The Attorneys of Chorey, Taylor, & Feil, A Professional Corporation

Signing Off

2010-07-23T04:19:00.000-07:00

by John L. Watkins

I want to thank everyone who has read this blog over the past two years. Effective tomorrow, two of my fellow shareholders and I will be joining the Atlanta office of another law firm.

It has been a privilege practicing with the lawyers at CTF. All are first rate, and I wish my colleagues staying at CTF all the best for the future.

My colleagues and I who are leaving are very excited about our new opportunity. I will continue to post and to write articles on legal topics in other forums.

Regards.

John

The Bad Guys Are Still Out There (But Can Usually Be Dealt With)

2010-05-23T07:18:00.000-07:00

By John L. Watkins

Readers of this blog know that proactive early steps with a lawyer (such as by documenting contractual and business relationships properly before a dispute develops) help avoid lawsuits and save money in the long run. Further, wearing a white hat by being honest and forthright in your business dealings will substantially lessen the chances of legal trouble.

A couple of recent experiences have reminded me, however, that the bad guys are still out there. Who are the bad guys? Bad guys come in a lot of varieties, but they tend to be characterized by a number of qualities, foremost of which is greed. Bad guys believe there is nothing wrong with taking advantage of another person. Bad guys believe that success in life and business is characterized by what you can get, not what you have earned or what is fair. Bad guys almost always believe that the end justifies the means, and the end is always what benefits them.

There is another interesting point I have observed over the years about bad guys: It is amazing how fundamentally unreasonable (or worse) clients tend to find fundamentally unreasonable (or worse) lawyers. Although this observation may bring a wry smile, the unfortunate reality is that these pairings tend to result in disagreements turning into blood feuds and lawsuits being brought that should never have been filed. It is also almost always a much more difficult proposition to resolve disputes and lawsuits when such a pairing is involved, at least until the expense of litigation has made proceeding prohibitively expensive for them.

There is no magic secret for avoiding bad guys. Further, close business associates who were once trusted colleagues can change as time passes. Simply stated, good guys can turn into bad guys. What is the root cause of this? Typically, it all boils down to money or power, or, put more accurately, a desire for more money, power or both. This statement may strike you has horribly cynical, but, having handled litigation for over 25 years, I am convinced it is true, or is at least true in many instances. Perhaps this is part of human nature, bringing to mind the old lawyer joke that "this town isn't big enough for one lawyer, but it is plenty big enough for two."

Although there is no magic secret for avoiding bad guys, there are a few things you can do to avoid a nasty encounter, or to increase your chances of a positive outcome if you have one:

1. As always, properly document your internal company relationships (through shareholders' agreements and operating agreements) early on, and at time when personal relationships are positive. If rights and obligations are clearly defined in a binding agreement, there is much less chance of a future dispute. There is also a much greater chance of a prompt and predictable resolution if a dispute develops.

2. If you have not documented your internal company relationships, but relationships are still friendly, see a lawyer and document them now.

3. If you have not documented your internal company relationships and a dispute appears to be on the horizon, see a lawyer now. If you are a shareholder of a corporation or member of an LLC, you should hire your own lawyer as opposed to the lawyer who has been acting for the company. If relationships are not properly documented, it is probably not the end of the world, but you need to know where you stand and develop a strategy for resolution.

4. Are your company's key external relationships properly documented? Are your supplier contracts documented? Are your customer contracts documented? Do you have properly documented terms and conditions? Are your warranty obligations defined and are any "implied" warranties disclaimed?

5. Are your employment relationships properly documented? If your company has key confidential information or trade secrets, do you limit access and take other steps to protect it? Do you regularly stress to employees with access what information is truly proprietary? Note that simply taking the position that "everything" is confidential may not be effective and may create problems later.

6. This is much more subjective, but is important: Are your relationships with key business partners (suppliers and customers) satisfactory? Are these relationships such that the suppliers and customers want to continue rather than simply work out the balance of the term of the contract? Extremely one-sided relationships -- regardless of whether one is on the giving or receiving end -- often lead to disputes.

7. Similarly, are your employees happy? Do your employees want to work for you, or are they simply waiting for the economy to improve so they can move on? If the employees are unhappy, who is to blame? Step back and look at things from the employees' point of view: If in their position, would you be happy with the relationship? If the answer is "no," take steps to fix the problems. If the answer is "yes," and you still have employees who are disgruntled, complain, and act out, you may want to consider severing the relationship. One disgruntled staff person can cause a lot of trouble and distraction throughout an organization. You probably should consult with an employment attorney before taking action.

8. If a customer, supplier or employee begins making demands that are of a nature they could lead to a legal dispute, see a lawyer as soon as possible. Do not misunderstand me, I am not suggesting you need to see a lawyer if an employee asks for a raise. However, if a demand is made outside the scope of normal and ordinary business, you probably need legal advice. Good business lawyers tend to be great coaches, and can help develop a strategy for making sure that a disagreement does not morph into a dispute or a lawsuit. Often, this is accomplished by the lawyer remaining in the background.

9. If you receive a demand letter, particularly from a lawyer, see your lawyer immediately. By this point, you are already a little behind the curve. The other side already has briefed their lawyer and thought through a strategy. You will need to act quickly to get up to speed. This is particularly not a time to try to go things alone. If you try to deal with the other side's lawyer without the benefit of counsel, you will be at a great disadvantage.

10. Sometimes, mediation is a great way to resolve disputes early and without great expense. Mediation is a process that involves bringing in a neutral third party to help the parties try to reach a settlement. A mediator does not have the authority to resolve the dispute, but acts (sometimes strongly) to try to help the parties reach a voluntary settlement.

The problem, however, is that many bad guys and their lawyers will not want to go to an early mediation. They may claim to need discovery (the legal process for obtaining information) or may argue that you do not "understand how serious they are about the claim." Statements like this may be driven by the client, but the unfortunate reality is that they are often driven by the lawyer's desire to make a larger fee before the case is settled. At some point, however, it is likely that the case will go to mediation, either because reason prevails or because a court directs the parties to go to mediation. For more information on mediation, go to my mediation website.

Unfortunately, you can follow all of these tips and still find yourself in a lawsuit with a bad guy. If this is the case, there is little choice but to fight it out in court. Although I cannot say that the bad guys never win, if you have been honest and forthright in your dealings with the other party, you will have a far greater chance of prevailing in the long run.

If you do not have a business attorney and are in Georgia, give me or my colleagues a call. If you need more information about how to find, evaluate, interview, and work with a business attorney, you may want to consider my book, An Insider's Guide on Hiring a Business Attorney.

An Insider's Guide on Hiring a Business Attorney

2010-05-11T14:56:00.000-07:00

by John L. Watkins

In numerous posts on this blog, we have stressed how serious legal issues can usually be avoided or their severity substantially lessened by involving an experienced business attorney early in the process. For instance, obtaining professional assistance in drafting a contract on the front end is almost invariably less expensive (and more effective) than litigating over a "home made" contract (or no written contract) on the back end. I have yet to have one lawyer disagree with this fundamental precept.

Nevertheless, my experience continues to suggest that business people still try to go it alone, pull a form off the Internet, or re-use a contract prepared for an earlier (and often quite different) transaction, all in a misguided effort to save money. Late last year, it dawned on me that many business people may know that they need a good business attorney, but may not have the foggiest idea of how to find one. Perhaps they get a recommendation from a friend or acquaintance at a cocktail party. Perhaps they meet a lawyer at an event. These methods, however, are not the most reliable for finding and evaluating a professional who should become a trusted member of a business's inner circle.

Having recognized the issue, I researched whether there was any publication that would offer a step-by-step method for business owners and executives to find, evaluate, interview and engage a business attorney. I found nothing that really fit the bill.

This prompted me to write An Insider's Guide on Hiring a Business Attorney (and How to Make the Relationship Work). The Guide was just published. The Guide is concise (just over 100 pages in total), and is not written in legalese. It explains how to go about finding and evaluating business attorneys. The book does not pull punches, as it is designed to help readers find the best business attorneys in their community.

You might be interested in why a lawyer would write a book about hiring other lawyers, or why a lawyer would be qualified to write such a book. The answer is pretty simple: In my practice, I have often had to engage lawyers in other states and internationally for clients. For example, a client may wish me to handle a litigation matter outside of Georgia in a jurisdiction in which I am not licensed. In most other jurisdictions, an out-of-state lawyer can handle specific litigation matters upon the permission of the court. (This is called being admitted pro hac vice). In order to do this, it is always a requirement to engage local counsel.

Similarly, if a business transaction involves another jurisdiction's law (perhaps because the opposing party insists), then it is often necessary to engage counsel from the applicable state (or country) to review particular legal issues. Accordingly, I have had considerable experience in finding, evaluating, and engaging counsel from other jurisdictions.

The Insider's Guide provides the benefit of my experience in finding and evaluating attorneys. The book covers tools that are available for this purpose. The book also explains how to interview an attorney for a possible engagement and key questions that should be asked. Having worked in both the big firm and small firm environments, I discuss differences between large and small firms (and please do not think that it is entirely pro-small firm just because that is the environment in which I currently practice). The book also discusses legal fees and alternative fee arrangements. Finally, the book provides tips for working effectively with a business lawyer (one hint: never lie to your attorney).

The book is $19.99. Those interesting in purchasing should visit the book's website, http://www.businessattorneyguide.com. The book will also be available in a matter of days on Amazon.com and through other distribution outlets.

I apologize for the plug, but this is an important subject. I do not know of any other publication that covers the same subject matter.

It should be stressed that the views in the Guide are mine alone, and the book does not purport to represent the views of Chorey, Taylor & Feil, A Professional Corporation, or other attorneys in the firm.

Energy Independence: Still a Long, Tough Slog

2010-04-11T13:17:00.000-07:00

by John L. Watkins

Last week, I attended an event on bioenergy sponsored by the German American Chamber of Commerce. The featured speaker was Mr. Jörg Mayer, the Managing Director of the Renewable Energies Agency in Berlin, Germany.

By way of background, Germany is far ahead in the field of renewable energy, being a world leader in solar, bioenergy and other alternative energy technologies, as well as conservation. Electricity is three to four times more expensive in Germany than in the U.S. Gasoline and diesel are also much more expensive in Germany than here. Thus, Germany has plenty of reason to become a world leader in alternative energy. Germany has adopted many government policies designed to promote, if not force, the development of alternative energy technologies.

What struck me most about Mr. Mayer's remarks was his statement that Germany's policy goal is to have alternatives supply 20 percent of Germany's energy needs by 2020. Given the cost of energy in Germany and the German government's push for alternatives, this was a pretty sobering statistic: If Germany's goal is to achieve only 20 percent in the next 10 years, it says very little for the chances of advancement toward energy independence in the U.S.

Many of my clients are involved in various aspects supplying energy or developing alternative energy technologies. Dieffenbacher GmbH + Co.KG, for example, has recently developed machinery for turnkey wood pellet production plants. Wood pellets are used to fire very efficient stoves used for heating in Europe, and usage is increasing in the Northeastern United States. Georgia is a logical place to develop pellet production plants because it is heavily forested and has a well-developed forest products industry.

Other clients are developing solar technologies. Another client has developed a system for extracting and processing grease from restaurant grease traps so that it can be processed into biodiesel. All of these technologies have great promise.

The legal issues arising from the development and adoption of these new technologies are many. The U.S. has traditionally produced electricity in centralized power plants (coal, nuclear and natural gas) and then transmitted the power by long distance through transmission lines. Many of the alternative sources favor a more decentralized approach, where the energy is produced at or near where it is consumed. Simply put, our grid system as it exists is not particularly well-suited to the adoption of alternative technologies.

Other challenges include protective intellectual property rights while still allowing for widespread adoption. Our research universities, such as Georgia Tech, need to become more streamlined in working with industry, and in respecting the intellectual property of their industry "partners."

Our public policy toward energy independence remains, frankly, an uncoordinated disaster. I am old enough to remember (as a teenager) the 1970s oil embargo. The simple truth is that our politicians only pay attention to energy policy when prices rise to an uncomfortable level or there are supply disruptions. Thus, when gasoline climbed past $4.00 per gallon, we paid attention. When the recession took hold and demand and prices fell, energy once again became yesterday's news.

Even when our politicians pay attention, their chief response is to hold hearings -- the modern day equivalent of a show trial -- and to demonize oil companies and other traditional energy producers. For the almost 40 years since the oil embargo, politicians of both parties have occupied the White House or controlled Congress. The simple fact is that nothing meaningful has been done and all of our leaders -- past and especially present -- ought to be ashamed of themselves on this issue.

It seems clear based on the German experience that alternatives -- as valuable as they may prove to be -- will not supplant the need for traditional sources of energy. Demand will continue to increase. We need to support the reasonable development of all sources of energy, alternative and traditional, as well as conservation and wise energy usage. In some instances, this is going to require abandoning the "not in my backyard" mentality that has stifled a number of initiatives.

It is also clear that we need to take advantage of technologies that are available now. For example, clean diesel technology is now widely available for automobiles. We just drove my four door sedan with a clean turbo diesel engine to Jacksonville and back and averaged 35.5 miles per gallon. The list price of the car was only $1,000 more than the comparable gasoline model. Other models are available (mainly from the German manufacturers) in different price ranges. In Europe, a very high percentage of autos have diesel engines. Diesels have not been as popular in the U.S., perhaps because we remember smoky and sluggish diesel cars from years past. Modern turbo diesels do not smoke and have plenty of power.

Hybrids, such as the Toyota Prius, offer very high fuel efficiency. My Dad has a Prius. It is quite comparable to other smaller cars to drive.

Other available options include modern foam insulation for existing houses. We installed spray foam insulation (it is sprayed in between the roof joists in the attic) about two years ago. We have found the manufacturer's promise of a 30 to 40 percent energy savings to be quite accurate, and it should pay for itself in a very short while. We also replaced our tank water heater with a tankless models. The tankless models are very expensive (largely because of installation costs), and the payback analysis really is not there, but ours has performed well so far.

Other existing technologies would provide substantial energy savings. In many hotels in Europe, you insert your room key card in a slot near the entrance of your room to activate the electricity. When you go out, you remove the key, and the lights go out. As it is, we could simply remember to turn the lights out when leaving our offices. In any city in the U.S. at night, you can see lights left on at night in office buildings. It is just a huge waste of resources.

Whether you believe in global warming or not, most people would agree that energy independence from potentially hostile foreign sources would be a good thing. Most would also agree -- hopefully -- that wasting resources is a bad thing. The policy and legal issues have a long way to go, but there is a lot we could do now if we just paid attention.

Cloud Computing: Still Foggy From a Legal Standpoint

2010-04-04T07:11:00.000-07:00

By John L. Watkins

I have written previously about the "cloudy" nature of cloud computing from a legal standpoint. Last week, I attended a seminar on cloud computing that was attended by about fifty lawyers and some "techies" interested in technology and cloud computing. The consensus resulting from the seminar appears to be that, although the list of legal issues is becoming a bit more defined (and lengthy), there still are very few answers.

Why Cloud Computing? Cloud computing, which is often called "software as a service," involves providing software and storage remotely (in the "cloud," or at a server farm in a remote location), instead of maintaining the software and storage locally, either directly on a computer or on a server for a local area network. Although this definition is generally correct, you should be aware that there are many variants of cloud-based services and formats that are way beyond the scope of this post.

There are many theoretical advantages to cloud computing, at least from a technology standpoint. Because the software and and storage are maintained remotely, there is less hardware to buy and maintain and much less on-site maintenance. Software updates can be pushed out remotely and handled by the provider. Most services are available anywhere there is an Internet connection and a computer with a browser.

Most people probably already use cloud-based services, whether they know it or not. Facebook, LinkedIn, Plaxo and other social networking sites are cloud-based, with the services accessed through a browser and the information retained remotely. Services provided through Amazon.com and other vendors are cloud-based. Google services, such as the Blogger platform on which this post is being written, are cloud-based, as well as the suite of Google Apps (meant to compete with Microsoft Office). One of the most successful and well known cloud providers is Salesforce.com, which provides CRM (customer relationship management) software and services.

Cloud providers and proponents argue that the security of cloud-based services is probably at least as good as relying on a traditional local area network, if not far better. They also argue that the backup of cloud-based services is more automatic and reliable.

For many businesses, the most compelling reason to consider cloud-based technology is cost. Cloud-based services are typically competitively priced and substantially lessen, if not almost eliminate, expensive hardware and IT services.

The Legal Jungle. As compelling as the technical case for cloud computing services appears to be, the legal minefields are many. By way of full disclosure, I do not claim to be an expert on the many statutes that may apply to those considering cloud computing solutions. I know enough to say, however, that Congress (and some states) have adopted what is literally a crazy-quilt of statutes that potentially create substantial exposure and liabilities for users. Many of these statutes are designed to protect customers or clients from the disclosure or theft (for example, from hackers) of personal information.

Once again, good legislative intentions have created an uncoordinated nightmare of regulatory compliance. However, with the cloud, it does not stop at our border. Cloud providers may maintain server farms in other countries, potentially bringing international regulatory systems into issue. Questions are certain to arise over which country (or state) has jurisdiction over legal issues.

At the seminar, one of the techies in attendance commented that the legal issues could be largely resolved by the U.S. adopting European Union standards. I do not know enough about the EU standards to draw any conclusions, but it is virtually certain that the adoption of understandable international standards would simplify the issues and foster the adoption of cloud-based systems. Although this is a noble goal, it is frankly difficult to imagine that such a solution is viable in today's political environment.

One of the most troubling aspects of the legal jungle surrounding cloud computing is that the cloud providers are, as a general matter, unwilling to accept any contractual responsibility for loss of data or other potential nightmares associated with cloud computing. If cloud providers are really certain that their systems are robust, redundant and foolproof, then why do the legal terms and conditions disclaim responsibility at every turn?

Although it may well be true that the risks of data loss are greater with a traditional local area network, many businesspersons are somewhat understandably reluctant to "turn over the keys" to an off-site provider which may store critical data almost anywhere. And, as one prominent commentator has noted, if an IT department loses critical data, at least the business owner has the cathartic pleasure of calling in the IT director and giving him a pink slip.

At the seminar, the speaker commented that cloud providers are willing to negotiate terms for "large" customers, but are not going to do that "for someone who wants to spend $20,000 for services." This observation is probably dead on, but it provides little comfort for small or medium-sized business for which a $20,000 expenditure is significant. Ironically, many cloud providers target small and medium-sized businesses.

Any Way Out of the Legal Jungle? At the current time, I can offer no easy way out of the legal jungle for those considering cloud-based services. It is true that some aspects of the legal jungle affect any type of computer network. The adoption of cloud-based services, however, creates additional issues.

In a post on this blog last year, I commented that a provider willing to come forward and put its legal terms and conditions -- such as by guaranteeing compliance and against data loss -- where its technological mouth is could probably sell a lot of services, even at a premium price. If there is a provider out there willing to do this (and which has the financial muscle to back up any guarantee), please let me know, as I would love to hear about it.

On a related subject, I recently spoke to an insurance broker that is trying to put together an insurance product to protect companies against liability associated with data breach and other computer-related liabilities. If this product comes to market and appears promising, I will let you know about it in a future post.

Certainly, an insurance solution has some promise (assuming, of course, the insurer would actually perform, which is an absolute roll of the dice with many insurers). An insurer would have every incentive to develop and assist its insureds with risk management approaches that would boost compliance and minimize risk. Many small and medium-sized businesses simply do not have the expertise or resources to do this on their own.

Stay tuned.

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

2010-03-21T10:07:00.000-07:00

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.

Want to Lessen Your Legal Risk? Wear a White Hat

2010-03-14T09:24:00.000-07:00

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.

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

2010-03-07T08:22:00.000-08:00

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.

Is the "Never Pay" Insurance Policy Making a Comeback? How to Fight It (Part IV)

2010-02-27T10:45:00.000-08:00

“In your policy it states quite clearly that no claim that you make will be paid. You unfortunately plucked for our Never-Pay Policy, which if you never claim is very worthwhile - but, uh, you had to claim - and there it is."

-Mr. Devious to Reverend Morrison about the letter from the insurance company refusing to pay the Reverend’s claim for damage to his car that was hit by a lorry while standing in a garage. Monty Python and the Flying Circus, circa 1971.

This is the final post in the "Never Pay Policy" series. The series deals with the fact that, at least in my small part of the world, many carriers are acting as if they sold the proverbial "Never Pay Policy." When the "Never Pay Policy" goes from being a joke to reality, many people lose. Insureds, whether businesses or individuals, are left to defend and settle claims with their own resources. In some cases, an insurer's failure to perform has the potential of putting an insured out of business or into bankruptcy. Claimants may face the prospect of not receiving compensation for their injuries. Damaged or destroyed property will not be repaired or replaced.

The prior posts covered some common sense steps that insureds can take to prevent a carrier from acting like it sold a Never Pay Policy in the event of a claim. Unfortunately, an insured can take all of these steps and still encounter a Never Pay approach. Even carriers that are generally responsible may have certain claims adjusters who think it is their job to deny as many claims as possible rather than making an objective and reasonable coverage determination. An insured’s experience with any carrier may turn out to be a crap shoot, depending on which adjuster is assigned. Some adjusters are reasonable. Some are not.

When an insured receives a reservation of rights letter (at least on serious claims) or a denial letter, it is time to consult with coverage counsel. Actually, if there is a serious claim, it is even better to consult with coverage counsel at the outset of a claim. Obviously, if a carrier has filed a declaratory judgment action, which is a lawsuit asking a court to determine coverage, the insured will need to hire coverage counsel to handle the lawsuit.

1. How to find coverage counsel. It is important for insureds to consult with counsel experienced in handling insurance coverage matters. It is tempting for many lawyers to take coverage cases even if they have very little experience in the area. These lawyers reason that an insurance coverage case is just a variety of contract claim, and that there is thus no reason they cannot handle it. I am not suggesting that a general litigator cannot handle a coverage claim, but if an insured is paying hundreds of dollars an hour, it usually makes sense to find someone with experience in the area.

Be aware that insurance carriers have legions of lawyers available to them. Each carrier has “panel counsel” consisting of lawyers from law firms pre-approved to represent the carrier in coverage disputes. In larger or troublesome risks (for example, those that may be relatively small but may set a precedent for other claims), the carrier may involve its national or regional coverage counsel. National or regional coverage counsel typically do little more than represent carriers in coverage matters, and will often fly in from out of state to work with the insurer’s local counsel. In a prior part of my career, I was on one of these teams and, although it is not what I do (or want to do) now, the experience was invaluable. Fortunately, the carrier I represented was one of the good ones.

There is no doubt that the carrier and its lawyers will check out the credentials of an insured’s attorneys. If the credentials show that the lawyer is an experienced coverage attorney, then the carrier will probably take an insured’s case more seriously. An insured will want to engage a lawyer with a lot of experience representing policyholders. Many policyholder lawyers formerly represented insurance carriers. Prior experience representing carriers is an advantage, because it provides insight into how carriers analyze claims and the issues that carriers tend to view as important.

There are resources to find experienced coverage counsel. A referral from a company’s usual business attorney is one method. There are other resources, such as Martindale.com and AVVO.com, which are directories that also rank attorneys. Be sure to review the lawyer’s credentials (most law firms have websites with online biographies), and ask questions about the lawyer’s coverage experience.

My upcoming book, An Insider’s Guide to Hiring a Business Attorney (Ocelot Atlanta 2010) details a process for finding, evaluating and interviewing a good business attorney. That process can be adapted to finding a coverage attorney. The book should be available in late March 2010 on Amazon.com.

2. A word about attorney's fees. In Georgia, the insured should expect to pay the fees of its coverage lawyer. The fees of the coverage lawyer are not part of the defense obligation (the obligation to provide a lawyer to defend the underlying claim). Even if the insurer sues its own customer and the insured prevails, an award of attorney’s fees is the exception, rather than the rule. This is a flaw in Georgia law that needs to be addressed by the courts or the Georgia General Assembly. The law in other states may differ.

3. Options for dealing with a carrier. The first thing a coverage attorney will want to do is to review the insurance policy and all communications between the insured and the insurer, particularly any reservation of rights or denial letter. After that review, the coverage attorney can advise the insured about possible options. Those options may include the following.

a. Negotiating with the insurer. A coverage lawyer may write a demand letter to the carrier asking it to reconsider its position. The demand may include additional facts that could affect the coverage determination or legal analysis. Sometimes, negotiations are successful.

It should be noted however, that many claims adjusters seem to become personally invested in their effort to deny coverage. Some adjusters seem incapable of being able to look at a claim objectively, particularly once a denial has been made. The only hope in such a situation is the involvement of another person. Sometimes, a supervisor may take a fresh look at the situation. In some instances, the carrier may choose to involve outside counsel. Outside counsel may advise the carrier to take a different approach. Although this sometimes works, carrier representatives and their counsel can be a particularly obstinate lot, so an insured should never count on an insurer changing its position.

Depending on the nature of the denial, an insured’s counsel may put the carrier on notice of a bad faith claim. Under Georgia law the bad faith remedy is limited to a penalty equal to 50 percent of the loss or $5,000, whichever is greater, plus the insured’s attorney’s fees in pursuing the claim for coverage. This is in addition to amounts due under the policy. However, obtaining a bad faith penalty requires suing the insurer. Georgia’s remedies are, in my opinion, far too limited, and virtually invite insurers to act irresponsibly. The law in other states differs.

There is another form of bad faith that may come into play. If a carrier has an opportunity to settle a liability claim within policy limits and unreasonably fails to do so, the carrier may be held liable for any resulting judgment even if it exceeds the policy limits. If a carrier has an opportunity to settle and fails to do so, then coverage counsel may put the carrier on notice that the insured will look to the carrier to pay “excess judgment” over the policy limits.

Negotiating with the carrier can sometimes be successful in resolving claims. In many instances, however, the carrier will be obstinate and will not reconsider its position. This leaves litigation as an alternative.

b. Filing a lawsuit. If negotiations fail, coverage counsel may recommend filing a lawsuit against the carrier. If the carrier has already filed a declaratory judgment action, then counsel will probably recommend filing a counterclaim.A lawsuit (or counterclaim) for coverage is essentially a breach of contract action. Nevertheless, it is a special type of breach of contract action, and some special rules apply.

Because insurance policies are contracts of adhesion -- meaning they are drafted by carriers and sold on a “take it or leave it" basis -- they are interpreted against the carrier and in favor of the insured. These and other rules give the insured at least a theoretical advantage in litigation. In many coverage cases, however, inexperienced counsel do not take full advantage of the rules. This has led to a number of unfortunate, and, in my view, wrongly decided decisions against insureds.

In reviewing the briefing (the legal arguments filed by the lawyers) in some of these cases, the lawyer representing the insured simply failed to make arguments and cite case law that might have changed the outcome. When an inexperienced lawyer (or one who fails to educate himself) goes up against an insurance company’s hired gun, it often not a fair fight.

What are the chances of winning a coverage case? Obviously, it depends on the facts of the case, the terms of the policy, the lawyers on the other side, and many other factors. The recent Georgia decisions suggest the result is a bit uncertain, as the decisions are not entirely consistent. The law in other jurisdictions varies.

c. Filing a bad faith claim. If an insurer’s refusal to defend or indemnify is objectively unreasonable, the insured may have a bad faith remedy in addition to recovering under the policy. The Georgia remedies were briefly discussed above. A bad faith finding is far from automatic, and requires an insured to show more than than the insurer simply made a mistake in denying the claim. There is no hard and fast rule about when an insurer crosses the line from good faith to bad faith, and the Georgia decisions indicate that a jury should usually decide the question.

In practice and in reviewing the recent Georgia decisions, the ability to prevail on a bad faith claim seems to depend as much on the court one is in as the facts. The federal court in Atlanta sometimes seems to take a very hard line against insureds asserting bad faith claims.

On the other hand, the Georgia Court of Appeals has issued a couple of recent decisions that are far more receptive to a finding of bad faith. In one very recent Court of Appeals decision, the court affirmed the trial judge’s finding of bad faith on summary judgment, meaning that the trial judge found the bad faith so obvious that the case could be decided without a jury trial. This case involved an underlying claim by a building owner against a building contractor resulting from a fire that was negligently started by a subcontractor. The insurance company refused to defend or indemnify the insured based upon a broad interpretation of "business risk" exclusions in the policy, which generally limit coverage for damages to the insured's own work.

The Court of Appeals found that the insurer's reliance on the builder's risk exclusions was incorrect and affirmed the trial court's decision that the insurer acted in bad faith. The Court of Appeals also quoted approvingly from the trial court’s order observing that the failure of an insurance company to provide a defense where it clearly should have done so could have put a smaller contractor out of business. This is one of the relatively few instances in which a court has expressly observed the enormous real practical consequences of a Never Pay approach.

Perhaps this case will start a new trend. In addition to affirming the trial court's finding of bad faith, the Court imposed a penalty against the insurer and its appellate counsel for a frivolous appeal. This penalty is rarely imposed. The case appears to indicate that at least some judges are fed up with insurers adopting a Never Pay approach. In theory, at least, the federal court is bound to follow the decisions of the Georgia state courts on issues of Georgia law.

There is case law in Georgia suggesting that an insured may only recover its attorney’s fees in pursuing coverage by proving bad faith, rather than simply prevailing on the coverage determination (proving that the insurer breached the policy). This is true even though another statute allows attorney’s fees in contract cases upon a showing that the other party had been “stubbornly litigious” or had caused “unnecessary trouble and expense.” There is a federal appellate case to the contrary.

The former decisions are particularly unfortunate, because they indicate that a party to a commercial contract - which, unlike an insurance policy is likely to be highly negotiated - has a better chance of recovering attorneys’ fees in a lawsuit over the commercial contract than an insured whose insurance carrier has breached the policy by incorrectly denying a claim.

There is great irony here because insurance company lawyers love to argue that an insurance policy should be treated the same as any other contract instead of being construed against the insurance company, as Georgia law provides. When the subject of attorney's fees comes up, however, the same lawyers argue that insurance policies should be treated differently from other contracts.

Once again, this discussion is based on Georgia law. The law in other states in this area varies considerably.

4. Possible future relief for insureds. In addition to the millions of dollars insurers spend on television advertising, as noted in the first post in the series, insurers also spend a lot of money on "governmental relations," or what might be known colloquially as lobbying. Any change in the current circumstances will surely bring substantial opposition. At least in Georgia, I suspect the carriers pretty much like things the way they are.

Insurers argue that if they are forced to pay more claims, premiums will go up. There are a couple of obvious rejoinders to that argument. First, what do insureds pay premiums for in the first place? Second, insurers rarely seem to take into account the huge costs associated with paying an army of claims adjusters, national counsel, regional counsel and local counsel in trying to support coverage denials.

In many instances, the result is that the insurer has to pay the claim anyway, and sometimes even a bad faith penalty. It would be truly interesting to see the results of a study comparing the costs of the current approach adopted by many carriers to the cost of a an approach that would give the insured the benefit of the doubt in simply paying claims.

I am not suggesting that insurance companies should be forced to pay claims that their policies were never intended to cover. What I am suggesting is that insurers should recognize they are in the business of covering risks. Therefore, doubts should be resolved in favor of the insured, rather than trying to force a claim into an awkward or forced interpretation of a policy term, condition, or exclusion.

Here are a few minor suggestions that would make the playing field a little more even for Georgia insureds.

a. The General Assembly, the Insurance Commissioner and the courts should prevent and give no credence to “Never Pay” provisions in policies or "Never Pay" interpretations of such provisions. It should be clear that an insurer's fundamental promise is to defend and indemnify claims. Insurers should not be permitted to sell policies with Never Pay provisions. Courts should follow existing precedent and interpret exclusions narrowly so that they do not swallow up the fundamental promise of coverage.

The Georgia Court of Appeals has recently done this in connection with the “business risk” exclusions in commercial general liability policies that insurers have used to try to deny coverage for claims arising from construction defects or negligent construction. Similar results should follow regarding the pollution exclusion, the fungus exclusion and other policy provisions that are sometimes used to try to deny coverage under circumstances that were never intended.

Further, the General Assembly and the Insurance Commissioner should prevent carriers from adopting such blunderbuss exclusions in the first place, or interpreting them to swallow the fundamental promise of coverage.

b. If an insured prevails in a lawsuit against its insurer, it should recover its attorney’s fees. In Georgia, a carrier can deny a claim knowing that it probably faces little risk beyond possibly having to pay the claim, while at the same time forcing the insured to hire and pay for coverage counsel. This can be a double whammy if the carrier has denied a defense and the insured is also having to pay to defend the underlying claim. In many instances, the insured may simply lack the resources to fight.

This allows carriers to engage in economic warfare against their insureds with little risk of consequence. If insurers force their insureds to go to court on coverage and the insured wins, an award of attorney’s fees should be automatic. This rule should apply regardless of whether the insurer or the insured institutes the litigation.

The reverse should not be true. Why? Because the insured has no say in drafting the policy language, does not have access to an army of lawyers, and is typically at an economic disadvantage.

At an absolute minimum, the Georgia courts should overrule the line of cases holding that the general contract statute for recovering attorney’s fees does not apply to insurance coverage cases. An insured, as a party to a “take it or leave it” contract of adhesion should not be at a disadvantage to a party suing regarding a carefully negotiated commercial contract.

c. The bad faith remedy should be made more meaningful. Presently, an insured that prevails in a bad faith action may recover, in addition to amounts due under the policy, a penalty of 50 percent of the loss. Previously, the statute provided for 25 percent of the loss. This is simply not enough to get a carrier’s attention. A multiplier of 200 percent would change this, and such would not be at the radical end of bad faith remedies in other states.

Conclusion. This series has provoked a quite a bit of interest and a little discussion. That is not surprising, as the subject is one of general concern. Almost all businesses and individuals purchase insurance to protect against a wide variety of risks. Monty Python’s “Never Pay Policy” skit is still funny after many years. As is the case with much humor, the skit is funny because it points to a generally accepted underlying truth. It is no laughing matter, however, when insurers deny claims and act as if they were selling Never Pay Policies. The consequences to insureds can be devastating. Until the insurance industry changes its ways or the state legislatures and insurance commissioners take action, insureds must look out for their own interests. Hopefully, this series has provided at least a few helpful observations on fighting the Never Pay Policy.

Is the "Never Pay" Policy Making a Comeback?: How to Fight It (Part III)

2010-02-21T11:29:00.000-08:00

by John L. Watkins

“In your policy it states quite clearly that no claim that you make will be paid. You unfortunately plucked for our Never-Pay Policy, which if you never claim is very worthwhile - but, uh, you had to claim - and there it is.”

-Mr. Devious to Reverend Morrison about the letter from the insurance company refusing to pay the Reverend’s claim for damage to his car that was hit by a lorry while standing in a garage. Monty Python and the Flying Circus, circa 1971.

The first post in this series discussed the apparent comeback -- based on my admittedly subjective observations -- of the proverbial “never pay policy,” or the practice of insurers in taking aggressive coverage positions and reserving rights and denying claims. If these observations are correct, the negative effects on businesses, claimants, and, ultimately, society, are readily apparent.

The second post of this series discussed some basic steps businesses and individuals can take to fight the return of the “never pay policy.” This post will go further and discuss what to expect in the event of a claim, how to tell if an insurer is acting like a “never pay” carrier, and some of the things an insured can do about it.

1. If you have a claim, or an event that may give rise to a claim, report it promptly. If an event happens that may give rise to a claim, notify the carrier. If there is a lawsuit, notify the carrier. In order to avoid disputes, provide notice in writing and keep a copy.

As noted in the second post, you should have access to a copy of the policy. Review the policy for the notice requirements and comply with the requirements.

Insureds often provide notice to their agent or broker. If you provide notice through the broker, make sure that the broker confirms in writing that no further notice is necessary. Then demand that the carrier confirm in writing that no further notice is necessary. Why? Because even when carriers receive notice from a broker, they will sometimes claim that notice to a broker is not in technical compliance with the policy.

Why the concern? Because insurers claim late notice all the time. Many insurers seem to raise late notice as a defense simply as a matter of course, regardless of whether the notice was really late or regardless of whether they were prejudiced by the claimed late notice.

Sometimes, carriers are successful in avoiding coverage on this ground. In an ideal world, insureds can cut off this issue by giving notice that cannot be challenged, and, importantly, documenting that they have given notice.

2. Until the carrier performs, be wary and very careful. The notice issue points out an unfortunate reality in the “never pay” era: Do not assume your insurer is on your side. Remember that the claims adjuster assigned to handling the claim will also be looking for coverage issues to raise.

Particularly in liability claims, there is an inherent conflict of interest (or, at the very least, a strong potential conflict of interest) in a claims adjuster handling a claim and also looking at coverage issues. In handling a first party property damage claim, for instance, a claims adjuster is supposed to be making sure that the insured is protected, that temporary assistance (such as temporary housing, a rental car, etc.) is provided, and that the insured’s life or business is put back together as soon as possible.

In a liability claim, the adjuster is supposed to be making sure that the incident is properly investigated, and that a lawyer is promptly appointed to defend the insured. Ultimately, it is the duty of the insurer to make all reasonable efforts to resolve the claim within policy limits. The claims adjuster will typically be privy to privileged information, including confidential reports and evaluations of defense counsel, some of the most sensitive information generated in defending a lawsuit.

Obviously, if an adjuster is looking for ways to deny or limit coverage, it runs counter to the insurer’s fundamental obligations in either a property damage or liability claim. In some instances (but usually only coverage issues are squarely in play), the insurer will adopt a “Chinese Wall,” meaning that there will be separate adjusters appointed for handling the underlying claim and the coverage issue. Theoretically, at least, the adjusters will not be able to communicate with each other which should prevent the use of confidential information to deny coverage.

In most cases, unfortunately, the carrier will not adopt a “Chinese Wall.” For this reason, there is always the potential of a conflict of interest. Accordingly, until the insurer performs, be very careful.

3. Cooperate with the insurer. While an insured must be wary, it must also cooperate with the carrier. Almost all policies have a “cooperation clause,” which provides that the insured must cooperate with the carrier in defending a claim. If the insured does not cooperate, the insurer may raise breach of the cooperation clause as a defense to coverage, and sometimes courts will deny coverage on this basis.

It may seem odd, to say the least, to be on guard and to cooperate at the same time. Nevertheless, this is the line an insured must walk, particularly in the “never pay” era.

4. What to expect if you submit a claim.

a. An Acknowledgement letter. Within a few days to a week after the claim is reported, the insured should receive an acknowledgment letter. This letter should confirm that the claim has been received and that the carrier is working on it. The letter should also provide the name of a claims adjuster and a claim number. Future communications should be addressed to this adjuster and should reference the claim number. The acknowledgment letter may say that the insurance company reserves its rights pending further review and investigation of the claim.

If you do not receive an acknowledgment letter within 10 days, it is a cause for concern. Check with your broker and consider sending further notice. If you send additional notice, be sure to reference the prior notice.

If the initial acknowledgement letter states that the insurer is generally reserving its rights, it is generally not a cause for great concern, as it is typically contained in the form used for such letters. If specific issues regarding coverage are raised, the acknowledgment should be treated as a reservation of rights letter, discussed below.

b. A Reservation of rights letter. An insurer may later provide a more detailed letter that is called a “reservation of rights” letter. As noted above, some acknowledgment letters should be treated as a reservation of rights letter. In this letter, the carrier will (1) set forth the facts of the claim, (2) quote policy provisions that may be applicable; and (3) will tell the insured what it plans to do. These letters are typically at least 3-4 pages long, and, in some instances, much longer.

In many instances involving liability claims, the insurer will say that it will “provide a defense,” but that it reserves all rights to withdraw the defense and not pay the claim. What this means in ordinary terms is that the carrier, for the time being, will appoint and pay for a lawyer to defend the insured, but may cut off the defense at a later date. The insurer may also refuse to pay for any settlement or judgment (the indemnity obligation).

If you get a reservation of rights letter, it is a cause for concern. If the claim is at all significant (meaning that it is a claim that would be a burden to handle without insurance), it is time to consult with an insurance coverage lawyer.

In this regard, a few words should be said about the lawyer appointed by the insurance company to defend the underlying liability claim. This lawyer will, in most instances, be chosen by the carrier and will be paid directly by the carrier.

There is again the potential for a conflict of interest between the insurance carrier and the insured regarding the defense lawyer. Unlike the claims adjusting process (at least absent a “Chinese Wall”), however, there are some checks and balances on this potential issue. It is clear under Georgia law that any lawyer appointed by the carrier is the insured’s lawyer. The lawyer owes all professional obligations to the insured, despite being paid by the insurer.

In this day and age, most “insurance defense” lawyers understand that they owe their primary obligations to the insured and will not cross the line. The lawyer appointed by the insurance company and defending the case cannot get involved in the coverage determination, either for the carrier or for the insured. If an insurance defense lawyer crosses this line and appears to be wading into the coverage issues, particularly on behalf of the carrier, it is a cause for great concern and the insured should consult with coverage counsel immediately.

Whether there appears to be a coverage issue or not, insureds should insist on being copied on all communications from the lawyer to the carrier, including any regular reports on the case. This demand will not only help the insured stay informed, it will help make sure that defense counsel sticks to its primary obligations.

c. A denial or declination letter. A denial or declination letter that means that, so far as the insurer is concerned, it is not going to pay the claim, or even defend a liability claim. A denial letter looks much like a reservation of rights letter: It typically summarizes the facts, and quotes provisions of the policy at length. The letter states, however, that the insurer is not going to provide a defense or pay the claim.

If an insured gets a denial letter, it should immediately consult with a coverage lawyer if it has not already done so. If there is a liability claim, the insured must also make sure that any litigation is answered and otherwise defended.

If there is a denial, the insured has essentially three courses of action: (1) the insured can accept the denial and deal with the claim itself; (2) the insured can respond to the letter with additional information or analysis and urge the carrier to reconsider its position; or (3) the insured can institute litigation against the insurer.

d. A declaratory judgment action. Sometimes, almost always involving a liability claim, a carrier will file a “declaratory judgment action” action against its insured. In a declaratory judgment action, an insured claims to be “uncertain” of its duties and asks a court to determine if it must defend a lawsuit and pay a claim. Often, the insurer will continue to defend the underlying claim under a “reservation of rights” pending the result in the declaratory judgment action.

A declaratory judgment action may sound innocuous, but do not be misled. This is a lawsuit in which the carrier is seeking the court’s blessing to deny a claim. It requires the insured to engage coverage counsel at the insured’s expense and to defend the claim, and possibly to assert counterclaims.

In many situations, an insurer filing a declaratory judgment action has already determined in its mind that there is no coverage, and is looking for the court to approve its determination. In other situations, the insurer may legitimately be unsure of its obligations. In other situations, an insurer may have determined that there probably is coverage, but perhaps its adjuster acted too aggressively. In such a situation, a declaratory judgment action may be used, ironically, to avoid or defend a claim that the insurer acted in bad faith.

This is a matter of opinion, but in my view, declaratory judgment actions are also sometimes also used as a weapon to conduct economic warfare on the insured. Carriers know that many insureds lack the resources to defend a lawsuit (ironically, that is why they purchased insurance), or that defending a declaratory judgment action will be a large financial burden. What the carrier may well be aiming for is capitulation or a settlement under which it lives up to less than its full obligations.

If a declaratory judgment action is filed, an insured has little choice but to hire a coverage attorney and defend the claim. This is simply the reality in the “never pay” era.

Conclusion. This post has covered some more of the steps you should take to fight the “never pay” policy. The next post will cover how to find a coverage attorney, and some of the legal steps that can be taken to fight the “never pay” policy.

Is the "Never Pay Policy" Making a Comeback? How to Fight It (Part II)

2010-02-14T11:30:00.001-08:00

By John L. Watkins

“In your policy it states quite clearly that no claim that you make will be paid. You unfortunately plucked for our Never-Pay Policy, which if you never claim is very worthwhile - but, uh, you had to claim - and there it is.”

In the last post, I focused on the business and societal ills that can result from insurance carriers acting as if they were selling Monty Python’s proverbial “Never Pay” policies. I also mused about a Utopian carrier that would write clear and easily understandable policies, and that would actually pay claims instead of paying claims adjusters to write reservation of rights and denial letters and a legion of lawyers to fly around the country litigating with the insurer’s own customers.

Now, I do not mean to suggest that carriers never pay claims. In many instances, they act responsibly. Unfortunately, it seems that some carriers (or certain claims adjusters) act as if they sold you a Never Pay Policy, and this attitude, at least based on observations from my little part of the legal world, seems to be increasing. Equally unfortunately, our Utopian carrier, at least to my knowledge, does not exist.

This post will begin to explore how the real world works and some tips for navigating the confusing world of insurance. I must, however, begin with this caveat. There is no way to make sure that claims that arise in the future will be covered, and there is no way to assure that your carrier will be reasonable. I am often truly astonished at the positions taken and incredibly creative arguments that insurance adjusters make to try to deny claims. There are some tips that may, however, increase your chances of success. This post will cover some of the basics. The next post will discuss when you probably need to consult with coverage counsel.

1. Find a good broker. Most insurance is bought through brokers or agents. Find an experienced broker, preferably one with experience in writing insurance in your industry. The broker should take the time to meet with you and develop an understanding of your business. The broker should know what you do and how you work in considerable detail. You may have particular risks that raise concerns. These risks should be discussed in detail. A good broker will likely raise other issues that may never have occurred to you. If a broker does not want to take the time to understand your business and review the risks, find another broker.

How do you find a good broker? Ask around. Do some research on the broker. Find out how many people the broker employs. It is probably not necessary to use a giant like Aon or Marsh, but be sure that your broker is well established. It is also helpful if the broker has a little size. Why? If a carrier is balking regarding a claim, a broker can sometimes step in and act as your advocate. It does not always work, but sometimes it helps. If the carrier views the broker as an important source of business, it may be more likely to pay the claim.

It may be helpful if you put in writing to the broker the risks that you want to make sure are covered. This will make sure that the broker has focused on the issues. Ask the broker to review any exclusions to coverage or endorsements that the insurer will require. Endorsements can include additional exclusions. Go over all exclusions and endorsements with the broker, and try to make sure that they do not create a hole in the coverage for potential risks of your business. If the broker makes a mistake and advises you improperly regarding coverage, the broker may be liable to you if the carrier fails to cover a claim.

A necessary implication of using a broker is that you will not be purchasing insurance online. Many carriers, particularly personal lines carriers (home and auto) are selling insurance online in an effort to cut out broker or agency fees and commissions. I would not advise buying business insurance online and would advise you to exercise extreme caution in buying even personal lines insurance online. A good broker is well worth having.

2. Check out the carrier. A broker may propose one carrier or several. Check out any proposed carrier’s financial strength. The broker can usually provide financial strength ratings, such as by A.M. Best, and explain them to you.

Any broker or policyholder’s coverage lawyer knows that some carriers are better about paying claims than others. Ask the broker about this issue. Ask the broker whether the broker would be comfortable relying on this carrier for its own insurance. Do some of your own research. “Google” the carrier online. You will probably begin to get a feel for the carrier’s reputation.

3. Do not buy based solely on price. It is tempting, particularly in the current economic environment, to take the cheapest quote that is offered. If your choice, however, is between buying a cheap policy from a carrier with a bad reputation and buying a somewhat more expensive policy from a carrier that has a good reputation, think very carefully before taking the “bargain.”

It is also worth noting that you should make every effort to make sure that you are comparing “apples to apples.” Make sure that your broker outlines any substantive differences between the cheaper policy and the more expensive policy. The cheaper price may be partially explained by higher deductibles or self-insured retentions (the part of the loss you must pay), lower policy limits, or endorsements that eliminate coverage for particular risks that may be important to your business.

4. Get copies of your policies and keep them with other important papers. I am often asked to evaluate insurance coverage issues. Of course, the first thing I need is a copy of the insurance policy. It amazes me how difficult it is in many instances simply to get a copy of the policy.

It also is clear to me that many business people do not even have a clear understanding of what an insurance policy is. Often, when I ask for a copy of the policy, I am provided with a one page copy of what is known as the “dec page.” This provides almost no help in evaluating coverage, other than determining the policy limits.

Just so the issue is clear, an insurance policy typically consists of three components. First, there is the previously mentioned declarations page, or “dec page.” This is usually one page (sometimes two) and it summarizes the types of coverage and the policy limits. The policy limits establish the maximum amount the carrier will pay. Limits are typically stated as “per occurrence,” meaning the maximum the carrier will pay for one event. Sometimes, the limits are stated to be “per claim” or “per accident,” which will establish the maximum amount the carrier will pay for a single claim or accident. There are also “aggregate” limits. Aggregate limits establish the total maximum amount the carrier will pay in a given period (typically a year) regardless of the number of “occurrences” or “claims.”

Note: There are important differences between “occurrence” based coverage and claims made coverage. These differences are beyond the scope of this post, and should be discussed with the broker. Most general liability coverages are “occurrence” based. Much professional liability coverage (such as for architects, engineers, attorneys) is written as “claims made” coverage.

The second part of the policy is the “body” or “policy form.” This is the main part of the policy, and includes the insuring agreement (what the policy will cover), exclusions to coverage (types of events that are not covered), conditions to coverage, and definitions. This, in essence, is the insurance contract, and is what a coverage lawyer or insurance professional will need to begin evaluating any coverage question.

The third part of the policy consists of endorsements. Endorsements are amendments to the policy. Endorsements can be very important and they can substantially alter the rights of the insured. Endorsements can include, for example, additional exclusions to coverage. For example, one now often sees endorsements with “fungus” exclusions. These exclusions were added by many carriers after many claims were reported several years ago for alleged mold-based property damage or bodily injury.

The policy will usually be delivered after it is purchased, sometimes long after it is purchased. The policy should include the declarations, policy form and any endorsements. Typically, it will be stapled together.

It is a good idea to keep a copy of the policy stored away from your place of business. Why? If there is a loss (a fire, for example) at your place of business, the policy will probably be destroyed. Copies can be maintained in a safe deposit box, or a copy could also be stored in an electronic form where it will be remotely backed up.

The important thing is to have ready access to the policy. Yes, your broker should have a copy. Yes, it should be possible to get a copy from the insurer. However, you would be surprised how tedious this process is. If you have a catastrophic claim and need to consult with an coverage attorney immediately, it is vastly preferable to have a copy of the policy readily available.

5. When you get the policy, review it. Take a careful look at the policy. Does it appear to be what you and the broker discussed? Do there appear to be exclusions or endorsements that affect coverage that were not discussed? If so, call your broker and go over these issues immediately.

One of the practical problems with the way insurance is sold in the U.S. is that the policies are not written in a readily understandable way. Unfortunately, even a careful reading of the policy is not likely to identify every possible issue that may arise. However, it does not hurt to go over the policy and to bring any possible issues that jump out to your broker’s attention.

6. Make inventories and take pictures. A big problem that exists for many property claims is documenting the property that was destroyed. It is a good idea to make lists of property (including, if known, the purchase price), and to take photos or videotapes of property. There are many cheap and easy to use video cameras, such as those by Flip video, that will fit in a shirt pocket. Many digital cameras, even ones that are quite inexpensive, now have video capability. Lists and videos can help eliminate disputes in the event of a claim. Electronic copies of lists and videos should be stored remotely or so they are backed up remotely.

7. If there is an event that may lead to a claim, take pictures. If there is an unusual event that may lead to a claim – such as, for example, a large hail storm – take pictures of the event. Take photographs of the hail or the weather event. If you have a video camera, take video.

It is unfortunate, but some insurance claim adjusters will try to deny that a weather event was substantial enough to cause damage. They may argue that generalized weather information, or even damage to surrounding buildings, is not enough. Although I do not think that many courts would agree with this approach, having photos or a video can end the debate.

Note that some policies require that particular types of property be separately scheduled. This can be true for personal and business lines of insurance. Ask your broker whether this should apply to you, particularly if you have unique and highly valuable property (jewelry, artwork, unique business machinery, etc.).

Conclusion. If you follow these basic steps, you will be more ready to deal with a claim than the average insured. In the next post, I will get into some of the details that may arise if there is a claim and if you need to consult with an insurance coverage attorney.

Is the "Never Pay Policy" Making a Comeback? Fight It!

2010-02-07T11:18:00.001-08:00

It seems impossible to watch five minutes of television without being bombarded by insurance commercials, whether featuring a talking gecko, cavemen, “Flo” with the nametag, a Benji-like dog losing sleep over worries about his bone, or the dulcet tones of actor Dennis Haysbert (he does have an amazing voice) asking whether you are in good hands. Although many of these commercials focus on saving money, they also promise you will be well treated if there is ever a claim. You are told you will be treated like “a good neighbor,” will experience “concierge claim service,” or will be in the aforementioned “good hands.”

It is not surprising that insurers spend hundreds of millions of dollars portraying themselves in this manner. After all, what insurers are selling is the promise of protection. Insurance is a product that you hope never to use, but, when you need it, you expect it to be there. Please be assured that I am not anti-insurance. If you have read this blog or listened to my podcasts, you know that I encourage businesses to establish a relationship with a good insurance broker, to put a good insurance program in place, and to review that insurance program regularly. In the past, I even represented a large carrier group (fortunately, one of the better ones).

Nevertheless, a large part of my practice now involves representing policyholders (typically commercial policyholders) when insurance companies will not pay their claims. I’m talking about liability claims, not health care and other types of claims. Maybe it is just my little part of the world, but my recent experience suggests that insurers are reserving rights and contesting claims with incredible vigor. Many insurance companies, quite frankly, act as if they are in the business of selling “Never Pay” policies, and they certainly do not always act as they portray themselves in their never-ending commercials.

If my recent experience does represent a larger reality, it bodes very badly for business. In fact, it bodes very badly for society in general. Small business is the backbone of our economy, and, if we are to recover from the current economic woes, small business will lead the way. Small businesses, however, can literally be wiped out a single claim if their insurance company does not pay.

In this regard, it should be remembered that the typical liability policy makes two fundamental promises by imposing two fundamental duties on insurance companies. The first duty is the duty to defend. This means that if you or your company is sued, the insurance company must appoint and pay for a lawyer to defend the case. If the insurance company refuses this fundamental duty, the cost of paying for a defense can impose a huge burden on a small company.

The second duty is the duty to indemnify, which is the duty to pay settlements or judgments to resolve the claim. Buildings and lives cannot be rebuilt if insurance companies do not pay claims. Injured parties will not be compensated if insurance companies do not pay claims. In short, business depends on insurance companies keeping their promise of protection, and, to some significant extent, society does as well.

It is my sincere hope that one of these days a carrier will come along with a new business model. First, this carrier will write policies that ordinary people can understand that clearly state what is covered and not covered. If an insured needs additional coverage, the insured will be able to buy additional coverage for the risk, again in plain language.

This carrier will realize, finally, that its insureds are customers, not adversaries, and will treat them as such. It will deal openly and honestly and will resolve doubts in favor of the insured, as the law already says it should. It will hire claims adjusters that focus on fairly paying losses, rather than writing reservation of rights and denial letters. This carrier will have no need for a legion of insurance coverage lawyers flying around the country filing lawsuits against the company's customers seeking court permission to deny coverage.

This carrier will have no need to spend millions of dollars on endless television commercials. It will become known not for what it says it will do, but for what it actually does. Its reputation will spread like wildfire in the community and it will never want for business.

This post has defined the problem and posed a Utopian solution. Unfortunately, our mythical perfect carrier is likely to remain a myth, at least in the foreseeable future.

For now, you must remain vigilant against the Never Pay Policy, and fight it at every turn. In the next post, I will cover a few tips that will help you fight the good fight and hopefully win.

Does Your Business Need a Legal Checkup?

2010-01-24T08:45:00.000-08:00

by John L. Watkins

Does your business need a legal checkup? As previously discussed, the nearly universal rule is that it is almost always less expensive to resolve a legal issue early on – such as through a proper contract prepared with professional assistance – rather than trying to fix the issue later, such as through litigation.

Unfortunately, many businesses do not seek legal advice until it is too late for an easy resolution. If your company does not have an in-house lawyer, or if it does not have a regular outside attorney it regularly consults regarding its legal affairs, it may be time for a legal checkup.

Here are a few of the items that should be considered during a legal checkup:

Has your business properly maintained its registration with the secretary of state or other authorities? It is surprising how many companies fail to maintain their annual registration and have been administratively dissolved. The result? No corporate shield against liabilities. Most of the time, reinstatement is possible, but you will need to act quickly.
Does your business maintain proper corporate or company records? Does it have corporate minutes, minutes of shareholders' meetings, or resolutions in lieu of meetings? Many businesses fail to maintain these basic documents, which again places the corporate liability shield at risk.
Does your business properly maintain separate financial and other internal records? Are loans from shareholders or members properly documented? Do you have more than one company, but their records are intermingled? Are proper financial records kept? Again, the failure to maintain and document separation of company business from personal business, or the business of other companies can place the liability shield at risk.
Does your business properly document its contracts? Does your business have contracts, or at least terms and conditions, for every transaction? Do these documents protect your company against making unintended warranties and other consequences? Have the terms and conditions been professionally prepared? Have they been reviewed recently?
Does your business have procedures in place for handling and documenting potential claims? Are potential claims reported to your insurance company? Unfortunately, many insurers seem to be in the business of denying claims based on any conceivable basis. If you do not comply with notice provisions in your insurance policies – which can sometimes require more than notice of just lawsuits and formal claims – you may be taking an unnecessary risk.
Does your business have in place procedures for protecting confidential information and trade secrets? This concern applies not only to your own confidential information, but confidential information of other companies (customers and suppliers are possibilities). Are employees who handle the information subject to non-disclosure agreements? Have the non-disclosure agreements been professionally prepared? Have the non-disclosure agreements been reviewed recently?
Do you have other appropriate agreements with key employees? Do you have covenants not to compete? If so, were the covenants not to compete professionally prepared? Have the covenants been reviewed recently? In Georgia, covenants not to compete present unique issues. How about covenants not to solicit your customers if they leave?
Do you have procedures in place to comply with legal obligations regarding employment? Do you have a company handbook? Do you have procedures for dealing with employee complaints?

Please note that this is not intended to be a complete list. There are other issues that apply generally, and many others that may apply to your company's potential circumstances.

How do you have a legal checkup? Find a good business attorney in your area and schedule an appointment. Expect to spend some money to have it done right. Although not an insurance policy or a guarantee, a legal checkup will probably save you large amounts of money in the future.

Legal Remodeling Can Be Expensive

2010-01-17T11:27:00.000-08:00

Have you ever heard a realtor refer to a house as a “tear down”? Tear downs are typically old, small, and often run-down houses on nice lots. For the typical tear down, the cost of remodeling and expanding the old house, replacing the leaky roof, replacing the inefficient furnace, adding air conditioning, and renovating the 1950s-era kitchen and single bathroom are just not worth it. Instead, it just makes more sense to bulldoze the old place and build a completely new house to the buyer’s specifications.

Clients bring me projects all the time that will either require legal remodeling or a tear down. Here is a typical scenario: The client begins discussion of a business transaction with another company. The client chooses not to involve a lawyer until after the business deal is struck. The client has often been presented with a draft contract from the other side. The client may already have gone back to the other side with the client’s own revisions. Finally, it dawns on the client that this is a serious transaction and that the document should be reviewed by a lawyer. That is when they call.

When the client emails me the contract or brings it by the office, the client will often say: “I think we have this one pretty much done. I just want to make sure it is generally OK and there are no legal landmines in it. Just take a quick look and get back to me.”

A quick look usually determines that the document is an unmitigated disaster. If the document has been prepared by the other side’s legal counsel, every term will be skewed to the other party’s benefit. If the document is “home made,” or written by a person with no legal training (whether by the client or someone with the other party), it will almost always be a mishmash of undefined terms, incomplete thoughts, and key omissions. I have literally seen supposed sales contracts that omit what the seller is to sell and the buyer is to buy.

There has been more than one occasion when, after reviewing one of these Frankenstein’s monsters, I have had to ask the client to begin at the beginning and tell me as simply as possible what the business transaction is supposed to be. More often, however, I have to tell the client that the document is a disaster and that the preferred approach would be a legal tear down: Trash the document and start on a clean sheet of paper.

Unfortunately, many clients seem unwilling to take this advice. If the document was prepared by the other side, they are concerned that submitting a new document will be perceived as an insult or will derail completing the deal. If the client prepared the document, they seem to take an ownership interest in defending the document – “Well, I don’t think it’s nearly as bad as you say" – rather than getting it right.

And so the legal remodeling process begins, often with the instruction to make “the minimum changes necessary changes for it to be acceptable.” There are a number of expressions that apply here. One of my late mother’s favorites was “you can’t make a silk purse out of a sow’s ear.” Although we do the best we can under the circumstances, the result is usually just what the client ordered: Minimally acceptable, but far from optimal.

In addition to ending up with a less than optimal document, legal remodeling usually costs just as much, if not more than a tear down. Starting on a clean sheet of paper almost always results in a better result.

Although a tear down is usually preferable to legal remodeling, it is still not optimal. In the scenario set forth in this post, the tear down still occurs after the client and the other party have cut the basic business deal. Business lawyers are used optimally when they are involved early in the process, and certainly before the key terms are struck. Lawyers can provide valuable input on how the transaction might best be structured. Lawyers can also identify key terms and conditions that should be included to protect the client’s interests. Lawyers can also advise the client on whether terms proposed by the other side are carry unanticipated risks.

Again, the irony is that involving a lawyer from the beginning and doing the transaction correctly will probably be no more expensive than either a last minute tear down or a remodeling project. All of this simply reinforces the universal rule that it is almost always more efficient and less expensive to involve a lawyer earlier in the process than later.

Top Ten Ways to Decrease Costs in Using a Business Attorney by Guest Contributor Jake ("The Snake") Flounder, III

2010-01-09T11:16:00.000-08:00

Introduction by John L. Watkins

The arrival of a New Year always seems to bring -- in addition to New Year’s resolutions -- a plethora of top ten lists. As many of you know, our blog has often shared our experiences in how important it is to involve your business attorney or business litigation attorney early on in the process, and to work closely with your attorney through completion.

Apparently, at least one of our readers has a different view, and, in the interest of providing equal time to differing views, and because I have nothing better to post, we offer the following post authored by guest contributor Jake (“The Snake”) Flounder, III on his Top Ten Ways to Decrease Costs in Using a Business Attorney.

Jake has run a number of businesses, including “TunaFrutti,” which offered franchises for combination sushi and ice cream shops, “Jake’s Arctic Golf Adventures,” which offered golf tours to Greenland, Iceland and Siberia, and “Ski Pine Mountain,” a resort which sought to bring alpine skiing adventures middle Georgia. Jake is no longer involved in these enterprises and is now available to bring his Elvis tribute show to your next birthday or holiday party, or other event. I should mention that Jake’s opinions are not necessarily shared by me, the firm, or the firm’s other attorneys. So now, for a different perspective, on to Jake:

10. Do it yourself whenever possible. Just as the case with wiring or running the gas lines in your home, you can save a lot of money with attorneys by doing it yourself. It’s this simple: If you don’t call them, they can’t charge you. And forget that “universal rule” stuff about how it’s always more expensive to clean up a home made legal issue on the back end than using a lawyer to do it right on the front end: That’s all just lawyer talk to drive up fees.

9. Have your assistant check the Internet for a form. Let’s face it, the Internet saves money. I did all of my shopping on eBay this year, and it turned out great, well except for my wife and mom not receiving their presents. Face it, legal services are commodities. The law from state to state is the same, and different circumstances never make a difference. In short, lawyers and legal services in general are all the same. One is as good as another, and a form on the Internet is bound to be good. So long as the form contains sufficient use of words and phrases such as “whereas,” “party of the first part,” and “hereinafterbelow,” you can be sure it is high quality and suitable for any legal needs. Forget those horror stories lawyers tell about Internet forms. That’s just marketing.

8. Don’t pay your lawyer’s bill on time. Never pay your lawyer’s bill on time. First, even though they have staff and rent to pay, they don’t need the money. Second, if you don’t pay them on time, they will be more eager to do the next assignment for you in the hope you will finally pay your first bill. Think about your own experience: Don’t you always treat your worst customers with special attention?

7. If you have to use one, call at the last minute. If you’ve followed the steps above, it is very possible you will never need a business lawyer, well, unless all that marketing stuff they say is true. But we know that is all bunk and I digress. However, if you simply cannot avoid using an attorney, be sure to call at the absolute last possible moment. 5:00 p.m. on Friday is good, and 5:45 p.m. is even better. Face it, most of these guys charge by the hour, and, if you don’t give them any time, they can’t charge you as much. Don’t believe all that junk they tell you about needing to structure and tailor the document for your needs, or to gather the facts about that lawsuit that needs to be answered on Monday. And if you can make a lawyer work through the weekend or miss his spouse’s birthday party or his kid’s little league game, you can be sure you will never be forgotten.

6. Demand that your work take priority over every other client. This goes hand in hand with the “call at the last minute” strategy. If you call at the last minute, you are going to have to make it clear that your work needs to be done before anyone else’s. You know what they say: “The squeaky wheel gets the grease,” and, as the late-paying, last minute, overbearing client, you are definitely going to be the squeaky wheel.

5. Cut the deal yourself and then tell the attorney to write it up. A lot of lawyers want to tell you they can help you structure and negotiate the deal to your company’s advantage. Even if a lawyer has handled many similar transactions, don’t ever believe that. Remember, you are the client and you know best. Besides, lawyers charge you for all that stuff. So just cut the deal yourself, and have them write it up with some of their legal mumbo jumbo. Not that it matters anyway.

4. Don’t let your attorney’s advice stand in the way of getting the deal done. Lawyers can be deal killers. Don’t let this happen to you. Ignore their comments about the merits of the deal. Don’t believe it when they tell you there is a problem with title or a claim against the company you are buying that you didn't know about. Don’t let them talk about buying assets when the other side is selling stock and you want to buy. Just tell the lawyer to shut up and finish the paperwork.

3. Don’t tell your attorney all the facts. This is a subtle tip, but it is very important. Lawyers always want to know all the facts. They say this will help them advise you and represent you in connection with the deal or the lawsuit. Don’t let a lawyer lead you down this path! First, if you tell them everything, it will take more time and, with lawyers, time is money. Second, there are certain things that should just be left unsaid. Talking about them could lead the lawyer to ask questions, and that takes money. And those untold facts never come back to haunt you, anyway, at least so far as I know.

2. Don’t return calls and provide input. Lawyers always want more information. If you return their calls and provide input, it just costs money. Lawyers claim they are professionals. Well, if they are professionals, make them prove it. They should know how to do this without bothering you or knowing what you want or are trying to achieve.

1. Lie. Sometimes, despite all your efforts and even after following the nine prior tips, lawyers will ask you a question that you just do not like or want to answer. This is particularly true if you are in litigation and the other side is asking pesky questions. My advice: Just say whatever you think the most helpful answer should be. It doesn't need to be the truth. Chances are, no one will ever find out. Sure, I did this in the TunaFrutti franchisee litigation and somehow the other side found out, which led to something called a “default judgment.” But that doesn’t mean my advice is wrong.

Note and Disclaimer: This post is a parody and Jake is not a real person. If you did not realize this until reading the preceding sentence, you probably need more help than even a great business attorney can provide.

Trade Secrets and Confidential Information Revisited

2009-11-23T15:35:00.000-08:00

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.

Why Dispute Resolution Provisions Matter

2009-11-07T14:09:00.000-08:00

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.

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

2009-10-27T14:55:00.000-07:00

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, http://www.ctflegal.com/, or the firm's podcast page, http://www.ctflegal.blip.tv/.

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

Trade Secret Prosecution Begins Under Federal Statute

2009-10-25T18:04:00.000-07:00

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.

Update on Sidekick Incident

2009-10-16T12:59:00.000-07:00

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.

Sidekick Episode Provides Real World Example of Cloud Computing Risks

2009-10-13T16:18:00.000-07:00

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 Salesforce.com, 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.

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

2009-10-10T08:43:00.000-07:00

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.

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

2009-09-27T09:30:00.000-07:00

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.

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

2009-09-22T16:09:00.000-07:00

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.

Buy/Sell Agreements 101 - Understanding the Basics

2009-09-21T08:22:00.000-07:00

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.

Corporate social media/networking policies; Part 2 - Framework

2009-09-15T14:38:00.000-07:00

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

2009-09-15T07:48:00.000-07:00

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.

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

2009-09-05T08:51:00.000-07:00

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.

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

2009-09-01T13:17:00.000-07:00

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?

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

2009-08-23T09:10:00.000-07:00

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.

CTF Podcasts Now Available on iTunes

2009-08-17T03:51:00.000-07:00

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, www.ctflegal.com, or at www.ctflegal.blip.tv.

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.

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

2009-07-22T04:29:00.000-07:00

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.

What Tom Watson Teaches Us About Business and Practicing Law

2009-07-18T19:56:00.000-07:00

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.

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

2009-07-17T16:10:00.001-07:00

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 http://www.ctflegal.com/podcasts.html or http://www.ctflegal.blip.tv/.

So Your Business Has Been Sued: Now What?

2009-07-13T13:24:00.000-07:00

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 www.martindale.com or its affiliate, www.lawyers.com. 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, www.avvo.com. 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, www.ctflegal.com, for more information.

Hart-Scott-Rodino Not Limited to M & A

2009-07-10T09:00:00.000-07:00

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.

New Podcast Series on Common Legal Mistakes by International Companies

2009-07-09T10:35:00.000-07:00

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, www.ctflegal.com/podcasts.html or on the firm's page on blip.tv, www.ctflegal.blip.tv. Further podcasts in the series will be released in coming weeks.

Should businesses risk using form agreements from the Internet?

2009-07-03T09:50:00.000-07:00

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.

Should you fear earnouts in M&A deals?

2009-06-29T13:56:00.000-07:00

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.

Thoughts on Twitter, Web 2.0, and legal marketing

2009-06-26T14:45:00.000-07:00

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

Lessons from a $1.4 million HSR fine

2009-06-24T15:23:00.000-07:00

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.

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

2009-06-18T16:40:00.000-07:00

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.

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

2009-06-14T11:33:00.000-07:00

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.

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

2009-06-10T04:18:00.000-07:00

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.

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

2009-06-05T04:37:00.000-07:00

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.

Seminar on Trade Secrets and Non-Disclosure Agreements

2009-06-03T04:41:00.000-07:00

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.

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

2009-06-01T04:20:00.000-07:00

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.

New Podcast Series on Mediation Available

2009-05-25T07:05:00.000-07:00

By John L. Watkins

If you want to know more about mediation, a new three-part podcast series on mediation is available on the Chorey, Taylor & Feil website, at www.ctflegal/podcasts.html or on the firm's page on the Blip TV site, http://www.ctflegal.blip.tv/. The series includes an introduction to mediation that contrasts the civil litigation system to mediation. The second podcast provides a detailed explanation of how the mediation process works. The third podcast discusses how to pick the right mediator for a particular dispute.

The podcasts include a few fairly strong opinions, which are mine, and which have developed over time. I have been involved in representing parties in mediation for about twenty years (mediation came into widespread use in a Georgia a few years after I began practicing law). One of my early bosses and mentors, Jack Watson, chaired the Georgia Commission on Alternative Dispute Resolution at the time. Through Jack's prodding, all of us who were then in the litigation department at Long, Aldridge & Norman (now McKenna Long & Aldridge) got a good dose of exposure to mediation and mediation training, whether we wanted to or not!

Early on, I was very skeptical of mediation. It seemed to me to be just another step inserted into the civil litigation process, and, frankly, just an excuse for lawyers or retired judges to make money. After all, good lawyers settled cases anyway, so why would anyone need a mediator?

Some of my early experiences in mediation validated my initial point of view. I remember one painful mediation involving a much older lawyer acting as a mediator. All he did, in a somewhat whiny voice, was to point out the expense of litigation and to say, "A bad settlement is better than a good lawsuit." This particular mediation was a totally worthless experience. (For the record, I do not see why you ought to take a bad settlement if you have a good lawsuit. The goal of mediaiton should be a fair settlement).

At some point, however, I was exposed to really good mediators, such as Abe Ordover of the now-defunct Resolution Resources Corporation. Abe had a truly magical touch as a mediator. I saw him and other good mediators, such as Marty Ellin, help resolve cases that were difficult to settle, and that, in some instances, seemed "unsettleable." Unfortunately, at least for those of us who need good mediators in Atlanta, Abe moved to San Diego several years ago. Abe is now running an art gallery (Abe is an extremely talented photographer in his own right).

Not being completely set in my ways, early views of mediation changed drastically, and I became and remain a great proponent of the process. In my last ten to twelve years at McKenna Long & Aldridge, a great deal of my practice involved cases outside of Georgia. These cases ranged from fairly routine business litigation matters to huge cases involving many parties and lots of exposure. This experience gave me an opportunity to see mediators from other parts of the country, including a few of the more nationally known "rock stars" in mediation.

Although the experience was great, and McKenna was (and is) a great firm, the travel was not so great. When I left McKenna in 2007, ultimately having the good fortune of joining Chorey Taylor & Feil, my practice returned to being, in general, more local in nature. I felt it was a good opportunity to try to share my knowledge of mediation. As a result, I became a registered mediator with the Georgia Office of Dispute Resolution, and also started a mediation website, http://www.watkinsmediation.com/, which contains articles with my thoughts on mediation. Most of the content on the watkinsmediation site is also available on the CTF website at http://www.ctflegal.com/mediation.html. Just click the links on the bottom of the page for articles on basic mediation and advanced mediation. I hope the podcast series will also provide valuable information.

When I announced I was available to act as a mediator, many of my colleagues in the legal community apparently thought I was retiring from practicing law. That is most definitely not the case, and the vast majority of my time is spent practicing law. However, I have found that crusty old litigators tend to make great part time mediators. Although I do not feel old, and I hope I'm not "crusty," I am available, through Chorey, Taylor & Feil, to act as a mediator. My colleague, Celeste McCollough, is also a registered mediator and is available to mediate through the firm.

The firm has excellent facilities for mediation, and we do not charge an administrative fee.

Ashcroft v. Iqbal: Back to the Future?

2009-05-23T11:05:00.000-07:00

By John L. Watkins

When I was in law school, now quite a few years ago, we were taught that a complaint filed under the Federal Rules of Civil Procedure had to meet a very low threshold to survive a motion to dismiss. The allegations of the complaint were to be taken as true, and the complaint was to be dismissed only if it could not state a claim for relief under any circumstances that might reasonably be imagined.

We were also taught that the Federal Rules were in derogation of the former system of "code pleading," in which a plaintiff had to set forth the allegations of the complaint or petition with great specificity. Code pleading allowed the defendant to challenge the complaint through general and special "demurrers." There are probably not many lawyers, at least those who practice in states where the state civil procedure rule are modeled after the Federal Rules, who can even tell you what a demurrer is with any specificity.

Nevertheless, the gist of what we were taught was that code pleading was essentially unfair, because it resulted in many cases being thrown out of court at the outset -- some potentially meritorious -- due the the failure to plead the right "magic words." The "enlightened" Federal Rules, in contrast, were designed to make sure that cases were decided on the merits and without regard to technicalities. Hence, all but the most general or manifestly insufficient complaints would "state a claim" and survive a motion to dismiss.

Georgia's procedural rules were changed many years ago, well before I started practicing, to mirror the Federal Rules. Nevertheless, when I started practicing at the Hansell & Post firm (now Jones, Day's Atlanta office), there were still some old dogs (one in particular), who lamented the passing of the general and special demurrer. I remember a comment along the lines of, "They let them [plaintiffs] get by with anything these days."

Well, my old colleague and mentor would probably be pleased about the United States Supreme Court's decision this past week in Ashcroft v. Iqbal (No. 07-1015, May 18, 2009). The Ashcroft case was about whether a Pakistani citizen could maintain a civil action against former Attorney General John Ashcroft and former FBI Director Robert Mueller for violation of the plaintiff's civil rights in the aftermath of the 9/11 attacks. However, the opinion has a much broader application, because the Supreme Court clarified the standards applicable for pleading a valid cause of action under Federal Rule of Civil Procedure 8 in all civil cases in federal court. Some would argue that the Supreme Court's opinion represents a trip "back to the future" because it establishes rules somewhat reminiscent of what we were taught years ago about code pleading.

In Ashcroft, the district court and the Second Circuit Court of Appeals ruled that the plaintiff had adequately pled a cause of action. Based on the allegations of the complaint that are repeated in the Supreme Court's opinion, it certainly appears that the complaint was pled with at least a typical degree of specificity. However, the Supreme Court disagreed, ruling 5-4 that the complaint was not adequately pled under Federal Rule 8. Somewhat typically, Justice Kennedy represented the swing vote, and he also wrote the majority opinion.

The significance of the Court's decision goes far beyond its particular facts. Much of the Court's discussion of the pleading requirements, is based on its recent prior decision in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). Twombly established stricter fact-based pleading requirements for antitrust cases.

Ashcroft, however, makes explicitly clear that the pleading requirements specified in Twombly, and amplified in Ashcroft itself, apply generally to Federal Rule 8, and hence to all civil cases filed in federal court.

To state a claim for relief, the Court stated that a complaint must contain sufficient factual matter, accepted as true, to state a claim for relief that is "plausible on its face." The requirement is not a "probability" requirement, but requires enough for a district court to conclude there is more than a "sheer possibility" that the defendant has violated the law. Complaints that plead facts that are "merely consistent with" liability fall short. Complaints that contain well-pleaded facts that only show the possibility of misconduct will not survive a motion to dismiss, because they do not show that the pleader is entitled to relief, as provided in Rule 8.

The Court also makes clear that pleading legal conclusions, or "threadbare recitals of a cause of action" supported by conclusory statements are insufficient. Further, the district court is not bound to accept as true a legal conclusion couched as a factual allegation. Although repeating the familiar mantra that Rule 8 is a significant departure from code pleading, the court cautioned that it "does not unlock the doors of discovery" to plaintiffs armed with only conclusory allegations.

Turning to the specifics of the Complaint, the Court found certain allegations to fail because they were merely a conclusory recitation of the elements of a cause of action. The Court made clear that these allegations were disregarded not because they were "extravagantly fanciful," but simply because they were conclusory.

The Court then considered allegations that the defendants subjected plaintiffs and others to detention because of their race, religion and national origin. The Court found these allegations consistent with purposeful illegal conduct. However, the Court found these allegations not sufficient because "given more likely explanations, they do not plausibly establish this purpose." Specifically, the Court found that, because the September 11 attacks were committed by members of Al Qaeda, it was no surprise that the efforts of law enforcement had a disparate, incidental impact on "Arab Muslims," even though the purpose of the policy was probably not to target Arabs or Muslims. Thus, the arrests overseen by Mueller were likely based on a non-discriminatory intent to detain aliens illegally present in the United States who had a connection to those who committed terrorist acts. Given this alternative explanation, a discriminatory intent was not a "plausible conclusion."

As previously noted, the Court also rejected the argument that Twombly only applied to antitrust cases, and held that the rules applied to all civil cases under Rule 8. The Court also rejected the argument that the district court's ability to limit and supervise discovery should excuse meeting stricter pleading requirements. Finally, the Court rejected an argument that Rule 9 allowed the plaintiff to allege discriminatory intent generally. The Court held that, although intent does not have to meet the heightened requirements of pleading fraud with particularity, as provided under Rule 9(b), the plaintiff must still plead intent consistent with the requirements of Rule 8, as they are set forth in the opinion. Rule 8, in turn, does not permit the pleading of the bare allegations of a cause of action to survive a motion to dismiss.

The practical significance of the Ashcroft decision remains to be seen. I can say, however, that it sure seems different than the rules that have applied for many years. Ashcroft applies a much greater level of scrutiny regarding the sufficiency of the allegations of a complaint than I am used to seeing. The way in which the Court considered an alternative explanation and weighed the plausibility of the allegations against the alternative explanation is like nothing I have seen in the district courts. Parenthetically, there seems to be more than a smattering of inconsistency in reasoning holding that well-pled allegations must be accepted as true, but then weighed for plausibility. In addition to this difference of approach, which will almost certainly be Ashcroft's primary legacy, here are my best guesses regarding the likely effects of the opinion:

Plaintiffs will file more detailed and fact-specific complaints. No one will want to take the risk of "notice pleading."

Defendants in federal court will be much more likely to file a motion to dismiss to challenge the sufficiency of a complaint. Because of the increased possibility of securing a dismissal and avoiding the expense and hassle of discovery, there is little incentive not to do so. The cost/benefit analysis (weighing the certain cost of filing a motion vs. the potential benefit) has substantially shifted.

More motions will mean a greater workload for federal district judges, a reality they will certainly not appreciate.

It is difficult to say, however, how federal judges will actually apply Ashcroft. Old teaching and old habits die hard. For example, despite recent amendments to the Federal Rules that, as written, require the Court to scrutinize and limit discovery, many judges seem to apply the discovery rules as broadly as they always have. Further, Ashcroft clearly leaves a great deal of discretion to the district courts, and there are not going to be many appeals from orders denying motions to dismiss.

It is also questionable whether Ashcroft will have any substantive effect for another reason: Litigants are almost always given at least one opportunity to amend and re-plead. In Ashcroft itself, the Supreme Court remanded to the Second Circuit to consider whether to remand to the district court so that the plaintiff could seek leave to amend.

My best guess -- although there is an argument to the contrary -- is that the net effect will be to increase the cost of litigating in the federal courts.

My best guess is that the decision will also increase the average time it takes to litigate a case in federal court.

Regardless of the effects, I am sure that my old colleague is somewhere smiling.

Clients and Counsel: Let's Be on the Same Team

2009-05-22T08:07:00.000-07:00

By John L. Watkins

Earlier this week, I saw an article in the Fulton County Daily Report in which an in-house lawyer was quoted as saying that she had to reduce costs from outside counsel, because otherwise it would come out of her bonus. Although I am sure that this lawyer is dealing with pressures, cost control and otherwise, that I can only imagine, what struck me was the implication of a somewhat adversarial relationship between the client and outside counsel, or, in this instance, between in-house counsel and outside counsel.

After many years in this profession, and despite the current economic conditions, I hope it has not come to that. It seems to me that the focus should be on providing needed legal services as efficiently as possible to the client, whether those services are provided by in-house or outside counsel. That result is best achieved when there is a strong relationship of trust and understanding between the lawyer and the client. Although the lawyer must earn that trust, it is also true that this type of relationship can only happen when the client lets the lawyer become part of the team.

In a team based relationship, the lawyer gets to know about the client's business in detail, the client's approach to legal issues, and the client's approach to business issues. As a result, the client receives added value without paying more. The client does not have to waste time telling me about their business or their overall goals, because I already know.

There are other ways that an intimate knowledge of a client's business adds value. For instance, I and many other business lawyers read the business press voraciously almost every day. If I see an article that I believe will be of value to a client, I forward it on. Although I try to do this for every client, it is certainly much easier to be attuned to articles of potential interest when you thoroughly understand the client's business.

The least satisfying relationships are, as I have written before, where a client treats the lawyer somewhat akin to a fire axe in a glass case: Break glass and use only in the event of an emergency. I guess some clients think they are saving money this way. In reality, in the vast majority of instances, the fire probably could have been avoided if the client had called counsel earlier earlier. Damage control is rarely very satisfying for anyone.

Other variations of the "fire axe" approach include not telling the lawyer all of the facts, or providing the relevant documents a drip at a time. Or calling with a "quick question" without giving the entire context. Even when one makes every effort to get the client to avoid these approaches, it is still sometimes difficult to convince people to do what is good for them.

Clients probably follow the fire axe and related approaches because they think it will save money. However, it is doubtful these approaches result in any real cost savings (much less optimal provision of legal services). It certainly makes it difficult for the lawyer to add any value beyond the narrow issue when used in such a piecemeal fashion. In fact, it is more difficult even to address the narrow issue when one does not understand the big picture.

Of course, relationships of trust and understanding do not happen over night. However, there are some things that both lawyers and clients can do to move the process along.

1. Lawyers need to communicate with their clients. I still hear about instances when lawyers do not return client calls or answer emails. Frankly, it is difficult to believe that this can happen in this day and age, but, apparently, some lawyers still do this.

2. Fee issues should be discussed up front and from the outset. If there is a reasonable mutual understanding about what the fees will be, there will rarely be a fee dispute.

3. If a client has a fee issue, the client should bring it up immediately. Perhaps there is a simple and reasonable answer for the bill. In other instances, an adjustment may be appropriate. However, just letting a fee issue simmer unresolved is no good for anyone: It undermines the client's trust in the lawyer, probably results in unnecessary personal stress on the part of the client or in-house lawyer, and cannot lead to resolution.

4. Lawyers do not always need to be on the clock. Of course, I do not bill clients for sending them business articles. I look for opportunities to take clients to lunch, which provides an opportunity for them to discuss their legal issues or whatever is on their mind off the clock. I often offer to provide educational presentations on relevant legal topics to clients at no cost. If I am attending an even that may be of interest, I try to make sure that clients are invited. Further, I almost always write a cover letter (no charge) that accompanies a statement for services rendered. If there has been any significant activity during the month, I usually try to include a brief status report in the letter reminding them about what was accomplished in the prior month. I use the word "reminding" purposefully; hopefully, the client is well-informed before the bill arrives.

5. Lawyers need to say thank you to their clients for their business and for their trust and confidence. Similarly, although I never think it should be expected, it sure does feel good when you have worked hard to achieve a good result, and the client says thank you for a job well done.

6. If lawyers are invited to become part of the team, they need to join the team. Lawyers should look for opportunities to provide added value, such as through articles, and, when applicable, through notifying the client of potential beneficial opportunities or business relationships.

7. Lawyers need to stay involved in their clients' work. One of the great frustrations that I hear in the legal press is that in-house counsel hate meeting with a "relationship" partner about a new matter, and then getting shuffled off to someone they have never met, often a young associate. This is probably the root cause of the rebellion at some corporate clients who refuse to pay for first year associate time. It does not have to be that way. Their are firms that eschew a leverage model and where the senior lawyers do most of the work, or at least stay involved. This approach brings experience and judgment to the relationship and also helps to assure that client expectations are met. One of the things that attracted me to Chorey, Taylor & Feil when I joined the firm in 2007 was that it follows this approach.

8. If a client is on a tight budget, involve the lawyer directly in the discussion. Although we always try to work efficiently, there still may be opportunities to do the work more efficiently. There may be work that can be identified as "optional." There may be work that the client may decide not to do, even though, optimally, it would be done. One caveat to the last point: If the client decides not to do certain work, the client sure should not blame the lawyer if it later turns out that it should have been done, and should also not object to an email from the lawyer confirming the decision not to do the work.

I do not have all of the answers. I know that hard economic times have strained corporate legal budgets for businesses of all sizes. But I cannot believe that, in either the long run or the short run, a confrontational approach between clients and their counsel or between in-house counsel and outside counsel will help anyone.

Legislation Proposes Sweeping Changes to Georgia Law Regarding Restrictive Covenants

2009-05-21T14:09:00.000-07:00

By Thomas J. Gallo

As many Georgia businessmen and businesswomen are aware, Georgia law regarding restrictive covenants, i.e. non-compete agreements and non-solicitation agreements, makes enforcement of covenants not to compete difficult. Even covenants drafted by experienced attorneys are often declared unenforceable by the Georgia courts and the standards for enforcement remain a somewhat shifting target. The enforcement issue creates problems for businesses and employees in assessing their legal rights and responsibilities.

The New Act

In early 2009, the Georgia General Assembly adopted an Act which is intended to clarify and codify Georgia law regarding restrictive covenants. In adopting the Act, the General Assembly found that reasonable restrictive covenants "serve the legitimate purpose of protecting legitimate business interests and creating an environment that is favorable to attracting commercial enterprises to Georgia and keeping existing business within the state." The Act is intended to provide guidance to parties to restrictive covenants so that everyone may "know their rights and duties." The Act further instructs the Georgia courts to interpret restrictive covenants in accordance with the "reasonable intent and expectations of the parties," but goes further to require that such interpretation be "in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement."

The Act will become effective only upon the adoption of an amendment to the Georgia Constitution, which will be submitted to Georgia voters during the 2010 general election. The proposed constitutional amendment will likely be subject to considerable controversy prior to the election.

Although the Act, if it becomes effective, redefines Georgia restrictive covenant law in many different ways, there are several important, overarching changes of which everyone should be aware.

“Blue-Penciling”

Under current Georgia law, the courts are not permitted to modify or redraft ("blue-pencil") an unenforceable restrictive covenant unless it was executed in connection with the sale of a business. So, if any portion of a restrictive covenant was deemed to be unenforceable, the covenant would fail; there is no means to salvage the agreement and impose reasonable limits on a former employee's competition or solicitation of customers. The new Act would change Georgia law and authorizes a court to "modify a covenant that is otherwise void and unenforceable as long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties." This important change makes the enforcement of restrictive covenants far more likely in Georgia and changes the nature of any legal dispute from "whether" a covenant is enforceable or unenforceable to "under what terms and conditions" the covenant is enforceable. Many believe that this change is unfair to employees and others bound by restrictive covenants.

Scope of Prohibited Activities, Products, or Services

Under current Georgia law, courts have struck down restrictive covenants because they did not identify with sufficient particularity the types of competitive activities, products, or services the restricted party was prohibited from engaging in or selling. The Act seeks to avoid these attacks by providing that any description of competitive activities, products, or services shall be satisfactory if it "provides fair notice of the maximum reasonable scope of the restraint . . . even if the description is generalized or could possibly be stated more narrowly to exclude extraneous matters." When a restrictive covenant is entered into prior to termination, the Act further provides that "any good faith estimate" of the competitive activities, products, or services that may be applicable at the time of termination is satisfactory even if it mistakenly includes extraneous matters. Such a covenant is to be enforced by the courts based on activities "actually conducted" and products and services "actually sold" within a reasonable time of termination.

Time Limitations

The Act instructs Georgia courts to presume certain time limitations in restrictive covenants to be "reasonable" and, therefore, enforceable unless proved otherwise. For example, a two year or less restrictive covenant against a former employee (not involving the sale of a business) beginning on the date of termination is presumed to be reasonable under the Act. A restriction for more than two years is presumed unreasonable. Restrictive covenants of three years or less involving distributors, dealers, franchisees, lessees, licensees (not involving the sale of a business) are presumed reasonable under the Act. Covenants longer than three years are presumed unreasonable. In cases involving the sale of a business, the courts shall presume a restraint the longer of: (i) five years or less, or (ii) the period of time during which payments are being made to the seller to be reasonable. Any longer restraint is presumed to be unreasonable under the Act.

Conclusion

There are a number of other important changes to Georgia's restrictive covenant law in the new Act. Whether those changes, as well as the changes discussed above, are important in any particular case depends on the facts and circumstances involved. Moreover, in the event the Georgia Constitution is amended in the 2010 General Election and the Act becomes effective, businesses throughout Georgia should have legal counsel familiar with this complicated area of law review and revise their restrictive covenants agreements and any employment agreements containing restrictive covenants.

Finally, in the meantime, existing Georgia law regarding restrictive covenants will continue to apply. It will remain important for Georgia businesses and employees to consult experienced counsel to help assess and protect their respective rights in the interim, as well.

For more information on Georgia’s current law regarding restrictive covenants, please see my articles on the firm’s website.

The Legal Issues Are Cloudy in the Cloud

2009-05-19T13:11:00.000-07:00

by John L. Watkins

"Cloud computing" has become a very hot topic. For the uninitiated, "cloud computing" generally refers to providing access to computer software through an Internet browser, with the software and data stored at a remote location at a "data center" or "server farm," instead of on the computer's hard drive or on a server located on the user's premises. "Cloud computing" is also referred to "software as a service."

Proponents of cloud computing claim many benefits, including lower costs, less need for on-site support and "scalability." "Scalability" means that the number of licenses and available resources can easily be adjusted as the need increases. Access can typically be provided to any computer with a browser and an Internet connection, but can be controlled through password protection and other measures. Proponents also argue that cloud computing makes it easier to manage and push down software upgrades. Cloud computing services are usually provided on a fee for service approach that may result in cost savings compared to the traditional local area network. To put it in common parlance, cloud computing is somewhat like renting as opposed to owning.

Cloud computing is not a technology of the future, but is here today. Google, for example, uses cloud computing to provide its suite of business applications intended to compete with Microsoft Office. Google applications are provided free or at very little cost. Salesforce.com is one of the best known providers of cloud computing services, providing customer relationship management ("CRM") software to a growing list of companies. IBM and Microsoft are also entering the playing field.

There appears to be little doubt that cloud computing is here to stay, and that it may indeed represent the future of information technology. There are many advantages and potential advantages to the cloud computing model.

That said, from a legal perspective, cloud computing raises a host of issues. Having spoken recently to several cloud computing vendors, there are some rather obvious questions. Perhaps the most obvious question is, "What happens if you lose my data?" The answers I was provided focused on technical and not legal issues, such as the back-up procedures provided.

Techical issues are important, and there are certainly technical issues that a potential customer may want to consider, such as maintaining a back-up on site, or a back-up through a separate vendor. These approaches might provide some real practical protection in the event of a catastrophic failure or bankruptcy at the primary provider. Other technical issues might focus on what happens when the relationship ends, whether happily or not. Is there another vendor that can provide the software and host the data? Will data have to be converted to a different format? If the customer decides to switch back to a local area network, will the terminals that have been used for cloud computing (which, I am told, can be very basic "low powered" machines) be of any use, or will a completely new network need to be installed?

Although technical solutions are a good thing, over twenty-five years of litigation experience have taught me that disasters do happen, even with fail-safe plans in place, and even with parties acting in complete good faith. And, I suppose, it is natural for a lawyer to focus on legal rights and remedies rather than technical solutions.

From a legal standpoint, cloud computing appears to raise a host of essentially contractual issues to be addressed by the parties' contract or licensing arrangements. There are also potential regulatory issues (ranging from privacy to export control issues), potential e-discovery issues, and certainly other issues that have not yet crossed my mind.

As businesses and their lawyers become more experienced with cloud computing issues, it is likely that a consensus will emerge as to how cloud computing issues will be addressed. Hopefully, purveyors of cloud computing services will be flexible and reasonable in addressing legitimate business concerns. However, given the prevalence of "standard" licensing in the software field (often on a shrinkwrap or clickwrap basis) and efforts to limit liability under any circumstances, there is some cause for pessimism.

All that said, here is a list of issues that one might wish to consider asking a vendor or otherwise considering in entering into a possible cloud computing arrangement:

What contractual obligation will you assume to protect my data? This could include reference to particular steps and procedures, including back-up obligations. The contract or license may specify a standard of care that the provider must meet.
What contractual obligation will you assume regarding uptime, if any? Will you provide any type of uptime warranty? Even if such a warranty is subject to a limited remedy, it probably would provide considerable incentive for the provider to limit downtime.
Most providers seem savvy enough to disclaim any interest in your data and will freely say -- in a sales setting anyway -- that "your data is your data." Well, that's good, but how do I physically get my data back at the end of the contract or if you go bankrupt?
What remedy limitations, if any, are in your terms? Are consequential damages excluded? Are total damages capped (such as to a return of fees paid)? Even if contractual obligations are assumed, if remedies are severely limited, the provider may be shielded from liability.
Where is my data going to be stored? Are you willing to agree that all my data will be kept in this location under specified conditions and at agreed security levels? This could be important for regulatory reasons, but also for reasons associated with meeting general customer confidentiality obligations or complying with privacy policies.
Have you inserted a forum selection clause into the terms? Many providers want to insist on litigating on their home turf (which often, it seems, is California), but that is rarely a happy instance for a customer.
How do I get out of this arrangement if you do not perform and what is my exit strategy? What rights do I have upon termination? What obligations do you have to assist in transitioning to a new vendor or back to a self-managed platform?

If you are considering going to the cloud, you should consider involving your business and technology lawyer early in the process. For more information about the services at our firm, click here.

New Trade Secrets Podcast Available

2009-05-17T17:57:00.000-07:00

The third podcast in CTF's series on trade secrets and non-disclosure agreements ("NDAs") is now available. With one multi-million dollar verdict having been awarded in a high-profile trade secret case in California within the past several weeks, and with another high profile case seeking hundreds of millions of dollars on trial in federal court in Atlanta, the new podcast is timely. The podcast covers trade secret litigation from the pre-suit investigation to a possible appeal. The podcast covers the claims and defenses that are likely to be raised, the procedural issues that may arise, and how trade secret litigation may ultimately be resolved. The podcast is available at www.ctflegal.com/podcasts.html or www.ctflegal.blip.tv.

John Watkins to Speak to Chamblee Business Association on May 21, 2009

2009-05-17T17:55:00.000-07:00

CTF Shareholder John Watkins will speak at the breakfast meeting of the Chamblee Business Association on Thursday, May 21, 2009. The meeting starts at 7:45 a.m. (doors open at 7:30) and ends at 9:00 a.m. at the Chamblee Civic Center on Broad Street in Chamblee. John will be speaking on Common Legal Mistakes and How to Avoid Them. The presentation will focus on legal mistakes commonly made by small and medium-sized businesses (and sometimes by larger businesses). The presentation will last approximately thirty minutes, with a question and answer session to follow. The meeting is open to non-members.

Are "Go Shop" Clauses Trending Up in M&A Transactions?

2009-05-13T15:05:00.000-07:00

By Tom McLain

Although they have been around since about 2005 and are part of the "standard" arsenal of clauses that M&A lawyers use, "go shop" clauses may be gaining some additional popularity in the current economic environment when one considers transactions such as Barclays' $4.2 billion sale of iShares to CVC Capital Partners (see Financial Times article). Generally, "Go shop" clauses are loved by Sellers but are not too popular with Buyers.

As the name suggests, a "go shop" clause allows the Seller to accept a high bid in a non-binding letter of intent, but still continue to shop for an even better bid. One of the distinct advantages to a public company Board of Directors is that a "go shop" clause limits later shareholder criticism that the Board failed to obtain the maximum price. Some argue that a "go shop" clause may actually expedite the sale of a company because the Board may be less hesitant to accept a bid and because the Board may be able to avoid or minimize other necessary due diligence such as obtaining a fairness opinion. Others argue that "go shop" clauses can slow a transaction because the Buyer waits until the "go shop" until the period of time in which the Seller can solicit new bids expires before it begins pursuing the transaction in earnest.

Buyers almost always prefer to use a "no shop" clause because it theoretically prevents the Buyer from being outbid. Additionally, Buyer argue that a "no shop" clause is necessary for them to commit to spend the time, money and effort to complete due diligence and draft a definitive agreement. Those arguing against "go shop" clauses say that they tend to have a chilling effect on the bidding because no Buyer wants to submit a price and then be the target of other bidder's efforts to buy the seller. However, particularly in the case of a public company, the insulating effect of a "go shop" clause may protect the successful bidder from subsequent shareholder suits that seek to enjoin a sale.

While it is always risky to predict trends, "go shop" clauses could become a bit more commonplace in the current economic environment. Companies that are effectively being forced to sell or merge due to dire financial conditions already have disappointed shareholders who have lost considerable value as compared to market prices of several months back. As a way of satisfying some of those shareholder concerns and perhaps heading off shareholder claims that the Board sold at a price below market value, public company Boards may be drawn quickly to "go shop" clauses. As the M&A market continues to slowly reestablish itself, we will see whether "go shop" clauses become more prevalent.

The One Almost Universal Rule

2009-05-13T06:26:00.000-07:00

by John Watkins

There are very few absolute truths in the legal profession. For every legal rule, there is at least one exception. There is one truth that is pretty close to universal, however, about how clients use lawyers. That rule is that it is almost always less expensive and more effective to involve the lawyer earlier in the process than later. As a litigator, there are countless examples I have seen in which a client could probably have avoided litigation if it had, for example, consulted with its lawyer about drafting a contract or structuring a transaction instead of trying to go it alone. Although it is not a perfect analogy, it is a bit like preventative medicine.

Many clients, apparently thinking they will decrease costs, try to use a lawyer like a fire axe that is kept behind glass: Break glass and use only in the event of a fire. Other clients try to limit the information they give to a lawyer, trying to "define" the problem, but lacking the training and experience necessary to do so. The result is almost invariably a less than optimal outcome at a higher overall cost.

Clients who achieve optimal results find an experienced lawyer and use the lawyer as part of their business team. Those clients involve the lawyer early in planning and structuring a transaction. As a result, they tend to avoid mistakes in negotiating and in structuring that are more costly to correct at a later date, if they can be corrected at all. These clients also make sure that a contract or relationship is structured as clearly as possible at the outset. These businesses realize that proactive legal assistance is part of their overall effort to reduce risks and to reduce costs. Although structuring a transaction or contract carefully does not absolutely guarantee there will be no future disputes, it lessens the probability. In addition, proper structuring almost always strengthens a company's position in the event of litigation.

Mediation Comes to Italy

2009-05-03T18:57:00.000-07:00

by John Watkins
In May of 2003, I attended a seminar on international dispute resolution sponsored by the Center for International Legal Studies in Heidelberg, Germany. The participants included lawyers from most of western Europe, the U.S., Brazil and Argentina. At the time, most of the participants from outside the U.S. were unfamiliar with mediation. Mediation is a structured settlement negotiation process in which the parties meet with a neutral third party called a mediator. The mediator cannot impose a settlement on the parties, but tries to assist the parties in reaching a voluntary settlement. Particularly when the parties participate on a voluntary basis (as opposed to being referred by a court), mediation has proven to be very effective in resolving disputes. For more basic information about mediation, see http://www.ctflegal.com/mediation-basics.html. For more advanced topics, see http://www.ctflegal.com/advanced-mediation.html. Or check out www.watkinsmediation.com.

The international participants at the Heidelberg conference were very familiar with international commercial arbitration, which is a time-honored method of resolving commercial disputes outside of a country's court system. Unlike mediation, arbitration (at least in its traditional form), is a binding dispute resolution process, in which arbitrators (usually lawyers or retired judges, although sometimes business people) decide the case in the place of a judge or jury. To U.S. lawyers, arbitration and mediation have gone together for many years as the two most prominent forms of "alternative dispute resolution" or "ADR" (meaning dispute resolution outside of the civil court system). So, it was surprising to me in 2003 that our European colleagues were so unfamiliar with one form of ADR (mediation) when they had used another form (arbitration) for many years.

Apparently, as Bob Dylan might say, the times are changing. I just attended a conference on international agency and distribution agreements sponsored by the Contract Section of the Union Internacionale des Avocats (International Association of Lawyers, or "UIA"). At this conference, I had the good fortune to meet Carlo Mastellone, the founder of Studio Legale Mastellone in Florence, Italy. Carlo, an elegant man born in London, explained to me that there is a huge backlog of civil cases in Italy, and that he and his colleagues hope to help resolve the situation through the use of mediation! Carlo is helping organize the effort in Florence, and they even have a website, http://www.conciliazionefirenze.org/. The website is in Italian, which makes it a little difficult for me to use (I would have a slightly better chance with German). However, I really like the artwork, which was done by an artist friend of Carlo.

In any event, I am glad that mediation has landed in Europe. In fact, I am glad we were finally able to export something to Europe relating to our legal system -- although it is actually about avoiding our legal system -- that may actually be appreciated! Now, if I can just get a case in Florence ....

Buying A Struggling Company

2009-04-27T12:58:00.000-07:00

As the economy begins to show some signs of stabilization, there seem to be more and more news articles suggesting that there are going to be bargains available for those who wish to expand their current business through acquisition. Certainly, those seeking to sell their business are finding that the prices are not at the levels that they hoped. In an article on CNN entitled It's a Lousy Time to Sell Your Business, it is reported that both the number of businesses sold and the median price have dropped noticeably on sites such as BizBuySell. Those drops are likely to lead to bargains.

Assuming a struggling company has been identified as a target, what's next? An article on BusinessWeek entitled How to Buy a Struggling Company, offers some practical business suggestions such as sticking to industries that are well known to the buyer and concentrating on due diligence. In other words, the financial and operational details of the struggling company need to be carefully and thoroughly examined.

On the legal side of the house, additional concentration on legal due diligence is also warranted. Special attention to the contractual arrangements between the target and its suppliers and customers is needed. In reviewing these arrangements, the possibility of the failure or bankruptcy of key suppliers and customers should be factored into the review. Additionally, since the business is troubled, consideration needs to be given to determining what lines, offices, divisions, etc. will need to be shut down and whether there are any legal impediments to taking such actions. It may also be the case that, in order to keep a key supplier relationship, the buyer will have to pay a debt owed by the target, which would become a hidden cost of the transaction if not known prior to purchasing the target.

Insofar as the acquisition itself is concerned, there could be issues regarding the indemnification provisions typically included in the definitive agreement. Often, particularly with smaller companies, the owners of a struggling company are themselves struggling. This may mean that the indemnifications in the definitive agreement are of little value. Accordingly, it may be the case that a significant portion of the purchase price needs to be escrowed for a period of time.

Of course there are many other legal issues that have to be settled, not the least of which is whether the transaction is to be structured as a asset or stock purchase. However, that determination, along with many others, will need to be made on a case by case basis.

A Good Time to Buy?

2009-04-24T15:17:00.000-07:00

A lawyer I know (Frank Aquila of Sullivan & Cromwell) recently wrote an article for Business Week entitled, "M&A: A Smart Strategy in a Down Economy." As Frank points out, mergers, acquisitions and divestures are key elements of corporate strategy. Just because markets are down does not mean that there are not deals worth doing or that a valuable management tool should be abandoned. History tells us that deals made during troubled economies often carry the strongest long-term returns.

Clearly, if an acquisition can only be financed with debt, today's climate may prevent the consummation of a merger or acquisition. On the other hand, if a company has available cash or can use its stock as currency, it should be actively considering targets, particularly strategic targets. Sitting on the sidelines, afraid to make a misstep, may itself be a terrible misstep. No one is suggesting that closing a deal will be easy, sellers are just as concerned about making a misstep and the due diligence investigation of the target needs to be exceedingly thorough. Still, there may be great targets out there that have a nice niche but are poorly managed or on the ropes with their lenders.

Tom McLain appointed to the Executive Committee of the World Chamber of Commerce

2009-04-21T08:13:00.000-07:00

On April 16, 2008, Tom McLain was appointed to the Executive Committee of the Board of Directors for the World Chamber of Commerce (the "WCC"). Solange Warner, the WCC’s founder and president said, "We are so pleased that Tom agreed to be a part of our Executive Committee and look for to being able to tap into his enthusiasm and experience." The World Chamber of Commerce, based in Atlanta, helps member businesses with their efforts to achieve business success in the lucrative international marketplace and provides educational and networking between businesses located in the U.S. as well as to those located in other countries. For more information about the World Chamber of Commerce, please click here and for more information about the international law practice at Chorey, Taylor & Feil, please click here

"Protecting the Crown Jewels: Trade Secrets and Non-Disclosure Agreements," by John Watkins

2009-04-19T16:50:00.000-07:00

All business owners and executives, but particularly those with small and medium-sized businesses, should know the answers to these questions:

* What is the key confidential information that puts you ahead of competitors?

* What are the main risks of misappropriation of your confidential information?

* Are you aware that survey data indicate that a high percentage of ex-employees admit taking company confidential information?

* What is a trade secret is, what do you need to do to protect it?

* When should consider non-disclosure agreements, or NDAs, to protect your confidential information?

* What are the key provisions of NDAs?

* What other provisions are sometimes included in NDAs that may affect your rights?

* Why does "one size fits all" not apply to NDAs?

* How does trade secret litigation proceed?

* What are your potential rights and remedies in trade secret litigation?

* Why should you get professional advice in dealing with trade secrets and NDAs?

Trade secrets and confidential information truly are the crown jewels of many businesses. This is the information that allows businesses to compete effectively, and that provides a competitive edge. Most businesses must rely on protecting this information -- assuming they are, as they should, be proactively trying to protect it -- through trade secret protection and NDAs. Many businesses do not, for example, have the expertise or resources necessary to prosecute and manage a large patent portfolio, and not all types of information are susceptible to patent protection.

Despite the critical nature of this information, my experience is that many business people do not understand what they should be doing to protect the crown jewels. I repeatedly see posts on LinkedIn and elsewhere asking for a "form" or a link to a "free site" to get an NDA. Other times, companies will try to re-use NDAs that were developed for another purpose. Given the potential value of the information, this cavalier approach is surprising.

It was with this background that Tom McLain and I developed our series of podcasts on trade secrets and non-disclosure agreements. The podcasts are available free at www.ctflegal.com/podcasts or www.ctflegal.blip.tv. In the first podcast, Tom and I provide the general background regarding trade secrets and NDAs. In the second podcast, Tom goes deeper into the different uses and purposes for NDAs. For example, what works in the employment context may not work for a business transaction. Tom then covers the details of NDAs and their typical provisions. Importantly, Tom also covers some provisions that may appear in NDAs, and that, perhaps without you realizing it, can substantially affect your company's rights.

Throughout the discussion, Tom's underlying message is simple: One size does not fit all for NDAs. Truer words were never spoken. It is certainly worth the time and investment to get professional assistance in drafting NDAs, or in reviewing NDAs that you may receive from other companies. Professional assistance in drafting and reviewing NDAs need not be expensive, certainly not in relationship to the potential importance of the subject. Most importantly, it will provide you with the confidence that you know what you are signing and what obligations your company is undertaking and what obligations the other party is assuming.

In the final installment of the series, which has yet to be released, I will discuss the subject of trade secret litigation. Trade secret litigation tends to be much faster moving than other forms of commercial litigation, and puts an even greater premium on preparation than is ordinarily the key. I will discuss all aspects of trade secret litigation, from the initial investigation through trial.