The property tax bill comes in the mail, and you pay it. But do you ever really look at it to determine whether you are paying the right amount?

“Property tax on the real estate and personal property that you own or that you lease is part of the overhead of the operation of your business,” says Carl Rashid Jr., leader of the Property Tax Appeals practice group at Dykema Gossett PLLC. “You want to make sure you are paying your fair share of taxes, but you certainly don’t want to pay more than your fair share.”

Smart Business spoke with Rashid about how to make sure you’re not paying too much, and, if you are, how to return that money to your bottom line.

Why should business owners be concerned about their property tax bill?

Real estate values have declined in the last few years, making it a good time to review the amount of taxes that you are paying. If your property was formerly worth $1 million, and you know for a fact that you could not get $1 million for it now, you should not still be paying property taxes based on a $1 million value. If you are looking at the bottom line, as you should be, you have to look at every item of expense in your overhead, and this can certainly be a major one.

When your next tax assessment comes, consult with an adviser to determine if the amount you are paying could be

lower.

How can an adviser help lower the amount of property tax a business pays?

Once you’ve received the assessment — usually in February in Michigan — and want to determine if you may be paying too much, contact an attorney to begin the assessment process. The attorney will look at the assessment, look at what comparable properties are going for in the area where your business is located, and oftentimes consult with an appraiser to determine the value.

To assist the adviser in making an accurate assessment, the business owner should provide the notice of assessment; the previous year’s tax bills; any appraisal reports that they may have; the insurance value of the property, although that is not always indicative of the true value of the property; and, if it’s an income-producing property such as an office building, a shopping center or an apartment building, the financial statements from the previous three years.

From there, the adviser will undertake the appeal seeking to lower the appraised value of the property and file it with the appropriate state authority.

How can business owners identify the right lawyer for their needs?

Look at the years of experience and the adviser’s success rate. That person’s relationships with the taxing units in the state are also critical. If those working at the taxing units respect the adviser, they are going to sit down at the table and try to resolve the issues. If they don’t respect the adviser, or don’t have a previous relationship with him or her, it can significantly lower the chances of success.

How long does the process take?

It could be a very long process, as long as three years, because of the backlog the state is facing. During that time, the taxpayer will continue to pay at the assessed value. And if the value is found to be less than the assessment amount, the portion that was overpaid will be refunded when the case is over.

While the appeal is pending, the lawyer will amend the petition to make sure that subsequent tax years are involved. The attorney will also keep you informed of the progress of the appeal as it goes through the tax tribunal or court system, and of subsequent filings.

Then, once there is a hearing and judgment, or a settlement — and most cases are settled — the revised assessment becomes the taxable value. The taxable value is frozen at that number and can only be increased by what the Consumer Price Index is in Michigan, but not to exceed 5 percent.

Once an appeal is settled, can a taxpayer appeal again the following year?

Yes. If you settled at a lower number, and after that the market drops again, as it has in the past few years, your property may be worth less than the value determined when you filed the appeal. If you feel that is the case, it may be worth it to repeat the process.

How does the taxpayer pay the adviser?

The case can be paid on an hourly basis or on a contingent fee basis. A lot of clients prefer not to receive regular bills and would rather pay a percentage of the amount recovered. Some clients also believe that hiring someone on a contingency basis provides an added incentive for the adviser to get results.

Would you advise that every business hire someone to appeal its property taxes?

No. A business should only appeal if there is enough tax dollars at stake to make it worth the time and effort of both the business and the lawyer involved.

It’s really determined on a case-by-case basis. If the amount in dispute is minimal then it becomes a business decision that each owner has to make based on what he or she is comfortable with and whether it is worth it to engage the services of a lawyer.

Carl Rashid Jr. is leader of the Property Tax Appeals practice group at Dykema Gossett PLLC. Reach him at (313) 568-5422 or crashid@dykema.com.

Insights Legal Affairs is brought to you by Dykema Gossett PLLC

Published in Detroit
Thursday, 31 May 2012 20:00

How to respond to a class-action lawsuit

Your company has been hit with a class-action lawsuit. So what do you do next? The first thing is to remember that it’s not like other lawsuits you may have faced, says J. Kevin Snyder, leader of the Class Action Defense Practice Group at Dykema Gossett PLLC.

“There are a number of things a company should do when it is served with any lawsuit, including conducting a prompt investigation, implementing a litigation hold, and objectively evaluating the case,” Snyder says. “But for a class-action suit, there are a few things you need to add to that list as you develop a response to the complaint.”

Smart Business spoke with Snyder about how to respond to a class-action suit and steps you can take to stop a suit in its tracks.

What is a class-action lawsuit?

A class-action lawsuit is brought by one or more people on behalf of themselves and other similarly situated persons, typically against one defendant. The complaint must include a class definition that will identify the scope of those who fall within the class. For example, a class may be defined as ‘all New York residents who bought widgets from Acme Stores within the last four years.’

How should a business address a class-action lawsuit differently?

First, many class-action lawsuits involve consumers who have entered into contracts that provide for arbitration of their disputes. In a recent decision, the U.S. Supreme Court upheld the use of class action waivers in arbitration agreements. As a result, it is now more likely that a defendant will be able to require that the case proceed as an individual claim by way of arbitration, thereby avoiding the class action altogether. Defendants should carefully review the relevant contracts for arbitration clauses and then consider promptly enforcing those rights.

Second, while a defendant should always consider whether a case can be removed to federal court, there are benefits that are particularly important to defendants in class actions. It is therefore important in a class action to thoroughly consider all options for removal (diversity, federal question, pre-emption, etc.).

Finally, in addition to evaluating whether there are challenges to the sufficiency of the pleadings, in a class action one should also consider preemptively challenging whether the case is of the type that is suitable for class treatment. Courts are increasingly willing to entertain motions to strike or motions to ‘de-certify’ at an early stage and before the plaintiff moves for class certification. Once a defendant defeats the class claims, settlement is likely.

How can a business minimize the expense of responding to a class-action lawsuit?

Recognize that a significant number of class-action cases are filed by individuals who sincerely believe they have been unfairly treated by the defendant. Often, however, their only interaction was through customer service. Because a single person can bring a class action on behalf of thousands of unnamed persons who were ‘similarly situated’ the first thing a company can do to minimize the expense in a class-action suit is try to avoid it in the first place by having excellent customer service.

Once a suit has been filed, and your investigation completed, one should consider an early and informal fact exchange with the other side. I have resolved many class action cases at an early stage by sitting down with the opposing counsel, and explaining why I believe their case lacks merit. If you can, offer documents revealing holes in their case, and discuss other facts that might undermine their claims. If you can convince the opposing attorney that the suit is a long shot, that attorney is much more likely to abandon the case outright, or at least discuss an individual settlement in the early stages.

If you cannot dispose of the case at an early stage, recognize that most of your legal fees will typically come from discovery. You can minimize the costs of discovery by appointing a single contact person for your counsel to work with in locating relevant documents and witnesses. In addition, clients are often capable of doing much of the leg work themselves. Your attorneys don’t always have to be the ones to sort through boxes of documents or storage cabinets to find relevant materials. If you can do those things in house, you will generally save a significant amount of money.

What steps should a business take if its investigation reveals that the plaintiff’s claims have merit?

First, take steps to modify or stop whatever the practice is. You don’t want to continue a problematic policy or procedure, or continue manufacturing and selling a product that you’ve determined is defective or creates liability or exposure for you.

Second, explore settlement. If you are not concerned with follow on litigation, consider trying to settle the case on an individual basis. Alternatively, consider settling the case on a class wide basis by stipulating to certification for the purpose of settlement and negotiating an agreement that resolves the issue once and for all. If a decision is made to settle on a class basis, there are a number of ways to reach an agreement that fairly compensates the class while minimizing the economic impact on the client. It is far easier to structure a favorable settlement early on than after two or three years of heavily fought litigation.

J. Kevin Snyder is leader of the Class Action Defense Practice Group at Dykema Gossett PLLC. Reach him at (213) 457-1810 or ksnyder@dykema.com.

Insights Legal Affairs is brought to you by Dykema

Published in Los Angeles

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 TVaughn@dykema.com.

Published in Detroit

Understandably, the company mindset is always to be looking forward. So, when a company hits a milestone with a product it has had in the development pipeline for a lengthy period of time, the natural inclination is to pause (briefly) to celebrate the accomplishment, before turning attention to the next product. This pattern of constantly looking to the next and the newest challenge is essential to continued growth and innovation, but it is also the source of major problems when, after several years have passed since approval, a product becomes the focus of litigation that has the potential to sprawl into hundreds, even thousands, of cases.

This puts the company into “panic mode” as it is confronted with the need to make critical strategic decisions in a highly compressed period of time based on an overwhelming amount of fragmented and incomplete information — often with no reliable guide to explain the company mindset during the approval process and to shed light on why certain actions were taken while others were not. Litigation “time capsules” are a proactive step intended to help address this problem.

“Litigation time capsules are designed to capture relevant information and key documents, and to identify and clarify the mindset of decision-makers at the point when product milestones were achieved,” says Kevin M. Zielke, a member and the practice group leader for the Pharmaceutical and Medical Device Litigation practice group at Dykema Gossett PLLC. “All of this information would be captured while memories are fresh and documents are close at hand, and then would be stored away such that, if the product faced litigation down the line, the company would have ready access to it. Armed with this information, the company is in a much better position to make the important strategic decisions necessary so that it has the best prospects for litigation success.”

Smart Business spoke with Zielke about litigation time capsules and how they can help a company minimize litigation risk.

Why are litigation time capsules so useful and why don’t more companies utilize them?

The problem is that when something good happens — a new product has made it through the development pipeline to approval, for example — no one wants to spoil the party by raising the possibility of future litigation. That, however, is precisely the time when undertaking this effort is imperative. The ounce of prevention that a company gains by taking the additional time and effort necessary to work with its attorneys to develop these time capsules has the potential to provide pounds of cure when, in the event of litigation, the company can avoid being caught flat-footed by the informational disadvantage that often exists at the outset of litigation.

While these time capsules can prove enormously helpful in the products liability context, where the company faces the prospect of many lawsuits being brought relating to a particular issue, they can also be used when significant corporate transactions or real estate deals are concluded. Essentially, they provide a snapshot of the then-existing facts, circumstances, key players and driving forces at the time the product was approved or the deal was done.

Why are litigation time capsules so important for businesses to have now?

Today, the need for ready access to key information years after the milestone has been achieved is made all the more critical by two fairly recent developments. First, the ready availability of inexpensive and potentially limitless electronic storage means that those tasked with responding when litigation has been brought are confronted with a veritable ocean of potentially relevant materials that may be stored on hard drives, servers, backup discs, external drives, flash drives, cloud storage and the like. Second, the increasingly rootless nature of company personnel frequently means that those who were responsible for key decisions or who possess information necessary to effectively respond to the litigation are no longer with the company and not readily available to discuss these issues. As a result, capturing the most relevant materials and having immediate insight into the thinking at the time are essential.

What are the consequences of not appreciating these risks?

Now, perhaps more than ever, successful companies have to confront the fact that the litigation target is on their backs at all times, and have to build this sensibility into their culture by making it part of standard operating procedure. The failure to do so means the company will find itself forced to make key strategic decisions based on whatever information those charged with formulating the response were able to cobble together in the often highly compressed time frames found in the litigation context — after that the company will be largely locked into those early strategic decisions. That’s why litigation time capsules work so well: you can wrap your head around lawsuits and respond to them as quickly and efficiently as possible.

Kevin M. Zielke is a member and the practice group leader for the Pharmaceutical and Medical Device Litigation practice group at Dykema Gossett PLLC. Reach him at (313) 568-6908 or kzielke@dykema.com.

Published in Detroit

Every business, no matter how well it is run, faces the possibility of a lawsuit.

But there are steps you can take before that happens to position your company to prevail, says Thomas M. Hanson, a member of Dykema Gossett PLLC and head of the firm’s Dallas office financial services litigation practice.

“If you’re in business, litigation is not necessarily inevitable, but it is certainly a possibility,” Hanson says. “Every company needs to prepare for it, just as you would prepare for other contingencies that might affect your business.”

Smart Business spoke with Hanson about the policies you need to have in place and if, despite your best efforts, you are sued, the steps to take to lessen the pain.

What everyday practices can help minimize litigation costs and potential liability?

In litigation, documents generally carry the day. Most businesses utilize some type of standard form contract, such as purchase orders, sales orders, or a standard form employee/consultant agreement. Businesses need to review those forms on a regular basis to ensure they clearly lay out the terms of the contract. A manufacturing company might think, for example, that its sales order gives the buyer ten days to inspect the goods. But review the contract from the perspective of a judge who has no understanding of your industry. Will she read it the same way? If not, you should clarify the language and potentially save yourself many thousands of dollars in litigation costs, not to mention potential liability.

Significant litigation expense can also be avoided if you have a standard document retention policy. Every company should have one, particularly given the proliferation of e-mail communication. Whatever your policy — if e-mails are deleted every six months, every five years or never — it should be written down. When you get into litigation, courts are more and more interested in finding out what happened to electronic documents. If you have a standard policy and can show that a key e-mail in the case was deleted according to a standard policy, you’ll be in much better shape than if you have no policy and it looks like e-mails were deleted haphazardly. Again, this simple practice can not only save you from attorneys’ fees but also from potential liability.

What other steps should businesses take to protect themselves?

Another issue with standard contract terms and conditions is making sure employees are using them. Too often, there is a two-page contract; the first page has a purchase order and page two is the standard terms and conditions. But your employees may not bother to send that second page. Suddenly, the case-winning provision you were relying on may not be part of your contract at all.

Finally, proper insurance coverage can be a lifesaver if your company is sued. If you have coverage, the insurance company is not only obligated to pay damages assessed, but, even more important, it is generally obligated to defend you and pay your lawyers. It makes cases infinitely more resolvable if you have a policy that will cover all or some of the cost.

If, despite its best efforts, a business is sued, how should it approach that suit?

Again, documents are key. In particular, courts are cracking down on what happens to electronic documents after litigation commences. If your servers automatically delete e-mails at a set time period, you need to have your IT personnel stop the automated delete function for any potentially relevant electronic documents.

Take steps to collect documents that might be relevant right at the beginning, and make sure, in writing, to instruct any employee who might have relevant documents not to delete anything — not e-mails, spreadsheets or documents stored on their hard drives. If you don’t, some courts may severely punish even the innocuous destruction or deletion of relevant documents. Real-life horror stories exist of courts ordering monetary sanctions of tens or hundreds of thousands of dollars or (even worse) issuing instructions allowing a jury to infer that the destroyed documents were harmful to the company’s case.

Should companies consider alternatives to fighting in court?

Absolutely. There are many ways of trying to resolve a suit without going through a trial, even without invoking a formal litigation process.

Arbitration, especially for smaller disputes among smaller companies, can be a great forum. You have much more limited discovery and, generally, you’ll have an arbitrator who is much more informal and will allow the parties more flexibility to try to work things out on a reasonable schedule. Also, decisions reached in arbitration can generally not be appealed, which lends more finality to a judgment that might be reached in court.

The downside is that you’ll have to pay for arbitration services, but a case that might be a two-week jury trial may only be three or four days in arbitration due to the informality and the lack of dealing with a jury.

Is settlement sometimes a better option than fighting a lawsuit?

Yes. Businesspeople often take a sound, rational, economic approach to business matters until they get sued, then the gloves are off and they don’t care about the expense and just want to fight it. When passion takes over and you’re lashing out at the other side not because there is any long-term benefit but because you are outraged that you’ve been sued, you have to ask if this is the right business decision for your company. But if the answer is yes, and a principled stance is the best approach for the company’s long-term success, then stick to your guns.

Thomas M. Hanson is a member at Dykema Gossett PLLC. Reach him at (214) 462-6420 or thanson@dykema.com.

Published in Dallas

Last year, the landscape of privacy law changed on several different fronts, and if companies aren’t aware of those changes, they could find themselves at severe risk.

First, in terms of workplace privacy, the Supreme Court ruled in City of Ontario v. Quon that the Ontario, California Police Department did not violate the Fourth Amendment rights of a SWAT team member by reviewing personal text messages he sent and received on a department-issued pager. Significantly, the court declined to rule on the broader issue of whether employees have a reasonable expectation of privacy when using employer-provided equipment for personal communications. The court did provide a bit of guidance for employers by noting that “employer policies concerning communications will of course shape the reasonable expectations of their employees, especially to the extent that such policies are clearly communicated.”

Also, the FTC had a significant up-tick in its focus on privacy issues, including a very significant settlement with the social networking site Twitter and release of a proposed framework that would provide considerable clarification and guidance on issues of consumer data privacy.

“The third notable thing that occurred with privacy law in 2010 was the increased presence of plaintiff lawyers in the fray,” says Kit Winter, a member with Dykema Gossett PLLC. “We’re seeing more and more businesses being sued for violating consumer privacy rights.”

Smart Business spoke with Winter about these changes to privacy law and what companies can do to ensure they’re covered.

What are the primary areas of privacy law that businesses should be most concerned with?

The first is employee privacy in the workplace. Although the trend seems to favor employers, the Supreme Court’s decision in Quon leaves many questions open, making it especially critical to obtain appropriate legal advice when dealing with employees’ personal communications and information. For example, the New Jersey Supreme Court ruled in April 2010 that an employee had a reasonable expectation of privacy in personal e-mails sent via her employer-issued computer, even though the employer had a policy stating that the company could monitor such communications and that all e-mails were not to be considered private. The court found that because the employer’s privacy policy permitted ‘occasional’ personal use and did not specifically inform employees that the company stored copies of employees’ private Web-based e-mails, the policy was ambiguous and did not override the employee’s subjective expectation that her communications would be private. To avoid this sort of result, businesses should adopt and disclose detailed privacy policies, comply with those policies, and know the specific laws applicable to the locations in which they operate.

Protection of consumer data is another area of potential risk. There have been laws in effect at the state level for more than a decade that say businesses need to use reasonable measures to keep consumer electronic data private. In 2010 the FTC raised the bar on the understanding of ‘reasonable measures’ by bringing an action against Twitter alleging that it permitted users to select easily guessed passwords. Twitter settled the FTC action by, among other things, agreeing to permit the FTC to audit its privacy protection practices for the next 20 years. The FTC’s action against Twitter is a clear message that robust privacy measures are required to pass FTC muster.

How can companies protect themselves against privacy litigation?

The FTC’s proposed privacy framework provides some welcome guidance. In order to reduce the burden on consumers resulting from long, legalistic privacy policies and ensure basic privacy protections, the FTC recommends that ‘companies should adopt a “privacy by design” approach by building privacy protections into their everyday business practices.’ Companies can protect themselves by providing reasonable security for consumer data, limiting and monitoring collection and retention of such data, and implementing reasonable procedures to promote data accuracy. In order to accomplish these goals, companies should consider assigning personnel to oversee privacy issues and training employees in privacy practices, among other things. The FTC is also encouraging companies to broadly disclose their privacy policies and to honor consumer requests to opt out of information gathering procedures like click tracking.

The big picture is that it is increasingly imperative that companies accurately describe what information they collect and what they do with that information in a manner that can be easily understood by consumers. Companies cannot store consumer data in an unencrypted manner and they must implement vigorous security protection for all consumer data and information that they collect and store.

Going forward, what should businesses in particular be aware of?

The trend in the future is for increased regulation of privacy and businesses’ use of consumer data. For example, the FTC is proposing a universal opt-out provision akin to the Do Not Call Registry that would allow Internet users to opt out of being tracked by companies and advertisers. The FTC has also made clear that when a company makes representations about how it treats consumers’ personal information, it has to live up to those promises or face FTC action.

The landscape of privacy regulation is rapidly changing and companies need to carefully examine what consumer data they collect and how they use it in order to avoid potential liability.

Kit Winter is a member with Dykema Gossett PLLC. Reach him at (213) 457-1736 or kwinter@dykema.com.

Published in Los Angeles

For small to mid-sized businesses, there are three problems that seem to occur over and over again: not documenting the ownership interest of the company; not properly documenting the protection of the company’s trade secrets such as customer lists, business plans, and pricing information; and not properly documenting the ownership of the company’s intellectual property, such as source codes, formulas, inventions and patents.

“In a small to mid-sized business, it’s often important that things move quickly, so everyone is in a hurry to get things done, which means that some items get overlooked,” says Brian Colao, a member of Dykema Gossett PLLC. “But, in order to get solid advice on these issues, a company does not need to spend a lot of time or money — it just has to understand these issues and why they’re so important.”

Ignoring these issues could be catastrophic, says Colao, so a business would be well advised to make sure they have all their bases covered.

Smart Business spoke with Colao, about these three issues, the mistakes companies often make with them, and how to avoid making those mistakes in the first place.

What are the consequences of these kinds of errors?

For one, if you don’t properly document the ownership interest of the company, you could lose your ownership interest. Even if you’re the majority owner and think you’re protected, without proper documentation, your ownership stake is at risk. Also, I’ve seen situations where companies basically lost the right to protect their customer and pricing information, even though it had clearly been stolen, because they didn’t properly document it. And finally, I’ve seen instances where companies lost their IP rights, trademarks, patents and copyright information because they weren’t properly documented.

How can companies avoid these errors?

First and foremost, the company owners and leaders need to sit down with a lawyer they’re comfortable with and get a complete understanding of what their rights are and what needs to be documented. The cost to sit down with an attorney early on in the process is very modest, but if you just plow forward and ignore these things, the cost of trying to fix things after the fact can be huge. In many cases it’s the difference between a few hundred dollars up front to spending hundreds of thousands of dollars after a mistake is made.

What should a company look for in a lawyer?

You want someone who understands small and mid-market businesses and you want someone who can sit down with you in a non-judgmental way and take inventory of the entire situation — from an ownership standpoint, from an IP standpoint and from a customer and employee standpoint. Bottom line, you need a lawyer who can efficiently and effectively evaluate exactly what needs to happen to properly protect the rights of the company, its owners and all parties involved.

What are the smartest ‘recoveries’ that businesses can make?

If a business is operating right now and hasn’t properly documented everything, it’s never too late to go back and do that. In fact, it’s better to do that now and have those discussions before there’s a disaster. Get everyone together and document what the rights are for each and every party involved. Once a dispute happens, it’s almost impossible to do that. If you try to go and fix one of these issues after the fact, you’re going to spend a lot of time and money. And, in many cases, you won’t even be able to recover.

Again, the key is, if you have any doubts in your mind, sit down with a lawyer early in the process. Many lawyers will do an initial consultation for free, and the right lawyer can make a proper evaluation of your rights and save you a lot of trouble on the back end.

Are there any warning signs or things in particular companies should watch out for?

Never do business with partners or employees on a handshake. Things may seem great and they may indeed be fine for a certain period of time, but it is a recipe for disaster just to do business with shareholders, partners or employees on a handshake. If you are currently in a situation such as that, you need to evaluate and document everything.

Brian Colao is a member of Dykema Gossett PLLC. Reach him at (214) 462-6409 or bcolao@dykema.com.

Published in Dallas

Understandably, the company mindset is always to be looking forward. So, when a company hits a milestone with a product it has had in the development pipeline for a lengthy period of time, the natural inclination is to pause (briefly) to celebrate the accomplishment, before turning attention to the next product. This pattern of constantly looking to the next and the newest challenge is essential to continued growth and innovation, but it is also the source of major problems when, after several years have passed since approval, a product becomes the focus of litigation that has the potential to sprawl into hundreds, even thousands, of cases.

This puts the company into “panic mode” as it is confronted with the need to make critical strategic decisions in a highly compressed period of time based on an overwhelming amount of fragmented and incomplete information — often with no reliable guide to explain the company mindset during the approval process and to shed light on why certain actions were taken while others were not. Litigation “time capsules” are a proactive step intended to help address this problem.

“Litigation time capsules are designed to capture relevant information and key documents, and to identify and clarify the mindset of decision-makers at the point when product milestones were achieved,” says Kevin M. Zielke, a member and the practice group leader for the Pharmaceutical and Medical Device Litigation practice group at Dykema Gossett PLLC. “All of this information would be captured while memories are fresh and documents are close at hand, and then would be stored away such that, if the product faced litigation down the line, the company would have ready access to it. Armed with this information, the company is in a much better position to make the important strategic decisions necessary so that it has the best prospects for litigation success.”

Smart Business spoke with Zielke about litigation time capsules and how they can help a company minimize litigation risk.

Why are litigation time capsules so useful and why don’t more companies utilize them?

The problem is that when something good happens — a new product has made it through the development pipeline to approval, for example — no one wants to spoil the party by raising the possibility of future litigation. That, however, is precisely the time when undertaking this effort is imperative. The ounce of prevention that a company gains by taking the additional time and effort necessary to work with its attorneys to develop these time capsules has the potential to provide pounds of cure when, in the event of litigation, the company can avoid being caught flat-footed by the informational disadvantage that often exists at the outset of litigation.

While these time capsules can prove enormously helpful in the products liability context, where the company faces the prospect of many lawsuits being brought relating to a particular issue, they can also be used when significant corporate transactions or real estate deals are concluded. Essentially, they provide a snapshot of the then-existing facts, circumstances, key players and driving forces at the time the product was approved or the deal was done.

Why are litigation time capsules so important for businesses to have now?

Today, the need for ready access to key information years after the milestone has been achieved is made all the more critical by two fairly recent developments. First, the ready availability of inexpensive and potentially limitless electronic storage means that those tasked with responding when litigation has been brought are confronted with a veritable ocean of potentially relevant materials that may be stored on hard drives, servers, backup discs, external drives, flash drives, cloud storage and the like. Second, the increasingly rootless nature of company personnel frequently means that those who were responsible for key decisions or who possess information necessary to effectively respond to the litigation are no longer with the company and not readily available to discuss these issues. As a result, capturing the most relevant materials and having immediate insight into the thinking at the time are essential.

What are the consequences of not appreciating these risks?

Now, perhaps more than ever, successful companies have to confront the fact that the litigation target is on their backs at all times, and have to build this sensibility into their culture by making it part of standard operating procedure. The failure to do so means the company will find itself forced to make key strategic decisions based on whatever information those charged with formulating the response were able to cobble together in the often highly compressed time frames found in the litigation context — after that the company will be largely locked into those early strategic decisions. That’s why litigation time capsules work so well: you can wrap your head around lawsuits and respond to them as quickly and efficiently as possible.

Kevin M. Zielke is a member and the practice group leader for the Pharmaceutical and Medical Device Litigation practice group at Dykema Gossett PLLC. Reach him at (313) 568-6908 or kzielke@dykema.com.

Published in Detroit

In today’s innovative and fast-paced business world, companies have to do all they can to protect their assets, processes and products. This is why the protection of trade secrets is such a vital issue.

There are laws in most states that provide a legal definition of a trade secret. All are essentially the same; the main point is that trade secrets consist of information that derives independent, economic value from not being known to competitors or others that could use that information.

“In other words, a trade secret gets its value from not being known by someone who could benefit economically from knowing it,” says Allan Gabriel, a partner in the Los Angeles office of Dykema Gossett PLLC. “A trade secret gives you protection against others disclosing or using information that has value to your company.”

Smart Business spoke with Gabriel about what constitutes a trade secret and how a company can protect its vital intellectual property.

How do trade secrets differ from patents, trademarks and copyrights?

They differ in a number of ways, most of it having to do with what they protect. A trade secret protects know-how — how you do something. The classic example of this is the formula for Coca-Cola. Other examples include our recent success in protecting software code that processes online employment tests and a sophisticated process to design automotive components.

Patents protect inventions that are useful, not obvious, and novel or new. Trademarks protect brand names — the name the public identifies with the product. Coca-Cola is the brand name for a cola-flavored beverage. Copyrights protect the expression of ideas authored by someone and fixed in something tangible — a book, a movie, or a song, for example.

What elements of a business are eligible for trade secret protection?

A trade secret can cover a formula, a process, a method of doing something, certain customer and pricing information and manufacturing techniques. There’s no exclusive list of what can be covered — if information has independent economic value that is gained by keeping it private, it could be protectable as a trade secret.

How long does trade secret protection last?

Simply put, for as long as the information remains a secret. Take again the Coca-Cola example. The formula has been around for a long time and it’s never been disclosed, so it will remain a trade secret for as long as it’s kept private. There are stories about how the formula is locked in a vault somewhere and only a handful of people actually know it. As long as this is the case, that trade secret protection will last.

This is different from a copyright, which lasts for the life of the author plus 50 years. Eventually, books and movies go into the public domain and are no longer protected by copyrights. Take for example, the holiday movie “It’s a Wonderful Life” — no one owns the exclusive rights to it anymore, which is why you see it all over television in December. Patents, on the other hand, last at most for 20 years after the patent is filed, approved and granted.

How do the courts interpret trade secrets?

In order to establish that a business has a trade secret, it has to prove that it meets the legal definition of one. You can’t register for a trade secret and get a stamp of approval from the trade secret office. To prove that you have a trade secret, you have to show that the information in question derives independent, economic value from not being known and that the information is maintained in a secret and confidential manner. You can’t just claim something is secret if it truly isn’t.

Consider a company that claims that the identities of its customers are trade secrets. If that company posts a list of its biggest and best customers on its website, then the information is public and therefore not eligible to be a trade secret. On the other hand, if a company makes an esoteric product — maybe a particular part or electronic component — and it’s hard to tell exactly who would buy it or be able to use it, then the identities of those customers could be protected as a trade secret, since a competitor could benefit economically from knowing who those customers are.

Another interesting aspect of trade secrets is that they can be negative information, meaning they can cover what not to do. For example, if a company manufactures a particular device and has a facility that’s closed to the public, and that company has spent years figuring out what manufacturing techniques do and don’t work, information regarding the techniques that don’t work could be trade secrets.

How should confidentiality agreements be crafted to protect trade secrets?

While it’s always a good idea to have confidentiality agreements to ensure that employees keep information secret, trade secret law independent of confidentiality agreements provides such protection. For example, if I worked for Coca-Cola and was one of the few that knew the secret formula, I couldn’t legally just go to Pepsi and reveal that formula, regardless of whether or not I had signed a confidentiality agreement.

Still, confidentiality agreements are important because having them represents evidence that you truly have a trade secret. You are taking reasonable steps to designate, define and protect what you feel is a trade secret. However, make sure that your confidentiality agreements are not too overreaching — you can’t say everything is a secret, like an accounting firm saying that its use of Excel spreadsheets is a trade secret. Confidentiality agreements should be narrowly drawn, specific and understandable.

Allan Gabriel is a partner in the Los Angeles office of Dykema Gossett PLLC. Reach him at agabriel@dykema.com or (213) 457-1706.

Published in Los Angeles

Smart and savvy business owners are always prepared — in life and in death. They know that trusts are among the most valuable tools to ensure the future of their business and family.

But, even the best laid plans can face unexpected bumps. So what happens when a trustee or beneficiary needs to alter the language of an irrevocable trust and can’t turn to the settlor for help because he or she may now be deceased? The answer is a legal proceeding known as a trust reformation.

“Trust reformations, when done right, can add value and help solve present or future problems with the administration of the trust,” says Mark Sales, an equity member of Dykema Gossett PLLC. “If you properly plan, communicate and keep it friendly, both the trustees and beneficiaries benefit.”

Smart Business spoke with Sales about trust reformations, how they work and when and why they should be utilized.

What exactly are trust reformations and how do they work?

Typically, trust reformations involve modifying an irrevocable trust to address unanticipated changes that have occurred since its establishment or clarifying the language of the trust instrument for the benefit of trustees and beneficiaries. While you can’t change an irrevocable trust just because you want to, a court can reform a trust for valid reasons. The law governing trust modifications has become more relaxed in recent years and there are now numerous permissible reasons for seeking a reformation. As an example, maybe one of the trustees died and the trust didn’t provide a way for picking a successor trustee. Or perhaps there are so many trustees that administration of the trust has become unwieldy. There could be a change in family situation, like when the settlor’s daughter is a beneficiary, her husband is a trustee, and then the two get divorced. Or there could be a need to react to market and economic conditions, such as declining real estate or changes to tax laws. For instance, we recently handled a trust reformation that allowed the trustees to diversify assets and have more flexibility in making investments while providing some protection from litigation if the investments did not perform as expected.

There are many reasons to consider a trust reformation. If the trustees and beneficiaries are interested in saving taxes or trustee fees, protecting or enhancing trust assets, providing more flexibility on investment of assets, changing the distribution scheme set out in the trust instrument or avoiding potential litigation because the terms of the trust are vague, they should consult with their estate planners or financial advisers on whether trust reformation is appropriate.

What can cause a trust reformation to fall apart?

If you don’t think things through and get everyone involved on the same page, something that was intended to be a friendly way to add value to the trust can turn into hostile litigation. Lawyers working on a trust reformation not only need to know the substantive law and procedural rules that apply to these matters, but also need to be able to negotiate emotional issues that can arise among the parties involved in the reformation, who may come from complex family structures.

For example, we have worked on several trust reformations in which service of process was required on infant minor contingent beneficiaries. We were able to avoid a process server going to the home by having the non-interested parent (informed ahead of time) accept the service papers (which start out with the not-so-friendly introduction: ‘You have been sued’), and enter a voluntary consent to the reformation as next of friend to the minor. By doing this, we were able to avoid miscommunication and the cost and delay of having the court appoint an ad litem to represent the minor.

When everyone is on board and knows exactly what is being done, a trust reformation will achieve its desired results.

It’s also important to note that special rules apply in certain reformation proceedings. For instance, many trusts have charitable remainder beneficiaries. A settlor wants to cover his children and grandchildren, then distribute the remainder to Baylor Hospital. When doing a trust reformation in these cases, you must give notice to the attorney general of the State of Texas and obtain a response to file with the court — typically a written statement that the attorney general declines to get involved in the proceeding. If you don’t follow these rules, the trust reformation won’t be allowed. And sometimes timing is critical in getting a response from the attorney general, for instance to take advantage of changes in tax law. Having a working relationship with the attorney general’s office is essential to a successful reformation. Finally, reformations that try to take advantage of tax issues may need to be coordinated with obtaining a letter ruling from the IRS.

When a trust involves a family business or other income-producing assets, what issues can arise?

In many trusts, the family business is a key asset. If a trustee controls ownership of that family business through the trust, you can run into various problems, such as tax issues. Or if you’re the president of a company that’s held in a trust and you’re also one of the trustees, paying yourself a big salary or other benefits, another trustee or beneficiary may assert claims of self dealing, conflicts of interest and breach of fiduciary duty. A trust reformation can clarify what is or is not permitted, thus protecting against future litigation.

A different example is a family trust in which particular beneficiaries are minors who were not born when the trust was established or a class of individuals who may be born later. Yet their interests must be protected, and may actually not be the same as those of their parents. If the court appoints an ad litem to represent these minor or unborn contingent beneficiaries, the ad litem must agree to the trust reformation. It’s imperative to the success of the reformation that counsel communicate with all beneficiaries, including parents and ad litems who may be appointed, and make sure there is agreement.

Most important, if you’re going to do a trust reformation, do it for the right reasons, keep it friendly and civil and make sure the trustees, beneficiaries and all interested parties are on the same page. Then, all will gain that mutual benefit of a successful trust reformation.

Mark Sales is an equity member of Dykema Gossett PLLC. Reach him at (214) 462-6451 or msales@dykema.com.

Published in Dallas