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Tech Bankruptcy
May 24, 2014
  FTC to the Bankruptcy Court: Do it Right or Appoint a CPO
In a May 22 letter from Jessica Rich, Director of the FTC's Bureau of Consumer Protection to the United States Bankruptcy Court for the Southern District of New York, the FTC drew a line in the sand in the ConnectEDU bankruptcy case. ConnectEDU was a venture funded tech start-up that provided data-driven services to help college students evaluate career options and paths.

The letter (the FTC also filed a formal objection with the Court) pointed out that ConnectEDU collected information from students under a privacy policy promising that “In the event of sale or intended sale of the Company, ConnectEDU will give users reasonable notice and an opportunity to remove personally identifiable data from the service.” The letter insisted that the Court either condition the sale on the company complying with that provision of the privacy policy or appoint a Consumer Privacy Ombudsman prior to the sale. Procedural oddities aside (the sale hearing itself was scheduled for May 23 on an emergency basis, leaving little time for appointment of a CPO), the letter is interesting because of the implications inherent in the FTC's dual request. Either the sale terms must change to make the sale itself consistent with the privacy policy OR the court should appoint a CPO. This implies an acceptance by the FTC that the court, with the CPO's guidance, might allow a sale that does not give users advance notice and an opportunity to remove personally identifiable information from the service prior to the transfer. 

The hearing date was moved to May 27 prior to the hearing, so it remains to be seen what action will occur in the case, but given the FTC's objection, it seems likely the US Trustee's Office will appoint a CPO.

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May 11, 2014
  When is a Contract Not a Contract?
Simple answer - when it is really two contracts. In Physiotherapy Holdings, Inc., the United States Bankruptcy Court for the District of Delaware examined the issue of contract integration.

The debtor in this case faced an unusual dilemma. The court had affirmed its Chapter 11 plan, but it still needed to address an essential software license with Huron Consulting Services. The debtor absolutely needed the software to operate - at least for the six to nine months needed to switch to new systems. But, the software license was governed by a Master Agreement, which, among other terms, required the debtor to indemnify Huron against certain claims a litigation trust was planning to bring. If the debtor assumed the Master Agreement/Software License as an integrated contract, the reorganized debtor would have to insure Huron against the coming storm - a prohibitively expensive proposition. On the other hand, if the debtor rejected the contracts it would have to cease operations - since access to the software was essential. And, because the debtor's plan had been confirmed, no further delay was obtainable.

The debtor attempted the middle road. It asked for leave to assume the software license while rejecting the Master Agreement. Ordinarily, a debtor must assume or reject an executory contract in its entirety. The debtor may not assume the parts of a contract it wants, while rejecting the rest. The same rule applies when several agreements are designed to work together as an integrated contract. The debtor must reject or assume the integrated contract in its entirety.

The court closely examined the provisions of the Master Agreement and the license agreement. Executed as part of a single business arrangement, the Master Agreement terms governed, and were incorporated into, the license agreement. However, the court noted that at several places in the combined contracts provisions made clear that where the specific contract had provisions conflicting with the Master Agreement's terms, the specific agreement's terms would control. In particular, the Master Agreement contained broad indemnification provisions while the license agreement contained only a subset of the indemnifications' scope. By carefully reviewing the contracts' provisions, the Court was able to support a finding that the license agreement constituted a stand-alone agreement, even if some of its terms were derived from the Master Agreement. The debtor could assume the license agreement, while rejecting the Master Agreement.

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A blog discussing the impact of technology on bankruptcy law and practice.

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Location: Boston, Massachusetts, United States

Warren E. Agin is a partner in Swiggart & Agin, LLC, a boutique law firm in Boston, Massachusetts focusing on the needs of technology companies. Mr. Agin heads its bankruptcy department. The author of the book Bankruptcy and Secured Lending in Cyberspace (3rd Ed. West 2005), Mr. Agin also chaired the ABA's E-commerce and Insolvency Subcommittee from 1999 to 2005, co-chaired the Boston Bar Association's Internet and Computer Law Committee (2003-2005), and served on the American Bar Association's Standing Committee on Technology and Information Services (2008-2011). Mr. Agin currently co-chairs the Editorial Board of Business Law Today. A contributing editor to Norton Bankruptcy Law and Practice, 3d, and co-author of its chapter on intellectual property for the past fifteen years, he is author of numerous legal articles and addresses on topics of technology, internet and bankruptcy law.

FTC to the Bankruptcy Court: Do it Right or Appoint a CPO
When is a Contract Not a Contract?
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