Execs have gone to jail

Sometimes it might seem tempting to agree with a competitor to divvy up customers, or to keep your prices at an agreed level, or to take turns submitting the winning bid in response to RFPs. Those activities, though, can lead to indictment and prosecution by federal- or state authorities for violation of the antitrust laws.

True story: In 2011, two executives of a Japanese auto-parts manufacturer pled guilty to participating in a scheme to fix prices of parts sold to U.S. auto makers; the executives agreed to serve 12- and 15-month prison terms and to pay fines. [link]

True story: In 2005, the German airline Lufthansa and the British airline Virgin Atlantic blew the whistle on a price-fixing scheme by a total of 21 non-U.S. airlines, including British Airways, Qantas, and Korean Air. The U.S. Department of Justice prosecuted, resulting in a total of some $1.7 billion in fines, and in four airline executives being sentenced to prison terms in the U.S. [link] [link]

Cover-ups can get you, too

Keep in mind that prosecutors might not bother trying to prove up an antitrust violation. Instead, they might reach for the low-hanging fruit by bringing charges of obstruction of justice, which can be much easier to prove. (It’s not unlike putting Al Capone in prison for tax evasion instead of murder, or prosecuting Martha Stewart for making a false statement to the SEC instead of insider trading.)

True story: : In December 2010, a British executive, who had been extradited to the U.S., was sentenced to 18 months in prison and a $25,000 fine: not for price fixing itself, but for conspiring to obstruct a price-fixing investigation. [link]

Additional reading

For more information about unlawful collusive practices, the Department of Justice has a useful antitrust primer that explains many of the relevant concepts.

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“If the other side doesn’t know what to ask for, it’s not my job to educate them.” That’s one reason a contract drafter might not want to use a short-form contract that references a “standard” form book, or to use a fill-in-the-blank form such as a PRECUT baseline contract form: the other side could see what other options were available, which would give them a good idea of what they might want to demand for in negotiations. But consider these points:

• Your notion that you’re the one with superior knowledge might be wishful thinking. The other side could bring in an expert who knows exactly what changes to demand. You might be better off setting the tone with a demonstrably-reasonable contract, and then standing on principle to reject unreasonable change requests.

• Suppose you’re right, and the other side doesn’t really know what they’re doing. Chances are you’ll get them to signature faster — and you’ll be laying a foundation for a trusting re­la­tion­ship — if the draft you’re proposing seems fair and balanced.

• It can be dangerous to have a clueless contract reviewer on the other side. The reviewer might make un­rea­son­able demands, but being clueless, s/he won’t know that, and can’t be convinced otherwise. That could drive the negotiation right into the ditch.

See also: (list is automatically generated)

• Leading off with a “hardball” contract form document might be a bad idea

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PRECUT ™ NDA Downloads

• Two-way NDA form (free fillable PDF)
• Curator’s Notes for the NDA form (free PDF)
• Word document containing all PRECUT NDA clauses, plus numerous other NDA provisions that can be copied to a custom addendum (free RTF file)
• Confidentiality provisions adddendum — just the confidentiality provisions from the PRECUT NDA, for possible use with other agreements (free PDF)

Commentary

The PRECUT ™ Nondisclosure Agreement is a free, balanced, multi-purpose, customizable NDA, in the form of a fill-in PDF.

While of course no contract form can be one-size-fits-all, for many purposes the PRECUT NDA should be pretty much ready to sign as-is.

The Curator’s Notes contain extensive commentary, as well as many additional clauses that can be used to create a custom addendum.

Ask your lawyer whether you could save time and money by using the PRECUT NDA as the foundation for your next nondisclosure agreement.

This is the first of what I hope will be a series of ready-to-sign contract forms available under a Creative Commons license.

Comments and other feedback are welcome, especially suggestions for other types of contract that you’d like to see developed.

[ADDED 2011-04-02] Please take a look at my e-book for the Kindle or in PDF, “Signing a Business Contract? A Quick Checklist for Greater Peace of Mind,” with pointers to help you avoid inadvertently giving away the store or even landing in jail.

See also: (list is automatically generated)

• PRECUT free, balanced, curated technology contracts
• Confidentiality agreement (NDA) short-form starter draft and annotated long form
• PRECUT confidentiality provisions addendum is up

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If you’re an employee of a company, and you sign a company contract as just “John Doe,” you might end up being held personally liable for the company’s obligations. (If you’re the owner of the company as a sole proprietor, or the general partner of a partnership, you probably will be personally liable in any case.)

A better way to sign a company contract is to have the signature block:

• clearly indicate that it’s the company, not you personally, that is agreeing to the contract, and that you’re simply signing on its behalf; and
• stating your title.

The wrong way to sign a company contract

A better way

Further reading

• Protecting the Deal Professional from Personal Liability for Contract-Related Claims, by Glen D. West, of the Weil Gotshal firm.

See also: (list is automatically generated)

• Note-taking in meetings and phone calls: Three easy habits your lawyer will love you for
• Signing a business contract? Be sure your company title is in your signature line
• Clients seem to like Webcam video conferences, with on-line document sharing, better than traditional on-site meetings

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Chances are that at some point in your career, a lawyer — yours, or someone else’s — will want to review notes you took at a meeting or during a phone conversation. So thinking ahead to that possibility, whenever you take notes, you should routinely do as many of the fol­low­ing things as you can remember, especially the first three things, to increase the odds that a later reviewer will get an ac­cur­ate picture of the event. It will help you stay out of un­de­served trouble and save money on legal fees

1. Indicate who said what you’re writing down.  Unless you want to risk having someone else’s statements mistakenly attributed to you, indicate in your notes just who has said what.  EXAMPLE:  Suppose that John Doe says in a meeting that your company’s off­shore oil-well drilling project can skip certain safety checks. Re­mem­ber­ing the BP drilling disaster in the Gulf of Mexico, you don’t want anyone to think you were the guy who sug­ges­ted this. So your notes might say, for example, "JD: Let’s skip safety checks,"; if you omitted John Doe’s initials, it wouldn’t be clear that you weren’t the one who made his suggestion.
2. On every page, write the meeting date and time, the subject, and the page number. The rea­son: Your lawyer will probably want to build a chronology of events; you can help her put the meeting in­to the proper context by “timestamping” your notes. This will also reduce the risk that an unfriendly party might try to quote your notes out of context.
3. If a lawyer is participating, indicate this.  That will help your lawyer sep­ar­ate out documents that might be protected by the attorney-client privilege. EXAMPLE:  “Partici­pants:  John Doe (CEO); Ron Roe (ABC Consulting, Inc.); Jane Joe (general counsel).”
4. Start with a clean sheet of paper.  When copies of documents are provided to opposing counsel, in a lawsuit or other investigation, it’s better if a given page of notes doesn’t have un­re­la­ted in­for­ma­tion on it.  This goes for people who take notes in bound paper note­books too: It’s best to start notes for each meeting or phone call on a new page, even though this means you’ll use up your note­books more quickly.
5. Write in pen for easier photocopying and/or scanning, and also because pencil notes might make a reviewer (for example, as an opposing counsel) wonder whether you might have erased anything, and perhaps falsely ac­cuse you of having done so.
6. Write “CONFIDENTIAL” at the top of each page of confidential notes. That will help preserve any applicable trade-secret rights; it will also help your lawyer segregate such notes for possible special handling in the lawsuit or other investigation.
7. List the participants. Listing the participants serves as a key to the initials you’ll be using, as discussed in item 1 above.  It can also refresh your recollection if you ever have to testify about the meet­ing. If some people are participating in an in-person meeting by phone, indicate that. Indicate each participant’s role if isn’t ob­vi­ous or well-known – remember, you might know who someone is, but a later reader likely won’t.  EXAMPLE:  “Partici­pants:  John Doe (CEO); Ron Roe (ABC Consulting, Inc.); Chris Coe (marketing).”
8. Indicate the time someone joins or leaves the meeting, es­pe­ci­al­ly if it’s you (so that you’re not later accused of having still been there if something bad happened after you left).
9. Write down the stop time of the meeting. This usually isn’t a big deal, but it’s nice to have for completeness.

See also: (list is automatically generated)

• Clients seem to like Webcam video conferences, with on-line document sharing, better than traditional on-site meetings
• How to sign a company contract without incurring personal liability
• An oral understanding might not get you off the hook for a written contractual obligation

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Smart Bear guest blogger Steve Hanov has posted a long essay, “Bending over: How to sell to large companies,” with advice for small software vendors. The essay is getting a lot of positive attention on Hacker News; the comments there from entrepreneurs are worth reading as well.

See also: (list is automatically generated)

• Software pricing post – a must-read

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A problem for vendors: Customer claims of oral misrepresentation

I recently wrote about why, when complex technology deals go bad and everyone starts pointing fingers, fraud claims are a weapon of choice for customers’ lawyers against vendors. 

(In a nutshell, often the easiest way for a customer lawyer to win over a judge or jury is to persuade them that the vendor lied, and/or in­ten­tion­al­ly concealed facts that the customer now says would have been important.)

Customers who make such fraud claims often allege that the vendor made oral misrepresentations or omissions. That kind of allegation can be tough for a vendor to beat without an expensive, full-blown trial, where the jury listens to witnesses and decides whom to believe.

Vendors sometimes include ‘no-reliance clauses’ in their contracts in an effort to preclude such fraud claims, but those don’t always work.

Cheap insurance: Provide written disclosure of what could go wrong

An easy way for a vendor to discourage customer fraud claims – and/or to win them on summary judgment without the need for a trial – is to demonstrably disclose ‘bad’ facts before closing the deal. 

One way to do that is to provide the customer with a “Risk Factors” disclosure sheet, as an exhibit to the sales contract (and possibly as a slide in the sales pitch), listing as many things that could go wrong with the deal as the vendor can think of, even the obvious ones.

Such a disclosure sheet might have helped SAP defend against Waste Man­age­ment’s accusation that SAP affirmatively misrepresented “that its software was an ‘out-of-the-box’ solution that would meet Waste Management’s needs without any customization or enhancements," according to a Waste Management press release.  The disclosure sheet might have confirmed things such seemingly-obvious things as:

• SAP’s proposed software solution had previously been implemented only in Europe;
• Customization of the software would be needed;
• Time estimates for implementation are subject to uncertainty;
• Not every problem can be foreseen;
• Etc., etc. 

This isn’t a new idea.  One obvious precedent is the side-effects warn­ings that pharmaceutical companies include in their television com­mer­ci­als. Another example comes from public offerings of securities in the United States:  SEC regulations require that a discussion of risk factors be provided to prospective buyers as part of the prospectus.  (To see an excruciatingly-detailed example of securities risk factors that ought to be obvious to just about any investor, scroll down to the “Cautionary notes” list in BindView Corporation’s final annual report on Form 10-K, starting on page 19, which I drafted.)

Disclosure of risks may actually boost sales

Some sales execs will respond to the idea of a risk-factors disclosure sheet by screaming (maybe just in their heads), "Are you nuts? Are you trying to kill my deal?  Why the [expletive] would I call the customer’s attention to what could go wrong?"

The answer is:  Because you might improve your odds of closing the deal.  Recent research has shown that a disclosure of negative in­for­ma­tion can helps to enhance customer trust.  As reported today in a posting at the Harvard Business Review blog:

… In fact, Xu says, research has shown that when people com­mu­ni­cate positive and negative information, rather than just positive information in, say, job interviews, they gain higher trust.

Xu asks, "Does this translate to advertising?" Maybe. She’s watching an interesting case in the field right now: Domino’s Pizza current, decidedly un-puffy ad campaign. Domino’s is admitting its previous faults; telling consumers negative things about itself and its product.

"And it appears it’s increasing their sales," Xu says. "Why is that?"

Scott Berinato, The Power and Perils of Puffery, Harvard Business Review Blog Network, May 11, 2010 (emphasis added).

This thinking is in line with some sophisticated received wisdom in the sales community:  While it’s true that good sales people know how to overcome customer objections, great sales people pro­mote confidence through ‘completed staff work,’ proactively identifying possible problems for the customer and explaining how the vendor will address them.

(It works this way in the law, too:  A great advocate, "selling" his client’s case to a judge or jury, will take the initiative to point out any major problems in his own position, and will explain how his client should win all the same. If the advocate doesn’t confront the problems in his case, the other side will throw it in his face – and the problems will loom larger in the minds of the judge and jury than if the first advocate had candidly dealt with them in the first place.)

Brainstorming risks can increase the odds of a successful project

A successful project is the best defense against potential customer claims.  One powerful way to promote a successful project is to spend time brainstorming what could go wrong and provide the customer with a list of risk factors.  Ideally, the customer’s reaction to the risk factors will help refine the project planning.

And if the customer gets cold feet and decides to walk away as a result of seeing the risk-factor disclosure sheet, it’s entirely possible that the vendor is better off – there are worst things in life than losing a deal that ought to be lost.

Related posts

• Why the fraud claim is the lawyer’s weapon of choice in lawsuits over failed technology projects
• Vendors, consider a no-reliance clause for your sales contracts, to help forestall claims of fraudulent misrepresentation
• Lawsuit-defense tip for software vendors: Clearly label demos and mock-ups as such

See also: (list is automatically generated)

• Lawsuit-defense tip for software vendors: Clearly label demos and mock-ups as such
• Vendors, consider a no-reliance clause for your sales contracts, to help forestall claims of fraudulent misrepresentation
• Disclosure periods in NDAs – how long?

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In making a sales pitch, it’s not uncommon for a software vendor to put together a non-working demo or mock-up of what the customer might see in the final, customized software imp­le­men­ta­tion.

Such demos can be great sales aids. But they can also give rise to fraud allegations if the customer later claims, "you never told us it was just a demo!"

Strange as it may sound, this does happen in real life; when tech proj­ects blow up, customers’ lawyers almost always look for op­por­tu­ni­ties to make fraud claims against the vendor. As Chris Kanar­a­cus reported in 2008 about the recently-settled Waste Man­age­ment, Inc., vs. SAP lawsuit:

"At that meeting, SAP AG executives and engineers represented that the software was a mature solution and conducted a dem­on­stra­tion consisting of what they represented was the actual SAP Waste and Recycling software," the complaint states.

The company later discovered [sic] that the software was a "mock-up version of that software intended to deceive Waste Management," according to the complaint.

SAP has admitted to this in "internal documents," the complaint states.

SAP also demonstrated the "fake software" at subsequent sales presentations, according to the complaint.

[Emphasis and extra paragraphing added.]

If you’re a vendor, you can easily give your lawyers ammunition to shoot down this particular type of fraud al­leg­a­tion: Clearly label every screen of your demo as such.

The label could read something like this, in a footer: Note: Some significant features shown in this demo are not currently implemented.

That kind of label could help dissuade the customer from making a fraud claim at all, or perhaps allow the vendor to move for summary judgment dismissing the claim without a trial.

Related posts

• Why the fraud claim is the lawyer’s weapon of choice in lawsuits over failed technology projects
• Why tech vendors should consider providing a written risk-factors disclosure sheet
• Vendors, consider a no-reliance clause for your sales contracts, to help forestall claims of fraudulent misrepresentation

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Looks like there’s useful information at the Justice Department’s Web portal for the Foreign Corrupt Practices Act.

(Hat tip: Main Justice via Ethisphere.)

See also: (list is automatically generated)

• Subscribe to department-specific blog feeds for R&D, HR, Sales, Finance, etc.
• Big majority of executives now think Sarbanes-Oxley Act isn’t so bad after all
• Corporate exec convicted of conspiracy to bribe foreign official – he either knew, or consciously avoided knowing, what was going on

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Contracts often contain generic statements that, in case of a breach, the breaching party will cure the breach within, say, 30 days. Some­times, however, it helps to spell out exactly what the other side must do to cure the breach. That way, the other side’s lawyers will have less wiggle room to come up with ‘creative’ arguments why the other side shouldn’t have to do what you want them to do.

Here’s an illustration: A client of mine, an enterprise software vendor, once came to me with a complaint about one of their big customers, which was ‘stealing’ the software, that is, deliberately using the soft­ware far in excess of its paid-for licenses.

(The software vendor knew this because one of the customer’s emp­loyees had quietly alerted the vendor’s sales rep to what was going on.)

The vendor could have sued its customer for infringement of the copy­right in its software.* But the customer had a big, capable legal staff and competent outside counsel. We knew those lawyers would look for arguments why the customer wasn’t liable for infringement and didn’t owe any money. If the vendor wanted to get money from the customer, it probably would have to file a lawsuit.

Filling a lawsuit shouldn’t be done lightly, even when a lot of money is at stake. Litigation is expensive. It’s a drain on management’s time and focus. You seldom know what or when the final outcome will be. Not to mention that suing a big customer is hardly a great way for a vendor to get more business from that customer.

So my client wasn’t interested in filing a lawsuit. It just wanted the cust­omer to pay for what it had ‘stolen’ in unauthorized use.

Fortunately, the vendor’s standard software license agreement had good language in it. (Yes, I had written the language.) The vendor’s contract expressly said that, if the customer made unauthorized use of the soft­ware, it agreed to buy the necessary number of catch-up licenses — and if the customer did so, then the vendor waived its right to seek copy­right damages.

That contract language proved very useful. Instead of having to argue with the customer’s lawyers about how a court would apply the law of copyright, we just pointed to the contract, which stated in black and white what the customer agreed to do. In due course, the customer paid up.

The lesson: For important breaches of contract, be careful about relying on a generic breach-and-cure provision that lawyers could argue over. Instead, consider spelling out in the contract exactly what you want the other side to do.

* My client theoretically could have sought to recover the customer’s indirect profits arising from the infringement, which can be a remedy with real teeth. Consider the case of Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 886 F.2d 1545 (9th Cir. 1989) (Frank Music II). The MGM Grand Hotel had a floor show called Hallelujah Hollywood!, which included ‘tributes’ to various MGM movies. The floor show incorporated significant portions of the musical Kismet, which had been made into an MGM movie. The court found that this went beyond MGM’s ‘movie rights’ and therefore infringed the copyright in the musical. The resulting damage award included not just a portion of profits from the floor show itself, but 2% of the overall profits from the MGM Grand’s hotel operations — including 2% of the casino profits — which, the court found, were indirectly attributable to the promotional value of the floor show.

See also: (list is automatically generated)

• Jury duty in breach-of-contract cases should be abolished, no?

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