Monday, June 29, 2009

Should you fear earnouts in M&A deals?

By Tom McLain

The Corporate Dealmaker section of The Deal.com (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 1-800-Flowers.com 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.

Friday, June 26, 2009

Thoughts on Twitter, Web 2.0, and legal marketing

By Tom McLain

Depending on who you listen to, a presence on Twitter is either an absolute must for businesses and law firms or it is a complete bust and waste of time. Twitter, along with other Web 2.0 and "social networking" tools, has been a big part of the buzz in among marketing experts for quite some time and businesses and law firms have been struggling to determine if it makes sense for them to jump in. Not long ago, I embraced Twitter wholeheartedly in an effort to understand if and how it might help me develop new clients. At least for now, I am backing off from my commitment to Twitter and, operating on the assumption that my experiences may be helpful to others, I decided to write this blog entry.

The importance and usefulness of Twitter as a method for marketing legal services is hotly contested as of this writing. In May, 2009, Larry Bodine, a respected law firm marketing expert, articulated the case against Twitter in his article, Twitter Not Effective for Law Firm Marketing, and concluded: "For business development purposes, it’s time to give Twitter the bird." Interestingly enough, just a few months earlier, in his January 2009 article Attorneys Flocking to Twitter for Marketing, Bodine predicted, "From where I’m sitting, 2009 will be the year Twitter becomes the major business development trend" and articulated the case for the use of Twitter. Not surprisingly, Bodine's sudden position reversal on Twitter had its immediate detractors and many quickly stood up to defend Twitter including, Peter H. Berge,Web education director of Minnesota CLE, who wrote Response to Larry Bodine on Twitter. A well reasoned point by point analysis of Bodine's article which agrees in part and disputes in part Bodine's conclusions can be found at Twitter for Law Firm Business Development and features comments from a number of people I know and respect like David A. Barrett and Stephen Fairley. Finally, Legal tweeters respond to recent barbs at Twitter, comments on the controversy and points out that Twitter has proven to be successful for certain lawyers, singling out solo practitioners as an example.

Before recounting my own Twitter experience, I must confess that I have my own serious reservations about Internet-based marketing of legal services which I suspect are not dissimilar from the reservations held by many others. The first reservation is best summarized as a general disbelief in the notion that anyone would actually make a decision to hire an attorney based on something found on the Internet. The second reservation is best summarized as a concern that anybody willing to hire an attorney based upon what they find on the Internet may not be the sort of client that I want to represent. While these reservations may have some merit, my suspicion is that my resistance to social networking as a business development tool is quite similar to the distrust that all of us who are old enough to remember had of the concept of having a webpage at all. In short, I think the day is probably coming when a lawyer who has no presence in social networking will be viewed as somehow irrelevant in much the same way as we currently feel about law firms with no webpage today. So it is simply a matter of choosing when and not if to climb on board. (Since I believe that Web 2.0 and social networking tools are here to stay, look for a future blog entry from me on policies that businesses should adopt).
Insofar as my own use of Twitter is concerned, I suspect that my experiences on Twitter could be viewed as many observers as a success, which may make my decision to pull back even odder. I opened my Twitter account on April 24, 2009 and have been fortunate enough to have attracted many of the sorts of followers that I hoped for (and, ironically, over half as many followers as Larry Bodine). More importantly, earlier this month, I was privileged to be the subject of a live interview on Twitter (known as a "twitterview") conducted by Lance Godard, a legal marketing expert with whom I have since had productive conversations. I have also been featured as a "poster child" in an blog entry called The Anatomy of a Twitter Tweet - Twitter Basics for Lawyers. Many of my tweets seem to have caught the eye of other members of the legal community and of people that could be viewed as prospective clients who have, in turn, republished my tweets (called a retweet) so that my tweets have been literally viewed by over 20,000 people.
So why is it that, after less than two months with apparent Twitter success, I have decided to back off on my commitment to Twitter. The answer is time. The beginning of the end for me can be traced to some of the questions that I answered in my twitterview. Those questions caused me to focus on my overall marketing plan and just how things like Twitter fit into it. Both sides of the debate over Twitter for lawyers recognize that it is vitally important to remain true to proven core marketing principles such as face-to-face meetings and other forms of personal interaction with people and that Twitter and other Web 2.0 tools are a poor substitute for "good, old-fashioned" client development. I do not think that I am alone in my belief that the marketing efforts should be focused on, in order, face-to-face interaction, maintaining a good website that is visible in Internet searches, maintaining a good blog that generates attention, and Web 2.0 tools. Of the Web 2.0 tools, my personal preference is LinkedIn, followed by Twitter. A fair assessment of my own marketing practices is that my priorities have been wrong and I was spending too much time on Twitter and not enough on higher ranking methods. In short, my balance was off or, in the words of Larry Bodine, I had allowed Twitter to become a "powerful distraction from getting real marketing work done." I simply need to create more time to focus on face-to-face marketing and blogging. In the words of my dear friend Chris Kimbel, sales director at Womble Carlyle, my marketing plan lacked proper balance and was skewed in an unhealthy degree in the direction of the least productive marketing methods.

So, while I work to achieve marketing balance, Twitter must necessarily take a backseat to the other best practices mentioned above. This does not mean that I consider Twitter to be a lost cause - particularly if three new matters show up on my doorstep from clients who say, "I found you on Twitter." My partner John Watkins will remain on Twitter and my law firm will maintain its twitter account. In fact, I suspect that some of the things I find important and my blog posts will wind up as tweets by John or my law firm.

In closing, I want to continue one of the wonderful Twitter traditions that occurs on Fridays. On Fridays, it is customary to provide the names of people on Twitter that you believe are worth following. In that spirit, I will provide my #FollowFriday list and include many of the lawyers, paralegals, legal marketing experts and other consultants whose tweets I have found to be interesting and/or helpful over the last two months. Everyone of them is worth a follow and none of them will disappoint.

http://twitter.com/TradeSecretLaw
http://twitter.com/fredabramson
http://twitter.com/lancegodard
http://twitter.com/taxgirl
http://twitter.com/nikiblack
http://twitter.com/barrettdavid
http://twitter.com/legalninjaKris
http://twitter.com/woodlandslawyer
http://twitter.com/gtiadvisors
http://twitter.com/constructionlaw
http://twitter.com/AdvertisingLaw
http://twitter.com/London_Law_Firm
http://twitter.com/nancymyrland
http://twitter.com/johnlwatkins
http://twitter.com/anthonymfreed
http://twitter.com/GrantGriffiths
http://twitter.com/JDTwitt
http://twitter.com/Bill_Warner
http://twitter.com/BlawgTweets
http://twitter.com/adriandayton
http://twitter.com/stephenfairley
http://twitter.com/Legal_Alerts
http://twitter.com/fpileggi
http://twitter.com/TrendTracker
http://twitter.com/22twts
http://twitter.com/joshuamking
http://twitter.com/downtownlawyer
http://twitter.com/AnnEvanston
http://twitter.com/AdLawGuy
http://twitter.com/dianelevin

Wednesday, June 24, 2009

Lessons from a $1.4 million HSR fine

By Tom McLain

Fines for violations of the Hart Scott Rodino Act are not a common occurrence. However, when they do come along, they tend to be eye-popping. The most recent example resulted in an settlement agreement pursuant to which John C. Malone, CEO and Chairman of Discovery Holding Company, is to pay a $1.4 million civil penalty.

The central theme of the
Complaint filed by the Federal Trade Commission ("FTC") against Mr. Malone is that he failed to file the required notification with the FTC and Department of Justice before acquiring voting securities of Discovery Holding Company ("Discovery"). Mr. Malone acquired the securities in a series of transactions beginning in August 2005 and continuing until April 2008. On June 12, 2008, Mr. Malone made a corrective filing with the FTC explaining that he had relied on a 2001 informal interpretation from the FTC that, unbeknownst to him, was replaced and disavowed by a February 07, 2005 informal interpretation issued by the FTC. The corrective filing established a waiting period that was to expire on July 14, 2008.

Had the fact pattern ended at this point, it is a reasonable assumption that civil penalties may not have been sought by the FTC. Based upon prior precedent and general procedures, provided that the reason for the missed filing is reasonable and there has been a demonstration of corrective actions taken to prevent future failures, the FTC has been reluctant to impose penalties. (See,
Procedures For Submitting Post-Consummation Filings). In fact, on May 9, 1991, Mr. Malone made a corrective filing under the HSR Act for a previous acquisition made in 1985, and on July 2, 1991 the FTC decided not to seeking civil penalties. In any event, the penalties in effect during the time periods in question were $11,000 per day for each day during which there was a violation. [Note: as a result of a 2009 amendment, the daily penalties have been increased to $16,000 per day].

While the 1991 violation of the filing requirements under the HSR Act certainly did not help Mr. Malone's situation, the events occurring after his June 12, 2008 were far more problematic. On June 14, 2008, before the expiration of the HSR waiting period, Mr. Malone exercised options and acquired more shares of Discovery. These options would have expired before the end of the HSR waiting period on July 14, 2008, but Mr. Malone did not notify the FTC to ask whether it was permissible for him to exercise the options with an escrow arrangement prior to the expiration of the waiting period. There is no indication regarding how the FTC would have responded to the request, had it been made. However, this oversight seems to have weighed heavily in the FTC's decision to seek civil penalties.

The underlying HSR rules which resulted in a determination that a notification filing was required could themselves be the subject of an article. However, the purpose of this article is to provide a reminder of the stiff penalties that can be imposed for violations of the HSR Act and to examine some of intricacies of corrective filings. The series of events for Mr. Malone were indeed unfortunate and lead the FTC to seek to impose civil penalties. The result of the events was the entry of a
consent judgment against Mr. Malone personally in the amount of $1.4 million. The consent judgment is testimony to the axiom that "bad fact lead to bad results." The primary lesson to be learned from Mr. Malone's problems is that one must always be mindful of the requirements of the HSR Act and that every merger or acquisition transaction must be weighed in light of those requirements.

Thursday, June 18, 2009

Litigation vs. Arbitration: A Primer, Particularly for International Companies, Part II

By John L. Watkins

In Part I of this post, we examined the civil litigation system and how it works. We also examined issues of concern regarding the civil litigation system, particularly for international companies. In this Part, we will examine how arbitration works and will compare arbitration to litigation.

Mediation

Before turning to arbitration, I want to say a brief word about mediation. Both arbitration and mediation are alternative dispute resolution (“ADR”) methods. Both are widely used. However, they are very different. Mediation is a structured settlement negotiation process with a neutral third party known as a mediator. Mediation is not a binding process. The mediator does not decide anything. The mediator tries to help the parties reach a settlement, and nothing is decided unless the parties agree. Mediation can be used whenever there is a dispute. Often, parties will mediate before they file for litigation or arbitration. Parties can, however, use mediation after a lawsuit has filed. Mediation can also be used after arbitration is filed. As stated, mediation is simply a method to help the parties try to reach a voluntary settlement and is often very successful. More information about mediation can be found at http://www.watkinsmediation.com/.

Arbitration

Arbitration is a true alternative to the civil litigation process. Arbitration provides a means for a dispute to be decided in a binding proceeding. The key difference between litigation and arbitration is that the parties agree to have their dispute decided by an arbitrator or a panel of arbitrators (typically, a panel consists of three arbitrators instead of a judge and jury.
Arbitration is a creature of contract. The parties can agree to submit their claims to arbitration in advance by including an arbitration clause in a commercial contract. A very simple arbitration clause might read: “The parties agree to submit any and all disputes arising out of or arising under this agreement to binding arbitration to be administered under the Rules of Arbitration of the International Chamber of Commerce (“ICC“). The arbitration shall be conducted in the English language. The situs of the arbitration shall be Atlanta, Georgia, U.S.A. The award of the arbitrator shall be enforceable by a court of competent jurisdiction.”

If the parties have not agreed in advance to submit their claims to arbitration, they can agree to do so after a dispute arises pursuant to a submission agreement. A submission agreement has similar language to that contained in an arbitration clause.

Generally, it is clear which parties have agreed to arbitrate because they will have signed an agreement. However, there have been instances in which non-signing parties (often affiliates of the signatory parties) are bound under various theories, including agency, alter ego and the like. Such issues do not often arise, but, when they do, they may spawn litigation about whether the parties are required to arbitrate.

In the U.S., most arbitrators are lawyers or retired judges. However, business people can sometimes serve as arbitrators. There are a number of organizations that administer arbitration, including the aforementioned ICC and the American Arbitration Association (“AAA”). Parties can also agree to a non-administered arbitration, in which they agree to a method for appointing the arbitrator or panel, and then the arbitrator or panel administers the proceeding.

It is important to understand that, by agreeing to arbitration, a party is giving up the right to litigate in court, and, in particular, the right to a jury trial. Arbitration agreements are generally enforceable under the Federal Arbitration Act if they involve a transaction “in commerce” (meaning it is not entirely intrastate). Most states also have statutes enforcing arbitration agreement. In the past several years, some parties have tried to avoid arbitration agreements under various theories. For the most part, these efforts have not been successful. The U.S. Supreme Court has generally been very supportive of enforcing agreements to arbitrate.

It should be mentioned that there are some on-going efforts to make arbitration agreements in certain settings -- particularly consumer transactions involving form contracts -- unenforceable. Given the current political climate, it would not be surprising if these efforts gain traction. However, it would seem unlikely that any legislation would affect the enforceability of arbitration agreements in commercial contracts.

How Commercial Arbitration Works

Commercial arbitration usually begins with the filing of a demand for arbitration. The party filing the demand is called the “claimant.“ The administering organizations have different rules, but arbitration rules do not typically provide for a default for failure to answer the demand. The failure to answer is typically viewed as a denial of the claim. The other party (the “respondent”) can file a counterclaim, just as is the case in litigation.

Administering organizations often have relatively high administrative fees. Lawyers would probably debate whether the “administration” provided has any value, particularly relative to the fees, but the fees must be paid. The failure to pay the fees will typically result in nothing happening until the fees are paid.

In addition to the administrative fees, measures have to be taken to pay the arbitrators. Unlike litigation, where the taxpayers pay the salary of the judge and the minuscule stipends paid to jurors, the parties must pay the arbitrator or arbitrators. The arbitrators typically charge hourly rates comparable to commercial litigators ($300 per hour and up), and it is easy to see how the arbitrators’ fees (particularly for a panel) can become significant. Normally, some deposit (usually split equally by the parties) will be required for the arbitrators’ fees.

The arbitration clause (or submission agreement) may specify how the arbitrators are to be chosen. If the clause or submission agreement does not specify the procedure, the arbitration rules will provide a method. Although the methods vary, common procedures include the administering organization submitting a list from which the parties may strike unacceptable choices (with the arbitrator or panel appointed from the balance), or each party nominating an arbitrator, with the nominated arbitrators choosing the chair. Needless to say, a lot of effort often goes into the selection process.

There is one side issue I should mention. In the past, it has not been uncommon for appointed arbitrators to serve as “party arbitrators,” meaning that they felt free to advance the case of the party appointing them. In 2004, the American Bar Association, in conjunction with the AAA, revised its ethical rules to establish a presumption that all arbitrators -- whether party appointed or not -- would serve in a neutral capacity. However, it is still preferable, in my view, to specify in the arbitration clause or submission agreement that each arbitrator will serve in a strictly neutral capacity. In my view, it utterly undermines the integrity of arbitration when a party arbitrator acts as a secondary advocate for a party.

Once the panel is chosen, there will usually be a preliminary hearing to decide how the arbitration will proceed. The various rules have differing requirements, which are beyond the scope of this article.


It is often said that arbitration is cheaper than litigation because it provides for less discovery. Although this may be true in theory, many practitioners have noted a tendency in U.S. arbitration proceedings to allow very full discovery, at least between the parties. The reason, I would submit is cultural. Most U.S. arbitrations are going to be presided over by U.S. lawyers, most of whom are well steeped in the tradition of “full discovery.” So, just as the old saying, “when in Rome …” goes, when arbitrating in the U.S., anticipate the possibility of full discovery. Full discovery may not be allowed, but do not be surprised if it is.

After discovery, the arbitrators will specify the pre-hearing procedures. (In litigation, there are “trials”; in arbitration, there are “hearings”). The procedures will typically include the preparation of detailed exhibit books containing copies of all documentary evidence and pre-hearing briefs. The procedures are often as detailed as those required in court, if not more so.
The arbitration hearing is supposed to proceed less formally than a trial. However, in practice, the hearing tends to proceed almost exactly like a civil court trial. The rules of evidence may be applied less strictly, but the basic presentation is pretty much the same. Some arbitrators ask everyone to work while sitting, as if this is somehow a meaningful concession to “informality.” With all respect to this view, I prefer to stand in examining a witness, and do not think it is appropriate for an arbitrator to tell me how to present the case.

Following the arbitration hearing, there will typically be a round of post-hearing briefing. Then the parties sit and wait -- often for months -- for a decision. The decision, called an “award,” is typically in writing.,


After an award is issued, the winning party may file a court proceeding to “confirm” the award and make the award the judgment of the court. The losing party may file a motion to vacate or overturn the award. Although motions to vacate or overturn the award are often filed, they are seldom successful. The standards for challenging an arbitration award are very difficult.

Assuming an arbitration award is confirmed and made the judgment of the court, it can then be enforced the same as any judgment. In practice, many losing parties will simply pay the award.

Comparing Arbitration to Litigation

Proponents of arbitration have long advocated that arbitration is "faster, cheaper, and better" than arbitration. In my view, it is not nearly so simple.

"Faster"

Whether arbitration is faster than litigation really depends, in large part, on the court system to which it is compared. If a court regularly takes two to three years to dispose of a case, then arbitration may well be faster. However, compared to some courts, such as the "rocket docket" of the Eastern District of Virginia, arbitration will almost certainly not be faster.

There are also some practical factors that tend to slow arbitration down, perhaps more than was formerly the case. First and foremost, at least in the U.S., arbitrations have come to be conducted in a manner very similar to litigation, with, as noted above a full discovery process.

Second, arbitrators do not tend to dispose of a case without a full hearing. The Federal Rules of Civil Procedure provide for several opportunities in litigation for the court to throw out a case that is lacking in any real merit: a motion to dismiss at the outset of the case, a motion for summary judgment, typically filed after discovery, and a motion for directed verdict filed after the presentation of the plaintiff's case at trial.

Although there is nothing that prohibits an arbitrator or panel from considering a dispositive motion, and although some effort has been made to modify some of the arbitration rules to accommodate such motions, they just do not seem to work in arbitration. Rather, the preference of arbitrators always seems to be to "hear the case." This means, in effect, that almost every case that is not settled has to go through the full hearing process. A cynic might argue that this approach is to the financial benefit of the arbitrators.

Third, because arbitration has a relaxed evidentiary standard, arbitrators tend to allow the parties to put into evidence anything they want to talk about. This sometimes results in rather lengthy and meandering proceedings.

A final thing that slows arbitration down is that arbitrators often seem to put consensus ahead of efficiency, even in scheduling. Thus, for example, a week may not be set aside for the arbitration hearing unless everyone (the arbitrators, counsel, and the witnesses) has a clear calendar. Trying to coordinate the schedules of many busy people is difficult. This results, sometimes, in arbitration hearings being set far into the future. Further, if the hearing is not concluded in the originally allotted time, the process to schedule a new week starts all over again. A court, in contrast, generally tells the parties when to show up, and they had better show up at the appointed time.

In sum, my experience is that arbitration is seldom significantly faster than most court proceedings, at least in reasonably complicated business cases. In terms of comparing which is "faster," the result is a toss-up.

"Cheaper"

The argument that arbitration is cheaper than litigation is based primarily on the belief that there will be less discovery in arbitration and that the hearing will be conducted more quickly and efficiently than in litigation. This may have been true at some point in the past. However, as arbitration, at least as it is practiced in the U.S., has come to resemble a court proceeding in form, any such advantage has likely disappeared. This is particularly true for cases that, if brought in court, would likely be dismissed on a pretrial motion.


Further, there are other costs associated with arbitration that parties do not incur in litigation. First, the administering organization often charges substantial administration fees. This can be avoided by using a non-administered arbitration. However, in the U.S., many lawyers who draft arbitration clauses default to the AAA or the ICC. Both organizations charge substantial fees.
In addition, as noted earlier, the parties have to pay the arbitrator or arbitrators. Arbitrators, who tend to be lawyers, charge hourly or daily rates that are similar to lawyers. At between $300 to $700 per hour (or more), this can add up quickly. Arbitrators charge not only for the hearing time, but for time spent reading briefs or otherwise preparing, and in their deliberations. In contrast, the taxpayers foot the bill for the judge and jury.

"Better"

Many business people - particularly international business people - think the prospect of six or twelve citizens picked at random deciding complex business cases is, to say the least, not an optimal decision-making process. This concern is heightened by the fact that some lawyers try to eliminate any person from the jury with any knowledge of the subject area. The potential problem is also heightened by the fact that juries may act to protect local interests, which can be a substantial detriment to international companies.

The jury system may not be the most rational system designed for resolving complex business disputes. The good news is that it seems to work pretty well in the vast majority of cases. However, one still hears of seemingly irrational verdicts or "runaway juries." The concern is especially acute in certain notorious parts of the country.

Arbitration, in contrast, typically involves lawyers or retired judges with either a clear understanding of the legal issues and often some experience in handling legal disputes in the particular industry. At times, business people with particular industry experience will also serve as arbitrators. Arbitrators may have to go through a vetting process with the arbitration provider before they are allowed to serve on the provider's roster of potential arbitrators. Further, the parties will typically have the opportunity to investigate the background of each potential arbitrator (or at least the chair) before they are appointed.

For this reason, many companies and their counsel believe that arbitrators generally reach more consistent decisions - and decisions based on facts and not emotions - than juries. It is also argued that arbitrators are far less likely to reach an extreme result - an outlier - than a jury.

Finally, many contend that arbitrators are far less likely to be swayed by local political or business interests. As we would say in the South, there is less chance of being "home cooked" in arbitration.

I tend to agree with these views, particularly in cases involving (a) complex business transactions, (b) matters that require a detailed (or counterintuitive) understanding of a particular industry or field of business; or (c) international companies. In such instances, a company would be wise to consider including arbitration clauses in all or most of its contracts.


Limitations of Arbitration

This is not to say that arbitration is a perfect system. There are bad arbitrators, just as there are bad judges and jurors. It is also commonly said that arbitrators often "split the baby" in a dispute, meaning that they reach a compromise result instead of the result demanded by a fair view of the evidence. In my experience, arbitrators do not always compromise, but it sometimes happens.

There are other instances in which arbitration might not be a good choice. First, arbitration is not really well-equipped to deal with situations in which a quick legal remedy might be available in court. For example, a party seeking to collect on a promissory note or other liquidated debt, or seeking to remove a defaulting tenant from a rental property, would probably be better off in court.


Second, parties seeking equitable relief - such as an injunction against the further use of trade secrets or requiring a party to turn over confidential information - might also be better off in court. Courts are used to handling emergency equitable proceedings. Although equitable relief is theoretically available in arbitration, arbitration is not really well-suited for obtaining emergency relief.

The concern over the possible need for equitable relief can be dealt with through an exception to the arbitration clause. It is not uncommon for a contract providing for arbitration to provide that a party may nevertheless seek purely equitable relief - such as an injunction - in court. Such a provision needs to be crafted so that it does not effectively gut the arbitration clause, but that can be done by making clear that the court is allowed only to award equitable relief, with all damages issues to be addressed in arbitration.


Third, parties need to realize that they can generally require arbitration only of persons with whom they have a contractual relationship. Thus, for example, it is generally not possible, at least absent a submission to arbitration after the claim arises, to require arbitration by injured parties of product liability or other tort claims.

Conclusion


Arbitration is not necessarily "faster, cheaper and better" in all instances. In fact, it is rarely faster or cheaper. However, it can be better and can provide more predictable and rational results, particularly for certain types of cases and international companies. In such instances, parties should consider insisting on an arbitration clause in their commercial agreements.

The litigation attorneys at Chorey, Taylor and Feil also have substantial experience in bringing and defending arbitrations. We also have substantial experience in drafting arbitration and dispute resolution provisions. Check out our website at www.ctflegal.com.

Sunday, June 14, 2009

Litigation vs. Arbitration: A Primer, Particularly for International Companies, Part I

By John L. Watkins

Many business people do not understand the difference between proceedings in court (lawsuits) and the most commonly used alternative dispute resolution proceedings, mediation and arbitration. This post (which will appear in two parts) will briefly address mediation, but will focus on the differences between court proceedings and arbitration. This post will hopefully be useful to all business people, but also focuses on some particular concerns of international companies.

Our firm's litigators are of course familiar with the civil litigation process, but also have considerable experience in arbitration and mediation, and can be consulted for more specific information.

The Civil Litigation System

Private parties have always used lawsuits to settle business and other disputes. Civil litigation begins with one party filing a pleading known as a “complaint” (in some states it is called a “petition”) against the other party. The complaint sets forth the background of the dispute and the basis for the claim. The party filing the complaint is known as the “plaintiff.” A copy of the complaint is “served” (delivered) to the other party, known as the “defendant.”


The civil rules (which vary somewhat depending on the court) provide a certain period for the defendant to file a responsive pleading, known as an “answer.” The answer admits or denies the allegations of the complaint, and may set forth additional defenses. The defendant may also include its own claims (known as “counterclaims”) against the plaintiff.


If the defendant fails to answer the complaint in the required period of time, the defendant becomes in “default” and may have a default judgment taken. This means that the defendant loses -- without the plaintiff having to prove anything on the merits -- simply because an answer was not filed in time.


Assuming that the parties file timely pleadings, the case then proceeds to “discovery.” Discovery refers to the information exchange process. The civil rules generally provide for (1) compelling the other party, or third parties, to produce documents ("documents" include electronically stored information), (2) requiring the other party to answer written questions, called “interrogatories,” under oath, and (3) taking sworn oral statements, known as “depositions,” from potential witnesses, who may be affiliated with the other party or not. The civil rules provide a number of ways, if necessary, to compel discovery from the other party or third parties. Courts may also assess attorney’s fees and potentially other sanctions against parties failing to provide discovery.



In general, the scope of discovery has been viewed as very broad, based on the theory that the facts ought to be freely available to both parties before trial. This broad scope of discovery has been one of the most controversial aspects of the civil litigation process. Critics of the process complain that discovery is too intrusive, too time consuming, and too expensive. Critics suggest that discovery has become nothing more than an end unto itself which becomes the focus of lawsuits, instead of getting to the merits of the dispute. Critics also argue that discovery has become a weapon used by lawyers to bludgeon the other party into settlement rather than a means to gathering necessary information.

The issues regarding discovery have become compounded, particularly in the federal court system, by the rise of “e-discovery.” “E-discovery” refers to the discovery of electronically stored information, including emails, instant messages, and other information. Because the use of email and other electronic communications techniques has become party of every day business life, the process of gathering and retrieving electronically stored information can greatly add to the costs associated with discovery. There are many computer consulting firms who now provide services to lawyers and their clients about managing e-discovery.


In addition, because simply the possibility of being required to produce electronic information is a given, and because the potential sanctions for having deleted electronically stored information are great, lawyers and consulting firms also advise clients regarding electronic information policies and technical solutions for managing and storing data.


There have been efforts to limit wide-ranging discovery. One of the most frequent complaints about the discovery process is that parties will seek information regarding other transactions or matters that do not appear directly relevant to the dispute. The Federal Rules of Civil Procedure, which apply to lawsuits in the federal court system, have been amended to include rules that -- on their face at least -- contain mandatory limitations on such discovery.


Even without the new limitations, the Federal Rules and analogous state rules have always provided judges with the ability to limit and control discovery. In fact, there is little doubt that the Federal Rules -- originally conceived at a time when the courts were less burdened that today -- assume that there will be active judicial management of discovery from the outset.


The problem is that, at least in most courts, active judicial management does not happen. Further, despite the new mandatory limitations on discovery, most judges have so far seemed to ignore them and proceed as they always have. In most courts, this means that the lawyers are left to “work it out” without substantial guidance from the court. Litigation attorneys are by training and general disposition vigorous advocates who press the positions of their clients. As a result, discovery disputes often occur, resulting in formal motions to compel and more expense.


There is no doubt that judges seem to have a loathsome view of any discovery issue. The issue has often become acrimonious by the time the lawyers get in front of the court. In such instances, many litigators have observed that judges handling a discovery dispute just seem to get mad, and often at the wrong party. Eventually, however, there will finally be a ruling, perhaps with attorney’s fees or other sanctions, and the process will continue. Often, there is a second or even a third round about whether a party has complied with the court’s order.


As a footnote, proceedings do not always happen this way and they do not have to be that way. On occasion, I have had the opportunity to practice in front of judges who become actively involved in discovery, or who will take a telephone call to resolve disputes between counsel informally. In the instances where judges will make themselves available, the chances for a full blown discovery dispute (and the resulting costs) are much less. It is not surprising, because those judges are applying the rules as they were intended.



Following the discovery process, the lawyers will usually need to prepare a pretrial order, which is a detailed document that governs the conduct of the trial. The specificity of this document varies from court to court. In the federal system, it is not unusual for the document to be so detailed that it essentially requires the parties to diagram the trial on paper. Needless to say, this can also be an expensive process.

At the end of the day, the case will be tried. Most cases will be tried to a jury. Potential jurors are simply citizens summoned to play a role in the judicial system. A juror cannot be related to a party or employed by a corporate party, but, generally, there are very few qualifications. There is no requirement that a juror have a basic level of general education, much less know anything about the subject matter of the dispute.

The parties will have a limited number of “peremptory challenges” for jurors, meaning that they can remove potential jurors they believe might tend to favor the other side. Some lawyers will use their strikes to eliminate any jurors who may have relevant knowledge of the issue at hand.


The case will then proceed to trial. Each side’s lawyer will get to make an opening statement regarding what they believe the evidence will show. Then the party’s present their witnesses and documentary evidence. The plaintiff goes first, and the defendant follows. At various points, there may be motions to the judge (such as following the plaintiff’s case or following the presentation of all the evidence) to “direct a verdict” for a party. Usually, these motions fail. The lawyers will then make closing statements to the jury. The judge will then “instruct” the jury on the law applicable to the dispute, and may frame the issues the jury is to decide.



The jury will then meet alone to make a decision. The jury may find for the plaintiff and award damages (money) to the plaintiff. The jury may render a “defense verdict,” meaning that it finds no liability on the party of the defendant. If the defendant has a counterclaim, the jury may find for the defendant on the counterclaim and award the defendant money.


The jury may also, in some cases, determine that there is reason to impose “punitive damages.” Punitive damages are, in essence, a monetary fine or penalty designed to punish the defendant and are meant to deter future misconduct. Punitive damages require proof of more than negligence or gross negligence. In Georgia, punitive damages must generally be based on willful misconduct or a "conscious indifference" to the consequences of its actions.


Punitive damages are normally imposed only in a two step process, meaning that the jury first has to decide whether to impose punitive damages. If the jury finds punitive damages are warranted, then there is further evidence and proceedings, and the jury will have to meet again to decide how much to award.



After a jury award is made, it is made the “judgment” of the court, which is, in effect, an order for a party to pay money. A judgment can be enforced through various mechanisms, such as “garnishing” the party’s bank account or wages, or by “levying” on the party’s assets (seizing them and selling them to satisfy the judgment).


There may also be an appeal. If there has been a money judgment, in some instances, enforcement of the judgment will be stayed pending the appeal, although this may require the losing party to post a bond.

So, there you have it: How a lawsuit runs its course from the filing of the complaint to the judgment. Usually, civil litigation is a slow process, taken one to two years or more. However, the length of time depends on the court. Some courts move faster than others and may decide a civil case in a matter of months.


Because of the time and expense involved, most lawsuits settle. Statistics routinely show that ninety-five percent (95%) or more of lawsuits settle.


Some Observations for International Companies

I have had the good fortune of representing a large number of international companies or their U.S. subsidiaries in connection with litigation or possible litigation in the U.S. I have also given seminars on various aspects of the U.S. legal system to international audiences. I have thus had many opportunities to discuss the U.S. legal system to many international business people. (Actually, it must be remembered that each state largely has its own legal system, but the comments here are of more general application).



International business people tend be particularly surprised about the following aspects of our legal system:


The Scope of Discovery. International business people are often surprised to find that the scope of discovery includes their emails, internal meeting notes, and their personal notes. As a general matter, if a document is within the scope of discovery, and if it is not part of an attorney/client communication or specifically prepared in anticipation of or in reference to litigation, it will probably be found discoverable.


Contingency legal fees. In the U.S., it is often permissible for lawyers to take plaintiff’s cases based on a percentage (typically 33-40%) of the settlement or judgment they collect.



Generally, no “loser pays” rule. Generally, the “American rule” is that each side to a dispute will bear its own attorney’s fees. Although there are exceptions to this rule, it holds true in many instances. Conversely, in many other parts of the world, a party that brings an unsuccessful suit is bound to pay the other side’s legal fees.

The jury system. International business people tend to be surprised (if not a little appalled) that citizens off the street are permitted to decide complicated business or product liability disputes about which they have no experience. This fear is heightened when it is known that the other side will probably try to eliminate anyone from the jury with any knowledge. The concern is that an important decision will be made out of ignorance, and probably based on sympathy for one party or the other.


Punitive damages. The prospect of large punitive damages is frightening to many international businesses. It is often impossible to insure against such an award, and a large punitive damages award might put a smaller company out of business. Although there have been efforts to reform punitive damages in many states, and although the U.S. Supreme Court has recently established some limitations on punitive damages, this is a valid concern.

Elected state court judges. In many states, judges in the state court system are elected. Because they are elected, such judges need to raise money to fund their campaigns. Local lawyers or law firms, as well as businesses, are often heavy contributors. This raises concern about whether such judges will act fairly, particularly in cases involving “outsiders.” It should be noted that judges in the federal system are appointed by the President and confirmed by the Senate, essentially for life. As a result, if an international company is sued in the U.S., the company will typically try to “remove” (transfer) the case to federal court.


Conclusion of Part I


In this Part, we have outlined how cases proceed in litigation. We have also discussed some concerns about the litigation process, particularly for international companies. In the next Part, we will briefly discuss mediation. Then, we will focus on arbitration, how it proceeds, and compare it to the litigation process.

Wednesday, June 10, 2009

International Companies Doing Business in the U.S.: What Do You Need?

By John L. Watkins

In these challenging economic times, international businesses need to find new markets for their products and services. Although some of the developing economies have shown signs of rebounding, many companies from our traditional trading partners will probably re-visit the U.S. as a market. Even in the midst of a severe recession and with the importance of emerging economies, the U.S. remains a safe haven and a relatively affluent and established market.

The basic question for European companies that want to do business in the U.S. boils down to "what do I need?" A business thinking about doing business in the U.S. will of course need to assess the market demand for its product or services as well as sales and distribution channels. If this research demonstrates an opportunity, the business will need to determine where to locate its business.

Although I am arguably biased, Georgia should definitely be on the short list, with the world's largest airport, multiple daily flights to Europe and other international destinations, two deep water ports (Savannah and Brunswick), a strong rail and road transportation system, and a strong university system led by the University of Georgia in Athens and the Georgia Tech in Atlanta. Atlanta, the host of the 1996 Summer Olympics, has a strong international business community. Add in a moderate climate and an attractive lifestyle, it is not surprising that many international and domestic companies, such as Kia and NCR, have chosen to locate or relocate facilities or headquarters in Georgia.

Once a decision has been made on where to locate, a business will need to engage professional assistance to establish business operations in the U.S. Many small businesses seem to think that all they need is an accountant. Certainly, an international business setting up in the U.S. does need a good accounting firm, preferably one with international tax experience.

A company should also engage experienced counsel, preferably before it starts doing business. In this respect, please keep in mind the one almost universal rule regarding legal services: It costs less to deal with an issue properly on the front end (such as properly setting up a business) than trying to fix it on the back end. In addition to helping set up the business properly, a lawyer should be involved in helping the company draft contracts and establish terms and conditions of sale that will help minimize the risk of disputes with customers or suppliers.

A company should also engage an experienced insurance broker. It is no secret that the U.S. is more litigious than other countries. Liability insurance is a key to minimizing litigation risk for product liability and other claims. A good insurance broker with international experience can help develop a logical insurance program and risk management strategy.

In order to assist companies considering doing business in Georgia, Tom McLain and I have prepared a basic checklist of legal issues that should be considered and addressed. A copy is available at our website at http://www.ctflegal.com/articles/Doing%20Business%20in%20GA%20Checklist%20Handout.pdf.

Our website also contains other information on U.S. legal issues that may be of interest, including additional articles and podcasts at www.ctflegal.com/podcasts.html. The podcasts are also available on http://www.ctflegal.blip.tv/.

We will be publishing additional blog posts on doing business in the U.S. and Georgia in the future, so check back for additional information.

Friday, June 5, 2009

Large Jury Verdicts Confirm Value of Protecting Trade Secrets and Associated Risk

by John L. Watkins

In the past several weeks, juries in two states have each awarded over $30 million in damages in separate trade secret cases. A California jury awarded Hansen Medical, Inc. $36.3 million in damages in a trade secret and breach of contract case against Luna Innovations, Inc. in late April. Last week, a jury in federal court in Atlanta awarded Lockheed Martin $37.3 million in a trade secret case against L-3 Communications Corp. and a subsidiary.

Each of these cases will likely be appealed and will perhaps be settled. Nevertheless, the size of the verdicts alone provides some important reminders for businesses. First, the verdicts show that trade secrets can have enormous value to businesses. Companies holding trade secrets should make sure that they are protected through non-disclosure agreements and other protections.

Conversely, companies who are hiring employees who formerly worked for competitors should take steps to make sure that those employees do not bring their former employer’s trade secrets. This can be addressed through employment agreements and other measures.

Employees considering leaving their employer and working for a competitor or starting their own business should also take steps to avoid becoming involved in trade secret litigation. This can be as simple as having a clear understanding (preferably written) with the employer regarding what the employee can take and cannot take upon leaving, and then abiding by that understanding.

More information regarding trade secrets and non-disclosure agreements can be found in our podcast series in which Tom McLain and I address these issues. Part I addresses trade secrets and non-disclosure agreements generally. Part II addresses non-disclosure agreements in considerable detail. Part III addresses trade secret litigation. The podcasts are available at the firm’s website at www.ctflegal.com/podcasts.html or at http://www.ctflegal.blip.tv/. Our attorneys have considerable experience in this area.

Wednesday, June 3, 2009

Seminar on Trade Secrets and Non-Disclosure Agreements

By John L. Watkins

We have previously discussed the importance of businesses understanding issues concerning trade secrets, confidential information and non-disclosure agreements ("NDAs") on this blog. Tom McLain and I have also done a podcast series on the subject, available at www.ctflegal.com/podcasts.html or http://www.ctflegal.blip.tv/.

I will also be conducting a seminar on trade secrets and NDAs in conjunction with the German American Chamber of Commerce ("GACC"). The seminar will be held on June 16, 2009, beginning at 5:30 p.m. The seminar will be held at the GACC's headquarters on Means Street, near the intersection of Marietta St. and Means St. in Atlanta. Please pre-register by June 10, 2009 at the GACC's website, http://www.gaccsouth.com/.

The GACC is a very active business organization in Atlanta and the Southeast. Please consider coming to this or another GACC event.

Monday, June 1, 2009

When Made In America Meant Something (Musings on the GM Bankruptcy)

by John L. Watkins

Note: I normally try to confine these posts to legal issues related to my law practice. However, in view of the General Motors bankruptcy that is being filed today, I took a little license to go a bit astray. The following views are my own, and should not be attributed to my firm, my fellow shareholders, or my colleagues. Nevertheless, I suspect they may resonate in some circles.

Being somewhat of a "car guy," this weekend was bittersweet, to say the least. On the one hand, I watched the Mecum Auto Auctions on the HDTV Theater channel on Saturday night. Despite the somewhat dismal economic conditions, I watched automotive icons from my childhood (and before) fetch rather astonishing sales prices. When the Shelby champion from the 1960s failed to sell for $6.8 million, who would have thought that was possible? $6.8 million not enough for any car? Hey, I know the old adage that “you can sleep in your car, but you can’t drive a house,” but come on: That’s a lot of money, particularly in a severe recession! Maybe Dana Mecum worked out a deal before the end of the weekend.

On the other hand, we knew that General Motors, an American icon if ever there was one, would declare bankruptcy on Monday morning. In fact, one of the commentators at the auction noted that automobiles manufactured under the Pontiac brand could only become more valuable now that the brand is being “retired” (of course, Oldsmobile is already gone and other GM brands are on the auction block).

The entire Mecum auction experience brought back memories of my youth. I was brought home from the hospital in a 1957 Ford Fairlane (green and white) that would probably be worth a pretty penny today, but which my Dad told me had rust. I remembered other automotive mistakes my Dad made in my early youth, such as a used 1957 Cadillac convertible (pretty cool with electric windows and servo buttons and the basis for the Batmobile, but far too expensive to maintain for a young assistant college professor with kids), and a 1960s-era Vauxhall (apparently, at the time, British for “bad auto”). Vauxhall, ironically, is another part of the worldwide auto bailout situation.

By 1964, my Dad found his bearings and brought home a new Dodge (it looked like something called the Polaris based on a recent Internet search, but I am pretty sure it had another name). This car, as I remember it, represented our family’s first car that looked pretty cool (it was the Space Age, after all), and actually worked pretty well. Dad kind of became a Chrysler junkie after that for a while (he always “needed” a new car every two to three years; a Detroit dream customer), buying a 1966 Dodge Coronet station wagon (useful for hauling three boys across the country), which was replaced, eventually, by a 1971 Plymouth wagon (with a “cool” spoiler thing on the back; a “Brady Bunch” vehicle if ever there was one). I learned this weekend that, if Dad had bought a 1966 Coronet sedan with a Hemi, instead of the wagon, and had kept it in mint condition, he could have made a mint.

Dad always thought we needed two cars. After a mind numbing skate down the icy roads of the “West Bench” in Pocatello, Idaho (one of several college towns in which we lived) in the “second car,” Dad’s 1960 Volkswagen Beetle, he had second thoughts. Dad decided it was a better idea (1) to relocate to a house in town (good choice), and (2) to trade in the Beetle on a 1969 Oldsmobile Cutlass. Dad’s Cutlass was yellow and very cool looking (and would still look cool to this day), but was stripped down version with no air conditioning that actually had a “three on the column.” Had Dad instead bought a 442 with a four on the floor and kept it in mint condition, he could have also sold it for a substantial sum this past weekend to one of Dana Mecum’s clients. Yet another lost opportunity.

When I was in high school in the early to mid 1970s, everyone agreed (at least in my circles), that GM made the best cars (including the iconic Corvette, the Malibu, and the Trans Am). Chrysler made some cool cars (all the Mopar stuff), and was still known for its engineering, and Ford made Mustangs (still cool), cop cars and great pickup trucks. “Made in America” still meant something.

Having driven a Plymouth Valiant “grannymobile” in high school, then through college, and then through law school (a wonderful and loyal car with the ever-reliable “slant six” engine, but not the most exciting thing on the road), my first new car in 1982 was a Toyota Celica. It was so cool. I became a loyal Toyota owner for over twenty-five years, buying a series of Toyotas, and then an incredible (and indestructible) Lexus LS 400. I finally succumbed to automotive lust last year (I inherited it from Dad, but my bouts seem to be less frequent) and bought a Mercedes E Class Bluetec turbo diesel with all the latest technology (it is awesome).

I did have a tinge of “Buy American” guilt in buying a series of Toyota products and then a Mercedes. After all, the cars of my youth were all from the “Big Three” (but were also some of the best cars built in the world at that time). Further, my wife’s uncle Jack, a prince of a man in every respect, was a GM dealer, split his time between Detroit and Florida, and had a wonderful career and family life by every measure. He was a very personal representation of GM to me. But how could you argue with Toyota's incredible reliability and maintenance that consisted of changing the oil when needed and occasionally buying a new set of tires? For most of my adult life, Detroit's only answer has been "not quite as good" at best and "just not very good" at worst.

However, my guilt was largely assuaged when Toyota started building some of the cars I was buying in America. Honda also started building cars here. Then BMW, right up the road in Spartanburg, South Carolina, and Mercedes-Benz in Tuscaloosa County, Alabama. (Both BMW and Mercedes, in my humble opinion, should have located here in Georgia, but I may be a little biased). At least Kia is now locating a plant here in Georgia. Volkswagen is locating a new plant just outside of Chattanooga, Tennessee, near the Georgia border, which will likely result in suppliers locating in Georgia, at least if they can survive the recession.

Nevertheless, the bankruptcy of perhaps the best automobile manufacturer from the days of my youth and, until recently, the world’s leading automobile manufacturer and an American icon, does not bring happy thoughts. I am also not thrilled with the tax dollars that have been thrown at this issue, and I will never be convinced that “Government Motors” is a good idea, regardless of which political party is in power.

However, I do think we can learn a few things from this incredibly unfortunate slice of recent American history.

1. There needs to be an effort to spark a manufacturing resurgence in the U.S. It is important. We cannot continue just to sell each other services or to buy products that are made solely abroad. It is great if governments – particularly state and local governments – provide incentives to manufacturers to locate here.

2. There was a time when “made in America” meant something. Judging by the fact that international companies continue to locate operations here, including the current icons of automotive quality, there is no reason why this cannot continue to be the case. Americans can manufacture goods to compete in any marketplace; they just need the will, the product development, and the management to do so.

3. We cannot and should not shut out international investment. We must instead encourage it. If headquarters are in Stuttgart, Munich, Tokyo, or Seoul, but the plants and jobs are here, and the products are made here, that is a good thing. And if we buy components and products that our trading partners manufacture elsewhere, that is also OK.

4. Arrogance is never a good management philosophy. GM’s financial performance has been pretty awful in recent years, but management continued to insist (at least from what I saw and read) that it was on the right track. Although this had a grain of truth, and although some GM models have recently gotten raves (the Chevy Malibu and Cadillac STS, for example), GM was often on the wrong side of consumer demand. At least from Main Street (where I live), this view was nothing new. Detroit would rarely admit a mistake and seemed insular in its “outlook,” if one can even call it an outlook. GM was lucky that its customers stayed loyal for as long as they did. If there truly is to be a “new GM,” this approach will have to stop.

5. Unions, if they are to have a meaningful place at the table, have to act as a true partner of business. Under the GM deal, the auto workers will now have a huge stake. Hopefully, the unions now realize that “us vs. them” does not work and that, truly, you can kill the goose that laid the golden egg. However, it is not fair to put the blame for this at the foot of the workers. Who can object to a person trying to get the most for the fruits of his or her labor? But the overall situation – the “big picture” – has to be kept in sharp focus by all the participants.

6. Government can and should provide incentives, as noted, but needs to get out of the business of business as soon as possible. When has government ever produced anything efficiently? This aspect of the “plan” bothers me the most. The sooner “Government Motors” is out of business, the better.

As lawyers, we can help. We can help our clients do business efficiently. We can help international companies desiring to locate here and create jobs do so. We can help American clients develop new distribution channels abroad. My firm and I represent a number of domestic and international manufacturers, and hope we can play a small role in helping a manufacturing renaissance in the U.S.

We can also remind our clients that even the biggest of icons can fail. We can remind them that they do need to stay competitive and to re-invent themselves as times may warrant. And, if they need convincing, we can remind them of what transpired on today, June 1, 2009.