Saturday, October 30, 2010
Article: 20 Ethics & Compliance Officers Who Matter
Article, 20 Ethics & Compliance Officers Who Matter, CLICK HERE.
Thursday, October 28, 2010
Internal Audit: A Pivotal Time to Take a Close Look
Internal Audit: A Pivotal Time to Take a Close Look, interesting article from KPMG.
Wednesday, October 27, 2010
Sunday, October 24, 2010
Governace Thoughts About SEC v. Office Depot
The following is a discussion about the SEC’s Complaint against Office Depot which is an action that was recently settled. To view the SEC’s press release about the settlement CLICK HERE. At various points in the below discussion I have inserted some of my thoughts as talking point comments—my comments begin with “DT” and are bolded and italicized.
Dave Tate, Esq. (San Francisco)
Litigation & Trials, Governance, Investigations, Mediator
Website
Linkedin
Twitter
Blog
tateatty@yahoo.com
I. THE SEC’S ALLEGATIONS PER ITS COMPLAINT
A. OVERVIEW
The SEC alleged that Office Depot (1) violated Regulation FD in June 2007 by selectively communicating to analysts that it would not meet analysts’ quarterly earnings estimates without issuing a press release or other public disclosure communication, and (2) overstated its net earnings in its financial statements for the third quarter of 2006 through the second quarter of 2007 as a result of accounting violations--Office Depot prematurely recognized approximately $30 million in funds received from vendors in exchange for the company’s merchandising and marketing efforts instead of recognizing the funds over the relevant reporting periods in a manner consistent with Generally Accepted Accounting Principles (GAAP). In November 2007, the company restated the above financials and announced a material weakness in its internal controls over financial reporting, resulting from the failure of its personnel responsible for negotiating agreements with vendors to communicate all of the relevant information to accounting personnel.
Office Depot is traded on the New York Stock Exchange. Its fiscal year ends on the last Saturday in December.
B. THE ALLEGED REGULATON FD VIOLATION
In pertinent part, the SEC alleged as follows (please note that the following allegations were obtained from the SEC’s Complaint—accordingly, they are only unproven allegations):
Office Depot, as a company policy, did not offer specific quarterly earnings guidance during the relevant time period.
In late 2006 and early 2007, the CEO and the CFO believed the significant earnings per share (“EPS”) growth the company achieved in 2005 and early 2006 was not sustainable and set out to temper analysts’ expectations. DT: Just an argumentative allegation, the facts that the SEC can prove are what matter.
In February 2007, during a publicly broadcasted earnings conference call, the CEO and the CFO described Office Depot’s business model, which contemplated mid to upper teens EPS growth over the long-term.
On another public conference call in late April 2007, the company warned investors that its largest business segments were facing a softening in demand that was continuing into the second quarter.
Shortly following the analysts’ publication of EPS estimates for Office Depot in late April (when most analysts lowered their estimates for Office Depot), the company reiterated at a publicly available investor conference in early May that its business model contemplated only mid to upper teens EPS growth over the long-term and that the company faced a softening demand environment.
On May 31, 2007, the CEO alerted Office Depot’s board of directors and the executive committee that the company would not likely meet the analysts’ consensus $0.48 EPS estimate for the second quarter and that senior management was discussing a strategy for advance communication to avoid a complete surprise to the market. DT: The SEC does not discuss how the board responded to this information. It is already alleged that as a policy Office Depot did not give specific quarterly earnings guidance. Arguably this is a change from that policy. Was there additional discussion about whether to go down this path, and, if so, to have the communications reviewed by counsel and approved by the investor communication disclosure committee? Was there a disclosure committee? Additionally, as alleged, the company had already commented about the softening demand environment.
Office Depot did not have written Regulation FD policies or procedures at the time. The company had also never conducted any formal Regulation FD training prior to June 2007, although its general counsel had occasionally distributed guidance and updates on Regulation FD. DT: If true, good idea to correct this, wouldn’t you say? This might also be an area of involvement for internal audit and/or governance, risk, compliance and ethics. Did the outside auditor ever recommend improvements?
In early June 2007, in response to the CEO’s May 31, 2007 notice to the board of directors, the CFO instructed the director of investor relations and his immediate supervisor to prepare a draft press release for her review previewing certain second quarter earnings information should the company later determine to issue one. By mid June 2007, certain of the company’s preliminary internal estimates forecasted up to $0.44 EPS for the quarter. The CFO and CEO were uncomfortable with issuing a press release because the company’s internal estimates were incomplete at this point. DT: More people involved. Was anyone questioning this course of action? Where is the board, counsel, disclosure committee?
On June 20, 2007, ten days prior to the close of Office Depot’s second quarter for 2007, the CEO and the CFO, both of whom had investor relations experience, discussed how to encourage analysts to revisit their analysis of the company. The CEO, in an attempt to get analysts to lower their estimates, proposed to the CFO that the company talk to the analysts and refer them to recent earnings announcements by two comparable companies that had recently publicly announced results which were impacted by the slowing economy. The CEO further suggested that Office Depot point out on the calls what the company had said to the market in April and May 2007. The CEO and the CFO jointly decided to adopt this approach. The CEO believed that if the analysts looked at Office Depot again in that light, they would come to the point of view that their estimates were too high and likely would lower them. DT: Again, as alleged, a departure from policy.
The CFO, the director of investor relations, and the director’s immediate supervisor, drafted talking points based in part on the CEO’s suggestions for use as a guide for the calls with analysts. The CEO was not asked to review the talking points and did not do so. DT: Is there oversight or involvement by anyone else? Although the allegations in this SEC Complaint were somewhat detailed, I am of the viewpoint that to the reasonable extent possible the SEC has a responsibility to investigate an alleged situation of wrongdoing to a high degree prior to bringing an action, and to then include in the Complaint all of the significant factual allegations. The SEC is an advocate, but it also has a responsibility to objectively evaluate an alleged situation of wrongdoing before bringing an action and to only bring actions that are reasonably warranted. For clarification, it would be relevant to allege that no other people were involved or exercised oversight, if that was in fact the case.
The alleged agreed upon talking points were as follows:
-Haven’t spoken in a while, just want to touch base.
-At the beginning of the quarter we’ve talked about a number of head winds that we were facing this quarter including a softening economy, especially at small end.
-I think the earnings release we have seen from the likes of [Company A], [Company B], and [Company C] have been interesting. On a sequential basis, [Company A] and [Company B] domestic comps were down substantially over prior quarters. [Company C] mentioned economic conditions as a reason for their slowed growth.
-Some have pointed to better conditions in the second half of the year – however who knows?
-Remind you that economic model contemplates stable economic conditions – that is midteens growth
On Friday, June 22, 2007, and the following Monday, June 25, 2007, the director of investor relations spoke individually with all eighteen analysts covering Office Depot and conveyed to them the information contained in the talking points. Office Depot did not regularly initiate calls of this type to all 18 analysts covering the company. Word of these calls quickly spread among analysts, some of whom believed that Office Depot was “talking down” analysts’ earnings estimates. DT: Who at the company was reviewing disclosures that were being made? Did the outside auditor become aware of the disclosures at some point?The CFO and the CEO were in communication with the director of investor relations during and after the calls. On Saturday, June 23, 2007, the CFO emailed the analysts’ revised estimates to the CEO and advised that the director of investor relations had spoken to most of the company’s analysts and that two had reduced their estimates. The CEO responded positively and encouraged the calls to continue so that additional analysts would lower their estimates.
On Monday, June 25, 2007, the CFO asked the director of investor relations’ immediate supervisor whether the director of investor relations had contacted a particular analyst whose EPS estimate was the highest and had not yet been revised. Also on Monday, the CEO requested and received an update, which showed that the analysts’ consensus estimate was still $0.46. With the CFO’s knowledge, the CEO then commented to the director of investor relations that they still needed conversations with a few more analysts.
Office Depot’s calls influenced many analysts to revise and lower their second quarter 2007 forecasts. By the end of the second day of the calls, fifteen of the eighteen analysts lowered their estimates, bringing the consensus estimate down from $0.48 to $0.45.
During a call on Friday, June 22, 2007, one analyst expressed concern to the director of investor relations about the lack of a press release. That same day, the director of investor relations conveyed to the CFO this concern and that one other analyst was informing his customers that he expected Office Depot’s earnings to be down based on his call. DT: If true, this appears to be a wakeup call to consider actions.
On Monday, June 25, 2007, the director of investor relations notified the CFO that another analyst told him that he was surprised at the lack of a press release and indicated that several of his clients were also surprised. Also, late Monday evening, the CFO instructed the director of investor relations to call the company’s top twenty institutional investors and relay the same talking points to them, which he did the following day.
After the close of the market on Thursday, June 28, 2007, six days after the calls to analysts began, Office Depot filed a Form 8-K publicly disclosing, among other things, that its earnings would be “negatively impacted due to continued soft economic conditions.” DT: So, here is a good thing, arguably the company did quickly take action to address the situation.
Between Friday, June 22, 2007 (the day Office Depot began calling analysts) and June 28, 2007 (the last market close before Office Depot filed its 8-K), the company’s stock dropped 7.7%. On the first day of the calls, Office Depot’s stock closed at $33.49 per share. This was a decrease of 2.8% from the previous close, on trading volume of almost 7.5 million shares, which was two and half times the average volume for the remainder of that week. On the second day of calls, the stock dropped another 3.5% to $32.32 per share on trading volume of 7 million shares.
C. THE ALLEGED GAAP AND INTERNAL CONTROLS VIOLATIONS
In pertinent part, the SEC alleged as follows (please note that the following allegations were obtained from the SEC’s Complaint—accordingly, they are only unproven allegations):
Office Depot often arranges with its vendors to receive funding for its various marketing and promotional activities relating to the vendors’ products, such as advertising, store displays, and product exclusivity. For example, vendors frequently pay Office Depot to place their products in prominent store locations.
Under GAAP, the funds from these agreements are recognizable during the reporting period in which Office Depot provides the marketing and promotional activities called for in the agreements. When the activities cover multiple reporting periods, the funds are to be recognized over the relevant reporting periods in a manner consistent with GAAP.
Between the third quarter of 2006 and the second quarter of 2007, Office Depot prematurely recognized funds from approximately 100 vendor agreements. Many of the transactions involved an email arrangement between Office Depot personnel and the vendors that were separate from, but in addition to, the original documented agreement. These supplemental agreements often included terms that bound Office Depot to some kind of future performance and thus, would have caused the recognition of these funds to be deferred into future periods. DT: In other words, the SEC argued that Generally Accepted Accounting Principles require the company to defer recognizing portions of the income and to variously recognize those deferred portions during the period of time covered by the company's merchandising and marketing efforts that were required by the company's agreements with vendors. The SEC's allegations relating to this claim are incomplete. It would really be helpful to know, for example, if some process was different in these transactions which then resulted on the details of the transactions falling through the cracks, or if prior email arrangements were common but in this case they were not reported up the line, and why not. As indicated in the following paragraph, if true, the situation had an impact.
The premature recognition of vendor funds inflated Office Depot’s operating profit from the third quarter of 2006 through the second quarter of 2007 by a total of approximately $30 million. Office Depot’s quarterly and annual financial statements during this period overstated net earnings by 1.3% to 6.7%.
In November 2007, Office Depot announced that it would be restating its financial statements for the third quarter of 2006 through the second quarter of 2007 due to material errors in the accounting recognition of vendor funds that should have been deferred into later periods. The company also announced having a material weakness in its internal controls over financial reporting based on the failure to ensure that complete and accurate documentation was provided to individuals responsible for the proper recognition of vendor funds. DT: Again, I cannot determine from the information alleged by the SEC, but it seems like it might have taken a while to spot the issue or problem.
The accounting errors leading to Office Depot’s restatements resulted from a communication breakdown between the Office Depot personnel responsible for negotiating and executing vendor agreements (internally referred to at Office Depot as “Merchants”) and the personnel responsible for accounting for the funds. During either the negotiation or execution of vendor agreements, the Merchants often had email or other communications with the vendors that modified the terms of existing agreements. However, the Merchants often failed to provide all of the documentation to the accounting department for consideration. DT: Some good things here, the SEC does not allege or provide facts evidencing any intentional wrongdoing, and these situations are correctible with proper education or instruction, internal controls, and oversight by the CFO, internal audit, the audit committee, and the outside auditor.
*******
Dave Tate, Esq. (San Francisco)
Litigation & Trials, Governance, Investigations, Mediator
Website
Blog
tateatty@yahoo.com
I. THE SEC’S ALLEGATIONS PER ITS COMPLAINT
A. OVERVIEW
The SEC alleged that Office Depot (1) violated Regulation FD in June 2007 by selectively communicating to analysts that it would not meet analysts’ quarterly earnings estimates without issuing a press release or other public disclosure communication, and (2) overstated its net earnings in its financial statements for the third quarter of 2006 through the second quarter of 2007 as a result of accounting violations--Office Depot prematurely recognized approximately $30 million in funds received from vendors in exchange for the company’s merchandising and marketing efforts instead of recognizing the funds over the relevant reporting periods in a manner consistent with Generally Accepted Accounting Principles (GAAP). In November 2007, the company restated the above financials and announced a material weakness in its internal controls over financial reporting, resulting from the failure of its personnel responsible for negotiating agreements with vendors to communicate all of the relevant information to accounting personnel.
Office Depot is traded on the New York Stock Exchange. Its fiscal year ends on the last Saturday in December.
B. THE ALLEGED REGULATON FD VIOLATION
In pertinent part, the SEC alleged as follows (please note that the following allegations were obtained from the SEC’s Complaint—accordingly, they are only unproven allegations):
Office Depot, as a company policy, did not offer specific quarterly earnings guidance during the relevant time period.
In late 2006 and early 2007, the CEO and the CFO believed the significant earnings per share (“EPS”) growth the company achieved in 2005 and early 2006 was not sustainable and set out to temper analysts’ expectations. DT: Just an argumentative allegation, the facts that the SEC can prove are what matter.
In February 2007, during a publicly broadcasted earnings conference call, the CEO and the CFO described Office Depot’s business model, which contemplated mid to upper teens EPS growth over the long-term.
On another public conference call in late April 2007, the company warned investors that its largest business segments were facing a softening in demand that was continuing into the second quarter.
Shortly following the analysts’ publication of EPS estimates for Office Depot in late April (when most analysts lowered their estimates for Office Depot), the company reiterated at a publicly available investor conference in early May that its business model contemplated only mid to upper teens EPS growth over the long-term and that the company faced a softening demand environment.
On May 31, 2007, the CEO alerted Office Depot’s board of directors and the executive committee that the company would not likely meet the analysts’ consensus $0.48 EPS estimate for the second quarter and that senior management was discussing a strategy for advance communication to avoid a complete surprise to the market. DT: The SEC does not discuss how the board responded to this information. It is already alleged that as a policy Office Depot did not give specific quarterly earnings guidance. Arguably this is a change from that policy. Was there additional discussion about whether to go down this path, and, if so, to have the communications reviewed by counsel and approved by the investor communication disclosure committee? Was there a disclosure committee? Additionally, as alleged, the company had already commented about the softening demand environment.
Office Depot did not have written Regulation FD policies or procedures at the time. The company had also never conducted any formal Regulation FD training prior to June 2007, although its general counsel had occasionally distributed guidance and updates on Regulation FD. DT: If true, good idea to correct this, wouldn’t you say? This might also be an area of involvement for internal audit and/or governance, risk, compliance and ethics. Did the outside auditor ever recommend improvements?
In early June 2007, in response to the CEO’s May 31, 2007 notice to the board of directors, the CFO instructed the director of investor relations and his immediate supervisor to prepare a draft press release for her review previewing certain second quarter earnings information should the company later determine to issue one. By mid June 2007, certain of the company’s preliminary internal estimates forecasted up to $0.44 EPS for the quarter. The CFO and CEO were uncomfortable with issuing a press release because the company’s internal estimates were incomplete at this point. DT: More people involved. Was anyone questioning this course of action? Where is the board, counsel, disclosure committee?
On June 20, 2007, ten days prior to the close of Office Depot’s second quarter for 2007, the CEO and the CFO, both of whom had investor relations experience, discussed how to encourage analysts to revisit their analysis of the company. The CEO, in an attempt to get analysts to lower their estimates, proposed to the CFO that the company talk to the analysts and refer them to recent earnings announcements by two comparable companies that had recently publicly announced results which were impacted by the slowing economy. The CEO further suggested that Office Depot point out on the calls what the company had said to the market in April and May 2007. The CEO and the CFO jointly decided to adopt this approach. The CEO believed that if the analysts looked at Office Depot again in that light, they would come to the point of view that their estimates were too high and likely would lower them. DT: Again, as alleged, a departure from policy.
The CFO, the director of investor relations, and the director’s immediate supervisor, drafted talking points based in part on the CEO’s suggestions for use as a guide for the calls with analysts. The CEO was not asked to review the talking points and did not do so. DT: Is there oversight or involvement by anyone else? Although the allegations in this SEC Complaint were somewhat detailed, I am of the viewpoint that to the reasonable extent possible the SEC has a responsibility to investigate an alleged situation of wrongdoing to a high degree prior to bringing an action, and to then include in the Complaint all of the significant factual allegations. The SEC is an advocate, but it also has a responsibility to objectively evaluate an alleged situation of wrongdoing before bringing an action and to only bring actions that are reasonably warranted. For clarification, it would be relevant to allege that no other people were involved or exercised oversight, if that was in fact the case.
The alleged agreed upon talking points were as follows:
-Haven’t spoken in a while, just want to touch base.
-At the beginning of the quarter we’ve talked about a number of head winds that we were facing this quarter including a softening economy, especially at small end.
-I think the earnings release we have seen from the likes of [Company A], [Company B], and [Company C] have been interesting. On a sequential basis, [Company A] and [Company B] domestic comps were down substantially over prior quarters. [Company C] mentioned economic conditions as a reason for their slowed growth.
-Some have pointed to better conditions in the second half of the year – however who knows?
-Remind you that economic model contemplates stable economic conditions – that is midteens growth
On Friday, June 22, 2007, and the following Monday, June 25, 2007, the director of investor relations spoke individually with all eighteen analysts covering Office Depot and conveyed to them the information contained in the talking points. Office Depot did not regularly initiate calls of this type to all 18 analysts covering the company. Word of these calls quickly spread among analysts, some of whom believed that Office Depot was “talking down” analysts’ earnings estimates. DT: Who at the company was reviewing disclosures that were being made? Did the outside auditor become aware of the disclosures at some point?The CFO and the CEO were in communication with the director of investor relations during and after the calls. On Saturday, June 23, 2007, the CFO emailed the analysts’ revised estimates to the CEO and advised that the director of investor relations had spoken to most of the company’s analysts and that two had reduced their estimates. The CEO responded positively and encouraged the calls to continue so that additional analysts would lower their estimates.
On Monday, June 25, 2007, the CFO asked the director of investor relations’ immediate supervisor whether the director of investor relations had contacted a particular analyst whose EPS estimate was the highest and had not yet been revised. Also on Monday, the CEO requested and received an update, which showed that the analysts’ consensus estimate was still $0.46. With the CFO’s knowledge, the CEO then commented to the director of investor relations that they still needed conversations with a few more analysts.
Office Depot’s calls influenced many analysts to revise and lower their second quarter 2007 forecasts. By the end of the second day of the calls, fifteen of the eighteen analysts lowered their estimates, bringing the consensus estimate down from $0.48 to $0.45.
During a call on Friday, June 22, 2007, one analyst expressed concern to the director of investor relations about the lack of a press release. That same day, the director of investor relations conveyed to the CFO this concern and that one other analyst was informing his customers that he expected Office Depot’s earnings to be down based on his call. DT: If true, this appears to be a wakeup call to consider actions.
On Monday, June 25, 2007, the director of investor relations notified the CFO that another analyst told him that he was surprised at the lack of a press release and indicated that several of his clients were also surprised. Also, late Monday evening, the CFO instructed the director of investor relations to call the company’s top twenty institutional investors and relay the same talking points to them, which he did the following day.
After the close of the market on Thursday, June 28, 2007, six days after the calls to analysts began, Office Depot filed a Form 8-K publicly disclosing, among other things, that its earnings would be “negatively impacted due to continued soft economic conditions.” DT: So, here is a good thing, arguably the company did quickly take action to address the situation.
Between Friday, June 22, 2007 (the day Office Depot began calling analysts) and June 28, 2007 (the last market close before Office Depot filed its 8-K), the company’s stock dropped 7.7%. On the first day of the calls, Office Depot’s stock closed at $33.49 per share. This was a decrease of 2.8% from the previous close, on trading volume of almost 7.5 million shares, which was two and half times the average volume for the remainder of that week. On the second day of calls, the stock dropped another 3.5% to $32.32 per share on trading volume of 7 million shares.
C. THE ALLEGED GAAP AND INTERNAL CONTROLS VIOLATIONS
In pertinent part, the SEC alleged as follows (please note that the following allegations were obtained from the SEC’s Complaint—accordingly, they are only unproven allegations):
Office Depot often arranges with its vendors to receive funding for its various marketing and promotional activities relating to the vendors’ products, such as advertising, store displays, and product exclusivity. For example, vendors frequently pay Office Depot to place their products in prominent store locations.
Under GAAP, the funds from these agreements are recognizable during the reporting period in which Office Depot provides the marketing and promotional activities called for in the agreements. When the activities cover multiple reporting periods, the funds are to be recognized over the relevant reporting periods in a manner consistent with GAAP.
Between the third quarter of 2006 and the second quarter of 2007, Office Depot prematurely recognized funds from approximately 100 vendor agreements. Many of the transactions involved an email arrangement between Office Depot personnel and the vendors that were separate from, but in addition to, the original documented agreement. These supplemental agreements often included terms that bound Office Depot to some kind of future performance and thus, would have caused the recognition of these funds to be deferred into future periods. DT: In other words, the SEC argued that Generally Accepted Accounting Principles require the company to defer recognizing portions of the income and to variously recognize those deferred portions during the period of time covered by the company's merchandising and marketing efforts that were required by the company's agreements with vendors. The SEC's allegations relating to this claim are incomplete. It would really be helpful to know, for example, if some process was different in these transactions which then resulted on the details of the transactions falling through the cracks, or if prior email arrangements were common but in this case they were not reported up the line, and why not. As indicated in the following paragraph, if true, the situation had an impact.
The premature recognition of vendor funds inflated Office Depot’s operating profit from the third quarter of 2006 through the second quarter of 2007 by a total of approximately $30 million. Office Depot’s quarterly and annual financial statements during this period overstated net earnings by 1.3% to 6.7%.
In November 2007, Office Depot announced that it would be restating its financial statements for the third quarter of 2006 through the second quarter of 2007 due to material errors in the accounting recognition of vendor funds that should have been deferred into later periods. The company also announced having a material weakness in its internal controls over financial reporting based on the failure to ensure that complete and accurate documentation was provided to individuals responsible for the proper recognition of vendor funds. DT: Again, I cannot determine from the information alleged by the SEC, but it seems like it might have taken a while to spot the issue or problem.
The accounting errors leading to Office Depot’s restatements resulted from a communication breakdown between the Office Depot personnel responsible for negotiating and executing vendor agreements (internally referred to at Office Depot as “Merchants”) and the personnel responsible for accounting for the funds. During either the negotiation or execution of vendor agreements, the Merchants often had email or other communications with the vendors that modified the terms of existing agreements. However, the Merchants often failed to provide all of the documentation to the accounting department for consideration. DT: Some good things here, the SEC does not allege or provide facts evidencing any intentional wrongdoing, and these situations are correctible with proper education or instruction, internal controls, and oversight by the CFO, internal audit, the audit committee, and the outside auditor.
*******
Thursday, October 21, 2010
Companies With Strong Physical Risk Management Deliver More Stable Earnings, New Research from FM Global Shows
Companies With Strong Physical Risk Management Deliver More Stable Earnings, New Research from FM Global Shows
Additional link: Companies with Strong Physical Risk Management Deliver More Stable Earnings, from FM Global
Additional link: Companies with Strong Physical Risk Management Deliver More Stable Earnings, from FM Global
Wednesday, October 13, 2010
California Trust/Probate Update - Five or Five Provision
New California Trust/Probate Update.
Estate of Cairns.
Summary: The five or five provision in a decedent's will, which authorized a trust beneficiary to elect an annual receipt of the greater of $5,000 or five percent of the value of the trust principal allowed the distribution to include not only cash, but also an interest in real property.
Estate of Cairns.
Summary: The five or five provision in a decedent's will, which authorized a trust beneficiary to elect an annual receipt of the greater of $5,000 or five percent of the value of the trust principal allowed the distribution to include not only cash, but also an interest in real property.
Wednesday, October 6, 2010
Options for Effectively Litigating Small California Business Disputes
Options for Effectively Litigating Small Dollar California Business Disputes(Including Business to Business and Business/Customer Disputes)
____________________________
Anyone who has been involved in a business dispute that is relatively small in dollar amount knows that it is challenging to litigate that type of dispute at least in part due to the time that it takes to reach resolution and the attorneys’ fees and costs that can be incurred. The following discussion gives you some ideas about how a relatively small dispute can be effectively litigated to resolution by settlement or adjudication (trial or arbitration) whether you are the plaintiff or the defendant party. For our purpose the term “effectively litigate” means a prompt (as reasonably possible), correct, cost effective resolution. What is a dispute that is “small dollar” in amount? Well . . . there is no formal or legal definition, and of course different people will have different criteria, but for the purpose of this paper I have in mind disputes that are between $1 and $100,000 in amount, not including attorneys’ fees.
For the purpose of this paper, I assume that the dispute is already in progress and that the contract or agreement terms and provisions were previously established—in other words we are not at the contract or agreement drafting stage although the underlying contract or agreement terms could be in dispute. A disagreement over the underlying terms and provisions should be taken as a wakeup call to improve the transaction agreement processes for future transactions. Regardless of already existing contract or agreement terms and provisions, the parties should nevertheless consider and work toward alternative processes or parameters that will promote a prompt, correct resolution by settlement or adjudication.
The Small Claims Court Option. Really small business disputes of $5,000 or less in value can be filed and adjudicated in the Small Claims Court as an effective means of resolution. The parties present their claims to the Court themselves without attorneys. Some Small Claims Courts also have pre-trial mediation programs to help the parties settle their disputes and avoid having the Court impose a resolution by adjudication. A plaintiff party with a claim valued in excess of $5,000 can nevertheless file that claim in the Small Claims Court; however, any award made cannot exceed the Court’s $5,000 jurisdictional limit. Nevertheless, for example, a plaintiff might find it to be cost and time effective to file an $8,000 dispute in the Small Claims Court even if any award made by the Court cannot exceed $5,000. It isn’t necessary to file a claim valued at $5,000 or less with the Small Claims Court—such a claim can also be filed in the Superior Court as a limited jurisdiction case (see below).
The Superior Court Limited Jurisdiction Option. Disputes of $25,000 or less in value can be filed with the Superior Court as limited jurisdiction cases. Limited jurisdiction cases have their own set of procedures which are stated at California Civil Code sections 85 through 100. Briefly, limited jurisdiction cases provide for the option of certain required voluntary disclosures of information, evidence/documents and witnesses at the beginning of the case and prior to trial; limited in number written discovery inquiries (interrogatories, requests for documents, and requests for admissions); limited numbers of depositions; subpoenas for records; physical and mental examinations; the exchange and discovery of expert witnesses; and the option of presenting trial evidence by declaration or deposition testimony.
The limited jurisdiction rules and procedural limitations can be used advantageously to effectively litigate business disputes not exceeding $25,000 in value. My primary concern about the limitations is with the restriction on the number depositions; however a motion can be filed with the court to allow a greater number of depositions (but you cannot predict how a court might rule on such a motion), and the parties can stipulate to a greater number of depositions but that would require the mutual agreement of the parties.
The Superior Court Unlimited Jurisdiction Option. Disputes in excess of $25,000 are filed in the Superior Court as general or unlimited jurisdiction cases. Generally there are few limitations on written discovery and depositions. Typically cases take a minimum of 1 to 1 ½ years or more to reach trial. For a variety of jurisdictional and strategic reasons this may be the most appropriate means of resolving your dispute, for example, the amount in dispute might exceed $25,000, or, for whatever reason, adjudication by arbitration might not be appropriate or acceptable. However, this also tends to be the most expensive and time consuming means of reaching resolution. Thus, even if the parties are adjudicating the case under the unlimited jurisdiction process, they should also consider stipulating to other options that might facilitate a more effective process.
Note that for the purpose of this paper I decided to not discuss federal court as a jurisdictional option; however, a case can be filed in federal court if there is federal question or diversity jurisdiction. Certainly you will find diversity jurisdiction (i.e., parties from different states) in a wide variety of business disputes, but before federal court diversity jurisdiction is available the dispute also must be more than $75,000 in amount. For the purpose of this paper and small amount disputes I am going to assume that in most circumstances a plaintiff will decide not to file the dispute in federal court, and more often than not most defendants will elect not to move the dispute into federal court.
Arbitration (by Clause or by Stipulation). Many contracts contain arbitration clauses that mandate that a dispute be decided by arbitration. Read the wording of the clause carefully as it may apply to all disputes or to only some disputes in select circumstances. Most likely the clause will also contain parameters or requirements relating to the conduct of the arbitration proceeding. Even if an arbitration clause is not applicable, the parties can nevertheless stipulate to arbitrate the dispute. There can be advantages to arbitration. For example, the parties can agree to the scope of discovery, disputes that are arbitrated typically can be resolved more quickly than disputes that are resolved in court, and in an arbitration the parties can select the arbitrator which can be advantageous if the parties want to ensure that the trier of fact has knowledge or experience in a particular subject matter area. A word to the wise: you should be aware that the courts have held that an arbitrator’s decision can seldom be reversed on appeal, unless, for example, the arbitrator clearly exceeds his or her authority as specified in the arbitration clause. By agreeing to arbitration or by signing a contract that contains an arbitration clause, the parties agree to be bound by the arbitrator’s award with all of its good and bad aspects, most likely even if the arbitrator arguably fails to follow the law.
Mediation (Court Required or Voluntary). One way or another in each dispute there should be an attempt to settle the matter prior to trial or arbitration. In fact, if possible and reasonable under the circumstances of the case, I believe there should be several attempts to settle the dispute, or to at least determine how far apart the parties are before any adjudication. Sometimes a contract will contain a clause that requires mediation. Additionally, in all likelihood if the case is being adjudicated in court, most likely the court will require that the parties attend at least one mediation or settlement conference session prior to adjudication. And, the parties and their counsel can voluntarily discuss settlement, or case value, or scheduling mediation whenever they want, including at the beginning of or early in the case.
On my website you will find the PDF format Dispute Resolution & Mediation Questionnaire Form designed to help parties prepare for dispute resolution discussions and settle their disputes.
Here is another option that might be useful in a dispute where the prevailing party is also entitled to recover reasonable attorneys’ fees, such as in cases where there is an attorneys’ fee clause. The recovery of attorneys’ fees by the prevailing party can become a significant issue in any dispute, particularly when the fees become significant in amount when compared to the amount in dispute. It is not uncommon for the attorneys’ fees issue to become an impediment to settlement. To encourage realistic settlement offers, after the parties have had sufficient opportunity to evaluate the case, consider a stipulation by the parties that their last settlement offers at a settlement or mediation session will set the parameters for determining prevailing party status for the recovery of attorneys’ fees and costs if the case ultimately proceeds to adjudication by trial or arbitration.
Liquidated Damages Clauses. Sometimes a contact or written agreement will contain what is called a liquidated damages clause which specifies that in the circumstance of a dispute damages will be calculated as being in the amount that is specified by the liquidated damages clause. Although a liquidated damages clause in some circumstances can simplify the issue of damages, but not the issue of liability or breach, a liquidated damages clause is only valid, if at all, if at the time that the parties negotiated or entered into the contract there was a reasonable effort by the parties to estimate a fair compensation for the loss that might be sustained in the circumstance of a breach, and it must have been impracticable or extremely difficult to fix the amount of actual damages. On the other hand, when a person signs an agreement, it is presumed by law that that person first read, understood and then agreed to the provisions in the agreement.
The Expedited Jury Trials Act. California enacted the Expedited Jury Trials Act in September 2010. The Act provides that after an action is filed the parties can agree or stipulate to litigate the dispute by the procedures specified under the Act. The Act also requires that the Judicial Council enact applicable rules and forms by January 1, 2011. In summary, the Act provides that when so stipulated by the parties, the dispute will be adjudicated by a jury of 8 or fewer jurors instead of 12, each party will have 3 hours to present that party’s case, and the jury’s verdict is for the most part binding, subject however to high/low or other agreements, with little opportunity for appeal.
Additional Opportunities to Stipulate to Processes and Parameters. Throughout the course of any dispute there are multiple opportunities for the parties to stipulate to procedures and parameters that can expedite effective litigation.
For example, in a high/low agreement the parties mitigate the risk of an unexpected or unacceptable arbitration or trial award by before the arbitration or trial agreeing to a minimum and maximum award range. The range is not disclosed to the arbitrator or trier of fact. If the ultimate award exceeds the high parameter that was agreed to in the high/low agreement, the award is capped or limited at the high parameter amount. Similarly, if the ultimate award is less than the low parameter amount that was agreed to, the defendant must nevertheless pay the low parameter amount.
As another option, a party can make a statutory California Code of Civil Procedure section 998 offer to compromise which is a formal offer to settle the case on the terms stated in the offer if those terms are accepted by the other party. If the offer is not accepted there can be significant ramifications for the party who did not accept the offer—briefly and generally, if the party who declined to accept the offer does not do better than the offer after arbitration or trial, cost shifting mechanisms kick in thereafter for the benefit of the party who made the offer possibly also relating the recovery of attorneys’ fees if attorneys’ fees are recoverable in the case by statute or agreement. Making a section 998 offer gets technical, but 998 offers are an important tool available to the parties, the use of which should be seriously considered in the course of effectively litigating every case.
Attorney Compensation Options. A few final comments about attorney compensation. Compensation is negotiable, of course. Talk with counsel—in small dollar amount cases at least consider possible options for lower hourly rates, contingency recovery, how to handle a possible award of attorneys’ fees after arbitration or trial, fixed fees, hourly fees at a lower rate with a contingency or other kicker, and variable rates or fixed fees at various different stages in the litigation.
I hope you found this discussion helpful. Contact me if you have comments.
Best regards,
Dave Tate, Esq. (San Francisco)
Litigation & Trials, Governance, Investigations, Mediator
Website
Linkedin
Twitter
Blog
tateatty@yahoo.com
____________________________
Anyone who has been involved in a business dispute that is relatively small in dollar amount knows that it is challenging to litigate that type of dispute at least in part due to the time that it takes to reach resolution and the attorneys’ fees and costs that can be incurred. The following discussion gives you some ideas about how a relatively small dispute can be effectively litigated to resolution by settlement or adjudication (trial or arbitration) whether you are the plaintiff or the defendant party. For our purpose the term “effectively litigate” means a prompt (as reasonably possible), correct, cost effective resolution. What is a dispute that is “small dollar” in amount? Well . . . there is no formal or legal definition, and of course different people will have different criteria, but for the purpose of this paper I have in mind disputes that are between $1 and $100,000 in amount, not including attorneys’ fees.
For the purpose of this paper, I assume that the dispute is already in progress and that the contract or agreement terms and provisions were previously established—in other words we are not at the contract or agreement drafting stage although the underlying contract or agreement terms could be in dispute. A disagreement over the underlying terms and provisions should be taken as a wakeup call to improve the transaction agreement processes for future transactions. Regardless of already existing contract or agreement terms and provisions, the parties should nevertheless consider and work toward alternative processes or parameters that will promote a prompt, correct resolution by settlement or adjudication.
The Small Claims Court Option. Really small business disputes of $5,000 or less in value can be filed and adjudicated in the Small Claims Court as an effective means of resolution. The parties present their claims to the Court themselves without attorneys. Some Small Claims Courts also have pre-trial mediation programs to help the parties settle their disputes and avoid having the Court impose a resolution by adjudication. A plaintiff party with a claim valued in excess of $5,000 can nevertheless file that claim in the Small Claims Court; however, any award made cannot exceed the Court’s $5,000 jurisdictional limit. Nevertheless, for example, a plaintiff might find it to be cost and time effective to file an $8,000 dispute in the Small Claims Court even if any award made by the Court cannot exceed $5,000. It isn’t necessary to file a claim valued at $5,000 or less with the Small Claims Court—such a claim can also be filed in the Superior Court as a limited jurisdiction case (see below).
The Superior Court Limited Jurisdiction Option. Disputes of $25,000 or less in value can be filed with the Superior Court as limited jurisdiction cases. Limited jurisdiction cases have their own set of procedures which are stated at California Civil Code sections 85 through 100. Briefly, limited jurisdiction cases provide for the option of certain required voluntary disclosures of information, evidence/documents and witnesses at the beginning of the case and prior to trial; limited in number written discovery inquiries (interrogatories, requests for documents, and requests for admissions); limited numbers of depositions; subpoenas for records; physical and mental examinations; the exchange and discovery of expert witnesses; and the option of presenting trial evidence by declaration or deposition testimony.
The limited jurisdiction rules and procedural limitations can be used advantageously to effectively litigate business disputes not exceeding $25,000 in value. My primary concern about the limitations is with the restriction on the number depositions; however a motion can be filed with the court to allow a greater number of depositions (but you cannot predict how a court might rule on such a motion), and the parties can stipulate to a greater number of depositions but that would require the mutual agreement of the parties.
The Superior Court Unlimited Jurisdiction Option. Disputes in excess of $25,000 are filed in the Superior Court as general or unlimited jurisdiction cases. Generally there are few limitations on written discovery and depositions. Typically cases take a minimum of 1 to 1 ½ years or more to reach trial. For a variety of jurisdictional and strategic reasons this may be the most appropriate means of resolving your dispute, for example, the amount in dispute might exceed $25,000, or, for whatever reason, adjudication by arbitration might not be appropriate or acceptable. However, this also tends to be the most expensive and time consuming means of reaching resolution. Thus, even if the parties are adjudicating the case under the unlimited jurisdiction process, they should also consider stipulating to other options that might facilitate a more effective process.
Note that for the purpose of this paper I decided to not discuss federal court as a jurisdictional option; however, a case can be filed in federal court if there is federal question or diversity jurisdiction. Certainly you will find diversity jurisdiction (i.e., parties from different states) in a wide variety of business disputes, but before federal court diversity jurisdiction is available the dispute also must be more than $75,000 in amount. For the purpose of this paper and small amount disputes I am going to assume that in most circumstances a plaintiff will decide not to file the dispute in federal court, and more often than not most defendants will elect not to move the dispute into federal court.
Arbitration (by Clause or by Stipulation). Many contracts contain arbitration clauses that mandate that a dispute be decided by arbitration. Read the wording of the clause carefully as it may apply to all disputes or to only some disputes in select circumstances. Most likely the clause will also contain parameters or requirements relating to the conduct of the arbitration proceeding. Even if an arbitration clause is not applicable, the parties can nevertheless stipulate to arbitrate the dispute. There can be advantages to arbitration. For example, the parties can agree to the scope of discovery, disputes that are arbitrated typically can be resolved more quickly than disputes that are resolved in court, and in an arbitration the parties can select the arbitrator which can be advantageous if the parties want to ensure that the trier of fact has knowledge or experience in a particular subject matter area. A word to the wise: you should be aware that the courts have held that an arbitrator’s decision can seldom be reversed on appeal, unless, for example, the arbitrator clearly exceeds his or her authority as specified in the arbitration clause. By agreeing to arbitration or by signing a contract that contains an arbitration clause, the parties agree to be bound by the arbitrator’s award with all of its good and bad aspects, most likely even if the arbitrator arguably fails to follow the law.
Mediation (Court Required or Voluntary). One way or another in each dispute there should be an attempt to settle the matter prior to trial or arbitration. In fact, if possible and reasonable under the circumstances of the case, I believe there should be several attempts to settle the dispute, or to at least determine how far apart the parties are before any adjudication. Sometimes a contract will contain a clause that requires mediation. Additionally, in all likelihood if the case is being adjudicated in court, most likely the court will require that the parties attend at least one mediation or settlement conference session prior to adjudication. And, the parties and their counsel can voluntarily discuss settlement, or case value, or scheduling mediation whenever they want, including at the beginning of or early in the case.
On my website you will find the PDF format Dispute Resolution & Mediation Questionnaire Form designed to help parties prepare for dispute resolution discussions and settle their disputes.
Here is another option that might be useful in a dispute where the prevailing party is also entitled to recover reasonable attorneys’ fees, such as in cases where there is an attorneys’ fee clause. The recovery of attorneys’ fees by the prevailing party can become a significant issue in any dispute, particularly when the fees become significant in amount when compared to the amount in dispute. It is not uncommon for the attorneys’ fees issue to become an impediment to settlement. To encourage realistic settlement offers, after the parties have had sufficient opportunity to evaluate the case, consider a stipulation by the parties that their last settlement offers at a settlement or mediation session will set the parameters for determining prevailing party status for the recovery of attorneys’ fees and costs if the case ultimately proceeds to adjudication by trial or arbitration.
Liquidated Damages Clauses. Sometimes a contact or written agreement will contain what is called a liquidated damages clause which specifies that in the circumstance of a dispute damages will be calculated as being in the amount that is specified by the liquidated damages clause. Although a liquidated damages clause in some circumstances can simplify the issue of damages, but not the issue of liability or breach, a liquidated damages clause is only valid, if at all, if at the time that the parties negotiated or entered into the contract there was a reasonable effort by the parties to estimate a fair compensation for the loss that might be sustained in the circumstance of a breach, and it must have been impracticable or extremely difficult to fix the amount of actual damages. On the other hand, when a person signs an agreement, it is presumed by law that that person first read, understood and then agreed to the provisions in the agreement.
The Expedited Jury Trials Act. California enacted the Expedited Jury Trials Act in September 2010. The Act provides that after an action is filed the parties can agree or stipulate to litigate the dispute by the procedures specified under the Act. The Act also requires that the Judicial Council enact applicable rules and forms by January 1, 2011. In summary, the Act provides that when so stipulated by the parties, the dispute will be adjudicated by a jury of 8 or fewer jurors instead of 12, each party will have 3 hours to present that party’s case, and the jury’s verdict is for the most part binding, subject however to high/low or other agreements, with little opportunity for appeal.
Additional Opportunities to Stipulate to Processes and Parameters. Throughout the course of any dispute there are multiple opportunities for the parties to stipulate to procedures and parameters that can expedite effective litigation.
For example, in a high/low agreement the parties mitigate the risk of an unexpected or unacceptable arbitration or trial award by before the arbitration or trial agreeing to a minimum and maximum award range. The range is not disclosed to the arbitrator or trier of fact. If the ultimate award exceeds the high parameter that was agreed to in the high/low agreement, the award is capped or limited at the high parameter amount. Similarly, if the ultimate award is less than the low parameter amount that was agreed to, the defendant must nevertheless pay the low parameter amount.
As another option, a party can make a statutory California Code of Civil Procedure section 998 offer to compromise which is a formal offer to settle the case on the terms stated in the offer if those terms are accepted by the other party. If the offer is not accepted there can be significant ramifications for the party who did not accept the offer—briefly and generally, if the party who declined to accept the offer does not do better than the offer after arbitration or trial, cost shifting mechanisms kick in thereafter for the benefit of the party who made the offer possibly also relating the recovery of attorneys’ fees if attorneys’ fees are recoverable in the case by statute or agreement. Making a section 998 offer gets technical, but 998 offers are an important tool available to the parties, the use of which should be seriously considered in the course of effectively litigating every case.
Attorney Compensation Options. A few final comments about attorney compensation. Compensation is negotiable, of course. Talk with counsel—in small dollar amount cases at least consider possible options for lower hourly rates, contingency recovery, how to handle a possible award of attorneys’ fees after arbitration or trial, fixed fees, hourly fees at a lower rate with a contingency or other kicker, and variable rates or fixed fees at various different stages in the litigation.
I hope you found this discussion helpful. Contact me if you have comments.
Best regards,
Dave Tate, Esq. (San Francisco)
Litigation & Trials, Governance, Investigations, Mediator
Website
Blog
tateatty@yahoo.com
Subscribe to:
Posts (Atom)
Posts
