By Samuel Mason, Drinker, Biddle & Reath LLP
The word "Awesome!" concluding an exchange of informal text messages effected the amendment of a contract and resulted in a $1.2 million judgment, according to a Florida federal court interpreting Delaware law. The case underscores that contracts and contract amendments can be made without necessarily executing, by hand, a formal definitive agreement. Companies can take certain steps to minimize the chances of inadvertently making or amending a contract, as summarized at the end of this article.
CX Digital Media, Inc. vs. Smoking Everywhere, Inc.,1 involved an alleged amendment to an agreement between Smoking Everywhere, a seller of electronic cigarettes, and CX Digital, which provides advertising and marketing services through a network of affiliates.
The parties had a written agreement (the "Agreement"), the existence of which was not disputed, providing for Smoking Everywhere to place ads through CX Digital and its affiliates and for Smoking Everywhere to pay $45 to CX Digital for each completed "sale" to an ultimate consumer.2 All of this activity occurred through direct e-mails, websites or social media sites. The Agreement provided "Volume: 200 leads/day" and specified that CX Digital would forward the sales to a particular landing page uniform resource locator ("URL") of Smoking Everywhere.
CX Digital provided 670 sales during the month of August 2009 but never more than 200 sales on any given day and billed Smoking Everywhere $25,150, net of a $5,000 deposit. Smoking Everywhere never paid this bill, apparently because it had not received an itemized bill.
The real issue in the case related to CX Digital's bill for September in the amount of about $1,300,000, covering sales averaging 1,244 per day. Smoking Everywhere refused to pay this bill on the grounds that CX Digital had breached the Agreement by sending more than 200 sales per day and by sending those sales to different Smoking Everywhere URLs than the one specified in the Agreement. It is not clear from the case (nor is it clear whether this is due to an omission by the court or the defendant's pleadings) whether use of a different URL caused any particular problems for the defendant. CX Digital did not dispute that it had sent the increased number of sales to the different URLs but asserted that it was permitted to do so by an amendment to the Agreement which was concluded in a series of instant messages on September 2 between Nick Touris of Smoking Everywhere and Pedram Soltani, an account manager at CX Digital.
Before analyzing the arguments, the Court quoted a "long technical discussion about switching away from the ecig.smokingeverywhere.com link" mentioned in the Agreement, which Soltani changed and Touris tested in "real time" during the instant message conversation. The crucial interchange as to the sales limit was quoted as follows:
pedramcx (2:49:45 PM): A few of our big guys are really excited about the new page and they're ready to run it
pedracx (2:50:08 PM): We can do 2000 orders/day by Friday if I have your blessing
pedramcx (2:50:39 PM): You also have to find some way to get the Sub IDs working
pedramcx (2:52:13 PM): those 2000 leads are going to be generated by our best affiliate and he's legit
nicktouris (3:42:42 PM): I am away from my computer right now.
pedramcx (4:07:57 PM): And I want the AOR [agent of record] when we make your offer #1 on the network
nicktouris (4:43:09 PM): NO LIMIT
pedramcx (4:43:21 PM): awesome!
The Court held that under Delaware law, which governed the Agreement, assent to the modification of the Agreement may be made "wholly or partly by written or spoken words or by other acts or by failure to act" and that overt manifestation of assent – not subjective intent – controls the formation of a contract.3 Therefore, a formal signed writing was not necessary, and if the words or acts showed and conveyed intent to amend, the Court was not going to plumb the depths of the speaker's or actor's psyche to divine the true intent.
The Court concluded, from the content of the instant messages and the behavior of the parties, that assent was given to change the original URL to two new Smoking Everywhere landing pages. Furthermore, after the interchange, CX Digital sent all its affiliate traffic to the two new landing pages and Smoking Everywhere never complained. Testimony showed that Touris was monitoring the CX affiliate ads and would have been able to see that the traffic was being directed to the new landing pages.
As to the 200 sales per day limit, the crucial interchange was Soltani's message that "we can do 2,000/day by Friday if I have your blessing . . . . and I want the AOR when we make your offer Number 1 on the network." Touris responded "NO LIMIT." The Court held that Touris' response was a rejection of Soltani's proposal to do 2,000 orders a day and to be designated the agent of record, but a counteroffer that there was to be no limit on sales and CX Digital would not be designated AOR. Soltani's reply "awesome!" constituted an acceptance of this counteroffer.
The Court examined whether Touris might have been referring to something other than the 2,000 sales per day limit when he wrote "NO LIMIT" but the Court found that Smoking Everywhere offered no "plausible alternative interpretation" for this statement. Also the context of the interchange certainly related to a change in the number of leads. Therefore the Court concluded that the two parties agreed to modify the Agreement to eliminate the sales limit.
The Court then examined four arguments of Smoking Everywhere that even if there was an agreement to amend, it should not be enforced, as follows:
— 1.An oral modification of a contract must be proven with "specificity and directness"4
— 2.The Agreement provided that it "may be changed only by a subsequent writing signed by both parties."
In addition, the Court held that even if the instant messages had not qualified as an enforceable modification, CX Digital materially changed its position in reliance on Touris' statements and thus Smoking Everywhere would have waived or been estopped from asserting the position that the modifications to the Agreement must be in writing.
— 3.Smoking Everywhere did not give consideration [anything of value] for the modifications
— 4.Touris lacked the authority to bind Smoking Everywhere
Interestingly, the parties appear not to have raised, and the Court did not discuss, the question of whether the instant message communications constituted a signed writing under the Delaware Uniform Electronic Transactions Act7 and the Federal E-sign Act8. Basically, these statutes provide that electronic records and signatures may not be denied legal effect or enforceability solely because they are in electronic form. These statutes could have served as support for an argument that the instant messages constituted a writing signed by both parties.
To minimize the chances of inadvertently concluding or amending a contract, companies should consider:
1 No. 09-CV-62020, Order(S.D. Fla. Mar. 23, 2011)2 Though the opinion could be more clear on the point, it appears that a "sale"for purposes of the Agreement required only a completed registration form for a free trial, and not an actual purchase of a Smoking Everywhere product. Put another way, the $45 payment was due if CX Digital produced a lead, not a purchase. This point is certainly important in terms of the economics of the deal but not to the legal contract analysis.
4 Smoking Everywhere cited Continental Ins. Co. v. Rutledge & Co., 750 A.2d 1219, 1230 (Del. Ch. 2000) (quoting Reeder v. Sanford School, Inc., 397 A.2d 139, 141 (Del. 1979)) and Reserves Dev. LLC v. Severn Sav. Bank, FSB, No. 2502-VCP,2007 BL 148410 at *25 (Del. Ch. Nov. 9, 2007).
5 Restatement (Contracts) § 149; Pepsi-Cola Bottling Co. of Asbury Park v. Pepsico, Inc., 297 A.2d 28, 33 (Del. 1972); see also J.A. Moore Construction Co. v. Sussex Associates. Ltd. Partnership, 688 F. Supp 982, 988 (D. Del. 1988).
6 Haft v. Dart Group Corp., 841 F. Supp. 549, 567 (D. Del. 1993).The defendant did not argue that the Delaware Statute of Frauds, 6 Del. Code Section 2714, required the purported amendment to have been signed by the parties. A footnote in the case stated that in any case the statute was inapplicable to the instant message modification. The footnote did not mention that another Statutes of Fraud provision, to be found in the Delaware version of Uniform Commercial Code Section 2-201, would not have applied because the Agreement provided for the sale of services by CX Digital, not goods.
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