Adding context to autonomous vehicle commercialization

At times, automated vehicles (AV) have dominated the headlines, so it can be easy to forget that the technology is still in the early stages of development and commercialization.

Justine Kasznica, shareholder at Babst Calland, is routinely asked: Why are AV companies and their automotive partners missing their stated deployment dates?

“This question raises an important point about current challenges to AV commercialization, with direct analogy to other autonomous mobility platforms, such as drones, personal delivery robots and more,” she says.

Some resources are being held back by the industry because of regulatory uncertainty, safety and security concerns, and the need for infrastructure that supports the technology, says Timothy Goodman, shareholder at Babst Calland.

“Even in view of this, progress is happening, particularly with regard to electrification and advanced driver-assistance systems (ADAS),” he says.

Smart Business spoke with Kasznica and Goodman, in the firm’s Mobility, Transport and Safety practice group, about AV development and commercialization.

Why should business executives stay aware of AV and other mobility development?

Automation has penetrated every segment of industry. In fact, warehousing, shipping, logistics and transportation are becoming more automated at a greater pace than ever before. In the future, whether it’s a drone, a legged robot or a wheeled delivery vehicle that solves the last mile problem, nearly every business will be impacted by AV. In addition, there’s plenty of opportunity to participate in this mobility evolution, even if it’s indirectly.

How is regulatory uncertainty playing a role in AV commercialization?

The federal government controls motor vehicle safety, with input from the automotive industry. Historically, National Highway Traffic Safety Administration regulations assumed vehicles would have a steering wheel, brake pedal and driver. The rules need to catch up to AV technology, which may or may not have these legacy items. However, federal rulemaking can take years, and this technology is changing rapidly.

In the absence of a strong federal framework, states are stepping in. A patchwork of laws ranges from hands-off and hesitant, to the proactive approach of Pennsylvania and California, which want to lead the way in developing sound regulations for AV testing and deployment. In addition, industry groups are creating voluntary standards for AV companies, which may influence future legislation.

The lack of a consistent regulatory frameworks had led many AV companies to start missing their projected targets for commercial deployment, in part because these regulations often dictate design features in their products.

What other challenges need to be overcome?

Autonomy is described in different levels, from zero to five. The technology is currently at level two, which is partial automation, i.e. lane assist, where the driver is still critical. Moving up to level three, four or five will require more than regulatory certainty — although that’s a big part of it. There are many transportation and infrastructure factors, like the advent of 5G, that need to catch up to the technology. This, in turn, further complicates AV development cycles.

The industry — and regulators — want AV systems to function well and not take unreasonable safety risks. AV systems in beta mode can become confused by unusual conditions, such as dust/rain/snow, pedestrians or unique road obstacles. Built-in redundancies are also required to combat software fails, while expensive and complicated technology, production cycles and implementation delays create barriers. Other concerns related to the cybersecurity and data privacy of integrated software systems need to be fleshed out before there will be full-scale commercialization. Solutions will require industry collaboration, public-private partnerships and data sharing.

While level five automation is years away, it will happen. Regulators are still trying to figure out how to promote safety without chilling innovation or picking winners and losers. In turn, resources are being held back by companies until there is more clarity with regard to regulations and the science.

Insights Legal Affairs is brought to you by Babst Calland

How companies can get the most from outside legal counsel

Smaller businesses tend not to have the budget for a full-time, in-house general counsel. Fortunately, there is another solution to help them avoid the common, and costly, legal pitfalls of being in business.

“Working pre-emptively with an outside general counsel on matters such as commercial contracting, general corporate governance, mergers and acquisitions, and vendor and supplier agreements reduces or eliminates the chance of encountering legal issues down the road,” says Elizabeth G. Yeargin, an attorney at Brouse McDowell.

Smart Business spoke with Yeargin about the many ways businesses can utilize outside general counsel.

What is corporate counseling, and why should an attorney deliver this service?

Legal counsel’s expertise is not limited to law. Through a legal lens, they can also offer practical business advice. For instance, an outside general counsel can participate in strategic and succession planning, disaster recovery and crisis management.

An outside general counsel may also have a background in the laws of a specific industry — tech or manufacturing, for instance. Generally, if it’s a highly technical industry that requires more than a general business law background, it’s better to work with someone with specialized trade knowledge.

These relationships have the added benefit of attorney-client privilege. Attorneys are bound by ethics rules and are prohibited from disclosing information received from their clients, which is different from other non-attorney advisers. Even emails between the attorney and client are privileged so long as outside parties are not included in the address line.

Which companies benefit most from working with an outside general counsel?

Smaller, closely held companies may benefit most due to the significant costs involved with staffing an attorney in-house, especially if those companies don’t have the volume of legal work to justify that expenditure. However, most inevitably have legal issues of some type that arise frequently enough that they need a trusted legal adviser who knows their specific business and can walk it safely through a legal minefield, or handle a one-off issue, such as selling a business or contracting with a difficult customer.

Who within an organization should work with an outside legal counsel?

Often an outside general counsel works directly with the CEO, CFO or president. There are, however, businesses that make outside legal counsel available to employees at other levels of the organization. For instance, sales managers or vice presidents are sometimes tasked with working directly with legal counsel when they have questions regarding supply agreements, procurement contracts or other sales-related obstacles.

It comes down to cost, need and comfort level.

Ideally, what should the general counsel-company relationship look like?

It’s best to be proactive, because it’s better to spend a little money up front to prevent much more costly issues later. That’s often the case with supply agreements and vendor contracts, which are easy to enter into but hard to get untangled from once a contract is signed.

Unless there’s a compelling reason — corporate compliance, for instance — outside counsel doesn’t likely need to be in attendance for every company meeting. But, especially when it comes to board or strategic meetings, it can be beneficial for the company’s lawyer to have a seat at the table to field legal questions and stay apprised of the general affairs of the organization. A lawyer never likes to find out through the news that a client is embroiled in a legal issue.

It’s a good idea for a company to hold regular checkups with its legal counsel so that he or she can keep track of the company’s current challenges. These checkups could be in the form of monthly meetings with the entire corporate management team or a brief phone call or lunch with the CEO. Counsel will, ideally, keep a running checklist of ongoing projects, discuss issues that are pending and those that have been resolved, and discuss upcoming strategic initiatives to keep everything at the forefront.

Insights Legal Affairs is brought to you by Brouse McDowell LPA

Critical considerations to make when forming a business

Starting a business often brings a sense of excitement coupled with owners’ desire to move quickly, but careful thought should be given to the tax and non-tax factors affecting the critical decision of how to structure the business. 

The right choice of entity protects the owners’ personal property by isolating liability associated with the business operations. Entity choice further affects access to capital, management rights and tax compliance.  

“The business form is incredibly important,” says Jonathan C. Wolnik, a tax and corporate attorney at McCarthy, Lebit, Crystal & Liffman Co., LPA. “Failing to start with the right advice from competent advisers can cause significant problems for the business and its owners.” 

Smart Business spoke with Wolnik about choice-of-entity considerations.

What are the key factors to consider when choosing a business entity? 

It starts with understanding the owners’ goals. Their vision answers questions as to how the company will be capitalized, if it needs to have closely guarded or freely transferrable ownership, and how it shall be managed. Very few owners are willing to intentionally accept personal liability for business activity, so the limitation of liability is always paramount. 

Partnerships can have very flexible management arrangements, whereas corporations typically have a more rigid management structure. However, general partnerships do not insulate personal assets, making the individual partners joint-and-severally liable for the activity of the other partners. This is often unacceptable to the owners, especially when it is easily mitigated.  

Further, the owners should understand the tax ramifications of their choice of entity, which can be easily explained by working with good advisers. But while it’s important to understand the tax ramifications among the entity options, taxes should not entirely control the business structure. 

Why would a company change entity type, and what would that process look like?

An entity formed as one type may convert to another, meaning, for example, that a corporation can become an LLC and vice versa. Typically, the entity seeking to change its form must notify certain state agencies before taking action. Further, a corporation typically must obtain a certificate of tax clearance from the Department of Taxation indicating that all prior tax liabilities have been satisfied. Other entity types do not share this requirement when converting.

A formal plan of conversion outlining why the entity wants to convert and how it will be accomplished must be adopted. The plan must be authorized at the appropriate level of governance. Note that tax-elections, such as the ‘S-election,’ do not constitute a formal change of entity type.  

The reasons for a conversion can vary and may include tax considerations or ownership changes. For example, an S-corporation is restricted as to who the permitted owners are. Therefore, admitting a new owner that does not meet the tax code’s requirements may necessitate a conversion to an LLC.  

Another factor to consider in conversion is the owners’ exit strategy. It may make sense to change entity type to obtain certain tax benefits at the time of exit, if possible. Foresight and careful planning are required when contemplating this type of action.  

What do people tend to overlook when setting up a business entity? 

Dispute resolution is often ignored by individuals starting a business. At the beginning, optimism and a desire to control costs keep owners agreeable. But those initial good feelings often fade, and if the governance documents do not adequately address dispute resolution, the problems compound. It is easier to reach agreements on dispute resolution at the start when everyone is looking forward to a peaceful and prosperous future. Processes for dispute resolution should be documented early in the business formation. 

For these reasons, professional advisers, both lawyers and accountants, should be consulted. Candid and honest conversation is critical and allows the lawyers and the accountants to ask important questions to help their clients reach the proper conclusions that shall fundamentally shape the business for years to come.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman Co., LPA

The myth of title theft: What providers of “protection” against it aren’t telling you

“Title theft” was a term unknown just a generation ago. Now advertisers bombard us daily with warnings about it. They say that thieves can “steal” our homes by forging our names on deeds, then resell the property or take out mortgage loans to drain its equity. They pocket the proceeds and “stick” us with any mortgage payments.

But can a thief really “steal” your house through forgery, and are you really obligated to pay off a thief’s mortgage loan?

Smart Business spoke with William Maffucci, a real-estate litigator with Semanoff Ormsby Greenberg & Torchia, LLC, to find out.

Can someone acquire title to a real property simply by forging the owner’s name on a deed?

No. A forged deed conveys nothing. And, having acquired nothing, the forger has nothing to resell to a third party or to ‘mortgage’ to a lender.

Although title theft isn’t real, a forged deed or mortgage can have a very real — often devastating — impact on the owner. Since the forger’s name will appear on the land records, the forger can sometimes deceive a third party into “buying” the property or a lender to take a “mortgage” of the nonexistent title.

The owner cannot simply ignore the forgery unless the defrauded buyer or lender accepts the owner’s account and disclaims any interest in the property. That rarely happens. Usually owners must file a lawsuit to clear title. Most owners need a lawyer to do that, and few lawyers are willing to handle such matters for free. The litigation can be lengthy, involving expert testimony as to the validity of the signatures, and prohibitively expensive.

Although the owner has no legal obligation to repay the forger’s loan, the owner may ultimately feel constrained to do so as a practical matter. Some owners don’t learn of the forged mortgage until the lender moves to foreclose the mortgage, or even after the foreclosure process is complete and title has passed again. Bringing legal action at that late stage can be particularly expensive.

Why do the advertisements for “protection” against so-called title theft say that a forger who subsequently “mortgages” the property to a lender can “stick the owner with the payments”?

Either the advertisers don’t understand the law, or their statements are intentionally ambiguous. The advertisements speak of ‘putting a shield’ around your title, ‘monitoring’ it, and issuing ‘alerts.’ If you inquire further, here is what you are likely to learn: The provider will regularly check the land records to see whether your name has appeared on any deed or other instruments. The provider will alert you of any such instruments it finds. If you respond that an instrument was forged, the provider will prepare and file in the land records document to alert further buyers or lenders that the instrument was forged.

Owners can check the land records on their own, but there’s value to the convenience of having someone regularly check the land records for them. There’s also a value to having a ‘red flag’ affidavit prepared and recorded as to any forged deed that is discovered — but only if the recording is accomplished before the forger succeeds in finding another victim to ‘buy’ or take a ’mortgage’ on the property.

Will a provider of “title theft” protection also pay for a lawyer to represent an owner in seeking to clear title after a forgery?

That’s the $64 — or even $64,000 — question. If the provider’s terms include its payment of the legal fees necessary to clear title of any forged instrument that it discovers, the service could prove to be extremely valuable. But that’s a huge ‘if.’

I’m not aware of any providers of ‘title theft’ protection who do cover their customers’ legal fees in litigation to clear title. And if such providers do exist, their service would almost certainly cost much more than the dime-a-day rates advertised widely.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

How litigation management helps companies in and out of court

Litigation management is a service that helps streamline the litigation process by focusing primarily on discovery.

“We help develop and coordinate discovery strategies, and handle discovery issues and projects in both serial and individual litigation matters,” says Marguerite Zinz, a partner at Brouse McDowell. “Our services help keep projected costs down because of the efficiencies we bring to information collection, management and review.”

These attorneys, because of their information management experience, are often used for nonlitigation projects such as creating policies and strategies for record retention and information governance and preservation.

Smart Business spoke with Zinz about how litigation management professionals can help companies improve their information management practices, both litigation-related and not.

How can litigation management professionals help companies?

Litigation management professionals are particularly valuable to any company that has to manage and collect information that will be involved in a litigation, whether the company is the one suing or being sued. As attorneys, they can be involved in as many aspects of the discovery process as is needed by the company, including written discovery, document productions, depositions and motion practice. These attorneys can also work with companies outside of litigation to develop and implement record retention and information governance policies, including assisting with the defensible disposition of information, performing audits and training employees on information-management policies, and assisting in legal holds.

What does a litigation management attorney do that a typical litigation attorney doesn’t?

A litigation management attorney can do anything a typical litigation attorney can do; they’re just generally not the person standing in front in the court room. Instead, they’re focused on discovery and making sure it aligns with the overall approach to the case.

Having a litigation management attorney focused specifically on discovery creates procedural and cost efficiencies, and frees up trial counsel to focus on the trial and not get bogged down with collecting or organizing the large amounts of information involved.

In a serial litigation context in which a company is getting sued repeatedly, a litigation management attorney can also ensure consistency in the company’s defense strategy across cases, and if new trial attorneys take cases later, they can more easily get up to speed on the issues generally involved in the case.

What types of companies would benefit from having an ongoing relationship with a litigation management attorney?

While litigation management professionals can assist any company that has large volumes of information, these attorneys are of particular benefit to companies in a lawsuit that involves a lot of information — and not just the company that has a lot of information that’s subject to discovery, but also the company that needs to acquire and review a lot of information from another party in a case.

This service is also helpful to companies that face repeat or serial litigation. Companies that manufacture any type of product can often find themselves the frequent target of lawsuits and would benefit from the creation of consistent and defensible practices that also mitigate costs through efficiencies.

What do companies often misunderstand about litigation management services?

Often companies think these attorneys are just focused on document production and handling, and are interchangeable with vendors that are not typically attorneys who handle eDiscovery and large-scale information reviews. What litigation management attorneys do encompasses that, but their legal training and licensure also give them a role in the strategy of the case, working with trial lawyers to determine where and how all of the information fits together in the overall litigation strategy.

There’s much more to litigation than arguing in court. Proper management of information is critical before and after a trial, and can save money, time and heartache for everyone involved.

Insights Legal Affairs is brought to you by Brouse McDowell

Opportunity Zones leverage capital gains to offer investors, cities benefits

Under the Tax Cuts and Jobs Act of 2017, a program was created that offers investors favorable tax treatment for investing capital gains in Qualified Opportunity Zones, areas in each state designated by their governors as distressed communities. The idea is to encourage investment to spur economic growth and development by pulling idle capital gains off the sidelines and into areas of need.

Smart Business spoke with Michael D. Makofsky, a principal at McCarthy, Lebit, Crystal & Liffman Co., LPA, about Qualified Opportunity Zones and what investors should know about them before investing.

How do Qualified Opportunity Zones work? 

Investing capital gains in a Qualified Opportunity Zone is done through a Qualified Opportunity Fund (QOF), which is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property within these zones. Many investment firms have formed these funds, and they operate under certain requirements. For instance, generally 90 percent of the fund’s investments must go to a property or a business that’s located in a Qualified Opportunity Zone. Further, real property that gets the investment has to be substantially improved over time (and there’s criteria for what exactly ‘improved’ means) and a percentage of a business’s income must derive from business activities within the Qualified opportunity Zone. 

When an event occurs that creates capital gains, the benefactor needs to make an investment in a QOF within 180 days. In exchange for the investment, there’s a tax deferral on the capital gains invested until the earlier of (1) the investment being sold or (2) December 31, 2026. There’s also an incentive to keep the investment in the QOF. Money that stays in that qualified property or business for five years will get 10 percent of the applicable capital gains tax permanently eliminated. If the investment stays for seven years, a total of 15 percent is eliminated. After 10 holding years, any gains in excess of the original investment value become tax-exempt. 

How is Ohio to trying take advantage of Qualified Opportunity Zones?

Ohio introduced legislation to provide an additional state income tax credit of up to 10 percent of the investment. The state senate has passed the bill, and Gov. Mike DeWine is in favor of it, so it’s expected to pass.  

Cuyahoga County is working to promote this program as well. The county set up Opportunity CLE, which has its own website for prospective investors and developers that highlight area Opportunity Zones. The county sees this as a big opportunity for the area. 

What does the early feedback suggest about investment activity in Ohio’s Opportunity Zones?

There’s still a lot to be determined when it comes to measuring the effectiveness of the Opportunity Zone program. Investors seem interested because they see the potential benefit, but even from the initial data, it’s too early to tell if it will have the benefit proponents anticipate. 

In some cases, the investments that are being made in Opportunity Zones are for projects that would be undertaken anyway. The tax credit becomes another incentive rather than the reason for the investment — it doesn’t seem to be an investment driver at this point.

There are regulations tied to the program, which could have a narrowing effect on the field of potential investors. But more information and time are needed to determine whether the program can produce the desired effects. 

What misunderstandings are common among those interested in investing in Opportunity Zones?

Investors seem to overlook the timing restrictions that dictate when they can invest. Also, there is some misunderstanding regarding what qualifies as an investment and what has to happen to the investment property for it to be considered improved. 

Investors need a thorough understanding of all of the QOF and Opportunity Zone guidelines and regulations before deciding if these opportunities make sense. Talk to professionals who are keeping up on these opportunities — accountants, lawyers — to get a better handle on the potential return.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman Co. LPA

Early-stage companies: Get your patent attorney involved early

Intellectual property (IP) drives value, especially in industries like robotics or medical devices. However, engineers would rather be developing new products. They dislike spending time on invention disclosures. Carl Ronald, shareholder at Babst Calland, believes patent attorneys can help fill this gap in younger companies that have started taking on outside investors.

“Sometimes, I will get a call from an engineering manager who just approved an employee request to present a poster at a conference. They’re wondering, ‘Is this is something that could affect patentability? Can you look at it? The conference is in five days,’” Ronald says.

It’s better to be proactive and strategic, where an attorney works with your engineering team — reducing the barriers to getting disclosures on paper, identifying what you should patent and what you should keep secret.

Smart Business spoke with Ronald about developing relationships between engineers and attorneys to build up an IP portfolio.

Why is it important to involve a patent attorney early in the development pathway?

It is critical to set the tone early. Executives that position the business as an innovative company need to make sure their employees are educated about IP, and that the organization is utilizing patents, trade secrets and other forms of IP to protect that value.

Let’s say, a Ph.D. student working with a company wants to publish an article. Some magazines have confidentiality around peer reviewers and some do not. So, a submittal to peer review could be a disclosure that could destroy novelty, thus destroying patentability. While in the U.S., you can disclose something and still file a patent within a year, overseas that is not the case.

Some engineers know about IP but do not understand the nuances around publication or the differences between U.S. and foreign patent laws; others know very little. And some feel hopeless, that the idea will be stolen anyway. If a patent attorney is brought in early, he or she can educate the R&D team about the IP process and pitfalls, while helping establish invention disclosure and incentive programs. This also applies to companies with in-house counsel; they typically prefer to work with an expert who deals with IP every day when these issues arise.

What are invention disclosure and incentive programs? How can an attorney help?

Invention disclosure programs are an organized way to identify and evaluate IP. An invention disclosure document is usually completed by an engineer if the group thinks it has solved a problem in a novel way. This starts the process to see if it infringes on someone else’s IP and protects the advancement if the team is creating something new.

In incentive programs, employees are rewarded, through money or stock, if the company files a patent application that lists them as the inventor. Employees may get another reward if a patent issues. Once incentives are attached to disclosures, the number of disclosures typically increases.

Traditionally, a three- or four-page invention disclosure provides an explanation of the problem being solved, along with the proposed solution. Some members of an engineering team lack interest in finding time to take on the burden of completing this document; having a patent attorney the engineer already knows can help. The attorney can touch base at critical junctions, such as a sprint review, to see what problems have been solved and take verbal disclosures, if appropriate. Or, engineers could email minimal disclosures as they go, and the attorney reviews those with the engineering manager or chief technology officer.

If these procedures are easier to follow, and properly incentivized, then the R&D team and attorney can work together to ensure IP value is maximized.

Why aren’t more companies working closely with an IP attorney early in the product development lifecycle?

While some companies feel they can handle IP on their own, others are concerned about cost. Many law firms, however, are starting to think outside the box with alternative fee arrangements, such as a flat fee for service or a lower initial rate until an agreed-upon amount of capital is raised. If you have an innovative company in a competitive market, it’s never too early to introduce a patent attorney to your engineering team.

Insights Legal Affairs is brought to you by Babst Calland

What businesses should know about the federal wage and hour changes

The amendment to the Fair Labor Standards Act (FLSA) proposed by the Trump administration will likely impact more than 1 million American workers who are set to become eligible for overtime pay. As a result, some employers will be faced with a choice: Increase employees’ salaries beyond the new salary threshold to potentially avoid overtime pay, or pay more in overtime. As employers consider this question, they will still have to navigate the duties test for each of the white-collar exemptions so as to not misclassify employees as they try to avoid the obligation to pay overtime. The Department of Labor’s duties test determines if any employee’s specific job duties meet all of the department’s regulations for exempt employees.

Smart Business spoke with Christopher J. Carney, partner and chair of the Labor & Employment Practice Group, and partner-in-charge of the Cleveland office of Brouse McDowell, about the rule changes and what businesses need to know to stay in compliance.

What are the more significant changes to the government’s new overtime rules?

In order to be exempt from overtime, an employee must meet both a minimum salary threshold and a duties test. The Trump administration’s Department of Labor has proposed increasing the salary level threshold for the white-collar exemptions — i.e., administrative, executive and professional employees — from the current annual level of $23,660 to $35,308 (or $679 per week). The proposed rule also seeks to increase the total annual compensation amount for employees who are deemed to be highly compensated from $100,000 to $147,414 per year. Consequently, employees who may not meet the duties test for any of the white-collar exemptions would still be exempt from overtime if their salary meets or exceeds the $147,414 threshold.

Just as significant as the proposed salary increase is what is not in the proposed amendment. The proposed amendment does not alter the highly fact-specific duties test for each white-collar exemption. In addition, the proposed amendment does not have an automatic adjustment to the salary threshold and it does not create different salary levels based upon the region of the country where an employee lives. The automatic adjustment and different regional salary levels were both part of the Obama administration’s attempt to rewrite the salary-level threshold in 2016.

If enacted — the new salary threshold would go into effect on Jan. 1, 2020 — the proposed rule will significantly increase the number of employees eligible for overtime.

How do the new federal overtime rules reconcile with existing Ohio overtime laws?

The proposed amendment to the Fair Labor Standards Act (FLSA) really does not have any effect on Ohio’s wage laws, as the Ohio law follows the federal law. There is one exception: the 2019 Ohio minimum wage of $8.55 per hour is higher than the federal minimum wage of $7.25 per hour.

What do employers need to do in order to be in compliance with the new rules?

Basically, employers need to decide whether to increase an exempt employee’s salary to the $35,308 threshold or convert them to nonexempt status and pay them overtime if they work more than 40 hours in a particular workweek.

Where might employers face legal heat because of the new overtime rules?

Employers will not face new legal heat because the salary threshold is increasing. That is straightforward. The complicated issue for employers is determining whether the employees’ duties actually meet the duties test for exempt status. The natural inclination for employers is to shoehorn as many employees into one of the white-collar exemptions as possible. However, the duties test for each of the white-collar exemptions is narrowly construed against employers, and that is where employers get into trouble.

What should businesses understand about the overtime rule changes?

Meeting the salary threshold does not automatically make an employee exempt from the overtime requirements of the FLSA. The proposed amendments do not address the duties test for determining who is and who isn’t exempt.

Insights Legal Affairs is brought to you by Brouse McDowell

Artificial intelligence is changing the way lawyers practice

Artificial intelligence (AI) is adding efficiencies and transforming businesses everywhere, and legal practices are no exception.

“General counsels and executives that are hiring lawyers need to understand that this technology is available now, so they can make sure their lawyers leverage the latest technology tools,” says Christian A. Farmakis, shareholder and chairman of the board at Babst Calland. “AI can increase speed, increase efficiency and lower costs for clients — if the law firm has the right tools, but more importantly knows how to use those tools.”

Smart Business spoke with Farmakis about the advancement of AI technology in the legal space, which business executives may want to take advantage of.

How is AI technology disrupting the legal industry?

AI is a term generally used to describe computers performing tasks normally viewed as requiring human intellect.

AI legal technology won’t replace lawyers, but these tools will drastically change the way lawyers provide services for their clients. While estimates vary, 23 percent to 35 percent of a lawyer’s job could be automated. As a result, lawyers will need to be more strategic and supervisorial, able to act as project managers and supervise the information being fed into systems, and knowledgeable about the assumptions underlying the machine learning algorithms.

So far, projects that classify data have been impacted the most, allowing those projects to be done faster and more efficiently. This includes:

  • E-discovery.
  • Due diligence.
  • Research.

Law firms can already pass these savings on to clients, but this is only the beginning of the transformation.

What will be the next wave of AI legal technology?

The next generation, which is starting to hit the market now, will be document automation and legal research and writing tools, as well as predictive technology tools. For example, a contract can be put through an algorithm in order to identify how risky it is. It could be used to determine how likely is it to go into litigation or if it complies with the company’s internal contract procedures and policies.

Another use is analytic tools that can measure efficiency and pricing of the legal services. E-billing and practice management tools could measure whether a service contract should cost $2,500, not the $7,500 that’s being charged. In other instances, AI could help firms do estimates for alternative fee arrangements.

Why is it so important for lawyers to use the right tool for the job?

AI technology is not going away. It’s here to stay, and it’s increasing exponentially. While the AI legal tech revolution is still in its infancy, the tipping point is around the corner. In 2016, the industry spent $8 billion on AI technology; that’s predicted to hit $46 billion by 2020.

However, many of these products are single-tasked products and not integrated tools that can perform multiple tasks. And many of the products’ pricing models do not yet meet the market needs.

While pricing adjustments are already starting to occur and integration should happen over the next five years, AI technology is nothing more than a tool. Just like other technology, purchasing the new tool is only a small part of what needs to happen to gain efficiency and lower prices. The organization has to be behind it, the employees need to know how to use it and the entire project must be managed properly.

Lawyers who have an open mind and an ability to use these new tools effectively are already passing cost efficiencies on to clients, and this should only increase in the future.

Insights Legal Affairs is brought to you by Babst Calland

What to consider ahead of the sale of a closely held business

There is an emotional bridge business owners need to cross as they consider selling their company, says Joshua G. Berggrun, an associate attorney at McCarthy, Lebit, Crystal & Liffman Co., LPA. 

“After decades of dedication to growing their business, the decision to sell is difficult and should be taken seriously,” he says. “As they make that decision, owners need to consider both their business and personal goals before the company is put on the market for sale.”

Smart Business spoke with Berggrun about how owners should prepare their business, and themselves, for a sale. 

What do business owners need to address as they prepare to sell their company?

Business owners must be ready to address tough questions: Why are you selling? What are your priorities? Are you being realistic? What do you need in order to put your business up for sale? The answers to these questions may not be so simple and could take time to develop. 

It is important for sellers to map out legal and tax implications triggered as a result of a sale or change-in-control, and determine whether their goals are best achieved through an asset sale, stock sale or a different transfer vehicle. They should also decide whether it makes sense to carve out certain assets or liabilities from the deal.

What should a seller know about a buyer’s approach to buying a business?

A seller should figure out what motivates the buyer. A seller should ask: Why are they buying? What value does my business add? Does the buyer want to strike a deal? Are they flexible and willing to compromise? 

A seller should understand different types of buyers. For example, there are strategic buyers looking to acquire the seller’s company and merge it into their portfolio of similar companies. There are also individuals looking to buy a business because they are tired of working for someone else and want to be their own boss.

A business valuation may be the main selling point for one buyer, whereas another buyer may also strongly consider the value and treatment of existing management and loyal team members.

What are the mistakes sellers make that most often lead to diminished sale value or difficulty finding a buyer?

When a major life event occurs — a death, divorce or loss of a key customer — some business owners rush to put their business up for sale. If sellers do not have their corporate records, key contracts and financials together, this inadequate planning and preparation leads to diminished sale value. Smart sellers will also consider their industry and have their finger on the beat of market developments. Technical innovations, new products and channels of distribution and the regulatory environment can all impact the perceived value of the business.

Who should business owners turn to for help as they prepare to sell their business? 

Buyers will want three to five years of financials, so business owners must have their legal and financials buttoned up in order to bring their company to market for potential buyers and attract top-dollar offers. Having attorneys and accountants on your team can help accomplish that. 

Owners will need to have a solid go-to-market strategy that targets the right buyers, without letting the whole world know. The right network is critical to this process and a trusted adviser, such as an investment banker, can help an owner tap networks of local, national and international buyers.

Keep in mind that when selling a company, the goal is to make the best deal for the owner, his or her partners and key employees. That means spending time and resources with a group of dedicated and creative professionals who are capable of acquiring and processing all of the information necessary to make informed decisions.

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