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.

The purpose of this article is to explain Presuit Mediation and how inclusion of a Presuit Mediation provision in your business contract can help you avoid costly litigation in the future.

A. What is Presuit Mediation?

Presuit Mediation is an informal process where the parties meet with an impartial mediator in an attempt to address disputes and reach a mutual agreement resolving the disputes.

Section 44.1011(2), Florida Statutes, defines “mediation” as a process whereby a neutral third person called a Mediator acts to encourage and facilitate the resolution of a dispute between two or more parties. It is an informal and non-adversarial process with the objective of helping the disputing parties reach a mutually acceptable and voluntary agreement. In mediation, decision-making authority rests with the parties. The role of the Mediator, includes, but is not limited to, assisting the parties and identifying issues, fostering joint problem-solving and exploring settlement alternatives.

Presuit Mediation has significant advantages over court-ordered mediation. Presuit Mediation occurs before costly litigation has ever been commenced and is handled outside the judicial system. Unlike court-ordered mediation, Presuit Mediation is not required to comply with the Florida Statutes and the Florida Rules of Civil Procedure requirements.

In addition, communications between the parties in a Presuit Mediation are entitled to confidentiality protections.

B. What are the compelling reasons for Presuit Mediation?

1. Cost. As a business person, would you rather (a) initiate and conduct an informal mediation conference within thirty days of a dispute arising, or (b) write the check for a team of attorneys to litigate the dispute over the course of the next year?

2. Speed. In the Presuit Mediation provision, the parties can specify the time period in which the mediation conference will be initiated. For example, the parties can specify that the conference will be held within thirty days of a party requesting mediation.

3. Informality. The mediation conference can be held in one of the parties’ offices or in the conference room of the mediator. Contrast one of these informal settings with the formality of an imposing courtroom complete with attorneys, a judge and jury.
4. The parties control the process. In a mediation conference, the parties are at liberty to tell their stories and negotiate a resolution in an informal, private setting without a judge or rigid rules dictating the process.

5. Confidential. A trial is open to the public. A mediation conference is a private meeting in which the parties are obligated to maintain confidentiality.

C. How is Presuit Mediation implemented?

The parties can simply include a Presuit Mediation provision when negotiating the terms of a business contract.

The Presuit Mediation provision should address how the mediator is selected, how the mediation conference will be conducted, payment of the mediator’s fees, what happens if no agreement can be reached, and the confidentiality of the parties.

When drafting the Presuit Mediation provision, its also important to consider an arbitration provision or choice of forum provision (in the event the mediation ends with an impasse), and the choice of law that will govern the contract.

D. Is it expensive to have an attorney prepare a Presuit Mediation provision for inclusion in your business contracts?

No. To draft a Presuit Mediation provision that you can include in all your business contracts, I charge a flat fee of US$275.00.

ABOUT THE AUTHOR

Fred Reilly’s law practice includes advising clients on international business transactions, corporations, contractual issues, real estate transactions, civil litigation and administrative proceedings.

Fred has been an attorney for more than 20 years. He is licensed to practice law in California, District of Columbia, Florida and as an English Solicitor. He has been admitted to practice before the United States Supreme Court and the United States Court of International Trade. Fred graduated from the London School of Economics and Political Science (LL.M. in International Business Law), Cumberland School of Law at Samford University (J.D. and Associate Editor of The Cumberland Law Review) and Purdue University (B.S. in Management). Fred spends time each month in Los Angeles and Central Florida. He is a member of The Beverly Hills Bar Association.

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 2010 by Fred Reilly. All rights reserved.

In the last two years, the global recession has taken a tremendous toll on many international investors who established business relationships with American companies. Unfortunately, numerous monetary losses could have been prevented if the international investor had conducted due diligence prior to entering into a business relationship with the American entity.

In my law practice, I have seen a substantial increase in the volume of cases where United States developers, investment partners, and business partners have either misrepresented the status of their entity or committed outright fraud concerning the status of their entity.

The purpose of this article is to explain the basic due diligence steps that an international investor should take to check out their prospective American business partner.

WHY ITS IMPORTANT TO CONDUCT DUE DILIGENCE

If you really don’t know who you’re going into business with, then you’re setting yourself up for disaster. For the international investor, there are many compelling reasons why its important to conduct due diligence:
1. If the entity doesn’t exist, a contract entered into with the non-existent legal entity is generally void.
2. Confusion about the name and status of a legal entity can lead to expensive legal wrangling and protracted disputes.
3. A mistake about the business entity that you’re contracting with could make it difficult – if not impossible to both protect and enforce your legal rights.
4. If you don’t have clarity about who you’re doing business with, you may transfer money to unsavory individuals that steal you blind.

AVOID CONFUSION

International investors frequently fail to obtain the exact name of a business entity. This simple mistake inevitably leads to much confusion. For example, many investors would fail to distinguish the difference between “Corporation, Inc.” and “Corporation, LLC” because it is very easy to focus solely on the word “Corporation.” In reality, “Corporation, Inc.” and “Corporation, LLC” are two separate and distinct legal entities.

The best way to avoid confusion is to (i) get the exact legal name of the business entity, and (ii) identify the jurisdiction in which the entity was created/registered.

CONFIRM THAT THE ENTITY ACTUALLY EXISTS

Legal entities in the United States are largely governed by the laws of the individual state where the entity was created and registered. If you know the exact legal name of the business entity and the state in which it was created/registered, it is easy to confirm that the entity exists and its corporate status.

For example, to determine the status of a Florida entity, go to the Florida Secretary of State’s Division of Corporations website (http://sunbiz.org). At this site you can conduct a search by the entity’s name for corporation, limited liability company, partnership, etc.

While on the site, you can also check to confirm the names of the officer and directors of a corporation, the names of the managing members of a limited liability, the names of the partners of a partnership, etc. This information is crucial for an international investor because its important to know which individuals have the legal authority to contractually bind the business entity.

OBTAIN QUALIFIED LEGAL ADVICE

Get sound legal advice. I know that statement sounds self-serving, but it is certainly not meant that way. An qualified and experienced attorney can save an international investor much heartache and huge potential losses. Having worked as an attorney since 1986, I have seen many scams, frauds, and ill-advised transactions. Like my colleagues who advise international investors on a regular basis, I know how to turn over the relevant rocks.

Bottom line – don’t get into business with someone that you don’t know. At the very least, conduct some basis due diligence to ensure that the business entity that you may do business with is the real thing and their representations are accurate.