Ask a Lawyer // October 2017 // Yahoo’s Lack of Imagination Costs $5.5 Million

Those of you who know me well, know I tend to get on a rant from time to time about contracts and clarity of language in contracts. I also want to talk about something designers are known for imagination. One of the little-understood facts about drafting contracts is that even a simple ability to imagine might save you a lot of money.

Those of you who love college basketball know how hard it is to predict the perfect bracket for March Madness. A couple of years ago, Yahoo! considered having a $1 billion prize for someone who could correctly predict the outcome of all 63 games in the bracket. Yahoo! then entered into a contract with SCA Promotions, Inc., a company that does risk management for contests and promotions, to have the $1 Billion prize. In exchange for Yahoo! paying an $11 million fee, SCA said they would pay $1 Billion to whomever accurately predicted all 63 games. There was a cancellation provision in case Yahoo! decided not to put on the contest. In the end, Yahoo! decided not to announce the contest and hearts were broken even before their brackets got busted.

The contract had an initial deposit of $1.1 million at the end of 2013 and the remaining $9.9 million due by February 15, 2014. The rest of the contract was fairly innocuous if a tad wordy. But, the cancellation provisions were less than clear, and that is where the real story begins. At stake in the case was this provision:

Cancellation fees: Upon notice to SCA to be provided no later than fifteen (15) minutes to Tip-Off of the initial game, Yahoo may cancel the contract. In the event the contract is cancelled, Yahoo will be entitled to a refund of all amounts paid to SCA subject to the cancellation fees set forth in this paragraph … Should the signed contract be cancelled between January 16, 2014 and February 15, 2014, a cancellation penalty of 50% of the fee will be paid to SCA by Sponsor (emphasis added).

Yahoo! had paid the initial payment of $1.1 million. Then Yahoo! canceled before paying the $9.9 million. Yahoo! said it owed SCA a cancellation fee of $550,000 or 50% of the money Yahoo! had already paid. SCA argued that the cancellation fee was $5.5 million of 50% of the entire fee. The parties went to court over the $5 million difference. An appellate court said that SCA was right and Yahoo! owed $5.5 million.

So what happened? Bad contract drafting happened but not necessarily in the language. Although some better language might have been used, the purpose of the cancellation provision was pretty clear. Remember, these parties have lots of high-priced legal talent on call. All that high-priced talent screwed this contract up because they failed to imagine what the other party might want in a cancellation fee provision.

Each side failed miserably at imagining what the other side would likely want in a cancellation setting. It is easy to predict that Yahoo! would want to minimize their costs and SCA would want to maximize their gain even in a cancellation setting. If the contract drafters had done a better job at imagining what the other side might want, they could have arrived at a deal that each side could live with without much effort. The cost for lack of imagination on Yahoo! was $5.5 million.

When thinking about your own contracts, it is very easy to know what you want out of a contract. We can easily imagine our concerns and demands. But a contract is a written description of a business relationship. If we want our relationships to be successful, we have to understand what the other side wants. We have to imagine what it would be like to be on the other side. So ask yourself, imagine, what does your client want? What are their concerns when a project goes well, or when a project does not go well? What might they reasonably expect and what might they reasonably expect from you? Imagine yourself in their position, and you will get a very good idea about what needs to be written into your client contract. In short, your business relationship is not all about you.

But don’t stop with imaging your client. You need to tell the lawyer who is drawing up your contract what the other side is likely to want. You should ask them to make sure any points of possible disagreement with your client is clearly written. Help your lawyer imagine what the other side might want. Your lawyer may not understand the relationship with your client, even if they understand the transaction.

Designers are used to imaging for their clients. When it comes to your contract with your clients, it is also important to imagine being your client. Don’t be a Yahoo!


BIO Disclaimer

MATT JOHNSTON IS A SOLO ATTORNEY WITH A FOCUS ON SMALL BUSINESS REPRESENTATION, COPYRIGHT AND TRADEMARK LAW, AND DISPUTE RESOLUTION. MANY OF MATT’S CLIENTS ARE DESIGNERS AND CREATIVE PROFESSIONALS WHOSE CONCERNS OVERLAPPING MATT’S PRACTICE AREAS. MATT CONCENTRATES ON DRAFTING CLEAR CONTRACTS OF ALL TYPES AND HELPING DESIGNERS WITH THE LEGAL SIDE OF THE DESIGN BUSINESS. AS A BENEFIT TO AIGA MEMBERS, MATT OFFERS A 10% DISCOUNT ON ALL CONSULTATION APPOINTMENTS, FLAT FEE PROJECTS, AND HOURLY FEES.

THE CONTENT OF THIS COLUMN IS FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE APPLICABLE IN ANY SPECIFIC SITUATION. NO ATTORNEY-CLIENT RELATIONSHIP IS CREATED THROUGH THIS COLUMN. IF YOU NEED CONFIDENTIAL LEGAL ADVICE, MATT IS AVAILABLE FOR PRIVATE AND PRIVILEGED CONSULTATIONS. CONTACT MATT IF YOU HAVE SPECIFIC CONCERNS.

By Matthew S. Johnston
Published October 4, 2017
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