Mediation as an alternative to expensive, public litigation of sensitive business issues

More than one hundred years ago, Abraham Lincoln was quoted as saying: “Discourage Litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner often is the real loser, in fees, expenses and waste of time.”

Lincoln was mainly trying to persuade lawyers to act as peacemakers and good members of the community by advising them to help resolve disputes without litigation. This he felt was simply a better practice than to be just another hired gun litigating your opponent into the dust. In truth, in the business community, this is often simply better legal and business advice than encouraging a business to initiate or continue a lawsuit.

Not all controversies or problems are appropriate for mediation. The decision to seek an alternative to litigation may, however, be most important in two situations. When the continuation of a business relationship (such as vendor-purchaser or employer-employee) is more important or could provide greater long term benefit than victory by litigation; or When the business has proprietary information or trade secrets at risk which might be subject to disclosure to the public (and particularly where such information may not be protectable in a court proceeding).

Mediation to Preserve Relationships

 

Most businesses employ alternative dispute resolution tactics nearly every day in their relationships with employees, customers and vendors. Litigation is and should be the exception to the rule when handling problems in these relationships. Were this not the case, certainly these businesses would not last long nor be successful.

Preservation of all of these relationships is essential for development and growth of any business. Our society seems, however, to be transcending into one that is ever more litigious and this may cause a strain on an already tenuous bond.

Early referral of a dispute may prevent the initiation of litigation. If litigation has already commenced, one of the goals of mediation can certainly be the rebuilding of a damaged relationship. Professional mediators are trained in the use of special techniques designed to allow the parties to address their own problems creatively and to reach their own binding solution.

Often, simple miscommunication or the desire to tell one’s story, is the missing element which first results in a bruised ego or growing mistrust, and then ends in a broken relationship. The process of professionally facilitated mediation can be handled in such a way that the parties have both the opportunity to give their version of the problem and to really listen to the other side’s version of what happened and what is important. This can all take place in an environment set up for a relatively relaxed, informal and positive conversation.

If saving the relationship with a valued key employee, an important customer or supplier is more important than trying to achieve a costly “victory” in court, then mediation can be the answer.

Mediation to Protect Proprietary Information

 

Any lawyer who has spent any time in the records section of any courthouse has undoubtedly come across a litigation file which contains some type of “sealed” envelope of evidence or records. Often, parties in business disputes deal with trade secrets and other information which their competitors would love to get their hands on. Attorneys for such litigants will then seek “protective” orders or use other procedural devices to protect such sensitive and valuable information from dissemination to the wrong hands.

Unfortunately, the judicial clerks, posting or docket clerks, copy room clerks, records retention clerks, secretaries and judges, adverse counsel and others who populate the courthouse and repeatedly interact with court files, are not usually particularly adept at nor informed on the issue of protecting such files from unauthorized eyes. Typically such files are public, pursuant to the Freedom of Information Act or some local state open records law. Often there is no way to tell who has opened a file, let alone who has copied part of its contents or even removed parts. Frankly, it happens in every jurisdiction.

If it were your customer or price list that might be subject to such unregulated disclosure, would you not take reasonable steps to protect this information? Once you sue or get sued, you lose much of your control over your records, let alone control of the outcome.

In litigation, you face a hostile opponent who may very well be able to use the power of the court to pry open your vault of confidential business secrets. You may also find that your fate is in the hands of a judge or jury that has less regard for your business than you do, and a different attitude about your trade secrets. Once the judicial forum is invoked by either party, however, it may become impossible to remove your business from it.

Alternatives in Dispute Resolution

 

There are a number of different ways to resolve disputes. The following is a brief list of some of the more common varieties and some differences between them.

Mediation

 

This is a process that typically is voluntary. It is more and more often, however, being ordered by courts, so it is worthy of investigation. It is best conducted by a specially trained neutral facilitator who will use special techniques to bring the parties to a voluntary final resolution of their dispute. The parties will develop their own solution, which can be binding, or nonbinding, partial or complete.

The process of mediation is typically not subject to disclosure and all communications with the mediator can be confidential. The mediator will often caucus or discuss issues privately with one party at a time at some point during the mediation. The mediation can last a few hours or a few days, according to the agreement of the parties.

The process is fairly informal and usually held at a location designed for the comfort of the parties in order to facilitate dialogue and trust. At the end of the mediation, the parties can settle, or they can decide to go to court or another forum if they have not reached a binding agreement.

Arbitration

 

This is also a private and confidential procedure which, unlike mediation, is adjudicatory in nature. The parties typically will select one arbitrator or a panel to hear the case. The parties will present their case in a fairly formal fashion. Rules of evidence and procedure guide the process, just as with a judicial case, although the rules are generally somewhat more relaxed. Pre and post trial motions, subpoenas, evidence and witnesses are all a part of this process.

Typically, the decision of the arbitrator is binding on the parties, just as with a judicial decision. The parties usually can go to court to enforce the arbitration decision. Because the process is much more drawn out and complex than mediation, it is usually much more costly.

Mini-trial and “Rent-a-Judges

Parties to a dispute may decide to hire their own private judge to decide their case. This is usually a retired judge who will use existing court rules, although the parties can decide by agreement to modify the rules for reasons of time, cost or confidentiality.

Often a mini-trial will severely limit such aspects of the process as discovery, cross-examination and extensive presentation of evidence. In some situations, executives from the opposing businesses will “present” their case to a neutral. This is not a negotiation or a mediation. It is an abbreviated statement of positions, justification and basis for position. The parties will typically decide if the process is binding or not.

A private judicial decision of this type can result in the parties retaining control of the situation and the information, and should greatly reduce the time needed to reach a conclusion. There is no judicial precedent to such decisions, so a private ruling can be made.

When not to Mediate Mediation is designed to bring the parties to a dispute together so they may gain insight into the other party’s apparent justification for their position, and well as being required by the process to more closely break down and examine the elements of their own position. It is also designed to facilitate the parties in looking at their mutual problem in a more innovative and flexible way than, perhaps, they had previously. Mediation, however, will meet resistance when the parties do not have sufficient information to make an informed decision. It will tend to be less successful if the parties cannot gain the same frame of reference on critical aspects of the controversy.

Additionally, it will certainly fail if one of the sides is merely using it as a fishing expedition, rather than as a good faith device to resolve a dispute. Having all reasonably ascertainable facts before the mediation begins will assure a better result.

Mediation is becoming more common in business disputes as the court system becomes more expensive and bogged down with other cases. The time consumed by executive, staff and counsel, let alone the cost, can be devastating to any business. Add to this the judicially imposed loss of control of the result and the potential for wholesale disclosure or your trade secrets, and the prospect of litigation can be daunting.

Mediation, rather than the “win-lose” situation sought in litigation, uses a public “win-win” strategy to allow the parties to formulate their own solution in privacy. Mediation can result in protection of your confidential business information while you rebuild an important relationship, or at least quickly resolve what would otherwise be a continuing distraction from running your business.

 

If you enjoyed this article, why don’t you join the Applied Entrepreneurship group on LinkedIn. Membership is free and I try to post about ten articles a day there. We have some great discussions going and if you are an entrepreneur, we hope you will join us.

Lessons I Learned Today 6/22/09 – “Overlawyered” Entrepreneurs

This is a digest and recap of highlights, quotes, and comments from articles and discussions posted on this date on the Applied Entrepreneurship, LinkedIn group site.

*Generic NDAs: Overlawyered and Overprescribed by Chadwick C. Busk 

*The premise for this post is that Nondisclosure Agreements (“NDAs”) are overprescribed and overlawyered. Just as doctors have overprescribed antibiotics, resulting in a degraded efficacy to cure disease, lawyers have prepared too many generic NDAs, resulting in a reduced ability to protect specific and legitimate confidential information of their clients.”

 ”If, as a business person, you really need an NDA to pursue a relationship with a new vendor or customer, consider telling your lawyer to first, make the NDA concentrate on specific information to safeguard and be limited in duration; second, eliminate the more general exceptions to the non-disclosure obligation; and third, spell out how damages will be calculated in the event of the recipient’s breach. You don’t need a large dose of NDA antibiotics when a legal aspirin in the form of a focused NDA will suffice.” 

“Taking these steps will increase the value of NDAs to your organization, and the recipients of your confidential business information will better understand their nondisclosure obligations.”

 

*Employee Agreements Update by Christopher W. Olmsted 

“Common noncompetition agreement provision now invalid. In many states, employers may restrict former employees’ activity with employee contract provisions called “covenants not to compete” or “noncompetition agreements.”

“When an employee leaves your company, chances are that he or she will go to work for a competitor. It is certainly unsettling to know that someone with inside knowledge of your company has fallen into the hands of a rival. Worse yet, that employee may seek to call on your clients or recruit your key employees.”

Take Away Tips:

* Non-compete agreements are enforceable in California only in limited circumstances.

* Any agreements restricting solicitation of business or the right to work for competitors ought to be reviewed and redrafted in light of the Edwards decision.

* Trade secret and confidentiality agreements may be used to prevent employees from taking company information to competitors.

* Conflict of interest policies may validly prevent employees from competing with the company during the term of employment (but not after termination).

* Financial incentives to stay with the company, and financial disincentives for leaving the company (loss of bonuses, tuition reimbursements, etc), are generally valid. Courts have imposed a few restrictions on the disincentives.

 

*Hiring An Attorney – The Five Questions You Should Always Ask by Herbert Chestnut

“Choosing an attorney can be a difficult and sometimes random process. Ironically, in most cases, whether you have selected a good attorney will only be determined when the case is over. Armed with these five questions, you will be able to gain some insight into the type of attorney that you are hiring.”

“The five questions below will not insure that your attorney is competent or the best lawyer for your case.”

1. How many years of experience do you have?
2. What percentage of your practice is in this area of the law?
3. Do you have malpractice insurance?
4. When I call your office, will I talk to your or one of your staff?
5. Will you try my case yourself?

 

*Protect Your Intellectual Property Assets – People, Processes & Products by Bambi Faivre Walters

“For the most part, intellectual property includes the people, processes and products that make your business successful over your competition. From a legal perspective, the term “intellectual property” includes patent, trademark, copyright, and trade secret rights.”

“Why is intellectual property important? Piracy, counterfeiting and the theft of intellectual property costs United States businesses more than $250 billion and 750,000 jobs per year. For many businesses, particularly small and mid-sized businesses, they are overwhelmed in the day-to-day operations and oftentimes find themselves at a disadvantage because they lack resources and expertise to familiarize themselves with protecting their intellectual property.”

The article outlines some basics of copyright, patent, trade secret, and trademark law.

 

*What is Due Diligence? by Alex Bomberg

“Alex Bomberg of International Intelligence Limited reveals how firms should guard against their companies falling foul of future litigation via straight forward basic due diligence.”

“In any industry today more than any other time, due diligence must play a vital roll as part of any company’s housekeeping policy, it should be employed at the initial stages of any joint venture and agent selection.”

Due diligence is best described as: “The process of systematically evaluating information, to identify risks and issues relating to a proposed transaction, i.e. to verify that information is what it is proposed to be.”

“Due diligence must in every case be measured, reasonable investigation into a company, group of companies or individuals to obtain intelligence which allows you to make an informed decision based on what you have discovered, without being totally reliant on it.”

Due diligence can be split down in to sections:

• Company information – director’s names, formation and ownership details
• Financial information – current turnover and past returns
• Legal history – judgments past, present or pending
• Political risk indication – country and region

“Prior to any business relationship, basic information should be requested in a formal document drawn up as part of either a non-disclosure agreement (NDA) or as a stand-alone document. Gathering copies of documentation and basic information will act as basis, the start of a lengthy process that will culminate in founded decision.”

A formal request should be made for the following

• Names, addresses and dates and places of birth of all company directors
• Past employment of directors
• Names, addresses and dates and places of birth of all company shareholders (non-listed companies)
• Company formation documentation
• Company structure
• Company insurance documentation
• Office locations and registered head office

 

*What New Artists and Musicians Can Do To Keep From Being Taken Advantage Of by R. Sebastian Gibson

“The author warns new musicians and artists in this article that signing a bad contract can end your career before it’s begun.”

“There is probably no other profession than the music business where so many people will try to take advantage of you when you are starting out as an artist or musician if you don’t have a lawyer. When you are just starting out, the entertainment industry sees you as someone whom they can take advantage of.”

“Music contracts are notoriously long, complicated and almost undecipherable to all but a music lawyer. Thirty page contracts are nothing unusual in this business. And there are so many contracts you will be faced with as a musician. Sign the wrong contract and you can be married to a bad agent, promoter, manager, distribution deal, publishing deal or record company and have your career over before it ever began.”

“Besides the issues you will face with copyrighting your music and trademarking your band name and logo, if you have one, there are management contracts, recording contracts, publishing contracts, agent contracts, distribution deals, licensing contracts, promotion deals, festival and concert contracts, producer agreements and that doesn’t even get into the complex issues contained in many of these agreements.”

“A music lawyer must have knowledge of synchronization rights, digital rights, peer to peer file swapping, sampling, mechanical licenses, copyright infringement, publishing, advertising law, immigration, employment law, negotiation, ring tones, and have a good understanding of how music is made from mixing to mastering, from the roles of the producer to the needs of the musicians.”

 

*A Business Guide to Making Money In This Tough Economy by R. Sebastian Gibson

“The author gives his advice as to where businesses and creative persons can make money in this difficult economy and recommends trying to have an invention or an improvement over an existing invention patented. The author also provides some valuable advice of business ventures to stay away from.”

 

*A Start-up Businesses Guide to Choosing the Right Form of Entity (S-Corp, LLC or Sole-Proprietor) by Jeffrey W. Weaver

“It is impossible to make an informed decision without understanding the basic characteristics of the various kinds of business organizations established and recognized by state and Federal laws.”

“The ability of your business to raise and solicit funds, avoid unnecessary taxation, and generally operate in an efficient and manageable fashion depends upon what form of entity you choose to organize.”

The article gives the reader quite a bit of information with which to make the decisions to organize as a proprietorship, corporation, or LLC.

 

*Business Ideas For Entrepreneurs Article

“Imagine yourself being the boss. You control the business. Moreover, you own the business! In fact it is everybody’s dream to be the owner of the business and to be your own boss! A lot of American people do not want to be lorded over by somebody. And throughout the crowd of college students, being one great entrepreneur is one of their wildest dreams ever.”

 

What I Think

I think the articles posted on this date present a nice set of legal issues many entrepreneurs face from time to time. Perhaps the first issue relates to the exact point in time, or circumstances under which, an entrepreneur should seek the counsel of an attorney. Unfortunately, this question is asked by many entrepreneurs, retrospectively.

I often find entrepreneurs are pretty far down the road when they come to me for start-up legal advice. Periodically, I find they have already put their innovation at risk by disclosing it to a wide variety of sources without the benefit of a non-disclosure agreement or non-competition agreement, let alone a strategy to protect the most valuable asset of their prospective business.

As Chadwick C. Busk points out in his article, Generic NDAs: Overlawyered and Overprescribed, there is some “art” to drafting and using these agreements. Clearly, there are thousands of these agreements floating around the Internet, which entrepreneurs can access for free or a modest charge. Likewise, they can attempt to “economize” by using these generic templates for their own, more specific circumstances.

Unfortunately, entrepreneurs often do a great disservice to their new business by dabbling in areas where they have no experience or education. Part of being a successful entrepreneur is surrounding yourself with people who are smarter or more experienced than you. In some cases, you will want to do whatever it takes to hire these people. In others, it can be relatively economical to work up your own documentation and have a lawyer review it, to see if there are deficiencies. Such services are often relatively inexpensive, since the attorney is merely reviewing or editing, rather than creating something from scratch.

Herbert Chestnut’s article, Hiring An Attorney – The Five Questions You Should Always Ask, gives some good, basic pointers and threshold questions to be asked of candidates to handle legal portions of the start-up entrepreneur’s enterprise framework. Another early-stage issue for an attorney, and perhaps an accountant, is the legal form of the new entity. The various options of sole proprietorship, partnership, “C” and “S” corporation, limited liability company, etc., can certainly be confusing for the average start-up entrepreneur. An incorrect decision at this point can lead to substantial personal and company tax and accounting issues, squandering the entrepreneur’s time and money. This error is something most start-ups can ill afford, and particularly so these days.

Much of my legal practice revolves around entrepreneurs involved in buying and selling a business. In many cases, the entrepreneur is seasoned and educated as to the important points of the flow of the deal and logistics. Often they are well enough versed in what lawyers and accountants call “due diligence,” that they can handle some or all of this themselves. Sometimes, however, they simply don’t know what they don’t know.

What kind of a military strategist would call in reserves or special forces after the battle had ended? The time entrepreneurs need the experts is on the front end, rather than in the middle or end. Procrastination on such things is not the friend of the entrepreneur.

 

 

If you enjoyed my impression of these articles, why don’t you read them for yourself and see what you and I missed or hit? Join the Applied Entrepreneurship group on LinkedIn. Membership is free and I try to post about ten articles a day there. We have some great discussions going and if you are an entrepreneur, we hope you will join us.