A Basic Primer on Damages Terms in Contracts

Posted by on Mar 12, 2018 in Draft Your Contract, Limiting Liability

When entering into arrangements with clients or engaging vendors, startup companies may be faced with a confusing array of contractual terms, including terms that reference various types of damages. Such terms are worthy of attention due to their potential financial implications. For example, an agreement might include a limitation of liability clause that reads something like this: IN NO EVENT WILL LICENSOR BE LIABLE UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ITS SUBJECT MATTER UNDER ANY LEGAL OR EQUITABLE THEORY, INCLUDING BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, AND OTHERWISE, FOR ANY…CONSEQUENTIAL, INCIDENTAL, INDIRECT, EXEMPLARY, SPECIAL, OR PUNITIVE DAMAGES … You may understand that this provision purports to eliminate the software vendor’s (licensor’s) liability for these types of damages if there is a problem with the product in question. But what, for example, are consequential damages? Obtaining an attorney’s advice when signing contracts is advisable—particularly when they contain terms such as these. However, having a very basic understanding of these types of damages concepts is also helpful. Following is a very general, limited overview of damages concepts. Keep in mind that the meaning of these terms and the applicable categories can vary from jurisdiction to jurisdiction and based on the type of contract in question (e.g., a services contract versus a contract involving commercial goods, such as software). Measures of Damages There are a variety of theories and approaches to measuring damages used by courts in different contexts. The most common approach in situations involving the breach of a contract is to attempt to define the aggrieved party’s “expectation interest” and put them in the same position they would have been in had the contract not been breached. For example, Startup Company signs a contract with Slipshod Software, under which it pays Slipshod $100,000 for a software license. However, the software does not function. As a result, Startup Company incurs $10,000 in personnel costs finding and vetting alternative software with comparable features for its business, which it licenses for the best available price of $115,000. Due to the delay in securing the software, which Startup Company needed for its business, Startup Company loses two clients, which would have yielded $50,000 in profit. Startup Company/Slipshod Example $100,000 licensing cost for nonfunctioning software $10,000 additional expense in personnel costs $15,000 above $100,000 for licensing new functioning software $50,000 profit loss from clients who leave = $175,000 expectation damages Startup Company can argue that its expectation damages total $175,000, including the $100,000 it had paid Slipshod Software, the $10,000 in personnel costs in finding comparable alternative software, the extra $15,000 for the alternative software, and the $50,000 in lost profits.  Awarding these expectation damages approximates the position Startup Company would have been in if Slipshod Software’s product had functioned properly. Direct Damages  In the previous example, Startup Company can argue that it suffered $115,000 in direct damages (the $100,000 original licensing fee and the extra $15,000 it had to spend to obtain comparable alternative software). Direct damages, also called “general damages” in some contexts, are damages that naturally result from a breach of contract (i.e., the damages any party would usually incur in this situation). Here, any company that requires this type of software for its business would need to recoup its licensing fee from Slipshod Software and would need...

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Cybersecurity 101 for Startups

Posted by on Jan 30, 2018 in Cybersecurity

Every business, including startups, has data to protect. So, it’s not really a matter of if, but when an organization will experience cyber and data privacy threats. This post will provide tips on how to proactively protect data related to employees, customers, vendors, operations, and intellectual property. From creating password strategies to setting up incident response plans, there are many things organizations can do to potentially save a ton of stress, cash, and even reputation. Prepare: Designate a person or team to handle information security and preparedness. A designated internal team member may be an executive or someone in legal, HR, or marketing. Someone designated outside the company may be an attorney, public relations representative, or an insurance contact. Make a plan to address cyber incidents. Prevent: Train your employees regularly. Most breaches result from human error. Hacks can be caused by phishing, ransomware, identity theft, and email compromise. Use strong passwords. Change them regularly and don’t share them with anyone. Password tip: a strong, smart password is private, unique, and is changed every 90 days. A good rule of thumb is to create an acronym from a sentence. Use symbols for some of the letters and include both upper and lowercase letters. For instance, you can use capital letters for proper nouns. Be sure it includes numbers, too. Example: I<32soSicfBR! / I love two scoops of Snickers ice cream from Baskin Robbins! Some password security tools we recommend include multi-factor authentication (2FA), biometric authentication (finger print, voice print, facial recognition), and password managers. Avoid public Wi-Fi. Use only secure internet connections for business matters. Protect computers by using firewalls, updating software, installing antivirus and antimalware, encrypting sensitive information, and regularly backing up files. Work with trusted business partners and know how to contact them. Dispose of data and media safely and securely. Respond: Mobilize your entire team, both internal and external. Examples of internal team members include information security officer, executive-level officer, in-house legal, marketing, and human resources. External examples include outside counsel, public relations, and insurance. Stop the breach – determine the cause of the breach and take necessary steps to stop it. IT professionals and/or forensic experts may get involved at this point. Notify all appropriate parties including affected customers, insurers, and law enforcement. Make any and all appropriate reparations including discounts, damages, free credit freezes, and credit monitoring. Seek any and all appropriate remediation. Hopefully this provides a solid foundation for where to start with cybersecurity. Threats and solutions are constantly changing, and it’s important to remain up-to-date with all operating system,  antivirus, and antimalware updates. While there are many things that can be done to hardware and software to protect information, perhaps the most important action to take is educating and training employees and service vendors who access company data. Remember, human error is almost always the cause for a breach. Brief Case Study Following Target’s 2013 holiday season hack of over 41 million credit and debit card accounts, Target was required to employ “an executive or officer with appropriate background or experience in information security” to implement and maintain its information security program through implementing a new IS program, changing network system policies, executing data encryption guidelines, and ensuring vendor compliance. If you have any questions regarding cybersecurity for your startup, please reach out to...

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Intellectual Property Law Series: Common Trademark Pitfalls Even the Pros Make

Posted by on Dec 4, 2017 in Intellectual Property

We’ve all heard of trademarks. But, what exactly do they do? And how do you select your trademarks, protect them, and then properly use them in commerce? As we discussed in the previous article, trademarks identify original sources for products and services and ideally help distinguish one source’s goods and services from another source’s goods and services. Trademarks can come in a variety of forms, including logos, taglines, product or service names, colors, scents, etc. As many of you already know, selecting a trademark is not always an easy task. And, properly using your trademark in commerce requires diligence. Avoiding the mistakes below can help you protect your trademarks, wallet, brand, and reputation. 7 Tips to Avoid Common Trademark Pitfalls: 1. Select a distinctive mark. In order for you to distinguish your goods and services from others, your trademark must be distinctive, i.e. not confusingly similar to another’s mark for similar goods or services. If your trademark confuses consumers as to the source of origin of your goods or services, you run the risk of losing your mark and even a lawsuit for infringement. So, make sure your mark is distinctive before you begin to use it in commerce. Trademarks can be: Arbitrary (Apple for computers, Kodak for cameras) or Suggestive (Microsoft for microprocessor software)   However, trademark protection is not afforded to marks that are: Descriptive (Smartphone for smart phones) or Generic (Escalator, Realtor, Dumpster) 2. Conduct a search to see if any others are using your mark or something confusingly similar. Even if your mark is not identical to another’s mark, you could still be at risk. We recommend searching through online search engines like Google and reviewing the U.S. Patent and Trademark Office (“USPTO”) database records. Not all trademarks are registered with the USPTO, but you still need to be cautious of using marks similar to others that already exist. Run the search before registering your trademark or using it in commerce. Example of Confusingly Similar Names but Vastly Different Products 3. Register your mark with the USPTO. Trademark registration gives you the exclusive right to use your mark in all 50 states for the covered goods/services, except for prior users. The registration process can be started based on the intent to use the mark in commerce, even if you haven’t used it yet. After five years of continued use in commerce, a registered mark can become incontestable, meaning that others cannot contest the validity of your mark. 4. Properly mark your trademark. Remember this difference: a common law trademark (a mark that is not registered with the USPTO) is marked with ™, and a mark that is registered with the USPTO is marked with ®. Use the ™ symbol before you file your trademark application with the USPTO and during the pendency of the federal trademark application. Upon receiving a federal registration, switch the ™ symbols to ® symbols. 5. Use your trademark as a proper adjective. The proper adjective describes the generic name of goods or services to which it applies. For example, we stocked up on Q-tips® cotton swabs and Little Debbie® snack cakes. Incorrect: Little Debbie® represents a third of the snack cake market. Correct: Little Debbie® snack cakes represent a third of the snack cake market. The risk of using your mark as a noun...

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Intellectual Property Law Series: Do Trademarks Matter? Yes.

Posted by on Nov 9, 2017 in Intellectual Property

Companies have many assets to protect, such as cash, equipment, inventory, furniture, etc. But, one asset that is often overlooked is intellectual property (IP), such as trademarks, patents, copyrights, and trade secrets. In today’s global economy, it is critical for business owners, executives, inventors, authors, and marketing professionals to identify their IP, take the steps necessary to protect it, and enforce their rights when appropriate. Our team presents this first article of a series that will provide you important reminders and tips for protecting your IP. This first one specifically covers IP assets protected under trademark principles, including the following: Trademarks – identify goods or products Service marks – identify service provided for the benefit of another Trade dress – identifies packaging and product configurations Trade names – identify names under which businesses operate A trademark identifies which person or company is the original source of a product or service and distinguishes it from those made or provided by competitors. Trademarks can take the form of names (Gillette®), brands (Johnson & Johnson’s “Band Aid®”), designs and symbols (Starbuck’s twin-tailed mermaid logo), and slogans (Walmart’s “Save Money. Live Better.”). A service mark identifies a service provided for the benefit of another, such as Unum insurance. Trademarks consisting of color, sound, packaging, and scents are commonly referred to as trade dress like the shape of a Coca-Cola glass bottle and the colors of 7-Eleven’s logo. A trade name is the name under which businesses operate and is usually different from their legal name. When managing your IP, the first step is to always identify your assets. The second step is to protect them. And, not protecting your IP could result in the loss of money (lawsuits, license fees, and settlements), time (fighting to protect your rights), credibility, and even your brand or company identity. The following articles in this series will address mistakes to avoid when managing your trademarks and copyrights. If you have questions about identifying, protecting, or enforcing your IP, please contact us. Interested in learning more about Paul and the Chambliss IP practice? Click to watch Paul’s video in our “UNLEASHED” video...

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Top 10 Takeaways from “Little Town, Layered Ecosystem: A Case Study of Chattanooga”

Posted by on Apr 14, 2016 in Update!

Our Chambliss Startup Group thrives on supporting entrepreneurs and not just with legal counsel. Our team believes in the entrepreneurial movement happening in Chattanooga, and we’re making a point to be a part of it, whether it’s by offering networking opportunities, developing a sense of community, or being a resource. But we’re not the only ones. There are a handful of solid supporters that have played a key role in this movement, and people are noticing. For example, this billion-dollar private, nonpartisan foundation recently put us on their map. The Ewing Marion Kauffman Foundation recently released the report “Little Town, Layered Ecosystem: A Case Study of Chattanooga,” which details the entrepreneurial support system in our hometown. The Kauffman Foundation is based in Kansas City, Missouri. The report is just one part of the Kauffman Foundation Research Series on City, Metro, and Regional Entrepreneurship. Other cities featured include Kansas City, St. Louis, and Indianapolis. If you haven’t read the report, it’s definitely worth taking a look. For those of you crunched for time, here are our top 10 takeaways: TOP 10 TAKEAWAYS FROM “LITTLE TOWN, LAYERED ECOSYSTEM: A CASE STUDY OF CHATTANOOGA”   1. The Chattanooga entrepreneurial ecosystem has 3 layers: philanthropic foundations direct entrepreneurship support organizations organizations in the public sector, including Mayor Berke’s office 2. Gig – the big spark. The Gig – Chattanooga’s (first in the nation) one-gigabit fiber internet service provided by EPB – got things moving and shaking among city leaders, entrepreneurs, and support organizations.   “Now everybody says, ‘We have to stay first, we have to do something’…”   3. Two local foundations are major players in not just the entrepreneurial ecosystem, but also in Chattanooga’s general development: Lyndhurst Foundation and Benwood Foundation.   4. The 5 main entrepreneurial support organizations are: The CO.LAB Us! Chambliss Startup Group Lamp Post Group LAUNCH Launch Tennessee 5. Let’s not forget EPB.   “Since the launch of the Gig, EPB estimates that ninety-one companies have been founded in Chattanooga, with approximately $50 million in venture capital provided from six firms.”   6. Where’s the best place in the ecosystem? The Innovation District. Shout out to the Enterprise Center located in the Edney Building at the heart of the district.  7. Mayor Berke played a huge role in bringing the right people together.    He not only exercises “his support through his official powers,” but he is also one of the biggest “cheerleaders” for the entrepreneurial community.   8. It doesn’t hurt that Chattanooga is an “attractive and affordable place to live.” Entrepreneurs migrating to our town enjoy it! 9. Chattanooga is just one example of how local assets can be utilized for the “betterment of a city ecosystem.”   “There are untapped and perhaps unexpected sources of entrepreneurship in every place.”   10. If you’re still not getting the ecosystem concept, a picture’s worth a thousand words.   This is just a tiny snapshot of the report, and we encourage you to take a look. It’s inspiring to see all the different organizations, firms, entities, individuals, and believers involved in making our hometown entrepreneurial ecosystem work for the betterment of the...

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Chambliss Startup Group Sponsors “Will This Float” Pitch Event

Posted by on Dec 9, 2015 in Crowdfunding and Fund Raising

The Company Lab (CO.LAB), based in Chattanoooga, TN, will host “Will This Float?” at the Revelry Room on Thursday, December 10, 2015 from 6:00pm to 10:00 pm. “Will This Float?” is an annual business competition where startups and entrepreneurs have the chance to pitch their ideas to judges and the Chattanooga community for the chance to win cash prizes. The overall winner will take $1,000 home and a $500 voucher from Forum Sherpas. Two other finalists will receive $250 each. Our Chambliss Startup Group is pleased to offer 10 hours of free business services to the three winners. For more information about the event, please check out the Times Free Press and articles or visit the “Will This Float?” event page. Also, you can read about the overall winner Undaground here. *Purchase event tickets...

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FINALLY… SEC Finalizes Crowdfunding Rules

Posted by on Nov 23, 2015 in Crowdfunding and Fund Raising

FINALLY… SEC Finalizes Crowdfunding Rules On October 30, 2015, the U.S. Securities Exchange Commission (“SEC”) adopted final rules which will allow companies to offer and sell equity and securities through a crowdfunding exemption in the Jumpstart Our Businesses Act (“JOBS Act”). These rules will likely become effective in May 2016. The crowdfunding exemption allows eligible companies to raise capital online by selling equity and other securities. Until these rules go into effect, investors need to have an annual income exceeding $200,000 or a net worth of least $1 million to invest in the equity or securities of companies. The Following Rules Apply to an Offering Company o May raise up to $1 million through the crowdfunding exemption in any 12-month period. o Companies engaging in crowdfunding offerings will be required to file certain information and disclosures with the SEC and provide such information and disclosures to investors. o Required information and disclosures include:         information about officers, directors and certain owners of the company;          a description of the company’s business and the intended use of proceeds to be realized from the offering;         information about the company’s financial condition;          the price of the offering, the target offering amount, and the deadline to reach the target offering amount;          o information about certain related-party transactions;          o audited or reviewed financial statements of the company; and          o the company’s recent tax returns. The Following Rules Apply to Crowdfunding Investors o If annual income and net worth is less than $100,000: may invest the greater of (i) $2,000, or (ii) 5% of the investor’s annual income or net worth in a single offering. o If annual income or net worth is equal to or greater than $100,000: may invest the greater of 10% of the investor’s annual income or net worth in a single offering. o The maximum amount of investment for any investor in any 12-month period is $100,000. Disqualified Companies o Certain companies are not eligible to participate under the crowdfunding exemption, including foreign companies, public companies that already report to the SEC, and companies with no specific business plan. Companies Must Use Registered Portals o Crowdfunding must take place exclusively online through an SEC-registered intermediary, either a broker-dealer or a funding portal. Transfer Restrictions Apply to Securities Purchased Via Crowdfunding o As a general matter, any security purchased through crowdfunding may not be resold for one year. o There are exceptions to this rule, however, including transfers (i) to family members, (ii) to accredited investors or (iii) at a SEC-registered public...

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Seven Tips for Crafting an Effective Arbitration Clause (Part 3 of 3)

Posted by on May 28, 2015 in Arbitration, Draft Your Contract

So you’ve decided that arbitration is preferable to traditional court litigation. It’s time to spell that out in your contract. That means crafting an effective clause that will maximize the advantages of arbitration (see Article 1) while minimizing the risks and disadvantages (see Article 2). Whether you are negotiating a complex deal with another sophisticated party, or creating terms and conditions applicable to all your customers, here are seven tips to craft an effective arbitration clause. Make it Mandatory: Make it clear that arbitration is not optional. Avoid language like “the parties may submit their dispute to arbitration.” Define the Scope: If you are like most parties, you want the arbitration clause to have the broadest scope possible. Use simple, uncluttered language like “any dispute related to this Agreement.” But if you think a certain matter should be excluded, be careful. A carve out can increase the likelihood that you may later find yourself fighting separate battles involving overlapping issues, which can then lead to inconsistent results. As a corollary, also consider whether you want a judge or the arbitrator to decide if a certain dispute is covered by the arbitration clause. Choose Your Organization And Rules: Effective arbitration clauses usually specify both the organization administering the arbitration and the procedural rules applicable to it. For example, JAMS and AAA are perhaps the two best known and widely used organizations. Both of those organizations offer a variety of procedural rules the parties can elect based upon their circumstances. For example, if you are likely to encounter small-dollar disputes with individual customers, you would be wise to explicitly reference one of the sets of streamlined rules intended for those situations. Otherwise, you might consider electing one of the many sets of rules applicable to certain industries, such as construction, telecommunications, or real estate. Location: If you anticipate that your dispute will require a live hearing before the arbitrator, clearly state where you want that hearing to be held. Arbitrator Selection and Fees: If not already determined by the rules you elect, make sure the arbitration clause addresses the following questions: (a) will there be one arbitrator or a panel of three? (b) how is the arbitrator selected? and (c) who is responsible for paying the arbitrator’s fees? Consider Express Time Limits: Specifying clear time limits for the arbitration can avoid unnecessary delays. For example, if you want to require a mandatory period of negotiation before either side can initiate arbitration, then limit that period to a certain number of days. You might also consider specifying certain time limits applicable to the arbitration itself so that the proceeding stays on course toward a speedy resolution. Class Arbitration Waiver: If your arbitration clause is part of a standard set of terms and conditions equally applicable to numerous transactions and parties, then you should heavily consider including a class arbitration waiver. Essentially, this language states that the other party (typically an individual consumer) waives any right to pursue arbitration involving any class action claim. Similarly, this language should also state that the arbitrator has no authority to conduct any type of class or other collective proceeding. Why is a class waiver important? Because for all its benefits, arbitration is often not the best forum to handle the complex mechanisms and issues of a...

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Are You Sure You Want an Arbitration Clause? (Part 2 of 3)

Posted by on Feb 27, 2015 in Arbitration, Draft Your Contract

Many business people, and even some lawyers, take it as an article of faith that any contract is improved by including an arbitration clause. If you ask them why they think a contract should contain an arbitration clause, you will probably hear something like: “because arbitration is quicker and cheaper than going to court!” Is this true? Yes, it can be. Is it always true? No, not by a long shot. Many people assume that simply including an arbitration clause—any arbitration clause—in their contract means that they will automatically gain the main perceived benefits of arbitration: quicker and cheaper dispute resolution. To paraphrase Marshall McLuhan, this is yet another assumption that has outlived its uselessness. In fact, a poorly drafted arbitration clause can have the opposite effect. Bad arbitration clauses tend to inflict extraordinary delay and expense because such clauses often result in prolonged litigation over what the clause itself means. For example, if the arbitration clause says nothing about class arbitration, is class arbitration permissible or not? Similarly, who resolves a dispute over whether or not a certain claim is covered by the arbitration clause: a judge or the arbitrator? These pesky questions are not minor skirmishes. They are threshold battles whose outcomes will define the entire course of the arbitration proceeding to follow. Depending on the circumstances, these preliminary issues can prolong a dispute for months. When the stakes are high enough, we have even seen these issues stretch out disputes for years while the parties churn through a morass of dueling proceedings and appeals. All the while, litigation expenses continue mounting while the underlying merits of the dispute remain virtually untouched. Even properly drafted arbitration provisions can present enormous danger. If an arbitrator rules against you, it will be very, very hard to overturn his ruling. Why? Because unlike a decision from a judge or jury, an arbitrator’s ruling cannot be overturned on appeal except for a few narrow, specific reasons, such as if the proceeding was rigged by fraud, arbitrator bias, or the like. And in some jurisdictions, an appellate court cannot overturn an arbitrator even if the arbitrator blatantly disregards the law. This is the risk you take when you bargain for the benefits of expedited, private litigation. So how can you minimize the likelihood of either unintended litigation or a bad ruling with no way out? First, drop the assumption that arbitration is a guaranteed time and money saver. It would be great if that were always true, but it’s not. Arbitration can achieve those goals, but not always. Instead, consider the pros and cons of arbitration [hyperlink Art. 1] and invest some time considering how those apply to your specific circumstances. All things considered, if arbitration does not look like a net gain for you, then do not insist on it. Leave it to the courts to settle any disputes. Sure, they may not be perfect, but they are pretty good at it overall. On the other hand, if you decide that arbitration is a compelling alternative to traditional litigation, then by all means include an arbitration clause in your document. However, do not rely on a generic form or some unconsidered boilerplate. Resolve to craft an arbitration clause that will establish a coherent and informed framework for resolving disputes. Calibrate that...

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Arbitration & Mediation: Know the Basics (Part 1 of 3)

Posted by on Feb 18, 2015 in Arbitration, Draft Your Contract, Mediation

Most of you know arbitration and mediation as two different kinds of alternative dispute resolution. Some of you have even participated in one or perhaps both. But what exactly are they? How do they differ? And which one is the best fit for your business needs? Arbitration = Private Litigation Arbitration is essentially private litigation that results in a binding, final decision. Instead of a judge or jury deciding your case, the parties select a neutral arbitrator who renders a decision. The parties typically agree to arbitrate based on a clause in an agreement, usually long before a dispute arises. Advantages: When deployed correctly, arbitration can be cheaper and faster than litigating in court. Arbitrations also typically afford the parties a higher level of confidentiality than is otherwise available in a court of public record. And to some degree, arbitrations can be less formal. Disadvantages: Ironically, a bad arbitration clause can be worse than none at all. A poorly drafted arbitration clause can inflict enormous expense and delay on the parties as they fight over what it means, and the cost of such a battle can negate the entire purpose of arbitration. Additionally, arbitration awards are appealable only in very narrow, specific circumstances. So if the arbitrator rules against you, virtually any appeal will be a very tough, uphill battle with a slim chance of success. We’ll discuss these dynamics in more detail in a future post, Are You Sure You Want an Arbitration Clause? Mediation = Facilitated Negotiation Mediation is a process where the parties to a dispute meet to negotiate and explore whether they can agree on a resolution. A neutral mediator, usually selected by the parties, facilitates the parties’ negotiations, but he has no authority to force the parties into settlement, nor is it his job to predict how a judge or jury might ultimately rule on the matters in dispute. Instead, a mediator’s role is to assist the parties as they seek their own, voluntary resolution of their dispute. Advantages: Perhaps the biggest benefit of mediation is control. Parties who mediate retain control of the outcome of their case, instead of handing that control to a judge or jury. When parties feel like they control their own destinies, they also tend to feel a higher sense of satisfaction with the eventual resolution. As Shakespeare said, “He is well paid that is well satisfied.” And of course, a successful mediation will resolve a dispute at a fraction of the cost of a full-blown trial. Disadvantages: Mediation is often not a productive exercise until the parties have already expended significant time and money litigating. Many business disputes start out with muddled issues and murky facts. Until the issues are crystallized and the facts are illuminated, parties are understandably reluctant to mediate. Why negotiate when you do not fully know either your own or your adversary’s strengths and weaknesses? Mediation also tends to be an ineffective tool when the dispute itself is binary, i.e. where only one of two outcomes is possible. When the outcome must be either “whole hog or none,” that doesn’t leave much space to...

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