Monday, November 23, 2009

Trade Secrets and Confidential Information Revisited

by John L. Watkins

We have addressed the importance of trade secrets and confidential information previously on this blog and in our series of podcasts. We have discussed huge jury verdicts that have recently come down against companies found to have violated the trade secret rights of others. We have also discussed how some prosecutors are now taking an interest in criminal prosecutions of trade secret violations under federal law. However, it should be noted that a California jury just acquitted two defendants who had been criminally charged with economic espionage.

Although the foregoing should have been enough to get anyone’s attention, the news just keeps coming. According to recent reports, a Chinese company just agreed to a $200 million settlement of a trade secret case in California. Associated Press has reported that a former Home Depot manager has been criminally accused of passing trade secret information. These issues are extremely serious and should be considered carefully by any company large or small.

To reiterate some of the key points: Each company should have practices in place to protect its own confidential information and to assure the confidentiality of the confidential information of others that it has agreed to keep secret. Potential legal protections should include: (1) Non-disclosure agreements (“NDAs”) with employees. These NDAs should cover the company’s information. In addition, if the employee will be handling confidential information of others, the NDA should cover that as well; (2) NDAs with consultants or outsourced resources; (3) NDAs with actual or potential suppliers; (4) NDAs with actual or potential customers; (5) NDAs with actual or potential investors; and (6) NDAs with potential business “partners.” Depending on a company’s business, there may be other parties who should be subject to an NDA. It is also a good idea to have company policies stressing the need to protect the company’s own confidential information and trade secrets, and the confidential information and trade secrets of others.

Having an NDA program in place, however, is probably not enough. A company should take other common-sense steps to avoid legal entanglements. These steps should probably include: (1) stressing periodically to employees the need to maintain confidentiality; (2) advising employees that particular information is sensitive; (3) making sure that only employees or others with a true need to know have access to confidential or trade secret information; (4) keeping hard copy confidential or trade secret information under lock and key; (5) password-protecting or otherwise restricting access to electronically stored information; (6) restricting copying of sensitive information; and (7) restricting or monitoring use of portable storage media such as thumb drives and portable hard drives. There may well be other steps that a company should take depending on the circumstances.

The one thing a company should not do is assume that it will avoid issues regarding confidential information and trade secrets. Burying one’s head in the sand may work for an ostrich, but it will not work for businesses in today’s complex and litigious world.

Saturday, November 7, 2009

Why Dispute Resolution Provisions Matter

By John L. Watkins

Commercial contracts of all types, ranging from sales agreements to merger agreements often contain "dispute resolution" provisions. These provisions typically govern what happens if there is a claim or dispute arising out of or relating to the agreement. In essence, the dispute resolution clause is a contractual agreement as to how the parties are going to resolve any differences that may arise.

Having litigated commercial contracts of different types for many years, one observation is that parties often do not pay enough attention to these provisions at the time the contract is drafted. At the time the contract is drafted, the parties are often focused on price and other key business terms. In addition, at the time a transaction is coming together, both sides are typically looking forward to a mutually beneficial relationship. In short, at the time a contract is finalized and signed, neither party tends to believe anything will go wrong. As a result, the dispute resolution provision, if it is considered at all, is often left to the last round of discussions.

Dispute resolution provisions often address two potentially important points: (1) Where a claim or dispute will be decided, and (2) how the dispute will be decided. Both issues require careful consideration.

Where the Dispute Will Be Decided. Dispute resolution provisions often have forum selection clauses, which are also known as choice of venue provisions. These provisions specify which court or courts will decide the dispute, and often provide that the court or courts in a particular jurisdiction will exclusively decide the dispute. Although there are sometimes exceptions, the courts have generally enforced these provisions.

It is easy to see why the choice of venue is important. To use an analogy to sports, the forum selection clause may mandate that the dispute must be decided (literally) in the other party's home court. Of course, it may still be possible to win in the other party's jurisdiction, but the fight will almost always be more difficult and more expensive. If the other party is, for example, a large employer in the other jurisdiction, it may be difficult to pick an impartial jury. It will also be necessary, at the least, to hire counsel in the jurisdiction to work with the company's usual counsel. This adds a layer of expense.

How the Dispute Will Be Decided. Dispute resolution provisions may also contain provisions requiring that the dispute be decided by binding arbitration, instead of in the court system. In arbitration, the case most often is decided either by a single arbitrator or a panel of three arbitrators. Arbitrators most typically are lawyers with some experience in the substantive area or non-lawyer industry experts.

Many companies, particularly international companies, prefer arbitration over litigation. There are pros and cons to arbitration, and whether arbitration is right for a particular party requires consideration of the particular circumstances. If parties to a commercial contract agree to arbitration, the agreement is typically enforceable. In addition, and although there are exceptions, it is extremely difficult to appeal an award entered in arbitration through the court system.

If arbitration is chosen, the dispute resolution provision may also address important topics such as how the arbitrators are to be selected, and where the arbitration is to be held. The dispute resolution provision may mandate that a particular organization, such as the American Arbitration Association ("AAA") or the International Chamber of Commerce ("ICC") administer the arbitration. The AAA, ICC and other organizations also have rules that will often be specified to govern the arbitration. The choice of an administering organization can be important. The use of an administering organization adds a layer of expense in the form of various fees. In addition, the parties must pay the arbitrators' fees, which can be quite expensive.

Conclusion. The purpose of this post is not to argue for a particular type of dispute resolution provision, but rather to point out the need for parties to consider them carefully before signing a contract. In most instances, the dispute resolution provisions will never come into play. When there is a dispute, however, they become extremely important.

Tuesday, October 27, 2009

New Podcasts Available in Series on Common Legal Mistakes by International Companies

by John L. Watkins

Parts 3 and 4 of our podcast series on How International Companies Can Avoid Key Legal Mistakes in Doing Business in the U.S. are now available. In Part 3, we discuss why U.S. contracts are so long (in general, the freedom of contract generally favored in the U.S. includes with it the responsibility to consider and negotiate provisions carefully, and the failure to do so can create risks). We also discuss important legal provisions in contracts, including getting paid and delivery terms.

In Part 4, we continue the discussion of important legal terms that are frequently overlooked or misunderstood, including warranties, indemnities, termination provisions, and dispute resolution provisions.

The podcasts are available on iTunes (search "ctflegal" and download or subscribe), the firm's website,, or the firm's podcast page,

We hope you will enjoy these and our other podcasts. Each podcast is actually a video podcast with slides that accompany the audio presentation.

Sunday, October 25, 2009

Trade Secret Prosecution Begins Under Federal Statute

By John L. Watkins

The protection of trade secrets through litigation has generally been limited to civil lawsuits, typically filed under state law statutory or common law provisions. This is true even though federal and state statutes have provided criminal penalties for trade secret misappropriation. The conventional wisdom was that prosecutors preferred pursuing more traditional crimes, perhaps lacked the resources to pursue trade secret violations, and preferred to leave enforcement to the aggrieved party's civil attorneys.

This approach and attitude may be changing. Last week, prosecutors in California began a trial against two individuals. The charges allege violation of the Economic Espionage Act, a federal statute adopted in 1996. According to press reports, the case involves the first jury trial in a case brought under the Act.

The Economic Espionage Act, 18 U.S.C. Section 1831, et seq. resembles many state trade secret statutes and provides broad criminal penalties for trade secret violations. Another federal statute that provides criminal and civil remedies, the Computer Fraud and Abuse Act, 18 U.S.C. Section 1030, et seq., may also come into play in trade secret cases. State statutes may also provide criminal remedies.

The increasing involvement of government authorities in enforcing remedies involving trade secrets certainly signals a new level of risk for those who may be considering taking or copying trade secrets. Many trade secret cases are brought against former employees who have left a company to join a competitor or to start a new business. The short answer for persons leaving a company is to be very careful and to have a very clear understanding with the employer about what can and cannot be taken.

I doubt, however, that the primary enforcement activity will shift from a company's civil litigation attorneys. Quite simply, the issue is one of control. In civil litigation, a company can decide whether to enforce its trade secret rights through litigation, the legal theories to be advanced, and can have a direct role in any resolution.

Friday, October 16, 2009

Update on Sidekick Incident

by John L. Watkins

Earlier this week, I discussed the incident regarding the apparent loss of data for users of the Sidekick phone sold by T-Mobile. Microsoft is now reporting on the T-Mobile website (10/15/09, 1:00 a.m. P.D.T.) that it believes it has recovered most, if not all, of the data.

Although this is good news, it appears that the incident has created considerable negative publicity for cloud computing generally. According to published reports, Microsoft is trying to limit the fallout from the incident, and has stated that the problem arose from technology used by its Danger Inc. subsidiary, which it describes as separate from Microsoft's other and core cloud based technologies.

It is heartening to know that considerable resources have been devoted to retrieving Sidekick users' data. At the same time, as reported in the original post, it appears that cloud providers still often contractually disclaim liability for loss of data.

It has been reported that at least two lawsuits have already been filed over the incident. It will be interesting to follow whether the lawsuits will be pursued if all or most of the data is in fact retrieved. I have not been able to determine whether the Sidekick terms and conditions disclaim liability. If they do, it will be interesting to see whether the limitations are enforced. Also, since the customer's relationship is presumably with T-Mobile and not Danger Inc., it will be interesting to see if any limitations will apply to Danger Inc.

Tuesday, October 13, 2009

Sidekick Episode Provides Real World Example of Cloud Computing Risks

by John L. Watkins

In a prior post, I wrote regarding both the promise of cloud computing, or software as a service, and the very real potential legal issues and conundrums faced by businesses considering moving some or all of their IT services and data to the "cloud." Perhaps the most fundamental issue is responsibility, or, more importantly, lack thereof, for lost data.

Recently, users of the Sidekick phone manufactured by Microsoft's subsidiary Danger experienced a loss of data first hand. According to published reports, contacts and photos stored on the phones were lost due to a server failure. One report indicated that the data was most likely permanently lost. However, as of this writing, T-Mobile, the distributor of the phone, stated on its website that "recent efforts indicate the prospects of recovering some lost content may now be possible." (Updated 10/12/09, 5:15 p.m. P.D.T.) The final outcome remains to be seen.

It is beyond question that many Sidekick users have been, at the least, severely inconvenienced by this event. The event puts in a very real context the possible loss of data by businesses considering using cloud based services. Consider the possible consequences of a catastrophic loss of data a doctor's office, an insurance agency, a law firm, or basically any other business.

As things presently exist, it appears that users of cloud based services may have little in the way of legal remedies. A very quick review of the terms and conditions for two of the best known cloud providers illustrate the issue. The Google Apps Premier Edition Agreement, paragraphs 14.1 and 14.2, disclaims liability for incidental and consequential damages and limits total liability to the amount paid by the customer to Google for services in the preceding twelve (12) months. The Agreement mandates California law and sets the exclusive venue for any dispute to be the courts in Santa Clara, CA. (Paragraph 15.10).

The Master Subscription Agreement for, which is said to govern the free trial and any subsequent subscription, similarly limits liability, for any single incident, to the lesser of $500,000 or the amounts paid by the customer in the preceding twelve (12) months. (Paragraph 11.1). The Agreement also excludes incidental and consequential damages (Paragraph 11.2). The exclusive venue for litigation (for North American customers) is San Francisco, CA.

I have not researched the enforceability of these limitations under California law, but it is a pretty safe bet that the attorneys who drafted the terms and conditions have done so. Assuming the provisions are enforceable, it means, in common parlance, that a customer experiencing a service interruption or loss of data is out of luck. One prominent commentator, John C. Dvorak, has written that the Sidekick incident may "blow up the cloud," and that the end user license agreements limiting responsibility are the reason.

For a business considering cloud based computing, the Sidekick incident should provide fair warning. Technology is not perfect. Data loss does happen, and there may be no effective remedy. To be fair, this could also happen using a conventional network, and there may be no remedy in that instance as well. However, a business that backs up its data with a simple tape drive system has a pretty reasonable chance of recovering it in the event of a server failure. Any business considering a cloud based approach should, at the very least, have the provider's terms and conditions reviewed so that it can assess the risk it is assuming.

The lawyers who drafted these terms and conditions cannot be faulted: They are doing what lawyers are supposed to do. Sellers often limit liability, and with good reason. However, if machinery, as an example, breaks down, it can be repaired or replaced. The irretrievable loss of data is, at least from a real world perspective, different (the "legalities" may well be the same). Further, the failure of cloud providers to take legal responsibility may limit the widespread adoption of cloud based technology.

Please do not understand this as a blanket rejection of cloud based computing. I love Google's applications (after all, this is being written on Blogger) and have been very impressed by a demonstration of Salesforce. I also am a loyal (perhaps to a fault), T-Mobile customer (BlackBerry, not Sidekick!). Whether I would store critical data or confidential client information in the cloud, however, is another story, at least at this point in time.

I'm just an old lawyer from Atlanta, but it seems to me that if one of these companies were willing to accept some liability for data loss (such as, for example, a guarantee to restore data in a certain period of time or face some real liability), it would eliminate one of the key objections to cloud based technology. If the risk of data loss is truly minuscule, notwithstanding the Sidekick incident, this should be a risk that could be spread over a large user base for an incremental additional cost. It is even possible that an enterprising insurer is developing a product that could serve as a backstop. My guess is there is some money to be made here at a number of levels. Maybe that vendor is out there somewhere in the cloud.

Saturday, October 10, 2009

Why Judge's New Procedure on Confidentiality May Result in Increased Arbitration and Mediation

By John L. Watkins

The Hon. J. Owen Forrester, Senior Judge of the United States District Court for the Northern District of Georgia, recently announced a new case management procedure that will limit the parties from consenting to blanket protective orders to protect the confidentiality of documents in civil cases. Such orders typically permit the parties to designate documents as "confidential" or "attorney's eyes only" without the necessity of court review or intervention. These orders are fairly common in complex business cases. Judge Forrester's procedure requires that he review a document before it is designated confidential.

Judge Forrester explained the adoption of the procedure to be based on his view that the courts should generally be open to the public. It remains to be seen whether other judges in the Northern District of Georgia or other courts will adopt Judge Forrester's procedure. However, Judge Forrester is very respected, so it would not be surprising to see his view gain favor with other judges.

If Judge Forrester's procedure becomes more widespread, there may be some interesting consequences. This past week, I participated in an interesting panel discussion on arbitration before the Atlanta Bar Association's Alternative Dispute Resolution Section. Another panelist suggested that Judge Forrester's procedure might lead to an increased use of arbitration because arbitration procedures are typically confidential. In addition, because arbitration is a creature of contract, it would seem likely that any agreement by the parties on discovery and confidentiality would be followed by the arbitrators.

Another possibility is that the procedure will foster an even greater use of mediation, or will perhaps result in mediation being used earlier in the process. Mediation is by its nature an extremely confidential process. I have previously written about why this characteristic makes mediation particularly useful in cases involving intellectual property, including trade secrets.

As for litigation, Judge Forrester's procedure will definitely require the parties to take a more detailed and focused look at confidential information that is the subject of discovery. In some cases -- those where there really is very little confidential at issue -- Judge Forrester's procedure might streamline things because the parties will simply produce the information. On the other hand, in cases where confidentiality is truly in issue, the very careful and selective review and analysis required, along with possible resulting motions practice, may slow things down and will probably result in increased expense.

The only sure thing is that Judge Forrester's procedure will require parties and their counsel to think carefully through their options before filing suit or in conducting discovery.

Sunday, September 27, 2009

Insurance 101: Understanding the Basics of Liability Insurance, Part 4

By John L. Watkins and Guest Contributor Henry Shurling

In our last post, we covered placing the insurer on notice in the event of an occurrence or a claim. Assuming that the insurer is on notice, this post will cover some of the things that may happen in the handling of the claim.

1. The Insurer Should Provide Written Acknowledgment of the Claim. An insurer should assign a claims professional and provide written acknowledgment of a claim very shortly after receiving notice. The claims professional is the person to whom communication regarding the claim should be directed. The acknowledgment will also include a claim number. It is important to reference the claim number in all future correspondence.

2. The Insurer Typically Must Provide a "Defense." Under most insurance policies, the insurer has two primary obligations: to defend and indemnify. As a practical matter, the obligation to defend means that the insurer must hire and pay for a lawyer to defend any lawsuit on your behalf.

Most policies allow the insurer to pick the lawyer. Sometimes, an insurance company will agree to use a lawyer proposed by the insured, particularly if the lawyer has some unique background knowledge or experience that will be helpful in defending the claim. The obligation of the insurance company to pay for the defense is often as important as the obligation to pay for any settlement or judgment, as legal fees can often be substantial.

There is one thing that is important for an insured to understand: Although the insurer may hire and pay for the lawyer providing the defense, the lawyer is the insured’s lawyer and owes primary professional responsibility to the insured and not the insurance company. Sometimes, "insurance defense" lawyers may forget this and will keep the insurer fully informed, but not the insured. If this happens, an insured should not be hesitant to remind the lawyer that the insured is the client. This is not to imply that insurance defense lawyers are not competent; in fact, many are excellent trial lawyers.

3. The Insurer May Make a "Reservation of Rights." Insurers will sometimes send the insured a "reservation of rights" letter. The purpose of a reservation of rights letter is to notify the insured of potential policy defenses or limitations to coverage. A reservation of rights letter typically says, in effect, that the insurer will provide a defense for the time being, but that it reserves the right to disclaim coverage in whole or in part at a later date. The insurer may also reserve the right to recover defense costs advanced by the insurer.

In Georgia, an insurer may reserve rights by unilaterally sending a letter. A reservation of rights letter is apparently often seen by insurers as a formality. However, from the insured’s perspective, it is a cause for concern. It is a good idea to have your lawyer (a lawyer you hire; the lawyer providing the defense cannot do this) review the reservation of rights letter to determine if there are any serious coverage issues.

In some other jurisdictions, the insurer will ask the insured to sign a "non-waiver agreement," perhaps because a unilateral reservation of rights letter is not accepted in that jurisdiction. A non-waiver agreement serves the same essential function as a reservation of rights letter, but requires the insured’s consent. Again, if you are requested to sign a non-waiver agreement, it is a good idea to consult with coverage counsel.

4. The Insurer May File a Declaratory Judgment Action Against You. Particularly if the insurance company believes there is a serious coverage issue, the insurer may file a declaratory judgment action against you. In such an action, the insurer is asking the court to determine whether or not it is obligated to provide a defense or, sometimes, indemnity. If this happens, you have no choice but to hire your own lawyer and defend the case or counterclaim for breach of contract and potentially other remedies.

Insureds should be aware that, although an insurance policy is a form of contract, there are rules of interpretation of insurance policy language that favor the insured. As a general matter, it must be clear that claim is not covered (particularly for purposes of providing a defense) before coverage will be denied. If there are ambiguities in the policy language, they are to be construed in favor of the insurance company. An insured should not conclude that there is no coverage because the insurer has contested it. Rather, the insured should have its own coverage counsel evaluate the situation carefully.

5. The Insurer May Disclaim Coverage. Insurers will sometimes simply deny or disclaim coverage. By this action, the insurer is saying that they will not provide a defense or indemnity. If this happens, you need to consult with insurance coverage counsel, who can advise you whether you should pursue litigation against the insurance company.

6. The Insurer May Settle the Claim. Many policies give the insurer the right to settle the claim, even without the insured’s consent. There are instances in which the insured may prefer to defend a case for reputational or other reasons, rather than settle. In such instances, the insured should have a frank discussion with the insurer’s claims representative. However, in most instances, if push comes to shove, the insurer has the right to make the determination.

Conversely, there may be other instances in which an insurer receives an offer to settle a claim within policy limits, but is unwilling to do so. Particularly if the insured believes that the risk of an adverse judgment (if the case proceeds to trial) exceeds policy limits, the insured should strongly consider putting the insurer on notice of its desire to settle and that, in the event of a judgment exceeding policy limits, the insured intends to hold the insurer responsible for the excess loss. This is usually best accomplished with the involvement of coverage counsel.

7. If the Matter Proceeds to Trial, the Insurer Should Pay Any Judgment. If the matter proceeds to trial, hopefully all will go well. However, if there is an adverse judgment, the insurer should, subject to any potential defenses to coverage, pay any judgment up to the policy limits. As noted above, if the insurer proceeded to trial in the face of an offer to settle within policy limits, it may be possible for the insured to hold the insurer responsible for the excess if the insurer made an unreasonable decision in failing to settle. If there was no opportunity to settle within policy limits and the judgment exceeds policy limits, the insured will be responsible for any excess. However, it may be possible to compromise and settle the result within policy limits due to the risk of the judgment being overturned on appeal.

We hope that this series of posts has provided you with information necessary to understand the basics of the often confusing subject of liability insurance. We note that this series of posts only covers basic concepts. Many liability insurance issues are very complex and are beyond the scope of this series of posts. We close by again noting that this discussion is based on Georgia law and general practices in Georgia. If you have a question about your liability insurance, or if you are in another jurisdiction, please consult an experienced broker or coverage counsel licensed in your jurisdiction.

Tuesday, September 22, 2009

Insurance 101: Understanding the Basics of Liability Insurance, Part 3

By John L. Watkins and Guest Contributor Henry Shurling

It is sometimes said that insurance is one thing that you buy that you hope you never have to use. However, claims may arise. If they arise, there are a few things that need to be done.

1. Have a System in Place for Reporting Accidents or Incidents that Might Lead to a Claim. A business should have a system in place in which accidents or incidents that occur that might lead to a claim are reported to management. Note that some policies have provisions requiring such events to be reported to the insurer. The important thing is to get the information to a responsible person who understands what needs to be done.

2. If Demand Letter Arrives or a Suit is Filed, Notify the Carrier. If a demand letter arrives from another party or the other party’s lawyer, the carrier should be notified. If a suit is filed, it is important to get the suit papers to the carrier as soon as possible.

3. Some Notes About Notice. Some carriers are more aggressive than others about raising an improper or late notice defense. It is never safe to assume that a carrier will not raise such a defense. Many insureds provide notice by calling “the insurance company,” meaning they call their broker. As discussed in the first post, the broker is not the insurance company.

Many brokers assist their insureds with claims as part of their service, and will report a claim to the carrier on behalf of the insured. Many carriers will accept such notice. However, policies typically have specific provisions on how notice is to be given. The safest approach is to follow these provisions exactly. Note that the address for giving notice is often different from the address for paying premiums.

Most insurers will send prompt written acknowledgement of a claim. It is a good practice to confirm in writing with the claims professional that the company acknowledges it is on notice of the claim, and that no further action need be taken to put the company properly on notice.

4. Cooperate. Almost all policies have some form of “cooperation clause.” This is a clause that requires the insured to cooperate with the insurer in the event of a claim. Insurers will need information to deal with the claim. As a general proposition, provide it. If it appears that an insurer is making unreasonable requests, your broker or counsel may be able to intercede and avoid any potential dispute.

Monday, September 21, 2009

Buy/Sell Agreements 101 - Understanding the Basics

By Thomas L. McLain

Whether your small company is a corporation or a limited liability company, most legal advisors recommend that buy-sell provisions be a part of your company documentation. Buy-sell provisions accomplish at least two purposes. First, by specifying the terms pursuant to which an equity owner may sell or transfer an equity interest in the company, the buy-sell provisions provide continuity of ownership and control. Second, buy-sell provisions provide liquidity in the event of the death or disability of an equity owner. By spelling out up front the terms pursuant to which these and other goals are accomplished, the owners should eliminate anxiety, pain, and real controversy later. However there is a lot to consider and this outline of the basics of buy-sell provisions will prime the business owner for an effective consultation with their company attorney.

Types of Buy-Sell Structures. In the case of a corporation, the buy-sell agreement is a stand-alone agreement. In contrast, in the case of a limited liability company, the buy-sell provisions are typically incorporated into the operating agreement. In either case, there are two types of buy-sell structures based upon how the payments are actually made.

· Redemption structures. This type of structure contemplates that the company purchase the equity interest of the selling equity owner.
· Cross-purchase structures. This type of structure contemplates that the remaining owners purchase the equity interest of the selling equity owner.

Triggering events. When an event occurs that causes the buy-sell provisions to be applied, it is said to be a triggering event. There are a variety if triggering events and some of the most common are summarized below.

· Death. The death of an equity owner is usually a triggering event, either based on the theory that the estate of the deceased owner will need liquidity, or based on the theory that the remaining owners do not want to be forced to deal with a representative of the estate. Sometimes the death of an equity owner gives the representative of the estate the right to force the purchase of the equity interest; other times, the death of an equity owner gives the company or the remaining equity owners the right to force the sale of the equity interest.
· Disability. Permanent disability is a triggering event for most of the same reasons that death is a triggering event. If the company has disability insurance, then the terms of the buy-sell provisions need to be coordinated with the terms of the disability insurance policy.
· Bankruptcy. The bankruptcy of an equity owner is almost always a triggering event because having a pre-determined method for the valuation and sale of an equity interest reduces the involvement of the company in the bankruptcy process and provides liquidity.
· Voluntary or Involuntary Departure. Some buy-sell provisions allow the company to force the sale of the equity interest of an equity owner who is no longer involved in the company as a result of a resignation or termination.
· Divorce. Some buy-sell provisions allow the company to force the sale of the equity interest of an equity owner who becomes a part of a divorce proceeding. There are pros and cons to divorce as a triggering event and these need to be considered.
· Proposed Transfer. The most common triggering event occurs when an equity owner decides to sell or transfer their equity interest to a third party. If it’s a sale, there is typically an opportunity to match the terms of the sale. If it’s a transfer, there is typically an opportunity to approve or disapprove the transferee.

Valuation. One of the key reasons for adopting buy-sell agreement is to provide a rational approach to business valuation in the case of a departing equity owner. Some buy-out provisions use different valuation techniques depending on the nature of the departure: For example, the valuation for a departing owner who has been terminated for cause by the company may be less favorable that then valuation used for a payment to the estate of a deceased equity owner. Some of the mechanisms used for valuations include:

· Book Value. Usually the least favorable to the departing equity owner.
· Market value. This method is implicitly used when a departing equity owner has a bona fide third party offer and that offer must be matched by the company or remaining equity owners.
· Appraised Value. Appraisals may or may not give full value to the business due to the variety of methodologies that can be used and discounts applied.
· Agreed Value. Many buy-sell agreements use this method. All equity holders agree to a value of the business on an annual basis.
· Insured Value. In the case of a cross-purchase agreement funded by insurance, the amount of insurance will often be used as the measure of the value of the company. Key man life insurance can also provide a value.

Terms of Sale. In instances where the buy-sell provisions have been triggered as a result of a bona fide offer from a third party, then the terms of the sale are usually dictated by the terms of that third party offer. In other instances, there are several different considerations. For example:

· Should the departing equity owner be able to force the purchase of the equity interest? The answer to this may depend on the circumstances; for example, it may be appropriate to allow a representative of an estate to force the purchase of the equity interest.
· Should the company be able to force the sale of the equity interest? The answer to this may depend on the circumstances; for example, it may be appropriate to allow the company to force a sale of the equity interest in the event of a divorce.
· Should the company or the remaining equity owners be required to borrow the purchase price from third parties? If not and the buyers may use notes, the interest, term and payment schedule of such obligation will need to be determined.
· Should any debt obligations be secured by the equity interest being sold or other security?

Other. There are many other things that can be considered in connection with a buy-sell agreement

· Non-compete. Although not common, buy-sell provisions may include non-competes and other restrictive covenants.
· Exceptions. There are often exceptions to the buy-sell agreement, particularly in the area of transfers. An equity owner may be allowed to transfer all or a portion of an equity interest to a close relative without there being a triggering event.
· Business Continuity. Particularly in the case of buy-sells structured as a redemption that are funded by insurance, additional life insurance may be purchased to make sure that the company receives funds to recover from the loss of a key owner. If so, this needs to be coordinated with the buy-sell provisions.

Tuesday, September 15, 2009

Corporate social media/networking policies; Part 2 - Framework

By Thomas L. McLain

For companies, the fundamental problem with social media and social networking is that employees use them to manage not only their professional relationships, but also their personal relationships. While this dual purpose component of social media may not seem any different than email, the very public nature of social media makes it far different. Part 1 of this series on corporate social media/networking policies established the need to develop policies to address micro-blogging sites such as Twitter, professional networking sites like LinkedIn, social networking like Facebook, and information sharing sites such as Digg, YouTube, and Flickr. In this Part 2 of the series, the framework of a corporate social networking policy will be outlined.

Definition of Social Media. Any social media policy needs to contain a definition of the term "social media" so that employees will know what will be governed by the policy. Social media applications are all Web 2.0 applications; applications that essentially allow real time interaction and collaboration over the Internet. The definition should describe generically the sorts of Web 2.0 applications that are included within the definition and it should also contain a non-exclusive list of specific applications.

Company Social Media Philosophy. A company needs to determine how far its policy will extend in the workplace and beyond. In the workplace, it will want the policy to govern company-sponsored communications, or "official communications," and personal communications. Common topics for official communications include: proactive sales/marketing, reactive sale/marketing (monitoring social media and reacting to "bad press"), direct inquiry customer service, reactive customer service (monitoring social media and reacting to problems), and human resources recruitment. Official communications and personal communications outside the workplace will also have to be addressed. The philosophy should stress that regardless of whether personal communications or official communications are involved, employee productivity is not to suffer as a result of involvement with social media.

Mechanics. Employees will often already have social media accounts so the policy will need to require disclosure to the corporation of all social media accounts. Accounts which will be used for official communications will need to be reviewed for consistency with the public image the company wishes to portray. The company should also have the passwords to all accounts from which official communications are sent. Employees need to understand that accounts will be monitored and that violations of the policy may result in the termination of the employee.

"Playing the Game" and Online Demeanor. Many social media sites are set up so that a participant needs to endorse others in order to gain credibility; however, such endorsements may give the appearance that the company is actually giving the endorsement. Thus, the company has an interest to protect in connection with any social media account used by an employee that identifies the employee as an employee of the company. The policy will need to be defined and require that the employee exercise appropriate business behavior. This requirement will need to be supplemented by training. Employees must not forget that, despite the informality of the communications, the comments they make online are public and essentially permanent.

Compliance. The policy will need to be conformed to all other policies, such as the company's email, confidentiality, privacy and communications policies. The policy will need to remind employees to protect proprietary and confidential company information and trade secrets.

Legal Issues, Monitoring, Training and Enforcement. Whether addressed directly in the corporate social media policy or indirectly outside of the policy, these topics will be discussed in Part 3 of this series.

Insurance 101: Understanding the Basics of Liability Insurance, Part 2

By John L. Watkins and Guest Contributor Henry Shurling

This continues our series of posts on basic liability insurance issues for businesses. In our first post, we discussed the general role of the broker and the importance of obtaining a complete copy of the insurance policy. In this post, we will cover some of the basic types of liability coverage for businesses.

Please note that this post contains only general information. Although many policies are similar, they may contain different terms and conditions. Some policies may have exclusions or endorsements that limit coverage. There is no substitute for a careful review and understanding of the provisions of your policy, which is of course beyond the scope of this post.

1. Motor Vehicle Coverage. A business has motor vehicle liability exposure whether or not it owns or leases motor vehicles. Of course if a company does own or lease vehicles, it is required by law to purchase liability coverage. The statutorily-required limits required are minimal and should be evaluated carefully. However, it is imperative to purchase coverage for “Hired” and “Non-Owned” vehicles as well. This coverage protects the named insured (usually the business) should an employee have an at fault accident when either renting a vehicle on business or when driving their personal vehicle on business.

2. Commercial General Liability (“CGL”) Coverage. Most basic business coverage is provided through a commercial general liability, or “CGL” policy. This coverage typically provides coverage claims for “bodily injury” (which includes physical injury or death) and property damage resulting from an “occurrence.”

There has been litigation about what constitutes an “occurrence,” but in most instances, an occurrence can be thought of as an accident. Generally, if an occurrence happens during the policy period (the period when the policy is in force), that particular policy will respond to a covered claim that is made after the policy period. Thus, for example, if an accident happens on the last day a policy is in force, that policy will provide coverage for a claim – if it is otherwise covered – made after the policy period ends.

CGL policies may also include coverage for “personal and advertising injury.” Personal and advertising injury includes coverage under certain circumstances for claims for libel and slander, malicious prosecution, wrongful entry into a dwelling, false arrest, invasion of privacy, and some claims (in advertising) for copyright and trade dress infringement. Although “personal and advertising injury” coverage potentially includes many claims, it is also subject to substantial exclusions, and carriers may contest coverage for such claims more than for other types of coverage.

CGL coverage often includes coverage for product liability claims. This coverage is typically called “product and completed operations” coverage. If your company is a manufacturer or a distributor of products, you should carefully review this coverage with your broker or insurance lawyer and make sure that it is sufficient for your needs.

It is impossible in a short post to include all types of claims that may not be covered by a CGL policy. Policies often contain many exclusions. As a general rule, breach of contract or breach of warranty claims are not covered. However, claims for “insured contracts,” such as where one company agrees to indemnify another company for claims (as is often common in construction or equipment supply contracts) may be covered. Again, if your company needs such coverage, it should be discussed carefully with your broker.

Claims for intentional misconduct are often excluded. However, this is a complicated issue and often depends on the particular circumstances of a claim.

3. Employer’s Liability Coverage. Often just referred to as part of Workers Compensation coverage, Employer’s Liability is a separate and distinct coverage written in conjunction with Workers Compensation. Unlike Workers Compensation, Employer’s Liability has specific limits stated in the policy that serve to cap the coverage available under the policy. There are typically four areas where Employer’s Liability may respond to an action an employee may take: Care and Loss of Services, Third Party Action Over Claims, Dual Capacity and Consequential Bodily Injury. While these types of claims are much more infrequent than typical Workers Compensation claim, care should be taken in purchasing the limits. If set appropriately, any umbrella coverage would provide additional limits of liability beyond what is set forth under the Employer’s Liability Coverage section.

4. Professional Liability Coverage. Professionals, from doctors and lawyers to consultants, need to have professional liability coverage, which protects them against claims of professional negligence or malpractice. Unlike CGL coverage, which is written on an occurrence basis, most professional liability coverage is written on a claims made basis. This means that the insurance will respond only to claims that are made (and sometimes made and reported) in the policy period.

Thus, unlike an occurrence-based policy, a claims made policy will typically not respond to a claim that occurs during the policy period but is made after the policy period. If the insured has renewed or obtained a new policy, the renewal policy or policy in effect when the claim is made will respond.

Thus, a claims made policy will typically cover claims arising out of events that occur before the policy begins, but even this is subject to qualification. Many claims made policies have a “retro date.” Essentially, a retro date establishes a date that cuts off coverage for claims arising prior to that date. It is therefore important to make sure that a retro date does not unduly restrict coverage.

Saturday, September 5, 2009

Insurance 101: Understanding the Basics of Liability Insurance, Part 1

By John L. Watkins and Guest Contributor Henry Shurling

In a number of our blogs and podcasts, we have noted that start-ups and small and medium-sized businesses should have a strong insurance program as part of their risk management program. A number of recent interactions with clients have reminded me that many businesspeople have a very limited understanding of insurance and how it works.

Accordingly, this is the first in a series of posts that will cover some of the basics of insurance for business. Henry Shurling of the McCart Group, an Atlanta-based insurance agency and risk management consulting company, joins this series as a guest co-author, and provides his considerable insights on these important issues.

Please note that the focus of this series of posts is on liability insurance. We are not covering other important issues such as group health, disability, or life insurance, although they are also very important.

1. Understand the Role of the Agent or Broker. When a company buys insurance, it typically uses, whether it knows it or not, an insurance agent or broker (although there are differences betwween an agent and a broker, we will refer to both genererically hereinafter as a "broker"). Businesspeople sometimes refer to their broker as "the insurance company," but that is not correct. Although a broker serves as the point of contact for obtaining insurance, the broker does not itself provide the insurance.

The role of the broker is to advise businesses on an insurance program and to solicit proposals from different insurance companies, or carriers, for consideration. Insurance carriers include companies such as Zurich, Travelers, Chubb, Hartford, among others. The carrier, not the broker, provides the insurance and issues the policy.

The broker should take the time to understand the customer's business and help recommend an appropriate insurance program with appropriate policy limits. Brokers should help businesses understand their risk exposures and look at alternative ways to address them. The purchase of an insurance product often plays a significant role when dealing with these exposures but is not always the most efficient method available. A competent broker should be willing and able to discuss these alternative methods with their clients.

For example, the McCart Group offers professional and technical services in areas of safety, health and claims management. These areas include OSHA compliance, FMCSA audits, Industrial Hygiene and Environmental Consulting. Although having coverage for a risk is important, avoiding claims in the first place is even better.

2. Obtain a Copy of the Insurance Policy. It is surprising that many companies facing a potential claim cannot produce a copy of their own insurance policy. An insurance policy is an important document, and the insurance policy, as issued, should be kept in a safe place, as is the case with other important company documents. It is true that a copy of the policy can be obtained from the carrier, perhaps with the assistance of the broker. This often takes time, however, and decisions may have to be made quickly in the event of a claim. In addition, having the policy available aids a broker in reviewing and comparing coverage at policy renewal time.

By referring to a copy of the policy, we mean the complete copy. A policy will usually have a declarations page (or "dec page"), which sets forth the basic coverage provided, policy limits and deductibles. But a declarations page is not the complete policy. The policy will also typically include the policy form, which includes definitions (which are often very important in determining the extent of coverage), the insuring agreement (the basic grant of coverage), the policy conditions (which often contain requirements for what the insured must do in the event of a claim), and any policy exclusions (important provisions that limit the extent of coverage).

A policy may also include endorsements, which are extra provisions that are usually attached to the basic policy forms. Endorsements modify the policy provisions and may increase or limit the extent of coverage. Endorsements are often very important in determining the extent of coverage.

In coming posts, we will cover additional insurance issues, and will delve into more specific issues regarding coverage and other issues.

Tuesday, September 1, 2009

We need a social media/networking policy?!? Why, what could possibly go wrong?

Corporate Social Media Policies- Part 1

By Tom McLain

Do companies really need to develop policies to address social networking or social media? The answer to this question may be surprising – Yes. Or, in light of reports of the NFL's recent decision to implement restriction on the use of Twitter (a micro-blogging site) on game days, maybe a "yes" is not so surprising. Still, the NFL is a lot different than most businesses and the fact that it feels the need to put limits or bans in place does not necessarily mean that other companies should. The reality is that the social networking/media phenomenon may be falling below the radar screen of management of many companies for many reasons, including the informality of the media. However, there are some very real dangers that need to be considered.

At the outset, the terms "social networking" or "social media" are themselves misleading, due to the inclusion of the word "social" and due to mistaken belief that, because they occurs on a computer over the Internet, they are not a serious endeavor. For example, it is easy to dismiss social networking as just a new way to chat or gossip. However, a better way to think of social networking it is "computer-based" networking. Company executives understand the concept of networking in the traditional sense – meeting with people in face to face settings that may or may not be social for the purpose of advancing one's business. "Social networking" needs to be thought of in the same terms – its just traditional networking facilitated by computers instead of being face to face.

It is also a mistake for company executives to dismiss or underestimate the social media phenomenon as a fad or as something that is reserved to a small number of people. In August, 2009, a video was produced (for the Internet, of course) entitled "Social Media Revolution" that provided some amazing statistics:

1. By 2010 members of Generation Y will outnumber Baby Boomers;
2. The fastest growing segment on Facebook is 55-65 year-old females;
3. There are over 200,000,000 blogs and 54% of bloggers post content or "tweet" (post on Twitter) daily;
4. What happens in Vegas no longer "stays in Vegas," but shows up on YouTube, Flickr, Twitter, Facebook…

Quite simply, the raw numbers associated with social media are huge and so the question quickly becomes whether social media has any real power, reach, or impact. There is little doubt that the sheer numbers have caught the attention of sales and marketing teams. Consider the following additional statistics from "Social Media Revolution:"
1. 78% of consumers trust peer recommendations, while only 14% of consumers trust advertisements;
2. People care more about how their social group ranks products and services than how Google ranks products and services;
3. 34% of bloggers post opinions about products and brands and 25%Internet search results for the world’s top 20 largest brands are links to user-generated content.

Very quickly, two things become evident: first, the sales and marketing groups of any company will be forced to begin using social networking and social media to promote the company's products and services and, second, the sales and marketing groups of any company will be forced to begin monitoring social networking and social media to manage negative publicity about the company's products and services.

Given the informal nature of these media, there will be a stronger need to establish guidelines on how to promote products and services and how to defend them, particularly with respect to company-sponsored communications or "official" activities. Unfortunately, it’s the "unofficial" activities that can raise even higher levels of concern.

One of the aspects of social networking and media is that user profiles of the party doing the communicating typically indicate where the person works. Moreover, the communications themselves are public and may be of endless duration. So informal, unofficial communications by employees are of considerable potential concern. It is easy to imagine all manner of scenarios which could lead to embarrassment if not liability for the company. For example, suppose a public company employee is active on Twitter and well identified as a mid-level manager for the company. Suppose further than an unrelated but unscrupulous twitter user decides to use twitter as a part of a pump and dump stock scheme for that company. If our mythical company employee were to innocently pass along information from the unscrupulous Twitter user simply because he was proud of his company and that information was false, would our mythical company employee be an accomplice to the pump and dump scheme? Perhaps not, but the circumstances could prove to be highly embarrassing.

Thus, there are several points which need to be addressed in any social media policy adopted by a company. Such policies will need to address communications that are made on behalf of the company or clearly in a person's capacity as an employee. The policy may also need to address communications made in other capacities. The details of how to develop a social media/networking policy will be discussed in later blog posts, but some of the things to be weighed and considered are:

1. "Official Communications"

(a) Procedures used to approve communications?

(b) Personnel authorized to communicate?

(c) Subject matters to be communicated?

(d) Require a separate "official" account?

2. "Unofficial Communications"

(a) Require a separate "personal account?"

(b) Disclosure to company of all accounts?

(c) No references to the employee's company affiliation?

(d) Disclaimer?

(e) During office hours
(1) Time restrictions?
(2) Subject matter restrictions?
(3) Network restrictions?

(f) During personal time
(1) Subject matter restrictions?
(2) Other restrictions?

Sunday, August 23, 2009

Why You Need Professional Advice and an Operating Agreement for Your LLC

by John L. Watkins

If you follow our blog or our podcasts (now available free for download or subscription at the iTunes Store (search for “ctflegal”), you have read or heard Tom McLain and me strongly suggest that businesses avoid the use of Internet forms or Internet-based document services. It is a fair rejoinder that, as lawyers, we have an economic interest running counter to such services.

As a litigator, however, I have often had to try to clean up legal messes caused by homemade agreements, misuse of forms, or, in some instances, the failure to document agreements. Cleaning things up on the back end, particularly through litigation, is always more expensive. Further, cleanups rarely achieve the same results that could have been achieved by doing things right on the front end.

A specific example of that graphically illustrates the point is the need for an operating agreement for a limited liability company (“LLC”). In Georgia, LLCs are still a relatively new form of business entity designed to provide liability protection to the owners (“members”) and flow through taxation.

Most business persons understand the need to form a corporation, LLC or other entity to help protect their personal assets. LLCs are easy and inexpensive to form. It is certainly true that an Internet service or a business person acting alone can form an LLC. Unfortunately, many business persons assume that, once the LLC is formed, that is all they need to do. This assumption can lead to unexpected and unintended consequences.

LLCs are designed to be highly flexible entities that can be adapted to the needs of the particular business. This flexibility allows the members to enter into an operating agreement that governs, among other things, how capital accounts will be established, how the LLC will be managed, how profits will be distributed, what happens when the business is wound down.

Absent an operating agreement, many critical issues will be determined by statute. Let’s say, hypothetically, that a business person establishes an LLC, coming up with the business plan and strategy and contributing the capital to start the business. Further assume that she decides that a trusted assistant should have a small equity interest in the business, both as a reward and an incentive to perform. Thus, the founder files the LLC paperwork listing herself and the assistant as the two members.

The founder may be surprised to find at a later date that, because there is no written operating agreement, she and the assistant are, by Georgia statute, entitled to equal votes in managing the business. O.C.G.A. § 14-11-308(a)(1). In addition, the founder and the assistant are entitled to equal profit distributions. O.C.G.A. § 14-11-403. The founder will also find, as a consequence, that the assistant has the legal right effectively to block anything the founder wants to do with the business.

It may be possible, if the assistant is a reasonable person, to clean this up at a later date by adopting an operating agreement that makes the assistant the minority equity holder and that allocates voting rights and profit distributions as was originally intended. However, if there has been a falling out between the two members, or if they simply honestly disagree on what their respective rights should be, it can lead to a very difficult dispute.

Of course, if the founder had consulted a lawyer in establishing the LLC, this scenario would have been avoided. The issues would have been addressed in an operating agreement, making the founder the manager, establishing the percentages for profit distributions, and dealing with many other issues.

In closing, please note that these are only a few of the issues that can arise when business founders rely on Internet services or try to act as their own lawyer. A founder should also discuss with a lawyer, for example, the basic issue of whether an LLC is the correct choice of entity.

Although the general principle regarding “do it yourself law” applies, the issues may be different in other states. People in other states should consult a lawyer licensed in their jurisdiction.

If you need help with forming a Georgia LLC and establishing an operating agreement, you may wish to consult with one of the firm’s experienced corporate attorneys, Tom Chorey, David Lumsden, Tom McLain, or Betsy Peterzell.

Monday, August 17, 2009

CTF Podcasts Now Available on iTunes

by John L. Watkins

We are pleased to announce that our series of legal podcasts is now available free of charge for download and subscription at the iTunes Store. Just search “ctflegal” at the iTunes Store, and you can download particular podcasts or subscribe to future podcasts. The podcasts are also available on the firm’s website,, or at

The firm began recording and distributing podcasts earlier this year addressing various legal topics of interest to business. The podcasts provide general information and hopefully allow our clients and friends to identify and understand legal issues that may affect their businesses. The podcasts are not intended, of course, to constitute legal advice and are no substitute for legal advice from a qualified lawyer addressing the particular circumstances a particular business may face.

Currently available podcasts include a three-part series on trade secrets and non-disclosure agreements (“NDAs”), and a three-part series on mediation. Our most popular podcast to date is entitled “Common Legal Mistakes Businesses Make and How to Avoid Them,” based upon a presentation I gave earlier this year to the Chamblee Business Association. This podcast addresses a number of mistakes we have observed businesses (particularly small and medium-sized businesses) make repeatedly.

We are currently working on completing a series of podcasts on common legal mistakes international companies make in doing business in the U.S. The first two parts are available, and we expect to release further podcasts in this series shortly. Future podcasts will address insurance issues and other topics.

Wednesday, July 22, 2009

Now Available as Podcast: So Your Business Has Been Sued: Now What?

by John L. Watkins

On our blog, website, and podcast page, we try to provide businesses with information about how to avoid disputes and litigation.

However, litigation sometimes happens. If the process server arrives at your business, what should you do? Do not panic, but do not procrastinate.

Our new podcast, available on the firm website or our podcast page addresses the initial fundammental steps a business should take if it is sued. Hint: Call your lawyer and forward the suit papers to your lawyer immediately!

The substance of the podcast is also available in an earlier post on this blog and in an article on JDsupra.

Saturday, July 18, 2009

What Tom Watson Teaches Us About Business and Practicing Law

by John L. Watkins

July 18, 2009. Today, I and the rest of the world that pays any attention to golf watched the amazing spectacle of Tom Watson, age 59 and only a couple of months short of his sixtieth birthday, and less than a year after hip replacement surgery, take the lead of the British Open, one of golf’s four major tournaments. No, not the Senior British Open, the British Open, or, for the rest of the world, the Open: The same tournament on the same Turnberry links that sent Tiger Woods, the best golfer on the planet for the last decade, packing after two rounds. The same tournament that Tom Watson has previously won five times, most recently in 1983.

As I am writing this, I have no idea if Tom Watson will pull off a win. Regardless of what happens, what Watson has achieved through three rounds is nothing less than astonishing, and can remind us all of a few important lessons about life, and maybe even about practicing law. Here are a few random, although hopefully appropriate, thoughts.

“This is what it’s all about, isn’t it?” Watson is reported to have asked this question to Jack Nicklaus on the back nine in the heat of their famous “Duel in the Sun” on these same Turnberry links 32 years ago, a legendary battle in which Watson prevailed. Nicklaus supposedly replied, “You bet it is.” Although Watson surely wants to win this year, perhaps more than anyone, the chance to be back in the battle after so many years, doing the one thing he does best, and under the most improbable of circumstances, is itself reward enough.

Although not nearly as true in golf as other sports, most athletes have very limited time in which they can play their game or sport at its highest levels. Fortunately, this is not true for most people in business, and it is certainly not true in practicing law. Watson has reminded us to stay in the game, to enjoy what we do, and to relish the chances – few as they may be – to do something really special in our chosen business or profession.

“Come on, old man.” These words were uttered to Watson during the second round by Sergio Garcia, the brash young Spanish star. At the time, Watson had made a number of bogeys, and the round seemed to be getting away from him. Sergio reminded Watson that he had shot a spectacular round the day before, and, in essence, told Tom to get it in gear. Watson responded with a number of birdies coming in, and, at the end of the day, he shot an even par 70 that took the lead. After the round, Watson thanked Garcia for the pep talk.

Golf, as life, business and law, is, when at its best, an intergenerational game. As much as Watson appreciated Garcia’s words of encouragement, Garcia was no doubt inspired by Watson’s performance. This is as it should be. The young should learn from the experienced, but the experienced can be inspired by and learn from those who are younger.

Tiger Woods, as an example, has certainly inspired many younger golfers. But he also inspired many more experienced golfers to get in the gym and to raise their games. And his example of taking his hat off and shaking hands on the last hole, regardless of his own performance, is an example to all generations.

Watson’s performance is also a reminder that these guys could really play, and, under some circumstances, can still play. There is an unfortunate tendency in athletics for fans to appreciate only the accomplishments their generation, and to downplay the accomplishments of prior generations. Many people who never saw Watson and Nicklaus play (not to mention Palmer, Player, Casper, Trevino, Ballesteros, Faldo, and many others) seem to assume that Tiger and Phil Mickelson and others are somehow inherently better than their predecessors.

The fact that Watson can challenge the young guys at 59 (and after a hip replacement) shows how wrong this assumption is, just as Nicklaus demonstrated with his top 10 finish at the Masters in 1998 at age 58 (before his own hip replacement). If these guys can challenge the current champions now, many years after their prime, it would seem to be a reasonable assumption that, hey, they really were pretty good and still are. And, for the record, if Tiger could go back in time, he would be pretty darn good, too.

The same assumptions made in athletics may also be made in business and law. Law, perhaps of all professions, is intergenerational. I started practicing in 1982 with the old Hansell, Post firm in Atlanta (it is now Jones, Day’s Atlanta office). The lessons that I learned from the Hansell, Post partners – Rhett Tanner, Hugh Dorsey, Jule Felton, David Bailey, Hugh Wright, Rick Kirby, and John Parker, among others – stay with me today. I have tried to pass my own lessons on to a generation of younger lawyers. As I have seen the lawyers I have mentored achieve success, I hope I have repaid the debt.

Experience Means Something. Watching Watson hit smart shot after smart shot in difficult and differing conditions – taking his medicine when necessary – shows the advantage of over 30 years of experience in playing links golf. Even in athletics – where youth must be served – experience still counts for something. This is even more so in business and law.

I hope Tom wins, but, even if he doesn’t, we can all learn something from his most recent accomplishment.

I also think I’ll hit some balls tomorrow after the tournament.

Friday, July 17, 2009

Part II of Podcast on Common Legal Mistakes Made by International Companies in Doing Business in the U.S. Now Available

by John L. Watkins

Part II of our podcast series on Common Legal Mistakes International Companies Make in Doing Business in the U.S. is now available. In this podcast, Tom McLain and I provide the general background regarding legal issues in the U.S. This discussion provides the foundation for more specific issues to be discussed in later episodes. Tom and I discuss the sources of law in the U.S. and the fifty states, and address some of the key legal differences that exist in most U.S. jurisdictions when compared to other countries. Specific topics include:

1. Why there really is no “U.S.” legal system, but instead fifty state legal systems with a federal overlay;

2. Why the U.S. is really not a “common law” system, but a mixture of statutory, regulatory and common law;

3. Some of the key differences between legal issues in the U.S. and most of the rest of the world, including the jury system, the fact that there is generally no “loser pays” rule, the fact that lawyers are permitted to take cases on a “contingency fee” basis, the fact that punitive damages are sometimes permitted, and the fact that, in many state court systems, judges are elected.

The podcast also provides an overview of how, despite the legal challenges, doing business in the U.S. can be managed with an acceptable level of risk. Future podcasts will cover topics on doing business in the U.S. in greater detail.

The podcast is available at or

Monday, July 13, 2009

So Your Business Has Been Sued: Now What?

by John L. Watkins

The marshal or process server arrives at your place of business with papers. Perhaps they are delivered through your corporate services company or perhaps they arrive by registered mail. You look at the papers and realize that your business has been sued. This realization is undoubtedly disconcerting, particularly if you have been fortunate enough to avoid litigation previously. Now what do you do?

The first thing you should do is take a deep breath and relax. It is not the end of the world. The remainder of this article will outline some of the basic steps you should take when this occurs.

1. Do Not Panic, But Do Not Procrastinate. All court systems have deadlines within which an Answer, Counterclaim or other papers must be filed in response to a lawsuit. Normally, these deadlines are between 20 and 30 days after delivery of the papers, but they vary. Typically, the front page (the summons) will specify when the papers have to be filed. If your company does not file an Answer in time, the court may enter a default judgment against it, meaning that it loses without a trial. But you do not have 20 to 30 days to wait, you need to be proactive and react immediately.

2. Engage Counsel. You will want to have the papers in the hands of counsel as soon as possible. If you have company counsel, forward copies of the documents immediately. If you do not have counsel, you will need to engage a lawyer. There are many ways to find a good lawyer. You can often get good recommendations from other business owners or trusted advisors. You might also ask attorneys you know for recommendations. If they are not a litigation attorney, they will probably still be able to make referrals.

There are other ways to research and find attorneys. Most lawyers and law firms have websites that include biographies of the attorneys. Check the attorney’s experience in handling similar types of cases. Check the attorney’s academic performance. Although strong academic performance is no guarantee that a person is a good lawyer, it enhances the odds. The most prestigious law firms, large and small, tend to place a lot of weight on academic performance in their hiring decisions. Thus, if a lawyer graduated at the top of his or her class, was on the law review, and has other good credentials, it is positive piece of information, but is not necessarily determinative.

The Martindale-Hubbell Law Directory is a long-standing publication that lists most attorneys. Further, it is now available on line at or its affiliate, Martindale-Hubbell also rates attorneys on a scale of “AV,” “BV” and “CV.” AV is the best rating. Many lawyers are not rated, which does not necessarily mean anything other than that Martindale has not received enough feedback to rate them. As with all such systems, they should be taken with a grain of salt, but an “AV” rating is one indication that a lawyer is most likely experienced and able. When I engage counsel in other jurisdictions on behalf of clients, all other things being equal, I look for an “AV” rating.

Other information is available through the AVVO website, AVVO, which rates lawyers on a scale of 1 to 10, is new and is controversial. If a lawyer has not registered with AVVO and “claimed” his or her profile, AVVO may include only a very basic outline of the lawyer’s background. AVVO may also assign a base rating to such persons, which often seems to be in the range of 6 to 6.5. If a lawyer with such a profile would register and then list awards, bar activities, speaking engagements, etc., that person’s rating might change very quickly to a 9 or a 10. If a lawyer has a very basic listing on AVVO (no photograph, no extensive biography) and a lower rating, that may be simply because the lawyer has not claimed his or her profile and the rating should, again, be taken with a grain of salt. However, if a lawyer has a high rating on AVVO, then that is, again, a piece of positive information.

3. Notify Your Insurance Broker and Carrier. You should also call your insurance broker immediately upon receipt of the suit papers and should forward copies of the papers to your broker to determine whether there might be any coverage for the lawsuit. As a further caveat for future reference, if you receive a demand letter threatening a claim before a suit is filed, that should be forwarded to your broker. Some policies require notice of any claim or occurrence and of any suit. It is always better to be safe than sorry. If there does appear to be even a possibility of coverage, it is a good idea to get confirmation directly from the carrier (and not just from the broker) that they are "on notice" of the claim. Your lawyer can be helpful in interacting with your broker and your insurance company. If there is coverage, the carrier will probably have to step in and provide a lawyer to defend the suit at their cost.

4. Preserve All Information. Once you are in litigation, or even aware of the prospect of litigation, you need to preserve all information, including emails and electronic information, that may be relevant to the litigation. You should involve your lawyer in this process. There is one strong word of warning here: Sometimes litigants try to destroy potentially damaging information. Not only may this subject the litigant to sanctions and other legal issues, it never works. The opponent will find out and will be able to prove the other side tried to cheat. There is an old adage among trial lawyers about witnesses who testify: "You lie, you lose." It is the same with litigants who try to hide relevant information.

5. Monitor the Situation Carefully. If you have counsel in place, have notified your broker and carrier, and have preserved all information, you should have taken the necessary preliminary steps. However, you still need to be vigilant. You should expect regular updates from your lawyer. If you have not received them, call the lawyer or send and email.

Make sure your carrier has responded. If the carrier is providing a lawyer, you need to understand that the lawyer is your company's lawyer and not the carrier's lawyer. Unfortunately, some "insurance defense" lawyers (those who are regularly engaged by carriers to defend insureds) seem to forget this. Sometimes, insurance defense lawyers will keep the insurer fully informed, but not the insured, who is the actual client. If this happens to you, you need to speak up and remind the lawyer that your company is the client, not the insurer. It is perfectly appropriate for the lawyer to keep the insurer informed, but the lawyer should also keep you informed.

You should be aware that many insurance policies give the insurer the right to settle the claim, including over your objection. However, you should be fully informed of any proposed settlement and your company should be fully protected in any proposed settlement. There are a few policies that require an insured's consent to settle, so, again, check the terms of your policy.

Our firm, Chorey, Taylor & Feil, A Professional Corporation, has a very active and experienced business litigation department. Five of our senior litigators have been named to the Georgia Super Lawyers list in Business Litigation or General Litigation. All of our litigators that are ranked by Martindale-Hubbell are rated AV. Four of our senior litigators are rated 10.0 by AVVO. Visit our website,, for more information.

Friday, July 10, 2009

Hart-Scott-Rodino Not Limited to M & A

By Tom McLain

When the Hart-Scott-Rodino Antitrust Improvements Act ("HSR") is mentioned, most people think of it as a requirement that may come into play in a merger transaction or some other type of acquisition transaction. However, there are occasional reminders that other sorts of transactions that cannot be classified as a merger or acquisition can be subject to HSR notification requirements. Just this week, such a reminder came with the announcement of an collaboration and exclusive global license agreement between Merck and Portola Pharmaceuticals. According to news reports, the licensing deal requires Merck to pay Portola a $50 million initial fee, followed by additional payments of up to $420 million upon achievement of certain milestones and also provides for double-digit royalties on worldwide sales of betrixaban, a drug for the prevention of stroke in patients with atrial fibrillation. In its press release, Merck commented that the "effectiveness of the collaboration agreement is subject to the expiration or earlier termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, if applicable."

While it is true that the vast majority of HSR notifications are filed as a result of a transaction involving a merger or acquisition transaction, the formation of a joint venture or other corporation can trigger a requirement to file an HSR notification. More importantly for Merck, the Federal Trade Commission (the "FTC"), through its informal opinions, has explained that certain exclusive licenses will be treated as the transfer of an asset for purposes of the HSR Act. With respect to the Merck/Portola transaction, the underlying collaboration and license agreement will have to be analyzed to determine whether it is sufficiently exclusive for the FTC to consider it to be an transfer of an asset. Assuming that the Merck/Portola arrangement is sufficiently exclusive, then the parties will have to determine whether other reporting threshold tests are met such as the" size of person test" and the "size of transaction test." The FTC's Introductory Guide II provides basic information regarding the reporting thresholds.

Given that, as of the 2009 amendment to the regulations, the daily penalties that can be assessed for a failure to make a required notification filing are $16,000 per day, it is quite important to remember that the HSR Act applies to things beyond mere mergers and acquisitions. Thus, it is important to remember that, whenever two companies come together to form a joint venture, form a corporation or limited liability company, or undertake a collaborative or exclusive arrangement, the implications under the HSR Act should be considered.

Thursday, July 9, 2009

New Podcast Series on Common Legal Mistakes by International Companies

by John L. Watkins

As a compliment to our continuing series of blog posts on legal issues for international companies, Tom McLain and I have just released the first part of a series of podcasts covering common legal mistakes that international companies make when doing business in the U.S., and ways to avoid them.

Part I is an introduction to the series, and discusses why the U.S. is an attractive market for international companies, particularly in the current tough economic environment. We also explain some of the reasons why our home state of Georgia should be on any company's short list of locations for its U.S. business operations. Finally, we discuss the five fundamental mistakes that international companies often make in setting up shop in the U.S. However, as Tom points out in the podcast, many of these issues apply equally well to domestic companies.

The podcast is available on the firm's website on the podcast page, or on the firm's page on, Further podcasts in the series will be released in coming weeks.

Friday, July 3, 2009

Should businesses risk using form agreements from the Internet?

By Tom McLain
You can find anything on the Internet. That includes form legal documents. However, just because you can find a form legal document that seems to pertain to your particular situation, should you use it? In the majority of instances the answer is no. Is that simply a self-serving answer from a lawyer or is there a rational basis for the answer? Read on and make your own determination.

Let me provide you with a peek into how I and many other attorneys draft contracts. At the core of the process is a skill you learned in kindergarten: cutting and pasting. Even when I am drafting a contract involving a subject matter that is new to me, there is always some component of reusing clauses and parts of agreements that I have used before. The primary driving force behind this is efficiency: if I do not have to draft everything from scratch, then I can deliver the contract to my client far more quickly (and cheaply). Moreover, I am able to reuse clauses that I have spent considerable time tweaking to get just right. In effect, the contracts that I write are generally a compilation of various "form agreements." Of course, there is also a significant amount of customized drafting and creation of clauses that are necessary to fit the particular situation.

So, if I use forms, why do I say that non-lawyers should not? Well, let me answer this by explaining a little more of my drafting process. When I consider which document to use as a starting point, I need answers to four questions: 1) which party did we represent, 2) was there equal bargaining power, 3) were there unusual circumstances, and 4) how heavily negotiated was the agreement. Thus, if I were representing a seller of a business, I would not want to start with an asset purchase agreement that I drafted while I was representing a buyer who had all the bargaining power in a transaction where the seller was desperate for cash and had no attorney. If I used that particular asset purchase agreement, then I would be using a document that was heavily stacked in favor of a buyer when I was representing a seller. This drives home a most important point: when it comes to legal documents, ONE SIZE DOES NOT FIT ALL.

So lets look at a particular example that seems to be quite common. Suppose you decide to search the Internet for a free confidentiality agreement form because you need to hire a consultant for your business. The point of a confidentiality agreement is to protect the confidential and proprietary information that your company uses to create whatever competitive advantage it has in the marketplace, arguably the single most valuable asset of the company. So, when you find a free confidentiality agreement form on the Internet that looks like it may be a good one, can you tell whether it was drafted to favor the company or to favor the consultant? If the form is "neutral," is that good enough for you or are you more interested in using a document that provides your company with as much protection as possible? Do you have the experience to know whether the form agreement is missing any key elements? Was the form agreement prepared to protect a business like yours? (Drafting to protect a technology company is far different than drafting to protect a brick manufacturer). Is the only document you need a confidentiality agreement or are there other ancillary agreements that are important? Do the provisions in the form agreement comply with the law applicable in your state or could portions of it be unenforceable? Without the answers to these questions, there is no way for you to safely predict whether using the form confidentiality agreement will protect your company or leave it vulnerable.

A confidentiality agreement may seem like a generic and harmless agreement that could be picked up from almost any source. Hopefully, this discussion has made it clear that there are many factors that need to be considered and that you need experience legal counsel to guide you through those considerations. In short, a confidentiality agreement needs to be customized to fit the particular business and the particular circumstances. The same sort of analysis holds true for almost any legal agreement you can imagine. So, can you find free legal documents on the Internet and use them? Sure. Will there be consequences? If you are extremely lucky, maybe not, but is it a risk worth taking? If you execute a form agreement, it could actually wind up being worse than having no agreement at all. Only you can decide if your business to too valuable to take such risks. You may decide that the risk is acceptable, but at least you now have an idea of the nature of that risk.

Monday, June 29, 2009

Should you fear earnouts in M&A deals?

By Tom McLain

The Corporate Dealmaker section of The (the online version of The Deal magazine) recently asked the question: Who's Afraid of Earnouts? The occasion for the question was a study of the deal making philosophy of Jim McCann, founder and CEO of Inc., whom Kenneth Klee, writing for The Deal on June 19, 2009, dubbed the "Entrepreneurial acquirer." Mr. McCann says that his company uses earnouts in every acquisition of a company. The counter-argument to the use of earnouts is found in Klee's June 5, 2009 article, Arguments postponed. So we have Mr. McCann extolling the virtues of an earnout and other experts saying that earnouts usually wind up being nothing more than a postponement of an argument. The point behind this article is to weigh in on the question of "Who's afraid of Earnouts?"

Like any good attorney, I'll start by reframing the question before I answer it. The question that is probably a little more appropriate is: "Who's very cautious about using earnouts in an acquisition?" Answer: I am. Perhaps the primary reason for my caution is that, in my experience, a significant number of earnouts creep into deals when buyers and sellers disagree over the value of a business. Since many of these disagreements are based on a different view of the future (the seller claims to see explosive growth and the buyer claims to see conservative growth or even contraction), an earnout serves as a compromise between the optimism of the seller and the pessimism of the buyer. These types of earnouts are usually tied in some way to the revenues (either gross or net) of the business after it has been acquired: if the revenue thresholds are met, the seller will receive some additional compensation. Lets call these "business performance earnouts."

One of the first cautious in connection with earnouts, in general, and business performance earnouts, in particular, is the tendency for both sides to believe that their assumptions will be borne out. This is usually a bigger problem for sellers because they may count the additional compensation embodied in the earnout as “money in the bank.” So if a seller accepts a deal that only works economically if earnout is paid, there is a significant risk of disappointment. Not only is the earnout dependent on how the business does as a unit of the acquiring company, but the earnout can also be influenced by overall economic conditions. It is quite easy to imagine that a significant number of performance-based earnout thresholds have been missed over the last 18 months due in large measure to the overall economic malaise. However there are other reasons to be cautions about earnouts.

Business performance earnouts can be quite tricky to define. Picking an appropriate performance criteria can be much more difficult to do that it may seem. It is not unusual for one of the parties to discover after the fact that the measurement rewards behavior that would not otherwise be desired. So, a lot of careful thought needs to be done by the financial and business due diligence teams before signing off on an earnout formula. The due diligence done in support of developing an earnout formula should include many things, including, without limitation, analysis of historical trends in the business, validation of the sales efforts, determination of the sensitivity of the business to adverse economics or increased competition, careful modeling, understanding the metrics of the business and determining how best to measure its success. Even when all the homework has been done, it is not unusual for me to caution sellers to assume that they will never see a dime of the earnout and to caution buyers to assume that they will wind up paying the entire earnout irrespective of whether either side feels like the performance thresholds have been met or missed. This is because there are often ways to "game" the formula and there are many unpredictable and uncontrollable influences on the formula. In other words, in this regard, I tend to fall into the camp that says that earnouts are merely a way to delay arguments until later.

However, the most difficult part of business performance earnouts can be the way in which they impact the integration the purchased business operations into the acquiring business. This is less of a concern with financial buyer than with strategic buyers, since much less business integration is required in the case of financial buyers. The fundamental obstruction to effective integration is that the former owners of the acquired business tend to want to continue running the business in the same manner as they have always run it in order to make sure they get their earnout. Thus, it is quite easy to have the old owners become quite obstructive to change because of their desire to protect their earnout. Again, this can be controlled to a degree in the manner in which the business performance earnouts formula is designed, but the argument that can often be raised somewhere along the way by the seller is "the buyer's actions prevented me from earning my earnout." The bottom line is that the impediments to business integration that are created by business performance earnouts need to be very carefully considered.

In other cases, the earnout may be more directly related to retention of the seller for a long period of time after the acquisition. Let's call these "retention earnouts." From reading Klee's article about Mr. McCann, this seems to be the primary reason for the earnouts that 1800 Flowers uses. Mr. McCann explains that "about 60% of the company's executive team has joined through deals." If you want to retain the seller's expertise, the challenge is keeping them motivated after they have received a big payday. Thus, retention earnouts are typically less results oriented and more oriented to service longevity and quality. They can simply take the form of requiring the seller to continue to work for a period of time in order to receive the full deal consideration. More often, retention earnouts combine longevity components and revenue components and, as in the case of 1800 Flowers, there may be complimentary programs providing employment incentives. The tension in retention earnouts is not so much over whether there will be problems with integration but over whether the seller will actually remain in productive service. Needless to say, retention earnouts be difficult to design but, since they are not serving as a bridge over a dispute, they can be a little easier to create.

Earnouts have been and will continue to be part of mergers and acquisitions. Earnouts that are created primarily as a way to resolve a current dispute in the future by making payments based on thresholds that are tied solely to company performance are the ones that are least likely to work as intended and the most likely to create future problems. It may be the case that, in these uncertain economic times, there may be an upswing in the use of business performance earnouts to fill in valuation gaps. In contrast, earnouts that are designed to encourage specific behaviors like the retention of services tend to be a little more likely to operate as intended. In summary, there is no need to be afraid of earnouts, but there is every need to be cautious in implementing an earnout.