More risks related to social media assets during a merger or acquisition
As discussed in my previous blog post, one of a company’s most valuable (but often overlooked) assets are its social media assets. Yet social media assets rarely receive more than a cursory treatment during a merger or acquisition. Giving social media assets merely superficial review can end up costing the buyer in third-party liabilities.
If the selling company has non-existent or haphazard social media policies, a buyer can unwittingly acquire assets ripe with liabilities and open its business up to costly litigation. However, like other assets, the associated liabilities can be greatly minimized by understanding what issues to look for in diligence and, in turn, knowing what warranties and representations are necessary to include in a purchase agreement.
What are third-party liabilities associated with social media assets?
The first concern (discussed in the prior post) is gaining ownership of the social media accounts. The next concern is from third-parties who believe the social media assets or content violate their legal rights or the government finding a company’s use of social media violates laws and regulations.
Common third-party claims include:
- trademark and copyright infringement and violations of the Digital Millennium Copyright Act (DMCA),
- false advertising,
- right of publicity, and
Common government claims include violations of FTC regulations on advertising (16 CFR Part 255).
This risk of third-party claims increases if the selling company did not adopt a uniform social media policy that educates its employees on legal compliance. Without a social media policy, a company’s website and social media pages are often ripe with issues given rise to third-party claims.
For example, companies can be found liable for actionable user-generated content (without appropriate DMCA and Communications Decency Act safeguards). They can also be liable for actionable content influencer-generated advertising. A buyer can unwittingly purchase high-risk assets if the selling company lacked a policy that required employees to monitor the social media pages of company sponsored influencers to ensure the influencers are posting original, non-infringing content in accordance with FTC regulations. A buyer should review the seller’s social media pages and policies to get an idea of what liabilities may arise from these assets and how to minimize these liabilities through provisions in the purchase agreement.
Common policy mistakes that increase the risk and liability regarding social media assets are:
- No policy for employee and influencer posting, specifically what specific employees are allowed to post and what education and training these employees receive regarding legal compliance in the social media field as usually the designated employees are marketers with little legal experience,
- No policy requiring employees and influencers sign contracts promising to follow all laws and regulations,
- No policy regarding DMCA takedown requests and removing infringing content;
- No policy on using third-party IP, specifically requiring licenses to use third party trademarks and copyrights,
- No policy on how to appropriately use licensed IP, specifically rules such as requiring all licensed trademarks being marked as such, and
- No policy on reviewing and removing user generated content, specifically not allowing user-generated IP infringement or defamation but also protecting a user’s freedom of speech.
For example, a recent case on social media liability involved Kim Kardashian and resulted in Kim Kardashian being awarded $2.7 million in damages. In this case, she sued the fast fashion company Missguided for infringing on her trademarks and right of publicity, citing activities such as frequently tagging her, using her name and image, and using models that looked like her to sell their goods. A buyer who did not check for liabilities such as these can easily find themselves with a list of expensive liabilities on its books.
What representations and warranties protect buyers?
Just like any other asset in a purchase agreement, there are several representations and warranties that a buyer should include to gain valid ownership and reduce its liability. Deciding what representations and warranties are appropriate is based on the value and type of a seller’s social media assets. Types of social media assets may include accounts or content accessible to users through:
- social media websites,
- rating and review websites,
- message boards,
- content-sharing websites, and
- mobile applications.
Representations and warranties a buyer might include based on the type of social media asset include that a selling company:
- requires that all employees turn over all social media accounts and passwords at the termination of their employment or as requested,
- has instituted appropriate policies or contracts that ensures ownership of all social media accounts and content material to its business,
- does not (and its name and social media account names do not) infringe on third-party intellectual property rights.
As with any set of representations and warranties it is important to adjust how robust or simple the set is by the goal of the transaction. If the selling company has good employee policies regarding ownership of IP or barely has any followers or user-posted content, including a set of robust policies may limit the buying company’s ability to negotiate provisions regarding more valuable and riskier assets. The best practice is to take the time to understand the nature and value of a selling company’s social media assets and stay up to date on the terms and conditions of social media providers.