Thought Leadership

Managing Risk

How can forward-thinking manufacturers protect themselves?

When it comes to innovation, Minnesota means business. According to the Minnesota Chamber of Commerce’s report “Minnesota 2018 Business Benchmarks,” Minnesota ranks fourth in the U.S. for both patents per capita, and technology and science workforce. As the state’s gross domestic product grows, more and more manufacturing companies are looking for guidance in how to protect themselves without impeding innovation.

Late last year, Minnesota Business convened a panel of experts to address those issues. Representing a broad range of experience, the panelists — Chris Harristhal, Susan Tegt and Paul R. Smith — offered strategies for minimizing the impact that litigation has on core business activities.

Harristhal, Tegt and Smith are shareholders in the manufacturing services group of Larkin Hoffman, a Minneapolis-based law firm. During the panel, Harristhal discussed manufacturers’ unique challenges from a competitive practices, employment and data security perspective. Tegt, an attorney with extensive in-house counsel experience, offered practical insight on the importance of good day-to-day decision making in minimizing the risk of litigation. And Smith, chair of Larkin Hoffman’s litigation practice, offered thoughts on risk and litigation management and legal principles impacting the design and manufacture of safe products. Here is a summary of the strategies discussed. 

Q: Is litigation stifling innovation in manufacturing?
Paul R. Smith: If you are looking for a simple answer, it would be the quintessential lawyer’s response: It depends. Of course, it’s that kind of answer that makes lawyers just slightly more popular than members of Congress, but, unfortunately, in this setting, it’s accurate. Whether or not manufacturers allow legal concerns to stifle innovation is a byproduct of management’s willingness to proactively address the issues that could lead to litigation.

The challenge is that issues facing manufacturers are incredibly diverse. They run the gamut from the protection of trade secrets and confidential
information to formalizing long-term relationships with key employees. They arise in the contractual relationships we forge with customers, suppliers and distributors. They impact the way products are designed and marketed and how manufacturers manage risk, resolve disputes and interact with our insurance partners. The breadth of these issues is why Larkin Hoffman established a designated Manufacturing Services Group to provide expertise to address this wide range of challenges.

Q: How do you protect your innovative ideas and products?
Chris Harristhal: There is a tension that exists between the free flow of information and protecting a manufacturer’s rights. The question posed by this symposium is: Is litigation stifling growth? Well, there are two sides to that coin when it comes to protecting important business information. On the one hand, if you want to have a free exchange of information, then you can’t have any restrictions on information. You don’t have confidentiality agreements or trade secrets. You just assume that the spread of information is going to allow people and entities to springboard off that information, resulting in innovation.

Now that’s a very noble thought, but when you’re the party investing the capital and developing the talent, you have a very real interest in making sure that other people are learning on their dime, not yours. So it is essential for manufacturers to inhibit the free flow of information in a way that will enable them to maximize their innovative potential while simultaneously limiting exposure to litigation. Thus, it is important to be vigilant about confidentiality agreements, noncompetition agreements and trade secret protection.

The most common business challenge is how to protect essential information. There are two methods for controlling your data. One is to establish unambiguous company policies. You need policies that will put employees on notice as to what information is confidential because you genuinely want your employees to do the right thing. So, clearly identifying what information the manufacturer believes is confidential is going to make your employees more likely to protect that information.

Secondly, if it becomes necessary to enforce your rights to protect that information, employees need to have been put on notice. Minnesota has adopted the Uniform Trade Secrets Act. While virtually all states have adopted some form of Uniform Trade Secrets Act, Minnesota’s Uniform Trade Secrets Act (MUTSA) has some unusual components. For example, Minnesota’s statute states that to protect your information as a trade secret, one of two things must occur: You have to explicitly notify the employee that the information is confidential, or the employee must reasonably know that the information is confidential, thus overriding the need to provide express notice.

Now, having litigated no-express-notice cases, I can tell you that you are far better off having a clearly defined policy regarding confidential information, strategic plans, financial information, customer lists, and the formula for the company’s “secret sauce.” Well-written, concise, thoughtful policies are the easiest ways to protect confidential information and, to a degree, obviate the need for confidentiality or non-disclosure agreements.

Q: Should I require my employees sign confidentiality agreements? If yes, at what point do I have them sign them?

Chris Harristhal: It is best to use confidentiality agreements at the inception of employment. The issue of consideration is at least reduced, if not eliminated, by having the employees sign the confidentiality agree-ment at the time of hiring. Again, you want to delineate the types of protected information. This is helpful for purposes of MUTSA and The Defend Trade Secrets Act because you can prove beyond doubt that the employee was on notice as to what information was confidential.

One benefit of having a contract is that you can recover not only potential damages but you may also secure attorney’s fees as an award. You may even be able to obviate the need for a bond. Typically, court rules dictate that a bond is required any time an injunction or temporary restraining order is issued. By agreeing ahead of time that the employee waives the obligation to post a bond, you eliminate that requirement. Whether a court will enforce that provision is a separate question, but, absent such a waiver, a bond will be required.

Q: What provisions should my contracts include?

Susan Tegt: When it comes to managing contracts, I bring a unique perspective. I spent a significant part of my career as an in-house attorney. Any private practice attorney will undoubtedly tell you to have every single contract reviewed, revised and renegotiated before it is signed. But the truth is business simply moves too fast for such a protracted process on those everyday contracts. Too often businesses simply don’t have the time or the budget to involve an attorney in every contractual negotiation. So my goal is to help clients identify specific contractual provisions to watch out for and offer some best practices to pass on to your team.

The biggest takeaway is to never assume any contractual provision is boilerplate. People see boilerplate legalese and think, “Oh, that will never affect me.” The unfortunate reality is that every single provision of these contracts has consequences, desired or unwanted.

So slow down and take the time to examine and contemplate the impact of each contract provision. Business contracts can roughly be broken down into two key areas. The first relates to performance terms. These are the terms that are near and dear to any business. What do I have to do? When do I have to do it? Where do I need to send it? How much am I going to be paid? And when are you going to pay me? These are the bread-and-butter terms of any successful sales department. They are the terms that anticipate success, long-term relationships and progress. They are also the terms that unfortunately become the sole focus of any negotiation.

The second group of provisions I think of as the protection terms. Unlike the performance terms, the protection terms are my areas of concern. Protection terms often only become important when something has gone wrong. These include: Who will pay for insurance? Are their circumstances when I’ll have to indemnify the other party? How should disputes be resolved? Or, where should disputes be resolved? These terms are triggered when the relationship sours and the once-promising business deal fails. These are the terms that are so often glazed over when the parties are filled with optimism but become pivotal when the deal needs to be unwound.

So how do you avoid this trap? I recommend creating a template for whoever will be reviewing contracts. The template can identify your standard business terms and can serve as a checklist, which will help you determine that all eventualities have been considered.

Protection clauses take many forms. There are confidentiality clauses in vendor contracts that limit the sharing of information. There are those that protect intellectual property rights and establish guidelines for the use of an intellectual property patent. Contract terms establishing dispute resolution rules are extremely important. Are you going to litigate in court or are you going to arbitrate? Are the parties required to mediate before initiating any adversarial process? Where are disputes going to be litigated or arbitrated? Too often companies are shocked to learn that they have willingly agreed to have any dispute resolved in a venue thousands of miles from home under laws that are less than favorable. There will be dramatic financial implications if you must litigate far from home. These terms are easily dismissed as unimportant, but the reality is that they are critical and will have a significant financial impact if a deal goes bust.

“Never assume any contractual provision is boilerplate” - Susan Tegt

Q: How can I protect myself from litigation when introducing new products to the market?
Paul R. Smith:I spend my time in the field of risk management, assessing whether or not products are properly designed, warnings are properly
written, and manuals instruct people in a fashion that is effective. The goal is to head off problems before they occur because resolving them after the accident has happened is far more expensive. I suspect that lawyers and engineers have added confusion to the product design process
by producing an endless series of papers and protocols in hopes of making the design process foolproof. Some are excellent; some are unusable. Too often, they are simply confusing. Far too often the religious reliance on these protocols results in designers abandoning common sense.

Too often design teams wrack their brains assessing foreseeable uses and misuses while forgetting that they have a wealth of information
at their fi ngertips. They have distributors, call-in centers, help lines and end users who are more than willing to describe how they use the product and how it is sometime misused. They can describe the problems they have historically encountered and what errors they made to cause those problems. And most importantly, they are always willing to describe how the product can be improved. Accessing easily available information helps design teams identify and resolve problems, clarify typical misunderstandings during use and educate the inexperienced.

Q: If an incident does occur is there any one thing I can do to mitigate risk for the company?
Paul R. Smith: I’m convinced that one of the essential risk management practices is for manufacturers to thoroughly investigate an incident and the incident scene as quickly as possible. Learn how your product was being used, how the product had been maintained and document what
you learn. Within days of an accident the product will have been moved and perhaps changed, the incident scene will be cleaned, evidence lost, and most importantly, the insight that could have been gained will be gone forever. It is surprising how often an immediate examination of the incident scene will lead to the conclusion that the product had nothing whatsoever to do with causing the incident.

 

Larkin Hoffman Attorneys

Inception: 1958

Attorneys: 76

Locations: Minneapolis & Rochester

Web: larkinhoffman.com