In the past week, there’s been wild speculation on the technology news and blog sites about the claims made in a bombshell lawsuit filed against Facebook.

According to published reports, a New York man filed a lawsuit claiming that he owns a majority ownership interest in the $25 Billion company by virtue of a contract that he signed in 2003 with Facebook founder and CEO Mark Zuckerberg. An email from Facebook has asserted that “the claims are absurd and we strongly suspect that the contract is forged.”

The Facebook lawsuit raises five critical points that every company and entrepreneur should consider when formalizing its business relationship with a written contract.

FORMALITY COUNTS

In the Facebook case, the company has asserted that the contract is a forgery. There’s no doubt this issue will be addressed at the initial phase of the litigation. If the contract is in fact a forgery, the case will be summarily dismissed. If the contract is legitimate, the litigation will proceed on the merits to determine the rights and obligations of the parties to the contract.

Do you formalize each important business relationship with a written contract? If so, do you have a filing system for maintaining these important documents in a safe and secure place?

The appropriate degree of formality for a specific contract is dependent on the gravity of the business relationship. A relatively minor contract (i.e., a gentlemen’s wager on a sporting event with $1 is at stake) can be written on the back of a napkin or an envelope and signed by the parties. By contrast, a integrated written contract is needed when there’s a company-to-company relationship involving substantial performance obligations, the use of complex intellectual property rights, and substantial money is at stake.

If the parties to a deal ever had any reason to believe that the subject matter of their deal would someday be worth $25 Billion, then they probably would have insisted on a much more formalized written contract.

CLARITY IS CRUCIAL

The second lesson of the Facebook case is the compelling need for parties to a deal to strive for clarity in stating the rights and obligations of the contract. The rights and obligations of the parties constitute the bulk of the contractual terms.

In the context of the Facebook case, the parties should have addressed relevant rights and obligations including:

· The ownership rights related to the intellectual property, name of the venture/entity, interest in ancillary ventures/entities, and stock/shares of the venture/entity.

· Performance obligations such as who is obligated to do what, the payment of compensation, vesting of ownership rights, breach of contract, and termination of the contract.

· How to handle a dispute including alternate dispute resolution (mediation and arbitration), choice of law, choice of forum, attorney’s fees, and costs.

EXECUTION IS IMPORTANT

What are the appropriate formalities for execution of the contract? This question turns on who has authority to bind each party to the contract. If an individual will be signing the contract, then the individual has the authority to bind themselves to the contract (assuming that he/she has the requisite legal capacity).

If a party to the contract is a legal entity (i.e., a corporation, limited liability company, partnership, etc.), then the appropriate individual with authority to bind the legal entity should be executing the contract on behalf of the corporation. In short, you would want the President of a Fortune 500 company to execute an important contract, not a janitor who works at a remote branch of the corporation.

In order to make it easier to authenticate the contract in court at a later date, you should also consider whether to have multiple persons execute the contract (i.e., President and Secretary, whether there’s a need for witnesses to the execute of the contract, and whether the execution should be notarized.

ENFORCEMENT SHOULDN’T BE AN AFTERTHOUGHT

During the deal-making process, you should always contemplate what action should be taken in the event that the contract is breached. Depending upon the business relationship at issue, the parties should consider inclusion of:

· A non-compete provision that defines whether and how the parties can compete against each other in the event the relationship is terminated.

· A confidentiality provision that protects either or both parties against the unauthorized disclosure of business secrets.

· A liquidated damages provision that requires the party who violates the contract to pay a pre-established sum of money (liquidated damages).

· A provision that provides for injunctive relief so that the non-breaching party can effectively seek a court order that compels the breaching party to immediately stop violating the contract.

GET PREVENTATIVE LEGAL ADVICE

Based on the news reports of the Facebook case, it doesn’t appear that the parties to the alleged deal sought legal advice prior to striking their deal. I think its obvious that if the parties had obtained sound legal advice when the deal was allegedly negotiated, they could have avoided several glaring problems in this case:

· The degree of formality of the contract would have been commensurate with the scope of the deal.

· Whether the contract was legitimate or a forgery would likely not be at issue.

· There would be much more clarity about the rights and obligations of the parties.

· The appropriate means for enforcing the contract would be apparent.

Ultimately, the Facebook case will be resolved. Unfortunately, many of the issues raised at the initial phase of litigation could have been avoided altogether and without the necessity of time-consuming, expensive litigation. Don’t make the same mistakes in your business.

ABOUT THE AUTHOR

Fred Reilly became an attorney in 1986 and is a Member of the California Bar Association, District of Columbia Bar Association, and Florida Bar Association. Mr. Reilly is also a Solicitor and Member of The Law Society of the United Kingdom.

He is admitted to practice before the United States Supreme Court and United States Court of International Trade.

Mr. Reilly graduated from The London School of Economics and Political Science (Master’s degree in International Business Law), The Cumberland School of Law at Samford University (J.D.) and The Krannert School of Management at Purdue University (B.S. Management).

He practices international business and eCommerce law. Mr. Reilly frequently travels to Florida, California, London, and Moscow.

IMPORTANT NOTICE
This purpose of this blog is to inform and not to advise. The statements are general and individual facts in any given situation may alter their application or involve other laws not referred to here. You should always seek advice from a competent professional if any questions arise.

AMERICAN LEGAL PROBLEMS: 5 STEPS THAT COULD SAVE YOU A FORTUNE

By Fred Reilly, American Attorney and English Solicitor

To many Europeans, the United States represents the land of opportunity – a vibrant place to live, work and profit. Some call it “Paradise.” But when a legal problem strikes across the pond, Paradise becomes the land of many sleepless nights. Anger, confusion and panic are just a few of the emotions experienced by an expat who suddenly learns that they must contend with an American legal problem. After the initial shock wears off, an expat with a legal problem in a foreign land often concludes: “I  don’t even know where to begin!”

Just because you’ve heard the horror stories doesn’t mean that you’re destined to become one. Begin by taking control. This article highlights five specific steps that you can take to get a grip on your American legal problem. Following these steps will make it far easier to resolve the problem and could save you a fortune in legal fees and expenses.

A. Where Do You Stand? When a legal problem strikes, people are often caught flat-footed. It’s difficult to seek solutions when the problem is shrouded by uncertainties. The first step to resolving your legal problem is to eliminate as many uncertainties as possible. Once you determine where you stand, its far easier to choose the correct path for solving the problem. Start with the basics of any legal problem – who, what, where, when and how. It may seem obvious, but it is extremely difficult for anyone to begin a meaningful analysis of a legal problem unless these basic facts are readily available.

Real estate disputes (i.e., mortgage foreclosures, homeowners association violations, disputes with a property management company, etc.) are common and provide a good example of how to approach an American legal problem. Suppose that you’re back home in Europe and a neighbor in Florida calls to say that she’s heard a rumour that a foreclosure action has been filed against your Orlando vacation home. How can you compile the basic information related to your foreclosure case? Start with the Internet. Conduct an online search of civil court records to determine the status of the foreclosure case. For example, the Orange County Clerk of the Court maintains a site ( which allows visitors to search civil court records by name and case number. Unless you know the status of your case, it is extremely easy to miss crucial deadlines or make procedural mistakes which could completely compromise both your rights and ability to defend a lawsuit.

What if you were concerned that a lien or some other encumbrance had been filed against your property? Conduct a search of official records online at the same County Clerk of the Court web site.

Maybe you forgot to pay your property taxes last year. Conduct a search of the Property Appraiser’s online site for the county where your real estate is located. For example, the Orange County Property Appraiser’s site ( allows visitors to search by parcel identification number, owner’s name, address, property name, Plat Book and Page, subdivision name, condo/timeshare name and other criteria.

Bear in mind that online resources have limitations, namely the records are not always 110% accurate, must be updated constantly and are subject to errors or omissions. Despite these limitations, online resources can provide immediate and invaluable information, especially if you happen to be four thousand miles and five time zones away from the legal problem.

B. Get Qualified Assistance. When an American legal problem arises, immediately consider the benefits of obtaining competent, qualified assistance. Depending upon the specific facts and nature of your legal problem, it may be necessary to hire an attorney. Let’s face it, America has a reputation as a litigious society. But not all legal issues justify the expense of hiring an attorney. Some minor legal problems may be easily resolved without the assistance of an attorney. Other seemingly simple legal problems can spin out of control and intensify rapidly. Unfortunately for a layman, it’s often difficult to know the difference between the two.

A telephone consultation with an attorney possessing the background and qualifications necessary to discuss your problem and point you in the right direction could be the best, most cost-effective call you ever made. You immediately place yourself in the position to make an informed decision and dramatically increase the likelihood of obtaining a favorable resolution. Rather than making an open-ended commitment to pay the attorney’s hourly fee, you simply pay a flat fee for the consultation. Later if you determine that the problem cannot be resolved without the assistance of legal counsel, you’ll at least be in a position to call an attorney who is already familiar with your situation.

If the problem dictates that you retain an attorney, make certain that you find one who is professional, ethical and dedicated to resolving your problem in a cost-effective manner. At first glance, this may appear to be an inconsistent recommendation. Put aside the negative stereotype that every attorney’s sole interest is making money at their client’s expense. The vast majority of attorneys are ethical professionals who put their client’s best interests ahead of their own. During an initial consultation, ask probing questions that will reveal whether the attorney is truly interested in helping you solve your problem or is focused on prolonging the problem and making it worse to justify additional billable hours.

Find an attorney who makes it easy to communicate. An attorney who caters to foreign clients will already possess the technology to exchange documents as scanned, plain text or Microsoft Word files. The tech savvy attorney will also utilize emerging technology such as Skype ( to make and receive inexpensive international telephone calls via their computer.

In an ideal world, get legal assistance before you desperately need it. For example, if you will be traveling to America on an inspection flight to consider a vacation home, contact an attorney before you ever depart for the States. Let’s face it, you’ll likely be dealing with sophisticated, commission-oriented salespeople who are highly motivated to get your binding commitment. Doesn’t it make sense to get briefed on potential legal pitfalls before you’re forced into a high-pressure situation?

C. Prepare Your Case. Before you contact an attorney, organize all relevant documents and write a chronology of events. This simple step can result in substantial savings of time, effort and money. It may sound cliche, but the devil really is in the details. Many clients gloss over this important step because they desperately want to discuss their case with someone – the sooner the better. Although a seasoned attorney can make an initial evaluation of your case without reviewing documents or a chronology, it is far easier to make specific recommendations and provide concrete advice when documentation is readily available for evaluation.

The chronology doesn’t have to be extensive, but a concise explanation of the key events will prove very insightful to the attorney evaluating your case. Whenever possible, strive for clarity so important points do not get lost in translation. The speed and convenience of the Internet have made email the preferred method of international communication. Be sure to include your chronology in the body of an email rather than attached it to the email as a file (which may be difficult to open).

Once you’ve organized your documentation, be prepared to send the documents as a scanned attachment to an email or a fax. If voluminous documents will be involved, it may be preferable to send an express mail package.

Here’s an important issue that may save you from a very awkward situation. When the legal problem arises, make a list of the full names and addresses of all parties involved so the attorney can immediately conduct an internal conflict of interest search. An ethical attorney must ensure that no conflict exists prior to discussing your legal problem and strategies for resolving it.

D. Issues To Raise During Your Initial Consultation. The initial consultation with an attorney is crucial to resolving your legal problem. It is important that both the client and the attorney understand each other and build the foundation for a solid working relationship. Raising the following six issues will help get the relationship started on the right track.

1. What is your desired outcome? If you’ve provided the attorney with relevant documents and a chronology of events, you’ll be in a position to discuss this issue which is the crux of your case – how to resolve the problem. Be prepared to explain your rationale for seeking a specific resolution. This information will be crucial to your attorney who wants to both win the case and satisfy their client.
2. What will be the fees and expenses associated with the attorney’s efforts to obtain the desired outcome? Attorneys respect clients who addresses the issue of fees and expenses. But bear in mind, you wouldn’t dare walk into a doctor’s office, declare that you’re sick and ask how much it will cost to cure you. You can’t expect to tell an attorney that you’ve got a legal problem and then ask how much it will cost to resolve the problem.
3. What are your budget limitations? Granted, everyone wants to minimize their attorney fees and out-of-pocket expenses. Based on the scope of the legal problem and the desired outcome, discuss any relevant budget constraints. Addressing this issue will spare both the client and attorney from an unpleasant surprise in the future.
4. Which attorney at a law firm will actually be handling your case? If more than one attorney will be handling your case, be certain to discuss the chain of command, communication protocols and how decisions will be reached.
5. What can the client do to reduce the total attorney fee? There are certain tasks that the client can handle instead of burning the attorney’s time. For example, most attorneys would be eternally grateful if the client in a homeowners association dispute offered to obtain the relevant documentation such as the association’s Articles of Incorporation, Bylaws, covenants and deed restrictions.
6. Is the fee negotiable? Wow! What a novel concept. Attorneys are also business people. Under certain circumstances, they may be willing to negotiate a flat fee instead of an hourly fee or the amount of the retainer. You’ll never know unless you ask.

E. Control Costs. One of the biggest fears associated with legal problems is that legal fees and expenses will become excessive. No one wants to get gouged. Although attorneys have professional and ethical obligations to act in the best interests of their client, some unscrupulous attorneys disregard or play the angles when it comes to this obligation. There are a variety of ways that unscrupulous attorneys gouge clients. Ignore these at your peril. Some of the most common methods are:

1. Exploit the inherent difference in bargaining power when the client is from a foreign country, unfamiliar with the applicable laws and desperate to resolve the legal problem at any cost.
2. Exaggerate the time necessary to accomplish certain tasks and otherwise pads the bill.
3. Prey on the client’s insecurities and lack of knowledge about the legal system in the United States.
4. Convince the client that it is absolutely necessary to contest every point.
5. Make the legal problem as acrimonious as possible, thus ensuring that most basic issues are hotly contested.

What constitutes an appropriate or fair attorney fee is ultimately an individual decision. As the client, you have the ability to seek legal services from a variety of attorneys practicing in a particular marketplace. But bear in mind that an attorney is a businessperson and is generally not obligated to accept you or anyone else as a client unless they can earn a fair profit from the representation.

Some clients make the (incorrect or misguided) assumption that the attorney who charges a hefty fee must be worth it. Occasionally, they’re chagrined to learn that they paid through the nose for some incredibly average services. Most of the time, they’re oblivious to the reality that they got gouged. So how do you determine when you’re receiving value for your money?

1. Focus on effectiveness.
2. Consider the attorney’s reputation among clients and the legal community.
3. Shop around.

F. A Final Word. Most legal problems only get worse (and more costly to solve) due to inattention. Don’t be an ostrich and hide your head in the sand. Take action to resolve your legal problems in the most cost-effective and expeditious manner. The steps outlined above will give you a great start.

Some of the best advice ever dispensed is anticipate problems and be prepared to take preemptive action. If you do so on a consistent basis, many potential legal problems will never materialize “across the pond.”

DISCLAIMER: This article and its content are intended to provide general information on legal topics and shall not serve as a solicitation for services in any jurisdiction where prohibited by law. This article is not, nor is it intended to be used as a substitute for legal advice. You should consult an attorney for individual advice concerning your own situation. Sending an email to the owner of this website, and receiving any response thereto, does not, in and of itself, create an attorney-client relationship.

© Copyright 2007 by Fred Reilly. All rights reserved.