I’ve been helping a client negotiate a contract. The other side is in another country. The other side’s lead lawyer and I have been doing our markup sessions using GoToMeeting‘s screen-sharing capability — I edited the document on my computer as he “looked over my shoulder” in real time. (Zoom.us has similar capabilities, which I’ve used extensively in working with another client.)

Yesterday we had a similar screen-sharing conference call, but this time with the business people on-line as well. We knew we had some knotty issues to discuss.

I started the GoToMeeting session. All but one participant logged in.

As the rest of us were waiting for the last participant, I turned on my Web camera, more playing around than anything else.

I asked everyone else to turn on their cameras, too. They did.

So now everyone could see and hear everyone else, in four different physical locations. The video images on my screen looked a little bit like the famous arrangement on Hollywood Squares.

We smiled and made small talk. Some of the participants seemed intrigued by the novelty of seeing everyone “face to face.”

A few minutes later the last person dialed in. We turned off the cameras. All hands focused on the draft contract on my screen and discussed the parties’ remaining issues. The discussion went pretty well.

Afterwards, something occurred to me: It might have helped that we were initially able to see each other as we made small talk. Seeing facial expressions and body language helped reduce the uncertainty (and the accompanying low-grade anxiety) of dealing with comparative strangers.

It seemed to me that we were no longer mainly just a collection of isolated, faceless voices in a telephone earpiece. Instead, we seemed to be at least a little more like an ad-hoc team that was trying to achieve a common goal, namely to get the deal done.

As I write this, it reminds me of one of the things that famed surgeon Dr. Atul Gawande says in his best-seller, The Check­list Manifesto. Gawande strongly recommends that when a surgical team starts an operation, each team member should introduce him- or herself and identify any concerns he or she has. He says that this practice helps bond the team together; he recounts an anecdote of how it saved the life of one of his patients when things started to go catastrophically wrong during a surgery.

I’m going to try this kind of preliminary video small talk — and perhaps a round of Gawande-style self-introductions — in future screen-sharing negotiations.

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• Clients seem to like Webcam video conferences, with on-line document sharing, better than traditional on-site meetings
• Spectrum sharing could use some standardized contracts, it sounds like

More and more, companies negotiate international transactions that involve technology transfers. The challenges can be numerous. These deals often involve people for whom English is a second language. The contracts might have to be drafted in two languages — and the two parties might not fully understand the other’s contract version.

Want to learn more? Come to the April 25 meeting of the Licensing Executives Society’s Houston chapter: Licensing expert Tom Pruitt will explore:

• selection, training and use of translators
• a ‘checklist’ of possible alternatives to help mitigate risks
• what could happen if the parties don’t properly agree on governing language and on a choice of law
• trends in international dispute resolution

Check it out (and register) at the LES Houston chapter’s announcement page.

If your company has significant market share, and you put certain provisions in your contracts, you might be risking having a court (or the FTC or the Justice Department) conclude that you’re engaging in “exclusionary conduct” and thus monopolizing or attempting to monopolize your market, in violation of the antitrust laws (specifically the Sherman Act). Vinson & Elkins lawyers Alden L. Atkins, James A. Reeder Jr. and Nicholas N. Shum go into this in What Companies Don’t Know Can Hurt Them: Monopolization Offenses. Some examples from part III of the article:

• Exclusive dealing
• Tying the sale of one product or service to another
• “Loyalty” discounts
• “Bundled” pricing
• Most-favored-nation clauses

Read it all.

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• Outsourcing contracts: Six suggested clauses
• Outsourcing contracts: Six suggested clauses

The thought isn’t original to me that legal “expert system” computer programs like those of Neota | Logic will eventually be disruptive to the law firm revenue model. And that disruption will raise the question: Where will expert senior lawyers get their training in the future, when junior lawyers can’t get hired to do the work by which they traditionally learned the ropes?

The answer may be that junior lawyers will increasingly be trained in legal “flight simulators,” powered by descendants of the very computer programs that took their learning-the-ropes work away from them.

We’ve seen this movie before, in BigLaw litigation: These days, the vast majority of disputes settle or are forced into arbitration. As a result, there just aren’t that many smallish trials anymore, which means that BigLaw junior lawyers have a hard time getting meaningful trial experience.

(I’ve known fifth-year lawyers who had never even taken a deposition, let alone tried a case. In contrast, I first-chaired my first trial — in a small case, of course, with a partner holding my hand — when I was a third-year associate.)

All this presents the legal community with a chicken-and-egg problem: Companies’ general counsel, for career-protection reasons, understandably want to hire trial lawyers who have already tried X number of cases to verdict; they don’t want to take a chance on a young partner who spent his or her first few years mainly reviewing documents. As a result, the young partner might well have a hard time attracting client work, which these days is the sine qua non of even a modestly-successful law firm career.

Certainly there are well-regarded trial training programs, such as those offered by the National Institute of Trial Advocacy (NITA). But those training programs are necessarily expensive in terms of money and opportunity cost.

That’s where legal expert systems might find another market: In serving as “flight simulators” to help train — and even certify  junior lawyers.

Who might pay for legal flight simulators? Law firms; big in-house departments; law schools; perhaps state bar associations.

It’ll be interesting to see whether anything develops along these lines.

(Hat tips to DiligenceEngine, via Jason Wilson.)

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• Contracts aren’t computer programs: they’re just one type of tool for motivating fallible humans
• Donald Trump’s lawyers learn the hard way: Don’t just switch the names in an old contract form

This is the equivalent of a hand-out for the “Legally Lean” presentation I did last night [2012-12-13] for the Houston Lean Startup meetup. Thanks again to moderators Javid Jamae and Glenn Gutierrez for inviting me, and of course to Greg Wright and the Houston Technology Center for hosting the meetup yet again.

EDITED 2013-03-04: I’ve added some tax-related information from an email I sent to a client.

Resources

Here’s a list of the resources I mentioned last night, with a few extras thrown in. I don’t necessary endorse everything in them. A given document might not be right for your particular needs without editing. Remember that small changes in your factual situation could have a significant effect on your legal position; see also the Cautions page.

Web site terms of service and privacy policy

Automattic, which makes perhaps the most-widely used blogging software (and hosts blogs on its own site), has made its terms of service and privacy policy available for re-use by others under a Creative Commons license. WARNING: In my view, there’s a huge flaw in the terms of service that could cause serious legal problems; if you use them, you should consult a lawyer about modifying the TOS language, as I discuss in more detail in a a May 2010 blog post.

Incorporation and investment documents

Renowned startup accelerator Y Combinator and the equally-renowned Wilson Sonsini law firm have posted a set of organizational documents for an angel-investor round.

The Orrick law firm has a large collection of contract forms for startup companies.

The Gunderson Dettmar law firm’s document collection is posted at the Docracy Web site.

Employment agreement form

See this working draft of a set of model provisions. Suggestions and other feedback are welcome in the comments on that page.

Contract negotiation tips for consultants

Here are some basic points to keep in mind.

Intellectual property tips

IP ownership claims by former employers / clients

• Check everyone’s previous contracts [employment agreements, severance agreements, consulting agreements, NDAs, etc.]
• Check the facts to see whether an employer might owns someone’s IP work product by default
  • Hired to invent?
  • Set to experimenting?
  • Corporate officer?
  • Copyrighted work created “within the scope of employment”?
• Get a waiver from the employer?

Copyright

• Can existing Web content be “re-purposed” for your site? It depends.
  • Just because there’s no copyright notice doesn’t mean it’s up for grabs (but a copyright notice is definitely a good idea for your own stuff)
  • All kinds of things can be subject to copyright ownership — text, graphics, sounds, videos, sound recordings, data compilations, etc.
  • Damages for infringement can include “indirect profits” — MGM Grand Hotel had to pay 2% of its casino profits for unauthorized use of Kismet musical material in its Hallelujah Hollywood floor show.
• Put copyright notices in your code, etc., early
  • Form: Copyright © [year of first publication] [owner's name]
  • Example: Copyright © 2012 D. C. Toedt III

Trademarks

• Check USPTO and Web for possibly conflicting marks
  • Test is “likelihood of confusion” — doesn’t need to be a certainty of confusion, but it does need to be more than a mere possibility
• Consider engaging a professional trademark search firm to clear a mark before making big investments in promoting the mark — you don’t want to have to change the name after you’ve started getting traction, and it might cost a lot of money to pay off a senior user. (On the latter point, Apple found that out the hard way with its Mac trademark.)

Patent applications

• Consider filing a provisional patent application
• Watch out for filing deadlines (U.S. law will change in March 2013)
• Most foreign countries are “absolute novelty” jurisdictions for patent filings — no grace period

Infringing someone else’s rights

Just because you have a patentable invention, or a copyrightable work of authorship, or a protectable trademark, doesn’t automatically mean you don’t infringe someone else’s pre-existing rights.

For more information about patent infringement, see this 2010 post I did.

Initial tax-related information

Tax status?

If you create an LLC, or a corporation that qualifies to be taxed under subchapter S of the (U.S.) Internal Revenue Code, you’ll need to decide whether, for tax purposes, the company’s income and losses are going to be passed through to its members (the default for LLCs, like a partnership) or whether instead you want to file an election to have the company taxed as a C or S corporation. This is something to discuss with someone who knows tax law.

I found a Nolo article that looks quite useful in discussing the pros and cons of various approaches: http://www.nolo.com/legal-encyclopedia/how-llcs-are-taxed-29675.html.

Employer identification number (EIN)

The company will need to get a federal tax ID. If the company applies for bank financing, or even to open a checking account, the bank will almost certainly require the company to provide a tax ID. You can get a tax ID, or “EIN,” on-line at https://sa2.www4.irs.gov/modiein/individual/index.jsp.

Unemployment tax registration

(For Texas companies, and probably for other states as well:) When you hire your first employee, you’ll need to register with the Texas Workforce Commission and make quarterly unemployment tax payments. See http://www.twc.state.tx.us/ui/tax/unemployment-tax-registration.html and https://portal.cs.oag.state.tx.us/wps/portal/employer.

Sales tax

When you’re ready to start making sales, you’ll need a sales-tax permit. You can get one on-line at http://www.window.state.tx.us/taxpermit/.

Employee tax withholding

The IRS is pretty fierce about the need for employers to withhold (and remit) employees’ income taxes, Social Security taxes, and Medicare taxes. (In some circumstances an officer, director, or manager could be personally liable for a company’s failure to withhold the required taxes, and possibly for up to a 100% noncompliance penalty.) See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employment-Taxes-2 for more information.

In drafting a contract, when should you refer to matters “arising out of or re­la­ting to ” the agreement, as opposed to just those matters “arising out of” the agree­ment?

This can be an important question when you’re drafting — or reviewing — an attorneys’ fees clause; a forum-selection clause; a governing-law clause; or an arbitration clause, to name four common examples.

More after the break.

A forum-selection clause might say, for example, that “Any action arising out of or relating to the Agreement may be commenced in any court having juris­dic­tion” in a specified location.

That might be more than you really want, how­ever — you might be willing to have “arising out of” matters litigated in the other side’s forum, while (quietly) leaving open that other matters might be litigated elsewhere.

Or you might be willing to arbitrate “arising out of” matters instead of taking them to court, but you might not be willing to arbitrate every conceivable claim that might ever arise between the parties.

Here’s a hypothetical example, involving a forum-selection clause:

a) Vendor is a software company. Customer, a Cleveland company, has recently bought a license to use Vendor’s Software Product A.

b) Carol, one of Customer’s IT employees, comes on-site at Vendor’s office for training in the use of Software Product A.

c) During a break in the training session, Carol notices that Vendor’s trainer has left a DVD containing Software Product B sitting on the desk at the front of the classroom. Carol surreptitiously steals the DVD and takes it home with her.

d) Carol’s boss congratulates her for having stolen the DVD. He directs her to start using (the stolen) Software Product B in Customer’s business.

e) Another Customer employee, Casey, learns of the theft. Troubled, Casey calls up a friend of his who works for Vendor and blows the whistle.

f) Vendor tries to work things out amicably with Customer, but the response from (thieving) Carol’s boss is “sue us.”

g) The license agreement between Vendor and Customer contains a forum-selection clause, requiring all matters “arising out of or relating to ” the license agreement to be litigated in Cleveland, Customer’s home city.

Under this forum-selection clause, would Carol’s theft of Software Product B have to be litigated in Cleveland?

Carol’s theft doesn’t seem to “arise out of” the license agreement. Arguably, though, it might indeed be “related to” the agreement.

If I’m representing Vendor, I might not mind agreeing to litigate, say, Cust­om­er’s warranty claims about Software Product A in Cleveland.

On the other hand, I probably wouldn’t want to be forced to litigate Carol’s theft of Software Product B in Cleveland; I’d want Vendor to have a choice in the matter.

Lesson: Before agreeing to “arising out of or relating to ” language in a contract, give some thought to the possible future ramifications.

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• Bye-Bye, Carolina; Hello, California
• Be careful what you ask for in your standard contract form – the other side may demand it for themselves
• Vendors, consider a no-reliance clause for your sales contracts, to help forestall claims of fraudulent misrepresentation

At the IACCM annual conference, someone made the comment that renego­ti­a­ting a master supply agreement with a customer at renewal time can be really tricky, because the vendor isn’t likely to get as good a deal. This is probably one of those truths universally acknowledged [1]. Here are a few possible reasons:

• People tend to resist change, sometimes “just because.” If a vendor proposes new pricing or new terms as part of a master-agreement renewal, the customer is likely to respond with, “why do we need to change things?”

• As a matter of negotiation strategy, the renewing customer might well invite other vendors to bid on the renewal. Each of these other vendors will have an incentive to beat the existing vendor’s current pricing and terms. (Not least, a would-be replacement vendor will almost surely want to be able to mention to other prospective customers that “Customer X switched their business to us,” thus taking advantage of social proof as a powerful sales tool.) That will put pressure on the existing vendor, which could find that holding the line with its current pricing and terms is about the best it can hope for.

• The renewing customer will probably trot out a list of complaints, minor or major, about the existing vendor’s past performance. These “disappointments,” according to the customer, warrant getting concessions from the vendor as a condition of renewal.

• Delusions can come into play: Just as some men leave their long-time wives to take up with trophy girlfriends, some customers might imagine that a dif­fer­ent vendor will magically give them the idyllic relationship they never seemed to achieve with the existing vendor.

Notes

[1] I’ve never read any Jane Austen novels but I’ve certainly heard and read the famous first sentence of Pride and Prejudice: “It is a truth universally acknowledged, that a single man in possession of a good fortune must be in want of a wife.”

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• Four reasons why a master service agreement isn’t appropriate for a software-as-a-service (SaaS) deal – Jay Parkhurst
• Responding to customer demands for extended payment terms

The scene: You’re in a contract negotiation, representing The Good Guys Comp­a­ny. The other side, Nasty Business Partner Inc., insists on requiring The Good Guys to get NBP’s consent before assigning the agreement. NBP has all the bargaining power; The Good Guys decide they have no choice but to go along.

Trying to salvage the situation, you ask NBP for some additional language: “Consent to assignment may not be unreasonably withheld, delayed, or conditioned.” But NBP refuses.

Have you just screwed your client?

In some jurisdictions, The Good Guys might have benefited from a default rule that Nasty Business Partner Inc. had an implied obligation not to unreasonably withhold consent to an assignment of the contract. See, e.g., Shoney’s LLC v. MAC East, LLC, 27 So.3d 1216 (Ala. 2009); Pacific First Bank v. New Morgan Park Corp., 876 P.2d 761 (Or. 1994).

But you asked for an express obligation — only to have NBP reject the request — and The Good Guys signed the contract anyway.

A court might therefore conclude that the parties had agreed that NBP would not be under an obligation not to unreasonably withhold its consent to assign­ment — that NBP could grant or withhold its consent in its sole discretion. This is pretty much what happened, on somewhat-different facts, in both the Shoney’s LLC and Pacific First Bank cases:

• In the Shoney’s LLC case, the contract had an express provision allowing the non-assigning party to use its sole discretion in deciding whether to con­sent to an assignment. The Alabama Supreme Court held that this clause trumped the general requirement of reasonableness.
• In the Pacific First Bank case, the lease agreement in suit included a consent-not-to-be-unreasonably-withheld requirement for certain sublet arrangements, but it did not include a similar requirement for assignments. The Oregon Supreme Court held that this amounted to an implied agree­ment that for assignments, the landlord was free to grant or withhold consent in its discretion.

Illustration: Conan O’Brien’s lawyers win by letting a sleeping dog lie

You might remember that TV talk-show host Conan O’Brien’s stewardship of The Tonight Show proved disappointing to NBC. The network decided to move Jay Leno back into that time slot and bump Conan back to 12:05 a.m. This led Conan to want to leave the show and start over on another network — but if he had, he would arguably have been in breach of his contract with NBC.

Conan’s contract apparently did not state that The Tonight Show would always start at 11:35 p.m. Conan’s lawyers were roundly criticized for that alleged mistake by ex-Wall Streeter Henry Blodget and some of his readers. See Conan’s Lawyers Screwed Up, Forgot To Specify “Tonight Show” Time Slot (Jan. 11, 2010), especially the reader comments following the article.

But then wiser heads pointed out that Conan’s lawyers might have intentionally not asked for a locked-in start time:

• The Tonight Show had started at 11:35 p.m. for decades; it could have been plausibly argued that this start time was part of the essence of The Tonight Show, and thus was an implied part of the contract.
• Suppose that Conan’s lawyers had asked for the contract to lock in the 11:35 p.m. start time of The Tonight Show, but NBC had refused. In that case, a court might have interpreted the contract as providing that NBC had at least some freedom to move the show’s start time.
• And suppose that Conan had asked to lock in the 11:35 p.m. start time of The Tonight Show, but that NBC had responded by insisting on just the opposite, namely a clause affirmatively stating that NBC was free to choose the start time. Given that NBC had the bargaining power at that point, Conan might have had no choice but to agree, given that he wanted NBC to appoint him as the host of the show. In that case, there’d be no question that NBC had the right to push the start time of the show back to 12:05 p.m.

Ultimately, Conan and NBC settled their dispute, with the network buying out Conan’s contract for a reported $32.5 million. This seems to suggest that NBC was concerned it might indeed be breaching the contract if it were to push back The Tonight Show to 12:05 a.m. as it wanted to do. As an article in The American Lawyer commented:

… If O’Brien had asked that the 11:35 p.m. time slot be spelled out in any agreement — and had NBC refused — the red pompadoured captain of “Team Coco” would be in a weaker position in the current negotiations.

“If you ask and are refused, or even worse, if you ask and the other side pushes for a 180, such as a time slot not being guaranteed, you can end up with something worse,” [attorney Jonathan] Handel adds. Without having their hands bound by language in the contract on when “The Tonight Show” would air, O’Brien’s lawyers are in a better position to negotiate their client’s departure from NBC.

Brian Baxter, Legal Angles Abound as Conan-NBC Standoff Nears Endgame (Jan. 20, 2010).

Judging by the outcome, it may well be that Conan’s lawyers did an A-plus job of playing a comparatively-weak hand during the original contract negotiations with NBC.

The lesson: Be careful what you ask for in a contract negotiation — if the other side rejects your request but you do the deal anyway, that sequence of events might come back to haunt you later.

Related post: Be careful what you ask for in your standard contract form – the other side may demand it for themselves (Dec. 4, 2008).

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• Reading notes

This past week I guest-lectured at an introductory lawyering-skills class for first-year law students. One of the points I wanted to make was the old chestnut, get to know your client’s business, which is self-evidently important for any lawyer or other professional who helps clients arrange their business relationships and document them in contracts.

Suddenly, though, I remembered a few of the parents at my son’s Little League baseball games, who would shout out from the bleachers to the batter: “OK, Johnny, be a hitter!”

Be a hitter? Even back then I wondered, what does that mean — what is little Johnny supposed to do?

It dawned on me that when we tell law students and young lawyers to get to know the client’s business, we might as well be yelling, “be a hitter, Johnny!” After the jump, some practical tips on actual things you can do toward that end.

A software-vendor client was on the verge of making a big sale to a potential marquee customer. The negotiations hit a snag, though, over the issue of customer-support response times.

The customer’s procurement people wanted the vendor to make a firm commitment that it would fix any bugs in the software within a certain amount of time — and that amount of time might be unrealistic in some situations.

We broke the impasse by reaching beyond the boundaries of software support. More about how we did so after the jump.

Borrowing a concept from the aviation world

If a pilot declares an emergency:

… Skies are cleared, runways are made available, fire and rescue equipment is mobilized, search and rescue teams are alerted. The pilots of the aircraft in trouble are given complete freedom to work on the problem and choose the best course of action, and everyone else follows. It is quite impressive to observe how much everyone works together to save an airplane in trouble.

A pilot declaring an emergency is always given the benefit of the doubt. Nobody questions whether he has a good reason or not to declare an emergency. If the pilot feels he needs to declare, then he does so. There will be plenty of time to analyze his actions later on, but until he’s safely on the ground, he does what he wants, and everyone assumes that he has a good reason to declare an emergency.

With that in mind, we revised the draft contract so that:

• The vendor gave the home- and cell-phone numbers of its chief sales officer (CSO) to the customer’s CFO.
• If the customer’s CFO — and only the CFO — personally called the vendor’s CSO to declare an emergency, then the vendor would go into all-hands-on-deck mode, and the vendor’s CSO would personally make progress reports to the customer’s CFO, on a twice-daily or even hourly basis if requested.

That did the trick; the companies signed the revised contract. (As it turned out, the vendor’s product worked fine, and the customer never did have to declare an emergency.)

The incentives align

We didn’t think of it at the time, but in hindsight it seems clear that this arrangement provided some useful incentives for performance by all concerned:

• It was impossible to contractually specify a problem-resolution deadline in advance, because there was no way to know how serious the customer’s business problem would be, nor how intractable the technical problem might be.
• The senior executives were busy people and wouldn’t want to spend their scarce time on non-emergencies of this kind.
• The front-line troops of each company would not want their senior executives to get involved with a non-emergency problem right away: The senior executives would inevitably be at least mildly annoyed at being dragged in, and might question why their people hadn’t been able to resolve the problem on their own.
• The customer’s CFO probably would not want to be perceived as the boy who cried wolf.
• The vendor’s CSO would not want his personal reputation to be damaged by non-performance on the vendor’s part.
• If a real emergency did arise, the senior executives’ personal attention would keep all hands focused on promptly identifying and resolving the problem.

Meta-lesson: If you can’t agree on an outcome, try agreeing on a process

This was just one example of a type of situation that’s fairly common in contract negotiations: The parties don’t really know what they should “carve in stone” in the contract language. This could occur because the parties don’t know (or disagree about) what’s feasible. It could also occur if one or both parties doesn’t know what it might want in an actual event.

In that type of situation, often illustrates the principle that if the parties can’t come to agreement about a desired outcome, perhaps they can agree instead on a reasonable process for getting through the situation.

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• Declaring an emergency (redirect page)