Keeping your company’s secret information secret is a matter of increased focus on protecting company intellectual property

In the last three decades, international trade has increased by a factor of seven — but unfortunately, this advance has also ratcheted up the rate of trade secret theft, an impediment that costs corporations hundreds of billions of dollars a year.

That rate of growth has catapulted multinational commerce to such prominence that it now accounts for a third of all economic activity worldwide.

principal, Zavitsanos, Anaipakos, Alavi & Mensing

principal, Zavitsanos, Anaipakos, Alavi & Mensing

“The world is getting to be a smaller place at a remarkably fast pace,” says Joseph Ahmad, a principal in the Houston law firm Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing. “When we were kids, there might have been a handful of companies that did a particular thing and probably most or all of those companies were in America.

“Nowadays, we’re seeing competition come from everywhere,” says Ahmad, who primarily represents business executives in trade secret cases and employment-related litigation. “The barriers to entry are rapidly declining, so now a lot of companies are facing competition from all over the world.”

Other factors driving the increased incidence of trade secret theft include large pockets of economic stagnation around the globe and the widespread conversion of analog business information to digital formats, which lends itself more readily to leaks and cyber attacks.

Pamela Passman, president and CEO, Center for Responsible Enterprise & Trade

Pamela Passman, president and CEO, Center for Responsible Enterprise & Trade

“In the last few years, there are a couple of key reasons why trade secret theft has grown,” says Pamela Passman, president and CEO of the Center for Responsible Enterprise & Trade, a nonprofit group whose mission is helping companies reduce counterfeiting, piracy and trade secret theft.

“One reason is the economic times we’re going through. People feel constrained, and they’re working under great financial pressure, so many people are cutting corners. Also, a great deal of companies’ information is becoming digitized and, therefore, more easily transferable.

“So instead of walking out of a place with stacks and stacks of papers, a person can walk out with a USB drive that has a huge amount of information on it.”

Increased cyber leaks and cyber attacks are also contributing to the problem, Passman says.

“There are some fairly aggressive third parties that have stepped up their activity in that area,” she says.

Ahmad agrees but points out that the lion’s share of trade secret misappropriation he encounters is a consequence of actions taken by a company’s employees or ex-employees.

“Of course, we do hear from time to time about individuals or organizations — especially overseas — who hack in to companies’ systems,” Ahmad says. “But, in my experience, that’s not a common occurrence. Most of the trade secret theft I see occurs via a current or former employee.”

That is why, Passman says, it’s essential to be straightforward with employees about your company’s policies regarding confidentiality, particularly as it pertains to trade secrets and other types of intellectual property.

“You have to be very clear with your own employees about your policies and about how serious you are about protecting your intellectual property,” Passman says. “Because that’s definitely where your greatest risk lies. And this is a critical issue both while those employees are at the company and after they leave the company.”

The labor market factor

Unemployment and sluggish job markets are also key factors contributing to the increased risk surrounding trade secret theft.

“Unfortunately, in this type of market, job seekers sometimes resort to extreme measures to gain the kind of edge they feel they need to get a job,” Ahmad says. “I’ve seen many new hires — whether consciously or subconsciously — come into a job with the belief that their value is increased if they can, as some of them would put it, ‘hit the ground running’ when they get on the job.

“In other words, they feel that with the help of their previous employer’s trade secret information, they can do a better job for their new employer. Sometimes this happens with the complicity of the new employer, but sometimes employees do it on their own, because they feel it makes them more marketable.”

What, then, are some practical strategies CEOs and their teams can employ to insulate their companies against the risk of having their trade secrets stolen? One of the important early steps executives can take is to enlist the help of a broad cross section of people in their organization to tackle the issue.

“First off, what I suggest is establishing a cross-group team of people to focus on protecting the company’s intellectual property,” Passman says. “This team should include somebody senior in the legal department, somebody senior in R&D, somebody from business development, somebody on the operations side, for example if they have a manufacturing division, and somebody responsible for procurement and the supply chain. It’s important to bring all these disciplines together and instruct them to establish some policies in this area, including trade secret policy.”

Another step that should be taken by companies that have significant intellectual property to protect is requiring employees to read and sign confidentiality agreements.

“The confidentiality agreement is first and foremost,” Ahmad says. “You have to make sure that every employee understands the significance of holding your company’s information confidential. All employees must be required to agree in writing they will do so.”

There are a number of items and types of information that companies can put into their employee confidentiality agreements to help protect their intellectual property.

One approach is to list or enumerate the company trade secrets and other types of information that are required to be held confidential. Another tactic is to include language stipulating that inventions and similar types of newly created information automatically become the confidential property of the employer.

“This helps the company in several ways,” Ahmad says. “First, you get to define what your trade secrets are and what information is expected to be held confidential and you get to formally notify the employee about it. This also enables you to make sure that whatever new intellectual property your employees develop will be the property of the company, and they will agree to hold that information confidential.”

Vetting third parties

Another area where companies seeking to protect their intellectual property need to be vigilant is conducting due diligence on third parties, such as suppliers and customers, as well as companies they may be seeking to acquire or merge with.

“For any key third parties that you’re going to be sharing your intellectual property with, it’s essential to conduct due diligence on them,” Passman says.

Due diligence encompasses activities such as research, interviews and online searches. A key part of the process is being alert to “red flags” — potential problem areas signaling that the third party may not be effective at helping co-protect the company’s sensitive information.

“Basically, you want to see if [the third party] has any red flags you need to be aware of,” Passman says. “For example, if they’ve been involved in different kinds of litigation, especially litigation involving intellectual property or trade secrets. And you’d want to explore and make sure you understand how they go about managing and protecting the intellectual property of the third parties that they in turn do business with as well.”

Regarding the employee confidentiality agreement, Ahmad says it’s unwise and potentially dangerous for a company to regard this process as a one-and-done deal. In other words, it’s insufficient to simply have employees read and sign the agreement and then file it away. Companies need to remind employees periodically about their confidentiality agreements and about the importance of keeping the company’s sensitive information private.

“Companies sometimes leave themselves vulnerable to trade secret theft loss if they approach these confidentiality agreements like a checklist,” Ahmad says. “By that I mean they can’t just have the employee read and sign the agreement, and then they knock it off their checklist and forget about it. The problem with doing this is you can be sure the employee will forget about it too.

“Many times, an employee will enter into a confidentiality agreement, and then they’ll work for the company for 10 or 20 years, and they’ll forget they even have the agreement. As a result, they don’t really respect the company’s trade secrets the way they should.”

Thus, it’s important to periodically remind employees about their confidentiality agreement — and even more important to underline that agreement’s significance when the person’s employment with the company ends.

“That’s probably the most critical aspect — how the matter is handled at the end of the employment relationship,” Ahmad says. “I’m often shocked at how many employees I see who have signed confidentiality agreements, and at the end of their employment, whether they resign or are terminated, they’re not even reminded that they have these agreements. Many of them don’t even know they have them.”

Business executives would be wise to take advantage of the employee exit interview because it represents their company’s last chance to underscore the imperative of keeping its trade secrets just that: secret.

“At the exit interview, employees must be required to sign and confirm that they understand their responsibilities in regard to keeping the company’s information confidential,” Ahmad says. “By doing that, you’re drilling in to the employee as they’re leaving the company — and presumably going to work for someone else, who just may be one of your competitors — that, ‘Hey, listen, this is serious. We take this matter very seriously.’”

How to reach: Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing, www.azalaw.com; The Center for Responsible Enterprise & Trade, www.create.org

Conducting the proper due diligence to ensure a successful acquisition

Thomas Vaughn, member, Dykema Gossett PLLC

When you’re considering buying a company, it’s not just a matter of locating a target and writing a check. There’s a lot that goes into doing proper due diligence, and if you fail to do it right, the transaction could be disastrous, says Thomas Vaughn, member, Dykema Gossett PLLC.

“From the purchaser’s perspective, conducting an effective due diligence process is critical to maximizing value from your acquisitions,” says Vaughn.

Smart Business spoke with Vaughn about why due diligence is critical to ensure a successful acquisition.

When considering purchasing a business, what is the first step?

Start by assembling a team of in-house and outside lawyers, inside and outside financial professionals, and possibly experts in various areas impacting the target. In the due diligence process, it is the job of the buyer to learn and understand everything it possibly can about the prospective target, and that requires a very deep dive by the due diligence team.

What is the next step?

The team should develop a due diligence strategy, and one of the most important components of that is to agree on the purpose of the due diligence effort.

From a buyer’s perspective, due diligence can be a very expensive process, so it is typically done in stages to keep costs down until the buyer is certain it is going to complete the transaction. As a result, in the preliminary due diligence, you are trying to determine the target company meets your investment parameters. You’re looking for ‘go, no go factors.’

The early stages of due diligence are very financial and operations oriented. For instance, making sure the financial statements and projections accurately represent the company’s business prospects and that there aren’t any major customer problems or potential defections are critical elements of due diligence.

From a legal standpoint, you look for high-dollar legal issues, like pending litigation or claims, or legal impediments to completing a deal, such as regulatory issues.

Also determine that the value you see in the company is an accurate perception of its true value. As part of that, identify and confirm synergies. All of these efforts will help you negotiate the purchase price and other deal terms.

Once you are satisfied with value and have signed a letter of intent, you can conduct the detailed part of the due diligence process.

How do you proceed with the detailed due diligence?

This is when the process starts in earnest. Have your team divide up responsibilities so that you’re not duplicating efforts and you are conducting the process as efficiently as possible. You want to make the process as smooth as possible for the seller. Due diligence is burdensome and time consuming for the seller. Don’t have multiple people asking the same questions or asking for the same documents.

One of the best ways to help this run smoothly is to present the seller with a detailed checklist. Often there is information listed on there that the company doesn’t have, but you can use the list to trigger the seller to think through the information documents the seller has and should be providing to you. Then keep the list updated to reflect documents received and make the list available to all team members

How is the due diligence information delivered?

Determine up front the deliverable to come out of the due diligence process. Is the expectation a written report from the accounting and legal staff? That is the most typical result, but there is an expense involved, so you have to determine if you want to incur that. You can also start with an oral report or short written report that notes red flags and items that are potentially problematic as a precursor to the full report.

That report should come with recommendations as to which problems can be potentially fixed and how to fix them, or whether the problem is so significant that it should have an impact on the purchase price or the decision to move ahead. Another outcome when due diligence identifies problems or uncertainties might be to have part of the purchase price paid as an earn-out. If certain things represented by the seller happen, you’ll pay the full price, but if they don’t, you won’t have to.

What are some red flags?

The biggest one is a very disorganized seller. In this case, the buyer needs to do very thorough due diligence. Lack of documents where you expect to see them, or poorly drafted documents or contracts, are also an issue.

Another red flag is a seller who provides you with certain due diligence but is slow providing other information. This may be an indication the seller is holding back bad news.

How does due diligence help in preparing schedules used in the typical acquisition agreement

The seller makes representations and warranties in the acquisition agreement and puts exceptions in the schedules. Then the buyer reviews them to get comfortable that nothing new has appeared in the schedules that was not disclosed in the due diligence process. It’s not unusual for new information to appear in the schedules, which can be a big problem.

If the buyer feels the seller intentionally didn’t disclose information until the last minute, it can have a very negative impact on completing the transaction and the ongoing relationship between the retained members of the management team and the buyer.

What kinds of things can show up at the last minute?

Usually it is a problem the seller was trying to solve before he or she has to disclose it, but can’t. The seller discloses it in the schedules just before the acquisition agreement is signed to avoid later indemnity claims. But doing so at the last minute is a problem in itself.

Thomas Vaughn is a member at Dykema Gossett PLLC. Reach him at (313) 568-6524 or [email protected]

How to win a “bet-the-company” lawsuit

Harvey Friedman, Partner, Greenberg Glusker Fields Claman & Machtinger LLP

Smart Business spoke to Harvey Friedman, a partner at Greenberg Glusker Fields Claman & Machtinger LLP, about making sure your company has the right litigation strategy when it’s all on the line.

A number of years ago, I represented an insurance company which sued a law firm for breach of fiduciary duty. The case was tried by a jury. The defendant was represented by a well-known, highly regarded law firm. I thought that the defendant’s lawyers did a professional, competent job at trial. After a short deliberation, the jury came in with a multi-million dollar verdict in favor of my client — despite the fact that it was an insurance company.

I had the opportunity to interview the jurors after the trial. I learned that the jurors had a difficult time relating to the defendant’s lawyers. Some of the jurors’ statements have greatly influenced the way I have tried bet-the-company cases since then. Those statements include: make the facts easy to understand, tell a story, talk to (not down to) jurors, avoid sarcasm or being overly aggressive, use non-legal terms (greedy instead of egregious, rip-off rather than unconscionable, stole instead of converted, doesn’t make common sense instead of illogical, fair instead of equitable), and establish the theme that what your client seeks is fair, right and makes common sense.

In addition to how to communicate to a jury, the following is a list of tools a defendant should employ to enhance its chances of winning a bet-the-company case.

Choose the best forum

  • First, avoid arbitration if possible. For many reasons, arbitrators often split the baby. Additionally, there are no meaningful rules of evidence, which allows either side to submit evidence whether it’s relevant or not, and there is no meaningful right to appeal if you are unsatisfied with the arbitrator’s decision.
  • Second, if you are a defendant, you should attempt to have the case litigated in federal court, not state court. A unanimous verdict is required in federal court, whereas many state courts, including those in California, require only 9 of 12 juror votes for a verdict. Jurors are generally more conservative in awarding damages in federal court and it is easier to obtain summary judgment, a determination made by the court without a full trial. Lastly, the interest payable on a judgment is much higher in state court (10 percent per year) than in federal court (approximately .13 percent per year).

Be the plaintiff. Even if you are the party against whom a claim has been asserted, make a peremptory strike; become the plaintiff by being the first party to file the lawsuit. Many jurors believe a plaintiff would not have filed suit unless the plaintiff had suffered damages. Filing suit first may enable you to choose federal court, instead of state court as the forum. Moreover, if the case needs to be filed in state court, you may be able to select the state if you file suit first. In addition, a plaintiff speaks first and last, both in presenting evidence and in the summation. This can be a significant advantage.

How to handle the lawsuit

  • If you contact most of the known experts on a particular issue, and thereafter choose one, the experts not chosen may disqualify themselves if asked by the other side to provide expert services. As a result, contact witnesses immediately, particularly expert witnesses.
  • Attack punitive damages at every stage in the litigation. You don’t want a jury to decide the issue. Many judges don’t like punitive damages and will grant a motion to strike them from the case.
  • The defendant usually has the right to take the plaintiff’s deposition first.  It is important for a defendant to take the plaintiff’s deposition and pin him down before he knows the particulars of the defendant’s defenses.
  • It is important to make a summary judgment motion because, even if it is denied, it is an excellent discovery tool. A defendant can learn about the evidence and witnesses the plaintiff intends to use at trial from the opposing papers the plaintiff files.

Hire a good jury consultant. Experienced jury trial lawyers believe that 75 percent of the outcome of a jury trial case depends on jury selection and opening statement. Although an experienced trial lawyer can do a good job in picking a jury without the aid of a jury consultant, the use of one can improve the possibilities of a “good” outcome to an “exceptional” outcome.

In addition, two important aspects of a persuasive opening statement are themes a lawyer is going to develop during the trial and “buzzwords” — words that a jury may relate to. A good jury consultant can help develop themes and formulate buzzwords.

Hire the best lawyer. There is a tremendous difference between a bench trial and a jury trial.  There are many lawyers who do an excellent job trying cases to a judge but do not do well trying cases to a jury. Lawyers who do well trying cases to a jury have exceptional people skills.

The usual procedure is to make a decision on the basis of references and an interview with the lawyer. The references often come from friends or clients of the lawyer and can be unreliable. At the interview, the lawyer typically will toot his horn and tell you about the successes he has had — which are often exaggerated.

The best way to choose between lawyers you are considering is to have your general counsel make contact with judges — sitting and retired — to discuss the trial attorneys you have identified and with lawyers who have opposed the trial attorney you are considering. Judges and opposing counsel have no axe to grind and will provide opinions which are unbiased and more reliable than a lawyer who has tooted his own horn.

It is almost certain that a bet-the-company lawsuit will be tried by a jury. For the best possible outcome, you need to choose a lawyer who knows how to relate to the jurors and can persuade them that your cause is fair, right and makes common sense.
Harvey Friedman is a trial lawyer at Greenberg Glusker Fields Claman & Machtinger LLP. He has tried more than 100 cases to conclusion, and for many years has been recognized by Best Lawyers in America in the Bet the Company and Commercial Litigation categories. Reach him at [email protected]

Survive the recession by controlling the controllable

Jeff Heintz, managing partner, Brouse McDowell LPA

Jeff Heintz isn’t bragging when he says the legal firm where he is managing partner, Brouse McDowell LPA, made it through the recent recession without missing a beat ― it’s a matter of fact that the firm only had a few scratches.

“We did OK because we stuck to what we did best; I think our reputation served us well,” he says.

Once Heintz realized that the 92-year-old company’s brand was the best weapon in his arsenal to fight the recession, he instilled a way of thinking to bolster that premise for the 120 employees.

“We adopted the philosophy that we are going to control the kinds of things we can control,” he says.

The first premise pertains to the quality of work, an obvious aspect that can be controlled.

“If you work hard, and you have high character, and you behave in a manner that is befitting of things like ‘A Lawyer’s Creed’ and ‘A Lawyer’s Aspirational Ideals,’ good things are going to happen to you,” Heintz says.

“If you develop skills that enable you to help your client as a technician and develop the feelings that enable you to discern how best to direct your client, whether or not a particular strategy has short-term or long-term benefit, then you can become a trusted adviser,” he says.

“There’s no better feeling in the world than being a trusted adviser, somebody who works hard, develops a business and builds it into something grand, and it is the centerpiece of that person’s life and perhaps that person’s family,” he says.

Place a high premium on community involvement, and feel an obligation to give back to the extent you can by participating and furthering the efforts of nonprofits and volunteering because it is the right thing to do.

“It also gives your people an outlet other than just coming in and putting on their miner’s helmet and cracking away at work. It keeps them fresh, focused and gives them some perspective.”

Dedication to clients can also be controlled.

“We’ve had relationships with clients that go back decades,” he says. “We’ve been through tough times with clients and we’ve been there for them. This time it was tough times for everybody.”

With a relationship that has developed trust and understanding over the years, there are often mutual benefits.

“You and your clients benefit from the strength and depth of your relationships because businesses across the board were facing issues that they never faced before, having to consider choices that they never considered before, and I think it is a considerable comfort to them to know that when they would pick up the phone to call their advisers, it’s a number that they have been calling for 30 or 40 years.”

One of the tools that may serve you in being open with clients is what Heintz calls the “sneaky direct approach.”

“You just sit down with them, and you tell them the truth,” he says. “You let them know even if you can’t lay out for them chapter and verse what will happen, you lay down for them as best you can your belief about what will happen and what steps you are taking to control what can happen. I think people tend to react well to that.”

Another factor to control is the seriousness with which responsibilities are taken.

“Take that commitment of trust very, very seriously,” Heintz says. “One of your first thoughts should be how is this going to benefit your client ― not how much money can you make, not how quickly can you get this job done, not how much personal goodwill can you get from this.”

As a final matter, protect yourself as best as you can against the things you can’t control.

“Ignore a lot of the chatter for things that happen at the federal level ― the preoccupation with the recent Washington gridlock, for example ― as difficult as it is,” Heintz says.

How to reach: Brouse McDowell LPA, (330) 535-5711 or www.brouse.com

Availability is king

It’s been said that no matter recession or economic growth, your ability to succeed in business is only limited by your availability to your customers.

Jeff Heintz, managing partner of Brouse McDowell LPA, believes in that. In fact, he has his home phone number on his business card.

“If you make your clients know that you are available to them pretty much 24/7, they appreciate the commitment and are very conscientious how they use it,” he says.

Likewise, cascade that premise of availability throughout your staff, from top to bottom.

“If you are accessible, that’s a talisman of your commitment to your clients,” Heintz says.

“Don’t tell them, ‘You need to get a hold of me between 9 a.m. and 5 p.m. on Monday through Friday because I’m not going to look at my mail over the weekend, and I’m not going to answer my phone.’

“Not everything’s an emergency, and there are people out there that live their lives at general quarters ― and everything’s an emergency ―but there are emergencies out there, particularly as we increasingly get to a global economy where it may be 7 p.m. on Friday night in Akron, Ohio, but 9 a.m. elsewhere on the globe where people are at work when you are at play. But most people use their best judgment, and they have the ability to discern between what’s an emergency and what’s not.”

How to reach: Brouse McDowell LPA, (330) 535-5711 or www.brouse.com

How to create a social media policy to minimize risks to your organization

Kristen Werries Collier, Partner, Novack and Macey LLP

If your organization still doesn’t have a social media policy, it is time to create one.

“Every organization should have a social media policy that enables it to optimize the opportunities that interactive social media sites present while minimizing the attendant risks,” says Kristen Werries Collier, a partner with Novack and Macey LLP.

Smart Business spoke with Collier about those risks and how to develop a workable policy to minimize your exposure.

What are some of the risks associated with social media?

While social media’s open format and accessibility to the public makes it a vital platform for organizations to disseminate information, that attribute engenders certain risks, including: the disclosure of confidential or proprietary information; the broadcast of negative comments about your organization, co-workers, customers or clients; and the risk of employees’ personal views being improperly imputed to the organization’s detriment. Your social media policy should essentially be a primer of how to avoid these and other risks.

How can an organization begin to draft a social media policy?

You don’t need to start from scratch. Visit socialmediagovernance.com/policies.php or www.kokasexton.com/word/100-examples-of-corporate-social-media-policies — free databases of social media policies. Assimilate what you like from these policies and then continue to modify the directives to address your specific concerns. If your organization already has a code of conduct related to media, you can modify those directives to cover the use of social media.

One size doesn’t fit all. You need to tailor your policy to reflect your organization’s culture. Determine how strict your policy needs to be based on your needs and tolerance for risk. I don’t think it makes sense to bar your employees from accessing social media sites at work. Your organization depends on your employees’ professional judgment, and their use of social media sites should be governed by that judgment, guided by your social media policy.

Even if you block access to social media altogether, that does not obviate the need for a policy that informs employees of the repercussions of posting negative comments during nonwork hours that could damage the organization’s reputation or reveal confidential or propriety information.

Who should be involved in creating the policy?

Keep in mind that you are asking your employees to self-monitor their behavior in accordance with prescribed guidelines, which means that any policy’s effectiveness turns on whether your employees understand it and buy into it. Given that, you want to create an understandable policy that protects your organization from the pitfalls of social media sites without overreaching.

To get employee buy-in, recruit a cross-section of employees to help you create the policy. They can then be integral to communicating it, facilitating implementation, monitoring its effectiveness and tweaking it.

What are some general guidelines for creating an effective social media policy?

1. Keep it short.

2. Define social media so it is clear what the policy is addressing.

3. Start on a positive note and highlight how your organization uses social media sites to its advantage so it is clear the policy is intended to empower and educate.

4. Declare that the purpose of the policy is to protect the organization.

5. State that the policy is not intended to infringe on employees’ personal interaction online but to ensure their posts do not reflect poorly on the organization, its employees or clients, and do not reveal confidential or proprietary information.

6. Encourage employees to use common sense.

7. Be specific. Provide an organization-specific list of the types of information that cannot be disclosed and note that if it seems confidential, it probably is.

8. Remind employees that if they identify the organization as their employer in online profiles, comments posted there could be imputed to the organization.

9. Direct employees to refrain from posting comments that could be interpreted as harassing, slurs, disparaging, demeaning or inflammatory.

10. Explain why certain conduct is prohibited.

11. Remind employees that their online presence is subject to applicable laws and terms of service.

12. Inform employees that you will monitor their social media presence, and then do it.

13. Tell employees the use of social media at work is a privilege, one that can be rescinded if abused.

14. Spell out the repercussions for violating the policy.

15. Have employees sign the policy.

16. Have a plan to minimize damage if the policy is violated.

How should an organization implement the plan?

Communicating the policy is as important as writing it. With that in mind, designate someone to convey a clear message about why the policy is necessary and that employees are expected to follow it. It would be a shame to invest significant time and effort into drafting the policy and then have it sit unread in your employees’ inboxes.

Also have a point person to answer questions because employees can’t abide by the policy if they don’t fully understand it.

How often should the policy be reviewed?

It should be reviewed at least annually, allowing you to work out the kinks by refining what works and eliminating what doesn’t. After you have a policy that has proven to be workable and effective over time, you can revisit it when the need arises, or at least every couple of years.

Kristen Werries Collier is a partner with Novack and Macey LLP. Reach her at [email protected]

Ray Werner avoids disagreements at firm by sticking to the facts

Ray Werner, Managing Partner, Arnstein & Lehr LLP

Ray Werner finds it difficult to remember a time when he had to break up a shouting match at Arnstein & Lehr LLP. Perhaps it’s because those who work for him know that the managing partner has a very simple, tried and true method for resolving disputes.

“Repeatedly, situation after situation, when you get the facts, it’s so helpful in making the right decision,” Werner says. “The facts sometimes make the decision for you. The facts solve the argument for you.”

Werner presides over 146 attorneys and 176 staff throughout the firm’s offices in Illinois, Wisconsin and Florida. Each attorney his or her area of expertise and that could make it difficult for the organization to march forward as one solid team. But Werner says camaraderie is not a problem at Arnstein & Lehr.

“One thing that often works is adult conversation,” Werner says. “You have to make sure that you confront issues in a calm, intelligent, fact-oriented way. So many times when people say, ‘Well, this is happening or that is happening,’ the facts help you defuse that situation. A lot of what I do is constantly provide the facts to the people I am working with. I’m making sure they understand what other people are doing, what the firm is doing and how we’re trying to do it.”

It’s your job to be in tune with those facts, whatever they might be, to serve as a mediator when that role is needed.

“I’ll go and investigate the facts to the extent that I can and then start talking with people about what I’ve learned,” Werner says. “I’ll ask them to challenge what I’ve learned.”

If it’s a dispute of some importance, you need to focus on getting the people who it concerns together in a room to talk out their differences.

“Putting people in the same room and having adult conversations that aren’t emotional conversations is important,” Werner says. “Not shuttling back and forth with what did A say, what did B say, going back to A, going back to B. Get A and B in the same room and let’s talk about it. It’s better that people are able to see each other.”

The worst thing you can do is let disputes play out over e-mail.

“It’s so easy for people to sit behind a computer screen not looking anybody in the eye and jot off a quick e-mail,” Werner says. “The advice is often giving pause before you hit that send button to make sure that what you’re saying is really what you want to say and do. When you wake up at 3 in the morning, you won’t say, ‘Oh God, why did I do that?’”

Werner says that resolving differences among lawyers can present a unique set of challenges.

“Lawyers, especially litigators, are trained to argue and take their side of the case and make the best they can out of it,” Werner says. “That’s just the way they are wired. When they start advocating for their position, they use those same skills. You have to weigh that and say, ‘OK, is there a little bit of overstatement here? Is there a little bit of too aggressively trying to reach conclusion A out of this set of circumstances rather than conclusion B.’ If so, filter that for where the reality might be.”

Your ability to stay level-headed in a dispute is another one of the keys to bringing it to a happy outcome.

“People know they are going to get a fair hearing from you,” Werner says. “You’re going to look at things fairly. You’re going to treat them fairly whether it’s compensation, whether it’s information or whether it’s discipline, which we sometimes need to deal with. But fair treatment, honesty and integrity are absolute keys.”

How to reach: Arnstein & Lehr LLP, (312) 876-7152 or legalnews.arnstein.com.

Be human

Ray Werner likes spontaneous encounters with his people at Arnstein & Lehr LLP. He just doesn’t have very many of them.

“Frankly, I often make appointments with people or small groups,” Werner says. “I think the people know me well enough to be candid. But breaking down barriers, we don’t spend enough time getting to know people.”

Werner is the managing partner at the law firm that dates back to 1893. And he obviously has a lot more important things to do, at least in terms of the firm operations, than to talk about how someone’s weekend was.

But such seemingly inconsequential information can be quite valuable in building morale with your team.

“Be human,” Werner says. “Have empathy for people.”

That doesn’t mean you try to be their best friend. But you don’t have to be an automaton either. Seek balance and look at your people as more than just numbers on a spreadsheet.

“I just had a conversation this afternoon with somebody about somebody else’s compensation,” Werner says. “We were talking about this person and how we like them and how we respect them and how we like being with them, but we have business decisions that need to be made. We try to make those business decisions in a human way, recognizing those are people just like us.”

Six ways to limit your chances of a visit from the DOL

Jennifer A. Watkins, Employee Benefits Attorney, Warner Norcross & Judd LLP

The Department of Labor is in the process of adding hundreds of investigators to its staff. And since DOL investigators are responsible for enforcement of fiduciary, reporting and disclosure requirements for employee benefit plans, you had better be following the letter of the law. In 2010, the DOL conducted 3,112 civil investigations, almost 75 percent of which resulted in findings of one or more violations.

Smart Business spoke with Jennifer A. Watkins, an employee benefits attorney in the Southfield office of Warner Norcross & Judd LLP, and she offered six ways to avoid a visit from your friendly local DOL investigator.

1. Deposit participant contributions as soon as possible.

This issue is one of the DOL’s top enforcement initiatives.

DOL regulations require that participant contributions, including loan repayments, be deposited to the plan’s trust on the earliest date the contributions can reasonably be segregated from the employer’s general assets. The DOL’s position is that the “earliest date” is determined on a case‑by‑case basis. Because most companies have the ability to transfer funds electronically, the “earliest date” is often within a few days of pay dates, and sometimes even the same day. It is not acceptable to rely on the maximum time permitted under the regulations, which is the 15th business day of the following month.

The Form 5500 Annual Report asks whether the employer failed to transmit any participant contributions within the period described in the regulations. This question must be answered, “yes” if there have been late deposits — even if the employer has corrected the violations. If there have been late deposits, very often the DOL will send the employer a follow‑up letter requesting confirmation that the employer took appropriate corrective actions. Our experience has been that a DOL investigation will sometimes follow, even if the employer has already corrected the violations and responds to the followup accordingly.

The Form 5500 is signed under penalty of perjury and plan administrators must always complete it truthfully. If a late deposit has been discovered, it should be corrected and reported on the Form 5500 as required. The only way to avoid inquiries from the DOL is to avoid making late deposits in the first place. Deposits should be made as soon as possible after each pay date on a consistent schedule.

2. Make sure your plan has a proper fidelity bond.

Another of the DOL’s hot-button issues is inadequate bonding of plan fiduciaries and individuals who handle plan funds. A company often has a fiduciary policy or a policy protecting directors and officers, but not a true ERISA bond protecting the plan. Generally, the amount of the ERISA bond should be at least 10 percent of the amount of funds handled, but in no event less than $1,000 or more than $500,000 for each plan covered.

The Form 5500 asks whether the plan is covered by a fidelity bond and for what amount. Answering this question “no” would obviously tip off the DOL to an issue, as would a bond below the required level.

Plan sponsors should know what level of coverage the plan has and answer the question accordingly. If the bond is inadequate, the plan administrator should seek to increase it immediately.

3. Promptly respond to participants’ inquiries or requests for information.

Certain plan documents must be made available for examination by any participant or beneficiary. These include the latest summary plan description, latest Form 5500, any applicable collective bargaining agreements, the trust agreement and plan document. If a participant or beneficiary submits a written request for these documents, the plan administrator must provide them within 30 days of the request. If a plan administrator does not, it may be liable for a penalty of up to $110 per day.

The participant or beneficiary may complain to the DOL if the plan administrator does not comply with information requests. These complaints often trigger an inquiry from the DOL, and depending on the response, the DOL may investigate the plan. A large number of investigations are based on participant complaints.

The best practice is to keep plan records updated and organized and respond to participant or beneficiary inquiries as soon as possible.

4. Distribute regular, accurate participant statements.

Plans must distribute regular benefit statements to participants and beneficiaries. For defined contribution plans, statements generally must be distributed once each calendar quarter if the plan allows participant investment direction and once each calendar year if the plan does not allow investment direction. For defined benefit plans, statements generally must be distributed at least once every three years. Finally, participants and beneficiaries may also request statements once during any 12‑month period.

Just like with routine plan documents, participants may complain to the DOL if they have trouble obtaining accurate statements. Statements should be accurate, easy to understand, and distributed in a timely fashion.

5. Ensure that fees are reasonable and do not pay expenses with plan assets.

The Form 5500 requires large plans to disclose service provider fees charged to the plan. Excessive plan fees have become another top investigative issue for the DOL, and investigators are likely to carefully review Schedule C to identify potential red flags. Also, while many administrative expenses may be paid from plan assets, some may not. You may need help determining whether fees are reasonable and sorting out what expenses may be paid with plan assets.

6. Respond promptly to DOL letters requesting information.

No explanation is necessary for this one. Ignoring the DOL’s inquiries will do the opposite of making them go away, so please don’t try it.

Form 5500 filings are a common source for investigators to select plans for investigation. Red flags include plans with a large percentage of assets in real estate, limited partnerships or the like, noncash contributions, loan defaults, low diversification ratios, unreasonably low rates of return, an adverse accountant’s opinion and notes or disclaimers on the financial schedules. Remember, the Form 5500 is signed under penalty of perjury. If you are concerned that any of these red flags may apply to your plan, we can help you fix them, but you must answer the Form 5500 truthfully.

In addition to the above triggers, the DOL will also target a plan for investigation based on other factors, such as bankruptcy filings or media reports that a company is in financial trouble. Too often, plans sponsored by employers experiencing severe financial difficulty are vulnerable to inappropriate behaviors by the employer, such as delaying deposits of participant contributions to the plan, loans to the company or other misbehaviors. Sometimes, investigators target specific industries or simply choose plans at random.

Jennifer A. Watkins is an employee benefits attorney in the Southfield office of Warner Norcross & Judd LLP. Reach her at [email protected] (248) 784-5192.

How failure to update forms and contracts can lead to problems for your business

Michael Weinberg, Partner, Novack and Macey LLP

Businesses use a number of legal documents, such as purchase orders, confirmations, invoices, leases and employment contracts, but despite the importance of such documents, the process of generating and updating them is frequently haphazard.

“Disputes often arise out of ambiguous, confusing, conflicting or outdated provisions in forms and standardized contracts,” says Michael A. Weinberg, a partner with the business litigation specialty firm Novack and Macey LLP. “Companies spend millions to litigate disputes that could have been avoided had they invested mere thousands in periodic reviews and updates of their core contractual documents. Quality forms and standardized agreements can be as important to success as physical, human and financial assets, yet they often go unreviewed and unrevised for decades. Such complacency and inattention can lead to disaster when the neglected documents become Exhibit A in a lawsuit.”

Smart Business spoke with Weinberg about how companies can make sure their forms and contracts are up to date and maximally enforceable, and what contract provisions might deserve special attention during the review and revision process.

How can a company start reviewing and upgrading its forms and standardized contracts?

The review and drafting process should be a collaboration between management, which knows the business, and corporate counsel, who knows the law. Companies too often think that, without lawyer involvement, they can simply copy forms and contracts that are being used by competitors or cherry-pick provisions from a variety of such documents.

That’s a mistake. Borrowed terms may be poorly drafted, out of date, specific to the requirements of a different state, or otherwise unsuitable as templates. Moreover, copying from multiple documents can lead to internal inconsistencies, variations in definitions and other anomalies that may result in confusion.

The goal of the drafting process is more than the generation of up-to-date documents that fulfill your business objectives; it’s also to ensure that such documents are clear and comprehensible. When a document is finalized, the non-attorney who participated in its creation should understand every word of it. While technical phrasing may be required in certain circumstances, forms and contracts with confusing ‘legalese’ are more likely to land a company in court than those expressed in straightforward standard English.

Given the rapid pace at which the law changes, biannual review of forms and contracts is warranted. All such documents should be reviewed concurrently, even though they likely were created at different times by different people using different terms. By putting documents on the same review timetable, their terms can be harmonized and the potential for future problems reduced.

What role should business litigators play in the review process?

Once documents have been drafted or updated, they should be looked at by a commercial litigator who will approach them from a perspective different than that of corporate counsel. The litigator can perform a ‘stress test’ on the documents, vetting their provisions to see if their language could be exploited by an adversary in a hypothetical dispute situation.

By playing devil’s advocate, the litigator can help pinpoint document provisions that need more work, or identify language or clauses that should be added to the documents to strengthen or clarify them.

What kinds of provisions give rise to problems?

There are myriad standardized documents, and within those a plethora of provisions, any of which may present problematic language. Certain provisions, however, may merit extra scrutiny. For example, a contract might provide for consent to jurisdiction in a certain state or court but then fail to include a stipulation that such state or court is the only place where suit can be brought.

Integration clauses can also lead to problems. Such clauses provide that the contract represents the entire agreement of the parties and supersedes all other agreements or negotiations. But, in Illinois, such language is likely insufficient to prevent a party from asserting that it entered into the agreement in reliance on an untrue ‘outside-the-document’ representation. To maximize the prospect that such an assertion will be rejected by a court, a separate ‘nonreliance’ clause should be included in the contract.

Warranty provisions are likewise tricky. If you want a warranty, use warranty language. Drafters sometimes employ words like ‘promise’ or ‘guarantee’ to describe something they really intend to be a warranty, but failure to use the correct technical term can be fatal. Moreover, when drafting warranties that run in favor of the drafting party, attempts to overreach can backfire. Overly broad warranties that go beyond those set forth in the Uniform Commercial Code are sometimes deemed commercially unreasonable and unenforceable, leaving the party seeking warranty protection with fewer rights than narrower language would have afforded it.

Restrictive employment covenants and confidential information protection provisions also give rise to disputes, but good drafting can improve your odds of success. A drafter should avoid attempting to define every type of information as proprietary or confidential, as such breadth of definition, if rejected by a court, can void the provision. Likewise, drafting covenants not to compete that are overly harsh or excessive in duration or geographic scope can leave you without any valid competition restrictions. A reasonable restriction that is enforceable is better than an overbroad restriction that is struck down.

Where terms of form documents are ambiguous, outdated, confusing, incomplete or poorly worded, misunderstandings can arise, relationships can be undermined and litigation can ensue. For this reason, when it comes to scrutinizing documents, every sentence should be viewed as a potential source of trouble.

Michael A. Weinberg is a partner with the business litigation specialty firm Novack and Macey LLP. Reach him at (312) 419-6900 or [email protected]


How to make sure you are vetting job candidates legally

Jennifer Raymond, Partner, The Stolar Partnership

Historically, employers have learned about potential hires through applications, questionnaires, interviews, references and background checks.

That is changing, however, as more companies are beginning to use social media outlets to vet candidates. But while such sites can provide a lot of information about a candidate, it is important to understand the legal ramifications of researching a candidate online, says Jennifer Raymond, a partner with The Stolar Partnership.

“Employers are reporting that they’re making all sorts of employment-related decisions based on social media,” says Raymond. “But most employers don’t have targeted, written policies addressing what they’re doing with, and how they’re collecting, social media information.”

Smart Business spoke with Raymond about what is permissible when using social networking sites and credit checks to screen applicants, how to keep up to date with hiring practices and how to minimize legal risks.

What are the pros and cons of using social networking sites during the hiring process?

The pro is that you get information that you wouldn’t otherwise get from an interview or a resume. The con is that you get information you wouldn’t otherwise get from an interview or a resume.

You can find inaccuracies in a resume and information regarding a candidate’s judgment by screening social networking sites. But you also might learn information that is protected and wouldn’t normally be accessible to you as an employer, such as a person’s religious beliefs or someone’s health conditions.

You might also find information about someone who drinks alcohol or smokes cigarettes. However, some states, such as Illinois, have laws protecting legal recreational activities, and you can’t make a hiring decision based on that type of information.

What steps should employers take to minimize the legal risks associated with using social networking sites to screen potential employees?

Employers should have written policies governing the screening process that include, among other things, exactly which sites will be searched and who will be doing the searching. It’s critical to develop policies that include examples of what is, and what is not, permissible hiring criteria, acceptable conduct and appropriate information to consider in making hiring determinations. All personnel who will be participating in interviews or participating in hiring decisions should be trained on these policies.

These guidelines must be applied to every candidate. Employers may want to avoid sites such as Facebook because of the risk of finding protected information that a candidate might say was used impermissibly in making a hiring determination. Employers may wish to limit their search to professional sites such as LinkedIn, where they can verify resume information, as opposed to finding out personal, and possibly protected, information about candidates. And whoever is conducting the screening should never misrepresent his or her identity to gain unauthorized access to a candidate’s social networking information, such as by ‘friending’ the candidate or creating a fictitious profile.

Can an employer also reference a candidate’s credit report when making hiring decisions?

This area is in flux due to the downturn in the economy. It has become more of an issue because, for example, the credit score of someone who was laid off could have changed because of unemployment.

The Equal Employment Opportunity Commission (EEOC) and a number of states have been cracking down on an employer’s use of credit reports to make hiring decisions. And while looking at a credit report itself is not discriminatory, it can have a disparate impact on specific categories of people that are protected, such as African-American or female candidates, who may have lower credit scores based on social circumstances.

Not only has the EEOC been increasing its enforcement, but four states have enacted laws to prohibit employers from using credit reports in making hiring decisions, except in certain situations. And Missouri is considering legislation that would curtail the use of credit screenings in hiring decisions. There is even federal legislation that’s been introduced that would amend the Fair Credit Reporting Act and prohibit the use of credit reports, except in certain situations. A good rule of thumb is that if the position requires the candidate to handle money or other financially sensitive information, or if it’s a managerial or executive level position that involves signatory power, then it may be permissible to look at credit report information and use it to make determinations. However, for rank-and-file employees, making decisions on the basis of credit information can be very risky. And it’s going to become even more risky as other states, and potentially the federal government, pass this type of legislation.

If a candidate claims discrimination during the hiring process, how can a company protect itself against a lawsuit?

You’re not going to be able to stop someone from suing you, but you can demonstrate to the courts that you have written policies, that you’ve trained supervisors and decision-makers to follow them and that you have a documented screening process for candidates. This preparation will go a long way toward defeating claims that may be brought by a disgruntled candidate who feels that he or she was treated unfairly.

How can employers make sure they stay up to date with legal hiring practices?

There are human resources publications and websites that post updated information, such as the EEOC and the Department of Labor. But the best way to stay up to date and protect your company is to conduct a regular audit of your written employment policies — including hiring policies — and use the services of a qualified employment lawyer who can make sure you are in compliance.

Jennifer Raymond is a partner with The Stolar Partnership. Reach her at (314) 231-2800 or [email protected]


How to keep your company’s intellectual property safe

Donald Tarkington, Managing Partner, Novack and Macey

Ideas and closely held information, designs and processes are often a business’s most valuable assets, and the law provides companies with tools to protect those assets.

Patent, trademark and copyright laws are the most widely known ways to protect new ideas, but, while lesser known, the laws protecting trade secrets provide the better tool for companies to protect their confidential intellectual property.

“Protecting one’s valuable trade secrets is not only a good business practice, it is also often necessary to maintain the protections afforded by trade secret law,” says Donald Tarkington, the managing partner of Novack and Macey.

Smart Business spoke with Tarkington about how to protect trade secrets and how to make sure departing employees don’t walk out with valuable information.

What information is covered by trade secret protection?

Trade secrets can include technical or nontechnical data, compilations of information, marketing or financial data, manufacturing processes and lists of actual or potential customers. It covers virtually any information that is sufficiently secret that it derives economic value from the fact that it is not generally known and that the business makes a reasonable effort to keep confidential. Even information derived from public sources may be a trade secret if accumulating that information requires significant effort.

Courts look to six factors in evaluating whether information is a trade secret: the extent to which the information is known outside the employer’s business; the extent to which it is known by employees and others involved in the business; the extent of measures taken by the employer to guard the secrecy of the information; the value of the information to the employer and to its competitors; the amount of effort or money expended in developing the information; and the ease or difficulty with which the information could be properly acquired or duplicated.

Do trade secrets need to be registered?

Trade secrets are not registered like a trademark or copyright. Nor are they applied for as with a patent. Unlike ideas that are patented, trademarked or copyrighted — which are protected even though they are publicly known — trade secrets are protected because they are secret and because their secrecy makes the information valuable. As long as the information is secret, used in the business and valuable, it will be protected if the business takes reasonable steps to keep it confidential.

Why is it important for companies to protect their business practices, products, services or intellectual property?

Trade secrets are, by definition, confidential and valuable. They are assets and should be protected. Businesses should be no more tolerant of someone taking their trade secrets than they would be of someone walking out the door with a valuable piece of equipment.

Protecting trade secrets is also important to preserving a business’s legal rights. Under the Uniform Trade Secret Act, information is not a trade secret, regardless of how valuable it might be, if the business does not make reasonable efforts to protect its confidentiality. Businesses’s efforts to protect confidentiality don’t have to be perfect. What is reasonable will depend on the size and sophistication of the parties, as well as the relevant industry. But a business must take affirmative measures to protect the secrecy of its information.

How can businesses protect their trade secrets?

There are several measures a business can take, including marking information as confidential, keeping information in a secure place, restricting access to those who need to use it, password-protecting electronically stored information, developing policies that require employees to keep the information secret and requiring anyone with access to sign a confidentiality agreement. For particularly sensitive information, businesses should work with their data processing professionals to restrict offsite access to electronically stored information and limit the ability to download or copy information.

How can businesses ensure departing employees won’t take trade secrets with them?

As long as information qualifies as a trade secret, the law precludes employees from using that information after they leave. The best protection, however, is to require employees to sign confidentiality agreements in which they acknowledge that the information they were given is confidential and that they will not disclose it if they leave.

Confidentiality agreements can even protect information that does not meet the strict definition of a trade secret. When one employee with access to secret information leaves, disable his or her password and e-mail access and take back company issued laptops. It is also a good idea to review the usage logs on the employee’s laptop and the company’s computer network to see if there is any unusual copying or downloading activity.

If a nondisclosure agreement is violated, what steps should a company take?

If a business learns that someone is disclosing trade secrets to third parties, it should consider taking action against that individual and against the former employee’s new employer.  Possible actions include a suit for damages resulting from improper use of information and/or an injunction action against the former employee and new employer prohibiting the use or disclosure of the information.

Knowingly allowing trade secrets to be disclosed to third parties risks damaging a business’s claim that the information is a trade secret. Deciding whether to take action against a former employee or a new employer should be considered on a case-by-case basis, but one thing that should be taken into account is that allowing the trade secret to be disclosed could destroy the value of the information and destroy the business’s ability to seek protection of the information in the future.

Donald Tarkington is the managing partner of Novack and Macey. Reach him at (312) 419-6900 or [email protected]