Why the MegaUpload Arrests Bother Me

January 31, 2012

Last week a consortium of U.S. federal agencies, working with police forces from around the world, shut down a series of file sharing/file storage sites best known as MegaUpload. They also arrested the senior executives of the companies behind the sites — including the flamboyant apparent leader of the group Kim Dotcom — and seized various assets of the company and the individuals. MegaUpload and its senior executives are not particularly sympathetic characters. But the arrests bothered me. I did not initially know why.

Many sites have been shut down for offering illegal goods, whether it be counterfeit goods meant to look like the original (fake Rolex watches for example), or illegal copies of software, But this one felt different. So I decided to write a blog piece about it. While writing this piece, I figured it out.

There are people who use technology to steal. Whether it is bank account balances, credit card numbers, knock-off copies of famous brand products, or digital content, it is clearly stealing. The technology is just the means to an end. I have no problem with arresting these types of people.

Then there are people who try to push the limits of the law using current technology. Sometimes these efforts lead to new uses of the Internet. For example, in the early days of the Internet I remember that the very first commercial Internet spam came from a law firm. The law firm got blasted for what was at that time seen as an outrageous attempt to commercialize the Internet. Ah the good old days when there was only one spammer. Yet commercial email advertising has become a major part of the Internet experience.

I do not see people who push the limits as criminals. Some of them may be bad people, and they often get sued, and they often lose, and I am fine with that. But I would leave it to the civil courts to define what appropriate technology behavior is. I would not make it a criminal issue.

The concepts of file sharing and on-line file storage on the Internet are still fairly new, and the law around what is allowed and what is not is still in flux. Several early cases, particularly A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (2001) and MGM Studios, Inc. v. Grokster, Ltd. 545 U.S. 913 (2005), established that if the file sharing company encouraged people to share copyright protected files through its site, then the site itself was liable for contributing to the infringement.

The current area of uncertainty involves the 1998 Digital Millennium Copyright Act (DMCA). Under the DMCA, service providers are protected from copyright infringement liability if they follow certain procedures. When they are notified by copyright owners of infringing material on their site (called a take down notice), they must promptly take down the copyright infringing material.

So far, courts have held that service providers do not lose the protection of the DMCA simply because they are aware that their site is being used to store copyright infringing material. See Viacom International, Inc. v. YouTube, Inc., No. 07 Civ. 2103 (currently on appeal although likely to settle) where the court found:

“[I]f a service provider knows (from notice from the owner, or a “red flag”) of specific instances of infringement, the provider must promptly remove the infringing material. If not, the burden is on the owner to identify the infringement. General knowledge that infringement is “ubiquitous” does not impose a duty on the service provider to monitor or search its service for infringements.”

The heart of the government’s case against MegaUpload seems to be that the owners of MegaUpload were aware that its site was being used for the exchange of copyright infringing material. Case law suggests that this knowledge is not sufficient for civil liability. It is hard to imagine that it would then be sufficient for criminal liability.

The government then seems to admit that MegaUpload removed offending files when it received a DMCA takedown notice. But the government also seems to be saying that MegaUpload was slow to remove files and did not do a very good job. Again, this does not appear to constitute criminal liability.

I have already discussed the problem that the sheer size of today’s major file sharing and file storage sites makes it impossible for companies to be in 100% compliance with the DMCA. See Copyright Enforcement on the Internet – Where should we draw the line? Even Apple does not maintain 100% compliance.

MegaUpload made some effort to remove infringing materials after it received take down notices. MegaUpload is a huge site. MegaUpload itself claimed that it had 50 million daily visitors and traffic on its sites accounted for 4% of all Internet traffic. The site could not possibly maintain 100% compliance with the DMCA. Does that make the owners of the site civilly liable for copyright infringement? Does it make them criminals? Those are tough question and ones where I do not think there has been any case law yet.

It is important for technology innovation that we let people push and test the limits. One of the founders of Napster, Sean Parker, took what he learned from Napster and became one of the key people in developing Facebook. If Parker had been branded a criminal instead, I would not say that social media would not exist, but social media might have developed much more slowly than it has.

By attacking MegaUpload before the limits of the DMCA have been established, theU.S.government is likely to scare off companies and new products and services that would otherwise provide legitimate technological innovation in on-line data storage (cloud storage) and file transfer services. TheU.S.government should have waited until case law was settled on this issue before using its full force to arrest and detain the MegaUpload individuals and seize their assets all over the world.

The criminal indictment quotes from many emails that suggest that the individuals who were arrested did participate in uploading some individual copyright infringing files to their own sites. Although these charges are minor, they may be the strongest part of the government’s case.

Even though the government’s case appears weak overall (and I say appears because we really do not know all the facts yet), I predict that the U.S. government will attempt to save face by putting so much legal pressure on MegaUpload that the executives will be forced to plead guilty to some minor charges and to forfeit their sites, seized property and money.

2 Comments | Law, Social Responsibility, Society, Technology, The Internet | Tagged: , , , , , , , , | Permalink
Posted by Law Offices of Gary Marshall

Well Written Website Privacy Policy May Backfire

January 24, 2012

I know that I should be writing more short blog entries rather than just a few long blog entries. But as you can see, I have trouble keeping my entries short. There is so much to say about any topic. In this entry I will try to keep it short. Here goes.

I recently came across a website privacy policy that was well written and easy to understand. In this case, that may not have been a good idea.

I read an email post where someone said that he had read about the Nextdoor website in the news. He was excited to give it a try in his neighborhood. Here is how the website describes itself:

“When neighbors start talking, good things happen. Nextdoor is the private social network for your neighborhood. It’s the easiest way for you and your neighbors—and only you and your neighbors—to talk online and make all of your lives better in the real world. And it’s free.”

He added that he glanced at the Privacy Policy, but didn’t see anything “out of the ordinary” to his untrained eye. When he invited some of his neighbors to join, a storm of email erupted around the Privacy Policy. Neighbors feared the sale of all of their personal information and the storage of their data forever and responded that they “would never sign up on a site such as this!”

I was curious about his comment so I read the entire Nextdoor privacy policy. (I would think that only a lawyer would actually do that, but apparently people actually do read these things.) It is well written and is in plain English, rather than in difficult to understand legal jargon. I like that. I try to draft my agreements that way as well. But that may be the problem. Most people do not realize just how little privacy they have. Because the agreement is very clear, someone who reads the agreement will better understand how their data will get stored and used. It is not that the Nextdoor site will use their data any differently than other sites, it is that Nextdoor is more honest and more open and clear about how the data will be used. Even when a website does not share information, it often stores that information for a long time and uses that information on its website in various ways. The Nextdoor privacy policy explains all of this quite well. I suspect that their data retention and use policies are not unusual. What is unusual is how open and honest they are about it. As a result, people who read the privacy policy may be more concerned about this particular site than they should be. That is a strange case where being open and honest about what you do may not be the best policy.

As a side note, one of my themes in this blog is how little privacy we now have. Here is a good example. Even without joining the Nextdoor site, much of your neighborhood information is already quite public. Where I live, in King County Washington, if you want to know who owns the house across the street from you and how much they paid for it, all you have to do is look up the address on the King County Assessors office website. You can find a history of sales including the parties and the price paid, tax value assessments by year, pictures of the house, floor plans, statistical details about the house, and lots of other data. All of that is already public information.

I am not sure telling your neighbors that their privacy is already gone will help convince them to join the Nextdoor website. But it is largely true.

Update May, 2013:

Instagram had a similar reaction from its customers when it tried to simplify its terms of use contract. The newer terms were easier to understand and protected the customer more, but because the customer could now understand the contract, many of them complained. Instagram ended up reinstating its older terms of use contract. See Why
the Instagram debacle just taught every tech company to be shadier than ever.

 

 

2 Comments | Business, Law, Technology, The Internet | Tagged: , , , , | Permalink
Posted by Law Offices of Gary Marshall

Top Ten Intellectual Property (IP) Law Traps

November 2, 2011

Intellectual property (IP) law is a deceptively complex area of law. IP law is very rules based, and the rules vary depending on the type of IP protection. Non-IP attorneys and individuals who attempt to practice IP law without the assistance of an IP attorney often run into trouble. Here are ten common traps.

Copyright

1. Copyright law is one of the few areas of law where transfers of rights must usually be in writing (real estate is the other obvious example.)

2. The owner of the copyright is the person who created the work, not the person who paid for it. You hire someone to design a website for you. It is your website. You paid for it. But absent a written agreement to the contrary, the website developer owns the copyright in the website.

3. It is deceptively easy to end up accidentally jointly owning the copyright instead of owning it outright. Say you write a software game program, but you hire an outside firm to handle the sounds. It is quite possible for the outside firm to own part of the copyright in the entire software game program. (This is called joint authorship.) This is easy to fix with a written agreement that covers copyright ownership.

Trademark

4. The right to register a federal trademark belongs to the person who used the mark first in interstate commerce, not the person who filed a registration first. But if the first person to use does not object to the other person’s improper federal registration within five years of registration, they may permanently lose the right to object.

5. You do not lose copyright rights by not policing your rights, but you can lose trademark rights by not aggressively policing your rights.

6. One way you can fail to police your rights and lose your trademark is if you license someone to sell your widgets under your trademark and the license agreement does not allow you the right to police the other party’s use of your mark.

Copyright and Trademark Registration

7. Copyright rights and trademark rights are both created automatically. Copyright rights exist as soon as you create something. Trademark rights exist as soon as you use a trademark in commerce. But in each case, you gain considerable additional protection by registering your rights. People often neglect to register.

Copyright registration is only at the federal level. It is fairly straightforward and can usually be done by a non-lawyer. (Practice Tip: Have you registered the copyright in your website and other marketing materials?) Trademarks can be registered at both the state and federal level. State trademark registration is also fairly straightforward but does not help much. Federal trademark registration is deceptively complex. Sometimes a federal trademark registration will be approved as submitted, but quite often it will not. You may need to negotiate with the Trademark Office, and there is a specialized technical language that they use and expect you to use as well. When trying to register a trademark federally, it is best to use an attorney who is familiar with the federal trademark registration process.

Trade Secret

8. A customer list is considered a trade secret. An employee cannot take a physical copy of the list with them when they leave a company. If the employee memorizes the list, that is considered the same as taking a physical copy.

Non-Compete Agreements

9. In Washington, where I practice law, a non-compete agreement entered into after the employee has started working for a company is not enforceable unless the employee is given new consideration for signing the agreement. The right to continue working for the company and to not get fired is not considered new consideration. Labriola v. Pollard Group, Inc., 152 Wn.2d 828, 834,100 P.3d 791 (2004).

Family Law and Estate Planning

10. Intellectual property is property. Yet I often see a divorce property settlement agreement or a will where there is no mention of intellectual property. Have you written a book, or painted a picture, or created other intellectual property? If so, it should be accounted for in the legal documents.

 

(These examples are oversimplified. Although they apply most of the time, I omitted all of the caveats for when they do not apply. Do not rely on these rules without seeking specialized IP law advice first. )

 

Leave a Comment » | Business, Law, Technology | Tagged: , , , , , , , | Permalink
Posted by Law Offices of Gary Marshall

Copyright Enforcement on the Internet – Where should we draw the line?

October 26, 2011

In this week’s news a woman is suing Apple for copyright infringement because two of the iPhone apps it sells are using pictures that belong to her. She complained to Apple but they did not remove the pictures. Details here.

.When should we hold a company liable for contributing to copyright infringement by others on its web site? I am not talking about direct infringement, when the company itself uses someone’s copyright protected work without their permission. That one is easy. They should be liable. But what if somewhere on the company’s web site someone else has posted material that violates someone’s copyright? In the early days of the Internet we still held the company liable, although we usually gave them a chance to fix the problem. They were not liable unless they were notified of the infringement and we gave them an opportunity to correct it, and they still failed to fix the problem. (See in particular the Digital Millennium Copyright Act (DMCA)).

These days web sites are so large, and the databases that drive the web sites are even larger. We have a company like Google that is trying to put every book ever written on its web site. Now we are starting to see cloud storage of music, and important files, and perhaps eventually cloud storage of everything. Has the Internet become too big to expect individual companies to be able to police their own web sites?

I was talking to an attorney from Facebook recently. I am paraphrasing what he said. If Facebook had to search its own web site for all the instances of a particular item, it would take months, or perhaps even years, even at computer speeds. Their database is that large.

In the case in the news, the woman used an iPhone app to take pictures which she then uploaded and posted on a picture sharing web site with the appropriate copyright notice. The iPhone app she had used copied her pictures, after removing the copyright notice, and posted them on the Apple App store web site to help market its app. She claims to have notified Apple at least six times prior to filing the law suit. I am not privy to the actual details of the case, but I find it hard to believe that Apple would intentionally ignore her complaints. I suspect they just have too much ‘stuff’ out there, and can no longer effectively police it all. According to Wikipedia, as of May 2011 the Apple App store had over 500,000 third-party apps officially available. That number is growing all the time.

So what is the answer? Do we let Apple get away with contributing to copyright infringement? Do we require that companies with large web sites/databases develop new techniques to police their sites? Or do we require companies to keep their web sites/databases small enough that they can effectively police them with today’s technology? I suspect that the answer will come from new technology, not from new laws. These companies will get better at policing their sites, and we as a society will get more tolerant when they do not do so as effectively as some people would like.

I would have advised this woman that once she posts something on the Internet, her ownership and control is effectively gone, no matter how aggressively she tries to police its use. That may not be fair. That may not be legal. But that is the way it is.

2 Comments | Business, Law, Society, Technology, The Internet | Tagged: , , , , , | Permalink
Posted by Law Offices of Gary Marshall

The Lesson from Skype: Don’t Count Your Stock Options Before They Hatch

August 30, 2011

Founders of startups and senior executives who join startups often place too much value on their stock options. Stock options are extremely risky. You may count on your stock options as a possible way to make you rich some day, but you should be very careful if you are counting on them to be part of a reasonable compensation package.

There is the obvious problem that the stock in the company may never be worth anything. But there are many other potential problems with stock options as well. A recent case is illustrative.

It was rumored that one or several senior executives of Skype lost their stock options when Skype agreed to be acquired by Microsoft earlier this summer. As best I can tell many employees of Skype had the right to purchase shares of Skype in accordance with a stock option agreement. That agreement was subject to the terms of the standard company-wide Stock Option Agreement. This is very common. The company-wide stock option plan in turn was subject to the terms of an investor stock plan. There was a provision in the investor stock option plan that allowed the investors to buy back the vested stock options of former employees of Skype at the stock election price. So if you had a vested option to buy 100 shares at $1 each, and the shares were now worth $100 each, the investors could buy back your stock options at $1 per share, wiping out any value you had gained in the stock options. At least one former employee appears to have lost his stock options this way. It is also rumored that a number of senior executive were recently fired and that they too will lose their stock options.

Yee Lee, the individual who appears to have lost his stock options in Skype had written about his experience in a blog. The letter Ricardo Velez, Skype’s associate general counsel, sent him is available here, and his stock option agreement is available here.

(Mr. Lee might still have legal recourse. It is possible that Mr. Lee could argue that the contract terms that forfeited his stock options were unconscionable, or that he had an implied contract right to the options that superseded. I am interested to see if he fights for his options.)

I have read blog comments that this situation is unusual. I do not agree. I have reviewed many stock option plans for clients. The company-wide Stock Option Plan is often subject to the terms of one or more other documents. I always ask the clients to get me a copy of those documents so that I can review them. Sometimes the client thinks I am just trying to run up my fee. But as the Skype case demonstrates, it is important to follow up on the details. In my experience it is rather common that the Stock Option Plan or the additional documents contain one or more legal conditions that could potentially make the client’s stock options worthless. It has also been my experience that the company is not gong to make any changes in these documents for just one person. It is a take it or leave it offer. My standard advice to clients is to insist on enough salary or outright stock grants to make the job worth taking, and consider the stock options as a potential bonus that may or may not come to be. Or accept the risk that you are taking a large risk and that the risk factors are mostly beyond your control.

Do not rely on the fact that you are friends with the people in charge of the company. They may be your friends now. But when there is a large amount of money at stake, friendships tend to fade fast.

If you think the company has value, you should try to stay with the company until you can cash out. As one Skype representative has been quoted as saying in response to the Skype situation,

“You’ve got to be in it to win it. The company chose to include that clause in the contract in order to retain the best and the brightest people to build great products. This individual chose to leave; therefore he doesn’t get that benefit.”

Of course every situation is different. There is less risk if you are receiving stock options in a public company with a large number of shareholders, positive financial track record, and is not likely to undergo a major change in order to raise capital. There is more risk in a start up that has yet to make a profit, and has no market for its shares, and is likely to restructure itself through a merger or sale, or other stock manipulation, in order to raise capital.

Stock options are still a great way to get rich. But they also remain a very risky way to do so. If you go the stock option way, be aware of the high degree of risk involved.

7 Comments | Business, Law, Social Responsibility, Technology | Tagged: , , , , , , , , , , , , , , , , | Permalink
Posted by Law Offices of Gary Marshall

Lawyer Equity – A Bad Idea (Part 2 of 2)

July 18, 2011

Paying Attorneys with Equity: Other Problems

In part one of this article, I brought up the issue that many start-ups will pay their attorneys with equity in the company rather than or in additional to paying them cash. I maintain that this is a bad idea. I described the main problem with this arrangement in the first part of this article – that such an arrangement creates a potentially harmful conflict of interest for the attorney. But there are many other reasons why this arrangement should be avoided as well.

Tendency to Over-litigate

I also get the sense that companies tend to over-litigate cases when they are not paying for them up front. The cost of attorneys fees is an incentive to try to avoid litigation and settle disputes. But if you are not paying the attorneys, you may feel that it makes sense to fight to the bitter end. That is still not the case. First, of course, you are still paying the attorneys. You are giving up some of your precious ownership interest in the company. Second, litigation is very distracting. You will end up spending valuable time on your litigation cases that you should be spending making your company successful. Third, litigation is a terrible way to resolve disputes. The judge who will decide your case will have very little time to get to know your case and will bring their own personal biases to the case. The end result is often a somewhat random decision. Do you really want to bet your company on the mood of a particular judge on a particular day? Better to settle the case and get back to building your company. You will have more incentive to settle if you are paying your attorney with cash instead of equity.

Failure to Value Legal Advice

The company may treat the attorney’s advice differently if the company is not paying for that advice. People tend to value advice in proportion to what they pay for it. When the attorney who is taking equity is giving what is in essence free advice, the company may not value that advice highly. If the company is paying its lawyer for advice, the company is more likely to take that advice seriously.

 I have seen this first hand. When I have offered my advice for free (what we attorneys call pro bono service), the client tends not to respect the advice.

Smart Money versus Dumb Money

There is a saying that smart money comes from banks and professional investors, and that dumb money comes from attorneys, doctors and friends and relatives. Banks and professional investors know about the risks of start-up businesses. They may not like it when they lose money, but they know and accept the risk. They also know about the ups and downs of business and will not be quick to pull the plug if they think the business idea still has merit. Dumb money people expect to get rich. They may cause trouble if they lose their money. And they may want to run at the first sign of trouble.

You may think that a lawyer who deals with start-ups all the time will not follow the dumb money pattern. That is true sometimes, but not as often as you would think. There is a reason why that person became an attorney and not an entrepreneur.

If You Need to Pay Your Attorney with Equity, Are You In Trouble Already?

One of the tests of whether a potential business idea has merit is whether the founders can raise capital. If you are having so much trouble raising capital that you need to in essence borrow money from your attorney, what does that say about the viability of your business plan? You may be too underfunded to start a business or your business plan may need adjustment. If your best source of money is your attorney, your company may have serious problems.

Lack of Attorney Choice

A start-up should be free to hire and ultimately to fire any legal advisors. But what if the current legal advisors are also shareholders in the company? Then there are problems. If you fire them, you may have to deal with disgruntled shareholders for the rest of the life of the company. That will influence whether you keep or fire them. This can lead to a messy situation. If you owe a former law firm money they are a creditor just like the rest of your creditors. But if they are shareholders instead, you are still partners with them, whether you like it or not.

Attorney Ethics Rules

Attorneys are governed by a set of ethics rules. These rules are imposed on a state-by-state basis, but the rules are very similar throughout the country. I do not believe that the rules prohibit an attorney from taking an equity stake in a client company. But they do impose conditions to protect the client, and those conditions are rarely actually met.

In Washington, where I practice, there are two rules that are directly on point. They are:

Ethics Rule 1.7 Conflict of Interest; Current Clients

… a lawyer shall not represent a client if the representation involves a concurrent conflict of interest …

and

Ethics Rule 1.8 Conflict of Interest: Current Clients: Specific Rules

(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client …

There are exceptions to these rules. Basically it is permissible to represent a client or enter into a business transaction with a client where there may be a conflict of interest, if the client is fully informed of the potential conflict and the risks involved, has an opportunity to seek independent legal counsel concerning the relationship, and agrees in writing. This rarely happens in practice. Yet the client rarely seeks independent legal counsel. It just does not feel right to pay one attorney to review an arrangement to hire another attorney for free.

If you will be giving your attorney equity instead of cash, who will put together the deal and prepare the paperwork? Usually it is the attorney you have hired. That could create major problems. If you are negotiating an equity arraignment with an attorney who negotiates equity arrangements all the time, how can you be sure you are getting a fair deal, and not being taken advantage of? Is the attorney giving you the best representation possible, or is the attorney looking out for himself? Will the attorney fully disclose the nature of the deal in a way that you can actually understand?

There is a reason why attorneys are required to take many steps if they want to enter into a potential conflict of interest situation with a client. The fact that there are many steps is a sign that the relationship has serious potential problems. The fact that the required steps are not often followed is just a further warning sign that it is best to avoid this situation all together.

There is also an ethics requirement that the attorney’s fees be reasonable (In Washington see Ethics rule 1.5). What is a reasonable amount of equity to receive from a start-up given the enormous risks involved and the large potential reward? It is usually very hard to say.

There are some lawyers who will push the rules of ethics as far as they can. There are others who try to make sure they stay within the rules. Wouldn’t you rather that your attorney was one who made sure they stayed within the rules, at least when it comes to rules that are meant to protect you, the client?

What Do You Think?

Attorneys are pretty evenly divided on whether it is appropriate to take an equity stake in a start-up client. Many start-ups like the idea, but they may not be well informed on the subject. You now know what I think. What do you think?

(My thanks to fellow Seattle attorney Mason Boswell whose comments in an on-line discussion on this issue helped me focus my thoughts on the subject.)

1 Comment | Business, Law, Technology | Tagged: , , , , , , , , | Permalink
Posted by Law Offices of Gary Marshall

Lawyer Equity – A Bad Idea (Part 1 of 2)

July 18, 2011

Paying Attorneys with Equity: the Main Problem

 Start-ups are usually short on cash. They also usually need legal help. So, it is tempting for a start-up to offer attorneys equity in the company instead of paying them cash. Many attorneys will agree to this. In fact, some will insist upon it. But it is a bad idea.

The Equity Arrangement

There are many variations on the attorney equity arrangement. The attorney can receive stock in lieu of payment. The attorney can offer a reduced rate and/or delayed payment of attorneys fees (until the next round of financing, for example) in return for equity. The attorney can obtain the right to purchase stock in the start-up at favorable rates, typically at the rate that the founders paid, or the rate of the most recent round of financing. The attorney can receive stock options instead of stock. Of course there are as many variations as there are attorneys. In any of these cases, the problems are the same.

The Main Problem – Conflict of Interest

The main problem is that if an attorney has an equity stake in the company, the attorney is no longer an unbiased professional. Attorneys are supposed to exercise independent professional judgment and offer unbiased legal advice to their clients. But the advice that the attorney gives the company may be affected by his or her ownership stake. This is called a conflict of interest – the attorney’s advice to the client may conflict with the attorney’s own personal interests. It is unrealistic to believe that the attorney will not take into account his or her personal financial interests while providing legal advice to the start-up, perhaps without even realizing that he or she is doing so.

Say that a company owes its attorney a lot of money for legal fees The company then comes to the attorney with a possible sale offer that would provide enough capital to pay the attorney’s fees. Isn’t the attorney faced with a possible bias of wanting the deal to close so he that can be paid? Would he still be expected to raise any red flags about the deal that he sees? Of course he would.

A company’s attorney should be working for and answer to the company, not to the individual shareholders of the company. Although I find that attorneys often fail to make this distinction, it is an important one to make. What is best for one shareholder may not be best for another, or for the company as a whole. (In my experience attorneys tend to favor the major shareholder, sometimes to the detriment of the company as a whole and/or to the minority shareholders.) When the attorney is one of the shareholders, who is the attorney representing – the company, the shareholders, or him or herself? The attorney should be answering to the company. The company is in turn answering to the shareholders. But if the attorney is one of the shareholders, then the attorney is in effect answering to him or herself, never a good situation.

A different perspective is to consider that the attorney who invests in the company is in essence acting as a venture capitalist. The interests of the venture capitalists are sometimes aligned with the interests of the company. but not always. For example, the venture capitalist’s interests may be very different than the company’s interests in negotiating a new round of financing, or deciding how to proceed with a company in financial distress, or dealing with a liquidation event. Often the start-up will be asking the attorney for advice dealing with venture capitalists. When the attorney’s financial interests are more aligned with the venture capitalists than with the start-up, it is impossible for the attorney to give truly unbiased advice.

There are also complex legal issues under securities laws for attorneys who own equity in their clients. That topic is beyond the scope of this article.

Having said that, I concede that attorneys taking equity would not be the only instance where an attorney would have a potential conflict with the client over money matters.

The attorney equity arrangement is somewhat similar to an attorney taking on a personal injury case on a contingency basis. Many attorneys will take large personal injury cases where instead of getting paid by the hour, the attorney gets a percentage, say 40%, of any money recovered. What if the other side makes a large settlement offer? The client asks the attorney’s opinion of whether he or she should settle. The attorney may have a bias towards taking the sure money, but is expected to advise the client on what is best for the client, not the attorney. Yet this is common practice and it is simply assumed that the attorney will always put the client’s interests first.

But I still can not shake the feeling that an attorney taking an equity stake in a company is different, and does interfere with the attorney giving his or her client unbiased professional advice. In addition to representing start-ups, I represent individual entrepreneurs in disputes with the companies they helped found. Sometimes these disputes end up in litigation. The company is usually represented by some large downtown Seattle law firm that has an equity stake in the company. I can’t help but feel that the attorneys are acting like their clients, with their clients perspective, when they should be unbiased legal professional advisors.

Leave a Comment » | Business, Law, Technology | Tagged: , , , , , , , , , , | Permalink
Posted by Law Offices of Gary Marshall

A common and nasty trap for start-ups and how to avoid it – Forgetting to put founder’s IP licensing rights in writing

May 19, 2011

I said in an earlier blog that when you license technology, you should put everything in writing. Here is one trap that often gets start-ups in trouble. Founders often neglect to put licenses between themselves and their company in writing. They just assume that the company can use the technology they create. But what happens when they are no longer associated with the company? Can the company continue to use the technology? Can the founder?

We have a restaurant chain here in Washington called Ezell’s Fried Chicken. Late last year the company got in a fight with its co-founder and namesake Ezell Stephens. The headline in the local news read Founder Of Ezell’s Chicken Fired In Feud With Board.As I started reading the article I was pretty sure of what I would discover. Ezell’s the company and co-founder Ezell Stephens never had a written agreement as to who owned the Ezell trademark and their proprietary fried chicken recipe. Now they both claim ownership.

Mr. Stephens had recently started his own chain of restaurants, which he also called Ezell’s, claiming it was his name after all. And he used the same chicken recipe that Ezell’s Fried Chicken used. He claimed rights in the recipe because he had developed the recipe and it was based on an old family recipe that he had brought with him to Ezell’s Fried Chicken. (See his statement from his court filing at the end of this blog.) One can easily understand and sympathize with his emotional attachment to his own name and his own recipe.

On the other hand, Mr. Stephens stayed quiet for over 20 years while the company used the Ezell’s trademark and the Ezell family recipe. He did not object when the company applied for and obtained federal trademark registration for the marks Ezell’s Famous Chicken and Ezell’s Fried Chicken. He allowed the company to bring in outside investors. He profited from the company as an owner and an employee. Even if there were no written agreement, there had to be an implied agreement that the company owned the trademark and the recipe. Mr. Stephens allowed the other owners to invest in and work for the company all the time relying on that implied agreement.

In determining the terms of any implied contract, the court will not look at the subjective intent of the parties – what Mr. Stephens thought he was agreeing to. Rather the courts look to the objective intent of the parties – given the facts and circumstance, how would a reasonably prudent person in their situation interpret the contract. Using the objective standard, it should be clear that Mr. Stephens transferred any ownership interest he had in the intellectual property to the company.

I can understand how he feels. He lost the right to his own name and to his family recipe. But a startup is a business. He chose to make a business decision. It is too late now. He took the money. End of story.

As I write this blog, the case is still active in court. The parties are fighting over who owns the Intellectual Property rights and over several agreements that the parties had entered into. I am not privy to all of the facts of the case, and do not know the details about the agreements, but as to the intellectual property rights, I would be very surprised if Mr. Stephens prevails.

For a similar take on the Ezell trademark issue, see fellow Seattle trademark attorney Michael Atkins’ Seattle Trademark Lawyer blog entry: Ezell’s Case Illustrates Need to Decide Who Owns Mark Before Dispute Arises.

The Ezell case reminds me of a story that I have heard several times from different sources. I have not been able to verify this story on the Internet and now believe it is apocryphal (being of questionable authenticity). But it could have happened and it illustrates my point very well.

The background story is true. Gene Roddenberry created the popular television series Star Trek, which aired in the 1960’s. Years later he helped produce a sequel television series, which was called Start Trek: the Next Generation. It was very successful. The Star Trek concept was also used in a series of successful movies and several other television series. Mr. Roddenberry had married an actress who was a regular in the first Star Trek show (she played Nurse Christine Chapel.)

Mr. Roddenberry died in 1991 while the Star Trek: The Next Generation show was on the air.

Now the story goes that Mr. Roddenberry owned the intellectual property rights to the Star Trek universe. Since he was personally involved with Star Trek: The Next Generation, no one thought that the television show needed a license to use the Star Trek universe. Supposedly, his wife was resentful of Star Trek because her husband spent too much time with Star Trek and not enough with her. When he died, she inherited the rights to the Star Trek universe. She initially refused to let Star Trek: The Next Generation continue to use the Star Trek universe. Without the Star Trek rights the show would have to shut down. Supposedly she was offered more money and a major recurring role in the show and she relented and the series was saved. (She did play the role of the recurring character in-your-face Betazoid Ambassador Lwaxana Troi. She appeared in every Star Trek television series that followed as well.)

Whether true or not, and I now think probably not, the point is still valid – make sure your company has valid written licenses for all of the intellectual property it uses, even if the you the founders brought that intellectual property to the company yourself.

——————

UPDATE: On October 18, 2011 the press reported that the parties had settled. Mr. Ezell agreed to give up the restaurant name Ezell but he can keep using his fried chicken recipe.

——————

From Mr. Stephens’ Answer and Counter-claim court filing:

3.9 Upon incorporation, Ezell Stephens retained all rights to his EZELL’S FRIED CHICKEN trademark; the Logo; and his recipes, procedures, and techniques.

3.10 Ezell Stephens also retained all rights to control the use of his name, voice, signature, photograph and likeness. These rights, along with the EZELL’S FRIED CHICKEN word trademark, the Logo trademark, and Ezell Stephens’s recipes, procedures and techniques are referred to collectively herein as “Ezell Stephens’s Intellectual Property.”

3.11 Ezell Stephens allowed EFC to use Ezell Stephens’s Intellectual Property without charge as long as he was involved with the day-to-day operations of the business. It was specifically anticipated and understood that Ezell Stephens would remain as an officer and director of the company that he founded, in order that he might control the quality of the goods and services provided in connection with the Ezell Stephens’s Intellectual Property.

3.12 Ezell Stephens did not intend to execute, and does not recall ever executing an assignment of Ezell Stephens’s Intellectual Property to EFC.

3.13 Ezell Stephens never intended, and has never agreed, that EFC could use Ezell Stephens’s Intellectual Property, including his name and photograph, after he was no longer involved with EFC’s business.

3.14 There are no written agreements that authorize EFC to use Ezell Stephens’s name or photograph.

3.15 There are no written assignments of any of the Ezell Stephens’s Intellectual Property to EFC.

3.16 The oral permission from Ezell Stephens to EFC to use Ezell Stephens’s Intellectual Property was also granted with the understanding that it was non-exclusive. In particular, Ezell Stephens retains, and has always retained, the right to use his name as a trademark in connection with separate restaurant businesses. Such rights have been recognized by EFC as part of its course of dealing with Ezell Stephens.

 

1 Comment | Business, Law, Technology | Tagged: , , , , , , , | Permalink
Posted by Law Offices of Gary Marshall

Top Ten Legal Mistakes Entrepreneurs Make (and how to avoid them)

October 27, 2010

Here are my top ten legal mistakes entrepreneurs make and how to avoid making them, based on this author’s 26 years of experience providing legal advice to entrepreneurs. The focus is on how to avoid getting into legal trouble, rather than a checklist of specific legal documents that you might need. In my experience entrepreneurs often get into trouble when they do not follow this advice.

1. Failing to conduct your business to avoid litigation.

Of paramount importance when starting and managing a new company is to avoid ending up in litigation. Litigation is a terrible way to resolve disputes. It is very expensive, and even more importantly, it takes away your mental energy. While you are in litigation win or lose, your company will suffer. Much of the rest of this top ten addresses ways to avoid litigation.

2. Failing to put it in writing.

All of your major agreements should be in writing. It may sound obvious, but there are many types of agreements that often don’t get put in writing.

When a company has only a small number of owners, there should be a written shareholder or partnership agreement among the owners. Often people will tell me that they are good friends and they don’t need an agreement. They are wrong. Friendships sour, people change, and people die. Peoples’ priorities change when money is involved. It is far easier to put that agreement in writing now while you get along with each other rather than after you are already fighting.

Often founders of a company will bring technology, valuable trademarks, or other proprietary information that they have already developed, with them into the company. After the company is formed, who owns this intellectual property? There should be a written agreement that clarifies ownership.

When you start to work for a new company, or when your company hires a new senior person, the basic terms of employment should be in writing. These terms include salary, bonuses, stock options, job responsibilities, and term of employment. If the new hire has to move to take the new job, is there a minimum period of employment? Does the company pay moving expenses? Any stock related agreements should also be in writing (see # 6 below).

3. Rushing into agreements.

Do not rush into agreements. Read all important agreements before you sign them. Have your attorney review all major documents. Too often, in the rush of making a business grow, entrepreneurs sign whatever is put in front of them, especially if it comes from someone they think they can trust, such as one of their partners or a venture capital firm. There is always time for review. You can and should look after your own interests. This does not mean that you are trying to kill the deal or be an obstructionist. Whoever drafted the contract took some time to prepare the document. You are entitled to take some time to review it and make sure it says what it is supposed to say, and treats you fairly (or at least as fairly as venture capitalists can treat entrepreneurs).

4. Not planning for the unexpected.

You may think nothing is going to go wrong. It is healthy to have that kind of optimism when starting a new company, and entrepreneurs are inherently optimistic people. You have to be to start your own company. But things do go wrong. You need to plan for the unexpected.

Go over your plan of action for your company and try to think what could go wrong and what would happen if it did. For example, what would happen if one of the founders died unexpectedly?

Anticipate that founders will have disputes. Fifty percent of all marriages end in divorce. The divorce rate among entrepreneurs is probably much higher. You may think that “even if the founders have a dispute or one of us leaves the company, we will be able to work out our differences. After all we are all reasonable intelligent people and we are friends. Nothing will come between that.” But it often does, especially when money is at stake. Plan for the unexpected now while you are still friends.

This is another reason to use attorneys. Clients rarely come back to their attorney to tell them the agreement worked exactly as planned; it is only when something goes wrong that they call their attorney. So attorneys are used to thinking about and planning for the unexpected. Your attorney can help you anticipate problems and prepare to avoid them or at least find a way to deal with them in an orderly non-litigation fashion.

5. Trusting people who say “You can trust me.”

If someone says “We don’t need the lawyers” or “We don’t need fancy contracts because you can trust me,” run, do not walk, and run away fast. Someone who can be trusted never has to say “trust me.” They have nothing to hide. They say, “Sure, we can put it in writing” and “Sure, have your lawyer review this.” and “What else do you need from me to assure you?” (For further discussion of this issue, see my blog entry Don’t Trust People Who Say You Can Trust Me.)

6. Using vague terms in agreements.

Try to use specific terms in any agreements you enter into. Watch out for vague almost meaningless terms like ‘profits’. The amount of profits in a venture is whatever the accountants want it to be. Don’t agree to giving or getting a percentage of profits, or any other subjective term. Use objective easy-to-measure terms instead, like ‘revenue’. Warner Brothers produced the highly successful Harry Potter movie series, with over a billion dollars in revenue. The company agreed to give a percentage of the profits from the movies to various people and companies. But according to the Warner Brothers accountants, these movies have not made any profit. (See STUDIO SHAME! Even Harry Potter Pic Loses Money Because Of Warner Bros’ Phony Baloney Net Profit Accounting.)

Specify stock options in detail. It is common in an offer letter that the company gives senior staff stock options worth around 3% of the company and that is all the letter says. At what price can you purchase the options? When do they vest? When do they expire?

Another vague term is ‘percentage of the company.’ What do they mean by 3% of the company; 3% of outstanding issued stock, with or without taking into account vested and unvested stock options; 3% at the time the letter is written, or at the time of vesting (after several diluting stock events) or when exercised (often after several more stock diluting events)? Be specific when offering or accepting stock or stock options.

7. Not having your own attorney.

Don’t expect venture capitalists (VCs) to look after your interests. When your company is ready to raise funds, the fund provider, usually a VC or two, will be represented by legal counsel. The VC will usually insist that the company hire a fancy law firm that has experience with corporate finance and securities. But who is representing the entrepreneur? Often, no one. You need your own independent legal counsel. You may be hesitant to hire an attorney because you do not want to kill the deal or seem like you are getting in the way. But a good attorney will look out for your interests in a way that does not hurt the company. The same is true if the company is going to be bought by another company.

But be sure to hire an attorney who is experienced in dealing with entrepreneurs and venture capitalists. Your family attorney or your friend’s divorce attorney will not be able to provide you with the counsel you need. Their poor advice will reflect back on how the VCs perceive you.

I remember reading once that the husband and wife founders of Cisco Systems, Inc. wished they had seen their own attorney before signing the documents presented to them by the venture capitalists. They say that they walked away with only 100 million dollars. (One article says before they left the company, they had also sold shares worth another 100 million dollars for a total profit of 200 million dollars.) That may not seem bad, but it is nothing compared to the billions the venture capitalists made.

Hiring your own attorney does not mean that you are causing trouble. It just means that you are looking after your own interests. I once represented an early founder who was no longer with the company, but still had a less than totally clear legal interest in the company. The company arranged to be bought by a larger company. My client was to receive very little of the sale proceeds. I stepped in on his behalf. But I made it clear that my client was not trying to kill the deal. Nor was he trying to be greedy and force the company to buy him off if they wanted the deal to happen. All he wanted was his fair share. Once the remaining founders understood that, we were able to negotiate an agreement quickly and the sale took place on schedule, and everyone was satisfied.

8. Not facing problem areas up front.

It is human nature to want to avoid conflict. There is the hope that if you delay a problem, it will go away. That does not work. The problem does not go away, it just gets worse. If there is a problem area in your future, try to deal with it now. Don’t kid yourself. The problem will come up, and if it comes up later, your options are more limited, and you are much more likely to be unable to resolve the dispute and end up in litigation, which is something you want to avoid; see #1 above.

Most startups are short on cash and on time. The founders can focus on only so many problem areas at once. Work with an experienced attorney who can help you anticipate problems and will advise you when you should take various legal steps. A good attorney will not tell you what to do–that is your job. Instead, the attorney will give you a risk assessment, tell you what kinds of problems can arise, what will happen if they do, and what you can do to prevent them. Then do not put off dealing with these issues because you think they will not happen or you can deal with them later when they do. Make sure that resolving problem areas sooner rather than later is part of your business strategy.

9. Expecting too much value in return for sweat equity.

Sweat equity is not worth much. Be aware that if you contribute sweat equity to a company, you may never be compensated. In many startups the founders forgo salary during the first year or two. They work hard for the company and expect to be compensated once the company is successful. This hard work is called sweat equity. Usually the salary accrues on the books as company debt. Meanwhile, investors have put up money and taken stock and/or stock options. Don’t expect to get paid for your sweat equity unless the company is really successful. Money always trumps sweat equity. The people who contribute the money will be able to dictate terms and will be sure that they are paid back first, before the founders are compensated for the time they have put into the company. I often see that the founders have not put their employment agreements in writing (see #2 above). Then, when the company folds and everyone is fighting over the assets, or the company is sold and everyone is fighting over the proceeds, the people who have worked hard for the company for a long time find that they are on the short end. No one wants to pay them for their past work.

Sometimes founders will avoid having to borrow money for a while and will build up accrued sweat equity compensation in the form of deferred salary and stock options. But even if you have this value on the company books, do not expect to ever see any of it. As soon as you need to raise money, the new investors will insist on erasing all of the sweat equity debt. They do not want to invest money in a company to pay for past performance. They will only want to invest in the future.

10. Failing to keep current on taxes and wages.

Timely pay the IRS and pay your employees or shut down. It is that simple. If you do not pay the IRS and some of your employees, you will probably end up personally liable for these debts.

Most entrepreneurs are optimists. They have to be to choose to be entrepreneurs. They always think that the company is on the verge of taking off and becoming successful. In many startups money is tight and gets tighter over time. Entrepreneurs have a strong temptation to forgo paying employee payroll taxes, and sometimes arrange not to pay their senior staff at all. They figure that they can make up these company obligations as soon as the product ships and sales take off. Instead they use the money that should have been spent on payroll taxes and employee wages to fund the development and marketing of the product. This is not a good idea.

Generally the company will be held liable for back taxes along with penalties and interest, and will also be liable for back wages. In many states including my home state of Washington, the company is liable for twice the amount of wages and any attorneys’ fees incurred collecting the wages. In many states including my home state of Washington, it is not a valid excuse that the company could not afford to pay the wages. If the company did not have the money to pay the employees, then the company should not have let them work and accrue wages; it should have laid them off instead.

But the real nasty surprise is that under the federal tax law, anyone who has any responsibility for writing checks and paying taxes will be held personally liable for unpaid taxes. In many states (perhaps all of them; I have not checked), these same people are also liable for unpaid wages, plus penalties and interest. I successfully represented two senior employees of a failed dot.com and obtained a large personal judgment against the founders of the company for back wages plus penalties and interest.

It is your responsibility to make sure that you do not ask people to do work that your company can not pay for. If the company does not have the money to pay wages and payroll taxes, then shut down before your employees do the work and you accrue company debt that you can and will be held personally liable for.

 Other Articles on this Subject

Here are two other good top ten lists with a different focus from my list. You may want to check them out too.

Top Ten Legal Mistakes Made by Entrepreneurs by Harvard Business School Professor Constance Bagley

Top Ten Legal Mistakes Made By Entrepreneurs, by J Mathew Lyons, Andrews Kurth, Austin, Texas

6 Comments | Business, Law, Technology | Tagged: , , , , , , , | Permalink
Posted by Law Offices of Gary Marshall

Top Ten Intellectual Property (IP) Licensing Agreement Drafting Tips

October 1, 2010

Drafting an effective Intellectual Property (IP) Licensing Agreement is more difficult than it may seem. Here are some drafting tips to help you.

1. Draft Contract terms to avoid litigation.

Of paramount importance when drafting a contract is to avoid ending up in litigation. Draft contract terms with this goal in mind. Litigation is a terrible way to resolve disputes. It is very expensive, and even more importantly, it takes away your mental energy. While you are in litigation you will have difficulty focusing on work and on your home life. They will both suffer.

Litigation results are unpredictable and somewhat random. Lawsuits are a good way to get a final resolution of a dispute. But they are not designed to get the best possible resolution. Rather they focus on 1) getting a resolution so that both parties can go on with their lives, 2) getting that resolution in a somewhat timely manner, and 3) getting that resolution at a reasonable price to the taxpayers who end up paying the costs of running the courthouse. Litigation results are never satisfying to either party. What you often get is a vague ruling from a judge with a dollar figure attached that seems to come out of the air.

My personal opinion is that the better contract attorneys are also litigators or have been litigators in the past. They understand from first-hand experience the importance of drafting contracts to avoid litigation. [By way of full disclosure I am both a litigator and a contract attorney, so I may be biased.] Much of the rest of this top ten addresses ways to avoid litigation.

2. Put everything in writing.

All of the essential terms of your deal should be written down. A contract is a plan of action – what the parties will do for each other. Think of it as a specialized business plan. Until you put the steps of the plan in writing, it is hard to see if you have left anything out. Until you put the plan in writing, it is hard to know if you and the other side are actually talking about the same thing. People’s memories fade over time and people tend to remember agreements in their favor. But they can not argue with the written word.

Remember to put things in writing even if you are licensing IP from yourself. Many founders of companies have already created much of the IP that the company will use before the company was founded. Who owns that IP? Under what terms can the company use that IP? This should be clearly spelled out in writing.

3. Use attorneys to draft documents.

Do not try to draft complex IP contracts yourself. Experienced IP attorneys know how to draft IP contracts. They know what to include and what traps to avoid. They understand how to draft a contract that works. I have heard and seen too many horror stories of clients who do it themselves, often cutting and pasting from other licensing agreements. Several of my clients ended up in litigation because they tried to save a little money by writing the licensing agreement themselves. They did not do a very good job. When problems arose, they ended up paying me far more to solve the problem through litigation than if they had just let the attorneys write the contract in the first place.

Although I wish that you could just buy a form on-line or cut and paste from your last contract, it does not work. Imagine what would happen if your attorney tried to write a software program by cutting and pasting code from existing programs. It would be a disaster. Don’t try to do the attorney’s job with a cut and paste job either.

4. Face problem areas up front.

It is human nature to want to avoid conflict. There is the hope that if you delay a problem it will go away. But it does not work. The problem does not go away, it just gets worse. If there is a problem area between the parties, deal with it now. The time to discuss it and resolve the differences is at the beginning of the relationship. The problem will come up, and if it comes up later, your options are more limited, and you are much more likely to be unable to resolve the dispute and end up in litigation, which is something you want to avoid, see #1 above.

I negotiated a contract where the other side agreed to a contract term regarding the payment of licensing fees from existing licenses. My client knew that the actual payment according to this term would end up being over one million dollars, while the other party thought it would be around $100,000. I insisted that my client disclose this fact up front and redraft the contract term. They gave up their legal claim to one million dollars, but the other side was never going to pay that amount anyway. Instead they negotiated a fee that both sides thought was fair, and they avoided litigation

5. Plan for the unexpected.

A contract should be a plan of action. But a contract should also deal up front with what will happen if the unexpected happens. What if things do not go according to plan? How should the parties deal with the unexpected? It is far easier to come to agreement on how to deal with the unexpected at the start of the relationship then after the unexpected has already happened.

A client of mine drafted his own license agreement against my advice. He was to distribute the other party’s software. Both sides were counting on the other party releasing a major upgrade to the software shortly after the agreement was signed. My client made a major investment in setting up his business in anticipation of the major upgrade. I asked him what would happen if the major upgrade did not happen. He insisted that it would and he did not have to worry about that, and he refused to plan for the unexpected. Three years later when the upgrade had still not been released, he came back to me and we ended up litigating the issue of what happens now.

Go over your plan of action and try to think what could go wrong and what would happen if it did. This is another reason to use attorneys. We see lots of cases when things have gone wrong, and we are used to thinking that way. Clients rarely come back to their attorney to tell them the agreement worked exactly as planned. It is only when something goes wrong that they call their attorney. So attorneys are used to thinking about and planning for the unexpected.

6. Make the terms fair.

If the contract terms are fair and reasonable, you are far less likely to have a dispute. You certainly want to try to negotiate a contact that is in your favor. But if the contract terms are too one-sided in favor of one party, the other party is less likely to want to perform, and you are more likely to end up in a dispute. Do you want to be in the IP licensing business or the litigation business? If you want to be in the IP licensing business, then draft a contract with reasonable terms so that both sides are able and willing to perform. That way you are not likely to end up in litigation.

There is a difference between a contract that is a good deal for you, and one that is a totally in your favor. Many attorneys try to get the most one-sided contract that they can. They are not doing their clients any favors. They are just setting their clients up to end up in litigation.

When possible, build incentives towards compliance. Don’t just say that a new product version is due by a certain date, say that there is an extra payment if the project is done on time, and the payment goes down if the new version is late.

7. Be wary of multiple agreements and/or attachments.

Sometimes a deal consists of multiple agreements and/or an agreement with attachments and schedules. If so, then think through how they will work together. Too often the agreements are negotiated as separate contracts even though together they constitute one deal. Attachments are often added as an afterthought, after the negotiations are finished. Do all of the documents make sense together? Are they consistent? What happens if one of the deals falls apart, and the others do not? One way to avoid potential problems is to make separate deals that stand on their own whenever possible.

I had a client who wanted to sell her IP to another company. She got a small lump sum payment and a favorable employment agreement with the new company, with salary bonuses tied to the success of the IP. She considered her new job to be part of the compensation for selling the IP. I told her that these deals did not work well together. She should sell the IP for what it is worth, and sign an employment agreement for what she is worth. She did not take my advice. She did not last long at the new company, and is now suing them to them to get her IP back.

8. Say it in plain English.

There is no need for a contract to use secret lawyer language that no one else can understand. Say it in plain English. If you don’t know what it means, ask. There are plenty of times when I read something prepared by an attorney, and I have no idea what it means, so I ask them to rewrite it.

Define technical terms, even if the parties know what they mean. It is fine to use acronyms, abbreviations, and initials in an early draft of a contract. But the final version of the contract should make sense to anyone, not just those in the know. First, there is less agreement on those shorthand terms than you may realize. Second, if there is a disagreement about the contract, the legal standard is what it would mean objectively to a normal person reading the contract, not what it means to the tech people. You never know who will be reading the agreement and trying to understand how it works. Remember that if you end up in litigation the ultimate arbiter will be a Judge, and most Judges have very limited technical knowledge.

The clearer a document is, the more likely both sides will understand it, and the more likely both sides will be able to honor the terms of the contract, and the less likely that there will be misunderstandings and litigation.

9. Make sure you are agreeing to the same terms.

When you think you have finished negotiating and you have come to an agreement, make sure you and the other party have agreed to the same terms. In the very old days, invoices and purchase agreements would fly back and forth by mail or personal delivery. A while back faxes would fly back and forth. Today it is usually emails and email attachments. It is very easy to think you have agreed to the same terms, when you are actually each referring to a different version of the contract. This type of misunderstanding happens more often than you might think. Make sure that you know what version you are agreeing to. When you think you have an agreement, pull all the contract terms together in one document and make it clear that this is the version you are all agreeing to.

10. Make sure the contract fits your particular needs.

      Keep in mind what you are trying to accomplish with your new agreement. Too often clients and their attorneys jump right in and start to write the standard contract, whether it fits what the client needs or not. I always try to start with asking my client “what are trying to accomplish here?” Then I draft a contract that fits the client’s needs.

There are times when a creative solution is better than that standard boilerplate. My favorite example is a telephone company with commercial clients. The telephone company would often end up in billing disputes over $3,000 to $5,000 dollars with its customers. This was not enough money to justify litigation. Besides, the company did not want to alienate its customers. So the telephone company wrote into its contract that there was mandatory arbitration of billing disputes. The result of the arbitration was only binding on the telephone company. If the customer did not like the result, the customer could still file a lawsuit. The customers were more than willing to go along with this contract term. It turned out that customers rarely took their claims to court even when they lost. The client really just wanted to have a voice, a chance to have their say. The telephone company had a fast and inexpensive way to resolve its dispute and keep its customers satisfied.

Write a contract that is easy to understand, fits your needs, is reasonably fair to both sides, and is likely to avoid litigation.

Leave a Comment » | Business, Law, Technology | Tagged: , , , , , , | Permalink
Posted by Law Offices of Gary Marshall

« Previous Entries
Next Entries »