Can Ello Legally Promise To Remain Ad-Free?

Bennett Haselton writes: Social networking company Ello has converted itself to a Public Benefit Corporation, bound by a charter saying that they will not now, nor in the future, make money by running advertisements or selling user data. Ello had followed these policies from the outset, but skeptics worried that venture capitalist investors might pressure Ello to change those policies, so this binding commitment was meant to assuage those fears. But is the commitment really legally binding and enforceable down the road? Read on for the rest.

In a previous article about Ello, I wrote:

There is, in short, nothing to stop Ello from doing what Facebook does whenever they make a significant change to their Terms of Service: presenting users with a dialog box next time they sign in, saying, "These are the new rules, by checking this box, you are agreeing to abide by the new contract which you're not going to read."

After the story had been filed, I had a second thought and wrote to Ello's PR department, asking:

Why not just make an irrevocable commitment in the TOS, to remain privacy-friendly, or ad-free, or whatever else it is that Ello wants to promise users? Something like, "This is a binding, irrevocable commitment that cannot be modified in future updates to the TOS." That wouldn't make the venture capitalists happy, but it might address some of the concerns of the users.

Coincidentally, just as I was sending that email, Ello was issuing a press release announcing that they had re-chartered as a Public Benefit Corporation (PBC), bound by a charter which is intended, precisely, as an irrevocable commitment not to run ads or sell user data.

However, as user WWJohnBrowningDo pointed out in the previous story's comment threads, the Delaware law defining a "Public Benefit Corporation" states that the charter can be modified, or the PBC status nullified, or the company bought out by another entity not bound by the original charter, with the approval of a 2/3 supermajority of shareholders. (Go here and scroll down about halfway to the section beginning "Notwithstanding any other provisions of this chapter." It's also called out on the site about benefit corporations that is linked in Ello's press release.)

So, my non-lawyer face-value reading of the situation is: Previously, Ello could only change its policy and run ads with the approval of 51% of shareholders, and now 67% is required. That's an improvement but hardly an eternal guarantee. Either way, the majority could be achieved if enough of the original founders and shareholders give in to temptation, or if the exit-hungry venture capitalists get enough seats on the board to outvote them. (I ran this past a few Internet privacy lawyers to ask if there was any more nuance to it than this -- in particular, whether a company could make a "binding promise" in their PBC character, then toss it out with a 2/3 supermajority vote and get away with it. They said they had no idea.)

So, even if a PBC charter is not an irrevocable promise to remain ad-free, perhaps we can give them credit for trying to make such a promise, to the maximum extent legally possible. Or did they? This is just off the top of my head, but: What if they had said, "To each user signing up, we promise that if we ever start running ads or selling user-specific data or otherwise violating this charter, we will pay $1,000 to each affected user."

Now that's no longer merely a "charter" but is now an actual obligation to an outside party. And a contractual obligation to an outside party cannot be nullified by a 2/3 majority or even a 100% majority of shareholders. (Imagine: "All shareholders in favor of canceling our agreement to pay back the money we borrowed from FooBarBank, raise your hands.") On the other hand, this depends on whether a court would find the contract to be enforceable.

Regardless, even if Ello never voted to rescind their charter, another potential loophole is that the charter contains no formal definition of what constitutes "charging for advertising". Ello's stated business model is to offer optional special features that users can pay to use. But conceivably they could add paid features which essentially amount to the ability to advertise to other users, such as the ability to send mass messages to thousands of recipients. (I doubt Ello would do anything as crass as to let you spam thousands of random strangers. However, in most social networking sites such as Facebook, you cannot even mass-message thousands of people who are in your Facebook friends list. That's the kind of feature that some Facebook users, and some Ello users, would presumably be willing to pay for.) Or Ello could charge extra to have a special "badge" appear next to your name, or your company name, in search results. Or, like CouchSurfing.org, they could offer to "verify" your identity by charging $25 to a credit card in your name. And if the paid features really do remain Ello's sole source of revenue, then their developers may find themselves under subtle pressure to degrade the experience for regular non-paying users, while offering increasingly attractive perks to the paid ones.

Aral Balkan, one critic of Ello's venture-capital cash infusion, told me pointedly: "Their original statement smacked of misdirection. 'Look, we just got over $5M in additional venture capital but don't worry about that because...' I still don't trust them, sorry. They're closed source, centralized, (currently at least) free to use, and they've just taken an order of magnitude more VC after the influx of users they experienced. It sounds like typical Silicon Valley fare to me. If it looks like a duck and quacks like a duck..."

I don't think it's a matter of "trust" -- I have no reason to doubt that the founders behind Ello are good people -- but when you dangle millions of dollars in front of someone, they can find rationalizations and loopholes that are consistent with their vision of themselves as a good person. And of course since hosting the Ello platform will cost money, if they don't make enough of it back from selling paid features, they will eventually make the kind of passive-aggressive announcement that is issued routinely by formerly free or ad-free services: "Look, we either have to start raising money somehow, or the service has to be shut down completely." And then regardless of how most people respond, they can say after a few days, "We have received an outpouring of support from users who said they would be willing to view ads as long as it keeps the service alive" (without saying what percentage of all user responses expressed this sentiment). Then the ads go up (I'm calling it thirty-six months in advance: some pundits will grandiosely refer to this as "destroying Ello in order to save it"), and then we're back to Facebook all over again.

Comments

Dear Bennett Haselton

[Anonymous Coward]

Shut the fuck up.

Sincerely,
Everyone in the Known Universe

Can Slashdot promise to remain Bennet free?

[enjar]

Read on for the rest ....

We Can Only Hope

Not a DeVry JD.

[Hognoxious]

What if they had said, "To each user signing up, we promise that if we ever start running ads or selling user-specific data or otherwise violating this charter, we will pay $1,000 to each affected user."

I know this one!

Carlill v Carbolic Smoke Ball Company [1892]

Re:Thank god

[sexconker]

Oh, it's "bennett" not "bennet". Script works as-is, but may block legitimate "bennet"s.