Written by: Bianca Lindau

This is the final Chat Generative Pre-Trained Transformer (“ChatGPT”) article in our ChatGPT introductory series. In the first article, we briefly described ChatGPT, how it works, and whether ChatGPT can provide legal advice. The second article explores the legal questions the use of ChatGPT raises, particularly concerning intellectual property ownership, infringement of intellectual property rights, and confidentiality of inputted information. In this article, we put ChatGPT’s ability to produce legal documents and answer legal questions to the test. Can the bot provide legal assistance to, for example, a budding entrepreneur efficiently and accurately?

Consider the following hypothetical: two people have an idea for a new phone application. They want to develop a social media application where users can share their images and videos, follow their friends and other users whose content they like, and interact with them (I am aware this sounds familiar, but let’s suppose it is innovative for this hypothetical). One founder will develop the application, while the other is responsible for marketing, providing design input, and funding the project. The two want to have an agreement that will address the terms of their collaboration. They want to ensure that any intellectual property created is protected and cannot be used individually by the founders for separate projects. Further, they intend to set up an entity under which they will do business for anything related to their app and potentially develop it. They have limited funds available for legal counsel and are considering using ChatGPT to draft an agreement and determine which entity type and in what state they should incorporate.

So, what does ChatGPT have to say about this? First, I asked, “What do you call an agreement where two people have agreed to work together to develop a new product for commercialization?”

ChatGPT responded, “An agreement where two people have agreed to work together to develop a new product for commercialization is commonly known as a ‘partnership agreement’ or a ‘joint venture agreement.’ This type of agreement outlines the terms and conditions of the collaboration, including each partner’s responsibilities, ownership of the intellectual property, distribution of profits and losses, and dispute resolution procedures. The specific name of the agreement may vary depending on the legal and business structure chosen by the partners.”

That’s not untrue. A partnership agreement might not be the right fit for our founders here. A partnership agreement is a legal document that dictates how a small, unincorporated, for-profit business will operate under two or more people. It lays out the responsibilities of each partner, ownership stakes in the business, and how profits and losses are allocated.

A joint venture agreement is more fitting. ChatGPT does not discuss whether a separate joint venture entity should be created or whether it’s better to have a joint development (or venture) agreement without creating a separate entity. Let’s work with the joint venture agreement.

I provided the AI model with the following prompt, “Draft a joint venture agreement for two founders who will develop a social media application where users can share their images and videos, follow their friends and other users whose content they like, and interact with them. One founder will develop the application, while the other is responsible for marketing, providing design input, and funding the project. Ensure that any intellectual property created is protected and cannot be used by either founder individually for separate projects.”

ChatGPT’s generated response starts with the following, “As an AI language model, I can provide you with a general template for a joint venture agreement, but I highly recommend that you seek the assistance of a qualified attorney to tailor it to your specific needs and legal requirements. The following is a sample joint venture agreement that you can use as a starting point: […].” I appreciate that the model recommends seeking legal advice from an attorney, particularly since the AI model cannot deal with specific nuances and usually does not follow up with questions to help it provide the best “advice” possible.

Then the language learning model generates a model agreement. The contract looks standard, and the language is easy to understand. The contract is subdivided into thirteen sections: formation of joint venture, purpose, intellectual property, management, profits and losses, funding, confidentiality, term and termination, notices, governing law and jurisdiction, entire agreement, amendments, and counterparts. The generated agreement deals with a separate joint venture entity and how the joint venture will be managed, making it a cross between a corporate governance document and a joint development agreement. It does, however, concisely address many relevant issues.

For example, section 1 states,

“1. Formation of Joint Venture.

(a) The Founders hereby form a joint venture to be known as [JV Name] (the “JV”).

(b) The JV shall be a separate legal entity, with [Founder 1 Name] and [Founder 2 Name] as the initial members.

(c) The JV shall have the power and authority to enter into contracts, acquire and dispose of assets, incur liabilities, sue and be sued, and otherwise conduct business in its own name.”

Section 1(b) states that the joint venture requires a separate legal entity, with the two founders being the members of the initial entity. What is the separate entity referred to in the agreement? The term “members” is used when describing persons who hold a membership interest in a limited liability company (“LLC”). It seems that ChatGPT assumes the entity will be an LLC. However, in section 4, the agreement states that management is vested in a board of directors. LLCs are governed by their members or managers, not by a board of directors. A board of directors controls a corporation. A layperson may not pick up on these inconsistencies. However, an agreement’s inconsistencies could affect a section’s validity, open the contract up to interpretation, and subject your agreement to the statutory or common law default for dealing with the issue the now invalid section was meant to deal with.

The AI model does deal with intellectual property fairly effectively:

“3. Intellectual Property.

(a) The Founders acknowledge and agree that all intellectual property created or developed by them in connection with the JV, including without limitation the Application, shall be owned by the JV.

(b) The Founders further agree that they shall not use any intellectual property owned by the JV for any purpose outside the scope of the JV’s business.

(c) The Founders shall take all necessary steps to protect the JV’s intellectual property, including obtaining patents, trademarks, or copyrights as appropriate.”

However, ChatGPT does not deal with third-party rights nor what should happen with the intellectual property if the founders, for whatever reason, no longer wish to work together. Using a ChatGPT contract is similar to using a sample agreement from the internet. ChatGPT was trained on vast amounts of text, including legal documents, but lacks a nuanced understanding of legal concepts. It does not deal with things you may need to deal with but forgot to input in your prompt. A good lawyer will not only deal with what you state you want but also bring up issues you may have overlooked or not thought of and help you effectively deal with these. ChatGPT requires you to have quite a bit of substantive legal knowledge and modify any generated output accordingly.

Let’s look at what ChatGPT has to say about entity formation for app developers.

This answer is quite nuanced and presents the two most common options, an LLC and a corporation. It discusses some of the benefits and drawbacks of each. However, it does not mention alternative structures (partnerships in various forms) or provide you with a recommendation. The model responds similarly when asked which state would be best to form the entity. It discussed Delaware and California and provided a little background on each. However, it omits some relevant considerations (such as the fact that you should consider the state in which you are doing business, particularly if you are a small startup).

All in all, ChatGPT’s responses are okay. It is not advisable to rely on the model to provide accurate, nuanced legal documents or advice. However, ChatGPT is still an excellent research tool. It can help inform you of issues you may want to deal with when pursuing a new venture. It can provide you with a simple overview of factors to consider when making important decisions, such as what kind of and where to form an entity. AI, such as ChatGPT, is still in its infancy. It will be interesting to see how its capabilities are further developed and improved.

CALDWELL’s Corporate Practice provides advice tailored to our clients’ contract drafting and entity formation needs. We pride ourselves on our ability to provide advice and solutions tailored to a specific client’s situation.

Please contact us today to learn more about how we can help you start or grow your business.

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