December 2009 – Feature: Online Marketing Contracts

Tips for structuring contracts, drafting payment provisions and allocating risk

By Greg Sater and Benjamin Alexander

As any reader of this publication knows, online is where it’s at. The old days of advertising something on TV or some other channel–while having merely a token presence on the web–are long gone. Today, everyone has at least one online marketing contract in place.

As industry attorneys who draft, negotiate and–at times–actually enforce such contracts in court, we thought it might be useful to provide you with a few pointers.

There are many different kinds of online marketing contracts. Basically and broadly defined, an online marketing contract is any agreement that is intended to result in a particular piece of marketing material–say, an advertisement for a new car–getting to a consumer, and hopefully being read by that consumer, when that consumer is using his or her computer. Specific examples include affiliate marketing agreements, sales lead contracts, e-mail list license agreements and many others. Despite the many different forms of such agreements, there are certain common issues that arise in all of them. We’ll outline some of these universal issues and examine some effective ways to address them. We are constrained by space–so please feel free to e-mail us if there are specific topics you’d like to see us take up in future articles.

Structure of the Contract

A preliminary issue in every such contract is whether the contract will be for a single campaign, multiple campaigns of single type or multiple campaigns of different types. Typically, a contract will cover multiple campaigns, each specified in more detail by an insertion order. If all of the campaigns will be of a similar type, most of the detail and “legalese” can be put into the main contract with very little detail needed in each insertion order. If, however, the contract is going to cover a variety of campaign types, then more detail needs to be contained in each insertion order. For example, a contract to license an e-mail list for repeated campaigns with a fixed fee per use and the same payment structure each time will have the fee and payment structure in the initial contract; the insertion order merely identifies the particular campaign and notifies the licensor that another campaign going to be undertaken. A license that permits the list to be used for a variety of campaigns with different fees and payment structures will need to specify those details in the insertion order.

Payments

What will the payment structure be? Cost per impression (CPM)? Cost per click (CPC)? Cost per action (CPA)? Per inquiry (PI)? Cost per order (CPO)?

Just giving it a name isn’t enough; people in the industry often use similar names for materially different arrangements. The contract needs to spell out exactly what triggers the payment obligation. For example, a contract shouldn’t simply say a flat fee will be paid for each order–a specific event should define what “order” means. Is it delivery or entry of a complete order record? Validation of the data? Authorization of the charge? Authorization of the first charge if it’s an installment offer?

You’ll also need to consider whether there is any opportunity to reverse a payment if there’s a chargeback or return on an order and, if there is, what the time limit is. If there’s an affiliate relationship, what’s the referral period? When do the cookies expire? And make sure that the contract makes it clear that the cookie is the final arbiter of a referral.

Many relationships present opportunities for upsells. The initial agreement should set the rules, beginning with whether upsells are allowed. If they are allowed, is a fee paid? Is the fee on all upsells or just in-path? Does the other side have the right to approve upsells?

The agreement should also specify how and when payments will be made, and on what period. Every Tuesday, for the previous Sunday to Saturday period, by check? On the 15th of each month for the previous calendar month? Every business day by 1:00 p.m. EST, by ACH transfer? Obviously, the expected traffic and dollar volume will be the primary factor to consider.

Consider, too, whether there should be a minimum amount due before a payment is required. Don’t accidentally create a contract that requires you to write checks for $4.00 every week.

Risk Allocation

Contracts allocate risk among the parties. Because of the nature of Internet marketing, there are some specific risks that should be addressed in online marketing agreements. One of the biggest risks is that your marketing partner will violate some law or some legal duty to a third party, and that you will suffer in some way as a result. The first line of defense against these risks is a promise from the other side that they haven’t–and won’t–violate laws or legal duties to third parties. Common representations and warranties (current promises) and covenants (future promises) with special importance in online agreements include:

Products and marketing – Products and any creative will comply with laws, regulations and guidelines, including applicable FTC and FDA regulations and guidelines.

E-mail – E-mail addresses were gathered and are provided in conformance with any applicable privacy policy; the originator of the e-mail addresses has affirmative consent for each address; mailing to any e-mail address provided will not violate CAN-SPAM (or any other applicable laws, regulations or guidelines); the originator of the e-mail addresses will make suppression lists available to users, to update any “do not e-mail” request; user of e-mail list will not mail to addresses on suppression lists or in a wireless domain and will provide required opt-outs in all mailings.

Telephone leads – Telephone numbers were gathered and are provided in conformance with any applicable privacy policy; making a call to any number provided will not violate the Telephone Sales Rule; user of leads will not make calls that violate the TSR.

Affiliate landing pages – These pages won’t incorporate competitors’ trademarks; they will comply with any applicable privacy laws or regulations (such as California’s Online Privacy Protection Act); they will disclose that collected information will be shared with third parties; they will not include content that is deceptive or misleading or not in compliance with federal and state consumer protection laws; they will disclose the terms and conditions of any incentives, points, rewards, cash or prizes promised to consumers in return for their response to any advertisement and comply with any sweepstakes laws regulating any incentives.

IP infringement – Creative and any other materials provided by a party will not infringe any third party’s copyright, trademark, patent or other intellectual property rights; search engine marketing will not generate results using third party trademarks.

The above list is just a beginning of the list of representations and warranties or covenants that you’ll want to consider in determining what’s needed in your contract.

In addition, another device for limiting risk in affiliate marketing contracts is to limit cross-publishing rights: prohibit cross publishing altogether, allow cross publishing only one level deep or only upon approval of the sub-affiliate. If cross publishing is allowed, it should be conditioned on subs agreeing to abide by the terms of the primary agreement.

Two other important tools for risk allocation are indemnification and insurance. Indemnification is the right of a party to be defended against claims and have its losses, costs and expenses paid by the other party if it has breached the agreement. To increase the likelihood that there will be money to pay any indemnification obligations, it is a good idea to require the other side to maintain insurance, too, naming you as an additional insured. (And always, after that, check to make sure that they actually have it!)

Next Topics

In our next installment, we’ll look at contract provisions that can be drafted for fraud prevention and detection, reporting verification and associated remedies.

We’re always looking to cover additional legal topics that might be of interest to you or your clients, so feel free to e-mail us the topics and we’ll add them to our list.

Greg Sater is a partner with Rutter Hobbs & Davidoff, based in Los Angeles. He can be reached at (310) 286-1700 or at gsater@rutterhobbs.com. An attorney at the firm, Benjamin Alexander can be reached at the same number or at balexander@rutterhobbs.com.