If you thought episode 1 of HBO’s Silicon Valley had a lot of legal issues, episode 2 will blow you away. Titled “Terms of Service,” the show continues its downward progression into becoming a legal dramedy.
Season 4, Episode 2 Recap (Contains Spoilers)
Episode 2 starts with Dinesh as a super CEO, garnering numerous VC offers, bragging on cable news shows, and generally acting full of himself. High on his newfound success, Dinesh decides to cut Richard off, which inevitably leads to an altercation. When push comes to shove, the others side with their new CEO, leaving Richard out in the cold.
Feeling sorry for Richard, Big Head provides his own login credentials, allowing Richard to discover a crucial flaw in Piper Chat: no parental controls. Can this show be any more geared towards lawyers?
At the same time, Gavin Belson decides to acquire Piper Chat in order to better spy on his employee. Gavin proceeds to bully Dinesh into handing over the company based on a claim of IP infringement; to which Dinesh happily agrees, fearing that his lack of parental controls will cost Piper Chat, and him personally, billions of dollars.
Legal Analysis / Advice*
I’ve said it before and I’ll say it again: put it in writing. There is an amazing standoff between Dinesh and Richard that really puts this advice into perspective. This scene takes place in their living room when Richard finds out that Dinesh cut off his access to Piper Chat’s data.
Richard: When we agreed to split the company, we said you could take the algorithm for your video chat and that I could use the data flowing through the system to optimize the algorithm for my thing. We had a deal.
Dinesh: We had an agreement, not technically a deal.
Richard: What the F**K Dinesh . . . So what, I should have got it in writing, is that it Dinesh? You want to lawyer-up now? You know, we’re just some guys in a house.
Dinesh: But I don’t want to be just some guys in a house, Richard. That’s the whole point. I want Piper Chat to be a real company.
My advice to Richard: Yes, Richard should have gotten it in writing and yes, he should “lawyer-up.” The reason to involve lawyers is that Richard sold all of his ownership in a company he founded, purchased intellectual property, entered into a license agreement and entered into an agreement to share data. All of these are fairly complicated deals, with myriad potential issues, that would benefit from the help of lawyers. Otherwise, it really is just two guys in a house.
Even though Richard failed to “lawyer-up” in the first place, once Dinesh demonstrated a willingness to renege on the original agreement, it was definitely time to seek legal help. So far, Dinesh has only tasted a slight amount of success; he would only become more difficult as Piper Chat saw real money and had a legal department backing Dinesh’s decisions (or just imagine what Gavin Belson would do).
Finally, Richard wants this deal in writing because Dinesh may not even have the authority to make it in the first place. At best, Dinesh is a minority shareholder. He was supposedly appointed Piper Chat’s CEO, but with a fractured board and a company that avoids following any corporate formalities, there is a good chance Dinesh does not even have the authority to enter into a deal of this size. With lawyers involved, Richard could not only make sure that he has people sign on the dotted line but that it’s the right people doing the signing.
My advice to Dinesh: The way Dinesh is using it; there is no difference between an agreement and a deal. So he should calm down.
Also, he should think before acting. If sharing information was part of the convoluted arrangement made to get Richard to resign and give up his shares, the last thing Dinesh wants to do when Piper Chat is finally seeing some traction is to undo that deal. If Dinesh violates his agreement, arguably the whole deal is off. Richard could argue that he is entitled to his share of the company (which is worth significantly more given the VC interest) and his old seat on the board, giving him renewed access to Piper Chat’s data and putting Dinesh one vote away from being ousted as the CEO.
If Dinesh really wants to be more than “some guy in a house,” he needs to start acting like a responsible CEO.
Privacy and Confidentiality
After his CEO tells Richard that he is cut off from the company’s data, Big Head decides to do the “big” thing and let Richard use his login credentials. While it may have seemed like a nice gesture, Big Head could also be in violation of his confidentiality agreement.
Most technology companies have its employees, officers, and board members sign confidentiality agreements, forbidding them from disclosing any confidential information to anyone outside the company. If I have to sign an NDA every time I step foot onto Apple, Facebook or Twitter’s campuses, even if it’s just to have lunch, I would hope that Piper Chat at least took this very basic step to protect its groundbreaking technology.
By providing his credentials to Richard, Big Head—at best—violated his duties of confidentiality. At worst, he violated his fiduciary duties as a board member and could be accused of conspiring to commit corporate espionage.
Legal Advice by Non-lawyers
Episode 2 has a host of legal advice being passed around, to non-lawyers, by non-lawyers, for non-lawyers. Here are the biggest examples:
Erlich gets very excited upon learning that Jian Yang may have a product in the works, only to be disappointed when Jian Yang claims that Erlich is no longer an investor. Why? Because Erlich attempted to have Jian Yang removed from his property. Accepting this as true, Erlich goes on to offer free rent, pool privileges, and more “crisper space,” just for a piece of Jian Yang’s invention. How do they formalize this agreement? By a handshake, of course.
Putting aside the dubious and probably unenforceable nature of a handshake rental agreement, the question of whether Erlich had a stake in Jian Yang’s venture is an interesting one and probably depends on their original incubator agreement, as well as their subsequent conduct. However, a crumpled sheriff’s notice and Jian Yang’s highly biased legal interpretation should not have been enough to convince Erlich. If only there were some sort of professional Erlich could have turned to for advice on this matter…
Gavin is similarly able to convince Denish that by comparing Piper Chat to Hooli Chat, Piper Chat had somehow violated Hooli’s IP and should, therefore, be wholly owned by Hooli. By that logic, Microsoft should own Apple based on Apple’s decade-long “I’m a Mac, I’m a PC” advertising campaign. Based on this “brilliant” argument, as well as some inaccurate advice about COPPA (more on that below), Dinesh ends up voluntarily giving up Piper Chat.
The biggest story, of course, is the violation of the Children’s Online Privacy Protection Act (COPPA). Although Dinesh does speak to his (disbarred) attorney about COPPA, the only legal advice that he actually receives is that Piper Chat is in “gross violation” of COPPA and an explanation of the penalties.
Even there, Piper Chat’s lawyer got it wrong by advising that COPPA carries civil penalties $16,000 per violation. In 2015, COPPA was updated under the Federal Civil Penalties Inflation Act, and each violation now carries a penalty of up to $40,654. However, without going into the details of COPPA (which could be its own series of articles), that is only the maximum penalty—which is almost never imposed—and there are numerous factors which courts weigh, including the level of harm to the public; benefits to the violators; whether the violation was done by accident or on purpose; the size of the violating company; and the violator’s ability to pay.
Add the fact that the Federal Trade Commission (FTC), the agency responsible for enforcing COPPA, is notoriously understaffed and has been criticized in the past for failing to investigate or prosecute COPPA violators, and an entirely new picture emerges. Had Dinesh received competent counsel, he would know that there are numerous actions he could immediately have taken to remedy the situation, decrease the likelihood of being fined, or at least substantially mitigate the ultimate penalty.
Worse still, as soon as their disbarred attorney is done dispensing legal wisdom, Jared takes over. Relying on Jared’s “expert” legal analysis, Dinesh is convinced that Piper Chat, and he personally, now owe the government $21 billion. Even after becoming physically ill, admitting that he has no idea how to get out of this situation, and lying in the fetal position in the bathtub, Dinesh still fails to consult with a licensed lawyer. Instead, he freely transfers the control of Piper Chat to Hooli.
Moral: Maybe don’t rely on the 30-second piece of advice from a disbarred attorney during his break at the carwash. And definitely don’t rely on Jared to fill in the details.
*As a disclaimer, since the characters and situations aren’t real, neither is my advice.These posts are meant to demonstrate to entrepreneurs that doing their own legal work makes about as much sense as fixing your own brakes; it sounds like a good idea, until you’re on the freeway and can’t slow down.