Today's General Counsel, V13 N2, April/May 2016

APR / MAY 2016 VOLUME 1 3 / NUMBER 2 TODAYSGENER ALCOUNSEL.COM

Cybersecurity and Risk Management Law Department Benchmarks Information Governance: Quantify or Guess Better, Not More, Data Collection The Cloud as E-Discovery Tool ERISA Plans as Breach Targets Will New Fed Rules Curb Litigation Costs?

The Future of E-Discovery Court Reporting in the Digital Age

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apr / may 20 16 toDay’s gEnEr al counsEl

Editor’s Desk

Hackers topped everybody’s black list not too long ago, but now their stock is rising. A hacker (employed by the FBI but a hacker nonetheless) prevented a high-level impasse between the DOJ and Apple, and the hacker who gifted a German newspaper with a trove of data about offshore shell companies would be a candidate for Time Magazine’s Person of the Year, if anyone knew who he or she was. Nevertheless, your average hacker is up to no good.

This issue of Today’s General Counsel contains much information about the risk hackers pose to corporate data, some of it pretty alarming. According to a benchmarking report by the e-discovery service provider Consilio, more than two years after the massive Target data breach initially caused by an email attack on a vendor, barely 20 percent of law departments have a data security program that covers the information they share with vendors. Patrick Rehfield and Sage Fattahian point out something that ERISA fiduciaries ought to be particularly concerned about: Companies with a pension or welfare plan share their employees’ personal data with vendors, and this data is highly desirable from the point of view of cyber attackers.

On the plus side, many corporate boards are treating cybersecurity as a governance and risk management issue. Peter Sullivan and Christopher Hart outline some protocols for examining the risk carefully and responding appropriately if a breach occurs, and Carrie Penman provides some timely advice about the delicate relationship between general counsel, their senior management and their boards when it comes to cybersecurity and other governance issues.

Joel Felber outlines the strategic considerations involved in the decision to obtain foreign patent protection, describing

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some relatively new options for universal patent and design protection, and Catherine Serafin writes about the litigation management guidelines that insurers often insist that counsel representing the policyholder follow. She maintains that some guidelines have the potential to impair a lawyer’s independent professional judgment and interfere with duties of loyalty.

Abby Sacunas describes some recent developments in the area of successor liability, and advises that the structure of M&A deals and choice of law are crucial when it comes to this potentially costly problem.

Bob Nienhouse, Editor-In-Chief bnienhouse@TodaysGC.com

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APR / MAY 20 16 TODAY’S GENER AL COUNSEL

Features

C O LU M N S

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COURT REPORTING IN THE DIGITAL AGE Kenneth Zais 225 words per minute, 500 milabytes per second.

LAW DEPARTMENTS SEE REGULATION AS BIGGEST CHALLENGE Consilio LLC Data privacy and vendor cybersecurity oversight are major concerns.

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SUCCESSOR LIABILITY FOR FCA VIOLATIONS

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COLLECT BETTER DATA, NOT MORE DATA

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LITIGATION GUIDELINES SHOULDN’T UNDERCUT POLICYHOLDER

Tirzah Lollar and Christina Fermer Checklist for a sleeper liability.

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WORKPLACE ISSUES The NLRB’s New Election Rules

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THE ANTITRUST LITIGATOR Courts To Decide if New Rules Will Curb Litigation Costs

Tanja L.Thompson and Mark Schneider Employers confront new timetable.

Jeffery M. Cross The eight-word change to Rule 1.

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INFORMATION GOVERNANCE OBSERVED Quantified Information Governance Barclay T. Blair Decisions can’t be based on tradition and supposition.

Justin Silverman Ask for too much and you might not get any.

Catherine J. Serafi n An issue best discussed before it’s critical.

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TRENDS IN CANADIAN M&A

By Jamie Koumanakos Pension plans remain active.

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apr / may 20 16 toDay’s gener al counsel

Departments Editor’s Desk

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Executive Summaries

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e-DisCovery

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16 Experts Predict Future of E-Discovery Jim Gill New data landscape will require new tools.

18 Cloud Enables Law Department Control Of E-Discovery Monica Enand In-house legal teams empowered.

intelleC tual propert y

20 Fundamentals of Protecting Patents Overseas Joel Felber Numerous options, cost-benefit required.

ComplianCe

28 New Guidelines for Board Oversight of Ethics and Compliance

CyberseCurit y

Carrie Penman Boards need good information, clear communication and a defined mandate.

24 Cybersecurity Concerns For ERISA Fiduciaries

30 Competition Outlook in Key Global Regions

Patrick Rehfield and Saghi (Sage) Fattahian Vague guidance but plenty of responsibility.

Bernd Meyring, Nicole Kar, Clara Ingen-Housz, Fay Zhou, Thomas McGrath and Douglas Tween Rule changes in China, “Brexit” threat in EU.

26 Cybersecurity is a Governance and Risk Management Issue Peter A. Sullivan and Christopher E. Hart Curtail data breaches and limit the fallout if they occur.

36 Corruption Risk For Multinationals in India Vasu B. Muthyala and Joshua L. Ray FCPA fills the void, as India gears up.

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T O D AY S G E N E R A L C O U N S E L . C O M / S U B S C R I B E

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senior viCe president & managing direCtor, today’s general Counsel institute Neil Signore art direCtion & photo illustration MPower Ideation, LLC law firm business development manager Scott Ziegler database manager Matt Tortora

Contributing editors and writers

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Barclay T. Blair Jeffery M. Cross Monica Enand Saghi (Sage) Fattahian Joel Felber Christina Ferma Jim Gill Christopher E. Hart Clara Ingen-Housz Nicole Kar Jamie Koumanakos Tirzah Lollar Thomas McGrath Bernd Meyring

Vasu B. Muthyala Carrie Penman Joshua L. Ray Patrick Rehfield Abby L. Sacunas Mark Schneider Cathy Serafin Justin Silverman Peter A. Sullivan Tanja Thompson Douglas Tween Kenneth Zais Fay Zhou

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T O D AY S G E N E R A L C O U N S E L . C O M / S U B S C R I B E

apr / may 20 16 today’S gEnEr al counSEl

Executive Summaries e-DIscovery

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Intellec tual ProPert y

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Experts Predict Future of E-Discovery

Cloud Enables Law Department Control of E-Discovery

Fundamentals of Protecting Patents Overseas

By Jim Gill Exterro

By Monica Enand Zapproved

By Joel Felber Leason Ellis

Experts discuss trends in the field of e-discovery. Among their observations: The character of e-discovery data has changed and may include text, video, audio, social media, and new metadata structures within the same data artifact.

This will require new tools and methods to preserve, retrieve, and search and review these data types. In particular, text messages are now commonly sought in investigations, and are occasionally at issue in civil litigation.

The notion that all data could be useful ignores reality. E-discovery practitioners can use the new Federal Rules of Civil Procedure to their advantage.

The amending of Rule 26(b)(1) addressing proportionality is due in part to the overwhelming growth in the volume of ESI that is potentially subject to discovery. The focus of Rule 37(e) on preservation efforts will result in analyses regarding whether a party took reasonable steps to preserve documents.

Rule 26(b)(1) leaves many areas open to debate, requiring a case-bycase analysis. Thus parties and courts will need to explore how best to apply proportionality, and this will lead to disputes and litigation.

The author concludes with some summary observations. The message experts are conveying, he says, is that legal departments should prioritize clearing out “ROT” (redundant, obsolete and trivial data) for more efficient e-discovery. They should keep abreast of the changing data landscape with the latest review and collection tools, understand the new FRCP Amendments, and increase project efficiency through integrated processes.

2016 is the year the cloud becomes mainstream for corporations. Security fears have been allayed and its cost and accessibility advantages have brought increasing amounts of corporate data into cloud repositories. Just as corporations have turned to the cloud to securely manage data, legal departments should now look to the cloud for solutions that provide cost-effective approaches to e-discovery and have the scalability to meet future needs.

The cloud empowers legal teams to seize control, streamline processes, reduce investment in infrastructure and be ready to respond rapidly to matters of any size. Surprisingly, even when change promises to save an organization time and money and make a team more efficient, it often encounters resistance and is difficult to implement. But the economy, simplicity and speed of cloud solutions can ease the difficulty and fear associated with insourcing e-discovery and make it possible for organizations of any size to incrementally bring more work in house.

Three factors that make it easy for organizations to start insourcing e-discovery: True-cloud software is available as a subscription-based operational expense that is affordable and predictable; cloud-based software can be deployed quickly, requiring little to no support from IT; and cloud software is generally so intuitive that anyone can use it, regardless of technology experience.

Given the growing complexity of data and increasing pressure to meet management goals, the cloud has become corporate legal’s new best practice for reducing waste across the entire discovery process.

The territorial nature of patent protection necessitates considering foreign patent rights and a benefit-cost analysis of foreign patent filing options. Such benefits as foreign market exclusivity, foreign-based licensing revenue and cross-licensing opportunities in foreign countries need to be balanced against costs, time and the effort required to address foreign patent laws. Particular consideration needs to be given to strict timing requirements imposed by individual patent offices.

Companies often prefer to defer specific country decisions by filing a single international Patent Cooperation Treaty (PCT) patent application. The PCT patent application is useful to delay the need to file patent applications in most industrialized countries for up to 30 or 31 months from a respective priority date.

Since May 2015, patent offices around the world, including in the United States, Europe, Korea and Japan, have been accepting standardized international design applications (IDAs) that cover protection for ornamental or aesthetic aspects of the shape of an article.

Other alternatives to consider are filing a single foreign patent application in a regional patent office that covers a number of individual countries, and tapping a recent development, commonly known as the “unitary patent,” that will provide for a new type of patent that has a unitary effect in the European Union.

A strategic view of your company’s current intellectual property assets, present and future business objectives, and current and potential competition, should include a close look at options for foreign patent protection and enforceability.

today’s gener al counsel apr / may 20 16

Executive Summaries CyberseCurit y

ComPlianCe

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Cybersecurity Concerns for ERISA Fiduciaries

Cybersecurity is a Governance and Risk Management Issue

By Patrick Rehfield and Saghi (Sage) Fattahian Morgan Lewis

By Peter A. Sullivan and Christopher E. Hart Foley Hoag

New Guidelines for Board Oversight of Ethics and Compliance

Pension plans and welfare plans store personal data on participants and beneficiaries that may be of great interest to cyber attackers. Not only does the plan sponsor have access to personal confidential data. but so too do the participant and beneficiary, the third party service provider and other vendors.

What cyber attackers are seeking is not just theft of plan assets, but personal data and individuals’ identities, which may be of higher value than plan assets.

In 2011, the Department of Labor’s ERISA Advisory Council began looking at cybersecurity issues in the context of maintaining privacy and security of information in employee benefit plans.

The ERISA Advisory Council identified identity theft and loss of plan assets as major concerns and recommended that DOL provide guidance.

The guidance has yet to be issued, and there currently is no comprehensive federal law governing cybersecurity, but there are many federal and state laws that address the issue in various ways.

HIPAA regulations may also be useful as a guide.

Guidance from the DOL will undoubtedly be driven first by a determination as to whether cybersecurity is deemed to be a fiduciary function. In the meantime plan fiduciaries can consider establishing prudent procedures for handling and securing personal identifiable information, including securing personal identifiable information “at rest” (data stored on computers, on storage devices or being used by the data owner) and information in motion (data transmitted across a network, such as email ).

In the face of numerous major data breaches with significant financial losses to companies, executives and corporate boards are now treating cybersecurity as a governance and risk management issue. This means treating cybersecruity the same as other risks, like safety, by examining it carefully and responding appropriately.

The first step is understanding the nature of the data at risk. Consider how it’s used, who uses it, who sees and manages it, how it is stored, and understand that the precise risk may be in large part related to the particular business the company is in.

Once the data is known, be clear on who is charged with protecting it. At public companies, cybersecurity must be a recurring item on the board agenda.

Having a board that’s knowledgeable and engaged regarding cybersecurity will help set the tone and instill a culture of accountability.

If third parties share data that you collect, create and vet contracts to confirm those parties have acceptable protections in place. This can make the difference in avoiding liability. Engage knowledgeable counsel in drafting contracts. Have a forensic plan in place to resolve a breach, and a business continuity plan that includes a crisis management professional who is ready to handle the fallout with customers.

There is no magic bullet to prevent data breaches, but good governance and risk management practices will help limit them, and where a breach occurs will help the company survive the aftermath.

By Carrie Penman NAVEX Global

With increasing regulatory oversight of ethics and compliance programs, one of the general counsel’s key focus areas is formalizing compliance-related board relations, ensuring that their boards receive timely information about risk.

Absent clear policies and processes, GCs are likely to find themselves caught in a challenging position between the board and other senior executives. While CEOs prefer to manage the information presented to directors, the directors, under increasing pressure from regulators, are likely to push for more disclosure.

The Office of the Inspector General (OIG) of the Department of Health and Human Services has released guidelines on what boards should do to meet their responsibilities. They are targeted at the health care industry, but are broadly applicable.

Adequate and timely information begins with standardizing communication protocols. Well-documented definitions of compliance roles and responsibilities should be in place, with their boundaries articulated, along with board-approved expectations for cross-functional cooperation and collaboration. Boards should consider engaging outside counsel to avoid putting GCs in an awkward position when directors with legal questions need advice that may run counter to the wishes of the CEO. The OIG guidance could be the start of a trend toward creation of a single, globally applicable guide. We also could see a movement for evaluating compliance programs – and boards – with standardized criteria. Regardless of how these trends develop, boards with the help of the GC can use the latest OIG guidance to their advantage.

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APR / MAY 20 16 TODAY’S GENER AL COUNSEL

Executive Summaries COMPLIANCE

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FEATURES

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Competition Outlook in Key Global Regions

Corruption Risk for Multinationals in India

Court Reporting in the Digital Age

By Bernd Meyring, Nicole Kar, Clara Ingen-Housz, Fay Zhou, Thomas McGrath and Douglas Tween Linklaters LLP

By Vasu B. Muthyala and Joshua L. Ray Kobre & Kim

By Kenneth Zais O’Brien & Levine Court Reporting Services

The European Commission wants wider and more harmonized powers for national competition authorities. Importantly, the UK will vote on its membership in the EU in June. If what’s being called “Brexit” does occur, there will be significant impact on competition law in the UK, including removal of the UK from the “one-stop shop” position in matters of merger control.

The outcome of pending cases in the financial sector before the EC will provide guidance on potential future enforcement priorities and where the Commission will focus resources.

Chinese competition authorities are updating key jurisdictional rules, and this should shorten the merger review timetable. Compliance will remain a focus.

China’s State Council has announced plans to review the Anti-Monopoly Law. Research has also been conducted on whether to create a single competition authority covering both mergers and anti-competitive conduct.

Nearly all the ASEAN countries have now adopted competition laws, and the most recent adoptees will begin drafting rules to support implementation of their laws. In addition to new regimes, existing ones have also undertaken a widespread review of their rules across the region.

In the United States, Federal Trade Commission and Department of Justsice policies on merger remedies have become so strict that there is a risk that difficulty in finding eligible buyers for a set of divested assets could force merging parties to abandon their transactions. Both agencies have been focused on making sure remedies are effective and create a viable competitor.

India’s government has been pushing economic growth by going after foreign investment, lowering barriers to doing business and addressing corruption. However, it will take time before a robust Indian enforcement regime is in place. Meanwhile the U.S. government’s global anti-corruption efforts, through enforcement of the Foreign Corrupt Practices Act, is filling the void.

This summer, for example, a New Jersey based global construction management firm reached a settlement with the DOJ for paying bribes to government officials in the Indian state of Goa. India has consistently been at or near the top of the charts for the number of whistleblower complaints globally. India enacted its own whistleblower statute, the Whistle Blowers Protection Act, in 2011, but unlike Dodd-Frank it applies only to reports about a public servant’s conduct, does not provide a monetary incentive, and has no anti-retaliation provisions.

U.S. regulators’ focus on India is across industry sectors, including manufacturing, infrastructure, energy and consulting. Penalties have ranged from a few hundred thousand dollars to more than $50 million. Companies, when faced with allegations of wrongdoing in India – specifically whistleblower complaints – should have a mechanism in place to hear grievances, acknowledge the complainant and assess allegations. Determine if there is a need for review conducted internally or by outside counsel. Outside counsel should have insight into government enforcement practice, local language capabilities, cultural familiarity and subject matter expertise to help make the very difficult self-disclosure decision.

Court reporting in the digital age is mobile and cloud-based. This changes important aspects of litigation for both outside counsel and the in-house legal department. Depositions and other proceedings are unmoored from a specific conference room, as court reporting adopts elements of streaming technology through computer, tablet or phone.

Legal teams are able to make connections across geographies and time zones as complex multi-jurisdiction litigation and class action cases proceed. In-house attorneys and support staff can confer with litigation teams by logging in securely from computer or tablets.

Because depositions (and other proceedings) can be streamed, electronic exhibits can likewise be introduced, marked and streamed, for access in the deposition room or remotely. Legal team members retain their personal, annotated copies on their devices. Costly, labor-intensive scanning, printing, packing, shipping and toting boxes of paper exhibits is eliminated.

The same paperless deposition technology is suitable for expert witness prep in advance of depositions, arbitrations, hearings or trials. General counsel and designated legal team members can consult remotely with experts to review electronic documents, such as financial statements, medical records, contracts, engineering reports, email exchanges and other key case materials.

As in-house and outside counsel look ahead to trial, the video deposition is searchable. Instead of repeatedly rewinding to pinpoint a statement, it can be isolated by highlighting a keyword to go straight to the reference. Video clips can then be created for settlement meetings or for playback in court.

TODAY’S GENER AL COUNSEL APR / MAY 20 16

Executive Summaries FEATURES PAGE 48

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Law Departments See Regulation as Biggest Challenge

Successor Liability for FCA Violations

Collect Better Data, Not More Data

Consilio LLC

By Tirzah Lollar and Christina Ferma Vinson & Elkins

By Justin Silverman LexisNexis CounselLink

More than half of law departments find that regulatory requirements are their biggest challenge, according to The Consilio Law Department Benchmarking Report. The Consilio report uses data from 119 companies to assess the practices and concerns of law departments.

Many regulatory requirements faced by law departments deal with data privacy and cybersecurity. This relatively new concern affects resource allocation, strategic planning and to some extent hiring practices. Fifty-eight percent of law departments have an internal dataprivacy program (and the data suggests that many more will have one soon), but data also reveals a lack of programs designed to secure information that companies share with vendors. Just 21 percent take these kinds of precautions with information shared externally.

More than 75 percent of companies with over $10 billion in revenue reported using alternative service providers for document review and data processing/ hosting. For companies with between $2 billion and $10 billion in revenue, the figure was 44 percent.

Law department spending continued to increase, but at a lower rate than in the previous survey year, and a majority of respondents reported having preferred provider programs for outside counsel.

Among companies with over $10 billion in revenue, 89 percent reported employing a law department operations manager. This finding supports anecdotal evidence of a trend to manage legal departments as a business unit. Many larger companies are employing a dedicated law department operations manager who guides operational, financial, technical and process support.

Generally in an acquisition the acquiring company assumes the predecessor’s liabilities. The Department of Justice and the SEC devoted several pages to this subject in their joint 2012 publication, A Resource Guide to the U.S. Foreign Corrupt Practices Act. That document warns that “[s]uccessor liability applies to all kinds of civil and criminal liabilities...”

In particular, the variety of ways the False Claims Act is being interpreted and applied must be considered. The False Claims Act applies to a company or individual that makes a false claim to the government. Any company considering an acquisition should first consider whether the target company has any pre-acquisition FCA compliance risk for which the acquiring company could be held liable.

In making that assessment, here are some questions to consider asking about the target company: Does it now or has it ever done business with the federal government? Does it receive federal funding, or is it applying for any?

Does it have any payment obligations to the federal government? For example, does it pay royalties to the government? Is the company involved in any joint ventures or partnerships that involve work with the federal government or federal funding? Has the company ever been investigated for potential violations of the False Claims Act case, and/or has it been the defendant in a False Claims Act case?

If the answer is “yes,” to any of these questions, the acquiring company should conduct additional due diligence to assess the risk.

Corporate legal departments need to collect and analyze data, but overambitious data collection can derail projects.

The “more is better” approach presents a number of obstacles to getting traction with implementation of an enterprise legal management (ELM) system.

Capturing data is time intensive.

Just the sight of all the data fields in the user interface will discourage attorneys and other members of the legal department from feeling good about using the system and tempt them not to enter any data at all.

Added complexity is likely to make it more difficult to manage the system and analyze the data collected. The critical objective for improving legal department operations is to collect the right data to drive better legal outcomes.

Focus on information that has significant business value based on the complexity and importance of the matter, and then enforce the data collection policy that garners that information.

Determine how the data could drive decision-making.

The level of detail needed will vary.

Who will be receiving the information?

How will it be used? Data analytics professionals from inside or outside the organization can be helpful in determining collection requirements unique to your department.

Becoming a data driven legal department does not happen overnight. Legal departments mature over time with regard to their collection and analysis of information. It should be a process with discrete stages and a clear roadmap.

Begin with a baseline set of data, then make adjustments over time.

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Executive Summaries features

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Litigation Guidelines Shouldn’t Undercut Policyholder

Case Provides Blueprint for Controlling Liability

Trends in Canadian M&A

By Catherine J. Serafin Lowenstein Sandler LLP

By Abby L. Sacunas Cozen O’Connor

Insurers often insist that counsel representing the policyholder follow the insurer’s litigation management guidelines.

But some guidelines have the potential to impair a lawyer’s independent professional judgment and implicate violations of ethical rules. Other guidelines have the potential to impermissibly interfere with a lawyer’s duties of loyalty.

Problematic guidelines may include restrictions on the use of experts and other third-party vendors; refusal to compensate for work on motions unless the claim handler believes the motion has a 50 percent or greater chance of success; and the requirement for prior approval by the claim handler for appeals, jury demands and the decision to mediate.

The ABA Standing Committee on Ethics and Professional Responsibility and many state bar associations have issued opinions regarding these or similar litigation management guidelines.

Unfortunately the remedy suggested by most bar associations is for the lawyer to withdraw, but that’s not satisfactory.

It can’t be unethical for one lawyer but ethical for another to follow a particular guideline. The policyholder is effectively left without counsel.

There are some practical steps to help insure defense counsel will effectively and zealously represent the policyholder.

One is simply to ask the insurer to strike problematic guidelines. The insurance company may be willing to substitute the policyholder’s guidelines for a matter; if the claim handler refuses, speak to a supervisor. Another strategy would be to address the issue of guidelines at the time of policy inception or renewal.

The Seventh Circuit’s decision in Thornton v. M7 Aerospace, LP serves as a reminder to companies that purchase or succeed to assets of a product manufacturer that liability may follow if they do not act on a fully informed basis to protect themselves.

Thornton arose out of a plane crash in which fifteen people died. The estates of the deceased sued several companies and one individual in the Northern District of Illinois. The companies had successively purchased the assets of the plane’s bankrupt manufacturer. Plaintiffs argued duty-to-warn and voluntary undertaking.

The Seventh Circuit upheld a trial court’s decision for the defendants: Some jurisdictions impose a duty of care on a successor based solely on its acquisition and operation of a product line, but Illinois does not, and Illinois law was applicable.

Plaintiffs had no more success arguing that a duty to warn arose under the voluntary undertaking theory, because Illinois law requires proof of reliance – that is, proof that the operator relied on the defendant’s voluntary undertaking of a duty to warn.

The author provides some key takeaways, including the importance of choice of law. Application of Illinois law was critical to the Thornton decision, and the fact it was specifically referenced in the Asset Purchase Agreement was crucial.

The manufacturer’s assets were acquired free and clear of any claims according to the Asset Purchase Agreement. This played a key role in determining the scope of successor liability.

By Jamie Koumanakos Blake, Cassels & Graydon LLP

A strong year-end bolstered Canadian M&A activity into 2016, making last year the most active year in Canadian dealmaking since 2007. The year got off to a robust start, with overall Canadian M&A deal values reportedly increasing by 154 percent over the same period in 2015. Going forward, the depressed Canadian dollar could operate to reduce valuations of Canadian-based target companies.

Trends this year may be shaped by a change in government. Newly-elected Liberals ran on campaign promises of more public support for renewable energy, increased taxes on high-income earners and planned deficit spending for three years to spur economic growth.

One impact may be a boost to the renewable energy sector. The government has stated its commitment to phase out fossil fuel subsidies, speed the approval process for energy projects and implement new climate change regulation. In addition, with government spending on infrastructure poised to increase by C$5 billion annually, investors will look to capitalize on new Canadian projects.

In 2015, direct investments by Canadian pension funds were made in a variety of industries, and this kind of direct deal activity should continue and perhaps increase in 2016.

For the first time in recent memory, the energy sector was dethroned in 2015 as the most active in M&A (in terms of deal value). Nevertheless, market participants expect this year to be robust in energy M&A, as both strategic and financial acquirers take advantage of undervalued Canadian assets.

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apr / may 20 16 today’s gener al counsel

E-Discovery

Experts Predict Future of E-Discovery

By Jim Gill

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obel prize winning physicist Niels Bohr once said, “Prediction is very difficult, especially if it’s about the future.” When something is difficult, you seek out the best and brightest of the field, so Exterro asked six e-discovery experts, with a combined 80-plus years of industry experience, for their predictions on

what might lie ahead. Here’s what they had to say.

A CHANGING DATA LANDSCAPE

New types of data are a big topic right now in e-discovery, and two of our experts had predictions about it.

“The character and composition of e-discovery data is changing and will

move beyond email and current productivity applications, such as the MS Office suite and PDF,” says Dera Nevin, Director, E-Discovery Services at Proskauer Rose. “The younger demographic has turned to texting and instant messaging, often through multiple simultaneous channels, and prevailing data will include text, video, audio, social media,

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E-Discovery

and new metadata structures within the same data artifact. The underlying shift in the data will require new tools and methods to preserve, retrieve and search and review these data types.

“While enterprise technology lags consumer applications, corporations are moving to structured systems for business information and business communications; we also see movement to the Cloud,” Nevin says. “Enterprises are also starting to invest in collaboration systems which re-imagine what documents look like. Instead of multiple versions of one document passed between employees via email, now multiple persons can work on the same document simultaneously, their unique contributions captured in metadata associated with the single document.

“Companies may mitigate the risks associated with discovery of text messaging, including Bring Your Own Device policies, implementing ‘sandboxes’ – separate spaces for work apps – on employees’ mobile devices, and requiring the use of enterprise texting apps that are journaled or backed up onto company servers.”

LEVERAGING FRCP AMENDMENTS

Not surprisingly, we had multiple predictions about the new Federal Rules of Civil Procedure amendments and how e-discovery practitioners can leverage them to their advantage.

Christopher Costello, Senior EDiscovery Attorney at Winston & Strawn, foresees a trend of attempting to “understand and apply proportionality

Rule 26(b)(1) factors intentionally leave many areas open to debate, requiring a case-by-case analysis of the factors in a given situation. This will require parties and courts to explore how best to apply proportionality to the case at hand, and will inevitably lead to disputes. Hopefully, as courts and parties become more familiar with proportionality analyses, those disputes will diminish. But in the meantime, I expect parties to litigate these issues.”

Bennett Borden, Chief Data Scientist, Drinker Biddle & Reath LLP, notes that the FRCP amendments “have the potential to provide significant strategic advantages to lawyers who know how to leverage them. The near future will be dominated by those who are first able to take advantage of these amendments.”

The underlying shift in the data will require new tools and methods to preserve, retrieve and search and review these data types.

Our search and review tools will need to adapt to this evolution in personal and business data.”

Gareth Evans, Partner & Chair of the E-Discovery Practice Group, Gibson Dunn, agrees that “text messaging and mobile devices are shaping up to be the new frontier in e-discovery. Relevant text messages are now more commonly sought in governmental and other investigations, and are occasionally at issue in civil litigation.

“Text messages sent and received on mobile device apps may feature an even greater degree of casual banter than emails,” Evans notes. “Users may engage in such casual communication assuming that their messages are ‘off the radar’ because they are not going through company servers. Text messaging apps often store messages in databases on the mobile device, however, and deleted messages may still be extracted, though it can be expensive and difficult to do so, and such deleted messages are generally considered to be inaccessible.

to the scope of discovery, especially as it relates to the overwhelming growth of ESI. Federal Rule of Civil Procedure 26(b)(1) is being amended to limit the scope of discovery to that which is both relevant to the claims and defenses at issue and proportional to the needs of the case.

“This amendment is due in part to the overwhelming growth in the volume of ESI that is potentially subject to discovery. Although the concept of proportionality has been present in the Federal Rules since 1983, within the last five years more attention has been paid to its role in structuring discovery.

“With the amended language, proportionality determinations are now front and center in any discussion by the parties themselves or with the court, about the scope of discovery,” Costello says. “Similarly, Rule 37(e)’s focus on preservation efforts will result in analyses regarding whether a party took reasonable steps to preserve documents. The same proportionality factors will be used to determine what is reasonable. The

Specifically, he lays out three “avenues of advantage” that legal can use in light of the these changes.

The first involves taking early initiative in the case. “The ability to serve Rule 34 requests within 21 days of the service of the complaint and well before the 26(f) conference allows a party to largely define what the case is about.

Requests for production frame the issues, and the included instructions and definitions frame the parameters of an eventual ESI protocol. Astute lawyers will use the new Rule 26(d)(2) to take the initiative.”

The second involves significantly reducing the volume, and the associated burden, of preserved data. “The narrowed scope of discovery defined in the new Rule 26(b)(1) can drastically reduce the burden of e-discovery, especially regarding preservation,” Borden says. “Under the current Rules, the scope of discovery is defined broadly, and then a portion of that scope is excepted out through the proportionality continued on page 23

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apr / may 20 16 today’s gener al counsel

E-Discovery

Cloud Enables Law Department Control of E-Discovery

By Monica Enand

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016 is the year that the cloud becomes mainstream for corporations. Security fears have been allayed and the cost and accessibility advantages have brought increasing amounts of corporate data into cloud repositories and systems. This is exemplified by corporations’ rapid adoption of cloud-based systems like Microsoft Office 365, Dropbox, Box and AWS for mission-critical business data.

From an e-discovery perspective, corporations now need to find costeffective and efficient ways to collect, process and manage the data from these new sources. It may sound paradoxical, but the answer to this problem of new data sources in the cloud is likely to be found - yes - in the cloud. In fact the cloud makes possible a new paradigm

for e-discovery management, empowering legal teams to seize control, streamline processes, reduce investment in infrastructure and be ready to rapidly respond to matters of any size.

Corporate legal departments have long wanted to insource e-discovery, in order to improve control over processes and stem runaway costs. A 2015 Thompson Reuters study focusing on legal department insourcing and efficiency found that 94 percent of corporate counsel rate cost as a frustrating aspect of e-discovery. According to that same study, 79 percent say they’re becoming less reliant on outside resources and redirecting the work in-house, as they seek to regain control and save money.

Despite some efforts to adopt onpremise solutions, e-discovery remains

frustrating. In addition to the expense, corporate legal departments find e-discovery increasingly time-consuming and complex, in large part because of another relentless trend: massive data growth.

According to the 2014 IDC Digital Universe study, corporations are facing ever-increasing volumes of digital data in a variety of formats, including mobile, cloud, video, data tracking and Internet of Things (IoT) – and it’s forecast to grow five times by 2020.

To date, increasing efficiency and cost-savings via insourcing has been an elusive goal for corporate legal departments. Existing solutions are hard to use, slow to implement and costly to deploy. Take the example of technologyassisted review (TAR), which was widely lauded as the preferred way to manage massive amounts of data. The fact is, counsel have not embraced it. In a Bloomberg BNA article, Tom Barnett, special counsel of e-discovery and data science at Paul Hastings, commented that predictive coding “is a complex technology that requires a large capital and resource investment. Employing someone who has the expertise to use predictive coding efficiently only makes sense for companies with sufficient volume of litigation to keep that person busy.”

Another factor that challenges the economics of insourcing with on-premise solutions is the issue of right-sizing investment to changing needs. Traditionally, on-premise tools

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E-Discovery

were designed with a fixed capacity. In practice, this meant corporate departments would invest in a solution with finite limits on the amount of data it could manage and the speed at which it could process the data. If capacity and computing power match up with litigation volume, then all is well. But if your litigation volume suddenly exceeds capacity, it becomes too costly and time-consuming to add resources.

Then your team is faced with two choices: either outsource e-discovery, which is expensive, or process the

cient, it often encounters resistance and is difficult to implement. Fortunately, the economy, simplicity and speed of true-cloud solutions can ease the fear and pains associated with insourcing e-discovery and make it achievable for organizations of any size to incrementally bring more work in house.

There are three factors that make it easier for organizations to get started insourcing e-discovery. First, true-cloud software is available as a subscriptionbased operational expense that is affordable and predictable, so it is easy

manage e-discovery. Corporate counsel gain instant access to their discovery data. Anybody on the team, regardless of technical prowess, can drag and drop data in the system for a quick peek, allowing for instant early insights into the merits of any matter.

The ability of corporate legal teams to know what the data holds in hours instead of weeks is already proving gamechanging for organizations. It means that legal teams can rapidly evaluate the strength of their case in order to determine their most advantageous strategy,

Increasing efficiency and cost-savings via e-discovery insourcing has been an elusive goal for corporate legal departments. information in batches, which is slow.

Neither choice is efficient or affordable.

Alternatively, if your litigation volume is significantly less than capacity, then you’re wasting your investment by spending money for solutions that go unused and you may also be investing in special personnel to support it.

Corporate legal departments are finding that complex, hard-to-use tools are rapidly becoming obsolete industrywide, and the market is demanding easier to use and more flexible alternatives.

Just as corporations have turned to the cloud to securely manage increasingly voluminous and complex data more efficiently and securely, legal departments should now look to the cloud for solutions that provide more cost-effective approaches to e-discovery and have the scalability to meet ever-growing future needs. As Gartner advises, in the 2015 report on critical capabilities for e-discovery software: “Digital data growth pushes more data through each stage of the e-discovery process.

In some cases, it breaks the threshold of technology capacity. To be able to scale, especially during the collection and processing stages, is increasingly important.”

Surprisingly, even when change promises to save an organization time and money, and make a team more effi-

for departments to implement without having to undergo a lengthy procurement process involving large capital expenditures.

Second, cloud-based software can be deployed quickly and requires little to no support from IT. Finally, cloud software is typically designed to be used in a simple, web-based interface, and is generally so intuitive that anybody can use it regardless of technology experience.

Because of these factors, many corporations are now testing the waters of insourcing e-discovery, starting with relatively simple, routine tasks such as internal investigations, contracts and employment matters. Since these are high-frequency matters with relatively lower risk, they make great test cases.

Saving money and improving efficiency in these areas will help companies build confidence that they can indeed insource more e-discovery tasks that will quickly deliver a return on investment.

As teams gain experience and proficiency, the goal of insourcing much of the litigation portfolio will become a reality and organizations will be able to significantly decrease their reliance on outside vendors and the costs they represent.

With cloud software, the industry enters a transformational age that will forever alter the way legal departments

before investing huge sums in processing and reviewing large volumes of additional data.

Given the growing complexity of data and increasing pressure to meet management goals, the cloud has become corporate legal’s new best practice for reducing waste across the entire discovery process, enabling teams to improve efficiency and overall outcomes through insourcing. ■

Monica Enand is the founder and CEO of Zapproved, a leading cloud-based e-discovery software provider for corporate legal departments.

Prior to founding Zapproved she had over 15 years with blue-chip companies, including Intel and IBM. She is a frequent speaker and active member in the entrepreneurial community in Portland, where she serves on several boards, including the Oregon Growth Board, the Technology Association of Oregon, and Bellevue, WA.-based Auth0. monica@zapproved.com

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apr / may 20 16 today’s gener al counsel

Intellectual Property

Fundamentals of Protecting Patents Overseas

By Joel Felber

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ecuring patent protection in foreign countries is an effective but often overlooked means to further a company’s business objective.

The territorial nature of patent protection necessitates consideration of foreign patent rights, including a benefitcost analysis of foreign patent filing options. The benefits of foreign market exclusivity, foreign-based licensing revenue, cross-licensing opportunities and other interests affecting competitors in foreign countries needs to be balanced against financial costs and time and

effort required to address many varied and nuanced foreign patent laws.

Particular consideration needs to be given to strict timing requirements imposed by patent offices around the world, in order to avoid inadvertent and permanent loss of rights. An internal review should be conducted to ascertain dates of any public disclosure or use of inventions in business, as well as dates associated with various pending or future domestic patent matters.

Companies often consider foreign patent protection only for a specific

product or service being made or used, but a competitor’s patent portfolio as a potential threat to a company’s product/ service line should not be overlooked.

An effective defense to such a threat can be a patent portfolio that includes foreign protection covering a competitor’s possible future development plans or otherwise unpatented areas in the business space. Your company should investigate whether the competitor has a strong presence in one or more foreign countries and consider applying for patent protection there.

today’s gener al counsel apr / may 20 16

Intellectual Property For example, consider where a competitor generates most revenue and where its operations are headquartered.

Patents secured in such areas can be used to block the competitor or to secure foreign-based license royalties. Significant licensing revenue from competitors in foreign markets, even in areas where your company has no plans to compete, can be useful to offset competitors’ investments in the same or similar business space. At the same time, cross-licensing foreign patents that cover the competitor’s product(s) or service(s) can be used

a foreign market present a competitor with a business opportunity to establish a new and unfettered business presence?

Even where your company has no plans to compete, foreign filing strategies need to be considered, and with a careful eye toward strict timing deadlines.

With hundreds of countries to consider for foreign patent protection, companies often prefer to defer specific country decisions by filing a single international Patent Cooperation Treaty (PCT) patent application. The PCT patent application is a patent filing that is a useful option

time delays associated with the PCT patent application may be unnecessary and focusing patent prosecution efforts in just one or two countries may be preferable.

Another alternative is to file a single foreign patent application in a regional patent office that covers a number of individual countries. For example, a single patent application can be filed in the European Patent Organization (EPO), the African Intellectual Property Organization, the Eurasian Patent Organization or the Office for Harmonization in the

Significant licensing revenue from competitors in foreign markets, even in areas where your company has no plans to compete, can be useful to offset competitors’ investments in the same or similar business space.

to combat a present or future threat of patent infringement brought against your company by a competitor here at home.

Procedurally and in a typical case, a domestic patent application covering a company’s product or service is filed in the United States prior to applying for foreign patent protection. The U.S. filing date sets a one-year deadline to foreign-file and claim the benefit of priority to the U.S. application. Although U.S. patent law provides for a one-year grace period to file for patent protection following the date of a public disclosure, such as a demonstration at a trade show, much of the rest of the world does not. In order to preserve foreign patent rights, your company should file for patent protection prior to any public disclosure of an invention.

Your company should consider foreign markets of interest, at least during the one-year time period from filing a U.S. patent application. Are there any countries that yield present or possible future sales? Where are your company’s current or potential competitors located or heavily invested? Is your company investing in foreign-based technology?

Would your lack of patent protection in

to delay the need to file patent applications in most industrialized countries for up to 30 or 31 months from a respective priority date.

PCT patent applications also streamline future national filings in countries around the world. A PCT patent application is often essentially a refiling of a previously filed national application, which obviates significant legal costs beyond government filing fees. A PCT patent application is searched and examined, and a formal opinion of patentability is reported to the applicant. A negative opinion can be challenged by the applicant by amending claims and/or arguing in favor of patentability in order to obtain a new favorable report.

Even with a favorable outcome, no international patent is granted from the PCT patent application. Subsequent “national phase” filings in individual countries are needed to pursue foreign protection that claim back to the PCT patent application.

In a case where a company decides that it can file a patent application only in one or two foreign countries, the PCT patent application may not be a costeffective option. The financial costs and

Internal Market (OHIM) to preserve patent rights in several member countries.

A patent application that is deemed to be in condition for allowance in a regional office usually requires additional costs and legal processes. For example, a granted EPO patent application must be “validated” in the respective member countries, which extends the patent into those countries. Validation must occur shortly after a notice of allowance, and validation costs can be significant depending on the number of countries where an applicant wishes to extend.

Fairly recently the United States and countries around the world have moved toward patent law harmonization. One legal development is the formation of the Patent Prosecution Highway, or “PPH.” Its basic premise is that a favorable decision of patentability obtained in a patent office of first filing (e.g., the European Patent Office) can be used to advance a corresponding patent application out of turn in an office of second filing (e.g., the U.S. Patent Office). The office of second filing can utilize the search and examination results of the first, avoiding duplication of work and expediting examination.

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apr / may 20 16 today’s gener al counsel

Intellectual Property Allowance rates in U.S. patent applications filed using the Patent Prosecution Highway are higher than in non-PPH cases, and prosecution costs are often lower. Your company should consider filing a patent application under the Patent Prosecution Highway to expedite and reduce costs in the United States after a corresponding PCT or national patent

language translation requirements for individual European countries.

Recent European regulations also provide for a unitary patent court (UPC) that will be established for, among other things, challenging patents in new streamlined post-grant proceedings. A transition period for implementing the unitary patent and unitary patent court

considering securing patent protection for a technology in a country or region that is reputed to reject applications directed to that technology, it is desirable to obtain an opinion from local foreign counsel regarding filing strategies that might take into account recent decisions in that country’s courts and/or patent office.

Although U.S. patent law provides for a one-year grace period to file for patent protection following the date of a public disclosure, such as a demonstration at a trade show, much of the rest of the world does not.

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application in a foreign patent office has received a favorable outcome.

Since May of 2015, patent offices around the world, including in the United States, Europe, Korea and Japan, have been accepting standardized international design applications (IDAs) that cover protection for ornamental or aesthetic aspects of the shape of an article. Twodimensional features on the surface of an article are also covered by an IDA. International design applications are authorized under a recent Hague Agreement, and IDAs are transmitted to and processed by certain Hague member countries around the world. A single IDA can include up to one hundred designs. Other advantages of IDAs include a single filing fee, one set of designation fees and centralized renewal fees.

Unlike U.S. design patent applications, IDAs are published, and local foreign patent laws may result in national offices refusing protection. Your company should consider the benefits and drawbacks associated with filing IDAs under the Hague Agreement.

Another recent foreign patent law development regards recent regulations that will provide for a new type of patent that has a unitary effect in the European Union, commonly known as the “unitary patent.” The unitary patent will provide an alternative to validation requirements of individual countries and eliminate

is expected to begin during the middle of 2016. Your company should consider the new protection and enforcement options in accordance with the new unitary patent and UPC in Europe.

A company’s consideration of foreign patent protection necessarily weighs financial costs and the likelihood of successful outcomes. Long-term budgeting for foreign patent protection can easily include over $10,000 per country, and fees for a single EPO patent application can exceed that amount, depending on the size and number of patent claims.

Other foreign patent application fees include annuities that often increase each year and are incurred during an application’s pendency, sometimes for years before an application even gets examined. Other costs include fees for requesting examination, fees for legal services during patent prosecution, national validation fees and language translation fees.

Furthermore, a favorable outcome in one country does not guarantee a similar outcome in another foreign patent office. Each patent office has its own criteria regarding application format, subject matter eligibility, novelty and obviousness, and foreign patent offices often disagree with a conclusion from the U.S. Patent Office that a claimed invention is eligible for patent protection. In the case where a company is

A strategic view of your company’s current intellectual property assets, present and future business objectives, and current and potential competition, should include a close look at options for foreign patent protection and enforceability. That could prove to be an extremely effective way of furthering your company’s objectives. ■

Joel Felber is a partner at Leason Ellis, where his practice is focused on domestic and international intellectual property protection, particularly with regard to computing hardware and software technologies. He assists clients in protecting and leveraging their inventions and related intellectual property by procuring utility patents, design patents, copyright and trademark registrations, as well as by negotiating and drafting legal agreements. Prior to practicing law, his career in industry included computer programming and software development.

Felber@leasonellis.com

today’s gener al counsel apr / may 20 16

E-Discovery

E-Discovery Predictions continued from page 17

factors. Under the new Rule, disproportional discovery is never within the scope of discovery in the first place. If it isn’t in the scope of discovery, then there is no need to preserve it.”

Finally, he notes that rule 37, as amended, “greatly reduces the likelihood of e-discovery related sanctions.

Currently, when a party fails to preserve information it had a duty to preserve, the court looks to their level of culpability in determining whether and what sanctions to apply. Under the amended

redundant, obsolete, and trivial (ROT) data. Whether it is old email archives and PSTs, backup tapes, data from legacy systems, or even those thousands of boxes of old hard copy documents gathering dust (and continuing to rack up bills) in the document warehouse, more companies are recognizing that there can be a significant return on investment, and significant risk reduction, in remediating ROT data.

“One of the biggest impediments to remediation,” Cohen notes, “has been over-preservation for legal holds, but most of that data is irrelevant, and effectively inaccessible anyway due to

motion, such as a motion to dismiss or for summary judgment. With the ability now to use e-discovery applications in cloud environments, processes for data in some cases can be completed for as little as $20-30 per gigabyte. This is a gamechanger. It means that we can collect and analyze the data at the very beginning of the case, before discovery demands are served, and use that data offensively to help win either a dispositive motion or a more favorable settlement.”

The message these experts are conveying is: Get ahead of the game and don’t wait until it’s too late. Clear out redundant, obsolete and trivial data to enable

The ability to serve Rule 34 requests within 21 days of service of complaint and well before the 26(f) conference allows a party to largely define what the case is about.

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Rule 37, the culpability of the party has no bearing other than in cases where information was destroyed with the intent of depriving the other party of access. Instead, the entire analysis hinges on whether the loss of information prejudiced another party, and proving prejudice is a difficult thing to do.

“This will significantly decrease the number and severity of sanctions,” Borden says. “It will be interesting to see how the interplay between amended Rule 26(b)(1) and the new Rule 37 effects discovery.”

DEFENSIBLE DELETION

When it comes to the “keep everything” strategy of e-discovery, Bill Piwonka, Chief Marketing Officer at Exterro, points out that “the notion that all data will (or could be) useful sometime in the future ignores reality.”

David Cohen, Practice Group Leader, Records & E-Discovery Group at Reed Smith LLP, agrees. He predicts that many companies will soon “take action to remediate large portions of

inconsistent indexing and prohibitive restoration and/ or searching costs. The continued explosion of data, companies moving or contemplating moving email and other systems to the cloud, growing attention to limiting data breach exposure and continued corporate focus on cutting costs, are all helping to drive data remediation interest.”

precision e-discovery. Keep abreast of the changing data landscape with the latest review and collection tools. Understand the new FRCP Amendments and their effects, and take advantage of significantly reduced e-discovery pricing by upping your project efficiency with integrated processes. If you find yourself unprepared, don’t say you weren’t warned. ■

SIGNIFICANTLY REDUCED PRICING

It’s been estimated that 60 percent of corporate legal costs come from discovery, and there’s no doubt that lowering those costs is one of the driving forces in the future of e-discovery.

Anne Kersaw, Principal, Knowledge Strategy Solutions LLC, predicts that one of the most pronounced trends in e-discovery will be “significantly reduced pricing, allowing for earlier discovery for dispositive motions and settlement negotiations.

“Historically,” she says, “as discovery volumes and costs mushroomed, discovery was deferred until it became clear that the case wasn’t going to settle or be resolved through a win on a dispositive

Jim Gill is the Content Marketing Manager at Exterro. Prior to joining Exterro, he taught writing and worked as an editor. He holds an MFA in Creative Writing from Southern Illinois University, Carbondale, and has published fiction, non-fiction, and poetry in numerous national literary journals. jim.gill@exterro.com

apr / may 20 16 today’s gener al counsel

Cybersecurity

Cybersecurity Concerns for ERISA Fiduciaries

By Patrick Rehfield and Saghi Fattahian

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T

he F.B.I. now ranks cybercrime as one of its top law enforcement priorities, and President Obama’s proposed budget would sharply increase spending on cyber security, to $14 billion.

Not only is personally identifiable information and data accessible with the click of a mouse, it’s transportable via applications on smart phones, tablets and laptops. The more immediate and available personal data becomes, the

greater the risk for a potential breach or unauthorized disclosure or access, as is evident from the cyber attacks on major retail operations, health care providers and the government.

PLAN ASSETS AND PERSONAL DATA

Pension plans and welfare plans all store personal data on each participant and beneficiary, ranging from social security numbers and addresses to date of birth

and health information. Not only does the plan sponsor have access to personal confidential data, but so do the participant and beneficiary, the third party service provider, and other vendors such as IT providers and data storage companies.

The technology platform where this personal data resides is increasingly complex, with more and more data being stored in the cloud and accessed

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Cybersecurity

remotely. While ERISA does not define the term “plan assets,” the broadest definition contemplates something of value. What cyber attackers are seeking to steal is not just plan assets, but also personal data and an individual’s identity, which may be of higher value than plan assets. the eRISA ADVISORY COUNCIL

While cyber crime has made headlines over the last few years, this is not a new issue for ERISA fiduciaries. In 2011, the Department of Labor’s ERISA Advisory Council began looking at cybersecurity issues in the context of maintaining privacy and security around employee benefit plans. It identified identity theft and loss of plan assets as a major concern, caused in part by a lack of rigorous cybersecurity policies and procedures.

of personal identifiable information, and also include notification requirements where there has been a breach or an unauthorized use or disclosure.

These laws generally mirror the privacy and security requirements imposed on personal health information under the Health Insurance Portability and Accountability Act of 1996.

HIPAA., as amended, establishes privacy and security measures that group health plans must impose to protect individually identifiable health information (PHI), including a notification scheme when there has been a breach of PHI. Under HIPAA, group health plans have been required to implement privacy and security measure on protected health information that they store for over a decade. HIPAA also contains

Plan fiduciaries should also review their record keeping to ensure they have proper procedures in case of breach or investigation, possibly using the privacy and security rules under HIPAA as a benchmark.

When establishing cybersecurity procedures, plan fiduciaries and plan sponsors should consider the type of data they store along with plan assets, and impose privacy and security measures on all third party vendors that have access to the plan’s data. They should also consider educating and training all personnel who have access to plan data.

Finally, it should be noted that if the DOL does not act in this area, ERISA plan fiduciaries may be required to implement cybersecurity initiatives as a result of SEC regulations on investment managers. ■

Cyber attackers are not just seeking plan assets, but also personal data and an individual’s identity, which may be of higher value.

The ERISA Advisory Council recommended that the DOL provide guidance on the obligation of plan fiduciaries to secure and keep private the personal identifiable information of participants and beneficiaries, and to develop educational materials and provide outreach for plan sponsors, participants and beneficiaries.

Notwithstanding the Advisory Council’s recommendations, there currently is no comprehensive federal law governing cybersecurity. While there are federal laws that govern the collection and use of financial information, such as the Gramm-Leach-Bliley Act, Fair Credit Reporting Act and the Fair and Accurate Credit Transactions, these laws govern transactions in the financial industry and do not apply to ERISA plans or the protection of personal identifiable information with respect to those plans.

In addition to these federal laws, most states have instituted privacy and security laws that address the protection

a comprehensive breach notification structure in situations where there has been a cyber attack or impermissible use or disclosure of protected health information to impacted individuals, the Department of Health and Human Services and the media.

DOL GUIDANCe FOR FIDUCIARIeS

Guidance from the DOL will undoubtedly be driven first by a determination as to whether cybersecurity is deemed to be a fiduciary function. In the absence of such guidance, plan fiduciaries may want to consider establishing prudent practices and procedures for securing personal identifiable information, including information “at rest” (data stored on computers, on storage devices or being used by the data owner) and information in motion (data transmitted across a network, such as email). These procedures may extend to third party service providers through administrative services agreements.

Patrick Rehfield is a partner at Morgan Lewis.

He focuses on matters related to executive compensation, payroll tax and employee fringe benefits.

He advises private and public companies regarding non-qualified retirement plans, equity compensation plans and executive compensation arrangements, and counsels publicly traded companies on reporting and compliance matters involving the SEC. prehfield@morganlewis.com

Saghi (Sage) Fattahian is an associate at Morgan Lewis.

She counsels clients on health and welfare plans, and works with clients to comply with requirements under the U.S. Internal Revenue Code, ERISA, ACA, COBRA and HIPAA. sage.fattahian@morganlewis.com

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apr / may 20 16 today’s gener al counsel

Cybersecurity

Cybersecurity is a Governance and Risk Management Issue

By Peter A. Sullivan and Christopher E. Hart

C

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ompanies have begun to see the issue of cybersecurity as part of a larger compliance and integrity program, rather than shunting it to the IT department today and litigation counsel tomorrow. In the face of numerous major data breaches, with significant financial losses to the companies exposed, executives and corporate boards are now treating cybersecurity as a governance and risk management issue. Treating cybersecurity in this way means addressing it as you do other risks, examining it carefully and responding appropriately.

The nature of the data at risk must be understood by considering what data the company has, how it is used, who in the company uses it, who sees and manages it and how it is stored. The risk is heavily dependent on the company’s business. The scope of the risk for a large national retailer, which processes point-of-sale personal credit card information from customers in hundreds of stores, will be different from that of a start-up IT services company operating in a single state with local corporate customers.

Nevertheless, there are general principles that would serve all types of companies well. Here are six widely applicable best practices for managing cybersecurity in the workplace: 1. Know your data. What data does your company collect, use, manage and discard? How is it collected, stored and maintained? Who has access to it?

Answering these questions requires a patient and thorough assessment of the data landscape.

The answers are highly relevant in assessing liability, in the event data is compromised. For example, if your company provides lines of credit to customers nationwide, you might be

subject to both state data privacy laws and federal laws governing companies that provide consumer financing. Public companies must also be concerned with federal SEC regulations and enforcement, and companies dealing with health care or patient information will be subject to the federal HIPAA law and state laws governing such information.

Even small private companies that do not collect, maintain or use personal data from customers must concern themselves with the consequences of a data breach.

2. Create lines of oversight and accountability. Once the data is known, be clear on who is going to be charged with protecting it. Until recently, a common way to handle the data protection question was to give that responsibility to the chief technology officer, who managed the company’s technology infrastructure as well as IT staffing. The upside of allocating responsibility to the CTO is that he or she will have a good understanding of the nature of the data and how it’s processed and stored.

Cybersecurity needs to be a recurring item on the agenda of public company boards in the same way that safety is.

Trade secrets, for example, might be at stake. Smart and thorough data mapping will identify where trade secret information, as well as proprietary customer data, reside. Also, remember that company data invariably includes employee data, which is as sensitive as customer data. It’s important to understand how employee data too is collected, stored and maintained.

Knowing your data does not mean simply assigning someone in HR or IT the task of creating a data map and filing it away. It means conducting regular audits of the type of data that is collected and maintained, and knowing where, physically, it’s kept and who has access to it. It also means knowing when it can be discarded, and how.

Knowing your data is the first step in managing the risks associated with that data.

In practice, however, this is usually not an effective allocation of responsibility.

The responsibilities of a CTO are typically so broad that cybersecurity might not get the full attention that it deserves.

For that reason, some companies have established a specific cybersecurity officer as an executive position, with responsibilities separate from the maintenance of IT infrastructure and staffing. With a separate cybersecurity officer position, there must be close coordination with the CTO. The right balance will depend on the specific needs of the company.

Cybersecurity also needs to be a recurring item on the agenda of public company boards in the same way that safety is. Having a board knowledgeable about cybersecurity will help set the tone at the top and instill a culture of accountability in this area. continued on page 39

today’s gener al counsel apr / may 20 16

Cybersecurity

27

apr / may 20 16 today’s gener al counsel

Compliance

New Guidelines for Board Oversight of Ethics and Compliance

By Carrie Penman

28

W

ith increasing regulatory oversight of ethics and compliance programs, one of the general counsel’s key focus areas is now formalizing compliance-related board relations, including communications, reporting and training. In particular, GCs need to ensure that their boards receive timely information about areas of risk and concern.

Absent clear policies and processes, GCs are more likely to find themselves caught in a challenging position between board and other senior executives. While CEOs and their teams generally prefer to manage the information presented to directors, directors themselves are now likely to push for more disclosure, as they feel increasing oversight pressure from regulators.

Here are six recommendations to help manage this tension, and to assist board members in meeting their oversight obligations: 1. Start with the latest regulatory guidance on board oversight.

Practical guidance on what boards should

do to meet their oversight responsibilities had been incomplete at best, until recently. Specifically, the Office of the Inspector General (OIG) of the Department of Health and Human Services has released board guidelines. They are targeted at the health care industry, but are broadly applicable to all industries.

The Bank of England Prudential Regulation Authority took similar action last year.

Taken together, these new requirements may be signaling a new global trend, as part of the broader movement to hold ethics and compliance programs (and organizations) to more uniform and comprehensive standards. We encourage organizations to share and discuss this new guidance with the board, or the board oversight committee that has been delegated oversight responsibility.

2. Have a clear plan and process for board communication on compliance issues.

Making sure directors receive adequate and timely information begins with standardizing communication protocols.

This can be an area of friction between the board and executive leadership. Every company should implement mandatory escalation policies, detailing what should be raised to the board, and when.

For example, in situations involving significant risk to the company’s reputation, serious financial concerns or allegations against senior executives, the chair of the committee that oversees the ethics and compliance program (usually the audit committee) should be notified within 24-48 hours of the allegation, before the internal investigation begins. This process protects both the GC and the board from executive pressure to delay notifications It’s best to define what should be reported, and when, before there is a problem, in order to avoid having to debate in the middle of an issue.

3. Keep in mind that successfully “managing up” requires defined and well-functioning roles and relationships across the leadership team.

As the guidance underscores, while compliance may be the name of a function within the organization, compliance is actually the responsibility of everyone who works there. Per the OIG guidance, the major functions that shape the program and play a key role in its operation are compliance, audit, legal, human resources and line management.

According to the guidance, the board should ask questions to understand and oversee the effectiveness of these roles and relationships with respect to their compliance-related activities.

Well-documented definitions of compliance roles and responsibilities should be in place, with their boundaries articulated, along with board-approved expectations for cross-functional cooperation and collaboration on relevant compliance matters. Management at all levels should be familiar with the requirements

today’s gener al counsel apr / may 20 16

Compliance

of the foundational program standards and what is expected of them personally.

Identifying and auditing potential risk areas is important. Risk-responsible management team members should be able to answer the board’s questions about the adequacy and effectiveness of the organization’s risk-management efforts.

4. Take board reporting on ethics and compliance beyond the 15 minutes of “zone-out.”

Unfortunately, compliance officers have not yet found the secret to meaningful board reporting, and the mere 15 minutes generally allotted on crowded board agendas is too often pro forma.

Endless charts on training completions and Excel spreadsheets of hotline calls, without context, do little to assure the board that the ethics and compliance program is having a measurable impact on preventing and detecting wrongdoing.

Boards need to understand what is working and what is not when it comes to the organization’s compliance program. They need to know that the resources invested in the program are addressing the most important risk areas and having the intended impact on behaviors.

The OIG guidelines provide further information that can help improve oversight of ethics and compliance programs.

The guidance tasks boards with setting and enforcing expectations for receiving specific types of compliance information.

For example boards should expect “regular reports regarding the organization’s risk mitigation and compliance efforts… from a variety of key players.”

Specifically, boards should expect to see and review: • Results of risk assessment.

• Ethics and compliance program and culture assessments.

• Auditing/monitoring activities.

• Implementation and status of riskbased compliance work plans.

• Any other information that will assist them with their oversight responsibilities.

Measures of organizational culture and results of other management actions should be provided as well. These might

include surveys measuring management’s effectiveness as role model, its performance handling ethics and compliance issues, and trends in potential issues both within the company and the industry.

All reports should provide appropriate metrics, context and analysis to inform board oversight and decision-making.

5. Include third-party reviews and guidance as part of the board oversight process.

Third-party assessments of ethics and compliance programs help mitigate personal risk and assure coverage and effectiveness. Many GCs are now also their company’s chief compliance officer, and as personal liability continues to increase for boards, it’s also increasing for compliance officers. Just as businesses rely on outside auditors to provide credible validation of financials, they can and should utilize third-party reviewers to validate ethics and compliance programs. Boards should also consider engaging separate outside counsel to avoid putting GCs, who typically report to CEOs, in an awkward position when directors have challenging legal questions and need advice that may run counter to the wishes of the CEO. 6. Make the most of allotted time for board education.

It is important to evaluate board member training that, in the end, can help further align the board and the GC. Using the new guidance as a framework for a board retreat or training is one option, but it might be more practical to take small steps to improve existing training. It’s not enough for a board to be briefed on the company’s ethics and compliance activities, and directors likely shouldn’t receive the same training as employees.

During training, boards should discuss board-specific risk areas such as conflicts of interest (both personal and organizational), insider trading, government and media relations, gifts and entertainment, and the consequences of unintended influence in their interactions with company leadership.

In addition to exploring specific risk areas, board members should be

encouraged to discuss their unique ethics and compliance responsibilities – for instance setting “tone at the top,” oversight of senior leadership, and managing board-related ethics and compliance violations.

The GC or chief compliance officer should help board members interpret ethics and compliance data and trends, and formulate questions to ask senior leadership about the organization’s commitment to ethics. Develop a plan for giving credit to board members for training they receive on other boards, and encourage them to share best practices from other organizations.

Finally, consider using the specific expertise of board members and involving them in creating or facilitating board training.

Keep in mind that the OIG guidance might be the first of numerous guidelines specific to different industries and countries – or it could be the start of a trend toward the creation of a single industry-neutral and globally applicable guidance. We also could see, in future government investigations, a movement for evaluating compliance programs – and boards – with more standardized and comprehensive criteria. Regardless of the direction these trends take, boards, with the help of the general counsel, can and should use the latest OIG guidance to their advantage. ■

Carrie Penman is chief compliance officer at NAVEX Global, and senior vice president of the Advisory Services team. She has been with the firm, which supplies ethics and compliance software, content and services, since 2003. Formerly she was the first chief ethics officer at Westinghouse Electric Corp., where she developed one of the first corporate-wide global ethics policies. cpenman@navexglobal.com

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apr / may 20 16 today’s gener al counsel

Compliance

Competition Outlook in Key Global Regions

By Bernd Meyring and Nicole Kar (Europe); Clara Ingen-Housz and Fay Zhou (Asia); Thomas McGrath and Douglas Tween (U.S.) The authors are partners in the competition group of Linklaters LLP

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today’s gener al counsel apr / may 20 16

Compliance

EuropEan union • Balance between EU and national enforcement The European Commission would like to see wider and more harmonized powers for national competition authorities (NCAs). While the legislative process is in its early stages, national legislators and authorities might feel encouraged to interpret and design powers more broadly even before any change to the EU legislative framework. The key concern is whether there will also be a more coherent and effective framework for the exercise of defense rights and more coherent enforcement in practice between the Commission and Member States.

• UK withdrawal from the EU (“Brexit”) The UK will vote on its membership in the EU in June. Beyond the fundamental impact on the sovereign and legislative framework for the UK, there would be a

aims to break down existing barriers to online trade across national borders within the EU. Among other developments, we have seen legislative proposals to reform the EU’s copyright regime. We expect to see further proposals to tackle unjustified ‘geo-blocking’, as well as the publication of the Commission’s preliminary findings in its e-commerce sector inquiry.

Anti-Cartel Enforcement and Competition Litigation

• Financial sector The Commission will likely wrap up a number of pending cases in the financial sector. The outcome of these cases will give further guidance on potential future enforcement priorities for the Commission and the types of behavior on which it will likely focus resources.

• Focus on priority cases The Commission has already dropped its credit default swaps investigation

In the EU, cooperation with antitrust investigations outside the leniency process will become even more difficult. significant impact on competition law in the UK if Brexit did occur. This includes the removal of the UK from the “onestop shop” position as a matter of merger control (whereby in general the Commission retains jurisdiction to review transactions meeting its jurisdictional thresholds, to the exclusion of Member States). It would also potentially affect the status of legal professional privilege attaching to UK qualified lawyers’ work in the Commission’s eyes.

• Digital Single Market The Commission has committed to deliver a set of targeted actions as part of its Digital Single Market Strategy by the end of 2016. This wide-ranging initiative, which represents a big political priority for the current Commission,

against 13 banks (with the investigations against ISDA and Markit continuing).

In addition, the Commission is seemingly wrapping up a number of other “non-core” legacy cartel investigations, in favour of pursuing cases where it can make more of an impact, e.g. the cases against Google and Gazprom.

Directive on Antitrust Damages

• Expected increase in number and efficiency of damages claims This year will be one of procedural reform in the competition litigation sphere across the EU, as Member States take steps to implement the Directive ahead of the deadline of December 27, 2016. The Directive is intended to promote and facilitate private redress across the EU. It is likely that it will

result in an increase in the number of private actions due to the harmonization of Member State regimes, and an increase in the efficiency of claims, since it will become easier to bundle claims in one forum. It remains to be seen whether these reforms will lead to new jurisdictions emerging as hot spots for competition litigation to rival the UK, Germany, The Netherlands and, to some extent, France.

• Clarity on access to information The Directive will also provide more clarity on access to regulators’ files and publication of cartel decisions that plaintiffs request. It should enable the Commission and NCAs to protect leniency documents and thereby maintain an important incentive for leniency.

Cooperation with the investigation outside the leniency process will become even more difficult. Companies will need to consider the disclosure risk very carefully when submitting information in the framework of investigations.

• New collective redress scheme in the UK We may see some answers to the many questions about how the Competition Appeal Tribunal will apply the new collective redress regime for competition damages actions that was introduced in 2015. We can expect that the reforms will promote indirect purchaser claims across Europe. The double jeopardy risk that results from claims by direct and indirect purchasers will lead to additional complexity for litigation and settlements.

Merger Control

• Remedies The Commission has become more open to considering remedies early in the process, as we have seen in cases such as Novartis/GSK and Holcim/Lafarge, and this should facilitate Phase 1 clearance decisions for strategic mergers where the parties are prepared to solve the competition issues upfront.

• Referrals The Commission and national competition authorities are actively using the

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referral system to reallocate cases that concern only one country to national competition authorities. Parties need to manage this risk proactively or face delays.

• Minority shareholdings Strategic minority shareholdings remain under scrutiny. While short term legislative action seems unlikely, we can expect

CHINA • Merger control The Ministry of Competition of the People’s Republic of China (MOFCOM) is in the process of updating the “Measures on Notification of Concentrations of Business Operators” and the “Measures on Examination of Concentrations of Business Operators.” It is

There would be a significant impact on competition law in the UK if Brexit did occur.

32

that both the Commission and NCAs will use existing legal powers more actively where they have concerns about the blunting of competition which can occur when competitors hold minority stakes in each other. This is particularly the case for NCAs that have existing regimes which capture minority shareholdings, e.g. the UK, Germany and Austria.

State Aid

• An important priority Throughout the first year of her term, Commissioner Vestager has made it clear that she regards state aid as an important priority, in particular to ensure that “public funding incentivises private investment rather than simply replacing it.” In her view, too much state aid is still badly designed and hinders growth, with its emphasis on tax treatment of larger multi-nationals and propping up “zombie” firms.

• State aid challenges to tax rulings In October 2015, the Commission ordered Luxembourg and The Netherlands to recover €20-30 million from Fiat and Starbucks respectively as unlawful state aid resulting from certain tax rulings given by authorities in those jurisdictions. Many other multinational groups are at risk of having to pay amounts reflecting up to a decade of taxes that they determined were not due.

expected that the revised set of measures will clarify the jurisdictional rules, further shorten the merger review timetable (particularly for simplified cases), and improve MOFCOM’s review procedures. Given the streamlining of the review process, we anticipate that MOFCOM will be able to increase the level of in-depth review of complex cases. MOFCOM will also continue to strengthen its enforcement efforts against failure to notify. Finally, compliance with remedy commitments will remain a focus.

• Antitrust investigations The National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC) will continue to pursue enforcement against price and nonprice-related anti-competitive conduct, with particular focus expected on the automotive sector, healthcare, consumer goods, telecommunications and shipping. Horizontal agreements, particularly traditional “hard core” cartel agreements, resale price maintenance and certain abusive conducts (including abuse of IP rights and excessive pricing), will continue to be an enforcement priority. NDRC and SAIC are also preparing drafts of a number of separate guidelines covering the automotive industry, intellectual property rights, suspension of investigations, exemptions under

Article 15 of the Anti-Monopoly Law (AML), leniency programs and calculation of fines, with drafts anticipated to be published (and some of the guidelines to be adopted) in the course of 2016.

• Amendments to AML and potential reform of the regulators China’s State Council announced plans to review the AML, which celebrated its seventh anniversary in 2015. China’s three antitrust agencies – MOFCOM, NDRC and SAIC – have been tasked with identifying and exploring possible areas for amendment of the AML. It is reported that research has also been conducted on whether to create a single competition authority covering both merger control and anti-competitive conduct.

ASIA EXCLUDING CHINA • Merger control In 2015, regulators across the region continued to closely scrutinize mergers for potential anti-competitive effects on various markets, gaining in analytical sophistication and self-confidence in bold decision-making. Two examples of increased enforcement activity in this area include the Competition Commission of Singapore’s block of a proposed merger for the first time ever in relation to an acquisition in the healthcare sector, and the remedies imposed by the Korea Fair Trade Commission (KFTC) on Microsoft’s acquisition of Nokia’s smartphone business, more than a year after the deal was closed, following the approach of other authorities, including Taiwan and China. In India, the Competition Commission imposed penalties of approximately USD $449,000 and USD $300,000 on the acquiring parties of a merger for failing to notify the transaction. It is expected that the multinational major deals currently on the horizon will lead to an increasingly coordinated approach between authorities in the region and beyond.

• Antitrust enforcement In 2015, more Asian authorities undertook the review at local level of global

today’s gener al counsel apr / may 20 16

Compliance

antitrust cases. For instance, the probe into financial markets spread to new Asian jurisdictions, with the KFTC opening its own investigation into the foreign exchange market in June. The KFTC has also been active in enforcement against bid-rigging. In India, the Competition Commission has continued to levy high fines for cartel conduct, imposing a penalty of USD $38.6 million on airlines for fixing a fuel surcharge rate. These cases, together with others, highlight the growing scope and extent of competition law enforcement in Asia.

• Legislative and regulatory developments Three more ASEAN countries – Myanmar, Lao PDR and the Philippines – enacted competition laws in 2015, meaning nearly all the ASEAN countries have now adopted competition laws. These countries will begin establishing new regulators and new drafting rules to support the implementation of the law.

began consulting on its implementation of the law for the past 10 years. Finally, in Hong Kong, the highly-anticipated competition law came into force in December. These developments suggest that significant changes are in the offing to national legislative frameworks, as well as to the practice and procedure of the authorities.

UNITED STATES • Merger control remedies could spoil deals FTC and DOJ policies on merger remedies have become so strict that there is a risk that challenges in finding eligible buyers for a reasonable set of divested assets could force merging parties to abandon their transactions. Both agencies have been very focused on remedies, in particular making sure they are effective and create a viable competitor. This is partially driven by two disappointing results, when divestiture buyers ended

China’s State Council announced plans to review the Anti-Monopoly Law.

In addition to new regimes, existing ones have also undertaken a widespread review of their rules across the region. In Thailand, a major reform of the current competition regime has begun with the aim of improving Thailand’s relatively poor enforcement track record to date.

In Singapore, amendments have been proposed to the Competition Act, as well as to the regulator’s guidelines, to reflect the modernization of its practice and procedure over the first 10 years of its implementation. In Taiwan, the Fair Trade Commission published a draft whistleblower program. In Malaysia, the Commission proposed a reform of the competition law allowing the regulator to penalize individuals for anticompetitive conduct. At the end of 2015, the Vietnam competition authority

up in bankruptcy within a year, and ultimately sold some assets back to the merging parties (Hertz/Dollar Thrift rental cars and Albertsons/Safeway supermarkets). In both cases, the buyers were private equity houses, who are now viewed very critically as buyers in the United States – as they are in Europe.

In other cases, the merging parties have made offers to divest a modest set of assets, but not nearly enough to satisfy the regulators. This has led to litigation (US Airways/American, Ardagh / Saint Gobain, AB InBev / Modelo).

A key risk for all deal makers in strategic transactions is whether the agencies will demand so much that the underlying strategic rationale or economics no longer make sense.

As important is the need to identify eligible buyers.

• Antitrust audits as a focus for compliance officers Competition law enforcers from several jurisdictions have been delivering a message that they expect companies to conduct antitrust audits as part of an effective compliance program, and that the audits should search for violations of law and not simply be checks on process.

For example, the head of criminal antitrust enforcement at the DOJ, in a speech entitled “Compliance is a Culture, Not Just a Policy,” stated that “a company should ensure that it has a proactive compliance program. This means that in addition to providing training and a forum for feedback, a company should make sure that at risk activities are regularly monitored and audited.” Other enforcers have delivered a similar message.

At the same time, leading antitrust enforcers are sending mixed messages about the importance of compliance programs by refusing to giving companies credit for pre-existing compliance programs. Earlier this year the United States for the first time gave credit to a company for compliance program improvements made after an investigation had begun, but the United States and EU still refuse to give penalty reductions to companies for good-faith compliance program efforts undertaken prior to an investigation.

Perhaps as a result, surveys indicate that a substantial majority of companies do not conduct the type of regular antitrust audits that enforcers expect, audits that might mirror their financial audits or anti-bribery audits. Companies also struggle with focusing antitrust audits, and enforcers have not provided much practical guidance.

Companies and their lawyers have been pressing enforcers to recognize good-faith compliance efforts made before an investigation has begun, in order to incentivize companies to invest in antitrust compliance programs before a problem occurs. Whether this will have an impact remains to be seen. ■

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SPECIA L A DVE RT IS IN G S EC T ION APR/MAY 2016 TODAY’S GENERAL COUNSEL

Super Lawyers, a part of Thomson Reuters, is the only lawyer-ranking service with a patented selection process. How do we do it? The infographic below shows, at a

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This issue marks the start of a unique partnership between Today’s General Counsel and Super Lawyers. In each issue, you will learn about lawyers and firms that have passed muster with Super Lawyers. We honor attorneys in commercial and consumer practice areas, and the focus with our partnership will be on those selected in a business-related practice area.

If you find yourself in need of legal services, whether for your business or personally, start your search with Super Lawyers.

For more information on our selection process or to find a lawyer in a specific region or practice area, please visit SuperLawyers.com.

OUR PATENTED SELECTION PROCESS NOMINATIONS Diverse list of the top attorneys nominated by their own peers

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START YOUR SEARCH FOR AN ATTORNEY WITH SUPER LAWYERS VISIT SUPERLAWYERS.COM Search for an attorney by practice area and location, read features on attorneys selected to our lists and find out more about our patented selection process.

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apr / may 20 16 today’s gener al counsel

Compliance

Corruption Risk for Multinationals in India

By Vasu B. Muthyala and Joshua L. Ray

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today’s gener al counsel apr / may 20 16

Compliance

A

s promised, India’s new government has been driving economic growth by going after foreign investment, lowering barriers to doing business, and actively addressing corruption issues that have plagued the country for generations.

The market response is clear. Foreign direct investment between October and May 2015 was up 40 percent to US $23.7 billion from the same period a year earlier, the Wall Street Journal reports. On the anti-corruption front, India is in the process of bringing its anti-corruption legislation – the Prevention of Corruption Act 1988 – in line with the standards set out in the United Nations Convention against Corruption, and implementing its recently passed whistleblower statue, the Whistleblowers Protection Act 2011.

Enhancing legislation is only the first step for real anti-corruption change. Enforcement is the key. Although it will take time before a robust Indian enforcement regime is in place, the U.S. government’s global anti-corruption efforts, through enforcement of the Foreign Corrupt Practices Act (FCPA), is filling the void in the interim. This summer, for example, Louis Berger International Inc., a New Jersey based global construction management firm, reached a settlement with the U.S. Department of Justice for paying bribes to government officials while working on a multi-billion dollar water and sewerage project in the south Indian state of Goa.

India’s appetite for change is evident by the fact that the story doesn’t stop there. Shortly after the U.S. settlement was announced, Goan officials arrested three individuals in India in connection with paying and receiving bribes in violation of the Prevention of Corruption Act, while a fourth person, the Goan Chief Minister, was interrogated and released on bail.

In addition, shortly after the Wall Street Journal recently reported that a long and on-going FCPA investigation of Walmart revealed that the retailer allegedly paid many small bribes to Indian government officials, Central Vigilance Commission (CVC), the organization with supervisory authority over the Central Bureau of Investigations for anti-corruption matters, opened an inquiry. According to the Indian press, this is the first time the CVC has initiated an investigation involving a private company.

THE EXISTING RISKS

This most recent India-focused FCPA action isn’t an anomaly. U.S. regulators have brought a dozen cases against multinational companies for violations of the FCPA in India.

The FCPA is a U.S. criminal statute that prohibits companies from paying bribes to foreign government officials and political figures for the purpose of obtaining or retaining business. It prohibits U.S. persons, entities, or any issuers of U.S. securities from making or

offering to make payments to foreign government officials to obtain or retain business or business advantage, and it requires that issuers maintain accurate books, records and internal controls.

The FCPA is enforced by the U.S. Department of Justice and the Securities and Exchanges Commission. Penalties for violations include monetary fines and imprisonment.

U.S. regulators’ focus on India has been across industry sectors, including manufacturing, infrastructure, energy and consulting. Penalties have ranged from a few hundred thousand dollars to more than $50 million, as the chart below demonstrates.

THE WHISTLEBLOWER FACTOR

Provisions in U.S. law that entice would-be whistleblowers with promises of riches are instrumental in uncovering graft and fraud in all corners of the world, including India. Since 2011, the Dodd-Frank whistleblower provision has been doing exactly that.

For the last year reported, the SEC received nearly 4,000 tips (up from approximately 3,600 the year before).

From the inception of Dodd-Frank, those reports have come from more than 80 countries, and the SEC has paid out a total of more than $54 million to 22 whistleblowers. India has consistently been at or near the top of the charts for the number of whistleblower complaints globally. According to the SEC’s 2015 report on its whistle-

Company

Industry

Year

Penalty (U.S.)

Louis Berger International

Construction management consulting

2015

$17.1 million

Tyco International

Industrial components

2012

$26.8 million

Oracle

IT services

2012

$2 million

Diageo

Liquor

2011

$16.3 million

Pride International

Oil and gas

2010

$56.1 million

Control Components

Industrial components

2009

$18.2 million

Westinghouse Air Brake Technologies

Transportation

2008

$675,351

York International

Industrial components

2007

$22 million

Electronic Data Systems

IT services

2007

$490,902

Textron

Industrial components

2007

$4.7 million

Dow Chemical

Chemical manufacturing

2007

$325,000

Baker Hughes

Oil and gas

2007

$33 million

Actions against Multinationals for FCPA Violations in India

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38

blower program to Congress, India was second only to China in Asia, with 33 reports made last year.

Despite India’s status as relative newcomer to U.S. investments, its high rate of whistleblower activity should not come as a surprise for those who do business in Asia. A democratic society, a younger generation’s desire for change, and a widespread entrepreneurial outlook can be contributors to this reporting rate.

Moreover, the DOJ’s own FCPA webpage, which provides translations of the law to 50 foreign languages, devotes 10 percent of the languages to those spoken in India: Bengali, Hindi, Punjabi, Tamil and Urdu. It is no wonder that there has been a consistent stream of FCPA settlements generated out of India, and that trend is likely to continue. Sony, Anheuser-Busch InBev, Beam Suntory, Bunge, General Cable and Wal-Mart are among the companies that have disclosed or that have been reported to be undergoing FCPA-related investigations with regard to businesses in India.

For its part, India enacted its own whistleblower statute, the Whistle Blowers Protection Act 2011 (WBPA).

However, unlike the Dodd-Frank provisions, the WBPA applies only to reports about a public servant’s conduct, does not provide a monetary incentive for whistleblowing, has no anti-retaliation provisions, and whistleblowers may even face the risk of criminal sanctions if it is deemed that their report is false.

India, in its efforts to curb corruption, is addressing the demand side of bribery – going after the corrupt government officials who solicit the payments. The recent enforcement actions by the Goan government in the aftermath of the U.S. Louis Berger settlement and the CVC’s actions in light of the Walmart revelations are exactly that.

But proposed changes to the Prevention of Corruption Act will permit prosecutions of companies as well.

NOT ALL FINES AND HEADLINES

Not all U.S. government investigations lead to multimillion dollar settlements, as we saw in the 2012 case of Morgan Stanley. In that case, U.S. regulators touted the fact that they didn’t extract

a settlement from the bank when they prosecuted Garth Peterson, a senior level executive based in China, for FCPA violations. According to the government, the bank had maintained a strong compliance program to prevent bribery, had adequately trained its employees (Asia-based employees were trained on anti-corruption policies 54 times in six years), and had itself discovered the fraud, brought it to the government’s attention and cooperated throughout the government’s investigation.

Related precedent exists for India, as well. In 2012, for example, the SEC issued a declination to Huntsman Corporation, a U.S.-based chemical manufacturer, which self-disclosed that over a two-year period employees of a joint venture in India made payments of $11,000 to India government officials.

What’s clear from both these matters is that the size of the illicit payments, robustness of internal controls, integrity of investigation, thoughtfulness of remedial measures and decision to self-disclose all weigh on the U.S. government’s decision about the type of resolution.

THE PATH AHEAD

India’s scrutiny of bribe recipients and the U.S. focus on multinationals and their employees will lead to more investigations and enforcement actions in both countries. The long-term result for multinational corporations focused on growth in this burgeoning economy is a less risky investment environment. As we have seen, in the last few years India has made some progress towards this end: Although in 2011 it was ranked by Transparency International’s Corruption Perceptions Index as 95th, by 2014 it had moved up to 85th place. This is certainly a move in the right direction, but India continues to be a high-risk environment in which to do business.

In light of these developments, counsel for multinationals should keep in mind the following: • When faced with allegations of wrongdoing in India, specifically whistleblower complaints, it’s important to respond appropriately.

Have a mechanism in place to hear

grievances, acknowledge the complainant, assess the allegations, and then determine if there is a need for a further review and whether it should be conducted internally or by outside counsel.

• An independent outside legal review will give legitimacy to any findings and show a degree of independence that is hard to replicate in-house.

Companies find it helpful to engage external counsel with insight into government enforcement practice, local language capabilities, cultural familiarity and subject matter expertise to help make the very difficult decision about self-disclosure – a decision with serious repercussions for a company. ■

Vasu B. Muthyala is a member of Kobre & Kim’s Government Enforcement Defense team in Asia. A former senior prosecutor for the U.S. Attorney’s Office for the District of Columbia and enforcement attorney at the SEC, his practice focuses on international government investigations, regulatory and compliance matters, with an emphasis on anticorruption, competition, U.S. sanctions and securities/accounting fraud. vasu.muthyala@kobrekim.com.hk

Joshua L. Ray is a London-based member of Kobre & Kim’s Government Enforcement Defense team.

Qualified as a U.S. lawyer, his practice focuses on white-collar criminal defense, regulatory investigations, complex commercial litigation, patent litigation and securities litigation. He also has experience conducting internal investigations on behalf of executive boards and committees. joshua.ray@kobrekim.com

today’s gener al counsel apr / may 20 16

Cybersecurity

Cyber Risk Management continued from page 26

3. Create good policies and stick to them. It’s not enough to know your data and have lines of oversight. Companies must also create cybersecurity policies that employees can understand and follow.

Policies are necessary for three reasons. First, they force the company itself to fully understand its risks, and how those risks are going to be handled.

You need to know the problem to solve the problem. Second, if a company has a good policy and sticks to it when a crisis occurs, that company is in a far better position to avoid liability. Often federal and state laws allow a company to avoid liability if it can show that it had a reasonable and comprehensive policy, and that it followed that policy before, during, and after a breach.

Good policies demonstrate diligence and good faith when the time comes to defend against a claim or charge.

educate employees about them, and train them on how to implement and execute them. Employees need to believe that there is buy-in at the top, and that everyone takes compliance seriously.

Education and training should be an integral part of your company’s data security plan.

5. Create good contracts. Vigilance in cybersecurity does not end at the company’s boundary. If third parties use data that you collect, you must carefully create and vet contracts with those third parties to confirm that they have acceptable protections in place. Doing so can mean the difference in avoiding liability. Engage knowledgeable counsel in drafting contracts.

6. Prepare for the worst. The most common question we get is, “How can I avoid a data breach?” The answer is you can’t.

Data breaches are the inevitable and foreseeable cost of data ubiquity.

And remember that while hacks originating from abroad and intrusive thefts Company data invariably includes of trade secrets or financial data tend to make the headlines, employee data, which is as sensitive more breaches occur because of simple as customer data. human error, like a lost unencrypted Third, policies help establish a cullaptop left on a subway. Or they happen ture of compliance, a “tone at the top.” because a company’s IT department Policies, whether they be statements of was so concerned about protecting the principles or rules to follow, give strucperimeter from the external threats that ture and importance to cybersecurity it forgot about the internal threats that for the employees who need to carry come from careless or disgruntled emthose policies out. ployees who have access to more data than they need to perform their job.

4. Train your people. Company emThat said, companies that plan for ployees are the ones that use the comthe worst will be best positioned to pany’s data. They need to know what survive the worst. Have a forensic plan data they have access to and are using, to resolve and root out a breach, and and what the parameters and limitaa business continuity plan. Determine tions are for using and maintaining it. which authorities you will need to conAs important as a cybersecurity policy tact in the event of a particular kind of is, even the best policy will be meaning- breach. Have a crisis management proless if it is simply posted in the dark fessional lined up to handle the fallout recesses of the company’s intranet, never with your customers. to be heard from except when occasionTo be ahead of the game, these plans ally dusted off and updated. A company’s can be collected and kept in a cybersepolicies are only as good as its ability to curity playbook that is kept up to date.

Cyberinsurance policies can also play a role. Cyberinsurance is still something of the wild west of insurance products, but the right policy can help minimize exposure after a large data breach. Having knowledgeable counsel vet policies is key.

Cybersecurity is no longer simply an IT Issue. Gone are the days when all you needed to do to was maintain and update anti-virus and malware security software. The mass of data collected has transformed the way companies need to think about security. There is no magic bullet that will prevent data breaches. The pirates and hackers are too smart and too motivated. But good governance and risk management practices will help limit them, and where a breach occurs, they will help the company survive the fallout. ■

Peter Sullivan is a partner at Foley Hoag, in the Intellectual Property, Litigation, and International Litigation & Arbitration Departments. He focuses his practice on intellectual property and complex commercial matters, appearing before state and federal courts, arbitration tribunals and the U.S. Patent and Trademark Office. psullivan@foleyhoag.com

Christopher Hart, an associate at Foley Hoag, is a litigator whose practice includes both commercial business matters in federal and state courts and international litigation and arbitration.

He has advised Fortune 500 companies on data privacy and cybersecurity issues, and he is a frequent speaker on issues pertaining to cybersecurity and data breach. chart@foleyhoag.com

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APR / MAY 2016 TODAY’S GENER AL COUNSEL

WORK PL ACE ISSUES

The NLRB’s New Election Rules

By Tanja L. Thompson and Mark Schneider

A

t the one year anniversary of the National Labor Relations Board election rules, many employers are feeling hurried, tired, and sometimes ill-prepared to respond to union organizing activity and “quickie” union elections. There is some debate as to whether organized labor has really organized and significantly increased its win rate under the new rules, but there is no debating the fact that elections are occurring much more quickly. This accelerated timeline has created hardship for employers.

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Tanja L. Thompson is a partner at Littler Mendelson and Co-Chair of the Traditional Labor Practice Group. She counsels employers in various industries on remaining union-free and managing their union-represented workplaces. tthompson@littler.com

Mark Schneider is a partner at Littler Mendelson, and Co-Chair of the Traditional Labor Practice Group. He focuses his international practice on representing management in all phases of labor law and labor relations before the NLRB, DOL and Occupational Safety and Health Administration. He also serves as a member of Littler’s board of directors. mschneider@littler.com

According to the NLRB General Counsel’s Office, the median time from petition to election under the new rules in 2015 was only 24 days, compared to 38 days under the old rules during the same time period in 2014. We’ve seen this trend toward significantly shortened elections continue in 2016.

Moreover, severely limiting the amount of time employers can communicate with their employees following the filing of a petition, coupled with the NLRB giving short shrift to important legal issues that arise in the representation case context (such as the determination of supervisory status or appropriate analysis of micro or fractured units), has created fundamental fairness issues for private U.S. employers.

Initial lawsuits to enjoin the new rules proved unsuccessful at the federal

district court level, leaving employers and their counsel with two perhaps equally undesirable options following the filing of an NLRB petition. The first was to forego any legal claims and agree to a quickie election, with at least some input into election terms. The second was to attempt to raise legal issues and face, at best, a cursory review of those issues, while leaving to the NLRB’s discretion the setting of election terms.

Faced with these two options, we’ve seen most employers forego their legal claims and submit to a stipulated election agreement with a quick election date. In turn, the NLRB has claimed the new rules to be a success in part because of substantially higher rates of stipulated election agreements, where the parties mutually agree upon the election terms.

Of course, what a company agrees to

TODAY’S GENER AL COUNSEL APR / MAY 2016

with a figurative gun to its head can hardly be considered willing acceptance of agreement with the new rules.

With this new and drastically tilted playing field, a number of non-union or partially unionized employers saw more union activity during the past year than they had in many years. Interestingly, several unions seemed to target nonunion locations in partially unionized

simply is little time to plan and strategize campaign activities and communications post-petition. Activities such as training supervisors, analyzing unit issues, garnering community and media support, understanding workplace issues driving employee morale and fueling interest in unionization, determining meeting logistics, researching the subject union, preparing meeting leaders, and

employee’s decisions regarding representation or collective bargaining rights.

This change will no doubt have an impact on how employers respond to and prepare for union organizing activity.

The year 2015-16 has brought several “gifts” to help labor grow its membership. The question now becomes, will it make a difference? Only time will tell, but for employers looking to resist

Unions have demonstrated the greatest success where companies have been ill-prepared for organizing and/or were surprised by a petition.

companies that had been left untouched by the unions that already represented some of the company’s employees for years, even decades. Perhaps this was considered low-hanging fruit, because unions already knew something about the companies and their employees.

Willingness to engage in micro-unit organizing also increased with partially organized companies, as unions relied upon the leverage of their prior penetration and minimal pre-election challenges. These elections, in particular, sometimes caught the targeted companies by surprise – and, surprise, under the new election rules, they have proven deadly for some employers. A number of companies have had greater difficulty turning around votes in these smaller units of employees. This could be, in part, because smaller units tend to be more unified and employees often have an easier time keeping union organizing activity under the radar pre-petition.

Across the country and across industry lines, unions have demonstrated the greatest success where companies have been ill-prepared for organizing and/ or were surprised by a petition. In our work with employers, we stress that running an effective counter-organizing campaign requires advance planning and high levels of coordination. With elections often occurring in three weeks or less from petition to election, there

developing social media responses or other custom communications, are all critical to success in a union election campaign. Furthermore, these activities often take significant amounts of time, depending on the size of the workforce, the internal politics and the experience level of the employer in this arena.

Some employers have celebrated the fact that after their advance planning, strategic communications and hard work, their employees have rejected unions in recent elections. Or at a minimum, they are breathing a collective sigh of relief that they have been successful to date in keeping a union at bay and are continuing or even increasing their pre-petition activities. We’ve seen a particular focus on educating employees about union authorization cards, given the NLRB’s sanctioning of electronic authorization cards. The trend toward electronic signatures likely will pick up as we enter year two of the quickie election rules. More education of this sort will prove important.

Unfortunately for employers, another shoe has dropped in the area of union avoidance, this time from the Department of Labor. The so-called persuader rules, first proposed in 2011, were finalized on March 23. Employers will be required to disclose any actions, conduct or communications that are undertaken by third parties in order to affect an

union organizing in the future, the legal and regulatory environment has shown that planning your counter-strategy today is critical, as time runs extremely short once a petition is filed. ■

TODAYS G ENER AL C OUNSEL .COM

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apr / may 2016 today’s gener al counsel

T H E A N T I T R U S T L I T I G AT O R

Courts To Decide if New Rules Will Curb Litigation Costs

By Jeffery M. cross

l

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itigation can be expensive, and antitrust litigation can be very expensive. Much of that expense is discovery. Indeed, I recently had a client forego what I thought was a meritorious antitrust claim because of its experience with very expensive and costly discovery in another antitrust matter. Discovery is expensive not only because of the process of propounding discovery requests and responding to the other side’s requests, but also because of the time and expense for both lawyers and executives in fighting about discovery.

This past December, Congress and the Supreme Court introduced amendments to the Federal Rules of Civil Procedure designed to control the costs of litigation, in particular discovery. Supreme Court Chief Justice John Roberts felt so strongly about the importance of these amendments in reducing the cost of litigation that he made them the subject of his 2015 Year-End Report on the Federal Judiciary.

The new amendments to the Federal Rules were the result of almost six years

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. jcross@freeborn.com.

of work by the Advisory Committee on Civil Rules. As Chief Justice Roberts indicated, this work confirmed that “while the federal courts are fundamentally sound, in many cases civil litigation [had] become too expensive, time-consuming, and contentious, inhibiting effective access to the courts.”

That certainly was the case for my client, who decided to give up challenging a valid antitrust violation that had caused it real injury because it felt that the whole process was too expensive.

And my client was a major international corporation.

The new amendments to the Federal Rules of Civil Procedure, which became effective on December 1, 2015,

are designed to address some of these issues. They apply to both new cases and pending cases.

The first significant change was the addition of only eight words to Rule 1.

This Rule directs that the Federal Rules “should be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action and proceeding.” Chief Justice Roberts felt that the addition of the italicized words created an obligation for judges and lawyers to work cooperatively in controlling the expense and time demands of litigation. He admonished that these “are words that judges and practitioners must take to heart.”

TODAY’S GENER AL COUNSEL APR / MAY 2016

The change to Rule 1 complements the existing Rule 26(g), which remains the same. This latter rule requires lawyers who sign discovery requests or responses to certify that a discovery request, response, or objection is consistent with the rules, will not needlessly increase the cost of litigation and is neither unreasonable nor unduly burdensome or expensive. However, it has not been my experience that many lawyers take these requirements seriously. The test will be whether the courts follow Chief Justice Roberts’ admonition and begin to enforce these obligations. In that regard, the new amendments emphasize judicial activism.

Probably the most significant change can be found in Rule 26(b)(1).

This rule added the requirement that discovery must be “proportional” to the needs of the case to the definition of the scope of permitted discovery. It sets forth several factors regarding this requirement of proportionality. Among them is the importance of the issues at stake, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues and whether the burden or expense of the proposed discovery outweighs its likely benefit.

The committee Notes to Rule 26(b)(1) stress that the changes regarding the proportionality calculation do not place the burden of addressing all proportionality considerations on the party seeking discovery. Nor was the change intended to permit the opposing party to refuse discovery simply by making a

boilerplate objection that discovery is not proportional. (Despite this, I have already seen parties opposing discovery make such a boilerplate claim.) The Notes emphasize that the parties have collective responsibility to consider the proportionality of all discovery, and to consider the issue of proportionality in resolving discovery disputes. The Notes point out that the party initiating discovery may do so without a full appreciation of the facts that bear on proportionality, such as the burden and expense of responding.

regarding the scope of discovery.”

Whenever I budget for litigation, I build in the cost of discovery disputes, including motions to compel. The new amendments to the federal rules allow the trial court in the Scheduling Order to require that before a party can move for an order relating to discovery, which would include either an order to compel or a protective order, the movant must request a conference with the court.

As Chief Justice Roberts described this requirement, “a well-timed scowl from a trial judge can go a long way in mov-

As Chief Justice Roberts said about this requirement, “A well-timed scowl from a trial judge can go a long way in moving things along crisply.”

On the other hand, the Notes point out that the party opposing discovery may have little information about the importance of the discovery. Consequently, the amendments require the parties to engage in early discussions regarding proportionality.

The Notes emphasize that the rules contemplate greater judicial involvement in this aspect of discovery. Chief Justice Roberts emphasized that the key to the new amendments is a “careful and realistic assessment of actual need,” but that assessment as a practical matter “may require the active involvement of the federal judge – to guide decisions

View our digital edition D IGI TA L .T OD AY S G E NE R A L C OUN S E L . C OM

ing things along crisply.” Many federal judges whom I appear before have already built into their Standing Orders that all discovery motions must be argued before the court by both sides prior to briefing the motion.

The new amendments to the Federal Rules have made significant changes to try to reduce the costs of litigation, in particular discovery. It remains to be seen, however, whether the courts will truly take to heart the challenge to actively engage in accomplishing these goals. ■

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apr / may 2016 today’s gener al counsel

I N F O R M AT I O N G O V E R N A N C E O B S E R V E D

Quantified Information Governance

By Barclay t. Blair

o

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ur research at the Information Governance Initiative overwhelmingly shows that information governance (IG) is shaping practices across industry sectors as a new approach to generating value from data while simultaneously addressing risk. In fact, most organizations doing IG have multiple projects in flight, and they are spending real money to get them done. On average, large organizations have seven active IG projects each costing over $750,000.

At the same time, we are experiencing a generational shift toward the use of data to drive decision-making at both the most trivial level of our personal lives, and the most consequential levels of global financial policy and multibillion-dollar business bets. It has been hard to miss the hype around big data, but amidst the hype, real transformation is happening.

For example, while some continue to dismiss the “Internet of Things” (IoT) as toasters and blenders uselessly connected to the Internet, GE recently reported over $1B in revenue from its IoT

Barclay t.

Blair is the president and founder of ViaLumina and the executive director and founder of the Information Governance Initiative, a cross-disciplinary consortium and think tank. An advisor to Fortune 500 companies, technology providers and government institutions, he has written award-winning books on the topic of information governance.

Barclay.blair@iginitiative.com

software business. It hit that mark faster than any GE division in history, and it’s only a small fraction of what their CEO is betting it will become.

Even regulators like the Federal Trade Commission have weighed in on the implications of IoT and are grappling with it from a policy perspective, advising companies to only retain “information for a set period of time, and not indefinitely.”

Life, business, and government are increasingly quantified by data that is driving critical decision-making. For example, analysts predict that by 2020 over 100 million people will be using their devices to enable data-driven decisions about health, sleep, and exercise.

The promise of data-driven decision making is this: Processing and analyzing

data at a scale far exceeding the capabilities of the human brain will transform our ability to understand and predict.

I believe that ability to govern information in a way that enables these deeper insights, unforeseen efficiencies and new business models is what will separate the winners from the losers in this new era.

But we still have a long way to go.

While we invest in technology that can beat a human at Jeopardy® in one part of our organization, we are stuck with the technology that prints Trebek’s cue cards in another. For all the big data sexiness, according to a recent academic study up to 80 percent of the development cost of an analytics project is spent on “data discovery and wrangling . . . the most tedious and time-consuming aspects of an analysis.”

today’s gener al counsel apr / may 2016

Why does it take so long? Because most organizations quite simply have very little idea what data they have, where it lives, what the data means, what rules must attach to it, and whether or not the data represents measurable value or risk.

Consequently our data is messy, incomplete, difficult to find and access, duplicative, and missing context essential to enable its analysis and use. In short, it is the inevitable outcome of a generation of attempting to force analog practices to work in a digital world. It has failed.

Most organizations continue to make management decisions about their information based on tradition, superstition

information (i.e., generally any information that does not reside in a database).

The idea that we should make decisions based on facts or evidence derives from the Enlightenment and the scientific method itself, but even in areas where you might expect that this approach is already baked in, it is still challenging. In the 1990s, for example, the concept of “evidence-based medicine” was introduced into the medical field and has since taken hold as an operating philosophy in branches of medicine from optometry to dentistry.

As defined in an influential article on the topic, evidence-based medicine is: “the conscientious, explicit, and

ample, despite no such legal requirement (absent very exceptional circumstances), many organizations effectively keep all information forever (even if they claim to be “keeping it for now.”) At some organizations this is because staff has become afraid of getting in trouble, getting fired or going to jail because they threw the wrong thing away. This fear is rarely rooted in a business or technology concern, but rather in (at least what is perceived as) a “legal” concern.

General Counsel are the only ones who can alleviate that concern and provide the leadership necessary for organizations to act based on facts about what is best for the business and what is

The ability to govern information in a way that enables deeper insights, unforeseen efficiencies and new business models is what will separate the winners from the losers in this new era.

and supposition, instead of on innovation, evidence and analysis. It’s time that our approach to governing our information caught up to the information age. It’s time to get with the program. I believe that the time has come for what I am calling “quantified information governance.”

Quantified IG is the application of smart technology and evidence-based practices to the governance of information. It ensures that we have essential facts about our information and our operating environment so we can make evidence-based decisions.

Quantified IG requires technology that supports the gathering and analysis of facts about our information. Just as the big data revolution is in part possible because of the availability of newlyaffordable Internet-scale infrastructure, Quantified IG is made possible by a new generation of file analysis, indexing and analytics technologies (many honed on the whetstone of high stakes/high data volume/high scrutiny lawsuits and investigations) that promise to profoundly increase our insight into unstructured

judicious use of current best evidence in making decisions about the care of individual patients.”

If the practice of medicine – which has embraced the scientific method for over a century – can benefit from a heightened focus on evidence-based decisions and policy, then surely there are other practices that could benefit from it as well. Do any come to mind?

Why do we have 1000 categories in our records retention schedule? Because that’s the way the last guy did it. Or because we inherited the schedule from a company we acquired. Because Janice liked it that way. Because that’s what makes the most sense to me. Because that’s what my old boss told us to do.

Because that is what the consulting company sold us. But is it right? Is it true? Is it the best way? Are these justifications based on anything more than tradition, superstition, or office politics? Without quantification, it is impossible to know.

General Counsel need to play a role in this transformation to using data to drive IG decisions and practices. For ex-

actually required from a legal perspective, and not on vague or misplaced fear.

General Counsel of course cannot do this alone. It is my belief that for most GCs, even if they were inclined to communicate that staff should start getting rid of the useless, outdated and trivial information (often greater than 50 percent of the entire volume, per our research), nobody in the organization has quantified the information environment for them in a way that gives them the confidence to provide such a direction.

GCs require more than supposition about the information environment – they need facts. This is the interplay between IG and the GC’s role. Without this partnership, the value of quantified IG will be limited. GC’s should start asking for this quantification, and then provide their insight and vision as to what facts they need about their organization’s data in order to provide informed, data-driven guidance. ■

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APR / MAY 20 16 TODAY’S GENER AL COUNSEL

Court Reporting in the Digital Age

46

BY KENNETH ZAIS

C

ourt reporting in the digital age is mobile and cloud-based. This changes important aspects of litigation for both outside counsel and the in-house legal department.

Now depositions and other proceedings are unmoored from a specific conference

room. Convenience and efficiency keep the litigation spend predictable, reducing risk and controlling costs.

TODAY’S GENER AL COUNSEL APR / MAY 20 16

Court reporting may not look much different than it did a generation ago. Reporters still set up stenographic machines to take accurate verbatim testimony at 225 or more words-perminute. A legal videographer, once brought in only for special circumstances but now routine, sets up the camera and backdrop to go on the record with the reporter.

TESTIMONY FROM ANYWHERE Innovation keeps court reporting in step with streaming technology through the client’s computer, tablet or phone. Legal teams make connections across geographies and time zones as complex multi-jurisdiction litigation and class action cases proceed.

connects participants through their computers and mobile devices, wherever they are located.

Skype, though free, is over a public network and neither secure nor consistently reliable enough for sensitive, high-stakes litigation. A secure connection is a cost-effective option for expert witness depositions, conferences with the legal team and co-counsel across offices, and for accommodating homebound deponents.

• Paperless Depositions Because depositions and other proceedings can be streamed, electronic exhibits can likewise be introduced, marked and streamed for all to see, whether in the deposition room or attending remotely. Legal team members retain their

Legal teams can attend a deposition on the schedule they choose without leaving their desk.

How does this make a difference for general counsel? For starters, the general counsel, a staff attorney, a paralegal or an expert can attend any deposition on their chosen schedule without leaving their desk. It’s a welcome alternative to spending hours at airports or in a car.

It doesn’t matter where the deposition is taking place. You can observe the deponent’s testimony, following both the text and video feed with each question and answer. Exhibits are also electronic.

All participants see exhibits on their devices as they are marked and introduced. Throughout the process, your team can exchange messages as if they were sitting across the conference table, but without the sticky notes. From witness prep through trial, inside and outside counsel can tap into court reporting technology to manage litigation through a variety of technologies and processes, including: • Internet streaming In-house attorneys and support staff often want to observe key depositions, but traveling from site to site is expensive and time-consuming. Instead, they can attend remotely, joining and conferring with their litigation team by logging in securely from computer or tablet, whether they are in the office or on the road. They are able to follow an important witness’s testimony through live text and video streaming.

• Mobile Videoconferencing Secure web-based mobile videoconferencing

personal, annotated copies on their devices.

Costly, labor-intensive scanning, printing, packing, shipping and toting boxes of paper exhibits is eliminated.

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• Expert Witness Preparation The same paperless deposition technology is ideal for expert witness prep in advance of depositions, arbitrations, hearings or trials.

General counsel and designated legal team members consult remotely with the expert to review electronic documents such as financial statements, medical records, contracts, engineering reports or email exchanges.

• Video/Text Synchronization Videotaped depositions capture the witness’s demeanor, expression and tone. When integrated with the court reporter’s transcript, the testimony scrolls as attorney and witness speak, similar to captioning a TV program. What’s more, as inhouse and outside counsel look ahead to trial, the video deposition is instantly searchable.

Instead of repeatedly rewinding to pinpoint a statement, isolate it by highlighting a keyword to go straight to the reference, then create compelling video clips for settlement meetings or playback in court.

Discovery, including depositions, represents a significant share of the litigation budget. Options available for court reporting can go a long way toward keeping costs in line. ■

Kenneth Zais is president and owner of O’Brien & Levine Court Reporting Services in Boston.

He is a member of the National Network of Reporting Companies (NNRC), an organization of leading agencies that provides services worldwide. kenny@ court-reporting.com

APR / MAY 20 16 TODAY’S GENER AL COUNSEL

LAW DEPARTMENTS SEE REGULATION AS BIGGEST CHALLENGE Data Privacy a Major Concern

ccording to The Consilio Annual Law Department Benchmarking Report, released in February, more than half of law departments find that regulatory requirements pose the biggest challenge they face.

Consilio is an e-discovery and document review service provider, whose services include conducting internal and regulatory investigations. The Benchmarking Report uses data collected from 119 companies that vary in size and operate in a range of industries. The data is used to assess the practices and concerns of law departments.

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TOP CHALLENGE FOR THE LEGAL DEPARTMENT 51%

1. Increasing or changing regulatory requirements

50%

2. Internal resource constraints 42%

3. Industry economic pressures

41%

4. Data/information security and privacy challenges 28%

5. Adaptation to internal reorganization, process, or technology changes 6. Legal risks in emerging markets

20%

7. Support for the business during major transaction or litigation event

20% 14%

8. Information governance challenges

13%

9. Business client satisfaction with legal services delivery 10. Synergies/integration following mergers and acquisitions 11. Employee retention

9% 7%

today’s gener al counsel apr / may 20 16

Many of the regulatory requirements faced by law departments deal with data privacy and cybersecurity. This relatively new concern affects resource allocation, strategic planning, and to some extent hiring practices.

One alarming issue the data reveals is a lack of programs designed to secure information that is shared with vendors. While 58 percent of law departments have an internal data-privacy program (and the data suggests that many more will have one soon), just 21 percent take the same precautions with information shared externally. utilize an enteRPRiSe CYBeRSeCuRitY anD/OR Data PRiVaCY PROGRaM

no 42% 58% Yes

utilize a tHiRD-PaRtY inFORMatiOn RiSK aSSeSSMent PROGRaM 21% Yes no 79%

Queried on whether the data had anything to say about what lies behind the laxity in vendor management, Laurie Fischer, Consilio managing director, was hesitant to use that term.

“I think it’s really just a lack of awareness on the part of many law departments,” Fischer said.

“However, we’ll see that change very quickly as cyber-attacks increase in severity and visibility, and internal IT and records management departments become increasingly aware of the risk.

They will bring the message to the law department that greater vigilance is needed.”

According to Fischer, the financial cost of breaches and cyber-attacks, large as it is, isn’t the primary force driving understanding of the risk posed by inadequate vendor management. It is the significant blow that corporate reputations take when those events occur.

Fischer perceives some confusion about the kinds of risk assessment measures that should be taken with outside vendors.

“What we see is that organizations are either doing nothing about it or they are going overboard, requiring their vendors to implement unrealistic requirements,” she said.

Fischer believes that organizations need to develop and perform realistic risk evaluations, define the criteria in order to mitigate risks, assess their vendors against those requirements, and then ensure that vendors implement strategies for any

gaps in current practices. “Typically, we see this as an exercise initiated by the law department, but enacted in close collaboration with information security. There should be some sort of vendor compliance review on a regular basis, as well, to ensure that vendors continue to comply.”

The Consilio survey doesn’t address the question of where ownership of the vendor data security issue resides, but other sources indicate that general counsel are reluctant to take complete charge of an area in which IT and risk managers have responsibility too.

“It’s true that many parts of the organization are involved in assessing vendors,” said Bret Baccus, managing director at Consilio, “but the law department must take the lead in evaluating law firms.”

Baccus notes that law firms often have strategic information about companies they serve, including crucial information about intellectual property, mergers and acquisitions, as well as litigation. Only the law department knows which firms have which kinds of data, and therefore the law department is in the best position to assess what risks are posed and how they should be addressed.

DISCOVERY TASK OUTSOURCING The pressure to manage costs has led many law departments to outsource discovery work to non-law firm vendors. More than 75 percent of companies with over $10 billion in revenue reported using alternative service providers for

The daTa reveals a lack of programs designed To secure informaTion ThaT is shared wiTh vendors. document review and data processing/hosting.

For companies between $2 and $10 billion revenue, the figure was 44 percent.

Hybrid law/e-discovery firms are beginning to appear in Europe, but not yet in the United States. Baccus was hesitant to predict that trend would take hold domestically. continued on page 53

49

SUCCESSOR LIABILITY for FCA Violations

By Tirzah Lollar and Christina Ferma

50

TODAY’S GENER AL COUNSEL APR / MAY 20 16

T

he Department of Justice year-end False Claims Act statistics made clear that 2015 was another big year for FCA enforcement actions. Then, just days into 2016, DOJ underscored its commitment to prosecuting FCA violations of all types through its resolution of claims premised on a successor liability theory. On January 6, URS E&C Holdings Inc. (URS) agreed to pay $9 million to settle with the DOJ, finally putting to rest the DOJ’s FCA claims against Washington Group International Inc. (WGI), which were brought in a case filed in 2004.

The government had alleged that WGI and its joint venture partners submitted false claims in connection with five United States Agency for International Development (USAID) contracts.

WGI and its U.S. joint venture partner, Contrack International Inc., won several of the contracts after concealing the identity of a third joint venture partner during the procurement process.

The third joint venture partner was a foreign company and was thus ineligible to work on a USAID-funded project.

As a result, the government alleged that all invoices and certifications of compliance with USAID’s source, componentry and nationality requirements submitted by the joint venture partners were false and violated the FCA. While the lawsuit was pending, WGI was acquired by URS in 2007. Nearly a decade later, the DOJ brought an FCA enforcement action against URS, using a successor liability theory and based on the alleged misconduct of WGI.

FCA AND SUCCESSOR LIABILITY

Generally in an acquisition the acquiring company assumes the predecessor’s liabilities, as in this case, where URS assumed the liabilities stemming from predecessor company WGI’s misconduct. The DOJ and SEC devoted several pages to this subject in their joint 2012 publication, “A Resource Guide to the U.S. Foreign Corrupt Practices Act.” That document warns that “[s]uccessor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception.” With the recent URS FCA settlement, the DOJ served up a strong reminder that successor liability applies to FCA violations, as well.

In light of the URS case and the shifting landscape of the False Claims Act, companies today must be cautious when considering a merger or acquisition, as the FCA now regularly impacts many more companies in more industries than it has in the past.

Essentially, the FCA applies to a company or an individual that makes a false claim to the government. Enacted in 1863 during the Civil War and originally termed “Lincoln’s Law,” the FCA was intended to hold government contractors accountable for submitting false claims for payment, in particular as a way of targeting contractors who were selling the Union Army unhealthy horses and mules, faulty rifles and ammunition, and rancid rations and provisions.

But over the years, the FCA has undergone many changes. Some were effected in 1986 through sweeping amendments that replaced many references to the armed forces with more general references to “the government,” or “an officer or employee of the Government, or a member of the Armed Forces.” Then the 2010 Affordable Care Act’s FCA-related amendments caused a boost in the enforcement of healthcare fraud under the FCA, further extending the FCA’s reach over the years.

The DOJ’s recently announced FCA enforcement statistics show the broad reach of the FCA today. DOJ recoveries in 2015 drew from a broad range of entities. They included the usual suspects – companies in the health care, housing and government contracts industries – but companies outside those industries were not untouchable. The DOJ itself stated that although “health care, mortgage, and government contract fraud dominated fiscal year 2015 recoveries, the department has aggressively pursued fraud wherever it is found in federal programs.”

In 2015, the DOJ reached businesses both big and small in a variety of industries, including education and insurance. The FCA reaches any company or individual that receives funding through federal programs, from FEMA to Medicare, and from the government’s small business administration program to HUD mortgages, to name just a few – if they submit false claims for funding or are shown to have made false statements to fake their eligibility to participate in such programs.

Even former pro bike racer Lance Armstrong is defending an FCA case. because his cycling team was sponsored by the U.S. Postal Service and DOJ has alleged he violated the FCA by seeking sponsorship money from the Postal Service while not complying with applicable rules banning the use of performance enhancing drugs.

The FCA also allows the government to reach a company that has payment obligations to the federal government, such as in royalty cases, should the company underreport or underpay royalties.

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apr / may 20 16 today’s gener al counsel

THE YATES MEMORANDUM

tirzah lollar is a

52

partner in the Washington D.C. office of Vinson & Elkins.

Her principal area of practice involves white collar criminal defense and government investigations.

She represents clients before enforcement authorities, including the Department of Justice, the SEC and the Defense Criminal Investigative Service. tlollar@velaw.com

Notable too is DOJ’s increased commitment to pursuing individuals involved in FCA violations, as announced in DOJ’s “Yates Memorandum” last year. On September 9, 2015, Deputy Attorney General Sally Quillian Yates issued a new DOJ policy, with corresponding guidance, that emphasized that the Criminal and Civil Divisions are required to coordinate their efforts to hold individuals accountable for corporate misconduct by instituting criminal prosecutions or filing civil charges – or sometimes both.

Moreover, out of the many civil statutes under which companies and individuals may seek reduced penalties by cooperating with authorities, the FCA was the only one specifically mentioned in the memorandum where the DOJ staked out its position that in order to receive any cooperation credit at all, a company must fully cooperate with DOJ’s investigation.

That means up to and including providing complete factual information about individual wrongdoers to the satisfaction of DOJ, which will conduct its own simultaneous investigation to assess the completeness of the company’s information.

DOJ’s reference to the FCA was not lost on the defense bar, and it suggests that an increased number of FCA suits will be brought against individuals in the coming years.

biggER RECOVERiES

christina Ferma is an associate in Vinson & Elkins’ Washington D.C. office. Her principal area of practice is complex commercial litigation, with a focus on white collar criminal defense and government investigations, including matters related to the False Claims Act and Foreign Corrupt Practices Act. cferma@velaw.com

The DOJ’s filing of FCA cases shows no signs of slowing down. The recovery total in 2006 was record-breaking, but that record was broken in 2012, and subsequently broken again in 2014.

The DOJ’s continued aggressive pursuit of FCA claims against companies in all industries, and the fact there is no longer a typical type of FCA case, make it imperative for companies to be cautious when it comes to any activity that might be covered by the FCA. FCA enforcement could further increase, in terms of both number of actions and scope, depending on the outcome of Universal Health Services, Inc. v. United States ex rel. Escobar, a case that will be heard by the U.S. Supreme Court in the 2016 term. The Court’s decision will provide much awaited clarity regarding the so-called implied certification theory of liability, a theory that has no basis in the FCA statutory text. In courts where it is recognized, it permits a defendant to be held liable if it is not 100 percent in compliance with all applicable contractual and regulatory provisions, regardless

of whether the relevant government agency had contractually insisted on perfect compliance, let alone would have been willing to pay for it.

FCA practitioners will be eagerly awaiting the Supreme Court’s ruling, because an endorsement of an implied certification theory as the law of the land would dramatically expand the already broad scope of the FCA.

TAKEAWAY FOR CORPORATiONS

Lawyers involved in mergers and acquisitions know that acquiring another company requires careful due diligence to assess the value and potential liabilities associated with the acquisition. In today’s world of frequent mergers and acquisitions, there already is a lengthy list of areas requiring attention in the course of due diligence, and the recent FCA settlement-based successor liability theory underscores the need to consider yet another.

Given the broad reach of potential FCA liability to all companies in any way doing business with the U.S. government, any company considering an acquisition should first consider whether the target company has any pre-acquisition FCA compliance risk for which the acquiring company could be held liable.

In making that assessment, here are some questions to consider asking about the target company: • Does the company do business with the federal government?

• Has it ever done business with the federal government?

• Does it receive federal funding, or is it applying to participate in any programs that received federal funds?

• Does it have any payment obligations to the federal government? For example, does it pay royalties to the government?

• Is the company involved in any joint ventures or partnerships that involve work with the federal government or federal funding?

• Has the company ever been investigated for potential violations of the False Claims Act case and/or been the defendant in a False Claims Act case?

If the answer is “yes,” to any of these questions, the acquiring company should conduct additional due diligence to assess the risk, and consider whether to go forward with the deal or if the terms of the deal should be renegotiated to account for any FCA risk. ■

today’s gener al counsel apr / may 20 16

Law Department Challenges continued from page 49

“I do see e-discovery vendors here becoming more part of the legal landscape, and law departments can partner with vendors to their advantage,” he said. “There is a quality edge in doing so because vendors focus exclusively on e-discovery and include collection, hosting and review as part of their service. Vendors have to adopt evolving technologies, whereas law

Among companies with more than $10 billion in revenue, 89 percent reported employing a law department operations manager. This finding appears to support anecdotal evidence of a trend to run departments’ internal operations as a business unit. Many larger companies are employing a dedicated law department operations manager who guides operational, financial, technical and process support.

“The position of operations director continues to evolve to a true executive level position in

Many larger coMpanies are eMploying a dedicated law departMent operations Manager. departments might be hesitant to make those investments. And data management, privacy protocols and security are more advanced among e-discovery vendors than they are in law departments.”

OTHER SURVEY HIGHLIGHTS Law department spending continued to increase, but at a lower rate than in our last year’s survey.

Sixty-seven percent of respondents reported using matter-level budgets and 74 percent reported having, or planning to implement, structured programs for conducting rate negotiations. A majority reported having preferred-provider programs for outside counsel and using a relatively small number of firms (a median of eight) for 80 percent of their work.

law departments across all industries,” said Baccus. “Operations directors are guiding spending decisions, interacting with senior-level executives in other internal functions, and relieving operational oversight responsibilities from the general counsel.”

The graphs in this article appeared in The Consilio Annual Law Department Benchmarking Report. The report is available at: www. consilio.com/resource/2015-law-departmentbenchmark. ■

DEGREE OF CHANGE IN TOTAL LEGAL SPENDING -10% to -8%

-7% to - 4%

-3% to -1%

Percent reporting change from 2013 to 2014

9%

Percent reporting change from 2014 to 2015

9%

8%

11%

0%

10%

8%

1% to 3%

13%

15%

4% to 7%

19%

17%

8% to 10%

16%

19%

26%

20%

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C

54

Collect Better Data, Not More Data

By Justin Silverman

ollecting data can present a paralyzing paradox. On one hand, corporate legal has recognized the need to collect and analyze data. On the other hand, overambitious data collection can derail projects from the outset.

When corporate legal first began implementing Enterprise Legal Management (ELM) systems, it often set requirements that put lots of data fields in place to capture many different pieces of data on a matter. After starving for data to answer to business leaders, corporate legal embraced a “get those fields in place and collect as much data as we can” approach.

In our experience, working with hundreds of legal departments, we’ve learned that the “more is better” approach presents a number of obstacles to getting traction with an ELM system implementation: • Capturing data is time intensive. The time required to collect all that information from legal staff may not be worth the time required to input the information.

• Visual intimidation. The sheer sight of all the data fields in the user interface will discourage your attorneys or other members of the legal department from feeling good about their user experience with the system and entering any data at all.

• Data complexity. Added complexity is likely to make it more difficult to manage the system and analyze the data collected.

The critical objective for improving legal department operations isn’t to collect all data, it’s to collect the right data to drive better legal outcomes.

In the face of business pressure to do more with less, market research firm Gartner, Inc. forecasts corporate legal adoption of ELM will grow between 20 and 50 percent by 2020. As more and more GCs turn to process and technology to meet these pressures, a set of best practices is emerging that defines what data to collect and how best to collect it.

1. Identify data with significant business value.

Focus on information that has significant business value based on the complexity and

today’s gener al counsel apr / may 20 16

importance of the matter, and then enforce the data collection policy.

This can be done in phases – for example by limiting the number of data fields required to initiate a matter. As the matter evolves or reaches certain cost or risk thresholds, expand the amount of data that needs to be entered.

For example, an early stage low-risk real estate matter may only require 5-10 fields for data entry, while a complex IP litigation matter that is going to trial may require much more.

Many ELM systems provide system rules to hide unnecessary fields so they do not clutter the screen or intimidate legal department staff.

In addition, the fields that are necessary may be marked “required” to prevent staff from progressing with matter initiation until the information is provided.

2. Determine how the data could drive decisionmaking.

In advance of an ELM implementation, determine how the data is likely to be used to make more informed decisions.

This means considering how the legal department will use the data prior to requiring staff to enter it. The level of detail a legal department truly needs will vary among organizations. What’s important is to take a step back before configuring the application to determine: • Who will be receiving the information?

• How will that information be used to control costs, manage risks, increase transparency or provide some additional value?

Data analytics professionals from inside or outside the organization can be very helpful in determining legal matter data collection requirements unique to your department. An associate general counsel at a high-tech company found helpful partners in the finance department. She noted two benefits for corporate counsel: providing a financial skill set that isn’t usually taught in law school and building credibility for fiscal responsibility.

3. Leverage existing data from other systems.

Manual entry of data by the legal department is not the only way to collect data. Many businesses already have data with inherent value to matter management. One best practice is to identify opportunities to pull in data from these existing sources, in lieu of having the legal department enter duplicate information.

Integration with other systems is a critical way that many companies pull in relevant information

without needing to ask people to type it into the system. ELM systems can integrate with systems for accounts payable, IP management and human resources, among others, to populate data fields that are relevant for analysis.

ELM drop-down lists can be configured based on the matter type or the practice area to limit options, so data can’t be pulled from other sources. Some systems have functionality to allow outside counsel to input data on a matter for

Many businesses already have data with inherent value to matter management.

55 greater collaboration. This is especially effective when the ELM system permits outside counsel to easily incorporate these data sources into the firm’s matter workflow or process.

4. Establish a roadmap for legal data maturity.

Becoming a data driven legal department does not, and should not, happen overnight. Legal departments will mature over time with regard to their collection and analysis of matter information. It should be a process with stages and a roadmap. Some departments may decide to advance more quickly, some may take a more measured approach.

A roadmap starts with putting a system in place (or replacing an existing system) and collecting a baseline set of data. Build your analysis based on that data and begin making decisions and facilitating discussions based on that initial information. Then make adjustments over time, by removing some data that is not being used and by adding or replacing with more relevant data.

In corporate legal, more data usually doesn’t mean better data for collection in a matter management system. Be strategic, or you may find that your legal department colleagues end up providing less information to the system and are less satisfied with the process. ■

Justin Silverman is vice president of product management for LexisNexis CounselLink. justin.silverman@ lexisnexis.com.

apr / may 20 16 today’s gener al counsel

56

Litigation Guidelines Shouldn’t Undercut Policyholder

By Catherine J. Serafin

C

orporations buy insurance policies to cover settlements and judgments. They also buy litigation insurance to cover the costs of defending claims when their policies provide that the insurer must defend

the policyholder, or pay the costs of defense. Policyholders rightfully expect a robust and zealous defense, not one that is driven by the insurer’s financial considerations.

today’s gener al counsel apr / may 20 16

In many instances, however, insurers insist that counsel representing the policyholder follow the insurer’s “litigation management guidelines” as a condition of payment of legal bills. Although the purpose of many litigation management guidelines – to make litigation cost effective and thoughtfully planned out – is laudable, some guidelines have the potential to impair a lawyer’s independent professional judgment, thus implicating violations of ethical rules.

Below is a discussion of some of the more questionable guidelines, and practical suggestions to allow a policyholder and its counsel to mount the strongest defense possible against claims, and still receive the litigation insurance the policyholder purchased.

The insurance company client in that case would have an interest in steering the case toward the uncovered claims, while the policyholder would want to focus on the covered claims.

IMPLIcatED EthIcaL RULES Lawyers generally must be committed and dedicated to a client’s interests, and they must zealously advocate on behalf of the client. When an insurance company pays defense counsel’s fees and requires compliance with litigation management guidelines, a number of ethical rules governing lawyers may be implicated for counsel representing only the policyholder.

For instance, ABA Model Rule of Professional Conduct 1.8(f) prohibits a lawyer from accepting compensation for representing a client from someone other than the client unless certain conditions are met. Those conditions are: (1) informed consent of the client has been obtained, (2) there has been no “interference with the lawyer’s independence of professional judgment, or with the client-lawyer relationship,” and (3) information regarding the representation of the client has been held confidential, as required by ABA Model Rule 1.6.

ABA Model Rule 5.4(c) also provides that a lawyer may not allow the person paying the bills to “direct or regulate” the lawyer’s professional judgment in providing the legal services.

In some jurisdictions, the insurance company and the policyholder may be considered “joint” clients of the lawyer, in which case ABA Model Rule 1.7(a) may come into play. That rule prohibits the joint representation if it involves a “concurrent conflict of interest,” which exists when the representation of one client will be directly adverse to another client, or where there is a “significant risk” that the representation of one client will be materially limited by the lawyer’s responsibilities to another client.

Such a situation may exist, for example, when a complaint alleges both covered and uncovered counts against the policyholder client.

In some situations, the insurance company

IMPERMISSIBLE “GUIDELINES” Certain litigation management guidelines have the potential to impermissibly interfere with a lawyer’s duties of loyalty and the exercise of independent professional judgment. Examples of such guidelines are: • Paying only for non-lawyers to draft all deposition notices, including corporate representative notices.

would have an interest in steering the case toward the uncovered claims, while the policyholder would want to focus on the 57

covered claims.

• Restrictions on the use of experts and other third-party vendors.

• Mandating the submission of all legal fee invoices to third party auditors.

• Requiring prior approval by the claim handler for research, travel, motions, and depositions.

• Refusing compensation for work on motions unless the claim handler believes the motion has a 50 percent or greater chance of success.

• Limiting fact gathering and document review to low level employees or contractors billed at paralegal rates.

• Prohibiting trial preparation until a trial date is set and a showing that it is “absolutely necessary.”

• Requiring prior approval of the claim handler for appeals, jury demands and whether to mediate.

The ABA Standing Committee on Ethics and Professional Responsibility, and many state bar associations, have issued opinions regarding these restrictions and other litigation management guidelines that cross the line from management to regulating the lawyer’s exercise continued on page 61

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Case Provides Blueprint For Controlling Liability

By Abby L. Sacunas

today’s gener al counsel apr / may 20 16

T

he Seventh Circuit’s decision in Thornton v. M7 Aerospace, LP should serve as a reminder to companies that purchase or succeed to assets of a product manufacturer: Liability may follow if you do not act cautiously and deliberately.

Thornton arose out of a plane crash in May 2005 in Queensland, Australia, that killed all fifteen people on board. The estates of the deceased sued several companies and one individual in the Northern District of Illinois. According to the plaintiffs, the aircraft was defective because it had a Ground Proximity Warning System to warn the crew of terrain ahead, but lacked an improved version of this component known as an Enhanced Ground Proximity Warning System that might have allowed the pilots to avoid the

stead in the business of building and assembling aircraft parts for other aerospace companies.

NO DUTY TO WARN Plaintiffs nevertheless claimed M7 owed them a duty to warn because it purchased the “product line.” Agreeing with the district court’s analysis granting summary judgment, the Seventh Circuit found that none of the four factors required to establish a duty to warn as a product purchaser under Illinois law were satisfied. Most fatal was that M7 did not have any service contracts with Transair and “the plaintiffs [did] not present evidence of any relationship between M7 and Transair with respect to the aircraft.” The Seventh Circuit specifically found that M7’s distribution of a catalogue of parts for the Metro aircraft, sale of flight, maintenance and inspection manuals to known Metro owners

The Seventh Circuit found that none of the four factors required to establish a duty to warn as a product purchaser were satisfied. accident. The plaintiffs claimed that M7 was liable under negligence and strict products liability theories for failing to warn the purchaser of the aircraft, Transair, of this purported defect.

The aircraft at issue was a Fairchild Aircraft SA227-DC Metro 23. The plane was designed, manufactured, assembled, tested, and sold by Fairchild Aircraft, Inc. Fairchild stopped manufacturing that type of aircraft in 2000 and filed for bankruptcy in 2002. The bankruptcy court approved 4M LLC’s purchase of Fairchild’s assets.

The Asset Purchase Agreement stated that the buyer assumed no “liability for personal injury or property damage arising at any time out of or in connection with goods manufactured, produced, distributed or sold by the Sellers prior to the Closing Date, including but not limited to any Product Liability claims.”

In 2003, 4M assigned that Asset Purchase Agreement to M7 free and clear of any liens, claims and encumbrances. M7 thus never had any relationship with Fairchild. In fact, although it acquired the right to the Fairchild name and the Type Certificate designating it the Original Equipment Manufacturer for the Metro fleet, it never manufactured any aircraft at all. M7 is in-

and operators and technical support was not evidence of a “relationship.”

In so finding, the Seventh Circuit recognized that the existence of a “continuing relationship between the successor and the predecessor’s customers benefiting the successor” has been deemed “the [most] critical element required for the imposing of this duty [to warn on successors].” Although some jurisdictions impose a duty of care on a successor based solely on its acquisition and operation of a product line, that is not the case in Illinois. Thus, because M7 did not have a continuing relationship with the purchaser, it did not have a legal duty to warn as Fairchild’s corporate successor.

Plaintiffs had no more success arguing a duty to warn arose under the voluntary undertaking theory. Under a voluntary undertaking theory of liability, the duty of care is limited to the extent of the undertaking. More important to the Appellate Court’s reasoning, Illinois law requires proof of reliance; that is, proof that the operator (here, Transair) relied on the defendant’s voluntary undertaking of a duty to warn.

Here, the Appellate Court took note that plaintiffs did not produce any evidence that Tran-

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apr / may 20 16 today’s gener al counsel

sair relied on M7 for warnings about defects in the aircraft. For this reason, the Appellate Court agreed that the plaintiffs could not establish that any voluntary undertaking by M7 caused the accident and their injuries, and upheld the dismissal of their claims.

LESSONS LEARNED Understanding the scope, depth and breadth of successor liability, particularly as it relates to the voluntary undertaking doctrine, can prove invaluable to those engaged in M&A activity on behalf of companies acquiring product lines, plants, assets and/or manufacturing facilities. The Seventh

refuse to impose a duty to warn solely based upon a successor’s relationship with the product line. There are however jurisdictions that do impose successor liability for negligence and strict products liability based only on the acquisition and operation of a product line irrespective of any relationship with the customer. California follows an equitable product line exception which examines each case of successor liability issues on their own unique facts.

Other jurisdictions, including Pennsylvania and New Jersey, similarly recognize the product line exception. Although it can be difficult to predict choice-of-law issues in advance, any com-

Successor entities must weigh the inherent interest in exploiting predecessor’s relationships against the threat of liability for negligence.

60

abby sacunas is a member of Cozen O’Connor’s commercial litigation department.

She is the managing editor of the firm’s Product Liability Prevention and Defense blog. asacunas@cozen.com

Circuit’s analysis and reasoning in this case can be used to help control exposure and avoid product liabilities with careful M&A strategy.

Here are some things to take away from this decision:

pany that purchases the assets of a manufacturer will have to consider the possible application of the law from a jurisdiction like California or Pennsylvania that can considerably expand its liability for the predecessor’s products.

• Deal structure is critical. 4M acquired Fairchild’s assets out of bankruptcy free and clear of any liens, claims and encumbrances. M7 acquired those precise rights by way of assignment of the Asset Purchase Agreement. This played a key role in determining the scope of M7’s successor liability. If instead there was a continuity of the business operations of Fairchild as it existed prior to the bankruptcy, with the same officers, directors, manufacturing operations, etc. only under new ownership, that transaction could have been treated as a merger or consolidation under the de facto merger doctrine resulting in the transfer of the liabilities needed to continue normal business operations. It is therefore essential to closely scrutinize the structure of corporate transactions to guard against disguised liabilities.

• Be mindful about creating an otherwise non-existent duty. Even the most diligent and appropriate acquisition cannot completely guard against successor liability. The Seventh Circuit in Thornton explained that if M7 had reached out to the customers of its predecessor, like Transair, to facilitate continued business, then even under Illinois law liability would have followed.

Successor entities must therefore carefully weigh the inherent interest in exploiting predecessor’s relationships against the threat of liability for negligence, and strict liability for claims related to the predecessor’s products. Even the voluntary provision of information about a predecessor’s products and availability of upgrades to those products can, according to Thornton, provide a basis for liability to the extent a customer relies upon such information. Thornton explained that reliance is key to establishing a duty of care under the voluntary undertaking doctrine. The voluntary undertaking doctrine, often called the Good Samaritan Rule, exists in some form across all jurisdictions. Thus, caution must be exercised everywhere because even the most benevolent conduct can open the door to liability. ■

• Carefully consider choice of law. The application of Illinois law was critical to the Thornton decision, and was specifically called for in the Asset Purchase Agreement. As discussed supra, Illinois law requires evidence of a continuing relationship between the successor and the predecessor’s customers. Moreover, Illinois courts

today’s gener al counsel apr / may 20 16

Litigation Guidelines continued from page 57

of independent professional judgment on behalf of a client. North Carolina, Ohio, and other state bar associations have issued opinions prohibiting compliance with guidelines restricting trial preparation activities, and limiting the time spent on legal research without prior approval unless the client gives informed consent.

There also are reported decisions in many states, including Texas, Montana, Tennessee and California, noting that various guidelines designed to contain costs may compromise a lawyer’s autonomy and the exercise of independent professional judgment.

Unfortunately, the remedy suggested by most state bar associations is for the lawyer to withdraw from the representation.

Similarly, the ABA Standing Committee, and Massachusetts, Connecticut, Virginia and many other state bar associations, have found that requiring lawyers to submit their fee bills to outside auditors may violate a lawyer’s duty to keep client matters confidential under Rule 1.6(a), and poses the risk of waiver of privileged information. The informed consent of the client is required before a lawyer may disclose such information, and such disclosure must not adversely affect the client’s interests.

Unfortunately, the remedy suggested by most state bar associations in the event that following a guideline would violate an ethical obligation is for the lawyer to withdraw. That is not a satisfactory solution because it does not resolve the problem. It cannot be unethical for one lawyer, but ethical for another, to follow a particular guideline, so it effectively leaves the policyholder without counsel, and unable to access the litigation insurance it purchased.

As alternatives to withdrawing from the representation, below are several practical suggestions that might allow defense counsel to continue to effectively and zealously represent the policyholder, and to be paid for that work consistent with the insurer’s obligations under the policy.

• Policyholder and its counsel should read the guidelines at the beginning of the representation and identify any that appear to present ethical issues. Research case law and bar opinions in your state to help identify such guidelines. Raise any issues with the insurer prior to agreeing to follow the guidelines. Any guidelines already found to be problematic in that jurisdiction should be stricken, and the policyholder and its counsel should request relief from other guidelines that will be inefficient, ineffective, or too restrictive for the matter.

• The policyholder may have its own set of litigation management guidelines it expects outside counsel to follow. The insurance company may be willing to substitute the policyholder’s guidelines for a matter.

• If the claim handler refuses to or does not have the authority to waive or substitute guidelines, speak to a supervisor. Keep going up the chain of command until you reach someone with the proper authority.

• Document any agreements at the start of the matter, because claim handlers often change.

• Depending on the policyholder, it may be appropriate to address the guidelines issue at the time of policy inception or renewal, and to reach an agreement before the policy goes into effect.

When properly drafted and used, litigation management guidelines can help litigation proceed in a more cost-effective and strategic fashion. However, sometimes defense lawyers face overly restrictive rules not tailored to the particular matter. In that case, there are solutions that remove guidelines that would be unethical to follow, or that simply make no sense under the circumstances. ■

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Catherine Serafin is a Washington, DCbased partner in the Insurance Recovery Group of Lowenstein Sandler LLP. She has extensive experience resolving complex insurance disputes on behalf of policyholders. cserafin@lowenstein. com

apr / may 20 16 today’s gener al counsel

Trends TRENdS In IN

CanadIan CANAdIAN M&a M&A 62

ByJamie JamieKoumanakos Koumanakos By

today’s gener al counsel apr / may 20 16

n unusually strong year-end bolstered Canadian M&A activity, making last year the most active year in Canadian dealmaking since 2007. This year got off to a robust start marked by overall Canadian M&A deal values reportedly increasing by 154 percent over the same period in 2015.

Here are some of the M&A trends that we see shaping the landscape in 2016: POLITICAL CHANGE, NEW INVESTMENT OPPORTUNITIES Following the ouster of Alberta’s provincial Conservative party in favour of the New Democratic Party, Canadians also elected a new federal government in November. Led by Prime Minister Justin Trudeau, the Liberal party secured a majority government and mandate for political change. For nearly a decade, former prime minister Stephen Harper’s Conservative government prioritized, among other goals, curbing government spending and the promotion of Canada’s natural resource economy.

ACTIVE PRIVATE EQUITY ANd PENSION PLAN SECTOR Last year witnessed a considerable decline in the value of the Canadian dollar relative to its U.S. counterpart, and the drop continued into 2016.

Most commentators have attributed the decline to depressed prices for key Canadian exports such as crude oil, the proposed rate-raising of the U.S. Federal Reserve and the U.S. dollar being a safe haven in times of international economic uncertainty.

As a result, U.S.-based private equity (“PE”) buyers should have a greater ability to pay competitive prices for Canadian-based target companies relative to Canadian PE firms. Equally, the depressed Canadian dollar could operate to reduce valuations of Canadian-based target companies, particularly companies whose operations cannot capitalize on a weaker Canadian dollar, making PE investment into Canada that much more attractive.

We also see Canada’s pension plans continuing to invest directly, and look beyond our borders to find investments of a size and scale that justifies the deployment of significant capital.

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The Special Purpose Acquisition Corporation (SPAC) market has been thriving in recent months.

In securing its new majority government, the Liberals ran on campaign promises of greater support for renewable energy, increased taxes on high-income earners and planned deficit spending for three years to spur economic growth.

With the new government now at the helm, the Canadian business community is readying itself for a new era of Liberal policymaking.

There remain some skeptics regarding the government’s influence on the business climate.

However, one impact is likely to include a boost to the renewable energy sector. The government has stated its commitment to phase out fossil fuel subsidies, streamline the approval process for energy projects and implement new climate change regulation. In addition, with government spending on infrastructure poised to increase

by C$5 billion annually, investors will look to capitalize on new Canadian projects.

In 2015, direct investments by Canadian pension funds were made in a variety of industries, including technology, infrastructure and private lending. We expect to see this kind of direct deal activity continue, and perhaps increase, in 2016.

Intriguingly, the Ontario government suggested in 2015 that it may abolish the “30-percent rule” for Ontario-based pension plans. The 30-percent rule prohibits pension funds from investing in securities of a company if the investment carries with it the right to control 30 percent or more of the votes that elect the directors of the company.

While pension funds and their advisers have developed investment structures in order to comply with this restriction, the abolition of the 30-percent rule will certainly be welcome news and should spur even greater direct investment.

As investors in PE funds, Canadian pension funds have also been increasingly vocal with PE

apr / may 20 16 today’s gener al counsel

fund general partners regarding the need to be presented with opportunities to directly invest alongside the general partner. Given the importance of pension funds as PE fund investors, we expect that such requests will continue into 2016, and that pension funds will increasingly negotiate for greater co-investment rights as part of the PE fund-raising process.

TROUBLE IN THE OIL PATCH Global oversupply and weak demand for oil over the past year has stalled new investment in the energy industry. This global trend has had a particular impact on Canadian markets, which are highly invested in oil and gas. In 2015, for the first time in recent memory, the energy sector was dethroned as the most active in M&A (in terms of deal value) by real estate and financial services. Nevertheless, market participants expect this year to be robust in energy M&A, as both strategic and financial acquirers take advantage of undervalued Canadian assets.

Of particular importance will be sales of assets and cash-flow streams by distressed companies trying to reduce debt levels or raise capital for maintenance or expansion of existing projects.

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Jamie Koumanakos is a partner at Blake, Cassels & Graydon LLP. He practises Canadian corporate and securities law with a focus on domestic and crossborder mergers and acquisitions and private equity transactions. He is a U.S. Coordinator of the firm’s private equity group, and regularly acts for private equity funds, corporations, hedge funds and investment banks with respect to public and private acquisition and investment transactions in Canada. jamie.koumanakos@ blakes.com

TAKE-OVER BIDS: JUST SAY “SLOW” Available defenses to hostile bids are expected to change this year. While Canadian boards are empowered to implement shareholder rights plans (poison pills) to ward off unsolicited offers, Canadian securities commissions have historically cease-traded rights plans after 45-60 days in order to permit shareholders to tender to a hostile bid. But in March 2015, the Canadian Securities Administrators published proposed amendments to Canada’s take-over bid regime: • All bids will be required to remain open for at least 120 days (an increase from the current 35 days) unless the target voluntarily shortens the period to not less than 35 days.

• All bids must be subject to a minimum tender condition of at least 50 percent of the outstanding securities of the class that are subject to the bid, not including those held by the bidder.

• Following the satisfaction of the minimum tender condition, all bids must be extended for an additional ten day period.

The changes are intended to provide target boards with more time to respond to unsolicited takeover bids and avoid the need for a rights plan. Shareholders will be assured an

opportunity to gauge whether a bid is successful before tendering, as the ten-day extension will be mandatory. The 50 percent minimum tender condition is intended to prevent partial (or “creeping”) bids, to ensure all shareholders can share in a control premium from the buyer.

While no effective date has been announced, market participants expect the amendments will be implemented during the first half of 2016.

FOCUS ON FOREIGN CORRUPT PRACTICES The interactions of Canadian businesses with foreign governments will be under greater scrutiny with the enactment of new legislation, the Extractive Sector Transparency Measures Act (ESTMA), and a new debarment regime for government procurement. Larger Canadian oil, gas and mineral development companies are now subject to ESTMA, which is designed to reduce international corruption by requiring public reporting of payments made to foreign and domestic governments and government officials (eventually including aboriginal governments).

The federal government also introduced a new “Integrity Regime” for all federal government procurement, which can result in a supplier being debarred from doing business with the government for ten years if it has committed an integrity-related offence, including one arising from foreign corruption issues. Enforcement actions received a boost from charges laid by the Royal Canadian Mounted Police against a large Canadian engineering firm. These factors will prompt potential purchasers to undertake more robust diligence efforts with respect to a target’s overseas activities.

SPAC ACTIVITY The Special Purpose Acquisition Corporation (SPAC) market has been thriving in recent months. Since the first Canadian SPAC, Dundee Acquisition Ltd., went public in April 2015, seven additional SPACs have closed initial public offerings or filed preliminary prospectuses.

SPACs raise public funds by offering investors units (typically one share plus a half-warrant for an additional share), with the net proceeds held in escrow. Sponsors of the SPAC then have a period of time, typically 21 months, to find a “qualifying acquisition” to present to shareholders and purchase with the escrowed funds. If a qualifying acquisition is not completed within the prescribed timeframe, the SPAC must return the escrowed proceeds to investors. We expect to see robust M&A activity by SPACs in 2016. ■

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