Sunday, March 21, 2010

Trade secrets: Do You Own What You Think You Own?

By John L. Watkins

A recent case involving a dispute between the famous Mayo Clinic and a former employee, a physician, has been in the legal news. Mayo and Dr. Peter Elkin are battling about who owns the rights to a software program that Dr. Elkin participated in developing. According to a report from The National Law Journal, the case is headed to trial after the trial court denied summary judgment to both parties.

The software in issue helps manage medical information and puts it in a clear and understandable format. According to a report in the Pittsburgh Tribune-Review, both sides agree that the software has great economic value.

Delving into the merits of the Mayo/Elkin dispute is beyond the scope of this post. The nature of the dispute, however, raises a fundamental question that often rears its head in trade secret, copyright and other intellectual property litigation: Do you own what you think you own?

The vision of recent college graduates (or dropouts) writing software or developing other technology in a storefront office or a garage is a modern variant of the American Dream of rising from rags to riches. Such efforts are not necessarily mere pipe dreams. In fact, modern technology and decreasing barriers to entry probably make it more possible than ever for an entrepreneur to achieve at least a modicum of financial success, if not becoming the next billionaire.

In many instances, friends will work together in developing technology or another invention. Sometimes, entrepreneurs will “partner” with another company for a particular purpose. In some instances, an investor will come into the mix. In each instance, if intellectual property rights are not documented properly, the possibility of a future dispute becomes very real.

Further, the possibility of a future dispute or lawsuit increases in direct proportion to the success of the venture. Put more bluntly, it is not likely that anyone will fight over worthless technology. It is very likely, however, that disputes will develop over valuable technology, as shown by the dispute between Mayo Clinic and Dr. Elkin.

When inventors or entrepreneurs believe they have developed, invented or written something valuable, it is critically important to consult an experienced attorney before entering into any relationship with a third-party business “partner” or an investor. It is equally important that persons working together document their respective rights and obligations regarding the technology, writing or invention.

This is definitely not a situation where inventors, entrepreneurs or investors should try to go it alone or use Internet forms. Prospective clients should also not assume that every lawyer has the necessary experience or expertise to prepare proper documentation.

When the documentation is not properly prepared, the resulting litigation can, from a lawyer’s standpoint, be very interesting. The litigation will certainly be very expensive. At this point, however, the client is surely kicking himself for not having documented things properly on the front end.

This all boils down to yet another example of what readers of this blog will recognize as the Prime Directive: It costs far less to deal with a legal problem on the front end than trying to sort things out on the back end, particularly through litigation. The Prime Directive is especially important when dealing with any form of intellectual property.

Sunday, March 14, 2010

Want to Lessen Your Legal Risk? Wear a White Hat

By John L. Watkins

The classic Western movie or television drama is uniquely American. Westerns typically involve a confrontation of the good guys against the bad guys, with the good guys (either literally or figuratively) wearing white hats and the bad guys wearing black hats. The audience roots for the guys in the white hats, and, at the end of the day, good triumphs against evil and the guys in the white hats win.

Some legal cases are not directly analogous to a classic Western. Some aspects of the law are highly complex and technical. The correct language in a contract, will, or other instrument often makes the difference between winning and losing. Sometimes, a rule of law will control. In such cases, judges will often decide a case on summary judgment, meaning that a jury trial is not necessary. For these reasons, it is very important to pay close attention to the language of contracts, wills, and other legal instruments. In such cases, it may seem that wearing a white hat (or being perceived as such) is not so important. However, if a judge perceives that one party is wearing the white hat, it will help achieve a positive result and lessen the chances that a judge will send the case to a jury. Judges are, after all, simply human beings trying to do a difficult job.

Many cases cannot be resolved based on the language of a contract or a rule of law, and will be tried to a jury. In these cases, it is very important to be wearing a white hat, or at least not to be wearing a black hat. Almost all cases that are tried to a jury involve an underlying morality play that is very similar to the classic Western.

Regardless of the type of case, most cases that are tried boil down to four simple questions:

  • Did the defendant do something wrong?
  • Did the plaintiff deserve what happened?
  • Are there other factors that excuse either party?
  • If the plaintiff deserves to win, how much money should be awarded?

Of course, most cases that are subject to being tried are in fact settled. However, these same basic questions have to be considered in evaluating the case for settlement. All defense lawyers – at least if they have practiced long enough – have had tough cases. Perhaps the defendant is callous or unsympathetic, making it more likely that a jury would find the defendant did something wrong. Perhaps the plaintiff is particularly sympathetic, having done nothing wrong, and making it certain the jury would never find the plaintiff deserved what happened. All of these subjective factors count in evaluating a case.

If you do not believe that highly subjective factors are important, you should be aware that parties to high stakes litigation often hire highly paid jury consultants to help evaluate the risk of the case, and, more importantly, to assist in developing the most persuasive trial strategy. Jury consultants typically have a background in psychology, sociology or communications. Jury consultants will assemble focus groups and mock juries from the locality in which the case will be tried. The results are often surprising and may result in a change in trial strategy.

The highly subjective factors that so often come into play provide an important cautionary lesson for businesses: If a company wants to lessen its risk of being sued, or a bad result if it is sued, it should strongly consider how it interacts with its customers and the general public. Put simply, it should make sure it is wearing a white hat.

Here are a few things a company may want to consider:

  • Can customers easily communicate with your company, or, for example, are they shuttled off to a voice-mail version of Hades?
  • Does your company respond promptly to complaints?
  • Do your employees, or at least your local managers, have the authority to resolve customer complaints on the spot?
  • Is your company’s policy (and, equally importantly, its attitude) to go perhaps a little further than what would be considered standard or reasonable to resolve problems, returns, and complaints?
  • Does your company communicate in a direct and straight-forward manner with customers?
    • If the answer to the customer’s position is “no,” does your company communicate the reasons in a straight-forward manner?
    • If the answer to a customer’s position is “no.” does your company communicate any available alternatives?
    • Note: The fact that the answer is “no” does not mean that your company’s position is unreasonable or will be perceived to be unreasonable in the event of a lawsuit. Failing to communicate, however, has a high probability of being perceived as unreasonable.
  • Does your company document its efforts to resolve complaints so that, in the event of a lawsuit, your company will be able to prove what it offered?
  • If your company has a dispute with another company, has it responded to communications from the other party?

One theme that runs through these issues is communication. Over the years, I cannot begin to recall all of the lawsuits that could have been avoided simply if the defendant had communicated appropriately with the other party. Some -- in fact many -- lawsuits are filed simply because it is the only way to get the defendant’s attention. Most of these lawsuits could have been avoided.

Another theme that runs through these issues is responsibility. Companies who address complaints and problems in a direct and straight-forward manner and try to resolve them are far less likely to be sued than companies that ignore them. If responsible companies – those wearing the white hat -- are sued, their chances of a favorable resolution are much greater.

In Westerns, the cowboy wearing the white hat would always win the gun fight and ride happily into the sunset. The modern day equivalent of a gunfight – a lawsuit – is a more complicated proposition. Sometimes, cases are resolved on contract language or legal rules. However, if a case is going to trial, and one party is wearing a white hat and the other is not, the chances of the former winning are far greater.

Sunday, March 7, 2010

Is the "Never Pay Policy" Making a Comeback?: Some Final Thoughts

by John L. Watkins

Last week's post concluded a four part series of posts on some insurers (or claim adjusters) acting as if they had sold Monty Python's proverbial "Never Pay Policy." In Monty Python's skit, Mr. Devious explains to Reverend Morrison that his claim has been denied because his insurance policy states that any claim the Reverend might make will never be paid. Even after decades, the skit is funny, probably because it rings true to many people who have had to deal with insurance companies regarding claims. This week's post will provide a few final thoughts (at least for now) on this subject.

1. Your business still needs insurance. Although the "Never Pay" approach adopted by some insurers is extremely discouraging, businesses still need insurance, and the series of posts should not be taken as an indication to the contrary. The U.S., in general, is a litigious society, and a well designed insurance program provides the first line of defense. The "Never Pay" approach adopted by some, however, indicates that care should be taken in deciding which carrier to choose.

2. It is extremely important to use a good broker or agent. Most insurance is bought through a broker or agent. It is extremely important to have a good broker or agent. Such a broker or agent will stay on top of current trends, and can advise which companies tend ot act responsibly and which do not. Good brokers or agents can also offer substantial assistance in the event of a claim. If an insurance company or adjuster balks at paying a claim, a broker or agent may be able to pressure the insurer to provide a defense or pay a claim.

3. The early involvement of coverage counsel can help level the playing field. Insurance companies all have a small army of lawyers available to them in the event of a coverage dispute. Many of these lawyers (and I have dealt with many of them) seem to believe that their job is to assist the carrier to deny claims, rather than get to a correct result (or a fair result if there is a gray area). An insured is rarely equipped to deal with an obstinate adjuster, much less an obstinate adjuster backed by an equally obstinate hired gun. As result, insureds should consider engaging coverage counsel early in the process. It is important to use a lawyer with substantial insurance coverage experience.

4. The biggest flaw in Georgia insurance law is that insureds must generally bear their own attorney's fees in contesting coverage. In Georgia, if an insurance company refuses to provide a defense or to pay a claim, the insured must generally bear the cost of hiring a coverage attorney. If the insured prevails in a coverage lawsuit, there is relatively little chance that the insured will recover its attorney's fees. Under some Georgia case law, an insured has less chance of recovering attorney's fees against an insurer in a claim under an insurance policy (which is a contract of adhesion drafted by the insurer) than a party suing on a heavily negotiated commercial contract.

The fact that an insurer can deny claims with relatively little prospect of even having to pay the insured's attorney's fees creates an undesirable situation for insureds, whether businesses or individuals. The lack of consequences encourages bad behavior among at least some in the insurance industry.

Consider the likely thought process of a "Never Pay" adjuster handling a claim. The adjuster believes there might provide a basis for denying coverage, but also realizes that there is a good chance that the insurer could lose if coverage were litigated. Georgia case law indicates that the adjuster should interpret any ambiguities in favor of the insured and finding coverage. However, being a "Never Pay" type, the adjuster wants to deny coverage if possible. Under Georgia law, the "Never Pay" adjuster can go ahead and send the denial letter knowing that many insureds will simply give up when the denial letter is received, and also knowing that there will likely be few negative consequences to the insurer.

If the insured does not give up and hires coverage counsel, the adjuster knows that he can always reconsider the claim. The adjuster also knows that he can refer the matter to a lawyer on the insurer's coverage panel to fight the insured. Because the insurer usually has more resources than the insured, and because there is little prospect of being forced to pay the insured's legal fees, the "Never Pay" adjuster may determine that "economic warfare" is the best approach, perhaps resulting in a compromise for less than the claim is truly worth.

Every now and then, an insured will take the insurer on and a court will pop the insurer with a big loss and a judgment for bad faith that includes attorney's fees. In a recent case, the Georgia Court of Appeals affirmed such a judgment and even imposed an additional penalty on the insurer for a frivolous appeal. Decisions such as this help keep at least some insurers honest.

However, insurers with a little more finesse know that, in Georgia, they can simply pull back and pay the hotly contested claims, while continuing to deny most claims without consequence. A presumption that the insurer would have to pay the insured's attorney's fees in losing a coverage battle would even the playing field and likely change this behavior substantially.

Getting the Georgia General Assembly to adopt such an approach would be hotly contested by insurers. However, there are far more businesses and individuals relying on insurance than there are insurers. At some point, one would hope, legislators have to listen to their constituents. Business organizations should get behind this reasonably small change in statutory law to protect insureds.

Further, the Georgia courts can, under existing statutory law, make it clear that insurers who breach their policy by denying claims face the same potential liability for fees as do commercial parties who breach commercial contracts. This approach -- adopted by at least one federal court decision applying Georgia law -- would be a small step forward in putting an end to the "Never Pay" approach.