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28
Apr

The Role of Compliance Programs in Avoiding Employment Law Liability

Obviously the main reason that employers should implement, maintain and vigorously enforcement compliance programs in employment law areas is to ensure that employees can work and thrive in a workplace that is free from the distractions and pressures caused by harassment and discriminatory practices.  The idea is to eliminate, or drastically reduce, harassing or discriminatory behavior in the first place.  However, if a supervisor or other agent of an employer does engage in activities that result in a complaint of harassment or discrimination, an employer can significantly avoid certain potential liabilities to the alleged victim if the employer can demonstrate that they have implemented and maintained effective compliance efforts.

The employer should be able to demonstrate beyond dispute that it has an anti-harassment policy and that employees, including alleged victims of harassment, are familiar with the policy.  An employer will likely not be able to meet this standard if there are factual disputes with regard to such things as when the alleged victim personally received a copy of the anti-harassment policy; whether she received any training or other oral notice of the policy, and when the policy was posted in the employee break room.  Moreover, the fact that an employer made some effort to distribute its anti-harassment policy after an alleged victim was hired, such as during the employee’s new employee orientation program, would not be sufficient if evidence cannot be introduced to show that that these efforts extended to the alleged victim and other persons already employed prior to the time that the anti-harassment policy was implemented. On the other hand, however, an employer is likely to be granted summary judgment if it can show that it had a comprehensive anti-harassment policy was adequately disseminated and that it conducted regular training regarding harassment issues.  Support for demonstrating dissemination of information can be obtained by showing that employee’s received a written summary of their rights under applicable anti-harassment laws.   In addition, companies should implement formal anti-harassment training programs either to comply with specific state regulatory requirements (e.g., California) or simply to provide further support for an argument that it has educated managers and employees about the issues surrounding harassment in the workplace.

The content in this post has been adapted from material that appeared in Business Counsel Update (March 2007) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

28
Apr

Guidelines for Hiring Salespersons Who Have Worked for Competitors

Salespersons who have worked for competitors are obviously very attractive candidates when companies are looking to add new skills and experience to their sales group.  Since they already are active in the relevant industry and markets it typically does not take long to bring them up to speed and they also should have a good familiarity with how business done and the products and services that are available from all of the companies approaching the specific customer base.  However, salespersons who have worked for other companies may have obligations to their prior employers not to use trade secrets or confidential information learned or acquired at their prior employment, and may have personally signed contracts so promising.  In addition, such persons may have explicitly agreed not to solicit former customers, even if trade secrets or confidential information of the prior employer are not being used.  Accordingly, when hiring salespersons who have worked for competitors companies must be mindful of potential liability it is found that they or their employees knowingly used confidential information of their competitors or engaged in other activities that might be prohibited under contracts between the new employees and their former employers. 

State laws regarding trade secrets and enforceability of non-solicitation agreements differ and the applicable law should be closely reviewed; however, the following general guidelines should be given to new salespersons before they begin contacting any customers or sharing information with colleagues at their new company:

  • They are allowed to use their general knowledge, skill and experience acquired in their former employment; however, they may not use the confidential information or trade secrets of the former employer in so competing (including information that is not in tangible form and is simply in the memory of the new salesperson).
  • Trade secrets or confidential information of a former employer should not be disclosed anyone at the new company and they certain should not bring any confidential or proprietary information of any kind from their former employer to the new company.  For example, they should not transfer to the computer network of the new company, via e-mail, CD, thumb or flash drive, or other removable storage device, any confidential information or trade secrets from their former employer, including personal contacts. 
  • They should not solicit former customers of their former employer; however, if former customers do contact them and ask to do business with you they may send them information about the new company, open an account, and sell to them.  It is important to carefully document how former customers first made contact.
  • If former co-workers of the new salesperson contact them and ask about employment opportunities at the new company they should be given the phone number of the human resources department of the new company and the new salesperson should refrain from any further conversations with former co-workers regarding prospective employment.

It is important to emphasize how important these rules are by making sure that new salespersons understand that the use of confidential information from competitors of the company is grounds for discipline up to and including termination of employment.  All of these points should be covered in the initial entrance interview with new salespersons.  Given the sensitivity of the issues and high likelihood of possible litigation with competitors it is recommended that legal counsel join the initial entrance interview to be sure that the new salesperson understands his or her obligations.  In addition, the guidelines described above should be given to the new salesperson in writing and he or she should be asked to acknowledge receipt of the guidelines and the fact that they have been reviewed and discussed with the company before the salesperson began engaging in sales activities.

The content in this post has been adapted from material that appeared in Business Counsel Update (April 2007) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

24
Apr

Registered Limited Liability Partnerships

Professional firms practicing in specified areas, such as law and accounting, may be able to take advantage of state laws that allow general partnerships reclassify themselves as registered limited liability partnerships (RLLPs) and thus afford partners of the RLLP with statutory protection from liability for debts and obligations resulting from errors, omissions, incompetence, negligence or malfeasance committed by other partners or partnership agents who are not under the supervision of the protected partner at the time of the act.  Protection would not be available to partners who have directly participated in the claimed act or who have knowledge of the act during its occurrence but fail to take appropriate actions.

The partnership agreement for an RLLP is similar in form and content to the agreement used whenever a service-related partnership is formed; however, there are certain provisions that should be included in order to ensure that RLLP status is achieved and maintained:

  • The agreement should state the intent of the partners to comply with the applicable state requirements for RLLP status including registration with the Secretary of State and any state agencies that prescribe rules and regulation for practice of the profession to be engaged in by the partnership. 
  • The statement of purpose of the partnership should be consistent with the conditions for eligibility for RLLP status provided by statute. 
  • The term of the partnership should be co-extensive with compliance with the registration requirements (i.e., the term should not begin until the registration as an RLLP has become effective and all other requirements for limited liability have been satisfied). 
  • The name of the partnership should identify the fact that it is operating as an RLLP (e.g., name of partnership, LLP). 
  • The partners must comply with any security requirements imposed by statute including maintenance of specified amounts of professional liability insurance and/or posting of a bond with the state (see, e.g., California Corporations Code § 16956(a)(1)).

Other issues that should be addressed in a comprehensive form of partnership agreement include capital contributions and capital accounts; rights, powers and liabilities of the partners, including participating in day-to-day management and voting requirements for extraordinary partnership decisions; restrictions on competition; allocation of income, gain, losses and distributions; books and records, accounting procedures and reporting requirements; meetings; interested party transactions; transfers of interests; dissociation of partners (i.e., retirement, withdrawal, death, disability or bankruptcy of partners); admission of new partners; dissolution and liquidation; failure of partners to make required contributions or otherwise comply with the terms of the agreement; and dispute resolution.  In addition, since each partner will also be an employee of the partnership and perform professional services on behalf of the partnership the agreement should outline the general terms of this employment relationship: salary or draw; vacation; facilities and support; benefits; professional licensure requirements; automobile and travel expenses.  Finally, to the extent permitted by applicable state law, the partnership agreement should include limitations on competitive activities by partners during his or her time with as a partner and for a specified period after dissociation to ensure that he or she does not misappropriate proprietary and confidential information regarding the partnership’s client base and use such information to engage in unfair competition with the partnership.

The content in this post has been adapted from material that will appear in California Transactions Forms: Business Entities (Summer 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

21
Apr

Attorney-Client Privilege for Transactional Lawyers III

I’ve been discussing some of the challenging ethical issues that can arise with respect to protection of confidential communications between a transactional lawyer and his or her client.  Another issue that often arises when the attorney-client privilege is asserted with respect to sensitive information that has been shared with the other party to a prospective business transaction is whether or not the disclosure to the other party destroys the disclosing party’s right to later assert the privilege with respect to such information in a litigation setting.  The potential dilemma for the disclosing party is deciding whether to disclose the information, and possibly lose the privilege, in order to pursue the potential business transaction or refusing the disclose the information to preserve the privilege and risking that the other party to the transaction will refuse to proceed since it cannot access valuable information that it deems necessary to make a decision about the proposed transaction.

Once again, the laws of each state should be reviewed to determine which rules will apply in this situation.  The general rule under California law is that disclosure of a confidential communication by the client or the client’s attorney to a third party waives the attorney-client privilege with respect to the communication.  However, California Evidence Code § 912(d) does allow disclosure of privileged communications without waiving the privilege if the disclosure is made in confidence and is "reasonably necessary" to accomplish the purpose for which the lawyer was consulted and California Evidence Code § 952 clearly allows disclosure of confidential communications to third parties "who are present to further the interest of the client" or those "to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted." 

Much of the uncertainty in this area for California lawyers was resolved in STI Outdoor v. Superior Court [91 Cal.App. 4th 334 (2001)] where the court of appeal made it clear that the attorney-client privilege associated with confidential communications was not automatically waived by disclosure of the communications during business negotiations and that the privilege would be available provided that the disclosing party could demonstrate that the communications were otherwise eligible for the privilege, there was a reasonable expectation that the communications would be maintained in confidence, and it was reasonably necessary to disclose the communications in order to accomplish the purpose for which the lawyer was consulted.  From this we can derive the following additional guidelines:

  • Before disclosing confidential communications to other parties make absolutely sure that the recipients have signing a confidentiality, nondisclosure, or joint defense agreement that includes specific and comprehensive restrictions on disclosure and use of the information in the communications.
  • Whenever possible, disclosure should be limited to those with a real “need-to-know” and a record of how the information was used by the receiving party should be created and maintained.
  • Information disclosed to other parties involved in a proposed transaction should be strictly limited to that which is reasonably necessary for the attorney to accomplish the purpose for which he or she was retained. 
  • All such information should be prominently marked with legends that make it clear that the disclosing party intends to assert that it is confidential, attorney-client privileged, or joint-defense privileged.
  • A privilege log should be created for the communications for which protection will be asserted and declarations should also be prepared to demonstrate that the disclosures were reasonably necessary in order to accomplish the purpose for which counsel was consulted.

The content in this post has been adapted from material that will appear in Business Counsel Update (Summer 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

21
Apr

Tips for Successful Joint Product Development with Customers

In my last post I began discussing the advantages and disadvantages that should be considered by manufacturers when they contemplate a joint development arrangement with one of their customers.  Assuming some sort of joint development project with a customer makes sense here are some simple suggestions for making sure that the project has the greatest likelihood of success:

  1. The manufacturer should be prepared, and eager, to open up its day-to-day operational activities to the customer and provide the customer with an opportunity to carefully scrutinize and evaluate the way in which the manufacturer approaches each key issue in the development process.  For example, the manufacturer should show the customer each of the steps that are taken in order to ensure an adequate level of quality control during the manufacturing process in order to build trust with the customer and provide the customer with a chance to suggest improvements.
  2. Both parties should come up with ways to assist the manufacturer in gaining a better understanding of the challenges that the customer faces when attempting to market and sell its finished products, including the products that are being jointly developed.  Representatives of the manufacturer might accompany the customer on visits to end users of the customer’s products.  In fact, this sort of due diligence is best done well before the specific goals and objectives of the joint development project have been established since the knowledge gained might lead to unexpected and highly innovative ideas about what might be done by the manufacturer.
  3. The level of integration and collaboration between the parties (i.e., just how “joint” the development process will be) must be aligned with the risk, complexity and expense of the chosen project.  Challenging joint development projects that are focused on developing new products and technology, as opposed to creating features that amount to relatively minor enhancements and improvements to something that has already been conceived, must be supported by frequent interaction and communication with customer representatives including ongoing feedback that ensures that the manufacturer remains on the right track and that the customer will be satisfied with its investment.
  4. A real serious attempt should be made to develop two-way communication between the manufacturer and the customer that encourages and facilities the continuous exchange of ideas between the parties even when there is no current project underway.  For example, if the manufacturer learns of an idea that it thinks might interest the customer the manufacturer should share the thoughts with the customer even if the communication has not been solicited.  While the customer may not be interested in the specific idea it may lead to something different that eventually becomes a solid concept for formal joint development planning.
  5. Intellectual property rights that will be used in and/or created by the joint development project should be identified in advance and clear rules should be established for allocation ownership and usage rights for such intellectual property.  The manufacturer should be mindful of the risks associated with sharing its proprietary technologies that serve as the foundation for its core competencies.
  6. Each side of the relationship—manufacturer and customer—should actively build and maintain a team of dedicated and enthusiastic scientists, engineers and marketers that remain committed to joint development activities for as long as the parties are willing and able to formally collaborate.  Many joint development agreements include an undertaking to establish a new project review committee with representatives from both sides that will be periodically to vet and approve new development projects and discuss the overall progress of the relationship.  Whenever a project is underway both parties should be required to appoint project managers, engineers and other skilled professionals who will be allowed to invest the necessary time and effort outside of their other responsibilities to ensure that the project is successful.  The team members from each side should regularly visit with their colleagues at the other party.  For example, representatives from the manufacturer should visit the customer to learn more about how products under development will be used and/or marketed by the customer.  In turn, customer representatives should go to the manufacturer’s facilities to conduct tests on new products while they are a “work-in-progress” so that the manufacturer can receive timely and thorough feedback on product quality and performance.

The content in this post has been adapted from material that will appear in Joint Ventures and Strategic Alliances (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

17
Apr

Working with Customers on Joint Development Projects

Manufacturers engaged in intense competition with other firms for customer business are well advised to look for ways to become true development partners with their prospects as opposed to simply being just one of several potential vendors.  Rather than approaching customers with a standardized sales pitch to buy generic products and services manufacturers should seriously consider opening with a serious and sincere proposal to collaborate directly with the customer to create new products and services that are unique and specifically suited to that customer’s requirements and sales and marketing objectives.  If there is interest the parties can move forward with a joint research and product development project that involves the contribution of ideas, feedback and financial and technical resources from the customer to support the manufacturer’s efforts to create new products and technologies in which both parties will have an ownership interest of some sort at the end of the initial collaboration. 

Working with customers on joint development projects can be advantageous for several reasons.  First, assuming that the customer is willing to contribute toward some of the costs of developing new products and technologies a manufacturer can use these types of relationships to maintain and even enhance core competencies in the research and development function without diverting budgeted funds from other functions or attempting to obtain new capital that might dilute ownership stakes and management control.  Second, the manufacturer will be given a valuable opportunity to learn about how the customer operates and the way in which customer views its relationships with vendors and the needs of its own customers.  This type of information has value beyond the specific customer relationship since it provides the manufacturer with greater insight into the overall business environment in which it is operating.  Third, while the manufacturer’s main challenge is demonstrating its expertise in product development to the customer the relationship should also be a platform for the manufacturer to showcase its skills in other operational areas such as logistics and marketing with an eye toward the possibility of an expanded alliance at some point in the future.  Finally, if the customer is willing and required to invest significant time and other resources in the development phase there is likely to be a much higher level of commitment from the customer to make the finished product commercially successful and this will hopefully translate into a stronger long-term revenue stream for the manufacturer.

There are, however, corresponding risks and disadvantages that also need to be considered by manufacturers before joining forces with a customer.  For example, smaller manufacturers need to safeguard their core technology and bargain for reasonable rights to use and exploit intellectual property that is created during the joint development relationship.  If care is not taken in this area a larger customer will simply appropriate whatever technical know-how is available from the manufacturer and let the relationship lapse.  The manufacturer should also be sure that the customer is able and willing to fulfill commitments made by the customer to support the development work.  If promised funding does not appear or the customer withdraws personnel and other resources during the project the chances of success diminish and the burden on the manufacturer will suddenly increase.  Another challenge for the manufacturer is making sure that its functional resources, including personnel and equipment, are strong enough to withstand the scrutiny that will come from attempting to work closely with a customer and give the customer open access to the day-to-day operational activities.  If the customer uncovers weaknesses in important areas, such as quality control, it may abandon the project and remove the manufacturer from its vendor list even for generic items.

In my next post I’ll try and provide some simple suggestions for increasing the chances of successfully completing joint development projects with customers.

The content in this post has been adapted from material that will appear in Joint Ventures and Strategic Alliances (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

17
Apr

Attorney-Client Privilege for Transactional Lawyers II

In my last post I discussed the general parameters that courts have applied in determining whether the attorney-client privilege can be evoked by a transactional lawyer for communications that the lawyer engaged in while working on a deal in the event that litigation later arises regarding the deal itself.  I believe that the inevitable dual role that transactional attorneys, both in-house and from outside law firms, generally play in assisting with negotiating and documenting a deal presents significant challenges in protecting the privilege.  Therefore it is essential for deal lawyers to understand and follow certain basic guidelines so that there is a greater likelihood that privilege can be successfully asserted if desired and that clients fully understand the risk and likelihood that sensitive communications may ultimately be disclosed in future litigation.  Suggestions include the following:

  1. Determine which state law regarding attorney-client privilege is likely to apply to the particular transaction and analyze the applicable case law to identify the likely boundaries of the privilege and the work product doctrine that will be established by the courts in that state.  The choices made in the transaction documentation with respect to governing law and forum selection will likely have a significant impact on defining the relevant legal landscape.
  2. Communicate with the client before the transactional engagement begins regarding the scope of advice that the client is seeking and the purposes for which the client intends to use that advice.  Once these communications are completed ensure that any engagement letters are carefully prepared to emphasize (if true) that the primary purpose of the engagement is to provide the client with legal advice.
  3. During the preliminary communications and prior to execution of the engagement letter ensure that the client has been formally advised and warned about the possibility that the attorney-client privilege may not be available to protect sensitive communications in the event that litigation regarding the transactions arises at some point in the future.  This is particularly important when the client has asked the attorney to actively participate in business negotiations during the course of the transaction.
  4. Attempt to carefully plan every communication with the client to avoid unnecessary mixing of legal and business advice that might adversely impact the availability of the attorney-client privilege for the communication in the future.
  5. Avoid inadvertent or simply clumsy use of the assertion of privilege that may later be used to deny the privilege to all communications including those that might otherwise qualify for protection.  For example, the common practice of affixing “attorney-client privileged” legends on all communications should be avoided and this practice should be limited to truly sensitive communications that include content that would clearly fall within the permitted scope of the privilege (i.e., legal advice).
  6. Carefully monitor participation in meetings and other streams of communication in which both business and legal matters are discussed and consider breaking those discussions out separately so that a clearer line can be drawn between privileged and unprivileged communications.

The content in this post has been adapted from material that will appear in Business Counsel Update (Summer 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

14
Apr

Why You Need a Chief Revenue Officer

A number of well-known fast growing companies have created the title of chief revenue officer ("CRO") as part of their executive team.  The CRO is charged with ensuring that the company remains focused on identifying and exploiting all potential revenue streams for the company's products, services and other core competencies (e.g., technology).  In order to accomplish this task the CRO must be given authority to intervene in and oversee the activities of several different departments, each of which will also have its own executive and top management group, including product development, sales, marketing and customer service.  The CRO should be involved in every major new business development project and should have a say in which customers receive top priority and when and how the company sacrifices profitability in order to increase revenues, market share and customer loyalty.  For example, the CRO should commission the research necessary to determine which customers have the highest potential for long-term revenue growth and should work with various functional departments such as sales and customer service to make sure that those customers are serviced properly.  The CRO should also decide whether it is worth pursuing a new sales channel through a discounting strategy that may reduce margins in the short-term yet expose the company and its products to a whole new group of customers.  Obviously the CRO must be highly effective in creating and managing cross-functional teams and reconciling the divergent views of managers in different departments.  It is also essential for the company to provide real incentives for senior managers of departments such as sales and marketing to follow the direction established by the CRO.

 

14
Apr

Attorney-Client Privilege for Transactional Lawyers I

Recently I have been putting together some new materials on contract negotiations and drafting and have also been observing how privilege and work product issues must be handled in the discovery context.  It became apparent to me that one significant issue that I need to consider is how the attorney-client privilege applies to the work that transactional attorneys do in the course of a deal, particularly when they are actively involved in negotiations with representatives of the other parties to the planned transaction.  I found a nice introduction to the entire subject in the most recent issue of Business Law Today in an article that is appropriately titled “Attorney-Client Privilege: Pitfalls and Pointers for Transactional Attorneys”.  The content below and in my next post is adapted from the article.

While the attorney-client privilege is generally an important and crucial issue in the context of litigation the privilege may also be applicable to communications that occur between attorney and client with respect to a business transaction.  However, clients and there lawyers should not assume that attorney involvement in a transaction will in and of itself be sufficient to assure that a privilege can be asserted to preserve the confidentiality of all communications relating to the transaction.  In general, the value and availability of the attorney-client privilege in the transactional context will depend on the degree to which the attorney’s role expanded beyond that of a legal advisor to include negotiation of the actual business terms and conditions of the deal.  Since it is quite common for lawyers to provide their clients with both legal and business advice, often as part of the same communication (i.e., telephone call, e-mail message or written memorandum), it is essential for transactional lawyers to thoroughly understand the potential restrictions on the applicability of the privilege and explain the guidelines in advance to clients so that they are not surprised to later learn that communications they believed would be secret are instead subject to discovery if litigation regarding the transaction commences.

The general test as to whether or not a communication involving a transactional lawyer will be eligible for protection under the attorney-client privilege is whether or not the pre-dominant purpose of the communication is to convey non-legal advice from the lawyer to the client.  If the dominant purpose of a conference call or written communication is for the lawyer to provide input on business terms and conditions or negotiation strategies the communication will likely not be eligible for protection under the privilege.  Certainly many transactional lawyers are engaged, at least in part, for their skills and experience in negotiating and completing specific types of deals and this inevitably leads to attorney input on business matters.  The difficult issue that arises in that situation is how to handle “dual purpose” communications (e.g., single documents or other communications that include both legal and business advice).  The basic rule seems to be that courts will likely permit assertion of the privilege for this type of communication if advice provided by the lawyer therein is based predominantly on the attorney’s evaluation of legal issues.  It will be more difficult, if not impossible, to assert privilege in situations where the attorney serves solely as a negotiator in the course of a particular transaction or engages in other activities that would typically be carried out by a businessperson rather than an attorney.    Whether or not the services provided by the attorney are primarily legal in nature will also determine if notes, mental impressions and legal analyses and conclusions prepared by the attorney during the course of a transaction can protected from disclosure through the assertion of the work product doctrine.

Obviously in-house counsel are subject to special challenges with respect to any attempt that might be made to assert the attorney-client privilege with respect to communications between counsel and executives and managers within the organizational client relating to a proposed business transaction.  Courts have recognized that in-house counsel often serve a very different role from transactional attorneys with outside law firms that may be engaged for the sole purpose of provide legal support for a specific transaction and that in-house counsel often serve also as corporate officers and engage in day-to-day activities within the company that necessarily cross the boundary that separates law and business.  Given the permanency of the relationship between in-house counsel and his or her employer and the exposure to and participation in business activities in-house counsel should expect that a much more stringent standard will be applied by the courts before protecting communications by counsel during a transaction under the attorney-client privilege.  In my next post I’ll provide some suggestions for transactional lawyers on how they can manage expectations about the availability of the attorney-client privilege for communications that they engage in while working on a deal.

The content in this post has been adapted from material that will appear in Business Counsel Update (Summer 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

10
Apr

Contract Review of Consignment Arrangements

In a previous series of posts I discussed some basic guidelines for establishing and administering contract review and approval procedures.  Whenever possible the general policies and procedures should include specific steps for particular types of contractual relationships that frequently arise during the course of business activities.  For example, a company engaged in sales activities may often have opportunities to enter into consignment arrangements with major customers pursuant to which products will be transferred to a customer’s warehouse prior to actual sale so that when the customer decides to make a purchase it simply removes the applicable products from the stockpile of consigned inventory and the actual purchase and sale is deemed to occur at that time.  A consignment arrangement will require a separate contract that lays out the terms and conditions upon which consigned products will be delivered and stored and the contract review process should include the following conditions:

  • The business case for the consignment arrangement should include information on projected volume and margins in order to allow the reviewing parties to determine whether the arrangement will meet company standards for opening a consignment account.  Consignment arrangements are costly to administer and can extend the period of time that passes before products are actually purchased and paid for; therefore, high margins should be demanded and provision should be made for covering shipping costs and other overhead expenses.
  • Vendor agreements relating to the products proposed to be included in the consignment arrangement should be reviewed and all necessary approvals and indications of support should be obtained from all such vendors.
  • The credit department should conduct a review of the creditworthiness of the customer to decide whether or not the customer qualified for participation in the consignment program.
  • An investigation should be made to ensure that the customer will be able to provide a suitable location for the consigned products and physically separate those products from other products, supplies and equipment.
  • The proposed form of consignment contract should be reviewed and approved by all departments impacted by the relationship such as credit/finance; legal; customer service (e.g., impact of consignment agreement on vendor warranty coverage); and product management (e.g., compliance with vendor agreement, inventory control etc.).
  • Before product is shipped under the terms of the consignment agreement the credit or legal department must take all actions necessary to perfect a security interest in the consigned inventory and must also obtain all documents to verify that the customer has obtained adequate insurance coverage for the products while they are part of the consigned inventory.
  • Plans should be made for regular inspections of the consigned inventory and review of the economic performance of the arrangement.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (Summer 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.