Business leaders are usually pleased if they are asked to serve on a business’s board of directors.

They should be. Being asked to serve on a board of directors is a recognition that a business leader has achieved success and that he or she has valuable insights into how a business can be profitable. Nonetheless, business leaders should recognize that serving on a corporation’s board carries with it very real responsibilities and risks, says Tim Miller,  a partner at Novack and Macey LLP.

“If a board member fails to take the responsibilities of board membership seriously, and instead treats board memberships as an ‘honor’ without responsibilities, or as a chance to periodically play a round of golf with colleagues, it can lead to serious repercussions,” says Miller.

Smart Business spoke with Miller about how to protect yourself should you agree to serve on a board.

What are some potential repercussions of failing to take seriously the responsibilities of being a board member?

A director could be sued for millions of dollars in damages. There are actions filed every day in this country in which stockholders allege that a director breached his or her duties and that this breach cost a company millions of dollars.

Ironically, such suits are filed even when a company is successful; sometimes these suits allege that the company should have been more successful. Even if such a case is meritless, it can cost a lot of time and money in attorneys’ fees to defeat it. In other cases, governmental entities can seek civil or criminal penalties against directors.

Don’t most corporations indemnify board members against losses from such suits?

Yes, most companies agree to indemnify board members against loss suffered by reason of serving as a board member. But if a board member is found to have not acted in good faith, he or she may lose the right to indemnification. And if a corporation becomes insolvent, its promise to indemnify its directors is not worth very much.

Even if a corporation is insolvent, doesn’t insurance protect board members?

Insurance may protect a corporate director. But insurance policies are usually written with exclusions that may leave a director uninsured against particular types of suits.

For example, many policies have an ‘insured v. insured’ exception.  If the stock of an insolvent corporation is sold, new management may decide to sue the directors who controlled the company when it became insolvent. In such a situation, the suit may not be insured. Moreover, penalties are usually not insured against.

All of this means that somebody who agrees to serve as a corporate director should try to do the job he or she has agreed to accept.

What duties does a board member have?

A director’s duties differ depending on the state where a business is incorporated, but usually directors are said to owe duties of care and loyalty.

What is the duty of care?

Just as it sounds, the duty of care requires directors to carefully act on behalf of the corporation. As the standard is usually formulated, the duty of care requires that the directors exercise the same degree of care that a prudent person would exercise in the management of his or her own business.

Among other things, this means that directors should attend board meetings, inform themselves of facts necessary to make decisions, exercise their judgment and make prudent decisions.

One of the more important aspects of the duty of care is that a director should make certain that he or she has adequate information to decide matters that come before the board. For example, if asked to approve of a corporation going into a new business, the director should make sure that he or she understands enough to make an informed decision about whether it is wise for the corporation to take such a significant step.

Frequently, rosy forecasts of future profits can distract from the need to be fully informed of risks before making a decision. A director may need to question management, test the assumptions underlying projections, consider what will happen if something goes wrong and ask how risks can be mitigated to make a reasoned decision.

In other words, a director should act as though the consequences of a decision is his or her responsibility — because it is.

What does the duty of loyalty involve?

The duty of loyalty requires that directors act in the best interests of the corporation — not their own best interests. Thus, for example, if a director learns of a business opportunity, he or she may need to refer it to the corporation and not exploit it for the director’s own benefit.

The duty of loyalty also means that, in situations in which matters are brought before the board and a director has a conflict of interest, he or she should recuse him or herself from the decision. For example, if the corporation is going to retain another business in which a director is interested, the director should disclose the conflict and should not vote on that matter. Indeed, the director should attempt to cause the minutes to reflect that he or she has not participated in a decision that could benefit him or her.

Does all of this mean that somebody should turn down a directorship if offered?

No. It means that those offered a directorship should think very carefully about what being a director means and should not accept the role unless they are willing to take it very seriously.

Tim Miller is a partner at Novack and Macey LLP. Reach him at (312) 419-6900 or tmiller@novackmacey.com.

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Published in Chicago

Over the past two decades, more and more businesses are including arbitration provisions in their contracts with vendors, suppliers, employees and other counterparties. Behind this trend is the fact that the court system can be slow, cumbersome, very expensive and confusing to business managers. Arbitration generally cuts through all this and delivers a result much quicker and at a lower dollar cost, facilitating decision making by managers because disputes are resolved faster.

However, including arbitration clauses in contracts is not always the right call, says Eric N. Macey, a founding partner at Novack and Macey LLP.

“While arbitration is generally quicker and more cost effective, that is not always the case, and arbitration results are not necessarily generally better,” says Macey. “In fact, they can be very, very mixed.

Smart Business spoke with Macey about the problems that can arise with arbitration and how to avoid them.

What kinds of problems are inherent to arbitration that aren’t necessarily present in a typical court case?

One is the issue of what I call ‘rent-a-judge.’ When you file a lawsuit, the court system assigns a judge to your case, and you don’t pay for that judge. In arbitration, if the parties don’t agree on an arbitrator, you have to have some method to select that person. This can be set out in your contract’s arbitration provision, or you can use third-parties such as JAMS or the American Arbitration System to select an arbitrator.

Sometimes the selection of the arbitrator becomes a long, drawn-out dispute in itself. Moreover, you and your adversary have to pay the arbitrator for his or her time. And in some instances, your arbitration may call for three arbitrators — one selected by you, one selected by your adversary and the third selected by the chosen arbitrators. Now you are contributing to the fees of three arbitrators, and they typically are not inexpensive.

What other problems can arise?

Another concern is that court proceedings offer you a full range of procedural safeguards that you don’t have in arbitrations. There are no rules of evidence in arbitration, and there are no rigorous procedural rules for pretrial disclosures, which can create significant problems.

For example, you don’t necessarily have the right to take depositions of individuals involved in the dispute in arbitrations. Consequently, you can get to the hearing and have no idea what that individual is going to say if he or she is called by your adversary as a witness. This wouldn’t happen in a court proceeding.

Another example is the issue of hearsay. Hearsay is just ‘rumor’ testimony, that is, what someone else told you, and under the rules of evidence, hearsay is inadmissible. The person who told you something must be the one to testify about it. An arbitrator or panel of arbitrators are not bound by these rules of evidence, so they are free to admit hearsay.

Thus, in an arbitration, if your opponent testifies that a supplier in China said one of your managers did something that hurts your case, that testimony may be admissible. A court would doubtfully admit such testimony.

If the arbitrator or arbitration panel makes a mistake, can you appeal, as with a court decision?

Yes, but the rules for modifying or vacating an arbitration award are very, very limited. Courts favor arbitration and give arbitrators a lot of deference in upholding their awards. It typically is not up to a court to determine whether the arbitrator followed rules of evidence or procedure, or even followed the law. What matters to a court reviewing an arbitration award is whether the award was within the scope of the arbitrator’s authority set out in the parties’ contract and whether the award is reasonably consistent with the terms of the contract.

When should businesses include arbitration provisions in their contracts and when should they keep them out?

As a rule of thumb, the more sophisticated the contractual relationship, the less likely I would want to include an arbitration provision. For example, if you are hiring a new CFO and negotiating a three-year employment contract, an arbitration provision makes sense. Alternatively, if you are selling a product line or division with innumerable financial terms and warranties and representations, I would leave out the arbitration provision.

Here is another example. If I am entering a one-off contract to buy product that is not cost prohibitive, I would include an arbitration clause, but if it is a contract to purchase variable amounts of a product over time that is integral to my business with fluctuating pricing and quality standards, I would opt to keep the clause out.

What can business managers do to avoid some of the problems you have raised?

Arbitration is based on a private contractual relationship. The key issue, then, is the arbitration provision in your contract. That provision governs your entire arbitration process. So when you are negotiating the contract, don’t just add a standard arbitration provision and think everything will take care of itself, because it won’t.

You need to consider whether the provision covers such things as the selection of arbitrators, the location of the arbitration, whether any pretrial procedures should be included, whether the provision should prevent the arbitrator from issuing awards for punitive damages or loss profits, whether the arbitrator has to provide reasons for his or her decision and how quickly the arbitrator must render his or her award. These are just some of the items that need to be thought through as part of an arbitration provision.

Eric N. Macey is a founding partner at Novack and Macey LLP. Reach him at (312) 419-6900 or emacey@novackmacey.com.

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Published in Chicago

For a company that depends on the confidentiality of its intellectual property, protecting its trade secrets during litigation may be as important, if not more important, than succeeding in the litigation itself.

“Whether the company is a plaintiff or a defendant in litigation, depending on the scope of the case, its trade secret information may be discoverable,” says Joshua E. Liebman, an attorney at Novack and Macey LLP.  “In fact, in some instances, a company may be required to disclose its valuable trade secrets to one of its direct competitors.”

Smart Business spoke with Liebman about how to protect trade secrets during litigation.

What are trade secrets?

To paraphrase Section 1(4) of the Uniform Trade Secrets Act — which has been adopted by most states — a trade secret is information that derives independent economic value from not being generally known to other persons and that is the subject of efforts that are reasonable under the circumstances to maintain their secrecy. It is important to remember that both elements must be met for information to be classified as a trade secret.

In other words, although a customer list that is developed over two decades and that identifies particular needs and price points for each customer clearly provides its owner with economic value, it is a trade secret only if its owner takes reasonable steps to keep the list secret.

Why would a party be required to disclose its trade secrets?

Trade secrets will almost always be disclosed by a party prosecuting a claim for either misappropriation of trade secrets or breach of a confidentiality agreement involving trade secrets.  In addition to those two obvious examples, trade secret information could be responsive to discovery requests served in any other breach of contract or business tort case.

Generally, courts permit broad discovery and require parties to produce documents and other potential evidence that are relevant to any party’s claim or defense, even if the potential evidence constitutes a trade secret. As a result, a defendant company may not only find itself in a lawsuit that it did not initiate but also in a position where it is forced to produce trade secret information to its competitor.

What can a company do to protect its trade secret information from disclosure?

The first step is to identify what it considers to be trade secret information. Once the trade secrets are identified, the company’s attorney should closely scrutinize the discovery requests to determine whether the trade secrets are responsive to the requests. If the information is not responsive, it does not have to be produced.

If the attorney determines that the trade secret information is responsive to one or more requests, he or she should analyze whether there are proper grounds for objecting to those requests. Objecting on the basis that the information requested is confidential or a trade secret is not permitted. Instead, a valid objection is that the discovery request is overly broad because a complete response thereto would require the production of information that is not relevant to any of the parties’ claims or defenses.

Once an objection is made, the attorneys may try to negotiate a limitation on the discovery request. If the attorneys cannot reach an agreement, then the party that served the request can ask the court to intervene by filing a motion to compel the production of documents or other information.

If a company’s attorney or the court determines that trade secret information is responsive to a discovery request and no objection applies, then the information must be produced. However, the information can be protected through the entry of a protective order, which prohibits the use of the disclosed information for any purpose other than the litigation in which it was produced.

How does a protective order work?

Generally, parties negotiate and agree to the terms of a protective order. In some instances, certain provisions of the protective order may be in dispute and require court intervention.In either case, the court must approve of the terms and enter the order so that it is a court order that can be enforced against anyone who breaches it.

Although protective orders vary, typically they divide protected information into two categories: confidential information and attorneys’ eyes only information. Confidential information usually can be shared with the court (but only under seal), counsel for the parties to the litigation and their legal staffs, expert witnesses or consultants retained by the parties, deponents in the litigation and the parties themselves. Most protective orders require expert witnesses, consultants and deponents to sign acknowledgements consenting to be bound by the terms of the protective order prior to reviewing confidential information.

By contrast, attorneys’ eyes only information generally can only be shared with counsel for the parties to the litigation. Highly sensitive and/or competitive information that a company does not want its opponent to access should be designated as attorneys’ eyes only.

That designation, however, should be used sparingly. It places a heavy burden on the attorney reviewing the information because he or she cannot consult with the client to determine whether the information is relevant, accurate or complete. Accordingly, a blanket attorneys’ eyes only designation likely will invoke an objection to the designation, which may result in loss of the heightened protection necessary for the information that truly is a trade secret.

Protective orders generally require protected information to be returned or destroyed at the end or litigation. A party concerned about its opponent using its trade secrets at the close of litigation should demand a signed verification that all protected information, including electronic and hard copies thereof, has been destroyed.

Joshua E. Liebman is an attorney at Novack and Macey LLP. Reach him at (312) 419-6900 or JLiebman@novackmacey.com.

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Published in Chicago

In the Information Age, every business has a website that is available to any person in the world who points a Web browser to its address. As a result, businesses must understand how to create an online presence that enables customers to find them and distinguish them from their competitors.

“Basic knowledge concerning trademark rights, website addresses and how they work together is key for any business in establishing and defending its online identity,” says John Haarlow, Jr., an attorney at Novack and Macey LLP.

Smart Business spoke with Haarlow about how to establish a strong Web presence.

What is a trademark?

The term trademark generally refers to a name or symbol used to identify a business or the goods and services it provides. For example, the name Nike and its swoosh symbol are both identified with Nike Inc. The concept of trademarks recognizes that consumers associate symbols and words with particular businesses, goods and services. One reason trademark law exists is to prevent consumer confusion caused by the use of similar words or symbols in association with competing or related goods.

What is a registered trademark?

A registered trademark is a mark that has completed the federal registration process before the U.S. Patent and Trademark Office. During registration, the proposed registered trademark must pass various substantive standards, such as not creating a likelihood of confusion with other registered trademarks for related goods or services. Registration does not require the assistance of an attorney, but one can be helpful during the process.

Why should a trademark be registered?

Every trademark used grants some rights automatically, including the exclusive right to use the mark within the user’s geographic market area. However, federal registration provides a more powerful group of rights, such as exclusive use of the mark in commerce nationwide in connection with the registered goods and services, so other businesses cannot use a similar mark in connection with similar goods or services. A registered trademark also provides notice to others that it is in use, making it is less likely that they will adopt or register similar marks. Should a controversy arise, a registered trademark enjoys a presumption of validity in litigation.

What is the connection between a trademark and a website?

When looking for a particular company or product website, many consumers expect that typing the company or product name, followed by .com in a browser’s address bar will take them to the right place. Thus, owning a domain name that corresponds with a trademark designating the name of a business or product is likely to make it easier for consumers to find them on the Web.

If possible, every business should own domain names corresponding with both its name and its products’ names. Consider registering multiple domain names to increase the chances consumers find your business or product on the Web and reduce the chances that others might obtain similar domain names.

How do companies obtain domain names?

It is easy to find one of the many companies that provide domain name registration. What can be difficult is finding an available domain name, as registration is on a first-come, first-served basis. Thus, while Delta Air Lines and Delta Faucet Co. can coexist in the marketplace because they sell different goods and services, only one of them can own delta.com. Moreover, owning trademark or other rights to a name is not a prerequisite for registration.

Anyone can register any domain name, regardless of whether he or she has recognized rights to the words registered. While there are legal remedies for cybersquatting — the improper registration of a domain name that is the same as or similar to a trademark with the bad faith intent to profit — they require resources that are not available to all businesses. As a result, the availability of domain names should be a consideration when choosing the name for a new product or business.

How does trademark registration help a business defend its rights on the Internet?

A federally registered trademark provides the exclusive right to use the mark nationwide. Thus, a domain name cannot use a registered trademark in a way that is likely to cause confusion between the domain name and the mark. In such circumstances, the holder of the federal registration will most likely be able to force the owner of the website to relinquish all rights to the offending domain name. This is true even when the two businesses use the marks at bricks-and-mortar locations in two different geographical areas.

For example, assume that the fictitious Beta Widget Co., marketing its products at beta.com, sells widgets in stores in Illinois and Wisconsin and obtains a registered trademark for the use of Beta in connection with widgets. Subsequently, Gamma Widget Co. begins selling a new line of widgets in North and South Dakota that it calls Beta Widgets and launches the website betawidgets.com. Consumers looking for Beta’s widgets might type betawidgets.com into their browsers, only to find themselves at Gamma’s website and be confused as to the source of the goods.

Should this chain of events come to pass, Beta would likely be successful in forcing Gamma to cease using the name Beta Widgets to refer to its new widget line and would likely be able to force Gamma to stop using the betawidgets.com website. However, if Beta did not have registered rights, these remedies would be in far greater doubt because only registered rights provide a national right to exclude, precluding Gamma from mounting a defense on the basis of the two companies’ distinct markets.

John Haarlow, Jr. is a commercial litigation and intellectual property attorney with Novack and Macey LLP. Reach him at (312) 419-6900 or jhaarlow@novackmacey.com.

Insights Legal Affairs is brought to you by Novack and Macey LLP

Published in Chicago
Saturday, 30 June 2012 21:01

How to prepare for a deposition

Although depositions may seem like they are less formal than a trial, they are a critical part of a lawsuit. The answers given at a deposition are legal testimony and, in essence, it is no different from testifying in court.

“A lawyer is entitled to depose an opposing party and all witnesses with knowledge relevant to the lawsuit,” says Andrew Fleming, a partner at Novack and Macey LLP. “Typically, depositions are conducted at the office of the attorney taking the deposition, and the witness is placed under oath to answer questions.”

Smart Business spoke with Fleming about how to properly prepare for a deposition for the best possible outcome.

What is the purpose of a deposition?

Depositions have two primary purposes. First, the examining lawyer often will use the deposition to learn the facts relevant to the case. For example, in a typical breach-of-contract case, the plaintiff’s lawyer asks a series of questions designed to determine if, in fact, the contract was breached. In that regard, the examining lawyer will depose the parties and other witnesses involved in the transaction to discover what each person involved in performing the contract did or did not do. The process provides a very important and useful procedure for obtaining evidence.

Second, a deposition gives the examining lawyer an opportunity to obtain admissions that support his or her case. To obtain this information, examining lawyers frequently use cross-examination techniques when questioning a witness.  In many instances, cases can be won or lost at the deposition stage, and as a result, thorough preparation is key.

How can a witness prepare for a deposition?

One of the most important things that a witness must do is to understand the deposition process and make sure that he or she is comfortable with testifying. A witness must first become familiar with the pertinent facts of the case.  Oftentimes, this requires a review of the documents relevant to the dispute, such as emails, correspondence, contracts and the like.

Next, the witness needs to review with his or her attorney the ground rules for the deposition — rules that are very important no matter what the case involves. Often, it helps to go through a mock deposition with the attorney to not only become more comfortable with the deposition process but also to give the witness and the attorney a chance to identify and correct bad habits before the deposition takes place.

What are some key deposition ground rules?

The first rule to make sure the witness understands that every question must be answered truthfully. If it is not, the witness may be subject to sanctions and criminal penalties. The witness must also listen carefully to the question and answer only the question that is being asked. Also, as a general rule, witnesses should not guess at an answer.

While these may sound like straightforward rules, they are easier said than done. It takes tremendous concentration and focus to sit for hours and answer only the questions that are being asked. And while it is natural during a normal day-to-day conversation for people to assume that certain events have occurred and to speak about them as if they have, in the deposition setting, it is important that a witness focus only on what he or she actually knows has occurred.

What are some common mistakes made during depositions and how can they be avoided?

In addition to losing concentration and guessing, mistakes frequently occur when a witness is shown a document and asked questions about it. All too often, witnesses will not read the document at the deposition even though they are asked to do so by the examining lawyer. Instead, they will skim through the document thinking they know what it says.

But, often in this situation, a witness will give inaccurate testimony when questioned about the meaning of a particular document. And worse, the examining attorney might exploit this mistake by getting the witness to agree to a particular spin that he or she places on the meaning of the document — a spin that is always in favor of the examining lawyer’s client.

It is easy to avoid this mistake. When asked to read a document at a deposition, a witness should slow down and do just that: Read the document.

In addition, a witness should never let the examining lawyer put words in his mouth. Be especially alert when asked typical cross-examination questions because those are invariably designed to get the witness to agree with the examining lawyer’s view of the case. These questions are not hard to spot, as they usually begin with phrases such as, ‘Isn’t it fair to say?’ Or, ‘Wouldn’t you agree that?’ When you hear such questions, think long and hard before answering, and resist the urge to casually agree with the examining lawyer.

What other traps should a witness look out for?

An examining lawyer will be so cordial that the witness may think the deposition is just a friendly conversation. This is not so. Even though such depositions are more pleasant, a witness must still not let his or her guard down and must always follow the rules discussed.

On the flip side, examining lawyers take a more aggressive approach at depositions, to the point of making the deposition an unpleasant experience. It is important in these situations that the witness maintain a calm demeanor. Becoming upset or even angry at an examining lawyer because of the manner in which he or she is asking questions can never benefit the witness. In fact, if you allow yourself to get upset, you often can lose your concentration and break some of the rules discussed. That is why it is always important that the witness maintain a calm and professional demeanor at the deposition, no matter how the examining lawyer behaves.

Andrew Fleming is a partner at Novack and Macey LLP. Reach him at (312) 419-6900 or andrewf@novackmacey.com.

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Published in Chicago

When a contract involves a large sum of money or is otherwise important, it is imperative that you get a lawyer involved to solidify the contract’s enforceability and to ensure that the contract accurately reflects the parties’ agreement.

Of course, it’s not always realistic or cost effective for businesses to hire a lawyer to review every contract involving low stakes. For example, if a business is changing suppliers in order to save a modest amount of money, hiring a lawyer to review the contract could eliminate some (or all) of the cost savings.

“And, if it turns out that the contract the parties signed is unenforceable or somehow defective, it’s usually not a huge problem because the deal itself was not that important to the company in the first place,” says Adam Waskowski, attorney with Novack and Macey LLP. “That’s why the company didn’t hire a lawyer to begin with.”

When businesses go it alone in preparing their contracts, there are some steps they can take to avoid turning a small deal into a big headache.

Smart Business spoke with Waskowski about the measures that can help businesses avoid signing contracts with unintended consequences.

Can companies just use language from old contracts?

No. Don’t do this. Sometimes businesses try to create new contracts using templates from previous deals or, worse yet, from Internet forms. For example, they might pull up Word versions of old draft contracts, change the parties’ names, make what they think are minor revisions (usually at the other parties’ request) and then sign the documents.

However, when people attempt to do this, they rarely get it right, and sometimes inadvertently include terms that they didn’t agree to — or delete terms they meant to keep in. Changing just one word of a contract — or even using a word differently in part of the contract than it is used in another part — can drastically change the contract’s legal effect. Accordingly, to draft a legal contract, you really need to know what you are doing.

So if businesses shouldn’t use forms, and the deal doesn’t justify hiring an attorney, what should it do?

You can do the deal if it makes business sense. Just don’t sign anything you don’t understand. In most situations, you don’t need a formal document containing specific fine print and legalese in order to form a contract. The best thing to do — if you must enter into a contract without getting a lawyer involved — is to simply memorialize in writing what you think are the really important terms and have both parties sign the document.

In most cases, these terms include, without limitation, price, quantity and timing.  For example, if you are looking to purchase 1,000 widgets for $1,000 each, to be of some quality recognized in your industry, and you need the widgets delivered to your place of business by April 1, 2013, it is probably sufficient to prepare something that says:  ‘This confirms that [Name of seller] will sell [name of buyer] 1,000 widgets for $1,000 each. The widgets shall be delivered to [place of business] by April 1, 2013, and shall be of [insert industry standard] quality.’ If both parties sign a document agreeing to these terms, that’s likely sufficient.

Likewise, in a contract to provide services, the important terms might include the services to be provided, the time that the services will be provided, the person who will provide the services (if this is important), and the cost of the services. This process is not, however, foolproof. It may not result in an enforceable contract.  But piecing together old forms of contracts won’t necessarily create an enforceable contract either. And by keeping things simple — and using language you understand — you will avoid agreeing to terms by which you did not intend to be bound. In most cases where the stakes are low, it’s better to enter into an unenforceable contract than to inadvertently enter into, for example, a 10-year exclusive contract when you thought the contract would be terminable at any time.

Can a person who has negotiated numerous similar contracts before just use forms?

You should be careful, especially if you are modifying the form or entering into a deal that differs from the previous deals. Lawyers aren’t geniuses, but reading legal documents is a very specific skill set that takes experience and training to do competently. In some respects, legal contracts are a bit like computer programming. One small change to the code can drastically change — or wreck — the program.

What if the other side proposes a contract containing lots of fine print?

In most cases, you shouldn’t approve the fine print — especially clauses that you don’t think you completely understand — without having an attorney review it, at least briefly. As a business litigator, I’ve frequently represented clients who signed contracts that they believed were ‘small’ deals where the underlying contract — unbeknownst to the client — provided for automatic renewals, longer or different contractual terms than the parties discussed, severe penalties for early termination, one-sided attorneys’ fees provisions (where you pay the other side’s attorneys’ fees if they win a lawsuit over the contract, but the other side does not pay your fees if you win), and so on.

If you want to do the deal without having an attorney review the written contract, I’d suggest crossing out the fine print if you have bargaining power. There are very few times when all that fine print is really necessary, especially if someone is trying to win your business. The fine print is invariably just a bunch of very one-sided provisions favoring the party that drafted it.

What if the signed contract contradicts earlier agreements?

You are probably stuck with the terms of the written contract. The written contract is the deal, notwithstanding what you think you’ve agreed to.

Adam Waskowski is an attorney with Novack and Macey LLP. Reach him at (312) 419-6900 or awaskowski@novackmacey.com.

Insights Legal Affairs is brought to you by Novack and Macey LLP

Published in Chicago
Wednesday, 05 October 2011 17:05

Don’t let technology changes put you at risk

As technology becomes an ever-increasing part of most businesses, so does the need to become more sophisticated on issues regarding intellectual property ? patents, trademarks and copyrights.

“An electronic process now can be easily patented,” says Eric Macey, partner in Novack and Macey LLP. “Because technology is claiming more of business, you have to become more familiar with it, because you are consistently signing license agreements to do business, and you are consistently getting rights to use technology in a certain way from people who hold patents.”

You have to make sure you know that what you’re doing is consistent with the law, particularly when you are outsourcing, a practice which is growing because of the cost benefits and flexibility that it can offer.

“When you outsource, you enter into contractual relationships that involve technology, which may involve patent rights, trademark rights and other rights,” Macey says. “You have to understand that you can’t just look at a form agreement and sign it. It’s not a simple purchase order. It’s not like that anymore.”

For instance, a company may outsource its website to a Web developer, and the site will offer items for sale from your inventory and provide for e-commerce sales. You may want your employees to have access to the site which may add to potential problems.

“You sign some agreement that has all kinds of information on it, on copyrights and patents that this company has that you can’t use and you can’t disclose and things like that,” Macey says. “I think in the old days you just signed them and didn’t read the fine print, but I think it has greater implications now because there is greater liability than you had before.”

Eric Macey, partner in Novack and Macey LLP, is a co-founder of the firm. He focuses on areas such as arbitration, business torts, class-action defense, commercial litigation, employment law, financial services and others. He has a clientele consisting of a wide range of business corporations and institutions, investment ventures, partnerships, and individuals. Macey has extensive trial experience in state and federal courts throughout the country and has acted as both an arbitrator and mediator in alternative dispute resolution settings.

Published in Chicago

When a dispute occurs between businesses, it is not uncommon for one of the parties to turn to the court system for resolution in the form of a lawsuit. However, there is an alternative method to resolving legal issues that can save you both time and money.

Alternative dispute resolution, or ADR, is a process in which legal disputes are resolved by trained mediators or arbitrators rather than a judge. Under certain circumstances, ADR can be used to settle disputes more quickly and less expensively than if they were decided in litigation. ADR also provides the parties with greater privacy because proceedings are not taking place in a public forum.

“Privacy is one of the principal advantages of arbitration or mediation over litigation,” says Stephen J. Siegel, a partner with Novack and Macey LLP.

Smart Business spoke with Siegel about how ADR can benefit your business and when it is an appropriate choice for dispute resolution.

What are the most commonly used forms of ADR?

The two principal forms of ADR in the United States are arbitration and mediation. Arbitration is similar in some respects to litigation.  Both are adversarial processes in which the parties offer evidence and arguments to try to obtain a favorable binding ruling from a neutral decision-maker.

But, arbitration is different from litigation in several key respects. Unlike in the court system, the parties typically participate in selecting one or more of the arbitrators. Also, there are only a handful of grounds on which you can try to overturn an arbitration award and these are very hard to establish. In addition, U.S. arbitrations are generally resolved in less than a year, whereas it often takes several years to get a decision ‘on the merits’ in business litigation. Finally, on average, there is less discovery and less motion practice in arbitration than in litigation.

Mediation is quite different from arbitration and from litigation. First, though mediations are sometimes contentious and have adversarial elements, a successful mediation requires the parties to collaborate with a neutral mediator and one another to negotiate an agreed resolution to the dispute.  Second, there are fewer rules in mediation and generally, the mediator and parties are free to design the process to suit their needs. Third, if settlement efforts fail, a mediation does not commonly lead to any sort of binding ruling.

Under what instances is it most appropriate to use ADR?

Arbitration and mediation are tools. They are helpful if used wisely, and can be frustrating and costly if not. Arbitration is a good tool for resolving repeat disputes of a known size and complexity. For example, if your company periodically has pricing or performance disputes with its customers that are significant but not ‘bet the company’ events, arbitration might be a good way to resolve those disputes. It can provide you with a confidential process, a say in who the arbitrator is and the opportunity to limit discovery and motion practice to help contain costs.

On the other hand, in large, complex or unique disputes, arbitration may not be the best choice because it offers little or no right to appeal.  If you don’t agree with the award, you’ll generally have to live with it, whereas in litigation, an appellate court can take a fresh look at the legal issues. Also, with bigger disputes involving multiple claims and issues, the parties often want more discovery and the opportunity to file motions to resolve issues before trial.  Litigation is well suited for such cases, though arbitrators often permit discovery, and sometimes allow motion practice.

Mediation is worthwhile for nearly any dispute that both parties want to resolve but which they are having trouble settling on their own. Setting aside a time and place to meet about settlement, and working with a neutral party frequently helps parties to bridge differences that seemed insurmountable.

Even when a settlement is not reached during mediation, the process can still be beneficial.  For example, it might bring the parties closer to a settlement and facilitate reaching a settlement in the future. Even if no settlement is ever reached, mediations often provide the parties with insights into their adversary’s positions, goals and strategies, and that can be invaluable as the dispute proceeds. Most mediations are valuable whether or not the mediation leads directly to a negotiated resolution.

On the flip side, a common frustration occurs when two parties want to settle but the mediator is not skilled at working the parties toward common ground. So take the time to investigate and select your mediator carefully.

How do ADR costs compare to cases processed in the court system?

Generally, arbitration should reduce your direct costs in attorney’s fees and other dispute-related expenses as compared to a litigated outcome. This is because there is less motion practice and discovery and the process typically leads more quickly than litigation to a hearing on the merits of the dispute. But, these savings are not always realized. Sometimes arbitrations get very involved and complicated. The choice of how to manage arbitration is as important as the choice of whether to arbitrate. Once you’ve agreed to arbitrate, you have an important task in laying out the ground rules to keep it less costly, burdensome and time-consuming than litigation. You have to manage the process to achieve those goals.

In general, mediation is less expensive than litigation or arbitration, but it’s hard to compare the costs. Mediation is often a supplemental way to resolve a dispute that’s in litigation or arbitration, so unless the mediation leads directly to a settlement, it may increase your direct costs. If the parties go to mediation simply because they were asked or required to do so, not out of a genuine desire to resolve the matter, then it can be an added cost with little or no benefit. But, as with arbitration, if you select your neutral party carefully and manage the mediation process, you’ll increase the chances of saving costs and obtaining an acceptable outcome.

Stephen J. Siegel is a partner with Novack and Macey LLP. Reach him at (312) 419-6900 or ssiegel@novackmacey.com.

Published in Chicago

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 kwc@novackmacey.com.

Published in Chicago

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 maw@novackmacey.com.

Published in Chicago
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