Wednesday, October 28, 2025
Executive Summary
Greenberg Traurig shareholders Brent Sokol and Alex Lindhardt examined the three recurring liability traps in technology consulting exclusivity agreements — strict liability knowledge provisions, vague timing triggers, and the interplay between contractual breach and tort fraud — concluding that the California Supreme Court’s 2024 decision in Ratigan has fundamentally unsettled the economic loss rule by holding that fraudulent concealment claims survive even when the concealing conduct simultaneously constitutes a breach of contract.
Instructor(s)
Brent Sokol,Greenberg Traurig
Alex Linhardt,Greenberg Traurig
Keywords
Ratigan v. Uber Technologies — California Supreme Court economic loss rule fraudulent concealment 2024 • economic loss rule — California — tort vs. contract liability distinction • fraudulent concealment claim arising from contractual relationship — post-Ratigan doctrine • technology consulting agreement exclusivity provisions — restrictive covenants • Medicalgorithmics S.A. v. AMI Monitoring, Inc. (Del. Ch. 2016) — timing of exclusivity violation • EMC Corp. v. Kempel (D. Mass. 2001) — strict liability restrictive covenants • Robinson Helicopter Co. v. Dana Corp., 34 Cal. 4th 979 (2004) — fraud exception to economic loss rule • fiduciary and confidential relationship duties in consulting agreements • when does an exclusivity clause in a consulting agreement get violated? • can a consultant be sued for fraud if they breach a nondisclosure or exclusivity agreement? • exclusivity waiver request provision — notice and approval best practices • independent development defense — startup consulting contracts and competing activities
Legal Analysis
Three Structural Hazards in Technology Consulting Exclusivity Agreements: Strict Liability, Vague Triggers, and the Absence of a Waiver Mechanism
Technology consulting agreements that include restrictive or exclusivity covenants routinely expose their signatories to three categories of liability that are poorly understood at the time of execution. The first, which Sokol illustrated through EMC Corp. v. Kempel, No. 00-10853-GAO (D. Mass. 2001), involves what he termed a “strict liability” provision: contractual language that charges the obligor — the person bound to refrain from certain activities — with knowledge of facts that may be practically unattainable. In Kempel, the employee’s non-compete agreement prohibited him from developing products “being developed by his employer as of the date of his termination,” a formulation that, as Sokol observed, does not turn on whether the employee actually knew what his employer was developing. The court enjoined the defendant’s competing activities despite his argument that he had no personal knowledge of the products in question, demonstrating that an obligor can be held liable under language that “charged him with knowledge that he didn’t fully have.” Sokol cautioned that signatories must evaluate, before executing any such covenant, whether they will realistically be able to determine whether they are in compliance.
The second structural hazard is what Sokol called the “timing concept”: the question of when, precisely, an obligor’s conduct crosses the line into a violation. Medicalgorithmics S.A. v. AMI Monitoring, Inc., C.A. No. 10541-VCS (Del. Ch. 2016), addressed a license agreement that prohibited the defendant from “seek[ing], develop[ing], engag[ing], promot[ing], or market[ing] any technology to replace” the licensor’s products. The defendant argued that merely having pre-development conversations about acquiring a competitive product did not constitute “seeking” a replacement, since no product existed. The Delaware Court of Chancery rejected that position, holding that the plain meaning of the contract’s expansive language “did not require that a replacement product must be ready for use,” and that the agreement was “designed to ensure there can be no running start to begin work on the replacement.” The court found a violation based on five low-threshold acts: discussing the replacement product, visiting production facilities, referencing an interest in developing competing products, drafting a letter of intent for a joint venture, and preparing an outline of that proposed venture. Sokol emphasized that the practical lesson is to identify, before signing, the specific “trip wire” that triggers a violation, recognizing that courts have generally declined to require a concrete “landmark event” before finding breach.
The third concept, and the one Sokol presented as a partial solution to the ambiguities created by broad trigger language, is the exclusivity waiver request provision — a mechanism requiring the obligor to provide advance notice of contemplated activities and obtain the obligee’s approval before proceeding. Such a provision converts what would otherwise be a binary violation-or-not analysis into a collaborative disclosure process that, as Sokol noted, “builds in . . . better knowledge” for both parties and allows them to decide whether to continue the relationship or part ways. The case Sokol discussed in this context involved a contract requiring notice before an advisor “participate[d] in the formation of any business or commercial entity in the field of interest,” with the court construing the trigger as occurring upon the advisor’s planning to provide services, not merely upon the formation of the competing entity — demonstrating that waiver provisions must themselves be drafted with precision. Sokol recommended that for consulting agreements subject to ongoing renewal, parties build into each renewal cycle a formal addendum that memorializes disclosed and approved activities, creating a contemporaneous record that forestalls later disputes about whether a particular competing engagement was sanctioned.
The Economic Loss Rule After Robinson Helicopter: Why Fraudulent Concealment in Consulting Agreements Was Never Simply a Contract Claim
The economic loss rule, as Lindhardt described it, is the doctrinal boundary that “prevents the law of contract and the law of tort from dissolving one into the other,” or, in another formulation he cited, prevents contract law from “drowning in a sea of tort.” In its operational form in California, the rule provides that a plaintiff may not recover tort damages for purely economic losses — financial harm unaccompanied by personal injury or property damage — that arise from conduct that also constitutes a breach of contract. The rule originated in early twentieth-century product liability law as a necessary counterweight to the development of strict liability doctrines for consumer products: courts creating draconian tort liability for dangerous products needed a limiting principle to prevent that liability from extending to every commercial disappointment. Lindhardt cautioned that despite its apparent simplicity, the economic loss rule has generated substantial confusion in the courts, which, he noted, “often struggle even today” to define its parameters precisely.
The foundational California authority on the fraud exception to the economic loss rule is Robinson Helicopter Co. v. Dana Corp., 34 Cal. 4th 979 (2004), in which the California Supreme Court held that contracting parties cannot allocate away liability for affirmative common law fraud. The Court’s reasoning, as Lindhardt recounted, was that while “parties . . . because of their technical experience and sophistication, can be presumed to understand and allocate the risk relating to negligent product design or manufacture, those same parties cannot and should not be expected to anticipate fraud and dishonesty in every transaction.” Robinson thus established that the economic loss rule was designed to confine negligence, not to eliminate tort liability for intentional misconduct. What Robinson left unresolved, however, was whether that exception extended equally to fraudulent concealment — the failure to disclose material facts — as opposed to affirmative misrepresentation. Lindhardt noted that for decades following Robinson, courts were “mixed” on this question, creating substantial uncertainty for parties whose contractual disclosure obligations overlapped with the common law duty not to conceal.
The practical significance of this unresolved gap was most acute in consulting agreements with periodic disclosure obligations. Lindhardt offered a concrete illustration: a consultant required by contract to disclose her activities for other companies might fail to reveal that she is, in fact, serving as CEO of a competing startup. That consultant might concede breach of the disclosure provisions while arguing that the economic loss rule foreclosed any parallel fraud claim. Lindhardt characterized this position as a misunderstanding of the rule’s scope: “a lot of people drafting consulting contracts aren’t necessarily thinking about the interplay between their specific contractual language they bargained for and general common law tort duties.” The consequence of this gap in understanding is that a consultant who treats a contractual breach as an “efficient breach” — accepting that she owes contract damages while believing her exposure is capped — may simultaneously be exposed to a fraud claim and, critically, punitive damages for willful and malicious concealment.
Ratigan v. Uber and the Post-2024 Landscape: When Contractual Disclosure Obligations Create Rather Than Foreclose Fraudulent Concealment Liability
Ratigan v. Uber Technologies, Inc. (Cal. 2024) — a long-awaited California Supreme Court decision arising from a Ninth Circuit certified question — resolved the multi-decade uncertainty over whether the economic loss rule bars fraudulent concealment claims that arise from a contractual relationship. The plaintiff, an attorney representing Uber subsidiaries, alleged that Uber had concealed an unlawful product launch in Buenos Aires, exposing him to Argentine government investigations and a travel ban. He asserted both breach of his retainer agreement and a common law fraudulent concealment claim based on identical underlying conduct. The district court dismissed the concealment claim as barred by the economic loss rule; on appeal, the Ninth Circuit certified to the California Supreme Court whether, under California law, a fraudulent concealment claim falls within the rule’s scope. The Supreme Court held that it generally does not: “There is no principled reason to treat fraudulent concealment claims in the performance of a contract any differently from those based on affirmative misrepresentation.”
The doctrinal basis of the holding was the Court’s recharacterization of the economic loss rule itself. Lindhardt explained that the Court clarified the rule as “a specific and narrow doctrine that applies to negligence and strict liability torts” and “does not extend to intentional torts at all.” The Court articulated two central questions for evaluating whether a concealment claim survives in a contractual context: first, whether the elements of the concealment claim can be established independently of the parties’ contractual rights and obligations — meaning there must be a freestanding tort duty, not merely a violation of contractual terms; and second, whether the concealing conduct exposed the plaintiff to a risk of harm beyond the reasonable contemplation of the parties when they entered into the contract. Lindhardt also noted that the Court articulated what some courts have read as a supplementary three-prong test — requiring courts to ascertain the full scope of the contract, determine whether an independent tort duty exists, and assess whether all elements of the tort can be established apart from contractual rights — creating, as he predicted, “a lot of confusion among lower courts” as to which formulation governs.
Ratigan introduced a doctrinal irony that Lindhardt identified as one of the decision’s most practically significant implications for consulting agreement drafting. The Court suggested in dicta that where parties expressly address the risk of concealment in their contract — by building in detailed disclosure obligations, remedies for non-disclosure, or acknowledgments that one party might withhold facts — a court might find that the parties “went into the contract clear eyed” as to the risk of concealment, potentially defeating the second prong of the Ratigan test. As Lindhardt observed, this creates an almost paradoxical dynamic: “the more you try to expressly write into your contract various provisions addressing concealment and disclosure through specific crafted contractual terms, the more it may appear to a court that the parties did in fact contemplate that one of the parties would breach the contract by concealing something,” which could reduce fraud exposure. Lindhardt also flagged that Ratigan applies only to fraudulent concealment arising in the performance of an existing contractual relationship; it does not govern pre-contract conduct, which under Lazar v. Superior Court, 12 Cal. 4th 631 (1996), remains subject to independent fraudulent inducement liability regardless of what the contract provides. For consulting agreements with exclusivity provisions, the post-Ratigan analysis turns in the first instance on whether the consultant owes a common law duty of disclosure — which may arise from a fiduciary or confidential relationship, the consultant’s exclusive access to knowledge of her own competing activities, the act of making partial disclosures that trigger an obligation to complete them, or the material nature of the concealed information.
Generated by AI based on the Interview/Transcript below.
Key Takeaways
- Ratigan ends the economic loss rule defense to concealment claims. The California Supreme Court held in Ratigan v. Uber Technologies, Inc. (Cal. 2024) that the economic loss rule is a narrow doctrine applicable to negligence and strict liability torts and does not bar fraudulent concealment claims arising from a contractual relationship, meaning a consultant who breaches disclosure obligations may face simultaneous contract and fraud liability, including punitive damages.
- Strict liability provisions charge unknowable facts. Sokol drew on EMC Corp. v. Kempel (D. Mass. 2001) to illustrate that exclusivity covenants can bind an obligor to compliance with facts they cannot practically ascertain, and cautioned: before signing, evaluate whether you will “actually . . . be able to determine whether you are violating your agreement.”
- Early triggers require no finished product. Medicalgorithmics S.A. v. AMI Monitoring, Inc. (Del. Ch. 2016) established that merely discussing a replacement product, visiting a competitor’s facility, or drafting a letter of intent can constitute “seeking” a competing product under broad exclusivity language, because agreements are “designed to ensure there can be no running start.”
- Identify the trip wire before signing. Sokol advised that every exclusivity agreement should be reviewed to identify the specific event that triggers a violation, and that from the obligor’s perspective, tying the trigger to a definite, observable event — such as formation of a company — is far preferable to language keyed to the act of “seeking” or “planning.”
- Waiver request provisions reduce risk for both parties. Sokol recommended building a prior notice and approval mechanism into any technology consulting agreement with a restrictive covenant, creating a disclosure pathway that allows both sides to assess competing activities in real time rather than litigating violations after the fact.
- Efficient breach thinking is dangerous after Ratigan. Lindhardt warned that a consultant who treats a contractual breach as merely an “efficient breach” and accepts contract damages as the ceiling of her exposure may simultaneously face a fraud claim and punitive damages: “the same exact conduct that caused the contractual breach is also violating common law duties that aren’t written down in the contract.”
- Detailed concealment provisions may reduce fraud exposure. In a doctrinal irony Lindhardt flagged as significant, Ratigan suggests that the more a contract expressly addresses the risk of concealment and non-disclosure, the more a court may find the parties contemplated that risk, potentially defeating the “beyond reasonable contemplation” prong of the test and reducing fraud liability.
- Ratigan does not reach fraudulent inducement. Lindhardt emphasized that Ratigan applies only to concealment in the performance of an existing contract; pre-contract fraudulent inducement claims remain governed by separate authority and cannot be defeated by pointing to the contract’s terms.
- Field of interest definitions should be anchored to publications or websites. Sokol recommended that parties define “field of interest” by reference to the obligee company’s own website language or the obligor’s published biographical sketches, which he noted “does not usually create a lot of dispute, because people in the field have very accepted definitions.”
- Renewal cycles are minimum disclosure checkpoints. Sokol advised that at minimum, every agreement renewal should require a formal addendum disclosing and approving all current competing activities, supplementing — but not replacing — the obligation to disclose in real time before any potentially conflicting engagement begins
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Interview/Transcript
This transcript was session four of an eight-part BCLT-Oregon Start Up Series. On October 28, 2025 leading legal experts Brent Sokol and Alex Linhardt of Greenberg Traurig discussed Understanding Exclusivity Provisions in Technology Consulting Agreements.
Allison Schmitt 00:30
Hi and welcome to today’s Startup Series Program: Understanding Exclusivity Provisions and Technology Consulting Agreements. I’m really excited for today’s program, which I think is going to be very informative — not only for those of you who are looking to start a startup company and may be encountering these issues, but for faculty who may be listening in or others who are working through the questions of how to deal with consulting agreements and really thinking carefully about what exclusivity means in these spaces. So we’ve got two expert presenters who are joining us today, it’s my pleasure to introduce you to them. So first, we have Brent Sokol who is a shareholder at Greenberg Traurig. He has over 30 years of experience representing medical device companies, biotech companies and companies in other technology areas in a wide range of disputes. So patent infringement, inventorship issues, as well as copyright, trademark, trade secret contract, purchase interference and DMCA and piracy claims. I’m going to put in a little shout out for a set of programs that Brent did with me about a year and a half ago related to inventorship. If you are encountering patent inventorship issues with the development of your company, you should check out the B-CLE series on inventorship. It’s extremely helpful. Brent comes to the practice with the background as a biomedical engineer and as a registered patent attorney, and so he’s been heavily engaged in thinking carefully about how to present facts and argument to judge and jury. In addition to his litigation practice, he’s spoken locally and nationally about global restructuring of corporate IP and in particular, company rights and the rights of lenders with respect to how those restructurings work. Joining Brent today is Greenberg Traurig shareholder Alex Lindhardt, who is a business litigator. His practice is also quite expansive, and we’re lucky to benefit from his knowledge. He works on contractual claims, business torts, partnership disputes, security fraud and shareholder derivative lawsuits. So he’s handled a wide range of disputes for Fortune 500 and international companies. A few examples include Samsung, Meta, Goldman Sachs, JP Morgan Chase, Wells Fargo and Hyundai. So he’s been involved extensively in both trial and arbitration settings and numerous practice areas, including life sciences. So with that, I think we’ll go ahead and get the program started. Brent’s going to be leading off for us. I’m going to start by posing Brent a question. So our title for the program today is ‘Understanding Exclusivity Provisions and Technology Agreements.’ When we say “technology,” what do we mean here? Are we focusing just on our particular area of technology, or is the advice that we’re going to be hearing today expansive across many areas of technology?
Brent Sokol 03:23
Our presentation today is for educational purposes only. It may not be used for any other purpose. These views are Alex and my views alone to help educate the BCLT and University of Oregon communities, and they do not reflect the views of Greenberg Traurig or its clients. Well, Allison, first of all, let me say it’s always a pleasure to work with you, both at BCLT and at your new job at University of Oregon, and we’re really pleased to coordinate with you again. I answer your question by saying these technology exclusivity provisions arise in many different technology contexts. So professors and entrepreneurs in a variety of areas will be faced with questions concerning what they can do while they’re consulting or starting up a company, with respect to other contractual obligations that they may have. And oftentimes those agreements are not very well thought through. They can be short agreements, even just two or three pages. And each industry, whether it’s biotech or electronics or networking, they have their own language, which is often vague. But for our purposes of our talk today, we’re going to explore three concepts that seem to arise in any technology concept, and my hope is that as a result of this talk, that your constituents, professors, VCs, and startup founders will think more about these particular concepts when they’re signing agreements that involve technology and some range of exclusivity. So the first case I want to discuss is called EMC Corp v. Kempel. It is a case from 2001 in Massachusetts, not a particularly famous case. And for those of us in California, it deals with an issue that won’t arise here in California because it is deals with an unenforceable exclusivity provision, or a post employment restriction on competition. So in California, and this is beyond the scope of this talk, there are specific statutes and case decisions that would prevent this type of agreement. But why it’s useful is because it puts squarely in mind the concept that some agreements will charge the person signing it — someone we would call the obliger, the person who is obliged to refrain from particular activities –they charge that individual with knowledge that they may not have and may not even have the ability to obtain. So let me explain by giving you some of the case facts. In this case, there was an individual who worked for the first company, this was an IT employee, and that individual wanted to start up his own company. And that IT company was developing the same kinds of data storage software that the employer was marketing. So again, in California, this kind of post employment restriction would not be enforceable, but it’s useful, because this type of provision arises in any type of technology agreement with a restrictive covenant. So in this agreement, I’ve quoted the exact language. It prohibited the employee from directly or indirectly competing with the company in any manner. So you’ll note that that’s very broad. And from the employer standpoint, that’s certainly desirable, because it seems to at least create an argument that almost anything could be indirectly competing. The thing to focus on in this language is that it also specifically required him not to develop products that were products or services being developed by his employer as of the date of his termination. I don’t know about you, but I don’t know everything that Greenberg Traurig is doing. We’re a firm with offices all around the world and over 2500 lawyers, so if somebody were to charge me with knowledge of everything that our firm was developing, I would be concerned because that’s not my job. Similarly, this employee did not know what his employer was developing, and so that’s what this dispute was about. The employee then argued that he had not violated the provision because he didn’t personally know about these products at his former employee. Next slide, please.
Brent Sokol 10:03
So the court was unsympathetic to that argument. The court in Massachusetts enjoined him from the activities, because the Court said in this contract language, it didn’t matter what the clients or the employees’ new company did. It just mattered what his prior employer did. And the trouble with that is he signed an agreement that charged him with knowledge that he didn’t fully have. So this is what’s called a strict liability revision, and it’s something to consider when you’re signing: Are you actually going to be able to determine whether you are violating your agreement? And if there are facts that you are charged with that you actually have no ability or had not learned of, but you’re still liable for it, that’s called strict liability. So this is a concept that occurs in a lot of technology agreements, and it’s something to watch out for. Next slide please.
Brent Sokol 11:33
This case illustrates a second concept for those of you who sign agreements, whether they be consulting agreements with a variety of startup companies, or if you’re in a startup company and you’re hiring consultants, this is another concept that often appears and I call it the timing concept. Meaning, when does the obliger — the person who’s saying, I won’t do X, Y and Z — when did does he or she step over the line and do an activity that violates the agreement? So in this Medicalgorithmics v. AMI case, a Delaware chancery case from 2016, the judge, who was the trier of fact, was presented with this contract language, and it was in the context of a license agreement. So during the term of the license agreement, the defendant could not seek, develop, engage, promote, or market any technology to replace the suppliers’ license product or services. So the key here is that this agreement included the word seek, which is a fairly vague but also broad language. When does someone cross the line into seeking? If you search on the internet because you have an idea for a company, is that seeking? When do you cross the line into development? You make a sketch at home on your notepad? So in this case, what triggered the dispute is the defendant became involved in pre development negotiations to own and market a product that would be competitive. So this defendant had had conversations about obtaining a product. Next slide, please. So the argument here by the defendant was it just meant he couldn’t take steps to market a competing product, and because there was not actually a product developed, he was only having a conversation with a third party about potentially acquiring a product that he had not triggered the restrictive provision. The language of the agreement, which I’m encouraging you to look at, was upheld, and the trial court rejected that argument. Here was the reasoning. Next slide, please. The court read the language and said the plain meaning of seeking or developing does not require that a replacement product must be ready for use. In other words, it could just be a conversation with someone about a potential product. The court noted the expansive contractual language did not require a landmark to occur, such as the creation of the product or the sale of the product, but the language was designed to ensure there can be no running start to begin work on the replacement. So this second concept about the timing of when a violation begins is very important. There’s often not a bright line or a landmark that would occur that these agreements are tied to. It’s usually more vague than that. So going back to my analogy, if you search up a competing product on your home computer, are you seeking a replacement product? In this case, as the next slide will show, the court believed there was a running head start, and the court looked at these five actions to constitute a violation. One, the defendant discussed the replacement product. Okay. That’s a pretty low threshold. Second, that individual visited the production facilities. The individual referenced an interest in developing its own products. Individual drafted a letter of intent to discuss a joint venture, so that’s a bit more concrete. And the individual prepared an outline of that proposed joint venture. That isn’t getting very far down the line. Yet the agreement, in the courts view as the trier of fact, believed that that was seeking a replacement product. So one of the things I hope for you to get out of this talk is to track in your agreements that you’re signing: what is the trip wire? What triggers a violation? And then at that point, it’s a matter of negotiation. The company that wants the restrictive covenant will try to maintain an early trigger because they don’t want to have someone they’re doing business with at the time to have a running head start. They would prefer the relationship to and then the individual can do what they want. And if you’re the individual signing these agreements, you would prefer to have something that is more definite so you know whether simply discussing a replacement product would violate the agreement. So that brings me to my final case that I want to discuss, and the issue in this case was a contract that had language that had an early trigger, I would say. It said, and I’ve highlighted this language, that the individual cannot participate in the formation of any business or commercial entity in the field of interest. So as an aside, field of interest should always be well defined, and usually individuals in the field can come up with a sufficiently definite definition that both sides understand. “Participate in the formation” is a little more vague. And so the third concept that I want to get is that if there are early triggers, one way that both sides can be satisfied that nothing improper is happening — in other words, there’s not a violation of the contract — is to include what’s called an exclusivity waiver request or exclusivity waiver form. This contract had such a provision and such a form. So what’s the advantage of that? That gives the parties a chance to get more information about what the proposed activities are going to be, and then they can decide whether they want to continue their current relationship or not. That way, both sides have better knowledge and can decide what to do, and if it’s done correctly, it can also avoid a dispute down the road. Next slide, please.
Brent Sokol 20:52
So in this case, there actually was a dispute over when the exclusivity waiver request had to be provided. So I would submit that that’s a better situation for both parties to be in than having a dispute about whether the activities have improperly begun. Because at least this way, if it’s done correctly, and there’s advanced notice, the parties can decide what to do, and whether to continue the relationship. In this case, the advisors position was that the contract language did not require the submission of the exclusivity waiver before a competitor is actually ready to begin developing and commercializing the technology. So it ties in this second concept of ‘when is the trigger’ of the violation to occur. The court looked at the language of the exclusivity waiver, and coupled that with the language of the ‘thou shalt not participate in the formation,’ and it construed this duty for the jury instruction to state if the advisor planned to provide services to or otherwise participate in any other company in the field of interest. That’s when the trigger to submit the exclusivity waiver request occurred. So the key language here is planned. So this provision was triggered upon the planning by the advisor, which of course, occurred even earlier than the participation. I would submit this third concept, if it’s not in the restrictive covenant agreements that you’re signing, is a good way to reduce risk and to promote better understanding amongst both parties. But of course, the provision or the exclusivity waiver form needs to be followed. So with that, hopefully you will keep in mind these three concepts that appear in almost every technology agreement with a restrictive or exclusivity covenant. First of avoiding contracts that require strict liability, that that holds someone liable regardless of what they know. Second concept is, look at when the trigger occurs and often the contracts will have broad language where there’s no landmark event that creates the trigger. And then third, a potential solution for these kinds of ambiguities is to require a submit, basically notice and approval in order to proceed. So with that, I’m happy to –Allison, if you’d like to ask me some questions or make your own points.
Allison Schmitt 24:33
I do have some questions for you, but I want to stop here for a second and say that I think that that list of — I think of it almost as a checklist of things that you need to be looking for if you’re the person contracting out your services — is a really important list to keep in mind as you’re reviewing these types of agreements. So the top of the slide here says ‘Best Practices for Obligor.’ I told you I was going to ask you this question. I think one of the challenges as faculty, as leaders of startup companies, as investors, fortunately or unfortunately, you do get to dip your toe into the legal world, and we have a lot of terminology that we get comfortable with going back and forth. But I think in some of the questions I have for you on this slide, Brent, are really directed to making sure that what we mean by the terminology is clear. And so when you’re talking about the obligor here, who are you talking about?
Brent Sokol 25:32
So an obligor is the person who’s obliged to do something, and you’re correct. This is classic legalese, but it also is probably the best term to describe the individual. It’s somebody who’s obliged, and who has to do something because of an agreement. And in this case, we’re talking about restricting their activities.
Allison Schmitt 26:01
Yeah. So this is the person
Brent Sokol 26:03
For bonus points: the obligee is the individual who receives that promise.
Allison Schmitt 26:13
Gotcha. So what we’re really talking about here, for the obligor, is the person, typically, we’re talking about the person who’s performing services in one of these agreements, and we’re talking about restricting their ability to do certain types of things.
Brent Sokol 26:25
That’s correct.
Allison Schmitt 26:26
And so I find your takeaway list really helpful from that perspective. And you’ve given us a number of examples to chew on, in terms of thinking about the risk of strict liability issues, in terms of thinking about why fuzzy, broad, vague terms might be really advantageous to the company or the individual who’s receiving your services, but for you as a consultant can be very problematic, and for figuring out when these restrictions may come into play. So I want to basically work our way down the best practices here. And so in terms of clarifying restrictive covenants, we’ve talked about field of interest or field of use a couple of times, and I think that you’ve given us some examples here of perhaps not as well defined fields of use. It’s probably unfair to ask you the question, what’s an example of a really well defined field of interest or a field of use? But I think anything that you can offer the audience in terms of thinking about, do you need to nail it down to a particular technology area? Do you need to be more restrictive than that? I suspect the answer to my question is it depends. Which is a very lawyerly answer that we love to give for all of these types of things, and that oftentimes is the right answer. But any guidance you can give about tailoring a field and what the obligor should be looking to put into the agreement to help tailor it and probably narrow it in many scenarios would be really helpful.
Brent Sokol 27:57
Well, let’s take, for example, a consulting agreement with a startup company. Often, the startup company will have a website with at least some preliminary information about what it is they do. That language may be a touchstone for what an understood field of interest is. In other words, the companies will put a lot of thought into how they define themselves and oftentimes those are understood. Another area you can look for a field of use definition or field of interest is in scientific publications. Often, when the author of a paper includes their bio or short biographical sketch, they will indicate what their field is. And there, what I found is that this does not usually create a lot of dispute, because people in the field have very accepted definitions. Just for example, artificial intelligence. Well, you know, maybe it’s not clearly defined, but people seem to understand if they are doing something related to artificial intelligence or not. So that’s a new technology, but usually, if somebody is a consultant in a field, say it’s in artificial intelligence, they’re consulting with a company that may be in that same field. And it’ll be well understood between them. You should always include a definition. But again, that could be tied to publications or websites, and you are correct that from the standpoint of the consultant, they would prefer the field of use to be narrow. And from the perspective of the obligee, they would like it to be broad. Usually that can be agreed upon without too much dispute.
Allison Schmitt 30:33
I have a question that probably underlies the first three bullet points that you have in the best practices list. When you’re developing technologies in a wide range of areas, sometimes that development goes in directions that perhaps you didn’t anticipate, and perhaps you’re in a scenario where your consulting agreement may not actually cover what’s happening going forward. And so I’m thinking through the question of, is it best practice, particularly when you’re dealing with restrictive activity covenants, to execute a new agreement or to modify the agreement that you already have as these developments are ongoing? Or is that an argument in favor of being a little bit more expansive with your field in order to be able to accommodate perhaps, you know, if you’re coming up with something completely unknown or a direction you really didn’t anticipate, that’s one thing. If you’re heading in a direction and maybe you’re coming up with something similar, maybe that’s a little bit easier to anticipate as you’re trying to contract around. I’m curious what your thoughts are and what you’re observing in the field in terms of how issues like that are being handled.
Brent Sokol 31:43
I think the best way to handle that is to have an addendum to the agreement where certain activities are presented and expressly called out as exceptions. So most companies, if they’re paying for someone’s consulting services, won’t be so specific to a specific product or service, because, as you point out, the job, the consultants job, the company’s job, can change, and the agreements often aren’t updated. So the solution, or a solution to that, is to require a disclosure of activities, and then, for the avoidance of doubt, it’s clear you would put an addendum, or add to the addendum, the name of the new company and the activity just so that it’s clear that that is not a violation of the agreement. And if it turns out that the obligee doesn’t like the activity and doesn’t want to have a contract with a consultant, for example, that is undertaking that, the parties can decide to part ways. But that way, it builds in — I guess what I’m saying is — it’s better to have a slightly broader definition of the field, and a notice and obligation and notice and approval provision. Such that the consultant is updating the company from time to time about what they’re doing, and then that’s reflected as either okay in the agreement or the parties can decide they no longer want to work together.
Allison Schmitt 33:50
You’ve segued really wonderfully into the next question that I wanted to explore, which does have to do with that last bullet point. So if you are going to have a prior notice and approval provision in one of these contracts, how often do you think consultants should or how often are you seeing that consultants are checking in? Is this a quarterly activity? Is this a yearly activity? Does it completely depend on the speed of development of a product or in a space?
Brent Sokol 34:18
Yeah, that’s an excellent question. I mean, most agreements require the prior notice whenever the new activity is going to be undertaken. One of the troubles with these agreements is that the people who signed the agreements are busy, and they’re not first and foremost thinking about their agreements. They may not have in mind the agreement, or, you know, they might have it in mind, but choose not to disclose. So I think the best practice is to at minimum, at every time when the agreement is up for renewal, do a check in. Like require an update. And I would put that in the agreement. I wouldn’t limit updates to that time period, but those should occur in real time before potentially conflicting activities occur, but at minimum, have a new addendum that’s created every time the agreement is renewed.
Allison Schmitt 35:31
Wonderful. Final question that I’ve got for you, and then I’m going to jump one bullet point up. So the example of a landmark that we have from the cases is the Medicalgorithmics case, and that’s a terrific name, where we’re talking about a landmark that would occur — when I read that language, I really was thinking about milestones — and that the court was looking for specific events to have occurred. Are there other types of, I’m going to say events, but things that could qualify as landmarks that obligors and obligees as well should be thinking about in terms of either landmarks that may work well for these types of agreements, or landmarks that are perhaps too mushy or going to create ambiguity that will be problematic later on, if the contract ever comes into dispute?
Brent Sokol 36:23
I think this comes up a lot with FDA requirements. You often see parties try to tie obligations under the agreements to particular government approvals. And this can be very problematic, because we don’t control what the government does, and so the intent of the parties may assume that there’ll be a certain timetable or certain development process. And you can get into that in medical device cases and in biotech cases, it’s usually the approval pathway or the review pathway with the FDA, and it’s very unpredictable. And so in these kinds of agreements, we’re talking here about consulting agreements, it wouldn’t make sense to tie the restriction to the advancement of a company past a certain point and the medical algorithmics case or Medicalgorithmics case really underscores the concept of no running head start. So most companies will say — this is the way I would put it — you can’t ride with the cops and root for the robbers, right? If you’re going to be on our team, you got to be on our team. And the courts, as evidenced by that Medicalgorithmics case, enforce that. So if you’re seeking to do something or developing that’s enough. Now if you’re the person making the obligation, you might want to try to tie it to something very specific. And in these cases, actually, in every one of these cases that I’ve given, the defendant’s argument was, “Look, we’re not very far along. We don’t have a product. We haven’t developed it yet. So why? Why am I violating anything?” And the courts are not sympathetic to that, because they understand that you can get a big running head start without actually having a physical product in your hand. So I think generally, it’ll be tough as a consultant, to sort of limit when your trigger can occur. But I think if you can tie it to specific events, like I thought in the third case, tying the trigger to the formation of a company. You know that was good because that’s a specific event. People know when the company is formed, it’s a bright line.
Allison Schmitt 39:36
Wonderful. Thank you so much for all of that helpful advice. I think this is very practical knowledge. It’s going to be very useful for our audience. And so we’re going to switch, not entirely in topic, but we’re going to switch to another facet of thinking about exclusivity provisions and really thinking about what the whole sum of your potential liability is, and what legal sources that liability comes from. So we’re going to switch over to Alex to talk with us about torque liability for breaches of exclusivity provisions.
Alex Lindhardt 40:09
Thank you, Allison, and thanks for having me and Brent. So let me move on to the next slide here. So Brent spoke about how contractual liability will depend on the specific language and the exclusivity provisions in your consulting contract. I’m going to speak to some of the liability issues that can arise from a consulting contract that aren’t purely contractual in nature. That sometimes sounds a little self contradictory to folks, but there are obviously a number of non contractual duties that arise from a contractual relationship. It happens all the time in the law. Is a basic example you could think of how common law fiduciary duties are not written down often in an engagement letter with your attorney, but they arise from that contract. And my experience and Brent’s experience has been that a lot of people drafting consulting contracts aren’t necessarily thinking about the interplay between their specific contractual language they bargained for and general common law tort duties. It’s often the case that a consultant or the obliger who breaches a contract is liable, not just for violating their exclusivity obligations or their disclosure or waiver obligations, but also for Business Torts outside the contract. And that’s usually significant, because whether you’re on the hook for a contract claim for violating your exclusivity provisions, or on the hook for a tort claim, is important not only because it’s a different source of liability, but because it might permit different remedies. And so you might have a consultant who thinks, Well, I breached a contract and that was intentional. It’s an efficient breach. Oh, well, that’s business, but they may not realize that the same exact conduct that caused the contractual breach is also violating common law duties that aren’t written down in the contract and going to subject them to a fraud claim and punitive damages. So the next slide here, the question of what separates contractual liability from tort liability, is kind of summarized in three words, which is economic loss rule. This is one of those doctrines that seems straightforward, and it’s probably one of the first things you learn in torts or contracts during your first year in law school. But the more you look at it, the more you realize how there are a lot of misunderstandings that still exist. And in fact, courts often struggle even today and even as of last year, and we’ll get to a recent California Supreme Court case to understand exactly what the parameters of the economic loss rule are. Many courts have described the rule in sort of apocalyptic terms, as what quote, prevents the law of contract and the law of tort from dissolving one into the other, another, equally melodramatic formulation is that the economic loss rule prevents contract law from, quote, drowning in a sea of tort, which is an interesting image. But what the rule really comes down to is that a plaintiff cannot sue for tort damages if they’re seeking purely economic losses, which, at least in California and some other jurisdictions, means financial harm without any physical or property damage. In other words, if I agreed in a written contract to sell you my laptop for $500 and it doesn’t work, you don’t get to sue me for negligence or strict liability and tort, but you can sue me for breach of contract or maybe breach of warranty. You didn’t get the product that you bargained for, but the product didn’t hurt anyone. It didn’t explode, it didn’t destroy your other property. And the concept of the economic loss rule is that for that sort of injury, I’m liable. I should be liable in contract or warranty, but not liable in tort. That’s that’s sort of the essence of the economic loss rule. The rule really comes from product liability law in the early 20th century, so fairly far afield from consulting agreements or technology scientific agreements. But back then, courts were starting to develop strict liability tort doctrines to protect consumers from dangerous products that were actually hurting people and the courts developing these new strict liability tort doctrines to to help consumers needed to counterbalance this draconian form of strict liability and tort by making sure that it didn’t also extend to claims for purely economic losses that should be governed by contract law. And so the economic loss rule is really a response to the development of strict liability towards in product litigation. And so related to that, to avoid the economic loss rule and to bring a tort claim, you need to, quote, demonstrate harm above and beyond a broken. Contractual promise. That’s a fairly recent expression from the California Supreme Court in Robinson helicopter from 2000 for so the economic loss rule was developed to limit negligence liability, and it really wasn’t developed to encompass limiting liability on intentional torts like fraud and Robinson helicopter, which we just looked at. It’s a big case from the California Supreme Court and cited very extensively in California that says parties basically cannot contract around liability for common law fraud, at least in the context of affirmative misrepresentations. Parties can contract around a lot of things, including negligence, typically, but you can’t contract around someone lying to your face. And the quote is, while parties, perhaps because of their technical experience and sophistication, can be presumed to understand and allocate the risk relating to negligent product design or manufacture, those same parties cannot and should not be expected to anticipate fraud and dishonesty in every transaction. The point being that courts presume whatever your contract says, parties typically almost never anticipate that the other side will just flat out lie to them over the course of a contractual relationship. The Robinson case, which we just looked at, that addressed affirmative fraud, you know, flat out lying to someone’s face. But for decades, and as recently as last year, courts were mixed on whether the economic loss rule should also eliminate liability for fraudulent concealment claims, as opposed to affirmative fraud. In other words, the law was unsettled as to whether someone could sue a contracting party for fraudulent omissions, as opposed to, again, flat out lies, if the same conduct also had constituted a breach of conduct, conduct, sorry, a breach of contract at the same time. To give an example that probably harkens back to Brent’s examples, you can imagine that a consultant is required by contract to provide adequate disclosures, either immediately or on some sort of periodic basis, about her other consulting activities for other companies and her participation in other companies, including startups. Is she liable for breach of the disclosure provisions in her exclusivity contract, or is she also liable for fraud due to the failure to be transparent in her disclosures. And for many, many years, including under Robinson, it was unclear whether that type of situation was just a contract breach or also a potential concealment claim. That changed somewhat last year with a major case from the California Supreme Court, which issue Ratigan, which is a long awaited decision on whether the economic loss rule bars concealment claims Ari from a contractual relationship. It is a lengthy and dense opinion, and it’s one of those opinions that might raise more questions than it answers. But to get to the punch line quickly, in rat again, the Supreme Court held that the economic loss rule generally does not prohibit fraudulent concealment claims for purely economic losses, even if that concealment claim arises out of a contractual relationship. So in other words, if a defendant may be liable for concealment in addition to breach of contract, even if there was no further misconduct other than what was underlying the breach of contract. You can be sued for both simultaneously. Facts of Ratigan are kind of interesting. The plaintiff was an attorney representing Uber subsidiaries, and he had alleged that Uber had concealed unlawful product launch plans in Buenos Aires, which I think had, I think his theory was that it had subjected him to reputational harm and actually made him the target of various Argentine government investigations, a travel ban, etc, because he was left in the dark on this illegal product launch plan in Buenos Aires. So the lawyer asserted a claim for fraudulent concealment against Uber, as well as a claim for breach of contract arising from his retainer agreement with Uber. And to be clear, it was the same exact conduct supporting both the concealment and the breach claims. In both claims, Uber had supposedly concealed unlawful product launch plans from their attorney in Buenos Aires was a breach of the retainer agreement, and so he argued also common law fraud. The case was filed in federal court, and the district court dismissed the concealment claim, finding that it was prohibited under California’s economic loss rule. And on appeal, the Ninth Circuit certified to the California Supreme Court the purely legal question of whether, under California law, a fraudulent concealment claim can fall within the scope of the economic loss rule.
Alex Lindhardt 49:52
The Supreme Court started by noting that the economic loss rule really was designed to avoid negligence claims. Um. Law and to ensure that claims that should have been breach of contract claims were not sort of artificially packaged as negligence claims. But the economic loss rule was not designed to prohibit liability for intentional torts like fraud, and with that background, the Supreme Court thought there was really no meaningful distinction between affirmative misrepresentations and concealment or omissions, and the Court said that it’s not even really that fraud is an exception to the economic loss rule. It’s that the economic loss rule is really a specific and narrow doctrine that applies to negligence and strict liability torts. It doesn’t extend to intentional torts at all. Ultimately, the Supreme Court held, quote, There is no principled reason to treat fraudulent concealment claims in the performance of a contract any differently from those based on affirmative misrepresentation on sort of a doctrinal test level. Ratigan laid out two central questions that determine whether a concealment claim can be brought if it arises from a contractual relationship. And this, this slide with these sort of two elements, is really the meat of the case for for litigators. Now, first, the elements of the concealment claim must be established independently of the party’s contractual rights and obligations. In other words, there must be a tort claim regardless of the contract, and regardless of the terms of the contract, that’s because to be subject to fraud liability. You’re not violating some particular term or some particular language in a contract that you came up with as a private party. You’re violating a bigger public duty, quote, a societal, societal duty that the law itself imposes on everyone second the conduct must expose the plaintiff to a risk of harm beyond the reasonable contemplation of the parties when they entered into the contract. And the Supreme Court explained, somewhat like Robinson, that parties generally do not enter a contract expecting that its terms will be intentionally ignored. But the court also kind of warned, almost as dicta, in kind of a theoretical way, that even though it might be uncommon, it was conceivable that parties may enter into a contract, anticipating that the other party might withhold or conceal certain facts during performance, unless they demand an agreement not to do so, and When the parties expect that the other side might conceal facts over the course of performing the contract. Then the court in Ratigan suggested there may still be no tort liability because the parties went into the contract clear eyed as to that one of the parties would conceal facts. Now the Ratigan face, ratkin case is a little confusing on sort of an element by element level, because, because having started the the opinion by saying that there’s two central issues to look at that we just looked at on the last slide, it later proceeds to lay out a three prong test to evaluate the underlying two prong test that we saw from the prior slide. And I think this will lead to a lot of confusion among lower courts, because it articulates a two prong test most of the time, and then later talks about a three prong test that clarifies the earlier test. And this lays out this kind of alternative test from Ratigan that some courts have interpreted as a three element test newly developed, first applying standard contract principles, courts must ascertain the full scope of the party’s contractual agreement, including the rights created or reserved, the obligations assumed or declined, and the provided remedies for breach. This really seems to go to the sort of contractual risk of harm concern that we looked at on the last slide. Second, courts must determine whether there is an independent tort duty to refrain from the alleged conduct. And in Ratigan, the court seems to indicate that this second element is basically automatically satisfied in the context of a fraud claim, because, of course, there’s always an independent duty to refrain from committing fraud in California. And finally, third, if an independent duty exists, courts must quote, consider whether the plaintiff can establish all elements of the tort independently of the rights and duties assumed by the parties under the contract. Again, this seems to go to sort of the first part of the analysis from the last slide, as to whether you have an independent tort aside from any particular contractual terms. So I thought I would sort of try to extrapolate as to what Ratigan, rat again, is really saying between the lines, because it is a dense opinion. It’s very long, and there’s a lot of sort of almost overlapping doctrines in it, and in the context of consulting agreements you often have, as we discussed with Brent during his presentation, exclusivity provisions that include disclosure obligations require requiring the exclusive consultant or advisor to immediately or periodically disclose their activities for other companies to ensure they’re complying with their exclusivity obligations. And so you can imagine and advise. Who fails to make adequate disclosures that truly reflect her her real activities for other companies. In some instances, those disclosure omissions might be material. For example, maybe she discloses that she’s doing some work for another company, but she doesn’t disclose that, hey, I’m also the CEO of that company and working for that company around the clock. Now, the consultant might take the position that, okay, fine, you got me. I breached the contracts disclosure provisions, and I’m guilty of breach, but that’s it. But I can’t be held liable for fraudulent concealment claims under the economic loss rule. So before Ratigan, that dispute between the company and the consultant might have revolved around a very academic question of whether the economic loss rule even applies to fraudulent concealment claims in the first place. And that might focus on the history of the economic loss rule the difference between a non disclosure and an affirmative lie, etc. But after Ratigan, the dispute probably revolves instead around two key questions, first, whether an independent duty of disclosure exists separately from the contractual duties, and second, whether the parties had contemplated that in fact there might be concealment of certain facts before they entered into the contract. And we quoted this case, Ramos V Ford. It’s a just kind of a post rat again, example of where a company was arguing, or trying to argue, that concealment was a contemplated risk of harm in the contract, and supposedly within the heartland of the warranty contract. In our example, the consultant might argue that putting the disclosure obligations in the contract means that the parties intended for an incomplete disclosure to result only in liability for contractual breach. The company knew going into the contract that there was a risk, a risk of harm, that the consultant might not provide the agreed upon disclosures. The company might argue that no reasonable person or company ever expects disclosure obligations to waive the right to sue for fraud, and that it would be ironic, highly ironic, if putting disclosure obligations into a contract showing how much the company cared about accurate disclosures had the effect of immunizing the consultant from any fraud liability at all there. There is no liability for fraudulent concealment unless all of the elements of concealment are met separately from the contract. That’s really in both of the sort of doctrinal tests that Ratigan articulates and usually, the threshold element for a concealment claim is whether the defendant owes the plaintiff a duty of disclosure in the first place. There are four ways to do that. The first is when there is a fiduciary or confidential relationship. You know, in some instances, it might not seem like you’re in a confidential relationship through an arm’s length consulting contract, but in fact, there is case law saying that if you know you work for years with a consultant and you work together closely and intimately, that might be the basis for something akin to a fiduciary relationship or a confidential relationship. Second, the consultant might be the only one with knowledge of their own activities and whether they’re in breach of an exclusivity provision and whether they’ve made adequate disclosures. And that might trigger a duty to disclose. The consultant might obtain a duty to disclose by concealing material facts. And then finally, once you start disclosing material facts, you have to disclose everything. You can’t make partial disclosures. And so you might want to be aware of what events trigger the common law duty to disclose because it may not be evident on the face of the contract. Finally, it might be a good idea to be aware of this strange new tension after Ratigan, which seems to suggest that the more you try to expressly write into your contract various provisions addressing concealment and disclosure through specific crafted contractual terms, the more it may appear to a court that the parties did in fact contemplate that one of the parties would breach the contract by concealing something. And so there’s an interesting new kind of almost theoretical dynamic opened up by the radigan case, where, ironically, the more the parties address concealment in their contract, talking in detail about what should happen if the other side conceals something material, the less potential for fraud liability might exist. The court might look at your contract and say, Wow, these parties really did think hard about whether one of the parties were going to lie or omit material facts when they signed the contract and they’ve contracted around it. And then I also just wanted to flag that Rattigan applies to fraudulent concealment claims within pre existing contractual relationships, but it does not apply to claims about the formation of the contract or fraudulent inducement claims, and under the didel case from California, you can’t rely on the contract to get out of tort liability for pre contract conduct.
Alex Lindhardt 59:51
And so rad again, raises a lot of new questions and sort of reaffirms that this is going to continue to be a contested area where there’s a lot of uncertainty and risk. For people who think their liability is confined to only the contractual provisions in a consulting agreement, wonderful.
Allison Schmitt 1:00:06
I want to thank you, Alex for a wonderful presentation, and thank you to you and Brent for joining us today. I’ve certainly learned a lot. I know that our viewers will as well. Please join us for our next program in the startup series, which will be next week.