DRG Law

Started My Own Firm, New Blog/RSS Location

2011-02-05T09:01:00.002-07:00

Back in November, I headed out on my own to start The Griess Law Firm, LLC. As a part of the process, I have created a new website with a new domain and a new location for my blog posts. The new RSS feed is located at http://www.griesslaw.com/blog/feed.

Civil Theft, Breach of Contract, and Software Development with a Copyright Ownership Defense in Colorado State Court

2010-09-15T21:19:00.001-06:00

A recent Colorado Court of Appeals case addresses an interesting situation involving claims by a software company which came up with an idea for a software program and then had a falling out with the company it hired to market and later write the program. The case is Steward Software Company, LLC v. Kopcho, No. 09CA1690, announced on September 2, 2010. Specifically, the software company came up with an idea for a banking software and hired the marketing company, and later the developer. The marketing company signed a nondisclosure agreement which stated that the it did not acquire intellectual property rights under the nondisclosure agreement except for the limited purpose of creating a marketing plan. However, no written contract was ever signed regarding the marketing work. Later, a developer was hired, but again, no written contract was signed.

After the initial version of the software was created, the parties had a falling out, apparently when the software company requested significant modifications to the program which took a great deal of time and increased the costs. The software company decided to withhold payments and the developer ceased work after it registered the copyright for the program.

The software company sued the developer and marketing company for breach of contract, breach of fiduciary duty, conversion, and civil theft, among other things. During the litigation, the software company apparently argued that the developer and marketer basically stole its trade secret idea and the corresponding program based thereon. As a part of its defense, the software company and marketer asserted that they owned the copyright in the program, a fact which would defeat at least a portion of the claims regarding whether it stole copyrighted intellectual property, i.e., you can’t steal what you own.

Interesting, the case was removed to federal court on the basis that it raised a federal question, copyright law. Generally, state courts have no jurisdiction to decide copyright issues as these are preempted by federal law. However, here, the federal court remanded (sent back to the state court) the case because it held that the raising of the ownership of a copyright as a defense to a state court claim did not raise a federal copyright issue which gave it jurisdiction to hear the matter.

Back at the state court, the trial court did not allow the developer or marketer to instruct the jury on the defense that it owned the copyright and therefore could not have stolen the copyrighted intellectual property. The jury determined that the developer and marketer had stolen something and awarded damages, but it was impossible to tell what exactly the jury believed had been stolen and whether this included the copyrighted materials.

The Colorado Court of Appeals held that one of the errors of the trial court was to fail to instruct the jury on the copyright ownership defense and remanded (sent it back to the trial court) the case.

This opinion case raises several points businesses should consider.

Should Have Created a Written Contract

First, as is a theme on this blog, the parties should have taken the time to draft and agree to a written contract. Initially, no one expects that their relationship will break down, but when it does, a written contract can be invaluable. For example, a written contract done well, would likely have addressed the scope of work and payment so that the contract could have provided a more efficient and cost effective way to deal the very sort of conflicts that gave rise to the falling out in this case. It could have not only identified rights and obligations, but also addressed the modification process, cost or time limitations, liability limitations and so on.

In addition, a well written contract dealing with intellectual property issues most likely would specifically address the ownership of the intellectual property at issue. For example, here, the question arises whether the software program developed by the developer was done for hire, a determination which affects ownership. There is also a question as to the scope of the trade secret idea which gave rise to the program, who owned that, and who owned derivations arising from the idea, and to what extent. Because there is no written contract to review regarding the roles, expectations, and intellectual property at issue, the issues get confused and it is likely nobody gets what they really wanted, and certainly not for the right price.

Who Owns the Copyright, Works for Hire

Second, in general, copyrights vest in the author of the work at issue. See 17 USC Section 201(a). However, works made for hire vest in the hiring party, if done as an employee within the scope of employment, or as a part of a contract where the parties expressly agree in writing, signed by them, that the work is considered for hire. See 17 USC Section 101. When hiring someone to generate copyrightable work in a non-employment situation, it is important to make sure you specifically get the copyright in writing, or it likely rests with the authoring party. Likewise, when hired to create copyrightable material, one should be deliberate about providing the specific rights one is giving away, while specifically retaining the others, and pricing the work accordingly. Lack of clarification can create some ugly situations.

Emphasis on Trade Secrets

Third, the case seems to highlight the potential good use of trade secrets to control derivative development of products and intellectual property. An idea is not able to be protected under copyright. However, a trade secret can be an idea, and can be protected, so long as it is secret and controlled. In contrast, copyrights adhere to the original work of authorship. As a result, while an idea is not copyrightable, the program, art, or literature that expresses the idea is copyrightable to the extent it is original.

What can happen, then, with appropriate contractual planning, is that the trade secret owner can keep control of the idea and use it to obtain a copyrightable product without releasing its advantage in the market related to its trade secret.

On the other hand, bad contractual planning can result in one party owning the trade secret, but failing to get the rights to the end result intellectual property. The developer arguably cannot use the product without concerns about misappropriate of the trade secret, but the trade secret owner cannot use the resulting intellectual property either. In short, the trade secret owner can spend a lot of money creating something they cannot use, while the copyright owner can demand more money to license the resulting product which is only really valuable to the trade secret owner.

Copyright Defense in State Court

Finally, the case seems to indicate that in a copyright related matter, a plaintiff with state court claims such as misappropriation of trade secrets or violation of a non-disclosure or non-compete agreement can remain in state court by electing to not pursue copyright infringement claims which may be weak. It also seems to mean that a defendant can still raise copyright related defenses even if they are not in federal court. This would be important on the one side when a plaintiff wants to limit its litigation expenses and focus on stronger claims unrelated to its possible copyright claims to protect a market, a business model, or to reserve future investment opportunities, and, on the other side, if a defendant has copyrights, even unrelated copyrights, which can limit its exposure to liability.

Conclusion

Regardless of how one looks at this case, it seems apparent that the appropriate use of, and planning with, contractual relationships involving intellectual property is key. Such use can significantly reduce costs and exposure to potential liability later on, allowing businesses to make informed decisions regarding product development, marketing, and investment.

Sorry, Been Real Busy, Blessings of Flexible Work Schedule, and How the Workplace Has Changed

2010-09-01T19:44:00.001-06:00

First, let me apologize that this is the first post in over a month. At first I was real busy with work, and then a whole set of problems occurred at work that prevented me from being able to pay attention to the blog.

Of the most import is that my 5 year old son got sick, and when he did not get better after a day or two, we realized he might have an appendix problem. So we rushed him to the ER and confirmed that he had appendicitis. We then rushed to the hospital where they put him in surgery as soon as they could, and found out that his appendix burst. We ended up at the hospital for a full week as he recovered. Naturally, that took a lot of our attention.

It is a real blessing to have a work place and a job where I had the kind of flexibility that I do. I was able to spend nights and mornings with my son while my wife was able to keep the kids at home. Friends watched the kids during the day while caught up on sleep or went to the office. The hospital had wi-fi, so I was able to get basic work done while still attending to my son so he was never alone at the hospital. Essentially with my cell phone and laptop, I was able to maintain a remote office where ever I was and keep things going without having to be at the office.

I have to specifically thank the families from church and elsewhere that took care of our kids, provided food, prayed with us, or visited the hospital like the Hammersmiths, the Johnsons, the Lascors, the Adams, my parents, the Geoffrions, the Orranges, the Baggerlys, our neighbor Ms. Bunny, the Cranes, the Gores, and I hope I did not miss anyone. It was a blessing to see our faith community in action.

As I rushed around with our health crisis, it is clear how much things have changed in professional life. With a laptop and cell phone I was able to convert almost anyplace into a work zone. Face to face contact with clients, fellow attorneys, and staff remains important, but I could work around other pressing activities.

I’m getting back up to speed and hope to post some content again soon.

Use of Trademarks by Online Hosts OK

2010-07-21T12:16:00.001-06:00

Recent federal cases point out that online hosts such as eBay and Google are not responsible for their users’ trademark infringements. A Second Circuit case, Tiffany v. eBay and Google v. Louis Vuitton Malletier, related to the identification of jewelry on-line as being from Tiffany, however, many of the items sold were counterfeit items. To the extent companies like Tiffany want to prevent such users from using their mark for false goods, they must track down each user and then take steps to prevent the infringement. This is extremely costly to those companies.

On the one side, it is important to note that not all uses of trademarks are infringing. Marks can be used to properly identify products such as a car dealer advertising that it has Ford Mustangs for sale, a church stating it provides Starbuck’s coffee to attendees before services, or an individual stating that they only use Apple computers. Therefore, users who are actually re-selling Tiffany products on eBay can state that the products are from Tiffany so long as they do not indicate that they are endorsed by or are affiliated with Tiffany. Accordingly, online hosts can note that they have users who are re-selling Tiffany, or other trademarked, products.

On the other side, there is such a thing as secondary liability for trademark infringement which is a lot like conspiracy or aiding and abetting. In the copyright context, Napster cannot provide a means for others to engage in widespread infringement knowing that this is what is going on, and then avoid liability by asserting that it is not the one actually engaging in the illegal copying. In the trademark context, an online host cannot ignore specific infringement taking place on its site, turn a blind eye to infringement about which it should know, or otherwise facilitate infringement.

The recent case law continues to place the burden on trademark owners to enforce their marks. Online hosting companies do not have to do this job for them. However, they do have to respond and engage appropriately when infringement is brought to their attention. Accordingly, companies with valuable trademarks have to continue to spend time policing their marks, one user at a time. One can easily imagine the almost impossible task this can be given how any individual user on Facebook, Myspace, Twitter, eBay, Google, personal blogs, and so on, might be infringing at any given time.

This is another example of how the case law demonstrates the drastic changes taking place. What is interesting is that the traditional models focus on control as held by the corporate entities, when it is the various consumers and small sellers who’s activities, in aggregate, are beginning to rival those of the corporate entities.

Trademark law is about protecting consumers. The traditional model is that the government gives the person with the most incentive the power to protect the consumers, i.e., the seller who wants to build their brand and convince consumers to buy their products. Companies have traditionally ignored the consumers themselves and focused on the distribution chain as well as their competitors. Perhaps trademark owners need to start using the technology that is causing them such a hard time to start to engage their customers more directly. Perhaps a re-seller registration system focused on consumers rather than sellers where potential buyers could quickly communicate with the trademark owner to verify the authenticity of the product in question. I’d be interested to know if that has been tried….

LLC Operating Agreement Controls Assignment of Membership Interest in Colorado

2010-07-07T10:12:00.001-06:00

In the case of Condo v. Conners, No. 09CA1130, from May 27, 2010, the Colorado Court of Appeals held that the provisions of the operating agreement for an LLC which prevented a member from assigning his membership interest without the unanimous written consent of the other members are valid, and the assignment is void.

In Condo, one of the members of an LLC assigned his membership interest (in the form of the right to receive distributions from the LLC) to his ex-spouse as a part of his divorce. The Operating Agreement for the LLC required that any assignment be approved in writing by the other members. The other members of the LLC refused to approve the assignment and instead purchased the assigning member’s interest from him. The former member’s ex-spouse then brought an action against the remaining members for tortious interference with contract and civil conspiracy on the basis that their actions had resulted in the divestment of her contractual right to the monetary distributions from the LLC. The Court affirmed the summary judgment of the ex-spouse’s claims.

In reaching its conclusion, the Court of Appeals for Colorado first noted that for a tortious interference with contract claim to succeed, there must be a valid contract. In general, Colorado statutes provide that an LLC membership interest is personal property which can be assigned and transferred. C.R.S. § 7-80-702(1). Any person who receives a transfer or assignment has the same rights as the member. C.R.S. § 7-80-702(3). However, the Court also noted that LLC's are governed by operating agreements which control over provisions of the statutes contrary to the operating agreement terms, subject to exceptions certain inapplicable exceptions. C.R.S. § 7-80-108(1). The goal of the statutes governing LLCs in Colorado is to give maximum effect to freedom of contract in operating agreements. C.R.S. § 7-80-108(4).

Accordingly, because the operating agreement at issue prohibited assignments without the consent of the other members, the Court found that the assignment was void. The assignment was void because the member who made the assignment was limited by the terms of the operating agreement, and because the operating agreement governed over contrary statutes which otherwise might have allowed for the assignment.

The Court went on to note that Colorado does not require any “magic words” in the operating agreement to make the assignment void such as a specific statement that the assignment would be void. Rather, the language in the operating agreement that the assignment, without the written consent of the other members, was not effective for any purpose, was sufficient to void the assignment. As a result, the ex-spouse assignee was never, and could never be, a member, or have any membership interest.

In the operating agreements we do for clients, as well as buy-sell agreements incorporated therein, we broach this and other similar issues with the members of the expected LLC asking them, for example, to determine whether, and how, they will allow the transfer or assignment of membership interests (whether voting rights, rights to distributions, or otherwise). It is an important exercise that many potential members do not initially recognize, or realize, they should address. But very often, when potential members consider the issues, they do not want to allow the membership interests to be freely transferable and they want to have some control over who can be, or become, a member of the LLC. For example, even if a divorce does not come into play, none of the members will live forever, and the succession of the membership interests in the estate of a deceased member, for the stability and perpetuation of the business, must be considered.

The Condo case reinforces that operating agreements are valid and will be enforced by the courts under Colorado law. The case shows that the members at the formation of the LLC have real power and their choices have real consequences which should be taken into consideration before there is a dispute. Furthermore, LLCs which exist, but where the members have not addressed these issues, or do not even have an operating agreement, can, and should, spend the time and money to put something in place before a dispute arises.

Update on Indy Film: Sita “No Longer” Singing the Blues

2010-06-30T09:00:00.000-06:00

One of the first posts on my blog was Copyright Law Not the Problem for Indy Film. The film was Sita Sings the Blues and is centered around a song that the film maker, Nina Paley, could not get licensed after she already made the movie around the song.

The American Bar Association Journal contained an article about the film in its May 2010 edition which is called No Longer Singing the Blues.

While the ABA article highlights some of Ms. Paley’s crusade regarding copyright alternatives, what I thought was particularly interesting was the report that Ms. Paley did eventually obtain a license. Originally, the demand was for more than $200,000; however, she was able to negotiate a deal for $50,000 per 5000 units sold. Since then, she has been able to do some distribution of the film and, if you follow the link above, you can apparently view the film for free on Google videos.

The point is that Ms. Paley has obtained a workable license under the current copyright regime. While the argument remains that some copyright owners can use their rights to prevent the creation of artistic works, it is debatable whether that is necessarily a bad thing.

If the song is so valuable that someone wants to create a film centered around the song, it is hard to argue that the song has no value, or that the author of the song should not be able to obtain the benefit of the value they have created. The copyright laws are focused on trying to encourage the creation of such works by giving authors the ability to capture this value. And one has to wonder whether the song on which the film is based would have been created, or made available to others, if the copyright law incentives had not existed. In many ways, the film, and its value, are dependent on the song and would never have existed without the song.

This raises the relational issues on which I like to focus. Songs and other works are often more than just an independent work. They are created and tied to their creator in intangible ways, they have a context. Some don’t want their work used for purposes that are antithetical to their views, values, or goals. An example is when a politician uses a song by an artist that is diametrically opposed to the politician. From the author’s perspective the use of the song twists and perverts their creation. It’s like taking a quote out of context.

While we want to promote the creation of works for the public’s use, I am not sure that it is good to completely severe works from the authors intent, desires, dreams, and hopes. Some things may never be created or said, but that is the necessary corollary of actually being able to say or create something of meaning or value. It is the necessary corollary of expression.

Furthermore, it should be noted that often times it is the limits which force the creation of the best works. Boundaries are not in and of themselves a bad thing. They simply establish the scope of the work. A painting has to have edges, and a novel has to use words. In fact, it is those limits which create the medium in which one operates. Likewise, access to a limited world of possibilities is often what forces us to do better with what we have, instead of relying on others.

Regardless, Ms. Paley got a license and the world keeps turning.

Copyright Registration: Not Jurisdictional but Still Really Important

2010-06-23T09:00:00.000-06:00

One of the frequent questions I get is whether a copyright owner has to register their works in order to have a copyright or to obtain protection under the federal Copyright laws. Last year, I wrote a short post highlighting registration asking the question: “Should I Register My Copyright?” Initially, I noted that one has a copyright regardless of whether one registers the work. I then focused on the advantages of registration including statutory benefits such as enhancing damages, and evidentiary benefits such as having presumptive proof (if the registration is successful) that the work is protected by copyright law.

While these advantages remain true, new developments in the law help to clarify the importance of registration, importance which I think must be emphasized.

Ownership versus Right to Enforce

First, let me point out that there is a difference between having a copyright, and being able to enforce the copyright. Using the real property example, it is one thing to own your house lawn, it is another to actually prevent others from walking on your lawn. With copyright, the walking on your lawn is someone else making a copy of your work without permission. You, as the author, may own the copyright in the work, but the fact of ownership does not in itself prevent someone from making a copy of the work. The power of ownership really takes effect when you can use the fact of ownership to prevent someone from making copies.

Accordingly, while one may have a copyright in their original work of authorship by virtue of having actually created the work, one must also be able to prevent copying.

Copyright Protection Other than a Lawsuit

Second, there are ways to prevent copying other than filing a lawsuit. For example, if one never shows their work to anyone else, no one can make a copy of the work. One can also use physical barriers or technology to prevent copying, like watermarks, encryption and so on. Use of these types of measures is a key part of creating a copyright protection system and should not be ignored. However, these measures have their limits, including their feasibility and applicability.

A Legitimate Lawsuit Option for Enforcement

Third, the perhaps the last component of a copyright protection system is a legitimate threat of litigation against those who are copying the work. One thing to be noted is that copyrights are a federal right and can only be enforced in federal court, i.e., by making a federal case out of it. But in addition, this is where registration becomes key.

The Reed Elsevier v. Muchnick Case

A recent case from the U.S. Supreme Court addressed registration as a pre-requisite for enforcement of copyright claims. The case is Reed Elsevier, Inc. v. Muchnick et al., 130 S.Ct. 1237 (2010). There, some of the parties seeking copyright protection under federal law had not registered their copyrights. The trial court raised the question on its own (without the parties raising the question) of whether it had the ability to handle the case if those parties had not registered their works. Another way of saying this is to say that the court raised the question of whether it had jurisdiction to hear the copyright claims.

This came about because the federal copyright statutes state that a party cannot file certain copyright claims (for our purposes, it is enough to note that the certain claims at issue are pretty much the ones most important to copyright owners) unless they have registered the copyright. Specifically, the statute states, in part, “no civil action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title.” 17 U.S.C. Section 411.

Applying this statute, the trial court determined that it did not have jurisdiction, and the parties appealed the issue all the way to the Supreme Court.

In resolving the question, the Supreme Court stated that trial courts do have jurisdiction to handle cases involving unregistered works. However, the Supreme Court indicate that registration was an essential element of a claim for violation of a copyright under the statute. In short, this means that while the court can hear the case, the copyright owner still has to prove they registered, or tried to register, the copyright with the Copyright Office to succeed in their lawsuit.

Like any lawsuit, a party has to prove they are entitled to relief or a remedy. If one is claiming someone else trespassed on their property by walking on it without permission, they not only have to prove that the other person actually walked on their property, they have to also prove that they own the property at issue. If they cannot prove this, they cannot prove an essential element of the trespass claim and they will loose.

With copyright violations, the federal statutes establish the elements of the claim that a copyright owner has to prove to win. It may be obvious that a copyright owner has to prove the the other person actually copied the work at issue, but the Reed Elsevier case also suggests that the copyright owner will have to prove that they at least attempted to register the work with the Copyright Office as well if they want to win. If they cannot prove this requirement, they will likely loose.

The reason I say that they have to prove they at least attempted to register the copyright is because registration does not have to be accepted for the copyright owner to file suit. A copyright owner has to have either successfully registered the work before they sue, or have tried to register properly, but been denied registration. In addition, in some situations, the registration can occur within three months of the suit for a violation of the copyright.

Conclusion

It is integral to be able to enforce a copyright in court against others who copy. Without the ability to enforce the copyright, one really has nothing from a legal perspective. Accordingly, because one must register their copyright to be able to win in a lawsuit about copyright infringement, registration is exceedingly important.

Legal Assessments: Mean What You Say in Both the Contract and the Relationship

2010-06-16T22:38:00.001-06:00

I’m back after a whirlwind of work related to some litigation matters with which I am periodically solely occupied. My old boss and mentor Rob Baldwin used to tell clients when he was really busy with one matter that he expected they would want the same thing when their matter required the same kind of attention.

Introduction

Previously, I’ve discussed some issues regarding entity structure for companies and corporations from a relational perspective. These discussions have focused primarily on internal relationships, specifically between owners, principals, shareholders, or members. I want to turn the attention now to the relationships an entity has with third-parties, whether customers, suppliers, independent contractors or the like.

The Contract Governs Over Informal Negotiations

In general, the same principles apply such as accurately identifying the duties and responsibilities, providing notice or disclosure, and actually complying with the terms and conditions. But what I want to do here, is point out that often, the people involved in a legal relationship formalized by a contract of some kind, tend to allow for a bit of a incongruity between what they understand the relationship to be, and what they included, or excluded, from the actual document formalizing the relationship. Specifically, what I want to point out is that the contract will most often govern any dispute, regardless of the informal negotiations before hand. As a result, the contract matters more than the informal negotiations, and a company can do a lot to stand out by making sure their contracts accurately reflect the informal negotiations.

A personal example

Let me give the example of a form contract you might get from a service provider. I recently had computer troubles after the lightning storm here in Denver a week back. I took the computer (my really old G4 iMac) to a service provider to retrieve data from the hard drive. I explained that I suspect the drive is fine and it is simply the power to the computer that is a problem. After discussing the situation with the representative at the store, confirming the price for the services, and what I needed done, I was given the standard service contract the provider uses for me to sign and initial. Of course, being an attorney and all, I actually read the terms.

Turns out that the standard form contract I was supposed to sign included a certification by me that I had a back-up of the data off the hard drive. It then went on to state that I would not hold them responsible if the data on the drive was lost during the repair work. This gave me pause.

As you can imagine, the terms are there because the provider needs the freedom to work on a broken machine without concerns that their efforts might accidentally destroy data which cannot be replaced. However, the situation in the form contract did not fit my circumstances. I was there because I needed them to retrieve the portions of the data on the machine for which I did not have a back-up. If I had the back-up, I would not need them. In addition, they wanted me to release them from responsibility, even if they lost the data because they were negligent (which is another way of saying they lost the data because of their own fault when they reasonably should not have lost the data).

This put me in a quandary. First, I was not about to lie and certify that I had a back-up. Second, I got a little concerned that they might be a bunch of hacks. I am willing to pay them because they hold themselves out as being capable of providing the services I am requesting using a skill I do not have. But their form contract implies that if they delete my data because they do not really have any skills, or because they have those skills and failed to apply them to the job, I basically have no recourse.

The Application

I bring all of this up as an example of how we do business and form legal relationship. In talking with the representative, I felt comfortable that they understood what I needed and had the skill necessary to do the job. I also received assurances that they understood my problem and would do what they could to help by applying skills I do not have, without accidentally deleting the data they were trying to recover for me. But after all of this conversation and forming of the relationship with the provider, the contract, which actually formed the relationship, was different in important respects. So the question arises, which one will actually govern the transaction: the informal conversations, or the contract. The answer is generally going to be that the contract will govern.

My issue with repair work on a computer is small. But when this principle is applied to a bigger transaction, with larger consequences, the same problem arises. One might have a great interaction with the other person, but get a contract that contradicts one’s understanding of how things are going to work. It might provide for discretion by the other person that keeps them from being responsible in certain situation, or limit how much skill they have to actually apply to the job. In the end, it is the contract which will govern any conflicts, and the discussions and expectations formed outside of the contract will probably not be worth much.

What many of us tend to do is pretend that the informal interaction is the real relationship and will actually be how the other party will perform in the relationship, even if the contract does not force them to do so. However, the contract is where the rubber hits the road. If someone is willing to say they can do something informally, they certainly ought to be willing to back it up by making themselves accountable in the actual contract if they cannot do it. Otherwise, we are simply entertaining a form of lying.

An Opportunity for Businesses to Stand Out

I think it is better, and actually a way for businesses to stand out among their piers, for businesses to draft their contracts in a way that honors the informal relationship they form to get business.

Using my example of the computer repair, it is perfectly possible to craft language in a form contract that addresses the concerns of both the provider and the customer. One way is that rather than asking a customer to release the provider from the responsibility to exercise the skill they hold themselves out as possessing, the provider could simply specify what the provider will be responsible for while also specifying what they will not be responsible for (like faulty equipment or incidental damage caused by good faith attempts to do the work requested on the machine). The provider could focus the form contract on getting authorization from the customer to do what is deemed necessary by the provider, at the providers discretion, to accomplish the task at hand, with a disclosure that such activities may have unintended consequences which the customer is willing to accept as a condition of providing the machine for the work, including a loss of data. The provider could state that they are limiting their liability for legitimate screw ups that could have been avoided to the amount of the charges for the work performed so they have an incentive to exercise their skill, but do not have to worry about a screw up sinking their business. And the provider could use the contract to suggest the customer get a back-up of the data before allowing the work, noting that if the customer chooses not to do so, the provider cannot be held responsible for inadvertent losses of data.

The Contract Matters, SO Draw a Line

Another point is that businesses and individuals should pay attention to the actual contracts. The informal relationship is a legitimate basis for some concessions in the contract terms, knowing that when all is said and done, one will have to live with the contract terms if things go bad. However, we do have to draw the line somewhere.

For me, I only crossed out the term in which I was asked to certify that I had a back-up of the data because, while it bothered me that they wanted me to release them from all liability for deleting my data while doing the work, it was not critical data and they had agreed to significantly limit the charges for doing the work if they could not retrieve 75% or more of the data. On the other hand, I was not about to lie.

Intellectual Property (IP) Copyrights and Copywriting—Just Like Music or Movies

2010-04-10T17:27:00.001-06:00

It has recently come to my attention that some copywriters do not necessarily understand that they have the same kinds of rights as other creative artists. And this is likely true for many professionals who create original works. However, copywriters, like musicians and other artists have the same set of statutory rights.

For example, many are familiar with the idea that a musician or movie studio can license their song or movie to others for specific purposes like personal use. When one buys a copy of a song performance, or a copy of a movie, they are generally buying a license for personal, private use. The buyer does not have the right to make copies of the work, to play it for the public, or to make it available for download on the internet.

Copywriters and other creative professionals have the same ability. A copywriter can license their copy to their clients to be used for specific purposes, or they can give them all of the rights to the copy. Likewise, when a designer creates a logo or a web design, they can license the use.

The fundamental idea is that all creative professional (as well as consumers) need to know their rights because this defines the product they are providing or buying, and should determine the price to be paid. A creative professional who provides their clients with all the rights to copy, use, modify, distribute and otherwise work with a creative product is giving away a great deal more than a professional who provides the client with a license to use the product in a certain way. The price should also be significantly higher. And finally, the professional who gives away everything must understand that they have not retained any right to use the product for their own purposes such as inclusion in a portfolio unless they specifically retain that right.

Depending on the business model of the creative professional, these issues should be closely examined so that the professional manages their assets appropriately. For example, a copywriter can license the use of their copy and charge a fee based on the anticipated use. Then, if the copy is successful the copywriter can reap the benefit or offer the client the opportunity to buy more rights to continue to use or modify the copy.

Key to the management of creative products, and the sustainability of the businesses in question, is first knowing the legal rights as they relate to the asset and product, and then accurately reflecting the transfer, and retention, of the appropriate rights through contracts and agreements.

From the consumer side, it is important to make sure the buyer knows what they are getting and how they can use it, and to make sure the price reflects the value being provided. The last thing anyone needs is a fight about who can use what.

Finally, the clear identification of the buying and selling of the rights to a particular creative work can help the parties decide who will register the work so that they can enforce the proper party has confidence in the ability to enforce their rights down the road.

Creative Connection Trade Show Lessons

2010-04-03T11:29:00.001-06:00

The Trade Show with Creative Connections went great. There was a steady stream of traffic and I had some interesting conversations with various business owners. I also learned a couple of lessons that will be very useful for the future.

The first is that I need to bring a drink. I got parched fast talking with everyone. It was great, but I found out quickly that all of the drinks and snacks were cash only and I generally don’t carry cash. However, this last time, a friend was kind enough to get a bottle of water for me.

Second, not too surprisingly, there were a lot of people who came through the show in order to give the exhibitors their cards and invite us to come to sponsored networking events or other trade show events. This wasn’t bad, but it isn’t necessarily the kind of people with which one hopes to spend time talking. Having a second person at the booth would be helpful to make sure that I am able to talk with those who might actually be interested in my services.

Third, I think that having on my sign some of the specific services I provide might help. This would have gotten some of the conversations in the right direction right away as visitors to my booth did not necessarily know why I was there. Listing out things like Trademark Registration, Copyright Protection, Contracts Review and Drafting, Company Formation, and so on, might be a helpful to visitors.

Fourth, setting aside some times for consults with prospects with a sign up sheet might have also been useful. That way, I can move beyond introduction straight to a second contact opportunity.

Finally, I toyed around with a give away of some kind. My firm has sometimes given away a simple will at Estate Planning presentations. I was considering a Trademark analysis as a give away given the context, but perhaps a single member LLC Operating Agreement would be appropriate. If one needed an Operating Agreement for a multi-member, I could discount the cost by the usual cost of drafting a single member Operating Agreement. And I could simply make it a certain number of hours credit toward whatever work the prospect might need. I think that next time I will move on that possibility.

Creative Connections Trade Show, March 25, 2010 at Colorado Community Church, 3-7 pm

2010-03-11T09:49:00.001-07:00

I’ve been a part of Creative Connections for over a year now, since when they used to meet at the Koelbel Library on Holly and Orchard. I’ve even had the privilege of presenting to the group on topics like Intellectual Property 101 and Independent Contracts. The group features creative professionals like digital and print designers, marketing consultants, artists, web developers, copywriters, film and video producers/editors, screenwriters, and more.

This coming March 25, 2010 from 3 pm to 7 pm, the group is having its second annual trade show where members set up booths to show the public, and hopefully interested businesses, their products and services. I will be hosting a booth at the trade show and hope that you might stop by to see what me, and my friends, are doing. It looks to be a great chance for businesses to get some insight and ideas into using creative media to augment business. And of course, I will be there to talk with, and to help businesses as they take advantage of intellectual property resources.

The event is being hosted at Colorado Community Church, just south of Hampden on Colorado Blvd. There will also be speakers and presenters on topics of interest related to the value of creative media to businesses.

Come on over and meet with your friends at Creative Connections, this Friday at 9:00 AM, at Colorado Community Church, just south of Hampden on Colorado Blvd. As always, it’ll be friendly, informative and fun!

Slowing Down Can Save You

2010-03-10T12:27:00.001-07:00

Some people are snails and some are risk adverse. However, it is unlikely that those people are very successful in running businesses.

Business leaders tend to see what is going to happen before others. A successful friend of mine in the nonprofit world suggested that this is what it means to have vision. But in addition to seeing what is ahead before others, they act on it swiftly. They are first to market, first responders, first to invest in appreciating stocks, etc.

Being able to be successful involves a combination of vision, speed, and risk management. As a result, it seems that more often than not, a successful business leader’s default speed is full throttle.

It is for those business leaders that the admonition to slow down can be very important.

There is a difference between going quickly in order to take advantage of benefits which will disappear as time goes on, and moving quickly because one has developed the habit of moving quickly in situations where the benefit is reducing as time moves on. One is a sense of urgency based on a cost/benefit analysis, the other is a psychological condition.

It may seem obvious in some situations, like one should not market a new tech device without first getting intellectual property rights in place . But other situations, or even certain details, may be less obvious. For example, carefully reviewing real estate documents as well as carefully surveying the physical property before a purchase can result in catching issues and problems such as neighbor encroachments, unrecorded leases, and so on. Furthermore, what may seem obvious to one person, may not have occurred to others. An example is whether a particular person should be the CEO of the company—it may be the obvious end result to the business leader, but getting the pieces in place to facilitate the transition, getting buy in from other key players (including the candidate), and providing the right atmosphere for success, may require time.

The CEO example also highlights the fact that no one is operating in a vacuum. Any time we act, as individuals or businesses, we are affecting others, some who have a say, others who do not, and many in between. Managing these relationships is not easy, and can substantially slow down the business process. Ignoring these relationships can be devastating. Addressing them is an investment.

Politics is an example of this sort of relationship management, in some cases, run amok. For example, when I worked in DC, I remember one Congressman in a key Committee Chairmanship expressing less than genuine doubts about certain legislation important to the President simply to get the President to call him.

Politics is simply a large scale example of what goes on, whether we like it or not, in business all the time, i.e., the exercise and sharing of power. The Founders put in mandatory checks and balances for the specific purpose of SLOWING THINGS DOWN where there was the exercise and sharing of the most power. Likewise, in business, we should consider the value of slowing down to make sure what we are doing really makes sense, is really for the good of the business overall, and to manage the relationships. In fact, it is often in taking the time to manage the relationships that we get the unique insight from other people as to what really makes sense, and what is really good for the business.

If people really are our best resource, let’s take the time to consult them, consider their input, and use them.

Remember, Best Intentions Often Not Enough

2010-03-03T09:00:00.000-07:00

Business people need to keep in mind that many of the activities that can get them and/or their business into trouble do not have an intent requirement. That means, you do not have to have a bad intent to get into trouble. And on the flip side, having good intent does not earn you a pardon.

This is important because in the rush of business, when opportunities or decisions present themselves, the same focus and decisiveness that make many business people successful, can also be their undoing. Focus, taken too far, ignores outside factors and potentially interested parties. Decisiveness then moves quickly down the path which is informed by the information available. Combined, a business leader can make quick decisions on limited information ignoring potentially important concerns because of the good that is expected to come out of acting on the information the leader does know.

Therein lies the rub.

Business leaders may try to comfort themselves during the mad rush of business decisions with the belief that good intentions, in combination with their business sense, will get them through unscathed. However, often, in business environments where there are many interested parties, and decision makers can have multiple persons to whom they are responsible (shareholders, Board of Directors, Members, executive officers, employees, etc…) the question may not be whether one is trying to do good, but whether one is taking care of certain people to whom they have some responsibility, or whether one is making reasonable efforts to avoid doing harm to someone.

As a result, good intentions are not enough. In addition, business leaders need to make sure that their good intentions are in harmony with their other responsibilities and duties they may have. In short, business leaders need to keep in mind all of the various parties and persons who might be interested, tempering their good intentions in the moment with full consideration of those persons and parties “not in the room.”

New Colorado Case Says Members and Managers of an LLC are Directly Liable to Creditors for Excessive Distributions

2010-03-02T09:19:00.001-07:00

Under Colorado Revised Statute (“CRS”) Section 7-108-403, a director of a corporation who agrees to a distribution that prevents the corporation from being able to pay its debts is personally liable to the corporation for the extra amount. But in addition, Colorado courts have determined that creditors can proceed against the directors who make the distribution in a lawsuit to recover the excessive distribution.

Colorado Developments Regarding LLCs

Now, the Colorado Court of Appeals in Colborne Corp. v. Weinstein, 2010 WL 185416, No. 09CA0724 (Colo. Ct. App. Jan. 21, 2010)(link here), has held that, by analogy, limited liability companies (LLCs) are under the same basic rules.

Specifically, under CRS Section 7-80-606 Members of an LLC are liable to the LLC for excessive distributions knowingly made to them. In the Colborne case, creditors sued the Members and Managers of an LLC under Section 7-80-606 asserting that the Members and Managers should also be liable to the creditors, not just the LLC, for any excessive distribution. The Members and Managers of the LLC argued that the statute only allowed the LLC to recover from them, not the creditors. While the lower court agreed with the Members and Managers, the Court of Appeals has now stated it agrees with the creditors, and has sent the case back to the lower court for more proceedings. Accordingly, the creditors are being allowed to bring a case directly against the Members and Managers to hold them liable for the excessive distribution.

Conclusion and Summary

On the down side, this does mean that LLC Members and Managers cannot hide behind the LLC entity if they give themselves all of the money from the LLC through a distribution without paying off their creditors.

However, there is also a lot of upside. First, if the rule prevails that the creditors can proceed against Members and Managers for an excessive distribution, creditors will be more likely to lend money to such entities knowing that they will have some recourse if the Members and Managers start making large distributions that could deplete the LLC’s ability to pay them back. Second, as the LLC statutes are tested in court, and the court’s analogize more with the corporate law which has been around longer and already been tested more, the LLC law becomes more stable and predictable. This lowers the risk and potential cost of creating and running a successful LLC.

Overall, the case suggests the courts in Colorado are heading in the right direction regarding the responsibilities of the Members and Managers of LLCs.

Proxy Voting is limited in Colorado for Directors of Nonprofits

2010-03-01T12:24:00.001-07:00

Under Section 7-128-205 of the Colorado Revised Statutes, a director of a non-profit, if allowed by the Bylaws, may make a written proxy directing another director to vote a particular way on a particular issue. If this is done, the director is deemed to be present for purposes of quorum, and the vote is taken according to the direction of the written proxy. However, the proxy is only good for the specific issues identified in the proxy, and the authority is only to vote as directed by the proxy. No other proxy voting is allowed by a nonprofit director.

For a corporation, there is no similar statutory provision for directors to vote by proxy. Accordingly, under the quorum and voting statutes for a corporation, it does not appear that a proxy vote by a director is allowed.

If you’re on a nonprofit board, remember this proxy rule so that the decisions of your board are legitimate and can be documented appropriately.

Legal Assessments: Entity Structure Adding Value to Your Business

2010-02-24T09:12:00.000-07:00

After several weeks working on trial preparation and other cases, I can get back to writing a bit more substantively for the blog—particularly on the topic of legal assessments.

As a refresher, my Legal Assessment posts are about exploring some of the legal issues affecting business from a relational perspective. Often, business people see legal rules and structures as essentially roadblocks to getting things done. Sometimes this is true, often times it is not. Doing a Legal Assessment is about examining the rules and laws to understanding the reasons for them in order that we can properly evaluate our position in relation to all of the people and business around us, and engage in business responsibly.

The prior posts were as follows: First, I highlighted what it means to look at legal issues from a relational perspective. Second, I discussed the basic types of business entities and the concepts behind having a separate business entity. Third, I discussed how some legal principles and structures can promote the independent operation of a business entity.

Now, for the fourth installment, I am going to highlight some of the specific legal tools and principles that can be used by a business to add value to its operations.

Duties and Responsibilities

Knowing what one is required to do, what one may do, and what one can expect from others, is foundational to beneficial interactions in the business world. There are rights, privileges, options, discretionary rights, conditional rights, and much more. These concepts in law are every well developed. Business can take advantage of these concepts to better define their business activities in their formational documents, inter-business contracts, employment relationships, and other interactions. Doing so allows businesses to better control their costs, income, expenses, and risks.

Using these legal principles can be as simple as defining when and how a business is going to be paid for a product or service to make sure that its cash flows are predictable. For example, setting up a construction subcontract so payment terms are based on percentages of delivery of materials or completion of work may make the difference for a business to be able to stay afloat during tough economic times. Another example might be locking in a discount from a supplier contingent on prompt payment during an initial term.

The other side of this equation is to take advantage of the latitude allowed by law to limit responsibilities and duties so that costs and expectations are appropriately limited.

It is not only important to have the business deal concepts in place with another party, it is also important to create and use appropriate language that gets the job done.

Notice and Disclosure

A familiar topic in business failures and problems is when one person is alleged to have unfairly taken advantage of another. An extremely easy and cost effective process that would often avoid these types of problems, and sometimes even facilitate more advantageous results for the parties involved, is notice and disclosure. For example, sending a letter to an affiliate to let them know you are considering changing suppliers before you actually do so, or telling a partner about a purchase decision.

Clearly, sometimes information is confidential and cannot be shared. But many times, notice and disclosure are simply overlooked. A deal may be going well and one simply does not consider whether others might want to know about the deal, be concerned about it, or have an interest. We also may assume that others with whom we are communicating understand all the information we take for granted.

But notice and disclosure can be extremely valuable. Often, simply giving others a chance to take a look, or letting others know about a transaction, or decision, eliminates the ability of others to object later. Providing notice often creates a presumption of fairness. Providing notice can shift the burden or obligation of raising an objection or concern. Providing notice can result in obtaining additional information from other sources that one might have overlooked, or even been unable of obtaining, resulting in major corrections. And providing notice, even when it is not really necessary, can build integrity and trust.

Notice and disclosure is about knowledge and freedom. We have to remind ourselves that we do not know everything, and that when we let others know information, we actually obtain more freedom to act without fear or reservation.

Compliance

The last legal principle is simply doing what you say you are going to do. Whether it is internal or external rules or regulations, it is extremely problematic for a business to set up a requirement and then ignore it. Often times, this happens simply because business’s loose track of their own rules or get busy and forget to do what is necessary to comply.

But rather than ignoring the failure to comply or the rules they just can’t get to, businesses should adjust their rules so they accurately reflect their values, and their compliance is consistent. This not only helps businesses avoid problems with those who might complain when the business fails to comply with the rules, it also helps both internally and externally interested parties understand the business values and act accordingly minimizing costs for the company.

In other words, if your members do not actually have their annual meeting on the first Wednesday of each September, the formational documents should be adjusted. And if you have an employee manual that calls for annual reviews, which do not actually take place, something needs to change.

Conclusion

The implementation of the legal principles of duties, notice, and compliance, add value to almost all the aspects of a businesses operation.

Welcome to the New Year, 2010

2010-01-06T08:52:00.001-07:00

Fortunately for my firm and practice, the last few months of 2009 were very busy. It seems like business has been picking up again.

Now, starting the New Year 2010 off, the firm has two immediate trials coming up. One is a two week trial in Denver this next week, and the other is a two week trial in Montrose starting in mid-February. While I am not participating in the trial this month, the significance of it is that our litigator extraordinaire, Mike Reagor, will be preoccupied with the first trial, and I will therefore be heavily involved in preparing for the second trial in February.

All this to say that I am pretty busy.

Regardless, life and business go on. As some indication of activities in the near term, I expect to be doing the second half of the radio show with B Hopkins re the FTC Regulations in early February, probably the 3rd.

Also, I have been working on the development of Legal Assessment services related to evaluating a business’s status in the areas of company formation and documentation, intellectual property identification and protection, as well as its contractual relationships. Blog posts will continue to address the concepts behind these services.

Eventually, I will also be writing some posts on the topic of Estate Planning as it relates to creating a legacy, i.e., Legacy Planning.

So 2010 starts.

One thought on the general economy heading into 2010: I have read a lot about how 2010 cannot be worse than 2009. Even so, the same pundits state that there is apparently no reason to believe that it will be a really good year either. In particular, the measures of wealth dropped so dramatically over the last couple of years, it is asserted that it is unlikely we can recover to the previous level anytime soon, perhaps not even this decade.

While this may be accurate in the aggregate, I just want to point out that such aggregate information will not, by its very nature, apply to everyone. In fact, it only indicates that while some may do poorly, others will do well, and the overall averaging effect is expected to be “less than” a full recovery to the previous perceived level of wealth.

For me and my house, things must be put in perspective. Our overall wealth has increased. We have four healthy beautiful kids, a roof over our heads, great friends and family who are there for us in rough and good times, a steady paying job, and work streaming in. I expect 2010 to be a great year of opportunity. Best wishes to you and yours as well!

FTC’s New Rules and Website Creation

2009-11-16T22:15:00.001-07:00

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.

A Little Preoccupied with Our Newborn Son – Elijah John

2009-10-19T09:50:00.002-06:00

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.

Momma 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.

DRC Law Gets Recognition Regarding Recent ESI Ruling in Federal Court

2009-10-13T13:52:00.002-06:00

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.

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

2009-10-07T19:38:00.001-06:00

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.

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

2009-09-29T19:45:00.001-06:00

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

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.

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.

Legal Assessments: An Introduction from a Relational Perspective

2009-08-15T18:59:00.001-06:00

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.

Independent Contracts Presentation Tomorrow

2009-07-16T21:33:00.003-06:00

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.

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

2009-06-22T21:55:00.001-06:00

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 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

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

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.

Trademark Registration and Usernames on Facebook

2009-06-11T20:48:00.001-06:00

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.

Link to Internet Radio Show

2009-05-27T12:34:00.002-06:00

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

Internet Business Strategies Radio Show Appearance

2009-05-17T21:57:00.001-06:00

B 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.

Insurance for Social Media Users Like Bloggers, and Twitterers?

2009-05-06T19:35:00.002-06:00

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.

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 the 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.

Intellectual Property 101 Presentation for Creative Connections Meeting

2009-04-25T11:21:00.003-06:00

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.

Should I Register My Copyright?

2009-04-18T11:41:00.001-06:00

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.

Proposed FTC Regulations Regarding Marketing

2009-04-08T20:33:00.002-06:00

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 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.

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 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

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.

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

2009-03-23T14:41:00.001-06:00

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

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 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.

A Basic Framework for Understanding Intellectual Property

2009-02-21T11:00:00.001-07:00

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

The 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 protected, 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.

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.

Contracts as Value Adding Business Tools

2009-02-08T14:56:00.001-07:00

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.

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

2009-01-27T14:03:00.001-07:00

As many interested in this topic would know, a couple of months ago, 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

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 that 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.

The Importance of ESI in Litigation

2009-01-17T16:12:00.000-07:00

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.

Yes, Bloggers Can be Sued

2009-01-11T16:59:00.005-07:00

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.

Copyright Law Not the Problem for Indy Film

2009-01-06T08:48:00.003-07:00

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.

Psalm 73 and Practicing Law

2009-01-05T09:07:00.001-07:00

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.

Beginning of a Beautiful Thing

2009-01-04T21:24:00.002-07:00

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.

Blogger v Wordpress

2009-01-03T11:46:00.001-07:00

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.

Hokies Win the Orange Bowl

2009-01-02T09:03:00.001-07:00

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.