Business law principles and applications

Cigarette Advertising Campaign

If we look at the case of Mary and RJR there is a contract formed between them for Mary to undertake a year long advertising campaign to present the companies cigarettes in a positive light, her remuneration was to be 25% of the increase in sales that the campaign created. It was also recognised that this was a very vague amount, and may be difficult to assess, as a result an additional clause was put for liquidated damages, which, stated that in a breach by RJR that Mary would be entitled to $25,000. The contract has been breached after only one month, Mary has incurred costs of $25,000 and RJR is refusing to make any payment.

The first consideration must be if there was a valid contract in place, and if there was, has it been breached and by whom. For a contract to be valid there has to be an offer, acceptance and consideration, as well as a mutual intent to create legal relations. This appears to be the case. The contract was to run for twelve months, it is RJR that has ended it, despite an increase in sales. It is also RJR that has refused to pay the liquidated damages, indicating that they will not do so. Therefore, we appear to have a breach by RJR, and as such Mary may seek remedy in the courts.

If we look at this in terms of the breach, not allowing the contract to run for a year there are three types of remedy, but only one may be sought. Contract law provides protection by way of an expectant interest, in reliance interest or for out of pocket expenses, for which Mary has $40,000 a restitution interest. Expectation may be difficult to claim, in the case of Hawkins v McGhee, here the expected condition less the current condition are the damages, but this is difficult to prove. It is also possible that the expectation may be seen as greater than the actual level of reliance. There is also no set amount, and as such there cannot be a specific reliance, expectation may be easier to determine. The next stage is to consider how this amount should be determined.

If we look further at the breach it is also not the failure of Mary to perform the duty, in the case of Aiello Construction V. Nationwide Trailor there was a formula laid down, which looked at the amount agreed, less the costs saved by the contracted party in not completion, less any payments made to them already. However, this is difficult as the amount was not specific. The damages for the out of pocket expenses may be seen as more straight forward, but there is also the liquidation clause, which states that were there is a breach b y RJR a set amount will be paid.

If we apply the case of Truck Rent-A-Center V. Puritan Farms then it would appear Mary has a very good case to claim her $25,000. Although under out of pocket expenses or the use of expectation in a breach may gain her more, it is also likely that this clause will be used as this states it will be used when RJR are in breach. In the Puritan Farms case the defendant leased a truck from the plaintiff with a contract that had a liquidated damages clause which stated where there was a breach the defendant would pay 50% of the lease rent that would have been due on the truck. The markets did not behave as expected, and the defendant breached the contract, the court found in favour of the plaintiff.

For the liquidated damages to be enforceable there are several requirements. The actual damages must be difficult to ascertain. This is the case with Mary, as there was an increase in sales, but it is difficult to quantify. The liquidated damages must also be seen as a reasonable estimate. This is more questionable, but as it was quantified on the contract this may be held, and the enforcement should not be seen as unconscionable or against public policy. It is also worth noting that under the UCC 2-718, it is stated that "Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty." This does not appear to be the case here.

It is this last case, and also the performance that was carried out that RJR may choose to use as a defence. The advertising that Mary undertook appears to have increased sales, but the way in which it was done appears to have encouraged underage children and teenagers to start smoking. The claim was that the campaign misrepresented the health risks. Indeed, Mary had used a cartoon character and we may argue that her campaign, even if legal was at the very least unethical. The argument may be that it was an implied term under such a contract that advertising would be both ethical and legal. The FDA has strong guidelines that are aimed at making sure that tobacco companies provide a strong anti-smoking message to children. Although the actual measure outlined by the FDA such as only black and white advertisements in magazines where there is a High youth readership and the placement of billboards away form school does not appear to be breached (FDA, 2000), the spirit of the FDA regulations has definately been breached with the use of a cartoon character. However, it is also very likely that before any campaign was initiated that the company had to approve it, and as such this may be seen as a difficult defence. RJR may also seek to make the claim that the advertising has damaged rather than helped them, as seen with the court case. However, the court case may have mentioned the advertising campaign, but was brought as a result of contaminated goods, which were not directly related to Mary in any way. Therefore, this may not be seen as a relevant defence.

If we consider public policy, there is a very strong message regarding the way smoking and children are viewed, if the liquidated damages, or any amount is enforced then we may argue that the courts are condoning the practice of advertising aimed at children. Although there is a technical breach, RJR may be able to use the public policy requirement to prevent the liquidated damages being enforced.

If we consider this case ethically there are some problems on both sides. RJR have formed a contract, one that they have then breached and ended, and have failed to follow the terms of the contract, neither paying for the increase in sales, which they have benefited from, nor paying the amount breached. There has been a subsequent court case where the advertising was noted as being very questionable and having increased sales. Technically, Mary had done what she was contracted to do, but the way in which she undertook this was unethical, and as there had been no specific requirements of how the sales should be increased, the breach and refusal to pay by RJR is also unethical. Had communication taken place and recorded blame may be easier to allot, however, both RJR and Mary should have been aware of the FDA regulations, and both should have taken more care in the way they conducted themselves.

As a final consideration there is a comment by RJR there is a comment regarding gender, this may strengthen her case RJR, and may also provide ammunition for future claims where a company run by a woman fails to be considered under the discrimination laws. However this is a separate issue.

Question

In this case we have an idea by Sammy for a new device that can automatically count calories and aid dieting by way of a reminder function. Sammy has the idea and also can build the device from components on the market. There is a need for him to be able to protect his idea and design, otherwise reverse engineering will lose him any first mover advantage he may be able to gain. Porter value chain may give use some indication where each of these protection may be seen as relevant.

In looking at intellectual property protection there are several methods that can be used, each will aid with the protection of the device and ideas as well as any research and development he carry's out. The main tools are the use of patents, copyright, trademarks and proprietary technical information, otherwise known as trade secrets.

The first protection will be that of a patent. This will protect others from copying his invention. He can patent different ways of the device working, even if he does not think he will use them. This is a complex document that is registered though the United States Patent Office, and in the document he will have to give detailed information regarding the product that is to be protected. The patent then protects his innovation from other developing and marketing the same type of product, regardless of whether or not they were even aware of his invention, for the life of the product, this is usually deemed as seventeen years. The only way that anyone else can use it is with the express permission of the patent holder.

This will protect the device from being manufactured in the U.S. By anyone else before it is even manufactured, and as such the research and development may continue, but all changes should be registered, to continue the protection. When in production it prevents any contractors taking the design and the design being reverse engineered and copied. The reverse engineering is still likely to happen, but they also have to avoid all of the patents. This will mean that when it comes to manufacture Sammy may license others to make the product for him, and as such will not need the same level of capital investment. He can develop the product and then simply take a licence fee. If anyone does compete with a breach of a patent he can also take legal action against them to stop and to claim damages. This will be seen as protecting the operations stage of the company, so that the product cannot be copied. However, this does not protect the products that they are buying form other suppliers, such as the chips. As a result they may wish to make use of confidentially clauses in contracts. The support service of technology development may also benefit from this protection.

Copyright may also be of use, to copyright his ideas in a printed form. Any advertising or publicity he undertake may also be copyrighted, as this gives the copyright owner five rights which are exclusive to them only; the right to copy, distribute, display, and perform their work as well as to amend it. This may be most often used with printed material, but with a design such as this there will also be some software involved. The patent protects the hardware and mechanics, the actual operation is a result software, then a copyright well protect this aspect of his invention. Arguably, the software is the most important part of the product, this also protects the product from competition stealing the ideas and the programming. The copyright is effective immediately, and it does not matter if there are any papers registered. It is interesting to note that the copyright will automatically reside with the inventor, and it does not have to be registered with the United States Copyright Office. In conjunction with the patent this is a protection that is necessary to prevent copycat products. However, as the idea alone is not enough, and if Sammy contracts someone there would need to be a written agreement who the copyright resides with, as the default position is the author not the person with the idea. If Sammy had them as an employee, and this was in the course of their work, the copyright would belong to Sammy.

Copyright may also be used to protect any related items, such as books or television programmes or videos he may make to accompany the product, These may be potential, but may also be related in other ways, such as a get fit video, with a work out, a book about weight loss, or even the development of a web site where information may be gained and the products may be sold. The same may be said of any scripts he produces, such as scripts for the telesales staff. The list is very long. In terms of Porters value chain this will protect the products during outbound logistics as well as the marketing.

Trademarks are also a feature that is pertinent. When the product is marketed it will need to be attractive and also recognisable. The development of a trademark is likely. This is used by consumers to identify product, and also aids repeat sales with increased consumer recognition. "A mark used in relation to good for the purpose of indicating a connection in the course of trade between the goods and some person having the right as proprietor or registered user to use that mark with or without any indication of the identity of that person " (Ivamy, 2000; 274).

A trademark can be registered at the United States Patent and Trademark Office and may be a valuable tool in marketing, especially if the product becomes established and other competing products come on the market. Trademark may be more valuable as the product is older, as it will be identify with the original, and as such repeat customers may be retained. Once the patent has expired there may be a number of new competitors entering the market, this will also help them identify which is Sammy's company and associate them with the marketing.