FALL 202 0 VOLUME 1 7/ NUMBER 3 TODAYSGENER ALCOUNSEL.COM
LEGAL’S ROLE IN BUSINESS STRATEGY Business realities, legal protection and compliance ADDICTION AND THE PANDEMIC
Self-isolation and substance abuse Internet gaming: Bad habit or addiction? Untreated addiction = legal liabilities
• Airtight oral contracts • Mediating on Zoom • Litigating on WebEx • Making expert advice undiscoverable
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TODAY’S GENER AL COUNSEL FALL 2020
The attorney’s dilemma with respect to counseling businesses is rarely expressed as succinctly as healthcare CEO Jason Gehman and Jimmie Strong, his legal adviser, state it in this issue of Today’s General Counsel: There is a “gray area” between business realities, legal protection and compliance, and that gray area is where most businesses operate. Keeping the company out of trouble is a good first step, but that’s all it is, and they go into some detail on what Gehman’s company expects beyond it. Keeping an expert’s advice confidential is a problem most litigators face sooner or later, and when it happens their familiarity with the rules governing fact discovery won’t be of much use. Allen Levine and Darren Goldman offer tips on how to maintain the attorney/client privilege over expert communications. French litigators Sylvie GallageAlwis and Gaëtan de Robillard write that climate change litigation in Europe is following a pattern that should be familiar to anyone who followed U.S. tobacco litigation: toxic tort claims against parties that profit from flimsy regulation, many of them copycat actions. They suggest that this template is applicable in any developed nation with a functioning court system, and it will inevitably end with entities in the carbon economy facing an onslaught of litigation. Mediating via video is a skill that more attorneys will have to become adept at. As an employment law specialist, Helene Wasserman is more familiar than most with the technology. In the Workplace Issues column, she discusses some unexpected problems that come up on WebEx and Zoom. For example, the time-tested formula of forcing parties into a room with their counsel and a mediator, then taking turns staring each other down until a deal is forged doesn’t work. Some unexpected ethical questions come up in the virtual space, as well. Attorneys should get used to it. There seems to be widespread agreement that the pre-pandemic status quo of face-to-face litigation and mediation is unlikely to return.
Bob Nienhouse, Editor-In-Chief bnienhouse@TodaysGC.com
FALL 202 0 TODAY’S GENER AL COUNSEL
8 | Executive Summaries
28 | Workplace Issues Remote Litigation is Here to Stay Learn the challenges, capitalize on the efficiencies. By Helene Wasserman
30 | The Antitrust Litigator Deciding Arbitrability When There is a Carve-Out Clause The arbitration company’s rules aren’t enough. By Jeffery M. Cross 32 | Privilege Place Need-to-Know Rules for In-House Counsel For me to know and you to find out. By Todd Presnell 48 | Back Page Front Burner Covid-19 is Increasing Fraud, But Companies Can Protect Themselves Internal audits are the first line of defense. By Steven Bock and Jordan Strauss
34 | Think You’ve Drafted an Airtight “No Oral Modifications” Clause? Sometimes it isn’t worth the paper it’s written on. By Marla R. Butler and David Castillo Gocher 36 | Legal’s Role in Business Strategy Navigating legal issues based on the client’s business goals. By Jason Gehman and Jimmie Strong 38 | Expect Pandemic-Related Addiction Among Employees Addiction is a medical issue, but it causes legal problems. By Sue Bright 40 | Don’t Let the Expert’s Communications Become Discoverable Try using the phone. By Allen Levine and Darren Goldman 42 | Is Internet Gaming Addictive? The World Health Organization thinks so. By Kurt D. Weaver and Madeline A. Campbell 44 | Climate Litigation Momentum Building in Europe A tsunami of copycat torts. By Sylvie Gallage-Alwis and Gaëtan de Robillard todaysgeneralcounsel.com
FALL 202 0 TODAY’S GENER AL COUNSEL
INTELLEC TUAL PROPERT Y
12 | Manufacturing Abroad to Avoid Infringing a Method Patent There’s always a way. By Jason Balich and Michael Pomianek CYBERSECURIT Y
14 | Cybersecurity Is a Fundamental Legal Responsibility Big risk for small companies. By Brad Smith
16 | Companies May Unknowingly Be Subject to Government Contracting Regulations Provisions are incorporated by reference into sub-contracts. By Ambika J. Biggs
20 | Defending a New York FCA Tax Investigation An uncertain tax position can trigger a big mess. By Zal Kumar, Leah Robinson and Dan Stein
18 | Compliance Strategies for Non-Competes Pay them, it’s foolproof. By Dan M. Forman
24 | Advertising Checklist for In-House Counsel Stick with mere puffery. By Penelope A. Preovolos, Claudia M. Vetesi and Mallory Morales
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FALL 2020 TODAY’S GENER AL COUNSEL
Executive Summaries INTELLEC TUAL PROPERT Y
Manufacturing Abroad to Avoid Infringing a Method Patent
Cybersecurity Is a Fundamental Legal Responsibility
By Jason Balich and Michael Pomianek Wolf Greenfield
By Brad Smith TurnOnVPN
Companies May Unknowingly Be Subject to Government Contracting Regulations
There is potential to infringe a U.S. method of manufacturing patent by manufacturing a product abroad and then importing it into the United States, but there are ways to avoid infringement. If you were to make a component using the patented method abroad, then import it, you would infringe the patent. Exceptions are when the component “becomes a trivial and nonessential component of another product,” or when the product produced by the patented method “is materially changed by subsequent processes.” If the U.S. patent claims a method used in making the final product, but the product of the patented method itself is not imported, there is no infringement. An example is using a patented method of making a catalyst to produce a chemical product that is imported. The catalyst is never imported, so there should be no infringement by importing the final product. If the U.S. patent covers a method of making the product, but the process used abroad only falls inside the scope of the claims a small fraction of the time, this is called “de minimis” infringement. One federal judge took the position that a finding of de minimis activity under 35 USC § 271(a), which governs domestic infringement, does not compel a finding of infringement under section § 271(g), which governs importation of products made by patented methods. Building a supply chain based solely on this exception would be risky.
There is a common assumption that only large firms with high-stakes clients are at risk of cyberattacks. Not true. Hackers know that small companies are far less likely to have dedicated security teams or tight security practices. For the effort involved in hacking a large company or law firm, hackers can attack multiple smaller businesses or firms and still achieve significant financial gain. If your tools are not secure, you are essentially inviting hackers into your systems. All devices that connect to a firm’s system and interact with confidential information and financial data need to be properly secured. Invest in anti-malware programs to help thwart any attacks. Install high-quality VPN software in your office router to encrypt data throughout the network. Make sure that devices used for remote work are covered by the security software. Far too many cyberattacks occur because someone opens a link that allows a criminal into a law firm’s systems. Cybercriminals use clever social engineering tactics to tempt your staff to click on links. Proper education around the risks is the best way to minimize them. Having a plan in place that details when and how to report a breach can make all the difference with respect to your firm’s liability. Additionally, you may be able to halt any fraudulent transactions if you act fast. Having a plan and acting on it is also likely to be a prerequisite for payment under any insurance policy.
By Ambika J. Biggs Hirschler
Many companies do not realize that they are government contractors and are subject to certain federal regulations. This often happens because government contracting is a relatively small part of their business or is handled by a separate division of the company. Or else, businesses that do not directly contract with the federal government do not realize that they are subject to federal regulations that apply to subcontractors. Executive Order 11246 prohibits government contractors from discriminating against employees or applicants based on their race, color, religion, sex, sexual orientation, gender identity or national origin. It generally applies to federal contractors and subcontractors with contracts exceeding $10,000, as well as federally assisted construction contracts. Federal contracting differs dramatically from commercial contracting with respect to wining and dining clients. It is common in the commercial world to treat clients to entertainment and send them presents but extending to government customers what you consider a customary token of appreciation can get you in significant trouble. Federal contracts and subcontracts are often lengthy documents that incorporate numerous other regulations. Prime contractors are required to flow many of these provisions down to their subcontractors and incorporate them by reference into subcontracts.
TODAY’S GENER AL COUNSEL FALL 2020
Executive Summaries PAGE 18
Compliance Strategies for Non-Competes
Defending a New York FCA Tax Investigation
Advertising Checklist for In-House Counsel
By Dan M. Forman CDF
By Zal Kumar, Leah Robinson and Dan Stein Mayer Brown
By Penelope A. Preovolos, Claudia M. Vetesi and Mallory Morales Morrison & Foerster
Non-compete agreements are an important tool. They protect against unfair competition from an employee. Historically, non-competes were enforced if they complied with a test of reasonableness, namely, whether the non-compete was limited to protect a legitimate protectable interest of the employer for a reasonable duration of time and over a reasonable geographic area. Ensure that any non-compete will be enforced in any jurisdiction where the employee might work. Whether under common law or state statute, each jurisdiction has a different definition as to “reasonableness.” Many states have undertaken legislative efforts to limit the application and enforceability of non-competes, especially as they apply to hourly employees. Other states exempt certain categories of employees from non-competes or will not enforce a non-compete against an employee terminated without cause. To stay ahead of legislation against non-competes in employment, consider paying for the non-compete time. It will be easier to convince a court that noncompete restrictions are reasonable if the employer pays the employee not to compete, as specified under Massachusetts law. This should include a monthly payment for the duration of the period, and a lump sum at the end payable upon verification that the non-compete wasn’t breached. Obtaining such agreements with critical employees is especially important in light of the Covid-19 crisis. Employee mobility in the remote workforce has substantially increased.
The New York False Claims Act (FCA) includes tax as a potential basis for false claims, allowing private plaintiffs and the New York Attorney General to seek treble damages from individuals and businesses for underpaying New York tax. In theory, the FCA unearths fraud by allowing whistleblowers to come forward with information the government would not otherwise receive through the tax administration process. In practice, however, the standards for civil fraud under the FCA don’t line up with the standards for tax compliance. Under the FCA, a standard but uncertain tax position can trigger a sprawling investigation. To manage an FCA tax investigation effectively, take the allegations seriously. The government essentially conducts two inquiries at the same time. It examines whether your tax position was correct, and whether you took that position knowingly. News of the investigation should be kept on a strict need-to-know-basis, especially within your company. The general counsel should create a small response team to perform tasks within the company and make recommendations to the ultimate decision makers. You need to know if your advisors have received subpoenas so that you can conduct privilege reviews of their materials. There are a myriad of additional considerations that you will have to think through, and some of them deserve consideration early on, like whether or not to request a Voluntary Disclosure Agreement or use a “Kovel” arrangement to hire an accounting firm that will assist the legal team under privilege.
The primary sources of federal advertising law are the Federal Trade Commission Act and the Lanham Act. The FTC Act prohibits “unfair or deceptive acts or practices.” Violations can lead to injunctions in district court, civil penalties, restitution and corrective advertising. Similarly, the Lanham Act allows private parties to obtain relief for false advertising. Many states have passed baby FTC acts and other consumer protection statutes. The Lanham Act differentiates between advertisements that are literally false and advertisements that are literally true but misleading in context. If an advertisement is not literally false, the plaintiff must establish that it is misleading by showing how consumers actually perceived it. For a misrepresentation to be actionable, it must be a statement of fact that can be objectively measured or empirically verified. Mere “puffery” cannot be the basis for a lawsuit. Puffery can be best described as opinions or superlatives commonly used in sales pitches. Disclosures cannot cure a false claim, but qualifications to avoid a misrepresentation are permitted. FTC guidelines suggest that disclosures be placed as close to the claim they qualify as possible. False advertising claims continue to be a hotbed of class action litigation against companies that sell consumer products and services, as well as a major focus of competitor litigation in consumer industries and beyond. The FTC, as well as California and other state attorneys general and district attorneys, also aggressively prosecutes these claims. todaysgeneralcounsel.com
FALL 2020 TODAY’S GENER AL COUNSEL
Executive Summaries FEATURES PAGE 34
Think You’ve Drafted an Airtight “No Oral Modifications” Clause?
Legal’s Role in Business Strategy
Expect Pandemic-Related Addiction Among Employees
By Marla R. Butler and David Castillo Gocher Thompson Hine
Most commercial agreements include a provision that states future modifications must be in writing and executed by the parties. In other words, there will be no oral modifications to the contract. But when the parties have an ongoing working relationship and the subject matter of the agreement is a regular topic of discussion, the teams often decide orally that the terms of the written agreement should change. This is exactly why that “no oral modification” provision is in the contract. The lawyers anticipated this and similar scenarios and included the provision to make sure that the contract is not modified without careful consideration and buy-in from the highest levels of the companies. Lawyers might be surprised to learn that in many states a no oral modification provision isn’t worth the paper it is written on and oral modification between the joint development teams might actually be enforceable. There is significant variation among the states with respect to the enforceability of no oral modification provisions in written contracts. What we know for sure is that drafters should not assume such a provision will be enforced. Where the risk of attempted oral modifications is high, drafters should consider using choice of law provisions to achieve the parties’ intended contractual goals. For example, under California law, a party asserting an oral modification need do so only by preponderance of the evidence. States like Delaware, New York and others, however, require more exacting proof.
By Jason Gehman PRSM Healthcare Jimmie Strong Baker Donelson
The tension between business realities, legal protection and compliance is heightened in the “gray areas” where business leaders often operate. Outside legal counsel can offer valuable perspectives to help navigate close calls at the strategy level and avoid pitfalls at the operational level. Alignment between the legal team, in-house and outside counsel, and business leadership should be the goal of every legal relationship. PRSM Healthcare, a domestic, “skinin-the-game” medical scheduling service in Wellsboro, Pennsylvania, partners with various gastrointestinal practices to provide medical scheduling services. The model was a significant gray area causing tension with legal regulations. Although the legal problem was clear, the easiest solution— switch the payment model to one not based on skin-in-the-game—was not viable. A team was assembled to implement a new business strategy. It included the legal department and non-attorneys with an understanding of data privacy and HIPAA compliance. The cohesive relationship between PRSM and their outside counsel resulted in achievement of immediate aims and set the stage for further success. Attorneys set the tone of client relationships by determining business goals and constraints first, legal questions and issues second, and the framing of legal issues in ways that redefine attorney success. Success in addressing legal problems alone results in a pat on the back. Success in navigating legal issues based on the client’s shared business and legal goals results in a lasting relationship as the client’s trusted advisor — the goal of the legal engagement.
By Sue Bright New Directions for Women
The pandemic is dominating the news, but the current addiction epidemic is critical as well. In fact, the two are inextricably linked. Calls to a national hotline dedicated to drug crisis counseling saw an 891 percent increase last March compared to March 2019. Addiction should be treated as a medical issue, but that does not preclude legal problems stemming from addictive behaviors. In-house legal departments should expect to see addictive disorders and be prepared to minimize risk for their businesses while supporting their employees. Substance use disorder causes a variety of legal problems, including loss of a professional license and DUI charges. Eventually employees will return to the workplace after long periods of working remotely. Self-isolation combined with external stressors, depression and anxiety can exacerbate substance misuse. In-house legal teams, along with HR professionals, can be key in supporting employers by providing resources to recognize signs of addiction and guidance in taking action. The longer active addiction goes untreated, the more likely it is that legal liabilities will occur. To refer employees most effectively to treatment, network within your local community. Over time, build a network of programs that specialize in various areas whether they’re female or male only, tailored for executives, or another niche. Allowing employees to access long-term treatment services is more cost-effective, less disruptive to the business, and limits the risks involved with continued addiction. todaysgeneralcounsel.com
TODAY’S GENER AL COUNSEL FALL 2020
Executive Summaries PAGE 40
Don’t Let the Expert’s Communications Become Discoverable
Is Internet Gaming Addictive?
Climate Litigation Momentum Building in Europe
By Allen Levine and Darren Goldman Becker & Poliakoff
For attorneys practicing in Florida State and in federal courts, a typical litigation consists of two discovery phases: fact discovery and expert discovery. Most litigators are familiar with fact discovery and know what must and must not be disclosed under the applicable rules of procedure. With respect to expert discovery, a number of variables will determine what must be disclosed to the opposing party. If a testifying expert considered and/or relied on a document or communication in forming his or her opinion, that document or communication is very likely discoverable, regardless of whether it would otherwise be privileged. Most attorneys prefer to have a written record. With experts, however, this preference can open the door to unwanted discovery. Use the phone. Edit drafts using screen sharing technology. Ask what types of documents are needed and provide only those documents. Make sure to periodically ask if there are any other documents that would be helpful and provide them. This allows the attorney to ensure that privileged documents and communications are not being provided, and thus are not subject to discovery. The uninformed litigator who assumes that the same rules apply to expert discovery as they do to fact discovery is walking into a trap. This mistaken assumption can lead to privileged communications and/or attorney work product being disclosed to the opposing party. By being mindful of the differences and taking simple precautions, litigators can make sure privileged materials remain protected.
By Kurt D. Weaver and Madeline A. Campbell Womble Bond Dickinson LLP
In 2014, the World Health Organization (WHO) concluded that the negative health consequences of excessive use of various electronic devices had reached the “magnitude of a significant public health concern” in an increasing number of countries. In 2018, the WHO released the 11th edition of the International Classification of Disorders (ICD-11), and gaming disorder was included as a behavioral addiction for the first time. The WHO blurs the line between reputable scientific conclusions and pure public health advocacy. There appears to be a lack of consensus on the scientific positions relating to gaming addiction. Indeed, many experts in the scientific community have voiced concern over classifying gaming disorder as a disease and have urged the WHO to postpone their formalization until more scientific evidence becomes available. The WHO’s declaration has generated litigation. The question is, is the WHO’s unproven assertion enough? The goal of science is to test hypotheses. That process typically begins with an observation, and proceeds to a hypothesis to explain the observation. This is followed by testing the hypothesis using sound methodology that is both valid and reliable. Once results are obtained, the process of peer review, publication and replication is followed. With respect to gaming disorder, one has to consider whether the cart has been put before the horse. Educating the trial judge on the current state of the science will be paramount in any litigation regarding a claim of addiction to video games.
By Sylvie Gallage-Alwis and Gaëtan de Robillard Signature Litigation
France, whose failure to act for the protection of the environment has been acknowledged by European and national courts, is becoming the scene of strategic actions against flimsy regulation and the parties that profit by it. Such claims will be the origin of copycat actions. It is already happening in the form of toxic tort claims. The French State’s failure to act was acknowledged by administrative courts on several occasions, including a January 2020 decision by the Administrative Court of Lille. The claimant argued that there was a causal link between her chronic sinusitis and the atmosphere pollution in and around Lille. The court noted that insufficient improvement of air quality in and around Lille is the fault of the state, but did not grant compensation, citing lack of evidence of a causal link between the claimant’s breathing problems and peak pollution over the period in question. The draft act voted on in March 2020 by the French Senate proposes to set up courts dedicated to environmental disputes. The draft proposes to extend the scope of the deferred prosecution agreement to serious breach of environmental laws or regulations. If adopted, it will definitely change the way environmental disputes are dealt with. The ever-increasing number of environmental standards, combined with the possibility of resolving disputes either before special courts or through a deferred prosecution agreement, demonstrate the rapid and inevitable development of climate change litigation. todaysgeneralcounsel.com
FALL 2020 TODAY’S GENER AL COUNSEL
Manufacturing Abroad to Avoid Infringing a Method Patent By Jason Balich and Michael Pomianek
nfringement of a U.S. patent is fairly straightforward for a company manufacturing in the United States. If it makes, uses, offers to sell or sells any patented invention without a license, it has infringed the patent. You might be surprised, however, that there is also the potential to infringe a U.S. method of manufacturing patent by manufacturing a product abroad and then importing it into the United States. Fortunately, there are opportunities to legally avoid infringement in such situations. First, some background: Every patent has what are called “claims,” the part of the patent that defines what others are prohibited from making, using, and so forth. Some patents claim a product, and some patents claim a method of making or using a product. Method patents can provide a degree of protection for products that are so well known that they can no longer be patented as products (think bulk commodities, as opposed to a new electronic gadget). Method of manufacturing pat-
ents are commonly used in such cases. They protect a novel way of making a product, even an old product. Let’s say you make or sell a product in the United States and want to take advantage of the technology protected by a method of manufacturing patent, without a license and without infringing. Let’s walk though some common scenarios to see how manufacturing abroad can be used to avoid infringing that U.S. method of manufacturing patent. Scenario 1: The patent claims a method of making an intermediate, a component of, or something for use in completing your final product, but not a method of making the final product itself. If you were to make the intermediate or component using the patented method in the United States, or outside the U.S. but then you were to import it to the United States, you would infringe the patent. However, there are two exceptions where you could legally make the intermediate or component outside the United States, use it to make the final product
outside the United States, and then import the final product into the United States without infringing. One exception occurs when the intermediate or component produced by the patented method “becomes a trivial and nonessential component of another product.” This includes situations where the patented method covers the manufacturing of minor components or ingredients, and then those components or ingredients are used in the final product. If all the manufacturing is performed outside the United States, then importing the final product itself will not infringe the United States patent covering the manufacturing of the components or ingredients used to make the final product. The second exception occurs when the product produced by the patented method “is materially changed by subsequent processes.” There have been several court cases that have analyzed what constitutes a “material change.” While the analysis that the courts apply is fact-specific, and aspects of these cases may not be entirely reconcilable, generally some change to the basic utility of the material will be held to constitute a material change. Under this exception one could, without liability for infringement, import a final product into the United States that is not itself patent protected, even if a method of manufacturing an intermediate of such product is patented in the United States, as long as the intermediate is materially changed in forming the final product. One potential pitfall for the unwary is that these exceptions do not apply to violations of the Tariff Act of 1930, which are litigated before the International Trade Commission (ITC). Thankfully, there are some prerequisites for patent owners to file a complaint with the ITC, one of them being that the patent owner must have already established a “domestic industry.” U.S. patent owners that operate outside
TODAY’S GENER AL COUNSEL FALL 2020
Intellectual Property the United States are not typically eligible to bring a complaint at the ITC. Thus, before relying on the two exceptions mentioned above, be sure that the patent owner is precluded from filing a complaint with the ITC. Scenario 2: The U.S. patent claims a method that is used in making the final product, but the product of the patented method itself is not what is imported into the United States. One example of this scenario might include using patented methods of testing for quality control of the final product outside the United States. Because the patented method covers producing test results, and does not cover producing the final product, importing the final product would not give rise to infringement of the patent. Another example might include using a patented method of making or regenerating a catalyst to make a chemical product that is then imported. Because the patented method covers the catalyst, which itself is never imported, there should be no infringement by importing the final product. One potential pitfall is that while one claim of the patent (such as the independent claim, so called because it stands alone) might only cover the testing or the catalyst, there might be another claim in the same patent (such as a dependent claim, so called because it references another claim in the patent) that specifically claims using that testing or that catalyst in making the final product. While there is an axiom in patent law that states it is not possible to infringe a dependent claim if you don’t infringe an independent claim, this scenario —where the dependent claim specifically extends the independent claim to cover a method of making the specific product you want to import— is a singular exception, and infringement of the dependent claim can be found even though importing that product will not infringe the independent claim of the same patent. Scenario 3: The U.S. patent covers a method of making the final product, but the process being used abroad for making the final product only falls inside the scope of the claims a small fraction of the
time, called “de minimis” infringement. De minimis infringement might occur, for example, when a process is first being started up, shut down or if a process control malfunctions. If the product was being made in the United States, there would typically be no exception to liability for de minimis infringement of a process claim, and the issue of the extent of infringement would only be applicable in determining the amount of damages due to the patent owner. Although still an open question, de minimis infringement abroad may be different. While the United States Court of Appeals for the Federal Circuit has not yet addressed the issue, at least one judge in the Federal District Court for the District of Massachusetts took the position that a finding of de minimis activity under 35 USC § 271(a), which governs domestic infringement, does not necessarily compel a finding of infringement under section § 271(g), which governs the importation of products made by patented methods. Building a supply chain abroad based solely on the possible existence of this de minimis exception would be very risky, but it is worth watching the case law. Should the Federal Circuit follow this district court lead, this would be another advantage to manufacturing abroad when facing method of manufacturing patents. Furthermore, even under settled law, claim construction and the prosecution history of the patent in question may provide a more robust reason why occasional incursions into the scope of a patented method may not result in infringement of that patent. A patent does not protect everything it describes. The claims provide the bounds of the invention protected by the patent. The first step to determine whether a process infringes a patent is determination of the scope and meaning of the patent claims — known as claim construction. Most inventions rely upon building blocks long since uncovered, and claimed discoveries will be combinations of what is already known. This may be acutely true of methods of manufacturing patents, which typically represent process improvements over prior methods. In these cases, the patent document itself, or
the patent attorney during the prosecution of the patent, may distinguish the claimed method from what was previously known. If this occurs, the claims of the patent cannot capture those distinguished or disclaimed method steps or process conditions as a matter of claim construction or estoppel. Thus, if the patent or prosecution history explains that the benefits of the claimed method only occur when its claimed conditions are practiced all or a substantial portion of the time, then as a matter of claim construction or estoppel, a method that only occasionally falls into the scope of the claims but otherwise practices method steps or conditions that were distinguished or disclaimed should not infringe. In sum, there can be a number of different scenarios in which manufacturing a product abroad and then importing it into the United States can legally avoid infringement of a method of manufacturing patent, but there are also a number of pitfalls for the unwary in doing so. The devil is always in the details, and a qualified patent attorney can provide advice on any individual situation. todaysgeneralcounsel.com Jason Balich is an attorney in the Litigation Practice at Wolf Greenfield. He counsels in patent, trade secret and commercial litigation matters before district courts, the International Trade Commission, and the Patent Trial and Appeal Board in post-grant matters such as inter partes reviews. Jason.Balich@WolfGreenfield.com Michael Pomianek is a shareholder in the Chemical & Materials Technologies Practice at Wolf Greenfield. He focuses his practice on patent prosecution, opinion work, due diligence, IP transaction and agreements, and IP counseling. Michael.Pomianek@WolfGreenfield.com
FALL 2020 TODAY’S GENER AL COUNSEL
Cybersecurity Is a Fundamental Legal Responsibility By Brad Smith
ll practicing attorneys face daily threats from cybercriminals worldwide. It does not matter whether you work for a large firm or are in a solo practice. Not only do lawyers and law firms deal with substantial sums of money, they possess confidential information that threat actors can use to leverage substantial ransoms. Failing to protect your firm and the money and information provided by clients will be costly financially and to the reputations involved. As IT and tech law specialist Sasa Markota noted, “Only when clients have full trust that their communication with the attorney is confidential can I get all the information I need to do my job. On the other hand, if that confidence is violated, clients could suffer irreparable harm, and my career and reputation would be ruined.” Let’s take a look at some fundamen-
tal cybersecurity points for lawyers and firms before going over actionable cybersecurity steps. BIG RISK FOR SMALL FIRMS AND DEPARTMENTS
There’s a common assumption that only large firms with high-stakes clients are at risk of cyberattacks. Not true. Hackers know that small companies are less likely to have dedicated security teams or tight security practices. For the effort involved in hacking a large company or law firm, hackers can attack multiple smaller businesses or firms and still achieve significant financial gain. Every staff member in a firm is responsible for cybersecurity. From office and support staff to senior partners, cybersecurity is a team effort. Although it is tempting to think that IT will take care of all security matters, this mindset is dangerous. The concept of proper
cybersecurity must permeate a firm’s ethos and practices. Below are some key areas that warrant consideration. If your tools are not secure, you are essentially inviting hackers into your systems. All devices that connect to a firm’s system and interact in any way with confidential information and financial data need to be properly secured. Invest in anti-malware programs to help thwart any attacks. You should also install high-quality Virtual Private Network (VPN) software in your office router to encrypt data throughout the network, shielding it from any prying eyes. Make sure that devices used for remote work are covered by the security software. The signature database should be updated, and the files fully scanned daily. Make sure that all software in use is set to automatically update. Software developers provide updates to patch
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Cybersecurity errors and alleviate exploitable security risks that allow hackers access. Make sure that updates are installed properly. The days when one password was good enough are long gone. Make sure everyone is using strong passwords and that these are being changed regularly. Everyone in a law firm should be using proper multi-factor authentication whenever they do work-related tasks. This should be applied to all devices and any cloud-based storage or software systems in use. Create cyber risk awareness. Far too many cyberattacks occur because someone opens a link that allows a criminal into a law firm’s systems. Cybercriminals use clever social engineering tactics to tempt your staff to click on links. Proper education around the risks is the best way to minimize them. Develop a healthy skepticism around suspicious emails and text messages before opening anything that seems above board initially. It’s easy to be fooled, especially when staff members are working fast and juggling multiple tasks. Law firm staff should never open suspicious links that arrive via email or short message service (SMS). Some training may be required before lawyers
The concept of proper cybersecurity must permeate a firm’s ethos and practices. and staff can differentiate between legitimate and dangerous emails. Make sure nobody is opening work emails on public wi-fi networks. Introduce an email deletion and retention policy. Check email settings regularly to make sure no redirects have been set up and emails are not being unwittingly forwarded to cybercriminals. Training by professionals is the best way to ensure a solid cybersecurity culture. Staff members can be the strongest or weakest link in cybersecurity. If your staff is vigilant and well informed, data
breaches due to human errors can be avoided. If not, malware on a compromised employee’s device could easily spread to a connected office network. Bear in mind that training carried out a few years ago will not encompass enough of today’s threats. Training should be repeated on a regular basis, and everyone in the team should be involved. CENTRALIZE CYBERSECURITY INFORMATION
Make sure all team members are on the same page when it comes to cybersecurity by keeping a copy of your procedures and key information in one place, and encouraging staff to review it. Your plan should include information on what to do if a breach should occur. Keep your clients in the cybersecurity loop. Securing your own systems is good; but if your clients, who are equally susceptible to hacks, aren’t adequately managing cybersecurity on their end, you may have an issue. Making sure that clients know about potential risks should be standard practice. The attorney-client relationship is not secure unless it is cybersecure. In your first meeting, let clients know about the risks that fraudulent emails pose. Confirm those risks in your first letter to clients and consider updating your standard letter of engagement. Require clients to verify an email request for payments before any money exchanges hands. In addition, some lawyers and firms include a warning at the bottom of their email signature. Brush up on any relevant data security laws. Failing to follow proper policies and procedures can result in legal malpractice. It is absolutely critical that all relevant data security legislation is followed to avoid expense, serious reputation damage and possible disbarment. The rules surrounding whether firms and attorneys are governed by state or federal laws when it comes to cybersecurity are somewhat murky. The American Bar Association (ABA) has issued rules and advisory opinions related to cybersecurity obligations, lawyers and law firms. As part of these Formal Opinions, the ABA stipulates
that attorneys should exercise reasonable efforts to stop “inadvertent or unauthorized” disclosures or access to client information. This includes staying up to date with technological developments and threats. Firms should abide by guidelines from the National Institute of Standards and Technology (NIST). The NIST provides the most comprehensive cybersecurity framework nationwide, and the one that is in use by the federal government. Under U.S. law, data owners face liability for losses resulting from a data breach even if the security failures are the fault of the data holder, such as a cloud provider. INCIDENT RESPONSE
The worst-case scenario is that a breach occurs, and sensitive client information is revealed to attackers. Having a proper plan in place that details when and how to report the breach can make all the difference to your firm’s liability. Additionally, you may be able to halt any fraudulent transactions if you act fast. Having a plan and acting on it is also likely to be a prerequisite for payment under any insurance policy. Make sure your response plan includes key information such as who you need to contact and when. Add contact information for a cybersecurity professional who can check your systems to ensure no further damage is done. Cybersecurity is a team effort that involves every single staff member in a law firm. Taking the right steps towards securing systems can mean the difference between success and failure. Follow the guidelines above to ensure your data, and that of your clients, is in safe hands. todaysgeneralcounsel.com Brad Smith is a technology expert at TurnOnVPN, a non-profit promoting a safe and free internet for all. email@example.com
FALL 2020 TODAY’S GENER AL COUNSEL
Companies May Unknowingly Be Subject to Government Contracting Regulations By Ambika J. Biggs
s surprising as it may seem, many companies do not realize that they are considered government contractors and are subject to certain federal regulations. This often happens because government contracting is a relatively small part of their business or is handled by a separate division of the company. Or else, businesses that
do not directly contract with the federal government do not realize that they are subject to federal regulations that apply to subcontractors. When people hear “government contractor,” they tend to think of large defense and technology companies, which receive billions in contracting funds each year. However, there are a wide variety of
businesses that aren’t typically thought of as government contractors — sporting goods and game stores, barber shops and salons, even amusement parks. A government contractor is defined as a company that contracts with the federal government for the purchase, sale or use of personal property or non-personal services. In essence, it is a company that
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Compliance provides goods and services to the government. A subcontractor is a business that enters into an agreement with a prime contractor for the purchase, sale or use of personal property or non-personal services that are necessary to the performance of a government contract, or under which any portion of the prime contractor’s obligations are performed. Having just one government contract could subject a business to additional
programs to help them monitor and examine their employment decisions and compensation systems to ensure equal opportunity and the employment and advancement of women and minorities. Federal contractors also must keep personnel and employment records relating to all aspects of employment from hiring to termination, including affirmative action programs as well as requests for reasonable accommodation and records identifying job seekers who were contacted. The Executive Order also prohibits contractors from firing or otherwise discriminating against employees or applicants for discussing or disclosing their compensation or another employee’s compensation, with exceptions for individuals who have access to other employees’ compensation information as part of their essential job function. Federal contractors and subcontractors may have to comply with Section 503 of the Rehabilitation Act of 1973, which prohibits discrimination against individuals with disabilities and requires employers to take affirmative action to ensure equal opportunity for such individuals. Section 503 contains antidiscrimination requirements beyond the Americans with Disabilities Act. It applies to any federal contractors and subcontractors who have contracts in excess of $15,000 for the procurement of personal property and non-personal services, including construction. While the aforementioned contractors and subcontractors must take affirmative steps to employ and advance individuals with disabilities, companies with at least 50 employees and contracts of at least $50,000 also must prepare and maintain an affirmative action program. Businesses also are required to keep personnel and employment records. The U.S. Department of Labor’s Office of Contract Compliance Programs (OFCCP) has established a utilization goal of seven percent for the employment of individuals with disabilities in each job group in an employer’s workforce or in
Having just one government contract could subject a business to additional government regulations. government regulations. Even if your company is not a prime contractor with the federal government, it can be subject to numerous regulations if it is subcontracting with a government contractor. In order to determine the applicable regulations, a company will need to examine its individual contracts, which lay out the regulations it must follow. ANTI-DISCRIMINATION REGULATIONS
Executive Order 11246 prohibits government contractors from discriminating against employees or applicants based on their race, color, religion, sex, sexual orientation, gender identity or national origin. It generally applies to federal contractors and subcontractors with contracts exceeding $10,000, as well as federally assisted construction contracts. You may be thinking that employers are already prohibited from employment discrimination under Title VII of the Civil Rights Act of 1964, which applies to all employers with 15 or more employees, but the Executive Order has additional requirements. In addition to prohibiting discrimination, it requires government contractors and first-tier subcontractors with 50 or more employees to provide compliance reports on their affirmative action efforts annually. Supply and service contractors and subcontractors that have at least 50 employees and a contract of $50,000 or more also must develop and maintain affirmative action
the workforce as a whole. The goal is not a quota. It is a benchmark against which contractors measure the level of representation of disabled individuals within their workforce. The Vietnam Era Veterans Readjustment Assistance Act prohibits federal contractors and subcontractors with contracts of at least $150,000 from discriminating against covered veterans and requires them to take affirmative action to employ and advance veterans. As with the Executive Order and Section 503, it requires certain contractors — those with more than 50 employees and a contract of $150,000 or more — to prepare and maintain an affirmative action program for veterans, as well as record-keeping requirements. In addition, it requires contractors to establish benchmarks for the hiring of veterans. The OFCCP is responsible for ensuring contractors abide by these employment regulations. Violations of the anti-discrimination regulations may be referred to the Solicitor of Labor for enforcement proceedings or the Department of Labor for judicial proceedings. Failure to abide by the regulations can result in the government withholding payments, termination of contracts and debarment from federal contracting. Contractors also may be subject to other regulations, such as the Walsh-Healey Public Contracts Act or the Davis-Bacon Act, requiring the payment of minimum wages and local prevailing wages as well as overtime pay. Contractors and subcontractors also may need to participate in E-Verify, a web-based system that employers use to confirm whether their employees are eligible to work in the United States. They should carefully review their contracts to see if these additional provisions apply. GRATUITIES PROHIBITED
Federal contracting differs dramatically from commercial contracting with respect to wining and dining clients. It is common in the commercial world to treat clients to entertainment and send them holiday presents, but extending what you consider to be a customary token of appreciation to government continued on page 23
FALL 2020 TODAY’S GENER AL COUNSEL
Compliance Strategies for Non-Competes By Dan M. Forman
on-compete agreements are an important tool. They protect against unfair competition from an employee who decides to take what she has learned about a company’s business, its trade secrets, clients, vendors or employees, and use that information for the benefit of a competitor or to start a competing business. Most states employ a version of the Uniform Trade Secrets Act and the U.S. Defend Trade Secrets Act to prosecute civil claims against trade secret theft by former employees. These laws provide for damages and include a powerful injunction remedy. They provide for double damages and the recovery of attorneys’ fees in certain conditions. However, proving such claims — beginning with the question as to whether the employer had
a “trade secret” — can be very difficult. Enforcement of a non-compete agreement presents a lower burden of proof than fighting over trade secret theft. The only facts that must be established are whether an enforceable non-compete exists, and whether the former employee is competing or working for a competitor. Historically, non-competes were enforced if they complied with a test of reasonableness, namely, whether the non-compete was limited to protect a legitimate protectable interest of the employer for a reasonable duration of time and over a reasonable geographic area. Like any good tool, such agreements must be maintained, honed and cared for to ensure that they will be enforceable. Recently, the law has changed significantly in many states. Pay close attention to the
following five compliance strategies to maintain enforceable and effective noncompete agreements. Jurisdiction. Ensure that any non-compete will be enforced in any jurisdiction where the employee might work. Whether under common law or state statute, each jurisdiction has a different definition as to “reasonableness.” Some states, such as California, will not enforce non-compete agreements. In fact, an employer who insists that California employees enter into a non-compete agreement risks exposure to a claim of breach of California’s public policy. An attempt to enforce such an agreement will likely be met with an affirmative claim against the former employer by the employee. Over the years, employers have expanded the use of non-compete agreements to many kinds of employment, including minimum wage positions. Some employers assert that a geographical limitation of “throughout the universe” is reasonable. As a policy matter, most states look at non-competes as restricting competition as well as an employee’s ability to earn a living. Thus, many states have undertaken legislative efforts to limit the application and enforceability of non-competes, especially as they apply to hourly employees. With some fanfare, those efforts have occurred in Illinois, Maine, Maryland, Massachusetts, New Hampshire, New Jersey and Washington. In addition, Massachusetts’ 2018 legislation has other conditions that are required to create an enforceable non-compete, including requiring the forum to be that of the employee’s residence, limiting the length of the non-compete and, most significantly, payment of 50 percent of the employee’s highest salary within the last two years of employment throughout the non-compete period. Other states exempt certain categories of employees from non-competes or will not enforce a non-compete against an employee terminated without cause. In the fall of 2019, the bi-partisan Workforce Mobility Act of 2019 aimed to ban non-competes in employment across the United States, except for those in conjunction with the sale of a business
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Compliance to protect the business’s goodwill. The proposed federal act also called for noncompetes to be limited to one year and to be restricted to the same area where the business operated. Although this bill has not passed into law, the Covid-19 crisis increases pressure to pass legislation to increase mobility of employees, as businesses shutter to avoid future unemployment claims. Reasonableness. Think about what you are trying to protect, how long is required for the protection and the critical geographic area. Reasonableness is the key to enforceable non-competes. Courts generally recognize that the types of interest legitimately protected are trade secrets, confidential informa-
Ensure that the agreement provides for an enforceable venue provision, and the law that will apply. To have the best opportunity to obtain injunctive relief, include an agreement that any breach of the non-compete constitutes irreparable harm that is difficult to measure, and that any bond or undertaking requirement is waived by the employee in order for injunctive relief to issue. Payment. To stay ahead of legislation against non-competes in employment, consider paying for the non-compete time. It will be easier to convince a court that non-compete restrictions are reasonable if the employer pays the employee not to compete, as specified under Massachusetts law. This should include a
during a specific period of time. Litigation. Move quickly into litigation. Many employers are reluctant to commence litigation under a covenant not to compete, and engage in a campaign of letter writing between counsel instead. Such campaigns quickly become expensive, typically with little benefit. Instead, send the employee one “reminder” letter with a copy of the non-compete, ask the employee to share it with her new employer and demand that she stop competing. Unless compliance is immediate, or there is a significant effort by the employee or her new employer to resolve the situation, move swiftly into litigation. Seek immediate temporary and permanent injunctive relief against all potential
Enforcement of a non-compete agreement presents a lower burden of proof than fighting over trade secret theft. tion, customer relationships, goodwill, investment in training employees, personnel information, business information and processes. Consider utilizing descriptions even more narrow than a business’s full range of potentially protectable information, such as “customer and prospective customer lists that employee accessed in the year prior to termination” as opposed to “all of Company’s customer and prospect customer lists.” Tailor any geographical limitation to the area where the employee actually conducted business. Most states permit non-competes to be blue penciled if the agreement provides for such a revision. Thus, language that will permit enforcement of any portion of the agreement even if some provision is no longer enforceable can deter a court from voiding a contract due to one over-broad proviso. It is ideal to give the court the power to reform the agreement to make it enforceable to the extent permitted by law. The dispute resolution provision is very important in enforcing a noncompete and obtaining an enforceable court order. Many non-competes include arbitration clauses, but if the employee cannot be compelled to arbitrate, obtaining an award may be an empty victory.
monthly payment for the duration of the period, and a lump sum at the end payable upon verification that the noncompete wasn’t breached. The lump sum will incentivize the employee. If it turns out that the employee was competing, making an express misrepresentation under oath will inure to your benefit in any litigation. A “clawback” provision will provide a remedy for the funds that were paid out when the employee was in violation. Exit interviews. Exit interviews are important tools to help enforce noncompetes. Be sure to go over an employee’s non-compete, confidentiality and other continuing obligations. Encourage your former employee to share a copy of the non-compete with any subsequent employer. And, of course, document these exchanges in the employee’s file. If there is litigation, these are grounds and evidence that breach of the noncompete was intentional and knowing. Find out the employee’s plans for future work. If you are concerned about enforceability, take the employee’s departure as a chance to enter into a new non-compete that might be better tailored to the situation, and that pays some percentage of prior earnings in return for express agreement not to compete
defendants and employers. When faced with actual litigation, not the prospect of litigation, the odds of compliance and a favorable resolution increase. A non-compete can be a critical tool for protecting your competitive situation. Obtaining such agreements with critical employees is especially important for businesses in light of the Covid-19 crisis. Employee mobility in the remote workforce has substantially increased. Given the number of businesses downsizing and terminating employment relationships, many employees are looking for a new position. The strategies outlined above can position an employer in the event an employee changes to a competitor. todaysgeneralcounsel.com Dan M. Forman is a partner at CDF and Chair of the Unfair Competition & Trade Secret Practice Group. He has extensive experience counseling and litigating over trade secrets, covenants not to compete, executive compensation and severance. firstname.lastname@example.org
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Defending a New York FCA Tax Investigation By Zal Kumar, Leah Robinson and Dan Stein
ince 2010, the New York False Claims Act (FCA) has included tax as a potential basis for false claims, allowing private plaintiffs and the New York Attorney General to seek treble damages from individuals and businesses for underpaying New York tax. The statute of limitations is 10 years. In theory, the FCA unearths fraud by allowing whistleblowers to come forward with information the government would not otherwise receive through the tax administration process. In practice, however, the standards for civil fraud under the FCA don’t line up with the standards for tax compliance, and the FCA leads to costly and complicated investigations over issues that are better suited to an audit by a tax authority. Under the FCA, a standard but uncertain tax position can trigger a sprawling investigation into who knew what when, rather than a straight-forward analysis of the merits of the underlying tax issues. This article explains the first steps you should take to put yourself and your company in the best position to manage an FCA tax investigation effectively and efficiently.
Take a deep breath. An FCA investigation likely means that someone with intimate knowledge of your company has accused it of wrongdoing in a complaint filed under seal. If you have received a subpoena, it means the government is taking the allegations seriously, and you should, too. In these cases, the government essentially conducts two inquiries at the same time. It examines whether your tax position was correct, and whether you took that position knowingly. Some cases involve “cooking the books” or reporting fake numbers — these should be the real FCA cases — but
others involve a tax reporting position that the government challenges under the FCA. In this situation, the government may not wait to decide whether it thinks you have gotten the tax right. If there is any possibility you got the tax wrong, it may forge ahead with its investigation to try and determine whether you acted knowingly (i.e., with the recklessness or intent required to state a claim). It may
News of your FCA investigation should be kept on a strict need-to-know-basis, especially within your company. seem unfair that the government would take an ambiguous position to court under the FCA, but it will do so if it determines that, in its view, you intended to flout the law or buried your head in the sand.
Strictly limit knowledge of the investigation. The allegations against your company remain under seal until the government decides whether to intervene. During that time, the government keeps the complaint and claims confidential, and you should approach the investigation on the same basis. News of your FCA investigation should be kept on a strict need-to-knowbasis, especially within your company. Among other things, you could have a whistleblower in your company who may be looking to gain insight into your response, including your review of documents or, even worse, opinions about
bad facts or bad documents. You also don’t want the investigation to mushroom, which can happen if others come forward, either seeking a financial reward or an opportunity to act on a grudge. As the circle expands, your company will become more exposed. Equally important, you want the ability to learn what happened before staff and advisors begin to get defensive themselves — after all, someone has accused the company of doing something wrong — and retreat in a way that hampers your company’s ability to identify and document key facts and advice that support its defense and positions. The investigations team, run by your outside counsel, will want to talk to each key person before their recollections are tainted or colored by the thoughts of others and self-preservation.
Form a small internal team. After deciding who to initially inform, the general counsel should create a small team to organize response efforts. This team will gather information within the company, handle communication within the company, make decisions with respect to the investigation, oversee and liaise with the outside advisors (discussed in the next step), and make recommendations to the ultimate decision makers. Third parties will handle most of the day-to-day work, and you should keep the internal group as small and nimble as you can for now. The team should consist of an attorney from the general counsel’s office, someone from tax, someone from accounting and someone from IT. Once the team has been selected, the general counsel should draft a brief memo or email that “creates” this group for the purpose of the investigation and in anticipation of litigation. You will want to ensure a healthy paper trail to protect this group’s dialogue from disclosure
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under attorney work-product protection. Additionally, let this small group know that knowledge of the investigation may only be shared on a need-to- know basis and on the general counsel’s express permission, and that the investigation may seek emails created all the way through the production period. This team should be very aware of everything they put in writing to preserve privilege and avoid unnecessary or unintentional disclosures.
Hire Outside Counsel. Do not rush into hiring a law firm even if your subpoena requests a response in a really short period of time
(it can usually be extended). Take your time and talk to a few firms. The tax aspect of the FCA is relatively new, and not that many firms have gone through the investigative process before. It is important that your legal team not only understand the New York FCA but also the process. The investigation potentially involves the New York Attorney General’s office, the New York State Department of Taxation and Finance, the New York City Department of Finance and a relator. You therefore need help both navigating the underlying tax issues and developing a strategy that accounts for parties that
have different interests, different perspectives and different chains of command within an evolving process. In this regard, advisors who have relationships with the government will not make the investigation go away more quickly. But they should give you insight into the government’s perspective, the issues you face and the arguments you need to make. As you might guess, your team will also need state and local tax expertise and investigations expertise. The tax counsel helps you understand the issues, vet the tax positions and develop arguments that support your defense. The investigations counsel helps you respond
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Compliance to the subpoenas, manage privilege issues, evaluate questions of intent, deal with investigators and generally handle the setting of an investigation. The critical consideration here is that you will need tax and investigations experts who can work closely together. You don’t want to miss a key document because the tax experts weren’t integrated with the document review, for example. While you’re hiring counsel, remember that you may not be able to predict how serious the investigation will be. You will likely have to wait and see the core documents, which may have their own surprises.
Ask the government what this is all about. You won’t be able to see the complaint filed against your company — unless and until you reach court — and you will therefore need to ask the government for a description of the issue or issues its investigators are reviewing. You may be able to figure out their focus from the subpoenas, but the government can and should give you more clarity. You will likely have millions of records that are technically responsive to the subpoena, and you and the government both have an interest in finding the information that is truly pertinent. This conversation should lead to prioritizing categories of documents to produce and developing search terms and time frames that narrow the overall scope of the production. It should also lead to discussions about the core issues, which are helpful to both the government and your company. Some assistant attorneys general are willing to engage in conversations at this early stage, but be cautious. Have your outside counsel make this early contact and report back to you.
Slowly build a story. Committing to a specific narrative and building a strategy around it too early can be one of the biggest mistakes you make. The narrative will color the investigation for your team, perhaps send you down unproductive or unpersuasive paths, and obscure the relevance of key documents or information. You need to understand the facts, documents, his-
tory and key decisions before building a definitive strategy and defense — or making any presentations. You will lose credibility if the documents contradict you. A detailed chronology of the key events, memos, people and emails will help you determine your path and build the true story of the company’s knowledge, intent and decisions.
Get in touch with your advisors. Your outside counsel will need to not only reconstruct events but also gain access to prior work product that may exonerate your company, or at least show that it approached its tax position with care. You will also need to know if your advisors have received subpoenas so that you can conduct privilege reviews of their materials before they send them to the New York Attorney General. If you are lucky, your advisors will give you copies of the materials they send and allow you to interview them or their staff. This access is invaluable. You want to be able to anticipate and understand the New York Attorney General’s positions, and you cannot do that unless you see what they see. You also want to confirm that your prior advisors continue to stand by their advice.
Don’t forget New York City. You may think that the FCA only applies to New York State tax. After all, New York City has its own FCA. That’s incorrect. The New York Attorney General and New York City treat the FCA as allowing claims based upon any New York City tax type, not just those that New York State administers. New York City tax issues will involve different law, different considerations — and potentially different strategy. Therefore, you cannot focus exclusively on New York State or assume that you can solve your New York City issue if you solve your New York State issue. Each jurisdiction requires careful, separate thought and consideration, whether you are reviewing documents or considering legal arguments. There are a myriad of additional considerations that you will have to think through, and some of them deserve consideration early on, like whether or not to request a Voluntary Disclosure Agreement or use a “Kovel” arrangement
to hire an accounting firm that will assist the legal team under privilege. But the eight steps above will set you on the right path. todaysgeneralcounsel.com Zal Kumar is a partner in Mayer Brown’s New York office and a member of the State & Local Tax practice. He focuses his practice on advising financial services firms and alternative asset managers with respect to transactional planning, audit defense and New York False Claims Act matters. He was previously the director of Business Tax Services for the New York City Department of Finance and the senior counsel to its tax audit division. email@example.com Leah Robinson is partner in Mayer Brown’s State & Local Tax group. She advises public and private business entities on state and local tax planning, controversy and litigation. firstname.lastname@example.org Dan Stein is a partner at Mayer Brown, leads the global Regulatory & Investigations group and is a co-leader of the White Collar Defense & Compliance group. email@example.com
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Compliance Contracting Regulations continued from page 17
customers can get you in significant trouble. Executive branch employees typically cannot accept gifts that have an aggregate market value of more than $20 per occasion, or that exceed a $50 market value in a calendar year. Each contractor is a singular entity, so if one employee gives a government employee a gift worth $20 on one occasion, all other employees would be limited to giving that government employee gifts totaling no more than $30 during the rest of the calendar year. The federal bribery statute also prohibits contractors from giving, offering or promising anything of value to federal employees with the intent to influence an official act, or to induce federal
Even if a regulation is not set forth in your contract, it could apply under the Christian Doctrine. employees into any act in violation of their lawful duty. Therefore, contractors cannot give gifts to government employees in the hopes of currying favors and winning business. Companies that are new to federal contracting or that handle a mix of commercial and government work must make sure that they train their employees on these important prohibitions and put policies and procedures in place to prevent violations. All federal prime contractors are required to register in the System for Award Management (SAM), the government’s primary repository for government contractors’ information. SAM profiles contain information about a company’s location, points of contact, type and size of the business, and the primary industries in which it operates.
Contractors are required to annually review and update their information to ensure it is current, accurate and complete. SAM also contains a list of contractors that have been suspended or debarred from government contracting. CONTRACT SPECIFICS
This article provides an overview of major government contracting regulations. Federal contracts and subcontracts are often lengthy documents that incorporate numerous other regulations. Prime contractors are required to flow many of these provisions down to their subcontractors, and incorporate them by reference into their subcontracts. Even if a regulation is not set forth in your contract, it could apply under the Christian Doctrine, which holds that certain regulations are incorporated into contracts even when they are not explicitly stated if they express a significant or deeply ingrained public procurement policy. When companies enter into government contracting, they must ensure that they understand what is required, and institute training and compliance policies so they do not run afoul of the requirements. Failure to abide by the requirements can lead to harsh consequences, including suspension and debarment from federal contracting, and significant civil, and even criminal, liability. If they are unsure whether regulations apply to them, it is prudent to seek legal counsel with expertise in government contracting laws.
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todaysgeneralcounsel.com Ambika J. Biggs is a partner at Hirschler in Tysons, VA. She represents clients in government contracts matters involving size protests, bid protests, claims and False Claims Act investigations, and counsels on suspension and debarment matters. firstname.lastname@example.org
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Advertising Checklist for In-House Counsel By Penelope A. Preovolos, Claudia M. Vetesi and Mallory Morales
long with making their advertising materials eye-catching and influential, consumer-facing companies need to ensure that their representations about products and services comply with advertising laws. This article discusses basic advertising law, some things to avoid and some things to do. Although every state has its own consumer protection laws, our focus is on federal and California law. The primary sources of federal advertising law are the Federal Trade Commission (FTC) Act and the Lanham Act. The FTC Act prohibits “unfair or deceptive acts or practices.” Violations can lead to injunctions in district court, civil penalties, restitution and corrective advertising. Similarly, the Lanham Act allows private parties to obtain relief for false advertising. There also are self-regulating bodies, such as the Council of Better Business Bureaus’ National Advertising Division (NAD).
Advertising laws cover both express and implied representations about products and services. Many states have passed baby FTC acts and other consumer protection statutes. In California, there are three primary statutes: • The Unfair Competition Law (UCL) prohibits unlawful, unfair or fraudulent business practices. Plaintiffs must have suffered injury in fact and lost
money or property as a result of the defendant’s practice. • The False Advertising Law prohibits untrue and misleading representations. The test is identical to the UCL’s fraudulence prong except that scienter is required (“knew or should have known”). • The Consumers Legal Remedies Act enumerates 24 specific acts defined as unlawful if they are part of a transaction that results in the sale or lease of goods or services. Only consumers can bring claims. Advertising laws cover both express and implied representations about products and services. Deceptive advertising occurs when a statement or omission is likely to mislead a “reasonable consumer” and the misrepresentation is important to the decision to purchase the product. The Lanham Act differentiates between advertisements that are literally false and advertisements that are literally true but misleading in context. If an advertisement is not literally false, the plaintiff must establish that it is misleading by showing how consumers perceived the advertisement. UNFAIRNESS
According to the FTC test, unfairness occurs when there has been substantial injury to consumers, consumers cannot reasonably avoid injury, and the injury is not outweighed by benefits to consumers or competition. California’s test for unfairness is whether the practice is “immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.” Additionally, there is a determination whether the alleged harm to the victim outweighs the utility of the defendant’s conduct. The tethering test concerns whether the practice is tied to a violation
of public policy as declared in specific constitutional, statutory or regulatory provisions. In order for a misrepresentation to be actionable, it must be a statement of fact that can be objectively measured or empirically verified. Mere “puffery” cannot be the basis for a lawsuit. Puffery can be best described as opinions or superlatives commonly used in sales pitches. Objective claims must be factual and substantiated before they are made. An advertiser must have a reasonable basis for claims, i.e., empirical evidence. An omission is not actionable unless there is a duty to disclose. In California, a duty to disclose may arise if the defendant (1) has a fiduciary obligation to the plaintiff, (2) has exclusive knowledge of material facts not known or reasonably accessible to the plaintiff, (3) actively conceals a material fact from the plaintiff, or (4) makes partial representations that are misleading because another material fact has not been disclosed. The Ninth Circuit has held that for an omission regarding a product defect to be actionable, the defect must raise a safety concern. It recently noted that some courts permit omissions claims where the defect is “central to the product’s function,” but it did not decide the issue. Disclosures cannot cure a false claim, but qualifications to avoid a misrepresentation are permitted. FTC guidelines suggest that disclosures be placed as close to the claim they qualify as possible. Seeing the disclosure should be unavoidable; it should be clear, conspicuous and understandable. Hyperlinks in online disclosures should be clearly and conspicuously labeled. Advertisers should not include a claim on a label without the same disclosures provided elsewhere. Advertisers who rely on disclosures on a label or packaging should make sure consumers who purchase online see the label before purchase or make the disclosures online as well. Advertisements should not suggest or imply that they are anything other than an advertisement. A clear and prominent disclosure may be necessary to ensure consumers understand that content that
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looks like news is native advertising. Endorsements/testimonials must be truthful and not misleading. Using unrepresentative testimonials may be misleading if not accompanied by information describing what consumers can generally expect from using the product or service. Endorsers should not talk about their experience with a product if they have not tried it or make claims about a product that would require
proof they do not have. Any connection between the endorser and the marketer of a product, including compensation, should be disclosed. Advertisements that are directed at a competitor risk Lanham Act liability, especially if the comparative advertisement falsely casts a product or competitor in a disparaging light or misuses a competitor’s name. Plaintiffs don’t have to be direct competitors to bring Lan-
ham Act claims; anyone who can “allege an injury to a commercial interest in reputation or sales” can sue. A product must be openly offered at a regular price for a “reasonably substantial” period before a discount is advertised. The price reduction cannot be insignificant. Advertisers may not artificially inflate the regular price. They must clearly and conspicuously disclose any material conditions or limitations.
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Compliance This is a common subject of FTC and state law consumer and government actions. When advertising free goods, all terms and conditions must be clearly and conspicuously disclosed. The item must be truly free. The cost of other items the consumer must buy to get the free product, costs of shipping and handling, or other added costs may not be marked up and must be disclosed. Items compared to a competitor’s must be of like kind and quality. An advertiser’s price must be bona fide, not temporarily lowered. Advertisers must disclose if their reduced price is being compared to a competitor’s regular price and must be able to show that the competitor’s price was in effect on the date of the advertisement. The competitor’s price must be representative of prices in the market and not an isolated instance. MADE IN THE USA
“Made in the USA” means all significant parts and processing that go into the product must be of U.S. origin. Only a negligible amount of foreign content or processing is permitted. Avoid broad terms like “produced” or “manufactured” in the United States. If a product is substantially transformed abroad, advertisers should comply with customs requirements that require it to show a foreign country of origin. Qualified claims convey that the product is not entirely of domestic origin and describe the amount of foreign content or assembly. Example: “Made in USA with U.S. and imported parts.” California’s statute was amended in 2016 to align more closely with the FTC’s standard. California courts have permitted “implied claim” litigation where product packaging imagery suggests product origins (for example, packaging with map of the San Francisco Bay area for beer brewed in Minnesota). Substantiation is particularly important when claims concern health or safety. Claims about health and safety benefits should be supported by reliable scientific evidence under the prevailing expert opinion in the field. False advertising claims continue to be a hotbed of class action litigation
against companies that sell consumer products and services, as well as a major focus of competitor litigation in consumer industries and beyond. The FTC, as well as California and other state attorneys general and district attorneys, also aggressively prosecutes these claims. This checklist is intended to provide a quick update and summary of the law, but advertisers and their counsel should review current federal and state law sources for detailed requirements and developments, and seek specialized legal advice as needed. todaysgeneralcounsel.com Penelope A. Preovolos is a partner in Morrison & Foerster’s Class Action Mass Torts group. She serves as lead counsel in major consumer class actions and antitrust cases. email@example.com Claudia M. Vetesi is a partner in Morrison & Foerster’s Class Action Mass Torts group. She focuses her practice on the defense of consumer class actions and complex commercial litigation false advertising. firstname.lastname@example.org Mallory Morales is an associate in Morrison & Foerster’s Litigation Department. email@example.com
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Remote Litigation Is Here to Stay By Helene Wasserman
he year 2020 will be remembered as one of the most challenging ever for business. Who could have imagined businesses closing physical office spaces and opening remote operations with the flip of a switch? But the show must go on. Just as business moved from the boardroom to the computer monitor, so has litigation moved from the conference or court room to webcams on home computers. Necessity is the mother of invention. The invention in this situation is the entirely new skill set we have developed to handle litigation remotely. Since closing physical doors and opening remote ones in March, Littler’s 1,500 lawyers worldwide have represented clients in hundreds of remote proceedings, including depositions and mediations. We have marshaled experiences to develop recommendations for assisting attorneys, clients and witnesses in how to survive and thrive. With respect to all virtual proceedings, you need to know your technology. Platforms such as WebEx and Zoom are being used in new ways. Before any virtual proceeding, it is vital to understand how the platform is being used, and even to request a trial run to ensure that you are comfortable with all aspects of the technology. Be sure you understand the
Helene Wasserman is a shareholder with Littler Mendelson and co-chair of the firm’s Litigation and Trials practice group. She has been active in a firm-wide initiative to smooth clients’ transitions to virtual litigation proceedings. firstname.lastname@example.org
basics: How much bandwidth do you have? How strong is your internet connection? Do you have sufficient redundancy of internet and phone service? Video proceedings require other considerations. Is your webcam part of your laptop, or is it a separate USB connection? You want to look people in the eye, which means that you need to know where your camera is, and that may not be where you “see” the people you are speaking with. Gallery view or speaker view is another consideration when there are multiple speakers involved. Is your background neat and
professional? Does it distract the participants? Attire is important. Dress for the proceeding as though it were taking place in person. Virtual depositions — where all parties, counsel, and reporters are in different locations — raise additional considerations that do not exist when depositions are in person. For example, it is important to determine early on how exhibits will be shown to the witness. In cases where there are no “smoking gun” exhibits, experience has shown that sharing exhibits in advance can make for a smoother deposition.
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However, we often do not want to share exhibits in advance. Reporting services well versed in remote depositions have a means for sharing screens and uploading documents as the deposition goes along, much like an in-person deposition. Again, knowing the technology used by the reporter is vital, as a number of different platforms are being used. Organization is key. Another unique remote deposition consideration relates to ethics. Steps need to be taken to ensure against improper communications between the witness and counsel during questioning. When no one else is in the same room to verify if inappropriate communications are taking place, entering into stipulations and making a record is a big step towards maintaining the sanctity of the deposition. Of course, it is important that everyone involved has access to the necessary technology. Some court reporting agencies have kits they can provide to ensure that the deponent can be deposed remotely. Further, maintaining deposition security requires that people don’t have
mediations — single plaintiff, multiple plaintiff and class/collective actions — have resolved at, or as a result of, the remote mediation. Of those matters that did not resolve, only a small percentage are cases in which the attorney thought the case would have resolved during an in-person mediation. To make remote mediations costeffective and efficient, there are several tips to consider. Preliminarily, it is important to know your mediator. If you are going to use someone whom you have not previously used, consider scheduling a pre-mediation call. Make sure that your mediator knows, and is comfortable with, the technology. She or he will be going from virtual room to virtual room. Ease with this process will make the whole mediation go smoothly. As always, submit your best possible brief. The more groundwork you lay in advance for the mediator, the more efficient the process will be. Always confirm that the party on the other side is participating. Nothing is more frustrating than a mediation where one party is either not participating or being kept in the dark, and all information is filtered through BEFORE ANY VIRTUAL the party’s attorney. PROCEEDING, IT IS VITAL Confirm with the mediaTO UNDERSTAND HOW THE tor that the party, and not just the attorney, will be PLATFORM IS BEING USED. participating. The one factor that these too much technology in the room where two uses of technology have in common the deposition is being taken. Turning is efficiency. Time and costs associated off Alexa and similar devices is vital to with lengthy travel are eliminated, and ensuring privacy and security. breaks in depositions and mediations can Conducting mediations via video is easily be used to attend to other matters. another new use of technology. LawWhile the jury is still out, it is becoming yers and clients alike were initially very clearer that these novel uses of technology reluctant to diverge from the formula of are here to stay. Learning the challenges, a mediation — force parties into a room overcoming them and capitalizing on the with their counsel and a mediator, stare efficiencies will help everyone thrive. them down and make a deal. todaysgeneralcounsel.com Covid-19 has forced us to be flexible, and the results have been impressive. A survey of the video mediations conducted by Littler since March has revealed that more than 75 percent of all remote
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THE ANTITRUST LITIGATOR
Deciding Arbitrability When There Is a Carve-Out Clause By Jeffery M. Cross
n my last column, I addressed the question of whether a court or an arbitrator should decide whether the parties have agreed to arbitrate, and whether the agreement covers a particular controversy. I also noted that a court sometimes is confronted with these questions because one of the parties did not see eye-to-eye with the other on the desirability or scope of arbitration. In such a situation, one of the parties will seek help from a court to compel arbitration, define the scope of arbitration or resist the demand for arbitration. Because the Federal Arbitration Act requires that arbitration agreements be treated like contracts, the parties can decide in their written agreement that certain disputes will not be subject to arbitration. There may be a so-called “carve-out” clause exempting certain disputes from arbitration. The parties can also agree to have an arbitrator decide the questions of arbitrability. As with the interpretation of any contract, a court determining whether the parties have delegated those questions to the arbitrator must look to the parties’
Jeffery Cross is a columnist for Today’s General Counsel and a member of the Editorial Advisory Board. He is a partner in the Litigation Practice Group of Freeborn and Peters LLP and a member of the firm’s Antitrust and Trade Regulation Group. email@example.com
intent as objectively revealed in the written agreement. However, on the issue of whether the parties have delegated questions of arbitrability, the Supreme Court has imposed a major modification to the law of contract interpretation. The Court has held that interpreting the parties’ intent must not assume that the parties intended to submit arbitrability questions to the arbitrator unless there is “clear and unmistakable” evidence that they intended to do so. The
Court felt that the issue of delegation was sufficiently nuanced that the parties might not understand the ramifications of such a decision. A SUPREME COURT CASE
The presence of a carve-out clause can make a court’s determination of the parties’ intent regarding who decides the questions of arbitrability difficult. That difficulty is essentially the question set forth in a grant of certiorari by the
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Supreme Court this past June in the case of Henry Schein, Inc. v. Archer and White Sales, Inc. It would be worthwhile to look at some of the arguments raised by the parties. The Henry Schein contract contained a carve-out clause exempting injunctive relief, disputes regarding trademarks, trade secrets or other intellectual property from arbitration. It also contained an “implied delegation” of the questions of arbitrability. It is “implied” because it does not explicitly delegate the question of whether the challenged conduct falls within the carve-out to the arbitrator. Rather, the contract indicated that any arbitration should be governed by the Commercial Rules of the American Arbitration Association (AAA).
THE CONTRACT INDICATED THAT ANY ARBITRATION SHOULD BE GOVERNED BY THE COMMERCIAL RULES OF THE AMERICAN ARBITRATION ASSOCIATION. Several appellate courts have held that such an invocation of arbitration rules is “clear and unmistakable” evidence that the parties intended to delegate the questions of arbitrability to the arbitrator. This is because Rule 7(a) of the AAA’s rules states that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” FIFTH CIRCUIT DECISION
The Fifth Circuit Court of Appeals in the Henry Schein case had ruled that “the placement of the carve-out [was]
dispositive” in determining whether the parties had delegated to the arbitrator the question of whether the conduct fell within the carve-out by invoking the AAA Commercial Rules. The actual arbitration clause reads as follows: “Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes relating to trademarks, trade secrets or other intellectual property…) shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.” The Fifth Circuit Court of Appeals held that the “most natural reading” of this provision was that any dispute should be resolved in accordance with the AAA rules, except actions seeking injunctive relief. The court of appeals also held that, given the placement of the carve-out in the sentence, it could not say that there is “clear and unmistakable” evidence that the parties intended to delegate the arbitrability questions to the arbitrator. The petitioner argued that the court of appeals had conflated the question of whether the dispute was arbitrable with the question of who decides arbitrability. In the case, the plaintiffs had alleged antitrust violations and included a request for injunctive relief. The petitioner argued that, by deciding whether the claim fell within the scope of the carveout provision, the court of appeals was necessarily deciding arbitrability. It noted that almost all arbitration clauses contain some limitations on scope. For example, a statement in an arbitration clause that “disputes arising from the contract are subject to arbitration” is a limitations clause. The petitioner argued that a party resisting arbitration could always assert that because certain claims fall outside the scope of arbitration, the delegation of arbitrability questions to the arbitrator did not apply, and if the Fifth Circuit’s decision were to stand, it would
unleash a wave of potentially protracted mini-trials over arbitrability. A key to the petitioner’s argument is that the reference to the AAA Commercial Rules is “clear and unmistakable” evidence of the parties’ intent to have the arbitrator decide questions of arbitrability. The respondent argued that the reference to the AAA rules was not “clear and unmistakable” evidence. It noted that the Supreme Court had never addressed this question. It also noted that there was no express delegation to the arbitrator to decide this question. It further noted that the AAA rules, at best, recognize the arbitrator’s competence to decide on arbitrability. It did not give the arbitrator exclusive rights to determine his or her own jurisdiction. In addition, the relevant rule was just one section of a lengthy set of rules for the dispute being arbitrated. The respondent also argued that it made little sense to apply the AAA Commercial Rules to disputes that were expressly excluded from arbitration. Of course, the question of who decides arbitrability when there is a carve-out clause could be solved by careful drafting. The Henry Schein case is an illustration of problems that can occur because of poor drafting. But it also will serve as a vehicle for the Supreme Court to resolve important issues concerning arbitrability, including whether there can be an implied delegation by invoking arbitration rules. todaysgeneralcounsel.com
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Need-to-Know Rules for In-House Counsel By Todd Presnell
t is a phrase found in 19th century writings and 20th century movies, but most often on elementary school playgrounds. When one kid asks another to reveal coveted information, he responds, “That’s for me to know and you to find out!” Perhaps it is time to bring that phrase into the 21st century world of the corporate attorney–client privilege — a world beset with information dissemination and concomitant privilege-waiver concerns. An in-house lawyer achieves attorney– client privilege protection when she proves an attorney–client relationship with the entity that employs the person with whom she communicates, the communication is confidential and intended to remain confidential, and the communication is made for legal advice purposes. This analysis is straightforward enough, but many courts, including the Second and Ninth Circuits, follow Dean Wigmore’s “famous formulation” by categorizing the privilege elements in finer detail and adding a waiver component. These courts define the privilege as (1) where legal advice is sought (2) from a
Todd Presnell is a trial lawyer in Bradley’s Nashville office. He is the creator and author of the legal blog Presnell on Privileges, presnellonprivileges. com, and provides internal investigation and privilege consulting services to in-house legal departments. firstname.lastname@example.org
lawyer in her legal capacity, (3) the communication relating to the legal advice at issue and (4) made in confidence (5) by the client are (6) at the client’s instance permanently protected (7) from disclosure by the client or the lawyer, (8) unless the client waives the privilege. This eighth category, “unless the client waives the privilege,” has its own classifications. A company waives the privilege through an inadvertent disclosure of privileged communications where the company failed to implement reasonable measures to prevent the disclosure and did not act with the requisite aggressiveness to retrieve the communications. Courts also find an implied waiver where an organization places the legal advice it received at issue in litigation. The theory here is that a company may not use its legal advice as a sword yet shield the basis for that legal advice from disclosure.
A corporate entity also waives protections over privileged communications when it intentionally and voluntarily discloses those communications to third parties. As an example, a Pennsylvania court held that a hospital general counsel waived the privilege when he intentionally and voluntarily forwarded a privileged email from his outside counsel to the hospital’s outside public-relations firm. This intentional waiver concept has a simple basis. Disclosure to individuals outside the corporate organization is inconsistent with the privilege’s protection of confidential communications. The intentional waiver concept becomes complex, and perhaps counterintuitive, when considered in the context of intracorporate distribution of otherwise privileged communications. Corporate employees can easily forward a privileged communication to others within
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the company, such as all employees in a division, other same level managers of other departments or simply to anyone on an unsolicited “FYI basis.” They can respond to an in-house lawyer’s email by copying others without authorization — or worse, blind-copying colleagues without the lawyer’s knowledge. The question then is which employees may receive privileged communications without waiving the privilege’s protections? Stated differently, to whom may an in-house lawyer send, or authorize to send, privileged communications without risking that a court will later find that distribution an intentional, voluntary waiver. Courts employ a “need-to-know” standard to determine whether distribution of privileged communications to certain corporate employees waives the privilege. The specific question is whether the recipient had a need to know the content of the privileged communication to perform her job effectively or to make informed decisions relating to or affected by the communication’s subject matter. Typically, an employee is on a need-toknow basis if she is an executive or is responsible for the specific matter at issue in the communication. One court provided a simple example involving an automobile manufacturer trying to remedy a design defect that had led to legal liability. The manufacturer’s vice president for design and the engineer who will re-design the defective product fall within the need-to-know scope of receiving privileged communications. The lawyers need to understand any engineering constraints, and the engineers need to understand the legal issues. The manufacturer’s assembly-line worker, however, has no need to know the legal basis for a change in design even though that change will affect his work routine. Building from this example, the court held that an in-house lawyer for a sports news publisher waived the attorney– client privilege because he informed several editors about the legal basis for ending an at-large editor’s contract. These editors had no hiring or firing authority,
nor did the in-house lawyer need their feedback in determining how to proceed. In short, the editors had no need to know the legal basis for a corporate decision, and disclosing it to them waived the privilege. The influential Restatement (Third) of the Law Governing Lawyers, Section 73, promotes a similar standard. It provides that when the client is an organization, the attorney–client privilege extends to communications disclosed to “privileged persons,” which in this context pertains primarily to agents such as interpreters, administrative assistants or subject-matter experts needed to convey information. The section also extends the privilege to communications to an organization’s other agents “who reasonably need to know of the communication in order to act for the organization.” The Restatement’s comments define the “reasonably need-to- know standard” to include a company’s agents responsible for accepting or rejecting the inhouse lawyer’s advice on the company’s behalf. It also includes a company’s agents responsible for taking action based on the in-house counsel’s advice. The needto-know standard permits disclosure of privileged communications to individuals who would be financially or criminally responsible for the conduct at issue or who would benefit from the legal advice. The scope extends to those individuals, such as members of a board of directors, whose general managerial and supervisory responsibilities cover a wide array of activities. And it extends to lowerlevel employees directly affected by the legal advice. The Restatement provides a helpful illustration to explain the need-to-know concept. An organization’s lawyer provides a confidential report to its president opining on potential legal liability if the company terminates a supplier contract. The president sends the lawyer’s report to the company’s purchase manager asking whether terminating the supplier contract is inappropriate for business reasons. Here, according to the Restatement, there is no privilege waiver because the purchase manager’s response would depend,
in part, on the lawyer’s advice. Thus, he would have a need to know the lawyer’s report, and distributing it to him would not waive the privilege. But courts have employed the Restatement’s standard to find privilege waiver where a corporate entity distributed otherwise privileged communications too widely within the organization. In a False Claim Act case, the District of Columbia federal court noted that a cornerstone of the attorney-client privilege is an intent to keep a privileged communication confidential. Citing the Restatement’s “need-to-know limitation,” the court stated that, in the corporate context, this requires that a company share privileged communications no more widely than necessary to implement the in-house lawyer’s advice. And this typically means sharing only with officers and employees with a responsibility for acting on in-house counsel’s advice. In this case, the company distributed privileged communications — here, litigationhold notices — to a broad scope of employees with no notice forbidding further distribution or a directive to keep the information confidential. The takeaway here is that in identifying those employees who have a need to know to comply with the need-to-know standard, you need to ask “how will the potential recipient use the information, if at all?” Resist the tell-all mindset when distributing legal advice. Include instructions and directives in communications that inform corporate employees not to distribute legal advice communications to anyone without the lawyer’s authorization. Provide training sessions to managers who most often communicate with the legal team so that they know not to disseminate privileged communications without direction to do so. And if you feel the urge to disseminate privileged information, or if an employee asks for privileged information, just repeat, “That’s for me to know and you to find out!” todaysgeneralcounsel.com
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THINK YOU’VE DRAFTED AN AIRTIGHT “NO ORAL MODIFICATIONS” CLAUSE? THINK AGAIN By Marla R. Butler and David Castillo Gocher
core tenet of contract law is that the contracting parties are masters of the agreement. Parties negotiate and ultimately agree upon terms that each party expects to be bound by and hold the other side to. Most commercial agreements include an integration or Marla R. Butler is a merger clause stating that the written and partner in Thompson executed contract is the complete and Hine’s Atlanta office. She represents clients final agreement between the parties, and in the medical, semisupersedes any and all prior agreements conductor, power, on the same subject matter between those networking and other same parties. high-tech industries Most commercial agreements also in high-stakes commercial litigations, include a provision that states any future arbitrations and trials. modifications to the agreement must be Marla.Butler@ in writing and executed by the parties. ThompsonHine.com In other words, there will be no oral modifications to the contract. These provisions make sense. After all, the parties engaged counsel who spent countless hours negotiating the terms of the agreement. The parties deliberated, debated and compromised until they reached terms that both sides could live with. The time and attention that resulted in these final, agreed-upon terms was substantial, as was evident from the legal fees each party paid its lawyers. So what happens when the parties have an ongoing working relationship and the subject matter of the agreement is a regular topic of discussion between the parties? Perhaps the parties are jointly developing a product and, as the development work proceeds, the teams from each company realize that one company is going to have to contribute more than was originally anticipated. Because the parties have worked so closely on the project, the relationship takes on an informality that leads to the teams deciding orally that the terms of the written agreement should change. This is exactly why that “no oral modification” provision is in the contract. The lawyers anticipated this and similar scenarios, and included the provision to make sure that the
contract is not modified without careful consideration and buy-in from the highest levels of the companies. But these lawyers might be surprised to learn that in many states a no oral modification provision isn’t worth the paper it is written on and oral modification between the joint development teams might actually be enforceable.
STATE BY STATE ANALYSIS The California Civil Code (§ 1698(d)) provides that “[a] contract in writing may be modified by an oral agreement to the extent that oral agreement is executed by the parties.” This statute, however, does not preclude waiver of a provision of a written contract, including a no oral modification provision by words or conduct. Accordingly, California courts will look to all actions between the parties. The issue of whether a no oral modification provision has been waived is a question of fact and requires a party asserting an oral modification to prove it by a preponderance of the evidence. Delaware courts have held that a contract provision deeming oral modifications unenforceable can be waived orally or by course of conduct. However, Delaware courts require a party attempting to prove the existence of an oral modification to do so by clear and convincing evidence. Where the parties have reduced a modification to writing on a prior occasion, Delaware courts are less likely to enforce an oral modification. Florida law provides that a no oral modification provision is generally enforceable. However, “[a] written contract or agreement may be altered or modified by an oral agreement if the latter has been accepted and acted upon by the parties in such manner as would work a fraud on either party to refuse
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IN MANY STATES, A NO ORAL MODIFICATION PROVISION ISN’T WORTH THE PAPER IT IS WRITTEN ON. In determining whether to enforce the oral modification, Pennsylvania courts will also take equitable considerations into account. Such considerations may include unjust enrichment and subsequent reliance.
STATUTE OF FRAUDS
to enforce it.” Florida courts require the plaintiff to prove that (1) the parties agreed upon and accepted the oral modification, (2) both parties’ performance was consistent with the terms of the alleged oral modification, and (3) due to one party’s performance under the contract as amended, the other party received and accepted a benefit that it otherwise was not entitled to receive. In Georgia, contractual provisions requiring all modifications to be in writing are valid and enforceable but may be waived by the course of conduct between the parties. For example, where the oral modification has been acted upon by one party and accepted by the other, that modification is likely to be enforced. In New York, no oral modification clauses are enforceable by statute. Nonetheless, the statute can be avoided where there is partial performance of an oral modification and such partial performance is “unequivocally referable to the oral modification” (Rose v. Spa Realty Associates, 1977). In the commercial transactions context, the Ohio Revised Code provides “[a] signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded. . . .” However, this same statute also states that, as with any other contractual provision, the no oral modification provisions may be waived by the parties. The waiver must be clear and unequivocal. Pennsylvania law provides that a no oral modification provision can be waived and a subsequent oral agreement enforced if the parties’ conduct clearly shows an intent to waive the provision. The party seeking to prove a subsequent oral modification must do so by clear, precise and convincing evidence.
In addition to the law described above, parties should keep in mind any applicable statute of frauds, which may also have the effect of limiting the enforceability of an alleged oral agreement. These statutes vary by state but generally require the following contracts to be in writing: contracts for the sale of land, contracts for the sale of goods over a certain dollar amount, and contracts that are not to be performed within a year. If not in writing, the contract will not be enforceable. In most states, the statute of frauds not only applies to original contracts but also typically applies to contract modifications. There are exceptions to when the statute of frauds will apply to contract modifications. For example, in some states if the oral modification relates only to the manner of performance, and not the substance of the contract, the statute of frauds may not apply. Additionally, even where the statute of frauds might apply to an oral modification, if the modification has already been performed by one party and accepted by the other, the modification may be enforced. There is significant variation among the states with respect to the enforceability of no oral modification provisions in written contracts. What we know for sure is that drafters should not assume such a provision will be enforced. Where the risk of attempted oral modifications is high, drafters should consider using David Castillo Gocher choice of law provisions to achieve the is an associate in Thompson Hine’s Corparties’ intended contractual goals. For porate Transactions example, under California law, a party & Securities practice asserting an oral modification need do so group in Cincinnati. only by preponderance of the evidence. His practice focuses on mergers and acStates such as Delaware, New York and quisitions and general others, however, require more exacting corporate matters. proof. David.Castillo todaysgeneralcounsel.com
Legal’s Role in Business Strategy By Jason Gehman and Jimmie Strong
awyers are trusted advisors, but what happens when lawyers choose to be more? Can outside legal counsel be in a position to effectively advocate for your business? Advocacy can take many forms: cultivating collaboration across business units, creating new customer and vendor relationships, and more. The most successful of these endeavors occur when lawyers help businesses achieve legal protection and compliance while fully considering business realities such as operations, profit and importance of the contemplated deal, process or arrangement. The tension between business realities and legal protection and compliance is heightened in the “gray areas” in which business leaders often operate. The natural tendency for lawyers confronted with gray areas is to find the safest path forward notwithstanding profitability. That path normally includes working with business leaders to simply get out of the gray area. Although that isn’t a bad first step, it is just a first step. In some instances, the busiJason Gehman is ness model and the chief executive growth potential officer at PRSM are attributable to Healthcare. Gehman co-founded PRSM willingness of the Healthcare in 2011. business to operate It is a leading proin the gray area. vider of gastroenterIn these situations, ology patient recall services. outside legal coun-
sel can offer valuable perspectives and insights to help navigate difficult questions, help with close calls at the strategy level, and provide detailed steps to avoid pitfalls at the operational level. Facing a recent business challenge, PRSM Healthcare and its outside counsel worked in this collaborative fashion to drive business value and customer acquisition.
RECONCILING TENSION BETWEEN BUSINESS MODEL AND LEGAL CONCERNS PRSM Healthcare, a domestic, “skin-inthe-game” medical scheduling service in Wellsboro, Pennsylvania, partners with various gastrointestinal (GI) practices to provide medical scheduling services. The skin-in-the-game model was a significant gray area causing tension between the company’s business model and legal regulations. The anti-kickback statute makes it illegal for healthcare providers to accept remuneration for generating Medicare, Medicaid or other federal health care program business. To avoid this issue, medical scheduling services are typically paid based on talk time or number of patients scheduled. In PRSM’s model, PRSM is only paid after the practice is paid for a procedure scheduled by PRSM. If the practice isn’t paid, PRSM isn’t paid. PRSM’s model solves a business problem for medical practices. The typical model puts the practice somewhat at odds with the scheduling service, as the scheduling service is incentivized to keep patients on the phone if paid per minute of talk time, or quickly schedule and rush patients off the phone if paid
per scheduled visit. PRSM contacts and pursues patients through all forms of communication at no cost to the medical practice, documents everything in its cloud-based software system, and schedules patients directly through integration with the medical practice’s systems. PRSM earns a flat fee only after a patient presents for treatment and has a procedure, and the physician bills the payer. In this case, the solution to a business problem for medical practices raised legal questions for PRSM. This skin-inthe-game system appeared to violate the anti-kickback statute. When discussing the potential antikickback issue, a couple of things became clear: The skin-in-the-game model is particularly important for PRSM’s target customers, GI practices. The model positions PRSM for scalable growth. Unlike in many healthcare sectors, the Centers for Medicare & Medicaid Services (CMS) spells out specific guidelines for GI practices. Colorectal and GI cancers are amongst the most common causes of cancer death in the United States. CMS has gone to great lengths to ensure that GI physicians are seeing, diagnosing, and treating their patient populations to catch early-stage cancer signs and prevent cancer recurrence. This creates a regular rhythm of patient visits and necessitates processes for patient communication to schedule follow-up appointments and screenings. PRSM’s GI practice clients, however, are not paid unless and until a patient elects a procedure and it is performed by the practice. PRSM fills an essential gap in the medical scheduling space by enabling GI practices to choose a partner
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that gets paid when revenue is generated, versus a vendor that gets paid in a manner that fails to ensure alignment of practice and service provider incentives. The confluence of two factors — the gap in an easily identifiable, large, and highly regulated market and PRSM’s willingness and ability to fill the gap and serve as a partner to its clients — positions PRSM for nationwide growth. Given the importance of the skin-in-thegame approach to PRSM’s clients and, hence, PRSM’s growth prospects, outside counsel collaborated with PRSM’s leadership team to solve the potential antikickback problem.
A MULTI-DISCIPLINARY TEAM Although the legal problem was clear, the easiest legal solution — switch the payment model to one not based on skin-in-the-game — was not a viable solution for PRSM. Outside counsel was directed to work with PRSM to craft a legal solution that would give PRSM guidelines to avoid anti-kickback issues, preserve PRSM’s growth trajectory, and address any additional issues surfaced in the contract review process. The contract review process involved review of a series of contracts, including the largest contract in PRSM’s history. PRSM could ill afford an unavoidable issue to delay review of the many legal issues on the table, including data privacy issues generally, HIPAA issues, cybersecurity issues, and negotiation of critical value-shifting provisions such as governing law and venue. A diverse team of individuals was assembled to implement this new business strategy. The team included the legal department and non-attorney members to access contract negotiation efforts and
development of an information security strategy, along with an understanding of data privacy (a key issue given PRSM’s reliance on technology integration with medical practice electronic health records systems) and HIPAA compliance efforts. Unique to PRSM’s partnership with outside counsel was the law firm’s ability to also draw on a multi-disciplinary team, which included information technology professionals and other consultants, to provide a comprehensive solution. After analysis and discussion of Office of the Inspector General opinions, Stark Law and anti-kickback statute safe harbors, PRSM and its outside counsel worked together to implement new processes that allow PRSM to work collaboratively with its customers. Each legal issue was addressed, each contract was finalized, and a lasting attorneyclient relationship was cemented. For such a successful outcome to be replicable, in-house legal departments, outside counsel and the business leadership team must have clearly defined roles and expectations for working together. Establishing a productive relationship where all have a seat at the table streamlines the legal process. And in this case, upon request for information about operations and cost or value likely to result from inclusion or exclusion of heavily negotiated provisions, PRSM provided fast, clear responses. Likewise, outside counsel was responsive and invested time to understand PRISM’s business. As a result of these efforts, PRSM signed one of the Southeast’s largest GI practices. More patients are being screened for deadly cancers because of PRSM’s awareness of how to communicate with and help retain patients. Practices are mitigating risk and paying
THE “SKIN-IN-THE-GAME” SYSTEM APPEARED TO VIOLATE THE ANTI-KICKBACK STATUTE.
only after procedures for which they are being paid are completed. Payers are realizing gains from investing in cancer Jimmie Strong is screening and an associate in the saving on cancer Nashville office of Baker Donelson. He treatment. PRSM’s focuses his practice relationship with on mergers and its legal counsel acquisitions, venture plays a significant capital, and securities. role in helping the jstrong@ bakerdonelson.com company reach its goals. The cohesive relationship between PRSM and their outside counsel not only resulted in achievement of immediate aims but also set the stage for further success. PRSM’s growth is scalable, as the company’s procedure completion rates continue to exceed national averages. PRSM is in talks with numerous large practices to identify synergies and determine ideal timing to begin contractual negotiations. The in-house counsel, outside counsel and business leadership relationship is the result of full alignment on key issues and corporate objectives. Understanding big picture goals and managing legal issues in a way that prioritizes those goals ensures successful outcomes and creates the foundation for growth. Alignment between the legal team, both in-house and outside counsel, and the business leadership team should be the goal of every legal relationship. Attorneys set the tone for each client relationship by determining business goals and constraints first, legal questions and issues second, and the framing of legal issues in ways that redefine the rubric for attorney success. Success in addressing legal problems alone results in a pat on the back. Success in navigating legal issues based on the client’s shared business and legal goals results in a lasting relationship as the client’s trusted advisor — the goal of the legal engagement. todaysgeneralcounsel.com
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Expect Pandemic-Related Addiction Among Employees By Sue Bright
T Sue Bright is the Executive Director of New Directions for Women, an addiction treatment center for women of all ages in Southern California. She works collaboratively with HR professionals, employee assistance programs (EAPs) and unions. sbright@newdirec tionsforwomen.org
he coronavirus pandemic is dominating the news, but the current addiction epidemic is critical as well. In fact, the two are inextricably linked. Calls to a 24/7 national hotline dedicated to immediate drug crisis counseling saw an 891 percent increase last March compared to March 2019. Addiction should be treated as a medical issue rather than a criminal justice issue, but that does not preclude legal problems stemming from the addictive behaviors. Experts predict increased legal cases related to the increase in alcohol and drug consumption. Accessible addiction treatment is more necessary than ever. Law firms have the opportunity to serve as a channel for intervention and referral to treatment. In-house legal departments should expect to see addictive disorders in their employees and be prepared to minimize risk for their business while supporting their employees. Substance use disorder causes a variety of legal problems. These are the most common:
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Loss of a professional license.
Whether the client is a fellow attorney,
Having multiple DUIs is a red flag
doctor, accountant or first responder, it
for substance use disorder and will
Divorce litigation and/or loss of child custody, which will certainly affect work performance.
can be devastating to have a profes-
certainly lead to license suspension
Addiction is a family disease, and guilt,
sional license revoked due to addic-
and large fines. If the employee is
co-dependency and anger are common
tion. Employee assistance programs
required to drive a company car, there
symptoms. These legal issues can be
(EAPs) in conjunction with in-house
may be an increase in auto insurance
especially shame-inducing for women.
counsel can support the transition to
or liability insurance policies. Estab-
We have worked with many mothers
treatment and ongoing drug testing
lish guidelines for dealing with these
who are facing child protective servic-
to support reinstatement. Developing
expenses and support the treatment
es cases; and when the mother is ac-
a sober network of people who can
process. Seeking treatment can reduce
tively working on her recovery, it bodes
testify on the person’s rehabilitative
punishments, legal consequences, or
far better for custody rights. When the
efforts, including representatives from
even support the DUI being struck
parent is attending a residential treat-
the workplace, is beneficial.
from the individual’s record altogether.
ment center that allows minors to visit, the care team can advocate on the patient’s behalf to share progress and support a positive ruling.
39 As we begin to recover from the pandemic, employees will return to the workplace after long periods of working remotely. Self-isolation combined with external stressors, depression and anxiety can exacerbate substance misuse. Despite the widespread perception that addicts and alcoholics are jobless, 75 percent of those struggling with substance use disorder were employed prior to the pandemic. It is quite likely there will be employees at all levels working within your company who are misusing drugs and/or alcohol. Supervisors can be slow to act because they are unsure how to address addiction and alcoholism. In-house legal teams, along with HR professionals, can be key in supporting employers by providing resources to recognize signs of addiction and provide guidance in taking action. The longer active addiction goes untreated, the more likely it is that legal liabilities such as workplace accidents will occur. Key physical indicators to look for include falling asleep during work hours, having bloodshot eyes or smelling like alcohol. Even as shelter-in-place orders lift, some businesses will continue to have staff work remotely. This can be barrier to identifying warning signs for addiction, but you can still look out for a change in work quality; incomplete projects; mood or behavior changes; avoidance of co-workers (remote workers may fail to utilize video chat during online meetings, or avoid phone calls, relying on emails only); and constant “emergencies,” including tardiness and emergent patterns like calling in sick after payday.
Per the Americans with Disabilities Act, substance use disorder is a disability. Have a clear drug and alcohol policy in place, including safety provisions on serving alcohol at company functions, which ensures that employees with addiction problems feel safe coming forward. Many employees believe they could be fired if they seek addiction treatment while employed. To refer employees most effectively to treatment, network within your local community. Ask colleagues whom they would trust to send a loved one to substance use disorder treatment. Keep a referral list that is updated and visit the treatment programs to learn more before making a referral. Over time, you will build a network of programs that specialize in various areas — female or male only, executives only, or some other niche. Keep notes on what insurance providers they accept to align with the health benefits your company provides. Keep in mind, it is unethical and illegal to accept kickbacks for referrals to treatment centers. Prior to the pandemic, substance use disorders affected more than 20 million Americans. When you add family members who are affected by a loved one’s addiction, more than one-third of our nation is impacted by this disease, and that number is growing. In-house counsel can play an important role in assuring their employees begin recovery. todaysgeneralcounsel.com
Don’t Let the Expert’s Communications Become Discoverable By Allen Levine and Darren Goldman
or attorneys practicing in Florida State and in federal courts, a typical litigation consists of two discovery phases: fact discovery and expert discovery. Most litigators are familiar with fact discovery and what must and must not be disclosed under the applicable rules of procedure.
For example, communications between a client and the client’s attorney can be withheld under the attorney-client privilege. Similarly, an attorney’s internal working papers, memoranda, and communications can be withheld under the work-product doctrine. While there are exceptions to both the attorney-client privilege and the work-product doctrine, the exceptions are narrow and well defined. The same is not true with respect to expert discovery, where a number of variables will determine what must be disclosed to the opposing party.
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The first question a litigator must ask is whether the expert is a “testifying expert” or a “consulting expert.” If the expert is hired to consult, and will not be providing testimony, then the opposing party is not entitled to any discovery, absent exceptional circumstances. If the expert is going to testify, the discovery rules become trickier and more perilous. In Florida courts, Florida Rule of Civil Procedure 1.280(b)(5)(A)(i) requires disclosure of “the substance of the facts and opinions to which the expert is expected to testify and a summary of the grounds for each opinion.” Though no Florida case has explicitly addressed the issue, they strongly suggest that an expert’s draft reports, notes, communications and working papers are discoverable. The courts also require disclosure of documents and communications that would normally be withheld under the attorney work-product doctrine and/or attorney-client privileges if those documents were “relied on” by the expert or “used as a basis for the expert’s opinion.” What constitutes “relied on” or “used by” is not well-defined. For example, an argument can be made that simply reviewing a document or communication from an attorney constitutes reliance, even if the expert ultimately rejected its value because the expert did review it and based his or her conclusion in some way on the evaluation. Case law is also not entirely clear as to whether an attorney’s written Allen Levine is a impressions are Partner at Becker & discoverable if Poliakoff. He chairs they are provided the Business Litigation practice. In addition, to an expert. Once he handles complex again, the issue business litigation and may be whether real estate litigation the expert “relied” for large corporate clients, closely held on those imprescorporations, real sions. The only estate developers and way to be certain financial institutions. a document given alevine@becker to an expert will lawyers.com
not be subject to disclosure is for the expert to testify he or she did not even look at the document. In federal court, the Federal Rules of Civil Procedure protect expert drafts from being disclosed as part of expert discovery. Rule 26(b)(4)(B) “specifically protect[s] drafts of any report or disclosure required under Rule 26(a)(2), regardless of the form in which the draft is recorded.” The rules are not quite as clear with respect to attorney-client privileged communications and workproduct documents. Rule 26(b)(4)(C) does “protect communications between the party’s attorney and any witness required to provide a report,” but leaves an exception for communications that “identify facts or data that the party’s attorney provided and that the expert considered in forming the opinions to be expressed” or that “identify assumptions that the party’s attorney provided and that the expert relied on in forming the opinions to be expressed.” Thus, the same questions as to what the expert “considered” and “relied on” are present here as well. Indeed, some federal courts have used these exceptions to require disclosure of otherwise privileged documents. PRACTICE TIPS
The upshot of the Florida and Federal Rules of Civil Procedure is if an expert considered and/or relied on a document or communication in forming his or her opinion, that document or communication is likely discoverable, regardless of whether it would otherwise be privileged. No litigator wants to go before a court to defend why a document or communication should not be disclosed. This is especially true when the argument will turn on convincing a judge that even though the attorney felt it necessary to share the document or communication with the expert, the expert did not consider or rely on it. To avoid this somewhat sticky situation, there are certain best practices litigators can adopt in communicating with their expert witnesses. Note that
observing these practices will not prevent deposition and/or crossexamination questions related to an expert’s communiDarren Goldman is cations with couna Senior Attorney in sel; but they will, Becker & Poliakoff’s Business Litigation generally speaking, practice. He handles prevent disclosure complex commercial of documents and disputes for large written communicorporate clients, cations that would closely held corporations, and financial otherwise be priviinstitutions. He also leged and/or work represents clients product. in restructuring disMost attorputes and appellate matters. neys prefer to dgoldman@ have a written beckerlawyers.com record. With experts, however, this preference can open the door to unwanted discovery. Tell the expert not to communicate substantive matters via email at the first meeting and reinforce that direction after the expert is hired. Explain that notes and worksheets will be discoverable. Communicate with an expert by phone, not email. Verbally express any disagreements with an expert’s opinion or evaluation of an issue rather than laying it out in a memorandum. The same information is being conveyed, but there is no record that must be produced. Although the communication may be protected from discovery anyway because it is an attorney’s mental impression rather than a fact, it avoids a court fight. It also could avoid having to produce redacted documents that may give the impression something untoward is being said — even if everything is in order. USE SCREEN SHARING TECHNOLOGY
Most experts will share a draft of a report with an attorney before submitting a final version. The attorney will often want to comment on the draft. These comments can range from minor continued on page 46
Is Internet Gaming Addictive? By Kurt D. Weaver and Madeline A. Campbell
Kurt D. Weaver is a partner at Womble Bond Dickinson LLP. He is a mass torts trial attorney and practices with Womble’s Advance Services Medical and Scientific Solutions group, researching, evaluating, and preparing medical and scientific experts for litigation. kurt.weaver@ wbd-us.com
Dr. Madeline A. Campbell has a Ph.D. in Cognitive Psychology from the University of Kentucky and has been at Womble Bond Dickinson LLP since 1996. Dr. Campbell is a medico-legal and scientific consultant, part of Medical and Scientific Solutions, an Advance Services practice of Womble Bond Dickinson. madeline.campbell @wbd-us.com
orty plus years ago, society used the label of addiction for few things — hard drugs being the most recognizable. Today people use “addicted” broadly when discussing how much someone likes chocolate, food, sex, shopping, gambling and surfing the internet, but what really counts as an addiction? Today, over 90 percent of children and adolescents play video games. Many spend substantial time playing (seven hours and seven minutes per week, on average). A similar trend line can be found in adult behavior as well. Is gaming a new addiction and will there be a wave of litigation as a result? For decades, the public health community has sought to address life-style problems to protect and improve health. Its work is achieved by promoting healthy lifestyles, researching disease and injury prevention, and detecting, preventing and responding to infectious diseases — a worthy pursuit. The investigation, testing, and warnings it issues have educated and protected society from many harms, including foodborne illnesses, motor vehicle dangers, children’s toys and car seat carriers, and workplace hazards.
The public health community’s expansion into advocacy often has practical and legal consequences. In 1986, at an international conference held in Ottawa, a broad new understanding of health promotion was adopted under the leadership of the World Health Organization (WHO), called “the Ottawa Charter for Health Promotion.” The Ottawa Charter initiated a tendency to vigorously advocate for and against things deemed to help or hurt the public health. That advocacy has led to litigation. For example, in 2015, a report from the WHO’s International Agency for Research on Cancer said glyphosate, the main ingredient in Monsanto’s Roundup, is a “probable carcinogen.” Bayer, which purchased Monsanto in 2018, now faces over 18,000 lawsuits regarding the ingredient’s use. A California jury recently awarded a couple
$2.055 billion in pain, suffering and punitive damages after they alleged the glyphosate exposure caused their blood cancer. And the glyphosate lawsuits didn’t stop with Roundup; lawsuits were soon brought against major food manufacturers and retailers. In the United States, the U.S. Surgeon General is the leading official on matters of public health. In 1988, the Surgeon General labeled cigarettes and nicotine addictive. Thereafter, the public health community began calling many other substances — chocolate, food, sugar-sweetened drinks — addictive, and behaviors such as gambling and surfing the internet soon followed. However, it was not until 2013 that the American Psychiatric Association (APA) recognized “behavioral addiction” as the nomenclature for “gambling disorder.”
Listed In Classification of Disorders Starting in 2014, the WHO concluded that the negative health consequences of excessive use of various electronic devices had become a significant public health concern in an increasing number of countries. In 2018, the WHO released the 11th edition of the International Classification of Disorders (ICD-11), and gaming disorder was included as a behavioral addiction for the first time. A gaming disorder is defined as a clinically significant syndrome, manifested by impaired control over gaming, increased priority given to gaming over other activities, and continuation of gaming despite occurrence of negative consequences. The WHO’s declaration has generated litigation. In October 2019, a proposed class action lawsuit was filed continued on page 47
Climate Litigation Momentum Building in Europe By Sylvie Gallage-Alwis and Gaëtan de Robillard
hile 2020 will go down in history as “the year of pandemic,” decisions handed down in 2019 and the news at the beginning of the year, before the Coronavirus superseded everything else, indicate plenty of pent-up energy behind climate litigation in Europe. France, whose failure to act for the protection of the environment has been acknowledged by European and national courts, is becoming the scene of strategic actions against flimsy regulation and the parties that profit by it. Such claims will be at the origin of copycat actions. It is already happening in the form of toxic tort claims. Authorities have adopted an increasing number of environmental standards at international, European and domestic levels of governance. Notably, they refer to the right to pure air, health and, more generally, the right to life and family. To enforce these rights, actions are being brought before administrative, civil and criminal courts — a pattern familiar to practitioners in the field of toxic tort. It consists first in obtaining decisions in which the state’s responsibility is engaged on principle, and then turning to companies for compensation.
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A landmark decision, the Urgenda case, was handed down in 2018 by The Hague Court of Appeals, which ordered the Dutch State to reduce its greenhouse gas emissions by 25 percent by 2020 to enable it to make a fair contribution to the Paris Agreement target. The court stated that it therefore belongs to the state to take immediate measures to mitigate climate change. Likewise, in a decision handed down by the European Court of Justice in 2019, France was condemned on the grounds of a breach of obligations it has under the European Union directive guaranteeing pure air for Europe. In particular, the French State was found liable for automatically and repeatedly going over the limits set for nitrogen dioxide, and not taking appropriate measures for reducing the excesses in the shortest time possible. The court based its reasoning on an objective liability system, according to which the mere observation of an exceeded limit establishes a breach of the directive. The directive also requires plans relating to air quality adopted by the European Union member states to provide efficient measures so that the amount of time the legal limits are exceeded is as short as possible. According to the court, the plan implemented by France did not meet the requirements called for by the directive. Sylvie Gallage-Alwis is a Partner at This condemSignature Litigation, nation arose in a specializing in mass, context in which toxic tort and product the French State’s liability litigation. She failure to act was heads the product liability & product acknowledged compliance litigation by administrative practice, which encourts on several compasses litigation occasions, includarising from pollution and environmenting a January 2020 related issues linked decision by the to products. Administrative sylvie.gallage-alwis Court of Lille. In @signaturelitigation. com this case, the claim-
ant requested 80,000 euros as compensation for alleged severe breathing problems. To support this allegation, the claimant argued that there was a causal link between her chronic sinusitis and the atmosphere pollution in and around Lille. The administrative court granted the request, noting that insufficient improvement of air quality in and around Lille is the fault of the state. As with the other administrative courts before, Lille did not grant compensation, citing lack of evidence of a causal link between the claimant’s breathing problems and peak pollution over the period in question. Although it is undeniable that the decision by the Administrative Court of Lille — as well as decisions handed down in Paris, Lyon and Montreuilare — are significant, the fact remains that the state’s responsibility is admitted only minimally, and this admission does not lead to compensation. That is exactly what happened following the acknowledgment of the responsibility of the state regarding asbestos. The French Council of State acknowledged responsibility in 2004. Yet, over the following 15 years, businesses became the target of thousands of actions and of case law, creating from scratch an almost automatic compensation system. QUESTIONING CORPORATE RESPONSIBILITY
A causal link is one of the fundamental criteria for liability. With respect to exposure to a chemical substance or a product, case law has attenuated this concept. Courts are satisfied with less and less consistent evidence, temporal concomitance and, more generally, the absence of specific scientific and medical debates. When it comes to air pollution or other important environmental pollution, considering that the number of claimants can grow exponentially, one can conclude that the causal link will always be called into question. This obstacle is more acute in the case of air pollution, where the “toxic substance” is diffuse by nature. Identifying who is responsible is
therefore a complex task. Out of pragmatism, the criminal route was preferred to the civil route at first, as the search Gaëtan de Robillard for evidence is in is a litigator at Signathe hands of judges ture Litigation, specializing in product liability and does not lie and product safety. with the parties He assists multinationas in civil matters. al businesses in the Thus, since 2014, consumer goods, life several complaints sciences, energy and automotive sectors. have been filed gaetan.derobillard@ against unknown signaturelitigation. people for endancom gering the lives of others in the hope that an investigation would be initiated and analyses carried out on the pollutants to which they are exposed. In contrast, in re Perenco, the claimant associations — which had obtained a civil injunction to obtain documents into the defendant oil company’s headquarters — were faced with a refusal to implement the injunction. Despite this kind of evidentiary difficulty, civil action is still used by individuals, as shown by the summons by a group of several cities and non-governmental organizations (NGOs) on grounds of the Vigilance Act of 2017. According to this act, corporations of a certain size must adopt and effectively implement a plan that contains reasonable vigilance measures to identify risks and prevent serious violations of environmental protection. If successful, this could pave the way for many actions, as it avoids debate about a causal link. MORE GROUNDS FOR PLAINTIFFS
Other elements converge, pointing to a multiplication of disputes and grounds available to claimants, starting with a decision handed down by the French Constitutional Council in January 2020. In this case, the Union of Plant Protection Industries was challenging the constitutionality of provisions prohibiting the production, storage and circulation in France of plant protection products
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containing active substances not approved by the European Union because of their effects on human health, animal health or the environment. The claimant argued that the provisions constituted an obstacle not only to the sale of such products in France but also to their export, and therefore restricted freedom of initiative. The Constitutional Council rejected this argument, stating that environmental protection is an objective of constitutional value, which overrides the freedom of initiative. This decision has had a huge impact in France and illustrates the trend toward increasing protection of the environment. In our view, this decision may very well consti-
tute a basis for new environmental obligations for government and corporations. The willingness of the authorities to implement a legislative arsenal, as well as mechanisms to preserve the environment, is reflected by the draft act voted on in March 2020 by the French Senate, upon proposal of the Minister of Justice. In this draft, it is proposed to set up courts dedicated only to environmental disputes. Even more innovative is the possibility for companies to negotiate settlements with the public prosecutor. The draft act proposes to extend the scope of deferred prosecution agreements known as Judicial Public Interest Agreements, or CJIPs — applicable until now
Expert Communications continued from page 41
to substantive edits regarding the expert’s ultimate opinion. As discussed above, these drafts are discoverable in Florida courts. While the amended Federal Rules of Civil Procedure prevent discovery of drafts in federal court in theory, in practice, many courts still look for ways around the Rule to order disclosure. To avoid this risk, take advantage of video conferencing technology such as Zoom, WebEx, Skype Meetings or Microsoft Teams. Set up a video call so the attorney can review the draft in real time. The attorney can then either dictate proposed edits or have the expert turn over control
No litigator wants to go before a court to defend why a document or communication should not be disclosed. of the screen and do it personally. This accomplishes the same goal as emailing and reviewing drafts but avoids the discoverable paper trail of prior versions. Don’t give the expert a document dump. Attorneys often give experts full access to their internal database to avoid insinuations that the expert was only given favorable information to support his or her opinion. The flip side of this strategy is that if some of the documents in the database are privileged, it could open those documents up to production if the expert reviewed them.
only to the offence of corruption, influence peddling and money laundering — to serious breach of environmental laws or regulations. If adopted, it will certainly change the way environmental disputes are dealt with. The ever-increasing number of environmental standards, combined with the possibility of resolving disputes either before special courts or through a deferred prosecution agreement, demonstrate the rapid and inevitable development of climate change litigation. todaysgeneralcounsel.com
Rather than give the expert unfettered access, ask what types of documents are needed, and provide only those documents. Periodically ask if there are any other documents that would be helpful and provide them. Inform the expert at the outset that if documents are needed, they will be provided. This allows the attorney to ensure that privileged documents and communications are not being provided, and thus are not subject to discovery. It has the added benefit of the expert being able to testify that every document necessary or helpful was provided. The uninformed litigator who assumes that the same rules apply to expert discovery as they do to fact discovery is walking into a trap. This mistaken assumption can lead to privileged communications and/or attorney work product being disclosed to the opposing party. By being mindful of the differences and taking the simple precautions detailed above, litigators can be sure privileged materials remain protected from forced disclosure. todaysgeneralcounsel.com
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addiction. Indeed, many experts in the scientific community have voiced concern over classifying gaming disorder as in Montreal, Quebec, on behalf of a disease and have urged the WHO to parents who claim that their minor sons postpone their formalization until more became addicted to Fortnite, and that scientific evidence becomes available. Epic Games, the publisher of Fortnite, Interestingly, the WHO itself previdesigned the video game to be highly ously sounded this exact caution when addictive, thereby knowingly putting the they noted in 2015 the lack of empirical health of users in danger. The complaint’s data to support a diagnosis of gaming allegations liken the addiction to a drug disorder: “[E]pidemiological research in addiction and cite the WHO’s decision this field is faced with limited and often to classify “video game addiction” as a unreliable data.” disease. The question is, is the WHO’s In October 2019, the journal Clinical unproven assertion enough? Psychological Science published a study To meet the burden of proof to esby Oxford University’s Internet Institute tablish causation, a plaintiff must offer that questions whether the research and admissible expert testimony regarding scientific attention given to this “imboth general and specific causation. mensely popular activity is empirically General causation is whether a subjustified” and concludes that it is not. stance is capable of causing a particuMembers of the WHO team who were lar injury or condition in the general tasked with evaluating the available population, while specific causation is evidence acknowledged that politiwhether a substance caused a particular cal pressure entered into the decisionindividual’s injury. making process MANY EXPERTS IN THE Courts applyfor considering ing the Daubert video gaming SCIENTIFIC COMMUNITY standard insist a disorder. HAVE VOICED CONCERN upon reliable The APA OVER CLASSIFYING GAMING publishes the information from experts based on DISORDER AS A DISEASE. Diagnostic and knowledge and Statistical Manexperience of their discipline. Whether ual of Mental Disorders (DSM), which an expert’s opinions have “widespread codifies psychiatric conditions and is acceptance” is an “an important factor used worldwide (although primarily in in ruling particular evidence admisthe United States) as a guide for diagsible and ‘a known technique’ which nosing disorders. For various mental has been able to attract only minimal health conditions, the DSM is considsupport within the community may ered “the gold standard” for making properly be viewed with skepticism.” clinical diagnoses. In 2013, the APA The WHO justified its decision to published its fifth edition of the DSM include gaming disorder in its catalog of and did not include gaming disorder as disorders based “on reviews of available a formal diagnosis. It made the decievidence,” and said they reflect a consension to list Internet Gaming Disorder sus of experts from different disciplines under the Conditions for Further Study and geographical regions. section. The working group did not believe there was enough scientific supScience or Advocacy? port to endorse it as a formal disorder. The WHO blurs the line between The DSM-5 states, “Other excessive reputable scientific conclusions and behavioral patterns, such as Internet pure public health advocacy. There apgaming, have also been described, but pears to be a lack of consensus on the the research on these and other behavscientific positions relating to gaming ioral syndromes is less clear.”
continued from page 43
A review of case law reveals a smattering of decisions in which the issue of video game addiction or gaming addiction have been mentioned. Although many cases make reference to a party’s position, or reference a condition referred to as “video game addiction” or “gaming addiction,” we found none that discussed any objective criteria for the alleged condition, and none in which a court or jury considered whether the term was a recognized condition or whether liability or fault could be imposed for such a condition. Seventh Circuit Judge Richard Posner famously noted, “[T]he courtroom is not the place for scientific guesswork, even of the inspired sort. Law lags science; it does not lead it.” As gatekeepers, trial judges will need to decide whether there is legitimate science to support a diagnosis of gaming disorder in the courtroom. Lay people may agree that gaming can be habit-forming, but in a court of law, science supporting an expert witness’s opinion must be based upon sound principles and methods and sufficient, reliable data. The goal of science is to test hypotheses. That process typically begins with an observation and proceeds to a hypothesis to explain the observation. This is followed by testing the hypothesis using sound methodology that is both valid and reliable. Once results are obtained, the process of peer review, publication and replication is followed. With respect to gaming disorder, one has to consider whether the cart has been put before the horse. Educating the judge on the current state of the science will be paramount in any litigation regarding a claim of addiction to video games. For any manufacturer— and especially video game manufacturers — to successfully defend against tort claims, an in-depth analysis of the scientific and medical literature on any “condition” associated with its products is not only warranted but sure to be advantageous. todaysgeneralcounsel.com
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Covid-19 Is Increasing Fraud, But Companies Can Protect Themselves By Steven Bock and Jordan Strauss
s the struggle with COVID-19 continues, we must consider what the new normal will look like with respect to fraud and how the risks can be mitigated. We hear from our clients daily, and the news is troubling. Criminals — whether state government associates, organized crime or simple opportunists — are targeting the least-prepared organizations. Insider threats grow more dire as the new economic reality takes hold and motivates normally law-abiding individuals to act out of desperation. A dispersed workforce is harder to monitor, especially with costs for oversight and compliance departments often being grouped into general sales and administrative costs, and companies facing cutbacks in the face of declining corporate revenues. For the foreseeable future, there will likely be strong economic headwinds against almost every industry. Millions will remain jobless, and the costs of healthcare will continue to rise. This will leave many people desperate, and businesses will be eager to bolster revenue or the appearance of revenue. Covid-19’s impact will continue to delay enforcement actions. Grand juries cannot meet, FBI agents cannot travel, and oversight in general becomes more difficult. In a recent survey of its members conducted by the Association of Certified Fraud Examiners (ACFE), 68 percent of respondents reported that they had an increase in fraud as of May 2020. Ninetythree percent expected an increase in the next year. So, what should general counsel Steven Bock is expect? managing director Based on our experience and what and global head for the Compliance we hear from clients, we think there will Risk and Diligence be four major trends. The ACFE report practice of Kroll, a also suggests that these trends are likely division of Duff & Phelps. He manages to emerge. First, computer-enabled fraud will continue to rise. Ninety-one percent of compliance operations and research ACFE respondents expect some increase in teams worldwide this form of fraud as more employees work to deliver globally from home, because information security consistent due diliis more difficult when users are dispersed. gence solutions. Second, fraud by vendors and sellers, steven.bock@kroll. com which we characterize as supply chain
fraud, will rise. Eighty-six percent of ACFE respondents agreed with this. This sort of fraud is common in economically difficult times, and our clients are already experiencing it — even from vendors that they viewed as blue chips. Third, we expect substantial compliance issues that may rise to the level of fraud depending on the materiality of the incident. Seventy-two percent
We expect substantial compliance issues that may rise to the level of fraud.
Jordan Strauss is a managing director with the Business Intelligence and Investigations practice of Kroll, a division of Duff & Phelps. He has served as Director in the White House National Security Council specializing in incident management and has held various roles with the U.S. Department of Justice. jordan.strauss@ kroll.com
of ACFE respondents expect some increase in bribery and corruption in the coming year, and we agree. Covid-19 has created an environment more conducive to fraud and less conducive to oversight and enforcement. Fourth, we expect a general increase in financial statement fraud (and so do 71 percent of ACFE respondents). As we navigate new challenges created by Covid-19, organizations need to implement measures to protect themselves. Often the internal audit function is an organization’s first line of defense, continually monitoring and adapting compliance and risk programs, and assessing the quality and success of internal anti-fraud programs. Executives should remind all employees to perform proper and thorough diligence on counterparties and vendors, particularly mission-critical vendors and service providers. Buyers should be evaluated continually for their overall stability, reputation, and compliance with certification requirements and local laws. Senior leaders must be aware of the risks of sloppiness in any of these spaces. Regulators will not be forgiving of those suspected of using this crisis to bury negligent, or worse, behavior. todaysgeneralcounsel.com
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