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Monday, April 25, 2011

DISPUTES – THE GOOD, BAD AND UGLY (by Matthew Hafter)

In Taffy’s March 30, 2011 blog entry, Inventions & Patents are Critical – the Technology Still Needs Development, he mentions the difficulties entrepreneurs have in protecting their early stage technology through the court system.  With this problem in mind, many clients ask about alternative dispute resolution (ADR) as a way to reduce uncertainties about the outcome of a dispute and the related costs.  While ADR has its place in any business arrangement, this is the wrong question.  Instead of asking how to resolve disputes, we should be asking how to avoid disputes.

The nightmare scenario for any technology startup is that a large, well-capitalized competitor will sue your company for infringement of its patents or other intellectual property rights.  Litigation can stretch on for years, it costs vast amounts of money, and the uncertainties it creates interfere with raising capital, relationships with key business partners, employees and others.  The risk for a startup is that the larger company can, regardless of the merits of the claim, “run your legs off” and force you to capitulate simply because the costs of further litigation are prohibitive.

But aspects of disputes can be constructive:  disagreement provides a way to rigorously explore facts and business and legal issues.  Resolution can provide finality and certainly; and, if done well, can provide a rational result.  Finally, dealing with disagreement provides a forum for people who are at odds with one another to satisfy the key need to be “heard.”

The key is to assume that disagreement will arise in any business relationship – whether with a licensor, distributor, supplier, joint venture partner, investor in your business, etc. – but to plan for procedures to maximize the likelihood that a disagreement will not spiral into a dispute.

To achieve this goal, you should take some time to think about how to deal with disagreements in the business relationship at its outset.  At this stage, the parties usually share goodwill and a goal of working together effectively.  However, once a dispute is on the horizon, motives are different and parties will opt for the dispute resolution process that each perceives favors its own interests.  At the beginning of the business relationship, the parties together place a high value on controlling the resolution of the disagreement themselves – a higher value even than getting the exact result each wants – because they can resolve the issues faster and for less cost than a third party (a judge or arbitrator).  The parties themselves will know more about the industry, the business and the facts of the dispute, and can therefore fashion a resolution that is superior to one created by a judge who knows little and cares less than the parties about the resolution.

Here are some features you can build in to the agreements that govern the relationship to make it more likely that the parties themselves will avoid destructive disputes.

-        Provide for regular meetings between the parties.

-        Establish procedures to assure a free flow of relevant information between the parties.

-        Adopt decision making procedures (for example, voting on key issues) the parties perceive as fair.

-        Structure the relationship to recognize a shared commitment to the venture so that both sides lose if it becomes dysfunctional.

It can also be helpful to establish more formal dispute avoidance procedures at the outset of the relationship.  Ideally, these procedures maximize the likelihood that the parties will resolve disagreements largely themselves with the least cost.  Examples include mandatory meetings between senior executives to discuss resolution of a problem, or non-binding mediation.
Mediation is a procedure many startups find useful.  Essentially, mediation is a form of facilitated negotiation with participation from the parties (usually a party representative with authority to settle from both sides must be present at the mediation) and their lawyers.  A meditation will typically follow a pattern:
-        The parties submit a written mediation statement educating the mediator about their positions.
-        At the mediation, the parties make opening statements.
-        Then the mediator will conduct private “shuttle diplomacy” sessions with each side to find areas of common ground, point out to each party weaknesses in its case and risks of proceeding to trial.
-        If a resolution is achieved, the parties may document the essential terms at the mediation (often in handwritten bullet points) to create a binding agreement (even if additional details must be written up later in a formal document).
Good preparation helps to assure a successful mediation.  The mediation statement will often be the best opportunity to make your case directly to the principals on the other side.  You should also be prepared with responses to anticipated weaknesses in your case, and a plan for concessions and what you want in return.  It is also important during the mediation session to take caucuses when needed to recalibrate your plan and strategy. 
The success of a mediation also depends on the skill and persuasiveness of the mediator.  Selecting the right person for this role is important.  The mediator must be skilled in dispute resolution – someone who will listen but also push toward a resolution; he or she must have a strong personality to stand up to both sides.  The mediator also must be someone both sides have confidence in to provide recommendations that are objective and credible.
Startups need to stretch limited resources and to secure the benefits of the constructive elements of disagreements.  The best way to do this is to plan for the inevitability of disagreement and establish procedures to avoid disagreements evolving into disputes at the beginning of what is hoped to be an ongoing relationship where the incentive to collaborate outweighs the incentive to gain advantage.

By Matthew I. Hafter

Matt Hafter is a corporate lawyer who works with many startup and venture backed technology companies.  He is a principal in Grippo & Elden LLC, a Chicago law firm that concentrates on complex commercial litigation and transactions.  Please visit http://www.grippoelden.com/ for more information about the firm.

Grippo & Elden LLC
111 S. Wacker Drive, 51st Floor
Chicago, IL 60606
Phone:   312.704.7700
Fax:        312.558.1195


A note from Taffy Williams:

Matt Hafter is an excellent Attorney that I worked with extensively over the past several years.  He is experienced in corporate and SEC law and a great person to have on your legal team.  When I asked him to help with the blog, he graciously accepted.  As usual he is able to communicate key points which we hope you will find helpful as an entrepreneur.   I am grateful for his input and enlightenment. Thank you Matt!

You can follow Taffy Williams on Twitter by @twilli2861 and you can email me with questions at twilli2861@aol.com and my company website is at http://www.ColonialTDC.com .



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