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.

By Fred Reilly, American Attorney and English Solicitor

Hiring an attorney is a very important decision. You may have heard all the horror stories about hiring an attorney, but it doesn’t mean that you’re destined to become one. Before you retain legal counsel, consider the following points.

1. Objective Advice. Will the attorney provide sound, objective advice? In order to render valuable, results-oriented advice, an attorney must first listen to the client, understand their goals and craft strategies that will result in the client’s success. How can an attorney (or anyone for that matter) provide a viable solution to your problem unless they first understand it?
2. Experience. Does the attorney possess the necessary experience and judgment to be effective in addressing your legal problem? Or does the attorney lack the knowledge, skills and seasoning necessary to handle your legal problem in an effective manner? Experience is invaluable when negotiating the terms of complex transactions, drafting precise legal documents and fashioning strategies for resolving acrimonious disputes.
3. Credentials. What are the attorney’s credentials? Has the attorney been trained to address the legal issues, negotiation strategies and unexpected complications that will arise? For example, not all American attorneys possess the educational background or professional qualifications necessary to advise clients on international business transactions or disputes. I received my Masters degree in International Business Law from the London School of Economics and Political Science. To better serve my international clients, I became a member of The Law Society. As an English Solicitor, I am very familiar with the legal issues that arise in international business law transactions and disputes.
4. Independent Advice. One of the foundations of an attorney-client relationship is the ethical obligation to provide clients with independent advice. Is the attorney committed to providing you with independent advice? Are there any potential conflicts of interest that may complicate the attorney’s ability to advise you in an independent manner?
5. Integrity. Is the attorney committed to representing the client in an ethical manner? Will the attorney treat the client and others with dignity and respect?
6. Work. Who will actually do the work on your case? Does the attorney himself – or a qualified associate – perform the legal services? Or does a partner bring in the client, then delegate the actual work to a junior associate and bill you at the partner’s higher hourly fee?
7. Access. How available is the attorney when you need to contact him? Can the attorney be reached by telephone, fax and email? Since I work with international clients, I use the leading low-cost internet-based technology (www.skype.com) to communicate with clients instead of expensive conventional international telecommunications (which are typically billed to the client). In addition, I use an email-enabled Blackberry to maintain accessibility.
8. Enthusiasm. Is the attorney enthusiastic about providing legal services to solve your problem or does your case represent just another paycheck?
9. Attention. Is the attorney so busy working on a multitude of cases that he’s simply unable to provide individuals with the personal service and care they deserve? Or does the attorney limit his services to a few select clients who receive the best service that he can offer?
10. Technologically Savvy. Does the attorney have the technical capability to conduct business in the Internet Age?
11. Efficiency. One of the maxims of the law is “Justice delayed is justice denied.” Inefficiency inevitably results in increased legal fees and expenses. Is the attorney committed to handling the client’s legal problem or dispute in an efficient manner that is mindful of the client’s expenditures of time, effort and money?
12. Fees and Expenses. Will the attorney charge the client fees and expenses in a straight-forward, fair manner? We’ve all heard horror stories about runaway attorney fees. Suffice it to say that I do not believe in charging clients for every paper clip.
13. Results-oriented. I have been a practicing attorney for more than 20 years. I’ve always viewed my role as attorney in the same light – maximize the client’s opportunities while seeking to minimize the client’s risks. I do not believe in complicating a client’s legal problem or dispute in order to charge additional legal fees. When I accept a client’s case, my objective is to help the client solve their problem. Period.

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 2007 by Fred Reilly. All rights reserved.