actually given to the consumer, the warranty and the services connected with it must meet certain specifications as implemented by the rules of the Federal Trade Commission (“FTC”). [16 C.F.R. Pt. 700 to 703]

The rules governing the contents of warranties [15 U.S.C.A. § 2303] apply only to warranties pertaining to consumer products costing the consumer more than $5; however, FTC rules regarding disclosure of written warranty terms [16 C.F.R. §§ 701.1 et seq.] and presale availability of warranty terms [16 C.F.R. §§ 702.1 et seq.] apply only to warranties pertaining to products costing the consumer more than $15. [16 C.F.R. §§ 701.2702.3]  Certain of the provisions dealing with designation of written warranties [15 U.S.C.A. § 2303] apply only to warranties pertaining to products costing the consumer more than $10. [15 U.S.C.A. § 2303(d)]

Consumers are given a federal cause of action for damages resulting from violation of the Federal Act or of a warranty or service contract regulated by the Federal Act, on which they may sue in an appropriate state or federal court. [15 U.S.C.A. § 2310(d)]  Given the legal requirements associated with warranties and the importance from a marketing perspective of issuing and servicing warranties in a lawful manner it is recommended that managers and other personnel responsible for warranties and service contracts offered by their companies familiarize themselves with the information and guidelines in the FTC publication called “A Businessperson’s Guide to Federal Warranty Law”.

When a company offers a product for sale, it should have a standard operating policy which describes the procedures for standing behind its products following their sale. The policy should be reviewed periodically for consistency with all product warranties and applicable law. When formulating a warranty policy, significant attention should be given to the business needs of the client, not just the requirements of the law. A warranty policy serves as a sales tool as well as a means to consciously allocate risk between a seller and a buyer for defective products. A poorly drafted warranty can reduce the sales potential for the company client as well as unnecessarily increase the risk of loss. With appropriate care in the warranty review, the attorney for the company can provide a very valuable service.  For further discussion on warranty law issues and practice tools, see Consumer Warranties (§§ 140:1 et seq.) in Business Transactions Solution on WESTLAW, which includes an executive summary for clients regarding federal warranty law (§ 140:61).

1
Mar

Contract Management Procedures are Essential for Good Contracts and Monitoring Clients’ Duties and Responsibilities

Contract management, sometimes referred to as contract administration, refers to the processes and procedures that companies may implement in order to manage the negotiation, execution, performance, modification and termination of contracts with various parties including customers, vendors, distributors, contractors and employees.  While business people often dismiss contract preparation as “lawyer’s work” that has little or nothing to do with the important aspects of the working relationship between the contractual parties, contracting is actually one of the crucial activities in determining the success of any business arrangement.  While the essential steps in the contracting process will vary depending on the type and scope of the transaction, and the point at which counsel is brought into the discussions, contract formation and management typically involves most or all of the following:

  • Investigation of the business and legal background for the particular transaction and determination of the role that counsel is expected to play in the contracting process.
  • Identification of the contracts and related documents required to complete the transaction and establishment of a time and responsibility schedule for drafting, review, discussion, revision and completion of all of the required items.
  • Review and evaluation of the related contracts and existing obligations of the company that might be impacted by the specific contract currently under discussion.
  • Collection and review of information regarding the business and legal affairs of the other party to the proposed transaction.
  • Preparation of the initial draft of each of the required contracts and related documents or, in cases where the opposite party is responsible for drafting, review of the initial draft of such items prepared by the opposite party.
  • Discussion of necessary changes in the initial drafts, negotiation of the same and preparation of the final drafts of the contracts and related documents for signature.
  • Preparation for, and completion of, the closing of the transaction at which time all contracts and related documents are executed and exchanged and any required performance at the closing (e.g., cash payments) is completed.
  • Ongoing review of the performance of each of the parties under the terms of the contract, at least in those cases where the contract is long-term and calls for continuous performance over an extended period of time.

The timing and sequence of these steps may be impacted by other conditions unique to the transaction.  For example, while the parties may quickly reach agreement on the content of the contracts, the actual closing may be deferred pending receipt of approvals from governmental officials or completion and delivery of various reports and opinions from third parties.

This month’s supplement to Business Transactions Solution on WESTLAW includes a new chapter on Contract Management (§§ 227:1 et seq.) that covers the creation and use of procedures relating to negotiation, formation and management of effective and enforceable contracts.  The chapter describes the essential steps in the contracting process; investigation of business and legal issues; defining the role of counsel in the contracting process; and establishment and administration of a contract review and signature authority policy.  The specialty forms library includes various forms for use in creating and administering a corporate contracting program including policies and procedures for negotiating and entering into contracts or leases, a contract review summary, procedures for review and approval of proposed contracts, a memorandum to officers, managers, and employees regarding contract review and approval procedures; and a memorandum from the general counsel to members of the corporate legal department regarding guidelines to be followed for effective contract management. The chapter also includes a contract formation and administration checklist, client executive summaries regarding contract management and basic procedures for contract review and approval, a slide deck presentation on contract management to be used for law firm and department training purposes and a memorandum on steps that attorneys can take to develop their own library of forms in order to be a more efficient contract drafter. For issues relating to drafting of particular types of contracts, reference should be made to the materials for the specific transaction in which such contracts are commonly used. Related information is included in Contract Formation and Performance (§§ 100:1 et seq.), Compliance Programs (§§ 223:1 et seq.) and Records Retention (§§ 228:1 et seq.).

1
Oct

Supplier Management

Companies that contract with a significant number of outside suppliers should prepare a formal policy that describes the procedures for initiation and management of supplier relationships and one of the areas that needs to be considered is the scope of any compliance obligations that will be imposed on suppliers, a topic that is discussed in this report

10
Sep

Protections of Children’s Online Privacy

Given the tremendous popularity of the Internet among children and the potential for unscrupulous Internet actors to prey on the inexperience and naivety of young people, it is not surprising that the federal government intervened early on in the development of the online world with the enactment of the Children's Online Privacy Protection Act (“COPPA”), which became effective April 21, 2000 and can be found at 15 U.S.C.A. §§ 6501 et seq. In general, COPPA prohibits unfair or deceptive acts or practices in connection with the collection, use and/or disclosure of personal information from and about children on the Internet [16 C.F.R. § 312.1].  The Federal Trade Commission (“FTC”) has developed regulations for implementation of certain provisions of COPPA which have been documented as the Children's Online Privacy Protection Rule (“Rule”) in 16 C.F.R. Pt. 312.  After several years of soliciting comments and internal debate, the Rule was substantially changed by the FTC as of July 1, 2013, and the changes have been touted as bringing online child protection into the 21st Century. 

From the time it was first adopted COPPA applied to commercial Web sites or online services (1) directed to children under the age of 13 that collected personal information from children, or (2) that operated general audience Web sites and had actual knowledge that they collect personal information from children. [15 U.S.C.A. §§ 6501, 6502]. The definition of a “Web site or online service directed to children” provided several factors (e.g., subject matter; visual and audio content; age of models; language or other characteristics; advertising appearing on or promoting the site or service; competent and reliable empirical evidence of audience composition; evidence regarding the intended audience; and whether the site uses animated characters or child-oriented actives or incentives) the FTC could use to determine whether a site is directed at children. [15 U.S.C.A. § 6501(10). According to the Statement of Basis and Purpose of the FTC's Children's Online Privacy Protection Rule (64 Fed. Reg. 59888, 59892 (Nov. 3, 1999)), a Web site operator possessed “actual knowledge” if it “learns of a child's age or grade from the child's registration or a concerned parent …,” or learns of such information from other age-identifying questions.] The original Rule defined the term “operator”, for purposes of determining who would be subject to COPPA, to include any person (i) who operated a Web site located on the Internet or an online service and who collected or maintained personal information from or about the users or visitors or (ii) on whose behalf such information was collected or maintained. The intent was to be sure that Web site operators who explicitly engaged “agents” to act on “their behalf” to collect personal information from children would be covered by COPPA.

As time went by, however, new tools were developed that did not fit within the original notion of “agent” but nonetheless allowed Web site operators to collect information in ways that arguably should be subject to COPPA. In response, the Rule was revised to provide that: “Personal information is collected or maintained on behalf of an operator when: (a) it is collected or maintained by an agent or service provider of the operator; or (b) the operator benefits by allowing another person to collect personal information directly from users of such Web site or online service.” Web site operators need to comply with COPPA if they enable third party apps that collect personal information about children or integrate outside services, such as plug-ins or ad networks, that collect such information. Accordingly, operators need to conduct a thorough investigation of their practices with respect to third party apps and other outside services to determine whether COPPA is applicable to their online activities.

Since its inception COPPA and the Rule have required protection of easily understood personally identifiable information such as a child's full name, home address, e-mail address, telephone number, or any other information that would allow a third person to identify or contact the child. [64 Fed. Reg. 59888, 59892 (Nov. 3, 1999)] COPPA was also understood to be covering other types of information, including hobbies, interests, and information collected through the use of cookies or other types of online tracking mechanisms, whenever such information was associated with a particular child. [16 C.F.R. § 312.2]  As time has gone by, however, there has been a growing recognition of the substantial changes that have occurred in communications technology since COPPA first became law and this led to changes in the Rule to expand the definition of “personal information” for purposes of the Rule to include “online contact information,” including instant messaging user identifiers, voice over internet protocol (VOIP) identifiers and video chat user identifiers; a “screen or user name where it functions in the same manner as online contact information;” “persistent identifiers,” including an Internet Protocol (IP) address or mobile device IDs that can be used to recognize a user over time and across different Web sites or online services; a photograph, video, or audio file where such file contains a child's image or voice; and geolocation information sufficient to identify street name and name of a city or town.

For detailed discussion of COPPA’s general requirements on website owners, privacy notices, parental consent requirements and the FTC’s “safe harbor” program under which an operator is deemed to be in compliance with the Rule if the operator complies with FTC-approved self-regulatory guidelines, see §§ 128:95 – 128.99.

In addition to complying with the requirements of COPPA, website operators must be mindful of laws and regulations that have been adopted at the state level.  For example, an operator of an Internet Web site, online service, online application, or mobile application directed to minors (referred to herein as an “operator”) must comply with California's law regarding Privacy Rights for California Minors in the Digital World [Bus. & Prof. Code, §§ 22580 to 22582] which prohibits them from knowingly marketing or advertising the following products or services to minors [Bus. & Prof. Code, § 22580, subd. (i)]:

(1) Alcoholic beverages, as referenced in Sections 23003 to 23009, inclusive, and Section 25658.

(2) Firearms or handguns, as referenced in Sections 16520, 16640, and 27505 of the Penal Code.

(3) Ammunition or reloaded ammunition, as referenced in Sections 16150 and 30300 of the Penal Code.

(4) Handgun safety certificates, as referenced in Sections 31625 and 31655 of the Penal Code.

(5) Aerosol container of paint that is capable of defacing property, as referenced in Section 594.1 of the Penal Code.

(6) Etching cream that is capable of defacing property, as referenced in Section 594.1 of the Penal Code.

(7) Any tobacco, cigarette, or cigarette papers, or blunt wraps, or any other preparation of tobacco, or any other instrument or paraphernalia that is designed for the smoking or ingestion of tobacco, products prepared from tobacco, or any controlled substance, as referenced in Division 8.5 (commencing with Section 22950) and Sections 308, 308.1, 308.2, and 308.3 of the Penal Code.

(8) BB device, as referenced in Sections 16250 and 19910 of the Penal Code.

(9) Dangerous fireworks, as referenced in Sections 12505 and 12689 of the Health and Safety Code.

(10) Tanning in an ultraviolet tanning device, as referenced in Sections 22702 and 22706.

(11) Dietary supplement products containing ephedrine group alkaloids, as referenced in Section 110423.2 of the Health and Safety Code.

(12) Tickets or shares in a lottery game, as referenced in Sections 8880.12 and 8880.52 of the Government Code.

(13) Salvia divinorum or Salvinorin A, or any substance or material containing Salvia divinorum or Salvinorin A, as referenced in Section 379 of the Penal Code.

(14) Body branding, as referenced in Sections 119301 and 119302 of the Health and Safety Code.

(15) Permanent tattoo, as referenced in Sections 119301 and 119302 of the Health and Safety Code and Section 653 of the Penal Code.

(16) Drug paraphernalia, as referenced in Section 11364.5 of the Health and Safety Code.

(17) Electronic cigarette, as referenced in Section 119405 of the Health and Safety Code.

(18) Obscene matter, as referenced in Section 311 of the Penal Code.

(19) A less lethal weapon, as referenced in Sections 16780 and 19405 of the Penal Code.

With respect to marketing or advertising provided by an advertising service, an operator shall be deemed to be in compliance if the operator notifies the advertising service, in the manner required by the advertising service, that the site, service, or application is directed to minors. [Bus. & Prof. Code, § 22580, subd. (h)(1)] If an advertising service is properly notified, the advertising service is prohibited from marketing or advertising a product or service on the operator's Internet Web site, online service, online application, or mobile application that is included in the list above. [Bus. & Prof. Code, § 22580, subd. (h)(2)]

 

27
Nov

Drafting & Using Durable Powers of Attorney

A durable power of attorney is quite handy in enabling a person to manage the principal's estate in the event of the principal's incapacity without the need for the commencement of a cumbersome court supervised guardianship. Most states also permit the principal to nominate a guardian for his or her estate in his or her durable power of attorney, if the need for such a guardian should arise, such as the named attorney dying or becoming incompetent. This designation could help avoid uncomfortable situations where the need for a guardianship does arise and several family members battle for the right to be guardian.

A durable power of attorney can be quite broad and extend to a wide range of subjects.  Each state has its own statutory regime relating to the form, content and effectiveness of a power of attorney and state rules are generally strongly influenced by the Uniform Power of Attorney Act, which was last updated in 2006 and replaced in its entirety the provisions of the then-current version of the Uniform Durable Power of Attorney Act. 

When drafting a comprehensive form of power of attorney, a good starting point is the state-specific version of the optional form of power of attorney appearing in Article 3 of the Uniform Power of Attorney Act, which is a document designed for use by lawyers as well as lay persons and which was deliberately drafted using plain language instructions to principals and agents.  Among other things, the form includes step-by-step prompts for designation of the agent and successor agents and grant of general and specific authority, and the Uniform Power of Attorney Act also includes default rules that should be understood before finalizing the content of a power of attorney.  In addition, counsel may recommend and draft powers of attorney for clients that are focused on specific activities relevant to the management of the client’s assets as part of the estate planning process.  Examples include a power of attorney for management and conduct of business, a power of attorney to manage real property and a power of attorney to convey real property.

Westlaw Next subscribers can learn more about drafting and using durable powers of attorney in Chapter 20 of Business Transactions Solution (Estate Planning). 

2
Oct

Confidentiality & Inventions Assignment Agreements for Consultants

While companies have traditionally relied on employees for the development of inventions and other proprietary information it is increasingly common to use consultants to perform similar services.  Such arrangements provide companies with more flexibility to tap into specialized skills available through consultants without the added expense of creating an employment relationship.  If a client will using consultants for technical work on a regular basis it will be useful to create a comprehensive consulting agreement that is tailored to engagements in which the consultant will be creating and/or receiving confidential information to be owned by the client and will be developing inventions and other items eligible for protection under intellectual property laws that will be assigned to the client by the consultant.  The agreement will be similar in many ways to an employer-employee relationship; however, the agreement should clearly lay out guidelines for provision of the services that are intended to fall within the definition of an independent contractor relationship even though the consultant may receive equity in the client as part of the compensation.  The confidential information and assignment of inventions agreement should include restrictions on the consultant’s activities with respect to solicitation of the client’s employees and other consultants, as well as restrictions on the consultant’s ability to provide services to other organizations that might be deemed competitors of the client.   Westlaw Next subscribers can access a template for a consultant's confidentiality and inventions assignment agreement at § 51:141.50 of Business Transactions Solution.

8
Sep

Regulation D Policies Must Cover Social Media Usage

My new post on the Legal Solutions Blog from Westlaw discusses how Regulation FD policies must take into account social media usage.

23
May

Law & Technology Blog on Legal Solutions: COPPA Compliance Programs

On the Law &
Technology Blog on Legal Solutions I completed my series on the upcoming
changes to the rules promulgated under the Children’s Online Privacy Protection
Act (COPPA) with an article discussing the key elements of a COPPA Rule Compliance Program. 

25
Apr

COPPA Changes: Updating and Expanding the Definition of Personal Information

On the Law & Technology Blog on Legal Solutions I continued my series on the upcoming changes to the rules promulgated under the Children’s Online Privacy Protection Act (COPPA) by discussing how the rules will define “personal information” as of July 1, 2013, since this is the data that website operators will need to protect.

2
Apr

Mediation Clauses and Agreements

A mediation clause can, and often is, used in conjunction with formal procedures for negotiations and/or arbitration. For example, the parties may be obligated to engage in some period of negotiations without the assistance of a neutral before a mediator is brought in to assist. Mediation may also be a required first step before the parties can commence binding arbitration procedures or ask for relief from the courts.  This month's report describes various methods for memorializing a mediation arrangement and also includes an example of a mediation services agreement.