[FOREIGN] My name is George Siedel.

 
I'm a professor at the Ross School of Business at the University of Michigan. 
Welcome to our course on the Three Pillar Model for Business Decisions. 
In this session, I'm going to provide an overview of the course, and 
this is going to be our agenda. 
First of all, I'd like to discuss the goals of the course, 
then cover a little bit of my background and how that relates to the course. 
We'll look at the course game plan, the course format. 
And finally, 
I have a few words to say about the importance of our course discussions.
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So what are our goals in the course? 
Well, our number one goal in this course is to make you more competitive.
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Whether you're starting your own business as an entrepreneur. 
Whether you're working in a lower level position in a large corporation and 
you're seeking career advancement, 
whether you're already in a leadership position in a company, 
I want to make you more competitive because we live in a competitive world. 
More than ever before the world is built on competition, 
especially in our global economy. 
So from a business perspective and 
from your personal perspective this is a course on competition. 
If you're not competitive, if you're not interested in competition, I suggest you 
stop watching right now because that's my ultimate goal in the course. 
Now, how can I make you more competitive? 
Well, my goal is to give you a decision making model that will 
provide you with a great source of skills to make you competitive. 
This Model is based on the famous Harvard Business School leadership course. 
And this course originated several years go. 
I happened to be a visiting professor at Harvard, and I was a part of 
a teaching committee that worked on an earlier version of the course. 
But the Harvard leadership course is based on three pillars. 
And those pillars are economics, law, and ethics. 
This course is an expanded version of the Harvard Leadership Course 
in that I have replaced economics with strategy. 
By doing that, the model becomes useful not only in business decision making But 
also in making nonbusiness leadership decisions. 
So here is the basic focus of the course. 
When we focus on a strategy pillar, a law pillar, and 
an ethics pillar this course allows you to, number one, become legally savvy. 
So that you can use the law to minimize business risk. 
So in other words, this is not a course of memorizing legal rules and 
listing legal rules. 
It's a course on actually how you can use the law 
as a practical matter in making day-to-day decisions. 
And second, the focus of the course is on linking the Strategy Pillar and 
the Law Pillar to create value for business owners and for 
other stakeholders, your customers, your employees and society at large. 
Whether you're starting a small business or whether you're working for 
a large corporation, value creation, of course, is a major goal of your business. 
And then, finally, the focus of the course is on 
how you can play a leadership role in making ethical business decisions. 
So just in summary, how can I minimize business risk and 
create value while also acting in an ethical manner?
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Little bit about my background. 
I teach at the University of Michigan. 
Michigan, if you're from outside the United States, 
is located near the center of the United States. 
I do a lot of teaching around the world.
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And when I travel abroad and I ask people, do you know where Michigan is? 
Sometimes I receive a blank stare until I mention, 
well, Detroit is a part of Michigan.
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Or better yet, when I mention that Chicago is very close to Michigan. 
If you think about a map of the United States, with Chicago right in the center. 
Michigan is a little bit to the right of Chicago. 
So I teach at the University of Michigan, but 
I was born south of the border in a state called Ohio. 
And I spent the first 18 years of my life on a farm in Ohio.
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I finally escaped from the farm and went to a small college, 
down the road from the farm, called the College of Worcester. 
I didn't even have to turn to get from the farm to the college. 
I just drove out the driveway, turned right, drove for 30 miles and 
there was the college.
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After I finished my undergraduate education at Worcester, 
I then attended the University of Michigan Law School.
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And after law school I had a fellowship to do research at Cambridge University for 
awhile so I did my research at Cambridge returned to the states and 
practiced law for a couple of years. 
And at that point I started my teaching career, and I've spent most of my 
career in Michigan although I have been a visiting professor elsewhere. 
I have gone back to Cambridge three times as a visiting fellow. 
I've been a visiting professor at Harvard, a visiting professor at Stanford and 
a visiting scholar at Berkeley. 
But for the most part, I've been hanging around the University of Michigan. 
Teaching at the university although I spent 5 years as Associate Dean 
where I was in charge of executive education and yet a lot of opportunity 
to interact with business leaders and with businesses around the world.
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So during my career, I have had a chance to look at 
the business environment in many different parts of the world, Europe, 
Asia, North America, South America, Australia and Africa. 
I've taught and worked with business leaders in all of those places. 
And even on campus, my courses have a very global focus, because in our MBA
program, 
one-third of my students are from outside of the United States. 
And so, in terms of my research and teaching, it's very global. 
And I'd like to make this course as global as possible, so 
in teaching the various modules in the course and start with the US approach and 
then I attempt to apply the model globally, so 
that if you're from outside of the United States 
this course is going to be a very good introduction to the US business culture. 
But on the other hand, if you're from the United States, 
the course is also an introduction to the global business culture. 
Now, one word of caution, given the global nature of the learners in the course.
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Typically learners in books are from countries all over the world. 
For example, in my earlier book which was called Successful Negotiation, 
Essential Strategies and Skills, there were hundreds of thousands 
of learners and 75% of them were from the outside of the United States. 
And as a result, when I teach MOOCs, I try to speak in a very slow and clear
manner, 
assuming that for many of the learners English is not your second language. 
Now, if English is your primary language, 
my slow manners speaking might become a little bit annoying. 
So I highly encourage you to set the speed to at least 1.25 and 
that will be a speed the teamwork has custom to. 
But generally, my goal is to speak in its slow and clear manner.
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So what's the course game plan? 
Well, these are the topics we cover in the course. 
This first module includes this overview, and 
also an introduction to the University of Michigan. 
You don't have to watch the introduction to the University of Michigan, 
it's not part of the official course. 
But for those of you from outside the United States, 
if you're unfamiliar with how a US university operates, 
I'll give you a little background into the university and 
the town in which it's located, Ann Arbor Michigan, which is classic college town.
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We then turn to module two which is a very important and somewhat technical model
but 
it gives you an introduction to the three pillar model for 
making business decisions. 
And then, we dive in to applying the model to the key issues 
that face anyone who is interested in business or who is in business. 
How do you attract and retain the best talent? 
In other words, how do you find the best employees? 
How do you develop successful new products? 
How do you create business opportunities from government regulation? 
This is an angle on government regulation that many people overlook. 
And it's a tremendously fertile area for business opportunities. 
How will you create and use intellectual property profitably?
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Everyone today should understand the fundamentals of intellectual property 
that we're going to cover and not only what is intellectual property, but how do 
you protect your intellectual property and how do you use it to create profits? 
How do you create value through your contracts? 
How do you make contracts much more than a legal document, but 
something that benefits both sides to the contract? 
How do you resolve disputes with your stakeholders? 
And finally, how can you, as a leader, create and lead an ethical organization? 
So that's our game plan for the course.
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What's the course format? 
Well, these are the elements in the course format. 
You'll be watching a series of videos which are roughly 5 to 20 minutes, 
they vary in length. 
And we've picked videos of this length based on research 
that focuses on our attention spans nowadays. 
And generally, anything more than 20 minutes is difficult to watch. 
So you can watch these in short segments.
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Unlike some books, I made my books very interactive. 
So as you watch this periodically, 
I'll ask you a question as I do in class and I'll ask to hit parts and 
write down your answer and then I'll discuss the correct solution. 
So this is a way for you to test your understanding of the material.
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How do you want to watch this course? 
Well, you have some options. 
It's set up for you to watch over a nine week period, the modules 
are divided by weeks, but if you want to you could binge watch the videos. 
You could set aside one weekend or a holiday weekend or whatever. 
And watch all 12.5 hours of the videos. 
Some of the people who took my earlier MOOC on successful 
negotiation indicated that they really enjoyed binge watching, 
and they compared it with other shows that they had 
binge watched such as Breaking Bad or Game of Thrones. 
There are some readings with the course but 
I've try to make this readings very practical, non academic, and concise. 
Even though they are concise, the readings due 
at additional contact that we don't have time to cover in the course. 
And so, highly recommend that you look at the readings.
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How are you evaluated? 
Well, there will be quizzes connected with each module. 
But these are not graded. 
They are to test your understanding of the material. 
They aren't part of your final determination of success. 
There will be a mastery exam at the end of the course. 
And if you're successful in that exam, then you're eligible for 
a University of Michigan Certificate. 
Now, what do I mean by Mastery Exam? 
Well, in a traditional on campus course
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we might give a final exam and either you pass or fail it. 
And if you pass you're given a grade A, B, C, D.
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With the Mastery Exam, the exam is actually part of the course learning. 
It's not to separate students into A, B, C categories. 
The purpose of the Mastery Exam is to help you continue learning, so that if you 
fail a particular question, then you'll have a chance to continue 
taking the exam until you understand the material, until you pass the exam. 
So that's the format of the course. 
And finally, course discussions.
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These are a very important feature the course, you'll have 
a chance in the course discussions to ask questions about the material, 
you'll have a chance to provide comments about the material, 
you have a chance to make friends with people around the world. 
Because, as I mentioned earlier, hundreds of thousands of people will probably 
be taking this course from every country in the world and so 
you can establish contact with them. 
And finally, you'll have a chance to share your experiences. 
I strongly recommend that you discuss your own 
experiences with the material covered in the course. 
This is a great way for others to learn from your experience. 
I might say something in the course that doesn't exactly jive with your experience, 
and I'd love to hear that. 
If your experience differs from what I recommend. 
But it's a great way for people to learn about how 
the material can be applied in real life and with my other course, 
I especially enjoyed hearing how people benefit it from taking the course, 
here's an example, the name of the course was Successful Negotiation. 
This person's saying basically he's a CEO with a manufacturing company in
Singapore 
and his negotiating with a key supplier and 
he decided to practice what he learned in the negotiation course. 
So he filled out a planning checklist I recommended in the course 
called the supplier and he explains here they had a great meeting, 
they expanded the pie that they were negotiating over. 
They learned about each other's interests, they renegotiated everything. 
And then, he describes some of the details, pricing reduction, 
pricing schedules, etc. 
And bottom line, it was a win-win, meaning both his company and 
the other company benefited in the projected savings over 
the next 5 years of $4 million, US. 
So I strongly recommend that you share your experiences whether they're 
successful in this case or whether you find it some of the concepts do not apply. 
That would be valuable learning as well.
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So that's the plan for the course. 
I'm really glad that you're taking the course. 
I'm looking forward to working with you. 
And at the end of day, how will I know that this course is successful or not? 
Well, my success as a teacher depends on your success. 
In your career and in your business. 
So I'm very invested in your success and I hope 
that this course will make you successful in the competitive world in which we live.
This course is based on courses that I teach at the University of Michigan. 
And before we dive in to the course material I'd like to give you 
a snap shot of the town for I live. 
Which is in Ann Arbor, Michigan the university and 
in the business school where I teach which is within the university. 
This might be of greater interest to those of you from outside the United States, but 
if you are from inside the US or outside the US please feel free to skip this 
segment and move on to the first unit on preparing for negotiation.
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The town where I live, Ann Arbor, Michigan, was founded in 1824. 
Has the nickname of Tree Town. 
It's a rather small town. 
Town, or you could even call it a small city with 116,000 residents. 
As you can see, this is a young town, median age 28. 
We're a relatively fat town. 
27% of us are obese, which 
probably is pretty similar to the rest of the United States, we're an educated town, 
70% of the people in Ann Arbor have a bachelor's degree or higher. 
And where people on the search for a mate almost six out of 
ten people have never married in Ann Arbor and generally we're pretty chilly. 
We're in Michigan which is in the northern part of the United States. 
For those of you who are from outside the United States, if you can picture Chicago 
which is right in the center of the country, north center part of the country. 
Ann Arbor, Michigan is about a four hour drive east of Chicago.
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We have a mixed population. 
You can see the demographics here and over 20% of 
the people in Ann Arbor speak a language other than English in the home. 
You can see here that about one-third of the population of Ann Arbor is 
affiliated with a religious congregation and you can see the, 
next the top six religions represented by this one-third of the population.
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Americans love rankings. 
And so we rank our cities. 
We rank our universities. 
We rank our business schools. 
Here's a number of rankings related to Ann Arbor, Michigan. 
You can see it's one of the most highly rated college towns. 
Highly rated for startup businesses, #1 Best cities for singles, 
but it's #2 also among the great cities for raising families. 
It's a healthy, smart, 
digital educated community according to these various ratings.
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And here's some pictures from Ann Arbor. 
On the left is a night scene of the city, we have a large farmer's 
market in the summertime, that's a picture of the farmer's market in the center, and 
a major art fare in the summer, which is the picture on the right. 
I mentioned earlier that Ann Arbor is called tree town, 
and you can see why, from this picture. 
A lot of trees in the city, which are spectacular in the fall, 
with various colors, red, oranges, and greens. 
A big splash of color, on the horizon, in the fall.
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Now, the University of Michigan, 
is a major employer within the city of Ann Arbor. 
You can see here that the University was founded in 1817, and
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currently has 3 campuses, the home campus is Ann Arbor. 
But there are also campuses in Dearborn and Flint. 
Very international student body, 60,000 students that come from 
all 50 states and 122 countries. 
Most of the students, 43,000 are on the Ann Arbor campus. 
And 28,000 of the 43,000 are undergrads. 
There's one faculty member for every 16 students. 
And the campus has grown from its original 1,920 acres to 21,157 acres. 
This is a major operation. 
If the University of Michigan were a corporation we would rank 
among the largest in the world. 
With an operating budget of over $6 billion dollars we 
receive $300 million in state support. 
Now for those of you outside the U.S. you might not be familiar with the distinction 
that we make in the U.S. between state universities and private universities. 
Michigan is considered a state university because we receive support from the
state. 
But as you can see here, 
the amount of support is relatively small compared to the overall budget. 
300 million out of a 6 billion dollar budget, 
which would be around five percent of that overall budget. 
So, we're grateful for the state support, but it's a small percentage. 
We spend a lot of money on research at the University of Michigan, over $1 billion. 
And we're usually ranked number one or 
two in the United States in terms of research expenditures. 
Currently, we're number two. 
And we have a very large, enthusiastic alumni body, over 500,000 alums.
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Here are some former University of Michigan students. 
We have Supreme Court Justices, we have a lot of astronauts, 
many Nobel Prize winners, we have a President Gerald Ford, 
we have singers such as Madonna. 
Shown on screen: Former University of Michigan Students • 3 U.S. Supreme Court 
justices, 11 astronauts, many Nobel Prize winners • President Gerald Ford •
Madonna 
(singer) • Michael Phelps (Olympic swimmer) • Arthur Miller (playwright) 
• Larry Page (Google co-founder) Athletes such as a swimmer named Michael
Phelps. 
We have people talented in the arts such as the playwright Arthur Miller and 
people who are very successful in business, 
among those is Larry Page the co-founder of Google. 
Here again we love rankings in the United States and so 
here is the latest ranking of the World's Best Universities by Reputation and 
you could see here that the University of Michigan is rank 
by the times as one of the top 15 Universities in the World. 
Of course there are many rankings this is one of the rankings we like better than 
some of the others we like the methodology used in this particular ranking.
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Here's some pictures of the University of Michigan, our famous Law Quadrangle. 
The Law Quadrangle was donated by an alumnus of the law school named 
William Cook. 
And he wanted the university to build something like 
the quadrangles at Oxford and Cambridge University. 
And they succeeded, spectacularly with the law quad. 
Here's the football stadium. 
At Michigan we don't have a school of theology. 
Instead some say the religion might be football. 
It's the largest football stadium in America. 
It seats 114,000 people. 
Now if you remember earlier, there are 116,000 people in the city of Ann Arbor. 
So the city is very quiet on a football afternoon, 
when the stadium is packed with 114,000 fans.
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Let's move on then to the business school within the University which is where I 
teach, founded in 1923 with a very good faculty student ratio, 
15 faculty and 26 students. 
Today that has expanded to over 3000 students 
126 full-time faculty who teach in eight areas. 
And when we look at these areas they represent the key 
functions in any successful business. 
Seven of the eight are business functions. 
The eighth one which is business economics and public policy, is a key discipline, 
a key foundation, that our students need in order to perform well in business. 
We offer a variety of degrees, 
have an undergraduate called a BBA, we have several masters programs 
ranging fro the full time MBA, to global, 
to part time, we have masters in accounting, supply chain management, 
entrepreneurship And a general one year Master of Management Program. 
And we have a Ph.D program. 
A research oriented degree. 
And finally we bring in thousands of business executives. 
Who take our Executive Education courses which tend to be short courses. 
Typically one or two weeks.
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This will give you a flavor for 
the kinds of students who walk around the Ross Business School. 
We admit 450 MBA's to our Full-time program every year. 
Average age 28. 
We want people who have business experience. 
I think the educational experiences 
more valuable when they do have this experience. 
One-third of them are females and you can see here the mix of citizenship.
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Just to give you a sample of what my class looks like, my negotiation course at
Ross. 
The last time I taught the course, 50% of the students were from outside the US. 
You can see the countries represented.
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And 50% from within the US, from a variety of states.
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This is what the MBAs do after graduation. 
Over a third of them go into consulting, one fifth into finance. 
Marketing is very popular, and 
then, followed by general management, strategy and operations. 
In 2013 the median starting salary was 112,000 but 
that does not include starting bonuses.
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Here we go again with rankings. 
On the undergraduate side, the US News and World Report does a ranking of BBA 
programs and Michigan is tied for second with MIT and Berkeley after Wharton. 
On the MBA side, 
the magazine called Business Week began ranking schools 25 years ago. 
They were really the founders of the ranking business. 
And four schools have appeared in the top ten in their rankings every. 
Ranking over the last 25 years and you can see them listed here, Harvard, 
Northwestern, Michigan, and Wharton.
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So here's a picture of where I teach, the Ross School of Business. 
We named the Ross School after Stephen Ross, 
a very successful graduate of the Ross School. 
Who's successful in real estate development. 
A few years ago he wrote a check to this school for 
$100 million, which allowed us to build this building. 
And more recently he wrote another check for 
another $100 million to help us renovate some of the other buildings on campus.
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So, that's our snapshot look at the city of Ann Arbor.
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The University of Michigan within the city, and then the Ross Business School, 
within the University of Michigan.
In this module, I'm going to introduce you to the course and 
also provide an overview of the course.
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This course focuses on these three pillars 
which are important in most forms of decision-making. 
The law pillar, the strategy pillar, and the ethics pillar. 
And we're going to start by looking at how these three pillars relate to 
a personal decision and a leadership decision. 
But then we're going to focus mainly on how they relate to 
business decision- making.
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These three pillars, by the way, are built on very solid theory based on the work 
of these philosophers, sociologists, and naturalistic philosophers. 
A professor named Tim Fort, a friend of mine from Indiana University, 
brought together the work of these various philosophers and 
scholars into what he calls the Tripartite Dialectic. 
Tripartite meaning three parts, dialectic meaning a dialogue. 
So his work focused very theoretically on how these three parts dialog together, 
and that's all I'm going to say about theory. 
I know you'd like to hear a lot more about it, but 
our focus is on very practical aspects of the tripartite dialectic. 
And here's a game plan for this module. 
First of all, I want to to talk about a couple of examples 
that go beyond business, just to illustrate how the three pillars apply in 
leadership decision- making and in personal decision-making. 
Then we're going to focus, 
more specifically, on how the pillars relate to business decision-making. 
We're going to look at a big challenge in using the three pillars in business 
decision-making, specifically, the gap between the strategy and law pillars. 
Then we're going to talk about how you can close the gap to achieve 
competitive advantage, then covering the organization of the course. 
And we'll look at a very useful and 
practical business and legal decision- making tool. 
And, finally, I've got some comments on developing 
a global mindset which is important today in our global economy. 
So, let's start with two decisions, one personal and one leadership. 
The personal decision is this. 
A friend is driving to your house and you decide to send a text to your friend, 
which reads pick up pizza at Pizza Express. 
You've suddenly developed a craving for pizza. 
You ordered a pizza at a local pizza joint called Pizza Express, 
you want your friend to pick up the pizza. 
The leadership decision is President Obama's decision to 
authorize the operation that resulted in bin Laden's death.
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My question to you is how do these decisions relate to the three pillars? 
So, please hit pause and jot down your thoughts on this. 
How do these two decisions, one leadership, 
one personal, relate to the three pillars?
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Let's start with the pizza decision.
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So, the strategy pillar. 
Strategy involves setting a goal and developing plans to implement your goal. 
So your goal, obviously, is to buy a pizza. 
And your implementation plan is to ask your friend to pick it up.
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The law pillar raises a legal question. 
What happens if you friend causes an accident while reading your text? 
Are you liable?
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And then there's the ethics pillar. 
Even if you're not legally liable, is your strategic plan ethical? 
So those are the applications of the three pillars in this case. 
And here's a little background on the law pillar. 
We've got an actual case decided recently. 
A woman texts her friend who is driving. 
He reads the text, he responds to the text, 
then crosses the center line of the road, hits a motorcyclist and his wife. 
They are seriously injured and their left legs are both amputated. 
So the husband and wife sue the driver, and he settles the case. 
But they also sue the woman who sent the text. 
So question, what do you think the legal answer to that is? 
Hit pause and write down your answer. 
If you send a text to somebody, 
to a driver, who injures somebody, are you liable? 
Well, this is the New Jersey court decided. 
The court said, yes, a sender is liable if she quote knew or had special reason 
to know that the recipient would view the text while driving and thus be distracted. 
Now, in this particular case, she was lucky, she got off the hook. 
The court said she did not know or 
have reason to know that the recipient would be distracted. 
But this is the rule of law in New Jersey. 
So, given this relatively new law, 
what would be your decision here, thinking within the three pillars? 
Would you send the text or not, and why? 
So, again, hit pause and write down your answer.
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Here's one analysis. 
Of course, you still have the same strategy, acquire the pizza. 
But when you think about the law pillar, now that you know the law, 
you have to decide whether legal liability is a concern. 
For instance, you have to answer these questions. 
Do you live in New Jersey?
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Will your state or country adopt a rule similar to New Jersey down the road? 
This is a new emerging area of the law.
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Would a judge decide that you knew or 
should have known that your friend would read the text while driving?
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And based on your analysis, would you change your strategic plans 
by cancelling the order or asking the restaurant to deliver the pizza. 
So you've got those legal questions. 
And then the ethics pillar. 
What if you're certain that your plan is legal, 
what are the ethics of texting your friend and placing both your friend, 
the driver and others at risk by sending the text? 
So that's an example of how the three pillars come into play 
with a personal decision. 
Let's now look at President Obama's leadership decision, his strategy. 
He decides to make the killing or 
capture of bin Laden the top priority of our war against al Qaeda.
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The law pillar. 
As a lawyer he realizes there are a number of legal questions, but even if he weren't 
a lawyer, wasn't a lawyer, he would probably raise these questions anyway. 
And so he asks a top secret team of four lawyers several legal questions. 
For instance, 
does he have the right to authorize a lethal mission to kill bin Laden? 
Does he have the legal right to delay telling congress until after the mission? 
Does he have the legal right to bury bin Laden at sea?
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And then the ethics pillar. 
Regardless of whether his decision is legal or 
not, should he authorize the killing of bin Laden? 
So, these two examples illustrate the application 
of three pillars thinking to a personal decision and a leadership decision. 
In our next segment, we're going to turn to 
applying the three pillars analysis to business decision-making.
Okay, let's now look at the Three Pillars as they apply to business decision making.
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My first practical exposure to the Three Pillars occurred a few years ago when 
I was a visiting professor at Harvard Business School. 
And I participated on the teaching committee of a course called Leadership, 
Values, and Decision Making. 
And this course gradually evolved into a course called Leadership and 
Corporate Accountability which, In my opinion, 
is the most important course in the Harvard MBA program. 
This course is required of all Harvard MBA students, and 
has a very practical focus according to my friend Professor Lynn Paine. 
The focus is on "decisions the students will have to make in their careers".
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And the course material states that "outstanding managers develop plans 
of action that fall in a 'sweet spot' at the intersection of their economic, 
legal, and ethical responsibilities". 
And at Harvard they call this sweet spot the "zone of sustainability". 
As you can see from this diagram, the Harvard model brings the Three Pillars 
together so that there's overlap among the Economic, Legal, and 
Ethical Pillars creating this sweet spot the zone of sustainability in the center.
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Another way to think about the Harvard model is this Decision Tree 
developed by a friend of mine Connie Bagley who's currently at Yale. 
But she taught at Harvard for several years, at the Harvard Business School. 
And under this Decision Tree, your first decision, 
represented by a box, is to ask yourself, is your decision legal or not. 
And then if it's legal, consider the economics of the decision. 
Does it create value or not. 
And if it creates value, then is the decision ethical or not? 
Now I've revised Connie's Decision Tree 
a little bit to come up with this version of it. 
But, one thing to consider, and we'll be talking about this later in the course. 
What if your decision is legal but 
it does not create value as you define value creation? 
And many people define it as creating value for shareholders.
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Even in that case, you might want to proceed, and 
make a decision that doesn't create value for your shareholders. 
And we call this often corporate social responsibility. 
Sometimes a company will make a decision that benefits society even though, 
arguably, it does not benefit shareholders. 
So, this is again just a Decision Tree version of the Harvard model. 
Now, I have decided to expand the Harvard Model by 
changing the Economics Pillar to a Strategy Pillar.
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And a couple reasons for this. 
First of all, strategy includes economics. 
But strategy is a broader field that includes other business functions and 
disciplines. 
And second, 
I like to use a strategy pillar because it relates to all types of decisions. 
It relates to personal decisions where you're not 
considering economic value necessarily. 
It relates to leadership decisions such as President Obama's decision. 
It relates to decisions by non-profit organizations. 
So that's the reason in this course 
we talk about a Strategy Pillar rather than an Economics Pillar. 
But strategy includes economics and 
in a business context it includes value creation. 
So these are the Three Pillars of Decision Making 
with the revision that Economics has been changed to Strategy.
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Now let's look at these three pillars in a little more detail.
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First of all the Strategy Pillar. 
The focus of strategy on a very general level is to determine your goals and 
how to implement them.
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And one of the key strategic goals that corporate strategists talk about and 
emphasize is value creation.
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And in talking about value creation, at least in the US, and 
some other economies, there's something called the Shareholder Primacy Theory, 
which basically means that shareholder value creation is the most important. 
You want to create value for your shareholders. 
They have primacy over other stakeholders. 
A stakeholder, by the way, if you're not familiar with the term, 
is somebody who has a stake in the business. 
But even people who follow Shareholder Primacy theory 
admit that other stakeholders are also important, if not for 
anything else at least to achieve shareholder primacy. 
And as we will be talking about later, these shareholders are especially, 
customers, employees and government.
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The Law Pillar, in business, the Law Pillar is especially important 
because it provides the framework for business operations and decision making. 
Law, in effect, represents the rules of the game of business.
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And the Law Pillar is very important globally, 
whenever you make a decision to invest in another country. 
Probably the very first question you're going to ask is, 
does it follow the rule of law?
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Or if it doesn't follow the rule of law, 
am I going to be subject to the arbitrary decisions of whoever is in power?
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The Law Pillar is very important for all types of businesses, ranging from 
the largest companies in the world to somebody who's starting her own business. 
For example, if you're starting your business as an entrepreneur you have to 
understand the various forms of business as you form your organization. 
The legal aspects of financing a business. 
The legal aspects of hiring employees. 
Contracting with customers, contracting with suppliers, producing safe products, 
and complying with government regulations.
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And the focus of the Law Pillar, and we'll say more about this later, 
is on managing risk. 
That is, preventing liability.
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And, finally, the Ethics Pillar. 
The Ethics Pillar focuses on whether conduct is right or wrong. 
In business, the emphasis of ethics is on values creation. 
Beyond value creation under strategy, 
values creation through ethical leadership. 
And in this course later on, we're going to talk very specifically about 
how you as a leader can create values within your organization.
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Beyond your business, when your company is engaged in an unethical conduct, 
it can have a ripple effect that goes far beyond the company. 
It can affect customers, suppliers, the economy, the industry you're in and 
other stakeholders. 
For example, in late 2015, 
VW was involved in emissions testing scandal. 
And almost immediately the share price plunged, affecting the shareholders.
Play video starting at :7:33 and follow transcript7:33
VW customers who had purchased VW cars lost resale value of their cars. 
Suppliers lost business, employees lost jobs. 
Germany lost an estimated trillions in brand value. 
Before this happened made in Germany was a very valuable brand, and 
that has been diminished somewhat because of the VW scandal. 
And then finally, the diesel industry has taken a hit. 
And so it isn't just your company that's affected by unethical conduct. 
It is a wide variety of stakeholders. 
So that concludes our look at the Three Pillars and 
in the next segment we're going to look at the big challenge 
with three-pillar thinking as it applies to business. 
And that's the gap between strategy and law.
In this segment I want to focus on a big challenge with applying three 
pillars thinking to business decision-making. 
And that is the gap between strategy and law.
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This is the way the three pillars should operate in sync with each other, 
creating the zone of sustainability. 
I actually prefer to call that overlap in the middle 
the zone of competitive advantage. 
If you can overlap these circles, you have a great chance to achieve 
competitive advantage over your competitors. 
The problem is this is not the real world. 
The problem is that while there's overlap between strategy and 
ethics, and between strategy and law, there's often 
a gap between the law pillar and the strategy pillar.
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Just, for example, with law and 
ethics there's a lot of overlap that we'll be covering later. 
For example, legal concepts such as fiduciary duty and 
fraud are very values-laden. 
They provide great guidance when you're faced with ethical dilemmas, but 
that kind of overlap does not exist between law and strategy. 
Now, there are two big picture reasons. 
Number one, law is very complex, and 
it's misunderstood by a lot people because of complexity. 
And there are also misconceptions about the role of a lawyer, so 
let's talk about each of these. 
Let's first of all start with the complexity of law. 
Let me ask you this question.
Play video starting at :1:52 and follow transcript1:52
Let's say that you have a bad experience with a business. 
You've purchased one of their products and it hasn't worked as you hoped it would. 
And so you go to a website and 
you complain about the product, you tell about your experience.
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You're very surprised the next week to learn that the company has filed suit 
against you.
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Now, what would be the legal basis of that lawsuit, 
what would you call the theory that they would probably use in suing you? 
They're going to claim that your statements about their product were false, 
that you were lying about their product. 
So what legal theory are they going to use?
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Please hit pause and write down your answer.
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The answer is defamation. 
They're going to claim that you defamed the company 
by your misstatements about their products. 
Now, we're going to talk about defamation later on in this course. 
It's a huge issue when it comes to terminating employees. 
There's a huge risk that an employee who is fired 
will file a defamation claim against the company.
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But my question here is, just to understand the complexity of law a little 
bit, defamation is an example of what type of law?
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Can you answer that question?
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And the answer is tort law, personal injury law. 
And tort law is a part of yet a larger area of 
law which I'm going to call private law. 
And private law is a part of yet a larger area of law, substantive law. 
And now we're getting to the very largest areas. 
And here's a legal road map that I hope will be useful when you're dealing with 
the complexity of law in the future. 
As you can see here, law is divided into two broad categories, 
substantive and procedural.
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And these words mean pretty much what they say. 
Substantive law deals with the substance of the law. 
What are the rules and regulations that govern 
the way you make business decisions, and the way you operate your business? 
Whereas, procedural law focuses on 
the legal procedures used to enforce substantive law.
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As you might guess, substantive law is primarily a concern for 
people running businesses. 
Procedural law is primarily a concern for lawyers. 
How do you file a lawsuit, 
how do you appeal a lawsuit, what are the rules of evidence during a trial?
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However, in recent years, over the past couple of decades at least, 
there has been a movement called the ADR movement
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which stands for alternative dispute resolution.
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And as a result of this movement, non-lawyer business leaders 
have been much more concerned about procedure.
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This movement began because business leaders began to ask, 
why is it that we outsource legal disputes to lawyers in the legal system?
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We have great problem-solving skills, 
why aren't we using these skills ourselves in resolving disputes? 
And that let to the ADR movement and 
the development of various processes that we'll be talking about later in the in 
this course that can be used to resolve disputes.
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Within law firms, I've heard people say that ADR has another meaning, 
which is alarming drop in revenue. 
However, that's actually a misstatement, many very prominent and 
leading law firms are very active in ADR. 
So we have the two broad categories of law, and then substantive 
law is divided into two categories called private and public. 
Now, some people would call private law civil law. 
I don't like to use that term because it's used in other contexts. 
It's used to distinguish criminal law from civil law, 
and it's also used to distinguish common law countries from civil law countries. 
So because it has different meanings,I prefer private law. 
Private law basically focuses on the law involving individuals and 
organizations where there's relatively little government involvement.
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And the three main categories of private law are the law of contracts, 
the law of torts, and the law of property.
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Public law, 
on the other hand, involves areas of the law where government is deeply involved. 
We've got constitutional law, which basically defines 
the responsibilities of government and the rights of citizens. 
And we have criminal law where the public is the complainant, 
the public in effect is a plaintiff, 
filing suit against people alleged to have committed criminal conduct.
Play video starting at :7:15 and follow transcript7:15
One specific aspect of public law that we will be focusing on quite bit is 
regulatory law. 
And we'll look at how regulatory law relates to the three branches of 
government, and how businesses can use regulatory law.
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So this is, again, a big picture road map of the law.
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The endpoints in this road map, the six endpoints, 
constitutional, criminal, contracts, torts and property, are so important 
that they represent the required courses in law schools around the world.
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If you are a law student entering law school with a mind of raw clay, 
in effect, this is the way the clay is molded. 
What we have here, in effect, is a picture of a lawyer’s brain. 
If you happen to stumble across a dead lawyer in the your feature, and 
you dissect him, this is what the brain looks like. 
And that's very important to think about when you work with lawyers
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because when you bring your business problem to lawyers, that problem 
will pass through the lawyer's brain down these paths, and perhaps 
hundreds of subpaths, until sometimes it seems as though you’re talking 
at such a level of abstraction that it has little to do with your business problem.
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Let's take a simple example, let's say that you had a great year in your 
business, and you decide that you want to hold a Christmas party. 
So, you ask your lawyer, hey, and problems with our party? 
Well, right away, the lawyer's going to talk about 
some of the things we'll discuss later in the course. 
Have you thought about religious discrimination in 
holding a Christmas party? 
Have you thought about sexual harassment if you're serving alcoholic beverages at 
the party and there's mistletoe around? 
Have you thought about respondeat superior, which means liability for 
employees who injure somebody on the way home? 
Have you thought about workers compensation for 
people who might be injured at the party? 
All of a sudden, you're going to go down many, 
many subpaths when you work with lawyers. 
So complexity of the law is one reason for the gap between law and strategy. 
The other reason is that lawyers are portrayed in 
a particular way in the media and in popular culture. 
We have TV shows, for instance, called LA Law. 
Now, other professions aren't as popular, generally, apart from doctors, 
aren't as popular. 
So we have LA Law, we don't have shows called LA Accountant. 
We've got shows called Law & Order, 
we don't have shows called Cost Measurement and Control. 
We've got Boston Legal, we don't have Boston Economist. 
We've got Judge Judy, we don't have Operations Manager Fred. 
For some reason law has captured the public fancy,
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both in the media and the popular culture. 
And what often comes out is that lawyers, basically, 
are involved in litigation because that's the most dramatic piece of the law.
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Let me ask you this question. 
When you look at, for instance, federal cases in the United States,
Play video starting at :10:43 and follow transcript10:43
what percentage of those cases do you think actually make it to trial?
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Please hit pause and write down a percentage.
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The percentage of civil cases that go to trial in the United States 
is less than 2%. 
So despite the media portrayal, despite what you see on TV, 
litigation is actually a very small part of the work of a lawyer.
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And a broader look at the work of a lawyer is depicted by this diagram. 
Lawyers are essential to business in providing advice on 
virtually every form of business activity, and 
then certain activities require implementation of that advice. 
Sometimes if there's a litigation decision made by business that involves following 
through with the litigation. 
But in most cases, it's so-called transactional work, making sure that 
the transactions are completed in a way that meets your strategic goals. 
Now in completing these transactions, one famous professor, 
Professor Gilson from Columbia, has called lawyers transaction cost engineers. 
I think that's too narrow because it only focuses on one piece of the lawyer's 
activity. 
I think a better term is risk management engineers. 
The key role of a lawyer is to manage legal risks, and 
here's a couple of quotes that illustrate that philosophy. 
The CEO of a major consulting firm recently said, 
Our lawyer is the person charged with protecting the corporation and 
making sure risks are understood and managed appropriately. 
The lawyer for the New York Giants professional football team said, 
my goal is best characterized as how to get to yes while minimizing legal risk. 
Legal risk is hugely important because recent surveys 
of business people conclude that legal risk is the top risk concern in business. 
And another survey by Norton Rose list the specific 
types of legal risk that you face in business. 
These are the most common, in order, in sequence. 
Contracts, labor and employment, regulatory, personal injury, 
intellectual property and patents, and dispute resolution processes. 
And we're going to talk about each of these risks throughout the course. 
But the bottom line is, because of the lawyer's emphasis on risk, 
there's tension between law and strategy, and the gap between the two pillars.
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The law focuses on risk management, strategy focuses on value creation. 
Sometimes this is called risk versus reward. 
A famous strategy professor I worked with over the years, 
CK Prahalad, called it the sour versus the sweet. 
Some of the executives I work with refer to the law department 
as the Department of Sales Prevention or 
the Department of No because of the emphasis on risk management. 
And in our next segment we're going to talk about how, 
given this gap between strategy and 
law, how you can close the gap in a way that creates competitive advantage
We're now ready to talk about how you can close the gap between the law pillar and 
the strategy pillar in a way that creates competitive advantage.
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And the key message in closing the gap 
is the importance of your becoming legally savvy. 
What does the word savvy mean? 
Basically means you have a practical understanding of how business and 
law really work. 
And this is very important for business success and for 
the success in your own personal career.
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Now becoming legally savvy is important regardless of where you are in a business. 
You could be the CEO, you could be the only person involved in the business if 
you're an entrepreneur, or you could work for a large organization at a lower level 
and still have a need to be legally savvy according to a recent survey. 
80% of corporate employees make a decision 
annually that has significant legal implications. 
And most of these decisions are made without consulting the legal department.
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So what legally savvy requires Is for 
you to have a basic understanding of the Law Pillar and legal risk management. 
So that you know first of all, when to consult an attorney. 
For most of the legal issues that arise on a day to day basis, 
you're not going to be able to consult an attorney. 
You can't have an attorney sitting at your elbow every time a legal question arises. 
It's too expensive, it's too time consuming so 
you have to decide which issues are important enough to consult the attorney. 
Second when you talk with an attorney you have to be legally savvy enough to 
understand the attorney's advice.
Play video starting at :1:53 and follow transcript1:53
Third, you have to be legally savvy in evaluating the advice and 
making a decision. 
And this is very important because sometimes 
the lawyer will give you one piece of advice, 
but somebody else within the company will give you another piece of advice. 
Let's say that you receive a call one morning from a reporter saying, 
look, one of your products has just seriously injured a customer and 
we want your comments, we're doing an article on this injury. 
So you go to your lawyer, what should I say to the reporter? 
Many lawyers traditionally have said say nothing to reporters. 
Nowadays, they'll usually say, talk to the reporter, but 
don't do anything that would cause us to increase our liability. 
You go to your PR person, the PR person is going to say talk to the reporter, 
definitely control the story. 
Be honest, be candid. 
So sometimes you'll have conflicting advice and 
it's up to you, the person in the middle, to make that decision. 
And then finally, you need to be legally savvy to implement your decision in 
a legally responsible way.
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Being legally savvy also requires you sometimes to take 
what I'm calling a trip to the balcony. 
That means climbing the balcony and 
taking a big picture perspective of the three pillars. 
And more specifically, this often requires reframing risk management, 
which is the Law Pillar, as value creation, which is the Strategy Pillar. 
Often, in our daily lives, we view life through very narrow frames. 
And this is good in one way. 
It helps us navigate through a world that is complex and uncertain.
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But on the other hand, because of the narrow frame, 
we often miss opportunities to come up with better decisions, 
it's sort of like looking in the rear view mirror of your car. 
You can see certain cars approaching but 
there is also a blind spot that you might miss. 
And so if you can reframe your legal decisions, your risk management decisions 
as being more strategic, then you have chance to bring the two pillars together. 
A key element in reframing is to consider the interests of the most important 
stakeholders. 
Your customers, your employees, investors, of course and government. 
And you'll find, one benefit of reframing is, 
that it creates a foundation for ethical decision making.
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So your mantra for business success and 
career success should be understand, protect, and create. 
First of all, understand the Law Pillar. 
Become legally savvy. 
Protect your company through legal risk management that's the Law Pillar. 
But finally, create value by closing the gap between the Strategy and Law Pillars.
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And so you can return to this fundamental diagram or 
instead of having the gap between strategy and 
law, you now have the overlap with competitive advantage in the center.
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In the next segment, we're going to talk specifically about 
how the course is organized and how it relates to the three pillars.
In this segment, I want to talk about the organization of the course, 
and then we'll move on to talk about a very practical tool that you can use for 
making decisions that overlap business and the law.
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So the first four modules in the course are going to match 
the four key stakeholders with the most important legal risks. 
So these have been based on international surveys of number one, 
what are the key stakeholders? 
And then number two, what are the most important legal risks? 
So we're going to pair the Employees stakeholder with Employment Law.
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We're going to compare the Customers stakeholder with Tort and 
Product Liability Law, the Government stakeholder with Regulatory Law, 
and Investors with Intellectual Property.
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This will be a way to get you thinking about the interest of the key stakeholders 
in a business, the stakeholders that are key to your business strategy, but 
also learn about the most important areas of the law, 
which will help you become legally savvy.
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After those four modules, we'll then move to two modules 
that cover the final two key legal risks that have been identified in the survey. 
That's Contracts and Dispute Resolution. 
Both of these areas involve processes that related to many stakeholders. 
And in the final module, we'll focus on the Ethics Pillar, and 
how it links to the Law and Strategy Pillars. 
Within each of these modules, we're going to focus on the mantra. 
The focus is going to be helping you understand. 
That has become legally savvy.
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Number two, Understand how to Protect your business and that's risk management. 
And finally, how you can Create value. 
And when you bring all of these three together, 
that creates competitive advantage.
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So let's now move to this practical 
decision making tool that's very useful in making business and legal decisions.
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This is a tool that I described in another Coursera MOOC 
called Successful Negotiation: Essential Strategies and Skills. 
So if you're interested in that course, here's a link to the course, 
but in that course I used this example. 
This is sort of a primer on this key tool, which is called a decision tree, 
and this example relates to how you can resolve a business dispute. 
So here's the example, your company has filed suit against a supplier. 
There's a 50-50 chance, your attorney tells you, that your company will win. 
Future legal and other expenses to litigate the case, total $400,000. 
Now let's assume that the defendant has just offered to settle the case for 
2 million, what would be your decision? 
Would you accept that offer or not? 
Please hit pause and write down your answer, either settle or no.
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If you used this legal management tool called the decision tree, 
then this would be your approach in making the decision. 
First of all, you would try to draw a picture of the decision, 
and this picture looks like a tree on its side. 
The square in the picture represents your decision. 
Your decision is, do I continue the case, or do I settle? 
Uncertainties are represented by a circle. 
And here the uncertainty is will I win or will I lose. 
Now I found that in everyday life 
just this piece of the decision tree is very valuable. 
I find it in many meetings, the discussions go all over the place and 
it's hard to focus. 
And so often I'll just take a piece of paper and I'll diagram our key 
decisions and the uncertainties in the form of a decision tree. 
And that alone is very valuable in clarifying decisions. 
But in this case we're going to go further, 
we're going to plugin some numbers. 
And the key numbers here are that you have a 50/50 chance of winning,
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and that's represented at the uncertainty node. 
And then if you win,
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you're going to win a net of 4.2 million after you deduct your expenses. 
If you lose you're going to lose $400,000, whereas if you settle, 
then, you could settle for $2 million. 
And then the third and 
final step in using a decision tree is to do a simple mathematical calculation, 
which is to calculate the weighted average of the uncertainty. 
So, there's 50% of 4.2 is 2.1. 
And then you deduct 50% of the $400,000 in expenses if you lose. 
And you come up with something called an expected value of 1.9 million. 
As you can see here with this decision tree that it would 
be a solid mathematical decision to settle the case. 
Now, I'm not saying that you should follow decision trees 
religiously in making all decisions. 
You have to consider your attitude toward risk, and some other factors, but 
at least it gives you a very useful way to think about decisions.
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And it's not only useful in resolving disputes, 
it's also very useful in making business decisions. 
What would be your decision in this case? 
You're trying to decide whether to acquire Company A, 
which has a $21 million value or Company B, 
which has a $15 million value, and the price is the same for both companies. 
If you just stop here, obviously, you would acquire Company A, 
because it's worth more. 
The problem is if you acquire Company A, there's a 90% chance the government 
will challenge the acquisition and a 60% chance the government will win. 
And if the government wins, the value of A drops to $14 million. 
And even if the government loses, the value drops to $19 million. 
Whereas, with B, there's not going to be a government challenge. 
So let's stop right here, and hit pause, and 
try to decide which company you would choose to acquire, A or B?
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And then, after you've made your decision, do a decision tree
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of this decision and see if it matches what your intuition tells you.
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So hit pause, acquire A or B and then prepare a decision tree.
Play video starting at :7:14 and follow transcript7:14
This is what a decision tree would look like in this decision. 
Your decision is acquire A or B, and there are two uncertainties. 
Number one, will the government challenge or not? 
There's a 90% chance the government will challenge.
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And the other uncertainty is, if the government challenges will it win or lose? 
There's a 60% chance the government will win. 
So after you have diagrammed your decision tree, then you can run your
calculations. 
Fundamentally the weighted average of acquiring company A, 
the expected value is 16.5, and 
that is more than the $15 million value of company B. 
And here again, you'd have to take in to account your attitude toward risk. 
So, I hope that this decision tree approach will be useful 
to you in your efforts to bring the law and 
business pillars together no matter what the specific stake holder involved or 
no matter what the specific legal issue involved.
Play video starting at :8:18 and follow transcript8:18
In the final segment, we're going to talk about developing a global mindset 
toward decision making and toward business.
So the decision tree is a tool that can apply regardless 
of the legal issue involved. 
And I'd like to here discuss another issue that applies across the board.
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We live in a global economy, and 
as a result, it's very important to think globally about the three pillars. 
This applies, regardless of what stakeholder you're thinking about, and 
regardless about what legal risk you're facing.
Play video starting at ::40 and follow transcript0:40
Let me ask you this question rather than me just stating the fundamental 
principle involved here. 
My question is, let's say that I sue you fo $100,000.
Play video starting at ::55 and follow transcript0:55
And my lawsuit is based on the color of the shirt that you're wearing or 
blouse that you're wearing. 
I claim that this blouse is in a color that is used by one of the football 
rivals of the University of Michigan, and it's caused me great mental distress. 
And therefore you owe me $100,000, 
but I also say to you I'm going to give you an out. 
You can pick one country in the world where this lawsuit cannot be filed.
Play video starting at :1:27 and follow transcript1:27
Which country would you pick? 
In other words, where's probably the worst place in the world to be sued?
Play video starting at :1:33 and follow transcript1:33
Now, I ask this question sometimes when I'm working with senior executives and 
it's amazing how consistent they are in their answers. 
Can you guess what country they select? 
Well, it's the good old United States of America. 
They say this is probably the worst place to be sued in the world.
Play video starting at :1:51 and follow transcript1:51
Then I ask them a second question.
Play video starting at :1:54 and follow transcript1:54
And that is let's say I am going to sue you in the United States, but 
you can pick one state in the country, 
where you you can not be sued.
Play video starting at :2:8 and follow transcript2:08
When is the worst state to be sued in within the United States? 
Now this is a tuff question for those of you are outside the United States, but 
here again at least from participants and executives who are from the United States, 
they're fairly consistent in selecting California.
Play video starting at :2:29 and follow transcript2:29
So I'm going to call this global mindset the California effect. 
And actually I've borrowed this term from a friend who teaches at Berkeley.
Play video starting at :2:42 and follow transcript2:42
But when I use the term California effect 
it's the equivalent of saying think globally about the law.
Play video starting at :2:50 and follow transcript2:50
Now why worry about the law globally? 
If you're operating a business in Brazil, 
why worry about the law in the United States? 
If you're operating a business in the United States, 
why worry about the law in India?
Play video starting at :3:8 and follow transcript3:08
If you're operating a business in China, why worry about German law? 
What's going on here? 
Why think globally about the law under this California effect? 
Well, there are a couple of reasons.
Play video starting at :3:27 and follow transcript3:27
First of all, thinking globally about the law is 
important because laws change. 
There was an article in The Economist awhile ago that described a new law. 
And the article began, quote, California today The United States tomorrow, 
and the rest of the world the day after, sort of describing the way 
the laws are changed around the world, so it's very important to think
Play video starting at :3:58 and follow transcript3:58
globally in order to try to predict changes in the law.
Play video starting at :4:3 and follow transcript4:03
One of my students was the HR Vice-President for 
a very large international corporation, and she said whenever their company 
develop a new HR policy they would always match it against California law 
to see if it, if they should adopt it or not.
Play video starting at :4:24 and follow transcript4:24
So, think globally about the law. 
Here is a quick example, something we'll be touching on later in the course.
Play video starting at :4:30 and follow transcript4:30
Is it legal in the United States for a manager to bully and harass employees?
Play video starting at :4:40 and follow transcript4:40
Hit pause and write down your answer. 
What do you think? 
Is it legal for a manager to bully and harass employees?
Play video starting at :4:49 and follow transcript4:49
The answer is, it depends but 
generally it is legal for a manager to harass employees 
as long as the harassment is not based on what we call a protected category. 
So as long as it's not based on race or sex, 
etc, as long as the manager Is an equal opportunity harasser. 
It's legal in the United States, but in many countries of the world, it's illegal. 
And so a wise company leader would look at what's happening around the world, 
and see that this is going to to come to the United States eventually, and 
adopt corporate policies to match that. 
So very important to think Globally about the law, because law changes. 
This is the legal version of 
think globally even though you are acting locally. 
Where as I saw on a student's sweatshirt recently, think globally, 
drink locally, but this 
is the legal version of think globally even though you're acting locally. 
There's another reason why developing a global mindset is important. 
Why the California effect is important, and 
that is because, when you do business in other countries in a global economy. 
Then you are going to be subject to their regulations, and 
you're going to be subject to potential lawsuits. 
So let's take a look at a case example.
Play video starting at :6:20 and follow transcript6:20
We've got a couple that lives in the state of West Virginia, Marv and Bessie.
Play video starting at :6:27 and follow transcript6:27
And Marv and Bessie go out one evening, and 
when they return to their house they discovered something interesting, and 
that is, their house is missing, and so Marv and Bessy are a little bit curious. 
What happened to our house? 
They did a little investigation, and they discovered that down the road 
from their houses they knew was a so called 7-Eleven store. 
I don't know if you have 7-Elevens in your country. 
They were started many years ago in a town called Southland Texas. 
They opened at seven in the morning, closed at 11 in the evening, and 
a huge number of 711s in the United States are owned by a company called
Southland, 
and, among other things, 711s sell gasoline. 
Now, in this particular case, there was a leak 
in the pipes connecting a gas storage tank, with the gas pumps.
Play video starting at :7:24 and follow transcript7:24
And so, thousands of gallons of gasoline seeped underground, and 
some of it ended up in Marv and Bessie's basement.
Play video starting at :7:33 and follow transcript7:33
There was a sump pump in the basement, a pump that pumps out water if there's 
flooding, and a spark from this sump pump ignited the gas and blew up their house. 
So that's why their house was missing, and 
Marvin Gussy got to thinking, this just doesn't seem right.
Play video starting at :7:54 and follow transcript7:54
And so they hired a lawyer and 
decided to file suit, now the lawyer did some research. 
He looked around the world, he wanted to find a large, rich defendant, and 
he finally found one in Japan, a company called Ito-Yokado. 
Now, what's the connection between this large company in Japan? 
And Marvin Bessie's missing house. 
How can they connect their loss with his large company? 
Please hit pause and write down your answer.
Play video starting at :8:34 and follow transcript8:34
Well, when I ask this question in class, 
people come up with some very creative answers. 
They say well maybe Ito-Yokado manufactured the pipe that leaked the gas. 
And no they didn't.
Play video starting at :8:49 and follow transcript8:49
Or they said, maybe manufactured the sump pump, and 
the spark from the sump pump caused the gas to ignite and caused the damage. 
Well they didn't manufacture the sump pump either. 
To make a long story short Ito-Yokado owns Southland Corporation. 
This large US corporation that owns the 7-Eleven, and so 
as a company owner they are brought into this law suit. 
So here you have a situation where now you're a Japanese executive, 
and you have to defend a law suit in a small town in West Virginia. 
And on a global scale, this small town might not be friendly 
to foreign corporations, just as when a US corporation is sued overseas. 
For example, 
there was a judge in the West Virginia Supreme Court who put it this way once.
Play video starting at :9:50 and follow transcript9:50
As long as I am allowed to redistribute wealth from out-of-state companies to 
injured in-state plaintiffs, I shall continue to do so. 
Not only is my sleep enhanced when I give someone else's money away, but 
so is my job security.
Play video starting at :10:5 and follow transcript10:05
So what What's behind, what's going on here? 
Why is it that when you make a business decision to operate in another country, 
you might have to go to that country to defend your 
business decision, to defend your business operations? 
Well the underlying law was illustrated by another case
Play video starting at :10:31 and follow transcript10:31
this case involved a couple of young men who were sitting around one afternoon 
listening to some old time music by a band called Judas Priest.
Play video starting at :10:44 and follow transcript10:44
And after listening to the music for awhile they loaded a shotgun,
Play video starting at :10:49 and follow transcript10:49
they drove to a lonely churchyard, and the first man 
propped the gun under his chin, pulled the trigger and killed himself.
Play video starting at :11: and follow transcript11:00
The second young man did the same thing only somehow he survived.
Play video starting at :11:6 and follow transcript11:06
And now we have a lawsuit filed by the young man against the band Judas Priest. 
All of whom are British citizens and against their corporations
Play video starting at :11:18 and follow transcript11:18
in the state of Nevada where this incident occurred, and 
a Nevada judge basically said, well look. 
Before I can decide this case, 
I first of all have to decide what right do I have to hear this case. 
These are British citizens in British corporations. 
How can I force them to defend a case in Nevada? 
Well, he decided that he did have that right, and this was his reasoning, and 
let me read a paragraph from the decision. 
The State of Nevada, 
in protecting its citizens from personal injury, Has a strong interest. 
Furthermore, the only alternative forum, 
the only alternative courts available would be the courts of England. 
An overseas lawsuit is expensive and burdensome. 
While it is true that members of Judas Priest will now be forced to defend 
a lawsuit in a country distant from their own, it is more fair 
to put the burden on them and not on the plaintiffs because and 
here's the key, language from the courts decision. 
The band members consciously and 
deliberately chose to develop a world-wide market.
Play video starting at :12:29 and follow transcript12:29
So in our global economy it's not uncommon for 
your business to choose a worldwide market, to operate in other countries. 
But one of the consequences of that 
is that you might then have to defend lawsuits in those countries.
Play video starting at :12:48 and follow transcript12:48
So that concludes our general look at the California effect, 
and what I want to do in our final piece is to look at 
how litigation differs between the United States and the rest of the world.
Finally I'd like to take a look at how litigation differs between 
the United States and the rest of the world. 
I mentioned earlier that when I ask business executives where is the worst 
place to be sued in the world, they inevitably select the United States. 
And why is that?
Play video starting at ::27 and follow transcript0:27
I know that some of you are from the United States. 
You might have sense of the reasons why. 
Others of you have probably seen US Litigation on TV shows, and 
you might have a sense. 
But, please hit pause and write down the key differences between 
litigation in the United States and litigation elsewhere.
Play video starting at ::51 and follow transcript0:51
Here are some items that should be on your list. 
Number one, in the United States, we use a different approach for 
hiring lawyers than in many other countries. 
We use something called a contingency fee system.
Play video starting at :1:9 and follow transcript1:09
It's not always required but it's one possibility. 
And with a contingency fee, 
the payment to the lawyer is contingent on the results of a lawsuit. 
So, if for example, you hire a lawyer on a 30% contingency, 
that means, if the lawyer wins $10 million for you, 
the lawyer's fee is30% of that or $3 million. 
If the lawyer loses the law suit, the lawyer's fee is 30% of 0. 
I read a story recently about a lawyer who visited somebody in a hospital, and 
he was explaining his contingency fee. 
He said to the injured person, I charge a one third contingency fee, 
and the injured person said I'm so glad to hear that. 
The lawyer I talked to earlier wanted to charge me a one-fourth contingency fee, 
and yours sounds much better. 
Obviously this person had trouble with math. 
But that's the contingency fee system. 
And that Is spreading to a few other countries because it enables, 
especially the middle class, to have access to the Jjustice system. 
Punitive damages, the purpose of punitive damages is to punish the defendant, 
very similar to a criminal fine. 
And it applies when a defendant has done something more 
than simply being careless, has acted in a reckless manner, in an intentional
manner. 
In causing an injury, a court can assess this additional amount 
that depending on local law often will go to the plaintiff
Play video starting at :2:50 and follow transcript2:50
rather than to the state, rather than to the government. 
Discovery is a huge difference. 
The word discovery is one of those rare legal words that means exactly what it 
says. 
Lawyers have a number of tools by which they can discover 
the type of case that the other side has. 
A key discovery tool, for example, is the deposition where a lawyer for 
the other side can force you to testify, under oath, before a court reporter. 
So everything you say is written down, and then the lawyer can analyze this 
in determining what kind of a case he or she has. 
So it's a very powerful discovery tool. 
I'll be mentioning that more in a few minutes. 
Jury trials are a fairly unique feature of the US system. 
Now many countries in the world allow a jury for a criminal trial, but 
the U.S. is somewhat unique in also allowing juries for 
civil cases, that is, business litigation. 
Who pays when you win a lawsuit?
Play video starting at :4:1 and follow transcript4:01
In most of the world, the rule is loser pays. 
If you win a lawsuit, the loser has to cover your attorney fees. 
But, under the so-called American rule, each side pays his or 
her own attorney's fees. 
So, we've got the American rule on the one hand, and the rule that's sometimes
called 
the everywhere but America rule on the other hand, which is the loser pay rules. 
And finally in the United States, we allow class actions.
Play video starting at :4:31 and follow transcript4:31
If your company injures me by overcharging me illegally for 
a product, let's say $1, I'm not going to sue you for the dollar. 
But if you have illegally overcharged 50 million customers, 
then we can join together as a class in suing you. 
And so all of a sudden, instead of a $1 lawsuit, you face a $50 million lawsuit. 
Now, who are the big winners in many class actions? 
Well, it's the attorney who brings them on a contingency fee. 
If the attorney has brought the class action on a 30% 
contingency fee, and the attorney wins $100 million, 
the attorney will receive 30 million of that and you and 
I will receive 70% of $1.00 which is $0.70, 
or worse yet we'll get a coupon from the company who has 
cheated us in overpricing their product. 
So those are the key differences that you should be aware of in a global economy
Play video starting at :5:41 and follow transcript5:41
with respect to litigation.
Play video starting at :5:43 and follow transcript5:43
Sometimes the combination of these 
factors can result in a very low barrier to entry into the legal system. 
For example, 
I mentioned a hypothetical earlier where I sue you based on the color of your shirt. 
Now this is a ridiculous lawsuit, and 
I'm going to be kicked out of court fairly quickly.
Play video starting at :6:6 and follow transcript6:06
And then the question arises, when that happens, what do I have to pay my lawyer? 
Well, under the contingency fee, I would pay nothing.
Play video starting at :6:16 and follow transcript6:16
What do I have to pay your lawyer? 
Well, under the American rule I would pay nothing. 
So there's a very low 
barrier to entry when you combine contingency fee with the American rule.
Play video starting at :6:31 and follow transcript6:31
Let's close this discussion, and this whole module, with a case example. 
And I use this case example also in 
the negotiation course, but here's the situation. 
We have somebody driving a Dodge Caravan. 
A grandfather driving a Dodge Caravan.
Play video starting at :6:56 and follow transcript6:56
And sitting next to him is one of his friends.
Play video starting at :6:59 and follow transcript6:59
Sitting behind the grandfather is his daughter.
Play video starting at :7:3 and follow transcript7:03
And sitting behind the friend in the backseat is his grandson, 
Joshua, eight months old.
Play video starting at :7:11 and follow transcript7:11
A driver of a pickup truck driving around 65 miles an hour 
in a 35 mile an hour zone crashes into the rear end of the Dodge Caravan. 
And this crash causes the friend's seat, 
the friend's front seat to collapse backwards onto baby Joshua,
Play video starting at :7:35 and follow transcript7:35
fracturing his skull and killing him.
Play video starting at :7:39 and follow transcript7:39
So those are the facts and let's see how this plays out under the American system.
Play video starting at :7:47 and follow transcript7:47
So number one, the parents decide to file a suit 
against DaimlerChrysler, the manufacturer of the car, and they hire a lawyer. 
Now, the case doesn't state this, but 
you can probably safely assume they hired the lawyer on a contingency fee basis. 
And in their lawsuit, they claim that Dodge Caravan seats are defective.
Play video starting at :8:10 and follow transcript8:10
That DaimlerChrysler failed to warn consumers the seats are dangerous, and 
therefore the company should be liable for 
compensatory damages and for punitive damages. 
Now in virtually every country in the world, 
compensatory damages are allowable if there's a violation of the law. 
In other words, you're entitled to compensation for your injuries. 
But the U.S. is fairly unique in allowing, also, punitive damages. 
In this case, they said that the company acted in an intentional, malicious, 
and reckless manner. 
So that's the beginning of the lawsuit.
Play video starting at :8:49 and follow transcript8:49
Next step, the company comes in. 
And they file papers saying, 
look the seat design was necessary to protect occupants of the front seat.
Play video starting at :9: and follow transcript9:00
And the seat design met industry standards, which was true.
Play video starting at :9:5 and follow transcript9:05
And the seat design exceeded government regulations, which was also true. 
So now we have the complaint filed by the parents and 
the response by DaimlerChrysler.
Play video starting at :9:19 and follow transcript9:19
We then enter the most important stage in any lawsuit, which is discovery. 
This is what takes a long time and is the most expensive part of the lawsuits. 
So, this was the result of the parents 
discovery along with hiring expert witnesses. 
At trial, they brought in expert testimony that showed that the current seat design 
was not necessary to protect occupants of the front seat, as the company alleged.
Play video starting at :9:52 and follow transcript9:52
They found through discovery that the company knew of the seat design problem 
for 20 years. 
The company had a minivan safety leadership team 
with employees from many areas in the company. 
And this team concluded that the seat design was unacceptable and 
inadequate to protect consumers. 
So what did the company do?
Play video starting at :10:14 and follow transcript10:14
The head of the engineering department ordered the chair of this 
leadership team to destroy the minutes of the team meeting, and 
they disbanded the safety team and fired the chair. 
So as a result of this discovery they found this evidence.
Play video starting at :10:33 and follow transcript10:33
Then it's time for the American jury to make a decision. 
Should the company be liable for compensatory damages? 
Should the company be liable for punitive damages? 
And, if yes, how much in punitive damages? 
So, please hit pause and write down what you think. 
Number one, would you make the company liable for compensatory damages?
Play video starting at :10:57 and follow transcript10:57
Yes or no, and number two, would you make the company liable for 
punitive damages, yes or no? 
And if yes, write down a number. 
What do you think the company should pay?
Play video starting at :11:12 and follow transcript11:12
Here are the results. 
The jury decided that the company and 
the pickup driver, remember this all originated with the pickup 
truck driver crashing into the back end of the Dodge Caravan. 
Should be liable for 5 million in compensatory damages, 
50% each for the wrongful death of Joshua. 
Now the pickup truck driver ignored the entire legal proceeding. 
Never showed up for trial, never responded. 
He's probably uncollectable, 
probably doesn't have any assets to cover this damage award.
Play video starting at :11:48 and follow transcript11:48
And the jury also decided that the company should be liable for 
$98 million in punitive damages. 
The trial court said, wait a minute. 
There's such a large discrepancy between the 2.5 compensitory damages and 
the 98 punitive damages. 
We are going to reduce the punitive damages to 13 million and 
this amount was upheld by the Tennessee Supreme Court. 
They concluded, DaimlerChrysler failed to warm consumers or redesign the seats. 
The company "deceitfully covered up evidence of 
the deficiencies of its seat design while at 
the same time advertising the Caravan as a vehicle that put children's safety first". 
And the court also noted that the compliance with government regulations 
should not protect manufacturers who know regulations are not sufficient to protect 
consumer's. 
And that following industry practice is not a defense when the practice 
places consumers at risk. 
We'll talk more about that when we get to the module involving customers, 
stakeholders, and product liability.
Play video starting at :12:55 and follow transcript12:55
What was not involved in the court decision was the American rule. 
But we can assume that the parents had to pay their lawyer 
out of their damage reward. 
It would not be covered by the defendant. 
And this was not a case involving class actions, 
this was a case brought by one plaintiff.
Out of all the features of the US system, 
the most important to you and the one facet that affects 
you everyday of every minute on the job, is discovery.
Play video starting at ::27 and follow transcript0:27
And the reason for that is that when you and your business are sued, 
the opposing side is, first of all, allowed to sweep in to your business and 
grab any evidence that might be related to the litigation.
Play video starting at ::46 and follow transcript0:46
They can grab not only a hard copy, 
they can grab electronic evidence such as emails. 
They can take your personal diary at home, if you've written things in there that 
relate to the litigation, it's very broad. 
And so the obvious message here is that you should strictly 
follow your company's, what's called a document retention system. 
A better name might be document destruction system.
Play video starting at :1:19 and follow transcript1:19
And strictly follow that and destroy documents according to that system. 
I don't know if you remember, if you're a student of history, 
business history, I don't know if you remember a company called Arthur Andersen.
Play video starting at :1:37 and follow transcript1:37
Back in 2002, Arthur Andersen was a huge international operation. 
They employed 85,000 employees. 
They had $9.3 billion in revenue. 
And Arthur Andersen was wiped off the face of the Earth because 
of issues relating to discovery.
Play video starting at :1:59 and follow transcript1:59
The claim was made, although it was eventually overturned by 
the US Supreme Court after the company was destroyed, 
the claim was made that the company 
illegally destroyed documents that should have been subject to discovery. 
Now, not all of their documents were destroyed, so 
let me give you an example of the kinds of documents that are subject to discovery.
Play video starting at :2:22 and follow transcript2:22
This is an email from the head of the engagement team of Arthur Andersen. 
And, in this memo, in this email rather, 
he is discussing one of their clients, Enron, and Enron was the problem for 
Arthur Andersen that led to the company being disbanded. 
So, number one, the opposing side can grab your emails. 
They can grab your memos. 
This was a memo that the head of the engagement team wrote for 
his own file, wasn't distributed to anybody, but is subject to discovery. 
Here's his calendar.
Play video starting at :2:59 and follow transcript2:59
Here's some notes taken at an Arthur Andersen meeting.
Play video starting at :3:4 and follow transcript3:04
Here's a fax of an email. 
This email was probably the most important email in 
the whole Enron Arthur Andersen matter, because in this email, 
a company attorney is saying to somebody on the engagement team that, 
basically she's saying we should follow our document and retention policy. 
And this was interpreted as meaning, we better destroy all documents quickly. 
And so they were taking documents out in wheelbarrows in the middle of the night 
and destroying them, and that's what caused a huge problem for Arthur Andersen. 
Here's another case involving Andersen, this one involving Andersen Consulting. 
And this is a lawsuit where, I think the basic 
claim was that Andersen Consulting was going to install 
a computer system for, I don't know, around $12 million as I recall. 
And it didn't work and so now they face a $100 million lawsuit. 
And the lawsuit includes this kind of evidence from their emails. 
This is one Andersen Consulting colleague speaking about another one. 
He should be taking classes at a community college, not charging for this. 
Andersen Consulting, by the way, is now called Accenture.
Play video starting at :4:30 and follow transcript4:30
Here's another email, to the recent exodus of one-third of our team, 
we are in pretty deep s. 
Now I am not sure, for those of you from outside the United States if you 
understand the meaning of that, but 
we are in pretty deep s with respect to meeting deadlines. 
We're now going to have to work like crazed weasels to get these things done. 
Another email. 
There's no way we'll have all the components done by the 11th. 
It's completely unrealistic to make estimates 
when we don't know what it is we are estimating. 
Pure, there's our s word again. 
There are problems so 
glaring I'm surprised we haven't gotten lots of problems in system tests. 
Any overruns are our client's problems. 
So although we should feel bad when they happen, it's their decision to spend or 
not to spend. 
Helpful aren't I? 
And finally, before you leave for the last time, 
you should delete your mail messages. 
And this raises a question, will deleting your email messages help? 
And the answer is probably no. 
Your messages are at a backup system. 
When you try to delete them it's a lawyer's heaven because the lawyer can go 
into the backup system, look at the messages you tried to delete, 
which are usually the most incriminating ones, and then bring that into court, 
the fact that you tried to delete the incriminating messages. 
So that's a key aspect of discovery. 
The other aspect is the deposition, where the opposing attorney, 
as I mentioned earlier, will ask questions in front of a court reporter,
Play video starting at :6:4 and follow transcript6:04
and this is a very powerful discovery tool. 
The opposing attorney might also use that to intimidate you. 
And what I have here is an example of a deposition. 
It's only about five and a half minutes, but 
it seems like it takes about a half hour. 
It's so aggravating for the executive who is being interviewed or 
who is subject to the deposition. 
He happens to be the CEO of a hospital system. 
As you watch this, 
think carefully, what would you do if somebody posed these questions to you? 
And if you want to see a humorous deposition, I think it's humorous, 
then here is the deposition that was taken in Texas. 
You'll see a Texas-style deposition. 
So bottom line, whenever you make business decisions 
wherever you are in the world, always think, how will this 
play out in court if I am sued in the end whether it's a pricing decision, 
a new product decision, a contract decision, whatever it is. 
How will it look in litigation?
Play video starting at :7:18 and follow transcript7:18
Here's some advice from a risk management article. 
What most of us fail to realize is that virtually everything we do in our daily 
business could end up in front of a jury. 
Never make the assumption, no one will ever see this. 
Do business as if you were in front of a jury.
Play video starting at :7:35 and follow transcript7:35
So that concludes our module. 
And again, the main focus here is trying to obtain an overlap between strategy, 
law, and ethics to create this center, 
which we call competitive advantage. 
And in our other modules, we'll look at this through the lens of stakeholders 
while also looking at the key legal risks involved in your business decision making.
This module is a very important one, because it deals with how you 
can attract and retain the best talent using employment law.
Play video starting at ::19 and follow transcript0:19
As in our other sessions, this is built on the three pillars of decision making. 
The three pillars that apply not only in business but in personal decision making 
and in leadership decision making, and these are strategy, law, and ethics. 
And in a business context, the three pillars overlap. 
And the focus of the strategy pillar is on value creation. 
The focus of the law pillar is on risk management. 
And when these two pillars overlap with ethics, we have a sweet spot in the middle 
that gives your business competitive advantage and 
can make you more competitive in your career. 
However, the catch is that in business there's 
often a gap between the law pillar and the strategy pillar. 
And so the challenge is to bring these two pillars together, 
which will enable you to create competitive advantage.
Play video starting at :1:19 and follow transcript1:19
And so, in this session as in other sessions, the goal is to make you 
more legally savvy so that you can create the overlap between law and strategy. 
The focus of this session, of course, is on attracting talent and employment law. 
And the specific focus is on what are the four 
most important stakeholders in any business, which are your employees.
Play video starting at :1:47 and follow transcript1:47
Whenever I ask senior executives what's the most important 
asset you have in your business, they don't hesitate a minute. 
They say it's our employees. 
So this module is especially important for 
any business that wants to achieve success.
Play video starting at :2:6 and follow transcript2:06
This is going to be our game plan. 
Employment law is a huge area as we'll discuss in a minute. 
And so we're going to focus our approach by, 
first of all, looking at employment law from a broad perspective. 
And then we're going to look at two of the most critical and 
controversial issue relating to employment law. 
One is what lawyers called wrongful discharge, what you and I know, is your 
ability to fire someone or if you're an employee the fact that you've been fired.
Play video starting at :2:38 and follow transcript2:38
And the other issue is discrimination. 
So we're going to look at these topics. 
We're going to relate those to the risk management piece, the law pillar. 
And then we're going to go beyond risk management at the very end and 
talk about value creation.
Play video starting at :2:53 and follow transcript2:53
Employment law is complicated because, as you can here, 
it covers almost everything that an employee does at work. 
Almost every interaction between a company and 
employee is covered by some aspect of employment law. 
If you belong to a union, 
you are probably covered by a collective bargaining agreement. 
We've got discrimination issues, discipline issues, your employee benefits, 
health and safety including workers' compensation, hiring and firing. 
Pay is governed by employment law, performance, your right to privacy. 
For instance, when you use email at work and 
your work hours, all of that is covered by employment law. 
And the issues keep emerging. 
Today there are issues that companies have to worry about, that three or 
four ago that weren't even on the horizon. 
In 2014, my son and I did a book called Employers and the Law, 
he's a graduate of law school, and 
we put together an anthology of articles that deal with current issues. 
And this is a sampling of what those articles are. 
What's company policy with regard to what's called BYOD?
Play video starting at :4:6 and follow transcript4:06
Companies nowadays are asking employees to use their 
personal smartphones at work, and this raises a lot of interesting questions. 
For instance, 
if the company is sued, does that mean that the person filing suit has access 
to everything on your smartphone, bullying at work, lactation discrimination. 
Can women breastfeed at work, what are company policies about lactation? 
Legal implications of leaning in, obesity discrimination, 
retaliation, workforce violence and so on. 
So not only is employment law a huge area of law but 
the issues are constantly evolving and changing. 
So employment law covers a huge number of issues affecting 
everything you do at work, and the issues are continually evolving. 
Let's now turn to two of the most controversial 
issues relating to your work. 
The first of those is firing, what lawyers call wrongful discharge. 
And the second is discrimination at work.
When we talk about wrongful discharge or firing, 
it's helpful to think of three types of situations. 
The first one is where the company has Good Cause to fire an employee. 
These cases are generally not controversial, if you have 
Good Cause then generally, around the world, you can discharge an employee.
Play video starting at ::31 and follow transcript0:31
The second situation, on the righthand side, is where there is a firing for 
Illegal Cause. 
And this is also a fairly straightforward area. 
If the cause violates the law, no matter what country you're in, then 
the discharge is illegal and the employee has a right to damages or other remedies. 
The toughest situation is where there is firing without cause and 
that's where we're going to focus for the next few minutes.
Play video starting at :1:4 and follow transcript1:04
Let's start by taking a look at this scenario. 
Let's say that you're a manager at a bank.
Play video starting at :1:11 and follow transcript1:11
And you learn that your bank is not complying with consumer credit law.
Play video starting at :1:16 and follow transcript1:16
You attempt to convince your superiors to comply with the law, without success. 
And so you decide to disclose incriminating files to the bank auditors. 
The bank then fires you. 
And the question is, can you recover damages from the bank, and why? 
So please think about that for a second, hit pause, write down your answer, and 
then we'll continue.
Play video starting at :1:43 and follow transcript1:43
I'm going to return to the answer in a few minutes, but 
first of all let's talk about the law a bit. 
The answer might depend on where you are located in the world.
Play video starting at :1:55 and follow transcript1:55
In the United States, there's a rule called the Employment at Will Doctrine. 
And under that rule, you can be fired at will. 
You can be fired any time without cause. 
That's the general rule. 
Whereas outside the United States, countries use a variety of approaches 
that often include a duty to give notice to an employee before firing and 
possibly to provide compensation to the employee in case of firing. 
Some countries might have one of these requirements. 
Some countries might have both. 
For example, here's a sampling. 
In Japan there's a requirement that the employer gives 30 day notice or 
provides pay instead of notice. 
In India there's a requirement 
of one to three months notice depending on how large the company is.
Play video starting at :2:50 and follow transcript2:50
In Mexico there's no requirement of notice, but, 
there's a requirement that the company have a clause for firing. 
And if there's no clause, then the company has to make payment instead. 
One question, which system would you rather work in? 
Would you rather work in the United States where you can be fired anytime 
without cause, or would you rather work for a company outside 
the United States where the law requires the company to give notice and 
possibly to provide compensation?
Play video starting at :3:23 and follow transcript3:23
I began thinking about this a few years ago, when I was Associate Dean for 
Executive Education at the Ross School of Business. 
And I decided that we should start a center in Paris, which we did. 
And so I flew to Paris in order to hire employees for this new center.
Play video starting at :3:42 and follow transcript3:42
And before hiring employees, I met with a French lawyer 
who explained the French system of hiring. 
And as she explained it, she said that I could hire an employee under what I 
believe she called a CDI or under a CDD.
Play video starting at :4:2 and follow transcript4:02
And one approach, the CDI, I would be hiring a permanent employee, 
whereas a CDD hiring would be on a temporary basis. 
And she explained to me that I definitely should hire temporary employees 
because permanent employees are very difficult to discharge in France. 
Well what's the consequence of that? 
If lawyers are giving this advice to employers, generally in France,
Play video starting at :4:33 and follow transcript4:33
the consequence is that it's going to be very difficult for 
you as an employee, to find a permanent job. 
Here's an article from Financial Times that discusses this. 
This article distinguishes employees between insiders and outsiders. 
If you're an insider you've got a permanent job, you're secure. 
But if you're an outsider it's very difficult to find a job. 
For example, 
this article quoted a small business owner, who noted that a small business 
owners will hire someone permanently only if they have a gun pointed at them. 
And this is the way a 28-year old journalist described the situation. 
Basically, what she's saying is if you're an outsider, 
everything is more complicated. 
When you don't have that long term position, especially in Paris, 
if you want an apartment, you have to lie on your application. 
Everybody does it. 
So, it gets a little complicated in terms of which system would you prefer being in. 
Some people think that permanent job creation 
is a problem in countries where there is not an employment-at-will rule.
Play video starting at :5:47 and follow transcript5:47
So, we've got this basic distinction between the U.S. employment-at-will, 
and the approach outside the U.S. where notice and compensation are required. 
However even in the United States, there are exceptions to the employment at 
will doctrine that do provide some protection to employees and 
we'll look at those exceptions next.
Let's now look at the exceptions to the U.S. employment at 
will rule which provide some additional protection for U.S. employees. 
And let's start with this case, 
we've got a situation where a job candidate is negotiating with a company. 
The candidate wants a job as director of marketing, 
and during the negotiations, 
the company says to the candidate, 
"If you are doing the job, 
you can be assured that you will not be discharged." 
This is an actual quote from the case. 
And the question is, if this person is hired and then fired without cause, 
is the person entitled to damages? 
Please hit pause. 
Write down your answer and then we'll look at the result. 
In this case, the court decided that normally this person could be fired without
cause. 
That's the general U.S. approach. 
However, when the company said, 
"If you are doing the job, 
you can be assured you will not be discharged." 
That became a contractual obligation of the company. 
The company in effect was changing the usual employment at will rule, 
and so the employee won the case. 
So we've got one exception, 
and that's where there's a contract formed that overturns the employment at will
rule. 
OK, let's try a second case. 
How do you come out on this one? 
You've got a salesperson who works for a company for 25 years. 
He obtains a $5 million order, 
and the next day the company fires him in 
an attempt to avoid paying the bonus that would go with his kind of order. 
Would the salesperson be entitled to damages? 
Hit pause and write down your answer. 
In this case, again under the normal employment at will rule, 
the company could fire the sales person and there would be no liability. 
However, the courts in some states, 
in a few states say, 
"Look this is not fair, 
and therefore in situations like this the employees should be entitled to damages." 
In other words, the company has to act in good faith in firing employees. 
So, we've got a second exception to the employee-employment will rule and that is, 
was the discharge, was the firing fair and in good faith. 
OK, let's try a third scenario. 
We've got a nurse who goes on a camping trip with 
hospital staff including her supervisor. 
And they're sitting around the campfire one evening and 
the employees begin to moon other people who are on the camping trip. 
And the supervisor says, 
"Hey, why don't you join them?" 
They're mooning each other while they're singing Moon River. 
Now, if you're from outside the United States I'm not sure if 
you understand the verb mooning, 
but basically it means dropping your pants and bending over backwards, 
that's called shooting a moon at other people. 
So she said, "No, 
I'm not going to do that. 
I'm not going to participate." 
She returns to the hospital, 
and she's fired even though she has had good performance reviews. 
Would she be entitled to damages? 
Well, here again under the normal employment at will rule, 
the answer would be no. 
The hospital could fire her without any cause. 
However in this case, 
the Arizona Supreme Court started by saying, "Look, 
we have little expertise in the techniques of mooning, 
but we do know that an employer may fire somebody for a good cause or for no
cause. 
But the employer may not fire somebody for bad cause, 
which means a cause that violates public policy. 
And firing somebody for refusal to participate in public exposure of 
one's buttocks is a termination contrary to the policy of this state." 
So, here we have a third exception used by 
both states which is a violation of public policy. 
So bottom line, courts have developed 
these three exceptions to the employment at will rule in the United States, 
and where the exceptions apply. 
The damage consequences in the United States can be fairly consequential, 
and I'll discuss that in a minute. 
But first, let's return to our situation involving the bank manager. 
So, you'll recall that as a manager of 
the bank you discover the bank is not complying with consumer credit law. 
You try to convince your superiors to comply, 
when they don't, you disclose the incriminating files to the bank auditors. 
The bank fires you. 
Can you recover damages? 
Now, think about this again. 
You wrote down an answer earlier, 
but think about it again. 
In the United States, 
would the manager be able to recover damages? 
Please hit pause, and write down your answer. 
And the answer is that, yes, 
the bank manager would be allowed to recover damages in 
most states because of the public policy exception. 
There's a policy that people should disclose incriminating files, 
and that was the reason for the firing. 
And therefore, in this case the bank was liable. 
Now as I mentioned in cases like this, 
the damages can be substantial. 
A few years ago, I was teaching at Stanford University as a visiting professor, 
and I returned home one night, 
picked up the local paper, 
and read an article about the Silicon Valley employee. 
The employee was fired. 
File a wrongful discharge lawsuit. 
The company investigated the case, 
and then said, "Oh sorry, 
we lost our file." 
And so according to this article the previous day, 
a jury had awarded the employee $6 million in 
actual damages and tacked on to another 
$55 million in punitive damages to punish the employee. 
Now, this is California where damages tend to be high in lawsuits like this. 
But it's not just California. 
For example Kentucky, two Ashland Oil employees were awarded 
$70 million after a wrongful discharge because they protested illegal foreign
payments. 
And in Texas, an energy company employee was awarded a 
$124 million for wrongful discharge 
after refusing to prepare documents containing misleading information. 
These are violations of public policy. 
Now in cases like this, 
often you read the headlines where the damage awards are 
huge after the jury gives the verdict. 
However, often these cases are settled afterwards in order to avoid an appeal. 
So both of these cases for example, 
settled for $25 million. 
The other side of the story, however, 
is that in some cases like the ones I've just described, 
the employee wins the lottery, 
but in other cases employees who are wrongfully terminated don't win much at all. 
Here's a quote from an ACLU attorney, 
"The average employee who has been wrongfully terminated has 
as much chance of getting a jury trial as sprouting wings and flying to the moon." 
And the reason for that is the employment at will rule. 
So one final note about these damage awards and that is, 
as a result of the three exceptions to the employment at will rule in the United
States, 
employers have become very cautious about firing employees, 
and actually according to this RAND study, 
the indirect costs of firing are much greater than the costs of jury awards. 
In fact, they're a hundred times greater than the jury awards. 
Now why is that? 
Well, it's because companies are afraid to fire employees even poor performers. 
So they keep poor performing employees on the job at a cost to the company. 
They make huge severance payments to employees, 
and they spend a lot of time going through various processes to discharge
someone. 
So the development of these three exceptions to the employment at 
will rule has had a huge impact on employment practices in the United States. 
Now next, we're going to take a look at how you can manage 
this risk of damage award after discharging an employee.
We have some big liability risks connected with firing somebody. 
Let's now look at how you can, perhaps manage those risks and 
risks management falls within two categories. 
The first category relates to performance reviews. 
In other words, when you look at the three types of firing. 
The question is can you move the firing from the no cause category to good cause? 
Because if you can show there was good cause for firing, 
then the liability is eliminated. 
I had a student in one of my classes once, 
she was at Energy Company HR Director and this is the way she put it. 
She said, we're an at will company.
Play video starting at ::57 and follow transcript0:57
Which means, we can fire our employees at will. 
And we'll make them sign an agreement when we hire them, stating we can fire you
at 
will, but we always try to show cause as a precautionary measure.
Play video starting at :1:11 and follow transcript1:11
So let's assume that you have been hired, as a manager at a company. 
And one of the first things you would do as a manager is to look at the quality of 
your talent, look at the quality of your employees. 
When you do that, you realize you've got a problem with one of your employees. 
This is a poor performing person and you want to fire this person and 
let's assume that even though you could fire at will, 
you want to try to show cause. 
So, you look at the employee's performance reviews. 
Now, what are you going to find at a typical company? 
Well, probably the past performance reviews are going to look something 
like this. 
Great. 
Great. 
Great performer and then it comes time for your first performance review. 
Terrible. 
So, you've got a problem here and the problem basically boils down to honesty. 
A lot of employers, a lot of managers and 
supervisors are reluctant to say honestly what they think about performance. 
And this is an example from an actual company where 
the company use the ten point scale in evaluating employees. 
And the way the scale workout in practice is, 
is that if you are a very good employee, you got a ten. 
If your employment performance was acceptable, you received a nine. 
If it was unacceptable, you got an eight. 
So on a ten point scale, even unacceptable performances received a very high
score. 
So the catch is as a manager, 
being honest in your performance reviews, so 
that you can show cause if necessary. 
This is very important for the company. 
But as pointed out by legendary CEO Jack Welch, it's also being fair to employees. 
It's not fair to employees to basically tell them 
you're doing a great job when they're not. 
You're not helping them to develop. 
You're not helping them understand the problems with their performance. 
Jack Welch appeared on the University of Michigan campus a while ago and 
this is the way he put it during his talk on campus. 
Don't any of you managers think you're being kind, 
because you give good appraisals. 
That is the cruelest thing you can do to a failing employee. 
One of my students said that he attended a lecture 
by Welch in which Welch asked the crowd, 
how many of you think that your company is honest? 
And 90% of the hands went up.
Play video starting at :4:4 and follow transcript4:04
And then Welch asked the crowd, 
how many of you think that your companies give honest performance reviews? 
Only 10% of the hands went up. 
So, that's the challenge in risk management. 
Honest performance reviews.
Play video starting at :4:21 and follow transcript4:21
Lets now move on to the other risk management approach and 
that deals with corporate communications. 
A few years ago, I was invited to Texas by a large corporation and 
they wanted me to give a legal briefing to what they called fast track managers. 
These were managers who were high performers and 
who were moving up quickly through the corporate ranks.
Play video starting at :4:48 and follow transcript4:48
And before I went to the company, before I flew down to Texas, I picked up some 
recruiting literature that the company had provided the Roth School of Business and 
this is what I discovered in one of the recruiting brochures. 
It says, each new employee at this company participates in an orientation program. 
And quote, at the end of the program, they are placed in permanent 
assignments consistent with their performance and career goals. 
Now based on our discussion of the law, do you see a problem with this language? 
Is there anything that bothers you about this language? 
Please hit Pause and write down your answer.
Play video starting at :5:34 and follow transcript5:34
There's one word in here that should have jumped out at you and 
should have bothered you a lot and that's the word, permanent.
Play video starting at :5:43 and follow transcript5:43
What this company in effect is telling employees or 
this could be interpreted by courts as telling employees despite the employment 
at will rule, we are hiring you in a permanent position.
Play video starting at :5:59 and follow transcript5:59
So, I went down to Texas and 
I gave my presentation to these fast-tracked managers. 
And there were a couple of HR people in the crowd and 
I mentioned this during my presentation, I mentioned this language and 
I saw both of them flinch when I mentioned the language. 
And at the end of the talk, they walked up to me and 
they said, can we have a copy of that recruiting pamphlet? 
And I gave them my copy.
Play video starting at :6:28 and follow transcript6:28
Next year, I was invited back to do another presentation. 
And again, before leaving, I picked up the company's latest recruiting brochure and 
I noticed that they had changed the language slightly. 
This is the way it now read. 
After you are hired, a dynamic career may be waiting for you, but 
they completely eliminated the word permanent. 
So, this relates to the contract exception to the employee law. 
You don't want to use language that can lead the employee to believe 
that you are creating a contract that overrides the employment at will rule. 
It could be not only written documents, it could be something that is said orally. 
An HR manager in one of my courses told me that she attended 
a company banquet and at the banquet, the CEO stood up. 
He was feeling very good at the banquet. 
Maybe he had a couple drinks, I'm not sure. 
But he said, I want you to know that as long as you work hard, 
you'll always have a job here. 
And she said, she almost fell out of her chair when he said that. 
Because it's statements like that that override the employment at will rule, 
because of the contract exception. 
So those are the two key approaches that you could use for 
risk management, as it applies to the employment at will rule.
Let's now move on to a topic that's related to firing.
Play video starting at ::15 and follow transcript0:15
But it's also a broader issue, and that's defamation. 
And we'll look first at the law of defamation and 
then we'll look at managing the defamation risk. 
So here's a scenario I'd like you to think about. 
Let's say that you're a manager and you fired Larry.
Play video starting at ::40 and follow transcript0:40
And Larry's trying to find another job.
Play video starting at ::43 and follow transcript0:43
And so he goes to a potential employer, and 
this employer calls you and said hey, why did you fire Larry? 
And you say, Larry was irrational, he was ruthless, 
he was disliked by our office personnel. 
Larry is a classical sociopath, he's a zero. 
He's a Jekyll and Hyde person who has no scruples.
Play video starting at :1:8 and follow transcript1:08
Okay, now what legal light bulb should go off when you make statements like that? 
There should be a huge legal concern when you talk 
to potential employers like the one who is thinking about hiring Larry, 
and light bulb is called defamation. 
Defamation, a simple definition is a communication that harms 
somebody's reputation. 
And defamation is divided into oral defamation, 
which is called slander, and written defamation, which is called libel. 
And in this particular case, Larry filed suit against his former employer. 
Larry, by the way, he couldn't find a job after he was fired, and he wondered why. 
So he hired a detective and the detective called the former employer and 
this is what the former employer said about Larry. 
So Larry filed suit and he won $1.9 million.
Play video starting at :2:13 and follow transcript2:13
So the question is, what can you, as an employer, do to avoid this liability? 
Now, I work with senior executives around the world. 
And when I ask this question, I always receive a standard answer, and 
that is, we don't talk about our former employees.
Play video starting at :2:35 and follow transcript2:35
We just give the name, their rank and their serial number, basically.
Play video starting at :2:41 and follow transcript2:41
We'll tell people when they worked for the company but 
we're not going to say anything more because of the risk of defamation.
Play video starting at :2:50 and follow transcript2:50
Now this causes some problems, this type of business policy. 
Number one problem is, if you want to hire somebody and 
you contact former employers, it's going to be very difficult for 
you to find out information about their job performance.
Play video starting at :3:9 and follow transcript3:09
But number two, and this is what companies often don't realize, 
they are still open to the risk of liability. 
Because this policy only talk about name, rank and serial number, 
typically applies when they're talking to outsiders, 
when they're talking to companies that are considering hiring former employees. 
And they forget that defamation can also apply to communications to 
people inside the company and even to communications directly to the employee. 
So here's an example involving a communication to insiders. 
We've got an employee who works for a company for 41 years. 
He's fired after the company accuses him of stealing a phone, 
which the employee claimed belong to him. 
In internal communications, the company accused the person of theft. 
The person sued the company for defamation and wins $15 million. 
And like many of these cases, again, the case was settled for 
a lesser amount later.
Play video starting at :4:18 and follow transcript4:18
And so the bottom line is, you should think about the risk of defamation even in 
internal communications, including performance reviews. 
Believe it or not, these are quotes from actual performance evaluations. 
This person works well when under constant supervision and 
cornered like a rat in a trap.
Play video starting at :4:41 and follow transcript4:41
This person would be out of his depth in a parking lot puddle.
Play video starting at :4:45 and follow transcript4:45
Or, when she opens her mouth, 
it seems this is only to change whichever foot was previously in there.
Play video starting at :4:53 and follow transcript4:53
Or, this person sets low personal standards and 
then consistently fails to achieve them. 
Well, these are sort of humorous, however, they are also grounds for defamation. 
So you have to be very careful in communication, even within a company.
Play video starting at :5:14 and follow transcript5:14
In other words, 
defamation liability does not only apply to communication to outsiders. 
Bottom line here, what you're giving the employee is a chance to recover damages, 
even where the company can show that the discharge was legal. 
Even though the firing was legal, there's an additional grounds of liability.
Play video starting at :5:41 and follow transcript5:41
I saw a quote recently from a prominent employment lawyer, 
and he said that in about 60 to 70% of wrongful discharge cases, 
the plaintiff, the discharged employee, 
also alleges defamation and also alleges discrimination. 
So defamation and discrimination are add ons to a wrongful discharge lawsuit.
Play video starting at :6:12 and follow transcript6:12
Now, this risk of defamation can even apply, 
surprisingly enough, when the company doesn't say anything. 
Here's an example. 
This is a little bit on the borderline, 
a little bit extreme, but you should be aware of the risk. 
We've got a trader who works for a brokerage firm for 12 years. 
Three of the firms officials suddenly show up in his office and 
in plain view of the other employees, grill him about his expense report. 
They then escort him out of the office without allowing him to speak to his staff 
or without allowing him to take his belongings. 
The employee sued for defamation. 
He said, in effect, this is defamation by conduct. 
Through their conduct, they were implying that I cheated on my expense reports. 
And the company asked the court to dismiss the case, and 
the court said no we're going to allow this to go to trial. 
And I'm not sure what eventually happened. 
But this case illustrates the risk of defamation by conduct. 
Now, what about communications directly to the employee? 
Can these be grounds for defamation? 
For example, let's say that you are Larry's boss, and 
you decide to fire Larry. 
And Larry says, why are you firing me? 
And you say Larry, you're irrational, you're ruthless, 
you're disliked by office personnel. 
Larry, you're a classical sociopath, you're a zero. 
A Jekyll and Hyde person who has no scruples. 
So you say that to Larry, okay? 
Now normall, defamation relates to comments 
made to other people, not to the individual whom you are defaming.
Play video starting at :8:5 and follow transcript8:05
But, here's the risk.
Play video starting at :8:8 and follow transcript8:08
Larry leaves your office and he applies for a job.
Play video starting at :8:14 and follow transcript8:14
The company calls you and says, why did you fire Larry? 
Well, under you new company policy you say, I can just give you his name and 
his rank and when he worked here and I'm not going to say anything else.
Play video starting at :8:28 and follow transcript8:28
So, the new company then says Larry, your old company won't talk. 
Why did they say they fired you? 
And Larry says well, they said I was irrational, 
I was ruthless, I was disliked by office personnel. 
They said I was a classical sociopath, a zero.
Play video starting at :8:47 and follow transcript8:47
A Jekyll and Hyde person who has no scruples. 
Well at that point, 
the new company is going to say well Larry, I don't think we can hire you. 
Or maybe they'll say you're great CEO material. 
No, kidding.
Play video starting at :9:2 and follow transcript9:02
But now, at this point, Larry might 
file suit against his old company, claiming defamation.
Play video starting at :9:14 and follow transcript9:14
But you say, wait a minute, this doesn't make sense. 
He just defamed himself by providing this information. 
Well some courts have come up with a theory of compelled self-defamation. 
Larry had to provide this information in order to be honest, 
because the old company wouldn't provide the information. 
So there's a risk even when you communicate directly with the employee.
Play video starting at :9:41 and follow transcript9:41
So these are the basic communication risks. 
Now, how can you manage these risks? 
Well, you could say, we're not going to talk to anyone, inside or 
outside the company. 
The problem is this can lead to rumors. 
It can lead to mistrust of the company. 
So other approaches are first of all, manage by fact. 
This is an old principle of quality management. 
If you stick to the facts, then you are not legally liable. 
If Larry is in fact a classical sociopath, then you can say that. 
It's only when you exaggerate and 
misstate the facts that you run into defamation risks. 
Or you should not be talking to other people at all, 
you should leave this to the experts, your human resources people. 
Or what I have discovered in working with executives in some countries and 
in some companies, 
they deliberately provide letters of reference to discharged employees. 
That way the employee can't say, well, my old company won't talk and 
I have to defame myself. 
They've got letters.
Play video starting at :10:51 and follow transcript10:51
Here's some language you can use if you're writing a letter for an employee and 
you can't think of anything good to say.
Play video starting at :10:58 and follow transcript10:58
Here's, for somebody who's been involved in criminal activity, you could say well, 
this is a person of many convictions. 
Or for somebody who's not trustworthy, you can say, her true ability is deceiving. 
For somebody who's unqualified, 
I most enthusiastically recommend this person with no qualifications whatsoever. 
Or for somebody who is lazy, 
you'll be very fortunate to get this person to work for you. 
Of course, these are provided in a humorous vein but 
the bottom line is try to be honest in your communications.
Play video starting at :11:36 and follow transcript11:36
So that concludes this segment.
Let's now move on to our other main topic, which is discrimination. 
So I want to give you a briefing on the law of discrimination. 
And then we'll get discrimination from a risk management perspective.
Play video starting at ::23 and follow transcript0:23
Discrimination is an important theory because, 
number one, it is used in wrongful discharge cases. 
Often when somebody is fired without cause, 
and bring suit, they will allege that in addition to 
the theories relating to employment at will, there was discrimination. 
And there was discrimination in the firing. 
Or as we've just discussed there was defamation. 
But discrimination is also important because it goes way beyond firing. 
It relates to all aspects of the work environment.
Play video starting at :1:3 and follow transcript1:03
So what do we mean by discrimination? 
Well, let me give you an example under US law. 
Although many of these, nowadays, apply around the world. 
Countries around the world have adopted most of these categories of 
discrimination, age, which some countries outside the US have not adopted. 
And by the way, when does age discrimination apply? 
Well, when you become an elderly person, defined as age 40 or 
older, you are protected by age discrimination, 
disability, genetic information, national origin, pregnancy, 
race, religion, and sex those are again very common around the world.
Play video starting at :1:50 and follow transcript1:50
And one question that often arises is, 
how global is the US law, even if there is no local law protecting some way? 
And here's the rule, regarding the global impact of US law. 
US anti-discrimination laws are generally global, 
in that they cover US citizens, employed by US companies around the world. 
Now a non-US citizen would not be covered, that's the general rule.
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However, there is a foreign law defense that companies can raise, 
even US citizens are not protected if US law would violate local law.
Play video starting at :2:31 and follow transcript2:31
So how would you decide this case? 
We've got a situation where, let's say you're a US pilot working for 
a US company in Saudi Arabia. 
Some of your flights take you over a holy area.
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The law in Saudi Arabia says that you cannot fly over this area, 
unless you are Muslim. 
And if you are caught, you will be beheaded.
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You're company demands that you convert to Islam, 
if you want to continue working as a pilot. 
You refuse to convert.
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Number one, what type of discrimination could you assert 
against the company if you sued the company? 
And number two, would you win your lawsuit? 
Please hit pause and write down your answer.
Play video starting at :3:19 and follow transcript3:19
Well, the answer is, that you would assert religious discrimination.
Play video starting at :3:26 and follow transcript3:26
And then the question is would you win or lose? 
You would lose your case. 
In other words, you would have to convert to Islam under the company demands, 
if you wanted to continue working as a pilot because of the foreign law defense. 
Remember, local law trumps US law. 
And the local law here in Saudi Arabia, 
says that you cannot fly over this area unless you are Muslim.
Play video starting at :3:56 and follow transcript3:56
So we've discussed the main categories of discrimination. 
But in the United States, we also have state laws that go beyond federal laws. 
So here's some examples of common state laws. 
Anti-discrimination laws cover gender identity, 
marital status, military discharge status, parenthood, political activities, 
receipt of welfare, sexual orientation, and use of a lawful product, for example, 
no discrimination for using tobacco, and finally, weight. 
And then in addition to state laws, we also have local anti-discrimination laws. 
So in my hometown, Ann Arbor, Michigan, we've got some additional categories.
Play video starting at :4:43 and follow transcript4:43
There's protection against discrimination on the basis of your arrest record, your 
educational association, your height, your HIV status, the source of your income, 
or whether you were the victim of domestic violence, or stalking. 
So, we have a huge number of categories of discrimination. 
And what I want to focus on here, since there's so many categories we can't cover 
everything, I'd like to take a deep dive looking at sex discrimination. 
Now here again, sex discrimination can be used in a lawsuit 
against a company, claiming you were discharged on the basis of your gender. 
No sex discrimination is allowed in firing somebody. 
But here again, sex discrimination, 
like the other types of discrimination extends to all aspects of employment. 
For instance, no sex discrimination in hiring, in job responsibilities, 
in promotion, in pay, and so on.
Play video starting at :5:47 and follow transcript5:47
However, sex discrimination raises an interesting question. 
And that is, what exactly is sex discrimination? 
And does it include sexual harassment? 
And then what is sexual harassment? 
Well it's very clear, 
that sex discrimination does include sexual harassment.
Play video starting at :6:8 and follow transcript6:08
But until 1986, it was unclear as to what constitutes sexual harassment. 
And, in that year, in a leading case by the US Supreme Court, 
the court decided first of all, that 
sexual conduct is illegal when it is unwelcome.
Play video starting at :6:31 and follow transcript6:31
So if the sexual conduct, let's say if a manager is welcome by the employee, 
then it is legal, unwelcome illegal. 
But then the court went on to say that there are two forms of illegality. 
One is so called quid pro quo sexual harassment. 
And then second, and this is where the supreme court clarified the law, 
the supreme court said there is also hostile environment sexual harassment. 
Now quid pro quo harassment is economic harassment. 
I will give you this, that's the quid.
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I will give you an economic benefit, in exchange for the quo, in exchange for 
sexual behaviors. 
If you sleep with me I'll give you a promotion. 
If you sleep with me I'll give you a raise. 
If you sleep with me I'll give you a job. 
That's this for that, quid pro quo. 
The classic example is the so-called casting couch, 
used by Hollywood directors, those cases are fairly clear cut.
Play video starting at :7:37 and follow transcript7:37
But what the Supreme Court also did is to say, you can also have non-economic 
harassment, based on the psychological aspects of the workplace. 
This is called hostile environment sexual harassment.
Play video starting at :7:53 and follow transcript7:53
This is the Supreme Court's definition of hostile environment sexual harassment. 
The Supreme Court said sexual misconduct is illegal, even when it is not 
linked to an economic quid pro quo, if the conduct has the purpose or 
effect of unreasonably interfering with an individual's work performance or 
creating an intimidating, hostile, or offensive working environment. 
This 1986 Supreme Court case has become so important, 
that it has been adopted around the world by companies, and by other countries. 
This is the way the economist put it, a Supreme Court ruling in 1986, made firms 
liable if they allow a hostile environment in which harassment is tolerated. 
This lead to near universal adoptions of codes of conduct by companies. 
And countries have also adopted the same approach as the Supreme Court. 
Here's a fairly recent change in the French sexual harassment law. 
They revised their law in 2012, and under their definition, 
sexual harassment includes putting somebody in an intimidating, hostile, or 
offensive situation. 
That's the same concept developed by the U.S. Supreme Court. 
Notice that in other countries, the penalties for 
sexual harassment can be much more severe than in the United States. 
In the United States, basically, if you violate the law of sexual harassment, 
the company's liable for damages, and might have to reinstate the employee. 
But in France, for instance, 
you're subject to a possible 3 years in prison and a fine. 
So sexual harassment is important around the world. 
It's a violation of company codes of conduct and a violation of law. 
And what we're going to do next, is to look at a case study 
of how this law might affect company decisions and operations.
So we have the legal definition of sexual harassment, but 
let's take a look in an actual case scenario which illustrates 
the kind of challenges that companies face in applying the law. 
So here are the facts.
Play video starting at ::26 and follow transcript0:26
And this is drawn from an article in the Harvard Business Review called The Case of 
the Mismanaged Miss. 
We've got a company that selects a male applicant over a female applicant for 
a marketing director position. 
Both male and female are equally qualified.
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The company uses and old boy network in finding candidates and 
in recommending candidates, they don’t use open job postings. 
The only reason why the female candidate learned about the position 
was that she had a friend in the old boy network who told her about it.
Play video starting at :1:4 and follow transcript1:04
Senior executives in this company are all male, 
there are no female senior executives. 
And very few female individuals even at the middle management level.
Play video starting at :1:17 and follow transcript1:17
The vice president, who made the promotion decision was this woman's boss. 
And he has an attitude where he believes that women should be in soft 
positions like HR in a company. 
This vice president treats her differently on a personal level from male employees. 
For instance, he often comments on her dress, 
on her hair, on the color of her eyes.
Play video starting at :1:44 and follow transcript1:44
In this company, the sales representatives that this woman works with 
have one of those so-called locker room calendars 
that have pictures of nude women hanging in the office.
Play video starting at :1:57 and follow transcript1:57
So, let's assume that this woman files a sexual 
discrimination case or sexual harassment case against the company.
Play video starting at :2:11 and follow transcript2:11
How do you think the jury would decide this case? 
If you were sitting on this jury, do you think that this company 
has violated the laws against sex discrimination? 
Please hit pause and write down your answer, but 
in writing down your answer, a second question.
Play video starting at :2:32 and follow transcript2:32
If you were a manager in this company, if you were a leader in this company, 
what changes would you make in the company? 
So two things. 
Do you think that this conduct violates the law against sex discrimination, 
sexual harassment? 
And second, as a leader in the company, what changes would you make?
Play video starting at :2:56 and follow transcript2:56
I ask this question to students in my class, 
including my programs for senior executives. 
And almost unanimously, not entirely, maybe it's 95% of the class said, 
clearly this is sex discrimination against this woman and they would award damages.
Play video starting at :3:19 and follow transcript3:19
If they were hired as a leader of the company, what changes would they make? 
They usually come up with these types of changes. 
First of all, this company needs a strong policy that 
includes specific examples of prohibited actions.
Play video starting at :3:36 and follow transcript3:36
Second, this company needs a grievance procedure so 
the employees with complaints have alternative ways to voice the complains. 
For example In some companies, if you want to complain, you have to go to your
boss. 
Well, that is difficult in a situation like this, 
because the boss was one of the big problems here. 
The boss had a discriminatory attitude. 
And so, employees should have alternative avenues to voice their complaints. 
They should be able to go to one of their peers, for example, or to HR.
Play video starting at :4:9 and follow transcript4:09
Third they recommend a job posting procedure instead of relying 
on the old boy network.
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And finally and this is a very strong recommendation.
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The company should develop a program to continually educate employees about 
sex discrimination and other forms of discrimination.
Play video starting at :4:32 and follow transcript4:32
So let's assume that you
Play video starting at :4:38 and follow transcript4:38
decide to follow through with these actions and 
specifically the recommendation to educate employees. 
So you schedule a session with employees that you are leading. 
And one of the questions that employees ask is, 
what about the locker room calendar in the office? 
Is that okay, the calendar that has nude pictures on it? 
How would you answer that question? 
What would you tell the employees if during the educational session 
they ask you about the calendar?
Play video starting at :5:13 and follow transcript5:13
Well, when I ask the executives, they say the calendar has to go. 
Okay, but what if it wasn't the locker room calendar? 
What if it was one of the most famous paintings in the world, 
let's say a Renaissance painting by one of the master painters? 
And it was a painting of a nude. 
Would you allow this classic painting to hang in the office?
Play video starting at :5:39 and follow transcript5:39
What if it was a picture of a family, 
of an employee's family on the beach wearing swimming suits?
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Will that picture be allowed?
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What if your employee has a picture of her husband in the office and 
he's wearing a speedo? 
Would that picture be allowed? 
Those are the kind of questions that you should be prepared to ask 
during an educational session.
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And what if an employee asks you during this educational session hey, 
can I make comments about somebody's dress?
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If I'm a male for instance, 
can I say to a female employee, that's a pretty dress you are wearing.
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I like your hairstyle.
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Your dress brings out the color of your eyes.
Play video starting at :6:29 and follow transcript6:29
And how would you answer that question as a leader of the company? 
What would you tell that employee? 
Can the employee make comments about 
somebody's dress, hair, eyes, etc?
Play video starting at :6:46 and follow transcript6:46
Now, these are tough questions to ask especially the questions 
about the comments. 
And think about, and sometimes there are no clear right or 
wrong answers, but think about them in this context.
Play video starting at :7:1 and follow transcript7:01
There are some situations where people around the world 
would agree that there has been clear harassment, for 
example, where there's unwanted touching or assault of an employee. 
No question, those cases are easy.
Play video starting at :7:19 and follow transcript7:19
The problems arise with the cases that are unclear. 
Where there are, for instance, comments about somebody's appearance. 
Let's say a male boss makes these comments to a female working for him.
Play video starting at :7:34 and follow transcript7:34
Look at the three possibilities of what might happen in this situation. 
Number one, the employee who's offended by these comments 
might say nothing and just smolder. 
And that's not a good situation. 
That creates a very uneasy situation. 
Number two, and this is the best possibility, where the person says to you 
the boss hey, your comments make me feel very uncomfortable. 
So now you can address this situation, you can change your behavior. 
In the third possibility, and 
this is most brutal possibility is where the employee decides to go to a lawyer or 
go to HR and have you written up for the comments you make.
Play video starting at :8:19 and follow transcript8:19
So how can you address this situation 
especially in the areas that are gray? 
Where it is unclear whether the comments are discriminatory. 
Whether they represent harassment or not. 
Well, some people recommend taking a golden rule approach.
Play video starting at :8:44 and follow transcript8:44
The golden rule is part of every major religion in the world. 
I don't know if you are familiar with the golden rule.
Play video starting at :8:51 and follow transcript8:51
It says do unto others as you would have them do unto you. 
Treat others as you would want to be treated.
Play video starting at :8:58 and follow transcript8:58
Now that might work in some context, but 
there's a problem in area of sexual harassment. 
And the problem is this, from an article in The New Yorker. 
This is just one example, various research teams has conducted a simple study. 
They hire woman to go to college men and ask them to sleep with her. 
More than half of the men say okay.
Play video starting at :9:23 and follow transcript9:23
Then they have a man approach college women with the same offer, 
virtually no woman would say yes.
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So I think you can immediately see the problem with the golden rule,
Play video starting at :9:38 and follow transcript9:38
treat others as you would want to be treated problem if you're a man. 
So a better approach is probably something called the platinum rule. 
Treat others as they would want to be treated. 
And whenever you're dealing with these borderline situations, 
remember the fundamental differences between the attitudes of women and 
men when you think in terms of the platinum rule.
Play video starting at :10:8 and follow transcript10:08
So that concludes our look at how you can try to manage 
risks related to sex discrimination and we're now going to turn 
next to approaches that take you to the balcony that
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give you a broader perspective on the issues that we've been addressing so far.
Let's wrap up this module by moving beyond risk management.
Play video starting at ::15 and follow transcript0:15
Risk management is very important and 
carries with it the possibility of avoiding huge liability.
Play video starting at ::23 and follow transcript0:23
For instance, I teach periodically in Los Angeles, 
we have an Executive MBA program in Los Angeles. 
And last time I taught there, I read about this California case. 
We've got a physician's assistant in a California hospital. 
She claims she was sexual harassed. 
For example, a surgeon stuck here with a needle and called her a stupid chick. 
One harasser said to me, You'll give in to me.
Play video starting at ::50 and follow transcript0:50
Her attorney described the hospital where she worked as a raunchy, vile, 
toxic workplace.
Play video starting at ::57 and follow transcript0:57
And so she filed 18 written complaints 
against the hospital and she was eventually terminated. 
Her case went to a jury and the jury, 
this was at the time I was teaching in California awarded her $168 million, 
3.5 million for lost wages, 39 million for 
mental anguish and $125 million in punitive damages. 
Now again like other cases this might be reduced at an appeal or 
the parties might settle the case but this illustrates the liability time bomb 
that companies face when they aren't involved in risk management. 
The problem is though, focusing too much on risk management can also prevent 
you from taking more positive measures that have huge benefits for the company.
Play video starting at :1:55 and follow transcript1:55
So lets look at a couple of examples. 
Remember the main goal here. 
The main goal a company is not just to reduce damages from sex discrimination and 
other kinds of discrimination cases and damages from employment at will cases. 
Your goal here, your strategic goal, is to attract and retain the best talent.
Play video starting at :2:22 and follow transcript2:22
And so how can you do this, first of all, in the discrimination area?
Play video starting at :2:27 and follow transcript2:27
Well, here's some advice, sexual harassment doesn't have to do 
only with law, it doesn't only have to do with morality, but it's a business issue. 
It's about having a productive workforce.
Play video starting at :2:43 and follow transcript2:43
An attorney recently gave this advice. 
He said that companies should have strong written policies 
prohibiting sex discrimination, prohibiting other forms of discrimination. 
But he also said they should not say anything more than necessary, 
they should not say anything that goes beyond the legal requirements. 
Because if they go beyond the legal 
requirements then they could be liable for what they say in their policies.
Play video starting at :3:20 and follow transcript3:20
I strongly disagree with that. 
I think that it overlooks the fundamental strategic 
goal in the company by focusing too much on the law pillar. 
I think that companies in order to retain and 
attract the best talent should have strong policies that go beyond the law. 
So, for example, when you're dealing with sex discrimination, 
obviously your company policies should include other forms 
of illegal discrimination under US federal law and 
these are common in discrimination laws around the world. 
So, you want your policies to comply with the law but even where 
a particular type of discrimination is not illegal where you live, I think you should 
think in terms of prohibiting all types of discrimination, legal or not. 
And one way you can do this is use, for instance, in the United States, 
the categories of state and local law that describe illegal discriminatory behavior. 
Even though your state or your city does not include those categories, 
those give you a good guideline, number one, 
on what you can do to prevent discrimination of all types and 
then number two, it also gives you sort of a preventive measure, 
because those state and local laws might become federal law down the road. 
And I suggest further that you look even beyond your own country.
Play video starting at :5: and follow transcript5:00
So let me give you this example.
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Let me ask you, based on what we've discussed today Is it illegal for 
a company to harass employees? 
Is it illegal for managers within the company to harass employees and 
bully them on the job?
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To ridicule them, to make fun of them publicly, 
to criticize their work in a very brutal manner.
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Is that legal or not? 
Please hit pause and write down your answer, and 
the answer is, in the United States, it depends.
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It's entirely legal if It is not based on one of the protected categories. 
So if the bullying, if the harassment is not based on national, 
origin, race, religion, sex, etc., then under US law, it is legal. 
However, In various countries around the world, workplace bullying is illegal. 
So as a US company, even though legally you could get away 
with workplace bullying, I would highly recommend 
that as a matter of company policy you prohibit that form of harassment. 
And you can look to other countries as a guideline in developing your 
company policies.
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What are the benefits of eliminating all forms of harassment? 
Well, here's a 2015 McKinsey study of companies in the US, 
England, United Kingdom, Brazil, etc.
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And they have discovered in this study that there is a so-called diversity 
dividend. 
For companies who have women and minorities in upper ranks, companies that 
have eliminated discriminatory practices and have promoted women and minorities. 
These companies achieve better financial returns. 
And another 2015 McKinsey study came up with these findings. 
Women constitute half the world's working-age population but 
they generate only 37% of the gross domestic product. 
If the gender gap can be closed by increasing the ability of women 
to engage in paid work, by allowing them to have the skills and 
opportunity to perform higher-productivity jobs, and 
to occupy leading positions in the economy can increase global 
annual gross domestic product by $28 trillion by 2025. 
And this increase in the economic welfare worldwide is 
the equivalent to the combined US and China economies today. 
So, huge potential payoff from eliminating discrimination and 
thinking more broadly than just the risk management part of the law.
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What about employment at will? 
What can a company do, thinking more broadly?
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Well, here's a suggestion that will make your attorneys shudder. 
If you suggest this to your attorney, make sure the attorney is sitting down.
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The attorney might have a heart attack.
Play video starting at :8:28 and follow transcript8:28
The suggestion is think about eliminating 
your right to fire employee ease at will in the United States. 
Here's a key study of a company that gave up its right 
to fire employees under the employment at will doctrine.
Play video starting at :8:47 and follow transcript8:47
The company's named Lincoln Electric.
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Global manufacturer based in Ohio, they do not follow the employment at will rule. 
They have not laid off an employee in the United States for over 60 years. 
And this job security that they give employees encourages employees, 
according to various studies, to make long term suggestions to improve productivity.
Play video starting at :9:14 and follow transcript9:14
A few years ago, the company made a costly mistake, during an expansion. 
And the employees had such a positive attitude toward the company, 
they volunteered to give up vacation time, and 
worked overtime, to help the company improve profits. 
This is the way a report at ABC World News put it. 
They quoted the CEO, people come to work here every day knowing that if they
work 
hard and they contribute to the success of the company they are going to have a job.
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Workers who don't measure up are let go. 
In tough times hours are cut. 
Employees are guaranteed only 32 hours a week, but in good times, rather than 
hire a lot of new workers, Lincoln requires it's employees to work overtime. 
So you notice a couple of things here.
Play video starting at :9:59 and follow transcript9:59
First of all rather than the typical approach where 
in good times companies hire a lot of people, in bad times they let them go. 
This has all kinds of consequences for company morale, for 
training, for recruitment, etc. 
These employees have a stable work environment. 
But notice also the sentence, workers who don't measure up are let go.
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This company policy doesn't mean that employees who 
are underperformers are going to be allowed to continue, they are fired. 
Unlike many companies who under the Rand study I mentioned earlier 
follow the employment at will rule, but who are afraid to fire underperformers. 
So this combination of guaranteeing employment, but being tough 
on work standards has been very successful at Lincoln Electric.
Play video starting at :10:59 and follow transcript10:59
So just to conclude this module, we have looked at ways in which, 
you can become a more legally savvy worker or 
manager in ways that not only benefit your career but can benefit the company. 
Hopefully, through the methods we've discussed you can close the gap between 
the law pillar, which focuses on risk management and the strategy pillar which 
focuses on creating value in a way that you can create the sweet spot
Play video starting at :11:35 and follow transcript11:35
among the three circles and increase your competitive advantage.
This module is an especially important one because we're going to be talking about 
meeting your customer needs and 
how you can move from product liability to product innovation.
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This module brings together two key 
elements that are critical to business success. 
First of all it deals with one of your most important stakeholders, 
your customers and second it brings into 
play a very important area of law called tort liability. 
And so our game plan for this session is that we are first of all 
going to do a legal briefing that will introduce you to tort law. 
We'll talk about business exposure to tort liability on a general basis. 
And then we'll focus more specifically on product liability. 
And especially the three key theories of product liability, 
which are contract, strict liability and negligence.
Play video starting at :1:6 and follow transcript1:06
We'll then move to the question of how you can manage product liability risk. 
Looking at product liability from the perspective of a lawyer who is focused on
Play video starting at :1:18 and follow transcript1:18
preventing liability. 
And then finally, we'll take a strategic look at product liability by asking 
how can you use this very difficult area of the law to create value. 
This is one of the most difficult areas to create 
value because liability can be so brutal on a business and 
it's very unusual to think of product liability as a business opportunity. 
But that's going to be our goal.
Play video starting at :1:48 and follow transcript1:48
So what is a tort? 
When you read about tort liability in media, what does that mean? 
Well, I read a definition of tort once in a law school bulletin 
that ran something like this. 
Tort law involves non-consensual, 
obligatory relations among people and institutions.
Play video starting at :2:8 and follow transcript2:08
Let me give you a little bit more friendly definition of tort law. 
My definition is a tort is a wrongful act 
that injures another person's body, property or reputation. 
So, let's assume that you and I get together for a cup of coffee.
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And let's assume you're very critical of my teaching.
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And so, you clinch your fist and you say to me, Siedel if you don't 
promise to improve your teaching style, you're going to be in big trouble.
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Now, have you just committed a tort? 
Please press pause and right down your answer, yes or no.
Play video starting at :2:57 and follow transcript2:57
And the answer is that, yes, you have committed a tort. 
Now, if you had followed through with your threat, if I said to you, 
I'm not going to change my teaching style. 
And so you followed through with your threat. 
And you hit me with your fist, 
that would be a particular type of tort called a battery.
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But the threat of a battery is also a separate tort called an assault.
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In lawyer's language, with a battery you have touched me in a harmful or 
offensive manner and 
with an assault you have threatened to touch me in a harmful or offensive matter. 
So both of these are torts and 
they are examples of the first of the three types of tort listed here. 
There are three categories of tort and the first one is the intentional tort. 
And intentional torts carry with them a lot of baggage. 
When you commit an intentional tort, you are subject to a civil lawsuit for 
damages. 
You can be brought to trial in a criminal lawsuit. 
You can be subject to punitive damages which are damages 
beyond those designed to compensate you, but 
those are damages designed to punish you for doing something wrong.
Play video starting at :4:25 and follow transcript4:25
You can lose your insurance coverage. 
And if you go into bankruptcy it's likely that bankruptcy will not provide 
protection for intentional tort damages, you'll still be liable for those damages. 
So let's look at this at a little more detail. 
First of all, bringing you to trial for a civil lawsuit and a criminal lawsuit. 
Occasionally in the paper, you read about somebody who commits a tort 
that is also a crime and is sued twice. 
A notorious example in the United States is the case involving OJ Simpson.
Play video starting at :5:5 and follow transcript5:05
He was tried in a criminal lawsuit for murder and found not guilty and 
then he was tried in a civil lawsuit and the jury held him liable for 
around $33 million. 
So often we'll have a disparity, a difference in result, 
between the criminal lawsuit and the civil lawsuit. 
Another example involved a foreign exchange student 
who visited the United States from Japan.
Play video starting at :5:36 and follow transcript5:36
He attended a Halloween party or he intended to attend a Halloween party 
dressed as an actor, John Travolta, in a movie called Saturday Night Fever.
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He went to the wrong house and as he walked up 
the sidewalk to this house wearing his Halloween costume. 
The owner of this house saw him coming, loaded his gun, 
walked out on to the porch and said, freeze.
Play video starting at :6:10 and follow transcript6:10
The Japanese student did not understand what he was saying. 
I've heard that the student thought he was saying please, I'm not sure if that's true 
or not, but he took one more step and the homeowner shot and killed him. 
So criminal case brought against the homeowner found not guilty.
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The Japanese parents filed a several lawsuit against the homeowner and 
he was held liable for around $650,000 dollars in damages. 
So why the disparity in this case involving the Japanese student or 
in the O.J. Simpson case? 
Well the difference is the result of different burdens of proof.
Play video starting at :6:52 and follow transcript6:52
In a criminal lawsuit, the evidence must show guilt beyond a reasonable doubt. 
Whereas in a civil lawsuit there's only a need to show by a preponderance 
of the evidence, that is you know, roughly 51% that the person committed the tort. 
There are other differences too, in the United States for example, you cannot 
force somebody to testify in a criminal lawsuit where you can in a civil lawsuit. 
So, those are two very important elements 
involved in committing an intentional tort. 
Punitive damages are similar to a criminal fine for committing the intentional tort. 
The only difference is that, in the United States, punitive damages 
in most states will go to the plaintiff rather than to the government.
Play video starting at :7:46 and follow transcript7:46
Losing insurance can be a huge problem for 
business when you committed intentional tort. 
Let say for example that you pollute property, you contaminate property. 
And the cleanup costs are huge, billions of dollars. 
So you go to your insurance company and you say well, I spent all this money 
cleaning up the property and now I want you to cover my expenses. 
Well the insurance company might say to you, 
wait a minute your insurance is designed to protect accidental loss. 
You intentionally contaminated the property and therefore you're not covered. 
So this element, loss of insurance, can be a make or break issue for many
businesses. 
It can force many businesses out of business. 
Finally, you lose bankruptcy protection when you commit an intentional tort. 
Normally with bankruptcy, when you go through bankruptcy you wipe away your 
debts, but there's an exception for debts related to intentional torts. 
So that concludes our look at intentional torts and 
in the next segment we'll look at the tort of negligence.
Let's now take a look at the second of the three categories of tort, 
which is the tort of negligence. 
In every day language, negligence is carelessness. 
Carelessness that injures another person's property or body.
Play video starting at ::26 and follow transcript0:26
Now, when you are sued for negligence, or when your company is sued, 
the actual proof of negligence will be a little more sophisticated. 
And specifically there are four elements necessary to prove negligence. 
First of all, 
the courts will ask did you owe a duty of care to the person who is injured? 
Second element, did you breach that duty of care?
Play video starting at ::50 and follow transcript0:50
Third, was there an injury? 
And finally, is there some kind of a link between the breach of duty of care and 
the injury; which lawyers refer to as causation. 
Let's try this example, let's assume, that I am out for 
a walk in the town of Ann Arbor where I live.
Play video starting at :1:13 and follow transcript1:13
And you are driving a car, and 
as you're driving, you're not paying attention to the road. 
You're observing joggers alongside the road, or bicyclists, or the scenery.
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You're not paying attention to other drivers. 
You're not paying attention to pedestrians.
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I cross the street at a stop sign. 
You missed the stop sign and you plow into me with your car.
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Have you committed a tort? 
Well of course the answer is yes, this is what we call a no brainer. 
You do not need a brain to do an analysis of this case. 
First of all, you as a driver owed a duty of care 
to me the pedestrian and to other drivers. 
Second, you breached your duty of care by not paying attention to your driving. 
Third, I was injured, we'll assume, when your car plowed into me. 
And finally, there's a link between your breach of duty of care and the injury. 
You caused the injury. 
And in fact, 
automobile accidents are probably the most common type of accident in the world.
Play video starting at :2:23 and follow transcript2:23
Now where courts face challenges in many cases 
is determining whether there is a duty of care. 
So just a quick example, a few years ago I 
was teaching a law course in Beijing. 
And after class one day I decided to go for a walk, and I brought with me 
some notes from the course that I was looking at to prepare for 
my lecture the following day. 
And as I was walking along, 
I suddenly realized I was headed directly toward an open man hole.
Play video starting at :3:2 and follow transcript3:02
Now let's assume that you were walking in this area. 
You saw me reading and walking toward the open manhole,
Play video starting at :3:12 and follow transcript3:12
and you think to yourself, golly this is really going to be exciting. 
And so, you run around to the other side of the manhole, to get a better look, 
as I slowly walk toward the manhole, fall in, and break a couple of legs.
Play video starting at :3:27 and follow transcript3:27
Let's assume I'm hospitalized, I lose wages, I suffer. 
I have a lot of pain and suffering, and so I sue you for 
hundreds of thousands of dollars.
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Are you liable? 
Have you committed the tort of negligence? 
Well, this is the type of case that causes a lot of difficulty 
in courts around the world, because they have to determine whether 
you owed a duty of care to me, to say watch out.
Play video starting at :4: and follow transcript4:00
All you had to do was to give me a warning, and all this pain and suffering, 
and hospital bills, and lost wages, would have been avoided. 
In the United States' system, the general rule is in 
this type of situation, there is no duty to warn somebody 
that they're facing a danger, unless of course you cause the danger. 
But generally, no duty of care to give the warning.
Play video starting at :4:28 and follow transcript4:28
This duty is different in some other countries. 
And even in the United States there are variations. 
For example, if you see somebody who's being victimized by a crime 
in a few states you at least have a duty to report the crime. 
But courts constantly wrestle with that question, 
when is there a duty of care and when is that duty missing?
Play video starting at :4:54 and follow transcript4:54
So, that covers the key elements of negligence, and 
now let's go on to the final tort, which is the tort of strict liability. 
And with strict liability, courts determine that in some cases, even though 
you did not intentionally injure someone, which would be an intentional tort. 
And even though you were not careless in injuring somebody, 
which would be the tort of negligence. 
You can still be held liable because you are involved in a dangerous activity. 
Such as for instance, being involved in a dynamiting operation, blasting operation, 
such as owning wild animals that might injure someone.
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A few years ago, I read about an incident in a neighborhood on the outskirts of 
Ann Arbor, where I live.
Play video starting at :5:53 and follow transcript5:53
Apparently, one of the home owners in this neighborhood owned 
three wild animals, two bears and a cougar.
Play video starting at :6:4 and follow transcript6:04
And the neighbors were very upset by
Play video starting at :6:9 and follow transcript6:09
having these wild animals in the neighborhood. 
Especially one of the neighbors who once looked out his picture window in his 
house, and saw the cougar looking in from the outside of the picture window.
Play video starting at :6:23 and follow transcript6:23
And to me, this is a classic case of strict liability. 
In other words, even though the owner of the animals did not intentionally injure 
anyone, even though the owner might be extra careful in caging the animals, 
if for some reason, an animal got loose and injured one of the neighbors, a court 
would probably hold that person liable under the theory of strict liability.
Play video starting at :6:54 and follow transcript6:54
I'm not sure how this neighborhood dispute was resolved, but 
if you ever visit Ann Arbor, and if you decide to go for a jog through certain 
neighborhoods, you might want to take with you three slower joggers. 
Okay, so that concludes our look at the three categories of tort. 
And now we're going to move on and take a look at 
how tort law has a big impact on business operations.
In this segment we're going to take a look at general business 
exposure to tort liability.
Play video starting at ::16 and follow transcript0:16
And then after this segment we'll move on and 
look specifically at product liability.
Play video starting at ::23 and follow transcript0:23
When you talk about general business exposure to tort liability, 
it brings into play an area of law called agency law. 
And the reason this is so important is that businesses enter into contracts and 
conduct business through agents, through employees. 
And the question that arises is, what rights and 
liabilities are created between the principal, 
which is the business, and third parties, such as customers, 
on the basis of the acts of the agent, the employee? 
Agents, for instance, can commit the principal to contracts 
when the principal authorizes the agent to negotiate a contract. 
And in fact, one of the very important features of negotiation 
is that if your a third party negotiating with the agent for a business, 
the very first question you should always ask at the beginning of a negotiation is 
whether the agent has authority to represent the business. 
If not, then you're just spinning your wheels. 
You're wasting your time if there is no authority. 
And in addition to contract liability, an agent can create 
tort liability when the principal controls the employee, 
which makes the employee an agent and the agent commits a tort. 
Injuring a third party, then the principal is liable. 
And in fact, the principal can be liable under other theories as well.
Play video starting at :2:2 and follow transcript2:02
For example, in some cases, the principal might commit a tort, 
which would result in direct liability. 
An example would be where a business hires, 
let's say a truck driver, who is known to be a reckless driver. 
Then the principal has committed a direct tort, 
which would result in liability when that driver injures someone. 
A principal also would be liable where the principal authorizes 
the agent to commit a tort. 
If the principal says to the agent, for 
example, shoot that customer, the principal of course would be liable. 
But the area that creates liability in most cases is called respondeat superior. 
Which means, basically, let the superior, let the business, 
the principal, respond for the acts of an agent.
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A looser translation might be, if you're an injured party, if you're the injured 
third party, sue the one who has the money, which is the principal.
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A respondeat superior applies when an agent commits a tort 
within the scope of business. 
So, let me give you a local example from where I live. 
So we have a principal, a bank, who sends an agent, 
a bank employee, out on an errand.
Play video starting at :3:30 and follow transcript3:30
The employee, becomes confused in her driving and 
she accidentally starts to drive down a wrong way street. 
And injures, and in fact kills, a driver of a truck. 
So, the question is, would the principal, the bank, be liable. 
And if so, under which of the theories we've just discussed? 
Did the plantiff commit the tort? 
Did the principal authorize the tort? 
Or is this a case of respondeat superior? 
Please hit pause and write down your answer.
Play video starting at :4:11 and follow transcript4:11
And the answer is that this is a case of respondeat superior. 
We have a situation where the employee, 
the agent, is committing a tort within the scope of business, and 
this was the way the case was reported in the local paper. 
A Washtenaw County jury has awarded $4.2 million to 
the family of a truck driver killed in a crash in Ypsilanti Township. 
The jury said that the employee, that's the agent, and 
the employer, the principal, the bank, both named as defendants, 
were responsible for the crash. 
This was an accident that occurred within the scope of business.
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Now, where this becomes very complicated is where the agent 
commits an intentional tort. 
And the question is, 
can an intentional tort be considered within the scope of business? 
Or is this simply a deliberate wrongful act by the agent? 
Let's take a look at this case where 
we have a customer orders furniture from a store. 
The store hires a trucking company to deliver the furniture.
Play video starting at :5:24 and follow transcript5:24
And, the person who delivers it, 
the agent, assaults the customer and injures the customer.
Play video starting at :5:31 and follow transcript5:31
So the question is whether the trucking company, and 
also the store, should be liable for the assault.
Play video starting at :5:42 and follow transcript5:42
Please hit pause and write down your answer. 
What do you think the court decided? 
Should the customer be allowed to recover against the trucking company and 
the store? 
In this particular case the court decided that the evidence would not support 
a finding that the trucking company had any knowledge that 
the employee was dangerous. 
In other words, what the court is saying is, 
there was no direct negligence on the part of the trucking company. 
However, if the assault was triggered off or motivated or 
occasioned by a dispute over the conduct, then and 
there, of the employer's business, then the employer should be liable. 
In other words, what the court is saying is that if this 
assault occurred within the scope of the business, 
that under that rule of respondeat superior, the business is liable. 
But what about the store? 
Would the store also be liable, 
the store that hired the tracking company to deliver the furniture? 
Again, please hit pause and write down your answer, which should be yes, 
the store is liable, or no, the store is not liable. 
The answer would be, no the store is not liable 
because the trucking company did not act as the agent of the store. 
And the trucking company is what in the law is called an independent contractor. 
It delivered the furniture on its own terms. 
It committed to deliver the furniture, but 
they way it delivered the furniture were not under the control of the store. 
So a very important exception to the rule of liability, when you 
hire an independent contractor, generally you're not liable for 
the acts of the independent contractor. 
Although, of course, there are exceptions. 
In China they follow the general rule of vicarious liability. 
This is a tort liability law that became effective in 2012. 
Employers are vicariously liable when employees commit the torts in the course 
of their working duties. 
And they make it clear under Chinese law that this applies even when 
a company is using employees hired through labor staffing agencies. 
Even though those employees might be employees of the labor staffing agency,
Play video starting at :8:10 and follow transcript8:10
the employers are still liable for the acts of those employees.
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So, that covers the general rules covering tort liability of the company, 
the principal, and the three areas of liability where the principal, 
the company, commits a direct tort. 
And second, where the principal authorizes a tort. 
And finally, the big area of liability, 
where the agent commits a tort within the scope of the business. 
In our next segment, I'm going to give you a quick quiz relating to these principles. 
And we'll look at a current problem that is especially important for 
businesses around the world relating to respondeat superior.
In this segment, let's look at how these principles apply 
in a case involving a University of Michigan graduate. 
So this will be a quiz for you. 
This is what happened. 
We have a graduate of the University of Michigan by the name of Rudy
Tomjanovich, 
and he is a professional basketball player, 
he was a professional basketball player.
Play video starting at ::36 and follow transcript0:36
He later became a very successful National Basketball Association coach, 
he won two consecutive championships while the coach of the Houston team.
Play video starting at ::47 and follow transcript0:47
But while he was playing basketball, he was involved 
in an assault by a player from an opposing team. 
The name of the player was Kermit Washington, who played for 
the Los Angeles Lakers. 
Kermit Washington slugged Tomjanovich, Tomjanovich hit the floor hard, 
and as a result of this intentional tort, he suffered a jaw fracture, 
a skull fracture, a broken nose, and spinal fluid leakage. 
In other words, this was a very serious accident, and 
not an accident, an intentional tort. 
And so, Tomjanovich sued Washington and 
the Lakers, and he sued them for $2.7 million. 
This happened several years ago, and that was a large amount of money in those
days. 
So my question to you is should Washington, 
and especially should the Lakers, be held liable for 
this intentional tort committed by one of their players? 
Now, let's assume here that the court decides that this is not 
within the scope of the business of playing basketball. 
Assaulting somebody, slugging somebody is not part of the game of basketball. 
So the question is if it's not within the scope of the business, 
can you think of any other reason why the Lakers should be held liable? 
Please hit pause and write down your answer.
Play video starting at :2:27 and follow transcript2:27
The answer is that a court decided that the Lakers should be held liable 
because they were directly responsible for their own negligence 
in hiring Washington to play basketball after they became aware 
that he had a tendency for violence while playing basketball. 
So they hired a dangerous agent. 
That agent committed the intentional tort, which resulted in the Lakers' liability.
Play video starting at :3: and follow transcript3:00
Now, an area where liability has 
become especially important relates to the use of cell phones.
Play video starting at :3:11 and follow transcript3:11
In a fact, because of cell phones, all of us have become similar 
to the traditional truck driver who hits a pedestrian or who crosses an accident. 
Here's an example. 
We've got a stockbroker who works for Smith Barney brokerage firm, 
his using his cell late one Saturday night for 
a business purpose while driving kills a motorcyclist and 
the principle is liable for the acts of this agent, and 
Smith Barney is held liable for $500,000. 
This is becoming a very common scenario. 
Here are some other examples. 
The state of Hawaii is held liable for 
$1.5 million after a teacher, an agent, hits a pedestrian. 
An Arkansas lumber company agrees to pay $16.2 million to a woman who 
was severely disabled in a car accident caused by a driver using his cell. 
The city of Palo Alto settles for $1.5 million after a city worker causes 
an accident that leaves the victim with serious spinal injuries. 
The company International Paper settles for 
$5.2 million after a woman lost an arm in a car accident. 
And a Virginia law firm settles a $30 million case for 
an undisclosed amount after an attorney kills a 15-year-old pedestrian. 
These cases are very sad for a number of reasons. 
Let's take this last case for instance, involving the attorney for 
the Virginia law firm. 
She's a young woman due to have a child. 
And the case is tragic because, first of all it's tragic for 
the family of the 15-year-old she killed, but also it's tragic for her. 
She loses her job, the law firm fires her, she loses her license to practice law,
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she's held liable for millions of dollar's and she has to serve 
a jail sentence, which begins shortly after the birth of her child. 
So cases are tragic on a number of dimensions. 
So my question to you is, if you own a business or 
you're an entrepreneur starting a business or you work for a large company, how
would 
you respond as a matter of business to this new form of agency liability? 
Please hit Pause and write down your answer. 
These are some elements that you should have considered as a company leader. 
First of all, develop a cell phone policy that prohibits the use of cells 
while driving for business purposes or while driving to and from work. 
Second, have instructions and training on safe cell use. 
For example, how do you use your cell with hands-free technology? 
And then finally, monitor and enforce compliance.
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Now let's say that you as a company adopt these policies and 
then one of your employees kills somebody or seriously injures somebody. 
Will you be held liable in that circumstance? 
Well, the quick answer is yes. 
You cannot avoid liability by simply telling your employees, 
look, be careful and this is how to be careful when using a cell.
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That does not protect you from liability or 
insulate you from liability to third parties. 
But what it does do is minimize your risk. 
It's a method of risk management.
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So that concludes our look at general business 
considerations relating to agency law, and 
in the next segment, we're going to focus more specifically on product liability.
In this segment we're going to focus on perspectives on product liability. 
And we'll also introduce the three key theories of 
product liability that we'll be looking at in later segments.
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Product liability is a very difficult topic to discuss, 
because it affects us in different ways. 
You and I are consumers of products. 
And so if we're injured by those products, then naturally we assume that 
we should be able to recover damages on the basis of those injuries.
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But on the other hand, 
we're also employees of companies that produce the products. 
And companies have been very hard hit by product liability. 
You've probably read the headlines about how product liability affects certain 
industries like the automobile Industry, the drug industry, the tobacco industry. 
Here's an example of one industry that's been especially hard hit, and 
that's asbestos. 
This is data from a Rand Report from a few years ago, 
in the United States and worldwide, over 6000 companies 
have been named as defendants in asbestos injury lawsuits. 
Ranging across 75 out of 83 different types of industries in the United States. 
That's 90% of industries in the United States have been involved in asbestos 
litigation. 
A total of $54 billion has already been spent on asbestos litigation. 
And it's estimated the total costs of all claims range up to 265 billion. 
And as a result of asbestos product liability, 
there has been reduced investment by asbestos defendants. 
This reduces the number of jobs.
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So, product liability is something that effects us as consumers. 
It affects our economy and the job market, from the perspective of companies. 
But, it also involves a very important public policy issue 
relating to the development of new products. 
A friend of mine served on the board of directors 
of one of the largest chemical companies in the world, 
in fact, the second-largest chemical company in the world. 
And he once shared with me this message from the CEO to the board.
Play video starting at :2:40 and follow transcript2:40
This is part of the memo to the board of directors. 
One of the most formidable problems in the future of companies like ours 
is potential product liability costs. 
In the long term the increased costs of product liability judgments 
are going to make a lot of companies very cautious about innovation because 
they will decide that the rewards aren't worth the risks. 
So beyond the perspective of us as consumers of the product. 
Beyond the perspective of the impact on the companies. 
There's an important public policy at issue here that relates to innovation and 
moving forward with new product development.
Play video starting at :3:24 and follow transcript3:24
All of us, in effect, wear two hats when it comes to product liability. 
We wear the hat of people who are concerned about company success, but 
we also wear the hat of consumers who might be injured by products. 
And here's an example of the two hats that we wear.
Play video starting at :3:42 and follow transcript3:42
We've got a Texas attorney, who spends his life, his profession career, 
defending companies in product liability cases. 
So one day he goes hunting with his son and two judges. 
After they conclude the hunt one of the judges asks the son if his gun, 
which was a Remington Mohawk, is unloaded.
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Now, in those days, to unload the gun you had to release the safety. 
So the son released the safety. 
The gun discharged, wounds the father and 
leaves him paralyzed for life from the waist down.
Play video starting at :4:18 and follow transcript4:18
So here we have somebody who's spent his life defending companies in product 
liability cases, who all of a sudden is injured by a product. 
He hires a leading plaintiff's attorney, 
Joe Jamail, who he was opposing in another case. 
And as a result, Remington, the manufacturer of the Remington Mohawk, 
settled the case for $6.8 million. 
So, please keep in mind these general perspectives as 
we dive into the theories of product liability.
Play video starting at :4:51 and follow transcript4:51
These are the three theories of product liability that I could almost guarantee 
will appear in any case against your company around the world. 
First of all, there is a contract theory based on warranties 
that you give to the buyers of your products. 
And second, two out of the three tort theories that we've just discussed. 
Strict liability and negligence will also come into play. 
Let me give you an example of a typical product liability complaint. 
This complaint was brought to me by one of my executive MBA students. 
Now, this case involves a company called Victoria's Secret.
Play video starting at :5:34 and follow transcript5:34
And a woman in Los Angeles bought a Victoria Secret thong.
Play video starting at :5:42 and follow transcript5:42
And as she was putting the thong on, a piece of metal 
from the garment flew off, struck her in the eye and injured her. 
So now we have a classic product liability scenario. 
She brings suit against Victoria Secret. 
This is what the complaint looks like, and of course the print 
is probably too small to read, so let me walk you through the complaint. 
At the beginning of the complaint, the complaint basically says that 
the plaintiff is bringing suit against Victoria Secret,
Play video starting at :6:21 and follow transcript6:21
on the basis of what it sold to her, which is called, quote, a sexy little thing. 
That was the name of the product, a low-rise v-string. 
And then second, the complaint goes on to say that the plaintiff 
used the thong in a manner intended by Victoria Secret. 
And Victoria Secret gave no warnings that there might be 
a possible defect in the product.
Play video starting at :6:51 and follow transcript6:51
And then finally, the complaint goes on to list the three theories of liability
Play video starting at :6:57 and follow transcript6:57
on which the complaint is based. 
First of all, the complaint says that 
Victoria's Secret should be liable on the theory of strict liability. 
Second, the complain says that Victoria's Secret owed a duty of care 
to the plaintiff and therefore was liable on the theory of negligence. 
And finally, the complaint says that Victoria's Secret is liable on the basis 
of contract warranties of two types, express warranty and implied warranty. 
And in the next module, we're going to take a look in closer detail 
at both expressed and implied warranties.
In this segment, we're going to take a closer look at contract warranties. 
Remember that contract warranties represent one of the three 
basic elements in a product liability lawsuit.
Play video starting at ::22 and follow transcript0:22
And these are the types of contract warranties that arise in a product 
liability case. 
Some warranties are express warranties, 
expressly stated by the seller of the product. 
Others are implied warranties. 
And there are two types we'll be looking at the implied warranty of merchantability 
and the implied warranty of fitness for a particular purpose. 
So let's start with the express warranty. 
Express warranties are created through a statement of fact or 
a promise that you might make to the buyer. 
They apply when you describe goods to the buyer. 
They are given when you provide a sample or a model to the buyer. 
I think the basic takeaway message here is that information in 
any form can constitute an express warranty. 
You don't have to use the word express warranty. 
You don't have to use the word warranty. 
Doesn't have to be written on parchment. 
Any time you provide information in the form of fact to a buyer, 
then you're giving an express warranty that can be the basis of liability.
Play video starting at :1:35 and follow transcript1:35
Question, is this coffee shop, making an express warranty? 
Please look at the video and 
then decide whether this is an express warranty or not. 
[MUSIC] 
>> You did it! 
Congratulations! 
World's best cup of coffee. 
Great job everybody!
Play video starting at :2:4 and follow transcript2:04
It's great to meet you. 
Hi. 
[MUSIC] 
>> And the answer is that when this coffee shop 
advertises the world's best cup of coffee, 
it is not in fact giving an expressed warranty. 
This is what's called puffing.
Play video starting at :2:27 and follow transcript2:27
Sellers are given some leeway when they state an opinion 
about their product that is not based on fact. 
Of course, this is a very common business practice and so courts have to 
draw a line between what's intended as a statement of fact. 
Let's say that the coffee shop, for instance, said that we've tested this 
coffee with 1,000 consumers and 990 of the consumers 
stated that it's the best cup of coffee they've ever had. 
It's better than x brand. 
Well, that case the company would have to stand behind that statement. 
That would be an express warranty, 
an express statement of fact, as opposed to the statement it did make, 
which is that they're selling the world's best cup of coffee.
Play video starting at :3:25 and follow transcript3:25
How can you avoid express warranty liability? 
Well, the common sense answer is, don't give them. 
You're not liable for express warranties that you don't give. 
You can also try to use language that negates or limits warranties, but if you 
have a conflict between the warranty and a disclaimer, the warranty will prevail. 
Also, they're excluded when the buyer knows of a defect. 
And still uses the product. 
So what do you think about this case? 
Where we've got a product. 
I read about it a few years ago. 
On the front of the watch package it says, water resistant to 100 feet.
Play video starting at :4:6 and follow transcript4:06
On the back of the package in fine print is says, any failure to function 
properly due to misuse such as water immersion is not covered.
Play video starting at :4:17 and follow transcript4:17
So let's assume you buy this product, you wear the watch while taking a shower or 
taking a bath, and the product ceases to function. 
Would you be able to recover damages or not? 
Please hit pause and decide whether there's liability or not.
Play video starting at :4:38 and follow transcript4:38
The answer in this case is that there should be liability, 
because this is an example of bullet number two. 
Where on the front of the package, the company has given a warranty, 
water resistant to 100 feet. 
At the back of the package is attempted to limit the warranty but 
there's a direct conflict. 
In that case, the direct warranty prevails.
Play video starting at :5:2 and follow transcript5:02
Let us now move on in our next segment to implied warranty, and we'll be looking 
at two types of implied warranty, the implied warranty of merchantability and 
the implied warranty of fitness for a particular purpose.
In this segment, we're going to be looking at the two implied warranties, 
merchant ability and fitness for a particular purpose.
Play video starting at ::17 and follow transcript0:17
These warranties, like the express warranty, are embedded in United States 
law, but they are also included in international sales of goods. 
There is a convention, a treaty on the international sale of 
good that has been adopted by many countries around the world. 
And so, when you're involved in international sales and 
where this convention applies, you're going to face similar warranty liability. 
So let's start with the implied warranty of merchant ability.
Play video starting at ::54 and follow transcript0:54
And this warranty basically says that sellers who are merchants warrant if 
their goods are merchantable. 
And so that raises the question, what do these two words mean? 
Well, a merchant is basically someone in the business of selling goods. 
A person who deals in goods of the kind sold, or holds himself out as having 
special knowledge, is a merchant, a business person.
Play video starting at :1:20 and follow transcript1:20
What does merchantable mean? 
It means that the goods are of fair, average quality fit for ordinary purposes.
Play video starting at :1:29 and follow transcript1:29
The second implied warranty is the implied warranty of fitness for 
a particular purpose.
Play video starting at :1:34 and follow transcript1:34
And unlike the implied warranty of merchant ability, 
this one applies to any seller. 
You don't have to be a merchant, it applies to you and 
me when we sell something if we have reason to know two things. 
First of all, the particular purpose for the which the goods are required. 
And second, the buyer is relying on the seller's skill or 
judgement in supplying suitable goods. 
Let's try a hypothetical. 
Let's assume that you have recently moved to the United States from let's say India.
Play video starting at :2:9 and follow transcript2:09
And you have been ask to participate on a baseball team.
Play video starting at :2:15 and follow transcript2:15
You don't know anything about baseball. 
You play a sport in India call cricket, which is very popular.
Play video starting at :2:23 and follow transcript2:23
But you know very little about baseball. 
And the person who has asked you to play baseball tells you 
you're going to be the catcher on the team, and 
the pitcher on the team throws a special pitch called a knuckle ball. 
A knuckle ball is a pitch that floats and is very difficult to hit, 
but it's also very difficult for the catcher to catch.
Play video starting at :2:49 and follow transcript2:49
So, you need a special catcher's mitt to catch knuckle balls.
Play video starting at :2:57 and follow transcript2:57
I am having a garage sale.
Play video starting at :2:59 and follow transcript2:59
Now, if you're from outside the United States, 
you might not be familiar with the term garage sale. 
But in America, we often, when we want to sell our junk, 
we put it into a garage and offer it for sale to our neighbors. 
So let's say that you come to my garage sale and 
you walk into the garage and you say to me, 
George I don't know anything about baseball. 
But I'm going to be a catcher and there's a knuckle ball pitcher, 
and I need a special met to catch the knuckle ball.
Play video starting at :3:41 and follow transcript3:41
I say to you well, I don't know about catching knuckle balls either. 
I don't know much about baseball, but 
I do have this catcher's mitt that I would be willing to sell to you. 
So, let's say you buy the mitt, and it turns out 
it's not large enough to catch knuckle balls and so you want to sue me for 
damages for breach of an implied warranty fitness for a particular purpose. 
Will you win? 
Well, let's look at the two elements, 
did you tell me the particular purpose for which the goods are required? 
Yes, you told me that you needed a catcher's mitt that would catch 
knuckle balls. 
Second, did you rely on my skill or judgement in supplying suitable goods? 
No, because I made it very clear that I have no skill or 
judgement in collecting knuckle balls. 
So you would lose that case. 
Now, if you went to a garage sale held by a professional baseball catcher, 
that was a legendary catcher, by the name of Yogi Berra who died recently. 
If you went to Yogi's garage sale, then you would win on the basis 
of the implied warranty of fitness for a particular purpose.
Play video starting at :5: and follow transcript5:00
So let's test your understanding of the implied warranties with this example.
Play video starting at :5:7 and follow transcript5:07
We have a situation where a bank repossessed a boat 
from one of it's borrowers and they sell the boat to Donald.
Play video starting at :5:18 and follow transcript5:18
During the negotiations with Donald, 
Donald tells the bank he wants to use the boat for charter service in Florida.
Play video starting at :5:26 and follow transcript5:26
The bank officers handling the sale made no representations concerning the boat 
during negotiations. 
Donald later discovers that the boat is defective and 
sues the bank for breach of warranty.
Play video starting at :5:40 and follow transcript5:40
Is the bank liable, and why? 
Now this is a very tough question. 
It's going to require your very best analysis. 
If you can analyze this correctly, I'm very impressed. 
You've got great legal aptitude. 
So, please hit pause and answer that question. 
Is the bank liable?
Play video starting at :6: and follow transcript6:00
The answer to the question is no. 
And to figure out why, let's go through our three types of warranties. 
First of all, did the bank make an express warranty? 
Well, clearly no. 
The facts state the bank officers handling the sale 
made no representations concerning the boat. 
They made no statements of fact.
Play video starting at :6:25 and follow transcript6:25
Second, would the bank be liable under 
the basis of the implied warranty of merchantability?
Play video starting at :6:34 and follow transcript6:34
The problem here is that even though the boat is not merchantable, 
it's not a fair, average, ordinary quality.
Play video starting at :6:42 and follow transcript6:42
We're missing the second element of the test. 
The bank is not a merchant. 
The bank is not in the business of selling boats, and therefore, 
there would be no implied warranty of merchant ability. 
Now, there might be a sophisticated argument that would say, well, if the bank 
repossesses a lot of boats, maybe they are the equivalent to a boat merchant. 
But that argument probably would not prevail on the facts that we have here.
Play video starting at :7:11 and follow transcript7:11
And then finally, is there an implied warranty of fitness for 
a particular purpose on the basis of Donald's statement to the bank 
that he wants to use the boat for charter service in Florida? 
Well, the bank knew the particular purpose. 
The problem is that Donald has no reason to rely on the bank for 
it's special skills or expertise relating to boats. 
The banker would be like me selling a baseball mit to catch knuckle balls. 
They have no special skill or expertise. 
And therefore, no implied warranty of fitness for a particular purpose. 
So, Donald would strike out on all three counts, 
express warranty, implied warranty of merchantability, and 
implied warranty of fitness for a particular purpose.
Play video starting at :8:7 and follow transcript8:07
One last question relating to implied warranties is, can you disclaim them?
Play video starting at :8:13 and follow transcript8:13
And the answer is yes. 
And specifically to disclaim the warranty of merchantability,
Play video starting at :8:21 and follow transcript8:21
you as a seller must mention the word merchantability, and 
if your disclaimer is in writing it must be conspicuous.
Play video starting at :8:29 and follow transcript8:29
Several years ago, I purchased some picture hangers that 
you glue to your wall and then hang your pictures on the hangers.
Play video starting at :8:41 and follow transcript8:41
So I put several of these hangers in my office, and 
I hung on the hangers some large pictures and some diplomas. 
I was working in the office late one evening on a hot, humid summer night.
Play video starting at :8:55 and follow transcript8:55
And all of a sudden, the pictures fell off the wall, 
crashed to the floor, damaged the frames, the glass was broken. 
In other words, the picture hangers were not adhering to the wall. 
They were not of fair, average, ordinary quality.
Play video starting at :9:12 and follow transcript9:12
So just out of curiosity I still had the package in which the hangers came, so 
I looked at the package and it said very clearly, 
there are no warranties, express or implied. 
And specifically there is no warranty of merchandability.
Play video starting at :9:28 and follow transcript9:28
Now, they misspelled the word merchantability, but 
still, I think it would count as a disclaimer. 
The disclaimer was conspicuous, and it mentioned the word merchandability. 
How do you disclaim an implied warranty fitness for particular purpose? 
The disclaimer must be in writing and it must be conspicuous.
Play video starting at :9:50 and follow transcript9:50
And then you can disclaim both implied warranties by using language such as, 
as is, or with all faults, or 
by requesting the buyer to examine the goods for defects.
Play video starting at :10:3 and follow transcript10:03
So, in closing this segment, let's take a look at Amazon's conditions of use. 
And I intentionally used a small font for 
conditions of use because the Amazon website, 
the font is pretty small when you want to find and click conditions of use. 
But if you find conditions of use and you click, this is what you find. 
Amazon services and all information, content, materials, products, 
and other services included on or otherwise made available to you 
through the Amazon services are provided by Amazon on an as is basis. 
So they've used the magic words, as is.
Play video starting at :10:46 and follow transcript10:46
And then it goes on to say, Amazon disclaims all warranties, express or 
implied, including, but not limited to, 
implied warranties of merchantability and fitness for a particular purpose. 
So they've used the right magic words. 
I think the only question that might arise [COUGH] if somebody challenged these 
disclaimers is whether the disclaimers were conspicuous since the words, 
conditions of use, are so small on the Amazon website.
Play video starting at :11:17 and follow transcript11:17
So that concludes our look at implied warranties, and 
in our next segment we will be exploring strict liability.
We're now ready to look at the tort theories of product liabilities, 
starting first to a strict liability, and then negligence. 
Remember from our diagram, that we have the three theories of product liability. 
One of which is a contract theory, and two of which are tort theories. 
In an earlier module, we mentioned that strict liability is usually 
applied when somebody is involved in an abnormally dangerous activity. 
However, in recent years, judges have applied the concept of 
strict liability to manufacturers and sellers of products. 
This is the rule of Strict Liability that judges have developed, 
and as you can see this rule sounds pretty reasonable. 
When you start reading it it says, 
somebody who sells a product in a defective condition, 
unreasonably dangerous to the user or consumer or to his property, 
is liable for physical harm caused to the ultimate user or consumer. 
Now, if you stop right there, that sounds like a very reasonable rule. 
But, then you get down to part 2A where it says that this liability applies even 
when the seller has exercised all possible care in preparing and selling the product. 
In other words, it doesn't make any difference whether or 
not you have intentionally injured the consumer. 
It doesn't make any difference whether or not you're negligent or careless. 
You are strictly liable when you sell a product in a defective 
condition that injures the user or consumer.
Play video starting at :1:53 and follow transcript1:53
This rule has had a global impact, 
it was originally developed by judges in California, 
it then spread across the United States, then spread across Europe, 
and finally it is spread across Asia. 
I remember several years ago when I made my very first trip to Japan, 
I was invited by a group called the Keidanren, which is 
the Japanese Federation of Businesses, and Japan had just adopted this rule. 
And, they wanted me to give some lectures on what the rule meant, and 
how it would impact business in Japan. 
This is a statement on adoption of the rule in Korea from the Korea Herald 
newspaper. 
With the reality of globalization, no one is immune from the US legal system. 
Happily, Korea has not developed a compensation culture 
like the one that causes so much grief for business in the United States. 
But the fact remains, in a globalized world, 
companies do not operate in a vacuum. 
Koreans are beginning to see the impact of their Product Liability Act 
that came into effect in 2002. 
It introduced strict liability for manufacturers. 
So, we have a global impact of the rule.
Play video starting at :3:12 and follow transcript3:12
Let's take another look at this rule, and let me ask you this question.
Play video starting at :3:18 and follow transcript3:18
Let's say that I hold a garage sale, and 
you visit the sale, and you purchase a product, let's say a lawnmower,
Play video starting at :3:33 and follow transcript3:33
and, the lawnmower is defective, and it injures you. 
So, you sue me, on the basis of this Strict Liability rule.
Play video starting at :3:44 and follow transcript3:44
Will you win or lose? 
Please press pause, look closely at the rule and let me know win or lose. 
The answer is that you will lose 
because of part 1A of the rule. 
This rule applies if the seller is engaged in the business of selling such a product.
Play video starting at :4:13 and follow transcript4:13
Now, why would the courts limit liability to businesses? 
Why shouldn't it apply to me, selling my lawnmower to you in a garage sale?
Play video starting at :4:27 and follow transcript4:27
Think about this for a second, hit pause, and write down your answer. 
What policy do you think underlies this rule of strict liability? 
The answer is 
that judges, courts 
limit the rule to business because they view a business 
as an entity that can spread the risk of loss from one person, 
the injured party, to a wide group of consumers. 
This is the way a prominent law professor put it once. 
Those who are merchants, and 
especially those in the manufacturing, have the capacity 
to distribute the losses of the few among the many who purchase the products. 
It's not a deep pocket theory.
Play video starting at :5:20 and follow transcript5:20
The assumption is that the manufacturer can shift the costs of the accidents 
to purchasers for use by charging higher prices for the cost of the products. 
So, in effect what the lawyers are assuming is the company is not going to 
bare the loss, the individual who is injured is not going to bare the loss, 
we're all going to share in the loss by paying a little bit more for our products. 
This theory was illustrated by an old ad for insurance, 
and the ad pictured a courtroom scene. 
You can tell who the plaintiff is in this case because he's wearing a cast 
on his left leg, even though it's probably been five or six years since the accident. 
Smiling and shaking hands with his lawyer as the jury foreman reads the verdict 
in the background, and all the members of the jury are smiling at the plaintiff. 
Even the court stenographer is smiling at the plaintiff.
Play video starting at :6:22 and follow transcript6:22
The caption for this ad summarizes product liability in a nutshell.
Play video starting at :6:29 and follow transcript6:29
The caption reads, the jury smiled when they made the award. 
They didn't know it was coming out of their own pockets, but 
that's, in a nutshell, the theory of product liability. 
When somebody is injured we all chip in a little bit to cover the loss. 
This was illustrated very dramatically a few years ago 
in a case involving a high school football player. 
He was playing football, wearing a helmet manufactured by Riddell, 
and his spinal cord was severed.
Play video starting at :7:3 and follow transcript7:03
He brought suit against the manufacturer Riddell, a product liability claim.
Play video starting at :7:10 and follow transcript7:10
Now, let me ask you this question. 
In a case like this, who, and he recovered $5.3 million, 
in a case like this, who writes the check for $5.3 million?
Play video starting at :7:23 and follow transcript7:23
Hit pause, and write down your answer.
Play video starting at :7:28 and follow transcript7:28
The answer is the insurance company writes the check typically. 
So in this case, 
the insurance company wrote the check for 5.3, to the high school football player.
Play video starting at :7:41 and follow transcript7:41
Then what does the insurance company do? 
They call Riddell, and they say, Redell, you've been paying us $40,000 a year for 
your product liability insurance. 
We're going to have to bump that up a little bit, 
to $1.5 million, which is about 10% of Redell's sales. 
Who else does the insurance company call? 
They call the other manufacturers of football helmets. 
Their hit with these increases in premiums. 
So, what do you do if you're Riddell? 
Well, you increase the price of your football helmets, 
in this case by about 25%. 
So, football teams now have to pay more for their equipment. 
What do they do? 
They increase their ticket prices, they increase their advertising prices. 
So, everybody chips in a few cents toward this award of $5.3 million. 
Now, that's the way product liability works in theory, 
in the theory established by judges, but what happens in practice? 
Well, in practice companies, manufacturers, retailers, 
etc don't always have the ability to increase their prices 
in a manner that will cover their product liability costs. 
And, so for instance, in the football manufacturing arena 
most football manufacturers had to go out of business. 
They could not afford the cost of product liability.
Play video starting at :9:15 and follow transcript9:15
What else happens is that those companies that 
remain in business then pass on their cost to you and I as consumers.
Play video starting at :9:26 and follow transcript9:26
I had a friend who years ago wanted to buy a football helmet for his son. 
His son was playing junior high football.
Play video starting at :9:35 and follow transcript9:35
And, so he walked into a sporting goods store and 
noticed a sticker on the helmets that he was looking at and 
the sticker said that the helmet cost $75 and 
$25 of that went to cover product liability cost. 
In other words there was a $25 tax on a $75 helmet.
Play video starting at :10:5 and follow transcript10:05
This is the way that Forbes Magazine put it a few years ago. 
There's a hidden tax levied on virtually everything we buy, sell, and use. 
This tax costs companies, individuals, and local governments at least $80 
billion a year, and some estimate as much as $300 billion. 
What is this tax? 
It is called tort liability.
Play video starting at :10:29 and follow transcript10:29
So, that is a strict liability and 
in our next segment, we're going to look at our last theory of liability, 
which is the tort of negligence as it applies in product liability cases.
We're now ready to look at our third and final theory, product liability, 
which is the tort of negligence.
Play video starting at ::17 and follow transcript0:17
Remember in an earlier module, we define negligence generally as carelessness. 
But more specifically negligence arises where there is 
a breach of a duty of care that causes injury. 
We have that critical link between the breach of the duty of care and 
injury which is called causation. 
There are three areas where negligence is especially important 
in product liability cases. 
The first area arises when there's a claim of defective manufacture of the product.
Play video starting at ::54 and follow transcript0:54
In effect, the question is, was the company careless in manufacturing 
a product and that produced a defective product that entered the consumer.
Play video starting at :1:6 and follow transcript1:06
Second question, was the company careless in designing the product? 
In effect what we're asking here is, did the design make the product defective. 
And finally, was the product defective because of a lack of warning? 
Was the company careless in failing to warn the consumer 
that a product might be dangerous.
Play video starting at :1:30 and follow transcript1:30
Let me ask you this question, let's say that you work for 
a car company, and you work in the design area.
Play video starting at :1:40 and follow transcript1:40
Is it possible for you to design a car that would 
eliminate injuries resulting from automobile accidents in the future?
Play video starting at :1:52 and follow transcript1:52
Think about that for a second, hit pause, write down your answer.
Play video starting at :1:59 and follow transcript1:59
The answer is probably yes. 
You probably could design a car
Play video starting at :2:5 and follow transcript2:05
that would eliminate injuries from automobile accidents in the future. 
But the question is, what would that car look like?
Play video starting at :2:14 and follow transcript2:14
Probably it would look like an army tank.
Play video starting at :2:19 and follow transcript2:19
Would consumers rush to buy this army tank? 
Probably not. 
It's probably not going to go pretty fast. 
Probably does not have good gas mileage. 
It's probably going to cost hundreds of thousands of dollars.
Play video starting at :2:34 and follow transcript2:34
And so in other words, even though you could design a perfectly safe car. 
The courts would not require you to do that because they try to 
achieve a balance, between the safety of the product and its utility. 
On one hand, you could develop a car that is perfectly safe. 
But the courts aren't going to require you to do that. 
They're going to ask well, how much does this product cost? 
If it costs hundreds of thousands of dollars, nobody's going to buy it. 
They're going to ask how desirable is this product? 
Are people really going to be interested in 
buying a car with a design that looks like army tank. 
And how useful is this product? 
What is the gas mileage? 
How fast will it go? 
How easy is the car to park? 
And so, they try to achieve a balance between the risk created 
by an unsafe product versus the utility of the product measured in terms of cost, 
desirability, and usefulness. 
There are other tests that some courts use as well, and 
this is illustrated by this advice from a law firm.
Play video starting at :3:49 and follow transcript3:49
Most states use a test that measures the dangers a product poses as 
designed against the benefits it provides, which is called the risk-utility test. 
That's the test we've just described. 
However other states use a test that measures whether the product was unsafe 
to an extent beyond what would be contemplated by an ordinary consumer. 
The consumer expectation test. 
So if you're involved in designing products for 
your company, which test would you use? 
Would you use the test used by most states the risk utility test that we just 
described or would you use the consumer expectations 
test that is used by a smaller number of states? 
Please hit pause and write down your answer.
Play video starting at :4:40 and follow transcript4:40
And the answer should be design your products to meet 
both tests because in a global economy your product is going to be 
marketed around the United States and in other countries. 
And so, whenever possible, as long as the tests don't conflict, 
don't be trapped by going with the majority rule. 
Try to adapt your product design to tests used in all jurisdictions.
Play video starting at :5:14 and follow transcript5:14
So that concludes our look at negligence, and we're next going to look 
at how you can control and minimize product liability risk.
Now that we've completed our legal briefing on product liability, 
it's time to look at two very important questions for any business. 
First of all, the legal question of how we can manage product liability risk. 
This is where the advice of a lawyer is especially important. 
And then after that, we're going to look at the strategic question, is there any 
way in which we can use product liability law to create value for our company?
Play video starting at ::40 and follow transcript0:40
So in terms of risk management, 
I think it's useful to think of three different types of risk management. 
One type is strategic, the second type is structural, and 
the third type is operational.
Play video starting at ::58 and follow transcript0:58
So let's start with the strategic question relating to risk management, 
and at its highest level the strategic question is, 
should we manufacture a product, or should we drop a product?
Play video starting at :1:13 and follow transcript1:13
For example, there have been studies of CEOs that have indicated that 
roughly half the companies in America have dropped products, 
because of product liability risks. 
And in many cases, this makes sense. 
But my concern is in making this strategic decision of whether to sell a product or 
drop a product managers and decision makers are asking the wrong question. 
When I work with business executives, I find that 
when they make this strategic decision, they often ask this question.
Play video starting at :1:52 and follow transcript1:52
If we manufacture and sell this product, will we be sued, 
and will we be liable for damages? 
And if the answer is yes, then they're inclined to drop the product. 
To me, that's the wrong question, 
because it ignores the theory underlying product liability. 
Remember, product liability is based on the theory 
of spreading the risk among all consumers.
Play video starting at :2:20 and follow transcript2:20
So to me, the key question should be not, will we be held liable? 
But the question should be, can we spread the risk 
among the people who buy the product by raising the price of the product? 
So a classic example occurred several years ago when tobacco companies 
entered into a settlement with various states in which the tobacco companies 
agreed to pay $206 billion dollars. 
Now, on the surface, you would think, well, this will destroy the tobacco 
companies coming up with that huge amount of damages. 
However, in fact, the tobacco companies were harmed very little, and 
in fact they continued to thrive, because 
they simply raise the price of a pack of cigarettes by 76 cents, 
and that combined with various savings from reduced advertising 
caused them to continue to do very well in business. 
Now, I'm not recommending that you get into tobacco sales or 
manufacture, but my point is when you make the strategic decision, 
make sure you're asking the right question. 
The question is not, who will be liable for damages? 
The question should be, are we manufacturing and selling a product 
in which we can spread a risk of loss by raising the price of the product?
Play video starting at :3:46 and follow transcript3:46
Okay, the next risk management tool is a very important tool. 
It goes far beyond product liability, the structural question.
Play video starting at :3:56 and follow transcript3:56
And in looking at this question, let's see if you could fill in this blank. 
This is from former president of Columbia University. 
What is the single greatest discovery of modern times, 
and even electricity is far less important? 
This discovery provides the only possible engine for carrying on international 
trade on a scale commensurate with modern needs and opportunities. 
Can you fill in that blank? 
Please hit pause, and try to answer this question.
Play video starting at :4:33 and follow transcript4:33
The answer to the question is limited liability. 
Limited liability is what enables our modern system of business, 
both nationally and internationally. 
And I think you're probably all aware of how limited liability works. 
With limited liability, you and I as investors, you and 
I as entrepreneurs, can invest in a business, and 
that business provides a veil that protects us from 
liability to the creditors of the business, the corporate veil.
Play video starting at :5:14 and follow transcript5:14
So if the corporation that we've invested in goes into bankruptcy, 
the creditors cannot come after us as individuals. 
The creditors cannot take our cars, our homes, and our assets.
Play video starting at :5:28 and follow transcript5:28
Those liabilities are absorbed by the corporate veil.
Play video starting at :5:33 and follow transcript5:33
This device is also very useful when it's not you and 
I making the investment but when it's a company making the investment, 
and we call this company a parent corporation. 
A parent corporation will Invest in a subsidiary corporation, 
and that subsidiary corporation protects the parent from liability. 
So if you are facing a particular type of liability such as product liability, 
such as environmental liability, liability in any form, 
you can try to isolate that liability in your subsidiary.
Play video starting at :6:16 and follow transcript6:16
And if you find yourself in a situation where you might be betting the company, 
because the liability is so great, you can put the subsidiary out of business, 
but your parent assets are still protected. 
This can even be used within a company, for individual operations of the company. 
Once I taught in an executive program, and 
one of the people in the program was the CEO of a large grocery chain. 
And she told me that one of their grocery stores was having problems with liability. 
People were slipping and falling and suing this particular store. 
And so they incorporated only that store 
as a separate subsidiary to protect the parent company from liability.
Play video starting at :7:10 and follow transcript7:10
This is especially useful in international operations where, for example, 
you might have a US parent corporation operating through a foreign subsidiary. 
The parent corporation is interested in 
protecting its assets from liability in other countries. 
I was personally involved in this a few years ago when I was associate dean for 
executive education at the Ross School of Business, and 
I wanted to set up a center in Hong Kong.
Play video starting at :7:43 and follow transcript7:43
Before doing so, I asked a Hong Kong law firm for advice. 
Should we set up this operation in Hong Kong as a subsidiary or 
as a branch office? 
And this is the advice, 
this is a direct quote from the letter I received from the Hong Kong lawyers. 
The disadvantage of using a branch office 
is that the university would be subject to any liability incurred in Hong Kong. 
The advantage in using the subsidiary model is that any liability 
incurred in Hong Kong is limited to your Hong Kong subsidiary. 
So in other words, if there's a huge liability problem, we could close 
down the subsidiary, but the liability would not pass to the parent corporation. 
Just as a sidelight, I decided to use the branch office model, in this case, 
because creation of a subsidiary was complicated for 
tax and other reasons, and I felt that liability risk was fairly minimal.
Play video starting at :8:47 and follow transcript8:47
Now, there is a major risk in creating a subsidiary
Play video starting at :8:53 and follow transcript8:53
as it applies to product liability or to any other type of liability, and 
that is that a court might pierce the corporate veil.
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Here's an example.
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We have a world-class race car driver by the name of Mark Donohue.
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His involved in a race, the tires on his car are defective, 
they caused a crash, and they kill Mark Donohue.
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His estate, the creditor here, wants to sue 
the United Kingdom subsidiary that produced the tires, but they also want to 
pierce the veil of that subsidiary and go after the US parent corporation. 
I'm not sure exactly why, but my guess is that they want to 
get into the US legal system where we have jury trials and higher damage awards.
Play video starting at :9:49 and follow transcript9:49
In this case, the court allowed piercing of the corporate veil, 
because the US parent did not treat 
the subsidiary as if it were an independent corporation. 
In other words, they controlled the subsidiary 
to such an extent that you couldn't distinguish the two. 
This is the way the situation was described in an article in 
Forbes Magazine. 
Big companies get into trouble over the question of whether they have dominated 
subsidiaries to the extent they are indistinguishable from the parent.
Play video starting at :10:27 and follow transcript10:27
Courts look at a number of other factors besides control in deciding whether to 
pierce the corporate veil. 
For example, was the subsidiary undercapitalized? 
Is it just a shell with very few assets? 
Does the parent call the subsidiary a division or a department?
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Does the parent freely transfer assets back and 
forth between the subsidiary and the parent?
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Does the subsidiary observe legal requirements? 
Do they file their annual reports? 
Do they have regular meetings of the board of directors? 
Do they keep minutes of those meetings, etc., the way any corporation would, 
and is the direct involvement of the parent in subsidiary operations? 
For example, 
is the parent involved in designing the products made by the subsidiary? 
So the point here is lawyers can do a great job in setting up a subsidiary 
designed to protect the parent corporation, for instance, 
in a product liability scenario, but managers have to be very 
careful in making sure the subsidiary operates on an independent basis. 
This not only applies when a US parent is operating abroad, it can also apply 
when a foreign parent wants to operate in the United States. 
There's a case involving AKZO Nobel, a chemical company based in the
Netherlands. 
They set up a US subsidiary, and 
somebody wants to sue the Dutch parent in the United States. 
And the court said, no, you can't sue the parent, 
because AKZO allowed the subsidiary to operate independently. 
There was no interference with the subsidiary's marketing, 
management, purchasing, or pricing.
Play video starting at :12:21 and follow transcript12:21
So, very important concept using subsidiaries as a structural matter 
to isolate liability in product liability cases, environmental cases, etc.
Play video starting at :12:36 and follow transcript12:36
Now, in the next segment, we're going to look at the last strategy for 
minimizing liability, for managing risk, and 
that relates to minimizing your contract exposure and your tort exposure.
We're now ready to look at the last piece of product liability risk management, 
and that relates to operations, and 
specifically how you deal with contract liability and tort liability.
Play video starting at ::22 and follow transcript0:22
We've already covered how you can deal with contract liability and 
that is by limiting your warranty exposure. 
You can limit that exposure, you might recall, 
by not giving express warranties and by disclaiming implied warranties.
Play video starting at ::43 and follow transcript0:43
Now, if you're operating a business, this probably means that you're going to be in 
the middle of a tug-of-war between your legal advisor and your marketing people.
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As a form of marketing, your marketing folks might recommend 
that you give express warranties, and they might be concerned if you try to
Play video starting at :1:7 and follow transcript1:07
deny implied warranties, try to disclaim implied warranties. 
So that's going to be a decision that you'll have to make when you're getting 
pulled between the marketing people and the lawyers who will tell you, 
hey you can eliminate your warranty liability if you want to.
Play video starting at :1:27 and follow transcript1:27
On the tort side, your major opportunities for 
limiting liability relate to your safety concerns relating to a product.
Play video starting at :1:41 and follow transcript1:41
So let's try a hypothetical.
Play video starting at :1:44 and follow transcript1:44
Let's assume that you and I are on a new product safety team within a company. 
Let's say it's a cross functional team that will bring in people from finance, 
marketing, engineers, lawyers, etc., to look at safety of new products.
Play video starting at :2:5 and follow transcript2:05
And we have a new product that we're considering today. 
This product is a talking hair dryer. 
So, you wake up in the morning, you walk into the bathroom, and 
the hair dryer automatically activates and says good morning to you. 
And you can give the hair dryer instructions, verbally. 
So our team wants to evaluate the safety of this product.
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Where do we start in evaluating the safety? 
What's the very first question we want to ask? 
Please hit pause and write down your answer.
Play video starting at :2:46 and follow transcript2:46
This is a very tough question, I've discovered. 
When I pose this to company managers, to executives, 
because they want to focus on how products should work.
Play video starting at :3:1 and follow transcript3:01
Engineers, company leaders, managers, often have a tunnel vision. 
We've manufactured a product to perform in this way, and so 
our goal should be to make sure it safely performs what it's intended to do. 
However, that's the wrong question. 
The question is not, will the product perform as intended? 
The question is, how are our customers actually using the product? 
The magic word here is foreseeable. 
What kind of foreseeable uses are customers making of the product. 
So what I'd like you to do now is, thinking of the hair dryer,
Play video starting at :3:49 and follow transcript3:49
what uses do customers make of hair dryers apart from drying their hair? 
See if you can think of three uses that customers make 
apart from drying their hair. 
Hit pause, write down those uses.
Play video starting at :4:8 and follow transcript4:08
This is what my students come up with, just as an example. 
They say they use hair driers for drying clothes, for starting charcoal,
Play video starting at :4:19 and follow transcript4:19
for shrinking plastic, for drying glue and paint, for 
defrosting refrigerators, for thawing pipes, for 
drying pets when they're not using their microwaves, just kidding, 
for drying polish, for dusting, and a number of other uses. 
So this is the very important starting point, 
how are people actually using our products? 
And then as you might guess, the next step is to ask yourself, 
are there any dangers associated with these uses? 
Now I'm not an engineer, I'm not sure where the dangers would lie. 
But let's assume that you decide that shrinking plastic, drying glue, 
drying polish, are all risky activities that might result in injury.
Play video starting at :5:13 and follow transcript5:13
So you've identified foreseeable uses, you've identified 
the risks associated with those uses, and now the question is, 
what is your next step as a member of this product safety review team? 
Please write down your answer, what is your next step? 
And then we'll move on.
Play video starting at :5:35 and follow transcript5:35
The next step, when I ask this question to executives and 
to product managers, is often stated as developing warnings so 
that people will not be injured by the product.
Play video starting at :5:53 and follow transcript5:53
This is the wrong answer.
Play video starting at :5:56 and follow transcript5:56
In other words, you can't jump from the risk 
identification to giving warnings relating to the product.
Play video starting at :6:8 and follow transcript6:08
And the reason why is that courts will first require that you try to 
redesign the risks out of the product before moving on to warnings. 
Here's an example of the court's logic. 
We have a situation where somebody's working 
with a tire and there's a warning on the tire. 
It's very prominent in red and yellow highlights, and it includes a drawing that 
shows an exploding tire throwing a worker into the air. 
And the warning says, never mount a 16-inch 
size diameter tire on a 16.5-inch rim. 
Mounting a 16-inch tire on a 16.5-inch rim can cause severe death or injury. 
Now after seeing this picture, after reading the warning, 
somebody decided to try to mount a 16-inch tire on a 16.5-inch rim. 
The tire exploded and it resulted in severe brain injury.
Play video starting at :7:18 and follow transcript7:18
The person sued the manufacturer and the manufacturer said, 
well wait a minute, we had a warning on the tire, it was very clear, 
and the person even read the warning. 
The court said, that's not enough because there is evidence that 
the tire was defectively designed, and according to the Supreme Court of Texas, 
warnings are not a substitute for a reasonably safe design. 
So as a result the defendant Goodyear, 
here, had to write a check for $5.5 million.
Play video starting at :7:56 and follow transcript7:56
So bottom line, instead of jumping from identifying the risks to the warnings, 
it's important first of all to go through a redesign process first, 
and then develop warnings.
Play video starting at :8:13 and follow transcript8:13
So that pretty much covers our look at how you can control and 
manage product liability risk, and we have one last segment, 
and that is, is there any way in which you can use product 
liability strategically to create value for your company? 
We'll look at that in our final module.
In this last segment, we're going to look at the question, very difficult question, 
of whether product liability can actually be used to create value.
Play video starting at ::20 and follow transcript0:20
When I discuss product liability and product liability risk management 
with business executives, I find that they become very agitated and upset.
Play video starting at ::33 and follow transcript0:33
And one of their fundamental attitudes is, 
how can we deal with customers who are idiots? 
Why do we have to redesign products for idiots? 
Why do we have to develop warnings for idiots? 
Why aren't people using common sense?
Play video starting at ::52 and follow transcript0:52
And to some extent, I agree with them. 
I don't know if you've seen some of the warnings that appear on products, 
but here are some examples.
Play video starting at :1: and follow transcript1:00
Caution, the contents of this bottle should not be fed to fish. 
This is on a bottle of shampoo for dogs.
Play video starting at :1:7 and follow transcript1:07
Do not use while sleeping or unconscious, this is on a hand-held massaging device. 
Do not place this product into any electronic equipment, 
on a case of a chocolate CD in a gift basket.
Play video starting at :1:22 and follow transcript1:22
Shin pads can not protect any part of the body they do not cover 
on a pair of shin guards made for bicyclists. 
This product not intended for 
use as a dental drill, on an electronic rotary tool.
Play video starting at :1:36 and follow transcript1:36
Do not drive with sunshield in place, 
on a cardboard sunshield that keeps the sun off the dashboard.
Play video starting at :1:43 and follow transcript1:43
Do not eat toner, on a toner cartridge for laser printer. 
Do not use orally, on a toilet bowl cleaning brush. 
Warning, has been found to cause cancer in laboratory mice, 
on a bottle of rat poison.
Play video starting at :1:58 and follow transcript1:58
For indoor or outdoor use only, on a string of Christmas lights. 
Now I'm not sure where else you would use the Christmas lights 
if you're not using it indoors or outdoors. 
Wearing of this garment does not enable you to fly, 
on a child-sized Superman costume. 
Beware, to touch these wires is instant death. 
Anyone found doing so will be prosecuted, on a sign at a railroad station. 
Do not attempt to stop the blade with your hand, in the manual for 
a Swedish chainsaw. 
And Warning: May contain nuts, on a package of peanuts. 
And I have here a source if you're interesting in following that up further. 
So, I understand why executives can be upset.
Play video starting at :2:43 and follow transcript2:43
But my concern is that in their anger about product liability law, 
they might be missing a great opportunity. 
And more specifically, let's go back to our hair dryer 
example where we looked at forseeable uses of the hair dryer. 
We looked at potential risks and then the need for redesign and warnings. 
Now if you can overcome your anger and look closely at that system, 
at that process, what are your customers telling you?
Play video starting at :3:21 and follow transcript3:21
If you look closely at forseeable uses, I think they're saying look, 
we have the need for a product like a hairdryer to dry our clothes, 
to shrink plastic, to thaw pipes, to dust, etc.
Play video starting at :3:39 and follow transcript3:39
We have the need for these products. 
These products are not on the market, so we have to use our hairdryers for 
these uses. 
In otherwords what you're getting when you go through this process of designing 
a safe product is free marketing research on what your customers want
Play video starting at :4:1 and follow transcript4:01
and you can then use this research for new product development.
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There was a legendary president of General Motors who put it this way once, 
he said, to discuss Consumer Research as a functional activity gives 
the wrong impression. 
In its broad implications, it's more in the nature of an Operating Philosophy, 
which to be fully effective, must extend through all phases of the business. 
Recognizing that the quickest way to profits, and permanent assurance of such 
profits, is to serve the customers in ways in which the customer wants to be served. 
And so here, going through the product liability prevention process, 
you are getting a lot of free marketing research on what your customers want. 
And I highly recommend that you use these results to develop new products rather 
that simply being angry at customers who perhaps are misusing your products. 
Now, value creation can extend beyond new product development.
Play video starting at :5:8 and follow transcript5:08
It can also extend to product delivery.
Play video starting at :5:12 and follow transcript5:12
I teach at the University of Michigan Business School and down the block, 
about a half block away from the business school, 
there's a little restaurant called Dominick's. 
And Mr. Dominick started the restaurant many years ago. 
He actually had two pizza restaurants, 
one near the business school and another one in a nearby town.
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He sold the Dominic's restaurant in the nearby town to a student 
who dropped out of the University of Michigan. 
And the student, in order to avoid confusion with the other Dominic's, 
changed the name of the restaurant from Dominic's to Domino's. 
And that was the beginning of Domino's Pizza, 
which has become a worldwide operation. 
Now Domino's Pizza, a number of years ago, had a guarantee in the United States. 
I think it still might have this guarantee at a few other countries. 
We guarantee pizza delivery within 30 minutes. 
Well as you can guess, this caused legal problems. 
There were traffic accidents that resulted in lawsuits. 
Remember our earlier discussion of liability of businesses for 
the torts of their agents under respondeat superior? 
So, what is the risk management solution to this problem? 
If you were a Domino's executive, what would you do? 
Please hit pause and write down your answer.
Play video starting at :6:53 and follow transcript6:53
This is the way Domino's addressed the situation. 
They, first of all, looked for possible solutions such as better training for 
drivers, better screening of drivers during the hiring process, or 
giving up the guarantee.
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And Domino's selected the third option, giving up the guarantee after it was hit 
with a $79 million jury decision in a case with somebody who was hit by a driver.
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Now this solved the risk management question. 
But solving that question might result in losing value since 
this guarantee was such an important feature of Domino's success. 
So then they ask the value question. 
Why did we guarantee fast delivery? 
What do our customers really want?
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And what they came up with in terms of an answer was, customers want hot pizza. 
That's why it's important to deliver pizza quickly. 
So once they identified the question, 
then they were able to focus on new product development. 
They developed a product that kept the pizza warm, 
a pizza bag containing heating coils. 
So creating value out of product liability is possible, 
number one, in new product development. 
Number two, in product delivery. 
And then there's a broader chance to build value that relates to the structure of 
your company.
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We mentioned that subsidiaries are very useful in risk management, because 
they reduce parent company liability relating to products and services. 
So that's the legal aspect of subsidiaries. 
But, the subsidiary structure can also encourage value creation, 
and here's an example. 
In late 2015, the CEO of Google, Larry Page, 
who's a graduate from the University of Michigan, 
announced the creation of a new parent company called Alphabet. 
And subsidiary companies, were the so called bets in the alphabet structure. 
So parent company with a lot of subsidiaries who are bets.
Play video starting at :9:10 and follow transcript9:10
And under this new structure, the bet companies operate very independently. 
They handle their own hiring, they negotiate their own contracts, 
they develop their own marketing campaigns, 
they have their own departments, marketing, legal, etc. 
And, this structure allows them to act faster, more efficiently and 
more independently. 
According to the CEO of one of the bets, 
the Google Life Sciences company, I act as CEO of an independent company 
instead of a senior executive emerged within a larger company. 
This is an example of a structure that
Play video starting at :9:52 and follow transcript9:52
enables companies to act in a more 
innovative way by allowing its subsidiaries greater freedom. 
So the subsidiary structure, in addition to minimizing liability, 
is also an avenue to create value.
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So, this concludes our look at product liability. 
Just to summarize, 
we started with a legal briefing that introduced you to Tort Law, generally.
Play video starting at :10:21 and follow transcript10:21
And then, zoomed in on product liability, specifically. 
We looked at opportunities for product liability risk management, 
relating to your strategic decisions of whether to manufacture the product. 
Your structural decisions as to whether to use subsidiaries. 
And your operational decisions relating to product design and warranty disclaimers. 
And then finally, we looked at product liability to create 
value in the form of new product development, new product delivery. 
And even in terms of corporate governance by setting up subsidiaries 
that not only limit your liability, but encourage innovation. 
So that concludes this module.
I'm George Siedel, and I want to welcome 
you to the module on creating value through government regulation.
Play video starting at ::17 and follow transcript0:17
This is one of our most important modules because government 
regulation has such a huge impact on your business, but 
it also has a huge impact on all of your stakeholders. 
For instance, your investors, your employees, and your customers. 
Here are a couple of quotes that illustrate the importance of government 
regulation. 
Here's something from the GE website. 
The success of GE, success of our company, 
depends significantly on sound public policies. 
Or something from the McKinsey Quarterly, the business value at stake from 
government and regulatory intervention is huge, about 30% of earnings. 
And according to a fairly recent PwC Global Survey, 
over-regulation is the top threat to business growth.
Play video starting at :1:6 and follow transcript1:06
Here's a quote from John Browne, the former CEO of BP, and his coauthor. 
It illustrates the importance of government regulation.
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The logic of understanding government is simple and compelling. 
The success of a business depends on its relationships with the external world, 
regulators, activists, and legislators. 
Decisions made at all levels of the business from the boardroom 
to the shop floor, affect that relationship. 
So in other words, regardless of where you are in a business, government
regulation 
is important, and this is our game plan for dealing with government regulation. 
First of all, 
I'm going to give you an overview of what government regulation means. 
And I'm going to provide a perspective that might be a little bit different from 
what you're used to, which you learn traditionally in school. 
Then we're going to focus on risk management. 
The strategies you can use to manage risk. 
That basically falls within the law pillar of decision making. 
And then we'll move on to how you can create value by using regulatory law, 
which focuses more on the strategy pillar. 
So let's start with an overview of government regulation. 
I think we're all familiar with the separation of powers. 
That's a part of governments throughout the world, 
anywhere where there's rule of law. 
Now if there isn't rule of law, if decisions are made by people in 
power based on their own discretion without any limitation, 
then these separate powers don't operate. 
But in most countries we divide government into a judicial branch 
that interprets law, an executive branch that enforces law, and 
a legislative branch that creates law. 
That's basic high school civics.
Play video starting at :2:58 and follow transcript2:58
A trivia question, especially for those of you from the United States. 
We have the three branches of government. 
We've got our congress, our president, and we have our court system.
Play video starting at :3:11 and follow transcript3:11
At what point during the year are these three branches together in one room? 
So that's the trivia question. 
Hit pause and write down your answer.
Play video starting at :3:22 and follow transcript3:22
And the answer is that the three branches of government are together in the House 
of Representatives every year for the President's State of the Union address. 
And here' a clip, 
if you're interested in watching this recent State of the Union Address. 
And what's very interesting about this is when you look 
closely at the Supreme Court justices, you'll notice 
that Justice Alito is saying something in response to what the president is saying. 
So your challenge is to see whether you're a good lip reader or not. 
So, hit pause, watch the video, and 
see if you can guess what Justice Alito is saying. 
If you're a good lip reader, you probably noticed his saying in 
response to the president's comments, he's saying, not true. 
In other words, he's calling the president a liar.
Play video starting at :4:14 and follow transcript4:14
So, this little clip illustrates 
the tension that arises sometimes between the three branches of government.
Play video starting at :4:22 and follow transcript4:22
Now, the problem with what we have all learned in a high school civics 
class is that this depiction of government is not true.
Play video starting at :4:34 and follow transcript4:34
And it's especially important to realize that it's not true in one specific aspect. 
It says the legislature creates law. 
Well, judges also create law. 
And this is especially true in a so-called common law system 
where the courts rely on earlier decisions in deciding cases. 
So judges actually make law when they decide cases. 
And, it's also not true in that the executive branch, 
depending on the country you're in, but the executive branch can also make law. 
For example in the United States we have something called an executive order 
where the president can issue an order to 
government agencies to follow a particular rule.
Play video starting at :5:27 and follow transcript5:27
Fairly recently, President Obama issued an executive order that 
ordered a higher minimum wage for government contractors. 
And so, there's a myth with regard to the separation of powers. 
It's not as simple as it appears. 
There's another reason, a very important reason why this is a myth. 
And that's because in addition to the three branches of government, 
we have a fourth branch. 
And this is the way the fourth branch was described by Professor Turley. 
Our carefully constructed systems of checks and 
balances is negated by the rise of a fourth branch. 
The shift in authority from the other three branches has been staggering. 
The fourth branch now has a larger, 
practical impact on the lives of citizens than all the other branches combined. 
So, my question for you now is, what is this very important fourth 
branch that touches your life more than any other branch of government? 
Please hit pause and write down your answer.
Play video starting at :6:32 and follow transcript6:32
The answer is the government agencies in every country of the world. 
We have the three main branches of government. 
You've got elected legislators in the legislature. 
We've got an elected head of government. 
And then we have judges who may be appointed or elected. 
But beneath the surface of the separation of powers is a huge 
bureaucracy of government employees who aren't elected and 
who are in their jobs for basically life. 
And it's these employees of the agencies who have such a big impact on us. 
Here's some figures from the United States. 
In the United States we have 2.8 million federal workers in 15 departments, 
69 agencies, and 383 nonmilitary sub-agencies. 
There was a study in 2007 that showed that Congress enacted 138 public laws, 
while in the same year these federal agencies finalized, 2,926 laws
Play video starting at :7:37 and follow transcript7:37
including 61 major regulations. 
So these agencies have a huge impact on our lives. 
Here's another example of the impact. 
There's something called the Code of Federal Regulations, 
which is code of all the rules and regulations made by the federal agencies. 
And you can see here in 1960 we had 22,877 
pages of rules and regulations, laws in other words. 
And by the end of 2014 we had 175,268 pages. 
And this gives you a sense of the scope of existing regulations that businesses, 
workers and consumers must comply with. 
In other words, you have to decide if you're in business which of 
those 175,000 pages applies to your business and then comply with those rules. 
So, that gives you a sense of the scope of federal regulations, 
and in the next segment we're going to take a deeper dive and 
look more closely at administrative agencies.
We're now ready to take a deeper look at administrative agencies and 
how they operate. 
And administrative agencies actually have three functions, 
they reflect the separation of powers, 
the executive function, the legislative function, and a judicial function. 
So the executive function of the administrative agency is to enforce 
the laws, and here's a couple of examples involving Twitter and Facebook. 
There was a FTC, Federal Trade Commission, proceeding involving Twitter, 
and they reached a settlement. 
And the cause of this proceeding was that Twitter had a privacy policy, and 
their policy said, we protect your information from unauthorized access. 
However, hackers discovered an administrative password and 
posted phony tweets, in other words, they violated the privacy policy. 
For example, one of the tweets was from President Obama offering his 
150,000 followers, a chance to win $500 in free gasoline. 
So FTC filed a complaint and it was settled, and now Twitter must number one, 
improve its security, and number two it's on probation for the next 20 years. 
Another recent example of an agency enforcement involved Facebook. 
The headline was the FTC settles a privacy issue at Facebook. 
And Mark Zuckerberg, basically the owner, the head at Facebook, 
said I'm the first to admit we've made a bunch of mistakes. 
Strangely enough, with both of these proceedings, after 
the complaints with Twitter and Facebook, this language appeared at the end of
Play video starting at :1:56 and follow transcript1:56
a FTC press release announcing the settlement of the cases. 
The FTC's website provides free information and 
a variety of consumer topics, like the FTC on Facebook and follow us on Twitter. 
So despite the enforcement actions, the FTC uses Facebook and Twitter.
Play video starting at :2:15 and follow transcript2:15
Okay in addition to enforcement laws, 
the second function of administrative agencies is to legislate. 
They're involved in a rule making function, and this function is 
especially important to business because with this rule making function. 
You have the possibility of commenting on public proposals. 
The agencies will publish a proposed rule, and 
if you don't like that rule, you can submit a comment, or 
if you do like the rule, you can submit a comment supporting the role.
Play video starting at :2:53 and follow transcript2:53
So this is called the public comment phase, 
before the agency finally decides whether to adopt a rule or not.
Play video starting at :3:1 and follow transcript3:01
Anyone can comment on a proposed regulations, 
you can do this right now, if you were to just to try it out, or 
you have a particular regulations that you are interested in. 
Let me show you how this website works. 
If you go to regulations.gov and 
you hit Advance Search, and then, click Public Submission.
Play video starting at :3:24 and follow transcript3:24
And then, type in the name of a company you're interested in, so 
I'm just going to select, randomly, Microsoft.
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And then, at the bottom, we'll pick a random comment. 
The first one by Kevin One which was submitted November 17th, 2015. 
And he's commenting on an optional
Play video starting at :3:49 and follow transcript3:49
practical training program, I think that was OPT stands for. 
For STEM students, Science, Technology, Engineering, and Math students, and 
he's talking about why expanding this program is good for 
the United States and for the US economy. 
He says first of all he's from Seattle, and in Seattle, 
one foreign worker creates nine local jobs in the service sector.
Play video starting at :4:13 and follow transcript4:13
Secondly, in the STEM area, there are not enough US graduates to fill job positions. 
And finally, he talks about diversity and foreign talent of US offices, 
had been the cutting edge for US businesses. 
And he mentions the advantage that the US has in important 
a large number of foreign workers and he sites examples such as Von Neumann. 
One of the founders of game theory, Cate Blanchett the actress,
Play video starting at :4:41 and follow transcript4:41
Sergei Brin, Jerry Yang, etc., were all foreign born. 
So here is somebody from Microsoft, commenting on, 
why expanding the opt for STEM. 
The optional practical training program for STEM is a good idea. 
So you could read what companies you've commented on or 
you can also comment yourself. 
Now take a look at the final
Play video starting at :5:8 and follow transcript5:08
Branch of Administrative Agencies work, which is a Judicial Function. 
In other words they not only Enforce Laws through the Executive Function, and 
create laws through the Legislative Function, but 
they also decide on whether you have violated a law.
Play video starting at :5:27 and follow transcript5:27
So in summary, the separation of doctorate and 
powers does not apply to administrative agencies, and they engage in all three 
functions of government, which makes them very powerful. 
And that's why people feel they touch our 
lives more than the three main branches of government.
Play video starting at :5:47 and follow transcript5:47
If you're interested here is a video summary of administrative law. 
This was a summary of the law turned into a song by a friend of mine a professor
and 
I'll warn you in advance that, that he was not nominated for a Grammy award. 
Although he doesn't have a bad voice, but actually he does a fantastic job 
in giving you a nutshell summary of what administrative law is all about. 
So I highly recommend you take a look at this video. 
And in our next segment then, we're going to move to risk management, 
and look at how you can control the risks associated with government regulations.
Let's now move to the law pillar of decision making and 
focus on how you can manage government regulatory risk. 
And there are three ways that I want to focus on, 
and the first one is shaping the law, developing what the law looks like. 
Do you think this is good news or bad news when it comes to shaping the law?
Play video starting at ::31 and follow transcript0:31
McKinsey did a survey of 
over 3,500 executives worldwide and this was their conclusion.
Play video starting at ::40 and follow transcript0:40
Less than 20 percent of the respondents reported having frequent success 
influencing government policy and the outcome of regulatory decisions. 
Good news or bad news that less than 20 percent of companies were 
successful in influencing government policy and regulatory decisions? 
Please hit pause and write down your answer, good news or bad news.
Play video starting at :1:6 and follow transcript1:06
I'm not sure whether you wrote down good news or bad news. 
My answer would've been good news or very good news. 
Because if fewer than 20% of your competitors are successful in 
influencing government policy and regulations that means that you have 
a fantastic opportunity for gaining competitive advantage. 
If the others are so unsuccessful, if you do it right and 
are successful, you can gain competitive advantage. 
Now, how do you go about this? 
What are the tactics and strategies you can use for 
influencing government regulations, and shaping the law, in other words? 
Well, here are some common examples, five common ways you can shape the law, 
influence legislators, influence lawmakers. 
The first one is to obtain stakeholder support. 
Go to your shareholders, your employees, your suppliers, 
your creditors, your customers, the local community. 
And emphasize to them how important a regulation is, 
how important a proposed law is, and get their support. 
Now, question, let's say that you're going to your shareholders.
Play video starting at :2:20 and follow transcript2:20
What specific type of shareholder would you search for? 
What particular type of shareholder is going to have the greatest influence on, 
let's say, Congress?
Play video starting at :2:32 and follow transcript2:32
Please hit pause and write down your answer.
Play video starting at :2:37 and follow transcript2:37
The answer to that question goes to the heart of the interests of lawmakers. 
If you're a lawmaker, what is your primary interest that's 
more important than any other interest? 
Well, that interest is keeping your job, and how do you keep your job? 
Well, you need to be re-elected, and so as a lawmaker, 
you're very interested in what people in your district have to say
Play video starting at :3:9 and follow transcript3:09
because they're the ones who are going to be voting for you. 
And so when you obtain stakeholder support, for 
instance with shareholders, very important to go to shareholders in the district 
where the congressman is based because 
the people in Congress are going to listen most closely to those shareholders. 
Campaign contribution are of course important. 
Advocacy advertising to influence public opinion.
Play video starting at :3:37 and follow transcript3:37
There's different views on how effective advocacy advertising is, but 
it certainly is one way to influence the development of law. 
Coalition building, try to find other groups, 
other individuals who share your interests. 
And finally, and this is a big one, lobbying by company leaders or 
professional lobbyists is especially important. 
So let's take a look at lobbying in a little more detail. 
This illustrates the importance of lobbying. 
We have Google, who a decade ago wasn't interested in lobbying, 
didn't realize how important it was. 
They opened a one man lobbying shop in Washington. 
But by 2014 they'd moved to a new space on Capitol Hill,
Play video starting at :4:23 and follow transcript4:23
doubling the size of its space, of its previous space, 
to 55,000 square feet, roughly the size of the White House. 
And their presence matches its expanded needs and 
ambitions as it tries to fend off threats from executive and 
legislative branches to regulate its activities. 
So, important to Google, important to many other businesses.
Play video starting at :4:48 and follow transcript4:48
If you're interested in a little more detail on what firms spend and 
what groups spend on lobbying, 
here's a website that might be of interest, opensecrets.org. 
And let's take a look at that website. 
I'll try to show you here how to use it. 
Once you're at this website, first click Influence and Lobbying, and then Lobbying.
Play video starting at :5:14 and follow transcript5:14
And go to the lower left side if you want to find out 
who the big spenders are on lobbying.
Play video starting at :5:20 and follow transcript5:20
Click top spenders and you can see for instance in 2015 
the US Chamber of Commerce was the top spender. 
They had over 64 million followed by the American Medical Association and 
the National Association of Realtors who are running neck and neck. 
Then Blue Cross Blue Shield, General Electric, Boeing, etc. 
So those are the people spending the most on lobbying on an annual basis. 
Now where do they spend their money? 
Well to find out click Agencies, and you'll see that 
there's a virtual tie between the US House of Representatives and the US Senate. 
In other words, the legislative branch of government, 
as you might expect because they make laws, receive the highest amount. 
Then you have some administrative agencies, the Department of Health and 
Human Services, EPA, Department of Defense, Department of Transportation 
received a lot of lobbying influence based on number of reports filed. 
And then finally the executive branch of government, the White House, 
there were 1,785 lobbying reports relating to the White House. 
So this will give you a feel where the money goes. 
And then finally, if you're interested in any specific company, 
you can go way down to the bottom left and type in the name of the company. 
Let me just randomly pick an Indian company, Tata and 
it'll show you these are the different Tata groups that are involved in lobbying. 
Let's try one of them, Tata group and 
you'll see the lobbying expenses for the last five years or so. 
So a very, very useful and interesting website, 
if you're interested in tracking lobbying activity.
Play video starting at :7:19 and follow transcript7:19
Here's some examples of executives who are involved in lobbying. 
I don't know if you recognize these gentlemen, but 
here they are leaving the White House. 
On the left hand side side we have the head of J.P. 
Morgan Chase, Jamie Dimon. 
And on the right hand side we have Lloyd Blankfein, the CEO of Goldman Sachs. 
And influence in government regulation is so important at J.P. 
Morgan Chase that they call it their seventh line of business. 
A newcomer to lobbying efforts, Mark Zuckerberg, Facebook CEO, 
he's formed a group focused on immigration and education policy. 
And last year Facebook, Google, Amazon and 
Yahoo formed a trade association to make sure policymakers do nothing to 
hamstring the free flow of information or overly regulate technology firms. 
That year actually was 2012 when they formed the trade association. 
So this is an example of one of the tactics I mentioned earlier, 
building coalitions and here's a picture of Mark Zuckerberg with the President.
Play video starting at :8:34 and follow transcript8:34
Another example of a prominent business leader who has been actively involved in 
shaping government regulation is David Carson, 
the retired CEO of People's Savings Bank in Connecticut.
Play video starting at :8:48 and follow transcript8:48
In many ways, 
David Carson epitomizes the role of a business leader in shaping regulation. 
Because in addition to lobbying on behalf of his bank and the banking industry, 
he testified in Congress for over four decades and 
he testified not only on business issues but on issues affecting society. 
For example, he's been very passionate about early childhood education and 
has been very active in shaping regulations relating to that issue. 
And this is what he has to say about his work in government. 
In my career, 
I've been involved in everything from neighborhood block watches to talking to 
chief of staff of the President of the United States about banking legislation. 
And everyone in between, state legislators, regulators, elected officials 
and bureaucrats, who can make the changes I thought would be good for our
society. 
The people who end up with power in our society are those who get involved. 
This is from his biography called Bow Tie Banker. 
The people who end up with power in our society are those who get involved. 
And I think what's interesting about this quote is that it 
illustrates the two hats that every business leader wears. 
On the one hand, 
you want to influence regulations that might affect your company.
Play video starting at :10:18 and follow transcript10:18
You wear the hat of a corporate leader.
Play video starting at :10:21 and follow transcript10:21
But on the other hand, as a concerned citizen, you wear the hat of 
somebody who wants to influence regulation in a way that benefits society.
Play video starting at :10:32 and follow transcript10:32
And what David Carson is saying here is that people who 
wear both of those hats are the ones who end up with power in our society. 
That's why Forbes magazine named David Carson one of the most powerful people 
in American business. 
And when you have that power, then you have the ability 
to do what you think is good for both your business and society.
Play video starting at :10:55 and follow transcript10:55
So, let's move on, 
and take a look at one last strategy that you can use for shaping the law. 
The first five strategies are from a great article by Keim and Zeithaml. 
But this is one strategy that I've added on my own and 
that is you can try to pit the branches of government against each other,
Play video starting at :11:19 and follow transcript11:19
in achieving new rules and new regulations. 
So let me give you two quick examples, one is from Wisconsin.
Play video starting at :11:30 and follow transcript11:30
They had a number of years of court decisions 
that people felt were anti-business. 
They related to product liability, a separate topic in this course. 
And so, the legislature passed 
a product liability reform act that overturned the court decisions. 
So here we have a case of business interests going to one branch of 
the government, the legislature, 
to overturn decisions by another branch of government, the court system.
Play video starting at :12:4 and follow transcript12:04
Here's another example. 
I don't know if you recognize this product, an e-cigarette, but 
here's an e-cigarette scenario that played out in the United States. 
Here's a definition of e-cigarettes, battery-powered products that allow you to 
inhale nicotine vapor without fire, smoke, ash, or carbon monoxide. 
It's estimated that in the United States by 2018 sales 
will reach $10 billion, so these are becoming a very popular product. 
So given this increased interest in e-cigarettes, 
we have a government agency stepping in, the FDA, and 
the FDA says, e-cigarettes are subject to tough drug regulations. 
An organization called Smoking Everywhere which sells e-cigarettes, 
goes to the court system, sues the FDA 
claiming that e-cigarettes are subject to less-strict tobacco regulations. 
They obviously did not want the more severe type of regulation, 
and in 2010 the U.S Court of appeals agreed with Smoking Everywhere. 
So here's an example of a business that goes to the court system 
to overrule a decision of an administrative agency. 
So if you want to shape rules and regulations, 
you can play off one branch of government against another.
Play video starting at :13:34 and follow transcript13:34
So that concludes our look at how you can shape government regulation. 
And in the next segment, we're going to take a look at compliance, 
and then move on to how you can use the law to attack competition.
Okay, so let's now move on to a second type of strategy you can use in risk 
management when it comes to government regulation, and that's simply,
compliance. 
Once the law or regulation has been adopted, 
then compliance is a very important strategy. 
And the compliance has been on the mind of business in 
recent years given a flood of recent laws and regulations. 
Here's an example from the financial services industry. 
Citigroup has 30,000 people working on regulatory and compliance efforts. 
And JP Morgan Chase in 2014 expected to add 13,000 
employees to work on regulatory and compliance efforts. 
Given this huge growth in compliance, if you're considering 
a future career, if you're trying to decide on a future career, 
you might consider a career in compliance. 
Now we're going to talk more about compliance 
when we get to the ethics module because 
compliance is a very important feature of dealing with ethical issues.
Play video starting at :1:23 and follow transcript1:23
Let's now move on to the final approach that you can 
use to try to manage regulatory risk. 
And that is actually using the law aggressively to attack competitors. 
I don't know if you can name the traditional four P's of marketing if 
you've ever studied marketing. 
But the law adds a fifth P to the traditional four P's of product, 
price, promotion, and placement. 
And the fifth P is plaintiff. 
You can use the law aggressively as a plaintiff suing your 
competitors in order to increase your market share. 
Here's an example of the fifth P of marketing. 
The battle between Apple and 
Samsung, which people refer to as the mobile device patent wars. 
Over 50 lawsuits in 10 countries have been filed 
between these two companies, claiming billions of dollars. 
Steve Jobs the former head of Apple vowed to destroy Android, 
saying, I'm willing to go thermonuclear war on this. 
This is from his biography. 
And according to Professor Love of Santa Clara, Samsung should emphasize 
in these lawsuits that Apple is losing marketplace share to Samsung, 
and so has decided to compete in the courtroom instead. 
That's the fifth P of marketing. 
And these lawsuits have been ongoing. 
Some of them have been settled, but there's still some mop-up litigation. 
Here's an example of the number of patent suits in the industry generally. 
I don't know if you can see the company names. 
But the red lines indicate companies that have brought suit against other
companies. 
And the blue lines indicates situations where the companies 
have been suing each other. 
So you can see there's a blue line connecting Apple and 
Samsung, as they have filed suit against each other. 
So all of these boil down to classic 
market share, classic business success, that is 
trying to be created through using the fifth P of marketing, which is plaintiff.
Play video starting at :3:49 and follow transcript3:49
So, that concludes our look at how you can manage regulatory risk. 
And in the next segment we're going to take a look at using regulatory law for 
value creation.
We're now ready for the last piece in this module. 
A very important piece that relates to the strategy pillar of decision-making. 
And that is, how can you use regulatory law in a positive way to create value. 
Now this is very contrary to many people's thinking. 
When you say regulations and 
law to a lot of business leaders they become very upset and they think 
very defensively about regulation rather than thinking about value creation. 
So one of the goals here is to try to change traditional thinking.
Play video starting at ::42 and follow transcript0:42
And we're going to be looking at three types of strategies. 
First of all, meeting stakeholder interests by anticipating regulation. 
Then meeting stakeholder interest through something I call regulatory gap strategy 
and then finally trying to meet the interests of society. 
So look at the question of anticipating regulation. 
And McKinsey, 
the large consulting firm, calls this operating at the regulatory frontier. 
Here's an example. 
Let's say the Food and Drug Administration, the FDA, 
is considering a new regulation that requires you to add labels 
to your products showing the amount of trans fats in your products. 
How would you respond to this proposed new regulation? 
Now, I would assume first of all as we discussed earlier, you would 
want to comment on the regulation, but beyond the traditional approach, 
beyond risk management, how else might you respond to this regulation? 
Please hit pause and 
write down your answer and then we'll discuss a possibility.
Play video starting at :1:56 and follow transcript1:56
Let's take a look at what one company did. 
Pepsi's Frito Lay division.
Play video starting at :2:1 and follow transcript2:01
They had a dual approach here. 
First of all they stopped using trans fats in potato chips and their other products, 
so they bypassed potential labeling requirements, and 
then second, they turned this into a marketing advantage. 
They obtained FDA approval to place 
prominent labels on their products showing that they had no trans fats. 
So rather than trying to fight regulation, rather than limiting 
the activity to shaping regulation, they anticipated the regulation 
in a very positive way that turned into a marketing advantage. 
So, you can use regulatory frontier thinking, 
not only in developing products that anticipate new regulations, 
but in other types and aspects of business operations. 
So, for instance, in the United States we've had a longstanding debate 
over whether to raise the federal minimum wage. 
And so, with regulatory frontier thinking, 
many companies have decided, well, why wait for the regulation to be enacted? 
Why fight the regulation? 
Let's just increase employee minimum wages on our own.
Play video starting at :3:18 and follow transcript3:18
So Walmart, McDonald's, Ikea, Starbucks, etc.,
Play video starting at :3:22 and follow transcript3:22
have increased minimum wages even when it's not required by 
federal regulation in order to better meet the needs of their employee stakeholders.
Play video starting at :3:33 and follow transcript3:33
That illustrates how you can operate on the regulatory frontier and 
anticipate regulation in a positive way that creates value.
Play video starting at :3:44 and follow transcript3:44
A second strategy for meeting stakeholder interests, 
is to use what I call a regulatory gap strategy.
Play video starting at :3:52 and follow transcript3:52
And what this strategy involves is searching for gaps in a regulatory 
structure, that allow you to develop new products and services for your customers. 
And here's an example that relates to the formation of Southwest Airlines.
Play video starting at :4:8 and follow transcript4:08
The people who started Southwest Airlines, a lawyer and 
a business executive discovered that there was a gap in the regulation of airlines. 
A gap of federal regulation of airlines that allowed them 
to start an airline and operate within the state of Texas. 
So they did that. 
They faced court battles with the traditional powerful airlines but 
they won those battles. 
They met customer interest by offering low fares and on-time flights. 
And then later they were able to expand by pushing for 
changes in the law that enabled flights elsewhere. 
So that's a very traditional example of what I call regulatory gap strategy. 
That's a phrase that I've coined.
Play video starting at :4:57 and follow transcript4:57
A more modern example is Uber.
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Uber discovered a regulatory gap. 
They argued taxi regulations don't cover 
transportation service companies that simply connect passengers to drivers.
Play video starting at :5:15 and follow transcript5:15
Transportation service companies don't own the cars themselves, 
they don't hire the drivers, they argued.
Play video starting at :5:22 and follow transcript5:22
Here again, they were meeting an interest of customers. 
The customers, obviously, were interested in lower fares, and 
Uber's strategy has been to shoot first and aim later. 
In other words, 
they enter markets without permission, trying to exploit this regulatory gap. 
They then develop support from local citizens, from drivers and customers, 
and they've used this strategy in about 277 cities worldwide. 
Let's look at the results as of 2015. 
After five years in business Uber is valued at over $40 billion.
Play video starting at :6: and follow transcript6:00
And over the years Uber has used traditional strategies in addition 
to regulatory gap strategy in order to achieve these tremendous results. 
For example, they do use lobbying for changes in the law. 
In the year 2014 alone, 17 US cities passed laws approving service. 
And Uber currently, is trying to create partnerships with European cities. 
And they use a compliance strategy. 
For example, currently in 2015 they're applying 
to be a radio-dispatched taxi service in New Delhi. 
By the way India is the second largest market outside of the United States. 
So they've combined regulatory gap strategy 
with traditional strategies in order to achieve these tremendous results. 
So, two important possibilities for using regulatory law for value creation. 
Are first of all, trying to meet state quota needs by anticipating regulation. 
By operating in the regulatory frontier. 
And second, by using the regulatory gap strategy. 
Find gaps in regulation that allow you to develop new products, 
do services, and even enter new industries. 
The other possibility for value creation is a little more controversial. 
And that is thinking about meeting the interests of society in general. 
When you talk about meeting societal interests it brings into play 
the controversial topic called corporate social responsibility.
Play video starting at :7:41 and follow transcript7:41
Some people feel that there are problems with corporate social responsibility 
because it is not aligned with profit maximization and 
it is not aligned with mainstream strategy. 
This is the way an article by Porter and Kramer describe the result. 
A hodgepodge of uncoordinated CSR and philanthropic activities 
disconnected from the company's strategy that neither make any meaningful 
social impact nor strengthen the firm's long-term competitiveness. 
So, basically, 
what they're saying is CSR activities are of doubtful value to society. 
And they are especially of doubtful value to the success of a company and 
it's ability to produce profits.
Play video starting at :8:31 and follow transcript8:31
Now, why is this? 
Well, I think that one reason
Play video starting at :8:39 and follow transcript8:39
relates to a very fundamental aspect of human nature. 
You and I have a fundamental bias in our human judgement 
that distorts our behavior. 
This bias, according to Max Bazerman in his book Judgement 
in Managerial Decision Making, is rooted in social norms that lead 
us to interpret most competitive situations as win-lose. 
Here's an example, 
a statement by a member of the House of Representatives on treaty negotiations. 
If the proposed treaty is in Russia's best interest 
it cannot be in our best interest. 
In other words, our interactions are win-lose in nature. 
Well, the problem is if we have this win lose mentality and 
we bring it to corporate strategy, then it's very difficult 
to engage in socially beneficial activities. 
It's very difficult to align corporate social responsibility with profit, 
because of our attitude that if we give more to employees, for 
example, that means less for shareholders. 
We have a fixed pie. 
And therefore the challenge becomes building a larger pie that can benefit 
both society and our stakeholders and the company.
Play video starting at :10:5 and follow transcript10:05
That's the challenge. 
And what this requires is what I'm calling an interest-based strategy. 
It's an alternative to fixed-pie thinking, and 
what this involves is first of all, finding out what your stakeholder 
interests are, finding out what society's interests are, and then trying to build 
a larger pie that benefits both the company and the stakeholders. 
It's a change in mindset from this win-lose mentality has 
dominated our interaction with individual stakeholders and the society in general. 
And a movement toward an interest-based approach 
that takes into account the interests of both sides. 
Here is an example from Porter and Kramer's article, Creating Shared Value. 
You've got Johnson and Johnson invests in employee wellness programs. 
Now, often, companies are reluctant to invest in these programs. 
Because the cost of the program, they feel, is going to reduce profits. 
However, think of this as an interest-based approach. 
Look at the benefits to both sides that actually isn't a fight over a fixed pie. 
But it builds this larger pie that involves better benefits for employees. 
They have better health, lower out of pocket health care costs. 
Benefits for the company, they have a more productive and healthy workforce. 
The company actually saved $250 million in healthcare 
costs over six years and a benefit to society in 
general in the form of healthier citizens and lower health costs. 
So, I think it is possible to meet societal concerns 
if there is a fundamental change in the mindset of decision makers, 
where the focus is not on the mythical fixed pie, 
and fighting over who gets the larger piece of a fixed pie. 
But building a larger pie that benefits all stakeholders.
Play video starting at :12:17 and follow transcript12:17
So that concludes our look at government 
regulation, a very important piece of business success. 
And in this module we have started by looking at 
various risk management strategies. 
We've looked at shaping the law and tactics for doing that. 
We've looked at complying with the law and finally using the law 
as method of gaining greater market share in battles with competitors. 
And then we've moved on to the strategy pillar by looking at 
strategies such as operating at the regulatory frontier, looking at 
the ability to use gaps in regulatory strategy to create value. 
And finally on changing the mindset to one that focuses on interest-based 
strategy rather than traditional strategy that focuses on a fixed pie. 
So that concludes our look at government regulation.
Welcome to our module on intellectual property.
Play video starting at ::13 and follow transcript0:13
Intellectual property is hugely important in today's business world. 
And to start our discussion, and to understand the importance of 
intellectual property, I think we should first step back and 
ask, well, what are the types of property, and how does intellectual property fit in? 
And fundamentally, property is divided into two categories. 
We have tangible property that you can touch. 
An intangible property that is non-physical. 
So little bit of a challenge for you. 
What I'd like you to do, is to hit pause and 
write down two types of tangible property, two examples, and 
two examples of intangible property. 
Hit pause and write those down.
Play video starting at :1: and follow transcript1:00
Well, I'm not sure what you've written down, but again, 
tangible property is what you can touch. 
And so, you could've written down real estate, 
you could've written down buildings, you could've written down desks. 
[SOUND] You could have written down chairs. 
All of those are tangible property. 
And tangible property is divided into real property, which is immovable property, 
like real estate, and personal property, which is movable. 
So I'm sitting in a chair, here, which is an example of personal property. 
And the chair and the studio where we shooting this, 
is in a building, which would be an example of real property. 
And then, you've got sort of a blend. 
You have something called a fixture, which was personal property, 
which has been a fixed to real property.
Play video starting at :1:57 and follow transcript1:57
One time personal, now it's part of the real property. 
And fixtures cause all kinds of legal battles 
when you buy a house from somebody. 
The question is, who gets the fixtures? 
Sometimes the seller will walk away with some fixtures that 
the buyer thought should belong to the buyer.
Play video starting at :2:18 and follow transcript2:18
So those are the two broad categories of property. 
And then another question, what percentage of holdings, 
today, are tangible and what percent are intangible? 
For example, what percent are tangible in the form of plants, equipment, 
real estate, etc., and what percentage of business holdings are intangible? 
Please hit pause and write down your answer.
Play video starting at :2:47 and follow transcript2:47
If I had asked you this a few decades ago, the answer would have been 75% 
of business holdings are tangible in the form of factories, 
equipment, etc., and 25% are intangible. 
In today's world, intangible property, 
such as intellectual property, and mainly intellectual property, 
represents 70% of business holdings. 
That's why intellectual property is so important. 
By the way, other forms of intangible property might include, for example, 
stocks and bonds. 
But, in today's world, intellectual property is huge. 
So what is intellectual property? 
Here's an example from the World Intellectual Property Organization.
Play video starting at :3:40 and follow transcript3:40
Intellectual property is creations of the mind, such as inventions, literary and 
artistic works, designs and symbols, names and images used in commerce. 
Now, intellectual property is a very specialized area of law. 
It's a very technical area of law.
Play video starting at :4:2 and follow transcript4:02
And I wanted to get the very best person 
available to teach this area because it is so specialized and technical. 
That person isn't me. 
And so, luckily, at the University of Michigan, 
we have one of the leading intellectual property experts in the world, 
who teaches at the Michigan Law School, but, a huge bonus, 
she is also an intellectual property practitioner. 
Her name is Susan Kornfield. 
She's practiced law for 30 years. 
She heads the Intellectual Property Practice at a leading law 
firm called Bodman PLC.
Play video starting at :4:42 and follow transcript4:42
As I mentioned, she teaches at the University of Michigan Law School. 
She's been an arbitrator for IP disputes. 
She's on an advisory committee to Stanford on intellectual property matters. 
And she's been selected, one of the best lawyers in America in the IP category. 
So I think you're going to enjoy this presentation by Susan. 
She is a master at taking a very complex technical topic and 
making it understandable and giving you lots of very interesting examples. 
And her approach is going to be, first of all, 
to make sure that you understand IP, that you're legally savvy. 
Second, she's going to look at how you can protect your intellectual property rights. 
That is, the legal pillar, the law pillar, managing risk. 
And then, finally, how can you create IP value for your investors? 
One big concern over the years with intellectual property, is that companies 
become so obsessed with protecting their intellectual property rights with the law 
pillar, that they forget that there are wonderful ways to create value. 
There was a book written a few years ago called Rembrandt's in the Attic. 
And the analogy that the authors drew, was to 
having this valuable asset, a Rembrandt painting in your attic and not using it. 
Well In the past, intellectual property was like that Rembrandt in the attic. 
The focus was on protecting it and now a days, companies are unlocking that value. 
So I am now going to turn the stage over to Susan Cornfield.
I'm Susan Kornfield, I'm an intellectual property attorney, and 
I've been practicing law for 33 years. 
Our goals for this segment, 
are first to identify the core intellectual property doctrines. 
So you understand what they do protect and what they don't protect. 
Because what they don't protect, 
can also be available to you when you develop your business assets. 
We're going to talk about how we can avoid risk or manage risk for claims 
of intellectual property infringement or trade secret misappropriation. 
And we'll also talk about steps that the business managers can take 
to help a company develop intellectual property value.
Play video starting at ::45 and follow transcript0:45
The core business issues and 
the core legal doctrines are trademarks that protect the company's brand. 
And you'll see that when we talk about a brand, 
we talk about much more than just a word. 
We talk about the product packaging, product design, and even service design. 
Copyright protects creative content, so we see copyright law as it applies to texts, 
photos, videos, music and other sound recordings, software and architecture. 
Trade secret is the doctrine that protects the nonpublic information that 
a company develops regarding competitors and regarding the company itself.
Play video starting at :1:24 and follow transcript1:24
Patent is the area of intellectual property law that protects elements of 
methods, new composition of matter such as drugs, designs and plants. 
The requirement for patent law, which is different than all of the other 
intellectual property doctrines, is that what you claim must be novel and 
it must be novel with respect to all of the inventions that are known worldwide.
Play video starting at :1:49 and follow transcript1:49
And finally, industrial design is also included as a part of a classic 
intellectual property doctrine. 
Although you will see that that's an area that is protected outside the US. 
Primarily in Europe, Latin America, and South America. 
And it is actually not a separate doctrine in the United States.
Play video starting at :2:7 and follow transcript2:07
One of the reasons you care about the development of intellectual property 
assets are the very powerful remedies, that the law will give you, 
in the event you discover an infringement or a misappropriation. 
And those powerful remedies are an injunction. 
So a court order that actually orders a company to stop doing something. 
These are the kinds of orders where courts require certain products to be removed 
from the marketplace or ban in the importation of goods into a country.
Play video starting at :2:36 and follow transcript2:36
Another remedy is you can get a court order that requires the infringer to turn 
over to you all of the profits that they made in connection with that infringement.
Play video starting at :2:46 and follow transcript2:46
Another remedy is damages, and damages means your lost income, 
lost revenue because of that infringement or misappropriation. 
Attorneys' fees and expenses depending on the particular intellectual 
propery doctrine are also available. 
Meaning, it's going to cost the infringer, not just the loss of their profits and 
payment to you of damages, but they will be paying your attorneys' fees and 
your expenses of litigation.
Play video starting at :3:12 and follow transcript3:12
You can also secure court orders requiring that goods be destroyed.
Play video starting at :3:18 and follow transcript3:18
And as we were mentioning earlier, in some cases, banning the importation 
into a country of infringing goods, which is a very powerful remedy.
Play video starting at :3:26 and follow transcript3:26
And sometimes in particular with counterfeit goods, 
you can secure the assistance of law enforcement. 
And this can be a very powerful remedy sometimes for 
a small business that doesn't have an army of lawyers to have the law enforcement, 
in the Unites States the FBI, the federal marshalls, actually go on to premises, 
seize goods, seize digital and physical evidence. 
It's a very powerful remedy and indeed these laws are not international. 
They are national. 
Sometimes there are international treaties where various countries 
agree that their laws will comply with certain requirements. 
But US patent law applies in the US, 
Chinese patent law applies in China and the like.
Play video starting at :4:10 and follow transcript4:10
So we're going to begin with trademarks. 
And this slide reminds us that the brand itself can be of tremendous value. 
So here we see that in a very recent trademark survey, 
Apple's brand is worth $118 billion, 
Google $107 billion, Coca-Cola $81 billion. 
Meaning if they sold the brand and didn't sell for example the secret to 
the Coca-Cola formula, the brand Coca-Cola is worth $81 billion.
Play video starting at :4:43 and follow transcript4:43
In the United States, our Supreme Court has noted that the function 
of a brand is to make a connection between your consumer, 
your purchaser, and your product. 
So it is, as the court says, 
a merchandising shortcut that gives the owner something of value 
because of the association that we have between the brand and the product.
Play video starting at :5:11 and follow transcript5:11
These are the areas of business that are affected by your choice of trademark law. 
So indeed your company name, your logo, your slogan, a product name, 
product design, product packaging, marketing materials in your website. 
And what this means is you should think carefully about each of these 
elements because if you put some thought into the creation of your mark and 
the design of your brand, you can prevent competitors and 
others from using that brand and using the similar brand.
Play video starting at :5:45 and follow transcript5:45
Trademark law also affects the characters that you develop, 
which may be particularly useful for 
companies targeting younger consumers or creating video games.
Play video starting at :5:56 and follow transcript5:56
Trademark law affects how you use a competitor's name 
in your comparative advertising.
Play video starting at :6:2 and follow transcript6:02
Your ability to secure a domain name and to register that domain name, 
which is very important these days because of online presence.
Play video starting at :6:10 and follow transcript6:10
A powerful mark makes it much easier for you to engage in trademark licensing.
Play video starting at :6:16 and follow transcript6:16
You can sell a trademark and 
the registration of that mark apart from other business assets. 
I have been involved in situations where a client was contacted by a company, and 
the company said, we want to buy a particular mark, and a few weeks later, 
and a few million dollars later, the client sold the particular mark. 
It didn't sell any inventory, or products, 
or customer information, or other physical assets. 
It just sold the mark because that mark was valuable to that particular company 
who was buying it.
Play video starting at :6:47 and follow transcript6:47
Trademark Law also affects your ability to partner with others strategically and 
to co-brand products.
Play video starting at :6:55 and follow transcript6:55
And finally a powerful mark is very important if you're ever involved in 
trademark or unfair competition litigation.
Play video starting at :7:4 and follow transcript7:04
This slide is taken from the US Trademark Act and 
it's fairly standard definition around the world. 
What is a trademark? A trademark or a service mark. 
Trademark is for goods, service mark is for services. 
They're treated essentially the same under the law.
Play video starting at :7:21 and follow transcript7:21
It includes any word, name, symbol, when you hear symbol, 
think logo, or device, such as product design or 
product packaging, or a combination, that is used to identify and 
distinguish your goods and services from those manufactured by others. 
And to indicate source, and 
this phrase, to indicate source, is the most important function of the trademark. 
It identifies one source so that when I, the consumer, am in the marketplace, 
and I see a particular brand, I understand it comes from one source.
Play video starting at :8:1 and follow transcript8:01
The most important attribute of a trademark is that it is distinctive,
Play video starting at :8:5 and follow transcript8:05
meaning it does not describe your goods or services. 
In fact, the more unrelated the trademark is to the goods and 
services, the more powerful the mark.
Play video starting at :8:16 and follow transcript8:16
So we have a concept here called the Trademark Power Hierarchy. 
And it goes from the most powerful to the least powerful.
Play video starting at :8:25 and follow transcript8:25
The most powerful trademark you can have is what we call a coined mark. 
And a coined mark is one you invented. 
That word did not exist before you created that word. 
Words such as Google. 
Or Kleenex, Visteon. 
A fanciful mark is a little less distinctive but still a powerful mark, and 
it's usually a word that combines two other words, such as Microsoft. 
If you think of those words Micro relates to the microprocessor, soft relates 
to software, but it is a newly created word from words that previously existed. 
An arbitrary mark is a mark that has no relation to the goods, but 
the word existed before you identified it as a mark for your goods, for 
example, Apple for computers. 
The word apple existed, 
indeed it has a very positive association in certain cultures. 
And Apple Computer claimed that word and 
developed that logo in association with its products and its company. 
A suggestive mark is a mark that when you hear it, it conjures up some 
of the qualities of the product, but it does not actually describe the product. 
For example, Downy for fabric softener. 
You hear the word Downy, you might think soft, silky, 
fluffy, but it doesn't actually describe fabric softener. 
And at the bottom of this list we have descriptive marks. 
And they re in a parenthetical, because if you choose a descriptive mark, 
as you will see from slides that we're about to view. 
You may not have any protection at all for the mark. 
So you will have invested significant dollars in branding the product, 
perhaps in publishing material, in packaging, 
and you will not be able to stop others from using that word. 
The one exception to this is what is called acquired distinctiveness, 
and that is where a descriptive mark is used for so long, with so 
much dollars behind it, it acquires distinctiveness.
Play video starting at :10:33 and follow transcript10:33
Here's an example of a company that fought for 
several years to register the mark multi-touch in the United States. 
Apple computer was unable to convince the U.S. Trademark office 
that multi-touch stood for anything other than multiple touches. 
And as we see the trademark trial and appeal board concluded that multi-touch 
is indeed highly descriptive of a feature of the identified goods. 
And indeed the Trademark Trial and Appeal Board, was completely unconvinced
with 
all of the success that Apple had with its product, and all of the sales, 
revenue, and the marketing expenditures because as the trademark trial and 
appeal board said, it is not helpful in establishing that the purchasing 
public associates the term multi touch with Apple.
Play video starting at :11:29 and follow transcript11:29
Years of battling for nothing. 
And here's the slide that we were talking about earlier, 
that refers to the kinds of activities, and 
the kinds of evidence you have to gather to try to convince the Trademark office or 
a court that a descriptive word that you have chosen as your brand, 
in fact, has acquired distinctiveness and 
is now associated, in the minds of the public, just with you.
Play video starting at :11:56 and follow transcript11:56
How long you have used it, how many commercial impressions have been made 
through radio, television, clicks, online, sales figures, advertising dollars. 
Usually this sort of information is gathered by having to prepare affidavits 
by individuals who are in your commercial sector, 
and statements from them that they in fact associate this market just with you.
Play video starting at :12:23 and follow transcript12:23
It can take many, many years. 
It can take millions of dollars in advertising and 
sometimes you don't prevail, because too much time has passed and 
other competitors are already using that term.
Play video starting at :12:36 and follow transcript12:36
So as you're thinking of developing a product line, the next several slides 
should focus your attention on what you should be thinking of. 
So first of all, what is the word itself? 
The name of the company, the name of a product, the name of a service? 
So we have the mark that is comprised of words, including slogans and 
including company nicknames. 
FedEx, was actually an abbreviation developed by the public, 
that didn't want to keep saying Federal Express, Federal Express FedEx. 
And FedEx, of course, 
filed this application with the trademark office to claim that nickname as its own, 
as did the restaurant Howard Johnson's, and Volkswagen, the Bug. 
You should also be thinking about how you are going to present the word, 
because you can have a separate trademark in, and a separate registration in 
the color and the shape of letters, they're used to identify your word.
Play video starting at :13:34 and follow transcript13:34
You'll also want to think about the logo.
Play video starting at :13:38 and follow transcript13:38
So we have an example here, the NBC peacock, 
which has undergone many evolutions of shape over the years. 
And we also have the logo of Ghostly International, 
a small independent record label. 
So trademarks are not just for the very large, international, multi-billion dollar 
companies, they are for smaller companies also, and indeed for non-profits. 
You can also attempt to save money sometimes, 
if you're a small company starting out, by filing one application 
to register a combination of a word element, and a logo. 
We call these composite marks.
Play video starting at :14:14 and follow transcript14:14
So that means that the public will associate the combination of the word and 
the logo together.
Play video starting at :14:21 and follow transcript14:21
Again, on the one side we have NBC, and 
on the other we have a logo that was developed by a local non-profit animal 
shelter as a part of its fundraising activities to build a new facility.
Play video starting at :14:32 and follow transcript14:32
Color, alone, in some cases can be a trademark. 
And this was a rather remarkable outcome of the case in the United States about 
30 years ago. 
But it has now been adopted through many parts of the world and that is, 
when you develop a product, if you choose a distinctive product color. 
You can acquire rights in that color over time.
Play video starting at :14:56 and follow transcript14:56
Here are few examples. 
Pink for insulation, Green for press pads.
Play video starting at :15:5 and follow transcript15:05
In a few moments we're going to continue looking at other kind of marks 
that you can develop to identify your products and services.
Continuing our trademark discussion. 
We're going to discuss additional kinds of marks 
that are available to a business owner when developing a new product.
Play video starting at ::20 and follow transcript0:20
Another kind of mark, sometimes called olfactory mark, 
is a mark that has a scent.
Play video starting at ::27 and follow transcript0:27
The tricky part of this to understand is the scent 
must be ornamental not functional. 
What that means is, you can not get trademark protection for 
a scent when the product is supposed to have a scent, such as perfume. 
You can in some cases get trademark protection for a scent when that product 
otherwise is not supposed to have a scent, and the scent is distinctive. 
Examples are sewing thread that was 
infused with the fragrance of plumeria blossom.
Play video starting at :1:1 and follow transcript1:01
Or the aroma of cinnamon for furniture, or 
the smell of fresh cut grass for tennis balls. 
One business consideration in choosing 
an olfactory mark is that many people are very sensitive to smell. 
And they may not want a particular product that is not supposed to have a smell 
to have one, but it is a mark that is available to you 
that you can consider whether it fits with your product.
Play video starting at :1:30 and follow transcript1:30
A touch mark is a very new trademark. 
It is not recognized in many countries outside of the US, 
though it is beginning to be recognized in Europe. 
And a touch mark is literally where the product packaging 
has a tactile attribute, meaning your fingers will feel and 
sense something which is unrelated to that product. 
An the example in the US was velvet textured covering 
on the surface of a bottle of wine, and that's because we don't 
of a bottle of wine as necessarily having a textured covering. 
In this photo, it's a little difficult to see, 
it is the photo from the US patent and trademark office database, but 
it shows a wine bottle covered with a velvet textured surface.
Play video starting at :2:20 and follow transcript2:20
A motion mark is literally a visual mark that imparts a sense of motion. 
And if you have ever put a DVD in your home video player, 
you have sometimes seen the Sony TriStar horse come galloping towards you for 
a second or two before your film launches. 
That is a motion mark. 
We also see motion marks with many consumer software products 
where we boot up the software, and we see a particular 
image that appears on the screen with a sense of motion and often sound.
Play video starting at :2:54 and follow transcript2:54
And sound marks, indeed, are their own separate trademarks. 
If you go to the URL that is at the bottom of this slide, you will see 
that the US Patent and Trademark Office has given you a number of different
marks, 
that are sounds that have been registered, such as the Pillsbury Doughboy giggle, 
the AOL You've Got Mail, the NBC Chimes, and the MGM roaring lion as examples.
Play video starting at :3:21 and follow transcript3:21
So if you have a product where having a particular sound 
will help make a connection between that product and 
your consumer, you can secure federal registration for the sound.
Play video starting at :3:33 and follow transcript3:33
An example of a company that did that very well was Angry Birds. 
Several years ago it created a clever word mark, Angry Birds. 
It developed mascots and character images. 
It developed a ringtone and made it available for free for download.
Play video starting at :3:51 and follow transcript3:51
And I can remember being in various meetings where people's phones 
would go off and we would hear the Angry Birds jingle being played. 
Great marketing.
Play video starting at :4:1 and follow transcript4:01
And now, a very important part of trademark law, trade dress.
Play video starting at :4:6 and follow transcript4:06
Trade dress must be distinctive and nonfunctional for 
product packaging or product design in order to be protectable.
Play video starting at :4:16 and follow transcript4:16
And it's sometimes very challenging to have discussions with engineers who often 
focus on function, and say in order for us to have protection from a trade dress 
perspective, what you come up with must be ornamental, aesthetic, but not
functional.
Play video starting at :4:34 and follow transcript4:34
So here are some slides illustrating different kinds of trade dress, 
the Coca Cola bottle, a very, very well known trade dress. 
So it's the bottle itself, the particular shape, which is protected by trade dress. 
You also see an example in this slide of stylized letters, the Coca Cola red and 
white curling ribbon and the cursive writing.
Play video starting at :4:59 and follow transcript4:59
Here is an example of a product, very inexpensive product, a dustpan.
Play video starting at :5:5 and follow transcript5:05
And, even if you couldn't read the red oval that says, OXO, 
O-X-O, you could see this particular product,
Play video starting at :5:15 and follow transcript5:15
squeegee, and you could tell that the company that created one, 
created the other, an excellent example of trade dress. 
So if you are only familiar with the dustpan, when you saw the squeegee 
available in your local store, you would realize it's the same company. 
So a lot of thought was put into color and 
shape in the design of these inexpensive products.
Play video starting at :5:42 and follow transcript5:42
A product from several years ago sort of created the world 
of handheld music devices, the iPod. 
And there was trade dress and design patent, which we'll talk about later,
Play video starting at :5:54 and follow transcript5:54
for the physical ornamental layout of the iPod. 
The use of the circular wheel, the use of a screen, the placement of the screen. 
One of the most recognizable product packaging in the world, 
the Campbell's soup. 
Very simple, great combination of the use of color, of stylized letters.
Play video starting at :6:18 and follow transcript6:18
Another example of a company that had decided to launch a series of books. 
And although I might not have been convinced in the beginning that For 
Dummies was a great trademark name, 
perhaps after $1 billion later in book sales, and the use of this 
very clever design of the series of books, the book covers, themselves. 
The colors, the use of a lettering, the placement of the graphics, 
all create a distinctive look for the color of these books.
Play video starting at :6:53 and follow transcript6:53
Another great example of marketing. 
In this case, by AstraZeneca, that created a pharmaceutical, a drug called Nexium, 
but when they launched their product they called it the purple pill.
Play video starting at :7:8 and follow transcript7:08
Indeed, they secured the URL purplepill and thepurplepill.com. 
The product was itself purple with these three design elements. 
And you'll see here that AstraZeneca Secured trademark registration for 
the phrase The Purple Pill. 
On the bottom of this slide, you'll see PRINCIPAL-2(F). 
And what that means is in the U.S. Trademark office, 
AstraZeneca had to prove that the phrase, The Purple Pill, which, as you can see, 
is descriptive of the product, had indeed acquired secondary meaning. 
That's what it means when we see a 2(f) registration. 
It is descriptive but it acquired secondary meaning. 
It is entitled to federal trademark protection.
Play video starting at :8: and follow transcript8:00
Another example of very distinctive and 
indeed famous trade dress, the Robin's Egg Blue Tiffany Box. 
That means that no one else in this field, jewellery, 
can use that color or a confusingly similar color for their product.
Play video starting at :8:17 and follow transcript8:17
A recent example, Christian Louboutin shoes have a distinctive red sole.
Play video starting at :8:26 and follow transcript8:26
And you can see here, 
there's actually a federal registration in the United States for the red sole. 
The color red is claimed as a feature of the mark. 
The mark consists of a red lacquered outsole on footwear 
that contrasts with the color of the adjoining upper portion of the shoe.
Play video starting at :8:48 and follow transcript8:48
So it means there's almost no product when you are developing that you can't 
give some thought to whether color can help give you a competitive advantage. 
A rather remarkable trademark registration is that which Apple 
secured on the design and the layout of its retail establishment.
Play video starting at :9:8 and follow transcript9:08
And lot of thought went into the design of this retail establishment. 
Indeed, there were many knockoffs around the world 
by companies that wanted to sell their technology, their computers, 
their mobile devices, in stores that look very much like this, and 
Apple has undertaken enforcement actions around the world. 
And the next slide we see the actual drawing that was submitted 
to the US Patent and Trademark Office to support
Play video starting at :9:38 and follow transcript9:38
the trade dress of the retail design. 
Another example is the wine store called Best Cellars. 
So it reminds us that even a retail establishment, through color and layout, 
can develop such a distinctive look that it can be registered, and 
can be enforced around the world.
Play video starting at :10: and follow transcript10:00
Some thought to software, and in particular, mobile devices, is that 
you can secure federal registration for the icons that you use in your product. 
And on this slide, we see individual icons for 
which Apple has secured or has applied for registration. 
So as you develop your products, think about your user interface and 
whether you can develop through color and shape, a distinctive icon.
Play video starting at :10:31 and follow transcript10:31
When you have a registered mark, worldwide, you use the R with a circle,
Play video starting at :10:36 and follow transcript10:36
and indeed, you need to use the registered symbol when your mark is registered, 
if you wish to secure certain kinds of remedies from courts.
Play video starting at :10:45 and follow transcript10:45
And if the mark is not registered, you can use a small TM, standing for 
trademark, or SM for service mark.
Play video starting at :10:53 and follow transcript10:53
I often advise clients to use the TM or the SM, because first of all it helps to 
signal to your purchasing public, that you are claiming that mark, as a trademark. 
And it helps develop a culture of being aware of the proper use of trademarks.
Play video starting at :11:9 and follow transcript11:09
In the United States we have what is called common law trademark rights. 
This is rather unusual, most of the industrial world requires that you secure 
registration in order to have trademark rights at all in that country. 
And this is something that a company that is outside the US, and 
wishes to conduct business in the US, must be extremely knowledgeable, and 
work with local counsel, because, if that foreign entity comes into the US, 
and secures trademark registrations, or already has them, 
that company may think that they can use those marks exclusively in the US. 
They are not aware that companies that were here first, and 
use the mark first, can in fact limit the power of that registration. 
The next few slides summarize why a company should consider securing 
registration, and we're going to run through them quickly, 
because it's really a matter just of reading the slides. 
First of all, it is evidence your mark is distinctive. 
If you walk into court with a federal registration, 
you have already met your burden of showing that your mark is distinctive. 
It's up to the other side to show it is not. 
It's proof that you are the owner of the mark and that the mark is registered. 
It is evidence that you have the exclusive rights to use that mark 
with those goods or services nationwide.
Play video starting at :12:36 and follow transcript12:36
It gives you the ability to stop third parties from using similar marks 
even if they have never heard of you, even if they adopted their mark in good faith.
Play video starting at :12:46 and follow transcript12:46
It gives you the ability for what we call brand extension. 
You have a registered mark. 
It is easier for you to extend that brand to related goods or services.
Play video starting at :12:56 and follow transcript12:56
You can also exercise a great deal of power and 
prevent the importation into the US of third party goods. 
Not merely because they're counterfeit, but because they're confusingly similar.
Play video starting at :13:13 and follow transcript13:13
You can use registrations as collateral for a loan. 
And indeed much of the work that we do at my law firm involves 
representing financial institutions who are loaning millions or 
hundreds of millions of dollars. 
And they take back a security interest in the trademarks of the debtor.
Play video starting at :13:31 and follow transcript13:31
If there's going to be a dispute involving trademarks or domain names, 
you are in a much stronger position if your mark is registered.
Play video starting at :13:38 and follow transcript13:38
And, unlike copyright and unlike patent, trademark can exist 
forever if you continue to use the mark in connection with the goods or services.
Play video starting at :13:48 and follow transcript13:48
And finally, with respect to the benefits of federal registration. 
In addition to being able to license the mark of third parties, 
you are better able to franchise the mark, you're in a stronger position to sell 
the mark at a higher value because you have exclusive rights nationwide.
Play video starting at :14:6 and follow transcript14:06
You can use your federal registration as a basis for international registration, and 
you can access what we call anti-counterfeiting statutes. 
Meaning you can get the FBI, The Federal Marshals, 
Homeland Security, involved in anti-counterfeiting activities. 
And one of the reasons that the federal government is willing to be involved 
in anti-counterfeiting activities is not just the impact on business, but 
because the dollars generated from counterfeiting are used to support 
organized crime and terrorism.
Play video starting at :14:39 and follow transcript14:39
And finally, as we discussed earlier, one of the benefits of Federal Registration 
is greater access to specific powerful remedies, 
such as getting an injunction, securing profits, 
being compensated for the damages, being reimbursed for the cost of litigation. 
In some cases, when the infringement is willful, treble damages 
you can secure three times the damages that you actually sustain. 
The destruction of the infringing articles, you can even cancel someone 
else's registration, and you can sometimes secure from a court an order 
where the other party must issue and pay for advertising that corrects its error.
Play video starting at :15:23 and follow transcript15:23
In the next segment we're going to talk about some considerations 
in selecting a mark.
Now that you have some background in the sorts of things that function 
as a trademark, 
here are some particular considerations in actually selecting a mark.
Play video starting at ::21 and follow transcript0:21
One is foreign translations and this has two elements. 
One is if you choose to register a mark that is, 
in fact, a foreign word, the United States Trademark Office and indeed most
trademark 
offices around the world will require that that word is translated and then it will 
decide whether, through that translation, the mark is simply descriptive. 
So let's say I'm going to design a new kind of high-end cat food and 
I want it to sound fancy. 
So I have, perhaps a Parisian background, and I use the word, chat, C-H-A-T. 
But chat merely means cat in French. 
So the trademark office would not give me trademark protection for 
the word chat because it means cat.
Play video starting at :1:9 and follow transcript1:09
You also want to avoid words that have a particular significance in an industry and 
that is because they're going to likely be found to be descriptive, and 
competitors of yours and other companies in that industry 
need the ability to use that word to describe their products.
Play video starting at :1:27 and follow transcript1:27
You do not want to chose a mark that is primarily a geographic description. 
And again, it's because other companies from that geographic region 
will be able to use that particular word.
Play video starting at :1:40 and follow transcript1:40
Marks that are primarily a surname, or a last name 
cannot be registered unless you can prove that they have acquired secondary
meaning. 
One of the most famous examples of this is McDonald's. 
Indeed, the McDonald's restaurant had to prove to the US Patent and 
Trademark Office that the name McDonald's, 
though a surname, had acquired distinctiveness. 
And then there are, of course, what we call social considerations. 
And that is, will your choice of a mark signal something socially or 
culturally that you didn't intend? 
One well-known example of this in the U.S. was the decision by 
the company that makes Aunt Jemima pancakes, pancake mix, pancake syrup 
to change the character it had been using to identify its product and 
have that character be a much more updated, modern-looking women. 
And at the time that the Aunt Jemima company did this, the character was highly 
recognizable, and many people had a very affectionate feeling about the character. 
But indeed over time, the character of the African-American woman was viewed 
as insulting, as suggesting a plantation or even slave or 
servant role, and it was no longer an appropriate image for the company. 
So even though, at that time, it was the second most trusted brand in the country, 
they updated their look and you can see the new character, Nancy Green, 
the individual who portrays Anna Robinson.
Play video starting at :3:17 and follow transcript3:17
This slide raises some of the potential trademark problems you can run into 
when you select a word or a logo or a mascot. 
First of all, 
you want to avoid choosing a mark that is too similar to your competitor's. 
Not only will it be difficult to secure registration, 
you can be sued by your competitor.
Play video starting at :3:37 and follow transcript3:37
As we discussed earlier with my example of Chat, you want to avoid a mark that is 
merely a foreign translation of your product itself.
Play video starting at :3:44 and follow transcript3:44
You want to avoid words that lend themselves to ridicule. 
Of course you will want to choose a mark that your target audience can actually 
pronounce, and spell, and remember, and refer to other people. 
Occasionally, companies try a little too hard to create a word, that 
when others look at it, they have no idea how to pronounce that particular word. 
You might decide as a marketing matter, 
you're going to develop that familiarity over time.
Play video starting at :4:11 and follow transcript4:11
Most marketing individuals with whom I work, 
want their public to understand their mark immediately.
Play video starting at :4:18 and follow transcript4:18
Also think about a mark that will not be so 
tied to a particular time and place that it will be obsolete.
Play video starting at :4:26 and follow transcript4:26
The next few slides identify about 12 factors that are considered 
by courts and most of these factors are considered by trademark offices when 
they are trying to decide whether one mark is likely to cause confusion with another. 
I want you to focus for a moment on the fact that there are about 12 factors. 
What that means is, there's not just one inquiry that has to be made 
as to whether a particular mark can be adopted by your company and 
used with your products, and registered, and enforced. 
You have to really think about a number of factors. 
And note also, the question is not whether you've chosen a mark that is identical 
to another mark, but whether you've chosen a mark that is likely to cause confusion. 
This is a much more nuanced and subtle inquiry.
Play video starting at :5:21 and follow transcript5:21
So we're going to run through these factors quickly.
Play video starting at :5:24 and follow transcript5:24
The first is, indeed, how similar is the mark with respect to what it looks like, 
what it sounds like, what it connotes or 
signifies, And the overall commercial impression that it makes.
Play video starting at :5:40 and follow transcript5:40
The next factor, how similar are the goods and services of your products 
with the mark of another company that you're either going to compete with, or 
that you're going to compare your product to.
Play video starting at :5:54 and follow transcript5:54
I tell my clients, if you flunk the first two bullet points 
you should stop right there and choose a different mark.
Play video starting at :6:1 and follow transcript6:01
The third consideration is, what are the trade channels for these products. 
And what we mean by that is, if one company is selling lipstick and another 
company is selling intercontinental missiles, you can probably have 
the same mark because those trade channels don't overlap, the products don't
overlap.
Play video starting at :6:21 and follow transcript6:21
The sophistication of the relevant consumers is important because if, 
in the sales cycle, you're working and 
meeting with consumers who are very knowledgeable, trained, often educated, 
where there's a lot of time that is given before that transaction is consummated, 
the sophistication of the consumers can be enough to make even similar marks
coexist.
Play video starting at :6:46 and follow transcript6:46
We also look to see whether one mark is very well known. 
And we can measure that by consumer groups, sales, advertising dollars, and 
the length of use. 
You'll see an example of that in a couple of slides.
Play video starting at :6:59 and follow transcript6:59
We look to see whether or not the mark you've chosen 
is very similar to other marks that already exist for goods of this type.
Play video starting at :7:7 and follow transcript7:07
We look to see whether there's any actual confusion, meaning whether or 
not your company has received a phone call by someone who, perhaps, 
is complaining about your product when it wasn't your product at all. 
It was your competitor's product. 
But the customer was confused because of the similar marks. 
And we look to see whether two marks have been used for a relatively long enough 
time, that if indeed there was a likelihood of confusion, 
we would have had actual confusion.
Play video starting at :7:36 and follow transcript7:36
We also look to see whether a mark is commonly used. 
The more commonly used a word is, the less trademark protection you get.
Play video starting at :7:45 and follow transcript7:45
As between two parties, we look to see whether one party has a federal trademark 
registration, because that, again, will typically give you superior rights.
Play video starting at :7:54 and follow transcript7:54
We also look to see whether the goods are so related that it is 
likely that a party who had that mark first will move 
into the product line where you want to sell your goods under that similar mark. 
And we call that bridging the gap, moving from an existing product to a new but 
related product.
Play video starting at :8:17 and follow transcript8:17
So applying this likelihood of confusion framework, here we see 
a company in Michigan, that registered the mark iPod in 1991. 
So take a moment and think. 
If there already was a registration for iPod, well before Apple ever launched 
its product, how is it that Apple was able to secure trademark registration for iPod?
Play video starting at :8:45 and follow transcript8:45
And here we see some of the details of Apple's registration.
Play video starting at :8:49 and follow transcript8:49
Here's the description of the goods, portable and hand held digital electronic 
devices for recording, organizing, transmitting, manipulating and reviewing 
audio files; computer software for use in organizing, transmitting, manipulating, 
and reviewing audio files on portable and handheld digital electronic devices. 
So note here, that when we secure registration, 
we have to use descriptions that can seem slightly awkward or very structured. 
It's because the trademark office is trying to use descriptions that will be 
consistent across goods.
Play video starting at :9:25 and follow transcript9:25
You'll see it was registered ten years, 
in fact it was first used ten years after the Michigan company had used iPod,
Play video starting at :9:33 and follow transcript9:33
and flipping back to that slide you'll see it's because one is for office furniture. 
And one are for the iPod device.
Play video starting at :9:43 and follow transcript9:43
Unrelated good, unrelated trade channels, even though the mark is identical.
Play video starting at :9:49 and follow transcript9:49
The next couple of slides show the kind of mistake a company can make when they
don't 
really understand the power of a senior user, meaning 
the company who used the mark first, and the fact that a mark does not have to be 
identical to be infringing, meaning to cause a likelihood of confusion. 
Here, PepsiCo, a multi-billion dollar company launched a new product 
of frozen sweet drink under the name, Polar Shock.
Play video starting at :10:18 and follow transcript10:18
That company was sued by this company, Polar, 
primarily sold water, but sold other kinds of beverages. 
And the court concluded that this Polar had been in business for 100 years, 
it had a registration, that its products were sold through the same trade channels 
as Polar Shock, that the first words were identical. 
And that the word, shock, did not make the mark sufficiently distinctive. 
And if you compare the two slides you will also see a similarity 
in the graphic design of the lettering. 
Look at the lettering for polar here for Polar Shock. 
And the lettering for Polar there.
Play video starting at :11:3 and follow transcript11:03
So there are a lot of considerations that go into when two marks 
are likely to cause confusion. 
And this Polar Beverage Company secured a court order that actually 
required Pepsi to pull the products from the stores where they had been installed. 
Very powerful.
Play video starting at :11:22 and follow transcript11:22
Here we have an example with trademarks of co-branding, and 
co-branding is literally two trademarks that appear to the consumer. 
On the one side, we see Betty Crocker, a well-known U.S. 
company in the world of cake mixes, and Betty Crocker is co-branded with Hershey, 
which is a well-known chocolate company for Ultimate Fudge Mix. 
So, when I as the consumer, see this product on the shelf, 
I know instantly that Hershey's has partnered up with Betty Crocker. 
So it's not just any kind of chocolate fudge in that product, it's Hershey.
Play video starting at :11:56 and follow transcript11:56
On the other side we see a recent deal made by the University of Michigan, 
a very well-known public institution, and Nike. 
So we see the Nike swoosh, we see the University of Michigan maize and 
blue colors, another example of co-branding. 
You have to think very carefully who you want to team up with when you co-brand.
Play video starting at :12:18 and follow transcript12:18
One of the things you'll want to think about in co-branding is 
how are you going to structure this deal? 
Is one party licensing to another? 
Are you actually going to set up a new business entity and 
have a joint venture that has its own stand alone existence?
Play video starting at :12:33 and follow transcript12:33
The companies will have to think through carefully, 
all of the elements of the product because your mark will appear with 
another company's mark, and the consumers are going to connect those two
companies. 
You'll have to think about what kinds of endorsements you want. 
When you think of certain celebrities, 
some who have had some disastrous public relations problems, 
you'll have to think about who exactly you want endorsing this particular product. 
And, of course, you'll want to think about how entering into a deal with one company 
effects or even limits your ability to do other deals. 
Lawyers, when they are working with clients, have to think about national and 
international considerations. 
How will a mark be seen in a country outside of the country where their 
client currently exists? 
What are the cultural sensitivity issues? 
Pronunciation? 
Can you take advantage of existing treaties that will allow 
you to file in one country and then extend that filing to other countries? 
You'll have to think about how important it is to have a distinctive mark. 
And indeed, there are such things are trademark pirates, meaning if your client 
begins to become very well-known in one country, there are individuals who will 
seek to secure trademark registrations in other countries so that when your 
client wants to expand there they have to actually bargain with trademark pirates.
Play video starting at :13:55 and follow transcript13:55
When I say tension between marketing goals and legal goals, 
what I mean is that often, the individuals responsible for 
marketing a product want to choose descriptive marks. 
And of course the attorneys are saying, please don't choose descriptive marks. 
It may not result in a mark that you can use or a mark that you can register. 
Please choose a more distinctive mark.
Play video starting at :14:17 and follow transcript14:17
The consequences of failing to register are very significant. 
And you think back to the slides we discussed earlier of the benefits of 
registration. 
So, consequences of failing to register. 
You may not be able to expand the business. 
The client may not be able to move into new geographic markets. 
The client may not be able to ban the importation, into a country, 
of counterfeit goods, or infringing goods. 
So, it's very important to get those marks registered.
Play video starting at :14:45 and follow transcript14:45
And indeed, if a client stops using a mark, typically for three years or more, 
that registration can be challenged and the mark can be deemed abandoned. 
So it's important that if our clients are not using a mark, 
we revisit the question of whether we should get a new application on file, 
based on future intent to use the mark.
Play video starting at :15:9 and follow transcript15:09
Also, acquiescence is an important issue. 
If you allow, or if the client allows another party to be using 
an identical or confusingly similar mark and takes no action, 
the failure to take action can be used against the client and 
the court can conclude the client has permitted or acquiesced 
in the use of that mark by a competitor, and the client can lose rights altogether.
Play video starting at :15:35 and follow transcript15:35
And then of course, for 
clients you'll want to think about the real development of a business asset. 
When you take the time and creativity to select a distinctive mark, power 
in your marketplace to stop a competitor from marketing their products or 
services in a manner that uses your marks, 
it allows you to think through how a particular brand will play out in terms 
of the product design, the packaging, the marketing.
Play video starting at :16:4 and follow transcript16:04
It allows you to think of ways that you can partner with another company where 
your brand will actually enhance the marketability of that product.
Play video starting at :16:14 and follow transcript16:14
You, of course, will want, internally, to develop what we call proper use protocols, 
how the mark appears, using a proper trademark symbol. 
Not using the mark as a noun, so that you don't say get me a Kleenex, 
but your advertising says Kleenex facial tissues. 
And then when I say forever's a long time, it means that if you continue to use that 
mark and you continue to file your trademark renewals, 
you can actually have that trademark forever. 
So now you have a much greater toolkit 
with your knowledge of the various elements that can function as a trademark. 
It will help you build a stronger product brand. 
Enable you to extend that brand across products to strategically license that 
brand with companies where you want to have that affiliation and 
generate a revenue stream. 
It gives you much greater power if you ever wish to stop an infringement. 
Sometimes all another company has to know is that you have a registration, 
they don't, and you are actually prepared to go into court and 
indeed, to use the trade marks and the registrations for 
collateral for loans and for assets that you want to sell in the future.
In this segment, we're going to talk about copyright law. 
That's the area of law that deals with creative content.
Play video starting at ::17 and follow transcript0:17
First, under the US Copyright Act, we see there are a wide number of works, 
kinds of works, that can be protected by copyright law. 
Literary works, which are not just books but 
are also the category where computer programs live.
Play video starting at ::33 and follow transcript0:33
Musical works, including the words. 
Dramatic works, including music.
Play video starting at ::39 and follow transcript0:39
Pantomimes and choreographic works.
Play video starting at ::42 and follow transcript0:42
Pictorial, graphic, sculptural work so 
that would be the area for photographs, artwork.
Play video starting at ::49 and follow transcript0:49
Motion pictures such as this video and 
other audio visual works, sound recordings which can be not only music but 
any kind of recorded sound, environmental sounds, and architectural works. 
And as a general matter, these are the kinds of works that can be registered 
under copyright internationally. 
In the US law, you're not required to actually fit your work into a category. 
These categories were identified by Congress to help us think about the broad 
types of works. 
But you can actually create a new work, a new category of works, and so 
long as it contains expressive content that you have embodied in something fixed, 
a fixed medium, you can secure copyright for that work.
Play video starting at :1:37 and follow transcript1:37
Here are the rights of copyright owners.
Play video starting at :1:40 and follow transcript1:40
To reproduce copies of a work, to create a derivative work which we'll talk about in 
a moment, a very powerful right, to publicly distribute copies of your work,
Play video starting at :1:51 and follow transcript1:51
to display your work publicly, such as posting, to publicly perform a work, 
such as on stage, and to digitally transmit sound recordings. 
This was added to the Copyright Act many years ago when, suddenly, 
music became digital and people were sending digital files around the world. 
And owners of copyrights in music compositions and 
sound recordings wanted judges to know that they had specific 
copyrights in the digital transmission of sound.
Play video starting at :2:24 and follow transcript2:24
So here's a definition of derivative work under the US Copyright Act.
Play video starting at :2:29 and follow transcript2:29
A derivative work is a work based upon one or 
more preexisting works, such as a translation, 
musical arrangement, dramatization, fictionalization, motion picture version, 
sound recording, art reproduction, abridgement, condensation, or 
any other form in which a work may be recast, transformed, or adapted. 
So what does this mean? 
This means that when you secure copyright in, let's say, a literary work, your right 
to create derivative work means you can create the foreign language translation. 
You can create an abridged version. 
You can create a stage play. 
You can license it for motion pictures. 
It's a very, very powerful right. 
That recognizes that a particular work may be created in one form, but can have 
commercial application and non-commercial applications in other forms.
Play video starting at :3:29 and follow transcript3:29
What is very important in understanding copyright and in particular 
US copyright is how much copyright does not protect.
Play video starting at :3:40 and follow transcript3:40
When I work with engineers and 
scientists, this particular slide is the one I spend the most time on.
Play video starting at :3:48 and follow transcript3:48
In no case, does copyright protection for 
an original work of authorship extend to any idea, 
procedure, process, system, method of operation, concept, 
principle, or discovery, regardless of the form in which it is described, 
explained, illustrated, or embodied. 
So if we take that apart, what this means is an article can be written, 
a book can be written, a video can be created that has incredibly valuable 
ideas, incredibly powerful methods or concepts or principles.
Play video starting at :4:30 and follow transcript4:30
And copyright law says, it is completely unownable under copyright.
Play video starting at :4:37 and follow transcript4:37
It means that a company really needs to understand 
all of the intellectual property doctrines, to think through if copyright 
is not going to protect my ideas, is there some other doctrine that will? 
And we'll be talking about trade secrets and patents a little later.
Play video starting at :4:54 and follow transcript4:54
It also means when you want to create a product, 
you are free to read from other materials or 
to learn from sound recordings or videos, ideas, procedures, processes, systems, 
methods of operation and unless they are protected by those other doctrines. 
You are free to use them.
Play video starting at :5:16 and follow transcript5:16
You don't need to get permission from that author of that scientific article to use 
their idea because they don't own the idea under copyright law.
Play video starting at :5:27 and follow transcript5:27
What's interesting, too, when you work with scientists and 
engineers is that they often feel that what is the most valuable 
element of their work product are the ideas and the methods and the concepts.
Play video starting at :5:41 and follow transcript5:41
And that's why you have to really understand under US law, 
copyright is about advancing knowledge.
Play video starting at :5:47 and follow transcript5:47
It is not about a property interest in a particular element of a work.
Play video starting at :5:53 and follow transcript5:53
So here are some core bedrock principles under US copyright law.
Play video starting at :5:59 and follow transcript5:59
For example, no copyright protection for 
recipes because recipes are considered systems, or methods, or facts. 
You wouldn't know that by the mud slinging that goes on on the web when people
copy 
recipes from each other you would think that they had stolen the Magna Carta. 
But indeed, if you understand that a recipe is a system or 
a method, it's not protectable. 
There's no copyright protection for 
algorithms because indeed algorithms are methods, processes,or systems. 
So again, if they're not going to be protected by trade secret or 
patent, they're not protected at all.
Play video starting at :6:35 and follow transcript6:35
No copyright in facts or data.
Play video starting at :6:39 and follow transcript6:39
This was a great shock to the information industry in 1991, 
when the US Supreme Court ruled unanimously. 
No protection for the telephone book. 
No protection for a name, a street, 
a phone number being organized alphabetically. 
And again, what this means to you, is that you have to be sure when you are
working 
with your team that they understand they are free to use facts from other sources. 
They are free to use algorithms,
Play video starting at :7:9 and follow transcript7:09
unless those algorithms are indeed protected by patent.
Play video starting at :7:13 and follow transcript7:13
There is no copyright in unoriginal collections of data.
Play video starting at :7:17 and follow transcript7:17
No copyright in published research. 
So what does this mean? 
This means you need to make a distinction between the research, the knowledge,
Play video starting at :7:26 and follow transcript7:26
and the article that was written to embody it or to explain it. 
So if you can sift through and 
sort through the knowledge from the article, you can use the knowledge.
Play video starting at :7:38 and follow transcript7:38
And in the US, no copyright for works of the federal government. 
This comes back to the premise of US copyright law, 
which is to advance public knowledge and in a democracy, the decision 
of the congress that the work product of the government belongs to the people. 
So unless that work product is protected by other legal doctrines, 
state secrets, privacy, it does mean, 
that the work is available, for use by anyone, there is no copyright. 
So that might be, for example, images that come back from the Hubble Space
Telescope. 
Or reports created by the Centers for Disease Control.
Play video starting at :8:18 and follow transcript8:18
These are unique to the US.
Play video starting at :8:20 and follow transcript8:20
Most copyright laws outside the US are not based upon 
the commitment to public knowledge, as the US law is. 
Most copyright laws outside the US are based upon personal notion of the human, 
the individual, who has infused a work with their spirit. 
It's a very personal notion of copyright. 
That is not the version of copyright we have in the U.S., 
you are much freer in the U.S, to use content from third parties.
Play video starting at :8:51 and follow transcript8:51
Here's an example, of a decision in the United States where, a computer model 
which had been created by placing tapes on the outside of a Toyota car. 
And those tapes had certain sensors and they capture the shape of the car and 
where used to create this model and the court ruled. 
It was all a collection of data, there was no originality, and 
there was no copyright protection for that model.
Play video starting at :9:20 and follow transcript9:20
Here's another example in the U.S. 
where a photographer had taken a new photograph of an old painting. 
The example that's used here is Vincent Van Gogh, 
The Diggers, from the Detroit Institute of Arts. 
We often think that if I take a new photograph today, 
I own copyright in that photograph. 
And as the court said a couple of years ago, if all you do 
is simply slavishly copy the original painting, 
you have added nothing new, copyright requires that you've added new authorship. 
And there is no copyright protection for a replica of a painting. 
A matte painting it's in the public domain. 
As you might imagine, it upset a lot of museums, and 
libraries where they sell copies of their artwork or of their 
materials, and may of those materials' the copyright expired a long time ago. 
But because the organization recently printed it, 
they print it with a new copyright notice. 
So you have to understand when a copyright notice is reflecting that this particular 
version was recently published as opposed to the material itself.
Play video starting at :10:35 and follow transcript10:35
Putting some of these principles to work, we see there was an individual, Mr. 
Hoehling, who had written a book called Who Destroyed the Hindenburg? 
And he provided a great deal of facts and 
research about certain events relating to the explosion of that dirigible. 
Universal City Studios created a film and 
used many of the facts from that book. 
And the court said that even though Mr. 
Hoehling sued, claiming you used content from my book, the court said the cause 
of knowledge is best served when history is the common property of all, and 
each generation remains free to draw upon the discoveries and insights of the past. 
So even though you can occasionally get drag into a lawsuit, 
if all you've used are facts, and theories, and 
insights, you have not used anything protected by copyright.
Play video starting at :11:29 and follow transcript11:29
In the US, and indeed in all of the industrialized countries, 
copyright is automatic. 
You do not need to register. 
Registration gets you certain benefits. 
But it is not a requirement in order to have the copyright. 
This is the opposite of patent. 
You have to secure a patent, or you do not have a patent. 
Under copyright, you have the copyright at the moment you've created this work,
and 
you have embodied it in something tangible.
Play video starting at :11:58 and follow transcript11:58
It lasts a very long time, currently life of the author, plus 70 years. 
If you're a corporation it will last essentially 95 years from publication. 
There is no longer any renewal of U.S. copyright.
Play video starting at :12:12 and follow transcript12:12
The copyright office does review your submissions but it does just to be sure 
that the information you've provided fits the requirements. 
The copyright office does not determine who was an author, 
it doesn't determine who really owns the materials, those are issues, 
if they have to be fought out, they are fought out in court. 
Copyright is very inexpensive.
Play video starting at :12:35 and follow transcript12:35
Depending on whether you do a paper filing or an online filing it's $50, $65. 
And what that means is we really should encourage companies to secure 
copyright protection. 
For their copyrightable material that is valuable to them.
Play video starting at :12:53 and follow transcript12:53
And copyright notice although it is no longer required is recommended for 
many reasons. 
One of which is it signals to the viewer 
that there is a company claiming copyright in this content.
Play video starting at :13:6 and follow transcript13:06
So why do we bother to register copyright? 
If the law does not requires it. 
First of all, as we know it's inexpensive, it lasts a long time.
Play video starting at :13:16 and follow transcript13:16
As with trademark law, once you have that copyright certificate, it is legal 
evidence that you are the owner and that this work contains creative expression.
Play video starting at :13:27 and follow transcript13:27
Enforcement is very significant. 
In the U.S. you cannot go into court and 
enforce your rights and stop an infringer if you don't have a registration. 
Very powerful.
Play video starting at :13:40 and follow transcript13:40
If you secure a registration and then you later discover an infringer, 
you have the ability to seek attorney's fees and 
you have the ability to ask the court to choose a number between $750 and 
$30,000, that will fairly compensate you. 
You will not be able to get attorney's fees or statutory damages, 
if you discover an infringement and then you secure the registration.
Play video starting at :14:7 and follow transcript14:07
Also having a registration enhances the value of an asset either for licensing, or 
for the sale of the company, or for use of the collateral as a loan. 
Next, we're going to talk about copyright and collaborations, and 
you'll see that the issue of who owns copyright can become very complicated in 
light of oral agreements, oral discussions that parties have, and 
what happens when they actually work together.
You have probably heard of the company Facebook, and 
you may very well have seen the film The Social Network.
Play video starting at ::15 and follow transcript0:15
One of the great teaching points of that film and that story is how relatively 
young individuals, college students, spoke with each other, met, 
discussed opportunities, and then later disagreed about who owned what. 
The underlying legal issue in the lawsuit against Mark Zuckerberg, 
the founder of Facebook, is whether or not Mr. Zuckerberg broke a contract, 
indeed an oral contract, not a written contract, as to who was going to 
own the work product and ideas behind what became Facebook. 
The suit was over oral contract, whether or not an idea was taken or 
misappropriated, as they said in their lawsuit, copied, 
and whether or not source code was used by Mark Zuckerberg 
that was originally developed by his founders. 
That case ultimately settled for $65 million, 
although it was a confidential settlement. 
Unfortunately, someone on the legal team ultimately filed certain papers 
in court and disclosed this information, so now we know. 
The takeaway message here is that collaborations that are not 
well-documented, whether you're a college student or 
whether you're a multibillion dollar company. 
If you do not document who owns what, who's contributing what, who's 
going to get a share of the revenue from the commercialization of this product, 
who's going to be allowed to create the derivative works based upon that product, 
you can find yourself in a lawsuit where people who are not present at those 
discussions, namely the jury or the judge, will decide in fact who owns what. 
This is an area of intellectual property law which dovetails with 
other areas of business law, meaning business law recognizes 
you can have a partnership without having formal partnership documents. 
You can have a partnership because you decide to work together for 
a particular product, a particular service, and to share the revenues. 
Other business law doctrines that come into play in these disputes are whether 
someone has been unjustly enriched, whether someone has breached 
a fiduciary obligation they owe another, a very high duty under the law.
Play video starting at :2:40 and follow transcript2:40
In some cases, whether or 
not the court should create what is called a constructive trust, 
reach in and take certain assets and give them back to another party.
Play video starting at :2:53 and follow transcript2:53
One of the most significant cases in the area of copyright and 
collaboration resulted in a United States Supreme Court decision about 25 years
ago, 
and it involved the creation of this particular work of art. 
Community for Creative Non-Violence is a nonprofit organization. 
It wanted to have an artist create a sculptural work that would depict 
the plight of the homeless in our nation's capital, Washington DC, so 
CCNV met with an artist, Mr. Reed, and they had many 
discussions about what exactly CCNV was looking for in this work of art. 
CCNV said, well, we would like it to be a couple, 
two individuals, because so many of the homeless in Washington DC are families. 
We want them to be huddled over a grate where the heat rises up from 
underneath the city because that is one way in which the homeless remain warm.
Play video starting at :3:53 and follow transcript3:53
We would like them to have African-American features 
because such a disproportionate percentage of individuals who are homeless in 
Washington DC are African-American, and we want the use of the shopping cart 
because it is an iconic element for many homeless individuals. 
It is a device where they can house sometimes 
all of their worldly possessions, so CCNV was very involved in 
describing in at a great level of detail of what they were looking for. 
Mr. Reid created the sculpture, ultimately, 
there was a dispute when it came to reproducing new copies of the sculpture. 
CCNV said, we own it, we own not just the sculpture, we own the copyright. 
We paid you $15,000, and Mr. Reid said, you don't own it. 
You didn't actually create the sculptural work, I created the sculptural work, 
I'm the artist, I own the copyright.
Play video starting at :4:46 and follow transcript4:46
To make a five-year legal battle short, the takeaway message for companies, 
sometimes even if you don't discuss it, copyright can be jointly owned.
Play video starting at :4:56 and follow transcript4:56
Other times, when one party is primarily responsible for making all of the creative 
decisions, and the party who is hiring them but is not involved 
in the creative elements, the party who pays the money does not own the copyright. 
They own the work product that was delivered, not the rights in it, so 
the takeaway message for business is, you must document 
collaborations or circumstances where you're paying a contractor. 
Because you may assume, because you pay the money, you 
own all of the rights in the work product, but that is not true under copyright law.
Play video starting at :5:35 and follow transcript5:35
Another area of consideration with copyright, as you can see from this rather 
crowded slide, is there are many different kinds of ways to own or share copyright.
Play video starting at :5:48 and follow transcript5:48
So for example, we see in the software community we often have freeware, 
software that is written by individuals. 
They actually relinquish their copyright, they do not assert ownership in their 
product, then we have shareware where indeed there is an individual or 
organization that claims to own copyright but 
is willing to make it available on certain terms. 
There is a general public license, a very well-known form of license, where, indeed, 
there are certain uses that are granted, to the user or the licensee, but 
copyright itself is retained by the organization that developed the code. 
I won't go through each of these other kinds of ownership, open source, 
copyleft, public domain, Creative Commons. 
What you need to be aware of is that these terms are often thrown around, and 
they may be used accurately or inaccurately, but 
they have implications for not just copyright. 
They have implications for what you want your users to do with your product. 
Maybe you want to make your source code open so that others in your community
can 
create products that will interface with your software, so 
you might make a conscious decision. 
You're not going to claim trade secret in your source code, 
you're going to make it open, but you are going to assert copyright so 
you can limit who can make copies without permission from you. 
You can also decide, for example, 
with Creative Commons you want some of your materials frequently used by others, 
and under Creative Commons licensing you take a certain tag. 
You affix it to your work, and through that tag you communicate to the world. 
Can they make other copies? 
Do they have to get attribution to you? 
Can they make commercial use? 
Can they change your use product? 
There are really just a few questions that are asked, but 
it gives you great flexibility to decide, yes, I want to retain copyright, but I 
want to allow all kinds of different uses for different segments of the community. 
You could decide you want educators to use certain content, and 
you don't want for-profit entities to use that content, so 
you should think of copyright as an asset that gives you a great deal 
of flexibility in deciding who can do what with your content. 
You also need to be sure that, when your development team downloads software 
from websites and says to you, we're free to use it, it's freeware. 
In fact, it may not be freeware at all, it may be shareware. 
It may be subject to a general public license, 
GPL, which has serious implications of what you can do with that software.
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Some other considerations, especially if your company is being considered for 
due diligence, is you want to look out whether you have security entries in your 
copyrights, very commonly done when the company that owns copyright, 
such as movie studio, a publishing house, recording industry, software company, 
can actually use their copyrights as collateral for a loan. 
If they don't repay that loan, the lending institution can foreclose and 
take the copyrights.
Play video starting at :9:4 and follow transcript9:04
You can also decide whether you want to grant exclusive licenses, 
meaning you're only going to grant a license at that one company, and 
you are not going to grant licenses to others. 
Or whether you want to grant nonexclusive licenses, 
which gives you the flexibility of licensing to others.
Play video starting at :9:20 and follow transcript9:20
You can also look at contracts where in exchange for 
being granted certain license rights in your content, you want to also 
secure back from that company an agreement not to compete with you. 
Sometimes, those noncompetition clauses can be reviewed for 
antitrust considerations, but from a copyright point of view you can think 
of your copyright as an opportunity to not just license your content for 
a revenue stream but secure back limits in competition. 
As we discussed earlier, copyright is subject to joint ownership. 
If you don't decide with your collaborator who can do what with the content, 
you should know the copyright laws of the U.S. have a default provision, and that is 
joint owners are free to exploit the copyright in that content 
in any way they want without permission from their other joint owner.
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One consideration, they have to share some of the revenues back. 
Source code escrows are very common with copyright and software, 
where we deposit source code for our software with a trusted third-party. 
In the event the copyright owner or the software vendor goes out of business, 
we have the ability to secure a copy of that code and use it for certain purposes. 
Of course, as with trademark, copyright is the basis for 
bringing an infringement claim, and 
to have copyright infringement there has to be an actual copying of authorship,
Play video starting at :10:56 and follow transcript10:56
and there has to be the creation of a work that is substantially similar.
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We find that if we use intellectual property agreements we can sort through 
issues of ownership, joint ownership, and license rights much more easily, and 
this has very serious implications when it comes to the next bullet point, 
employee moonlighting.
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Just yesterday I had a discussion with a client who said, 
we're going to be hiring a contractor to work on a particular project, and we come 
to find out the the contractor is already employed full-time by another company. 
Moonlighting is a word that we use sometimes to refer to 
someone who's already employed full-time with one company, 
who is doing some work on the side for a different company.
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The copyright implications are that the copyright law says an employer 
automatically owns the copyright of the work product of its employees. 
It doesn't matter whether the employee is sitting at their desk at the company, or 
whether they're sitting on a beach, or whether they're in an airplane.
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If it's created by an employee within the scope of their employment, the employer 
owns it, so you really have to be sure if you're bringing on a contractor that you 
thought through whether that contractor is actually free to work for you. 
Here's a couple of examples, one involving photography and 
one involving dolls, where we see the layering of various intellectual 
property rights in one particular fact circumstance. 
So, we've heard of Flickr, the website where people can upload photos, and 
just because somebody may allow you to use copyright does not mean 
that you can actually use that particular photograph, and here is our example. 
Here is Alison Chang, who was at a church picnic, there she is with her peace sign. 
She's got a cap on her head, you might notice the Adidas logo on her cap, and 
this photograph was taken of her by her friend Justin.
Play video starting at :12:56 and follow transcript12:56
Alison is a teenager She's a young teenager and 
lawyers who are listening to this might be thinking, a minor, a child.
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Virgin used that photo in an ad, 
Dump Your Pen Friend, it was an ad to encourage people to sign up with Virgin.
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Virgin was sued by the parents of Allison Chang for the use of her face, 
the use of her image, without their consent in this commercial ad, and 
Virgin's explanation was, we got the photo off of Flickr. 
It's a file sharing site where people share photos.
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The point is, Allison was not the photographer, 
she was the subject, and a company cannot assume that even if a photograph 
is made available through Flickr that they can use that photograph for any purpose. 
Here, the concerns were endorsement and invasion of privacy and 
the use of an image of a minor without permission from the parents, and 
the point here is, one image can implicate many different legal rights, 
and here we have issues of copyrights, right of privacy, and trademark. 
I'm going to flip back one slide because you're going to see Virgin was sensitive 
enough to the issue of trademark that it removed the Adidas logo from her cap, 
but it wasn't sensitive enough to realize, you can't take image and use it for 
commercial purposes without thinking through these other implications.
Play video starting at :14:29 and follow transcript14:29
Now we have one of the great battles over the last few years. 
Barbie, one of the most recognizable doll brands in the world, Mattel sued 
MGA which was the creator of this Bratz line, and it created this Bratz line based 
on work product that had been given to it by a former employee of Mattel, Mr Bryant. 
There was about a five-year battle. 
Many millions of dollars at stake here over the question of moonlighting, was Mr. 
Bryant free to work for another company part-time while he worked for Mattel? 
There was an issue of whether or 
not what he actually delivered to Bratz was protected by copyright law at all. 
The takeaway message here is that companies need to be sure when they 
are contracting with an individual who already has employment, 
either full-time employment or part-time, or who came up with the idea. 
The idea for this line of dolls, when they were a former employee, it implicates 
whether or not you, as the new company, MGA, are free to run with that new idea.
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Next we are going to talk about the Fair Use cases.
We've spent a bit of time talking about how under US copyright law, 
the law exists to further public education. 
And there are many, many sections of the US Copyright Act, at least 15 of them,
Play video starting at ::23 and follow transcript0:23
that place limits on what owners can do with their copyright. 
There are certain kinds of uses of copyright that the law says to an owner 
you do not have exclusive right to control this work. 
And one of the most important parts of US Copyright Law is called Fair Use.
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Before 1976, fair use was just a doctrine, made by judges. 
But after 1976 it actually became a part of the law and 
so fair use is not some kind of exception to copyright. 
It is part of copyright and a part of copyright law. 
What I want to do for the next couple of minutes is to identify for 
you the actual words of this part of the Copyright Act, and 
then some cases that have given us a better understanding of fair use. 
So first of all, we begin with a sentence that says notwithstanding 
the provisions of sections 106 and 106A, and what you should know, and 
that's simply referencing. 
Not withstanding the part of the Copyright Act that give owners exclusive rights.
Play video starting at :1:32 and follow transcript1:32
The fair use of a copyrighted work, including such use by a reproduction in 
copies or phonorecords or by any other means specified by that section. 
For purposes such as criticism, comment, news reporting, 
teaching, including multiple copies for classroom use, scholarship or 
research is not an infringement of copyright. 
The takeaway here in this part of the copyright act does go on, 
there are some other very important clauses. 
The take away is fair use is not an infringement. 
If you are making a fair use, you are not infringing. 
You are engaging in a lawful use. 
And look at the kind of examples that are actually a part of the law, criticism, 
comment, news reporting, teaching, scholarships, and research. 
And by those words you can really feel that copyright law exists 
to support education, the discussion of ideas, speech. 
When we are undertaking a Fair Use analysis, 
the statute requires that we look at four factors, and 
we do look at number one, what's the nature of this use? 
Is this use by an educator in a nonprofit educational setting,
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is it being used by a for profit entity? 
That does not decide whether or not the use is fair, it's one factor. 
We tend to favor a lot of non-profit uses as fair uses, 
but then as you'll see a lot of commercial uses can also be fair uses 
if the public is benefiting from that use. 
Number two, the nature of the work. 
That's an inquiry looking at are we copying from a primarily factual work or 
we're copying from primarily a fictional or fanciful work. 
The notion here is we probably can use a little more 
if we're using works that are primarily factual.
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This third factor, the amount in substantiality of the portion used 
in relation to the copyrighted work as a whole.
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Two things you should understand from this section. 
There is no magic number, there is no magic percentage. 
If there's one mythology about copyright, I would like to blow up. 
It's the notion that copyright lawyers know that percentage you can use and 
we know just how many words you can use.
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We just won't tell anyone else. 
That's what people think. 
But as you can see here, it's a quantitative concept. 
The real question is are you using the least amount you need to 
use to make your point or are you using more. 
Indeed, are you using so much more that it affects factor four,
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what happens when you make that use that you claim is fair? 
Are people then going to buy your work, 
instead of the other work that you copied from?
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Now as a general rule, when a work is unpublished we tend 
to look a little more carefully at whether that use is fair, because we believe that 
the person who authored the work gets to decide when that work is first published. 
Not a hard line rule, but it does emerge from body of law. 
Now let's apply this to some cases.
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So here we have Demi Moore, on the cover of Vanity Fair in, 
I think it was 1993, at that time, the best selling issue of Vanity Fair ever. 
And then we see Paramount Pictures used, and 
you can either say the idea or some of the creative elements of that film. 
Paramount hired its own pregnant woman and did their own photo shoot, 
but obviously, you can tell by looking at the Paramount pictures photo 
that it is commenting on the very famous Annie Liebowitz photo. 
And Annie Liebowitz, highly regarded, very well-known photographer, 
sued claiming that what Paramount Paramount copied was her artistic choices. 
The lighting, the orientation of the model to the camera. 
And if you read the decision which you can locate if you go to Google Scholar and 
you put in that citation, you'll see the court understood it was parody. 
It was commentary. 
That the use of that promotional photograph 
by Paramount doesn't harm the commercial value of the Annie Leibovitz photo. 
And this is one of the earlier cases involving fair use, and 
it was by a commercial entity. 
So Paramount did not digitize The Vanity Fair photo. 
Paramount recreated the look.
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And we see another example of a commercial use and 
this was a book written by Alice Randall, who's an African American writer. 
She decided that the book, Gone with the Wind, depicted a very
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Stereotypical view of slaves on the plantation during the Civil War era. 
And she decided to criticize Gone with the Wind. 
So she wrote a book called The Wind Done Gone. 
And she took some of the characters from Gone with the Wind and 
she changed their background. 
She took some of the scenes and rewrote it from a different perspective. 
And SunTrust Bank, the entity that owned the copyright in Gone with the Wind, 
sued Houghton Mifflin, the publisher of that book. 
And if you read the decision, again at the citation on that slide, 
you will see that the court said that there was actually a great public benefit 
in taking some of the characters, the settings, and 
the lines of dialogue from Gone With The Wind and 
showing it in a very different light from the perspectives of the slaves. 
And the court found that to be fair use.
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To use no more than was necessary to engage in criticism and commentary.
Play video starting at :7:42 and follow transcript7:42
The next case involving a book 
that was created about the Grateful Dead called the Illustrative Trip. 
We see that certain photographs in which the Bill Graham Archives own copyright.
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Here's an example of one of the photographs of a poster 
in which the Bill Graham archives own copyright. 
You'll see how this poster was shrunk to a very small size and 
used on a particular page in that book.
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And although the Bill Graham archives had an existing licensing system set up for 
the use of the posters, and 
the photographs, and Darling Kindersly, is a commercial entity. 
Darling Kindersly said, we're not reselling your photographs, 
we're not reprinting your posters, we are taking that particular poster and 
we're creating a new context for it. 
We are juxtaposing that image with other photographs, 
certain historical information quotations, commentary indeed, we're giving 
the reader a new way to understand that particular photograph at a point in time, 
at a point in a particular culture, and that was also found to be fair use.
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Here's an example on the left of a photograph taken by Blanch for 
an airline magazine. 
And then on the right you see how the feet were used by Mr. 
Koons, Jeff Koons, who is a contemporary painter and 
who has been involved in a fair amount of copyright cases. 
And Blanch said, you used the entirety of my photograph. 
But the court looked at the artistic use of those images of feet and 
again you can read the entire decision. 
What the court basically found that it was an artistic commentary 
involving feet, food and fetishes and it qualified its fair use.
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One case that did not find that the use was fair was Gaylord, 
who had created this sculptural work in Washington DC, the Korean War Memorial.
Play video starting at :9:53 and follow transcript9:53
And a photographer came in one day during the wintertime and took this photo and 
created this stamp. 
And the U.S. Postal Service was sued. 
And it claimed that it had transformed
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this particular sculptural work by depicting it with snow. 
But the court concluded, you didn't give us something new in the way 
that the previous cases we discussed gave the public something new, 
a different understanding. 
But the court said you simply took this particular statue and 
photographed it with snow. 
And so the US Postal Service was found to infringe the copyright 
that the sculptor held in the artwork.
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So lawyers, especially when we are talking about US copyright law, 
it can be very difficult for 
our clients to think through what is and isn't protected by copyright law. 
And that's in part because the medium in which we all live, we hear messages 
from the recording industry, the motion picture industry, the publishing industry. 
And quite honestly they are telling the public, Falsehoods about what 
those what copyright covers and what they own and what you can do with materials. 
For example how many times do we see in the beginning of a book 
a statement that says copyright ABC company, 
no portion of this work may be reproduced by any means or 
stored in a system and it goes on and on telling us what we can't do. 
Those statements are of course false. 
And clients think they're true and it's sometimes hard for clients to understand. 
We need to have a much more thoughtful and 
measured analysis of what has the client created? 
What portions of it are copyrightable and what portions are not. 
And indeed if it's not protected by copyright, 
it may very well be content that the client can use from other sources.
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Bullet point number two, an issue I ran into as a practitioner virtually everyday. 
And that is the use of part time employees, the use of volunteers, 
the use of contractors, 
if you don't have the right contracts With the right magic words in those contracts. 
The client may not end up actually owning copyright in the content created by 
volunteers, part-time employees or contractors. 
A clean room in the copyright world clean room is a technique for setting 
up a group of people who are going to create a new work for our clients. 
And you staff that team with people who have not had access to competing works. 
And that's because as we see here independent creation is 
everything in copyright law. 
And what this means is even if our clients create a work 
that is substantially similar to another work out there. 
If they created it with people who didn't have access 
to those competing works it doesn't matter that it's virtually identical. 
This is the opposite of patent law, and it's the opposite of trade secret law. 
So, sometimes when we have a client who is going to be creating a competitive 
product. 
And if we anticipate that there might be litigation, 
one of the things we can do is think through with the client, 
who should be on the team that's creating this new work, and how do we support 
their innovation while not tainting them with content from competing works.
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Then, of course we want to encourage our clients to register a copyright in their 
significant works because it enables us, essentially, to pick up a phone, and 
call the opposing party and advise them that they've engaged in infringement, and 
we're prepared to go into court tomorrow. 
And we're going to get attorney's fees and statutory damages and may be
destruction 
of infringing goods, unless we negotiate a resolution right now. 
Indeed, I have had conversations where because I was able to transmit a copy of 
my clients copyright registration, we've literally stopped infringement 
as it was happening and had checks sent FedEx the next day.
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And then of course, with the role of the attorney in counselling the client, 
we want to think through what happens with clients who have employees 
who do want to permit certain either entrepreneurial activities and 
allow employees to have their own business outside of the company business or 
to moonlight and work for third parties.
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And of course as client, you have the opportunity to think through how copyright 
look and support the value that you have embodied in literary works, 
motion pictures, architectural works. 
You'll understand now that your protection exist immediately you don't have to wait 
until the work is registered, all the registration is fast and cheap, and 
patents which will expire 20 years after the date the patent application is filed 
under US law. 
Copyright last 95 years for a corporation, it last a very long time. 
And this can be particular valuable depending on the industry that you're in. 
If you're in software, 
probably your life expectancy of the software is much less than 95 years. 
But if your industry is publishing, and you have literary works, or 
motion picture, or certain artistic works the copyright might last a very long time.
Play video starting at :15:21 and follow transcript15:21
The other issue to consider is that when someone has copied 
from even commercial products that is your product design, your packaging, etc. 
You can use copyright to law to banned the importation into the US and 
of course as with trademarks, copyright can be license. 
So you can attach a value to a revenue stream for 
the commercialization of that content.
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So through our copyright segment, you have learned that copyright protects 
certain expressive content, doesn't protect other content, and 
can be a revenue stream for the licensing or the sale of copyrights.
This session, we're going to talk about trade secret law.
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Trade secret is an area of intellectual property law that is very much grounded in 
company culture, company processes, ethics, and human behavior. 
The purpose of Trade Secret Law is indeed, 
as the court said 50 years ago, to protect the standards of commercial morality.
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Honest commerce. 
It also encourages innovation and invention, and as the court says, 
it helps to maintain the public interest in free and open competition 
of unpatented goods, and protects relationships based on trust. 
So let's walk through this again. 
The notion that it protects standards of commercial morality 
is because trade secrets are not registered. 
There isn't any official public office that confers a trade secret 
on your business processes.
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The only way that you can maintain your trade secret is through your people. 
And so they need to behave in a way that is ethical.
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By saying it encourages innovation, 
means that to the extent a company can develop data. 
Or processes or procedures and 
ultimately products that have a component of them that deal with secrecy and 
that give you a competitive advantage, trade secret will protect that product. 
It does not need to be patented.
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The concept of keeping the public interest in free and 
open competition means if something isn't patented,
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others are free to copy it, unless it violates trade secret law. 
Or, unless the name they've chosen for that product violates trademark law.
Play video starting at :1:56 and follow transcript1:56
The Economic Espionage Act was the first time in the United States 
that trade secret law became criminalized. 
Meaning it wasn't simply a violation that your former employer could enforce. 
It was a violation where you could go to law enforcement, and you could seek 
assistance from the police or from the Federal Bureau of Investigation. 
Here's a definition that's used in this federal act. 
A trade secret means all forms and types of financial, 
business, scientific, technical, economic, or engineering information. 
So right there you see that it isn't just medical or engineering or scientific 
information, but indeed some kinds of data that we might consider purely strategic. 
Financial information, business plans. 
And this includes patterns, plans, 
compilations meaning collections of information, 
program devices such as technologies, formulas, designs, 
prototypes, methods, techniques, processes, procedures, programs or codes. 
Meaning, almost anything could qualify in the form that it's embodied,
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whether it's tangible or intangible.
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By referring to intangible we mean, even if it's just in your head, 
even if it's not fixed or embodied in something.
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And whether or how stored, compiled or memorialized, physically, 
electronically, graphically, photographically or in writing.
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Notice how broad this is, meaning it can apply to virtually any company.
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And here's your requirements if you want to claim trade secrets over those data, 
formulas, plans, and processes.
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You have to take reasonable measures to keep the information secret. 
Reasonable measures, and the information has to provide economic 
value to the company because it's not generally known and 
it isn't something that can be more easily reverse-engineered. 
So really two requirements here. 
You need to take reasonable measures. 
And, this is the kind of information that we couldn't fairly easily 
reverse-engineer, or indeed with a great deal of expense, independently develop.
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So what are not trade secrets? 
Well indeed, any information that's already publicly known. 
Or generally known in a field, or as it says, are reasonably ascertainable, 
meaning we can figure it out if we work at it, or we can reverse engineer it. 
Those are not trade secrets, so 
how might you be able to acquire information lawfully?
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One way, you could hire an expert, you could go to somebody who has been in that 
particular industry a long time and has a great deal of experience.
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You do not have to necessarily hire someone with a PhD, 
college education, an MD.
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You can develop a trade secret because you work with someone who is 
very experienced in the field and has developed know-how.
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When we talk about trade secret misappropriation, 
we talk about unlawful conduct, wrongful conduct. 
The definition of misappropriation is, 
when someone uses a trade secret or discloses the trade 
secret of another company without the consent of that company.
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The statute identifies certain ways that that can happen. 
One would be, you use improper means to acquire the knowledge of the trade
secret. 
Improper means could be, you have a stealth attack on a computer system. 
It could mean that you bribe an employee, could mean that you go on to a facility 
and you hide recording equipment in your clothing. 
Could mean that you physically remove materials from 
the place of employment, of the place the company has its business operations.
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We all have a pretty good instinctive understanding of what 
improper means would be.
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Next, a company can get into trouble, if it knew or had reason to know 
that information was derived from someone who used improper means to acquire it.
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I had a circumstance not long ago, where a client was reviewing a laptop 
of a former employee, who was no longer with the company. 
And the company was reviewing the content of the laptop, and 
indeed found information from a competitor on that laptop, that 
the employee should not have gathered and that the company didn't want to
possess. 
And indeed, it contacted its counsel to figure out what do we do with information 
on our laptop, we didn't request it, we haven't used it, we haven't disclosed it. 
Do we have any obligations to notify a third party?
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And finally the third point is that if information is acquired by accident or 
mistake, a company cannot use that information.
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One of the most common ways that this can happen 
is that a company hires a new employee, and that new employee has had 
previous employment in that industry or with a competitor.
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And sometimes former employees do not realize they can not 
disclose trade secrets even if they haven't signed a non-disclosure agreement. 
And although we're going to talk about non-disclosure agreements in a moment, 
it reminds me of a time some years ago. 
I was working with a client who was in the field of aviation engineering and 
had hired a new engineer to work on a particular project. 
And the engineer said I haven't signed any nondisclosure agreements so 
I'm not under any obligations of nondisclosure. 
And as an attorney, of course, that sounds like nails on a chalkboard because
indeed 
you are still under those obligations. 
And that's because there is a fiduciary duty, an ethical duty when 
one is employed, or one is a contractor and learns information that's a secret. 
The obligation not to disclose it to others, or not to use it improperly 
begins right then, whether or not a document is ever signed. 
Many individuals with whom I've worked, 
including very educated individuals, do not know this.
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So let's look at that first bullet point that we have to meet, 
if we want to claim trade secret in our information.
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We have to exercise efforts that are reasonable under the circumstances. 
So let's sort of begin with what kinds of circumstances? 
Imagine that there are trade secrets that are highly confidential, 
very important to the company. 
An example might be the formula for a new drug, the formula for 
Coca-Cola, which we'll talk about later. 
If something is very valuable, 
you need to act as though that information is so valuable. 
That you have implemented procedures that are even more detailed than you might 
use with information which is going to become public in a few days, 
a few weeks, a few months. 
Which is not to say that, even with information that's going to become public 
soon, that you wouldn't want to implement certain protocols. 
But if you want to later claim that information is highly sensitive, 
highly valuable, you need to act as though that's true. 
So here are a couple of slides that talk about measures 
that many companies undertake. 
The first is incredibly important if a company does business worldwide, 
or at least outside of the United States, and that is contracts. 
And that's because not all industrialized countries recognize trade secret law 
in the way that the United States recognize trade secret law. 
So therefore, the ability of a company to claim that it 
has a proprietary interest, a property interest in information 
will often depend on how well-written their contracts are. 
And these contracts need to be with employees, whether full-time or 
part-time, independent contractors. 
And think about independent contractors, they are often working with one company, 
then another company, then another company. 
And they are often in circumstances where they have a great deal 
of confidential information about many different companies. 
Consultants, volunteers, and strategic partners. 
And we often don't think of having contracts with volunteers or 
with interns, sometimes because we're not paying them a wage. 
But indeed they are in possession of information just by virtue 
of working with the company, working on projects, working with company
employees. 
And often a volunteer can be a younger person, who's not yet 
been introduced to the ethics of the business community. 
They may not realize that certain information 
has strategic value because it's confidential. 
So, you need to think about your communications with your volunteers and 
your employees. 
You want to think about how you use policies that may be circulated, for 
example, by email.
Play video starting at :11:25 and follow transcript11:25
In my own law firm occasionally my law firm chairman will circulate an email and 
state that we need to reply to that email and 
state we have read it and we understand it and it can go into our files.
Play video starting at :11:37 and follow transcript11:37
So, next is company policies and there's really two kinds of company policies. 
The kind that people write and then they put on a shelf and no one reads them, and 
no one knows they're there. 
And the company pulls them out at some point in the future when they 
want to try to enforce them. 
You want to be sure that you are the other kind of company, the kind that drafts 
the policies, posts them, circulates them, for example, by email. 
Occasionally reminds employees of the existence of certain policies and 
how employees can conform their behavior. 
Another approach, notices, posting them conspicuously. 
Having a notice that says people cannot walk past this point, 
unless they're escorted. 
People cannot walk past this point, unless they have a badge, or 
some other kind of identifier. 
And, to send reminder notices to staff. 
Remember, of course, that you're probably always bringing on new people, and 
you may have had this very same discussion with your employees six months ago. 
But you may have a 5% turnover and you'll have new people on board who don't
know 
about these policies, so staff education is very important. 
And what that does, it begins to create a culture where your employees and 
your staff are mindful of the fact that there is indeed 
confidential information within the company. 
That this information gives the company a value,
Play video starting at :13:6 and follow transcript13:06
it's a way of keeping the company competitive. 
It's a way of creating additional value if the company is going to 
partner up with another company or be acquired in the future. 
And it can help people change their own behavior to conform to those requirements. 
You'll want to think about your procedures for checking in and 
checking out information. 
If it's electronic, you can have an audit trail so 
you know who has access to information.
Play video starting at :13:33 and follow transcript13:33
You'll want to be sure that people log in and log out.
Play video starting at :13:37 and follow transcript13:37
And that when people are accessing your technology remotely, 
you have the kind of technology trail that first of all can limit 
who has access and can require of course authentication procedures. 
Here's another list of procedures you should at least consider. 
I want to take a moment to say that it isn't a requirement 
that you use all of these procedures. 
It's a reminder that you have to think about, which of these make sense, 
in light of the value of that trade secret, how large or small your company 
is, how much of a burden it will be to implement these procedures. 
And indeed, later down the road, when there has been a misappropriation, 
how much you will wish that you had actually implemented these procedures. 
So again, another method that you can use is to restrict visitor access. 
Is there really a need for visitors to come on site and 
see your manufacturing floor, to see what kind of equipment you're using. 
To see the design and the layout and the workflow.
Play video starting at :14:43 and follow transcript14:43
Think of physical security. 
Indeed, many trade secrets are lost because people indeed, 
physically remove digital storage devices, 
remove documents, have physical access to areas of the company. 
They should not have physical access.
Play video starting at :14:59 and follow transcript14:59
The need to know is a concept where 
even if there are perfectly ethical people within the company, 
it doesn't mean that you give them access to everything the company has. 
You want to allow access to those company secrets and 
processes, where employees need to know them to do their job. 
But you don't need to give access to everyone merely by virtue of the fact 
that they happen to be an employee or an officer or a director.
Play video starting at :15:28 and follow transcript15:28
Of course, shredding, deleting, and destroying documents is 
a perfectly lawful way to eliminate the likelihood that certain 
materials with confidential information will fall in to the wrong hands. 
This is an act that you'll want to work with your attorneys closely. 
Because there are circumstances where shredding, deleting, and 
destroying documents is illegal because it can be the destruction of evidence. 
There's also certain documents where you need, for legal reasons, 
to retain them for four years or six years or eight years. 
So, work closely with your lawyers on that point.
Play video starting at :16:2 and follow transcript16:02
The next issue, disclosing only what is absolutely necessary. 
Let's say you're having some initial business discussions with a potential 
strategic partner or perhaps a company that might be a manufacturer for you. 
You probably don't need to disclose the entire manufacturing process and 
the ingredients. 
And the sources of supply if you merely need to know 
whether that particular company has the capacity to meet your demand.
Play video starting at :16:29 and follow transcript16:29
Also, you'll disclose as little as possible, so only what is necessary, 
as little as possible. 
But of course you want to disclose what you need to disclose 
to accomplish a business goal.
Play video starting at :16:42 and follow transcript16:42
Exit interviews, this is a great opportunity for 
a business to work with their human resources director and their attorney.
Play video starting at :16:50 and follow transcript16:50
Exit interviews are great for HR purposes. 
Meaning develop a check list, walk through the check list and 
make sure you have all of the information you need from any departing employee. 
And much of it is just administrative. 
What's their current address? 
How do you reach them to send them their final paycheck? 
Information you may need for taxes. 
But we also use exit interviews as a way of reminding people as they're leaving 
the company that there are obligations that continue even after they leave. 
And those obligations certainly include trade secret. 
And depending on the contracts you have with your employees, they may also
include 
obligations not to solicit customers, not to solicit your workforce. 
So use your exit interviews as a check to keep track of that information. 
And indeed I had a situation a couple of years ago where my client was 
very worried about a particular engineer who was leaving the company. 
He was leaving on bad terms, 
he was quite hostile, I was invited to the exit interview. 
And as you might expect, this employee refused to sign any document 
indicating that he had been present at that interview. 
But I, myself, conducted the part of the interview dealing with trade secrets. 
And about 45 minutes later after the interview I received a phone 
call from the company's CEO that the IT department had detected 
that a technological back door had been built into the technology. 
And certain company documents were being removed from the company server and 
redirected to another location. 
Moments later I was on the phone to the Department of Justice 
seeking the intervention of the FBI.
Play video starting at :18:34 and follow transcript18:34
And their first question was, how confident are you that it's this employee, 
and that he knew this information was a secret? 
And I was able to talk about the exit interview, the checklist, and 
my own participation in that interview. 
And one of the reasons that law enforcement cares very much about 
the procedures that you take to protect your information is their 
burden of proof is beyond a reasonable doubt. 
Beyond a reasonable doubt. 
That's a very high standard and so if you ever need law enforcement to assist you, 
you need to conduct your business protocols at that very high standard. 
And indeed the FBI got involved and all of the information was retrieved. 
And finally, when people are leaving, don't forget to retrieve documents or 
materials from them. 
And don't forget to ask whether they have any materials at home on home
computers. 
Because, indeed, who isn't working at home these days or on a mobile device?
In this segment on trade secrets, we're going to talk about how these issues apply 
in the real world when working with individuals and 
working with law enforcement. 
So here's an example of the kind of company trade secrets, company assets, 
that law enforcement has decided is worthy of being involved in. 
And although I won't walk through each of them, you can see some of them 
are engineering information, some of them are technology, such as software and 
source code, some is purely business information, project information, pricing. 
And even though this particular slide talks about secrets that 
are investigated by the FBI, you should know that the framework we've 
been discussing applies identically for criminal investigations or 
for enforcement by you, through your courts on a civil basis. 
The only difference is the burden of proof, meaning everything we have talked 
about to what is a trade secret, the measures you have to take, 
the value it has to provide your company applies whether a criminal matter, or 
a civil matter is commenced. 
So ethics do matter. 
I have discussed with clients the fact that there isn't a contract I can write 
that is more important than indeed the ethics of the individuals that they hire. 
So although I would like to say that your contracts written by your lawyer, 
will be very helpful to you, and they will be. 
It is also true that when you have employees and staff who are ethical, 
You're not likely to run into trade secret misappropriation issues. 
It is important to have contracts because first of all, 
by having a written agreement, it raises to the level of consciousness of 
the individuals who are working with you, that this obligation does exist and 
it reminds them of the conduct that they need to exercise, 
in terms of casual discussions that they have. 
I remember several years ago, 
I received the phone call from a very close friend who said, 
do I have to read on the the front page of the paper that you were involved in this 
very high profile opportunity with the major hospital, and I said I guess you do. 
And that was because, despite the fact that this person is a friend, and 
this person is very trusted, there is simply no reason for me to be disclosing 
to an individual anything over which I have a duty to maintain in confidence. 
So how do you develop trade secrets? 
It's a very simple answer. 
You develop them through the act of invention, the act of innovation. 
The act of literally creating the trade secret. 
Unlike patent, there is no agency who reviews your trade secret and 
declares it to ba a trade secrete. 
There is no registration. 
How do you know it's a trade secret? 
Truth is, you don't really know it until you like around your industry and 
you assess whether it appears that anyone else in that industry has this 
information or this process, or if it's tested in court. 
One example of how these rights arise, a friend of mine was a chemist for 
a pharmaceutical company and he said that in the time period that patent 
covered their drug they were also optimizing their manufacturing processes. 
They figured out, over time, who were the best sources of supply for 
certain ingredients. 
They figured out the sequence in which this particular drug should be made, 
the batch size, the temperatures, 
the rate at which certain ingredients should be mixed. 
The time period that they needed to cool. 
Many, many elements of process optimization. 
None of which were disclosed in their patent application. 
And that's because they were not claiming a patent on a process, 
they were claiming a patent on a drug. 
But, they relied on trade secret to continue to protect all of the information 
that was not publicly known, so that even when the patent expired and 
competitors were allowed to make the same drug, this company could say we have 
the technology to develop a product that has greater bio availability. 
We have the processes to have a product with greater shelf stability, 
and they made various product claims because they had had 15 to 20 
years of advanced experience working with that particular drug. 
What is important to about how rights arise is how they are lost. 
They are lost by your own actions. 
If you do not exercise obligations that are reasonable under the circumstances. 
And they arise by lawful acts of third parties. 
Meaning there can be, let's say, university scientists who 
are working in a particular field, and they publish papers, 
they give speeches, and what you claim to be a trade secret, may in fact, 
lawfully enter the public domain by those who are committed to publication. 
A trade secret can theoretically last forever. 
They tend really not to last forever because over time, in an industry, 
others who are competing with you begin to figure out the same kinds of 
processes that you have figured out to manufacture products. 
What a trade secret can give you is the first mover advantage. 
Therefore, because trade secrets can last forever, 
you have to think very carefully before you sign a nondisclosure agreement. 
Where you agree that the information will be kept secret for three years, or 
five years or two years. 
Because what the means is that after that time period 
expires the other party is free to use that information. 
And indeed, 
there will be some information which is very difficult to reverse engineer. 
An example, I have a client who's in the business of shot pinging. 
And that's an engineering process where tiny, 
tiny pellets at certain trajectories and speeds, 
certain concentrations are focused on metal, and 
it will deform the metal at the molecular level, the atomic level. 
And it will result in the metal being much stronger as a result of this shot pinging 
process. 
Companies who deliver certain metal materials to my client do not 
see all of the elements that are involved in the decision. 
What kind of pellets, what kind of concentration, 
what period of time, what the force should be, what the trajectory should be. 
The customers simply get back a metal product that is much stronger than 
the product they originally delivered. 
That client was initially going to protect that process through patent, but 
concluded that they would actually have a longer period of protection if 
they kept it a trade secret. 
And indeed, it's been about 25 years since I had that initial discussion 
with that client and the information is still a trade secret. 
The third bullet point is just a reminder that although we hear from Coca-Cola that 
its formula is a trade secret, there are many individuals who believe they 
have recovered some of the early notebooks relating to the development for 
the formula for Coca-Cola. 
And there is an episode of the radio show This American Life, 
where they discuss whether or not the formula is indeed a secret. 
Many years ago I had a discussion with a chemist at Coca-Cola who said, 
even if you figure out that there's a certain amount of lemon in the formula you 
won't know whether it's lemon rind or lemon juice, and you won't know whether 
the lemons are from Italy or California, and all of that go into our trade secret. 
Now, I don't know if he was just teasing me, but I will say, 
having worked with clients for many years, sometimes it can be 
the details that really do make a particular formula a secret. 
The next few slides are the story of a very important case that was decided 
just a couple of years ago in the United States. 
And this slide is really to remind us that if you do nothing to 
protect your trade secrets, the courts are not going to save you. 
Although these slides are rather text heavy, 
they tell us a story about a company that had many opportunities to step in, 
either have a discussion, sign a document, mark materials, and did none of those. 
So, Fail-Safe as we see was a company that, in this particular law suit, 
brought a trade secret misappropriation claim against AO Smith. 
Here is the court telling us what this case is about. 
Essentially, whether a plaintiff, in other words, 
whether a party who claims to be injured, can bring some legal theory, 
including the theory of what's called unjust enrichment. 
Unjust enrichment is a notion of legal fairness. 
Somebody has been unfairly enriched. 
When that party fails to take any protective measures to 
safeguard its proprietary information. 
And as the court notes, 
all of these relationships do not proceed along the same path. 
But where one company fails to take any protective steps to shield 
it's proprietary information, 
it cannot then expect the law to protect it when the relationship sours. 
So let's see what happened here. 
We see that Fail-Safe manufactures what are called 
anti-entrapment devices for artificial pool drains and 
AO Smith manufactures motors for pool and spa pumps. 
And it's been developing anti-entrapment technology, so you see that the parties 
have sort of a symbiotic, potential symbiotic business relationship. 
Maybe Fail Safe would be an entity that would want to sell it's technology 
to AO Smith. 
But we see here, AO Smith is also developing anti-entrapment technology. 
There's a trade show, AO Smith sees a fail safe technology and 
they begin business discussions. 
And this probably happens a million times a day around the world. 
They're talking about whether AO Smith will develop a pump motor for 
fail safe's entrapment prevention technology. 
There's no agreement, so no writing comes out of this, nor 
did they even discuss confidentiality. 
And, by the way, at trade shows and 
other business events it's not surprising that engineers would first be interested 
in whether there's a potential business relationship, an engineering relationship. 
Not necessarily that we would expect them right then to discuss confidentiality. 
Though probably your employees would because you will have advised them on 
the importance of thinking about these issues. 
Then Fail Safe sends a letter expressing an interest, but 
the letter does not mention confidentiality. 
Then they have a meeting to begin the process. 
Months of correspondence and now we're engaging in creating test results. 
Neither the letter nor any correspondence mentions confidentiality and 
now we're going down the road of disclosing unfavorable test results. 
Fail Safe goes to Milwaukee City located in Wisconsin to meet with engineers and 
look what happens here. 
Failsafe signs AO Smith's standard one way confidentiality agreement. 
A one way confidentiality agreement is where you agree to keep the other 
person's information confidential. 
They have not agreed to keep yours confidential. 
The note here that is the standard agreement, 
often clients are not familiar with, or comfortable with legal documents. 
When they hear it's the other party's standard agreement they think, 
it's the standard agreement, it's probably fair. 
Well, it might be if it's mutual, but this is a one-way agreement. 
And Fail Safe did not similarly require that AO Smith enter into 
a confidentiality agreement. 
And note here, despite having demanded such confidentiality 
agreement in other relationships. 
You can see here how trade secret is all about conduct. 
Well, Fail Safe, you did have other companies sign a confidentiality agreement 
in the past, didn't you? 
Yes we did. 
You didn't require AO Smith to do that, did you? 
No we didn't. 
But you signed their one way agreement, didn't you? 
You can just see how bad this looks. 
So, Fail Safe then discloses information that will be important in developing 
this device, how to test it, again, no mention of confidentiality. 
The parties meet, Fail Safe shares test results, and again, 
confidentiality is never discussed. 
You can see how the court is telling us how this case is going to end. 
A year later, Fail Safe sends out a letter publicly 
disclosing certain information about this relationship. 
And the reaction of A.O. Smith, is to say, we're writing to those same people, 
we are telling them that the information in your letter is not accurate, 
there isn't a joint relationship and AO Smith accuses Fail Safe 
of having breached the very confidentiality agreement it signed. 
And then what happens? 
AO Smith actually introduced two pump motors that Fail Safe 
claims incorporated the Fail Safe trade secrets two years later. 
Fail Safe sues, well we all know how this ends, right? 
There is no trade secret. 
Who waits for two years after they believe that a trade 
secret has been misappropriated to actually go to court? 
And here, indeed, is the motor from AO Smith. 
The bottom line here, in particular, for startup companies, 
is the fact that you may be small, or that you may be a startup, 
will not excuse you from having these larger, 
more established companies Sign confidentiality agreements with you. 
Or, at least be aware that if you don't raise the issue orally, 
perhaps you send in an email statement that you're expecting that they are going 
to treat this information confidentially. 
Marking your information, do something. 
To your lawyer the chance down the road to remind the other party that 
this information is indeed confidential. 
In our last segment we'll work with attorneys and with companies to 
talk about the steps they can take to protect the value and their trade secrets.
In this segment, 
we're going to talk about some of the key takeaways from the trade secret
discussion 
that different kinds of relationships that you're going to have with individuals and 
with companies, and some of the legal ways to protect your trade secrets.
Play video starting at ::24 and follow transcript0:24
First of all, 
trade secret is a very important doctrine in intellectual property law. 
And that's because there are going to be elements of a product or 
the entire product that is not going to be protected by patent. 
It might not be protected by copyright or trademark. 
It's going to be those elements, for example, data. 
As we know from our copyright discussion, copyright does not protect data or 
facts, but trade secret will.
Play video starting at ::53 and follow transcript0:53
And when you think about trade secret as a part of your overall portfolio, 
especially if you're involved in manufacturing. 
Trade secret can apply from the very beginning of the manufacturing process. 
Who are your sources of supply? 
What are the prices that you're paying? 
What's the sequence that you're using in your manufacturing process? 
If you're developing software, trade secret can protect algorithms, 
your technical specifications, the result of testing elements 
that are not protected by copyright, and are not protected by patent.
Play video starting at :1:33 and follow transcript1:33
So especially the last couple of years, since the United States Supreme Court has 
ruled, that many patents that have issued on software are invalid.
Play video starting at :1:43 and follow transcript1:43
And because there are many countries outside the US 
that do not confer patent protection on software. 
Your means for protecting much of your software will be through trade secret and 
of course, your user interface trademarks, as we discussed earlier.
Play video starting at :2:1 and follow transcript2:01
Therefore, when you think of how to look at the portfolio 
of company assets, think about those areas where trade secret fills in 
the gaps left by patent, copyright, and trademark.
Play video starting at :2:16 and follow transcript2:16
Again, it can last a very long time. 
As we know, or as we've heard from Coke, the formula is well over a 100 years old.
Play video starting at :2:24 and follow transcript2:24
Independent creation is a complete defense to misappropriation. 
So in this way trade secret is very much like copyright.
Play video starting at :2:31 and follow transcript2:31
So you have to think about then, 
how will you create a technology development team or 
a product development team, if you bring in someone who comes from a competitor. 
And therefore, who has had access to the trade secrets of that competitor. 
How do you, as a business, bring in a new talented employee, 
put them on your development team without exposing yourself to a claim for 
trade secret misappropriation. 
And indeed, sometimes a company simply has to decide, 
is this a risk that we can manage? 
Or do we bring in this very talented person and 
put them on a different project for a period of time. 
So for example, one thing you can do is you sit down with that employee when they 
come in the door and you remind them. 
You know they have a duty of confidentially with a respect to 
information that they already have, 
that the company has a policy against their use of it or their disclosure of it. 
You don't want that confidential information, and 
that even if they think that they're really not using 
something that's confidential they're just using their skills and their knowledge. 
Give them an opportunity to meet with company counsel so 
that the attorney can explain to them the difference between a skill set and 
a knowledge base on a one hand that they get to have as their own 
assets and a former employer's secret.
Play video starting at :4:2 and follow transcript4:02
So independent creation is a complete defense to trade secret misappropriation.
Play video starting at :4:9 and follow transcript4:09
You'll also want to think about what happens when you bring in 
a workforce that's a part-time employee? 
Part-time employees, or independent contractors who work for 
you on a specific project, as we discussed earlier, they may have other 
employment opportunities and they may be also consulting with other companies. 
You need to remind them not to taint your processes and 
your work product with the trade secrets of others. 
For attorneys, and you can think back to those couple of slides about
Play video starting at :4:43 and follow transcript4:43
measures that are reasonable under the circumstances. 
Trade secret really is about client conduct. 
And we need to be careful and not over lawyer and 
give a client a dozen procedures they have to follow, but instead to think about for 
each client what are the processes needed for that particular company to succeed. 
And which ones are absolutely critical, and 
then we might want to conduct what we call trade secret audits from time to time. 
Having a check list for clients. 
Do they have policies that they give to individuals, 
even at the level where they're offering a position? 
Reminding individuals that we have policies against bringing in information, 
or documents, or materials. 
So you can develop a checklist, everything from how the client works with
employees, 
how they hire, fire, how they work with strategic partners. 
And make sure that the client understand that these are not requirements just 
because you're concern about little details but 
because you're concerned about the clients assets and the protection of those
assets. 
And again, this may explain the fail safe A.O. 
Smith case, clients will sometimes rely on their instincts and they’ll think if they 
are working with people who are honorable or who have a reputation. 
That they don't need to worry about protocols. 
And the truth is, sometimes the clients are right. 
If you work with ethical people, 
you don't typically have to have the same concerns about misappropriation. 
But if you work with ethical people, and you take no steps whatsoever, 
you will not be able to enforce those trade secrets against others. 
So trade secrets can be lost once, and then lost forever.
Play video starting at :6:29 and follow transcript6:29
Again, protocols are what matter.
Play video starting at :6:32 and follow transcript6:32
And remind the client that if they would like to develop a product that is going to 
directly compete with another company, help them put together a clean room. 
Just like the kind of clean room we discussed when we talked 
about copyright law. 
And sometimes what we can do as attorneys is we can connect the clients with 
experts in particular fields so that a client is getting, for 
example, advice from the university professor, or 
someone who has had extensive experience in a particular field. 
And will be able to advise the client on how to develop a product, create 
specifications, develop testing protocols, and ultimately develop a competitive 
product without ever having access to the information, or personnel of a competitor.
Play video starting at :7:16 and follow transcript7:16
Again, as attorneys, we sometimes look at contracts, and sometimes in the US, 
we look at non-competition agreements. 
Non-competition agreements are very problematic in many states, 
in the United States, and they are very problematic outside these United States.
Play video starting at :7:33 and follow transcript7:33
Let's make a distinction here between a trade secret agreement and 
a non-competition agreement. 
A trade secret agreement focuses on indeed protecting the trade secrets of a
company. 
A non-competition agreement states, 
essentially, even if you are never using the trade secrets at all, 
you can't work for a competitor. 
You can't work in this field. 
Now, different lawyers have different opinions about non-competition agreements. 
Generally, I disfavor them, unless someone is an officer who's 
highly compensated and typically has stock or stock options. 
If they're just a mere worker, 
why should they be prevented from working for a competitor? 
Because they've been developing skills and knowledge in a particular field, and 
indeed there are many states in the United States, California being a prime
example, 
that makes non-competition clauses illegal. 
You can't prevent someone from working for 
a competitor just because they're a competitor. 
You can prevent them if they're taking trade secrets. 
Other states however, will enforce non-competition agreements. 
For those states though, that do allow non-competition contracts they 
typically require what is called a legitimate business interest. 
What is a legitimate business interest n preventing this employee 
from taking a position with an employer? 
And the answer is almost always trade secret. 
So, sometimes the care that a client takes to 
implement trade secret protocols can actually be used to limit 
future employment of a key employee with a competitor.
Play video starting at :9:19 and follow transcript9:19
Having said that, outside the U.S. many, many countries in particular 
in Europe will not enforce non-competition agreements from near working folks. 
They may for a stock owner, a director, or an officer but 
they typically will not for a worker bee, and 
that is because of the tremendous impact it has on the ability of someone to be 
employed when there is no assertion of trade secret misappropriation. 
I have often had clients say to me I would like a non-disclosure and 
non-competition contract that I can use around the world. 
And I have to remind them there is no such contract. 
Indeed, there's no such contract that can be enforced, 
even in all 50 states in the United States. 
And finally for clients, the value that is brought to your company 
through trade secrets is, indeed, know-how. 
Sometimes that intangible ability that your staff have and that are implemented 
to manufacture a particular product to a particular specifications.
Play video starting at :10:26 and follow transcript10:26
And that know-how does not have to meet the requirement of patents 
which is novelty.
Play video starting at :10:33 and follow transcript10:33
Again, registration is not a requirement so you can be developing trade secrets, 
virtually, everyday.
Play video starting at :10:40 and follow transcript10:40
They can last a short time. 
If some university professor publishes a paper and you read it, and 
you say hm, that's the algorithm that we use within our company for this particular 
manufacturing process, it means others are free to use that very same algorithm. 
On the other hand, it may be a long time before people figure that out.
Play video starting at :11:1 and follow transcript11:01
As we discussed, the use of trade secret can affect the mobility of 
your key employees and their defecting to competitors. 
So well-known case in the United States where a key employee who 
was involved in the development of Gatorade left to go to a competitor, 
but he didn't just leave to go to a competitor, 
he lied to a few people within his company before he left. 
He said, well, I've been thinking of accepting this job offer, but 
I haven't actually accepted it yet. 
When in fact he had accepted that employment, and 
he continued to attend high level company meetings. 
And ultimately when he went to the new employer, 
even though the new employer said, we don't need these trade secrets, 
we're not going to use those trade secrets. 
We're an ethical company, we have our own policies, we have our own protocols. 
What the court said is, but he's a liar. 
And we think somebody who lacks the morality to speak honestly to an employer 
doesn't really have the morality to keep this information confidential. 
So the court entered an order that barred him forever from using the information, 
and it barred him from taking the position with a new company for 
a period of time until the information that he knew was obsolete. 
So when I lecture to my students and 
in particular to my business students I say, here's some free legal advice. 
Don't lie.
Play video starting at :12:38 and follow transcript12:38
And of course, trade secrets, 
our basis on which you can actually get an injunction against a competitor. 
You can go to court. 
If you prove that you have a trade secret, that you've 
used measures reasonable under the circumstances, you can get a court order. 
That will order your competitor to stop making a particular product, 
to pull it off the shelf. 
You can sometimes get an employee fired.
Play video starting at :13:1 and follow transcript13:01
And you can sometimes get the court to require that your competitor pay you, 
not just damages to you, but a certain percentage 
of all of the money they have made off the products using that information. 
And finally, trade secrets can be licensed just like patents can be licensed. 
You'll have to, of course, have trade secret protocols built in to that license. 
But there can be a revenue stream from those trade secrets.
In this segment we're going to talk about patent law, 
a very powerful remedy that's available to innovators.
Play video starting at ::16 and follow transcript0:16
So first of all, looking at the definition of patents, 
we see that the invention has to be useful.
Play video starting at ::25 and follow transcript0:25
Novel, and by novel we mean worldwide.
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And not obvious to a person, 
who has what we call ordinary skill in math art or in math field. 
So the notion here, is the willingness to give you a company, 
an absolute monopoly, a legal monopoly over an invention,
Play video starting at ::48 and follow transcript0:48
is because you've given back to us, the public, something that is useful, 
something which is so new, it doesn't exist anywhere else in the world. 
And it isn't just the next step or an obvious step in a particular field.
Play video starting at :1:4 and follow transcript1:04
Under patents, the inventions are all disclosed. 
So there's information in the patent application. 
There's information that's disclosed in the patent prosecution phase, and 
in the ultimate patent that issues. 
So the idea here is that even though a legal monopoly can seem to be 
at one level harmful to the public, 
because it puts the power in one company to make or use or sell an invention. 
The countervailing thinking is that it really helps the public 
because you've brought this new thing to us, and 
you've taught us the background and how to use it.
Play video starting at :1:44 and follow transcript1:44
It's also true, under patent law, that even if you're not the original inventor 
of a particular device, or material, you can develop an incremental step, 
a new improvement to existing technology. 
And that new improvement can itself be patentable. 
This is an important point, if you're thinking of developing some kind of 
invention that another larger player in your field would want to buy from you. 
So if you can find a way to improve upon an existing patented product,
Play video starting at :2:17 and follow transcript2:17
even if you can't make that product because of the existing patent, 
you could control the ability of the owner of that patent to move into a particular 
field by patenting the next level of improvement.
Play video starting at :2:32 and follow transcript2:32
Recently in the United States, we just mean about ten years ago, the patent act 
was amended and the United States joined most of the rest of 
the world in issuing patents to the person who was the first to file.
Play video starting at :2:48 and follow transcript2:48
Not necessarily the person who was the first to invent. 
Now, to claim ownership of an invention you still have to have invented it. 
You can't have misappropriated from a third party or copied from a third party.
Play video starting at :3:1 and follow transcript3:01
But until a few year's ago, if you secured a patent 
all the way through the patent process and you've secured a patent. 
Someone who invented it prior to you could have your patent invalidated. 
That is no longer true. 
So what this means for companies who wish to secure patents in the United States, 
get your application on file.
Play video starting at :3:23 and follow transcript3:23
Patent law, though very powerful, doesn't protect everything. 
Here's a list Of what US patent law does not protect. 
And indeed this is typically true around the world. 
So you can't get a patent on natural phenomena. 
And we don't just mean lightning and thunder and wind. 
We mean natural phenomena that occur in the body. 
And there was recently United States Supreme Court had 
upheld patents that were based upon genetics. 
When the courts concluded that what was being patented and what had been
patented 
was simply naturally occurring events, scientifically occurring events. 
You can't get patent protection for printed matter. 
That's why when you have printed matter you have to think about a copyright.
Play video starting at :4:11 and follow transcript4:11
Abstract ideas. 
This is the bullet point, 
which has really become a dagger in the heart of many software patents. 
Over the last few years, since the United States Supreme Court 
ruled in a very significant patent opinion that many of the processes 
that were the subject of software patents were just ideas. 
They just happened to be an idea that used a computer to carry out the idea. 
I think the last estimate was well over 60% of the software 
patents that have been challenged in the last few years have been invalidated. 
So think about that, companies put a lot of time and money Into securing patents 
and they are dropping like flies when they cover software.
Play video starting at :5:5 and follow transcript5:05
Indeed scientific principals as we were discussing earlier when 
it came to notions of the body. 
Patent is not available. 
Patent protection not available, for scientific principles or laws of nature.
Play video starting at :5:19 and follow transcript5:19
Or merely because you take an algorithm and 
happen to embody it in hardware, firmware or software.
Play video starting at :5:28 and follow transcript5:28
So we have three kinds of patents.
Play video starting at :5:30 and follow transcript5:30
Utility patents, which are very common, they cover useful articles.
Play video starting at :5:36 and follow transcript5:36
Machines, manufacture, compositions of matter.
Play video starting at :5:40 and follow transcript5:40
Several years ago I had a client that developed a synthetic macromolecule, 
created a new form of matter and received a patent on that molecule.
Play video starting at :5:51 and follow transcript5:51
Design patents, very, 
very popular these days because of the popularity of mobile phones, 
of products that are used by consumers where elements of the product 
are novel but not necessarily useful, they're ornamental, they're aesthetic.
Play video starting at :6:12 and follow transcript6:12
We see cars. 
Often cars and the exterior of cars can be protected through product trade dress
and 
through design patents.
Play video starting at :6:20 and follow transcript6:20
And then plant patents. 
Obviously this is an area that's been very controversial as some plant patents 
cover genetically modified crops and creates cultural issues 
over the question of what happens when some of the seeds of those plants 
purchased by one farmer blow into the field of another farmer and 
indeed some of the owners of plant patents have sought to prevent people 
from growing crops when the seeds are covered by plant patents.
Play video starting at :6:56 and follow transcript6:56
So a patent lasts, now, 20 years from the date the application is filed. 
It used to be 17 years from the date a patent issued. 
This is the US time period. 
Internationally, patents can range from 14 years to 20 years.
Play video starting at :7:14 and follow transcript7:14
And in some countries certain kinds of patents, such as software patents 
can be a much shorter time period than patents on other products or machines.
Play video starting at :7:25 and follow transcript7:25
When a patent expires It's over, meaning anyone can manufacture that product. 
They don't need to ask permission, they don't have to pay a fee. 
That is the whole point underlying patent protection. 
You get a monopoly for a period of time, and then the public is free to use it.
Play video starting at :7:43 and follow transcript7:43
And there are many fields, in particular. 
In particular, the genetic pharmaceutical field, 
where competitors wait anxiously for the day that patent expires. 
And they will have in the marketplace, as soon as possible, 
sometimes the next day, drugs that are the generic equivalent of the patented
drugs. 
Of course, depending on the product that you have, you may have to secure 
regulatory approval well in advance of the expiration of that patent. 
But the point is that some companies will actually develop their technology by 
looking at the patterns that will be expiring over the next year or two, and 
thinking how they can build upon that invention and have a commercially, 
competitive product that has new inventions contributed by that company, 
based upon inventions that have just expired. 
And indeed for 
our clients who are thinking of International patent protection. 
There is the patent cooperation treaty, which is a rather complex process that 
gives you an opportunity when you have filed a patent application in one country 
to extend that patent application several years down the road 
to other countries getting the earlier filing date. 
Remember of course patents are national in scope. 
There is no such thing as an international patent, 
although there is an international patent treaty. 
Patent applications are reviewed by the examiners in each country and we have 
to meet the standards required by each of those countries in order to get a patent. 
We see these days that there are many companies that have secured, 
let's say US patent protection. 
And find that their competitors are going to countries where that 
client has no protection. 
China is a prime example. 
And they are contracting with the fabricators and 
manufacturers to manufacture a product which would be infringing 
if done in the US, but there is no patent on that product in China. 
So it is perfectly legal to manufacture that product.
Play video starting at :9:50 and follow transcript9:50
All a client can do if it has a US patent is keep an eye on the borders. 
And the importation because a US patent will allow a company to prevent 
the importation of goods that infringe that patent.
Play video starting at :10:9 and follow transcript10:09
Patenting is very expensive. 
We were talking earlier, copyright protection is between $30 and 
$65 per copyright application. 
Trademark, few hundred dollars for filing fees and 
a couple thousand dollars for attorney's fees. 
Trade secret, there's not necessarily any fees associated with it at all because 
there's no registration. 
But patent fees in the US range from maybe $4,500 for an attorney's fees for 
a ver simple patent, to a couple hundred thousand dollars for 
very complex patents, often in the pharmaceutical field. 
But why do companies secure patent protection? 
Well first of all, it is a legal monopoly. 
There is no such thing as independent creation being a defense. 
So unlike copyright, unlike trade secret, with a patent it is, 
indeed, an absolute monopoly. 
The sole right to make, or use, or sell, or import, that patented invention. 
So it's a huge competitive advantage.
Play video starting at :11:13 and follow transcript11:13
In the US there is no requirement that you actually use the patent. 
This is different from, for example, 
in Europe, where a certain period of time, typically 3-5 years of non-use 
can allow someone to challenge the validity of the patent. 
So in the US you can have, 
if you wish, a huge patent portfolio not exploited at all.
Play video starting at :11:37 and follow transcript11:37
And wait until someone else moves into that field and 
then either negotiate with them or sue them for a licensing revenue. 
We have a term that we use in the US, we call them trolls. 
Now they like to be called non-practicing entities. 
We call them trolls because the notion is they are like those nordic 
sagas where the trolls hide under the bridge, and 
it isn't until you cross the bridge, they jump up to charge you a fee. 
But the notion is, they have the patent ownership, and 
if you want to exploit that invention, you need to negotiate with them.
Play video starting at :12:13 and follow transcript12:13
Indeed you can license patents, and that can be a great source of revenue. 
And companies can often find a way that an invention has application for 
other products and other geographic areas, and can be the basis of licensing
revenue.
Play video starting at :12:29 and follow transcript12:29
If you have patents, you can sometimes enter into a contracting relationship 
with a competitor and you'll be able to either compete directly with them or 
to license your patents to them. 
And divide up the field in a way where you're going to get 
a share of a certain segment of the market that you might not otherwise get, 
because your competitor needs to use that patent to sell that product.
Play video starting at :12:55 and follow transcript12:55
Patents can also be used to establish a defensive legal position. 
I saw this used a few years ago. 
I was meeting with a client who had been sued for patent infringement. 
It's a rather large company, they had their own in-house patent counsel. 
And I recall his first statement at the outset of that meeting, 
where he turned to one of his engineers. 
And he said, you go through our patent portfolio. 
And you find not only patents that cover what we're manufacturing here. 
You find patents that that plaintiff is probably violating, 
meaning that there were enough patents on enough products 
that this attorney felt there was a good likelihood. 
I don't mean that they have patents that covered what they were doing. 
They might be able to bring a counter claim against the plaintiff. 
Field good defense is a good offense.
Play video starting at :13:48 and follow transcript13:48
Or is it the best offense is a good defense, or 
in this case it works both ways because you can bring a counter claim.
Play video starting at :13:54 and follow transcript13:54
Then of course, because a patent is a legal monopoly, 
indeed you can simply prevent someone from using that technology. 
You don't have to license it.
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Patents are often used to value a company for 
purposes of an acquisition or making an investment.
Play video starting at :14:12 and follow transcript14:12
And this is an area of business and 
business law that I think is quite curious because sometimes investors or 
even acquirers are more dazzled by the number of patents 
than really investing the time to understand the quality of the patents. 
So for example, I can think of a client who had a patent on a particular tool, 
and it was a very clever tool. 
And it was very successful in the marketplace. 
And they promoted the existence of the patented product, 
it was a matter of advertising and making an impression on the public. 
But if you actually studied the patent, it covered a very, 
very narrow part of that tool. 
And it was pretty easy to engineer around that invention. 
So although it was a matter of company pride and although it was 
true as a matter of marketing to be able to assert we have these patented products. 
Before you acquire the company, 
because of the patents, look carefully at the quality of the patents. 
And then finally, having patents can indeed support a culture of innovation. 
It's a way of signalling to employees, we're innovative. 
We're a company that's creating something new. 
I can think of one client of mine when you walk into their waiting area, 
they have a huge wall with copies of their patents that are highlighted 
with beautiful lighting and it's a way of showing visitors to the company. 
We're innovative and we're very proud. 
Now we're talk about how patents apply to our workforce.
In this segment, we're going to talk about ownership of patents and 
the right to use patented inventions even if you're not the owner.
Play video starting at ::17 and follow transcript0:17
The easiest way for a company to acquire ownership of a patent is if it has 
an actual employee, typically someone who is full time, but 
an actual employee, who is paid to invent. 
And we call those people, paid-to-invent employees. 
In those circumstances, under the laws of many industrialized countries, 
an employer will automatically own the patented invention. 
There doesn't have to be a contract. 
But in many other countries, there does need to be a contract and in some cases, 
there actually has to be additional consideration above and 
beyond salary or wages. 
And some companies will have a policy where they automatically pay an employee 
$100 or $250 or the equivalent 
to be sure there is some underlying legal consideration for the invention.
Play video starting at :1:13 and follow transcript1:13
Then we have what is called a shop right. 
And this is, essentially, judge made doctrine in the United States, 
where a company whose employee is not ordinarily paid as an inventor. 
They may be employed to do welding. 
They could be employed to do work on the floor of a manufacturing facility. 
But that employee develops an invention, creates an idea, and 
actually embodies that idea and solves a problem.
Play video starting at :1:42 and follow transcript1:42
What the law in the US says is the employee is indeed the owner of that 
invention, but the employer has the right to use the invention 
because it was created by an employee during work hours in connection with 
work responsibilities typically, but not always, with company additional resources. 
And we'll talk about a very well known case involving employees who invent 
when they are not paid as inventors.
Play video starting at :2:14 and follow transcript2:14
Assignment, literally means a document 
that transfers ownership from one entity to another. 
So one way you can acquire ownership, we see this often in the patent world where 
one company will purchase the patent portfolio of another. 
Google acquired, I forget how many thousands, tens of thousands of 
patents of Motorola a few years ago when Google wanted to go into the mobile
space.
Play video starting at :2:40 and follow transcript2:40
Constructive trust is an interesting doctrine under English law and US law. 
And it's a situation where someone who has 
a fiduciary responsibility, this is typically an owner, 
a director, someone who has a high duty, an ethical duty to a company,
Play video starting at :3:2 and follow transcript3:02
doesn't disclose to the company that this person has invented something. 
Or allows the company to think the company has ownership and 
actually has the company spend money seeking patent protection. 
But then the individual says, I wasn't a paid-to-invent employee, 
I was a director or an officer but I wasn't paid wages and
Play video starting at :3:26 and follow transcript3:26
you don't own that invention, I do. 
A company can go to court, can demonstrate the existence of that fiduciary duty, 
the use of the company resources to protect that invention. 
And the court will actually, with a wave of their magic judicial wand, 
transfer the ownership of that patent from the individual to a company. 
And I did that a few years ago with a small start-up company where the CEO, 
who is a part time CEO, developed a certain technology, 
disclosed it to the company, he did not develop it necessarily on company time, 
the company secured patent protection. 
And the individual later left the company and began, or 
attempted to license this invention to others. 
He wouldn't stop that attempt to license the invention. 
He said he was the owner because he had no written employment agreement, and 
indeed he did not. 
He had never assigned his rights. 
So we brought a lawsuit and 
the court concluded that there can be a constructive trust 
imposed by the court over that invention, returning the ownership to the company.
Play video starting at :4:35 and follow transcript4:35
Patents, like other forms of intellectual property, can be co-owned. 
So if company A collaborates with company B, their employees can 
contribute inventorship, and the companies can be co-owners of that invention. 
You might recall when we talked about copyright law, 
we said there can be co-ownership, but there is this duty to share equitably, 
the revenue stream from commercializing that invention. 
The opposite is true in patent, there is no equitable duty of accounting, 
unless you contract with that other party. 
So this is another reason why it's very important when you have a collaboration 
that you document. 
What can be done with the inventions that arise. 
Who will pay for the patenting. 
Who can exploit and whether any revenues need to be shared. 
And as we have discussed with the other intellectual property doctrines, 
you're going to think about what is the likelihood that my workforce 
is comprised of people who are not just paid-to-invent employees but 
part-time employees, interns, consultants, volunteers and advisors. 
Remember, if those other folks, in particular, 
interns that you're not paying, consultants who are not employees, 
volunteers who are not employees and advisors who are not employees, 
if they invent, how are you going to move the ownership of that invention 
from those individuals to you and the general answer is contract.
Play video starting at :6:3 and follow transcript6:03
Here's an example, of an individual, Mr. Roberts, who was a mechanic. 
He worked for Sears, Roebuck, in the automotive repair section and 
he developed that well known product, the quick release socket wrench.
Play video starting at :6:19 and follow transcript6:19
He was not a paid-to-invent employee. 
He owned the invention. 
This particular case has a rather 
sordid story of lawyers who essentially lied to Mr. 
Roberts and said to him this invention is probably not very valuable. 
Why don't you transfer your rights to us? 
And Roberts did so, only to find out that the company exploited it and 
made millions and millions and millions of dollars. 
And they, one a lawsuit later, and 
a very long period of time, Roberts got his share of that revenue. 
But the point here is that individuals who are not paid-to-invent often, in 
this case and particularly with tools, are often in a position where they can solve 
a company problem because they're working with the company products and
processes.
Play video starting at :7:8 and follow transcript7:08
What that means is as a company you'll want to have 
contracts with even those employees who are not necessarily paid-to-invent, 
whereby contract the company will own inventions. 
In some cases, a company will decide that someone who is employed 
has come up with an invention that's not particularly valuable to the company. 
So, some companies will simply reassign the patents to the individual and 
let that individual exploit them if they wish. 
And sometimes companies will reassign them and request that there is a certain
share 
of the revenue that comes back to the company if the employee later exploits it.
Play video starting at :7:44 and follow transcript7:44
Here's an example of how design patents, the shape of the phone, the placement 
of certain features, design patents have become a hot litigation topic. 
I think Apple and Samsung have been suing each other over design patents for 
about ten years and One or the other is winning every couple of years. 
But it's a reminder that in the market for consumer products, 
a distinctive ornamental look can be a very important marketing advantage.
Play video starting at :8:18 and follow transcript8:18
One of the questions that I have asked creative individuals and 
my students is, did Samsung have to copy the packaging, too? 
Meaning, if you're going to be developing a competitive product, 
you might want to think not only about the product shape and 
the user interface design, but also think about packaging. 
It just tends to make something look like more of a copy than perhaps it 
needed to be.
Play video starting at :8:45 and follow transcript8:45
Here's a reminder, that if you publish information about an invention and 
you wait in the US for more than a year to file your patent application, 
you no longer have an invention that's patentable. 
So here, there was a certain formula, a bodybuilding supplement.
Play video starting at :9:7 and follow transcript9:07
Information about it was published in a muscle magazine. 
And more than a year later the company filed for 
an application on that supplement. 
But by then, because the information had been already publicly available, 
it was found to be invalid. 
So it's why companies often ask their scientific and engineering staff 
to consult with company attorneys before they submit papers for publication, 
before they submit papers for conferences, or before they give public presentations. 
Because outside the US, you are typically not given this one year time period. 
Outside the US, if you publicize the information relating to 
the underlying invention, you cannot secure patent protection. 
So in the US, we give you one year to get it on file. 
But outside the US, you may not have any protection at all.
Play video starting at :10:5 and follow transcript10:05
The patent process typically involves filing an application where you have to 
provide a great deal of information about why your invention is useful, 
why it is novel.
Play video starting at :10:17 and follow transcript10:17
You have to make oaths, and that is indeed a declaration that you make, under
penalty 
of perjury, that all of the information you provide is accurate and true.
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This application is formally examined by a patent examiner. 
It's ultimately published, at which point, anybody in the world who can access 
uspto.gov can read the information in your pending patent application. 
As a general rule, it's about 18 months after you file your patent application. 
Your application is published, one exception in the US, 
if you decide not to seek international patent protection, 
in the US you can limit the publication of your pending patent application.
Play video starting at :11:2 and follow transcript11:02
The patent examiners will conduct searches regarding the novelty of your invention.
Play video starting at :11:9 and follow transcript11:09
There will be, indeed, substantive examinations, 
often meetings with a patent examiner, detailed memoranda back and 
forth, and then the application's either granted or it's denied. 
In the US, this process takes on average three and a half years. 
If it's software related it's more years. 
If it's outside the US and it's software related, let's see I have a client who has 
several software based patent applications pending, one has been 
pending in Australia and Canada for over seven years and the patent has not
issued. 
So companies really need to think about the likelihood of success 
in some of these fields.
Play video starting at :11:48 and follow transcript11:48
It is expensive, it is slow, I'm saying in this note here that for an average fee 
in the US for securing patents, $12,000 if it's not a very complicated invention. 
Although it says here, Biotech and Pharma are upwards of 50,000, I have 
been to legal conferences where patent councils say, more like 125 to 250,000. 
It really depends on the number of claims, 
the number of claims that are being sought.
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So unlike copyright protection, which exists automatically so 
long as you have something that is independently creative and 
expressive, patent protection is much slower and much more expensive.
Play video starting at :12:32 and follow transcript12:32
Patent litigation, the figure that I have here of the average patent infringement 
lawsuit costing about 1.5 million, it's a few years old.
Play video starting at :12:41 and follow transcript12:41
If the patent infringement claims go on for several years as they do with some 
of the larger companies, meaning there's trials, there's the hiring of experts. 
There are appeals, there are appeals from the appeals. 
There are requests for reconsideration and rehearing. 
Fees can be upwards of $100 million for 
some patent infringement lawsuits, so they are expensive. 
Why do companies pay lawyers that much money? 
Because you can acquire powerful remedies. 
You can get an injunction against your competitor, 
you can get an award of attorney's fees. 
In some cases, for willfulness, you can get treble damages. 
And there have been awards of damage in patent infringement 
in upwards of a billion dollars.
Play video starting at :13:25 and follow transcript13:25
And as you can see from bullet point number three, a lot of companies will 
sometimes evaluate the merits of these cases, and decide that they will enter 
into a license where they pay a certain percentage of their product sales to 
the company who contends that the product would otherwise infringe their patents.
Play video starting at :13:45 and follow transcript13:45
In the US, we have what are called provisional patent applications and if 
you're a startup you should really think about provisional patent applications. 
And what it is is an opportunity to provide the US Patent and 
Trademark Office with very basic information about your invention. 
You get it on file, it's an inexpensive filing fee. 
You can use the words Patent Pending, because that's technically true and 
that will sometimes scare away people from trying to copy your product. 
That particular provisional patent application is never actually examined. 
That patent application does not become the basis for 
a review of the invention that's described. 
It does give you an earlier filing date, and 
you have one year to get your full-blown patent application on file. 
Your full-blown patent application, indeed, needs to relate back to the same 
subject matter, but it's never reviewed by the patent examiner. 
It really holds your place in line. 
And, what does this allow you to do? 
It allows you an entire year to decide. 
Do we think there's merit in this invention? 
Are there investors who want to invest in our company? 
Do we think that this particular invention is going to be 
important to our business and we want to build other products around it? 
You'll note here that you cannot file provisional patent applications for 
design inventions.
Play video starting at :15:9 and follow transcript15:09
So, finally, you have to pay attention to these details. 
With patents, in particular, you need to have those who are inventing 
sign contracts, whether or not they are paid-to-invent employees. 
Be sure that you look at the information your team is going to 
publish to decide if you want to get a patent application on 
file before they disclose that information.
Play video starting at :15:29 and follow transcript15:29
And decide whether or 
not what you're looking at as an invention is just momentary in time. 
And the heart of this is really going to change over the next year or two. 
If it's really going to change significantly, 
you may design your way out of the original invention that you have now. 
And you're going to have something later down the road that you want to seek 
to protect.
Play video starting at :15:52 and follow transcript15:52
As we stated earlier, particular for 
those companies who seek protection outside the US, 
you have to be very careful about Disclosing information. 
And reason I say watch out for non-disclosure agreements, 
there's this concept in the US law called public disclosure, and that means if you 
don't follow procedures that we typically think of as relating to trade secret, 
meaning having another party acknowledge that the information you're receiving 
is not public, can't be used for any public discussion, publication. 
If you don't have certain information that's protected by non-disclosure 
agreements with third parties, you can be found to engage in a public 
disclosure of your invention, and you will lose patent protection as well. 
So, non-disclosures not only protect trade secrets, they avoid 
the possibility that what is disclosed later is the subject of a patent 
application which can be invalidated because the information was made public.
Play video starting at :16:58 and follow transcript16:58
So, lawyers, of course, we care about patents, because they give our clients 
such a powerful legal tool and because independent creation is irrelevant. 
You can stop someone who's manufacturing a product using that invention, 
even if they've never heard of your client.
Play video starting at :17:15 and follow transcript17:15
So it's powerful, but it's limited. 
Worldwide protection is expensive, but often one of the assets 
that will be considered in the patent portfolio of your client. 
It can help protect the client if it's ever sued for 
patient infringement because at least the jury will think 
who could possibly think that you're infringing a patent or 
infringing willfully when you yourself have patents that cover that product. 
And, very important legally, patents come with a presumption that they're valid, 
so this sifts the burden of proof to the party challenging it 
to prove it is not valid. 
And of course, companies, you can see throughout this the power 
of the patent to stop competitors in their tracks. 
They can't make, use, sell, or 
import that invention into any geographic territory where you have a patent. 
You can use it as a basis to license others, and 
of course licensing gives you a chance to think about licensing your patent for 
money, or sometimes what we call cross-licensing. 
You license your technology, and 
they license some of their technology back to you. 
So, sometimes the value of a patent is you have access 
to the patent portfolio of others, even if they're not paying you a revenue stream. 
We discuss the defensive strategy, the likelihood that you're committing 
patent infringement is lessened if you have patents that cover your products.
Play video starting at :18:43 and follow transcript18:43
When you're looking to perhaps set up a joint venture, 
let's say the joint venture needs a million five to get off the ground. 
If you're contributing a patent portfolio, whether you're contributing ownership or 
licensing, that can be a very valuable contribution, and you don't have to come 
up with money because you're contributing technology and innovation. 
Indeed, it helps create a culture within your company of innovation and 
a certain amount of cultural pride to be able to say 
I'm a named inventor on seven patents in this company.
Play video starting at :19:13 and follow transcript19:13
And indeed, as we discussed earlier, it can be the basis on which some investors 
think that you are a pretty solid and 
innovative company in which they may want to invest money, 
even though they're not always able to determine the quality of those inventions.
Play video starting at :19:29 and follow transcript19:29
Are the owner or presumed to be the owner 
of any invention that relates to the company's business for 
a certain period of time after the individual is no longer employed? 
I've seen patent tails as long as six months, and so 
they typically read something like this.
Play video starting at :19:48 and follow transcript19:48
During the time period of your employment and for six months thereafter, the
company 
owns all intellectual property rights and inventions, including copyrights, patents, 
trade secrets, trademarks, if they relate to the business of the company.
Play video starting at :20:6 and follow transcript20:06
Now, of course, the clauses go on for a couple of additional sentences, but 
why might a company include in a contract with an employee that the company 
owns an invention, even after the time that the employee is no longer employed? 
And if you think about it, it's because an employee could indeed come up with 
an idea, an invention, something they need to perhaps test further, 
but something they don't want to disclose to the employer. 
They want to go off and create their own company and 
they want to invest in further development and testing of this idea they have. 
So they leave the company, maybe form a new company, 
maybe they partner up with some colleagues and they take that idea, 
let's say that idea that was developed on October 16th of 2015. 
And sometime later in December, they have enough data that they believe 
they can reduce it to an actual invention and get a patent application on file.
Play video starting at :21:6 and follow transcript21:06
One of the reasons that some companies will include a patent tail 
is they're afraid that an employee, indeed one who is paid to invent, 
will come up with something valuable, leave the company, and 
then seek to get patent protection in the name of the new company. 
So they put in this clause, that will give the company a basis to claim, 
we're going to presume that if you get a patent application on file within 
three months or six months, we're going to presume you conceived 
of this invention while you were employed by us. 
And indeed, the language of most patent statues talks about 
an invention that is conceived and then reduced to practice. 
What you should know is that these kinds of clauses can, on their face, 
have a real implication for entrepreneurship. 
It can really affect the ability of an employee to leave and 
start a new business. 
In some circumstances you're going to want to be sure that you have the patent 
tail as short as possible, as you think will be reasonable and thus enforceable. 
And in some cases you'll have to pay, 
such as paying them as a consultant during that time period. 
The point here is that in particular now in the 21st century, 
patents are incredibly valuable. 
The work force is very mobile, and employees are very entrepreneurial, 
so you have to carefully think through the contracts you'll have with your staff, 
and you have to also think about whether or not your key employees 
will sign contracts that limit them after their term of employment.
We're now ready to begin our module on contracting, and 
this module is especially important for two reasons. 
First of all, in surveys of business leaders, 
they identify contracting as an especially important business 
topic that's at the intersection between the law pillar and the strategy pillar. 
And second, contracting affects every stakeholder in a business. 
And so it creates tremendous opportunity to create value for 
all of your stakeholders.
Play video starting at ::43 and follow transcript0:43
The videos in this module are from another MOOC that 
I produced called Successful Negotiations: Essential Strategies and Skills. 
So if you took that course, you don't have to watch these videos again. 
If you didn't take the course, 
you might want to watch the other modules in the course. 
The course has been translated into Spanish and Portuguese, and 
it is also subtitled in French, Ukrainian, and Chinese. 
Also, I produced an app in connection with the course 
that includes negotiation planning tools 
including a contract checklist of the elements we'll talk about in this course. 
And so here's a link to the website and to the app.
Our plan in covering this unit is to divide it into four sections. 
First of all, we're going to talk about perspectives on contracts, 
general perspectives. 
We're going to take a quick look at the sources of contract law and 
the two key variables in determining the sources. 
Then we're going to spend most of our time on the key elements 
in creating a contract. 
And my goal there is to give you a checklist to stuff into your pocket for 
future negotiations when your involved in contract negotiations.
Play video starting at ::42 and follow transcript0:42
And then finally, we're going to take a look at the tension that can arise 
between your business objectives and your legal objectives and 
make some suggestions for dealing with those tensions.
Play video starting at ::56 and follow transcript0:56
So let's start with the first section on 
some general perspectives on contracts and contract law.
Play video starting at :1:4 and follow transcript1:04
Let's start with this simple definition of a contract, basically it has two elements. 
A contract is an agreement number one enforceable by law.
Play video starting at :1:15 and follow transcript1:15
So you and I can enter into a number of agreements, 
we can agree it's a great day outside, but that's not enforceable by law. 
So our goal here is an agreement that will be held up in a court of law.
Play video starting at :1:30 and follow transcript1:30
And there are many different perspectives that you can use in looking at a contract. 
One perspective is a global perspective. 
And that's illustrated by this quote from the Wall Street Journal. 
In setting up market systems in former communist lands, one thing should be kept 
in mind: It can't be done without first creating a legal system that protects 
the right of all individuals to hold, buy, and sell property without the legal 
protections for the contracts through which those transactions are conducted. 
A system of contract law and the means to enforce it are fundamental. 
And what this writer is basically talking about is what we 
refer to as the rule of law.
Play video starting at :2:17 and follow transcript2:17
Before you make any investment decisions relating to another country, 
probably your very first question is will my contracts be enforced?
Play video starting at :2:28 and follow transcript2:28
Are they enforceable? 
Will the courts honor the contracts that are made? 
Otherwise, you're taking a great risk in making those investments. 
So you can take a global perspective in looking at contracts.
Play video starting at :2:42 and follow transcript2:42
You can also take a business perspective. 
And here's one way to look at contracts from a business perspective. 
Obtaining a contract is the primary goal of a business entity.
Play video starting at :2:55 and follow transcript2:55
In other words, when you look at any business, and 
you scrape away all other activity. 
When you scrape away strategy, marketing, finance, 
HR, accounting, what's left at the core of any business entity. 
And it's contracts. 
Without those contracts, the entity would not exist. 
We talk a lot in business about value creation. 
Well, contracting is where value creation takes place. 
And the business people who are the best negotiators 
are going to create the greatest value. 
So that's the business perspective on contracting. 
And then finally, there's a personal perspective and 
that runs something like this.
Play video starting at :3:47 and follow transcript3:47
In the world of contracts you as the writer control the script and 
produce the play. 
You and I everyday enter into many contracts. 
It could range from a simple contract such as walking into a McDonald's and 
buying a hamburger. 
Or it could be a more complex contract that relates to you personally. 
For instance when you buy a house, 
probably the largest financial deal that most people make. 
Or it could relate to your personal work. 
The kinds of contracts that you make on behalf of your business. 
But the key message here is regardless of where you make the contracts, 
you exercise a principle known as freedom of contract. 
The law gives you a lot of freedom in writing that contract to create 
your responsibilities and to also create your duties. 
And in exercising that freedom, there is a well laid out 
framework of legal principles that we're going to talk about and that's, again, 
the checklist that you can use in future negotiations.
Play video starting at :5:4 and follow transcript5:04
So these are some perspectives to keep in mind before we dig into 
the details of contract law.
Let's look at another aspect of the contracting process, and 
that is determining the source of contract law.
Play video starting at ::17 and follow transcript0:17
Let's say, for example, 
that you're negotiating with someone and you go to an attorney.
Play video starting at ::25 and follow transcript0:25
And you ask the attorney for advice.
Play video starting at ::29 and follow transcript0:29
Where does the attorney go 
to find out the law that relates to the contract that you're making? 
Or more common today is the do it yourself contract, where you go online, 
there are a number of services that will help you form contracts. 
Where does the law come from that forms the basis for 
those online contracts that you are using? 
Well, basically there are two variables to determine this source of contract law.
Play video starting at :1:1 and follow transcript1:01
One variable depends on what type of legal system you are in.
Play video starting at :1:8 and follow transcript1:08
Fundamentally, the legal world is divided into two parts. 
Roughly half the world is represented by the Common Law, and 
half by so-called civil law. 
Common law developed in England originally, and 
it's based on precedence, which means that in 
addition to laws made by legislatures in addition to constitutions and 
in addition to rules made by administrative agencies. 
Courts look at prior decisions to decide particular cases. 
So in a common law country, which is basically 
England where it originated or countries that used to be owned by England. 
Common law countries lawyers spend a lot of time reading and hunting for cases. 
Go try to find cases that are very similar to the contract negotiation 
you're involved with, in order to give you legal advice.
Play video starting at :2:15 and follow transcript2:15
Civil law countries, and the civil law originated on the European continent.
Play video starting at :2:22 and follow transcript2:22
Civil law countries, rather than relying so 
heavily on precedence, use instead a so called code. 
Which is sort of an encyclopedia of law. 
And so a lawyer in a civil law country would go to the code, 
try to find the principles that govern your situation. 
And then use a deductive process in coming up with legal advice. 
Again, the civil law developed in Europe 
of famous civil law code is the Napoleonic code. 
Napoleon was once quoted as saying that he had won many wars in his lifetime, 
but his proudest achievement was the development of the Napoleonic Code. 
Now what's the practical difference 
between negotiating in a civil law or common law country. 
Well, in many cases, the laws in the two countries overlap. 
But yet there are some practical differences that you'll encounter 
in your everyday negotiations. 
For example, in a civil law country, 
given the fact that there's a large encyclopedia of law of code. 
The contracts tend to be a little bit shorter because they can 
incorporate the code by reference. 
Whereas in a common law country, 
the lawyers will spend more time thinking of every possible scenario 
that might occur in trying to cover all eventualities in the contract.
Play video starting at :3:58 and follow transcript3:58
Now today, in a global economy. 
In fact, when I talk to people in even civil law countries, they tell me that 
even their contracts are becoming much longer than they did in the past. 
But traditionally, you probably generalize and say contracts in the civil 
law country were a bit shorter than those in a common law country. 
Another basic difference is that in some situations, 
there might be variance in law. 
So when we begin to talk about actual contract law, I'll point out 
a couple of situations where the civil law is different from the common law. 
But in most cases, the law in the two systems overlap especially 
with the development of a uniform code that I'll be mentioning in a few minutes.
Play video starting at :4:54 and follow transcript4:54
So that's the first variable. 
The difference between common law and civil law. 
Just to wrap up a look at this variable let me give you a quick quiz to 
test your knowledge of geography and history. 
So, I'm going to ask you about four countries and 
I'll ask you whether they are common law countries or civil law countries.
Play video starting at :5:19 and follow transcript5:19
So get your pencil and paper ready. 
So the first country is India.
Play video starting at :5:25 and follow transcript5:25
The common law or civil law? 
Now remember the test is was this country originally 
quote owned by England, in which case it would be a common law country. 
Or by a European country in which case it would be civil law. 
And England, in India,
Play video starting at :5:48 and follow transcript5:48
India's relationship was with England and it is a common law country. 
Okay? Question number two, Brazil.
Play video starting at :5:58 and follow transcript5:58
Common law or civil law?
Play video starting at :6:3 and follow transcript6:03
And Brazil's legal system is related to a continent, 
to Portugal, and that makes it a civil law country.
Play video starting at :6:15 and follow transcript6:15
Okay, next one. 
And I'll warn you in advance, this is a tough one.
Play video starting at :6:20 and follow transcript6:20
The United States.
Play video starting at :6:23 and follow transcript6:23
Common law or civil law?
Play video starting at :6:27 and follow transcript6:27
In a way, this is a trick question, 
because the United States was once owned by England. 
Therefore you would immediately think common law, but yet it's a mixed system. 
It has a pocket of civil law because we bought Louisiana from the French and 
Louisiana has retained a civil law tradition. 
So actually the US is mixed.
Play video starting at :6:54 and follow transcript6:54
And final question, Canada.
Play video starting at :6:58 and follow transcript6:58
Common law or civil law?
Play video starting at :7:2 and follow transcript7:02
Another trick question.
Play video starting at :7:4 and follow transcript7:04
Canada is also mixed. 
Most of the provinces are common law. 
Canada used to be owned by England. 
But, Quebec has a civil law tradition.
Play video starting at :7:16 and follow transcript7:16
So, again as you travel around the world you're going to encounter
Play video starting at :7:22 and follow transcript7:22
both common law and civil law countries. 
For the most part they're the same but there are some differences, 
which I'll refer to later.
Play video starting at :7:30 and follow transcript7:30
Now, the other variable In determining the type of law 
is what type of contract are you dealing with.
Play video starting at :7:39 and follow transcript7:39
You can divide the contract pie into three big pieces. 
There's contracts for the sale of real estate, contract for the sale of services, 
and contracts for the sale of products, which the law often calls goods.
Play video starting at :7:55 and follow transcript7:55
Contracts for the sale of real estate and 
services follows the distinction we just discussed. 
It would either be common law or civil law. 
Since it's a real estate contract in England or 
in India, it would be governed by common law principles.
Play video starting at :8:15 and follow transcript8:15
But when it gets to products, it becomes a little more complicated because even 
in a mainly common law country like the United States. 
There is a code that would be similar to a civil law code. 
In the United States, we call this code the Uniform Commercial code. 
And by uniform, we mean that it has been adopted around the country, 
although there are variations within individual states.
Play video starting at :8:48 and follow transcript8:48
There's another uniform law that applies internationally. 
And that's the United Nations convention on contracts for 
the international sale of goods. 
So if you're involved in international contracting and 
if your country has adopted this convention, 
then this might be the law that governs your negotiation and your sale. 
So far, 81 countries. 
They're hard to read here, but 81 countries have adopted 
the UN convention on contracts for the international sale of goods. 
The latest one was the Congo in June 2014. 
You have the countries listed here included as a trivial question, 
one of the flags. 
I realize that it is hard to see, but see if you can identify that flag.
Play video starting at :9:50 and follow transcript9:50
Which happens to be the very last country on the list, Zambia.
Play video starting at :9:55 and follow transcript9:55
So what this means is that if you are a company in let's say Brazil, 
which is one of the adopters and 
you're selling goods to a company in the United States.
Play video starting at :10:8 and follow transcript10:08
Because both of those countries have adopted this convention,
Play video starting at :10:14 and follow transcript10:14
you're contract would be governed by this international law, 
unless you said in the contract, we do not want the law to apply. 
We're going to pick a different law, but generally it's the default position.
Play video starting at :10:31 and follow transcript10:31
So those are the two variables. 
That are important in determining the law that will govern your contract.
We're now ready to take a look at the key elements in creating contracts. 
And this section is especially important because it's going to give you 
that checklist to stuff into your pocket and 
keep in mind in your future contract negotiations. 
And specifically, there are four elements on the checklist. 
First of all, have you reached an agreement. 
Second, is there consideration.
Play video starting at ::36 and follow transcript0:36
Third, is the agreement legal. 
And finally, must the deal be in writing.
Play video starting at ::43 and follow transcript0:43
So let's start with this first question.
Play video starting at ::46 and follow transcript0:46
To a large extent, answering this question can be common sense. 
Did one side make an offer? 
Did the other side accept the offer? 
For instance, try your common sense on this scenario.
Play video starting at :1:2 and follow transcript1:02
And by the way, this section in general is going to be 
a test of your analytical ability.
Play video starting at :1:11 and follow transcript1:11
I'll try to give you several case examples and see how 
your logical skills match those of the court making a decision. 
So here's the scenario. 
This happens to be based on a Chinese case, 
not precisely, I've made up a couple of facts, but loosely. 
So on Monday, 
a store offers to buy TVs from a manufacturer. 
Delivery of the TVs are to be made to the store. 
On Wednesday the manufacturer accepts 
the offer but tells the store, you have to pick up the TVs at our plant.
Play video starting at :1:55 and follow transcript1:55
On Friday the store says, okay we'll pick up the TVs at the plant.
Play video starting at :2:2 and follow transcript2:02
But then, after this series of communications, 
the price of TVs drops and the store no longer wants 
to go through with the contract or the agreement, if it is a contract. 
So that's my question to you. 
Actually two questions, if you have a pencil and paper handy.
Play video starting at :2:23 and follow transcript2:23
The first question is, is there a contract here when the manufacturer sues the store, 
and second if there is a contract when was the contract made? 
Monday, Wednesday, or Friday? 
So, please write down your answer.
Play video starting at :2:42 and follow transcript2:42
And again, I don't think you have to have a great knowledge of law to answer 
a problem like this. 
I think you can use common sense. 
The answer is that, yes, there is a contract.
Play video starting at :2:56 and follow transcript2:56
There was an offer by the store. 
There was an acceptance by the manufacturer.
Play video starting at :3:3 and follow transcript3:03
But then a little bit tougher question is, 
when did the acceptance occur, Wednesday or Friday?
Play video starting at :3:11 and follow transcript3:11
And the answer to that question is Friday, 
because the Wednesday communication from the manufacturer was 
not an acceptance because they changed the terms of the offer. 
So legally, what the manufacturer is calling 
an acceptance is really a counter offer back to the store.
Play video starting at :3:36 and follow transcript3:36
By counter offering, the manufacturer has killed the initial offer, 
and now it's up to the store to accept, which the store did.
Play video starting at :3:46 and follow transcript3:46
So, the precise analysis is, manufacturer makes offer on Wednesday, 
store accepts on Friday, binding contract.
Play video starting at :3:58 and follow transcript3:58
Now, this principle of counter offer is especially important to any negotiator. 
When the other side makes an offer to you, you have to remember 
that if you accept the offer but 
add additional terms, although there are exceptions as with any legal rule, 
but if you add additional terms then you have killed the original offer and 
you can no longer accept it after that point. 
So you have to be very careful in the way you word your
Play video starting at :4:35 and follow transcript4:35
acceptance if you don't want to kill that original offer.
Play video starting at :4:41 and follow transcript4:41
In another unit I mentioned this case, 
where a college offered a job to a professor. 
She replied, granting some of the following provisions would make my 
decision easier, let me know what you think.
Play video starting at :4:57 and follow transcript4:57
And for example, she asked whether they would consider a higher salary. 
And she asked for no more than three new class preparations per year for 
the first three years. 
And the college search committee responded 
by saying we've decided to withdraw the offer of employment to you. 
Now as far as I know there's no litigation connected with this scenario. 
But if she had sued them, if for 
example, let's say I had an additional fact, if she then accepted their offer
Play video starting at :5:36 and follow transcript5:36
after receiving this latest communication, would there be a contract?
Play video starting at :5:41 and follow transcript5:41
And the answer to that would be no for two possible reasons. 
Number one, they withdrew the offer, 
which a person making an offer is allowed to do before acceptance. 
So that's the end of the offer.
Play video starting at :6:1 and follow transcript6:01
But a second possibility would be, a court could interpret her language 
easily as a counter offer, which would also kill the original offer.
Play video starting at :6:14 and follow transcript6:14
Although she worded it in such a way that it's a little bit ambiguous 
as to whether it's a counter offer or not.
Play video starting at :6:23 and follow transcript6:23
This would make my decision easier. 
It's not like saying I want these things or 
I accept your offer with the addition of these additional elements. 
But in any event, clearly because they withdrew the offer, 
which they're allowed to do, there could be no contract, 
no acceptance after that point. 
Here's a letter, in the examples I've given, 
the analysis is fairly straightforward and common sense, but 
here's a letter that's a little more complicated and convoluted.
Play video starting at :7:1 and follow transcript7:01
This appeared in our student newspaper at the University of Michigan. 
And allegedly it was written by a student who was rejected by a company after he 
sought summer employment, and this was his reply to the company in a humorous
vein.
Play video starting at :7:19 and follow transcript7:19
Dear Company X, thank you for your letter on February 6. 
After careful consideration, I regret to inform you I am unable to accept your 
refusal to offer me a summer associate position in your New York office.
Play video starting at :7:35 and follow transcript7:35
This year I have been particularly fortunate 
in receiving an unusually large number of rejection letters. 
With such a varied and promising field of candidate firms, it is impossible for 
me to accept all refusals.
Play video starting at :7:49 and follow transcript7:49
Despite your firms outstanding qualifications and 
previous experience in rejecting applicants, 
I find your rejection does not meet my needs at this time. 
Therefore, I will assume the position of summer associate in your New York office 
this June. 
I look forward to seeing you then. 
Best of luck in rejecting future applicants. 
Regards, Tom. 
And, of course, this sort of turns offer and 
acceptance upside down and was written in humor.
Play video starting at :8:17 and follow transcript8:17
A more serious issue that 
relates to offer and acceptance, relates to the very common 
scenario where you've been negotiating with the other side, and 
you've developed a what looks like it's going to be a deal.
Play video starting at :8:40 and follow transcript8:40
You've looked at positions, you've explored all interests, you put together 
the interests, maybe build a larger pie and now you're on the way to a deal. 
But the question is, 
how can you convert those discussions to an actual legal contract? 
That is a big challenge in any negotiation.
Play video starting at :9:2 and follow transcript9:02
And what many people do is to use what is commonly called a frame work
agreement. 
You start to put together an agreement, a skeleton agreement, 
and then gradually you fill in the missing pieces. 
And these framework agreements go by a variety of names. 
Sometimes they are preprinted leases, or real estate contracts. 
They're called memorandum of understanding, letters of intent, 
agreements in principle, memorandum of agreement. 
A variety of terminology, all of which are examples of framework agreements. 
These are great negotiating tools to help you move from discussions 
to a legal commitment.
Play video starting at :9:53 and follow transcript9:53
The challenge however, is that at some point as 
you complete this framework agreement, you cross a line 
from a negotiating tool to an actual binding contract. 
And a fairly dramatic example of that occurred several years ago, where we have 
Pennzoil negotiating with Getty Oil to acquire Getty Oil, and 
they developed a framework agreement called a memorandum of agreement.
Play video starting at :10:26 and follow transcript10:26
Now, after they developed this agreement, another oil company, Texaco, 
decided that it was interested in Getty Oil. 
So Texaco enters the picture, negotiates with Getty Oil, 
and is successful in acquiring Getty Oil.
Play video starting at :10:46 and follow transcript10:46
Now at that point, Pennzoil says wait a minute Texaco.
Play video starting at :10:50 and follow transcript10:50
Our memorandum of agreement was more than just a framework agreement. 
It was more than just a negotiating tool. 
It was actually a binding contract, and you interfered 
with our contract, and therefore you owe us damages. 
So Pennzoil sued Texaco, 
of course they could have sued Getty Oil too, but 
Getty Oil was part of Texaco, won the lawsuit, 
and Pennzoil was awarded damages of $10.5 billion. 
At that point Texaco said, 
wait a minute, we don't have that much money in our checking account. 
And Texaco declared bankruptcy. 
So a misunderstanding about whether this agreement was a negotiating tool or 
a binding contract resulted in this huge loss to Texaco.
Play video starting at :11:52 and follow transcript11:52
In bankruptcy, Texaco was able to reduce its loss to quote only $3 billion. 
But still, it was a huge financial hit for Texaco.
Play video starting at :12:6 and follow transcript12:06
Penzoil in this case made a fairly unique move. 
Rather than hiring corporate lawyers to try the case, 
they hired a famous personal injury lawyer named Joe Jamail.
Play video starting at :12:20 and follow transcript12:20
And of course he was successful in the case, and this is a report on his success. 
The Pennzoil verdict remains the largest verdict upheld on appeal in legal history. 
The case later settled for $3.3 billion, and 
Jamail's personal take was over $400 million. 
According to Jamail, we celebrated that night at my house by eating hamburgers
and 
drinking beer. 
I've still got the $3 billion deposit slip on my wall. 
That year, Jamail made more than Michael Jackson, 
Steven Spielberg, Bill Cosby, and Eddie Murphy combined.
Play video starting at :13:1 and follow transcript13:01
One last question that's very important to this discussion of framework agreements. 
And that is, is there a practical tool you can use to avoid the risk 
that a court will consider what you think is a negotiating tool as a contract? 
And of course the answer to that is yes, and it's a very simple solution. 
When you're using framework agreements as negotiating tools, 
simply write at the top that this is only a negotiating tool and 
is not intended as a binding contract, until you agree that it is a contract. 
That way you should be protected from the risk of locking yourself 
into a contract before you intend to.
Play video starting at :13:50 and follow transcript13:50
So that concludes our look at whether an agreement has been formed.
We're now ready to discuss the second key element in creating a contract, 
which is called consideration.
Play video starting at ::17 and follow transcript0:17
And there are technical legal definitions of consideration. 
Let me just give you a very practical definition. 
Which means that for a deal to be binding, both sides have to give up something. 
Now there are different views of consideration in common law and 
civil law countries. 
The general rule is in civil law countries consideration is not necessary. 
In common law countries it is necessary. 
However given our global economy and 
the mixture of legal systems in contract negotiation it's probably a wise thing 
always to try to include consideration in contracts, just to be safe.
Play video starting at :1:1 and follow transcript1:01
Let's try an example, several years ago the dean of 
the business school where I teach, the Ross School of Business called me and 
told me that he was involved in an interesting negotiation.
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One of our graduates was considering making a large gift 
to the business school. 
And the gift was complicated because there were tax considerations involved, and 
so the dean was negotiating not only with the donor, but also with his attorneys. 
He wanted me to be involved in the negotiation, so 
I gladly participated in the negotiation. 
And eventually, the graduate agreed to give the school $30 million, 
which as that point was the largest gift in history to any business school.
Play video starting at :1:54 and follow transcript1:54
And he structured the gift so that rather than writing a check for 
$30 million, he agreed to make payments over 20 years. 
He agreed to write a check for $1.5 million each year over a 20 year period.
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Now there were no complications with the gift. 
But let's assume that over the course 
of the 20 year period the graduate passed away.
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And let's assume that his children didn't think that this gift was such a great idea
Play video starting at :2:30 and follow transcript2:30
and so stopped payment.
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The question that would arise is is this 
a legally enforceable promise by the graduate?
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Now in this case the graduate signed a five page written agreement 
with all the details of his promise to make the gift of $1.5 million a year. 
Let's just show that if there is a binding contract, 
death would not change the contractual obligation.
Play video starting at :3:1 and follow transcript3:01
So, the only question is, is this a binding gift, 
when somebody promises to make 
payments of $1.5 million a year over a 20 year period. 
Think about that for a second. 
Press pause if you'd like to, and then reach a conclusion. 
Would this be a binding contract or not?
Play video starting at :3:29 and follow transcript3:29
The answer depends. 
And it depends on whether there is consideration or 
not, at least in common law countries, it depends on whether there is consideration.
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Clearly, the graduate gave up something. 
He gave up $30 million, or $1.5 million a year. 
The consideration question would be, 
did the business school also give up something in exchange?
Play video starting at :4: and follow transcript4:00
Now when you look at the five page written agreement 
the answer to that question would be yes. 
The business school promised to start an institute with the name of the graduate. 
They promise to dedicate rooms at the business school for 
the institute to furnish the rooms, to furnish faculty for the rooms, et cetera. 
And so in this case, the promise would be enforceable, 
even if the children did not want to perform the contract it would be 
a legally binding contract because there was consideration on both sides.
Play video starting at :4:38 and follow transcript4:38
Our next key element in creating a contract, 
and again these are all elements that should be on your 
negotiation checklist which should be in your pocket during every negotiation. 
And the question is is the agreement legal.
Play video starting at :4:53 and follow transcript4:53
This can be a fairly obvious element. 
You can think of very clear and 
simple situations where the agreement is not legal.
Play video starting at :5:4 and follow transcript5:04
For example let's say that I agree to sell you a truck load of
Play video starting at :5:11 and follow transcript5:11
cocaine and you don't deliver, so I sue you in court. 
And the question is, is this a legal contract? 
Well, of course not. 
We've got an offer and an acceptance, we've got an agreement, 
presumably we have consideration. 
I agree to give you the cocaine, you agree to pay for it. 
But the court clearly will not enforce that agreement, because It is not legal. 
And in fact after throwing us out of court, probably the local prosecuting 
attorney will grab us and arrest us and we'll end up in criminal proceedings.
Play video starting at :5:50 and follow transcript5:50
But in business dealings, the question of whether something is legal or 
not is not only important, but it's more subtle. 
So for example, let's assume that you work for a company and 
like many companies, this company asks you to sign 
a non-compete agreement when you are hired by the company. 
In other words, you sign an agreement that says that for 
example if you leave the company you cannot work for 
a competitor for a certain period of time. 
Let's say one year.
Play video starting at :6:31 and follow transcript6:31
But let's say that you are an entrepreneur, 
you want to leave the company and start a competing business or 
work for a competitor within that one year period. 
Then the question is will a court enforce your non-compete agreement.
Play video starting at :6:51 and follow transcript6:51
And this depends. 
It's a tough decision for a court because no court wants to put you out of work for 
one year in a business where you have developed expertise. 
So courts look very closely at these agreements around the world.
Play video starting at :7:7 and follow transcript7:07
And they ask for example, well is this agreement too broad 
in terms of geographical area covered?
Play video starting at :7:17 and follow transcript7:17
Or is it too broad in terms of the interest involved? 
These agreements must be crafted so 
that they are designed to protect an employer interest. 
And if they go beyond that then the court might say, well, 
this agreement is not reasonable and throw it out.
Play video starting at :7:38 and follow transcript7:38
So, generally, these agreements are legal. 
They do not violate public policy. 
But if they're crafted too broadly, 
then a court will say well, this agreement is not legal. 
Now, in certain states, notably, California, all of these agreements
Play video starting at :8:1 and follow transcript8:01
are considered to be illegal and unenforceable. 
But in most states and in most countries It would be a question for 
it to determine whether they are legal or not. 
So those are some considerations to think about in terms of legality.
Let's now move on to our last element to determining whether 
there is a valid contract, and 
that is the very important question of whether the contract must be in writing.
Play video starting at ::20 and follow transcript0:20
This sounds like a fairly simple question, but 
there are a lot of subtleties related to this question, and 
fundamentally, the question is must the agreement 
be in writing, and there are two basic situations. 
First of all, there is the situation where it is in writing. 
And second, there's a situation where it is not in writing. 
And if it isn't in writing, there are two sub-questions. 
Is a writing required? 
And then, there's a practical approach I want to 
talk about to avoid legal complications. 
So, let's start with the top situation where you have an agreement that is 
written, and look at some of the complications that can arise. 
Here's the deal.
Play video starting at :1:10 and follow transcript1:10
Let's say that you live in Mumbai, India.
Play video starting at :1:16 and follow transcript1:16
And you have a job offer from a company in New York City.
Play video starting at :1:21 and follow transcript1:21
So you negotiate an employment contract with that company in New York City.
Play video starting at :1:28 and follow transcript1:28
And you discuss all the details in the contract. 
Let's say you have quite a bit of furniture for 
example, and one of the questions is will the company pay for 
shipping your furniture from Mumbai to New York City? 
Which is going to be fairly expensive, let's say $10,000. 
And the company says to you, no problem 
we promise that we will pay to cover your shipping cost. 
So you negotiate the deal, you then put the deal in writing.
Play video starting at :2:3 and follow transcript2:03
However, you forget to include the promise to pay for 
your shipping costs, so you ship your furniture to New York. 
You move to New York. 
You start your work, your job and then you bring your bill for 
the shipping costs to the company, your bill for $10,000 and 
the company says to you, yes, we remember, we absolutely made that promise. 
However, things are a little tight here, 
right now and we're not going to cover the shipping bill.
Play video starting at :2:42 and follow transcript2:42
Now let's assume that you eventually sued the company for 
the $10,000 shipping bill. 
The question is, is that an enforceable contract or not?
Play video starting at :2:57 and follow transcript2:57
Now remember, the company clearly made the promise.
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And they'll admit they made it if you sue them in court.
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So the question is,
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can you enforce the promise even though it was not in your written contract? 
Think about that for a second and then jot down either yes or no. 
Yes, you can enforce the promise and recover your $10,000, or no you can't?
Play video starting at :3:28 and follow transcript3:28
The answer to that question depends on something called the parol evidence rule. 
And here's a concise statement of the rule. 
The rule seeks to preserve the integrity of written agreements by 
precluding the introduction of evidence about contemporaneous or 
prior declarations to alter the meaning of written agreements.
Play video starting at :3:52 and follow transcript3:52
And what that means in plain English is that once you reduce your contract 
to writing, then the agreement 
is limited by the four corners of that writing. 
Courts, in determining what your obligations are, and 
what the other side's obligations are, are only going to look at the writing. 
They're not going to try to unravel the negotiations. 
And what was agreed to or not agreed to during the weeks or 
months of the negotiations. 
They're going to focus on that written agreement. 
Whatever you said prior to that written agreement. 
Whatever you said at the same time as that written agreement aren't going to
account, 
it's just whatever is in the written agreement. 
Now when I was in law school I thought this was one of the most boring rules 
ever to study, as a matter of theory. 
But when I look at negotiation practice, 
I think it is one of the most valuable rules, because if a court decided 
to look into what was said during a negotiation, 
that could be an endless process during every negotiation. 
You reach certain agreements along the way, then you throw them out, so 
it makes very good sense to limit the decision to what you put in writing. 
And so bottom line, in this case, because you entered into 
a final written agreement, you intended that to be your complete agreement, 
the court would not allow you to recover for 
the for the promise to pay for the delivery of your furniture.
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Now, there is a difference, by the way in the legal rule in certain countries, 
especially in civil law countries where the parol evidence rule Is not applied or 
it is applied in a different way and I'm not going to get into the technicalities. 
But the reality is that in virtually every business contract, 
the pro evidence rule is included as a separate clause. 
And I think this makes great sense. 
Regardless of whether you're in a civil law country or a common law country, 
put in this clause, because then it brings the deal to a final conclusion.
Play video starting at :6:31 and follow transcript6:31
It prevents the possibility of a court going back and 
trying to unravel weeks and months of negotiations. 
Here's an example of this contract clause. 
This is a little bit hard to read but 
we've got a contract between a guy named Mark Zuckerberg of Facebook.
Play video starting at :6:54 and follow transcript6:54
And, basically, this contract is an agreement 
to amend an earlier employment agreement and so, 
I didn't include all the details of Mark's contract with Facebook here, 
but it covers his compensation which is $500,000 a year, 
it covers his benefits, for example, 
the contract stated he gets 21 days of paid leave per year. 
This is a strange contract by the way. 
Does Mark really care? 
Mark, the founder of Facebook whether he's paid $500,000 a year or 
not when he is worth over $25 billion as a result of his ownership of Facebook. 
But anyway they felt it was necessary to form this contract, but 
then, so you go through all the details of the typical employment contract, but 
then you get down to the end, and 
it says that this letter of agreement supersedes and replaces any prior 
understanding what agreements whether written or applied between you, 
Mark Zuckerberg and the company regarding the matters described in this letter. 
So like most business contracts they have incorporated
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the parol eventual into the contact and this is something that is done 
whether you're in a civil law country or a common law country.
Play video starting at :8:28 and follow transcript8:28
Now let's go back to our hypothetical example of you 
moving to New York and let me ask you this additional question.
Play video starting at :8:38 and follow transcript8:38
Let's say that you're negotiating with the company so 
you sign the contract, the company signs the contract.
Play video starting at :8:48 and follow transcript8:48
Deal done.
Play video starting at :8:50 and follow transcript8:50
But then, after signing the contract, 
you remember that you forgot to ask them about shipping the furniture.
Play video starting at :9: and follow transcript9:00
So, you send an email to the company and you say to them, look, I 
forgot to ask will you pay for shipment of my furniture, it's going quite expensive. 
They send an email back saying sure, that's our company policy. 
We will pay for shipment of the furniture. 
So, in this hypothetical, unlike the earlier one, 
rather than making the promise before or at the same time of the written contract, 
they made it after the contract was signed.
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Question, is their promise enforceable legally?
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Think about that for a second. 
Write down yes or no.
Play video starting at :9:47 and follow transcript9:47
And the answer is no.
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It's not enforceable legally 
because even though it does not violate the pro-evidence rule, 
because this was a promise made after the writing rather than before. 
It does violate another legal principle that we 
just discussed called consideration. 
Here, the company has promised to give up something. 
They promised to pay you for the shipment of the furniture.
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You are not giving up anything.
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You've all ready committed to work for the company and 
you're not giving up anything else. 
And so that type of promise would not be enforceable as a result of consideration.
Play video starting at :10:41 and follow transcript10:41
So, that's a look at situations where the agreement is in writing and 
I especially want to emphasize the importance of the parol evidence rule, 
and including a parol evidence rule clause in your contract.
Play video starting at :11: and follow transcript11:00
Now let's look at the other situation where the agreement is not in writing. 
Then the question is, is a writing required? 
Is the agreement enforceable when it is oral?
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And the bottom line answer to that is yes. 
Oral agreements are enforceable, even when they are multi-million dollar
agreements. 
However, each country has exceptions. 
Each country says, well, certain types of contracts are so 
important that they must be in writing.
Play video starting at :11:35 and follow transcript11:35
For example, real estate is a fairly scarce asset. 
It's a very important asset. 
And so virtually every country around the world says if you're selling real estate, 
that agreement must be in writing to be enforceable.
Play video starting at :11:53 and follow transcript11:53
Now I'm not going to go into the gory details of all of these exceptions. 
The important thing is when you are negotiating in any particular country, 
it's a question you want to be sure you are clear about at the outset. 
Is this the kind of contract that has to be in writing, and 
therefore I'm going to put it in writing.
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What I would suggest as a practical matter,
Play video starting at :12:23 and follow transcript12:23
forget about the technicalities of the law and always put your agreements in writing.
Play video starting at :12:29 and follow transcript12:29
You should always do this number one because it simplifies your life. 
You don't have to worry about technical legal details. 
But number two the human memory is very fallible and 
so to avoid memory problems, 
put the deal in writing. 
There's an old Chinese proverb that I think captures it best. 
The palest ink is better than the best memory. 
No matter how good your memory is, it's better to have your contract 
in writing even if the ink is very pale. 
Because even though you are not trying to cheat the other side, 
even though the other side is not trying to cheat you, 
the way you remember the deal, might be quite different.
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And keep in mind when you do put your agreement in writing, 
it does not have to be a 20 page agreement that says contract at the top.
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You can be trapped by a written contract that is written on 
a napkin in a restaurant the courts aren't going to be too interested in 
what was used for the writing, as long it was in writing it would be enforceable. 
Here's an example, an American case. 
We have two people, 
Mr Lucy and Mr Zehmer who are drinking at a restaurant. 
And after they've had a few drinks Lucy offers to buy Zehmer's 
472 acre farm for $50,000. 
Zehmer accepts the offer. 
So far we have an offer and acceptance, it's oral, not enforceable. 
Because as I mentioned, real estate contracts have to be in writing.
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But then Zehmer writes on a restaurant order form quote, 
we hereby agree to sell to WO Lucy, the Ferguson farm complete for 
$50,000, title satisfactory to buyer, end of quote. 
And then Zehmer and his wife signed the writing. 
And here's what the writing looked like. 
So, later, Zehmer changed his mind and 
he refused to transfer the farm to Lucy. 
He claimed number one, 
he thought Lucy was kidding when he made the offer to buy the farm ad number
two. 
And number two, He claimed he was drunk. 
He said he was, quote, as high as a Georgia pine, end of quote. 
And that the negotiation was, quote, just a bunch of 
two doggoned drunks bluffing to see who could talk the biggest. 
Well, the court decided he wasn't that drunk, 
he had capacity to make the contract, and 
that he had a valid contract, we had the writing, 
as proof and therefore, he had to transfer the farm to Lucy. 
There's one last, very important piece about this writing issue. 
And that is that even when you put your contract in writing,
Play video starting at :15:49 and follow transcript15:49
and this is called the express contract. 
There are a number of contract terms that are implied by law. 
And so it's very important that you have a basic understanding of 
what goes beyond what you've put into writing. 
In other words, it's important that you not only understand what you expressly 
agree to but what the law automatically includes in your contract.
There's one last cluster of issues that I want to explore relating to 
creating a contract, and 
that is the tension that arises between business objectives and legal objectives. 
This tension is inherent in the definition of a contract. 
Earlier we defined a contract as an agreement enforceable by law.
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The agreement part relates to the business deal. 
The enforceable by law part relates to the legal aspect 
of a contract, and this creates an inherent tension. 
The focus of law, the focus of lawyers is on preventing losses. 
They want to create a legally perfect contract, 
whereas the focus of people in business is value creation. 
They want to create value and they want to achieve their business goals. 
And this contract tension between the legal aspects and 
the business aspects lead to two key questions. 
First of all, how can we refocus our contracts so that the business 
objectives do not become lost in the legalities of the written agreement? 
And second, how can we make the legal terms more understandable? 
So let's start with this first question. 
How can we refocus contracts so 
that the business objectives do not become lost in the legalities? 
As I mentioned earlier, lawyers view 
contracts from the perspective of trying to create a perfect contract. 
Here's a definition of a legally perfect contract. 
The conventional goal, an agreement that is final, binding and enforceable. 
The contract documents should thus be as legally perfect as possible. 
In other words, lawyers view the contract through the eyes of a judge.
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They're asking, what happens if something goes wrong? 
What happens if we end up in court? 
Will the promises made by the other side be enforceable? 
That's their concept of a legally perfect contract.
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What's the problem, however, with trying to develop a legally perfect contract, 
especially if you're not the lawyer, 
if you're the person in business who must perform the contract? 
Why don't you press pause for a second and try to think of 
problems that arise when there's so much emphasis on the legalities of a contract.
Play video starting at :2:52 and follow transcript2:52
First of all, you end up with a contract that is long and complex. 
What used to be handshake deals between people in business now 
can morph into contracts that are 40, 50, 200 pages long. 
Another problem, transaction costs. 
Takes you a lot of time and money to work with lawyers when the contract is
drafted. 
But then because most of us don't understand the legal terms, 
and what they mean, and the implications. 
If there is ever a problem then you have to go back to the lawyers and 
ask them, what does this mean? 
Which results in more time and expense.
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The contract becomes the focal point when future disagreements arise. 
Rather then business problem solving. 
Without that legal contract, if there's a problem in business, 
you and the other side would simply work out the problem. 
You would use common sense. 
However, detailed contracts often have procedures 
that you have agreed to follow in the event of a dispute. 
And so all of a sudden your resolution of 
the problem becomes very legalistic. 
I recall talking recently with the CEO of a fairly large company that he founded, 
and we were talking about contracts, and he said, in my opinion, 
all the contracts do is give you a right to sue, and I ignore them. 
When I have a problem with a customer, we work it out and 
try to do what makes sense in business terms, not according to the contract. 
There are big problems when you're negotiating a cross cultural contract, 
because in certain cultures, 
the focus is more on relationships than it is on a legal document. 
In some cultures, rather than being the end of a negotiation, 
signing the contract is the beginning of a negotiation. 
And the focus is on finding partners in business who you trust, 
and who you can work with and continue to negotiate, 
realizing that circumstances change over the course of a contractual relationship.
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Finally, contracts tend to focus on the negatives, 
rather than positive business opportunities. 
So lots of problems with trying to develop a perfect contract.
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Here's a quote from a recent report 
conducted by an organization called IACCM. 
Stands for International Association for Contract and Commercial Management. 
It's the largest network of negotiators, contract negotiators, in the world.
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They have around 28,000 members. 
The members are from around 160 countries. 
And so they conducted a world wide survey, and 
this is their conclusion of the way businesses is conducted today. 
Most business-to-business negations are dominated by discussions over 
financial issues such as price and risk allocation, that's the legalities, 
such as limitation of liability and indemnification.
Play video starting at :6:29 and follow transcript6:29
They do not contribute to the win-win approach that 
negotiators claim they prefer. 
In other words, what's going on in the world today is that these prominent 
negotiators who belong to IACCM are claiming that this is where we 
spend our time, but these are not the issues that are most important.
Play video starting at :6:52 and follow transcript6:52
So let's look at an alternative to the way that business is done today.
Play video starting at :6:59 and follow transcript6:59
There's a group of lawyers who work for a beer company in Scotland who have 
developed what I call a lean contracting approach. 
And their philosophy is that contracts should emphasize free market 
economics rather than legalities. 
They have a minimalist approach, 
where they've decided all your contract should include is what are the goods and 
services that are being sold and what's their price. 
The do have a clause covering intellectual property rights, 
but the rest of the contract includes in terms that are implied by law. 
We mentioned earlier, that the law over the centuries has developed 
certain implied terms that are a part of a contract. 
And these have been tested in court. 
They make good sense. 
So why renegotiate terms that are already implied by the law?
Play video starting at :8: and follow transcript8:00
So here's a clause from the Scottish contract. 
We have agreed on the essential elements of the contract. 
Rather then incur time and expense negotiating and 
recording, in writing, other non-essential terms and conditions. 
We have agreed to allow the general law to regulate such matters, 
implying such terms as it may.
Play video starting at :8:22 and follow transcript8:22
And then, another clause from the contract. 
There is no minimum duration for this agreement. 
We'll simply continue to do business with each other for so 
long as it remains mutually beneficial to do so. 
In other words, why treat the contract as a club, 
a legal club to force the other side to do something they don't want to? 
Why not use this free market economics approach? 
If it doesn't make sense to continue doing business together, then walk away.
Play video starting at :8:54 and follow transcript8:54
So let's compare their approach with the approach 
that's used elsewhere in the world. 
Here's another beer contract that I pulled off the Internet. 
This is a contract between Coors Brewing Company and one of its bottle suppliers. 
This contract, which I would say is fairly typical, 
23 pages long with another around 8 pages of exhibits. 
So compare that to the Scottish contract with one of its suppliers. 
One page contract, one page attachment.
Play video starting at :9:34 and follow transcript9:34
Now, does this mean contracting approach makes sense in every scenario? 
No, I don't think so. 
In fact, even with a supply contract, this might be too minimalist. 
So I think what you have to decide is, if you're in a business to business 
kind of situation, are you in a situation involving a snapshot transaction? 
A one-time transaction, let's say a loan agreement, 
shared transaction, you're selling some real estate. 
In which case, you probably do want a more detailed contract as opposed 
to a long-term relationship, where you have a certain trust in the other party. 
In that case you can minimize your legal terms, 
and you can rely on what the Scottish lawyers call commercial affinity, 
which means staying together for as long as it makes sense. 
In the long-term relationship, 
then you can rely more heavily on trusting the other side.
Play video starting at :10:42 and follow transcript10:42
When I present these concepts to lawyers as you might expect,
Play video starting at :10:47 and follow transcript10:47
many lawyers are upset. 
They say, well, you need page upon page of legal protection. 
We need these protections for our client. 
We need a legally perfect contract. 
We need contracts that are 40, 50, 200 pages. 
But then I ask the attorneys, when you enter into a contract with your clients, 
how long are those contracts?
Play video starting at :11:17 and follow transcript11:17
Usually, there is a long pause, because when they enter into 
contracts with their clients, often they don't even put the contract in writing. 
Often it's a handshake agreement, or 
at most a one page agreement that specifies what they're going to do for 
the client and what the client is going to pay. 
So in other words, many attorneys do not practice what they preach. 
And bottom line, if you are in these long-term relationships, 
trust can go a long way toward focusing on the business deal. 
Earlier in this course, we mentioned this example of Warren Buffett 
deciding to buy a $23 million company from Wal-Mart. 
Usually this kind of transaction requires millions of dollars and 
would be delayed for months for legal and accounting due diligence. 
But here because there is trust, even with a snapshot transaction like this, 
because there was trust, there was a two hour meeting and a handshake.
Play video starting at :12:30 and follow transcript12:30
According to Buffett, we did no due diligence. 
We knew everything would be exactly as Wal-Mart said it would be, and it was. 
So when you're dealing with somebody you trust, 
then I think the lean contracting approach can be 
beneficial and can also be very economical.
Play video starting at :12:55 and follow transcript12:55
So let's now turn to our second question.
Play video starting at :12:59 and follow transcript12:59
Again, we're looking at the tension between the legally perfect contract and 
a contract that makes sense from a business perspective. 
And this question is how can we make the legal terms more understandable?
Play video starting at :13:15 and follow transcript13:15
And the answer that question is developing as a result of research done 
by people in Europe and the US and elsewhere. 
There's a movement called visualization, which basically means, 
how can we visualize these complex legal terms? 
I've written a couple of books with a co-author, 
Helena Haapio, who is one of the leaders of the visualization movement. 
She's a contracts expert based in Finland. 
So here's an example. 
This is what a typical contract clause might look like. 
The agreement shall be valid for 
an initial period of three years from the date of signing. 
Unless either Party gives notice of termination at least six 
months before the expiry of the three-month period, it shall remain in 
force until further notice, with a notice period of at least three months. 
Notice shall be given in writing. 
Now when you look at that, that causes a bit of head scratching 
as you try to absorb what these words mean. 
The alternative is to try to visualize it. 
If you press pause and try to visualize it, 
you could probably come up with some interesting possibilities. 
Here's one possibility,
Play video starting at :14:38 and follow transcript14:38
where you have a timeline that shows the date of the signing on the left.
Play video starting at :14:43 and follow transcript14:43
It shows the date of termination and 
the requirement for six months between the two red arrows. 
And if the contract is not terminated, then the second two red arrows 
indicate that can be terminated at any time on three months' notice. 
So, I apologize this is so small, but basically with one line, 
you've captured visually what all those words intended to say.
Play video starting at :15:14 and follow transcript15:14
My co-author got me involved in a visualization 
effort recently in San Francisco. 
There was what we called a legal design jam, which brought 
together a small group of attorneys with a group of designers. 
And this was at the invitation of Wikipedia. 
Wikipedia wanted us to look at their trademark policy, 
to determine whether it could be improved as a result of visualization. 
So this is what their trademark policy looked before we began work on it. 
As you can see, it's very densely worded, it would take a lot of time to read and 
absorb and try to understand what that means. 
As a result of our design effort, we came up with a much simpler policy 
that is color coded in greens, yellows, and reds. 
The greens basically means you have free use of Wikipedia, 
the reds mean you cannot use Wikipedia, and 
the yellow says you can use Wikipedia content with permission. 
So it simplifies your use of the trademark policy. 
It's very clear what you can do, 
what you can't do, and where permission is required. 
And we also developed this in a variety of languages. 
And in early 2014, Wikipedia adopted this visualized 
approach as their trademark policy. 
So that concludes our look at this tension between legal and business objectives. 
And it also concludes our look at the unit on creating a contract.
This module is on an especially important topic for business, and 
that's dispute resolution.
Play video starting at ::16 and follow transcript0:16
And I say it's especially important for two reasons. 
First of all, 
business leaders in various surveys have indicated how important the topic is. 
Although, sometimes they talk about specific aspects of dispute resolution, 
such as class actions. 
The second reason why it's so 
important is that dispute resolution touches every stakeholder. 
There's a possibility of a dispute with every key stakeholder.
Play video starting at ::44 and follow transcript0:44
I first became aware of how important dispute resolution is 
a few years ago when the CEO of Citi Corp, 
his name was Walter Wriston, invited 10 of us 
who were representatives from business schools to lunch in New York City. 
And we all weren't sure exactly why he invited us to lunch, but over a long lunch 
he explained to us how important dispute resolution was to business. 
And he explained to us that litigation was hurting business 
tremendously because of the time involved and because of the huge costs.
Play video starting at :1:27 and follow transcript1:27
And so, he tried to encourage us to begin offering courses on 
dispute resolution in our business schools. 
So we all went back to our campuses, and 
that's when I first developed my course on negotiation and dispute resolution. 
So, very important topic that relates to the survival of a business. 
Many businesses, according to a recent survey, 
are involved in bet the company type litigation that can destroy a company.
Play video starting at :2: and follow transcript2:00
Now, we're going to draw the videos for 
this module from my other MOOC on negotiation. 
And specifically, we're going to be looking at these topics. 
We're going to start with dispute prevention, and then ADR Concepts and 
Tools. 
And then spend some time focusing on the two key building blocks of ADR, 
which are arbitration and mediation. 
If you have watched the other MOOC videos, 
then you can skip this segment. 
If you haven't taken the other course, 
if you're interested in learning more about the course or 
taking the negotiation modules, here's a link to that course. 
It's been translated into Spanish and Portuguese, and 
subtitled in French, Ukrainian and Chinese. 
And here's also a link to a negotiation and dispute resolution planning tool. 
It's an app I developed called Negotiation Planner. 
So, if you want to visit that website, 
you'll find a number of tools that you can use for dispute resolution.
Dispute prevention or preventive law is something that's been kicked around for 
years, but only within the last few years has a clear definition been developed. 
And basically it means that it's more important to predict what 
people will do than to predict what a court will do. 
Winning a lawsuit can be ruinous. 
In the past the emphasis was on, well, if they sue us, will we win or lose in court? 
That was the traditional question. 
The preventive law question is not will we win in court, but 
what is driving people to court? 
And this preventive law philosophy was well-captured by the philosopher Voltaire. 
I was ruined twice in my life, once when I lost a lawsuit and once when I won one. 
In other words, even winning a lawsuit can have disastrous consequences, 
not only in terms of the legal cost of the proceedings, 
not only in terms of any damages you have to pay, but 
also in terms of destroying business relationships.
Play video starting at :1:21 and follow transcript1:21
So let me give you an example, a personal example of a company that I think 
does a great job with preventive law, and that's Marriott Corporation. 
Marriott Corporation has been written up in books like In Search of Excellence
Play video starting at :1:40 and follow transcript1:40
about how responsive they are to customers. 
And I had a personal experience a number of years ago. 
I was invited by a corporation in Texas to give a one day legal briefing. 
So I flew to Dallas and checked into my hotel, and 
I called the front desk and asked for an early morning wake-up call. 
Well, the call never came.
Play video starting at :2:10 and follow transcript2:10
Now being a very risk averse person, I had set two backup alarms, so 
I woke up at 6 AM as scheduled and got to my briefing on time, no problems. 
But when I checked out, 
I thought I would test the Marriott dispute prevention system. 
I filled out one of the little cards that they leave in your hotel room asking how 
was your stay. 
And basically I said, I had a great stay, enjoyed the stay. 
The problem is I never received my wake-up call.
Play video starting at :2:44 and follow transcript2:44
Well, after returning home, two weeks later I received this 
letter from the president of the Marriott Corporation, J Willard Marriott. 
Let me read what he said. 
He says in this letter, dear Mr. Seidel, 
now he misspelled my name, but that's not a big deal, everybody does. 
It was truly disappointing to learn about the problem you had with our wake-up 
service. 
Please accept my sincere apologies. 
I have forwarded your comments to our Dallas Fort Worth Airport Marriott and 
I've asked our general manager to give prompt attention to the matter. 
Thank you for taking the time to write. 
I hope you will allow us another opportunity to serve you soon so 
that we may regain your complete confidence. 
Sincerely, signed, Bill Marriott.
Play video starting at :3:34 and follow transcript3:34
Now this may have been Bill's computer speaking, I'm not sure. 
It may have been an automated response, 
but it gave me a good feeling about my stay at the hotel.
Play video starting at :3:46 and follow transcript3:46
Now compare this dispute prevention approach 
with another situation involving another hotel.
Play video starting at :3:56 and follow transcript3:56
We have a prominent entertainer by the name of Connie Francis. 
Back in the 1960s she was an international star, 
she had many hit recordings, 
had a very tragic situation in the 1970s. 
She was staying at a Howard Johnson Hotel and 
somebody broke into her room and raped her. 
And this was her response to what happened.
Play video starting at :4:29 and follow transcript4:29
I never received so 
much as a note from Howard Johnson's saying we're sorry it happened. 
After being shocked, I was very angry. 
Now, let's try to guess what happened in this situation. 
And my guess is after she was raped, 
of course the news would reach Howard Johnson's headquarters. 
And so the company leaders, probably the board of directors, 
probably met with their attorneys and they said what should we do here? 
Should we apologize to Connie Francis? 
And my guess is probably the lawyers would follow the traditional approach. 
They would say well, 
number one if she goes to court she's probably not going to win. 
This was not a result of our actions. 
This was a result of an independent third party, a criminal, and 
therefore we should not be liable. 
They took a traditional approach. 
What happens if somebody goes to court? 
And then they probably also said, whatever you do, don't communicate with her, 
don't do anything that might indicate that we are liable, such as an apology. 
Well, what happens, they don't apologize for what happened. 
Connie Francis is shocked, she's angry. 
She then goes to a lawyer. 
The lawyer sues Howard Johnson's. 
There are years of very negative publicity as this case works 
its way through the court system. 
And at the end of the day Howard Johnson's has to write a check to Connie Francis
for 
$2.5 million.
Play video starting at :6:14 and follow transcript6:14
And perhaps all of this could have been avoided 
with a dispute prevention philosophy.
Play video starting at :6:22 and follow transcript6:22
Now I did read about another hotel recently, or actually somebody 
told me the story that tried a dispute prevention philosophy, but failed. 
Apparently a large company scheduled a corporate retreat at the hotel,
Play video starting at :6:42 and follow transcript6:42
and they had major problems with cockroaches in the hotel. 
So the person who organized the retreat sent a very nasty letter 
to the hotel manager complaining about the cockroaches. 
And almost immediately he received a detailed 
four page letter apologizing and going into great detail 
about what the hotel was going to do to eliminate the cockroaches. 
And this corporate manager was very impressed until he got to the last page of 
the letter and a little yellow Post-it note floated out from the last page. 
He picked it up and it said, Sarah, send the son of a bitch the bug letter.
Play video starting at :7:29 and follow transcript7:29
So sometimes companies have trouble implementing 
a dispute prevention philosophy.
Play video starting at :7:40 and follow transcript7:40
Let me give you some data and another example of dispute prevention. 
This happens to be a local example 
involving the University of Michigan health system.
Play video starting at :7:51 and follow transcript7:51
The traditional approach when doctors were sued was you don't apologize. 
You don't talk about what happened. 
Much as in the Connie Francis case, 
doctors were advised don't apologize to patients. 
Don't talk to them because we don't want to do anything that would create 
liability. 
Well, the Michigan hospital system decided to take the opposite approach. 
They adopted what they call the Michigan Claims Management Model, and 
it's based on disclosure. 
We're going to disclose what happened to our patients. 
We're going to apologize if we've done something wrong, and 
we're going to offer a settlement. 
And the three principles underlying this model is we want to compensate patients 
quickly and fairly if there's been unreasonable care.
Play video starting at :8:43 and follow transcript8:43
If the care was reasonable, then we want to support our hospital staff. 
And we want to learn from patients' experiences, 
we want to improve our processes. 
Which often didn't happen under the traditional model where 
hospitals refused to acknowledge that something was wrong. 
So what's the result? 
The lawsuit rate at the Michigan hospital system dropped from 
2.13 per 1,000 patients to 0.75. 
The median resolution time dropped from 1.36 years to less than a year. 
And they accomplished the real goal which is to improve patient safety and 
to do what is right.
Play video starting at :9:30 and follow transcript9:30
Social media provides a lot of opportunity to engage in dispute prevention. 
And here's one of the pioneering social media efforts. 
We've got a person who's called Comcast Twitter Man. 
When Twitter first started to become popular way back in 2008, 
one of their customer service managers, 
Frank Eliason, realized how powerful this could be. 
So beginning in early 2008, he began searching Twitter for the word Comcast. 
He also searched for Comcrap to discover what people were saying about the
company. 
By the end of the year he had handled 22,000 tweets, and 
he was able to respond to the customer concerns. 
So for example, we've got this person, Technophile, who post this tweet. 
We have the Comcast service guy out, and he tries to charge us for 
new cable, then he leaves, and not only is our cable out but also the Internet. 
So Frank looks into the situation, contacts the guy, 
gets details, and discovers the problem is probably the exterior of the building. 
Sends a technician and now the customer is friendly. 
So, through social media he has used a dispute prevention philosophy. 
But even with social media, problems might arise. 
Here's a recent situation.
Play video starting at :11:3 and follow transcript11:03
Somebody posted on Facebook, a Domino's Pizza customer, hey, 
this is the best pizza ever. 
Keep up the good work, guys. 
Domino's response, so sorry about that. 
Please share additional information with us. 
Please reference this number so we could have it addressed. 
So we have to be careful about sending standardized 
responses to social media comments.
We're now going to move on to discuss ADR, alternative dispute resolution
concepts. 
This is a general introduction and look at concepts. 
And then later on, we're going to look more in depth at the true 
key building blocks of ADR which are arbitration and mediation. 
So in this segment, I first of all 
want to give you an example of a form of mediation, and 
then we'll look at an example of a form of arbitration. 
But the basic message here is that 
you can start with the two building blocks that we'll explore later on. 
But you can be as creative as you want to be in developing 
variations on the two basic themes. 
So, let's start with mediation, and 
the example I'd like to give you is called a mini-trial. 
But again, there are a lot of variations on the basic mediation theme. 
So, here's the example.
Play video starting at :1:14 and follow transcript1:14
Let's take a look at an actual mini-trial. 
This was one of the very first mini-trials ever. 
It involved an intellectual property dispute between Telecredit and TRW. 
And this case is typical of a lot of litigation. 
The two parties fought over intellectual property. 
It was a $6 million claim. 
The parties spent $500,000 in the early years of the litigation. 
They exchanged 100,000 documents. 
The case sat in court for three years, nothing was happening.
Play video starting at :1:55 and follow transcript1:55
And so finally, the Executive Vice President of TRW and 
the President of Telecredit got on the phone and basically asked, 
you know why have we outsourced this dispute to the court system? 
Why have we outsourced it to lawyers? 
We deal with business problems all the time. 
Why don't we get together and just resolve this dispute? 
And so they came up with a structured negotiation, 
which later came to be known as a mini-trial. 
And fundamentally there were five people at this structured negotiation. 
There's was the Executive Vice President of TRW, the President of Telecredit. 
They each brought an attorney, 
and then there was a neutral party, an expert on intellectual property, 
who could answer any technical questions that arose during this negotiation.
Play video starting at :2:56 and follow transcript2:56
So, they began on day one with the attorney, 
one of the attorneys, let's say the attorney for Telecredit standing up 
in front of the two executives and explaining her case. 
And then the executives asked her questions. 
If there were technical issues, they referred them to 
the intellectual property expert, and that attorney sat down.
Play video starting at :3:21 and follow transcript3:21
And then let's say the attorney for TRW got up, 
and again, had about a half day to present the case, 
answer questions, technical questions go to the expert, that person sits down.
Play video starting at :3:36 and follow transcript3:36
The two executives then go off into a room by themselves for 
one half hour and settle the dispute.
Play video starting at :3:44 and follow transcript3:44
Estimated savings in legal fees, $1 million, but 
think about the benefits beyond those dollar savings. 
For one, this procedure gave each executive a chance 
to hear the case as described by the opposing attorney. 
And that description might sound quite a bit different from the story that they get 
from their own attorney.
Play video starting at :4:11 and follow transcript4:11
Second, they're able to come up with a resolution 
of the case that makes sense from a business perspective. 
When you're in court, litigation is a zero sum game. 
One person's going to win 6 million, one person's going to lose 6 million. 
But when you negotiate a settlement as somebody in business, 
then you can come up with something that preserves the business relationship.
Play video starting at :4:36 and follow transcript4:36
So, that's a quick example of a form of mediation, 
again you can come up with as many varieties as you want. 
Let's now move on to arbitration, and 
an example of a variation on the arbitration theme. 
This example is called Rent-A-Judge. 
Now, this is not the same as the Buy-A-Judge program that has been 
used in Chicago and other emerging economies for many years, just kidding.
Play video starting at :5:10 and follow transcript5:10
With Rent-A-Judge, 
you actually hire a retired judge to hear the case. 
And so an example, we've got a couple of former roommates 
who are involved in the dispute, Brad and Jennifer.
Play video starting at :5:31 and follow transcript5:31
Jennifer is especially upset because Brad now has a new roommate called Angeli. 
So, they're involved in litigation, 
Brad Pitt and Jennifer Aniston. 
And rather than go to court, they use the rent-a-judge procedure. 
They hire a retired judge to hear the dispute.
Play video starting at :6:2 and follow transcript6:02
Now what are the advantages for 
Brad and Jennifer in using this retired judge? 
And what would be the advantages for you if you're involved in a business dispute? 
Think about that for a second, hit pause if you want. 
Write down the advantages that you can 
think of in using this form of arbitration or other forms of arbitration.
Play video starting at :6:31 and follow transcript6:31
Here are some items that might be on your list of advantages.
Play video starting at :6:37 and follow transcript6:37
Number one, it might be a lot quicker than sitting for 
years in the court system waiting for your case to arise.
Play video starting at :6:48 and follow transcript6:48
Number two, it might be cheaper, although we're going to discuss that issue later.
Play video starting at :6:54 and follow transcript6:54
Number three, and this is a big one for Brad and Jennifer, but also for 
your business, you want to keep the dispute out of the newspapers. 
You want to keep this private.
Play video starting at :7:8 and follow transcript7:08
One way to think about arbitration is that it is a type of litigation, 
but it's private litigation.
Play video starting at :7:17 and follow transcript7:17
And finally unlike the regular court system, you get to pick the judge.
Play video starting at :7:24 and follow transcript7:24
When you're in the regular court system, 
the selection of the judge is pretty random. 
You might end up with a judge who has never handled a business case, 
who has no idea
Play video starting at :7:36 and follow transcript7:36
what's going on in the type of business dispute that you're involved with. 
With Rent-a-Judge, 
you pick somebody who's an expert in the particular area that is in dispute. 
So, lots of advantages to using that form of ADR.
Play video starting at :7:56 and follow transcript7:56
So, that concludes our look at ADR concepts.
We're now going to discuss some alternative dispute resolution tools, 
very practical ADR tools that you can use in resolving disputes and 
specifically we are going to look at these four tools. 
First of all the corporate pledge, and we'll look at screens, and 
then contract clauses, and finally online dispute resolutions.
Play video starting at ::32 and follow transcript0:32
The corporate pledge is a pledge that you can adopt or 
your company can adopt as a matter of corporate policy. 
This pledge has become very popular, has been adopted by over 4,000 
operating companies as a matter of corporate policy. 
Probably adopted at the board of directors level
Play video starting at ::58 and follow transcript0:58
and this document is a little bit difficult to read but 
the key language in the document reads as follows. 
In the event of a business dispute our company and 
another company which has made or will then make a similar statement. 
We are prepared to explore with that other party resolution of the dispute through 
negotiation or ADR techniques before pursuing full-scale litigation.
Play video starting at :1:26 and follow transcript1:26
So let's take a look at screens.
Play video starting at :1:29 and follow transcript1:29
Screens, are basically a list of questions designed for 
people in business, non lawyers, and based on the answers to those questions, 
the screen will advise you, for example, whether to use a binding 
ADR process or a non-binding process. 
Now quick question, what do we mean by binding processes and 
what do we mean by non-binding processes?
Play video starting at :2: and follow transcript2:00
Hit pause or just take a second to write down your answer. 
What is a binding process and what is a non-binding process?
Play video starting at :2:9 and follow transcript2:09
The non-binding processes are negotiation and mediation.
Play video starting at :2:14 and follow transcript2:14
When you enter into those processes you're not bound to anything, as opposed to
Play video starting at :2:21 and follow transcript2:21
litigation and arbitration, which are binding processes. 
So basically the way screens are used. 
You first of all will answer these questions, and then the screen will advise 
you to use either the binding process or the nonbinding process. 
And if it advises you to use a binding process then you use another 
screen that will advise you whether to use litigation or arbitration. 
So, very useful tool for managers.
Play video starting at :2:53 and follow transcript2:53
Contract clauses, are very important. 
And, in determining whether to use an ADR clause, there are two basic scenarios. 
The first scenario is, where you include the clause, in a business contract. 
And I've never seen it in empirical studies, but I think that this 
by far is the most common use of ADR contract clauses. 
The second possibility is not to include the clause in a contract and 
wait until a dispute arises. 
This is a little more dicey because once you are in the middle of a dispute it's 
going to be more difficult to persuade the other side to agree to mediation or 
arbitration. 
It's better, I think, to bake it into the original business contract.
Play video starting at :3:47 and follow transcript3:47
And there are a variety clauses that you can use, 
you can find these easily on the internet. 
One possibility is to simply state in the contract, 
we agree to go to mediation in the event of a contract dispute. 
Second possibility, simply we agree to go to arbitration.
Play video starting at :4:6 and follow transcript4:06
But, then you can have an escalation clause where basically you say we agree to 
go to mediation first and if the mediation fails then we will move to arbitration.
Play video starting at :4:18 and follow transcript4:18
Or you can have a three part escalation clause. 
We're going to start with negotiation, if that fails we'll move to mediation, 
and if that fails then we will move to arbitration. 
So lots of possibilities. 
And again, you can find many examples on the Internet. 
Finally, there's increasing 
use of online negotiation and dispute resolution.
Play video starting at :4:48 and follow transcript4:48
There's been a pile of research on whether 
using online resolution is effective or not. 
I've got a huge stack of research studies. 
I've tried to summarize the pros and 
cons of using online negotiation and dispute resolution. 
And you can see here some of the basic conclusions. 
A lot of reasons on the left-hand side. 
To use online negotiation and 
dispute resolution a lot of reasons on the right hand side not to use it and 
these are fairly self explanatory but I think the bottom line on the right hand 
side is the online negotiation and dispute resolution is less effective. 
However, the bottom line on the left hand side is it's cheaper and more convenient.
Play video starting at :5:42 and follow transcript5:42
It's a lot cheaper to use online than flying to various locations and 
having face to face meetings.
Play video starting at :5:50 and follow transcript5:50
One compromise that you might consider is that one of the reasons why online
Play video starting at :5:59 and follow transcript5:59
negotiations are not as effective is that it's more difficult to build rapport. 
That's the very first item under con. 
Hard to build rapport. 
So one possibility to think about is, 
is there some way that you can develop rapport at the beginning of a negotiation
Play video starting at :6:18 and follow transcript6:18
especially through the use of a face to face meeting and 
then you can move to the online negotiation and 
dispute resolution after developing a relationship with the other side.
Play video starting at :6:34 and follow transcript6:34
Here's some examples of online dispute resolution.
Play video starting at :6:41 and follow transcript6:41
Some of these involve everyday situations. 
Landlord bills me and my roommates for damages we didn't cause. 
Broken window, broken screen. 
We live in a bad neighborhood.
Play video starting at :6:56 and follow transcript6:56
The landlord insists we caused the damage and then had to be us. 
So we got a dispute basically between landlord and tenant. 
Another online dispute is a little more exotic.
Play video starting at :7:13 and follow transcript7:13
Person wants a Harley Davidson tattoo on his left bicep. 
Problem is, the tattoo artist misspelled Harley Davidson. 
According to this person, in filing this complaint, this is a permanent typo. 
I either take a belt sander to my arm, wear long sleeved shirts for 
the rest of my life, or this person has to pay to have the thing lasered off, now. 
So that's the tattoo dispute, 
and then some of these disputes are fairly romantic.
Play video starting at :7:43 and follow transcript7:43
Here's an example. 
For the last year, my boyfriend of three years and I have been having sex, 
using only the pill for contraception. 
I want him to pay half the cost, he refuses. 
I'm asking the jury to resolve this before it becomes ugly. 
We agreed to let you decide. 
I'm suing him for $11.75 per month for as long as we're sexually active. 
So the examples of online dispute resolution, and 
that concludes our look at ADR tools.
We're now ready to begin our look at the two building blocks for all of ADR, 
arbitration and then mediation.
Play video starting at ::17 and follow transcript0:17
So, let's start with a question. 
Have you ever been involved in an arbitration?
Play video starting at ::25 and follow transcript0:25
Or more specifically, the question is have you ever signed an arbitration agreement?
Play video starting at ::31 and follow transcript0:31
Think about that for a second. 
Answer yes or no.
Play video starting at ::38 and follow transcript0:38
If you answered no, that means that you have 
probably never purchased auto insurance.
Play video starting at ::49 and follow transcript0:49
That means you've probably never used a credit card.
Play video starting at ::54 and follow transcript0:54
That means you've probably never used Ebay.
Play video starting at ::58 and follow transcript0:58
Never used Amazon never purchased anything on Amazon.
Play video starting at :1:2 and follow transcript1:02
Because if you've done any of these things, 
you have signed an arbitration agreement. 
In other words, arbitration is embedded in a lot of our everyday transactions. 
That's the fine print that you and I never read when we sign up for a service. 
Here, for example, is the Amazon agreement that you agreed to if you use Amazon.
Play video starting at :1:31 and follow transcript1:31
What is actually involved in an arbitration? 
I think the best way to look at that and 
analyze it is to look at a video of an arbitration. 
This is a 15 minute video. 
It's going to be a little complicated at the beginning, so 
let me give you a very quick briefing. 
What we have here is a dispute between the owner of some real estate and 
a contractor. 
The owner hired a contractor to build a building. 
The problem is, after the construction started, 
the owner made some design changes, and as a result, 
the contractor is claiming an additional $55,000. 
Also there's a subcontractor involved who did some plumbing. 
Work are hired by the contractor who also had to make changes and 
this cost an additional $95, 000. 
So the owner has refused to pay and this matter is now in arbitration.
Play video starting at :2:34 and follow transcript2:34
As you look at the video please 
keep these questions in mind which I want to address after the video.
Play video starting at :2:41 and follow transcript2:41
First of all, if you were the arbitrator, how would you decide the case? 
Second, are there any surprises in the arbitration? 
Is this what you expected from an arbitration?
Play video starting at :2:54 and follow transcript2:54
Third, does the arbitrator have to be a lawyer?
Play video starting at :2:58 and follow transcript2:58
Fourth, do the parties or 
would you have to be represented by a lawyer in arbitration?
Play video starting at :3:5 and follow transcript3:05
And finally is litigation procedure followed in the arbitration?
Play video starting at :3:12 and follow transcript3:12
So please think of those questions 
as you watch this video. 
[MUSIC]
Play video starting at :3:52 and follow transcript3:52
>> Didn't you tell me that the arbitrator is a lawyer. 
>> Mm-hm. 
>> I'm concerned that he won't be able to understand what I'm trying to 
say in there. 
And that could jeopardized the who arbitration. 
>> Yeah, if what I understand is that you want to make sure that we have 
an arbitrator how is knowledgable about construction. 
>> Yeah. >> I agree. 
Mr. Harbin knows that he's well qualified in that regard. 
He was educated and he worked as a construction engineer before he ever 
became a lawyer and his law practices been concentrated in construction. 
And he was an experienced arbitrator, so that's why we put him 
number one on the list of potential arbitrators that the AAA gave us. 
>> Well, as long as he understands construction, I feel comfortable.
Play video starting at :4:31 and follow transcript4:31
>> Good morning, everyone, I'm Steve Van Lear, 
the American Arbitration Association's Tribunal Administrator on this case. 
It's nice to meet you all face to face after talking so 
many times on the telephone. 
You've all met David Halbran, the arbitrator, so 
at this point I'll turn it over to him. 
Mr. Halbran. 
>> Thanks very much, Steve. 
And a good morning to everybody. 
I understand that the subcontractor has a claim against the contractor and 
the contractor has a claim over against the owner. 
I've read each of the claims and the answers to them, so 
I'm generally familiar with where we're all starting from. 
I also understand that the subcontractor has a contract with the contractor. 
The contractor has a contract with the owner. 
And that each contract has it in an arbitration agreement. 
But that since all claims rise out of the same set of facts, 
that everybody's agreed to arbitrate both claims together. 
So thanks for that, and we are ready to go. 
As you know, this is an informal proceeding. 
The formal rules of evidence do not apply, and the basic rule is just common sense. 
So you should stick to the point and the facts that count, so 
we get to the meat of it all quickly and we move along. 
And I know you'll all do that.
Play video starting at :5:42 and follow transcript5:42
Now, I understand the last that each of you has an opening statement that tells 
your view of the case, and that'll be very helpful So Mrs. 
Crittenden for the subcontractor if you'll start first to claim it. 
And then the contractor Mr. Madison and finally the owner. 
We're ready, please proceed. 
>> Thank you Mr. Halbrin, as you know I represent Mead Mechanical, 
the plumbing subcontractor in connection with this project. 
Mead Mechanical had a contract with the general contractor to install 
all of the plumbing fixtures in the building. 
We received a work schedule from the general contractor and 
were well underway in performing under the contract, when we received a stop work 
notice from the owner as a result of design changes proposed by the owner. 
At that point we got our crews off the project, got them into other jobs and 
waited for the design changes to be delivered. 
Once we received those, it was apparent that we had to go back in and 
re-do a lot of the work that had already been done. 
The cost of this additional work totaled approximately $95 thousand. 
Never the less, we went back in, we got the work done in accordance with 
the new plans and on time and submitted our bill to the general contractor. 
From that point forward, we have received nothing but delays. 
We have not been paid. 
Apparently, the owner is taking the position that he is not responsible for 
these charges. 
Because none of the work would have had to have been redone 
if the original work schedule had been complied with. 
For his part, the general contractor tells us that he had the right to vary that work 
schedule and in fact, had the right to be ahead of schedule if that was necessary. 
And they also discussed all of this with the owner 
before the design modifications were actually implemented. 
We don't really know or care whose position is correct. 
We simply want to be paid for the work which we have already done. 
And that is why we have initiated these proceedings. 
>> Thank you, Ms. Crittendon. 
>> Mr. Madison, 
will you please call your first witness? 
Yes. 
As our first witness I'd like to call my client Mike Lunden of Lunden construction.
Play video starting at :7:53 and follow transcript7:53
>> Mister Lunden please raise your right hand do you 
solemnly swear to tell the whole truth and nothing but the truth. 
Yes I do. 
>> Thank you. 
Mr. Madison, please proceed. 
>> Mr. London, would you please explain to the arbitrator the substance of your 
agreement with the owner, Mr. Baker? 
>> Yes. 
It was not a complicated project. 
I agreed to build Mr. 
Baker's building for him, it was an office building, for a lump sum price.
Play video starting at :8:21 and follow transcript8:21
My price was based on the plans and 
specifications that he furnished us prior to bid. 
>> Did you begin to work? 
>> Well yes. 
We were given the notice to proceed and 
we started on the project right away with the foundations. 
Our subcontractor, Mead Mechanical, was also doing some of their preliminary
work, 
and their pipe chases which are in the foundation. 
>> How did the work progress? 
>> Well, we were well into the subcontract and submittal phase. 
And we were in good shape with respect to our schedule. 
>> Did any delay occur in the work? 
>> Well we gave the owner our schedule and we're beating the milestones on 
that schedule, when Mr Baker called us on the telephone and 
told us to stop work because he was redesigning some of the work.
Play video starting at :9:4 and follow transcript9:04
>> Mike, this is Bill Baker calling. 
I wanted to let you know that I decided to make some structural changes on our 
building, and we'll need to stop work for a while until we get it straightened out. 
>> Bill, you know that we've started on the foundations and 
the mechanical subcontractor has got some completed work out there as well. 
I think based on our job walk last week, Mead has about 35% of their rough in done, 
and we're forming and pouring the first half of the grade beams. 
Anyway I know that if any of your changed work affects the work 
already completed it's going to mean some extra costs, and 
it's going to have to be from your account. 
>> Well, Mike, the changes really shouldn't affect the work in place if this 
was done as the schedule shows. 
But in any event, if there's a problem, you let me know what the cost will be. 
>> I will, but I'm concerned that if the redesign takes any length of time at 
all it's going to mean a delay and extra cost. 
I've scheduled some heavy mechanical equipment to be delivered and 
my labor agreements are coming up in June. 
>> Well, I really don't think that we'll be held up too long. 
But in any event, you let me know, okay? 
>> Okay, I will.
Play video starting at :10:3 and follow transcript10:03
It was almost four months with Mr. 
Baker that we received the revised drawings and structural changes. 
Course we took the revised drawings and 
forwarded them to our sub contractor Mead Mechanical, but 
the structural changes required a substantial amount of the plumbing and 
mechanical work which had already been done to be ripped out and redone. 
For instance it required changes in the locations of the blockouts, 
grade beams and so forth. 
It was almost six months since the owner told us to stop work 
that he ordered us to resume work.
Play video starting at :10:33 and follow transcript10:33
In addition to our subcontractor's claim, we incurred extra costs in the area of 
extra supervision and coordination of the work. 
>> Well, would you please tell the arbitrator the costs that you incurred as 
a result of the six month delay and the changes that were made in the work? 
>> I have prepared a record of our labor and material costs. 
It itemizes and breaks down our extra costs in the area of extra supervision, 
remobilization and escalation. 
Not including Mead Mechanicals claim, our claim and extra costs amounts to
$55,000. 
>> Mr. Halbrin, as the contractors next exhibit I'd like to submit this summary of 
the costs that were incurred in connection with the delay and changed work. 
I've already given a copy to Mr. Hogan the owner's lawyer. 
>> And I would simply like to note that this is only a record of claim cost and 
has no bearing on my client's liability. 
>> Well, I appreciate that. 
I'm sure we all do. 
And of course, 
you can cross examine to the extent you want with respect to the costs. 
Now, Mr. Matteson, do you have any more questions? 
>> I have no more questions of this witness. 
>> Fine. Mr. 
Hogan, please proceed with cross examination. 
>> Mr. London, after you had begun work on this project, you were aware were you
not, 
that structural redesign was being considered by the owner. 
>> Well I seem to recall hearing something like that, but 
never anything from Mr. Baker. 
>> Well, regardless of the source of these rumors, 
you were aware that redesign was being considered, correct? 
>> Well as I said, I heard rumors, but 
it was a long time after I first heard them that Mr. Baker said anything to me. 
In fact, I'm sure it was not Mr. 
Baker who first told me about the structural redesign.
Play video starting at :12:14 and follow transcript12:14
>> Wouldn't it have been easy for you, sir, to call Mr. 
Baker and find out whether or not the rumors were true. 
>> I suppose so.
Play video starting at :12:22 and follow transcript12:22
>> Don't you think that you as a prudent general contractor had a responsibility 
to call the owner and find out whether redesign was being considered. 
>> Well, I am a prudent general contractor, but I'm not an architect or 
an engineer. 
I simply build a project according to the plans and the specifications that 
the owner gives us, and it's up to him to make any changes that he wants to. 
>> The work schedule that you have in front of you sir, that is the one that 
you prepared and submitted to the owner in connection with this project, correct? 
>> Yes, it is. 
>> And this is the schedule that was submitted pursuant to 
the agreement between you and the owner for 
the construction of this office building, correct? 
>> Well, that's what you say, but as far as I'm concerned, 
we were ahead of schedule. 
>> You knew did you not, sir, that the owner was concerned about the schedule and 
the time when the project would be completed. 
>> Well, I knew that he wanted the building completed on time, so 
he could start leasing the space and turning a profit. 
>> Isn't it true sir that if this schedule had been followed, 
none of the work done by Mead Mechanical would've had to be redone? 
>> Yes. 
>> Thank you sir, I have nothing further. 
>> Mr. Madison, do you have any further witnesses to put on for the contractor? 
>> No, Mr. Halbrin,, that's all we have at this time. 
>> Thank you, and Mr. Hogan, are you ready to proceed? 
>> Yes. 
>> Then please put on your first witness and put on the owner's case. 
>> Mr. Baker, please tell us about the reasons for the structural redesign work.
Play video starting at :13:49 and follow transcript13:49
>> Well, the construction had barely gotten underway I had a conversation with 
my architect who suggested some changes to the front entrance of the building
which 
would have involved relocation of the public lounge areas. 
I liked the idea, it would have improved the attractiveness of the building, so 
I told him to work up a design. 
When he did, I liked it and I decided to proceed. 
I immediately called the contractor to let him know what was in the works.
Play video starting at :14:12 and follow transcript14:12
Hello, Mike, this is Bill Baker calling. 
We've decided that we're going to change the front entrance to our building, 
which may require moving the public lounge areas. 
Looks like you'll have to hold up any further work till we decide exactly 
what we're going to do. 
>> Well Bill, when we were out at the job last Friday, 
you saw that we had the foundations and some of the mechanical in place. 
I think that's ahead of my schedule that I gave to you. 
You're going to start moving things around at this point, 
you know there's going to be some extra costs and I'll have to submit them to you. 
>> Well, I can see what you're saying. 
But as I read the work schedule, which of course you submitted. 
The work that you completed so far, in accordance with the schedule, 
shouldn't have to be changed and there really shouldn't be any extras. 
>> Well, Bill, I'll have to take a look at it, 
and I'll let you know as soon as I can. 
>> Well okay, Mike, you check it and 
if you think there are going to be any extras, you let me know right away, 
because it may change the way I go on this. 
>> I'll take a look at it, Bill. 
All right. 
>> Did you ever authorize any extra work? 
>> Absolutely not.
Play video starting at :15:10 and follow transcript15:10
>> I have nothing further, Mr. Halbrin. 
>> Thank you Mr. Hogan, Mr. Madison would you like to cross exam? 
>> Yes, thank you Mr. Halbrin. 
Mr. Baker, you understood in connection with this contract, 
that you had the responsibility to notify the contractor if you were going to make 
any changes in the work or stop the work, isn't that correct? 
>> Yes, I understood that. 
>> And you understood, did you not, that the contractor had the responsibility for 
coordinating the work on the project >> Well I knew he was in charge 
of construction. 
>> You expected the contractor, did you not, to organize the work, 
to finish the job as quickly as possible? 
>> Well I don't know that, 
all I know is that I approved the schedule which he submitted. 
>> Wasn't it important to you to have the work done on time? 
>> Yes. >> Indeed, 
wouldn't you have benefited if this building had been finished ahead of time? 
>> Well, certainly not the way it turned out. 
>> There was nothing in the contract to preclude the contractor from 
finishing ahead of time, was there? 
>> No, not that I know of. 
>> That's all that I have. 
Thank you Mr. Madison. 
>> And this witness concludes the testimony on behalf of the owner. 
>> Thank you Mr. 
Hogan, I understand that each of you has now put in all of the evidence orally and 
in writing that you want to put in, and that each of you rests.
Play video starting at :16:19 and follow transcript16:19
And accordingly, we'll take a break for a few minutes and then after the break 
you can all come back and each of you can give opposing arguments. 
>> Mr. 
Halbrun, we believe the evidence in these proceedings demonstrates the following.
Play video starting at :16:35 and follow transcript16:35
At the early stages of this construction project, 
the owner began to consider structural redesign. 
Indeed, this was while foundation work was just beginning.
Play video starting at :16:47 and follow transcript16:47
This fact was known to the general contractor.
Play video starting at :16:51 and follow transcript16:51
Pursuant to the agreement between the owner and the general contractor, 
a construction schedule was prepared by the contractor and approved by the owner.
Play video starting at :17:2 and follow transcript17:02
Had this schedule been followed, 
the structural redesign would have had no impact whatsoever on this project.
Play video starting at :17:10 and follow transcript17:10
That is, none of Mead Mechanical's work would have had to be redone.
Play video starting at :17:17 and follow transcript17:17
During the discussion between the owner and the general contractor concerning 
the job shutdown while this redesign work was finalized, the owners 
requested the general contractor to advise if any extra costs would be incurred.
Play video starting at :17:33 and follow transcript17:33
The general contractor never advised the owner of any extra costs, and 
indeed, none were ever authorized.
Play video starting at :17:41 and follow transcript17:41
Since the contractor did not advise of any extra costs, 
any extra work done by Mead Mechanical, or 
the general contractor, should be for the general contractor's account.
Play video starting at :17:54 and follow transcript17:54
The owner should not be liable for 
any extra work done by either Mead Mechanical or the general contractor. 
Thank you, sir. 
>> Mr. Halbrun, you've heard Mike London testify that he and 
the mechanical subcontractor had started work and were proceeding in accordance 
with the contract documents when Mr. Baker stopped the project. 
Unfortunately, the stop work order came so late that it 
impacted work already in place and was impossible to avoid extra costs. 
Yes, the contractor was ahead of schedule, but time was of the essence. 
And it's a central feature of a lump sum contract 
that the contractor have the freedom to reorganize the work as necessary 
in order to achieve maximum cost savings. 
This is what gives the contractor the incentive 
to give the owner the lowest possible bid in the first place. 
Mr. Baker's position is totally without merit. 
He gave clear oral instructions to stop the work. 
He expected those instructions to be complied with.
Play video starting at :18:59 and follow transcript18:59
On previous occasions when he had made oral changes, those were paid for.
Play video starting at :19:5 and follow transcript19:05
He had an obligation to notify the contractor of changes in the work in 
a timely fashion. 
He was at the job on a regular basis and could see the progress of the work. 
And Mr. London told him that extra costs 
would be involved in the changes in the work and the delays. 
Mr. London has correctly interpreted his obligations under the contract and both 
he and the mechanical contractor should be paid for the extra costs incurred. 
>> Okay, you've made your positions very clear, 
all of you, and I'm very grateful for that, I think I have them well in mind. 
I've taken a lot of notes here, as you've all seen. 
I'd like a chance to review them and, of course, I want to think about it. 
But as to the time of the award, 
the AAA rules do require that an award be issued within 30 days and it will be. 
And I'll try hard to do it before then. 
So the hearing is now closed and thank you all very much.
Play video starting at :20:8 and follow transcript20:08
>> So that concludes our look at an arbitration. 
And in the next segment we're going to explore the questions that I raised 
earlier, along with some additional questions.
Let's analyze the questions that we asked during the last segment. 
First of all, how would you decide this case? 
When I ask this question in my class, 
there's usually a lot of debate, 
sometimes heated debate, and often the class is divided into three parts. 
Some people say, "Well, 
clearly the contractor and subcontractor should be allowed to recover from the
owner, 
the owner made the changes, 
the owner knew that the changes were being made, 
the contractor has the right to complete the work ahead of schedule." 
A second theory of the class say, "Look, 
clearly the owner wins because the owner never approved the additional expenses." 
And then a third group tries to split the bill. 
For instance, they might say, "Well, 
the contractor can recover 55,000 from the owner 
but the contractor is liable to the subcontractors." 
So, strong differences of opinion. 
Any surprises? 
The most surprise that people usually express is that they 
are surprised how legalistic an arbitration is. 
For instance, swearing in the witnesses, 
testifying under oath, the examination of the witnesses, 
the use of attorneys. 
That's why I like to refer to arbitration as private litigation. 
It's similar in many ways to litigation, 
although it is out of the public eye. 
Must the arbitrator be a lawyer? 
Well, this was covered at the very beginning of 
the video and the answer to that question is, no. 
One of the lawyers was explaining to his client that they were lucky in this case
because 
the arbitrator was both an expert on 
construction law and a lawyer but you could have either one. 
You are qualified to be an arbitrator if you want to. 
You do not have to be a lawyer. 
Must the parties be represented by a lawyer? 
The answer to that is, no. 
You're free to go to an arbitration on your own. 
However, given the fact that this is a legalistic procedure you 
might want to bring in a lawyer if the other side is bringing in a lawyer. 
And finally, is litigation procedure followed in arbitration? 
No, not necessarily. 
As this arbitrator pointed out near the beginning, 
the formal legal rules of evidence are not going to 
apply and he would use common sense instead of those traditional rules. 
Here's an additional question. 
Is arbitration more expensive than litigation? 
Let's assume that we have a $600,000 construction dispute 
and these cost estimates come from experts in Texas, Florida, and Pennsylvania. 
And my question to you is, 
in the $600,000 construction dispute, 
what costs more for filing the case and for 
the hearing and trial including legal fees for the hearing and trial, 
but not other legal fees? 
Which costs more, arbitration or litigation? 
Please think about that for a second. 
May want to write down your answer. 
Is arbitration or litigation cost more for this construction dispute? 
Here are the results. 
Costs $300 in these States to file the case in court, 
and cost $8,500 to file the arbitration claim. 
Legal fees would be higher in litigation than arbitration but 
the cost of the arbitrator would be higher by almost $17,000. 
So the total cost for the filing, for the hearing, 
and for the arbitrator would be $49,000 as opposed to $36,000 in litigation, 
substantially higher in arbitration. 
Now, why is that? 
Well, it's because when you use the court system, 
generally, you get free public goods. 
You virtually get a free judge, 
you get a free courtroom, 
and you get a free flag whereas, 
in arbitration you have to pay for these. 
Where the difference is- If you look at the total cost, 
litigation does cost more and my guess is that that results mainly from discovery. 
Discovery is more elaborate, 
takes up more time legally in litigation than in arbitration. 
You can control discovery through your arbitration agreement. 
So keep these figures in mind when you're 
negotiating an arbitration clause in a business deal. 
One other very important point regarding arbitration is illustrated by this case. 
We've got a guy named Camm who threatens to shoot another worker, 
Bingham, and also other workers where he works in Palo Alto. 
These threats are considered a joke. 
Camm tells Bingham, "I can kill a man at 600 yards." 
Camm owns 18 rifles and pistols. 
He has a personalized license plate, "SHOOT." 
And one day, Camm and Bingham get involved in a workplace dispute and Camm
says, 
"I'm going to shoot you, 
I'm going to shoot your wife, 
and I'm going to shoot your baby." 
So, Palo Alto, the city of Palo Alto, fires Camm. 
Case goes to arbitration. 
The arbitrator says, "Look, 
this threat is just everyday boy talk," and reinstated Camm with back pay. 
Now, my question for you is, 
is that a final decision or will the court interfere with that decision? 
Final or not? The answer, 
generally is, that is a final decision. 
According to the court, 
"An arbitrator's decision is not generally reviewable for errors of 
fact or law even when it causes substantial injustice." 
Now, Palo Alto said, "But, wait a minute. 
Public policy requires us to have a safe workplace." 
But the judge said, "Well, 
that's true but that doesn't mean you have to fire your employees." 
There was a happy ending here in that, 
even though the arbitrator's decision was valid, 
there were separate reasons that resulted in a reversal. 
There is a separate injunction against Camm that came into play. 
But generally, the rule to keep in mind is that 
arbitrator's decisions are generally not reviewable for errors of fact or law. 
In other words, the arbitrator's decision- the arbitrator acts as the judge, 
as the jury, and as the Court of Appeals. 
And so there have been some major cases where this rule has come into play. 
Years ago, there used to be a firm called Arthur Andersen which has since
disappeared, 
and they had a consulting arm called Andersen Consulting, 
which is now known as Accenture. 
And Andersen Consulting broke away. 
And the question is, 
when they broke away, what did they owe Arthur Andersen? 
Arthur Andersen was fairly confident that they were going to recover 
around $14 billion in compensation from what came to be known as Accenture. 
But the arbitrator's decision was only $1 billion and as this article notes, 
it cannot be appealed. 
That's final, even though it was way short of what Arthur Andersen thought it should
get. 
Despite this finality of arbitration awards, 
according to this study, 
a significant majority of companies in Asia, 
Europe and the Americas prefer 
international arbitration to resolve cross-border disputes. 
Corporations overwhelmingly favor the finality of arbitration awards. 
Although, I sense there is increasing dissatisfaction with arbitration for other
reasons, 
especially because it has become such a legalistic process and as 
a result many companies now favor mediation even more than arbitration. 
And in the next segment we're going to look at mediation.