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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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Update!—New TN Law Concerning Patent Infringement Allegations

Posted by on Jun 23, 2014 in Intellectual Property, Update!

In recent years, state legislatures have attempted to pass legislation regarding patent law – an area that the U.S. Constitution states is exclusively governed by federal law. The stated goal behind many of these laws is to protect businesses from costs associated with defending “bad faith” patent infringement allegations (i.e. to protect from alleged “patent trolls”). Some argue that these laws are constitutional because they are more akin to consumer protection act legislation and do not necessarily overlap or interfere with federal law. In Tennessee, the legislature recently passed such a bill to protect small businesses from costs associated with defending “bad faith” assertions of patent infringement. Public Chapter 879 went into effect May 1 of this year, and states that a person or company cannot send a written or electronic demand letter stating that another person or company is infringing upon their patent when: (i) the threat is made in conjunction with continual past threats where no litigation was filed; (ii) the letter falsely claims that litigation was filed; or (iii) the claims in the letter “lack a reasonable basis in fact or law.” Certain organizations and claims are exempted from the statute; but ultimately, if you are seeking to enforce a patent or are receiving letters claiming that you are infringing upon a patent, you may want to consult with an attorney about this new law (codified at T.C.A. § 29-40-101 through 104). The consequences of ignoring the new law – which include the possibility of attorneys’ fee and punitive damage awards – could be...

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Terminating Your Contract: Things to Remember Part 2

Posted by on Mar 10, 2014 in Draft Your Contract, Practice Pointers

Let’s continue the discussion on issues to consider with regard to the termination of your contract. Most contracts have provisions governing what will constitute a breach or default and what the parties’ respective rights and obligations are in the event the contract is terminated for such breach or default (“termination for cause”). Right to Cure It is common in termination for cause provisions for the terminating party to allow the defaulting party to have a period in which to correct the default. This is typically called a “cure period.” Determining a reasonable cure period is dependent on the subject matter of the contract, the nature of the default and the parties’ respective bargaining powers. For example, if a party defaults in a service obligation under a contract, the provision may state that the defaulting party has ten (10) days to re-perform the service in accordance with the contract before the terminating party may officially terminate the contract. Notice One element of having the right to cure a default before the other party may terminate the contract is the concept of notice. Notice is important because it is a means by which the parties communicate to each other what is deficient or lacking in the other’s performance. Without adequate notice of what the breach or default is, it is difficult or impossible for the defaulting party to take full advantage of the cure period. Contracts typically have provisions stating when and how a party must notify the other of a default. The notice period is usually congruent with the cure period, such that the terminating party must provide a certain amount of prior notice of the default, coupled with providing the defaulting party the opportunity to cure the default, before the termination right is triggered. There are other matters to consider when dealing with termination issues, and these are just a few which pertain to termination for default. If you’re in the process of terminating or drafting a contract, please contact an attorney to discuss the particular termination issues that may be encountered in regard to your...

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Update! — Fee Changes at Patent and Trademark Office

Posted by on Feb 5, 2014 in Intellectual Property, Update!

The U.S. Patent and Trademark Office recently implemented a number of fee changes that will affect patent applicants and patent owners. Filing fees for patent applications have significantly increased, as have certain other patent prosecution fees. Issue fees, on the other hand, have been slightly decreased. Another change was eliminating the separate fee paid for publication of certain patent applications. U.S. patent applications for which a corresponding application is filed in another country are always published, but applications for which there is no corresponding foreign application are published at the option of the applicant. Publication does provide a limited benefit to applicants whose patents are subsequently issued with claims substantially the same as those published; however, until recently, there was a significant fee charged for publication. Patent owners whose applications have been published with issued claims substantially the same as those published, are entitled to recover a reasonable royalty from infringers who begin infringing prior to the issue of the patent, for the period from commencement of the infringement after publication until the patent issues. Such patent owners are also entitled to recover at least a reasonable royalty from infringers for infringement occurring after the patent issues. Some courts have held, however, that in order to recover a reasonable royalty from an infringer whose infringement began after publication but before issue of the patent, the patent owner had to prove that the infringer possessed a copy of the published application. Because this requirement, along with the requirement that the issued claims substantially mirror the published claims, limits the availability of the remedy for pre-issue infringement, some patent owners have elected to avoid publication of their U.S. application when no foreign application was filed, in order to avoid paying the publication fee. Now, with the publication fee having been eliminated, the only reason to choose not to publish your U.S. patent application is if you believe that the invention can be maintained as a trade secret if the patent application is not allowed. Because inventions directed to machines and other devices cannot be kept secret once the invention is placed on the market, there is no longer any downside to publishing U.S. patent applications directed to such inventions. Please contact any attorney should you have any further questions or if you are wondering how or whether to patent your...

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Terminating Your Contract: Things to Remember Part 1

Posted by on Jan 16, 2014 in Uncategorized

Contracts often have various provisions concerning when and how a party may terminate the contract. Typical termination provisions can cover situations in which the party terminates for cause or without cause. The distinction between the two types of termination clauses can be crucial to your contract rights and remedies. A provision governing termination without cause essentially gives one or both parties the right to terminate the contract for any reason, whether or not there has been a breach. Often called a “termination for convenience” clause, these provisions can have various effects on the practical terms of your deal, which you may want to consider when you’re drafting or negotiating your contract. For example, 1) If a termination without cause provision is going to be a part of your contract, consider how much notice you would like to have or give if you or the other party wants to terminate the contract without a breach. Things to consider would be how long it will take you to find another seller or service provider to fill in the void. 2) It is common for a service provider or seller to raise the price or quote a little bit in order to account for the fact that the other party may suddenly terminate the contract. Be aware of how the pricing structure works in your deal, and try to substantiate where the costs are attributed. 3) Consider your capital investment. Many times a termination without cause provision can expose you or the other party to losses resulting from a shorter contract period. If the contractual relationship is cut short early, the party may not have recovered their costs yet. Therefore, it is common to see some sort of cost recovery provision or penalty provision in the event a party terminates without cause. Stay tuned for more on termination for cause provisions. While there are many other issues to consider when you’re drafting termination provisions, these are just a few that you may want to keep in mind. You should always consult an attorney when you’re in the process of drafting and negotiating a...

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When Disasters Plague Your Contract

Posted by on Jan 6, 2014 in Draft Your Contract, Limiting Liability

Part of the contract drafting process entails a bit of forward thinking: trying to identify and minimize ahead of time those things that could go wrong. If you’re new to the business world, or you’ve just entered into a new sector or started a new business, it can often be difficult to predict the downfalls your business may face– or the downfalls the other contracting party may face. There are some risks that every business must face which are more predictable than others. For example, every business at some point can expect to have an invoice dispute with a supplier, customer or independent contractor. On the other hand, there are those risks which are completely unpredictable and therefore less controllable. In the world of contracts, these risks are often called “force majeure events,” and well-drafted contracts usually contain a Force Majeure provision dealing with how such events will affect the parties’ respective obligations during the course of the contract. Force Majeure refers to acts of God and other events which are wholly outside of the control or influence of the party. Typical force majeure events include things like floods, fires, tornadoes, hurricanes, tsunamis, earthquakes, riots, etc. While these events are pretty intuitive and it is hard to contest their occurrence being completely outside the control of the contracting party, there are some events, such as supplier bankruptcy and currency and market fluctuations which are less clear and which are often heavily negotiated. Force majeure provisions list the events which will constitute force majeure and set forth the parties’ respective obligations or release from obligations if the force majeure event occurs. For example, a force majeure provision may excuse a supplier from complying with a deadline or delivery date. As a startup company or entrepreneur, be cautious when you see a provision dealing with force majeure and, if you’re drafting an agreement, ask yourself how your contractual relationship may benefit from including a provision to help manage uncertainties. If you are interested in learning how to protect against risk, including force majeure risk, please contact an attorney or have an attorney review your agreement before you sign...

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App Development: Privacy Issues to Consider

Posted by on Dec 13, 2013 in Intellectual Property, Limiting Liability

If your company is developing an app, or having an app developed for it, there are key issues concerning privacy that your company should keep in mind. Apps can often require or facilitate access to personal information about end users which is typically regarded as private and subject to protective laws or regulations. Some apps gradually collect personal information about the end user as the end user navigates the app. Such information can include: financial account information health information location data personally identifiable information (e.g. name and address) There has been greater focus of the Federal Trade Commission (FTC) on privacy issues in mobile devices and apps. Therefore, to help avoid liability or harm to your company’s reputation as a result of privacy breaches, at the initial stages of the app development process and throughout your operations, your company should understand the types of personal information would be shared or accessed as a result of an end user navigating your company’s app. It’s never too early to consider privacy issues–especially if your app facilitates or requires access to information which is highly regulated, (e.g. financial, health or children information). If your company is developing and app or having an app developed, please contact an attorney who can help you minimize risk with respect to privacy...

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Developing an App? Protect your Intellectual Property!

Posted by on Dec 4, 2013 in Uncategorized

If your startup company is working on developing an app, remember that the app, or the development process, raises intellectual property issues that you should consider. For example: if there is a process or method embodied in the app, it may be something worth patenting the app may have a name that should be protected by a trademark the app may have terms used in connection with it that should be protected by a trademark the app developer may treat the app’s source code or other aspects of the app’s development as a “trade secret“ the content of the app itself should maybe be protected by copyright–if original (e.g. the app’s graphic, textual, images and artwork, database elements and software code) If you’re working on an app, or having an app developed for your company, please see an attorney for further discussion on how best to protect your IP in the...

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