The lesson I learned from this colossal mistake could benefit you if you find yourself in a similar legal situation with a small business.
A new venture that could have been worth a considerable income materialized when two fellows contacted me with a plan to create a pay-per-call dating service.
They wanted an interactive pay-per-call service for people to dial in and listen to recorded messages from other users. The system would let them leave a private message for anyone they found interesting and wanted to meet.
Pay-per-call services were once a big thing in the 1980s and ’90s. People would dial into the service via a 900 areacode and use the keypad on their phone to interact with menu prompts. The phone company charged for the call and paid the service provider their share of that revenue.
So they offered to have me join them in an equal venture, where we would each share one-third of the profits.
The idea for the dating service was to allow men and women to record a personal profile in their voice.
Other callers would select from a menu to listen to profiles of people of the opposite sex and by age range. As they browse through recorded profiles, they can leave a private message for anyone they like.
The user’s profiles were publicly available, so anyone calling in could listen to them.
Only the intended recipient could pick up the private messages. Therefore, people could safely leave a callback number. Callers would be charged by the minute on their phone bill while listening to profiles and leaving messages.
I began programming the system while we worked on writing a partnership agreement. However, we couldn't agree on every detail of the agreement and spent months negotiating while I continued the development.
If you begin work on an assignment before having a signed agreement, you create a binding contract. The legality behind this is that acceptance of an agreement is implied and binding when you perform a task. It does not have to be a signed contract.
I’ll show how one might unintentionally bind themselves into a contract to which they don’t agree.
We were working out the details of the business agreement while I was programming. That was my first mistake. I should have waited until we had a signed contract with all the details exactly as I would want. But I would have maintained control of my rights to the software as long as I didn’t give it to them.
We still didn't have an agreeable contract when I finished the programming. So they suggested we start running the dating service to begin making money, and if we still don't agree on everything, we can shake hands and walk away as friends.
Those words sounded irresistible, but I didn't realize the legal consequences. I installed the computer system with my software at their premises so it would be online. Then they started running radio advertising. The dating service was an overnight success earning revenue.
I lost my rights by letting them use the application I created.
Soon, the first payment came in from the phone company. I saw the check. It was for $100,000.
I asked for my third, but they told me that since this was the first check, we should put that income back into the company. That made sense to me, and I went along with it.
A month later, another check came in for roughly the same amount. Once again, they came up with an excuse for not giving me my third.
By the third month, they didn’t show me the check because we were having issues agreeing to the final form of the business agreement. I insisted I get my third of the proceeds now, or else I’ll pull the plug.
They told me that I couldn’t do that:
Do the math. $100,000 a month is a million a year! I asked my attorney if they could sue me if I pulled the plug since I never signed the contract.
My attorney told me that by giving them the software and hooking up the computer to run the business, I had legally agreed to let them have the system without an agreement for compensation.
My attorney went on to explain that if I pulled the plug, they could indeed sue me. However, if I don’t pull the plug, then they can’t do anything against me and I could sue them for nonpayment.
Therefore, I left the system running and initiated a lawsuit.
The suit dragged on for a whole year. After several months one of the fellows came to me and said,
I told my lawyer,
My lawyer realized that I would indeed be wasting time in court. So he worked out a settlement instead, where they would pay me for the development of the system.
That’s a one-time payment with no ongoing residuals. I blew it. I knew that would be the best I could get out of it at that point since I lost my rights due to the unintentional binding contract to provide the system free and clear.
Sadly, that one-time payment was far from what I would have made if I had held off until we had a signed agreement. I would have shared one-third of a million dollars — every year.
They knew what they were doing. The lesson learned is if you work without a signed agreement, the other party may take advantage of you in any way they choose. And when they lack integrity, they will do only what is in their own best interest.
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