Liability

Instructions

1.  I know you are not a lawyer, and I don’t expect you to answer the questions in this problem as if you are a lawyer. I expect you to approach the questions from the perspective of a business owner who’s responsible for spotting legal issues and making a preliminary assessment of their impact on your business. Don’t be overly concerned about whether I agree with the exact judgment calls you make in your assessment. The objective here is for you to spot the issues and demonstrate your understanding of the legal implications.

2. Please don’t cite cases or outside materials. If you make a statement in your answer, you can assume that the statement is supported.

3. Your answer should not exceed five (5) pages.

Background

Assume that you graduated from the University of Maryland three years ago. At a trade show shortly after graduation, you met Ann and Bob from Week 1 of the ENES671 course. You immediately hit it off with Ann and Bob. The three of you exchanged contact information at the trade show and soon began discussing ideas for forming a technology-based business together. You would bring the technical skills, Bob the sales experience, and Ann the business management skills. You had been working on an innovative way of integrating powerful circuitry into fabrics, and the three of you thought the possibilities of the technology were endless. Two years ago, the three of you decided to pursue an interactive clothing business, CloudFabric. You set up CloudFabric as a partnership in which the three of you owned equal shares and comprised the board of directors. Each of you initially contributed $10,000 to the business venture to support the business operations and development of your first product. Your first product would be BabySpeak, an interactive baby blanket that provides vital information to a parent via a mobile app. For example, BabySpeak can signal when a baby’s diaper needs to be changed and can monitor/regulate a baby’s temperature. CloudFabric had contracts in place with ICB, Inc. for the internal circuity and with WonderFiber Co. for the fabric. CloudFabric negotiated a deal with MagicBlankets, Inc. to be a non-exclusive retailer for BabySpeak. BabySpeak was successfully developed six months ago and CloudFabric immediately started offering the blankets for sale.

Unbeknownst to you, Ann and Bob had asked Steve to help with sales for BabySpeak prior to the deal with MagicBlankets, Inc. They had worked with Steve in previous business ventures and thought he could help supercharge CloudFabric’s sales operations. Ann and Bob verbally promised to give Steve 10% commission on all sales he procured as compensation for his efforts. Steve’s first sale was four months ago to Rich Man, a wealthy pediatrician in a neighboring state. Rich was interested in the technology and was hoping to one day market it to some of his patients’ parents.

Last week, you were approached by FiberWorld, Inc., one of the largest fabric companies in the world. FiberWorld is interested in discussing a possible joint venture with CloudFabric. You discuss the possibility with Ann and Bob and they both agreed that a joint venture with FiberWorld may be worth exploring. You scheduled a meeting with FiberWorld’s board and CloudFabric’s board for next week. Last night, while you, Ann and Bob were preparing for the meeting with FiberWorld, Ann got a frantic call from Steve. Steve had just learned that Rich filed a lawsuit against CloudFabric. His BabySpeak blanket had overheated and caused significant burns to his two-year old daughter’s body. He is seeking more than $250,000 in compensatory damages. Given Rich’s standing in the community, the lawsuit is likely to get a lot of public attention.

Questions

  1. Let’s assume that FiberWorld wants to have the joint venture discussion with CloudFabric primarily to learn about your business. Does CloudFabric have any intellectual property which it can or should protect? How should you go about protecting CloudFabric’s IP during the discussions with FiberWorld? If CloudFabric strikes a deal with FiberWorld, will CloudFabric lose any rights to its IP going forward? What should CloudFabric do to protect the rights in its current and future IP?
  2. Ann and Bob did not consult with you before agreeing to bring on Steve as a salesperson. Is the verbal agreement between Steve and CloudFabric or is the agreement just between Ann, Bob and Steve? Please explain your answer. Assuming the agreement is a valid contract, who would be liable for breach if Steve is not paid commissions under the agreement?
  3. Who could be liable for the injuries sustained by Rich’s daughter? Please explain your answer.