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A Binding Agreement: 1

A Binding Agreement: 1

September 7, 2006
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" Often just the threat of having to pay the other party's attorney's fees in the event of a dispute can act as an effective deterrent to contract-breaching conduct. "

"Some of the biggest deals in the entertainment business were made with a handshake or negotiated on a cocktail napkin over lunch."

While this bit of Hollywood lore is based in fact, what also is true, and is by far much more common, is the fact that some of the biggest, most expensive and most avoidable legal problems have occurred because of the lack of a well-written agreement. This problem is so widespread that it is one of the main causes of early retirement of entertainment attorneys and is known in the profession as "client failure to get it in writing" syndrome.

In fact, many lawyers have learned to detect the symptoms early, such as when a potential client utters the words "no, we didn't have a contract," which a trained practitioner immediately knows translates into the legal term "cha-ching."

There are innumerable reasons why the failure to take the time to hammer out a good contract can cost you big time. Over and over again, I have witnessed unsuspecting parties pass into the pit of vexatious litigation for the want of a signed piece of paper with a few well-drafted terms on it.

For example, take Cain and Abel, a couple of college buddies who decided to go into the online adult entertainment business together. The guys, whose names I've changed to protect the innocent, were good friends, so they didn't bother to execute a partnership agreement or form a corporation and issue stock to themselves. They simply had one of those famous "handshake deals" in which everything was supposed to be split 50-50. Given their longtime friendship, the informal agreement seemed more than sufficient to them. "Besides," they reasoned, "with so many important things to do to get the business up and running, and with so many other expenses to pay for, who has time, let alone money, to hire a lawyer to draft an agreement?"

Good fortune smiled upon Cain and Abel, and their online adult business started making money almost from Day 1. In fact, with the exception of a few chargeback issues, some defamatory remarks on the boards and the usual assortment of problems associated with growing an adult paysite, their venture soon seemed like a well-oiled online money machine destined for greatness.

Success led to greater success, and in a couple of years, Cain and Abel had reached the point where they were living the life of cyber Svengalis in the sex business.

Unfortunately, about that same time, Cain developed a fondness for a certain kind of powdered stimulant. Not long thereafter, the two began to have "differing views" regarding the direction their company should go. Differences turned into arguments. Arguments turned into battles.

Then one day, Abel was shocked to find that he was no longer getting his regular salary and profit disbursement payments automatically deposited into his account, as they had been for the past two years. It wasn't very long thereafter that Abel discovered that Cain had all their domains registered in his name, as well as all their merchant processing accounts, and that Cain had taken the company's servers to Toronto and moved himself to Antigua.

Abel wanted to sue Cain, among other things, of course. But Abel was stymied again and again because of jurisdictional and other legal problems, such as where the lawsuit could legally be brought and which country's laws would govern the action.

The guys ultimately called a truce to the legal war that followed, but by the time it was over Abel hadn't seen a penny from the business for more than two years, during which time he lost his beautiful Malibu home. Abel did learn, however, that the fees he paid to his lawyer's firm allowed his attorney to purchase a nice beach-front bungalow about a mile down the coast from Cain.

If Cain and Abel had executed a proper partnership agreement or had formed a corporation with a proper shareholder agreement, much if not all of Abel's misery could have been avoided. For example, a proper partnership or shareholder agreement could have enabled Abel to prevent many of Cain's actions and could have required that their dispute be resolved at a place in the U.S. using state and/or federal law. An effective agreement also could have provided Abel with the means to require that the company, or even the merchant processor, continue to make payments to him and to make Cain reimburse Abel for all his attorney's fees and costs associated with his action against Cain.

Frequently, a well-drafted contract that anticipates potential areas of conflict or disagreement can also function as a self-enforcing deterrent to breaches of the agreement. Often just the threat of having to pay the other party's attorney's fees in the event of a dispute can act as an effective deterrent to contract-breaching conduct.

Failure to have appropriate contracts in place at the time that content is created also can create legal chaos down the road. For example, suppose you hire an outside non-employee or photographer to create content for your site, but neither he nor any performers who are depicted in the material execute a "work for hire agreement" or provide you with a subsequent assignment of rights in the works.

In part two, we'll look at copyright issues and beyond.

Gregory A. Piccionelli is one of the world's most experienced Internet and adult entertainment attorneys. He can be reached at Piccionelli & Sarno at (310) 553-3375 or www.piccionellisarno.com.


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