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.

9 WAYS TO SLASH YOUR EXPOSURE TO LAWSUITS

By Fred Reilly, American Attorney and English Solicitor

For most Plaintiffs and Defendants, lawsuits quickly become nightmares. But it doesn’t stop there. Lawsuits have become so commonplace, that the threat of litigation casts an exceptionally dark cloud over people. Once you become embroiled in litigation, the process takes on a life of their own and tends to drag on forever – depleting assets and sapping your energy to move forward. Like a cancer patient whose life depends on the next doctor’s appointment, the litigant’s life revolves around the next motion, deposition, hearing and appointment with their counsel.

The purpose of this article is to provide you with nine specific precautions you can take to reduce your exposure to future lawsuits. By no means is this article a silver bullet. But the points discussed below should provide insight into specific action that can decrease the threat of future litigation.

1. Negotiate clarity. Many civil lawsuits are the result of one or both parties failing to adequately achieve clarity in their contractual negotiations. Without clarity, it’s understandable that rationale people could reach different conclusions in their interpretation of rights and obligations and how such rights and obligations should be performed. Notice my choice of words -  “rationale people.” In today’s world, there are many irrational people and it’s even more crucial to achieve clarity when you’re dealing with an individual who may become unreasonable, combative or belligerent if there’s the slightest provocation.
2. Don’t commit when you can’t comply. I realize that this point is incredibly obvious, but I’ve seen it time and again. Most civil lawsuits are the result of “promises made and promises broken.” If you never make the promise in the first place, it’s generally difficult to penalize you for not performing it.
3. Mitigate. If you realize in advance that you cannot fulfill an obligation, take action to mitigate the impact of your inability to perform. Mitigation can substantially decrease your exposure to damages because it forces the other party to take stock of their own position. Don’t be an ostrich and hide your head in the sand – the problem rarely disappears on its own. It only gets worse.
4. Document problems (with one very important caution). Many lawsuits are swearing matches – the only evidence submitted is the testimony of witnesses. In these types of cases, the parties didn’t commit their legal positions to writing and the merits of the case are largely decided by the judge’s assessment of the credibility and consistency of the witness testimony. By documenting a problem, you produce a paper trail that can be extremely helpful when a dispute is being litigating. Documenting a problem comes with one very important caution – there is a significant risk that you may inadvertently compromise your position, make an admission or otherwise undermine your legal position. That’s why it is very important to consult an attorney before taking any action that may negatively impact your case in the event that litigation is necessary to resolve your dispute.
5. Email communications. As an attorney, I’m very mindful of the countless ways in which clients unwittingly undermine their own position through their email communications. Let’s face it, the Internet makes it easy to communicate and we’ve grown accustomed to firing off an email reply via a Blackberry or some other form of PDA – it’s convenient, responsive and can be devastating evidence later in the event of litigation. I advise clients to be very careful about the content of their communications, but especially emails which can be taken out of context with great ease.
6. Alternative dispute resolution. Litigation through the judicial system is not the only option for resolving a dispute. If you enter a relationship or transaction that is likely to end in a dispute, consider the merits of including a mediation or arbitration provision into your agreement. Although these alternative dispute resolution methods don’t necessarily fit all circumstances, they are ideal for situations where the parties want to avoid the lengthy procedural delays and public scrutiny that occur when disputes are litigated in the court system.
7. Include an attorney fees and costs provision in contracts. A certain degree of deterrence can be achieved by the inclusion of a contractual provision that requires the losing party in litigation to pay for the prevailing party’s attorney fees and costs. Most people don’t want to pay one attorney, much less two. This provision forces a potential litigant to address the merits of their case and the possibility they may not prevail.
8. Address problems without delay. Many civil lawsuits are the result of the Plaintiff reaching the conclusion that the Defendant is unwilling to address a legal problem. When a lawsuit is filed, litigants dig in their heels and seek vindication. Left unresolved minor problems have an amazing tendency to become major problems. Take the responsibility to initiate action to solve your own legal problems at the earliest possible time.
9. Get preventative legal advice. This recommendation may appear self-serving, but it is certainly not intended to be. No doubt you’ve heard the phrase “the best defense is a great offense.” As an attorney and Solicitor, I can honestly say that I’m in a far better position to reduce or eliminate a client’s legal problem if they seek my advice long before litigation is ever initiated. Lock the barn door before the horse leaves, not afterwards. No one likes uncertainty. If you’ve ever been involved in litigation, you no doubt recall the lengthy periods of uncertainty. Obtaining legal advice when a problem first arises is important for another reason – the client will know where they stand, can better evaluate the risks and has more flexibility to fashion a reasonable resolution they can accept. Finally, preventative legal advice helps to reduce the acute anxiety that’s associated with nightmares.

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.