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84% share of Facebook possibly lost due to a bad contract and a complete lack of organization at start-up?
This is another shocking example of how vital it is to have good legal counsel from the beginning of your enterprise.
Even if Facebook prevails in the litigation, the enormous collateral damage to Facebook resulting from this lawsuit (monumental expense, public relations nightmare, endless hassle) could have been avoided if only its founder had been diligent and retained counsel at start-up.
Since contracts today form the basis of all business transactions and relationships, it is inevitable that every business owner or manager will be faced with negotiating contracts at one time or another. For some businesses, contracts are drafted so regularly and in such volume that the failure to have a good contract management process can quickly lead to frustration and negative consequences. For others, the harmful results of ad hoc contract management only become evident when it’s too late—when there is non-compliance or costly litigation.
Contract management is the process used by businesses to negotiate the terms and conditions in a contract and also to ensure compliance with those terms and conditions after execution. A strong contract management process can be described as methodically and efficiently managing contract negotiation, execution and compliance for the purpose of maximizing financial and operational performance and minimizing strategic and operational risk to the company. While each step in the contract management process is equally important, we thought we’d focus on step 1: contract negotiation.
We believe that having a well-managed contract negotiation system is an essential first step toward structuring contract management for any business. All parties suffer when poorly managed contract negotiations take on a life of their own—distracting in house counsel and business owners from their core business objectives, wasting time, breaking budgets, and potentially resulting in contracts being delivered incorrectly.
By no means is this a comprehensive list of strategies, but two very powerful ways to increase the efficiency of drafting and negotiating an effective contract are as follows:
- Start with standard and neutral templates that you and your customers perceive as fair.
- Create standard, pre-determined fallback positions that require minimal revision or negotiation.
Starting with Standard and Neutral Templates
Standard and neutral templates can help to streamline negotiations and minimize the overall length and cost of the negotiation process.
Begin by identifying your most frequently used contracts and create a template for each type. Because your business is not conducted in a vacuum, you need your contracts to be up-to-date and very savvy to industry standards. Take time to thoughtfully benchmark key provisions—especially those with the most legal significance and risk—against industry standards, industry leaders and your customers’ and competitors’ previously executed contracts. Your company’s policies, preferences and risk tolerance should always be in the forefront as you develop the key templates for your business.
Next, identify those provisions where it is acceptable and fair for your company to provide truly neutral language. Reciprocal indemnification and confidentiality provisions and balanced boilerplate are terms where neutral language should be considered.
Lastly, delete extraneous and unnecessary provisions from the contract that have no significance or are unduly onerous. For example, some may see extensive audit rights or record keeping requirements as inappropriate or overly burdensome depending on the business relationship of the parties.
Creating Standard, Pre-determined Fallback Positions
Standard, pre-determined fallback provisions also help to minimize the overall length and cost of negotiation. Perhaps more importantly, pre-determined fallback provisions can prevent ad hoc customization and time-consuming negotiation of individual contracts and ensure that the negotiated terms are always attuned to the operational or strategic risks to the company.
Fallback provisions should be based on specific risk criteria for the relevant transaction. Any negotiator armed with a set of standard fallback provisions can produce a quick and balanced response to a counterparty’s objection to particular terms.
Here’s an example of standard, predetermined fallbacks applied to the indemnification provision of a service agreement: A company’s standard clause may provide that the “Vendor shall indemnify Company and its Personnel for any and all damages, costs, expenses and other liabilities, including reasonable attorney’s fees and court costs, arising under this Agreement or out of Vendor’s performance of Services.” Depending on the industry of the service provider, this may be acceptable; however, there are many ways to limit this indemnification if requested. Some standard fallback options to this provision could include:
(i) limiting indemnification to the extent the claim is caused by vendor’s negligence;
(ii) including the limitation in (i) above and also providing that the vendor will have no obligation if a court deems the claim to have arisen from the company’s negligence; or
(iii) including the limitations in (i) and (ii) above and also further limiting the vendor’s indemnification obligation to a specific dollar amount.
Failure to Develop Templates or Have Fallback Positions
Failure to develop neutral templates or have standard fallback positions will increase the amount of time required for contract negotiations and can have numerous ramifications on contract management and business generally, including:
- loss of business resulting from harm to the business reputation
- increased legal work and expense resulting from the need to review and approve changes to non-standard terms
- a longer overall contracting process resulting in lost productivity
- higher commercial and legal risk resulting from ad hoc negotiations that don’t take into consideration the operational and strategic risk to the company
- greater customization and complexity in the final contracts that often lead to inconsistency among the final terms and complicated compliance with contractual obligations and government or industry regulations
These two contract negotiation strategies are truly the tip of the iceberg in terms of possible improvements to your company’s contract management approach. Call me at (202) 973-2682 and I’ll be happy to chat with you about your particular concerns.
Yesterday I had the pleasure of offering an educational program for members of DC’s Affinity Lab, a business incubator that provides shared office space, tools and a rich, vibrant network for budding entrepreneurs.
I’ve been working with Affinity Lab for several years now and love being a part of their exciting mission to support DC entrepreneurs.
In the first of what will be quarterly workshops at the lab, I did a quick presentation and offered one-on-one consultations along with Manning Sossamon attorney Vicky Husband and our Senior Legal Assistant, Amanda Delgado. We had a great time talking with people from some remarkable up-and-coming businesses!
The workshop’s topic was crucial—and often overlooked—considerations for young businesses after formation. Specifically, I focused on important provisions to include in Shareholder and Operating Agreements. Carefully drafted agreements contain restrictions on:
- rights of first refusal forthe Company and/or other shareholders,
- valuation protocols, and
- contingency provisions for death or disability of key shareholders.
No wonder founders often neglect to prepare careful documentation at formation. Who wants to stop to consider his mortality or the quality of his relationship with his business partner when there’s so much work to be done getting the business off the ground? At this thrilling, hectic time, careful documentation can feel like a nuisance or something that can safely wait until the business is more successful.
Unfortunately, putting off these issues can create serious problems on down the road. I see these situations more often that I would like! A company we know created its initial governing documents without the assistance of an attorney. While they hit most of the important points in their drafts, they failed to include a strong buy-sell provision that would require a departing founder/employee to offer his or her shares back to the company for purchase.
A good buy-sell provision ensures that only those founders actively involved with the company retain a significant equity stake in the company. In this instance, the founders wound up in a heated dispute about the company’s direction and parted ways. This left one founder at the helm, while the other split—and still controls almost 40% of the Company’s equity.
Do you feel like you might have missed something like this in your corporate governance documentation? Don’t wonder. Pull it out and have a read. It’s a good idea to discuss any concerns with your attorney. Depending on the circumstances, it may be possible to correct certain oversights now. I’m always glad to help; you can call me at (202) 973-2682.
A recent story about canned unicorn meat got us thinking about trademarks. The National Pork Board sent a 12-page cease and desist letter to ThinkGeek, insisting the Fairfax-based retailer stop marketing its fictitious product under the slogan “the new white meat”. At issue is the trademark THE OTHER WHITE MEAT® which the National Pork Board has been using since 1986.
We find trademark protection is often misunderstood. Business owners sense that their trademarks are valuable and should be protected but they are fuzzy as to how and why. The #1 misunderstanding we hear is that owning a trademark means that nobody else can use it. There is also confusion as to what a mark really is, how it functions, and what benefits Federal registration actually provides.
What Exactly is a Trademark?
First, let’s be clear about what a trademark really is. A trademark is “a word, phrase, symbol or design, or a combination of words, phrases, symbols or designs, that identifies and distinguishes the source of the goods of one party from those of others” (see Basic Facts About Trademarks). A service mark is the same thing; it just applies to a service as opposed to a product.
Note the wide range of words and symbols that can be protected—nearly anything goes including sounds (NBC chimes), colors (UPS brown) and, under the right circumstances, décor (McDonalds). Also note the emphasis on the origin of goods or services. The trademark registry exists to prevent consumer confusion, not to provide businesses with intellectual property rights. If you are not actually providing goods or services, you have no basis for registering a trademark.
Perceived and Actual Protections
In our experience, clients are usually looking for a guarantee of exclusive use. No such guarantee exists. Consider this example:
A pie maker inspired by fluffy cumulus clouds captures their form in a special meringue. “When I trademark ‘Cumulus’,” he thinks, “only my pies can be called by that name. There will be no other ‘Cumulus’ in the marketplace.”
Guess what? The same mark is already registered and other businesses are using it to sell everything from rain suits to fishing rods to bonded polyester fiberfill.
Why Bother to Register?
The United States Patent and Trademark Office (“USPTO”) neatly distills the actual benefits of Federal registration in its Basic Facts about Trademarks:
- constructive notice to the public of your claim of ownership of the mark; a legal presumption of your ownership of the mark and your exclusive right to use the mark nationwide on or in connection with the goods and/or services listed in the registration;
- the ability to bring an action concerning the mark in federal court;
- the use of the U.S registration as a basis to obtain registration in foreign countries; and
- the ability to file the U.S. registration with the U.S. Customs Service to prevent importation of infringing foreign goods.
Federal registration isn’t the only game in town. State- and local-level registrations are also a good safeguard and you actually start gaining protection for your mark the moment you begin using it.
Use It or Lose It
Occasionally, a client will request that we register a mark to “reserve” it for later use. While it is possible to submit an application for a mark on the basis of “intent to use,” the registration cannot be completed until the applicant demonstrates use of the mark in commerce. If you aren’t using your mark in commerce—and that means any “commerce that the U.S. Congress may lawfully regulate; for example, interstate commerce or commerce between the U.S. and another country” according to the USPTO—don’t expect a favorable outcome.
Refine Your Mark
If you are still mulling over exactly what mark to register, consider these two paramount points:
1. Be different.
“Likelihood of confusion” is the single most important consideration for Federal trademark registration. Simply put, would a typical consumer confuse your mark with another existing, registered mark? You would be very surprised how many business owners have the same great product name idea—or even last name—as you. Do your homework and see what’s out there.
Even if you have chosen a sufficiently unique identifier, you may encounter unexpected pitfalls in the registration process. When we sought protection for “Pete’s Apizza,” the USPTO examining attorney decided consumers might confuse it with an existing mark: the PIZZA!PIZZA!® slogan owned by Little Ceasars. (Apizza, for the record, is pronounced ah-BEETS.) Our client is now registered as “Pete’s New Haven Style Apizza” and we promise that if you try their pie, the likelihood that you will confuse it with Little Caesars’ product is nil.
2. Avoid being merely descriptive.
It is essential for marks to serve as unique identifiers rather than simply descriptions of the product or service. Think “post-nasal drip removal aid” (bad) versus “Kleenex” (good). That’s not to say that description is a no-go; just remember to add a unique identifier. “Accounting Services” would never make it through the application process but “Wimbley’s Accounting Services” will fare better.
Manning Sossamon Can Help
We have assisted our clients with dozens of successful Federal trademark applications. We will be happy to help assess your chances for a favorable trademark application and can handle the entire process from start to finish. Contact us to get started.
Welcome to our blog!
Our practice demands that we navigate daily a thicket of issues and information, questions and quandaries, options and opportunities. In the course of all we do to help our clients achieve their goals we accumulate insights, ideas and solutions. We are thrilled to have the opportunity to share these—and more—with you, our friends and clients, in this blog.
Having assisted the successful launch and operation of so many businesses we know a thing or two—or ten—about avoiding and handling business litigation.
Warm up your laminator because if you should ever pull a post from a legal blog and put it under your pillow, this is the one. While many of the tips seem self evident, businesses large and small can benefit from a refresher.
Ten Tips for Avoiding and Surviving Litigation
The best way to avoid litigation is to do everything you can from the very inception of your enterprise to protect yourself from potential lawsuits. These five tips will minimize your risk of being sued.
1. Be Diligent During Start-Up.
Entrepreneurs often neglect to form a business entity or, if they do form an entity, they fail to observe corporate formalities such as establishing business bank accounts and keeping business accounting records. This advice holds true whether you are an emerging company or a large corporation that has elected to create additional subsidiaries or operating units.
2. Execute an Agreement Between Founders and Investors.
The management and operation of the venture should be clearly spelled out in an appropriate agreement that governs the balance of power between the founders and any investors. Your choice of business entity dictates the document set that governs the rights and responsibilities of the business founders and its investors (if any). We strongly advise that a full set of governing documents be negotiated and executed at the inception of the business.
3. Insurance, Insurance, Insurance.
Every business should have insurance in place that is effective from the date of formation. The easiest way to obtain the appropriate insurance is to contact a reputable insurance broker and discuss in detail the risks associated with your business. It is very important to select a broker who is able to actively help you evaluate your business risk and tailor your insurance package by extending the coverage limits in specific areas or adding options to cover risks that are inherent to your industry.
4. Protect Yourself From Personal Liability.
In general, business entities shield the personal assets of their owners from personal liability for the debts or actions of the entity (except in the case of a sole proprietorship or partnership). The legal concept of “piercing the corporate veil” describes a judge’s decision to hold an owner, manager or director of an entity liable for the debts or liabilities of the entity. In order to successfully pierce the corporate veil, a plaintiff generally must prove that formation of the business entity was merely a shell and that the entity neglected corporate formalities and protocols, such as not using duly authorized corporate meetings to approve major corporate actions.
5. Understand Applicable Consumer Protection Laws.
Failure to appreciate what consumer protection laws apply to your business can be extremely dangerous. Just one allegedly misleading statement can lead to a mountain of litigation and the ultimate failure of your business. Be very careful with your verbal comments and written signage and very diligent in providing customer/client service. Seek expert advice regarding how local consumer statutes might impact your business.
Even if your business is properly set up and takes all of the necessary precautions to avoid litigation, your business may still be the subject of a claim for compensation or the subject of formal litigation. Here are the five essential tips for how to efficiently, properly and, with a clear head, handle any type of dispute once it arises.
6. Document Everything.
The temptation for any business is to keep things simple and not document important transactions and correspondence. Be diligent. Retain all important documents so that you have a clear record of any transactions and communications with potential claimants.
7. Don’t Procrastinate.
Anytime we receive bad news we want to ignore it. Doing so is a fast track to a lawsuit or even a default judgment. Immediate response to potential claimants often avoids most litigation.
8. Discourage Plaintiff’s Attorneys.
Since many plaintiffs’ attorneys work on a contingent fee basis, they will not take a case if it looks like a loser. Help a plaintiff’s attorney make his/her decision. Convince the attorney his case has no merit.
9. Retain Counsel.
The plaintiff’s attorney’s best friend is the person or company who tries to represent itself in a dispute. Don’t be this friend. Once you determine that the threat of a lawsuit is real and that you cannot dissuade the plaintiff’s attorney from taking the case, retain an attorney immediately to avoid inappropriate admissions and ineffective strategies.
10. Be Unemotional. Be Shrewd.
If a claim is asserted against your business, you likely will be very angry. Since you must be able to consider your options with a clear head, strong emotions are your worst enemies. Be objective, cooperate with your attorney, understand the costs of litigating versus paying the claim, and develop your strategy accordingly.