Trade secrets protection clauses are often embedded in distribution contracts over the sale of technical parts for the manufacturing industry. Such clauses ought to be carefully designed when products and materials will be exported to a foreign country.
Alongside the issue of protecting a company’s own confidential business information, the large scale distribution of products carries the need to consider and, if deemed appropriate, devise a sound set of rules governing the relationship between the company as the principal and its local distributors as agents.
Moreover, the principal-agent contractual relationship is rarely something left only to the mutual agreement of the involved parties, since many countries maintain rules governing this type of contracts that are set to protect certain interests of one of the parties (usually the agent) and for that they are deemed mandatory and cannot be circumvented by parties.
Trade secrets in a transnational distribution contract may well represent a complex issue that could explode in all its magnitude when parties fight over the fulfillment of the contract. The extensive litigation that could follow as a result, with the intricacies of technical and legal issues to determine, amplified by the need for at least one party to fight in a foreign country, with a different legal system into force, may represent a real nightmare not only for the companies’ finances but for their managers and employees as well.
At some point the board should seek the opportunity to de-escalate the conflict and bring a real advantage to their company by seeking a settlement that could end the litigation. But how could that be done without restoring the relationship between companies and reinstate a reliable line of communications between the respective people holding true power to settle?
Could parties’ lawyers help in envisaging a viable way to resume talks and discuss a convenient exit strategy? The experience shows that quite rarely lawyers take the lead in suggesting or supporting their parties to settle a litigation already in place. Sometimes the same lawyers are not trained or have little experience as negotiators and rather they prefer to keep fighting up to the end.
However, lawyers do have an effective tool to use in those instances. Sometimes the intervention by a third party can represent a turning point: by being neutral and perceived as “other” than the parties and their lawyers, while expressing the role of a facilitator rather than a judge or arbitrator, an intervention from a third party could really help them understand their priorities and available options in view of a commonly sought solution that will bring the fight to an end. Parties’ lawyers do have the opportunity to trigger the intervention of a neutral to help their parties sort things out.
This happened in a real case recently. The assistance of a third party mediator was sought by a lawyer during a litigation procedure to stimulate the other party to consider to seize the momentum and think about reaching a mutually acceptable final settlement.
The case involved a US corporation – US-Italian Suppliers (for the purposes of anonymity all names of companies in this case study have been fictionalised) – that had, for decades, been engaged as a commissioned sales representative for an Italian manufacturing company (“Italozione Exports”) and her entire line of products, charged with selling to customers based in the North American territory. This business relationship has been officialised in an agency agreement that has remained in place for a long time.
However, company Italozione Exports was acquired by another, German-owned, US corporation (“Transatlantic Amalgamated Producers”).
Immediately after acquisition the CEOs of Transatlantic Amalgamated assured US-Italian Suppliers that this would not have changed the good relationship that had existed between US-Italian Suppliers and Italozione Exports. However, a few years later, Transatlantic Amalgamated began merging with Italozione Exports. Consequently, Transatlantic Amalgamated instructed US-Italian Suppliers to not solicit or sell Italozione-made products to the German parent company’s prospective or existing customers. Furthermore, US-Italian Suppliers would only receive commission for selling Italozione-made products, which became problematic as Italozione merged with Transatlantic Amalgamated and wound down its own production. Given that the instructions received by US-Italian Suppliers directly conflicted with the company’s rights under the original agency agreement, US-Italian Suppliers formally protested to Italozione Exports and Transatlantic Amalgamated.
A few months later Transatlantic Amalgamated publicly announced that Italozione Exports would become a wholly owned subsidiary of the German firm. Suddenly thereafter, Italozione Exports terminated the agency agreement with US-Italian Suppliers citing just cause.
Consequently, US-Italian Suppliers commenced litigation in a US court seeking a multimillion dollar judgement for monetary, exemplary, compensatory, and punitive damages, for fraud and unfair competition and for the unpaid commissions and the indemnity due under the contract governing Italian law for wrongful termination.
The defendant, Italozione Exports, through Transatlantic Amalgamated’s lawyers justified its termination of the agency agreement by claiming US-Italian Suppliers had entertained a relationship with a Chinese company that represented a competitor to Transatlantic Amalgamated in China. US-Italian Suppliers exchanged several proprietary technologies and trade secrets belonging to Italozione to the Chinese company, in a blatant violation of the contract. They also raised, among a number of objections, the doctrine of forum non conveniens, based on the terms of the distribution agreement, which stated: “This agreement shall be governed and interpreted in accordance with the Italian Law. The Law Court of Milan will be competent for any dispute”.
The trial court found that this clause not applicable and after several years of struggle a jury ruled in favor of US-Italian Suppliers, awarding a substantial portion of the damages sought by the plaintiff. The case was appealed and the Court of Appeal, which was of a different opinion. In sustaining the defendant’s construction of the relevant contractual terms as a valid forum selection clause, the court reversed the trial judgment and declared the Italian court competent to hear the case. The US state’s Supreme Court upheld this ruling. Thus, US-Italian Suppliers, after several years and several million dollars spent on litigation, went back to “square one”. The only option left was to commence a de novo trial in Italy.
It was at that point that US-Italian Suppliers’s lawyers invited the company’s CEO to consider mediation to negotiate a viable solution between Italozione Exports and Transatlantic Amalgamated before embarking on a new, long, expensive and uncertain litigation. The opportunity for this became palatable when Transatlantic Amalgamated, who in the meantime was acquired by a US conglomerate, sold the German company to an investment fund. As a result this latter’s board was changed substantially and a new CEO was appointed.
Lawyers from both sides, with the support of the mediator and their respective CEOs, were involved in a series of talks that eventually brought to a mutually acceptable monetary settlement sealed by a signed formal agreement.
This account stresses the importance of lawyers considering negotiations as an ongoing process, capable of being interrupted but also reinstated, and thus being mindful and quick to seize the initiative.
Experience has shown that sometimes even the most intractable litigation can be resolved through negotiation. A negotiation may also benefit from the intervention of a skillful third party neutral who facilitates the flow of information between the parties and brings them to consider the possible options available to pursue a mutually beneficial solution.
In protecting the interests of their client, a good lawyer should recognise when time is ripe to move from litigation to mediation, especially when the odds are in their favor.
In the example used here, at least three circumstances were pivotal: the completion of several years’ of fully fledged litigation in a US court; the beginning of another litigation, in a different country unfamiliar to the parties involved (the Italian company was a wholly owned subsidiary of the German parent); or, the change in the ownership and management of one of the parties, not related to the old one, who was blamed for having betrayed its word and maliciously terminated their relationship.
In sum, at the point when mediation was triggered in my case study, all parties were more inclined to consider a settlement before being dragged into a new litigation. By that time, an honorable settlement was definitely in the best interest of all the parties involved.