Best Efforts or Reasonable Efforts? — How Legal Efforts Standards Can Affect You

Posted by on Jun 28, 2013 in Draft Your Contract, Practice Pointers

It’s very popular for people to talk about giving “110%” these days.  Suddenly, giving 100% effort seems like slacking.  And what about just partial attempts, like 75%?  Although they are contract provisions that are often overlooked, “efforts” provisions can have a huge impact on your business deal. Before entering into any contract, you should know what “effort” qualifiers exist and what they mean– because understanding these provisions could make the difference between having a claim under a contract or being subject to a breach of contract claim yourself. The three most common effort qualifiers in contracts are (1) Best Efforts, (2) Reasonable Efforts and (3) Commercially Reasonable Efforts. While these may seem innocuous on the surface, each phrase can mean something totally different and can subject contracting parties to completely different standards and requirements.   While some courts remain unclear on the actual distinctions between each standard, here is a brief overview:  Best Efforts –      This is often considered the most demanding of the effort based standards.  This is a gross generalization, but think about it this way–basically if it’s possible, you have to do it, regardless of whether it’s unreasonable or not commercially reasonable or cost-effective. Reasonable Efforts      – This is a middle ground between best efforts and commercially reasonable efforts.  Again– the general practical application is that there is some leeway as to whether it’s possible vs. whether it’s reasonable.  Just because it’s possible, doesn’t necessarily mean you have to do it if it’s not reasonable. Commercially Reasonable Efforts –  This is considered the least demanding effort standard. By including a commercial standard, courts look into whether it  makes sense from a business or other economic or efficiency standard. So, just because it’s possible and just because it’s reasonable, does not mean you have to do it if it’s not necessarily reasonable for your business. So, the next time you are reviewing a contract or signing a contract, keep an eye out for any effort based provisions and consider how they might change the deal and whether you would rather a different standard be put in place – whether a higher or lower. To the extent possible, it is often preferable to define what standard should apply in more detail, but if one of the more generic standards is used make sure it aligns with your business...

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Business Practice Pointer: Avoiding Verbal Agreements

Posted by on Jun 25, 2013 in Draft Your Contract, Practice Pointers

Many of the business disputes our clients face are the result of a misunderstanding or miscommunication concerning the parties’ respective obligations under a given contract.  While many startups or entrepreneurs may not believe they are in the contract formation stage of their business yet, they may easily engage in conduct or conversations that can lead to similar business disputes down the line. One classic mistake many businesses and entrepreneurs make is coming to a verbal agreement that is not memorialized in any “provable” fashion.  When a discussion or negotiation occurs verbally, whether over the phone or in person, it is difficult to prove the content or outcome of the discussion should there be any disagreement in the future concerning what was said (unless someone was recording the conversation!). Whether the discussion concerns the scope or timing of work or services to be performed, or whether the discussion concerns something seemingly more mundane, such as when the next discussion will occur, it is important to remember that, if it isn’t written or recorded in some manner, then it will be difficult to clarify or prove later should the need arise. We hear from clients and entrepreneurs all the time about how they thought one thing, engaged in behavior based on their belief (or, even worse, incurred expenses based on their belief!), only to find out the other party had a completely different understanding.  When we ask whether either party can prove what the understanding was, the typical response is, “Well, we discussed it over the phone,” or, “We just talked about it when we ran into each other.” The lesson to be learned is that, whenever possible and whenever you can remember, try to make a habit out of following up a verbal conversation with a written re-cap.  Usually a simple email will work, such as: — “Hey, it was great seeing you today and talking about _______.  As I mentioned, I will  _______ and be ready to discuss it with you on ______.”     — “I wanted to follow up our conversation earlier today and say ‘thank you’ for your willingness to take care of _____.” — “I wanted to thank you for your understanding that I am going to need more time to _______.” By following up verbal agreements with a written reference or summary, you ensure that, at the very least, there is something to help substantiate that the occurrence and the scope of the conversation. NOTE:  If you do not want to be able to substantiate the occurrence or scope of a conversation (i.e. it will be beneficial to you to not be able to prove it later), then you may want to intentionally fail to follow up.  However, you can use the follow up to your advantage by indicating in your email what your understanding was. At any rate, as we often tell our business clients:   Although you may not think the content of the conversation could ever turn into a real problem, there’s never a problem until there’s a...

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Social Entrepreneurship—Too soon?

Posted by on Jun 20, 2013 in Your Entity

Many entrepreneurs are intrigued by the new buzzwords sweeping the community – “social entrepreneurship.”  Social entrepreneurship seeks to combine the most popular features of for profit entities (namely, eh, profit) with the best features of typical non-profit entities (the charitable or socially beneficial mission). One particular advantage that proponents of social entrepreneurship suggest is that these hybrid models will be able to seek more investment than traditional non-profit ventures while simultaneously continuing the public benefit mission of non-profit entities.  However, it is important for startups to stop and really do their research when it comes to social entrepreneurship and what it really means. The most popular social entrepreneurship entities are the L3C and the B Corp. The L3C is a “limited profit limited liability company,” while the B Corp is a “Benefit Corporation.” Both are new structures which strive to combine the public benefit mission of non-profit entities while allowing some amount of profit. This hybrid model is designed to attract more investors to entities whose mission is to benefit the community by enticing them with profit incentives. However, while L3Cs and B Corps sound great in theory, it is important to consider some of the legal issues surrounding such entities: Both L3C’s and B Corps have rather uncertain legal implications; Both L3C’s and B Corps are only recognized in a minority of states; The IRS has not provided significant guidance on either entity yet, and it is unclear what position the IRS will take–meaning there is a lot of gray area when it comes to the tax aspects of such entities; Further, it does not appear that there are any significant tax advantages to either entity. In addition to all this uncertainty, there remain concerns as to how the need for profit can successfully be balanced with social mission on such a broad scale. So, before you start working on a business model that is based on an L3C or B Corp structure, we suggest you contact an attorney (and, probably, an accountant) to discuss whether this structure is the most appropriate for your business and charitable...

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Trade Secrets vs. Patents Part 2

Posted by on Jun 18, 2013 in Intellectual Property

Now that you have a better understanding of the differences between a trade secret and a patent,*  which one is better for you? The decision whether to obtain a patent or maintain an invention as a trade secret must be considered in light of the circumstances and facts of each individual case. For example, obtaining a patent is generally the better option if the invention is likely to be invented independently by another or can be “reverse engineered.”  By patenting the invention first, you can enjoy a legally-recognized monopoly on the invention for  a substantial period of time. On the other hand, a trade secret may be the better option in other situations, such as where you have developed a formula or process for making a product that cannot be reverse engineered easily.  A classic example is the formula for Coca-Cola.  If the owners had patented the formula in 1886 when it was first used, competitors would have been free to copy the formula  after the patent had expired.  By maintaining the formula as a “trade secret,” Coca-Cola has continued to derive an economic benefit from the formula to this day. Furthermore, trade secrets are the only viable option where the secret concerns things that are not patentable, such as customer lists or business methods.  Making the best decision on how you protect your intellectual property requires careful consideration and weighing of all factors and circumstances relating to your invention and how to derive the most benefit from it.  Because of the complex issues involved and long-term consequences  at stake, it is recommended that you consult with an experienced intellectual property attorney to help you navigate through the decision-making process. *For a discussion on the differences between trade secrets and patents, please see the post from Friday, June...

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Trade Secrets vs. Patents Part 1

Posted by on Jun 14, 2013 in Intellectual Property

If you have invented a new product, technology, formula, method, or process, you generally have two options to protect your invention: (1) obtain a patent for the invention; or (2) maintain the invention as a “trade secret.” But, what’s the difference between a “patent” and a “trade secret”?  A “patent” is a legally-recognized limited monopoly on an invention which the government grants to an inventor in exchange for the inventor disclosing how to make and use the invention.  The monopoly granted to an owner under a patent lasts less than 20 years.  A “trade secret,” as implied by its name, is not generally known or disclosed to the public or readily ascertainable by others, and by virtue of its secrecy, confers an economic benefit to its owner.  No term could go on forever.  The owner must take reasonable efforts to maintain its secrecy in order for it to qualify as a “trade secret.” BUT BE WARE: One cannot both patent an invention and maintain it as a trade secret!  This is because the disclosure requirements for obtaining a patent nullify the secrecy of the invention. The decision whether to obtain a patent or maintain an invention as a trade secret must be considered in light of the circumstances and facts of each individual case…. TUNE IN to Trade Secrets vs. Patents Part 2 for a discussion on when a patent is a better option, or when you should maintain your invention as a trade secret. And, as always, please contact an attorney if you have any questions concerning what we’ve mentioned in this...

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What’s with Delaware?

Posted by on Jun 11, 2013 in Your Entity

As a startup who’s in the initial stages of forming an entity, or as a current business owner with an entity already in place, you may wonder at some point why so many people decide to incorporate or form their LLC’s in Delaware, rather than their home state. So, what is it with Delaware?  What makes Delaware so attractive from a business owner’s standpoint?  There are many answers to this, many of which are too complicated or boring to get into in a forum such as this, but there are many reasons why you may want to consider incorporating your company or forming your LLC in Delaware.  While we highly suggest you discuss your business plans with an attorney before making the decision, we thought we would at least highlight some of the reasons why people choose to use Delaware, rather than–say–Tennessee where we are located, to form their LLC’s.  Given the breadth of the topic, we will stick with LLC’s for now and address Corporations later. A recent study in the Oregon Law Review** discusses the top reasons cited by attorneys who recently chose Delaware as their state for forming an LLC. Chief among the reasons for choosing Delaware are: 1) Judicial infrastructure: development of LLC case law and perceived judicial expertise; 2) Freedom of contract and the ability to waive fiduciary duties in Delaware; 3) Limitations on the rights of creditors of members; 4) Limitations on the rights of transferees of membership interests; 5) Less of a likelihood for “piercing the corporate veil” and losing limited liability; 6) Less rights given to minority interests. *Note: Please understand that just because we cited these reasons for choosing Delaware does not mean that these features are not also present in Tennessee’s or some other state’s LLC statute.  We list them only because these were the results of the survey discussed in the Oregon Law Review.  Again, if you’re curious about how your current LLC structure may fit in or relate to the Delaware structure, please contact an attorney. **The name of the article is “Why Delware LLC’s?,” Franklin A. Gevurtz.  91...

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Posted by on Jun 7, 2013 in Startup, Update!

The Revised Tennessee Business Corporation Act (“TCBA”): NOTICES IN ENGLISH The TCBA sets forth laws governing for-profit corporations in the State of Tennessee.  In order to ensure that the TCBA was up-to-date in terms of its applicability to modern business conduct and operations, revisions to the TCBA went into effect on January 1, 2013.  One change that may affect how corporations in Tennessee conduct business pertains to general notices which, according to the TCBA, corporations and shareholders must provide under certain circumstances.  As of January 1, 2013, all notices and other communications must be in English unless agreed upon by the sender and the recipient.  (TCA 48-11-202). Given the influx of non-native English speakers into the State of Tennessee, as well as the increasing presence of foreign-owned and affiliated corporations, this language requirement could end up affecting more businesses than one would otherwise suspect—especially those closely held corporations which are owned or managed by individuals for whom English is a second language. Therefore, when drafting corporate documents or when communicating in writing, it is important for corporations (including their shareholders, managers and directors) to communicate in English if they have not clearly established in writing, whether in the communication itself or in the corporation’s bylaws, that another language is...

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Welcome to the Chambliss Startup Group Blog

Posted by on Jun 5, 2013 in Startup

We are excited to launch our Startup Group’s blog, and we hope that our readers find the information we share helpful, if not entertaining! As part of our efforts to help entrepreneurs and small business owners with their legal and business needs, we will be posting periodic blogs with tips, pointers and legal updates which we believe could be helpful to those who are starting a business or operating a relatively new business.  We hope to get to know you, but first here’s a little bit about us: WHO WE ARE: We are a group of attorneys with a variety of expertise from the Chambliss law firm who love meeting, hanging out, learning from and helping entrepreneurs and startups. WHAT WE DO: We hold regular legal clinics and host seminars at a variety of locations around town.  We also love to have a good time, so we host periodic Startup Socials where entrepreneurs and like-minded innovators can come hang out, eat, drink and network in a casual environment. WHY WE DO IT: We do this because we are passionate about our city and region and want to be a part of the progress and innovation. WHAT WE WANT: We want to meet and get to know you, hear what you’re passionate about, learn about your current or future business and help you in any way we can–even if it’s making a simple introduction or recommending a good restaurant to patron or a good way to enjoy our city. We welcome any feedback and discourse, so please do not hesitate to contact us.  Also, check out our website:  and come visit us on Facebook (“Chambliss Startup Group”) and follow us on Twitter:...

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