How does one determine bad legal advice? In medicine, if a doctor is to remove surgically the right arm, but accidently removes the left, that is fairly obvious. Not so with legal advice. Lately, there have been a spate of rulings on exculpatory clauses written by lawyers for their clients in their industry, believing that by stating verbally, it will get them out some sort of liability. But, more often than not, it never really works. And it costs the company goodwill in the long run.
Everyone sees the warning signs on parking lots stating that they will not be held liable for leaving things inside the car. However, is that true? Not so. Judges have ruled that warning placards like that cannot protect a landlord or shopping center from gross or severe negligence. There are standards of behavior that are not tolerated by the law, and a simple notice claiming not liable for severe negligence is not a politically or legally acceptable behavior.
In one actual securities case, the officers of a Maryland company had been held liable for selling security/stock type instruments without registration and a license, even though the very paper marketed to potential clients claimed that the company had not registered its paper as securities and would not be held liable for their distribution and purchases. The federal and state regulator thought otherwise. By not claiming that they were not securities did not deny the de facto sales of the stock instruments commonly known by Blue Sky and SEC regulators. There are procedures – by filing with the SEC and seeing whether they are exempt. However, the CEO felt that the exculpatory clauses would protect him. They did not.
In merchant banking, I have worked on financial instruments entitled “participations”, as described as such by outside counsel so that they would not be labeled as securities. Yet, I knew that they were being distributed just like securities. The bank did not have the license to be an investment banker or trader, and would be years before the Federal government would allow that to happen. But I could tell that the term, participation, was unquestionably a security.
And in one former company, employees stopped by my office to inquire why they were required to sign a non-compete agreement that geographically covered the world, broadly included the whole industry and restricted employment in the same industry for a lifetime. Apparently, the CEO and my GC predecessor had drafted this document. In reply, I stated that, in the State of New York, that document is not worth anything legally. Judges are not that stupid. But I felt that this type of employee contract would discourage anyone for staying long.
In these examples, I am simply pointed out that judges and regulators apply common sense in protecting the public. Claiming or describing an omission or disclaimer, in some instances, judges apply “judicial policy” to adjudicate in what the judge feels whatever judgment will protect the public, in spite of exculpatory clauses or statements. And I feel that some attorneys mislead the client believing that inserting some clause against common sense or social policy will protect the client from contingent liability. Words alone don’t make the law. Policy does.
The reason I thought about this issue lately has been the Tesla clauses requiring its car users in their “nondisclosure” agreements not to divulge or inform the federal agency, NHTSA, about any notable automobile defect. This nondisclosure agreement surfaced regarding problems with the suspension. Of course, the restriction would be self-serving – the less the public knows about a potential car defect, the least likely it will have an impact on sales. It might also avoid the potential class action lawsuits, whenever car defects appear in the news. Such legal clauses would suggest that the car manufacturer has something to hide. And now, when this information comes out in the open, whatever federal investigation will undergo greater scrutiny. Imagine buying a car from Ford or Chrysler Fiat that when you sign on the dotted line to purchase that car, you also had to execute a nondisclosure agreement not to inform the federal government about any defects. Tesla, being a so called technology disruptor, failed to use common sense in understanding how the rest of the automobile industry works and the regulatory oversight that oversees the car industry. Now this dirty laundry is appearing in many national newspapers.
To some degree, I feel that whoever gave such legal advice, it had been more harmful in the long term than protective. I always balance economic risks with legal issues. I myself faced an in-house client to take such legal risks, and I have always been very informative to management about the potential risks. One company CEO asked to do telecommunications business in a banned country, and I articulated both the financial and criminal risks in undertaking such a business. The regulatory penalties were too risky.
More often than not, I see regulatory carelessness within NorCal technology companies from Theranos to Tesla. I once made a comment that anyone can hire lawyers, but one has to decide to hire the right kind for the task at hand. A J.D. degree doesn’t mean that the attorney knows every topic of the law. And I rather pay a premium for an attorney who knows well the subject matter, can read in between the lines, rather than paying pennies on the dollar, and then suffering substantial economic losses in the long run.