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


The Court held that the "specificity and directness" requirement was met for the same reasons underpinning the Court's conclusion that the parties intended to modify the Agreement. The Court read the e-mails excerpted in one of the cases cited by Smoking Everywhere, and concluded that there, "the parties had discussed different options orally but never reached any agreement." In contrast the "no limit" message and the increase in volume of leads that immediately followed provided "specific and direct support" that the change was intended.

— 2.The Agreement provided that it "may be changed only by a subsequent writing signed by both parties."


The Agreement contained the typical boilerplate clause that it "may be changed only by a subsequent writing signed by both parties." However the common law rule, followed by Delaware, is that "an oral agreement is sufficient to modify or rescind a written contract, notwithstanding a provision in the written contract purporting to require that subsequent modifications be evidenced by writing."5 The Court held that if oral statements were sufficient then an instant message conversation would be as well.6

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


Smoking Everywhere's third argument, that there was no consideration as required to form an agreement to be enforceable, was easily disposed of. CX Digital promised to provide sales on an unlimited basis and Smoking Everywhere promised to pay $45 per sale and in addition CX Digital materially changed its position in reliance on the modification, which also constitutes consideration.

— 4.Touris lacked the authority to bind Smoking Everywhere


Finally, Smoking Everywhere asserted that Soltani was aware that Touris was required to obtain approval from the president of Smoking Everywhere before execution of the initial Agreement and thus should have known that Touris was not authorized to amend it. However, in his opening statement Smoking Everywhere's counsel indicated that CX Digital was informed that the president's approval would be required only after the litigation commenced. Prior to that time Touris had apparent authority to bind Smoking Everywhere, as far CX Digital was concerned. He was vice president of marketing, he negotiated and signed the original Agreement and he worked with Soltani to change the URLs simultaneously with the instant message exchange.

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:


  • educating officers and employees about the possible effect of oral statements or informal e-mails

  • providing in contracts that only specific named officers have authority to make or amend contracts.

  • including in e-mails and instant messages an automatic legend to the effect that they do not constitute an offer, acceptance or binding agreement.


Samuel Mason is a partner in the Philadelphia office of Drinker Biddle in the Corporate & Securities Group. Sam has practiced for more than 30 years in the areas of mergers and acquisitions and corporate finance, both in the U.S. and internationally. He can be reached at Samuel.Mason@dbr.com or (215) 988-2642.

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.

3 Restatement (Second) Contracts, § 19 (1981); Industrial America, Inc. v. Fulton Industries, Inc., 285 A.2d 412, 415 (Del. 1971).

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.

76 Del. C. §§ 12A-101 et seq.

815 U.S.C. §§ 7001 et seq.

Legal Topics:


Contracts
Electronic Marketing & Advertising
Interpretation & Scope
Legal Drafting
Modification
Oral Agreements
Technology Law
Technology Transactions

Industry Topics:


Online Advertising & Marketing

Disclaimer


This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.