Trust the Leaders 2.0 - Volume 7 by Smith, Gambrell & Russell, LLP

Leaders Trust the

A PUBLICATION OF SMITH, GAMBRELL & RUSSELL, LLP

Volume 7

2.0

SGRLAW.COM

What's Hot?

Trending in Legal 2022

Volume 7

Contents 3

Editor’s Letter

Time Running Out for Forever Chemicals: EPA Gets Tough on PFAS

Forum Selection Clauses: A Little Time and Thought Now Could Save You a Lot of Time and Headaches Later

Practical Considerations When Including Restrictive Covenants in Employment Contracts

What's the Protocol Here? Navigating Web 3.0

Non-Union and Union Employers – The National Labor Relations Board’s Impact on Your Business

SGR Holds Due Diligence Roundtable on Lessons Learned from Theranos Case

The information contained herein has been obtained from sources believed to be reliable. The content and information in this publication do not constitute legal advice, do not in all cases reflect the opinions of SGR or its attorneys and are not in all cases complete or current as of the publication date. This publication is not intended to and does not create an attorney-client relationship or provide legal advice or legal opinion. Legal advice should be obtained from one’s legal counsel. Permission is granted to use and reproduce this publication in whole or in part for internal and personal reference, provided that proper attribution of authorship is given. Except for material in the public domain, this publication may not be further copied, modified, used or distributed, in whole or in part, in any form or by any means without the written permission of Smith Gambrell Russell. All other rights expressly reserved.

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Editor’s Letter Ladies and Gentlemen,

•

Welcome to spring! And to this issue of Trust the Leaders 2.0, the digital magazine of Smith Gambrell Russell.

Recent state and federal regulation limiting the scope of noncompetition agreements to facilitate worker mobility (p. 16).

•

The Web 3.0 iteration of the World Wide Web, and how it will impact the way we interact, and transact, with one another (p. 20).

•

Current initiatives by the National Labor Relations Board to promotion unionization and address alleged violations of the National Labor Relations Act (p. 26).

•

What prospective investors and board members can learn from the January 2022 conviction of Theranos founder Elizabeth Holmes on fraud and conspiracy charges (p. 32).

Part of our role as our clients’ trusted legal advisers is to keep you updated on developments across the legal landscape that may impact your industry and your business. To that end, this issue is dedicated to an array of hot topics in the legal field that we’re monitoring for you. In the pages that follow, you’ll learn about the following: •

•

Expected action by the EPA to tackle a group of manmade chemicals, known as “forever chemicals” because they do not readily degrade in the environment (p. 4). How dealmakers should approach the forum selection provisions in their contracts, especially with the growing number of business courts and the continued availability of alternative dispute resolution procedures (p. 10).

Enjoy the issue!

Dana M. Richens Editor-in-Chief editor@sgrlaw.com

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Time Running Out for Forever Chemicals: EPA Gets Tough on PFAS

By Phillip Hoover and Emma Cramer

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Environmental

n October 18, 2021, the Environmental Protection Agency (EPA) announced an imminent, all-fronts attack on a class of chemical substances known as “PFAS” (perfluoroalkyl and polyfluoroalkyl substances) that, when fully implemented, will have sweeping effects on every major program administrated by the agency. The announcement came in the form of the agency’s PFAS Strategic Roadmap, which sets timelines to address harmful PFAS compounds in the environment, and utilizes existing authority and EPA programs to create a comprehensive, integrated approach to safeguard communities from PFAS contamination.

article focuses on two such programs that are likely to have an immediate effect on the regulated community: 1.

The listing of two PFAS compounds as hazardous substances under the Comprehensive Environmental Reclamation, Compensation and Liability Act (CERCLA); and

2. Utilizing the EPA’s authority under the Toxic Substances Control Act (TSCA) to require PFAS manufacturers and importers to provide critical safety data on PFAS.

CERCLA Listing

The Problem PFAS are a large group of manmade chemicals, about 4,700 in total, that do not readily degrade in the environment. These “forever chemicals” have been widely used since the 1940s and crop up in a multitude of consumer products, such as nonstick cookware, water-repellent clothing, stain-resistant upholstery and carpet, cosmetics, and grease-resistant products, to name a few. Their widespread use and their persistence in the environment have led to PFAS being present in most drinking water aquifers, and human and animal tissues. In recent years, studies of the forever chemicals have reached a clear consensus showing a strong link between PFAS and harmful effects in humans and animals.

The Approach As outlined in the Strategic Roadmap, the EPA intends to use the authority of every program under its administration to address the PFAS threat. This

One of the first affirmative actions to be taken by the EPA will be listing two of the most studied PFAS compounds – perfluorooctanoic acid, or “PFOA," and perfluorooctanesulfonic acid, or “PFOS,” as hazardous substances under CERCLA. A proposed rule listing the two compounds is expected in the spring of 2022, and a final rule is projected to be issued in the summer of 2023. The immediate effect of the designation will be to require facilities across the country to report releases or spills of PFOA and PFOS

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Environmental that meet or exceed the reportable quantity (RQ) assigned to the substances. In addition, the designation will grant to the EPA the authority to require investigation and remediation of PFOA and PFOS compounds at federal Superfund sites. The statute also authorizes Potentially Responsible Parties (PRPs) to sue other PRPs for contribution for cleanup cost, which inevitably leads to protracted negotiations and litigation regarding apportionment of liability. Any time a new hazardous substance is added to CERCLA’s list, the class of PRPs at Superfund sites is potentially expanded. New PRPs are especially likely with PFAS compounds given their ubiquitous nature in the U.S. marketplace and the number of manufacturers who have used them. In addition to expanding the scope of investigations at current federal sites, the CERCLA inclusion will potentially lead to reopening sites that are undergoing long-term operation and maintenance under approved Remedial Design/Remedial Action (RD/RA) plans. These reopeners will almost certainly lead to additional liability for PRPs who have previously settled with the EPA and other

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

PRPs, and who have entered into consent decrees and cost-sharing arrangements for site remediation. Most states’ remediation programs adopt by reference the federal list of hazardous substances. The effect of state adoption will be to extend PFOA and PFOS investigation and remediation obligations down to state-administered sites, which are typically smaller and far more prevalent than their federal counterparts. Similarly, the designation may have a reopening effect on federal and state brownfield decisions. Federal and state brownfield programs can only release prospective purchasers from liability for hazardous substances that are known at the time of the application. As a result, the associated brownfield agreements will not provide coverage, and therefore liability releases, for substances not known at the time of the application. Brownfield agreements that require any form of long-term monitoring and maintenance would be especially susceptible to this type of reopener, especially if there is any reason to suspect that PFAS compounds might be present.

Due Diligence and the AAI The hazardous substance designation will also change the face of environmental due diligence for transactions involving commercial and industrial assets. Environmental due diligence is required to establish the “innocent landowner" defense to CERCLA liability. A necessary element to establishing the defense is that purchasers conduct an “all appropriate inquiry” (AAI) into the condition and history of a property prior to purchasing it. Where the AAI standard is satisfied, a PRP can effectively assert the innocent landowner defense to CERCLA liability, which prevents the landowner from being responsible for funding future site cleanups.

hazardous substances, failure to include PFAS in the Phase I Assessment would result in the report not satisfying the AAI Standard, potentially making the innocent landowner defense unavailable. How purchasers and lenders seeking to conduct AAI should interpret the risk presented by the presence of PFAS remains uncertain. The health effects of PFAS are still being studied and are largely unknown. At this early stage in their regulatory life, there is little precedent for analyzing the risk presented by PFAS when they are detected in the environment. Current healthbased drinking-water standards for PFAS are

The EPA has long acknowledged that the AAI rule’s requirements can be satisfied by following the practices established by the American Society for Testing Materials (ASTM) Standard E 1527, which has become the industry standard for a Phase I Environmental Site Assessment. In response to the imminent listing of PFAS compounds, ASTM has revised its Phase I standard to address emerging contaminants such as PFAS. Under the revised standard, PFAS is identified as a “non-scope” consideration, meaning that users who commission Phase I assessments can choose to expand the scope to assess the possible presence of PFAS constituents in or on the subject property. This is the same status currently given to lead-based paint, asbestos and radon. Given the imminent nature of the CERCLA designation, however, and the fact that several states have already started including PFAS compounds in their cleanup programs, property buyers are strongly advised to including PFAS analysis in their ASTM Phase I due diligence. Of course, when PFAS compounds become federally regulated as

measured in parts per trillion rather than the parts per million typically seen with other hazardous compounds. As a result, target cleanup levels are expected to be quite low, making health-based remediation actions difficult and very expensive to complete. Given this uncertainty, and a lack of experience in the environmental industry in dealing with PFAS-contaminated sites, it will be difficult for environmental professionals to provide accurate risk assessment analysis. This uncertainty will likely have a cooling effect on purchasers’ and lenders’ willingness to consider transactions where PFAS are potentially present.

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

TSCA The primary tool the EPA intends to use to collect information on PFAS and their health effects is the Toxic Substances Control Act (TSCA). In 2020, Congress directed the EPA to utilize its authority under TSCA to develop a process for prioritizing which PFAS should be subject to additional research. To gather the data needed to develop PFAS priorities, the EPA is utilizing the Chemical Data Reporting (CDR) rule under TSCA. The CDR rule requires manufacturers (including importers) to provide the EPA with information on the production and use of chemicals in U.S. commerce. In response to the 2020 congressional directive, in January of 2021, the EPA proposed new reporting requirements for PFAS under the CDR. The proposed rule amendment is designed to enhance reporting, and to eliminate exemptions that were previously available to PFAS compounds. The amended rule will require companies that manufacture or import PFAS compounds to report their uses, production volumes, disposal records, exposures and hazards for hundreds, or potentially thousands, of PFAS substances dating back to January 1, 2011. The new reporting rule will cover a vastly expanded class of manufacturers and importers, as the EPA removed exemptions that would normally be applicable. Notably, the rule does not contain an exemption for “articles.” Generally, the purpose of the article exemption is to make clear that manufactured goods themselves are not considered “chemical substances” subject to the CDR requirements, even though they may contain or be made up of chemicals that are subject to CDR. Removing the article exemption

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

for manufactured goods containing PFAS will impact entirely new segments of the supply chain that handle articles containing PFAS who have not previously fallen under TSCA’s regulatory regime. Additionally, under the proposed rule, there is no exemption for “small manufacturers and processors” who are otherwise exempt from the CDR rules. TSCA defines “small manufacturer” as one with total sales, combined with those of the parent company, of less than $12 million; or total sales with the parent company of less than

$120 million and annual production volume of a qualifying chemical substance that does not exceed 100,000 pounds at any individual plant site. Under the proposed rule, this definition is inapplicable, and all companies could be required to report on PFAS use, placing a significant regulatory obligation on very small manufacturers. The EPA will also use its authority under TSCA Section 4 to require manufacturers and importers to fund and conduct studies on the health risks presented by priority PFAS compounds. Under Section 4, EPA has broad authority to require manufacturers (including importers) or processors to test chemical substances and mixtures.

Environmental This testing is required to develop data about health and environmental effects when there is insufficient data for the EPA to be able to determine whether a chemical substance or mixture presents an unreasonable risk to human health or the environment. Normally, testing is done by and at the expense of a manufacturer or importer who seeks to introduce a new chemical into commerce or has a new use for a chemical substance already registered under TSCA. Section 4 review will be used to ensure that all new PFAS compounds, and all new uses for existing PFAS compounds, are safe before entering commerce. EPA will also use its authority under Section 4 to require review of existing PFAS that have already undergone Section 4 review to assure that they are not being used in harmful ways. Finally, Section 4 review will be used to prevent resumed production of harmful “legacy” PFAS – PFAS chemicals that have previously undergone Section 4 review, but are no longer in commercial use – without conducting appropriate healthbased analysis based on the latest information and knowledge. The data collected will be used by the EPA in future listing decisions under CERCLA, and in setting health-based standards under other programs administered by the agency such as the Clean Air Act, the Clean Water Act and the Safe Drinking Water Act.

Conclusion The EPA’s PFAS Plan outlines a very ambitious and broad approach to identify and eliminate environmental and health hazards posed by PFAS in the environment. This article focused on just two of the prongs of the EPA’s Strategic Roadmap, which are likely to take effect in the very near future and have an immediate regulatory effect on

the U.S. marketplace. In the same Roadmap, the EPA has stated its intent to address drinking water contamination, set industrial effluent discharge limits and air pollution limits, and establish waste handling practices under the Resource Conservation and Recovery Act. At a bare minimum, companies involved in the chemical, manufacturing and industrial sectors need to carefully examine their chemical usage and supply chains and find substitutes for and eliminate the use of PFAS altogether. In addition, in all transactions where environmental due diligence is warranted, prospective buyers should consider adding PFAS review to the scope of the Phase I Environmental Site Assessment in order to assess the potential for the property or the business operating on the property to have used or released PFAS chemicals in the past. As outlined in the EPA’s Plan, a substantial amount of regulation concerning PFAS is coming. Businesses must start making plans now to avoid costly enforcement actions and litigation in the future.

If you have any questions about these issues, please contact your Environmental Law counsel at Smith Gambrell Russell or contact the following:

Phillip Hoover phoover@sgrlaw.com

Emma Cramer ecramer@sgrlaw.com

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Litigation

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Forum Selection Clauses:

A Little Time and Thought Now Could Save You a Lot of Time and Headaches Later By Austin Hemmer and Tony Cochran

hen drafting or negotiating a contract and after working through the substantive provisions, do you too often just use the same-old boilerplate provisions from an earlier contract, e.g., forum selection, merger clause, choice of law, etc.? These items can indeed be afterthoughts. Do they really matter? Well, as litigators, we can tell you that these seemingly mundane clauses can and do have ramifications when a dispute arises. Nowhere is this more immediately felt than in a forum selection clause or the related dispute resolution clause. Along with a choice-of-law provision, these are some of the first places we look when we begin to analyze the dispute and help the client come up with a game plan. A forum selection clause could be outcome determinative and will also play a role in how quickly and efficiently your dispute may get resolved, which in itself can be outcome determinative if, for example, there is a large discrepancy in resources or leverage between the parties. Perhaps never before has this been more important as courts struggle to clear dockets suffering from pandemic-related backlogs. The focus of the courts will almost certainly land first on

criminal and family proceedings, with your business dispute falling much further down the line. The good news is that, as one attorney famously quipped, you are not a potted plant.1 You can negotiate where and how your disputes will get resolved. Forum selection clauses are simply a matter of contract and presumptively valid. The parties can waive personal jurisdiction and select any forum they can agree upon, subject to a court’s subject matter jurisdiction. Thus, a wide variety of options arms you with the ability to choose (or at least negotiate for) the best possible forum for these times and your business. What are the factors to consider? Most businesspeople want a convenient, fair, predictable and prompt decision with minimal expense. It may also be important to have a decision maker with some specialization in business disputes generally, or some expertise in a specific industry. You should also consider whether there is a need for confidentiality. And in this post-COVID world where a new wave of infections could disrupt proceedings, you should consider whether the forum has embraced virtual proceedings and has invested in the necessary information technology resources and staff.

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

You should also consider the law of the jurisdiction that you choose. While you can utilize a choiceof-law provision to select the law governing the contract, a court may still tend to revert to the law of the state where it sits (i.e., the forum state) or may decline to apply the parties’ chosen law if it is contrary to the forum state’s public policy. And for tort claims that may be brought in the same proceeding as a breach of contract claim, such as breach of fiduciary duty, the court will apply the choice-of-law and conflict-of-laws principles of the forum state to determine what law to apply. This can have enormous consequences. For example, for these kinds of claims, most jurisdictions might apply the law of the jurisdiction where the conduct occurred or the jurisdiction with the greatest interest in the claim, but some jurisdictions will simply apply the forum state’s law. Even in arbitration, the law of the forum state can have a significant impact on the proceedings, as discussed below.

So, what are your options?

flexibility in choosing where to assert a claim if you act first. But having no forum selection provision and being subject to suit anywhere jurisdiction and venue exist leave you open to litigating in an inconvenient forum chosen by your opponent. You could find yourself in your opponent’s home forum, one with common law bad for your position, and/or one suffering from a pandemic-related backlog of criminal cases. Why take this chance? The boilerplate – “the federal and state courts of [fill in the blank]”: At least you have narrowed it down to a (presumably) convenient state. But you again put yourself at the mercy of the luck of the draw. Since the judge oversees the litigation process, and, in addition, many contractual and commercial disputes are decided as a matter of law by the judge, he or she will have an enormous impact on whether you receive a fair, predictable and prompt decision. Don’t leave it up to your opponent to choose the court and don’t leave it up to chance to choose your judge. You could end up with a judge whose background is in criminal or family law or a judge who rarely sees a complicated business dispute, as is often the case in rural areas. You could also end up with a judge whose docket moves at a snail’s pace or a judge who refuses to handle matters virtually if another wave of COVID-19 infections threatens to disrupt proceedings. Or you could end up with a judge whose approach is to never make a decision and instead force litigants to settle out of frustration on the eve of an expensive trial, playing into the hands of those who litigate through delay. Don’t just go with the boilerplate.

Do nothing: You could, of course, have no provision governing where and how your disputes will get resolved. This certainly gives you some

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Litigation

Designate a specific court: You can improve your odds by selecting the court in a specific county, circuit or city. However, you could do even better by selecting a court with some specialization in business disputes and no crowded criminal dockets. According to the Pew Charitable Trusts and data collected by the American Bar Association’s Subcommittee on Business Courts, over half of the states have business courts focused on handling business disputes.2 Most of these courts are of limited jurisdiction, meaning not every dispute can get resolved there. For example, one of the preeminent forums for corporate disputes, the Delaware Court of Chancery, is generally limited to hearing equitable claims or claims involving the interpretation of Delaware corporate documents. Likewise, the newly created Georgia State-wide Business Court is limited to certain types of commercial disputes and amounts in controversy. However, this limited jurisdiction is also what makes these courts so attractive. Business courts were created to secure the just and efficient resolution of business disputes by judges who are not overburdened by criminal or family law dockets and have attained some specialization in resolving complex commercial disputes, and also to foster a bar of experienced attorneys with expertise in commercial disputes who appear regularly before these same judges. All of this has been shown to lead to more fair, predictable and efficient outcomes for businesses.3

through a forum selection clause. Indeed, it may be the only way to get in front of such a court. For example, unlike the Metro Atlanta Business Case Division, a separate business court here in Atlanta, the Georgia State-wide Business Court

requires the consent of both parties. The Georgia State-wide Business Court will, however, enforce a forum selection clause choosing that court for the resolution of disputes.4 Mandatory arbitration: Mandatory arbitration can be a good option, especially if you believe it is important to have a decision maker with particular expertise in your industry or certain types of disputes. For example, if your contract concerns health care payments, you could require that the arbitrator(s) have experience with such disputes, which can add predictability to the result. Because arbitration is confidential, it can also be an excellent choice for disputes concerning confidential or trade secret information.

Lawyers and their clients should therefore give serious consideration to selecting a business court

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Litigation

However, with pages of rules and some arbitrators permitting dispositive motions, arbitration can often feel just about the same as litigation, rather than the sleek, alternative dispute resolution proceeding you envisioned. There is also the risk of a compromise decision by the arbitrator(s). Moreover, arbitrator fees, administrative costs and attorney fees can amount to an off-putting expense. The number of arbitrators is certainly a factor to consider in this regard. Paying for three experienced litigators or businesspeople to serve as arbitrators can get very costly. And having three arbitrators rather than one can slow the process.

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Creating a private, party-driven arbitration process rather than going through an established arbitration system (e.g., the American Arbitration Association) can often keep the costs down, provide predictability and the desired confidentiality and result in a prompt decision. However, great care will need to be taken to make sure the process and procedures are clear so disputes regarding the process don’t themselves end up in court. There are also some potential disadvantages to not being in court. For example, third-party discovery in arbitration can be very limited or perhaps not permitted at all.

You could find yourself confronting an important third-party witness or reviewing their documents for the first time at the final hearing. And if you obtain an award in arbitration, you still have to go to court to enforce it. For these reasons, it is important to consider the location of the arbitration because the forum state’s law may control on these types of issues. In the end, decisions regarding forum selection are not made in a vacuum. One size does not fit all. Each contract and each transaction can be unique. The above factors will likely carry different weight in each situation, and you cannot foresee all of the potential situations that may arise. But the point of this article is to take some time and try to contract

for the best forum for you. Don’t leave it to your opponent or chance. If you have any questions about these issues, please contact your Litigation counsel at Smith Gambrell Russell or contact the following:

Austin Hemmer ahemmer@sgrlaw.com

Tony Cochran acochran@sgrlaw.com

See https://www.gettyimages.com/detail/video/attorney-brendan-sullivan-counsel-for-lieutenant-colonel-news-footage/1272259940. See https://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2015/10/28/business-courts-take-on-complex-corporateconflicts. 3 See State of Georgia, Court Reform Council, Final Report at 19, http://georgiabusinesscourt.com/wp-content/uploads/2020/07/FINALREPORT_Court-Reform-Council.pdf. 4 See O.C.G.A. § 15-5A-4(a)(1). 1

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Practical Considerations When Including Restrictive Covenants in Employment Contracts By Dan Goldstein

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Employment

hile still enforceable in a vast majority of states, restrictive covenants in employment contracts have recently been the subject of state and federal regulation limiting their scope, while new laws restricting their enforceability continue to be proposed and make their way through legislatures and administrative agencies. These new laws not only place various limits on restrictive covenants, but in some cases, impose penalties on employers for violations of the law. Employers should be mindful of this evolving landscape when including restrictive covenants in employment contracts, both to ensure that the agreements’ terms are enforceable under the law, and to avoid potential civil penalties and damages.

Types of Restrictive Covenants Restrictive covenants in the labor and employment context are agreements between an employer and employee that restrict the activities of an employee following a separation of employment. Their purpose is to protect an employer’s intellectual property, goodwill, relationships, confidential and proprietary information, and trade secrets from falling into the hands of competitors. These covenants typically take the following forms, either as provisions to an employment or separation agreement, or as separate standalone contracts: •

Noncompete. A noncompete is an agreement or contractual provision between an employer and employee that prohibits the departing employee from engaging in, or performing services for, a competing business for a period of time following their separation of employment.

•

Nonsolicitation. A nonsolicitation clause prohibits a departing employee from soliciting the clients, customers or employees of their former employer for a specified period of time following their separation of employment.

•

Nondisclosure. A nondisclosure agreement requires employees to keep confidential, and prohibits employees from disclosing, proprietary and confidential information and trade secrets that were disclosed to employees during their employment with the employer.

Enforceability of Restrictive Covenants Restrictive covenants are primarily governed by state law, and their enforceability can vary significantly from state to state. In a majority of states, restrictive covenants will be enforced, provided they are reasonable in duration and geographic scope. What constitutes a reasonable duration for a restrictive covenant varies by jurisdiction but typically will range from six months to two years, though in some cases longer durations have been held reasonable under the circumstances. Likewise, the geographical scope of a restrictive covenant generally must be limited to where the employee provided services and where the employer does business. A majority of jurisdictions will also weigh whether the restrictive covenant is necessary to protect the employer’s legitimate business interest, whether it imposes an undue hardship on the employee, and whether it is injurious to the public. Because noncompetition clauses, in particular, limit a former employee’s ability to make a living, they are often subject to

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Employment

more judicial scrutiny and treated less favorably than the other restrictive covenants, such as confidentiality agreements and nonsolicitation clauses. Moreover, as described below, noncompete agreements have recently been subject to state and federal legislation limiting their reach.

State Regulation of Noncompetition Agreements A number of states have recently enacted statutes providing that noncompete agreements in the employment context are unenforceable, or nearly so. In California, Colorado, North Dakota and Oklahoma, noncompete agreements restricting post-employment conduct are either per se unenforceable subject to narrow exceptions, or subject to significant limitations. In January 2021, the District of Columbia passed one of the broadest prohibitions in the country on the use of noncompete agreements. The Ban on NonCompete Agreements Amendment Act of 2020 prohibits employers in Washington, D.C. from requiring an employee to sign a noncompetition clause. Other states have enacted statutes that, while still allowing for noncompetition clauses, limit their enforceability against lower-wage workers. Illinois, Maine, Maryland, Massachusetts, Nevada, New Hampshire, Oregon, Rhode Island, Virginia and Washington have all passed laws prohibiting employers from entering into noncompete agreements with workers who earn below a certain wage threshold. Almost all of these laws were passed, or amended to increase their scope, within the last three years. Some states (Florida, Massachusetts, Louisiana, Oregon, Utah and Washington) have also recently

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

enacted statutes limiting the acceptable time period of a noncompete, ranging from one to two years. Further, many states bar the use of noncompetes with respect to certain industries, professions and types of workers. One of the recent trends in this area is requiring noncompete provisions to be supported by additional independent consideration. Under the common law of most states, an offer of at-will employment constitutes adequate consideration. However, some states now require more. In Massachusetts, noncompete agreements must be supported by a “garden leave” clause that requires the employer to compensate the employee during the noncompete period or provide other mutually agreed consideration. In Illinois, sufficient consideration must consist of at least two years of continued employment or other independent consideration. Other states, by statute and common law, require consideration in addition to continued employment to enforce noncompetes entered into after the commencement of employment. What constitutes sufficient consideration for a noncompete varies on a state-by-state basis.

Federal Regulation of Noncompetition Agreements At the federal level, on July 9, 2021, President Biden signed an Executive Order on Promoting Competition in the American Economy. The order, among other things, encourages the Federal Trade Commission (FTC) to exercise its statutory rulemaking authority under the Federal Trade Commission Act to curtail the use of noncompete clauses and other clauses or agreements that may limit worker mobility.

In February 2021, a bipartisan group of legislators introduced the Workforce Mobility Act in the House and the Senate. The Workforce Mobility Act would prohibit the use of noncompete agreements except in the context of the sale of a business or the dissolution of a partnership, give the FTC and the Department of Labor enforcement authority, and create a private cause of action for violations of the statute, among other things. The Workforce Mobility Act is currently in committee review. While the FTC has not yet promulgated any rules with respect to noncompetes and the Workforce Mobility Act has not been signed into law, these executive orders and proposed legislation demonstrate the federal government’s view of noncompetes, and its intention to limit their scope in the future.

“Blue Penciling” Overbroad Covenants When a restrictive covenant is overbroad in duration or scope, many states permit their courts to “blue pencil” the offending provisions. “Blue penciling” is the term used when a court modifies an overbroad covenant to a level that is acceptable and enforces the modified version. There are notable variations among the states in the treatment of overbroad restrictive covenants and the availability of blue penciling. In certain jurisdictions, including New York, courts will only allow blue penciling in the absence of overreaching in the first place, and where the employer had in good faith tried to reasonably protect a legitimate business interest. In other words, employers cannot simply draft knowingly overbroad and overreaching restrictive covenants with the expectation that the courts will modify it to an acceptable level.

Notably, for years Georgia had a strong public policy against restrictive covenants in employment agreements. Georgia courts disfavored blue penciling and would strike down restrictive covenants in their entirety if they were unreasonable in whole or part. With the passage of the Georgia Restrictive Covenants Act in 2011, the law allows Georgia courts to blue pencil overbroad restrictive covenants entered into after May 11, 2011. Recent cases in Georgia, however, have construed the Act quite narrowly, with courts declining to use their discretion to rewrite vague and overbroad restrictive covenants. To increase the likelihood of enforcement, employers in Georgia should take extra care to draft clear, narrowly tailored restrictive covenants.

Best Practices Employers looking to protect their business interests, intellectual property, goodwill, confidential information and trade secrets from departing employees will need to do so within the changing landscape of state and federal laws. Employers should work closely with legal counsel to craft employment contracts and restrictive covenants that comply with the law when written, and that will be enforceable going forward.

If you have any questions about these issues, please contact your Employment Law counsel at Smith Gambrell Russell or contact the following:

Dan Goldstein dgoldstein@sgrlaw.com

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

What’s the Protocol Here? Navigating Web 3.0 By Michael Riesen

TRUST THE LEADERS 2.0 | Volume 6 | SGRLAW.com

Cyber Introduction: Web3

early 60 years ago, J.C.R. Licklider penned a series of memos describing his “Intergalactic Computer Network” – a globally interconnected set of computers through which users could access data and programs. Sound familiar? Today, we are confronted with changing landscapes in commerce, politics, finance, society and the law that are embodied in the so-called Web 3.0 or Web3 ecosystem.

What is Web3?

In 1967, the fundamental design for ARPA’s Internet “ARPANET” was published. ARPANET implemented Network Control Protocol (NCP), which used packet switching to allow multiple computers to communicate on a single network, and is regarded as one of the first working prototypes of the Internet. There are several layers in a technology stack that help define the interconnections and operability between computers. For example, you may have the physical layer, which defines the characteristics of the hardware (e.g., network interface, hubs, cables, connectors, etc.) in the network to enable

Web3 doesn’t have a single definition. Some reference Web3 when envisioning a network of data that is largely processed by machines in a machine readable language – computers talking to computers. Others define Web3 in terms of certain themes, namely, decentralization and trust, with blockchain as its technological foundation. But, to understand where we are going with Web3, let’s first look at a summary of how we got here.

A Summary of the Internet In the early 1960s, several researchers affiliated with the Advanced Research Projects Agency (ARPA), later referred to as Defense Advanced Research Projects Agency (DARPA), began building the framework that would take Licklider’s Intergalactic Computer Network from concept to implementation. Leonard Kleinrock published the first paper on packet switching theory in July 1961. Packet switching is a method for effectively transmitting electronic data that would later become one of the major building blocks of the Internet.

the computers to transmit and receive data. Many consumers relate to the physical layer when they are desperately searching to find the right cable to fit the port on their smart phone. And it’s not just the plug. The way the power and data move through the plug and interface with the device needs to be defined. In addition to the physical layer, a network implementation may include a data link layer (e.g., Ethernet), an internet layer (e.g., IP), a transport layer (e.g., TCP), and an application layer (e.g., HTTP). Each layer has its own protocol that governs the functionality of that layer. So why is this important?

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Cyber

Just as ARPANET used NCP to define the rules and functions that enabled data sharing across the network, there are other protocols that may be used depending on the network goals. Processes can evolve and may be upgraded. Most of us can relate to the various cellular network protocols and the evolution of the speed of transmission over cellular networks. We all recognize that nobody was streaming 4K movies on their car phone in 1990. Technology evolves and new protocols exposing new features are developed.

The Evolution of Web 1.0, Web 2.0 and Web 3.0

Then, in 1999, Darcy DiNucci published the following commentary on the transition from Web 1.0 to Web 2.0, stating: The Web we know now, which loads into a browser window in essentially static screenfuls, is only an embryo of the Web to come. The first glimmerings of Web 2.0 are beginning to appear, and we are just starting to see how that embryo might develop. The Web will be understood not as screenfuls of text and graphics but as a transport mechanism, the ether through which interactivity happens. It will ... appear on your computer screen ... on your TV ... your car ... your cell phone ... maybe even your microwave oven. Web 2.0 is what most of us recognize as the World Wide Web of today. This includes the complex web pages, searchable content, online banking and social media that we all rely on in professional and personal life. In other words, Web 2.0 is how we, a global society, stay connected with each other.

Tim Berners-Lee wrote the first proposal for the World Wide Web in March 1989. Together with Robert Cailliau, they published a management proposal in 1990 that outlined the principal concepts and terms behind the Web. The document described a “hypertext project” called “WorldWideWeb” in which a “web” of “hypertext documents” could be viewed by “browsers.” This World Wide Web embodied Web 1.0. Common themes of Web 1.0 include static pages, online guest books and HTML forms sent via email.

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Yet, some criticize the centralization of these tools, whereby large technology companies control the platforms that enable these global connections. Critics of the over-centralization in Web 2.0 are seeking alternatives to funneling their usage and data through these corporate entities. In other words, many were seeking a new protocol that enables peer-to-peer exchange of information without having to rely on “Big Tech” as a middleware. At the core of many of these critiques is a call for increased control over your personal data, privacy and digital security.

Enter the Trustless Protocol In 2008, Satoshi Nakamoto – a pseudonym for a currently unknown person or group of people – published a paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System. This paper defined a new

2.0. The Bitcoin system offered control over your personal data, privacy and digital security – all without a requirement to go through a centralized entity. Bitcoin was launched in 2009. Was it too good to be true?

The Bitcoin system offered control over your personal data, privacy and digital security. Like any revolutionary technology, the queue for those ready to adopt the technology is only outnumbered by the queue of those skeptics who are ready to point out the flaws in its implementation.

system for online payments. More importantly, this paper defined an alternative to centralized banking – a peer-to-peer financial transaction that did not require the parties to trust a centralized financial institution to facilitate the transaction. This was a proposal for a decentralized, trustless protocol for transactions. In a purely technical sense, this Bitcoin system and its protocols were just a continuance of the evolution of protocols governing how we share data. This was the next evolution in digital banking. And for many, this paper represented a manifesto that addressed the critical shortcomings of Web

Technology Implementation In the early days of Bitcoin, anyone looking to purchase Bitcoin needed to find a source. Initially, there were only two ways to obtain bitcoin – by mining it yourself or arranging a peer-to-peer (P2P) trade via a forum. Some of these P2P transactions involved “cloak and dagger” coffee shop meetups and portable hard drives straight from a spy thriller. In other words, just because the underlying technology of blockchain and the Bitcoin system were decentralized and trustless doesn’t mean the practical implementation was refined in the same way.

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Every major technology company has taken a hard look at blockchain technology. Several groups recognized the issues surrounding the exchange of Bitcoin. Digital crypto exchanges began to emerge around 2010. These exchanges offered the ability to buy, sell or exchange crypto currency and tokens in a digital marketplace. Wait! Now that I have to go through another entity, doesn’t this defeat the trustless aspect of blockchain?

Road – a marketplace that used Bitcoin as its sole currency and that was alleged to have facilitated anonymous criminal transactions including the sale of drugs and guns as well as money laundering. In 2014, Mt. Gox, a crypto exchange handling over 70% of all bitcoin transactions worldwide at the time, was hacked. An estimated 850,000 bitcoins belonging to customers and the company were missing or stolen, estimated at more than $450 million at the time. So, just as blockchain and Bitcoin started to become mainstream, a dark cloud was cast over the ecosystem. Maybe regulated, centralized Web 2.0 isn’t broken after all?

The Year of the Tiger

This is the sentiment that quickly began to sprout around opponents of blockchain implementation – suggesting that blockchain was an elegant solution looking for a problem to solve. And thus began the debate over whether blockchain, with its posterchild Bitcoin, was a technological renaissance or simply another well-intentioned scheme to be exploited by nefarious individuals. Wherever one stood on this debate, it did not help the general public’s sense of security when scandalous stories started to break. In 2013, the U.S. Federal Bureau of Investigation shut down Silk

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Fast forward to 2022. Bitcoin is still here. Several other crypto tokens and currencies have entered the fray. Every major technology company has taken a hard look at blockchain technology and many have developed their own protocols built on the same or similar foundations as published by Satoshi Nakamoto. After all, blockchain simply represents a technology system or protocol. Blockchain is an extension of the advancements in interconnectivity and sharing of information that humanity has been developing for over 60 years. Simply put, blockchain as a technology is not going to disappear anytime soon. Instead, like other systems and protocols that offer advanced features for our digital interactions, blockchain will be a foundation for future protocols that will define how we transact with each other.

Cyber

As we continue our global reawakening into a post-COVID society, the Year of the Tiger offers a boon to interpersonal relationships. People want to connect and share more than ever before. From Web 1.0 to Web 2.0 and now Web 3.0, the way we conduct our interactions with each other will be governed by protocols.

of development of this “Intergalactic Computer Network” are going to be just as exciting as the last 60 years. And, until trustless protocols govern every human interaction, there are counselors and advisers that can help you navigate the transition into Web3. Trust me.

Regulatory protocols will govern the manner in which exchanges and companies can offer cryptorelated services.

If you have any questions about these issues, please contact Smith Gambrell Russell or contact the following:

Privacy protocols will govern the manner in which we can control our own identity and data. Token protocols will define how we purchase tokenized land in a metaverse platform, and how we build our own layers on that land.

Michael Riesen mriesen@sgrlaw.com

Blockchain, NFTs and the metaverse are governed by protocols, some of which make a claim of being decentralized and trustless. Some of these platforms and protocols promise a true peerto-peer interaction that will change the way the world interacts. All I can say is the next 60 years

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Labor

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Non-Union and Union Employers – The National Labor Relations Board’s Impact on Your Business By Pat Hill and Yash Dave

or many years, in an effort to comply with the National Labor Relations Act (NLRA) and avoid unfair labor practice charges (ULPs), non-union and union employers have trained their frontline supervisors that: •

• •

•

Hourly employees may discuss (or complain about) their wages, wage increases and benefits (or lack of benefits) with other employees. Management cannot permit anti-union talk while prohibiting pro-union talk. Management may never prevent talk about unions (for or against) while employees are on non-working time. Management must be consistent in treating union solicitation the same as any other kind of solicitation by employees who are not acting on behalf of the company. This includes, for example, policies regarding sports pools, collections for gifts or flowers, and charitable collections.

who promised to become the “strongest labor President you have ever had” and a change in the majority status of the National Labor Relations Board (NLRB), the NLRB has demonstrated how it is targeting to upend the previous business-friendly administration’s laws, regulations and decisions. The current administration already created the White House Task Force on Worker Organizing and Empowerment to consider “issues that may be hindering full enforcement of workplace protections.” Despite these changes, the January 2022 Bureau of Labor Statistics report showed there were 241,000 fewer union members in 2021 than there were in the previous year. Only one in 16 workers belongs to a union. Based on these statistics, non-union and union employers might wonder if they should be concerned about the new NLRB. A justifiable concern exists because unions are filing more ULPs with the NLRB against non-union and union employers and the NLRB is seeking to promote union organizing.

Now, employers likely will need to conduct more training because, as expected with a new president

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Since being sworn in on July 22, 2021, Jennifer Abruzzo, general counsel (GC) for the NLRB, has lived up to President Biden’s commitment to “a cabinet-level working group that will solely focus on promoting union organizing and collective bargaining.” On August 12, 2021, the GC issued a memorandum instructing regional offices to send cases relating to certain issues to her office for consideration. The memorandum highlighted more than 40 decisions from the previous NLRB that are up for reconsideration, based on the GC’s view that they overruled legal precedent and are not consistent with the basic purpose of the NLRA to promote unionization. The memorandum goes beyond an intent to overturn the previous NLRB’s precedent – it also “identifies other initiatives and areas that, while not necessarily the subject of a more recent Board decision, are nevertheless ones I [GC] would like to carefully examine.” Those initiatives include: •

•

Information requests when an employer intends to relocate its operations; and

•

The right of an employer to withdraw recognition after the third year of a contract of longer duration.

On September 8, 2021, the GC issued another memorandum advising the regional offices to seek a variety of remedies to address alleged violations of the NLRA. The following list is not exhaustive: •

In cases involving unlawful terminations, the memorandum advises regions to seek compensation for consequential damages, front pay and liquidated back pay.

•

If the aggrieved employee is an undocumented worker, the memorandum recommends that regions seek compensation for work performed under unlawfully imposed terms, employer sponsorship of work authorizations and other remedies designed to prevent unjust enrichment.

•

In unlawful failure to bargain cases, the GC advises regions to seek remedies that include requiring the employer to submit to a bargaining schedule, submit status and progress reports to the NLRB, reimburse the other party’s collective-bargaining expenses, reinstate unlawfully withdrawn proposals, and submit to other broad cease-and-desist orders.

•

A unique suggestion in the GC’s memorandum is that regions should consider the hiring of a qualified applicant of the union’s choice in the event a discharged employee is unable to return to work.

Whether non-union employees have a right to union representation/witnesses at investigatory interviews; Whether an employer must provide the union with its interview questions in advance of the interview;

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Labor •

If the matter involves unlawful conduct during a union organizing drive, the memorandum suggests that regions seek a wide range of remedies that include: (a) granting unions contact information for and access to employees, including bulletin boards and equal time to address employees during an employer’s “captive audience” meeting about union representation; (b) requiring employers to reimburse unions for costs incurred as part of their organizing effort, including costs associated with any re-run election; (c) requiring an employer to read (with the union present) the “Notice to Employees and Explanation of Rights” (Notice) to employees, supervisors and managers, or possibly a video recording of the reading of the Notice, with the recording being distributed to employees by electronic means or by mail; (d) requiring an employer to publish the Notice in newspapers and other news media (including social media) at the employer’s expense; and (e) requiring employers to provide management and supervisor training on the NLRA.

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Labor

On November 29, 2021, a Memorandum of Agreement was created between the NLRB and the Department of Labor (DOL), Office of Labor-Management Standards (OLMS) to share investigatory information. The OLMS is an agency of the DOL that “promotes standards for democracy and fiscal responsibility in labor organizations.” The OLMS appears to be focusing attention on its Form LM-10 that is completed and submitted electronically via the OLMS’s website. The LM10 is used to report any payments to any union, union official and employees for the purpose of causing them to persuade other employees with respect to their bargaining rights; payments for the purpose of interfering with employees in the exercise of their bargaining rights; and payments

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

to labor consultants and attorneys for the purpose of persuading employees with respect to their bargaining rights. Recently, the OLMS targeted companies that have employees who filed a decertification petition – an attempt to remove a union where employees believe support for a union has diminished. Presumably, the OLMS is investigating whether any employee filing a decertification petition must have been paid by the company to do so. As a result of investigations, companies have had to provide proof that the employee and also the attorney representing the company during the decertification process were not paid to be “persuaders” and thereby subject to the LM-10 reporting requirement.

Union employers should monitor the developments from the NLRB and associated federal agencies . In December 2021, the NLRB announced that it will issue proposed rulemaking on the standard for determining whether two employers are “joint employers” under the NLRA. The NLRB is expected to revert to its 2015 standard that two companies were deemed to be joint employers if they possess an ability to indirectly control employment terms and conditions of another employer’s employee, even if the company never actually exercised that ability. President Biden signed an executive order on February 4, 2022 that mandates the use of project labor agreements (PLAs) on federal construction projects valued at or above $35 million. PLAs are pre-hire collective bargaining agreements between contractors and labor unions that set the terms and conditions of employment for a specific construction project, such as wages, hours, working conditions, worker qualifications and dispute resolution processes. Thus, under a PLA, the government or a general contractor negotiates with one or more unions to set the terms of the project before the project starts. While the order does not require construction companies to unionize, it does require federal construction contractors to adhere to the terms of PLAs. Under the order, PLAs must include

guarantees against strikes and lockouts, prompt and mutually binding procedures for resolving labor disputes, and mechanisms for labor-management cooperation on matters of mutual interest and concern, including productivity, quality of work, safety and health. As the federal government pushes forward with the Biden administration’s initiatives, non-union and union employers should monitor the developments from the NLRB and associated federal agencies and work with counsel to review and update policies and procedures to comply with the new rules and regulations.

If you have any questions about these issues, please contact Smith Gambrell Russell or contact the following:

Pat Hill phill@sgrlaw.com

Yash Dave ydave@sgrlaw.com

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

SGR Holds Due Diligence Roundtable on Lessons Learned from Theranos Case By Lori Gelchion, Bob Hussle

Michael Riesen, and Emily Ward

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Roundtable

SGR recently hosted an informal, virtual roundtable to discuss some of the lessons that can be learned from the Theranos saga and the recent trial of its former CEO, Elizabeth Holmes. SGR partners Lori Gelchion and Bob Hussle (Corporate Practice), Michael Riesen (Intellectual Property Practice) and Emily Ward (Litigation and White Collar practices) each approached the case from their unique vantage point and discussed issues ranging from investor due diligence to corporate governance policies to patents. They also shared advice for company directors, investors and other lawyers. Below are some key excerpts and topics covered in their panel.

Background: Theranos was a privately held corporation that claimed to have developed a breakthrough bloodtesting technology that only required very small amounts of blood. The company raised nearly $700 million from venture capitalists and private investors, most of whom were ultra-wealthy, in private placements not registered with the Securities and Exchange Commission (SEC). At its peak, Theranos was valued at approximately $10 billion. Eventually it was revealed that many of the claims made by Theranos and Ms. Holmes about its technology and business were false. The SEC brought a civil action against Theranos and Ms. Holmes under the anti-fraud provisions of federal securities laws, which was subsequently settled. The Justice Department then brought an 11-count criminal indictment against Ms. Holmes for wire fraud and conspiracy, among

other charges. Based on the same conduct as the SEC’s civil action, in January 2022 a jury convicted Ms. Holmes of three counts of investorrelated wire fraud and one count of conspiracy to defraud investors; the jury was unable to reach a unanimous verdict on the remaining charges.

Investor Due Diligence Emily: Theranos raised its money through private placements to pre-selected investors and institutions, not publicly registered offerings in the open market. At least some of these socalled sophisticated investors did very little due diligence or investigation into the company and its claims. What kind of diligence might have revealed that something was amiss or at least sent up some red flags? Lori: It’s very typical, almost universal, for investors to review the issuer’s financial statements and corporate records. Some investors asked for these items from Theranos but did not receive them. Receiving pushback on this very basic request is clearly a red flag. It’s also typical for investors to review material contracts. Given the claims made against Theranos, review of Theranos’s contracts with the military, retailers or pharmaceutical companies may have revealed, for instance, that claims of Theranos products being used by the U.S. Department of Defense in Afghanistan were not supportable.

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Roundtable

Investors could have also performed diligence on the Theranos supply chain. This may have revealed that Theranos was purchasing traditional blood-testing equipment from third parties. This should have led investors to ask “why?” As we now know, Theranos was testing blood samples on other companies’ equipment and claiming it as their own.

Investors might have also engaged health care and technology experts to diligence the product. Simply put, does it work? Some investors never asked to see the blood analyzer in action, and those who did ask questions about the technology received answers that were characterized as cagey, indirect, oblique or deflective. Ultimately, even those investors who did conduct some due diligence were still defrauded because their diligence did not uncover the fraud.

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Emily: Focusing on start-ups, what kind of due diligence should investors consider taking when considering whether to invest in a start-up company like Theranos? Lori: Diligence on start-ups typically involves reviewing financial statements, corporate records, material contracts, the product or the technology, the market capitalization, the business model, and projections, among other things. With startups in particular, it’s also important to diligence the people – the founder, the senior executives and the key management. Is there sufficient experience and expertise in the C-suite to know that what the company is attempting to achieve is actually possible? Do they have a fundamental understanding of the product or process and how it works? And do they have the leadership and experience necessary to achieve what they envision?

Corporate Governance – Investor Due Diligence Emily: One of the consequences of Theranos being a private company is that it did not have many of the corporate governance safeguards required for public companies like an independent audit committee or whistleblower protections. What should a prospective investor look for when considering the corporate governance policies of a private company?

One thing you might ask a company is what their whistleblower policy is. Bob: With respect to the board composition, it’s important for potential investors to note not only the qualifications of each of the directors but also what their personal investments are in the entity in which you are about to invest. Ideally, you would like to see a board comprised of individuals with significant personal investments and stakes in the entity. There is also no requirement for private companies to have audited financial statements, but at some point during the life cycle of a private company, you would expect that prior significant investors would demand that the company prepare and distribute audited financial statements. So the fact that they don’t have those should be a clear red flag. Theranos was valued at approximately $10 billion at its peak so it’s almost inconceivable that it could go that long without having audited financials. Emily: One other corporate governance safeguard lacking at Theranos was for whistleblowers. Internal whistleblowing was not protected by law at Theranos and was reportedly highly discouraged. Is that something prospective investors should consider?

permitted by law to disclose to the government without fear of reprisal.

Corporate Governance – Board of Directors Due Diligence Emily: Are there any additional corporate governance considerations that someone should investigate when considering whether to join the board of a private company like Theranos? Bob: What they might also wish to examine is whether there are committees of the board, like an audit or a corporate governance committee. Does the board meet in executive sessions without management? Does the company have auditors and does the board have direct access to those auditors? Those are all things that, if I were considering joining a board, I’d want to know about. In addition, I’d want to know if there is insurance in place, how the board operates, and whether it conducts its oversight of the entity in a way that discharges the board’s duties.

Bob: Absolutely. One thing you might ask a company is what their whistleblower policy is, and whether they have updated their employee nondisclosure forms to make clear that those employees are permitted to talk to the government. Many employees still don’t know that they are

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Diligence of Patents Emily: Elizabeth Holmes and Theranos filed for, and were granted, several U.S. patents. This is something that likely made them look like a good investment, both for individual investors and some of the large companies who had contracts with Theranos. Does the fact that Theranos was granted patents for technology mean the technology itself was good and vetted by the U.S. government?

accept the widget company’s representation that it has the exclusive rights to the electric car without further investigation or diligence. In that situation, you may find out that the patent applications were still pending, or maybe they were abandoned, or maybe they were granted and only covered a very specialized particular area – maybe the battery pack and nothing else. That’s why it’s important that we do have diligence in the patent area. One way to conduct diligence is to look at the patent application. A good patent application should include enough details such that you’re teaching somebody else how to do it or how to make it. If you see hundreds of millions of dollars in investment after the applications were filed, or years and years of trial and error and even third-party equipment being brought in, one may speculate very quickly that what was put in the application was not necessarily enabled because someone couldn’t just go out and make it based upon what was written there. Emily: What sort of patent-related diligence is accessible to a prospective investor in a company?

Michael: Patents are meaningful to competitors, to investors and to the patent owners themselves. But does having patents mean that it’s been vetted, that the technology is good? The short answer is no. With increased public interest in patents comes some general misinformation and misnomers, if you will. For example, someone may read that a widget company has patents on an electric car, and without a full understanding of the scope of those patents,

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Michael: I think it’s important that you understand what the scope of the patent really covers. That could mean just picking up the patent and having someone look at it with that technical and legal eye to determine what is really covered by this patent and whether there are problems with the patent. Just because the Patent Office has put its stamp on it doesn’t necessarily mean that the challenges are over. There are several jurisdictions that allow post-grant challenges. When conducting diligence, you should look to identify whether these patents could be challenged or invalidated.

Roundtable

Key Takeaways: •

Issuers: Your innovators must tell investors the truth about what their technologies can do today, not just what they hope it might do someday.

•

Investors: Be wary about investing based on relationships without doing sufficient diligence. Even if you have a relationship with and trust the founder, a board member or other investor, you need to verify the claims made about the company before investing.

•

Patents: Investor diligence needs to determine if trade secrets are being protected by the company and if the patent portfolio can stand up to a challenge or enforcement. Government Oversight: We may see increased regulatory scrutiny on large private companies that have chosen to stay private rather than go public and expose themselves to public disclosure obligations. This could result in some rulemaking or legislation at either the federal and or the state level that companies should be aware of.

If you have any questions about these issues, please contact Smith Gambrell Russell or contact the following:

Lori Gelchion lgelchion@sgrlaw.com

Bob Hussle bhussle@sgrlaw.com

Michael Riesen mriesen@sgrlaw.com

Emily Ward eward@sgrlaw.com

To listen to the full Leaders Speak podcast, “Episode 37 – Due Diligence: Lessons Learned from Theranos,” visit https://sgrlaw.com/insights/ podcasts.

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

SGRLAW.com

TRUST THE LEADERS 2.0 | Volume 7 | SGRLAW.com

Trust the Leaders 2.0 - Volume 7

Articles inside

What's the Protocol Here?

Practical Considerations When Including Restrictive Covenants in Employment Contracts

Non-Union and Union Employers The National Labor Relations Board’s Impact on Your Business

SGR Holds Due Diligence Roundtable on Lessons Learned from Theranos Case

Forum Selection Clauses

Editor’s Letter

Time Running Out for Forever Chemicals