Saturday, January 1, 2011

A Great New Year's Resolution for Your Business: A Legal Check-Up

By John L. Watkins

One of the best New Year’s Resolutions any business can make is to have a legal checkup. The idea of a legal checkup (sometimes called a legal audit) is to identify potential legal risks and issues and to take proactive measures to resolve or minimize them before they become expensive problems. The nearly universal rule is that it costs less to resolve a legal issue early on - such as through a proper contract prepared with professional assistance - rather than trying to address the issue later, such as through litigation.

The best legal checkups are customized for each business. The legal issues faced by a start-up will be different than those of an established larger business. The legal risks of a trucking company can be quite different from those of a software company.

If a business has in-house counsel, then in-house counsel should coordinate the review, with the assistance of outside counsel as necessary. If a business does not have in-house counsel, it should have a continuing relationship with an outside business attorney, who can handle the work.

Each legal review should be customized, but here are some of the issues to be considered. The items are listed starting with issues that are more frequently faced by small companies and then proceeding to issues more frequently faced by medium-sized or larger companies.

• Has the business properly maintained its registration with the secretary of state or other authorities? Failure to maintain registration (at least in some jurisdictions) can result in dissolution, which can in turn lead to a loss of corporate liability protection.

• Does the business maintain proper corporate or company records? Are corporate minutes and resolutions, for example, maintained and up to date? Failure to maintain proper records may put the corporate liability shield at risk.

• Does the business properly maintain financial records? Are loans from shareholders or members properly documented? Are corporate financial expenditures segregated from personal expenditures? If there are multiple corporations, are separate books and records carefully kept for each company? Again, failure to maintain proper financial records may place the corporate liability shield at risk.

• Does the business have a professionally drafted set of terms and conditions under which it does business? Do the terms and conditions properly limit risks, such as by disclaiming implied warranties and limiting remedies? Have the terms been reviewed recently?

• In addition to customer terms and conditions, are supplier terms and conditions properly documented? Are subcontractor terms and conditions documented? Do suppliers and subcontractors assume an appropriate level of risk in relationship to the transactions? Do suppliers and subcontractors have sufficient financial resources and insurance to back up their obligations?

• Does the business have procedures for protecting confidential information and trade secrets? Are employees who handle the information subject to non-disclosure agreements (“NDAs”)? Do suppliers, contractors, subcontractors or customers have access to the confidential information and trade secrets, and, if so, are they also subject to NDAs? Have the NDAs been professionally prepared and recently reviewed?

• Does the business have other intellectual property in the form of patents, copyrights, and trade secrets? Is the intellectual property carefully managed and protected? Are procedures in place to make sure that deadlines are met and fees are paid?

• Does the company have in place proper security and privacy procedures for its information technology? Has the company determined if there are any special regulatory requirements for data storage, security, or privacy applicable to its industry? Does the company outsource any of its IT, such as to a cloud computing provider? If so, has the company performed proper review and due diligence of the provider’s technology and procedures? Does the contract with the cloud computing provider protect the company’s interests?

• Does the business periodically review its employment and employee benefit procedures? Do key employees have employment contracts with appropriate covenants (which may include, depending on the circumstances, covenants not to compete and non-solicitation covenants)? Have employment contracts been recently reviewed and updated?

Note: There are important changes to Georgia law. Employers in Georgia should, in particular, consult with an employment attorney regarding the changes.

• Has the company carefully assembled and reviewed its insurance coverage? Does the company really know what is covered and not covered? Have the policy limits been reviewed for adequacy? Is there a procedure in place for reviewing endorsements that insurers may add upon renewal that may limit coverage? Have issues such as environmental liability, employment liability, and cyber liability been considered and properly insured? Does the company grant “additional insured” status to customers? If so, has the potential effect on the company’s aggregate policy limits been considered?

• Does the business have procedures in place for handling and documenting potential claims? Are potential claims reported promptly to the insurance carriers? Are claims tracked? Do the carriers and defense counsel provide periodic reports?

Please note that this is not intended to be a complete list, although it should provide a reasonable starting point. If you do not have an in-house attorney, the business should engage a regular outside attorney to learn about the company’s business and serve as a trusted legal adviser. If you do not know how to go about finding an attorney, check out my book, An Insider's Guide on Hiring a Business Attorney, which provides a step-by-step guide for finding, evaluating, interviewing, engaging, and working with a business attorney.

Sunday, November 7, 2010

Veterans Old and New: Let's Not Forget

In the last three weeks, I have traveled out of town to Phoenix for a mediation and to our home office in Indianapolis for my law firm's Partners meeting.

On the way back from Phoenix, I was seated next to a young man with very closely cropped hair, who appeared to be traveling with two other young men. We struck up a conversation. He and his buddies had just joined the Army and were on their way to basic training. The young man's story was interesting. A Navajo, he had grown up on the reservation  in a house that did not have running water until he was about ten years old. This would have been in the past decade.

My young acquaintance decided that he wanted to make something out of his life. He told me that he and his buddies had been hanging out and going nowhere. Some had been drinking too much. He wanted to learn skills, see the world and be successful, so he joined up. The Army was honest with him: After basic training, he would go back to a base in Arizona for a short period and would then deploy to Afghanistan.

The other fellow on our row -- a guy who looked to be a few years older than me -- joined the conversation. It turns out that he was an Air Force veteran who had served in Vietnam. He is now a military contractor, assisting the Air Force with logistics. He was returning home to Florida, but had done multiple stints in Iraq and Afghanistan as a contractor. The older fellow offered words of encouragement to our young friend.

As our young friend prepared to leave the plane in Atlanta with his buddies, I thanked him for his service and wished him well. I said a silent prayer for the success and safe return of this young man and his buddies.

Yesterday, I was sitting on another plane next to a young man in an Army uniform. Although he was a young guy, the look in his eyes suggested he had a lot of experience under his belt. Unlike my young friend from the earlier flight, he was not talkative. I asked him where he was headed. He said he was on his way back to Afghanistan, having previously done tours in Iraq and Afghanistan. I thanked him for his service. He did not appear to want to talk more, and I respected that.

Veterans Day is next Thursday. On this day -- which seems to receive so little publicity -- we should certainly remember the many sacrifices our fellow citizens have made during the history of our country to preserve freedom at home and abroad. The sacrifice is not just of lives lost or physical wounds received. It is a sacrifice of families being separated and lives and ambitions put on hold.

It should also be remembered -- as my two recent acquaintances reminded me -- that the sacrifice continues. Young men and women are still serving their country, and are still being sent into harm's way, enduring separation from their families, and putting other ambitions on hold. 

On the other hand, it is also worth remembering the considerable achievements of our men and women in uniform. Without their service, the world would be a very different place, and not for the better.

It is also worth remembering that military service has proven to be a life long honorable career for some, and a springboard to success in the civilian world for others.  My acquaintance from Phoenix volunteered because he felt that military service would allow him to "be somebody," and to lead to a better life. I wish him all the success in the world.

If you see a veteran next Thursday, or if you see a man or woman in uniform, thank them for their service. It's the least we can do.

Saturday, October 30, 2010

Barnes & Thornburg Cloud Computing and Cyber Security Blog

My law firm, Barnes & Thornburg LLP, one of the top 100 largest law firms in the U.S., has just launched its Cloud Computing and Cyber Security blog. The firm also just formed a Cloud Computing and Cyber Security Practice team. The team is composed of lawyers in the firm's various offices, and cuts across many other practice areas, including information technology, intellectual property, business, litigation, insurance coverage and international law.

Roy Hadley and I co-lead the team. Roy is an information security and technology lawyer, and deserves the lion's share of the credit in organizing the new team. Right now, Roy and I are also monitoring and contributing to the blog, although we hope and expect other team members will contribute in the near future.

To access the blog, click here.

Saturday, October 23, 2010

Thinking About Cloud Computing and Cyber-Security?

By John L. Watkins

Many businesses are thinking about using cloud computing providers for all or part of their IT infrastructure. Cloud providers promise scalability, off-site IT management, availability and security. As with all new technologies, there are many legal issues.

My law firm, Barnes & Thornburg LLP, has recently established a Cloud Computing and Cyber-Security practice team that cuts across many legal disciplines. My partner, Roy Hadley, and I are the leaders of the new team.

Roy is a true information technology specialist. Roy has practiced for many years in the technology space, including serving as general counsel and chief privacy officer of technology companies. I bring the litigation, insurance coverage, and general business perspective. We have many other members on the team specializing in different disciplines, including intellectual property (which is very strong firm-wide at BT), information technology, insurance coverage and recovery, international law, tax, and general business, among others. The collective experience our colleagues bring to this initiative is pretty amazing. The firm will be launching a blog on cloud computing and cyber-security topics shortly.

Roy and I were recently asked to write a primer on the legal issues for the Georgia State Bar’s Technology Section. Click here to read the article. I hope you find it useful. Caveats: This is a general overview written from a general U.S. point of view. There are additional issues in Europe. As a general statement, Europe seems to be ahead of the U.S. in dealing with these issues.

Saturday, October 16, 2010

This One's for Casey, Jr.


By John L. Watkins

Yesterday, Margaret and I lost Casey, Jr., our 21 year old black and white Manx cat. He was a stray in the neighborhood, probably about a year old, when we moved into this house many years ago. He looked a great deal like a black and white Manx cat from our former neighborhood named Casey who liked to "make the rounds" and get fed by many, including us. Thus, we took to calling the new cat "Casey, Jr.," and our old friend became "Casey, Sr." Casey, Jr. seemed destined to be our cat.

Anyway, it took a bit of an effort to adopt Casey, Jr. He was perfectly willing to come on the porch and accept food, but was quite feral, and was not about to let anyone pet him or pick him up. Once I finally coaxed him into the house, an almost instant transformation took place. He decided he really liked regular meals and attention, and became quite the Southern gentleman. He was always dapper -- at least until his last year -- looking like he was wearing a tuxedo. He loved being petted and purred on contact. His favorite spot was on Margaret's lap or sitting beside her on the couch.

It's always difficult to lose a pet, but losing this one was really hard. Twenty or so years is a long time to have a pet. Casey was a link to a different time in our lives, when we were young and things seemed a lot simpler.

Casey enjoyed his life and he had a great heart. You really do not expect an animal to reach such a Methuselah-like age, but he just kept on going. Over five years ago, our vet told us he probably had three to six months to live. The vet was wrong, and Casey still had great years ahead of him. In the past year or so, however, he got old and creaky, and, as old animals tend to do, just could not keep on weight despite having a healthy appetite. Even at the end, Casey's heart and spirit were willing, but the rest had just worn out. We miss him and always will.

If this has touched you, there are two things I would like you to consider doing. First, if you have been thinking about adopting a dog or a cat, do it. And if you are considering a pet, please adopt one from a shelter, or take in that dog or cat your kid brought home. We support Furkids, a no-kill shelter in our part of town. A few weeks ago, we visited its open house. I cannot tell you how many wonderful cats and dogs were there waiting for homes. Trust me, that free "DSH" (domestic short hair) or friendly mutt will make just as good a pet as a purebred.

Second, please consider giving to a shelter in your area. It doesn't matter if it is just a few dollars. Any amount helps. In these lousy economic times, the shelters are really struggling to keep open. If you need a suggestion, the previously mentioned Furkids is a great organization, as is the Atlanta Humane Society.

Thursday, October 14, 2010

What About Clients?

By John L. Watkins

One of my favorite legal blogs is What About Clients, written by Dan Hull and others from the Hull, McGuire firm. The key point of the blog is that the focus of what we do as lawyers should always be the client. A great reminder for all of us.

Dan is another guy with Midwestern roots and an international outlook. He "gets it." With great content written in a pithy and entertaining style, the blog is a must read.

Sunday, October 10, 2010

Trade Secrets, Green Technology and Protecting What You Think You Own

By John L. Watkins

According to a press release from the FBI last month, green technology is an increasingly attractive target for "would-be information thieves looking to make a fast buck." The Economic Espionage Act is a federal law that makes trade secret theft a federal crime. The language of the Act is very similar to the Uniform Trade Secrets Act, variants of which have been adopted by most states. The state acts provide for civil remedies (damages and injunctions), and sometimes criminal penalties.

Many companies -- large and small -- seek to protect important information as trade secrets. It is often impractical, for example, to maintain a large patent portfolio. The Copyright Act can provide some protection, but is limited in its scope. A trade secret, in contrast, can potentially be almost any information that has economic value and that is subject to reasonable efforts to maintain its secrecy. Examples can include customer lists, supplier lists, business plans, computer programs, formulas, and financial information, all depending on the particular circumstances.

The Need for Protection

A key element for protection under virtually any trade secret law is that the owner took reasonable steps to protect the information. Companies or individuals with trade secrets -- from start-ups to the largest companies -- need to make sure they have acted to maintain the secrecy of their information. This requires legal help, preferably from the beginning.

The vision of recent college graduates (or dropouts) writing software or developing other technology in a storefront office or a garage is a modern variant of the American Dream of rising from rags to riches. Such efforts are not necessarily mere pipe dreams. In fact, modern technology and decreasing barriers to entry probably make it more possible than ever for an entrepreneur to become successful, if not becoming the next billionaire.


This same technology -- thumb drives that hold gigabytes of information and portable hard drives that hold terabytes -- make it easy for anyone with access to the information to copy it. More and more trade secret cases are being brought against former employees who used such technology to take company information.

The start-up is particularly vulnerable. In many instances, friends will work together in developing technology or another invention. Sometimes, entrepreneurs will “partner” with another company for a particular purpose. In some instances, an investor will come into the mix. In each instance, if intellectual property rights are not documented properly, the possibility of a future dispute becomes very real.

Further, the possibility of a future dispute or lawsuit increases in direct proportion to the success of the venture. Put more bluntly, it is not likely that anyone will fight over worthless technology. It is very likely, however, that disputes will develop over valuable technology.

When inventors or entrepreneurs believe they have developed, invented or written something valuable, it is critically important to consult with an experienced attorney. All employees should sign a written non-disclosure agreement. It is also important to enter into a non-disclosure agreement before entering into any relationship with a third-party business “partner” or an investor. It is equally important that persons working together document their respective rights and obligations regarding the technology, writing or invention. (In addition to trade secret protection, it is also important to consider whether to seek additional protection, such as a patent application or copyright registration).

This is definitely not a situation where inventors, entrepreneurs or investors should try to go it alone or use Internet forms. Prospective clients should also not assume that every lawyer has the necessary experience or expertise to prepare proper documentation or to provide the proper advice.

Having proper non-disclosure agreements and other contracts in place is only the beginning. Adopting procedures and practical measures to maintain the secrecy of the information is also very important. This includes limiting access to the information to those who really need to have such access, monitoring usage, and being diligent in reinforcing the need to keep the information secret. Experienced legal counsel can offer practical advice on this subject.

This is an area in which experienced counsel can provide substantial value at a low cost. Management looking to cut a few corners by avoiding legal fees or who think they can go it alone (frankly, a common attitude among entrepreneurs and engineers) often find that failing to invest a little in initial legal advice later leads to costly legal bills, a loss of any protection for their technology, or both.

Trade Secret Litigation

If a company expects that there has been an information breach, it is extremely important to consult immediately with counsel. It may be necessary to engage forensic experts to determine whether there has actually been a breach and the likely extent of the breach. Ideally, forensic experts should be engaged with the assistance of counsel. The failure to act promptly may compromise potential legal and equitable remedies.

Given the FBI's stated interest, it may be tempting to turn the investigation over to the criminal authorities. This should be done only after consultation with company counsel.

First, and most importantly, the authorities are probably not going to be able to secure any direct relief for the company. Damages and injunctive relief will need to be sought directly by the company. Second, involving the government also involves a loss of control. The authorities, not the company, decide whether to proceed and how aggressively to pursue the matter. In contrast, the company can decide how it wishes to pursue possible civil remedies. Third, if the government is to be involved, their involvement is typically best handled through company counsel.

Conclusion

Trade secret statutes provide substantial civil and criminal remedies for the misuse of proprietary information. Not surprisingly, green technology and other cutting edge technology provide attractive targets for those seeking to profit from the work of others. It is critically important to involve counsel as early as possible in protecting confidential and proprietary information. If there is a breach, the early involvement of counsel will help achieve the best possible outcome.

If you do not know how to find a business attorney and need a resource, my book, An Insider's Guide on Hiring a Business Attorney, provides a step-by-step guide for finding, evaluating, hiring, and working with a business attorney. It is available on Amazon.com for $15.99.