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IP • DOJ reverses direction on key patent guidance • Prevent proprietary software from walking out the door M&A • Due diligence in the #MeToo era • Injuries and standing in antitrust law • Court interpretations of M&A contracts $199 Subscription rate per year ISSN: 2326-5000 View our digital edition: issuu.com/todaysgc
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TODAY’S GENER AL COUNSEL SPRING 20 19
No matter which side of the immigration divide you’re on, the travails of business immigrants and business visitors probably aren’t on top of your list of things to fret about. Nevertheless, the problems faced by this privileged subset are real. Articles in this issue of Today’s General Counsel, by David Leopold and by co-authors Greg Berk and Jonathan E. Meyer, describe an administration that is taking direct aim at U.S. businesses that hire foreign professionals or do business with foreign visitors. Government agencies are under instructions to “rigorously enforce and administer” the laws concerning the H-1B visas that corporations rely on to validate trusted employees. Both articles suggest steps you can take to make sure your company doesn’t run afoul of ICE. Writing from the perspectives of an important client and the chair of a major law firm, Peggy Kelsey and Kimberly Leach Johnson discuss some new wrinkles in the perennial problem of passing the torch. Client transition plans, they say, can be an occasion to bring more diverse viewpoints to the legal profession, especially now that baby-boomers are retiring. The transitions need to be planned up to five years in advance. Many of our readers are veterans of those curious ad-hoc organizations called joint defense groups, so they’ve had the experience of making common cause with sometimes bitter competitors. Terrence Dee explains how best to organize these groups in order to make the most of the edge they can provide in major litigation. Disagreements are inevitable, he writes, and outside counsel are generally in the best position to resolve them, but in-house counsel can help, especially if they already have a working relationship with their counterparts’ in-house attorneys. In the compliance sphere, Eric Rieder and Austin Campriello discuss the latitude prosecutors have when they are pursuing recipients of insider trading tips, despite the caselaw requirement that the tipper has received a personal benefit from giving the tip. We’re pleased to welcome a new columnist, Todd Presnell, who will be familiar to many readers from his blog Presnell on Privileges. In this issue he discusses when the attorney/client privilege extends to third party agents.
Bob Nienhouse, Editor-In-Chief bnienhouse@TodaysGC.com
The Oscars at The Exchange, Legal Operations Forum Today’s General Counsel Institute hosted The Exchange, Legal Operations Forum in Beverly Hills, California on February 24–26. Senior business executives and general counsel alike gathered to discuss today’s strategies for corporate teams and their legal support.
1. Left to right: James Rice, President and CEO, Solaris Paper; Benjamin Hodges, Software Engineer, SAIC; James Kahrs, Business Development Manager, Knovos; and Gianno Caldwell, Fox News Political Analyst and Special Correspondent for Extra TV. 2. Joy Murao, Founder and CEO, Practice Aligned Resources; and Neil Signore, SVP and Managing Director, Today’s General Counsel Institute. 3. Roberta Anderson, Owner and Principle, RAS Enterprise Risk Management Services 4. Left to right: Jennifer McGovern, Program Director, Today’s General Counsel Institute; Tammy Brandt, Chief Legal Officer and Head of Business and Legal Affairs, Dreamscape Immersive; and wife, Ann. 5. Christina Porras, Professional Services Director, Oasis; and Richard Levis-Fitzgerald, VP Enterprise Sales, Oasis. 6. Michael Kinberg, Principal at Kinflix, Inc. and Carla Ford, General Counsel at US VETS.
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SPRING 2019 TODAY’S GENER AL COUNSEL
2 | Report from the TGCI Exchange The Legal Operations Forum 8 | Executive Summaries
34 | Workplace Issues #M&AToo Don’t acquire a harassment suit. By Devjani H. Mishra and Raoul Parekh
36 | The Antitrust Litigator Antitrust Injury and Standing Principles that limit potential claims and parties. By Jeffery Cross 38 | Privilege Place Employees, Agents and the Attorney/Client Privilege Third party agents and the client. By Todd Presnell 64 | Back Page Front Burner Sensible Disclosure Concerning Litigation Finance Transparency doesn’t mean revealing strategy. By Alan Guy
40 | Planning for a Smooth Client Transition A chance to bring in more diverse leadership. By Margaret “Peggy” C. Kelsey and Kimberly Leach Johnson 42 | Out-of-State Deposition and Discovery in Texas Miles and miles of miles and miles. By James W. Walker and Ian Ross Phillips 46 | Keys to a Successful Joint Defense Group They work if competitors can cooperate. By Terrence J. Dee 48 | Insider Trading and the Personal Benefit Requirement The 2014 decision is just about dead. By Eric Rieder and Austin Campriello 52 | SEC Zeros in on Celebrity Promotions Mayweather leads with his chin. By Michael Rivera and Abby Yi 54 | Supreme Court PDR Decision Could Upend Regulatory Ground Rules Are courts bound by agency’s statutory interpretations? By Becca Wahlquist 58 | Contractual Potholes On the Road to M&A When contracts are unclear, courts look to extrinsic evidence. By Kyle Gann, Steven Gavin, William O’Neil and Jason Osborn 60 | English Courts Possess Powerful Tools for U.S. Litigation Assets can be frozen, witnesses can be compelled to testify. By Lesley Timm, James E. Nealon and Elisa Wahnon
TODAY’S GENER AL COUNSEL SPRING 2019
L ABOR & EMPLOYMENT
14 | Will U.S. Border Protection Admit Your Foreign Visitor? Stuck in secondary inspection, or placed on the next plane home. By Greg Berk and Jonathan E. Meyer 16 | Trump’s Hard Line Includes Business Immigration Taking aim at U.S. businesses that hire foreign professionals. By David Leopold
31 | Faster, Cheaper, Smarter AI is transforming legal technology. By Ajith Samuel
INTELLEC TUAL PROPERT Y
20 | Protecting Software in the Face of an Ever-Changing Workforce Keep unwanted technology out and proprietary software in. By Mark P. Kesslen
26 | Implementing a ForcedLabor Compliance Program Seven elements, and the evidence you must provide. By Richard Mojica, Nathan Lankford and Nicole Gökçebay
22 22 | DOJ Withdraws Assent to Key IP Policy Standard setting must be pro-competitive. By Andrew B. Grossman, Kathi Vidal, Susannah P. Torpey and Ian L. Papendick
28 | Banks Caught In State/ Federal Cannabis Conflict Feds lack funds to prosecute, so far. By William Bogot and Joshua Horn
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SPRING 2019 TODAY’S GENER AL COUNSEL
Executive Summaries INTELLEC TUAL PROPERT Y
L ABOR & EMPLOYMENT PAGE 14
Will United States Border Protection Admit Your Foreign Visitor?
Trump’s Hard Line Includes Business Immigration
Protecting Software in the Face of an Ever-Changing Workforce
By David Leopold Ulmer & Berne LLP
By Mark P. Kesslen Lowenstein Sandler
The Trump administration has called for a record reduction in legal immigration and has taken aim at U.S. businesses that hire foreign professionals. No provision of immigration law has changed, but the myriad statutes and regulations that govern the issuance of business visas are being restrictively interpreted. In 2017, Trump signed the executive order titled Buy American and Hire American (BAHA). Although it does not purport to change immigration statutes — only Congress can do that — it directs government agencies to “rigorously enforce and administer” the immigration laws and “suggest reforms to help ensure that H-1B visas are awarded to the mostskilled or highest-paid” foreign workers. By April 7, 2018, U.S. Customs and Immigration (ICE) had received 236,000 H-1B petitions for the available 85,000 slots. ICE has increased its I-9 employment verification audits, and businesses have therefore been subject to investigation by Homeland Security agents, substantial monetary fines for I-9 violations and — where there is evidence of intentional disregard of the immigration law — criminal liability. Derek Benner, Acting Executive Associate Director for ICE’s Homeland Security Investigations, told the Associated Press that the agency would focus on criminal cases against employers and on deporting employees who are in the country illegally. General counsel are advised to fashion an employment-based visa and corporate compliance strategy that includes a plan to protect the recruitment and retention of foreign professionals and ensure corporate compliance with the employment verification rules.
What can organizations do to prevent proprietary software from going AWOL and unwanted outside technology from walking through the door uninvited? To counter these risks, reevaluate and update existing employment agreements and trade secret policies, develop a copyright registration process (which is an evolving best practice), and reassess patent filing strategies to address the challenges created by the mobile and ever-changing workforce. This also provides you an opportunity to introduce an open source code policy to ensure that wrongly introduced code does not virally impact the value of your source code. A robust non-disclosure and invention assignment agreement (NDIAA) ensures that ownership of all developed work product, including associated intellectual property rights, is assigned to the company and protects the company’s confidential and trade secret information and data. A best practice being adopted at many tech companies is to file for copyright registration for developed code. This grants the owner the ability to immediately seek injunctive relief in federal court. It creates a record of ownership and evidence of validity and protects the literal and nonliteral elements of the code against an exact copy and works that are substantially similar. In making a decision to file for patent protection on technology, the detectability of the software must be assessed. If it is easily or somewhat detectable, pursue a patent. Licensing of open source software is also a concern. The two types of licenses available are permissive and copyleft.
By Greg Berk and Jonathan E. Meyer Sheppard Mullin
The regulations regarding business visitors entering on a B-1 Temporary Business Visitor visa or Electronic System for Travel Authorization (ESTA) visa waiver are vague. The B-1 visa permits individuals to come to the United States to conduct activities such as consulting with business associates, negotiating a contract or participating in short-term training. It does not permit visa holders to conduct day-to-day business here. The line between acceptable and unacceptable activities can be unclear, but there are ways to improve the odds that your employees will not be flagged by Customs and Border Protection (CBP) and can avoid being stuck in secondary inspection or placed on the next plane home. Even though a visitor with an ESTA visa waiver is permitted to remain in the United States for up to 90 days, and a B-1 business visa holder can stay for 180 days, a long stay by an individual who is clearly here for business purposes can garner unwanted attention from CBP. Returning too soon can cause problems and so can coming too often, but the criteria are vague. Bringing children on B-1’s at the start of a school year is a red flag. Not all foreign employees should travel here on a visitor’s visa. In some cases, they should obtain a United States work visa. Several kinds are available, but none are foolproof in the present political climate. General counsel must remain vigilant: Preventive measures on the front end will spare aggravation and expense on the back end.
TODAY’S GENER AL COUNSEL SPRING 2019
Executive Summaries COMPLIANCE PAGE 22
DOJ Withdraws Assent to Key IP Policy
Implementing an Effective ForcedLabor Compliance Program
Banks Caught in State/Federal Cannabis Conflict
By Andrew B. Grossman, Kathi Vidal, Susannah P. Torpey and Ian L. Papendick Winston & Strawn LLP
By Richard Mojica, Nathan Lankford and Nicole Gökçebay Miller & Chevalier
By William Bogot and Joshua Horn Fox Rothschild LLP
In a December 2018 speech before the Berkeley-Stanford Advanced Patent Law Institute, Assistant Attorney General Makan Delrahim, head of the DOJ’s Antitrust Division, announced that the DOJ has withdrawn its assent to the 2013 Policy Statement on Remedies for StandardsEssential Patents Subject to Voluntary FRAND Commitments (the Joint DOJ/ USPTO Policy). He elaborated upon the DOJ’s enforcement approach to standard setting organizations (SSOs). AAG Delrahim’s body of public remarks, including his December 2018 speech, should serve as a reminder that antitrust risks are inherent whenever market participants come together and act collectively in organizations. They should remain vigilant to ensure that the rules, procedures and patent policies of the SSOs are tailored to maximize procompetitive goals, and to ensure that their participation, and the conduct of other participants, is in compliance with the rules of the SSO and the antitrust laws. While participants in SSOs should always be mindful of the antitrust risks inherent in any joint enterprise with competitors, the DOJ’s shift in focus should prompt them to ensure that they give appropriate consideration to the adoption of best practices designed to reduce any antitrust risk. Standard setting must be for a legitimate pro-competitive purpose. Patent policies should be well documented, fair, and should involve early disclosure of standards-essential patents and independent determination of the value of these patents. Grant-back requirements should be fair and transparent.
Congress has amended Section 307 of the Tariff Act of 1930 (19 USC §1307) to close a loophole exempting products that were in short supply in the United States from the general prohibition on imports made by forced labor. As amended, the Act prohibits the importation of products made wholly or in part with convict labor, forced labor (including child labor) or indentured labor, with no exceptions. In December 2018, U.S. Customs and Border Protection (CBP) issued a proposal to the Commercial Customs Operations Advisory Committee to implement the forced labor provisions through trade compliance. CBP’s proposal sets out seven elements of an effective forced labor compliance program, as well as the evidence demonstrating implementation that Custom-Trade Partnership Against Terrorism members would be required to provide to CBP. For example, companies are expected to involve stakeholders and partners in methods of understanding the forced labor risks in their supply chains, as well as to establish a code of conduct for the company and the company’s partners. This proposal provides a template for the broader universe of importers to take stock of their current forced labor compliance programs and be better prepared for potential CBP inquiries. In particular, an importer can compare its existing forced labor compliance efforts to the proposal’s elements and note where it is already meeting likely CBP expectations, and where it has further work to do. Companies should use it as guidance to keep pace with CBP’s forced labor compliance expectations.
Lawyers must counsel clients in the nascent industry of state-legalized cannabis that their routine business affairs violate federal law, a situation that new Attorney General William Barr calls “untenable.” It requires lawyers involved in the cannabis space to remain conscious of evolving law. In 2009, Deputy AG David Ogden issued a memorandum to federal prosecutors in states that had passed medical marijuana laws. It said that federal resources should not focus on individuals in compliance with existing state laws providing for the medical use of marijuana. In 2013, Deputy AG James Cole published an update identifying eight enforcement priorities that were important to the federal government and would guide the DOJ’s enforcement of marijuana matters. It identified situations in which banks might run afoul of federal law, including providing services to a marijuanarelated business knowing that it is diverting marijuana to a state where marijuana sales are illegal. Former AG Sessions retracted both Ogden and Cole Memos in favor of a harder line; but nothing much changed because of an amendment to the federal spending bill, first approved in 2014 and every year thereafter, which prevents the DOJ from using federal funds to prosecute state-compliant medical marijuana operators in states that have legal cannabis programs. A 2016 Ninth Circuit interpretation strengthened the prohibition. In light of this amendment, even if the DOJ wants to prosecute state-compliant persons and businesses in the medical cannabis space, it has no funding.
SPRING 2019 TODAY’S GENER AL COUNSEL
Executive Summaries FEATURES PAGE 31
Faster, Cheaper, Smarter The Future of Artificial Intelligence in E-Discovery
Planning for a Smooth Client Transition
Out-of-State Deposition and Discovery in Texas
By Margaret “Peggy” C. Kelsey WEC Energy Group Kimberly Leach Johnson Quarles & Brady LLP
By James W. Walker and Ian Ross Phillips Cole Schotz P.C.
A major generational swing is currently underway in the workforce, as roughly 75 million baby boomers — who hold about one-third of all U.S. jobs — approach retirement. Law firm leaders need to implement smooth, efficient client transition plans in the coming years. Some law firms link compensation to smooth transitions, giving more than 100 percent credit to a partner who meets certain transition expectations. Developing team-based relationships early and gradually sows trust and establishes relationships that make a client transition more seamless down the line. In respect to diversity, it’s crucial that law firm leaders begin thinking about how they can bring women and minorities onto their client service teams 5 to 6 years before a client transition. This should be a mutual endeavor, with GCs pushing their clients to hire and promote diverse lawyers and law firms nurturing, developing and introducing such lawyers into established client relationships. Preparing a succession plan can become an opportunity to open a discussion with the client about their needs, their key drivers, what they’re looking for in a new relationship partner. Client transitions in the waning years of the boomer generation not only afford law firms the opportunity to deepen their client relationships but provide an occasion to bring more diversity to the legal profession as a whole. The only way to take full advantage of such succession planning and client transitions is to start early, be communicative and remain transparent.
Most states have enacted the Interstate Depositions and Discovery Act, which simplifies procedures for issuing subpoenas for out-of-state discovery, including document requests and depositions. Texas has not adopted the Act. Generally, a party seeking discovery from a non-party Texas resident files a motion for entry of a mandate, writ or commission in the underlying matter with the presiding court. If the non-party is a corporate entity, the topics upon which the representative is to be deposed should also be included as an exhibit. If the Requesting Party seeks the production of documents, it should attach the discovery requests to its motion. The court with jurisdiction over the underlying lawsuit retains jurisdiction over any objections the other parties to the case might wish to make. While most issues regarding the scope of discovery must be resolved in the originating court, Texas courts retain an interest in protecting the rights of any Texas resident to whom the discovery is directed. The best means available to the Requesting Party to secure the necessary discovery in admissible form is to retain Texas counsel to handle all matters subsequent to issuance of the mandate, writ or commission. This can greatly increase the odds of successfully obtaining the necessary discovery, particularly when, as is often the case, the deponent and opposing counsel avail themselves of every means of resisting the discovery requests and are generally uncooperative. This will likely save time and money.
By Ajith Samuel Exterro
The rise of artificial intelligence (AI) in legal technology began during the document review phase of electronic discovery, which accounts, on average, for over 70 percent of the costs associated with pre-trial discovery. Technologies like predictive coding, in which algorithms learned from “seed sets” of documents coded by human reviewers, provided fast, accurate and less expensive means for legal teams to work through a vast body of potentially relevant electronically stored information (ESI). In the past decade, AI has begun addressing tasks like contract review and management and case law review and has begun predicting case outcomes. Although AI has been used in the review phase of e-discovery for approximately a decade, its current integration into document review has become simpler and more elegant. In the past, document review technology required seed sets and users who could define the parameters for relevance. Today, deep learning algorithms, which simulate the human brain by combining several layers of neural networks, can operate in the background, observing as human attorneys review documents, learning the criteria that make a document relevant to a particular matter. AI can apply data mining techniques to vast bodies of data, not just ESI but also custodian identities and relationships, before any data has been collected. By examining relationships between concepts and existing custodians, AI can suggest new keywords and search terms to find relevant ESI.
TODAY’S GENER AL COUNSEL SPRING 2019
Executive Summaries PAGE 46
Keys to a Successful Joint Defense Group
Insider Trading and the Personal Benefit Requirement
SEC Zeros in on Celebrity Promotions
By Terrence J. Dee McDermott Will & Emery
By Eric Rieder and Austin Campriello Bryan Cave Leighton Paisner
By Michael Rivera and Abby Yi Bass, Berry & Sims PLC
A joint in-house counsel defense group can maximize effectiveness and position the defense for the best possible outcome in litigation. The initial challenge for a joint defense group (JDG) is that membership is often effectively involuntary. Plaintiffs’ lawyers decide who the co-defendants are. Members are often arch-rival competitors or groups with distinctly different interests. Insurers add another layer of complexity. Establish a relationship and line of communication with your fellow JDG members. Disagreements are inevitable. Ideally, outside counsel would resolve most issues, but in-house counsel will be recruited to help; and negotiating will be easier if you have already developed a working relationship. Organizing the right leadership team quickly is key to its long-term success. Joint defense efforts are often chaotic at the beginning as parties jockey for prominent roles, race for the best local counsel and scramble to create the first meeting agenda, circulate competing drafts of initial motions, and even set up the conference call and email distribution lists — all to gain leverage for control of the group. These efforts, if not managed, can cause ill-will, distrust, and ultimately lead to a dysfunctional group. In-house counsel play a critical and unique role in creating a high-functioning JDG. More engagement early on to set the structure and establish working relationships with other in-house counsel, followed by more selective involvement once a healthy group is established, will lead to successful results for the defense group and your client.
A recent decision from the United States District Court for the Southern District of New York illustrates the broad reach of prosecutors in pursuing recipients of insider trading tips, despite the case-law requirement that the tipper has received a personal benefit from giving the tip. In 2014, in United States v. Newman, the U.S. Court of Appeals for the Second Circuit held that to establish liability the government must show a “meaningfully close personal relationship” as well as an exchange of pecuniary value between tipper and tippee. Although it was not entirely clear what the Second Circuit’s words meant, the U.S. Attorney’s Office and the Securities and Exchange Commission understood Newman to be a significant obstacle to their insider trading actions. In 2016 the Supreme Court rejected Newman, at least in part, in Salman v. United States. That case viewed a tipper’s gift of confidential information to a trading relative or friend as satisfying the personal benefit requirement. A Second Circuit opinion further restricted it; and in December 2018, in a decision denying a motion to dismiss an insider trading case, United States District Judge Jed Rakoff stated that “[w]hat remains of Newman therefore applies in only the rarest of cases” (United States v. Pinto-Thomaz). Whether future courts will follow Judge Rakoff’s lead in setting forth the doctrinal support for insider trading cases is uncertain, but the law in the Second Circuit has plainly traveled a long way since Newman.
The enhanced publicity garnered from celebrity involvement in an SEC action can help the agency warn and educate a broader segment of the public of the consequences of securities violations, thus deterring more would-be violators and alerting more investors to fraud schemes. This scenario puts celebrities at heightened risk when they are involved with companies that come under SEC scrutiny. The SEC can be motivated to charge the celebrity or announce their involvement with a punished company to publicize the action. The benefits to the SEC of pursuing actions involving celebrities is illustrated by recent enforcement actions against two celebrities. In November 2018, the SEC announced charges against boxer Floyd Mayweather Jr. and music producer Khaled Khaled (aka DJ Khaled) for promoting ICOs via Twitter. Cracking down on fraudulent ICOs and protecting investors from fraudulent ICO schemes is a chief priority for the SEC. Mayweather and Khaled were required to disgorge all the compensation they received for promoting the ICOs and to pay additional penalties totaling over $600,000 for Mayweather, and over $150,000 for Khaled. Mayweather once said, “Boxing is real easy. Life is much harder.” To avoid the hassle of dealing with a regulatory inquiry (which can be costly and time consuming) and to protect themselves from potential liability, celebrities should consult counsel when considering an endorsement involving any type of investment in a company.
SPRING 2019 TODAY’S GENER AL COUNSEL
Executive Summaries FEATURES
Supreme Court PDR Decision Could Upend Regulatory Ground Rules
Contractual Potholes on the Road to M&A
English Courts Possess Powerful Tools for U.S. Litigation
By Becca Wahlquist Snell & Wilmer
By Kyle Gann, Steven Gavin, William O’Neil and Jason Osborn Winston & Strawn LLP
By Lesley Timm, James E. Nealon and Elisa Wahnon Withers
In PDR Network, LLC v. Carlton & Harris Chiropractic, Inc., the U.S. Supreme Court is considering the question of whether district courts need to adhere to statutory interpretations made by federal agencies with national reach. A West Virginia district court dismissed a Telephone Consumer Protection Act (TCPA) class action after refusing to defer to a 2006 order of the Federal Communications Commission (FCC). The Fourth Circuit reversed, holding under the Hobbs Act that the court should have been required to defer to the FCC ruling, and could not itself interpret the plain language of the statute. Some argue that national uniformity is most important, so that businesses know what regulations mean from looking at an agency order and know how to comply with the law. Some argue that unfair or wrong agency orders should not be permitted to override a defendant’s ability to defend itself in a litigation brought long after the time to appeal a relevant agency’s order has ended. It is difficult to predict how the Supreme Court will rule, but it is certain that what it does in PDR Network will be significant and should address the question about who interprets federal law. Businesses will need to watch closely for this opinion. It could determine not only how TCPA litigations progress, but how agency orders in general are treated in the future.
Ambiguity, not clarity, can emerge from the complex documentation prepared in an M&A deal. A Delaware case, LSVC Holdings, LLC v. Vestcom Parent Holdings, Inc. made this clear. As a first step, a Delaware court will look only to the four corners of the contract to establish the parties’ intent. If the meaning of a provision is not susceptible to more than one reasonable interpretation, the court ends its inquiry. If there is ambiguity, it may look to extrinsic evidence to divine the intent of the parties. In the LSVC case, the court sought to resolve the ambiguity by digging into extrinsic evidence. In its decision, it cited oral negotiations, drafts of the letter of intent, interim drafts of the agreement and issues lists. Often, there is an additional layer for a court to consider, an “interpretive” section to the agreement that lays down guidelines for interpreting a contract. An example is the statement that a contract should be read as though it were mutually drafted by the parties. Contracts are read by courts as a whole in order to understand meaning. When meaning is unclear, a court will look to the facts and context surrounding the deal terms. Deviations from common law standards of contractual interpretation imposed pursuant to interpretive provisions need to be thoughtfully considered in light of the specific deal, not merely accepted as handme-downs from precedent of a prior era.
This article focuses on two potent interim remedies that an English court can grant in aid of U.S. court proceedings: (1) obtaining evidence or documents from a witness/ non-party resident in England or Wales through the 1970 Hague Convention, and (2) obtaining injunctive relief in the form of a Worldwide Freezing Order from the English court over parties or assets resident within or outside of England. The most common types of evidence sought through the Hague Convention are depositions and disclosure of documents, which can be obtained with a Letter of Request acquired through an application to the English court. For an LOR to be enforceable in England, the U.S. attorneys will need to send it to English solicitors who will then apply, without notice, to the English court for an order to give it effect. A freezing order is an interim injunction that restrains a party from dealing with or disposing of its assets with the intention of making itself judgment proof. The authors list common pitfalls to watch out for when making an application for a freezing order in aid of U.S. proceedings. The applicant must show a real risk that a judgment made in its favor by the U.S. court will go unsatisfied if the defendant is not restrained by the injunction. There must be solid evidence of a risk of dissipation. The threshold is high and, as mischievous defendants tend to dissipate their assets secretively, often difficult to prove.
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SPRING 2019 TODAY’S GENER AL COUNSEL
Labor & Employment
Will United States Border Protection Admit Your Foreign Visitor? By Greg Berk and Jonathan E. Meyer
t’s 9:30 pm, Sunday evening, and you just got a call on your cell phone from Customs and Border Protection (CBP) at Los Angeles International Airport. A VP from one of your European offices was due to enter the country tonight as a business visitor, but CBP is now holding her in secondary inspection, and she’s been there for 12 hours. Your leadership is in a panic. The VP has been spending a lot of time in the United States lately, developing business leads, meeting with your American executives, and working on the global strategy for your company. Even though she is employed and paid overseas, CBP has questions to ask her and you. They want to determine if she, an executive, has actually been “working” here, rather than visiting on business. CBP advises you that they are seriously considering giving her an “expedited removal order.” This would not only allow them to immediately put her on a flight back to Europe; it would bar her from entering the United States for the next five years and permanently terminate her visa waiver privileges. The VP’s inability to return to the United States for five years would be catastrophic to your business. It is a general counsel’s nightmare. And, while still not an everyday occurrence, it is happening with increasing frequency. We regularly receive calls from clients whose employees have become ensnared in situations like this one. THE RULES
The regulations regarding business visitors entering on a B-1 Temporary Business Visitor visa or Electronic System for Travel Authorization (ESTA) visa waiver are vague. As stated on the website and elsewhere, the B-1 visa permits individuals to come to the United States to conduct activities such as consulting
with business associates, negotiating a contract or participating in short-term training. On the other hand, the rules do not permit B-1 visa holders to conduct dayto-day business here. To the frustration of many, the line between acceptable and unacceptable activities can be unclear at best.
The VP’s inability to return to the United States for five years would be catastrophic to your business. Fortunately, there are ways to improve the odds that your employees will not be flagged by CBP, and can avoid being stuck in secondary inspection or placed on the next plane home. FACTORS THAT TRIGGER CBP SCRUTINY
In our experience, the following types of conduct are likely to trigger increased scrutiny, and possible intervention, from CBP officers: • Staying more than three weeks at a time. Even though an ESTA visa waiver visitor is permitted to remain in the United States for up to 90 days, and a B-1 business visa holder can stay for 180 days, a long stay by an individual who is clearly here for business purposes can garner unwanted attention from CBP. • Returning too soon. So-called backto-back entries can raise the antenna of the immigration officer at the airport. CBP’s interpretation of
“too soon” is fact specific, and there is no set meaning for it. They look at the totality of the circumstances, including how long the back-to-back entries are, whether there have been other similar entries in the recent past and whether there is a factspecific reason. • Coming too often. Similarly, CBP does not just look at how long it has been since the last trip, but how many trips have been taken within a set period. Just like “too soon,” “too often” is not defined anywhere. CBP simply uses a smell test, based on the specific facts for the specific traveler. • Being publicly listed as a United States employee. It is not uncommon for employees to give an impression on Facebook, LinkedIn or Twitter that differs from their official worksite overseas. CBP is not in the Stone Age; it is familiar with social media. If an employee intimates on social media that she or he is based in the United States when the official documents say otherwise, there is a risk of being stopped and questioned at the border. • Bringing children on B-1’s at the start of a school year. This is a red flag that your employee may be coming here on more than a business visit. Children cannot attend public school on a B-1 Temporary Business Visitor visa. They must obtain an F-1 or M-1 student visa. DOCUMENTS TO CARRY ON THE PLANE TO PROVE THAT ONE IS MERELY A VISITOR
One way to avoid (or shorten) secondary screening by CBP is to prepare the right documentation. These so-called “back-pocket documents” only need to be shown if needed, but they can be handy in secondary inspection. They
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Labor & Employment
include proof that the employee is employed and paid abroad, including: • A foreign business card. • An invitation letter from the United States host, outlining the permissible purpose of the trip. • Other documentation demonstrating the permissible purpose of the trip. • A bank statement showing that the employee has enough funds to cover expenses while in the United States. • Evidence that the company has United States workers on the payroll doing the daily productive work to support the foreign employee’s area of responsibility.
• Evidence of strong ties to the home country, such as a residential lease, a mortgage statement, proof of family in the home country (occupying a home, family ties, and so forth). WORK VISAS
Not all foreign employees should travel here on a visitor’s visa. In some cases, they should obtain a United States work visa. Although, again, there is no bright line test, a work visa should be seriously considered if the employee spends more than three months in the United States in any given year; repeatedly spends more than one month at a time in the United States; travels to the
United States more than four times a year, and stays for long periods of time on some of those trips; owns a home in the United States; or performs productive work that no United States workers on the payroll can perform. Congress has created many types of work visas. Each has its own unique requirements and limitations. They can be based on investment, a specific type of degree, or a particular occupation. Some require a treaty with a particular country. A good starting point for counsel to determine if there is an applicable work visa is to review the job description for the United States position, the continued on page 19
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Labor & Employment
Trump’s Hard Line Includes Business Immigration By David Leopold
he media is replete with reports about the Trump administration’s crackdown on unauthorized immigration. Indeed, a dispute over the funding of President Trump’s border wall led to the longest government shutdown in U.S. history. However, the administration’s hard line immigration policies are not singularly focused on illegal immigration. Trump has also called for a record reduction in legal immigration and has taken aim at U.S. businesses that hire foreign professionals. Now, companies must navigate an increasingly complicated maze of policies aimed at business immigration. It’s a new world for companies that seek to employ and retain foreign professionals. BUY AMERICAN, HIRE AMERICAN
In April 2017, Trump signed the executive order titled Buy American and Hire American (BAHA). The order was meant to set the economic tone of the administration’s America First policy. Although it does not purport to change immigration statutes — only Congress can do that — it directs government agencies to “rigorously enforce and administer” the immigration laws and “suggest reforms to help ensure that H-1B visas are awarded to the most-skilled or highest-paid” foreign workers. In effect, BAHA attempts to convert U.S. Citizenship and Immigration Services (USCIS) — the Department of Homeland Security (DHS) bureau tasked with adjudicating business visa petitions — from an immigration benefits agency to an enforcement arm of the DHS. To illustrate the practical impact of Trump’s BAHA order on businesses, let’s consider the hypothetical case of Adita Patel and her employer, U.S.based CRT Engineering Group LLC (CRT).
Patel, a native of India, works in San Francisco as an entry-level engineer for CRT, a leading international engineering firm. Patel originally entered the U.S. on an F-1 academic student visa to pursue a bachelor’s degree in civil engineering at the Massachusetts Institute of Technology. Upon graduation, she began working for CRT in a post-graduation student visa program known as Optional Practical Training (OPT), which is available to foreign students who complete degrees at American institutions. OPT authorizes a foreign graduate to work for an employer in the U.S. for one year. Since Patel earned a STEM degree at a U.S. institution of higher education, and since CRT uses the DHS’s E-Verify electronic employment authorization verification system, Patel was eligible to extend her OPT for an additional 24 months. In April 2017, shortly before Patel’s OPT was set to expire, her employer sponsored Patel for a H-1B non-immigrant (temporary) visa classification, which is available to foreign professionals whom U.S. employers seek to employ in “specialty occupations” that require a bachelor or higher degree, such as civil engineering. Because H-1B visas are subject to an 85,000 visa annual quota tied to the federal fiscal year, CRT filed its H-1B petition on Patel’s behalf on April 3, 2017, the earliest possible filing date in advance of the fiscal year (FY) 2018. By April 7, USCIS had received 236,000 H-1B petitions for the available 85,000 slots.
CRT and Patel were fortunate because USCIS selected Patel’s H-1B petition in a random lottery the agency conducts when the number of petitions received far exceeds the available H-1B slots. REQUESTS FOR EVIDENCE, PETITION DENIALS
Since BAHA was issued, there has been a marked increase in USCIS pushback against H-1B petitions in the form of requests for additional evidence and outright denials. The proportion of H-1B petitions denied for foreign-born professionals increased by 41 percent from the 3rd to the 4th quarter of FY 2017, from a denial rate of 15.9 percent to 22.4 percent. The number of Requests for Evidence in the 4th quarter of FY 2017 almost equaled the total number issued by USCIS adjudicators for the first three quarters of FY 2017 combined. Failure to comply with an adjudicator’s Request for Evidence will result in the denial of an application. As a percentage of completed cases, the Request for Evidence rate was approximately 69 percent in the 4th quarter compared to 23 percent in the 3rd quarter of FY 2017. In Patel’s case, it’s likely that several weeks after the H-1B petition had been accepted for processing, USCIS would have issued an extensive request for evidence in support of it. USCIS now routinely seeks additional evidence of a petitioning company’s ability to pay the offered salary — even if, as in the
Trump has also called for a record reduction in legal immigration and has taken aim at U.S. businesses that hire foreign professionals.
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Labor & Employment
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Labor & Employment case of CRT, the company is prominent and has a reputable track record with USCIS. The agency has also pushed back hard on petitions in support of entrylevel positions. In Patel’s case, for example, it would not have been unusual for the USCIS to question whether the engineering position required a college or higher degree if she had been offered an entry-level wage. In its adjudication of petitions, USCIS has increasingly made the assumption that an entry-level wage that equals or exceeds the prevailing wage in the area of intended employment suggests the position does not require a bachelor’s degree, requiring a forceful and persuasive response from the petitioning company. BAHA-related restrictions are not limited to H-1B petitions. USCIS and other DHS agencies have similarly restricted other business-related visa categories, including O-1 and TN classifications. In the case of international transfers of executives, managers and specialized personnel, the U.S. routinely demands that the petitioning company detail the qualifying relationship between the U.S. and foreign parent or subsidiary, as well as extensive evidence of the nature of the work and expertise of the candidate. Further, USCIS has issued guidance broadening adjudicators’ discretion to deny petitions without providing petitioning companies an opportunity to provide additional supporting evidence.
her employer petitioned for her, USCIS granted her change of status from F to H visa classification. Legally, what changed was Patel’s visa classification, not her visa. To return to the U.S., Patel will need an H-1B visa stamp in her passport, which will be her legal permission to apply for admission to the U.S. with an H-1B visa classification. The process should be a no brainer, right? After all, Patel has completed a bachelor’s degree program in the U.S., and a prestigious engineering firm successfully sponsored her petition and change of status to H-1B. Needless to say, she has never had a brush with the law and poses no security threat. However, shortly after taking office, the Trump administration instituted “heightened screening procedures,” more commonly known as “extreme vetting.” The process requires the visa applicant to provide the overseas U.S. consular officer extensive information about his or her personal history, including travel, address and employment history for the preceding 15 years. Extreme vetting is ostensibly triggered when a visa applicant is deemed to warrant additional scrutiny in connection with terrorism or national security. Yet, in practice, any visa applicant DHS determines requires additional scrutiny can be subjected to extreme vetting procedures. Nor is there any timetable during which the extreme vetting process must be completed. Foreign employees such as Patel who travel abroad and apply for visa stamps risk being delayed for days, months, even years while waiting for the vetting to be completed — and it doesn’t matter whether or not they have a history of working and living in the U.S. In addition to more restrictive business visa adjudications, U.S. Immigration and Customs Enforcement (ICE) has increased its I-9 employment verification audits. Businesses across the U.S. have
Businesses across the U.S. have been subject to investigation by Homeland Security agents.
RISKS OF INTERNATIONAL TRAVEL
As with many foreign nationals employed in the U.S., it’s likely that Patel will travel overseas during her time working for CRT in H-1B status. Since she was originally admitted to the U.S. with an F-1 student visa, Patel will have to apply for an H-1B visa stamp in her passport at a U.S. consulate in her home country to return to the U.S. with an H-1B classification. That’s because when
therefore been subject to investigation by Homeland Security agents, substantial monetary fines for I-9 violations, and — where there is evidence of intentional disregard of the immigration law — criminal liability. In 2018, Derek Benner, Acting Executive Associate Director for ICE’s Homeland Security Investigations, told the Associated Press that the agency would continue to focus on criminal cases against employers and on deporting employees who are in the country illegally. According to the Society for Human Resources Management, “ICE opened more worksite investigations seven months into fiscal year 2018 than the agency completed in all of FY 2017.” Enforcement investigations in FY 2018 more than doubled the previous year’s total, and arrests related to worksite enforcement have nearly quadrupled. The Trump administration has not changed a single provision of immigration law. What it has done is restrictively interpret the myriad statutes and regulations that govern the issuance of business visas. Trump’s crackdown extends to all facets of immigration policy, including business visas. General counsel are well advised to fashion an employment-based visa and corporate compliance strategy that best serves the company and the foreign talent it seeks to employ and retain. This includes a plan that will protect the recruitment and retention of foreign professionals and ensure corporate compliance with the employment verification rules. David Leopold is a partner at Ulmer & Berne LLP. His practice focuses on employment and family-based immigration, the representation of employers in Form I-9 compliance matters, complex removal cases including administrative trials and appeals, and federal court litigation. He is the past president and past general counsel of the Washington, D.C.based American Immigration Lawyers Association. email@example.com
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Labor & Employment U.S. Border Protection continued from page 15
resume and passport. Here are some of the more common work visas. L-1 Intra-Company Transferee. The L-1 visa is used to transfer a key employee from the overseas company to a United States affiliate, and comes in two forms. The L-1A is for an executive or senior level manager, typically for a large company, while the L-1B is for a specialized knowledge worker whose skills and knowledge about company operations cannot be easily found in the United States. Both require the employee
an individual who has demonstrated extraordinary ability in her or his field. It is valid for three years and eligible for unlimited renewals. However, it requires applicants to be at the top of their field, with national or international acclaim, awards and publicity. Country-Specific Visas. A number of visas are available for citizens of specific countries. The most common are the TN visa, the E-2 non-immigrant visa and the E-3 Australia Free Trade Agreement visa. • The TN visa allows citizens of Canada and Mexico to obtain work authorization with a United States company. Only specific occupations are included on the NAFTA list. These include, among others, engineers, software engineers, computer systems analysts, scientific technicians and nurses. The visas are valid for three years, with no limit on renewals. Spouses do not receive work authorization. • The E-2 non-immigrant visa is designed to allow non-immigrant investors who are from a country that has signed an E-2 treaty with the United States to live and work in the United States for two years at a time, based on a qualifying investment. They must make a minimum $250,000 investment in a United States company that is at least 50 percent owned by foreign nationals with nationality from the treaty country. Managers and essential employees are also eligible for E-2 status. Job creation is paramount to extending these visas. • The E-3 Australia Free Trade Agreement visa allows Australian professionals to obtain work authorization with a United States company for two years and with unlimited renewals. The criteria are similar to those for the H-1B visa, but it has its own generous quota. The spouse can also receive work authorization.
CBP simply uses a smell test, based on the specific facts for the specific traveler. to have worked for the overseas affiliate for at least one of the past three years and both permit a spouse to obtain a work permit. H-1B Professional Occupations. The H-1B visa is designed to provide work authorization for certain professionals with college degrees, such as software developers, engineers, scientists and financial analysts. The visa, which has a long list of technical requirements and qualifications, is good for three years and renewable for three additional years. It can be extended beyond that if the employer sponsors the employee for permanent residency. However, only a limited number of H-1Bs are available in any given year, and applying for one is therefore a roll of the dice. J-1 Exchange Visa. The J-1 visa is designed to develop educational and cultural exchange and to allow a visitor to take learned skills back to her or his home country. It can be used by college interns for up to 12 months or trainees with four-year degrees for up to 18 months, and requires a designated organization to sponsor and facilitate the program. O-1 Extraordinary Ability. The O-1 visa provides work authorization to
Enhanced scrutiny is here and is not going away anytime soon. CBP has
been instructed to step up scrutiny and enforcement of visitor travel, and all indications are that this will continue, or perhaps even accelerate, in the coming years. General counsel must remain vigilant. Don’t wait until you receive that Sunday evening phone call. If you prepare and advise your management team appropriately, you can minimize the risk that your visiting employees will be caught up in enhanced CBP scrutiny. Whether by preparing your employees for their business travel or securing a visa in advance, preventive measures on the front end will spare aggravation and expense on the back end.
Greg Berk is Special Counsel in Sheppard Mullin’s Labor and Employment Practice Group. He leads the firm’s immigration practice. He assists employers worldwide with the hiring and retention of foreign national executives and highly talented individuals that are needed in their United States workforce. He also handles I-9 and other immigration compliance matters. firstname.lastname@example.org Jonathan Meyer is a partner at Sheppard Mullin. He counsels clients on their interactions with federal and state government, as well as cybersecurity, homeland security, congressional oversight and immigration. He previously served as Deputy General Counsel and Senior Counselor in the Department of Homeland Security, Deputy Assistant Attorney General at the Department of Justice (twice), and Counsel to Senator Joe Biden on the Senate Judiciary Committee. email@example.com
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Protecting Software in the Face of an Ever-Changing Workforce By Mark P. Kesslen
he average person changes jobs 10 to 15 times during his or her career, which means many people spend five years or less with any one employer. Do you know what employees and others are bringing with them when they join your company, or what they are taking when they leave? Either can create financial and litigation risks for your organization. Take the notorious case of Anthony Levandowski. When he left Google’s Waymo division to form his own company, which was ultimately bought by Uber, he took with him 14,000 technical files related to laser-ranging LIDAR and other self-driving technologies. Waymo employees who followed Levandowski downloaded other sensitive information, including manufacturing details and supplier lists. In early 2018 — a week into trial — Google and Uber settled, with Uber agreeing to ensure it would not use the Waymo technology and giving Waymo a 0.34 percent ownership stake in Uber. The case demonstrates that it has never been easier for employees to take trade secret and proprietary information with them from job to job. Making these situations even more precarious, companies are increasingly using consultants and contractors to handle their development work. So what can organizations do to prevent proprietary software from going AWOL and unwanted outside technology from walking through the door uninvited? How do you know whether your new employee or contractor is introducing a prior employer’s information or other third-party code into your products and services? Does your current intellectual property (IP) portfolio provide the necessary safeguards? These risks, coupled with increasing cyber thefts, mean you need to develop
new strategies to protect your IP. Triedand-true methods may no longer be adequate. To counter these risks, it’s time to reevaluate and update existing employment agreements and trade secret policies, develop a copyright registration process (which is an evolving best practice), and reassess patent filing
proprietary and confidential information into the company, and requires them to confirm they are not bound by any agreement or arrangement that would conflict with their new position. It includes a provision requiring them to confirm in writing that they have purged or returned all proprietary and confidential information and removed it
It has never been easier for employees to take trade secret and proprietary information with them from job to job. strategies to address the challenges created by the mobile and ever-changing workforce. This also provides you an opportunity to introduce an open source code policy to ensure that wrongly introduced code does not virally impact the value of your source code. THE NDIAA AGREEMENT
The first step occurs when a new employee joins the company or a new contractor is engaged. Many organizations overlook the simple step of using a robust non-disclosure and invention assignment agreement (NDIAA), which addresses critical expectations of the new relationship. First, it ensures that ownership of all developed work product, including associated intellectual property rights, is assigned to the company. This assignment is critical to the copyright and patent strategy described below. Second, it protects the company’s confidential and trade secret information and data. The NDIAA includes a provision that prohibits new employees or contractors from introducing a prior employer’s
from all personal devices upon leaving the company. These provisions provide clear causes of action for breach if employees or contractors behave as Mr. Levandowski did. An NDIAA works well for employees and certain contractors, but there is another security aspect to be considered. What are you doing to protect your trade secrets and code with supply chain partners who are also provided access to the company’s proprietary and confidential information? Trade secret policy must address how the company contractually addresses the care and handling of this information, including from a cybersecurity perspective. It has to address the use, storage and transfer of electronic files. These protections must be in transactional documents with third parties in order to create the necessary cause of action that will allow your company to enforce its rights. In addition to the claim of breach of the NDIAA and requirements under the trade secret policy, a properly defined IP strategy relating to copyrights and patents will provide more leverage against
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the former employee or contractor. A best practice being adopted at many tech companies: File for copyright registration for developed code. COPYRIGHT FOR ADDITIONAL PROTECTION
Although a copyright automatically exists upon creation of the code in some tangible medium, it is now prudent to file for registration with the United States Copyright Office to obtain additional benefits. This grants the owner the ability to immediately seek injunctive relief in federal court. The registration creates a record of ownership and evidence of validity. It also entitles the owner to statutory damages and attorney fees if the copyright is infringed. The copyright protects the literal and nonliteral elements of the code against an exact copy and works that are substantially similar. Therefore, when a former employee or contractor takes code and
reuses it, there should be a relatively clear path to establishing copyright infringement. Since this will likely be a new strategy for the company, internal procedures and processes should be established, depending on the software development schedule of the organization. The focus should be on new releases and material changes to existing products including source code (which is preferable to object code); graphical elements; application program interfaces; and the structure, sequence and organization of the software, including file structures, design, organization and data input formats. Filing the application is relatively straightforward, but the Copyright Office requires the deposit of the first and last 25 pages of the software’s source code unless trade secret information is incorporated. In that case, the confidential information can be redacted from the filing. The cost is the time to fill out the
registration application and a filing fee, currently $55. QUALITY, NOT QUANTITY, FOR PATENT PROTECTION
If a former employee or contractor takes core intellectual property and implements it at another organization, a claim for patent infringement may be an aggressive, necessary but expensive course of action. Much has been written about the demise of software patents since the 2014 Alice Corp. v. CLS Bank International decision. However, software patents continue to be filed and issued. The key is to be smart — it’s not a game of quantity, but rather of quality. continued on page 25
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DOJ Withdraws Assent to Key IP Policy By Kathi Vidal, Andrew B. Grossman, Susannah P. Torpey and Ian L. Papendick
n a December 2018 speech before the Berkeley-Stanford Advanced Patent Law Institute, Assistant Attorney General (AAG) Makan Delrahim, head of the DOJ’s Antitrust Division, announced that the DOJ has withdrawn its assent to the 2013 Policy Statement on Remedies for StandardsEssential Patents Subject to Voluntary FRAND Commitments (the Joint DOJ/
USPTO Policy). He elaborated upon the DOJ’s enforcement approach to standard setting organizations (SSOs). Although it is always notable when the DOJ and other agencies change or withdraw their previously published guidance, AAG Delrahim acknowledged that the relevant Supreme Court authority and other precedent is unaffected by the DOJ’s policies, and provides the ap-
propriate guidance on how injunctions relating to standards-essential patents (SEPs) and antitrust issues relating to SSOs should be analyzed. The substantive focus of Delrahim’s remarks was on the increased investigatory and enforcement scrutiny that the DOJ will take with respect to SSOs’ compliance with the antitrust laws. Based on remarks that Delrahim has
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Intellectual Property made since his appointment as head of the Antitrust Division, this increased scrutiny on SSOs should come as no surprise. His body of public remarks, including his December 2018 speech, should serve as a reminder to SSOs and companies that participate in them that they should always be aware that antitrust risks are inherent whenever market participants come together and act collectively in organizations. They should remain vigilant to ensure that the rules, procedures and patent policies of the SSOs are tailored to maximize procompetitive goals, and to ensure that their participation, and the conduct of other participants, is in compliance with the rules of the SSO and the antitrust laws. There is no dispute that SSOs can have legitimate functions that benefit consumers and competition in the marketplace. “When they work well, SSOs translate ingenuity into useable, commercialized technologies,” Delrahim observed. However, at a basic level, SSOs and their standards-setting functions involve groups of competitors coming together and jointly agreeing on how they should conduct business in their industry. Such agreements among competitors are subject to the antitrust laws. PRIVATE ENFORCEMENT
In addition to DOJ enforcement, SSO participants also must be cognizant of the risk of private enforcement. Whether the activities of an SSO violate the antitrust laws is a highly fact-specific inquiry such that one competitor’s legitimate, pro-competitive SSO may be viewed as another’s illegal conspiracy to restrain the development of competitive alternatives. As Delrahim notes, “often a single maverick firm may be willing to take a chance on a new and innovative technology or business model that the rest of its competitors would rather see killed off in its incipiency,” and such innovators and patent holders have private causes of action and remedies available to them under the antitrust, patent and contract laws. Delrahim expressed concern that the Joint DOJ/USPTO Policy could be
read as a limitation from an antitrust perspective on the availability of injunctions and exclusion orders prohibiting sales of infringing products in connection with SEPs subject to a fair, reasonable, and non-discriminatory (FRAND) licensing commitment in the rare instances in which SSO participants seek to cloak anti-competitive conduct behind standard-setting policies that purport to increase competition.
The relevant Supreme Court authority and other precedent is unaffected by the DOJ’s policies. Although the Policy itself already noted that injunctions and exclusion orders are appropriate, depending on the facts of the case, Delrahim stated that “the potential for confusion remains high because the joint statement from 2013 indicates that an injunction or exclusion order ‘may harm competition and consumers,’ seeming somehow to suggest antitrust inquiry that is distinct from the goal of optimizing the incentives for innovation — namely, dynamic competition.” INJUNCTIVE RELIEF
With respect to the availability of private injunctive relief under the patent laws, Delrahim observed that the test articulated by the Supreme Court in eBay v. MercExchange already “strikes a careful balance that optimizes the incentive to innovate, for the benefit of the public.” The law governing actions for injunctive relief in the district courts and exclusion orders issued by the United States International Trade Commission remains unchanged. Thus, the fact-
intensive legal analysis and prevalence of injunctions and exclusion orders is unlikely to change in any significant way based on the DOJ’s withdrawal from the policy. Delrahim’s remarks — that the patent laws and the Tariff Act, not the antitrust laws, govern the availability of injunctions and exclusion orders relating to FRAND patents — in no way immunizes patent holders from antitrust scrutiny with respect to their conduct relating to standard setting and licensing. As the body of established antitrust precedent makes clear, claims that a patent holder violated the antitrust laws in connection with a standard-setting process can be a viable and potent response even to successful patent infringement lawsuits and the issuance of injunctions. Delrahim’s speech was significant, however, in its focus on the potential for antitrust liability to arise as a result of joint competitor conduct that crosses the line from instituting fair and procompetitive standard-setting procedures to ones designed instead to restrain a competitor and innovation. He specifically highlighted the potential antitrust problem where a group of product manufacturers within an SSO come together to dictate licensing terms to a patent holder as a condition for inclusion in a standard, because it may be a collective exertion of monopsony power over the patent holder. He noted that best practices exist to guard against such abuses of the standard setting process, which would serve to protect not just patent holders but also all SSO participants. ANSI, the American National Standards Institute, publishes a set of essential requirements for due process. These safeguards are ANSI’s view of what the minimum acceptable requirements are to ensure that every person or organization with a direct and material interest in the outcome of a standard has a right to participate in the development of that standard. In addition to discussing best practices in the standard-setting process, Delrahim emphasized that SSOs’ patent policies governing how participants in the SSOs should license their IP “affect the incen-
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Intellectual Property tives for innovation. If an SSO’s policy is too restrictive for one side or the other, it also risks deterring participation in procompetitive standard setting.” Thus, there should be a competitive market for SSOs. Delrahim also observed that SSOs and their participants could be the victims of antitrust conspiracies. In sum, his statements appear to mark a shift in how the Antitrust Division will treat IP rights and rights holders compared to the previous several years. Recently, some stakeholders have argued that the DOJ favored implementers and disfavored innovators. For example, the Institute of Electrical and Electronics Engineers (IEEE) — an important SSO in the technology sector — amended its bylaws in 2015 to restrict SEP holders’
reduce any antitrust risk, including, but not limited to: • Standard setting must be for a legitimate pro-competitive purpose, such as ensuring safety or interoperability. • Standard-setting procedures should be well documented and involve adequate due process, including appeals for participants. • Patent polices should be well documented and fair, and should involve early disclosure of SEPs and independent determination of the value of these patents. • Clear guidance should be provided concerning which patents will be included in the standard and subsequent specifications.
Some stakeholders have argued that the DOJ favored implementers and disfavored innovators. rights against infringing implementers. The DOJ ruled in a business review letter that the amendments would be free of antitrust concerns. Now taken at face value under the new enforcement focus articulated by AAG Delrahim, similar policies may face increased scrutiny insofar as they can be read to reflect an unfair exercise of the collective power of the implementers. Patent holders should not view Delrahim’s announcement as a blank check to exceed the scope of the rights granted by their patents, however, and need look no further than the Qualcomm case for a reminder that the Federal Trade Commission has independent enforcement authority and a history of interest in curbing potential abuses by patentees. While participants in SSOs should always be mindful of the antitrust risks inherent in any joint enterprise with competitors, the DOJ’s shift in focus should prompt them to ensure that they give appropriate consideration to the adoption of best practices designed to
• There should be no restriction on the ability of SEP holders to license their patents independently. • Grant-back requirements should be fair and transparent. • Safeguards should be in place to ensure that the policies of the SSO are implemented fairly; prevent the dominance by any participant or group of participants; and are not used to stifle competition or reduce the incentive to innovate among participants of the SSO or by nonparticipants. • Participants should not be restricted from participating in competing SSOs or from making competing products
Kathi Vidal is the managing partner of Winston & Strawn’s Silicon Valley office. She is experienced in highstakes patent disputes for leading companies, with a focus on semiconductors, telecommunications, circuits and systems, computers, software, Internet applications and consumer products. KVidal@winston.com Andrew Grossman is an intellectual property litigation partner at Winston & Strawn’s Los Angeles and Silicon Valley offices. He has successfully tried complex, high-stakes patent infringement cases involving complex technology in district courts as well as before the International Trade Commission. AGrossmas@winston.com Susannah P. Torpey is a partner at Winston & Strawn’s New York office. She focuses on antitrust litigation, including price fixing, no-poach agreements, group boycotts and anti-competitive product redesign. STorpey@winston.com Ian Papendick is a litigation partner at Winston & Strawn’s San Francisco office. His practice focuses on antitrust litigation and counseling, international cartel investigations and sports litigation. IPapendick@winston.com
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Intellectual Property Protecting Software continued from page 21
In the context of the ever-changing workforce, the question is how to build the proper portfolio to protect against ideas being stolen and then implemented in the new organization. This is not to suggest that companies should abandon their existing patent strategy. Instead, we are recommending that companies consider a change in their philosophical approach to filing software patent applications to ensure the patent portfolio is used as an efficient and effective tool to enforce their rights. The first factor to consider in filing for patent protection is whether the technology will be incorporated into a company product. That is, does the technology represent a differentiator that provides a competitive advantage? The second factor is whether competitors want or need to use or copy the technology. If either is present, then in the context of this strategy, the detectability of the software must be assessed to determine in which of three categories the code falls. Those categories are: • inherently strong detectability (i.e., no reverse engineering), such as code that requires unique input (configuration files, command line interface parameters, graphical user interface input), or produces unique graphical output attributable to implementing the invention, or that is described in product literature; • medium detectability (i.e., some reverse engineering), such as code that generates network traffic or other detectable output, including some “fingerprint” features attributable to implementing the invention, which becomes weak if traffic can be endto-end encrypted; and • weak detectability (i.e., significant reverse engineering using a debugger), such as executable code utilizing known central processing unit (CPU) registers and system data structures, or executable code that includes “fingerprint” features only attributable to implementing the invention, modify-
ing known system data structures or CPU registers. If the software falls within the first or second categories, then a patent application should be pursued. This strategy focuses on core products and services that provide a competitive advantage. The detectability will enable you to more readily ascertain whether the former
of that code in source code and at no charge, which could extinguish the entire enterprise value of the code. Some of the copyleft licenses that could cause concern include GPL, LGPL, and AGPL. Therefore, having the proper policy in place protects your intellectual property against potential bad behavior created by the mobility of the current workforce.
A rogue employee or contractor could introduce open source into a company’s code base and do grave harm to the organization. employee or contractor appropriated your company’s valuable IP. This is not to say that patents directed to emerging and less detectable innovations should not be filed; rather, this outlines how to use patents as tools against the theft of ideas by employees and contractors. By following this approach, a company will be in a better position to associate a third party’s adoption of its technology with the hiring of a former employee or contractor. Why is open source part of this discussion? Many NDIAAs include specific guidance about the proper use and introduction of open source code, and many companies include open source code policies addressing the same points. With that said, with a mobile workforce, a rogue employee or contractor could introduce open source into a company’s code base and do grave harm to the organization. There are generally two types of open source licenses: permissive and copyleft. A permissive license imposes minimal requirements on the user of the open source, such as the obligation to include a copyright notice and various disclaimers relating to its use. The copyleft license, however, requires the code user to distribute under the same license. Therefore, a company’s code base integrated with code under a copyleft license will require release
Most of the actions above, other than implementing a copyright process, are likely small or incremental changes to your organization’s overall IP strategy. However, they are critical to monitoring and enforcing your rights against a mobile workforce and to helping ensure that valuable IP is not leaving your company.
Mark Kesslen is a partner at Lowenstein Sandler. He chairs the Intellectual Property Section of The Tech Group, and focuses his practice on advising innovators as they create businesses, launch new products, and conduct M&A and venture capital transactions. He counsels his clients on intellectual property issues, such as litigation assessments, patent scope, open source, trademarks, privacy and ownership risks. firstname.lastname@example.org
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Implementing an Effective ForcedLabor Compliance Program By Richard Mojica, Nathan Lankford and Nicole Gökçebay include fewer CBP examinations, front line inspections and shorter wait times at the border. Although the substance of the proposal is not particularly novel — it mainly restates Department of Labor guidance and is generally consistent with CBP’s other inquiries to date — it is noteworthy in that it shows how previous nonbinding guidance from CBP may be formally incorporated into the C-TPAT program to support CBP’s enforcement efforts. For the broadest range of importers, the proposal offers useful insight into CBP’s current expectations regarding forced labor compliance programs, including areas of potential inquiry in future CBP enforcement efforts.
PROPOSED COMPLIANCE PROGRAM
lmost three years ago, Congress amended Section 307 of the Tariff Act of 1930 (19 USC §1307) to close a loophole that exempted products that were in short supply in the United States from the general prohibition on imports made by forced labor. As amended, the Act prohibits the importation of products made wholly or in part with convict labor, forced labor (including child labor) or indentured labor, with no exceptions. Since this change, U.S. Customs and Border Protection (CBP) has reinstated its enforcement of 19 USC §1307 through multiple channels, including visiting companies in higher risk industries, conducting audit-like surveys of forced labor compliance efforts, issuing questionnaires to United States importers regarding supply chain due diligence and detaining imports suspected of being made by forced labor. CBP has also published guidance on its website on how to mitigate forced labor risks in supply chains and has encouraged com-
panies to adopt the principles set forth in the U.S. Department of Labor’s Comply Chain, a web-based tool that provides step-by-step guidance on how to create a social compliance system, when building their own programs. In December 2018, CBP issued a proposal to the Commercial Customs Operations Advisory Committee (COAC) to implement the forced labor provisions of 19 USC §1307 through trade compliance. COAC is a group of various United States government and industry representatives that advise the Secretaries of the Department of Treasury and the Department of Homeland Security on commercial operations of CBP. CBP is proposing to require companies that participate in the CustomsTrade Partnership Against Terrorism (C-TPAT), a voluntary supply chain security program whose members are known as “trusted traders,” to develop and maintain a validated forced labor compliance program to remain eligible for the program’s benefits. Such benefits
CBP’s proposal sets out seven elements of an effective forced labor compliance program, which are summarized below, as well as the evidence demonstrating implementation that C-TPAT members would be required to provide to CBP. • Engage Stakeholders and Partners: Companies are expected to involve relevant stakeholders and partners — employees, suppliers, communities, other companies and government entities — in methods of understanding the forced labor risks present in their supply chains. The proposal does not provide guidance on the substantive content of such engagement but notes that it may occur through one-to-one meetings or through multi-stakeholder groups or industry associations. Evidence of implementation may include documentation of membership in the International Labor Organization’s Global Business Network on Forced Labor and Human Trafficking and certification programs. • Assess Risks and Impacts: Compa-
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nies are expected to conduct periodic assessments to identify how they may be at risk for contributing to forced labor. The assessment should cover both internal and external risk factors (e.g., worker hours, working conditions, industry and countryspecific forced labor risks) and include supply chain “mapping,” a process that involves identifying the suppliers at all levels of the supply chain and knowing where they are located. As evidence of implementation, C-TPAT members would be required to provide the risk assessments to their CBP National Account Manager (NAM). • Develop a Code of Conduct: Companies are expected to establish a code of conduct that sets out the standards and policies for both the company and the company’s partners. The proposal does not require that any specific topics be covered but includes a host of topics that companies may address, such as prohibitions on forced labor and human trafficking, fraudulent and coercive recruitment, employment contracts, working hours and wages, workplace equality, employee awareness and grievance procedures. As evidence of implementation, C-TPAT members would be required to provide their code of conduct, signed by senior management, to their CBP NAM. • Communicate and Train: Companies are expected to extend communication and training to employees and suppliers (including suppliers beyond the first tier) on topics such as standards in the code of conduct, remediation policies, and procedures and grievance mechanisms. The proposal instructs companies to provide documentation of training to CBP and make available, upon request, forced labor information collected through grievance mechanisms. It also provides NAMs the opportunity to attend training events and/or take online training. • Monitor Compliance: Recognizing that auditing plays a critical role in the effective implementation of a successful compliance program, companies are expected to utilize
internal and/or external auditors to ensure the effective implementation of their system. The proposal recommends that auditors consider questions such as whether workers are working excessive overtime, and whether the employer restricts a worker’s freedom of movement or forces workers to engage in illicit activities. In addition, the proposal instructs companies to produce a report demonstrating the company’s commitment to using the data gathered from the audit to inform future practice. C-TPAT members would be required to provide the audit reports to CBP as evidence of implementation. • Remediate Violations: Companies are expected to remediate forced labor violations identified in audits — both to correct the violation identified and to prevent its future recurrence— and disclose remediation efforts to the appropriate government party. The proposal suggests that companies organize their efforts into a corrective action plan, which should contain a summary of how each issue is addressed. As evidence of implementation, C-TPAT members would be required to provide CBP with copies of their corrective action plan and records of any steps taken to ensure the safety of employees who have been found to be victims of forced labor, including disclosure to relevant law enforcement authorities. • Disclosure: Lastly, companies are expected to disclose the existence of their compliance program or lack thereof via a website link that is conspicuous, readily identifiable and placed on a company’s homepage. As evidence of implementation, the proposal instructs NAMs to view C-TPAT members’ disclosure online. KEY TAKEAWAYS
This latest CBP proposal not only reflects compliance standards that may apply to future trusted traders but also provides a useful template for the broader universe of importers to take stock of their current forced labor compliance programs and be better prepared for potential CBP inquiries. In particular, an importer can
compare its existing forced labor compliance efforts to the proposal’s elements and note where it is already meeting likely CBP expectations, and where it has further work to do. Doing so would not only position an importer to more effectively respond to potential CBP inquiries in terms familiar to the CBP but may also help the importer identify and remediate any major program gaps in advance. In addition, the proposal likely signals to companies that CBP is ramping up its enforcement efforts, and laying down the foundation to be able to detain or seize imports that are not shown to have been made free from the use of forced labor. Therefore, companies should use the proposal as guidance to keep pace with CBP’s forced labor compliance expectations. Richard Mojica, member at law firm Miller & Chevalier, focuses on developing and implementing customs compliance programs for companies. He also counsels clients on matters including customs audits and investigations, penalty proceedings, tradefocused M&A due diligence and compliance assessments. email@example.com Nathan Lankford is a member at Miller & Chevalier. He focuses his practice on matters involving the Foreign Corrupt Practices Act business and human rights and other areas of international corporate compliance. He is a founding member of the firm’s Business & Human Rights Practice Group. firstname.lastname@example.org Nicole Gökçebay is a fellow at Miller & Chevalier. She focuses her practice on international corporate compliance and internal and government investigations related primarily to the Foreign Corrupt Practices Act and other anti-corruption and human rights standards. email@example.com
SPRING 2019 TODAY’S GENER AL COUNSEL
Banks Caught in State/Federal Cannabis Conflict By William Bogot and Joshua Horn
awyers must counsel clients in the nascent industry of state-legalized cannabis that their routine business affairs violate federal law, a situation that new Attorney General William Barr calls “untenable.” It does not exist in any other area of law, and presents opportunities and challenges for lawyers who advise cannabis industry clients. Below we provide an overview of the legal issues surrounding this dichotomy. The Controlled Substances Act (CSA) is the legal foundation of the federal government’s fight against illegal drugs. Cannabis is classified as a Schedule 1 controlled substance under
the CSA. As such, it is considered to have a high potential for abuse. Under federal law, it is illegal to possess, manufacture, distribute, dispense cannabis or conspire to do so. State laws to the contrary notwithstanding, persons who violate the CSA are subject to federal criminal prosecution, and businesses that assist them risk conspiring to violate federal law. OGDEN AND COLE MEMOS
In October 2009, Department of Justice Deputy Attorney General David Ogden issued a memorandum providing guidance to federal prosecutors in states that
had passed medical marijuana laws. The Ogden Memo reiterated the DOJ’s commitment to enforcing the CSA, but also acknowledged a rational use of limited resources. Although the prosecution and disruption of illegal drug manufacturing and trafficking activity is a core federal priority, the Ogden Memo stated that, as a general matter, pursuit of these priorities should not focus federal resources on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana. Accordingly, the prosecution of an
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individual cancer patient using marijuana pursuant to state law was an example of an inefficient use of limited resources. The Ogden Memo explicitly noted that prosecution of commercial businesses remained an enforcement priority. In June 2011, Deputy Attorney General James Cole issued a memorandum reiterating the views and guidance in the Ogden Memo, including that the enforcement of the CSA remained a federal priority. The memo recognized the increased scope of commercial activities with respect to medical marijuana, but stated that “persons who are in the business of cultivating, selling or distributing marijuana, and those who knowingly facilitate such activities, are in violation of the [CSA], regardless of state law.” With respect to persons participating in transactions involving the proceeds of such activities, the memo noted that they may be in violation of federal money laundering statues and other federal financial laws. In August 2013, Cole published an update with a new memorandum—the Cole Memo. The Cole Memo identified eight enforcement priorities that were important to the federal government and stated that those priorities would guide the DOJ’s enforcement of marijuana matters under the CSA. They were: • Preventing distribution to minors; • Preventing marijuana revenue from going to criminal enterprises, gangs and cartels; • Preventing diversion of marijuana from states where it is legal to other states; • Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; • Preventing violence and firearm use in the cultivation and distribution of marijuana; • Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use; • Preventing the growing of marijuana on public lands and the attendant public safety and environmental dan-
gers posed by marijuana production on public lands; and • Preventing marijuana possession or use on federal property. This guidance relied on the DOJ’s expectation that states permitting marijuana-related conduct would implement “strong and effective regulatory and
sions of the money laundering statutes, unlicensed money remitter statute and the Bank Secrecy Act remain in effect with respect to marijuana-related conduct, and that a prosecution based on transactions involving proceeds from marijuana-related activity does not require a marijuana-related conviction under federal or state law. Investigations
The 2009 Ogden Memo stated that federal resources shouldn’t focus on individuals whose actions are in compliance with state laws providing for the medical use of marijuana. enforcement systems.” In those circumstances, compliance would likely reduce the possibility of implicating federal priorities, leaving state and local governments to address marijuana-related conduct. If, however, state enforcement actions were insufficient, the federal government could challenge such regulatory schemes as well as conduct criminal prosecutions. The Cole Memo also articulated a policy change. It directed prosecutors not to consider the “the size or commercial nature of a marijuana operation alone” in assessing whether federal enforcement priorities were implicated. Instead, matters were to be assessed on a case-by-case basis, weighing all available information and evidence, including whether the operation is demonstrably in compliance with a strong and effective regulatory system. The primary question is whether the conduct implicates one of the federal enforcement priorities. It is also important to note that the Cole Memo is only a policy statement, not a rule of law and could not be used as a defense to federal prosecution. In February 2014, Cole issued a memorandum reiterating the guidance in the Cole Memo generally, and providing guidance with respect to certain financial crimes having marijuana-related conduct as a condition. It stated that the provi-
and prosecutions of such offenses based on marijuana-related violations of the CSA should be subject to the same analysis as other marijuana-related activity (i.e., applying the eight enforcement priorities). BANKING SERVICES ADDRESSED
The 2014 memo provides some examples where prosecution might be appropriate: Providing banking services to a marijuana-related business knowing that it is diverting marijuana to a state where marijuana sales are illegal, or being used by a criminal organization to conceal funds from other illegal activities, or to support other illegal activity — and prosecution when a financial institution or individual is “willfully blind to such activity by, for example, failing to conduct appropriate due diligence of the customers’ activities.” The 2014 memo reaffirms the importance of a strong state enforcement and regulatory scheme. Financial institutions operating in states without such systems or servicing marijuana-related business not in compliance with such systems “are more likely to risk entanglement with conduct that implicates the eight federal enforcement priorities.” In February 2014, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department provided
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guidance to clarify expectations for financial institutions seeking to provide services to marijuana-related businesses. The FinCEN Memo starts with the basic premise that decisions concerning providing banking services to a marijuanarelated business should be made by each financial institution based on its specific situation, including business objectives and risk evaluation and management. The FinCEN Memo stresses that customer due diligence is a critical element in making this assessment, and identifies seven elements that should be included in customer due diligence, the sum and substance of which would provide comfort to the financial institution that the medical marijuana business is compliant with the state law in which it operates. A financial institution should also consider if a marijuana-related business implicates one of the eight federal enforcement priorities, a crucial element in assessing the risk in providing banking services to a marijuana-related business. This consideration is not only important in making the initial decision on whether to provide such services but it is also required as part of a financial institution’s obligation to file a suspicious activity report (SAR) for every marijuana-related business consistent with the guidance in the FinCEN Memo. A financial institution must file either a “Marijuana Limited” or a “Marijuana Priority” SAR for each marijuana-related business, based on whether the financial institution reasonably believes, based on its customer diligence, that the business violates state law or implicates one of the eight federal enforcement priorities. For the Marijuana Limited SAR, the financial institution must include statements that it is being filed solely because of marijuanarelated conduct and that there has not
been any additional suspicious activity. The Marijuana Priority SAR, on the other hand, must include details on the enforcement priorities and details on the implicated financial transactions. The FinCEN Memo also identifies certain red flags indicating signs that a marijuana-related business is engaged in activity that implicates one of the federal enforcement priorities or violates state law — the predicate for filing a Marijuana Priority SAR.
In 2014 FinCEN provided guidance to clarify expectations for financial institutions seeking to provide services to marijuanarelated businesses.
SESSIONS RETRACTS MEMOS
In January 2018, former Attorney General Jeff Sessions rescinded the Ogden and Cole Memos, and directed federal prosecutors to follow wellestablished principles that govern all federal prosecutions. FinCEN did not rescind its guidance for banks. Enforcement was left up to the discretion of federal prosecutors in the District of Columbia and the 33 states with legalized cannabis. While this change in policy made widespread news at the time, not much changed. The Ogden and Cole Memos were never law and were always subject to change and rescission. The memos merely provided suggested guidance for federal prosecutors to best allocate resources. Most notably, the memos had only discussed medical cannabis, and were silent on adult use. Notwithstanding Sessions’ actions, federal drug enforcers lacked resources to pursue the medical marijuana industry. The Rohrabacher-Blumenauer Amendment to the federal spending bill bolsters this view. First approved in 2014 and every year thereafter, it prevents the DOJ from using federal funds to prosecute state-compliant medical marijuana operators in states that have legal cannabis programs. In 2016, the Ninth Court of Appeals
enjoined the DOJ from criminally prosecuting individuals in compliance with state medical cannabis laws, holding that Congress specifically barred the DOJ from spending money to prosecute individuals for violating the CSA for cannabis when the individuals are otherwise in compliance with state cannabis laws (United States v. McIntosh, 2016). In light of this amendment, even if the DOJ wants to prosecute state-compliant persons and businesses in the medical cannabis space, it has no funding. Thus, persons and companies in compliance with state medical marijuana laws cannot be subject to federal criminal prosecution. Attorney General William Barr reiterated that he would “not go after” state-legalized cannabis operations. Until the federal government enacts marijuana reform, this federal/state legal dichotomy will continue. It requires lawyers involved in the cannabis space to remain conscious of evolving law.
William Bogot is cochair of the national Cannabis Law Practice at Fox Rothschild LLP. He counsels clients across the country in the legalized medical and adult-use cannabis space, and he is a trusted adviser to both public and private cannabis companies. firstname.lastname@example.org Joshua Horn is cochair of the national Cannabis Law Practice at Fox Rothschild LLP. He offers guidance to clients on the regulatory framework in states where cannabis has been legalized and the unique issues that businesses in the industry face. email@example.com
Faster, Cheaper, Smarter THE FUTURE OF ARTIFICIAL INTELLIGENCE IN E-DISCOVERY By Ajith Samuel
Today, when we hear about technology firms “disrupting” existing industries, most often those disruptions are powered by AI. Navigation systems analyze roads, traffic patterns and data from drivers to recommend the fastest route home or to work, while also laying the foundation for future fleets of self-driving cars. Companies like Uber and Lyft combine these navigation systems with networks of drivers and individuals seeking rides. Netflix and Amazon analyze vast pools of viewer and consumer behavior to recommend entertainment options and purchases. In the coming decade, AI will fundamentally transform all aspects of our economy. Despite its notoriously technologyaverse nature, the legal profession will not be spared. In fact, AI is already making deep inroads into the law. The rise of AI in legal technology began during the document review phase of electronic discovery. A time-intensive endeavor requiring large
PHOTO: GETTY IMAGES
y nature, technological innovations give rise to new industries, but truly revolutionary technologies do not just create new industries. They transform the world, fundamentally altering wide swathes of the existing business and industrial landscape. Approximately 150 years ago, the western industrial landscape was fundamentally changed by harnessing electricity. Machines could operate faster, cleaner, and more powerfully. The workday was extended, allowing factories to operate two and three times longer every day. Manual tasks were automated. According to Andrew Ng, Co-Founder of Coursera and Adjunct Professor of Computer Science at Stanford University, artificial intelligence (AI) is the new electricity. “Just as electricity transformed almost everything 100 years ago,” he explains, “today I actually have a hard time thinking of an industry that I don’t think AI will transform in the next several years.”
numbers of trained attorneys, document review was by far the most expensive phase of the discovery process, averaging over 70 percent of the costs associated with pre-trial discovery. Technologies such as predictive coding, in which algorithms learned from “seed sets” of documents coded by human reviewers, provided fast, accurate and less expensive means for legal teams to work through a vast body of potentially relevant electronically stored information (ESI). AI has spread widely out of document review in the past decade, adding tasks like contract review and management, case law review, and even simple legal services such as disputing parking violations to its purview. And it continues to tackle new tasks, making forays into predicting case outcomes, sentencing, and more. In short, legal technology vendors, law firms and legal teams have a clear mandate: Innovate or be left behind. No less an authority than Gartner Analytics estimates that 80 percent of emerging technologies will be built on a foundation of AI by 2021. As with many new technologies driven by advances in engineering, it’s important to ask if AI is a solution in search of a problem. In the legal area in general, and in e-discovery in particular, it is not. Five years ago, legal industry revenue was over $250 billion in the United States; today it is rapidly approaching $300 billion. Similarly, the costs of e-discovery continue to rise, as every advance in technology is seemingly offset by increasing data volumes. Depending on your source, the e-discovery software and services market is between $10 billion and $12 billion today and will likely reach $18 billion to $20 billion within five years. Much as it was 15 years ago, when the e-discovery industry was born, it costs too
much and takes too long to get to the facts of any given legal matter. AI-powered e-discovery technology can speed up the process, reduce costs, and do so defensibly in the eyes of the courts. The first proofs of AI’s ability to perform legal tasks came in document review during e-discovery, which makes sense given that AI excels at categorization tasks. Perhaps the most famous AI categorization exercise is the ImageNet Challenge, a contest in which AIs compete to classify images of similar objects — for example, dogs of various breeds. In 2010, the winning AI had an error rate of 28 percent; by 2013, deep learning models helped drop that rate to 12 percent. By 2017, the error rate of the winning team dropped to 2.5 percent, half the human benchmark of 5 percent.
Although AI has been used in the review phase of e-discovery for approximately a decade, its current integration into document review has become simpler and more elegant. In the past, document review technology required seed sets and users who could define the parameters for relevance. Today, deep learning algorithms, which simulate the human brain by combining several layers of neural networks, can operate in the background, observing as human attorneys review documents, learning the criteria that make a document relevant to a particular matter. Where before legal teams had to take extra steps to “train” AI, today the technology’s integration in the review process has become frictionless. But is it effective? The answer is resoundingly yes. Legal teams can set the review AI to make its recommendations at a given confidence level — 50 percent, 75 percent, 95 percent — and it will operate in the background until it reaches that level. AI’s abilities are not limited to review. In fact, they are broadly applicable across the Electronic Discovery Reference
Model. We can think about AI improving e-discovery outcomes in three broad conceptual categories: as curator, as advisor, and as orchestrator. AI already acts in these three roles in any number of applications today. • AI as Curator: A large number of streaming music and video services, as well as web retailers, leverage AI as a curator to make informed recommendations to their users. As the AI on Spotify or Netflix learns your tastes, it makes better and better recommendations of music or movies you might like. Similarly, AI in e-discovery can learn which documents might be relevant to a given matter and recommend that reviewers look more closely at them. • AI as Advisor: Whether you’re texting, using an instant messenger or replying to an email, chances are you’ve had a computer offer you a choice between several possible responses to a given message. Similarly, an e-discovery AI can assist paralegals or project managers with tasks like scoping custodians, drafting collection criteria or selecting the right document review team for a given project. • AI as Orchestrator: AI can also function as an orchestrator, learning from past actions and results, and coordinating tasks across multiple channels. A good example is Uber. Its platform orchestrates users’ entire trips, including pricing, nearest driver, fastest routes, and estimated wait and arrival times. Similarly, AI can orchestrate the entire e-discovery process. If the relevance rate you got at the end of document review were only four percent, then it would learn that collection criteria could be improved. It can use that insight for future matters to ensure that collection is more targeted, that you select the best reviewers based on historical case results, and more. All three roles — curator, advisor and orchestrator — must converge to solve the business problem at hand: How can we get
to the facts of the case faster, cheaper, and in a defensible manner — in other words, smarter? What might some versions of these new e-discovery technologies look like? One likely possibility is to give e-discovery professionals insight into custodians and the data corpus earlier in the process. Why should teams wait until the review phase to understand the story being told by ESI if they can have visibility into data sources prior to collection? With an AI-powered early case assessment technology, artificial intelligence can apply data mining techniques to vast bodies of data — not just ESI but also custodian identities and relationships — before any data has been collected. By examining relationships between concepts and existing custodians, AI can suggest additional custodians who should be interviewed and/or placed on legal hold, and new keywords and search terms to find relevant ESI. Practitioners and technologists who predict a time when AI discerns the facts of a matter quickly, cheaply and defensibly will be well served by taking Peter Drucker’s advice to heart: “The best way to predict the future is to create it.” Find out more about how Exterro is using artificial intelligence to power its next generation of e-discovery technology today.
AJITH SAMUEL is Exterro’s Chief Product Officer and leads the company’s product strategy team in creating innovative solutions to help large corporations navigate information smarter. He has 15 years’ experience in regulatory compliance and designing and architecting large-scale information systems for the futures industry. firstname.lastname@example.org
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#M&AToo By Devjani H. Mishra and Raoul Parekh
hat started with a single tweet is now a boardroom issue. Since late 2017, allegations of historical and recent sexual harassment have swept across every area of public and private life, with no sphere and no industry immune. Below, we consider how the M&A world has responded, and explain why investors and trade buyers alike should consider altering their deal practices in the #MeToo era. Apart from a desire to “do the right thing,” why does this issue hit home? First, there is the direct legal liability for the target company. In the UK and most European jurisdictions, damages for sexual harassment claims are uncapped, and compensatory damages for highly paid employees can edge into the
Devjani H. Mishra is a Shareholder in Littler’s New York Office. She works closely with senior management and human resources personnel to establish corporate compliance, ethics and training programs and codes of conduct, and assists clients with transactional due diligence, employment practices audits and investigations. email@example.com Raoul Parekh is a Partner with GQ|Littler in London, and works across all areas of employment law, including advisory, litigation and transactional support. He regularly co-ordinates international employment law advice across EMEA for United States-headquartered multinationals. firstname.lastname@example.org
millions of dollars. In the United States, damages under federal law are generally capped at $300,000 (plus attorneys’ fees) but are often uncapped under parallel state and municipal laws, and can similarly run into the millions. Accompanying that liability is the obvious destruction of the target’s value. There can also be more indirect legal risk. For example, the UK financial regulator has indicated an unwillingness to approve for senior or sensitive roles candidates who participated in the management of a company that failed
to address an inappropriate workplace culture. Shareholder derivative actions against the board could also follow, particularly if they knew or should have known about the issues (as has been alleged of the Weinstein Company board). Lastly, the reputation risk of a highprofile and/or poorly handled sexual harassment scandal can dramatically impact the profits or even financial viability of a business. In bygone days, a cynical investor or executive might have justified inaction as the expedient
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choice. Now, thorough, proactive and prompt action is a baseline expectation, with executives and boards being required to explain why they did not dismiss harassers. So the motivations to act are clear. And in the experience of the authors, it’s common for the presence of external investors to act as a stimulus for change. External investors (whether
employment agreements that indicate a need for further investigation. Harvey Weinstein’s contract notoriously contained a $250,000 liquidated damages provision for his first breach of the company’s code of conduct, escalating by the same amount for each successive breach up to a maximum of $1,000,000. Ignoring that this provision apparently grossly underestimated the loss flowing from his
advisors will have to balance the desire to know everything against what inquiries can reasonably be put to a seller/target. Limitations on role type/seniority/salary level will help achieve that, with different levels of scrutiny applicable to different industries. Similarly, questions about policies, training and logs of harassment complaints can help identify red flags. After the deal closes, buyers will
Any potential investor in Real Madrid would certainly have wanted to know of the rape allegations against their one-time star player Cristiano Ronaldo. board members or shareholders) typically bring a greater independence and dispassion, as well as more skepticism about executives with whom they have not developed a long-term relationship. Publicly traded companies have also seen activist shareholders and corporate governance watchdogs (e.g., ISS) reporting on these issues, creating another kind of pressure. TOOLS TO MANAGE RISK
When considering an acquisition, then, it is becoming increasingly standard to evaluate the target’s potential #MeToorelated liabilities. Luckily, tools and techniques exist to enable savvy lawyers and investors to manage and mitigate these risks. In the first instance, specific due diligence inquiries on this topic are becoming more common. But those inquiries need to be carefully considered. Will threatened claims be brought? Could additional questions about pre-litigation document hold notices flush out nascent claims that might otherwise be left unreported? The broader trend towards ever lighter due diligence processes is unhelpful here; investors might need to specifically instruct their lawyers that this is an area of concern. Further, consider requiring disclosure of obvious red-flag provisions in
repeated breaches, such provision should set alarm bells ringing in any data room. It is customary for warranties (and due diligence inquiries) to focus on the target company’s obligations and actions (for example, “Please disclose all actual and threatened claims against the company …”). That may present issues for the target, and even potential liabilities, where such claims have been resolved with confidentiality agreements, which may have been intended to protect the accusers as well as the alleged perpetrators of harassment. Further, such inquiries may not be sufficient if confidentiality or similar agreements concerned allegations of sexual harassment to which the target company is not a party (even where the board is aware of the matter). In a highly publicized example, any potential investor in Real Madrid would certainly have wanted to know of the rape allegations against their one-time star player Cristiano Ronaldo, allegedly concealed by an NDA to which the club was not a party. Real Madrid has launched legal proceedings denying that they had any knowledge of the allegations or the NDA. Inquiries should also consider notfor-cause terminations over a reasonable period, in an effort to identify blushsaving departures. Buyers and their
often have a long list of post-acquisition steps. That list should include assessing the culture and openness of the acquired organization, to again try to flush out potentially significant issues before they escalate, when remediation and behavior change might still be possible. The right allocation of risk and actions pre- and post-acquisition will vary significantly between transactions. As ever, a fine line must be walked. On one side of that line lies an overbearing buyer making unreasonable inquiries of a seller that lie outside their reasonable knowledge and inflate the costs of any potential deal. On the other side, a passive buyer sleepwalks into an issue that erodes the potential upside to the transaction entirely. What Weinstein and #MeToo have done is incentivize buyers to work out how to walk that line. Luckily, the right advisers have the tools to help light the way.
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THE ANTITRUST LITIGATOR
Antitrust Injury and Standing By Jeffery M. Cross
his past summer, I was a member of a trial team that prosecuted a patent antitrust jury case. The result was a substantial damages verdict in favor of the plaintiffs. In post-trial motions, the defendants raised the issues of antitrust injury and antitrust standing. Although the case settled before the court could rule on these motions, it would be worthwhile to consider those important antitrust concepts. Private parties can only bring antitrust claims for violations of Sections 1 and 2 of the Sherman Act through Section 4 of the Clayton Act. Section 4 states that “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue ….” Read literally, this language is broad enough to cover every conceivable harm, direct or indirect, close or remote, that might be caused by an antitrust violation whose effect may “ripple” through the economy. However, the Supreme Court has rejected such a literal reading and placed limitations on the scope of a private right of action. One such limitation is “antitrust injury.” The plaintiff must prove an injury of the type the antitrust laws were intended to prevent, and that flows from the conduct that makes the
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 at Freeborn & Peters LLP and a member of the firm’s Antitrust and Trade Regulation Group. email@example.com
defendant’s acts unlawful. A second limitation is “antitrust standing.” It requires a showing of factors similar to the concept of proximate cause. Antitrust standing should not be confused with standing under the Constitution. Harm to the antitrust plaintiff is sufficient to satisfy the constitutional requirement of injury in fact. However, under Section 4 of the Clayton Act, the trial court must make a further determination of whether the plaintiff is a proper party. ANTITRUST INJURY
To understand the concept of antitrust
injury, it is helpful to put the doctrine in the factual context of the leading case that enunciated the principle. In that case, the defendant manufactured and sold bowling equipment, including automatic pin-spotters. The defendant had repossessed a number of bowling alleys from customers who had purchased its equipment but had defaulted on the purchase price. Because there was not a market for used pin-spotters, the defendant took over the defaulting bowling alleys and operated them. Competitor bowling alleys sued, alleging harm caused by defendant’s acquisition of the defaulting bowling
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alleys. The plaintiffs alleged that they would have made greater profits if the defendant had allowed the bowling centers to close instead of operating them. The Supreme Court held that such damages were not the type of injury the antitrust laws were intended to prevent, and therefore they did not meet the test of antitrust injury. The competitor bowling alleys did not meet this test because
market, farmers selling in the cash market would have standing. Standing would be found because the farmers’ injuries were inextricably intertwined with the injury sought to be inflicted on the futures market. This conclusion would be based on a finding of a close and continuous link between the cash and futures markets. Although the defendants’ conduct was directed to the futures market, the
by asserting that plaintiffs’ alleged overcharges had been passed on to plaintiffs’ customers, and declining to allow plaintiffs to use “pass-on” as a sword to permit suits by indirect purchasers who claimed that they had been injured because the alleged overcharge had been passed on to them. The principle behind these decisions was a fear that the use of pass-on theories would transform
The central interest of Congress in enacting the Sherman Act was to protect the economic freedom of participants in the relevant market. their injuries arose as a result of the defendant’s increased competition in running the bowling alleys. ANTITRUST STANDING
As noted above, the concept of antitrust standing is similar to the proximate cause or remoteness considerations in tort law. This doctrine examines the connection between the asserted wrongdoing and the claimed injury in order to limit the class of plaintiffs to those in the best position to vindicate the antitrust infraction. The Supreme Court, in the leading case regarding antitrust standing, articulated a test involving several factors that limit the persons deemed injured in their business or property under Section 4. The first of these factors requires an examination of the nature of the plaintiff’s alleged injury, recognizing that the central interest of Congress in enacting the Sherman Act was to protect the economic freedom of participants in the relevant market. However, the boundaries of this interest are not necessarily so narrow as to limit recovery to only competitors or consumers. The Court held that standing would exist for those parties whose injury was inextricably intertwined with the injury the competitors sought to inflict on the market. For example, if defendants conspired to depress soybean prices in the futures
conduct predictably impacted the cash market. Sometimes this analysis focuses on whether the plaintiff’s injury is derivative of an injury to another party. For example, the injuries of stockholders, employees, suppliers, or landlords are said to be derivative of the injury to the company. Courts have defined a derivative injury as that where the plaintiff seeks to stand in the shoes of another, or complain of secondary consequences arising from an injury to another. A party whose injury is derivative generally does not have standing. The second factor considered by the Supreme Court involves an analysis of the directness of the relationship between a plaintiff’s injuries and defendant’s conduct. This factor is very similar to proximate cause in tort law. The proximate cause test often revolves around the concept of “foreseeability.” This factor also considers whether the chain of causation is direct and unambiguous or whether it is tenuous and speculative. The third factor is whether the indirectness of the alleged injury will create the risk of duplicative recoveries, or a complex apportionment of damages. This takes into account earlier decisions by the Supreme Court refusing to allow defendants to use “pass-on” as a shield
private treble-damage actions into massive efforts to apportion the recovery among all the potential plaintiffs that could have absorbed all or part of the overcharges. The fourth factor is whether there are more direct victims of the alleged conspiracy. The Court held that the existence of an identifiable class of persons whose self-interest would normally motivate them to vindicate the public interest in antitrust enforcement diminishes the justification for allowing a more remote party to sue. The concepts of antitrust injury and antitrust standing are important principles in antitrust law, limiting the potential claims and parties. Both plaintiffs and defendants should have a clear understanding of these concepts.
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Employees, Agents and the Attorney/Client Privilege By Todd Presnell
or better or worse, a corporate entity’s in-house lawyers must communicate with its employees and third-party agents to provide their client optimal legal advice, but the privilege in the corporate setting lacks uniform application. For instance, some state courts apply the control group doctrine to restrict the privilege’s scope to communications between in-house counsel and employees who have authority to make corporate decisions based on the lawyer’s legal advice. This quite narrow doctrine contrasts with other state courts — and federal common law — that apply the subject-matter test, which broadens the privilege’s application to any employee’s communication so long as it pertains to matters within the scope of her or his employment. Other nuances of the privilege present in-house lawyers with special challenges as well. Regardless of whether the narrow control group or broader subjectmatter doctrine applies, courts scrutinize employee/in-house lawyer communications to discern whether they pertain to business advice rather than legal advice.
Todd Presnell is a partner in Bradley’s Nashville office. He is a trial lawyer, and creator and author of the legal blog Presnell on Privileges (www. presnellonprivileges. com). He provides internal investigation and privilege consulting services to in-house legal departments. firstname.lastname@example.org
Some courts view regulatory advice as routine business discussions unworthy of privilege protection. The evolution of electronic communications presents confidentiality issues that could destroy any privilege protection an in-house lawyer establishes. And even though the attorney/client privilege is the oldest of all evidentiary privileges, many privilege-related issues have remained unresolved (particularly in state courts), leaving in-house attorneys with uncertainty when they communicate with employees and agents. It is imperative, therefore, for in-house counsel to
remain abreast of developing privilege issues in all jurisdictions. As an example, two 2019 state supreme court decisions provide guidance on first-impression privilege issues in the areas of employee-experts and third-party corporate agents. It is not unusual for companies to identify their employees as testifying experts. For example, a product manufacturer might designate an internal engineer to testify that the company properly designed an accused product. Adversaries are frequently entitled to discover communications between a
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company’s lawyer, whether in-house or outside counsel, and its expert; but the question arises whether the attorney/ client privilege protects those communications from discovery if the expert is an employee. The Texas Supreme Court, in In re City of Dickinson, 2019, addressed this issue and held that there is no “employeeexpert exception” to the attorney/client privilege. The City of Dickinson sued Texas Windstorm, seeking coverage for property damage incurred during
so does that eliminate the privilege for non-employee consultants and other third parties? The Tennessee Supreme Court, in another first-impression case, recently held that the privilege is not limited to employees but extends to those third parties who act as the functional equivalent of an employee. In Dialysis Clinic, Inc. v. Medley, a company owned and leased commercial properties to tenants. The company lacked internal knowledge about managing these properties, so it
role for the company, (2) acts as the company’s representative in interactions with others, (3) possesses information that company employees lack, (4) is authorized to communicate with the company’s attorneys and (5) communicates with company attorneys in a confidential setting. The Texas and Tennessee Supreme Court decisions illustrate the fact that the corporate attorney/client privilege remains a developing doctrine with many undecided or underdeveloped
The Court adopted the functional equivalent test to determine which third-party agents fall within the client sphere. Hurricane Ike. During summary judgment briefing, Texas Windstorm submitted an employee’s opinion affidavit. The company’s counsel and this employee exchanged emails during the affidavit drafting process, and the City wanted those emails, claiming that Texas’s expert discovery rules overrode any privilege protection. The Court rejected this claim, upholding the privilege as “quintessentially imperative to our legal system” and refusing to create an exception to Texas’s attorney/client privilege. The Federal Rules of Civil Procedure make employee-lawyer communications nondiscoverable, and now in-house lawyers can use the Texas decision to bolster their state court arguments that the privilege does not give way when they designate an employee as a testifying expert. It is also common for companies to outsource certain functions to third parties, whether individuals or other corporate entities, rather than keeping those functions in-house. The question then is whether the attorney/client privilege covers an in-house lawyer’s communications with those third parties. The privilege typically applies to communications between an in-house lawyer and her or his client’s employees,
outsourced those functions to a property management company. The company’s in-house and outside counsel communicated with the property management company for purposes of providing the company — not the property manager — with legal advice. When the company filed detainer actions against certain tenants, it sought communications between the property manager and the company’s counsel in discovery. The Tennessee Supreme Court faced the question of whether the privilege extends to third parties holding an agency relationship with the lawyer’s client and, if so, what type of agent qualifies for privilege protection. The Court adopted the functional equivalent test to determine which third-party agents fall within the client sphere so that the privilege protects their communications with in-house lawyers. That test generally holds that the privilege applies to third parties whose role with the company renders them the functional equivalent of an employee. The Court adopted a nonexclusive list of factors that courts, and lawyers, should consider when determining whether the privilege applies to a company’s non-employee agent: whether the non-employee (1) performs a specific
questions that produce day-to-day uncertainties for in-house lawyers and provide lessons as well. Early detection is key. In-house attorneys should identify situations that are out of the ordinary, such as communications with third-party property managers or employee-experts, and understand the privilege contours before engaging in substantive email strings. Consistent monitoring of privilege developments in all jurisdictions is essential, because one state’s new rule can influence the law in other jurisdictions, including yours.
Planning for a Smooth Client Transition BY MARGARET “PEGGY” C. KELSEY AND KIMBERLY LEACH JOHNSON
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major generational swing is currently underway in the workforce, as roughly 75 million baby boomers — who hold about one-third of all U.S. jobs — approach retirement. This fact alone should raise the alarm among law firm leaders, who will need to create and implement a multitude of smooth, efficient and satisfactory client transition plans in the coming years. In the past, these transitions have tended to look a lot like this: One day, the relationship partner retires, and the next, you get a notice from the next, most senior partner in line (whose name, by the way, you might not even recognize). It can feel like a unilateral decision made by the law firm — one that’s cold and merely transactional. Having been on both sides of the equation, we can say with confidence that the old ways of doing things
don’t work anymore. For one, the demographic makeup of the workforce is, rightly, shifting away from the old guard, and diverse legal teams are now becoming a priority. For another, more law firms are now competing for shrinking pieces of the same-sized pie: The past ten years have seen a decline in legal spend on outside counsel, a rise in alternative legal service providers winning discovery and due diligence work, and increased investments in technology that handles tasks traditionally performed by junior lawyers and legal assistants. DEEPENING RELATIONSHIPS
Margaret “Peggy” C. Kelsey is the Executive Vice President, General Counsel and Corporate Secretary of WEC Energy Group, where she oversees all legal and governance matters for the company. Peggy.Kelsey@ wecenergygroup. com
A successful client transition today isn’t something to be treated like any other administrative task. Rather, it’s an opportunity for law firms to deepen their relationships with clients — to solidify mutually beneficial partnerships, distinct from the client’s relationships with other service providers. Kimberly Leach Our shared experiJohnson is Chair of ence transitioning to Quarles & Brady LLP a new relationship and helps drive the partner tells us that growth and strategic communication, vision of the firm, as well as its diversity transparency and and inclusion, comadvance planmunity, and pro bono ning are keys to efforts. She is one of success. By way 18 women to lead of example, long a major law firm, a position she has held before the transisince 2013. tion of Quarles Kimberly.Johnson@ & Brady’s WEC quarles.com Energy Group relationship partner, we began holding “lunch and learn” meetings between Quarles & Brady’s WEC Energy Group client services team and WEC Energy Group. These meetings were not only educational but allowed the players on each side to build and grow relationships with a broader group of people — be it younger lawyers from Quarles & Brady, or senior business leaders from WEC Energy Group. Developing these sorts of team-based relationships early and gradually sows trust and continued on page 45
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OUT-OF-STATE DEPOSITION AND DISCOVERY IN
By James W. Walker and Ian Ross Phillips
James W. Walker is a member of the litigation department at Cole Schotz P.C. He handles trial and appeal of complex commercial disputes nationwide for Fortune 500 companies, municipalities and individuals. jwalker@coleschotz. com
ost states have enacted the Interstate Depositions and Discovery Act, which simplifies procedures for issuing subpoenas for out-of-state discovery, including document requests and depositions. Unfortunately, Texas has not adopted the Act. It is difficult for out-of-state litigants, unfamiliar with relevant Texas legal requirements, to conduct depositions or obtain meaningful discovery from non-party Texas residents efficiently, and the assistance of local counsel is often required.
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The first step in obtaining discovery from a non-party Texas resident is to review the local and state rules in the underlying lawsuit’s jurisdiction, as well as any applicable Texas rules. The primary rule regarding a non-party resident deponent (Tex. R. Civ. P. 201.2) states: “[i]f a court of record of any other state or foreign jurisdiction issues a mandate, writ, or commission that requires a witness’s oral or written deposition testimony in this State, the witness may be compelled to appear and testify in the same manner and by the same process used for taking testimony in a proceeding pending in this State.” Although this rule is almost identically restated in Section 20 of the Texas Civil Practice & Remedies Code, litigants generally rely on the Texas Rules of Civil Procedure because it provides other rules applicable to non-party discovery that work in tandem with Rule 201.2.
MANDATE, WRIT OR COMMISSION A mandate, writ or commission is a document issued from the court with jurisdiction over the underlying out-ofstate controversy. It empowers a party to seek the full range of available discovery from a Texas resident. Generally, a party seeking discovery from a nonparty Texas resident files a motion for entry of a mandate, writ or commission in the underlying matter with the presiding court. It should be attached as an exhibit to the motion. If the non-party is a corporate entity, the topics upon which the representative is to be deposed should also be included as an exhibit. Further, if the Requesting Party seeks the production of documents in addition to an oral or written deposition, it should attach the discovery requests to its motion. This allows opposing counsel to review the full scope of the requested discovery in order to consider any available objections to assert at that time. It is important for the Requesting Party to include as exhibits all the discovery it seeks. The court with jurisdiction over the underlying lawsuit retains
jurisdiction over any objections the other parties to the case might wish to make. As has been previously noted by a Texas appellate court, “the court with jurisdiction over the underlying case is generally charged with determining the relevancy and materiality of evidence sought by a party seeking a deposition in Texas[,] … while the Texas court has the obligation to protect the witness’s legal rights, including, for example, the witness’s right to avoid compelled production of privileged evidence.” This holding clearly delineates the role of the court with jurisdiction over the underlying matter from that of the Texas court. While most issues regarding the scope of discovery must be resolved in the originating court, Texas courts retain an interest in protecting the rights of any Texas resident to whom the discovery is directed. The party in the underlying suit opposing the discovery request should lodge its objections in the presiding court and not wait until after the mandate, writ or commission is issued. It may be too late. Take care regarding the language of the mandate, writ or commission sought to be issued by the presiding court. The requirements will be governed by the prevailing law in the presiding court.
in which the non-party Texas resident resides. As a practical matter, this means the non-party deponent will only Ian Ross Phillips is a be required to litigation associate at appear for deposi- Cole Schotz P.C. with a practice focusing tion or produce primarily on contract documents within disputes and employ150 miles of their ment matters. Prior residence. to joining the firm, he served as a term law Out-of-state clerk for the Honorcounsel for the able Paul D. Stickney Requesting Party in the United States must be mindful District Court for the of the fact that Northern District of Texas. you can drive six iphillips@coleschotz. hours in Texas com and not even get halfway across the state. Texas is composed of 254 counties. Taking the geographic expanse into account, it is important that counsel for the Requesting Party carefully determine the county in which the non-party deponent resides as a predicate to determining where the ancillary proceeding should be filed. For example, El Paso County, located in West Texas, is 812 miles from Bowie County located in East Texas. It is easy to run afoul of the 150-mile limitation if you are not paying attention. An ancillary proceeding is a suit necessary to invoke the jurisdiction of a Texas court over the enforcement of the mandate, writ or commission. If issues arise regarding the validity of service or the Texas resident’s rights, privileges and objections in relation to the discovery sought, both the Requesting Party and the Texas resident made the subject of the discovery request may seek a full adjudication of their rights in the Texas court. In the absence of an ancillary proceeding, the Requesting Party will lack a forum in which
Texas courts retain an interest in protecting the rights of any Texas resident to whom the discovery is directed. With a mandate, writ or commission in hand, counsel must consider the best means and location for issuing and serving the discovery subpoena upon a Texas resident. The rules generally only permit district clerks, stenographers and Texas-licensed attorneys to issue subpoenas. Additionally, the effective subpoena range in Texas is only 150 miles from the courthouse in the county
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to compel performance from the Texas resident. Keep in mind, if the Requesting Party does not open an ancillary proceeding, the non-party Texas resident retains the right to file one for the purpose of moving to quash the subpoena or having her or his claimed privileges and objections adjudicated. This is exactly what occurred in the Cantrell case (2017 WL 6544283), and this opinion reveals one of the downside risks that may confront a Requesting Party. Once the subpoena was quashed by the Texas court, the Requesting Party was left to pursue an appeal seeking a reversal of the trial court’s ruling. Until the appellate court handed down its ruling, the Requesting Party was prevented from taking the deposition or collecting discovery. Depending upon the nature of the discovery sought, and the manner in which it is pursued, great care should be taken at each phase of the process so as to provide the Requesting Party the best chance at securing the discovery in admissible form and without undue delay. If the Requesting Party is seeking discovery from a cooperative witness, it may be possible to avoid the filing of an ancillary proceeding by simply having Texas counsel issue the subpoenas directly. An appropriate level of cooperation in this context would include the acceptance of service of the subpoena and the provision of the requested discovery in the absence of any objections or claims of privilege. Certainly, this approach will save the
Requesting Party the costs and attorney’s fees associated with initiating a suit in Texas. Recall that Texas attorneys are empowered to issue subpoenas. In such an instance, it will still be important to ensure that the subpoena meets all legal requirements and complies with the
Texas counsel can also respond to any motions to quash and may file an appropriate motion to compel or seek a hearing. Texas Rules of Civil Procedure. In the event that cooperation to this extent is offered by the Texas resident, there is no genuine need for a Texas court to provide a forum for enforcement of either party’s rights and obligations.
LOCAL COUNSEL In the absence of such cooperation, the best means available to the Requesting Party to secure the necessary discovery in admissible form is to retain Texas counsel to handle all matters subsequent to issuance of the mandate, writ or commission by the underlying court. This method can greatly increase the odds of successfully obtaining the necessary discovery, particularly when, as is often the case, the deponent and opposing counsel avail themselves of every means of resisting the discovery requests and
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are generally uncooperative. Texas counsel can file the ancillary proceeding, issue the subpoena and arrange for service on the non-party resident. If need be, Texas counsel can also respond to any motions to quash and may file an appropriate motion to compel or seek a hearing on any asserted objections or privileges. This approach offers a comparative advantage because once the ancillary proceeding is opened, an enforcement mechanism for the subpoena exists, and any issues raised by the non-party resident may be addressed by local counsel appearing before a familiar court. Having Texas counsel also facilitates the production of documents and the taking of a deposition at her or his office in the same county where the deponent resides. Relying upon Texas counsel also affords the lead counsel for the Requesting Party in the underlying matter a ready resource for securing advice on Texas law and procedure relevant to written and oral discovery. This approach will likely save time and money, and will allow the Requesting Party the best opportunity for securing the discovery in a timely fashion. All things being considered, if you want to secure discovery from a Texas resident, the safest and most efficacious means of getting what you need requires the engagement of Texas counsel.
T ODAY S GC
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continued from page 41 establishes relationships that make a client transition more seamless down the line. Being communicative and transparent early on also means law firms need to institute practices that get the ball rolling years before a lawyer retires. Some law firms link compensation to smooth transitions, giving more than 100 percent credit to a partner who meets certain transition expectations; at Quarles & Brady, lawyers are required to begin formal succession planning for clients for whom they are the relationship partner once they reach age 55. And when it comes to diversity, it’s crucial that law
bill and dividing up the credit among the team. Some view the relationship as a security, an asset over which they become protective. This can make the client feel completely irrelevant. WHAT MAKES A GREAT RELATIONSHIP PARTNER
A great relationship partner is someone who asks a lot of questions in an effort to understand their client and figure out how they can be of better service. She or he should be calm under pressure, understand the business and be a solid, rational person who wants to deepen the partnership experience. She or he should not only have a solid relationship with the client but should have credibility and leadership within their law firm so they can advocate for the
works with to discuss what’s important to WEC Energy Group from their perspective and how Quarles & Brady can do better. The partnership goes both ways. For instance, a GC who feels comfortable with her or his outside counsel will provide constructive feedback about any gaps in service and opportunities for improvement and engage in meaningful discussions about law firm recruitment and staffing. That can only happen in a deep and trusting relationship. Crucially, client transitions in the waning years of the boomer generation not only afford the law firm the opportunity to deepen client relationships but provide an occasion to bring more diversity to the legal profession. This should be a mutual endeavor, with
CLIENT TRANSITIONS IN THE WANING YEARS OF THE BOOMER GENERATION PROVIDE AN OCCASION TO BRING MORE DIVERSITY TO THE LEGAL PROFESSION. firm leaders begin thinking about how they can bring more women and minorities onto their client service teams 5 to 6 years before a client transition. Whatever the law firm’s internal practice may be, it means next to nothing if it’s not parlayed into a meaningful conversation with the client. In this way, the act of, say, preparing a succession plan can become an opportunity to open a discussion with the client about their needs: their key drivers, what they’re looking for in a new relationship partner, the importance of diversity, etc. When it comes to choosing a new relationship partner, these same factors — communication, pre-planning, transparency, a true partnership – are paramount. Too often, a relationship partner simply has the job of sending out the
client’s needs. A good relationship partner doesn’t need to be doing the bulk of the legal work or even be familiar with all of its relevant nuances; what GCs are looking for is someone who can effectively manage the relationship and be the face of that relationship within the firm. Quarles & Brady’s relationship partner for WEC Energy Group does this, in part, by meeting with his WEC Energy Group counterpart each month solely to discuss relationship and higher-level strategic issues. They each have a notebook dedicated to these meetings in which they write down relevant questions and discussion points as they arise during the month. This same relationship partner has gone so far as to reach out to another law firm WEC Energy Group
GCs pushing their clients to hire and promote diverse lawyers and law firms nurturing, developing and then introducing such lawyers into established client relationships. The only way to take full advantage of such succession planning and client transitions is to start early, be communicative and remain transparent. We believe such practices will create lasting, productive client relationships for years to come.
Keys to a Successful Joint Defense Group By Terrence J. Dee
TODAY’S GENER AL COUNSEL SPRING 2019
joint in-house counsel defense group can maximize effectiveness and position the defense for the best possible outcome in litigation. The elements of a successful joint defense group (JDG) are the same as for any joint venture, whether it involves nations fighting for a common cause, businesses entering into a strategic alliance, or even marriage. Study after study of war and business alliances confirm that centralized leadership, unity of vision, adaptability, mutual trust, and clear communication are the common characteristics that distinguish success from failure. The same can be said for common interest or joint defense groups. The initial challenge for JDGs is that membership (or potential membership) is often effectively involuntary. Plaintiffs’ lawyers decide who gets the privilege of sharing the co-defendant title. Members are often arch-rival competitors or groups (such as manufacturers, distributors, marketers, trade groups or individuals) with distinctly different interests who hold potential cross-claims, including contractual and common law indemnity rights. And then there are the insurers and coverage disputes, adding yet another layer of complexity. Terrence J. Dee is a partner at How can McDermott Will & in-house counsel Emery. He focuses his manage all of these practice on product moving pieces to liability, class action, make the JDG antitrust, trade secrets and other successful for his complex litigation. or her client? The He is the head of the sooner co-defenChicago Litigation dants can break Group, chairs the down the potential firm’s Pro-Bono and Community Service obstacles and focus Committee, and on the common is the Co-Chair of purpose of defendthe firm’s Product ing the litigation Defense Litigation and defeating the Group. email@example.com common enemy
(as opposed to each other), the sooner the JDG can move forward efficiently and effectively. Here are some ideas for in-house counsel from the perspective of an outside counsel on how to achieve that goal.
Resolve Disagreements Quickly
Establish a relationship and line of communication with your in-house contemporaries. During the course of a joint defense, outside counsel will inevitably disagree on management and strategy issues. For example, in multiple jurisdiction cases, the defendants may disagree on whether to attempt removal and pursue a multidistrict litigation strategy versus accelerating cases in favorable jurisdictions and slowing down cases in less favorable jurisdictions. The group could disagree over how it should be organized, who takes the lead on drafting, oral argument, or serving as the point of contact with plaintiffs’ counsel. Ideally, outside counsel would resolve most of these issues. But inevitably, inhouse counsel will be recruited to help with an intractable problem. Negotiating those issues will be easier and less painful if you have already developed a working relationship with your inhouse contemporaries. In-house counsel too often stay in the background with little or no coordination with their codefendant in-house colleagues. That is a mistake. The best way to cut through the pre-existing barriers is to develop a relationship with your co-defendant colleagues. Make individual phone calls early in the litigation to introduce yourself, or meet in person if possible. Prioritize those calls after evaluating the defense group and identifying the primary targets in the litigation, i.e., those who have dominant market share
or otherwise have more exposure. Set expectations early on with other in-house counsel about your view of your client’s role and which defendants should take the lead. The most successful defense groups are those in which the respective in-house counsel develop lines of communication, credibility, and trust as early in the process as possible. By engaging early, co-defendant in-house counsel can develop a rapport that makes resolving disputes easier. And by extension, if in-house counsel develop a healthy working relationship with their counterparts, their respective outside counsel will follow their lead. Identify and resolve potential points of conflict between joint defendants. Plaintiffs’ counsel love when joint defendants point the finger at each other. Cross-claims, indemnity litigation and other disputes between the parties drive a wedge between defendants and play right into the hands of plaintiffs. Work with your outside counsel at the outset to identify the potential legal and business differences between co-defendants that could create friction or cause divisions within the defense group. Explore the potential for tolling agreements to preserve potentially divisive cross-claims and indemnity disputes until after plaintiffs’ claims have been fully litigated. If keeping such cross-defendant disputes in the litigation is unavoidable, identify strategies for phasing the litigation to allow the parties to front common defenses and remain aligned for as long as possible.
Set expectations early on with other in-house counsel about your view of your client’s role.
Establish The Leadership Structure
Organizing the JDG and establishing the right leadership team as quickly as continued on page 51
BY ER IC R IEDER A N D AUSTI N CA MPR IELLO
Insider Trading AND THE
Personal Benefit Requirement
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recent decision from the United States District Court for the Southern District of New York illustrates the broad reach of prosecutors and regulators in pursuing recipients of insider trading tips, despite the case-law requirement that the tipper has received a personal benefit from giving the tip. This marks a turnaround from four years ago, when it appeared that the personal benefit requirement stood to substantially curtail the government’s ability to bring insider trading charges against tippees unless the government could show a “meaningfully close personal relationship” between tipper and tippee.
PECU N I A RY E XCH A NGE
In 2014, in United States v. Newman, the U.S. Court of Appeals for the Second Circuit held that to establish liability the government must show a “meaningfully close personal relationship” as well as an exchange of pecuniary value between tipper and tippee. Although it was not entirely clear what the Second Circuit’s words meant, it was clear that the U.S. Attorney’s Office and the Securities and
The driving force behind the decline of the Newman approach was the Supreme Court’s 2016 decision in Salman v. United States. That case involved a tip from brother to brother, where the tipper had received no money or thing of similar value in return. The Court relied on its language in Dirks v. S.E.C (1983), where it viewed a tipper’s gift of confidential information to a trading relative or friend as satisfying the personal benefit requirement. The defendant in Salman attempted to rely on the Second Circuit’s Newman decision, but the Supreme Court rejected that argument, and stated: “To the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family and friends, … this requirement is inconsistent with Dirks.” After the Salman case, the personal benefit issue came before the Second Circuit in United States v. Martoma. There, in August 2017, the court not only noted that the Supreme Court had explicitly rejected (1) the pecuniaryvalue requirement of Newman, but also concluded that Salman had implicitly
The driving force behind the decline of the Newman approach was the Supreme Court’s 2016 decision in Salman v. United States. Exchange Commission understood Newman to be a significant obstacle to their insider trading actions. Then came a U.S. Supreme Court decision rejecting Newman at least in part, and then a Second Circuit opinion further restricting it. And in December 2018, in a decision denying a motion to dismiss an insider trading case, United States District Judge Jed Rakoff stated that “[w]hat remains of Newman therefore applies in only the rarest of cases” (United States v. Pinto-Thomaz).
abrogated (2) the “meaningfully close personal relationship” aspect of Newman. The opinion was written by Judge Robert Katzmann and joined by Judge Denny Chin; the third panel member, Judge Rosemary Pooler, dissented. A third holding of Newman, that the tippee had to be aware of the tipper’s personal benefit, was unaffected by Salman and remains as an important limitation on the government’s pursuit of insider trading cases. In June 2018, the Second Circuit
Eric Rieder is a partner at Bryan Cave Leighton Paisner. His practice focuses on securities litigation, Securities and Exchange Commission investigations, mergers and acquisitions, and other complex litigation. erieder@bclplaw. com
49 Austin Campriello, a partner at Bryan Cave Leighton Paisner, is a criminal defense attorney, former prosecutor and a Fellow in the American College of Trial Lawyers. He defended the former executive director of Dewey & LeBoeuf in a six-month trial involving allegations of grand larceny, scheme to defraud, and falsification of business records that resulted in his client being acquitted of 21 counts and a mistrial on the remaining counts. AVCampriello@ bclplaw.com
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issued an amended opinion (Martoma II), with Judge Pooler once against dissenting. The court reached the same result as before and affirmed the conviction in the case before it. But it modified its holding that Salman implicitly overruled the “meaningfully close personal relationship” aspect of Newman. Instead, the court stated that it was not necessary to decide whether Salman entirely abrogates Newman’s “meaningfully close personal relationship” test. Judge Katzmann emphasized that there are many ways to establish a personal benefit to the tipper, including pecuniary gain; a reputational benefit that will translate into future earning; a relationship between the tipper and tippee that suggests a quid pro quo; the tipper’s intent to benefit the particular tippee; and (the scenario involved in the Salman case) a gift in the form of confidential information to a relative or friend where the tip, and the resulting trade, resemble trading by the insider himself, followed by a gift of the profits to the recipient.
I N TEN T TO BEN EFIT
In one of the points that provoked the strongest disagreements from the dissent, the panel made clear that an intention by the tipper to benefit the tippee in question was itself sufficient to support a finding of personal benefit to the tipper, even without additional evidence of a relationship between the tipper and tippee. Although Martoma II held that it was not deciding whether Newman’s “meaningfully close personal relationship” test had any continued vitality, it is difficult to discern when it would apply. In PintoThomaz, Judge Rakoff suggested that the test “only applies, at most, to situations where a fact-finder is asked to infer an adequate personal benefit simply from the relationship between the tipper and tippee” — which he said would be “in the rarest of cases.” Judge Rakoff in Pinto-Thomaz further attempted to build on Martoma II in defining how to understand and
apply the personal benefit requirement in tippee insider-trading cases, and to simplify what he described as the needless complexity created in some of the case law since the personal benefit element was adopted in Dirks. Trading by a corporate insider on material information was understood to breach a duty to the company, and thus give rise to a violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. But what about where the insider did not trade, but tipped a non-insider who did? In Dirks, the
Insider trading is a variation of the species of fraud known as embezzlement. Supreme Court held that the tippee’s liability derived from the insider’s breach, meaning that the tipper had to have breached a duty and that the tippee had to have known about it for the tippee to be liable. Dirks looked to the tipper’s personal benefit as the touchstone for determining whether the tipper had breached a duty. In that case, the alleged tipper was seen as acting to blow the whistle on corporate wrongdoing, and thus the court concluded that he was not acting for a personal benefit and therefore his tipping behavior was not a breach of duty. In keeping with its understanding of Dirks, the majority in Martoma II did not focus on the issue of personal benefit in isolation, but rather framed the question as an either/or: Was the tip given for a personal benefit, constituting a breach of fiduciary duty, or a legitimate corporate purpose, which would not be a breach? The court stated: “The tipper’s intention to benefit the tippee proves
a breach of fiduciary duty because it demonstrates that the tipper improperly used inside information for personal ends and thus lacked a legitimate corporate purpose.” In this view, it seems that the finding of personal benefit is most important to prove the absence of a legitimate corporate purpose, such as whistleblowing, for divulging confidential corporate information. Judge Rakoff in Pinto-Thomaz elaborated further on the corporate purpose issue. In his view, “insider trading is a variation of the species of fraud known as embezzlement,” in which an embezzler takes property (inside information) of another (the corporation) and uses it for his or her own benefit. What matters, he stated, is the purpose for which the insider disclosed the information, whether for “personal advantage,” or “a corporate or other permissible purpose.” Indeed, Judge Rakoff suggested that the Dirks court could have “averted subsequent confusion” by using the term “personal purpose” or “personal advantage” rather than “personal benefit.” Yet he concluded that “Dirks was quite clear as to the wide breadth of its understanding of a personal benefit.” Whether future courts will follow Judge Rakoff’s lead in setting forth the doctrinal support for insider trading cases is uncertain. And it is possible that the Supreme Court may provide further or contrary guidance. But in light of Salman, Martoma II and now Pinto-Thomaz, the law in the Second Circuit has plainly traveled a long way since Newman.
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Joint Defense Groups continued from page 47
possible is key to its long-term success. Joint defense efforts are often chaotic at the beginning as parties jockey for prominent roles, race for the best local counsel, and try to be the first to secure the necessary experts ahead of their co-defendants. Outside counsel scramble to set up the first meeting on their home turf, create the first meeting agenda, circulate competing drafts of initial motions, and even set up the conference call and email distribution lists — all to gain leverage for control of the group. These efforts, if not managed, can cause ill-will, distrust, and ultimately lead to a dysfunctional group. In-house counsel can play an important role in proactively working with other in-house and outside counsel at the outset to identify the proper leadership structure and what lawyer will best serve the group in the leadership role. There could be an executive committee and several “working groups” designated for drafting, discovery and experts, as necessary. But behavioral management theory experts all point to the need for one lawyer who takes overall leadership. That position takes political skills, humility and patience — characteristics that not every lawyer possesses. Specifically, the leader should have the following qualities: • Patience to give voice to all parties and their counsel, from the largest defendant to the local brick-andmortar store added solely to defeat diversity jurisdiction; • Responsiveness to co-defendants on strategy decisions and open-mindedness to others’ thoughts, including the humility to yield to better ideas in the face of disagreement from the group; • Diplomatic skills to move the group to decisions by persuasion and consensus, not fiat; • Willingness to do the legwork to negotiate and build consensus before
calls and meetings to avoid joint defense group “food fights”; • Ability to delegate responsibilities and spread out work product assignments fairly among the defense group; and • Communication skills for establishing clear lines of intercommunication with the entire defense group, which minimizes the risk of rogue defendants (or outside counsel) and increases the chances that all defendants stay on message. • Of course, it may be difficult at first to determine who has these skills or to overcome the inherent bias for your own outside counsel. But in-house counsel should attempt to conduct due diligence and focus on and prioritize the leadership and structural issues as soon as possible. Although much of this heavy lifting occurs in the beginning, in-house counsel should also stay vigilant to the question of group leadership throughout the length of the joint defense.
counsel command a certain reverence and prestige with outside counsel. This is a valuable asset. To the extent in-house counsel involve themselves into the minutiae of the day-to-day workings of the JDG, or interject themselves into disputes too quickly or too often, they can diminish their stature and dilute this impact. That doesn’t mean disengaging from outside counsel or the case. Just the opposite. In-house counsel should be fully engaged, but a sound JDG is one in which outside counsel can participate in open and frank discussions on strategy and other issues. When in-house counsel enter into the discussions, some of that can be lost. Outside counsel will act differently, more guarded, and less candid. In addition, in-house counsel should be circumspect when it comes to escalating disputes within their own organization to the general counsel or business leaders to pressure their colleagues at co-defendant organizations to “get their outside counsel in-line.” Taking such measures can create long-lasting divisions within the JDG. To the extent possible, disputes should be escalated only when necessary for the most critical issues. Be conscientious of what issues are mountains and what issues are mere molehills. In-house counsel play a critical and unique role in creating a high-functioning JDG. More engagement early on to set the structure and establish working relationships with other in-house counsel, followed by more selective involvement once a healthy group is established, will lead to successful results for the defense group and your client.
In-house counsel command a certain reverence and prestige with outside counsel.
Manage JDG disputes smartly. You have established working relationships with other in-house counsel, you have resolved (to the extent possible) divisive issues that could interfere with a cohesive joint defense, and you have created the leadership and organizational structure necessary for a healthy and effective defense group. Your job is done, right? Not so fast. This is a group of lawyers, after all, and usually very smart lawyers who have (or think they have) lots of good ideas. And they generally fall in love with their own ideas to the exclusion of all others. This leads to disputes that can seem intractable, particularly after entrenchment sets in. When does an in-house counsel get involved? It is important for in-house counsel to have a healthy sense of self-awareness of their role at this point. In-house
SEC ZEROS IN ON
CELEBRITY PROMOTIONS BY ER A MICHAEL RIV YI AND ABBY
T Photo: @FloydMayweather–Twitter
he personal problems of celebrities are often widely publicized. An overlooked beneficiary of such publicity can be the Securities and Exchange Commission (SEC). News of an SEC enforcement action involving a celebrity reaches a larger, more diverse audience than does a typical enforcement action — public company record-keeping violations are not featured on TMZ.
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The enhanced publicity garnered from celebrity involvement in an SEC action can help the agency warn and educate a broader segment of the public of the consequences of securities violations, thus deterring more would-be violators and alerting more investors to fraud schemes. This scenario puts celebrities at heightened risk when they are involved with companies that come under SEC scrutiny. The SEC can be motivated to charge the celebrity or announce their involvement with a punished company to publicize the action. The benefits to the SEC of pursuing actions involving celebrities is well illustrated by recent enforcement actions against two high profile celebrities. In November 2018, the SEC announced charges against Floyd Mayweather Jr. and Khaled Khaled (aka DJ Khaled). Mayweather is one of the most successful boxers in American history, and Khaled is a music industry mogul and worldrenowned music producer. Given the immense popularity of both across many segments of society, these enforcement actions generated a level of publicity for an ongoing SEC initiative to warn the public of the perils of Initial Coin Offerings (ICOs) that the SEC could not otherwise have replicated through public announcements and investor education initiatives. Mayweather and Khaled were charged with improperly promoting investments in ICOs. Cracking down on fraudulent ICOs and protecting investors from fraudulent ICO schemes is a chief priority for the SEC as ICOs have become a hot vehicle for raising capital in the last few years. In 2018, over 1,200 ICOs raised an aggregate of $7.3 billion. The proliferation of ICOs prompted the SEC in July 2017 to warn the public that virtual tokens or coins sold in ICOs may constitute securities, and that persons involved in the offer and sale of a security must comply with the federal securities laws. The SEC’s concern escalated when ICO issuers began using celebrity endorsements to generate public interest in their ICOs. In response,
the SEC issued a public warning in November 2017 that celebrities can run afoul of the law for failing to disclose compensation received in exchange for promoting an ICO. By suing Mayweather and Khaled, the SEC demonstrated its intention to punish celebrities who fail to heed this warning. The SEC charged Mayweather and Khaled with violating the “anti-touting provision” of Section 17(b) of the Securities Act of 1933, which prohibits persons from receiving undisclosed compensation in exchange for publicizing securities on behalf of a company. The SEC alleged that Mayweather and Khaled touted investments in certain virtual coin or token ICOs on their Instagram, Twitter and YouTube accounts without disclosing payments for their promotional efforts. For example, Mayweather’s Twitter account posted a picture of Mayweather holding his boxing title belts with the caption: “Centra’s (CTR) ICO starts in a few hours. Get yours before they sell out, I got mine . . . .” Similarly, Khaled touted Centra’s ICO and debit card product on his Instagram and Twitter accounts and included the statement: “This is a Game changer here. Get your CTR tokens now!” The SEC required Mayweather and Khaled to disgorge all the compensation they received for promoting the ICOs and to pay additional penalties and prejudgment interest totaling over $600,000 for Mayweather, and over $150,000 for Khaled. In addition, the SEC prohibited both from promoting any securities for three years and two years, respectively. A celebrity understandably might not focus on the possibility that an endorsement could be illegal due to the prevalence of celebrity endorsements. However, the SEC’s actions against Mayweather and Khaled serve as an important reminder that celebrity endorsements can bring scrutiny from a multitude of government regulators, not just the SEC. The SEC has broad regulatory reach involving investments and securities. Celebrity endorsements of cryptocur-
rencies should be approached with extreme caution, as the SEC is closely monitoring and scrutinizing this area. In light Michael J. Rivera of the SEC’s ICO is a member in the pronouncements Washington, D.C. discussed above office of Bass, Berry & Sims PLC. He repand the heightresents businesses ened publicity and individuals in surrounding the securities enforceMayweather/ ment proceedings Khaled enforceand internal investigations. ment actions, the michael.rivera@ SEC clearly exbassberry.com pects celebrities to be on notice that endorsements of ICOs must comply with the federal securities laws. As such, the SEC likely will impose harsh punishments Abby Yi is an for future celebrity associate in the Washington, D.C. violators in the office of Bass, Berry ICO space. & Sims PLC. She repMayweather resents companies once said, “Boxing in connection with internal and governis real easy. Life ment investigations is much harder.” concerning white Without a doubt, collar and corporate a call from the compliance matters. abby.yi@bassberry. SEC will make com anyone’s life more difficult. To avoid the hassle of dealing with a regulatory inquiry (which can be costly and time consuming) and to protect themselves from potential liability, celebrities should consult counsel when considering an endorsement involving any type of investment in a company. Counsel can provide legal advice on potential risks associated with endorsing an investment and how to mitigate those risks, including assisting in structuring a proposed endorsement deal to comply with the federal securities laws.
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SUPREME COURT PDR DECISION COULD UPEND REGULATORY GROUND RULES 54
Do Federal Courts or Federal Agencies Have Final Say on Interpretation of Federal Statutes? BY BECCA WAHLQUIST
n PDR Network, LLC v. Carlton & Harris Chiropractic, Inc., the United States Supreme Court is considering the question of whether district courts need to adhere to statutory interpretations made by federal agencies with national reach. To explain why this decision will be very important to American businesses, the discussion in this article focuses on my experiences with the Telephone Consumer Protection Act (TCPA), the statute on which I have spent the majority of my career as a defense attorney, and which caused the dispute in PDR Network. The PDR Network case comes out of the Fourth Circuit. A West Virginia district court dismissed a TCPA class action after refusing to defer to a 2006 order of the Federal Communications Commission (FCC) that
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had expanded the need for opt-out disclosures to solicited facsimiles. The Fourth Circuit reversed, holding that under the Hobbs Act, that court should have been required to defer to the FCC ruling, and could not itself interpret the plain language of the statute. The PDR Network defendant raised constitutional concerns with this order, noting that under the Fourth Circuit’s interpretation, a defendant would be barred from litigating a statutory defense that it never had a full and fair opportunity to present to any court, on the theory that an agency has put the issue to rest without any judicial determination whatsoever. In November 2018, the Supreme Court took review in PDR Network on a single question: “Whether the Hobbs Act required the district court in this case to accept the FCC’s legal interpretation of the Telephone Consumer Protection Act.” Briefing is complete, and oral arguments were scheduled to take place on March 25, 2019. Below, I discuss the potential impact of PDR Network and the Hobbs Act
Becca Wahlquist is a partner at Snell & Wilmer. She has more than a decade of experience defending major companies sued under the Telephone Consumer Protection Act (TCPA). She was invited by the Senate Commerce Committee in May 2016, and by a House Judiciary subcommittee in June 2017, to provide testimony about the TCPA’s impact on American businesses. She is the head of Snell & Wilmer’s TCPA Practice Group. bwahlquist@swlaw. com
FCC orders have been issued that over time have expanded the scope of the TCPA and written additional liability into the statute.
in the context of the TCPA, a statute that has (with the help of various FCC orders) grown into one of the most litigated and hotly contested fields of civil litigation. Particularly in the past five years, American businesses across all industries have found themselves targeted by TCPA claims alleging that they are liable for $500 to $1500 for every call/ text/fax communication made over the past four years.
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HOBBS ACT AND TCPA LITIGATION
As a litigator who has dealt with class action claims brought under the TCPA for 18 years, I have seen firsthand the problems stemming from an antiquated 1991 statute being applied to modern technologies that could not have been conceived of in 1991. With the Congress unwilling or unable to revisit the statute, businesses targeted by aggressive TCPA lawyers have at times turned to the FCC — the regulatory agency with authority to interpret the TCPA — to seek interpretations that they hoped would provide relief from litigations putting millions to billions of dollars in statutory damages at issue. But businesses have often not gotten what they wished for, and instead have seen FCC orders issue that (over time) have greatly expanded the scope of the TCPA and have written additional liability into the statute. When the FCC has issued orders that are bad for defendants (i.e., interpreting the kinds of dialing equipment subject to the TCPA to include any computerized system or smart phone), defendants are in a tough place, particularly if they are not sued until years after the FCC
soak in for a minute: Anda was potentially on the hook for $150 million for failing to include opt-out notices on faxes that the recipients had given Anda permission to send.” When I have argued that the FCC is wrong, and has impermissibly expanded the scope of the TCPA, I tell the court that it need not give Chevron deference to an FCC order when the plain language of the TCPA should determine liability under that statute. Under Chevron, if a statute is silent or ambiguous with respect to a specific issue, then the lower court must defer to an agency’s ruling on that issue if it is based on a “permissible construction” of the statute. But the plaintiffs, in turn, then argue that the Hobbs Act predates Chevron and strips the lower courts of jurisdiction to consider the “validity” of those administrative rulings. TCPA defendants thus often find themselves in an unmanageable situation: The statute says what it says, and defendants ask the district court to review the statute and act according to its plain language, but the district court is told it cannot do so. To explain why the PDR Network decision could have such significant
Several circuit courts of appeals have conducted assessments of the statute’s definition of ATDS, with splits already emerging.
order in question has issued. That is because under the Hobbs Act, challenges to an order from the FCC were to be made to a circuit court of appeal within 60 days of the issuance of that order — not years later, in the context of a private litigation. As one judge recently noted when looking at the statutory liability of a defendant sued under an FCC expansion of the TCPA: “Let that
impact, I need only think of the biggest driver of TCPA litigation at present: claims that a company placed calls or sent texts using an “Automated Telephone Dialing System” (ATDS) in violation of the TCPA. Up until July 2015, courts asked to consider whether equipment functioning as an ATDS looked to the language of the statute itself. “ATDS” is defined in the
TCPA as “equipment with the capacity (A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.” Then, in July 2015, the FCC issued a divided, 3-2 order determining that essentially any computerized system or smartphone could be an ATDS subject to the TCPA’s restrictions. The July 2015 FCC Order was so expansive that litigation skyrocketed, as tracked in a study I conducted for the United States Chamber of Commerce looking at TCPA cases brought before and after the 2015 Order against companies in over 40 industries. Then, in March 2018 the D.C. Circuit Court of Appeals vacated much of the 2015 FCC Order; in the meantime, many courts that refused to stay proceedings had simply plowed ahead. Cases were determined and settlements (and class settlements) were reached based on the 2015 Order. With the July 2015 FCC Order vacated, several circuit courts of appeals have conducted assessments of the statute’s definition of ATDS, with splits already emerging. Now, a defendant sued in the Ninth Circuit faces claims that any computerized system that can store numbers is an ATDS, but a defendant sued in the Second or Third Circuits has circuit law tracking the statute that only equipment that can randomly/ sequentially generate and dial numbers would be an ATDS. District courts not in those circuits are either adhering to earlier orders from the FCC on “predictive dialers” or following one of the outside circuit courts, or are interpreting the TCPA for themselves. So right now, the question of “What is an ATDS” is chaos, legally speaking — with companies unsure of what dialing equipment or phones can be subject to TCPA lawsuits. This is why the PDR Network case will be so immediately impactful on TCPA litigations: There is currently no FCC order on ATDS, but the FCC is working on a new definition of “ATDS.” That order is expected in 2019, and the
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question of whether district courts need to give deference to whatever that order says will be a key question in thousands of pending litigations. The FCC’s anticipated order could change the legal landscape for TCPA cases (again), should district courts be required to defer to it. But if the FCC issues yet another bad order exceeding that agency’s powers, would it be fair to argue that the Hobbs Act precludes future defendants from challenging that ruling? POTENTIAL IMPACT OF PDR NETWORK
Some argue that national uniformity is most important, so that businesses know what regulations mean from looking at an agency order and know how to comply with the law. Some argue that unfair or wrong agency orders should not be permitted to override a defendant’s ability to defend itself in a litigation brought
long after the time to appeal a relevant agency’s order has ended. It is difficult to decide which argument should win out; indeed, the question is so tricky that the United States Chamber of Commerce, when filing its amicus brief in PDR Network in January 2019, filed it on behalf of neither party. Instead, the Chamber emphasized the importance both of uniformity (so that businesses can conform to federal laws) and of retaining the right to defend against unfair or poorly reasoned agency decisions in a later private litigation. Importantly, the reach of the Supreme Court’s decision on the Hobbs Act could impact the orders issued by any regulatory agency with national reach, such as the Department of Transportation and the Department of Agriculture. Thus, six states (Oklahoma, Indiana, Louisiana, Nebraska, Texas and West Virginia) also filed an amicus brief in PDR Network
on January 15, 2019, arguing that the Fourth Circuit’s ruling would require companies to closely review the Federal Register to look for any interpretative rule by an agency and then decide within 60 days whether it should be challenged, in the event there could be future litigation. The states argue that their companies should not be required to perform such inefficient guesswork in crafting compliance strategies. In sum, it is difficult to predict how the Supreme Court will rule, but it is certain that what it does in PDR Network will be significant and should address the question about who interprets federal law — federal courts, or the federal agencies with regulatory authority under the statute. Businesses will need to watch closely for this opinion. It could determine not only how TCPA litigations progress but how agency orders in general are treated in the future.
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COntractual pOthOles On the rOad tO m&a 58
by kyle gann, steven gavin, william O’neil and JasOn OsbOrn
Kyle Gann is a partner at Winston & Strawn LLP. He represents private equity funds and public and private companies in complex corporate transactions, including mergers and acquisitions, leveraged buyouts, joint ventures, divestures, recapitalizations and restructurings. firstname.lastname@example.org
Steven Gavin is a partner at Winston & Strawn LLP, He advises clients in corporate finance and merger and acquisition transactions. email@example.com
he horror, the horror: Josef Conrad’s words echo in the soul of every M&A lawyer who hears about litigation relating to contract ambiguity. As a species, the deal lawyer craves clarity. This instinctual need, wed to word processing software, has resulted in deal documents of extraordinary size and detail. Complex provisions — often only distant cousins to plain English — are drafted, negotiated and redrafted to finely slice and dice risk and economics. The intent of this process is to create clarity across multiple, and often remote, scenarios. Sometimes, however, even lawyers (particularly sleep-deprived ones) are prone to imperfection. Ambiguity, rather than clarity, can emerge from
the complex documentation prepared in an M&A deal. LSVC Holdings, LLC v. Vestcom Parent Holdings, Inc. made this clear. The case dealt with how the parties intended to allocate the benefit of transaction tax deductions. The parties initially agreed at the Letter of Intent stage to a split of transaction tax deductions. It was not clear, however, which transaction-related tax deductions were intended to be split between the parties. Did the parties mean that the benefit of all transactionrelated tax deductions would be split equally or, more narrowly, that the transaction-related tax deductions not utilized by the seller in the pre-closing period would be split equally? Although the facts of this case have
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been written about extensively with respect to other lessons learned, the purpose of this article is to highlight the important reminders embedded in this decision about how a court will seek to resolve contractual disputes relating to ambiguity.
COntracts and the delaware COurts In the first step of its analysis, a Delaware court will look only to the four corners of the contract to establish the parties’ intent. If the meaning of a provision, read in the context of the overall structure of the contract, is not susceptible to more than one reasonable interpretation, the court ends its inquiry. That single meaning is applied regardless of the parties’
actual intent. It does not matter whether or not the reasonable interpretation was reflective of substantive business negotiations that occurred outside the four corners of the agreement. A court simply will not save a party, or its lawyer, from their failure to conform the contract to the parties’ mutual understanding. If, on the other hand, there is ambiguity in the agreement (i.e., more than one reasonable interpretation) — as often is the case in complex contracts — a court may go further and look to extrinsic evidence to divine the intent of the parties. Once the court has to go beyond the four corners of an agreement to understand the contract’s meaning, the analysis shifts to an objective assessment of the meaning of the provision and an examination of the parties’ intent. In other words, the court shifts into “get it right” mode; and while the words of the definitive agreement are the starting point of the investigative process, they are not outcome determinative. The court will look to the parties’ dealings to decipher their intent. These may include, among other things, the negotiation history and interim drafts of the contract. In the LSVC case, Delaware Vice Chancellor MontgomeryReeves sought to resolve the ambiguity by exhaustively digging into extrinsic evidence. In rendering its decision, the court cited oral negotiations between the parties, drafts of the letter of intent, interim drafts of the agreement and issues lists prepared by the parties. Often, however, there is an additional layer for a court to consider. M&A lawyers will typically include an “interpretive” section to the agreement. The purpose of this section of an agreement
William O’Neil, a litigation partner at Winston & Strawn LLP, represents private equity funds and their portfolio companies, frequently advising buyers and sellers in post-closing disputes, including working capital, representation and warranty, and fraud claims. firstname.lastname@example.org
Jason Osborn, a partner at Winston & Strawn LLP, counsels clients on their business development strategies and regularly represents private equity funds and public and private companies in complex transactions. josborn@winston. com
is to lay down the rules of the road for how a court should interpret a contract. A common example of an interpretive provision is the statement that a contract should be read as though it were mutually drafted by the parties. This tells a court that, notwithstanding what common law principles of contractual interpretation might say on the subject, it should not construe ambiguities against any individual party. Without this type of interpretive provision, a court might look to common law and construe ambiguity in the contract against the primary drafter. By market custom, sellers prepare the initial draft of a purchase agreement in an auction context and buyers typically prepare the initial draft in a proprietary deal process. Application of common law rules of construction, in which ambiguities are construed against the drafter, could continued on page 63
a delaware cOurt will lOOk first tO the fOur cOrners Of the cOntract in Order tO establish the parties’ intent.
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English Courts Possess Powerful Tools for U.S. Litigation By Lesley Timms, James E. Nealon and Elisa Wahnon
his article focuses on two potent interim remedies that an English court can grant in aid of U.S. court proceedings: (1) obtaining evidence or documents from a witness/non-party resident in England or Wales through the 1970 Hague Convention on the Taking of Evidence Abroad in Civil and Commercial Matters (Hague Evidence Convention); and (2) obtaining injunctive relief in the form of a Worldwide Freezing Order (formerly known as a Mareva Injunction) from the English court over parties or assets resident within or outside of England.
Hague Evidence Convention
documents, which can be obtained with a Letter of Request (LOR). A U.S. litigant first applies to the U.S. court for a formal LOR to the English court for judicial assistance under the Hague Evidence Convention. It should identify the witness, contain details of the claim and explain why the evidence sought is necessary to resolve the issues before the U.S. court. If a U.S. litigant is seeking a deposition from a witness in the UK, the letter should contain a list of the questions that will be put to the witness (although this does not mean a U.S. litigant will be confined to asking only those questions). It also should indicate whether the evidence is to be taken on oath and how the examination will be recorded. If the U.S. litigant is seeking production of documents from the witness, the LOR should state the particular documents sought and why the applicant believes they exist and are in the possession of the other person. By contrast, the equivalent procedure in the U.S. under 28 USC has a much broader scope. Unlike Hague Convention procedures, Section 1782 does not require that an applicant first seek the
The Letter of Request should state the particular documents sought and why the applicant believes they are in the possession of the other person.
A party to U.S. proceedings can make an application to the English court under the Hague Evidence Convention to obtain documents and/ or evidence from a party, non-party or witness resident in the jurisdiction. Evidence can include examination of witnesses (orally or in writing); production of documents; inspection, preservation, custody or sampling of any property; and medical examination of any person, including taking blood samples. The most common types of evidence sought are depositions and disclosure of
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requested discovery from the English court. Nor must a Section 1782 applicant demonstrate that the discovery sought would be admissible in English proceedings. English applicants using the 1782 procedure can benefit from U.S. discovery procedures, which are recognized as among the most liberal and far reaching in the world. It is also possible to ask the potential witness for voluntary disclosure of documents and or a voluntary deposition at any stage of the litigation, although the U.S. party may have more leverage after the LOR has been issued. For an LOR to be enforceable in England, the U.S. attorneys will need to send it to English solicitors who will then apply, without notice, to the English court for an order to give it effect. The order is typically issued by the English court within a matter of weeks. If a deposition is sought, the application must identify which specific witnesses are being deposed. Significantly, corporate entities cannot be ordered to give oral evidence but can be required to answer written interrogatories. The applicant must also appoint an independent examiner (usually a barrister) who will observe the deposition and be responsible for its overall conduct. Once served with the order, the respondent will have the opportunity to apply to, object to, and/or dismiss all or part of it if there are grounds to do so. The High Court will start from the principle that it is obliged to give effect to a request from a foreign court, unless it is satisfied that there is good reason not to do so. When deciding whether and in what terms to make the order, the High Court will apply English civil procedural rules â€” namely, the documents sought must be relevant to the issues in the case, and any searches must be reasonable and proportionate in terms of the cost and burden of compliance. In particular, the High Court is specifically prohibited from making an order requiring the potential witness to make general disclosure of documents.
Lesley Timms, a Withers partner in the litigation and arbitration team in London, has developed a broad commercial practice with a focus on complex contractual disputes. She regularly advises start-up companies on their contractual arrangements. lesley.timms@withers worldwide.com
61 James E. Nealon, a Withers partner in the litigation and arbitration team in New York, concentrates on civil litigation, with a focus on commercial and employment litigation and arbitration. james.nealon@ withersworldwide. com
Elisa Wahnon, a Withers associate in the litigation and arbitration team in London, assists on a wide range of commercial disputes and has experience in arbitration and settling matters through mediation. wahnon@withers worldwide.com
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The High Court will use its discretion to determine whether the application is permissible. It will not amend the order to the extent that it effectively substitutes the request for a different one. These rules are considerably narrower than their U.S. equivalent of discovery. For this reason, it’s very important that U.S. and English counsel coordinate at an early stage on the content and scope of the LOR to ensure that it strikes an appropriate balance between obtaining the documents and evidence sought by the application, and surviving the rigorous English civil procedure rules of disclosure.
By virtue of Section 25 of the Civil Jurisdiction and Judgments Act 1982 (CJJA), English courts have the power to grant a freezing order in aid of foreign proceedings. A freezing order is an interim injunction that restrains a party from dealing with or disposing of its assets with the intention of making itself judgment proof, thereby preserving the defendant’s assets until judgment has been obtained and satisfied. An English freezing order can attach to assets located anywhere in the world. Further, the English court has broad powers to make ancillary orders to ensure the efficacy of the freezing order, including by ordering a defendant to disclose the value, location and details of its assets in the form of a sworn affidavit. However, a freezing order is considered a draconian remedy and the English court will only grant one where it is just and expedient to do so, adopting a twostage approach. It will first ask whether, had the substantive proceedings been brought in the UK, the facts would warrant the relief sought and, in particular, whether the claimant has shown that there is a good arguable case (a very low threshold), and whether there is a real risk that without the freezing order, the respondent will dissipate its assets. If the answer is yes, the court considers whether the fact that the court has no jurisdiction — apart from its jurisdiction
to grant interim relief in aid of foreign proceedings — makes it inexpedient to grant the freezing order. The English court has the power to grant a freezing order over assets located both within and outside the UK but will do so only if the respondent is resident within the jurisdiction, or is someone over whom the UK court has or could assume personal jurisdiction. Otherwise, the court will only grant a freezing order over assets outside the jurisdiction if there are exceptional circumstances. The applicant will likely need to establish that there is a “real connecting link” between the subject matter of the freezing order and the territorial jurisdiction of the court (for example, a real connecting link will exist if the assets are located in England). The court will only grant an injunction if the claim in the foreign proceedings is a money claim. In Yossifoff v. Donnerstein (2015), the court refused to grant a freezing order in which the underlying proceedings in Israel were for an accounting where no damages were being sought. The court will only grant worldwide relief if it considers it just and expedient to do so. Each case is highly fact specific and will be determined on its individual merits. However, in the case of Motorola v. Uzan (2003), the English court listed five principal considerations that are often cited by parties as reasons for granting (or discharging) a freezing order, summarized as follows: • Whether the freezing order will interfere with the management of the case in the primary court. • Whether it is the policy in the primary jurisdiction not to make worldwide freezing orders. • Whether there is a danger that the freezing orders sought will give rise to disharmony or confusion and/or present a risk of conflicting, inconsistent or overlapping orders in other jurisdictions. If so, then respect for the territorial jurisdiction of that foreign state should discourage the
English court from using its unusually wide injunctive powers against a defendant to U.S. proceedings. • Whether, in a case where jurisdiction is resisted and disobedience to be expected, the court will be making an order that it cannot practically enforce. There are some common pitfalls to watch out for when making an application for a freezing order in aid of U.S. proceedings. Freezing orders are usually obtained in the first instance without notice to the defendant so as to preclude the opportunity to dissipate assets. However, this means that, when making the application, the applicant is under a duty to bring all material facts to the court’s attention, even if these facts are not beneficial. Freezing orders are often discharged at the return hearing (at which point the defendant will be afforded the opportunity to respond to the application) when the defendant brings to light material facts that the claimant should have disclosed at the without notice hearing, but did not. The English courts have been known to deny freezing orders in aid of U.S. proceedings on the basis that is it inexpedient to grant one, for example, where the defendant neither owns assets nor is resident in England and therefore there would be no effective sanction were it to disobey the order. These interim remedies can be an effective way for U.S. litigants to aid their claim in U.S. proceedings. In particular, these remedies should be considered where a defendant or relevant third party resides or has assets in England or Wales.
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Contractual Potholes continued from page 59
have the odd result in which one party is disadvantaged in litigation by virtue of taking the primary pen on the document. Generally, parties seek to avoid this result by expressly instructing courts to ignore this common law doctrine.
lImIt On extrInsIC evIdenCe A more interesting version of this provision attaches language that limits the type of extrinsic evidence that a court can consider in deciphering the parties’ intent. Typically, this additional language tells a court that it should not look to
waged over sandbagging provisions. A seller did not want to include an antisandbagging provision only to have its deletion construed against it. Conversely, a buyer did not want to include a prosandbagging provision only to have its deletion construed against it. It is difficult to read the LSVC case and not come away with the view that this interpretive language — which excludes prior drafts of the agreement, but not other types of extrinsic evidence — introduces more complexity into an already complex situation. If a court were to follow this interpretive language, it could look at issues lists, oral negotiations, email correspondence and other extrinsic evidence, but not prior
limited, which takes some of the pressure off negotiation of old hot-button favorites such as the sandbagging provision. Additionally, insurers will not insure buyers for breaches about which they had actual knowledge. Therefore, in an RWI deal, much of a buyer’s postclosing recourse will be subjected to an anti-sandbagging provision (albeit narrowly tailored) no matter what it negotiates in the purchase agreement. The LSVC case serves as a healthy reminder to practitioners that (1) contracts are read by courts as a whole in order to understand meaning; (2) when meaning is not clear on the face of the contract, a court will seek to understand the facts and context surrounding the
the additiOnal language tells a cOurt that it shOuld nOt lOOk tO priOr drafts Of the cOntract tO understand the meaning Of the definitive agreement. prior drafts of the contract to understand the meaning of the definitive agreement. The concern addressed by this language is that a court could look to prior drafts, see that a provision was included and subsequently deleted, and infer meaning from that deletion. The potential impact of failing to include this limitation on the scope of the court’s review is best demonstrated in the negotiations around “sandbagging” provisions. An “anti-sandbagging” provision says that a buyer cannot make an indemnity claim if it had knowledge of the relevant breach. A “pro-sandbagging” provision says that a buyer can make an indemnity claim, regardless of whether it had knowledge of that breach. Many contracts are ultimately silent on the issue. Setting aside whether silence is the appropriate way to address this issue, we suspect that interpretive language limiting a court’s ability to look at prior drafts began creeping into agreements in the context of the battles that were
drafts of the agreement. At the minimum, presenting this partial picture will make the court’s task more difficult. At worst, it’s a land mine planted in the middle of a battlefield (and it’s impossible to predict who will step on it). It is difficult to predict how the LSVC case might have otherwise been decided if the deal documents had excluded prior drafts from extrinsic evidence and restricted the court from looking at the negotiation history holistically. In addition, while this interpretive language does prevent a court from construing contractual silence against a party, we believe this concern was primarily driven by negotiations around sandbagging provisions. With the advent of representation and warranty insurance (RWI) as a common deal device, this interpretive provision may not address a need that can be clearly articulated in the context of today’s dealmaking. As a result of RWI, a seller’s postclosing exposure is often very financially
deal terms; and (3) deviations from common law standards of contractual interpretation imposed pursuant to interpretive provisions need to be thoughtfully considered in light of the specific deal, not merely accepted as hand-medowns from precedent of a prior era.
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Sensible Disclosure Concerning Litigation Finance By Alan Guy
obbyists opposed to litigation finance promote the misconception that it is fundamentally unethical. They contend that unless relationships between funders and litigants are made fully “transparent” to opposing parties, the legal system will be put at risk. Little could be further from the truth. However, a modest amount of disclosure regarding commercial litigation finance would help demonstrate that it is an ethical practice that benefits both litigants and the legal system. To understand why, it is important to first understand what commercial litigation finance is — and is not. In the United States, there are many ways to fund litigation, including traditional contingency fee agreements. Commercial litigation finance, however, typically involves a third party (a “funder”) providing capital on a non-recourse basis, under an agreement that carefully delineates the rights and responsibilities of the funder, Alan Guy is a litigant and lawyer. In return, the Managing Director funder receives a share of what at Vannin Capital LLC in New York. the litigant obtains or retains He works with law in the dispute. Litigants can use firms and claimants these funds to cover everything on how third-party from attorneys’ fees to operating funding can be expenses. This can have a powerdeployed across a broad range of highful impact on the P&Ls of a legal value commercial department and a company. litigation disputes. Because funding is provided on a Prior to joining Vannon-recourse basis, investments are nin, Alan practiced only made after extensive diligence. at Cravath, Swaine & Moore LLP and This involves screening out litigants Freshfields Bruckhaus unlikely to prevail on the merits or Deringer US LLP, whose disputes are not commercial advising clients on in nature. For example, most comhigh-value claims. mercial funders will not back a case Alan.guy@vannin. com based on settlement value alone
or fund personal injury litigation. Funders also will not fund on a budget that is disproportionate to the amount in dispute. Funders are careful to avoid funding on terms that violate applicable laws or ethics rules, because doing so may prevent them from enforcing those terms when a dispute ends. Ultimately, commercial litigation finance is corporate finance, not gambling on lawsuits. That is why courts and The amount a legal ethicists that have party can spend considered commercial litigation finance have litigating a dispute is a fact generally found that it is not improper or of enormous unethical. strategic value. So why have funders resisted demands to disclose funding agreements and funder communications with lawyers and litigants? The answer should be evident to any general counsel familiar with litigation. First, the amount a party can spend litigating a dispute is a fact of enormous strategic value. Second, when evaluating the prospects of success in a litigation, one must be frank about a case’s strengths and weaknesses. As courts have consistently found, that information is of little value when resolving the issues in dispute, but its disclosure can unfairly prejudice a party’s case. In our opinion, the best way to clear up misconceptions about funding is for courts and lawmakers to enact sensible rules regarding disclosure. These would require disclosure of the fact that an entity is providing funding on either side of a case and the identity of that entity, but prohibit any broader discovery regarding funding. That would allow funders to demonstrate how commercial litigation finance is actually being used, without exposing funded litigants to unfair and burdensome discovery.
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