It’s no surprise that start-ups and small businesses are mindful of their budgets. Occasionally, however, cost-consciousness can lead a company to question the need for a contract or contract review, particularly when a transaction involves a small dollar amount or simple service offering. By assuming a lower risk of liability in these situations, the cost of hiring a lawyer to write, or review, a contract can seem unnecessary. This is a misconception.
The truth is that the potential for liability or harm resulting from a deal exists in all deals, and it is not at all proportional to the size (or complexity) of the deal. Even small, simple deals, can have devastating impacts.
Here are 5 examples of unforeseen liability which could destroy a business:
- Content Infringement
You hire a blogger or freelancer to write a few articles for your website. The blogger may be willing to write the articles for free (a cashless deal), in exchange for the publicity and name recognition. You publish the articles on your website. You later find out that the blogger plagiarized the content, or said something libelous, or included someone’s copyrighted images without first obtaining the rights to do so. You find this out when the offended party sues you for $10 million for publishing the content. - Software Infringement
You run a small online business, and want to use some inexpensive, simple, off the shelf software from another small company, to power the “shopping cart” on your e-commerce website. To use the product, you must click-to-agree to their standard terms. You assume their standard terms are in fact “standard,” so you click and use. Six months later, another company says that e-commerce software infringes their intellectual property, and they sue not only the software provider (for $100 million), but also, every company that has been using the technology on their website, including you, for $5 million each. - Product Liability
You are an affiliate marketer, reseller, or drop shipper, and you are promoting, selling or distributing products made by someone else. These are inexpensive $10 products and you do not sell very many of them. One of them blows up in the consumer’s face, injuring or killing them. You get sued for $50 million for recommending or selling this product to them. - Data Breaches
You use basic database software to store and process certain data about your customers (and/or hire a consultant to help you manage this data). The software was not secure, or perhaps the consultant lost his laptop, and your customer information is stolen. Your customers sue you, and the government fines you for breaching privacy laws and not taking adequate care to protect this data. - Frivolous Lawsuits
You are launching a new app and need a Terms of Use and Privacy Policy. Instead of hiring a lawyer help you write it, you just copy and tweak one from another app you like. It turns out that their terms were not well written, and did not protect you well. A disgruntled customer files a frivolous lawsuit against you, and, although you can eventually make it go away, you end up spending more time and money fighting the case because you were not adequately protected by your terms.
As you can see, the exposure you have is not related to the size nor the complexity of the transaction you are contemplating.
However, the good news is, for simple, small deals, the cost of engaging a lawyer to help you is likely small as well. An experienced lawyer will already have seen many similar transactions, and can make practical, quick and efficient suggestions on how to mitigate your risk. Think of it like buying insurance: the simple act of hiring a lawyer can help you avoid unforeseen risks, including those carrying multi-million-dollar liability price tags which can which can effectively ruin a business.
Brian Heller is a Member of Outside GC’s Washington D.C.-based team, and is an experienced technology and deal attorney, specializing in SaaS software licensing, Virtual Reality (VR) products and services, digital and social media, online advertising, mobile apps, cloud services, terms of use, data use and protection and content licensing. Brian has represented both vendors and customers and uses this experience to present reasonable positions on behalf of his clients. Brian can be reached at bheller@outsidegc.com.