Conflict Resolution: Good News For Mediation

Corrections or additions?

This article by Kathleen McGinn Spring was prepared for the May

28, 2003 edition of U.S. 1 Newspaper. All rights reserved.

Keeping Strategic Partners Happy

Just imagine the excitement. After years of struggling

to perfect an innovative software package in your garage office —

and draining your savings along the way — a big company agrees

to take on the marketing and distribution of your product. Its

1,200-person,

international sales force will demonstrate your software to decision

makers around the globe.

Oh happy days! Your problems are over. Well, maybe not.

Debra Dorfman, partner at tech-focused law firm Hale & Dorr

at 650 College Road, has seen dream partnerships turn into nightmares.

"What happens if you give exclusive marketing rights to a company,

and it doesn’t perform?" she asks. It happens. All the time. The

more she talks, the more clear it becomes that entering into a

strategic

partnership can be very risky business indeed, and that the risk falls

disproportionately on the younger company with the new technology.

Dorfman speaks at a one-day seminar on "Strategic Alliances:

Partnering

Your Way to Success" on Thursday, June 5, at 8:15 a.m. at

Englehard

Hall on the Newark campus of Rutgers University. Also speaking are

Gene Slowinski, director of Rutgers Strategic Alliance Research,

and Russell Parr, president of Intellectual Property Research

Associates. The event has a number of sponsors, led by the New Jersey

Small Business Development Centers. Topics on the agenda include

"The

Alliance Framework," "Negotiating the Alliance Agreement

Document,"

and "What Marriage Counselors Have to Teach Us." Cost: $100.

Call 800-432-1832.

Dorfman’s topic is "Understanding the Legal Issues."

Articulate,

and experienced, she lays them out in enough detail to deter anyone

from having his cousin, a guy who is really good at finding legal

forms on the Internet, prepare a partnership agreement.

She has been with Hale & Dorr since it opened its Princeton office

at 214 Carnegie Center (www.haledorr.com). She and many other

attorneys joined David Sorin, the head of the office, in leaving

Buchannan

Ingersoll, where she also worked on tech transfer agreements. A

graduate

of Barnard, who studied law at Fordham and obtained her J.D. from

the law school of the University of Utah, Dorfman praises Sorin for

giving her a shot at a law firm partnership.

The mother of two grown children, she made what she describes as a

difficult decision and worked part-time from her home, when they were

small. For most attorneys, this is a choice that dooms any chance

of partnership in a law firm, most of which take on recent graduates

in what they call "classes" and groom them for six or seven

years, choosing the best to join the firm and urging the rest to move

on. There are few ways to get back on to the partner track after

taking

a substantial break.

"David Sorin gave me a chance to prove myself, and I’m

grateful,"

says Dorfman.

In a way, the arrangement sounds much like the tech transfer

partnerships

on which she works. Many involve a relatively new company with an

exciting new product or process that could well energize a more

established

company. The established company sees something in the newcomer that

will make its product line better, and will give it an edge in winning

new business. Sorin, a tech law pro, might have seen the same edge

in Dorfman, a bright, passionate woman, who cheerfully admits to

working

"nights and week-ends, anything it takes." The "strategic

alliance" worked both ways, benefiting each of them. And that,

says Dorfman, is what any good strategic alliance does.

"The deal is opening a door for the young company," she says,

"but each company is getting something out of it. The more

established

company is finding it is stagnating, or is in a rut. It feels it has

commercially used up its juices. It’s looking for something —

a new direction, a new product, a new way of distinguishing itself.

The young company has the technology or know how or patent; it may

have the software to make something faster or more useful. It works

for each party."

Strategic alliances come in all shapes and sizes. "It runs the

gamut," says Dorfman. "It can be as simple as an Internet

linking agreement or as complex as a joint venture." The former

could involve two companies with complementary products or services

getting together to call customers’ attention each other’s offerings.

The latter could involve forming a whole new company, with its own

offices, employees, policies, and corporate structure.

In between the two extremes fall any number of arrangements. A joint

development agreement is a common form of strategic alliance. It

commonly

involves a young company with know how, and perhaps access to patents,

and a more established company, maybe one with manufacturing

facilities

and process expertise. There could even be three — or more —

partners involved. One might have the tech patents, one the

manufacturing

facilities, one the sales force, and one the distribution network.

And while a number of the strategic alliance agreements on which

Dorfman

works involve a young company partnering with an established company,

she says it is also common for two mid-range companies with

complementary

strengths to join forces. She works on a number of these deals, as

well.

"Maybe one has a great marketing force, and wants products,"

she gives as an example. "And the other has a fabulous product,

but no sales force."

Another form of strategic alliance takes the form of a "preferred

partner network." An example from the consumer world is the

currently

contentious relationship between Nike and the Foot Locker, begun when

the young manufacturer and the young retailer set out to boost one

another’s sales. Giving lots of its hot models to the Foot Locker

put Nike on the map, and propelled the Foot Locker chain to

sneaker-sale

dominance. Now Nike, unhappy with the Foot Locker’s discount policies,

is cutting down on number of popular models it is selling to the

retailer.

(A problem an air-tight agreement could have prevented?)

While Dorfman did not comment directly on the Nike/Foot Locker set-to,

she did emphasize that business is anything but static, and that

agreements

do need to be reviewed and updated. Thinking of as many contingencies

as possible upfront is the best overall strategy, though. Here are

some key considerations:

Guard your equity. One reason that strategic alliances

are so popular right now is that venture funding has dried up. Many

entrepreneurs, says Dorfman, have gone through their own money, and

have tapped out their entire friends and family network. They badly

need the boost an alliance with a more established company can bring.

In any deal, the more senior company is likely to want equity in

exchange

for its cash or services. Don’t give away more equity than is

necessary,

advises Dorfman. A good way to accomplish this goal is to focus

clearly

on exactly what each party needs, and to craft an agreement to deal

only with those needs. If the big company’s needs involve only a small

part of the company’s products or expertise, and through careful

discussions

it realizes that this is true, it may be happy with a smaller equity

stake. At the same time, if the payment or service the larger partner

will contribute to the neophyte is enough to get it to the next stage,

perhaps it should not pursue more in the deal.

"I spend a lot of time talking to clients about goals," says

Dorfman. "I tell them to not go overboard or get overly ambitious.

Let’s accomplish immediate goals."

Don’t get voted off the island. After the strategic

alliance

ends, the young company has to be left with what it needs to survive.

Be very careful in giving away exclusive rights to core technology,

says Dorfman. Technology may be your company’s main asset, and perhaps

its only marketable asset. Consider putting only part of it in play

in the deal, or only for a limited time, or maybe only in a restricted

geographic area. "You have to be able to survive if the alliance

doesn’t work out," she says. If you’ve given away rights to core

technology, it will be difficult to do so.

Likewise, make sure that key clients and key employees are not being

given away. You will need them when the term of the alliance is over.

Get the metrics in place. It is not enough to agree to

have a marketing company take your software to the world. If the

product

is complex, you need to specify how the sales force will be trained,

and who will train them. You need to put in writing the results the

marketing effort must achieve — in each market. If your software

isn’t moving as well as you were led to believe it would on the West

Coast or in Malaysia, you need to retain the right to give those

territories

to another marketing firm.

"If you’ve given an exclusive license (and the other party doesn’t

perform), you would be in a very bad position," says Dorfman.

"How do you get out of that? Have you expressed the minimum level

of effort?"

Cushion the blow of termination. Sometimes deals fall

through. This recently happened to one of Dorfman’s clients. After

all of the agreements were written, the bigger partner, a financial

services institution, backed out. All was not lost, though. The terms

of the strategic alliance specified that fees would be paid if the

deal was terminated. "They would have liked to have the

relationship,

but they were happy to have the fees," she says of her client’s

reaction.

Prepare for a stalemate. Many strategic alliances are

50/50 deals. You manufacture, I distribute. Or I invent, you market.

A potential pitfall, says Dorfman, is decision gridlock. A common

occurrence, the deleterious effects of two minds pulling in different

directions, can be mitigated by prior planning.

Write in dispute resolution mechanisms upfront, when everyone’s happy,

and there are no disputes on the horizon, urges Dorfman. Sometimes

putting a steering committee or a management committee in place is

enough to avert problems. Other times an outside party will have to

intervene. Specify in the strategic alliance agreements who the party

should be. An arbitrator? An international trade group? Also specify

a timeframe for resolving issues. Many times, says Dorfman, the more

established company has the resources to outwait the young company,

and will not hesitate to do so.

In a sense it is the job of Dorfman, and other attorneys in

her area of practice, to be wet blankets. "All the time,"

she says, "I see such optimism." The deals she turns into

formal agreements often represent the big break for a young company.

It is her job to make sure that the longed-for deal will indeed boost

— and not blast — its hopes. "People are not aware of

what will happen when the deal goes away," she says. At least

they’re not when they walk into her office. When they walk out, a

little of the euphoria is gone, but the dream is more secure.

Top Of Page
Conflict Resolution: Good News For Mediation

Mediation of a case, rather than taking it to court,

might seem like a good idea when first presented. Think of all the

legal fees that will be saved. Think of all the hassles that can be

avoided. So you tell your lawyer to mediate, not litigate. But then

what happens when you don’t like the result? What happened in the

landmark Lerner v. Laufer case was that the client sued the lawyer

for doing what she told him to do.

The community of mediators was rightfully worried about this case,

even though a lower court had decided in the attorney’s favor. The

case of Lerner v. Laufer, decided in appellate court on April 8,

recognized

that parties in mediation embark on a process that differs

fundamentally

from litigation.

This ruling is among the topics for the Alternate Dispute Resolution

(ADR) conference, "Coast to Coast Conflict Resolution,"

scheduled for Friday, June 13, at 8:30 a.m. at the Sheraton at

Woodbridge Place in Iselin. L. Randolph Lowry of the Straus

Institute for Conflict Resolution and professor at Pepperdine

University School of Law, is the keynote speaker. Judge Linda R.

Feinberg, will make a special presentation. Cost: $225 for non

members. Call the New Jersey Institute for Continuing Legal Education

at 732-214-8500 (www.njicle.com).

By design, the roles of clients and lawyers are not the same in

mediation as they would be in a fully adversarial encounter, says

Hanan Isaacs, who will talk about the case at the seminar.

Isaacs chaired the dispute

resolution section of the state bar association and served on the

New Jersey Supreme Court’s Complementary Dispute Resolution Committee

and teaches a course in conflict resolution at Rider. He has his law

office on Ewing Street at Princeton Professional Park and is past

president of the New Jersey Association of Professional Mediators.

With over 250 members, NJAPM is the largest statewide mediation

organization,

and the only New Jersey mediation organization with a structured

accreditation

process. Members come from a variety of licensed professional

backgrounds,

including law, psychology, social work, engineering, architecture,

business, and accounting (800-981-4800, www.njapm.org).

As a amicus curiae (friend of the court), Isaacs argued Lerner v.

Laufer on behalf of NJAPM. "The judges understood how important

this case was to public policy," says Isaacs. "They

specifically

acknowledged that mediation is now an accepted process in the

resolution

of civil and family disputes and is here to stay. It is one of the

first cases to establish a standard of practice for attorneys, where

the parties first use a neutral-third party (a mediator) to structure

and monitor the process of decision-making between the parties."

Laufer represented Lynne Lerner in her divorce in 1994, following

mediation with a New York mediator. At that time, Laufer had

recommended

that he undertake discovery. When Lerner declined his recommendation

and requested that he just review the mediation agreement, he warned

her in writing that he couldn’t guarantee that the settlement was

in her best interest. In 1999, Lerner filed a malpractice suit,

alleging

that Laufer violated rules of professional conduct requiring

diligence.

The judges had to decide whether, and to what extent, an attorney

may limit the scope of his representation of a matrimonial client

in reviewing a mediated property settlement agreement. Lerner was

represented by Hilton Stein, and then by Andrew Rubin, while the

attorney,

Laufer, was represented by Marianne Espinosa Murphy.

In November, 2001, the state Superior Court dismissed the claim,

stating

that there was no standard that required a lawyer to launch a

full-blown

matrimonial case after a client had agreed the work should be

restricted

to a review of the mediation agreement. The appeals court confirmed

the decision upholding mediation and its values of self-determination

and dismissed the legal malpractice action.


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