One poisoned water bottle: Paul O’Neill explains the subprime mortgage crisis
March 28, 2008
From the March 30 NY Times Magazine’s interview with Paul O’Neill, former secretary of the Treasury:
[NYT:] It’s so hard to understand how the subprime mortgage crisis has triggered a financial crisis of global proportions. [Paul O'Neill:] If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles; that’s basically what we’ve got there.
Supreme Court nixes expanded judicial review of arbitration awards (but stay tuned ….)
March 26, 2008
Yesterday the Supreme Court rejected the view that parties to an arbitration agreement, at least under the Federal Arbitration Act, can agree to expanded judicial review of the arbitrator’s award. See Hall Street Assoc., L.L.C. v. Mattel, Inc., No. 06-989 (U.S. Mar. 25, 2008) (hat tip: SCOTUSblog).
I’ve put a more detailed write-up at the 100 Feet Up wiki.
Signing a contract without indicating it’s for your company can get you sued personally
March 24, 2008
I recently ran across a case from California where:
• a company officer signed a letter agreement, on his company’s letterhead, but with no indication of his title;
• the company backed out of the deal;
• the other side sued both the company and the officer in his personal capacity; and
• the company’s D&O insurance carrier successfully denied coverage, on grounds that D&O coverage doesn’t include garden-variety breaches of contract; and
• the insurance carrier therefore didn’t have to pay for the officer’s litigation defense expenses.
See August Entertainment, Inc. v. Philadelphia Indemnity Ins. Co., 146 Cal.App.4th 565 (2007).
Of course, there was a wrinkle, one that likely didn’t sit well with the court. The two companies had settled their dispute. Under the settlement, the officer agreed to allow a $2 million judgment to be entered against him. The plaintiff agreed to look solely to the insurance carrier for recovery of the money, and to dismiss its claims against the officer’s company, which was now insolvent.
Regardless, the court had no trouble holding that the D&O policy did not cover the plaintiff company’s claim for breach of contract.
Layoffs - advice for GCs on how to manage them
March 24, 2008
Dallas lawyer Michael Maslanka writes in Texas Lawyer about how to manage layoffs, including suggestions for drafting litigatable releases (hint: simpler is better, and no release is better than a spurned one).
Here’s the drill: If offering two weeks severance only, forget the release, and just give the money. A release offered and refused is admissible as evidence of consciousness of guilt. …
A more fundamental release challenge is that lawyers assume one size fits all; they believe a release used 10 years ago is good to go for today, and they try to sound smart by drafting densely written, 20-page releases. It’s as if there was one release drafted in the misty past, handed down from generation to generation, and used again and again without question.
Here’s the deal:
- Make it simple with bullet points and check marks, and boil it down to a few pages. The goal is to get the employee to sign it, not show legal virtuosity.
- Write in active voice, not passive. Releases saying that the employee has been advised to consult an attorney are invalid; the release must say that the company advises the employee to consult.
- Think ahead: Extinguish any outstanding issues on reimbursements owed and commissions due; but don’t extinguish all obligations, such as an existing covenant not-to-compete, with a merger clause.
(Extra paragraphing and bullets added.)
Source code escrows usually aren’t worth the bother
March 19, 2008
Shawn C. Helms and Alfred Cheng, two associates in Jones Day’s Dallas office, write in CIO Magazine about something I’ve been saying for years: Source code escrow clauses are almost never worth negotiating in a software license agreement, because it’s seldom ever cost-effective for a customer to get source code out of escrow and use it. The authors articulate several specific reasons, some of which I’ve paraphrased below:
- The software vendor is likely to go to court to fight a release of source code from escrow. The resulting delay alone might destroy much of the business value of the escrow to the customer.
- The customer’s IT staff likely doesn’t have time to do anything significant with the escrowed source code (including the non-trivial task of coming up to speed in how it works). And there’s probably no budget to hire the additional bodies that would be needed.
- The odds are that the escrowed materials will be incomplete, sometimes materially so, because the vendor likely considers it a low priority and the customer doesn’t police the vendor’s contractual compliance.
A source-code escrow can sometimes be highly appropriate. If a customer’s business relies on custom-built software that’s unavailable anywhere else, then an escrow might be crucial — but in that situation, the customer has to monitor the vendor’s compliance and be ready to do the needful with the code.
If the software is a commercial package, however, the customer often won’t even bother trying to use escrowed source code: Instead, it will simply rip out the offending software and switch to a competitor’s offering. (In situations like this, competitors are often happy to give away displacement licenses for free in order to get the future maintenance revenue stream, and so that their sales reps can tell prospective customers that they displaced the fired vendor.)
Invention ownership - watch out for automatic assignment language in the employment agreement
March 18, 2008
A subsidiary of Major League Baseball was able to throw up, at least temporarily, a complete roadblock to a computer scientist’s patent infringement lawsuit.
It turned out that the computer scientist, a Dr. Barstow, had previously signed an employment agreement with his former employer (which apparently wasn’t otherwise involved in the infringement suit).
That agreement had automatically assigned, to Dr. Barstow’s then-employer, all of his rights in any inventions he made that were “related” to the employer’s business.
When Dr. Barstow’s new company sued the Major League Baseball subsidiary, the subsidiary’s lawyers of course learned about the employment agreement. So the subsidiary went and made a deal with the former employer to acquire its rights in the patent, along with a retroactive license. With that in hand, the subsidiary successfully moved to have the infringement suit thrown out.
What mattered here was the language of the invention-assignment clause in Dr. Barstow’s old employment agreement. That language said that Dr. Barstow was, then and there, assigning his future work-related inventions to the employer: he “agrees to and does hereby grant and assign” to the employer all rights in future inventions falling within the scope of the agreement (emphasis added).
That meant that any transfer of Dr. Barstow’s ownership rights to work-related inventions had happened automatically, as a matter of law, as soon as he (and his brother) had made the inventions. There had been no need for the former employer to get Dr. Barstow to sign any additional paperwork to confirm the assignment.
(The case isn’t over yet: An appellate court ruled that a question still existed whether the inventions in question were sufficiently work-related to come within the scope of the automatic assignment.)
Lessons:
- If you’re an employee working on a sideline project that you don’t think should belong to your employer, you need to read your employment agreement carefully, and consider consulting an attorney.
- If you’re an employer, have your IP lawyer review the invention-assignment language in your employment agreement forms.
Reference: DDB Technologies LLC v. MLB Advanced Media LP, No. 2007-1211, at 9 (Fed. Cir. Feb. 13, 2008) (affirming decision that former employee could not assert equitable defenses to his assignment obligation).
Law firms as feudal baronies
March 18, 2008
Law-firm consultant David Maister certainly seems to know big law firms:
Listen to David Maister from his new book, "Strategy and the Fat Smoker: Doing What’s Obvious But Not Easy," in which he writes that having a collection of great lawyers is not the same as having a great and effective organization.
Rather, he writes that firms are made up of "bands of warlords, each with his or her followers, ruling over a group of cowed citizens and acting in temporary alliance — until a better opportunity comes along."
Ouch.
Michael P. Maslanka, "GCs Should Treat Legal Fees as Execs Treat Business Issues," Texas Lawyer, March 18, 2008 (link) (emphasis and extra paragraphing added).
The blog is back, with a new name
March 18, 2008
After a hiatus of nearly four years, I’m reviving the By No Other blog and renaming it 100 Feet Up. I’ll be using it again to post notes on technology- and business-law topics, ones that wouldn’t really fit at the Pactix Web site.
I got the idea for the new name from an old lawyer joke in which one of the characters shouts, "you’re in a balloon, about 100 feet up in the air." (The same joke gets told about consultants.)
But the name also has a less-frivolous meaning. Recall that Civil War generals sent observers up in tethered balloons to do surveillance and reconnaissance. They knew that, from 100 feet up, you can often get useful information about the challenges ahead. I hope that will prove true here as well.