Archive for August, 2009

Lesson in Legal History and Negotiation – John Adams and Samuel Quincy

August 29th, 2009

Boston - Freedom Trail: Old State House
Image by wallyg via Flickr

I grew up outside Boston, though I have not been back there in a long time.  Last week at the tail end of a family vacation we stopped in Boston to follow the Freedom Trail and show my kids a slice of American history.

On the trip, we walked past Boston’s old State House, the site of the Boston Massacre in 1770.  Five civilians were shot by British troops following a riot and the event is cited as one of many that led to the American Revolution.

The soldiers were arrested and brought to trial.  I find it fascinating that the political environment was so charged that no lawyers could be found to represent the defendant soldiers.  Colonials were already bitterly divided between those loyal to England and Patriots seeking a higher degree of autonomy or outright independence and apparently even the Loyalists feared collateral damage to their careers if they took the case.

The solution was an elegant exercise in negotiating strategy.  John Adams, whose credentials as a lawyer and a Patriot were unimpeachable, represented the soldiers.  Loyalist Samuel Quincy, the colony’s Solicitor General, acted as prosecutor.

The legal history here is interesting.  The compromises required to get the case to trial are fascinating.  Adams the Patriot defended the British soldiers; Quincy the Loyalist worked to convict them.  The trial depended on both men putting their full efforts into pursuing cases that (on some level, at least) ran against their personal convictions.  I’m sure that must have been a tremendously difficult assignment for both sides.

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Reading Contracts: What am I Missing?

August 28th, 2009

One of the hardest things to do when reading a new contract is to figure out what is not covered.  It’s relatively easy to review an agreement and pick out things that are completely wrong or run contrary to one’s interests.  On the other hand, the sea of words can prevent readers from noticing, for example, that a license agreement provides a nonexclusive, worldwide, perpetual license, but doesn’t say clearly whether the license fee must be paid and once paid whether it must be periodically renewed.

The best way to be sure a contract contains all the terms one needs is to do the same type of transaction over and over until you know it cold.  Next best is to find someone else who has to rely on.  Those aren’t particularly helpful suggestions to someone in unfamiliar territory with a deal on the line, though, so here are some suggestions to help identify missing terms.

1) Make up a hit list.  Before you start reading, write down list of the important terms.  This step takes a surprising amount of mental discipline but it is incredibly important.  Avoid the temptation to dive straight in and “see what the contract says”.  Even if you think you know what terms you need, write them down before you start reading.

2)  Take the contract in sections.  This goes along with my piece on How to Read a License Agreement.  Instead of reading front-to-back, search the contract to find all the terms on your hit list.  Do they match your requirements?  Is anything from your list missing?  Bonus points for lining up your hit list in one column on a piece of paper and writing down the comparable terms in the contract in the next column.  I have only taken this extra step a handful of times, but found it very helpful when the deal was complex or I was having a hard time getting through the contract language.

3)  Put it Back Together.  Now that you have found the biggest points, you can read through and see how other terms flow around them.  Do all the defined terms match your understanding of what they should be?  Do any subparagraphs under one of the big points limit its applicability?

4)  Try to Break it.  It’s also easy to read a sentence, squint a bit and say “yeah, that basically covers it”.  Instead of trying to read the contract in a way that fits your needs, do the opposite.  How could a paragraph be read against you?  E.g. if you quit vs. being terminated by your employer, will you lose any vesting in your stock?

5)  Read with a Friend.  If the deal is important it merits more than one set of eyes.  I frequently find that useful points come out of discussion with a co-reader.

6)  Search for Exemplars.  I am putting this last because it’s really hard to find good examples of many types of agreements.  The SEC’s EDGAR database is a good source, but search is very limited unless you pay for advanced search capabilities.  Docstoc and Scribd have pretty good libraries but since there is no clear way to judge quality it is best to look for at least 3 samples of the type of agreement you need, then compare terms carefully before relying on any one contract.

I hope these ideas are helpful.  Reading carefully and catching everything is a genuinely hard task.  Practice very much makes perfect and these are some of my favorite practice tools.

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Thinking Out Loud About Contract Survival – Please Contribute

August 12th, 2009

I have recently come across a number of contracts with extensive survival provisions.  For the non lawyer-wonks out there, a survival clause says that when the contract is terminated certain provisions will continue to govern the parties’ behavior toward one another.

There is a part of me that hates the concept of these provisions- they turn the whole deal into a kind of roach motel that the parties can enter, but can’t fully leave for a long time.

The other part of me understands that survival clauses have value, but wants to find the right logic for using them.

Confidentiality – Yes
For example, parties to a deal may well learn a bunch of confidential information about one another.  Terminating the agreement might be used as a way to escape the need to keep that information confidential, so I commonly see language that says the parties will be required to keep information confidential for 3-5 years, and that the confidentiality language will continue to bind the parties after the agreement is terminated.

Indemnification – No
On the other side, I also see language that says one party’s indemnification obligations will continue after the deal ends.  Indemnification means that, in an agreement between A and B, if C sues both A and B because of something A did, then A will take charge of the litigation and cover all of B’s damages and legal costs.

I can certainly see why B might want this, but B is really saying there that it wants the ability to terminate the deal- ending A’s economic advantages- and still keep A on the hook for any downside issues that come up.  As lawyer for A, I push back on this idea.  If B wants out so be it, but B shouldn’t get to keep the economic advantages and push all the risk onto A.

In Search of a Rule
Is there a principle goverining which provisions should survive termination of an agreement?  I’ m not sure and this is the thinking out loud part.  Here are my ideas to date:

-> Leverage wins.  If one side to a deal has significantly greater negotiating leverage then it can probably dictate the type of risk-allocation point above.

-> When the parties are in equal positions, my idea is that “passive” activities can/should survive, but the parties should not be required to affirmatively do anything.  E.g. confidentiality doesn’t require anyone to step forward and take action, so it can survive.  Indemnity is an active obligation by one side to litigate and pay costs.  It should not survive.

Seeing this written down, I am not sure if this is the right way to think about it.  E.g. the parties may negotiate limitations of liability in a deal (e.g. in a dispute damages payable by A are limited to fees paid to A by B during the term of the deal).  Should one side be able to terminate the agreement and dump the liability cap or should both sides be held to the negotiated terms forever?

Comments Requested
Is there a rule here or is every deal a unique set of circumstances?  I’d love to hear your thoughts in the comments.

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Privacy and Employer-Owned Materials

August 3rd, 2009

I have probably generated 500 standard-form employee confidentiality/inventions agreements, and a good number of employee manuals, all of which say that basically anything an employee does on work time with employer-owned equipment (computers) belongs to the employer.

It is very useful to see the limits of these policies. A recent case from the New Jersey Appellate Division has some useful guidelines.  Here is my summary of the helpful considerations in under 500 words.

Case Facts
The CEO of a company got into a dispute with her employer.  The employer took back its computer when the CEO quit and found on it cached copies of emails the CEO had sent to her attorney from her personal Yahoo account.

The employer said that the emails belonged to it since *everything* on the computer belonged to it pursuant to the employer’s policies.  The CEO said that purely personal matters fell outside the scope of the policy.

Court Ruling
The appeals court said that it is not enough for a company to say it owns everything done on its computers- there has to be a need to reach out and take ownership of entirely personal matters.  Based on that, the court held that the emails were not the property of the employer and the employer had no right to hold and use them.

Useful Concepts
None of this is strictly relevant outside of New Jersey, of course, but the case brings up a few interesting ideas:

1) Personal vs. work email.  The CEO did not use her work email account to communicate with her lawyer.  This was an important point in establishing the CEO’s expectation that her emails would remain private.

2)  The court likens the employer’s actions to rifling “a folder containing an employee’s private papers” or examining “the contents of an employee’s pockets”.  To me, this is the most important point.  An employer can certainly *review* an employee’s file folders, but if it finds purely personal items it is obligated to return those to the employee.  Computers are no different- people may store personal information on them.  Employers need to be aware that they are not entitled to review or use these simply because the employer owns the computer.

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