The psychology of the negotiation dance and the interplay of ethics in the potential range of outcomes has been examined and discussed by many.  Check out Carrie Menkel-Meadow and Michael Wheeler’s What’s Fair: Ethics for Negotiators (Jossey-Bass 2004) for an insightful and thorough resource.

Looking for the overlap in each side’s objectives (the frequently cited “win-win” approach), I have found that the most productive and the least costly outcomes are characterized by fair and balanced agreements.  Where excessive leverage is used to extract agreements, possible upside may be limited, and damage could ensue, because the disadvantaged party is less motivated and may ultimately find it preferable or necessary to breach the agreement.

Domination and advantage-taking by any means or cost, even in some rare cases through illegal and unethical acts, does happen.  When I witness these behaviors, as I have on a few occasions in my career – most recently the startlingly illegal and unethical acts of a client’s lender and largest competitor working together to create a monopoly in a small industry – it drives home the point that there are predictors or red flags that can be observed, which should guide the unwary away from these dangerous situations.

There is a tension between “getting a deal done” quickly and getting a fair outcome.  Sometimes companies follow Warren Buffett’s model of handshake business deals.  Their focus is consistently on “the relationship” and “the business,” and their inclination is to trust their partners regardless of the risks. When it works, this model works great.  The focus should be on the relationship and the business.  If business proceeds successfully, the partners’ trust and reliance will naturally increase.  For Warren Buffett, the handshake deal works well.  Mr. Buffet has the financial resources to protect himself and pursue legal remedies against a partner who proves to be untrustworthy.  But a partner without Mr. Buffet’s resources may find our justice system to be woefully inadequate.

Everyone complains about our litigation system.  Companies are rightfully upset about “harassment lawsuits” brought by unhappy plaintiffs (or inspired by a plaintiff’s attorney) with no real merit.  But it should also be noted by parties with less bargaining power in a negotiation, that justice is virtually inaccessible to those with limited financial means.  A more powerful adverse party may use financial muscle to manipulate the legal system to gain unfair advantage.  Sometimes, as lawyers, we downplay this possibility, because we know (at least theoretically) that our legal system has error correction built into it – with appeal processes and financial recovery available to an ultimately prevailing party.  We forget that the Bad Guys “win” simply because they have the financial staying power to use the system unethically.  A meritless lawsuit may expose a plaintiff to attorney’s fees – but first the harmed defendant must finance a process that results in a judgment in their favor, while experiencing the harm caused by specious litigation.

Avoiding messy situations at the outset by finding the Right Partners is key, whether your company is large or small.  If you have higher leverage than your prospective partner, you can afford to be somewhat more risk tolerant.  Mr. Buffet’s leverage is his financial strength and business control, making him a partner that all but a select few would want to cross.

What are these “red flags?”

-       Reputational Facts. Though it may seem like an unnecessary and time-consuming chore, everyone needs to be reference checked.  In the financing context, exceptional VCs pride themselves on their relationships as well as their most recent success.  Experienced and successful VCs often propose less onerous and more balanced terms than their peers.  These VCs know that success of their investment involves trust and business success that benefits all stakeholders.  They also enjoy the power of their leverage, so, like Mr. Buffet, they are less likely to be crossed or challenged (who would want to be blacklisted from their network?).  Lenders should also be investigated.  Large organizations may have a reputational legacy of troublesome behavior. Are they known for ruthless, aggressive or unethical practices?  Could be a clue that this potential lender relies on their leverage for unilateral business advantage rather than for mutual business success.

-       Business Terms. How balanced are the terms?  Does the agreement work now and in the longer term?  One red flag that indicates a tendency toward unethical behavior is when a more powerful partner knowingly seeks terms that are of questionable enforceability or legality.  A few examples of unenforceable or questionable terms that appear often are:  noncompete agreements in California (terms that do not fit the narrow California exception permitting enforceability – which involves acquisition of a business interest); agreements not to “hire” as opposed to “solicit” employees in California; agreements with provisions that are contrary to public policy (eg waiving certain employment claims, or agreeing not to pursue the option of bankruptcy protection), among many others.

-       Reasonable Players. Are your future partners smart, successful players with a leadership style that encourages flexibility and mutual success?  Is there a high level of respect being demonstrated by the other side?  Does the opposing side see value in your success?  I am sometimes told by clients that they “need” to do a deal at any cost.  If that is true, then the downside scenario should be understood and accepted, not just by the deal-makers, but all involved in the business deal.  Trusting a partner of questionable ethics is trouble.  As the old folktale about the scorpion and the turtle teaches, a scorpion is still a scorpion.

-       Gut Feel. Realize that a good arrangement is healthy.  Stay focused on objectives and understand your partner’s needs and wants.  Don’t be intimidated.  Get your objectives and priorities on the table respectfully.  Listen, don’t leap.  Take your time and be sure you get it right for both sides.  You may need this transaction today, but, in most cases, you also want a long-term partnership.  Make sure you have the Right Partner at the table with you.

Let’s face it.  There is a natural tension between companies and their creative talent.  Companies must own the intellectual property it is paying to create.  A technology company’s value is denigrated if its IP ownership rights are murky. Engineers want creative freedom and independence to make money from ideas and inventions that they believe should belong to them and not their companies.  The solution is to be clear about expectations, while respecting the needs of the company and the engineer.

Understand the difference – from an IP perspective – between employees and consultants

The law provides a default level of protection for employers.  Under US copyright laws, an employer automatically owns an employee’s “works made for hire.”  Outside of an employment relationship, a worker and her company could agree that her work is “work for hire,” but without this contractual agreement, the default in the law is that a consultant or independent contractor owns her work product.  A critical term in any consulting agreement is the worker’s agreement to assign that work product to the company.

Focusing only on IP ownership, the important difference between employees and consultants is who carries the burden of defining the scope of the worker’s work product.  Typically, an employee’s scope of work is broadly defined as something reasonably within the “business” of the employer and related to the employee’s role (and the higher the position the more expansive the scope). What happens if the company’s business changes?  (See my discussion about the California Labor Code below, if you’re a California employer/ee.)  Or what if the company is huge and has its fingers in numerous unrelated businesses?   When a large employer hires creative talent, the employer typically wants to corner the market on its employee’s great ideas – even if it turns out the employee was hired for a distinctly different purpose.  Unless an employee negotiates otherwise, the employer will have an expansive right to the employee’s creative works that fit reasonably within its “business” and the worker’s role.

Contrast that with a consultant’s scope of work, which is (hopefully) detailed with specificity in a consulting agreement.  Companies must take extra care with consulting agreements, to assure complete assignment of the IP rights they expect to receive.

Devil in the Details

Most proprietary information and inventions agreements are company-favorable – they should be… they are drafted by attorneys representing companies.  As a starting point, “standard forms” provide a very comfortable level of protection for companies who desire clean ownership rights to the IP work product of their creative talent.

In California, employees have statutory help in protecting their right to create IP outside of their regular job.  Labor Code section 2870 provides a public policy limitation on the employer’s scope of work.  An employee can retain ownership of his independent creations, if he invents the IP on his own time, without using the employer’s equipment, supplies, facilities or trade secret information and the invention does not relate at the time of conception or reduction to practice to the employer’s business or actual or demonstrably anticipated research or development or results from any work performed by her for her employer.  This Labor Code section must be referenced in any employee proprietary information and inventions agreement.  In fact, many agreements require employees to notify their employer if they are working on something that would fit this exclusion.

Nobody wants to be tangled in a dispute about IP ownership when workers move from one company to another – especially not the hiring company or job-changing worker.  Every proprietary information and inventions agreement should have a section confirming that the hired worker is not bringing any previously created IP with her to her new job.  The agreement should also have a place for the worker to list her prior work.  For seasoned engineers, the listing of prior works could be burdensome and worrisome, placing the engineer in a puzzling situation if the prior work was highly confidential.  The key is to provide a sufficiently descriptive reference to the prior work – without disclosing confidential information.  And again, the tension arises… Companies will desire a narrow description of IP in any listing of “prior works” and engineers will desire a broad reference.  This is a topic to be discussed and worked through at the outset of the relationship.

To ensure the company’s clean ownership of its IP, most proprietary information and inventions agreements contain a special license clause.   The clause typically says that the worker grants a nonexclusive, royalty-free, irrevocable, perpetual, worldwide, transferable and sublicensable license to any “prior work” IP that the worker incorporates in a company’s product.  This broad license protects the company from being sandbagged.  Heads will roll if the company finds itself in a situation where it must negotiate with a worker to get a license in order to sell the products the company thinks it has paid for.  As an engineer-entrepreneur, the time to discuss licensing a prior work to your company is before you use it in the course of your employment and before you incorporate it in a company product.

So what is the net-net?

Companies need great talent – and engineers need jobs.  The upper hand in any negotiation will be the party with the lesser need.  Think about your leverage as you approach your new relationship – whether you are a company hiring your next technology guru or an engineer looking for a new job.

Communicate and be sure everyone involved understands a few crucial facts that effect IP ownership:  What is the company’s “business?”  What are the company’s plans for development?  What is the employee’s “role?”  Or, what exactly is a contractor expected to do – and what is the resulting work product?  Who has control over the direction of the company’s development?  If you do not have control of the direction of development- and you’re the worker – anticipated new development directions need to be communicated to you.  When you consider the California Labor Code section I referenced in this post, it is important to remember that whether an invention falls within that exclusion depends on:

• the scope of the employer’s business at the time of conception or reduction to practice of the invention; or
• the scope of the employer’s demonstrably anticipated research or developments at the time of conception or reduction to practice of the invention; and

• whether the employee used the employer’s equipment, supplies, facilities or trade secret information; or
• did the work on the employer’s “time” or
• used the “results” from any work performed for the employer.

All to often, the answers to these questions are not clear.  Good communication and a willingness to negotiate and clarify these terms at the beginning of the relationship helps avoid problems later in the relationship.

One of my serial entrepreneur clients succeeded in doing just that.  He was considering an employment offer from a large company.  Despite the large company’s obvious leverage (he wanted and needed a job), he was able to limit the scope of his new “full time” job to carve out IP he could continue to develop at his pre-existing “part time” job, even where there was risk of overlap – because the part time employer was also quite large (with a huge business scope).  Why did he succeed?  He approached the discussion with openness and a concern to protect the IP of the new employer.  He focused on assuring their rights of ownership to the IP that related to the reason they were hiring him – and he had logical and reasonable explanations for the need for this carve-out for the prior job.  Turns out, at least that time, a balanced approach worked and both the company and engineer were satisfied with the results.

How do you find the right attorney for you?   Since I have been a consumer of legal services as well as a provider during my career, I have a checklist of questions or topics that I find useful:

• Your Future  (your “exit” goal). What are your plans – personally and for your company?  Do you plan to build and sell your company to a larger company?  If it is possible, would you want to go public?  Do you want to move on to something new in a couple of years?  Or, do you plan to keep your company – and derive profits from it someday?  Are you not sure, but want to keep all options open?

Why Goals Matter. Your attorney should consider your goals before he tells you what kind of entity you should form (LLC or corporation, subchapter S corporation, which state to incorporate in, etc.).  Making good decisions early is more efficient.  You save time, money and hassle trying to make adjustments to better fit you and your co-founders later on.  Some of your early decisions cannot be changed – and workarounds to get your company to better fit your goals may be difficult.  Your attorney should take time to get to know you and understand your business and your goals.

• Your Timing. Your attorney should consider “when” you want to achieve your goals.  Projecting the timetable for your “success,” requires you to make assumptions about your business, available capital, development or ramp up costs and available people resources.  When will you achieve your first customer sale and cash flow breakeven point?  What about other key milestones?  If you are typical, you likely have multiple possible “success” time-tables, with the timing of your “success” dependent on funding or other critical inputs.

• Your Immediate Needs. Do you need to meet people outside of your own networks?  Are you primarily focused on introductions to investors?  Are you targeting certain groups, like specific venture capital firms or angel investor groups?  Will you be operating in secrecy (stealth mode) for awhile?  Is your first priority development – and IP protection?  How many employees will your start up have in the first few months?  The first year?  What are your thoughts about the sharing of ownership among your co-founders, employees, others?

What is the Best Fit for you?  After you interview a few attorneys, how do you decide between them?  When I outsource work to other firms for my clients – I look for these competencies:

• Listening – am I being heard?  I look for someone who is fully present with me and get nervous with endless multi-tasking (attorneys checking their blackberry, responding to email, answering calls during time with me raises a red flag about efficient billing practices…  How could that hour billed to one client be worth the high price asked, if the attorney was interrupted 15 times during that hour to respond to text messages, email, calls, you know what I mean)?  Do I have a working rapport with her?

• Experience – can I be sure they have the experience needed to help me?  If so, are the attorneys able to explain the issues and outcomes relating to my matter, so that their relevant experience is accessible to me, the client?  Do I feel confident in their skills and experience?  What do their other clients say about them?

• Responsiveness – do they have time for me?  Is my company a priority for them?  Who will I interact with in a firm, the partner, an associate, and/or a paralegal?  Am I comfortable with the team or the senior attorneys who will be interacting with me?  Often a firm is responsive by having very junior staff members “respond.”   The challenge is reaching the senior advisor when you need her.

• Cost – will the firm work with me to control legal costs?  Or am I cost-insensitive, but cash flow challenged?  Some larger firms offer fee deferrals for periods of time, but the trade-off is that the fees for the services performed are probably higher than they could otherwise be because of this deferral – sometimes significantly higher.  Does this matter to me?  Do I want a fixed fee arrangement (called a “fee cap”) or a discount for the volume or type of work I am seeking?  Am I willing to provide incentives, or premiums, for certain types of performance (e.g. finishing in a certain time-frame).  Is my attorney sensitive to my financial situation?

• Resources – is the firm’s area of skill and expertise what I need?  Will I need to assemble a team of other experts?  Will I be inhibited from seeking the best expertise, if that “expertise” is found in different firms?   How resourceful are the individuals I will be working with?  Do I think that the networks of those in the firm are useful to me?  Will the firm actually use their networks for me?

After considering these factors, I move to a final “gut” test, which I call the “Foxhole Test.” Is my selected attorney someone that I would want in a foxhole with me during tough times?  How much do I trust him?  Do I feel sure that he will watch out for me and provide me with the assistance I need, when I need it.  Will she stick with me during difficult times or turn her attention to others? The more serious or “bet the company” my matter is – the more important this Foxhole Test.

Another problem that should be considered is that lawyers tend to be boring.  I’d like to say that we simply can’t help it, but I think it has more to do with our desire to provide the complete legal answer – to be technically correct.  Since this is my first effort at a blog – I am no expert at this – I can only speak from my observation that several posts from attorneys that I have found seem more to be like articles on legal topics.  My favorite blogs are much more personal, more authentic.  If I want to find an article on a legal topic, I can probably find it easily enough with Google.  I think this leaves a lot missing, and agree with Matt Mireles’ post criticizing “the utter lack of transparency and overall opacity of the market for legal services.”

I recently needed to find attorneys with lender liability, anti-trust and class action capabilities for a client in crisis and found it interesting that my ability to find the right talent for a particular situation still relied mostly on my own personal network and contacts and was not something that could be easily found through the web.  If I were a client, or someone in need of finding the Right Attorney for a legal matter, without my network, I would be extremely frustrated.  So why not take Matt’s challenge, and start my own blog.  One of the benefits of setting up my own firm after spending so many years in big firms, is that I no longer have to worry about gaining a consensus about what to write.  I also think it may be useful to share insights and observations that I share on a daily basis with my clients.  So Matt, I will give it a try.