Monday, November 16, 2009

FTC’s New Rules and Website Creation

About eight months ago, I wrote a post regarding the FTC’s proposed rule changes regarding endorsements and testimonials.  Those rules, with some slight changes, will become a reality on December 1, 2009.  If you are interested, the FTC has put together its 81 page Guides Concerning the Use of Endorsements and Testimonials in Advertising, in which the FTC highlights its thoughts and reasoning regarding the comments and its eventual decisions regarding the changes.

Depending on who you read, the rule changes are minor or they are the end of the world.  I generally agree with Robert J. Ambrogi in his post which asks the question The FTC Blog Rules: Overbroad or Overblown?  He concludes that some of the reactions to the rules have been exaggerated in scope, but that those who regularly endorse products or services should exercise caution. 

The rules certainly change the playing field by bringing social media like blogging within the scope of the jurisdiction of the FTC.  But those rules are also good and are generally designed to protect consumers from snake oil salesmen and deceptive advertising.  We need to remember that the FTC has discretion in its enforcement of the law just like a traffic cop who can consider mitigating circumstances before issuing a speeding ticket.  Likewise, abuses are always possible.  As concerned citizens, we need to recognize that the FTC is walking a tight-rope while balancing competing concerns.  On the one side is the danger of prosecuting innocents, on the other side is allowing harm to consumers by failing to stop the bad guys.

I will be the guest for B. Hopkins on November 18, 2009 at 1pm MST on her internet radio show to talk about the FTC rules as they relate to website creation.  It should be a fun discussion and I invite you to join us.

Monday, October 19, 2009

A Little Preoccupied with Our Newborn Son – Elijah John

Just wanted to announce the birth of our fourth child, Elijah John Griess born on Saturday, October 17, 2009 at 11:23 AM, 6 lbs and 14 oz, 20 inches long.

IMG_0183Momma and baby are doing great and the siblings are loving their new little brother. We went home yesterday afternoon and have begun to figure out what the new normal looks like.

Tuesday, October 13, 2009

DRC Law Gets Recognition Regarding Recent ESI Ruling in Federal Court

Back on January 17, 2009, I posted a blog on a recent ruling my office obtained from the District Court for the District of Colorado in Smith v. Slifer Smith & Frampton/Vail Associates, et al., No. 06-cv-02206-JLK-MJW, D.C.Colo. As I discussed, Michael Reagor of our office obtained an adverse inference regarding missing electronically stored information in the case.

We have now posted the Order for anyone who might be interested at the DRC-Law website. The Order is also available for viewing on Google Docs.

In addition, the case has been discussed in various blogs including the Electronic Discovery Law blog and Practical Ediscovery.

As it is my firm, I’ll leave the comments and analysis to others. Suffice it to say, we are happy with the result.

Wednesday, October 7, 2009

Legal Assessments: Fundamental Value of a Separate Legal Business Structure – Part II

Last time I wrote on some of the basic reasons why having a separate business entity is important.  Specifically, it facilitates the business to becoming a distinct commodity apart from the individual or individuals who make up the business.  This post will help to identify how legal principles and structures can assist in establishing and facilitating the business’s separateness.

First, creating Articles of Organization or Incorporation establish the business structure.  When creating an LLC, the Articles of Organization notify the state that the entity has been formed.  Articles of Incorporation go a bit further and establish the fundamental structure of a corporation identifying the initial Board of Directors, the shares that are authorized and the like.  However, this is only a first step in creating a truly separate entity.

Second, beyond Articles are such documents as the Operating Agreement, the Bylaws, Buy-Sell Agreements, and Shareholder Agreements.  These legal documents are essentially contracts which can more specifically spell out the rights and responsibilities of the the various owners, the executive officers, and interested parties.  They can ensure that the business has a method for succession of ownership or authority, and an objective foundation on which to engage in business. Such documents are key to establishing who is responsible for different parts of a business’s operation, how the interested parties are to interact, how notice is given for major meetings and activities, and who has the authority to engage in activities on behalf of the business.  The documents not only provide the independent guidelines for how the business activities take place, they are designed to protect various interested parties from being taken advantage of and ensure a level of stability and accountability between the parties.  Solid formational documents provide a system and procedure for fair operation of the business, while also providing protection to the business when outside eyes examine the business.

Third, businesses should keep clear records of their activities whether it is Board minutes and resolutions, or the accounting of its revenue and expenses.  Letters reciting the business name and its actions and its business reasoning for such actions, can do a lot to not only provide an institutional memory, but also protect the individuals as they engage in business activities.  These documents demonstrate that the business is operating distinct from the individuals who make it up, give notice to the public of who is acting, and provide authority for the business to act.

Fourth, businesses can use various contracts and procedures within the business to establish the goals and purposes of the business.  A simple example is an employee handbook or a policy regarding public relations.  Businesses can use contracts with customers and suppliers to establish the scope of its engagement and how much it is going to give or receive in transactions.  Another example fundamental to establishing a business as a separate entity can be written procedures for how the business is to be accomplished to provide reliable service that is consistent with the business goals and purposes.

Finally, businesses that have a secure and clear identity apart from the individuals within, can build value into the company by presenting to the public, its partners, suppliers, and customers, a clear image of who it is, and what it does.  Such clarity helps to build strong relationships for continued and productive future interaction.  It also opens avenues for the creation of valuable trademarks, and an increased clear market presence.

When a company takes its distinct identity seriously, and uses legal tools available to it in a clear and effective manner, it creates opportunities for the company to add value to its operations.  These include making the most of the resources available to it and establishing a corporate identity that facilitates transactions and profit from the sale of its products or services.  It is able to protect itself and its assets by relying on the actions of the company apart from the individuals within.  In summary, it is able to present itself clearly and reliably to the persons that make up the business, the public, and to other companies so it can engage in business most efficiently.

Some very practical examples of how a distinct business entity can be advantageous are such things as building a credit history that can be used to obtain loans or a line of credit for operations and expansion.  Another is the creation of a business that has value regardless of whether the same people are working at the company facilitating investment and the continued operation of the business after key personal move on.  One can more easily sell for a premium ownership in a distinct business than in a business that is essentially tied to specific person or persons.  And another example is a distinct business protects the participants from tax and other liabilities because the documentation demonstrates the business apart from the persons engaged.

Future posts will more closely examine how some specific legal tools and principles can be used to help a business add value to its operations for its owners and participants.

Tuesday, September 29, 2009

Legal Assessments: Fundamental Value of a Separate Legal Business Structure – Part I

Almost anyone starting a business activity considers the formation of some sort of legal business structure such as a limited liability company, a corporation, or a limited partnership.  Generally, the most important reasons for doing so cited by business owners is the limited liability afforded to the owners for activities engaged in by the business entity.  Another factor in selecting a business structure is getting the best tax treatment for the activities in which the business will be engaged.  However, while these issues are key, the creation of a separate entity has advantages related to the simple fact that it is a separate entity.

Sole Proprietors and General Partnerships

Before addressing the value of a separate entity for conducting business, remember that anyone can conduct business without creating a separate entity.  A person selling goods or services as an individual is a sole proprietor, and two or more persons working together to sell goods or services is a general partnership.

The essence of such a business is that the person or people are the business.  Such persons are personally liable for their activities when doing business because their business activities are personal activities. 

Contrast a Business Entity

Chess Piece (small) In contrast, a person who forms a legal entity for their business activities is wearing two different hats depending on what they are doing and how they represent themselves.  When going to the mountains for a vacation, they are personally responsible for their activities and can do things the way they personally prefer.  But when they conduct business as the entity, they must maintain the business persona and act as the business entity.

The advantage of acting as a separate entity is that one can build the business apart from personal issues.  Personal preferences or values still can, and should, impact the business activities, but the impact and implications of applying preferences and values is different.  For example, a personal preference to discriminate against a legally protected class of persons is unacceptable in business activities, whereas the same discrimination in private life is acceptable, even if there may be a social stigma attached.

Key to this distinction when creating a business entity is the way that the law views a business entity as a legally established and supported structure engaged in commercial activities with the public.  In other words, the law recognizes that the a business entity is a special social structure and that the relationships are different.

Some Advantages to Treating the Business Entity Separately

Besides tax status, one primary advantage to treating business entities as distinct is the ability to create systems and structures within the business that perpetuate the goals and values of the business.  The business can be worked on apart from changing personal lifestyles or activities.  Work can be broken down into discrete activities that can be systematized and formalized.  This allows principals to find people who can do the jobs necessary to keep the business going without over-committing themselves, being limited by their particular skills or talents, by their own time constraints, or having to always be be the producer.

In addition, treating a business separately from personal life helps to build a corporate culture.  Corporate culture can be instilled and reinforced by the policies and procedures of the company, its goals, products, or services.  One business can have a techy orientation, another can be environmentally oriented, and yet another can be kid friendly.   These cultures can exist apart from the particular orientations of the owners, principals, shareholders, members, or employees.

Bridge to Sea (small) Finally, creation of a separate entity for business activities expands the founder’s influence to “change the world”, and creates a legacy.  No longer is the influence of the business person limited to their personal activities and capacities, they can create a business institution that independently operates to provide an income stream, provides jobs and livelihood for others, increases productivity and value for society, and influences society according to the values and goals established within the business entity.

The bottom line is that a business entity is an institution apart from those persons who form or operate the entity.  This gives the entity a “life of its own” that creates value.  When done well, it allows the entity to become a commodity that can be bought, sold, trademarked, and an independent source of revenue.

Saturday, August 15, 2009

Legal Assessments: An Introduction from a Relational Perspective

Many businesses simply do not know where they are at legally.  Often, business owners believe that the legal aspects of their business are a thorn in their side that is to be avoided if possible, and dealt with only when absolutely necessary.  However, most business owners also realize that business takes place within the context of law. 

For example, a business’s existence as a limited liability company (LLC), corporation, or partnership, is governed by state legal requirements and responsibilities.  In addition, all interactions between businesses, suppliers, associates, affiliates, employees, contractors, and their clients are contractual arrangements whether or not the relationship is memorialized in a contract.  And finally, business assets such as real property, information, and products, are each regulated by legal frameworks.

With this in mind, a business’s success is dependent on its compliance and exploitation of the applicable legal frameworks.  This post, and the ones to follow, will attempt to explore some of these legal issues affecting businesses from a relational perspective.

The Relational Perspective

Law is about relationships.  Fundamentally, law is the rules and norms that are recognized by courts in prior experiences from other situations, or proscribed by governing bodies as policies.  Those rules and norms cover all types of interactions whether the interactions are intentional contractual arrangements or are the result of general interaction in society.  

Businesses’ commercial activities are also fundamentally about relationships.  These relationships include interaction with the public, with the governing authorities, with other businesses, with employees or contractors, and with clients or customers.  Each of these relationships raises issues about expectations, performance, and enforcement.

While law often is known for addressing the resolution of conflicts which develop when a relationship has a problem, those same rules and norms used to consider what the fair and just resolution should be, also provide a great deal of insight into how a business can engage in its various relationships to accomplish its goals and purposes.

Application

Sometimes businesses view the pro-active application of law as a way to avoid loosing money, or keep from going out of business.  While this is appropriate in many circumstances, and a part of the analysis, such concerns side-step addressing the underlying reasons a business might get into a such a situation, and furthermore, misses the opportunity provided by, and the value available from the application of, legal tools and principles.

Because law is about relationships, running afoul of the law has a lot to do with a real, or perceived, mismanagement of how a business engages in its relationships.  When such problems develop, the law is called upon to resolve the relational conflicts caused by that mismanagement.  This can result in remedies such as requiring compensation or other activities to try to fix the problem. 

But on the other side, because the law is about relationships, it can also be exploited to understand how a business can best manage its relationships and maximize the value of its activities and opportunities to increase its earning capacity.

In short, the pro-active application of law to a business can go beyond risk management to address how a business can best create value-added relationships, protect and preserve assets, and increase its productivity.

Forecast

There are many ways that a business can use legal principles and tools to add value to its operations.  In the next post, I will start to talk about some of the fundamental reasons why a legal business structure, used properly, can be a great tool for businesses—including reasons that go beyond limited liability for the owners and favorable tax treatment.

Thursday, July 16, 2009

Independent Contracts Presentation Tomorrow

I am making a presentation at Creative Connections tomorrow, July 17, 2009, 9 AM to 10:30 AM at Colorado Community Church. Direction are available HERE. The meeting is free and open to interested persons. Below are the slides I will be using.


Monday, June 22, 2009

Why You Should Make a Contract in Your Business Transactions: Because Contracts Can Add Value

Over the last few days I have talked with several people who have come to me with an all-too-common problem.  They got into a business relationship or entered a transaction for services, but did not create or use a written statement of their understanding, i.e., a contract.  Now, they are feeling slighted or stuck and they need to figure out how to make the most of the existing, ambiguous, situation.

Not only can much of the emotional or financial burden of such situations be avoided by engaging in a contract, but one Stock Up (Small)can also make more money, provide and obtain better goods and services, develop integrity in the business community, and establish one’s self with stronger, sustainable, and recurring business relationships.

I often hear that businesses and service providers avoid formal written contracts because such an agreement puts them off, or puts off their potential business partners.  We have all heard stories of a simple transaction which, for some reason, involved a multi-page burdensome contracts.  But there are also many seemingly simple situations which do not involve a contract, and then go awry.  There is a happy medium.

Many of the basic reasons to put a contract together are fairly straightforward and highlighted below:

Get On the Same Page

Empty Page (Small) First, a contract allows the parties to actually “get on the same page.”  Everyone has had the experience of a misunderstanding or miscommunication in simple situations like when and where to meet for lunch.  Contracts give the parties a chance to express what they are thinking and their expectation, reducing the likelihood of confusion.  This clarification goes a long way to create a level of security and trust.  It also works to prevent persons from being tempted to wiggle out of commitments, to get something extra without compensation, or to fail to live up to their presentations.

Take a Moment to Take Stock

Second, contracts give the parties an opportunity to pause and think about their transaction so they can address the points that are important to them.  Anything worth doing should be given at least a modicum of thought.  Taking the time to think about the different aspects of a transaction keeps important issues from being assumptions that create problems later.  It creates a situation in which the parties actually bargain into a mutually beneficial situation.  In particular, a contract provides an opportunity for parties to take stock of what they have, what they are giving up, and what they are getting in return so that they can make sure that the bargain is advantageous to all involved.  And finally, part of the advantage of this process is that parties consider their relationship and establish a foundation on which the relationship can remain strong and beneficial in the future beyond the initial transaction. 

Accountability

Club small Finally, contracts make enforcement easier.  The parties can easily tell if they are getting that for which they bargained.  As a result, parties do not have to expend as much time and energy keeping each other accountable.  This also helps to prevent parties from taking advantage of each other.

Conclusion

There are other reasons to take the time to put together a contract for business transactions, and there is much more to each of these reasons, but these are some of the basics.  By approaching contracts as opportunities to add value to one’s self and others, businesses can turn their contracts into useful tools for their activities.

Thursday, June 11, 2009

Trademark Registration and Usernames on Facebook

Facebook recently announced that starting June 12th/June 13th they will allow users to choose personalized usernames for use on Facebook.  Users will be able to select usernames on a first-come, first-served basis.  This, of course, raises serious concerns for owners of registered trademarks who want to protect the use of their mark from others on Facebook.

Facebook has provided a form for owners to identify their marks so as to try to prevent the use of the marks as usernames.  The site is located HERE.

Given the rise of social media and the use of Facebook, it is advisable that mark owners take advantage of the opportunity provided by Facebook to identify their registered marks to, presumably, prevent the use of the marks by others which might cause confusion.  It is always better to try to prevent the harm from occurring, if possible, than to have to take action after a mark has been misappropriated and the harm has begun.

Wednesday, May 27, 2009

Link to Internet Radio Show

Linked here is the archived radio show for your convenience. Thanks to all those who listened live.

Sunday, May 17, 2009

Internet Business Strategies Radio Show Appearance

MicB Hopkins of Psiphon Consulting has asked me to appear on her  radio show at Real Coaching Radio this coming Wednesday, the 20th of May at 1pm MST.  Her radio show is Internet Business Strategies Radio.  The topic is going to be legal issues for internet businesses. 

Callers can participate through Skype by calling realcoachingradio or calling 303-847-3260.

Wednesday, May 6, 2009

Insurance for Social Media Users Like Bloggers, and Twitterers?

I was reviewing posts on social media issues and ran across an article about the lawsuit for defamation against Courtney Love based on her tweets. The article is here: Tweet This: You’re Being Sued. At first I thought that the article was a bit late in discussing the first lawsuit related to Twitter. However, the article did raise an interesting issue—general liability insurance.

Not too long ago, I was at the Denver Twestival raising funds across the country on the same night to put fresh/clean water wells in Ethiopia and I was talking with @eclewis when she mentioned she was considering the possibility of getting insurance for her blog. I had never heard of insurance specifically for a blog so I was not much help. The best I could do was suggest that I suspected the usual legal malpractice insurance policy probably covered it as Elizabeth (like me) is an attorney blogging on legal issues. I never checked specifically as each policy is different and I never asked to check through her policy, but it seemed plausible.

Now, after reading the article from the Financial Times website , I realized that on top of professional liability policies which might be in place, a personal general umbrella liability insurance probably covers defamation claims arising out of social media activities. At least, in my formal life as an insurance defense attorney, I recall that most general liability and umbrella policies specifically covered defamation claims.

worried small While it seems likely that umbrella policies cover defamation, I doubt that insurers have taken into account the rapidly increasing use of social media to determine whether they are charging the right premium, or that the risks are covered properly. Specifically, it would seem that the policy language in place is based on the usual expectation of risk for an average person of defaming someone rather than the potential increased risk now associated with the widespread use of social media. In fact, it seems likely that with more people engaging in social media, and with the expansive impact of the media (any post or comment is generally available to anyone with access to an internet connection), there is a heightened risk of defamation claims against persons previously unlikely to be at such risk.

Accordingly, I suspect insurers will either start charging more, or start excluding defamation claims taking place over social media. My bet would be that the policies will be changed to exclude defamation claims arising out of social media activities with an option for the insured to bus a rider (an addition to the policy) which specifically covers such risks for an added premium cost.

The good news is that, at least in Colorado for commercial liability coverage, and likely in most jurisdictions, under statute, insurers have to notify their insureds of changes to Mail Smallthe coverage being provided before the changes take place. This also likely applies under common law for personal liability coverage under general contract rules that a party cannot agree to a change without being able to agree to the change which implies notice of the change. That is partly why one might get a few extra pages with modified policy language in the mail from their insurer regarding their coverage now and again.

One thing that should be noted is that most people do not have umbrella liability policies even though they are fairly inexpensive and can often be built on top of one’s auto, homeowner, and/or lease coverage. If you have assets, or plan to have assets in the near future as an individual, a personal umbrella policy for liability is a good idea for consideration.

Of course, the best thing for bloggers to do is to be aware of the risk of defamation and consciously avoid posting potentially defaming content. This is generally a common sense issues.

Regardless, it would be wise for bloggers to consider examining their umbrella or professional liability insurance policies to determine where they stand. It might even be a good idea for companies and individuals with a web presence to hire an attorney to give them a solid opinion on what their policies cover and their risks. I, for one, am going to check my own personal umbrella policy and my malpractice coverage so that I am not caught unawares.

Saturday, April 25, 2009

Intellectual Property 101 Presentation for Creative Connections Meeting

I am working on getting some of the resources I put together accessible. Here is my Intellectual Property 101 Presentation that I gave to the Creative Connections group in South Denver a few weeks ago. Enjoy.


Saturday, April 18, 2009

Should I Register My Copyright?

Registration of one’s copyrighted work with the Copyright office is not required to obtain a Copyright.  In fact, one need not actually publish their work for it to be copyrighted.  Rather, copyright protection attaches upon the creation of the work.

While this is true, there are certainly advantages to registration.  I was reminded of this recently while reviewing this intellectual property blog from the firm Shepperd Mullin in Washington, DC.  Particularly useful is the linked article by Matthew Clanton discussing the advantages of registration from the additional statutory rights for recovery to objective evidence that the work is copyrighted.  And when registration costs only $35 to $45 per work, and can be done online at www.copyright.gov, the down side is minimal. 

So, think about it.

Wednesday, April 8, 2009

Proposed FTC Regulations Regarding Marketing

Back in December of 2008, the Federal Trade Commission (“FTC”) issued proposed rule changes to regulations related to endorsements.  The proposed rule change summary from the FTC is here.  What has changed in the last few years is that the internet and social media have provided new forums in which company advertisers can make representations and present to consumers testimonials and endorsements of their products or services.  However, because social media has created a forum in which smaller business can engage in marketing to general consumers, the effects of these proposed rule changes create implications that both larger and smaller businesses should take into account as they engage in marketing over social media tools.

Foundation

As a foundation, businesses need to keep in mind that the FTC is Shield (small) charged with protecting consumers.  Certainly, we want to prevent businesses from misleading consumers into purchasing goods or services based on false assertions regarding the qualities of the products being sold.  A good example used by the FTC in its rule summary is assertions by weight loss programs that the diet plan being sold will result in weight loss of a certain amount within a certain amount of time.  If the assertion is substantiated with studies, there is no problem.  But if the assertion is misleading and used to suggest some kind of miracle product, there is a problem.

Representations in Marketing in General

As a first issue then, every business who is now engaged in making representations about their goods or services over social media needs to keep in mind that they should be accurate about their representations.  In short, don’t be a snake oil salesman.  But in addition, because more businesses are starting to use social media as a means of getting their message out, businesses that operated under the radar before, need to give consideration to how their representations might be examined by a regulatory agency like the FTC.

For example, the FTC is concerned about representations by a company that indicate that certain results are typical.  That is, a result can be generally expected.  And if the FTC is concerned that such a result being communicated is atypical, they may want investigate and obtain the empirical basis for the claims, i.e., a legitimate study that shows the results are typical.  If there is no such basis, and the average consumer hearing the message could be mislead, the FTC may take action.

States (small) Part of what makes this interesting is that before social media, most businesses operated locally within their state jurisdiction.  So marketing statements did not cross state lines.  However, with social media such as Twitter, a statement made on the media can be viewed by users around the world, let alone across state lines.  And as soon as such representations cross state lines, the marketing communication is interstate and FTC regulatory authority is likely triggered.

Endorsements

In addition to the possibility that smaller businesses need to start paying attention to FTC regulations about advertising given the advent of social media, the changes in the regulation also focus on endorsements.  What the FTC is apparently trying to do is prevent companies from using third-parties to do what they were unable to do themselves. 

Specifically, the FTC wants to make it clear that businesses cannot hire others to falsely assert the efficacy of their products or services and avoid responsibility.  So the FTC is also proposing that the rules be changed to allow it to address when a business provides an otherwise disassociated person with compensation so they are inclined to make favorable comments the business could not otherwise make.

Traditionally, the way this has been addressed is that the business or hired person must properly disclose the association as in the fine print in a commercial stating that the person making the testimonial is a hired actor.  And when there is no compensation, the testimonial must be unaltered by the business so it is clear to consumers that the endorsement is independent and the opinion of the one making the statement. 

The concern that rises in social media contexts is whether someone will come under suspicion when no such disclosure is made. 

The easiest way to deal with this situation is to make sure that Take Money (small) businesses are clear about what is going on when they make statements in social media or use endorsements.  If there is a possibility that there is some kind of compensation taking place with sample goods or free services, this should be noted.  Also, businesses should not alter the statements made by endorsers.

Average users, on the other hand, are unlikely to come under suspicion unless there is some activity going on that suggests a connection.  Regardless, users who are on social media and endorse others may want to phrase their endorsements clearly, whether by context or language, as opinions, beliefs, personal experiences, and advice.

Conclusion

Audience (small) In summary, the capacity of social media to augment the breadth and scope of representations made by business owners and users means the impact is greater.  As a result, more people are paying attention, including potentially governmental regulatory agencies, and users need to be careful to be responsible, honest, and truthful as they would with any large audience. 

Monday, March 23, 2009

The “Hidden” Cost of Doing Business: Enforcement; and Three Suggestions

Any business transaction has several stages.  First is the prep stage in which the parties get ready to do a deal, learn what each other has to offer, and whether there is a mutual benefit.  Second, there is the deal making where the parties agree to actual terms of the transaction.  Third is performance. 

Hopefully, everything stops there. 

However, when performance goes wrong, there is the fourth, often overlooked, stage: Enforcement.

Enforcement Generally

OLYMPUS DIGITAL CAMERA         Enforcement in transactions is the process of making the other party do what they promised, pay what they owe, or hold up their end of the bargain.  What many clients fail to realize, is that there is a cost for enforcing an agreement, even when all the facts and circumstances seem to be in their favor.  If a party is not willing to do their part voluntarily, there is going to be a cost to forcing them to do their part or letting them out of their obligations. 

These costs include things like hiring an attorney, hiring a replacement, renegotiations, sending correspondence, making phone calls, filing a lawsuit, actually obtaining a judgment from a court, getting an injunction, or making the legal efforts to collect money damages from any source where the money might be.

As a result, failing to take the potential cost of enforcement into account at the beginning of a deal is bad business. 

Why “Hidden”?

In short, if one has to pay more than the up front price to get a good or service, the extra costs are often considered to be “hidden”.  The problem with hidden costs is that, if known, they would change the purchase decision process. 

Usually, the evaluation of whether the price of a good or service Face and hands (small) is acceptable is generally made by considering the value of what one is going to get in relation to other options.  That determination is subjective and depends on expectations.  When factors are missed because of deception or a lack of foresight, the potential benefit of the bargain is undermined.

There can be a lot of costs lumped into “hidden” costs.  For example, the cost of a car is not simply the sticker price.  There is insurance, negotiation costs, delivery costs, repair and maintenance and so on.  Each of these costs can be viewed as an independent and individual transaction, or as the overall price of the car.

The cost to enforce a transaction is one of these potential additional costs.

Finding Hidden Costs

Sometimes the hidden costs do not matter.  In a minor transaction for a stick of bubble gum, it is simply not worth the effort.  Nobody should spend a dollar chasing 25 cents.

On the other hand, if one is going to invest $1,000,000 for an anticipated future return, they should take significant steps to avoid, and account for, all costs.

And sometimes only some effort is required to address obvious risks.  When one buys an item off of Craig’s List, one generally ought to deal locally in order to see the merchandise and test it before giving the seller the money.  If a seller refuses to do this, it is a clear sign that the hidden costs may be high and the transaction should not take place.

Enforcement is a risk that can be great in some situations, and minor in other situations.  The expense should be adjusted accordingly.  But it should never be ignored.

Some Suggestions for Taking the Cost of Enforcement into Account

Here are just a few basic suggestions.

First, adjust the price you are willing to pay up front.  For example, pay less if there is a risk that you will not get the benefit of the bargain, or charge more up front if they are unlikely to perform later. 

Second, create a contract with terms that will help with enforcement.  For example, include an attorneys fee provision so you can recover the costs of paying an attorney to seek enforcement.  Another possibility is to make payment terms in the contract that allow you to pay as the party performs, or withhold money if performance is unsatisfactory.  And yet another option is to determine how and when conflicts will be resolved whether in court, at mediation, or in arbitration.

Third, get sufficient security or collateral for the transaction.  When banks do a loan for property, they get the property as collateral so they can foreclose on property if the borrower is unable to pay.  Similarly, consider obtaining rights to an asset or something of value from which you can recover if the other side fails to perform. 

Conclusion

At the beginning of a deal, the potential costs of enforcement can seem remote and unlikely.  Nobody wants to assume, or suggest, that they cannot trust the person with whom they are working.  Often we rely on a presumption that the other party has an incentive to perform in order to maintain their reputation, obtain repeat business, or keep integrity within a community.  However, incentives change, and it is appropriate to test these presumptions and make sure we are wise with our resources.

When addressed appropriately, the parties can do themselves a great service by taking the time to consider the enforcement costs as a means of facilitating the transaction, the relationships, and being wise stewards of resources. 

Saturday, February 21, 2009

A Basic Framework for Understanding Intellectual Property

As I prepare for my presentation on basic intellectual property  issues this coming Friday with the Creative Connections group here in South Denver (the group and meetings are also listed at Meetup.com), I thought it would be appropriate to also post a blog on the topic. 

Foundations

Cloud Idea Bulb on WhiteThe first thing to realize about intellectual property law is that it is mostly a fabrication.  It is a bundle of legal rights regarding intangible property.  Intangible property is property that derives value from what is represented rather than an intrinsic physical nature.  See "property" at Dictionary.com.  In addition to this, intellectual property relates to products of the mind or intellect.  See again "property" at Dictionary.com

For example, a book is a tangible item.  But copyright law does not protect the book itself.  The book is personal property which can be stolen out of your car.  Instead, intellectual property law identifies and then protects something underlying the book: in the case of copyright, the original work of authorship which is contained within the book.  As a result, the person who steals the book has committed theft against the owner of the book, but the person who photocopies the book and sells it on the street corner violates the author’s copyright.

Not Everything is Protected

The creation of protection for mental products is not normal.  It requires the application of power and control by an authority to restrict unauthorized uses.  As a result, not everything is Bright Ideaprotected, and not all uses are restricted.  In fact, many uses are encouraged.

Ideas, for example, are not protected.  They are extremely valuable mental products, but they are so valuable that we don’t want to give anyone monopoly control over them.  We want everyone to use ideas.  Facts are also not protected because we want everyone to have access to facts, no matter the source.

Basics Categories of Protection

So what is protected?

Copyright law – this protects original works of authorship.  It gives authors the exclusive right to control how their work is used.  Specifically, and depending on the type of work, these rights include control over reproduction, creating derivative works, distribution, public performance, display, and transmission.

Trademark law – this protects consumers from being deceived about the source of goods or services.  The mark or trade dress is protected from being used by others so consumers will not be confused.  It is also protected so trademark owners can create a reputation for their mark that communicates with the public.

Patent law – patent law protects inventions.  They must be non-obvious, new and useful and can extend from a new molecule to a business method or process.  The protection is exclusive right to control the invention for a limited period of time.

Confidential Information, Trade Secrets – this protects information which is actually confidential or a secret, like a client list or a secret ingredient.  The protection can include noncompetition , nondisclosure , and non-solicitation requirements, as well as other procedures for keeping the information confidential or restricting the use of the information.

Enforcement is Key

Finally, protection for intellectual property is only as good as the enforcement of the rights available.  A good example is the music industry.  Club small

The music labels and artists have copyright rights over the distribution and performance of their songs.  But with the internet, many customers started to share songs with each other over their computers.  Arguably, because the rights holders had established a business model and protection system using widespread public distribution of physical storage devices like records, tapes, and CDs, the sudden proliferation of electronic media undermined their ability to protect the asset.

The Recording Industry Association of America (RIAA) tried to force internet service providers and software providers to stop facilitating the distribution of the songs, but they did not get very far, in part, because it is not the providers responsibility to enforce the copyright laws for the RIAA.  As a result, the RIAA started suing customers who might have participated in downloading songs.  Clearly, this is not a good situation.

The point is that intellectual property is an asset created by law, and its protection and use must be managed in the context of the legal rights and enforcement mechanisms available. 

Sunday, February 8, 2009

Contracts as Value Adding Business Tools

More often then not, people appear to view contracts as adversarial weapons rather than value adding business tools.  This is unfortunate.

Contracts can be a great tool for building business relationships and marketing, as well as risk management.  The key is communication and transparency.  In short, contracts provide parties a unique opportunity to discuss their respective expectations and interests to come to a mutually beneficial arrangement.  This allows the development of trust and loyalty between parties.  It also allows a business to distinguish itself from competitors.  The parties have to write out their understanding in a document a third-party will understand so that clarity and understanding are key to the accomplishment of the goals.  Finally, a contract encourages the parties to engage with each other and think about what is really important to them so they can work together. 

Contracts can also serve many purposes other than simply being a last resort document to force another party to do what a business wants.  A well reasoned and stated contract can be a source document for cooperation.  When a party knows it had the opportunity to negotiate, think about, and engage in the formation of the contract as a collaborative effort, the contract can provide guidance and clarity to the continuous interactions.  The parties can avoid costly management debacles, or wasted activities, because the contract is there to keep the parties on track.

Contracts can be marketing tools because they can provide prospective partners and businesses with an opportunity to become a part of the business’s operation.  A contract that is collaborative gives each party a stake in the success of the other side, not simply because they have to, but because they want to help each other in order to do more together than they coudl do apart.  Contracts can further reassure parties that they will be cared for, and to engage outside parties in a dialogue about the goals, vision, and hopes of the businesses.

But, perhaps most importantly, use of a contact as a value adding tool for a business, places the contract negotiation and activities in the broader context of the business’s greater mission.  A contract is not just about getting a deal with the best terms in a particular subset of the business’s operations.  It can be about promoting the goals and values of the business as a whole.

Tuesday, January 27, 2009

Death of the Billable Hour: Relationship First, Billing Method Second

As many interested in this topic would know, a couple of months  Time is Money-smallago, the ABA Journal published an article by Scott Turow entitled The Billable Hour Must Die.  The article has created a buzz in legal circles about the use of the billable hour as a means of getting paid.  Like all attorneys who have had to bill by the hour and track their time tediously, I have struggled with the billable hour.  However, I am not so sure that the method of charging is the real issue.

Recap of Turow’s Article

Turow’s article starts with the attorney prospective.  Specifically, the billable hour is a prison because making more money means charging more, or working longer hours.  Because there are only so many hours in a day and so much one can charge, the limits can be problematic. 

Second, Turow suggests that the billable hour puts the attorney adverse to the client by creating an incentive for the attorney to be less efficient and to prolong the engagement—particularly in litigation.  For example, attorneys often talk about the opposing attorney doing things just to run up the fees.

Not a Unique Problem

People-small In thinking about this, the problems underlying the billable hour are not unique.  For example, do not the same problems apply to every wage earner in the workforce?  If I make an hourly wage, the only way I can make more is to work overtime.  And do not hourly wage earners have an incentive to be inefficient or to prolong their workload in order to fill the time with work?  Yet I don’t hear cries to end the hourly wage.

Alternatives Not Really Different?

And what about the problems with the commission based payment system (i.e., contingent fees for attorneys).  Interests are aligned to get the deal done, but not necessarily in the same way.  An extra $10,000 to a client may be a big deal, but because the agent only gets a fraction of the amount, the value of working more hours to get an extra amount becomes marginal.    This does not even address the potential problems associated with an attorney who has in interest in the deal when they are supposed to provide objective counsel.

Similarly, a flat fee system just means that the attorney has an incentive to try to get the work done as efficiently as possible.  This does not promote quality.  Instead, it promotes speed, potentially to the detriment of clients. 

One alternative identified in the Turow article was doing the work and coming to an agreement on the payment at the end based on what the client thought the value was.  And while this picture, assuming it works, is nice, the same can be done with an hourly rate system.  This is because the client is free to offer more, and the attorney is free to write off parts of the bill—the billable hour can be the starting point.   

Relationship First, then Billing Method

Which brings me back to relationships.  It seems that the discontent with the billable hour is in part a discontent with the fact that a fee-for-services system is inherently incapable of perfectly aligning the economic interests of clients and attorneys. 

But, the billing method is not the issue.  The problem is Shaking Hands-smallthat attorneys and clients have to deal with each other, and cannot rely on their billing systems to make them buddies.  The emphasis, as with any business deal, should be on the relationship first like getting expectations out early, identifying interests and goals, and then taking the time to address these before engaging in representation.  The billing method will become less and less  material when the parties are focused on having a good relationship with communication and trust that is aimed at being mutually beneficial. 

Attorneys are not mechanics, they are advisors and counselors.  If an attorney is having a hard time addressing the advantages and disadvantages of the billable hour with their clients so they can work together toward a mutually beneficial understanding of the relationship, there is a serious underlying problem which will exist regardless of the billing method.  In short, how can a client trust that the attorney is going to be honest and straightforward on any aspect of their case if the attorney is embarrassed about their own interactions with their client?   

The billable hour may not be the holy grail of billing methods, but it is not the cause of disharmony between attorneys and their clients.  Instead, the billing process is an opportunity for clients to learn about their attorney’s basic mode of operation and bring the parties together.  It is an opportunity for an attorney to demonstrate to the client the kind of honesty, integrity and responsibility the attorney practices.  When this discussion and communication is a normal part of interaction with clients, the billable hour simply becomes the starting point for the parties to reach a fair compensation system. 

Saturday, January 17, 2009

The Importance of ESI in Litigation

Binary Field E-Discovery has become an important topic in litigation in recent years.  As people have moved toward electronic means of documentation and communication, much of what was traditionally found in a paper file such as notes, correspondence, financial accounting, memoranda and the like are now in one or more file formats on a computer or server somewhere.  Not a case goes by these days where a significant portion of the pertinent information is located in a Quickbooks(TM)  file, an Excel(TM) spreadsheet, an email message, or pdf document.

The Federal Rules of Procedure were amended in 2006 to include specific guidelines and requirements regarding Electronically Stored Information or ESI.  While each individual state has its own set of rules governing the discovery process, the Federal Rules are currently setting the standard, as is Federal case law on the issue.

Perhaps the best known opinions on the issue come out of Zubalake v. UBS Warburg LLC, 217 F.R.D. 309 (S.D.N.Y. 2003), 220 F.R.D. 212 (S.D.N.Y. 2003), and 2004 WL 1620866 (S.D.N.Y. July 20, 2004).  This was a gender discrimination lawsuit before the Rules were amended.  The plaintiff believed that there were emails which would show she had been fired for discriminatory reasons.  The defendant produced paper copies of some emails but failed to include certain key emails because they had been deleted or destroyed.   Eventually, the court granted sanctions against the defendant for willfully destroying emails which likely would have related to important facts in the case.

What came out of Zubulake (and now the Federal Rules) includes the duty that the attorneys for parties make efforts to ensure that their clients locate and preserve relevant information which is in electronic form.  The sanction that can be allowed for failure includes an adverse inference regarding the missing information and even the possibility of a default judgment against the offending party.

ESI has become an important part of litigation.  Counsel for parties are now required to make efforts to ensure that their clients can access and produce such information as soon as there is a possibility that the information will be required in litigation.  This has led to what are called litigation freezes regarding both physical information and ESI.

Recently, my firm has been involved in federal litigation regarding this very issue in Smith v. Slifer Smith & Frampton/Vail Associates, et al., No. 06-cv-02206-JLK-MJW, D.C.Colo.  As plaintiffs, we sought ESI regarding a real estate transaction in Vail.  It was determined that such information would likely be on the work and personal computers of a defendant broker.  However, the broker apparently wiped the hard drives of the computers using a wiping software after litigation had begun.  After several months of expert forensic analysis and related motions, the magistrate judge Watanabe issued an order and recommendation which found that the defendant had likely destroyed the relevant ESI.  The judge then recommended that an adverse inference instruction be given to the jury regarding the missing information and that the defendant pay for the cost (including attorney fees) of establishing the situation.  The Order is at Document 111 and is dated January 12, 2009.

The point is that ESI and its management are vital aspects of litigation in the modern age.  It is important to have appropriate policies and procedures in place regarding this form of information and to have counsel capable of properly addressing it should litigation ensue.

Sunday, January 11, 2009

Yes, Bloggers Can be Sued

There were a couple of posts on Twitter this past week about a blog from the Philippines concerned with bloggers being sued for the content of their blogs: "Suing a Blogger?" The blog asks the question whether a blogger can really be sued for their story and the comments on their site. (We are not going to get into international law or Philippine law.) In a kind of initial response, there were some tweets on Twitter simply stating "not in the US." To support this assertion, there was a link to another blog discussing the Communication Decency Act or "CDA" on Blog for Profit: "Blog Protection 101: The Communication Decency Act and Your Blog." While the CDA is applicable, the blog itself notes as follows: "Keep in mind that the CDA will not protect you for information that you create and publish on your blog." In other words, the answer to the question of whether a person can be sued for their comments on their blog is definitely yes.


First, the CDA only protects companies that provide hosting services, not the content providers. In general, that means Google is not liable for what people blog simply because they host the space for the blogs. It also probably means that a blogger is not liable for the comments made by third parties about their blog posts. However, regardless of Google's liability, bloggers are still responsible for what they put on their blog.


Second, even if someone is not liable, that does not mean they are immune from being sued. Hopefully the suit gets knocked out early for lack of a basis or because some defense is applicable. But, that does not mean the Clerk at the Court is going refuse to accept the filing. Furthermore, it is fairly easy to make adequate allegations to overcome a Motion to Dismiss and force at least some litigation.


But the bottom line here is that there is a liability possibility out there for bloggers, just like traditional print media or any other private citizen who "publishes" false and harmful statements. Now, you might say, "What about free speech?" Certainly there is a tension between free speech and defamation liability. But free speech does not mean one can lie about others to harm them. Free speech protection is primarily about public dialogue. For example, if Rick posts on his blog that George Bush is a war criminal who should be tried for war crimes (as seems popular these days), there is no liability even if Mr. Bush is innocent. On the other hand, if non-public figure Bob is trying to get a job, and his former employer has a blog in which he falsely states that Bob was embezzling money, thus preventing a potential employer from hiring Bob, there is a liability problem. And that liability exists whether the employer communicates the lie via a newspaper interview, a verbal reference check, a blog, or a comment on someone else's blog.


There seems to be a fear that bloggers will stumble into liability unawares. And the real issue is that a blog can potentially go everywhere, to everyone. It is by nature, a pulblic statement to everyone who cares to listen.


But rather than demand immunity from liability, maybe bloggers need to recognize and adapt to the media, i.e., be deliberate and thoughtful about what they post. Anyway, how can bloggers expect to be taken seriously as legitimate sources of information, if they do not have any responsibility for their statements. Instead, as Blog for Profit points out in the "How to (Try to) Stay Out of Trouble When Blogging" article, #2 is "Don't Defame."


The point is, yes bloggers can be sued, even in the U.S.


See also Bloggers and Section 230 Protection.

Tuesday, January 6, 2009

Copyright Law Not the Problem for Indy Film

Yesterday I read an article on techdirt.com entitled "Copyright Once Again Being Used to Hinder Culture, Not Enable It." I posted a comment on Twitter starting out "Wrong-don't use songs." Then I got concerned that I might have broken some unspoken taboos or etiquette on Twitter by being so confrontational. Partly as a result, I think it is worth pointing out my objections to the point of view being presented by the blog.

First: What was the fact situation the blog addressed? Well, according to techdirt.com it appears that an independent film maker used some 1920s jazz music by Annette Hanshaw in her film. The film is reportedly really good. But the film will not be widely distributed because the licensor of the jazz music wants an incredibly large amount of money before she will give permission to use the music in the wider distribution. The film maker can't make any money that way and is bemoaning the misfortune. Notably, the film critique Ebert liked the film and noted the way the copyrights were being used to prevent the film from being distributed and that this likewise limited the public's knowledge of the music.

Second: So what's the problem? According to techdirt.com, a good movie is not getting out to edify the culture because some relatively unknown music author (or their representatives) is using their hefty copyrights to hijack the movie.

Third: So how do I see it? Under the U.S. Constitution Art. 1, Sec. 8, copyright law is "[t]o promote the Progress of Science and useful Arts…." Authors are therefore given "the exclusive Right" to their writings. The general idea is that the exclusive control of ones works will promote the creation of such works by giving author's a monopoly in order make money off the works, i.e., incentive.

Now there may be problems with the system in place, most notably, how long do copyrights exist. Every few years, Congress extends the length of copyrights, in large part because Disney lobbies to extend its protection of Mickey Mouse. The length of the copyright means that it takes longer for works to fall into the public domain so we can all use them and build off of them.

It seems people approach copyright from one of two positions. Either one believes that material should be available for use in order to promote art, or one believes the materials would not exist unless they are only available after the author gives permission. The first position is too shallow for me and seems more a product of our culture than good policy.

Specifically, the argument for availability almost always skips the foundational question of whether the work would exist if the exclusive rights did not exist. But more importantly, I think, is that the position has a sense of entitlement. For example, in the above fact example that spawned this discussion, nobody seems to care about the jazz music, the emphasis is on how we want access to the movie. The only reason we even discuss the jazz music is because it is a roadblock to getting the movie. That impliedly minimizes the music. And if the music is so unimportant, why don't you use other music and bypass the offending author?

It seems that there is more going on, like maybe the music is a key part of the film such that the quality of the film is intrinsically tied to the quality of that particular jazz music. And if this is the case, why should the filmmaker have any right to force the songwriter to license their quality music. And this brings up the main point in my mind. This "problem" is really about wise relationships and partnerships.

When one engages in a creative endeavor with other people, one is engaged in relationships and partnerships. Those relationships and partnerships are going to be directly affected by the personalities and character of the people. In copyright, the law provides only a backdrop of rights and responsibilities--namely, that the author has an exclusive right to their own work. This means the authors can be jerks if they are jerks. And it makes it extremely important that one develops a strong relationship with appropriate contracts, licenses, and negotiations. But, in the end, we are dealing with people, and one is being nearsighted to blame the law for the abuses of the author.

Too often, it seems we want to add a law or change a law because we cannot get what we want from someone, or because that person has used the law to defeat our interests. Copyright law is not the problem in this case. If we have ended up in a society where we have to change the laws in order to make the majority of people reasonable in our own estimation, we, as a society, are beyond any help the law could provide. Furthermore, such thinking is more or less a blame game where we evade taking responsibility for our own actions and decisions.

The filmmaker in the article has partnered with the songwriter and built her film on the back of the songwriter. (If this is incorrect, she should simply change the music and she would have no problem.) She must now engage that author and deal with the consequences.

Monday, January 5, 2009

Psalm 73 and Practicing Law

Sometimes, as a lawyer, I get the feeling like I'm a fool for trying to do the right thing, practice the right way, and advising my clients to do the right things. Too many times, justice is thwarted and the opposing counsel with the arrogant, confrontational, hateful attitude is the one that seems to get away with all of their lies, half-truths, and undermining. (Of course, to get this far, you have to believe that there is something like the truth, that there is a right way to act, and that you can know what those things are. Discussions for other posts.)

Psalm 73 really hits the spot for me. I sit there and really identify with the first few verses, thinking about how unfair it is when I am respectful and the other side takes advantage of it. When I am courtious and it is thrown back in my face. When I repress the urge to respond to someone with an equal measure of the venom that they have carelessly spewed out at me. But more than this, I have to confess that I get envious. I want the success of winning the case, of obtaining victory. I want the spoils of doing well - more clients, more income. And it seems like the attorneys who do wrong, who do not care about people or relationships, that they get these things.

So I love that last half of Psalm 73, how it brings the perspective back to my practice. I would rather do good and maintain my integrity, my service to my clients for their whole health. I will strive again today to be a testimonial favoring God, by how I practice my profession.

Sunday, January 4, 2009

Beginning of a Beautiful Thing

It only took me about three days of concerted effort, but I am now set up to blog on this site.  Of course, this is the start up phase and I have much to go.  I like the twitter posts because they are short and simple.  No real commentary necessary.  A blog on the other hand, requires more.  And while I am not alien to blogging as I have been doing so personally for a while now, this will be my first foray into blogging regarding professional matters.

So here is my goal: to create an inviting and informative business community related to my practice of law in Colorado.  I will work to engage both clients and colleagues regarding business (and some other) issues from a legal perspective.  And hopefully, if you know me, that means we get to talk about all kinds of truly important and practical issues and topics from a relational perspective.  Because law is about relationships, and relationships are worth pursing well (like with integrity, forethought, discernment, wisdom, grace, and sound judgment).

Looking forward to writing more.

Saturday, January 3, 2009

Blogger v Wordpress

Thought I had settled on Wordpress and then I realized that I cannot change the Wordpress templete by adding any information so I cannot put my twitter posts on there. However, I can do this in Blogger.

But Blogger's templetes are less attractive so I would have to figure out how to get it to look better. So now I am trying to figure out which one to go with.

Friday, January 2, 2009

Hokies Win the Orange Bowl

It's been a while, but the Hokies have finally pulled out a bowl game.  Of course, I would have liked to see the team play a little better.  The defense pulled off some spectacular plays with four turn overs.  But it always seems to me they should generally prevent the other team from moving the ball and shouldn't be counting on the interceptions as the basis of the defense.