In this episode, hosts Brad and Michael explore the pitfalls business owners can face when working with new vendors. Hear how a business owner, dissatisfied with a marketing agency’s work, had her website held hostage. Tune in to uncover the warning signs to watch for when assessing vendor contracts, and gain insights into the legal ramifications of your agreements.
Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
Transcript
*The below transcript has been edited for readability.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd.
Michael: As a business and health care law firm, we meet a lot of interesting people and learn their amazing stories. This season, we are riding the emotional rollercoaster of the crises that arise in the operating season of a business. Brad, our theme this season is Running a Business.
Brad: Yeah, Michael. And we’ve talked about this in almost every show so far this year, but that’s just one season of business. For those who are hearing this for the very first time, what are the other seasons?
Michael: There’s four seasons of a business. There’s the building season, so you’re starting a business. The operating season, one we’re in right now, so running a business. We have the scaling season, which will be our next podcast season, you’re growing a business and the buying and selling season. [00:01:00]
Brad: Awesome. Well, continuing with this tradition, do you have a mini story for today?
Michael: Brad, I can’t quit the litigation stories I’ve been rolling out this year this season.
Brad: Michael, you’re definitely not the hero of any of these stories. You’re kind of like the Forrest Gump, where you just kind of, you have these great outcomes with litigation in your mini stories.
Michael: Well, way to bring a movie reference in into it. Thank you for not quoting Forrest Gump.
Brad: Yeah. Maybe your litigation stories are like a box of chocolates, you never know what you’re going to get.
Michael: Okay. Well, I finally understand what my daughter means when she uses the word cringe with your dad joke there, Brad. But seriously, back to the story, Brad, in this mini story, this litigation mini story, I was so close to becoming a TV star.
Brad: Was the TV show called “That’s All We Had To Say About That” since you didn’t really litigate any of these stories? [00:02:00]
Michael: I seriously feel like I’m staring at the sun right now with your dad jokes. You’re derailing me. Our client in today’s story is named Dr. Defendant.
Brad: Okay. Not really a stretch since you said this story was about litigation.
Michael: So, Dr. Defendant is a plastic surgeon, and he had provided enhancements to his patient, Ms. Dancer.
Brad: Let’s keep this on track. Why Ms. Dancer? Was she part of like a local ballet?
Michael: No, Brad, she was a different kind of dancer. She was the kind of dancer where she would be able to be paid in dollar bills by the audience if they liked her dancing.
Brad: A friend of mine told me about these kinds of places…she’s a…
Michael: No, don’t say it. Don’t!
Brad: What? I was going to say belly dancer.
Michael: Yeah, sure you were. Ms. Dancer was not happy with [00:03:00] her outcome. She wanted the largest sized breast implants available, and Dr. Defendant as medically appropriate, obliged.
Brad: Okay. So I guess I was wrong. She’s not a belly dancer, so let me guess. She was unhappy because she started having back pain.
Michael: No, Brad. She started complaining because she felt duped. She was expecting even larger implants than she received. Her demand was for a revision surgery to go bigger.
Brad: Oh, sounds like the go big or go home.
Michael: Yeah. Something like that. Well, Dr. Defendant would not operate again. He said it was not medically possible with her body type to go any larger. She was apparently limited by something called skin, the amount of skin on her body.
Brad: Oh my God. I’m glad I’m not letting my 13-year-old boy brain take over the story. I’m starting to worry that you somehow – how would you becoming a TV star make sense in this story so far? [00:04:00] Something’s weird here.
Michael: Yeah. Well, be patient. Things escalated at her being told no. She did not like that. Sometime passed and apparently Ms. Dancer could not find a lawyer to take her case.
Brad: Oh, that’s a shocker.
Michael: Yeah. Well, eventually, Dr. Defendant was sued in small claims court by Ms. Dancer.
Brad: How ironic that she went to small claims court. I think we have a vocabulary word though. What is a small claims court, Michael?
Michael: I do appreciate that dad joke, Brad. That was a good one. This is the lowest level. The small claims court is the lowest level of the court system in most jurisdictions. It’s common for people who do not have an attorney to go make a claim in small claims court, and they represent themselves. We see it in Texas as an outlet for angry patients more often than you’ll see in other states because they have higher amount, higher upper limits [00:05:00] that can be awarded in Texas than in most states. So, it’s still not rising to the level of a normal kind of traditional court size or court case, but the small claims court is a vehicle for angry patients in Texas.
Brad: Yeah. And we’ve talked about it just in general, angry patients. They have different ways to get their day. One, they could file a lawsuit or they could report the doctor to the medical board, or they could just go along the line and leave a nasty review. And I suppose it is interesting that there’s a, a quirk in Texas where it’s more common for people to kind of go this route. However, I don’t see why this is even a mini story.
Michael: Well, fair observation, other than it being a little interesting with Ms. Dancer and why she’s complaining. Things got a lot more interesting when Dr. Defendant was invited to litigate this matter on Judge Judy. Brad, this was my chance for fame. [00:06:00]
Brad: Was this after your speeding ticket defense where you swore that you would stay in your lane?
Michael: Well, you know the answer. Yes, Brad, it was because you were here when I got that letter from Judge Judy’s team. Fortunately, I did not have to decide whether I would help Dr. Defendant. He quickly declined the opportunity to be on the show. I did learn – it was kind of interesting that I guess Judge Judy, her team monitors small claims filings and look for a story. I can almost see the headline for this case on the show.
Brad: The headlines in this one, my little 13-year-old boy brain is going crazy. I think we need to move on. Did Dr. Defendant win his case?
Michael: Well, he did have me help. He had me help settle this for a small amount, no pun intended, so that this would not be a distraction to his normal practice.
Brad: All right. Well, that was a pretty long mini story, but let’s jump in today’s real story. [00:07:00]
Michael: Okay, Brad, our client in today’s story is Ms. Sarah.
Brad: Okay. Why Ms. Sarah?
Michael: Well, Ms. Sarah built her own empire, starting with salons and eventually expanding to build a chains of medical spas. She started with nothing and is now thriving. She reminds me of the story of the Spanx founder, Sarah Blakely.
Brad: Okay. So what’s the business crisis?
Michael: Slow your roll, Brad. We’re just getting started. I’ve said this throughout the season, I can’t get to the crisis without painting a vivid picture of the situation.
Brad: Oh, you mean you like providing context?
Michael: Well, that is a simpler way to say it. Well, Ms. Sarah’s chain of medical spas is called Switch Medical Spa.
Brad: Okay. Why Switch Medical Spa?
Michael: Well, I kind of strained my back on this one, but I was trying to think of a name that reminded me of Spanx in honor of our Ms. Sarah character. And for some [00:08:00] reason, when I heard the word Spanx, switch was the first thing I thought of when I hear that word.
Brad: Yeah. Well, spank does bring back some painful memories from my childhood, but let’s keep going with this story.
Michael: Me too. Well, about a year… Let’s go back about a year prior to the story. Ms. Sarah had decided to implement a more intentional digital strategy for her marketing, and she decided she wanted to update her website, update her social media channels and optimize her SEO.
Brad: Okay. Now, Michael, we have talked about this in other episodes, but for those not familiar, can you define again, what SEO means?
Michael: Search engine optimization, so this is basically designing your content in a way that allows the business to be found when someone searches on Google, so they would get directed to your website.
Brad: Wow, that’s a great idea. I mean, they could be found on the whole worldwide web. I mean, we should consider that Michael.
Michael: As a card-carrying Gen X-er. [00:09:00] I’m going to exercise my right to kick you out of Gen X. You’re officially a baby boomer now with your worldwide web reference.
Brad: Okay, sorry. We’ll, get back to today’s story okay?
Michael: All right. Ms. Sarah was not happy with her website marketing company that she had been using for years since she started her business. They were a local company that helped all types of businesses with all types of marketing. Switch Medical Spa now had seven locations, so their marketing needs were no longer a great fit.
Brad: Please tell me, please tell me, you’re talking about the Frank the Tank Marketing Agency again.
Michael: Well, I would love that, Brad. That would be fun. But this story is in a different part of the country. So audience members who don’t know what Brad’s talking about; in a prior episode this season about a marketing company helping with the rebrand, we had Frank the Tank Marketing Agency. And what Brad’s trying to do right now is get us to start talking about the movie Old School again. [00:10:00]
Brad: My boy blue!
Michael: Okay, moving forward, Ms. Sarah started doing her research to find a new marketing company. She was reaching out to her colleagues in the medical supply community for recommendations and trying to see which marketing company had good SEO. She did a little Google searching herself.
Brad: Well, there are marketing firms that… I mean we’ve been around a long time, and there are new hot names that appear from time to time, and it’s difficult to find the right fit because businesses either hate or love the marketing company. And there seems to be mixed opinions, again, depending who you ask, but even, who is the good marketing company that’s out there?
Michael: Yeah. You can find someone that’ll say they love someone and someone else will say they hate someone every time. Well, she had settled on Flash in the Pan Marketing Company.
Brad: Oh, Michael. Now, who’s the boomer? Although it is a clever name, but I’m worried that this will only resonate with some of the older members of our audience. [00:11:00]
Michael: The more seasoned.
Brad: Yes, seasoned members of our audience. Why Flash in the Pan?
Michael: Well, this is an old expression. Don’t say it, Brad. One of the definitions that you can find, if you look up Flash in the Pan, is one that appears promising, but turns out to be disappointing or worthless.
Brad: That’s pretty bad.
Michael: Is that a foreshadow?
Brad: Yeah, that definitely paints a picture, I think, of where we’re going. So I want to make sure I’m following. She decides to engage Flash in the Pan Marketing, but a year before our story today?
Michael: Yes. Okay. Good. Good way to stay on point, Brad. So, Ms. Sarah made a mistake in this year ago timeframe. She did not call me when she decided to sign this agreement. She thought it was a boilerplate contract and she was anxious to get started.
Brad: Okay. Well, you raise an important point. Even responsible business owners get in the habit of signing vendor contracts without much thought to it, and [00:12:00] And we’ve seen this scenario play out all the time, especially with marketing contracts.
Michael: Yeah. And with marketing contracts in particular, it’s even more tempting to simply sign the contract. Their contracts often look like glossy proposals. Shocker, right? From a marketing company. And then they just kind of have a signature at the bottom of it. And it kind of feels like the blend of a glossy ad and a purchase order more so than a contract.
Brad: Except purchase orders are contracts, and the typical marketing contract has a ton of provisions that can be problematic if you’re not paying attention. So, are we finally ready to talk about the crisis, Michael?
Michael: Yes. Brad. You were relatively patient today.
Brad: Thank you.
Michael: Ms. Sarah called me with all, I mean, all the emotions to tell me she was trying to switch marketing companies, which was not the emotional part. The emotional part was that Flash in the Pan would not turn over control of her website. [00:13:00]
Brad: Okay. Now I’m the one that feels like I need some context here. Can you back up a little bit? Wait, what happened here?
Michael: Well, you know me, Brad. This is exactly what I said to Ms. Sarah. She said that, and now my context brain was going crazy. So I started asking those exact same questions. It turns out that Flash in the Pan had terrible results with SEO and that Switch Med Spa was being assigned a new marketing representative like every couple months.
Brad: Oh, yeah. Well, and audience members who don’t know, sometimes this happens where, especially with certain marketing companies, they assign somebody to you and they’re just fresh out of school with fresh ideas. And then like two and a half months later, the person you’ve been giving all your information to, they have a new person who’s going to work your account. And just unfortunately, there’s a lot of turnover in marketing companies where you’re not getting the results probably you want.
Michael: Yeah. I mean, and usually the kind of representatives, that’s a startup position, and so they’re in and out quickly. [00:14:00] Well, Ms. Sarah had started holding back on paying certain invoices that she disputed because the way their contract was set up, just a little context, is that she had a monthly fee that she paid in return for a lot of the SEO stuff. But then she would also hire them for special projects. It might be an ad campaign or something like that. And so she was having a problem with the inefficiency on these special projects from all these different reps. She believed she was getting triple billed for the same work that was never getting completed.
Brad: Oh, no.
Michael: She referenced different campaigns that never even came to fruition. And you know, as a note for the audience, she had not called us when any of this was going down, so this really festered to a true crisis.
Brad: Oh, no. This sounds like we’re getting into some of that 5/50 rule issue. And for those not familiar, when we talk about the 5/50 rule, this means that if you call an attorney up front [00:15:00] you’re going to pay them $5 to work…
Michael: Figuratively.
Brad: Or it’s a 5,000/50,000 rule, or you can wait till later and when it festers, as you said, it’s becoming a $50,000 issue.
Michael: You’re right on point, Brad. So, Ms. Sarah eventually with all this, had had enough and she was ready to get out. And so she was trying to go back to her old marketing company, at least as a placeholder while she was trying to figure out what to do in the long term. Flash in the Pan had different ideas. They said that they would not turn the website back over to Ms. Sarah until she paid the $50,000 in disputed invoices that she had not paid and paid the monthly that was due for the rest of the term, which amounted to like another $70,000.
Brad: Wow. This is really a 5/50 rule.
Michael: [00:16:00] I think what we should do next is going to commercial Brad, and then learn more about the story and what happened and talk about some of the legal implications.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto. I’m still here with my co-host, Michael Byrd. Now Michael, this season, our theme is Running a Business, and we were taking for good or bad real stories of our clients and the problems that pop up [00:17:00] when you’re operating in the operating season of your business. Now, Michael, Switch Medical Spa was in a bind, it sounds like, based on what you were kind of talking about. When we left for commercial, the website was being really held hostage by Flash in the Pan Marketing unless they paid well over a hundred thousand dollars in undisputed invoices. Let’s first break down the issues just with the marketing contract.
Michael: Yeah. There are two big issues. So first, let’s talk about how in the world Flash in the Pan marketing could hold the website hostage. And then second, we will move on and deal with the second issue, which is discussed this demand for payment for the $70,000 owed under the rest of the term of the contract.
Brad: Yeah. And I’ll take the first one on holding the website hostage. Audience members, this is kind of a weird area of law. As a general rule when you have something like with intellectual property, or on the street, IP, on the ownership of that IP, [00:18:00] it is initially owned by the worker, or the worker’s creator. So, in this case if you follow the traditional rules, and that we’re calling the website designer. They’re the creator of this work. So this has something to do with copyright law.
Michael: Yeah. And Brad, you can’t just say a fancy word like that. What is copyright law?
Brad: Oh, good point. So U.S. copyright law is, there’s both common law aspects to it or as we’ve talked about in other episodes, a way of registering with the United States Patent and Trademark Office. Much again, like the trademarks that we talked about earlier this season, basically, giving copyright owners certain exclusive rights. For example, the right to reproduce and make copies of their original work or the right to prepare derivative of their work based on their original work, meaning additional kinds of modifications to it, and the right to distribute copies to sell their actual work. And most people think of like maybe their favorite books or, or movies when they hear a word copyright. But again, this applies to almost any type of real creation.
Michael: Okay, Brad, that’s great and all, but we know that other businesses hire people to help create IP all the time. How does the business still get to own it when that happens?
Brad: Good point. So generally, there’s two ways this happens. So the first way is if the work is created by an employee like your W2 employee in the course of his or her employment, then if that happens, the employer owns the copyright, so they’re working for you. The second one is, if the work is created by an independent contractor, much like today’s story with this marketing company, the independent contractor will sign an agreement often called an industry like a work for hire or made for hire agreement, or if it’s part of the marketing agreement, as you said earlier, the business would confirm that they [00:20:00] have a, what you call, again, work for hire language in this agreement. And for the audience member, this means that this allows the business to own the copyright and not the independent contractor or the creator.
Michael: Here’s where it’s really tricky. So we talk about these marketing agreements and they’re nice and glossy and they have like little signatures at the bottom. What almost all of them don’t have is this magic language. They don’t have this work made for hire language. And so what that means is that the absence of language that most small business owners and entrepreneurs don’t even know to look for is that the marketing company owns the website and they’re basically licensing that right to the actual client. And so, the marketing companies don’t really want to own the website. They use this as a tactic – [00:21:00] as leverage to get what they want, which is to make sure they get paid and to lock people in. And so, we’ve had the, “my website is being held hostage” conversation countless times over the years because it’s a go-to strategy.
Brad: Well, Michael, that’s the first one. What is it? The website being held hostage. Let’s talk about the second issue. How are they demanding the payments of this? Well, because there’s almost over a hundred thousand dollars really.
Michael: So first, they’re buoyed by the fact that they have possession of the website, and so they have this confidence there. But there’s also common language in these marketing agreements that we’re in, unfortunately in Switch Medical Spa’s agreement that are problematic, so the termination provisions are really difficult to get out of. And sometimes they don’t even exist. So it’s not uncommon for a company to sign a five year contract and there’s [00:22:00] very limited or sometimes no ways to even get out of the agreement. And so you try to terminate and they’re like, fine, but you owe us the rest of the money that’s in the contract. And when you say, well, I’m not going to pay that. They’re like, fine, I’m going to keep the website. So it all works hand in hand in their strategy.
Brad: Yeah and that’s an important element. You know, we talked about holding hostage, but if you can’t even terminate an agreement, again, these are the things that – the hardest part of these things is when you’re hiring someone, you have this trust and it’s all puppy dog tails and cotton candy because you’re super excited about hiring them, but having a person look at that termination provisions is critical.
Michael: And one of the problems, kind of stepping back a little bit is, we noticed that small business owners are often quick to sign vendor contracts without seeking legal advice, so Ms. Sarah did. It’s super common. In fact, Ms. Sarah’s fantastic at engaging with us on what she believes are the big things, and she’s good at it. But the vendor contracts kind of just flow quickly. I mean, they’re ready to go. They’re want to do their marketing contract, it’s presented, it looks fine, it looks glossy. They just sign it. Let’s talk a little bit about some tools that our audience members can at least flag. Like, what’s the bare minimum best practices that they should check in a vendor contract?
Brad: Besides it being pretty?
Michael: Yes. I actually don’t think pretty is that important?
Brad: Yeah. Yeah. I was just making that up.
Michael: I mean, that’s why I partnered with you.
Brad: Oh right. I’m confused by that. So the very first thing, obviously just taking a step back is, look – we’ve talked about this. Is there an alignment of expectations? Do they really outline truly what they’re going to do on their behalf and how they plan to do this? So, that’s the first thing you start kind of going through and trying to see all the duties and obligations that they’re going to do inside the contract. So again, if they’re just kind of [00:24:00] saying, oh, we’re going to do A, B, and C, but it’s not in the contract. Again, it makes it a little bit harder from an enforcement perspective. But again, we always talk about in any of these – any kind of contract, the alignment expectation is critical. The second piece is, and I know this is one that most people overlook is, who’s signing it? Are you personally signing it or is your business signing it? And which is the entity that’s actually going to be providing the services? So we’ve seen situations where the wrong entity signed it and then they don’t have control of the entity. So again, who are the parties listed is actually another important element.
Michael: And a big go-to they’ll do, and you’ll see this a lot of times with equipment stuff is they’ll just list the name of the person as the party. And so now all of a sudden you’ve personally signed this vendor agreement and you’re personally liable for it. You don’t even enjoying the benefits of it.
Brad: And I I’m going to add one more piece to that, which is critical. So even if you have the entity’s name listed, so let’s go back to [00:25:00] Ms. Sarah’s Switch, it is listed, then when she signed, she wants to be signing as the officer or CEO or president. Again, another critical element to prove that she’s not doing it in her individual capacity.
Michael: I want to double click too, on your alignment of expectations. What you’ll see a lot of times in these vendor agreements, especially in the marketing agreements, is a surface level description of what’s going to happen, but not really double clicking on like what’s going to happen, what timeline’s going to happen. Like if you’re carrying expectations as the business owner on the timeline or the level of detail; you want to get on the same page and oftentimes add that in so that there’s clarity. But let me touch on a couple other areas that you should look at. So you talked about the entities and expectations; you also, if you’re looking at a down and dirty vendor contract, you want to [00:26:00] figure out how can you get out of the contract? Like, you sign onto this, what’s the escape clause? And that’s usually going to be a termination provision. If you can’t find one, that’s a pretty good sign that there’s not one.
And so understanding what kind of notice is required and basically how you can get out. So if it’s oftentimes clients think, well I can get out on 30 days’ notice. You’re like, yeah your risk is much lower because you can get out if this isn’t working. You also, kind of hand in hand, with that want to look at what are your post-termination obligations if you do terminate. So we mentioned, I mean, if you’re expected that you have to pay the rest of the monthly payments for the rest of the term, you have these financial obligations that could carry on even though you get out. You have clauses and vendor contracts where you can’t solicit their employees a lot of times [00:27:00] or you can’t compete sometimes, you’ll see non-competes buried in there, and then you might see personal guarantees and other strings attached that you want to make sure you understand go into this if you try to get out of the contract.
Brad: All good points. Maybe we can take a jump back into our story today, Michael. So what ended up happening with Ms. Sarah and Switch Medical Spa and their big dispute with Flash in the Pan Marketing,
Michael: We had an intense and emotional negotiation, so we’re following the 50 rule, not the five rule at this point. We got extremely close to litigation multiple times, and I had a litigator kind of teed up and ready to go.
Brad: He’s going to bring his baseball bat.
Michael: Yeah, pretty much. Ms. Sarah was extremely elevated because her website was being held hostage, so you can imagine, and Flash in the Pan [00:28:00] had played this game routinely and they would not budge hoping to get paid. Ultimately Brad, the parties resolved it with a payment of $30,000 in return for the website, which no one was happy with because they were hoping to get the hundred thousand and they realized Ms. Sarah wasn’t backing down and they believed that she would file a lawsuit. And so, I will say this, the level of conflict involved, kind of circling back to the beginning of the story, it was a great reminder of why I am glad I’m no longer a litigator.
Brad: Yeah. Well, and I think for audience members, Michael said this a little bit earlier when you have those vendor agreements, a lot of times the marketing people who you have the great relationship with who are trying to sell you that equipment or sell you the space or sell you their services, they’re not always the same people who you end up working with much less who comes on the enforcement side. So, not a fan of just blindly signing whatever that vendor agreement is. Make sure [00:29:00] you yourself kind of go through it or reach out to an attorney and make sure they have it. I mean, you said this earlier, I mean, having a “forever contract” with no ability to terminate ever. I mean, what if you don’t do the services, I’m still obligated to pay?
Now of course you’re not, but that’s more of statutorily than actually going through it. And so, there’s a lot of elements that you should just pause, then going back to our 5/50 rule, of just having someone look at it and refresh it and making sure that you understand what you’re getting into. I mean, you and I both know, there have been situations where I’m like, look, I know this company, they’re not going to modify this, but I still think you should know what you’re getting into so that you have eyes wide open as it relates to what you’re about to sign. And then if you’re okay with that risk, great, but don’t just jump into it, and treat every vendor like any other contract you would do. I think Michael, we’re getting close to the end, what are some of your final thoughts?
Michael: [00:30:00] Well, unless your dream is to one day appear on Judge Judy and you want to help me realize my dream to represent you on Judge Judy. There are some basic precautions that can be taken when you’re reviewing any vendor contract. Because of the nuances with marketing agreements in particular, these are especially important to not only review, but hire an attorney to help you make sure you’re protected.
Brad: Totally agree. Well, Michael, next Wednesday we deal with a real life crisis that happened at an IV Bar in Texas. Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com.
Outro: ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or [00:31:00] recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.