The following are a few examples of reasons to perform an audit of your legal documents.

1. Technology Policies

Most employment agreements do more than just set the salary of an employee and the number of vacation days allowed. These agreements contain employee policies and workplace procedures that must be followed, and the more complicated and high-profile the position, the more restrictive these agreements are of work, and even some personal, activities.

There was a time when having an e-mail or computer policy seemed ridiculous and overly controlling but today these are commonplace clauses in most employee contracts. Now, more and more companies are adding policies for cell phones and even social networking sites. If your employee policies don’t include the word “Twitter,” chances are they need to be reviewed.

2. “Personal” Online Activities

The Federal Trade Commission (FTC) recently released updated guidelines aimed at protecting consumers from potentially misleading endorsements. Under these new rules, an employer could be liable for statements made on non-employer maintained websites (such as personal blogs, MySpace, Facebook, and Twitter) by employees. Employees are now required to disclose their relationship to an employer when making endorsements even if those endorsements reflect their own thoughts, opinions, and beliefs. A misleading statement by an employee made on one of these social networking sites can expose an employer to expansive liability but I’m guessing most employees won’t consider such activities damaging, or even covered by the terms of their employment.

3. Non-transferability Clauses

When parties come together to form a contract they usually only want to deal with the other party and require that the terms of the contract are nontransferable without their written consent. These types of clauses are generally not argued about and present few problems, that is, until a Court decision in September of 2009. In the case of Cincom Sys, Inc. v. Novelis Corp., the 6th Circuit held that a nontransferable software license was violated when a party to the contract merged with another subsidiary of its parent company, thereby changing its corporate structure.

Because this type of language that prevents transfer or assignment of a contract is so common it is highly recommended that an audit be performed in advance of any mergers or sales.

Conclusion

Most businesses realize that there are certain legal services included in the cost of doing business. My firm deals with many individuals who have recently started a business or are contemplating taking their first steps to a new venture. Too often, however, we encounter people who simply want the minimum work possible to allow them to move on to “more important things” and who have no interest in developing an ongoing relationship with an attorney or law firm. In many cases these individuals turn to form contracts and non-attorney legal providers to give them standardized templates and forms that they try to adapt to suit their needs to save money. While these practices may appear to work at the time you never really know the value of your legal documents, or of a relationship with a good law firm, until you are paying to enforce your rights in court.

Plaintiff Cincom Systems, Inc. (“Cincom”) licensed two pieces of proprietary software to Alcon Rolled Products Division (“Alcon Ohio”), a wholly-owned subdivision of Alcon, Inc. Under the terms of the agreement, the licenses were non-exclusive and non-transferable and the software could only be installed on computers designated in the contract. Further, Alcon Ohio could “not transfer its rights or obligations under [the] Agreement without the prior written approval of Cincom.”

Fourteen years later Alcon Ohio created a separate corporation known as Alcon of Texas, also a wholly-owned subsidiary of Alcon, Inc. Alcon Ohio then merged with Alcon Texas with Alcon Texas remaining as the surviving corporate entity. The newly merged Alcon Texas then simultaneously merged into itself and its three Texas subsidiaries. When the dust and paper cleared the former rolled products division of Alcon Ohio emerged as a subsidiary of Alcon Texas with the new name Novelis.

Upon learning of the corporate changes Alcon Ohio underwent, Cincom filed suit against Novelis alleging a violation of the license agreement between Cincom and Alcon Ohio. The software licensed by Alcon Ohio remained on the same computers, however those computers were owned by a new corporation. The District Court determined that Alcon Ohio’s series of mergers constituted a transfer of the license under Ohio Law, the appellate court affirmed the judgment.

On appeal Novelis argued that the District Court misinterpreted the controlling case on this issue, PPG Industries, Inc. v. Guardian Industries Corp., 597 F.2d 1090 (6^th Cir. 1979), and that a change in Ohio substantive corporate law since PPG was decided required the appellate court to find that no transfer of the license occurred.

The court in PPG addressed the question of whether the newly formed corporation following a statutory merger acquires the patent license rights of the constituent corporations.  PPG granted a non-exclusive, non-transferable license to use its technology, assignable only with PPG’s express written approval. Despite the restrictions of the license, the licensee merged with another corporation, and under D.C. and Ohio laws, the license automatically transferred to, and vested in, the successor corporation. The court held that in the context of intellectual property, a license is presumed to be non-assignable and non-transferable in the absence of express provisions to the contrary. The fundamental policy of the patent system is to encourage the creation and disclosure of new, useful, and non-obvious advances in technology and design by granting the inventor the reward of the exclusive right to produce the invention for a period of years. This reward of control designed to encourage innovation would be undermined by allowing the free transfer of licenses by operation of state law. To obtain the right to use a protected technology, a corporation would be free to either license the technology directly, or merge with another company that had obtained such a license.

Novelis failed to distinguish the present case from the case in PPG. Both licenses were non-exclusive, non-transferable and required express written approval to assign. The focus of PPG’s holding was not on the prevention of patented inventions falling into the hands of competitors as Novelis suggested. The harm is in the breach of the terms of the license and the violation occurs when a transfer occurs regardless of whether the receiving party is a competitor or a newly formed entity composed of the licensee corporation.

When PPG was decided, Ohio’s statutory merger law provided that “all property of a constituent corporation shall be ‘deemed to be [t]ransferred to and vested in the surviving or new corporation without further act or deed.’” The current statute provides that “[t]he surviving or new entity possesses all assets and property of every description, and every interest in the assets and property, wherever located . . . and . . . all obligations belonging to or due to each constituent entity, all of which are vested in the surviving or new entity without further act or deed…” The sole basis for Novelis’ argument is that the new statute removed the word “transferred,” however the effect and intent of the language remains the same. Under Ohio law states that once a merger has occurred the previous corporations no longer exist and all that remains is the newly created entity. The determining factor in determining whether a transfer has taken place is whether the same legal entity continues to hold the license. The appellate court affirmed the District Court’s judgment and found a transfer by operation of law in. This transfer violated the license agreement, which could only be assigned with the prior written approval of Cincom.