Today's General Counsel, V14 N2, April/May 2017

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Knowledge Keep Your Third-parTY CommuniCaTions privileged Compliance Programs to Avoid Govt Investigations Defensible E-Discovery

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Editor’s Desk

A good lawyer brings a lot to the table, but even not so good lawyers bring something no one else in the business sphere can offer, the attorney-client privilege. In this issue of Today’s General Counsel there are articles about several ways the privilege comes into play and the dangers of inadvertently waiving it. Lillian Hardy discusses the increasing reliance on third party experts during FCPA and other investigations, and the importance of routing the advice they offer through counsel, preferably outside counsel, so the privilege is retained. She suggests having counsel dictate and monitor the entire investigation process.

Christopher Loeber notes that annually one in five U.S. companies suffer a catastrophic event that implicates business interruption insurance, and often the first response is to open communications with insurance brokers. He advises filtering those communications through counsel, so they are privileged and won’t be discoverable. He also suggests thinking twice about the initial press release, as attempts to minimize the impact of the event can affect subsequent claims. Counsel can help with writing something that will reassure stakeholders without compromising a future case.

Technology is so thoroughly a part of the legal process now that twenty-six state bars have adopted some version of the ABA Rule requiring awareness of the benefits and risks associated with relevant technology. Julia Brickell advises general counsel to take a close look at the technologies their departments use, and decide whether they understand them well enough to satisfy the rules of professional conduct. If not, they need to engage an expert’s help. Nishad Shevde writes that legal departments are increasingly determined to bring legal services in-house because of rising fees for outside providers,

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but they see using the technology in a defensible way as a challenge. Nevertheless, the trend is accelerating because software providers are developing simpler platforms, including native cloud platforms. That eliminates many security concerns and lowers costs significantly.

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

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Features

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KEEP YOUR THIRD-PARTY COMMUNICATIONS PRIVILEGED Lillian S. Hardy Protecting communication with non-lawyer experts.

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LEGAL COMPETENCE AND THE ROLE OF TECHNOLOGICAL EXPERTISE

THE GC AND REAL ESTATE

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GENERAL COUNSEL AND THE HEADQUARTERS LEASE

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MAJOR ISSUES IN REAL ESTATE LEASES

Julia Brickell Courts are requiring tech proficiency for legal teams.

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Eric Allon Traps for the unwary.

Amol Pachnanda It’s an art, not a science, and the GC needs to know it.

BECOMING A THIRD-PARTY WITNESS WHEN COMPETITORS OR SUPPLIERS MERGE Steve Cernak Think twice about it.

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SUSTAINABILITY ACCOUNTING STANDARDS AS THE NEW GAAP Tricia Dunlap Standards for non-fi nancial reporting have gained acceptance.

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HOW TO MAXIMIZE YOUR BUSINESS INTERRUPTION INSURANCE RECOVERY

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C O LU M N S

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Christopher C. Loeber Tip for the post-catastrophe press release – talk to counsel fi rst.

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BEST PRACTICES AND PRIORITIES FOR GCS

Sarah J. Gorajski Laws and requirements vary widely.

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Nancy Jessen Refocusing the legal department into a small, high-performing team.

TEN WAYS TO IMPROVE YOUR ARBITRATION CLAUSE Dawn M. Johnson and Abby L. Risner Exercise your “freedom of contract.”

WORKPLACE ISSUES Strategies for Paid Sick Leave Compliance

THE ANTITRUST LITIGATOR Antitrust Implications of Wage and Benefit Surveys Jeffery Cross Don’t exchange prospective information.

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BACK PAGE FRONT BURNER Legalized Weed is Still Dangerous Mechelle Zarou Workplace rules for multi-state employers.

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Departments Editor’s Desk

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Executive Summaries

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E-DISCOVERY

16 The E-Discovery Imperative Steve Wilson Don’t perpetuate an outdated system.

18 How Insourcing E-Discovery Affects Law Departments and Firms Nishad Shevde Law fi rms are slow adopters.

INTELLEC TUAL PROPERT Y

20 Extraterritoriality and The Lanham Act Prateek Shah and Katharine Wagner Key appeals court decisions will affect future litigation.

CYBERSECURIT Y

COMPLIANCE

22 The Life Cycle of a Data Breach

26 Improve Compliance Programs to Avoid Government Investigations

Martha Coakley, Christopher Hart and Emily Nash Preparation, management, compliance and litigation.

Robb Adkins and Staci Yablon Internal investigation can deflect government investigation.

30 The Regulatory Challenge of Autonomous Vehicles Roy Keidar “Whose fault is it?”

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editor-in-Chief Robert Nienhouse managing editor David Rubenstein

exeCutive editor Bruce Rubenstein

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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Robb Adkins Eric Allon Julia Brickell Steve Cernak Martha Coakley Jeffery Cross Tricia Dunlap Sarah Gorajski Lillian S. Hardy Christopher Hart Nancy Jessen

Dawn Johnson Roy Keidar Christopher C. Loeber Emily Nash Amol Pachnanda Prateek Shah Nishad Shevd Abby Risner Steve Wilson Staci Yablon Mechelle Zarou

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APR/ MAY 2017 TODAY’S GENER AL COUNSEL

Executive Summaries E-DISCOVERY

INTELLEC TUAL PROPERT Y

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The E-Discovery Imperative

How Insourcing E-Discovery Affects Law Departments and Firms

Extraterritoriality and the Lanham Act

By Steve Wilson Accusoft

By Nishad Shevde Exterro

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A conservative estimate suggests 44 zettabytes of data will be produced annually in the next three years. With over a billion emails sent every day, manually sorting and categorizing data is simply not feasible. That means electronic discovery solutions have become a must for law departments.

Nonetheless, organizations remain slow to take full advantage of them.

There are numerous high-profile examples, going back years and persisting to the present day, of the corporate disaster than may result. Last March, for example, a Volkswagen CIO was brought to court for intentionally destroyed digital evidence related to what became the car company’s diesel emissions scandal, and in July of last year, the telephone headset company Plantronics was sanctioned $3 million for spoliation after a senior vice president knowingly deleted as many as 90,000 emails in an antitrust case.

Recent amendments to the Federal Rules of Civil Procedure provide another powerful impetus to adopt e-discovery.

Addressing issues like document preservation, they make it difficult to claim ignorance if proper e-discovery technology is not applied, and they give judges the ability to take action when relevant data is replaced or destroyed. There may be severe punishment for noncompliance. We also find many other countries, including Singapore and Canada, are elevating their standards for how attorneys handle electronically stored information.

Ignoring e-discovery, or choosing to remain with outdated methods, will result in expensive consequences and compromise the ability of attorneys to perform their legal duty.

Insourcing of legal services constitutes a major shift in the legal market. Seventyseven percent of those surveyed in Exterro’s 2016 In-House Legal Benchmarking Report said that half or more of their organization’s legal services – legal holds, document review, data collection/processing – were conducted internally. Seventy-six percent expect to perform more legal services in-house in the next two years. The major reason is the expense of law firm/service provider services. But in-house legal teams are struggling with how to insource in a defensible manner.

Legal project management software is designed to orchestrate the activities associated with legal projects, such as e-discovery, matter intake and witness deposition. Its value is becoming better understood by many in-house legal departments, simply because traditional project management practices may not be effective with an increased workload.

On the law firm side, however, legal project management is still a relatively new idea. To stay competitive and stop losing business to less expensive, more flexible competitors – or in-house legal departments themselves – firms need to adopt practices that improve productivity and empower faster and less expensive outcomes.

Companies wanting to move more of the legal process in-house, and law firms wanting to stay competitive as client expectations change, will need to invest more in the legal project management process. That means more training, more personnel, executive buy-in to change in the business model, and adopting new legal project management software to help manage and orchestrate the process.

By Prateek Shah and Katharine Wagner The Claro Group

Two recent decisions by the Fourth and Ninth Circuits on issues of extraterritoriality could have a significant impact on Lanham Act litigation. These two cases are striking because of the contrasting extraterritoriality issues raised, their potential impact on future litigation – especially in the area of proving economic and reputational harm – and their potential impact on commerce.

In March 2016, the Fourth Circuit vacated the district court’s dismissal of Bayer’s unfair competition claims of false association and false advertising in Bayer V. Balmora. The appeals court held that Bayer was not required to use or register its trademark in the U.S. to pursue unfair competition claims under the Lanham Act. In the second case, in August of 2016 the Ninth Circuit reversed a district court’s dismissal of a trademark infringement and unfair competition case under the Lanham Act in Trader Joe’s v.

Hallatt. The district court had dismissed Trader Joe’s claims based on a finding that federal courts lacked subject matter jurisdiction. The appeals court decision was based on a finding “that the extraterritorial reach of the Lanham Act raises a question relating to the merits of a trademark claim, not to federal courts’ subject matter jurisdiction.”

Both cases are now back with district courts, so the legal battles are far from over. However, the reasoning expressed by the appeals courts in these cases indicates that proving economic and reputational harm will be key requirements for plaintiffs to prevail under such claims.

TODAY’S GENER AL COUNSEL APR/ MAY 2017

Executive Summaries CYBERSECURIT Y

COMPLIANCE

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The Life Cycle of a Data Breach

Improve Compliance Programs to Avoid Government Investigations

The Regulatory Challenge of Autonomous Vehicles

By Martha Coakley, Christopher Hart and Emily Nash Foley Hoag

A data breach can be an existential crisis for an unprepared business, and in the best case it’s likely to be expensive and disruptive. Treat data security as an integral part of the company risk profile, and to account for that risk build governance and management structures, including a data breach team. It should include a compliance and legal expert, a forensic investigator and a PR professional.

When a breach occurs, first calls should be to outside counsel and a forensic investigator. Counsel can provide expertise in managing compliance questions and navigating issues that might arise with third parties. Forensic investigators provide crucial assistance in identifying the source and scope of a breach.

In some cases, notification must also be sent to a state agency (usually the attorney general). But there are significant differences among states regarding such things as what information is protected, whether notification is necessary regardless of harm, and timing.

Many states are updating their data breach statutes and considering new regulations. Meanwhile, much remains uncertain regarding the scope of federal regulation, given questions about the new administration and its deregulation agenda. In private litigation, we can expect federal and state courts to work out questions of standing and injury, with plaintiffs continuing to use novel theories to advance their claims. Whatever the future brings, it will be critically important to be prepared in advance for a data breach, to manage compliance carefully, and to be ready for litigation.

By Robb Adkins and Staci Yablon Winston & Strawn

Employee misconduct is a significant factor in many cases that lead to government investigations and a major driver for legal fees, fines and associated costs.

This means companies need to embrace practical and attainable measures that can reduce non-compliance and the likelihood of government investigations.

As a general principal, companies can save money if they establish a robust compliance program, follow up on potential issues as they arise, and implement a culture of compliance wherever the company operates. A short, succinct, easy-to-follow policy that outlines major risk areas is the most likely to be understood and internalized by non-lawyer employees, especially in cases where it must be translated into other languages and applied in a variety of cultural contexts. Employees of U.S.based public companies, wherever they are located, must be specifically educated on the FCPA. In addition, there has been a proliferation of foreign anti-corruption laws, and in many venues a more rigorous enforcement of existing law. After it sets up a compliance program, a company must ensure it is periodically audited and reviewed to address changes in regulations and enforcement trends.

Investigating a potential issue, and raising it to management and/or the board of directors if significant enough, is better than waiting for a regulatory body to require it. Proactive internal investigation by a company, before regulators are involved, allows the company to remain in control, with privilege protection, and make its own determination of the most appropriate action.

By Roy Keidar Yigal Arnon & Co.

The autonomous vehicle is one of the most important technological innovations of the last several decades. One thing that separates the AV industry from other advanced sectors is the difficult regulatory issues that come with it. Public safety is the foremost concern. Even remarkable technical achievements, bankrolled by major investments, won’t be enough. For the AV industry to advance, it is essential for technical progress to be accompanied by the creation of legal structures that address the technical, economic and social reality.

It is vital, for example, to develop a clear understanding of the decisionmaking algorithms at the heart of AV technology. Artificial intelligence will be making life and death decisions. A high level of confidence in the reliability of the underlying technology must be reached before the regulator will feel comfortable enough to give the stamp of approval.

Another important issue is the question of tort liability in car accidents. As cars become autonomous, the question of driver negligence starts to become a moot point. The legal structure will need to be reviewed, paving the way for a new regime that possibly holds the manufacturer and other service providers chiefly liable for damage caused to people or property in AV-related accidents.

The U.S. is leading, both in terms of technological advancements and new legislation. The recent U.S. Department of Transportation AV policy, for example, provides significant input for state legislators, and is a step forward for the industry.

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Executive Summaries FEATURES

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Keep Your Third-Party Communications Privileged

Legal Competence and the Role of Technological Expertise

General Counsel and the Headquarters Lease

By Lillian S. Hardy Hogan Lovells

By Julia Brickell H5

By Eric Allon Bernkopf Goodman LLP

Corporations increasingly rely on third parties in global bribery investigations, data security incidents and other investigations. The extent to which communications with these third parties are privileged can significantly shape the course of an investigation and litigation that may follow. Any time an otherwise privileged attorney-client communication is disclosed to a party outside the corporation, there is a danger it could waive the privilege. This article examines circumstances where the privilege may be protected and suggests steps to maximize the likelihood.

Courts have found that the privilege may extend to third parties in two circumstances. First, where a third party provides services to counsel necessary for effective representation of the client’s interests. A separate line of cases supports claims of privilege when a contractor or consultant is so integrated in the company as to become the “functional equivalent” of an employee.

Outside counsel should dictate and monitor the investigation process.

Specify that documents produced during an investigation are being created at the direction of legal counsel with the clearly stated purpose of providing legal advice.

Memoranda documenting interviews of corporate employees should reflect counsel’s impressions and not merely transcribe. Engagement letters should document that consultants are working under counsel’s direction in order to facilitate legal advice and document confidentiality obligations.

Followed rigorously, these practices can maximize the possibility that communications with non-lawyer consultants and others will fall under the attorneyclient privilege.

Twenty-six states have now adopted some version of the 2013 ABA Model Rule 1.1, which requires awareness of “the changes in the law and its practice, including the benefits and risks associated with relevant technology.” The scope of technologies a lawyer may encounter suggests that outside expertise may be required.

For general counsel, the technology the client deploys and the data it acquires likely presents risk to the enterprise that warrant legal guidance. Whether providing advice as in house or outside counsel, rules of professional conduct call on lawyers to recognize when it is necessary to call on outside help.

Ensure that inside and outside counsel have enough access to business clients to truly understand the business technologies on which they advise. Understand the scope of the content and applicable regulatory schemes. Use an expert to understand security and other vulnerabilities in the environment. Uncover and examine technology and data-oriented policies and procedures, and analyze what they mean and ask if they address current realities.

Take an especially close look at technologies used to meet legal obligations, including those used for discovery. Talk to the CIO, IT, legal, and the business.

Assessing expertise is difficult. Find those with deep background in the underlying activity to be accomplished, not just those who can use a technology. Interview the purported experts. The mark of competence for general counsel or outside counsel often lies in knowing when and how to engage expert technology help.

A general counsel is often asked to spearhead a company’s efforts in connection with a headquarters lease. There are numerous traps for the unwary in this endeavor. To avoid them, here are some issue to watch: Planning the timing for the move; forming a multi disciplinary team; creating criteria and locating the best space and landlord for the company; negotiating key terms in the letter of intent and the lease; and making sure the key construction benchmarks are met for landlord’s and tenant’s build out and occupancy of the new space, and departure from the existing space.

Any move to a new headquarters must dovetail with the expiration of the existing lease, thereby giving the company time to transition before the holdover provisions of the existing lease apply. It’s advisable to begin the process of choosing a new headquarters several years in advance.

At the earliest stage, the general counsel needs to select and meet with the team to set goals and priorities. The team should decide generally on the locations that work for the company and its employees.

Because tax and insurance issues arise during lease negotiations, it is important to alert the accountant and insurance agent as well as a tax attorney that a new lease is being considered.

A headquarters lease is a major undertaking. It’s a responsibility of the general counsel to oversee and coordinate the process, and to assure that the new headquarters will meet the company’s goals.

today’s gener al counsel apr/ may 2017

Executive Summaries features PaGe 46

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Major Issues in Real Estate Transactions

Becoming a Third-Party Witness When Competitors or Suppliers Merge

Sustainability Accounting Standards as the New GAAP

By Amol Pachnanda Ingram Yuzek Gainen Carroll & Bertolotti LLP

It is incumbent upon general counsel to have a full understanding of the major issues involved in an office lease. This article identifies those issues, and it offers suggestions and negotiating strategies from the tenant’s point of view.

The actual delivery date of the premises is important, especially if the tenant is nearing the end of its existing leased, an the lease should clearly provide for an anticipated delivery date. If the landlord misses the anticipated delivery date, then the rent should be abated.

The subordination, non disturbance and attornment [formal acknowledgement of transfer] agreement provides that the tenant subordinates its lease to the lender’s mortgage. If the tenant does not receive a SNDA, then the lender has the right to terminate the lease if it succeeds to the landlord’s interest. For larger deals, this is an unreasonable risk. Construction delays at the new premises can force a tenant to holdover.

To mitigate the damages resulting from a holdover, the tenant should insist that holdover rent be calculated on a per diem basis instead of monthly.

Usually, the general counsel’s biggest concern is whether the lease can be assigned to a successor without the landlord’s consent. The lease should provide that corporate and related party transactions do not require the landlord’s approval. All that is required is notice to landlord.

Landlords will insist on a net worth test for the new entity. Such a test is not unreasonable and tenants routinely agree to it.

Steven J. Cernak Schiff Hardin LLP

To determine if a merger is good or bad for competition, the Federal Trade Commission and the Department of Justice Antitrust Division need information about the merging parties and the relevant industries. That information comes through a Hart Scott Rodino Act (HSR) filing. Throughout this process, the reviewing agency will reach out to third parties – customers or competitors – for relevant information, usually via a voluntary phone interview with a knowledgeable executive.

Companies preparing to respond to enforcement requests for information should begin by answering three basic questions: Are we the witness the government really wants? Do we have the type of evidence the government wants to hear? And are we prepared to go wherever these inquiries lead?

While the agencies have done a good job of keeping these informal interviews secret, the merging parties might correctly guess the interviewees and request a summary of the discussion. Sometimes the initial phone call from the agency can lead to more calls or requests for documents and data.

If there is to be an interview, the company should get assurances that it’s not a target. Gather answers to typical questions asked by the agency and be prepared to provide them free of company or industry jargon. Set up the ground rules for the call and assure they are followed. If the interview leads to document production or sworn testimony, the same care must be taken as when the company is involved in litigation.

By Tricia Dunlap Dunlap Law PLC

It took the 1929 crash, fueled in part by misleading financial reports, to prod congress to create the SEC and mandate reporting for publicly traded companies.

But neither Congress nor the SEC established accounting standards. In 1973, the Financial Accounting Foundation formed the Financial Accounting Standards Board (FASB) and the SEC called FASB’s standards “generally accepted.”

Since then publicly traded U.S. corporations have reported financial performance using FASB’s “Generally Accepted Accounting Principles,” or GAAP. Almost immediately, however, some argued that financial metrics alone do not accurately reflect corporate value.

In 1989, the Coalition for Environmentally Responsible Economies published its “Valdez Principles,” advocating environmental disclosures. The Global Reporting Initiative (GRI) grew out of that effort in the 1990’s. Since then, non-financial reporting has proliferated.

Today sustainability measures are applied to a broad spectrum of corporate operations. None are financial issues, yet performance on any of them can affect corporate value.

The Sustainability Accounting Standards Board changed the status quo in 2012. It laid out evidence based, objective, potentially material, and industryspecific standards to guide an analysis.

SASB sets standards by researching each industry’s unique issues, and by soliciting input from industry groups, investors and other stakeholders.

When FASB launched GAAP, 83 percent of corporate assets were tangible and easily valued. Today 80 percent of assets are intangible and value can be difficult to assess. It appears the market is adopting a different understanding of corporate value.

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Executive Summaries FEATURES

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How to Maximize Your Business Interruption Insurance Recovery

Best Practices and Priorities for GCs

Ten Ways to Improve Your Arbitration Clause

By Christopher C. Loeber Lowenstein Sandler LLP

By Nancy Jessen UnitedLex

By Dawn M. Johnson and Abby L. Risner Greensfelder, Hemker & Gale P.C.

Each year nearly one in five companies suffers a catastrophic event that leads to two general categories of loss: physical property damage and business interruption (BI). Both are covered by first-party property policies. BI losses are less obvious and more complicated, but with knowledge and preparation companies can maximize their insurance recovery in the wake of this often large-scale loss.

It is vital to include a coverage lawyer on the crisis management team. Without that input, in the immediate aftermath of an event a company can easily take steps that severely and negatively impact its subsequent BI claim. A press release, for example, seeking to minimize the impact of an event can affect subsequent insurance claims. Coverage counsel can help craft a release that will reassure the necessary parties without compromising the claim.

Insurance brokers are a valuable resource and should be included on the emergency response team, but communications with them are discoverable.

Thus, all event and claim-related documents and information must be filtered through counsel.

Internal accountants and bookkeepers are excellent resources, but often lack familiarity with first-party property insurance policies. That’s where forensic accountants come in. Failure to retain forensic accounting experts from the outset virtually guarantees insurance money will be left on the table.

When it comes to obtaining business interruption recoveries for catastrophic events, even simple mistakes can cost millions, but a little preparation goes a long way. General counsel are well-advised to plan ahead.

General counsel must look for ways to protect the company’s legal and business interests while managing costs and maintaining efficiency in the department.

Changing how the department delivers legal services requires a business oriented mindset, and informed determination of which of the skills needed for efficiency gains are more available outside the department.

In respect to contract review, the tactical approach is to look at each contract individually. A more strategic approach is to analyze contracts as a portfolio, to understand which clauses typically delay contract negotiations, and to recommend language changes that will require fewer review cycles.

Intellectual property can be a source of revenue loss for many corporations, particularly when it comes to enforcement. Shifting day-to-day management to an external provider allows the internal legal team to focus on identifying potential IP revenue opportunities or strategic acquisitions. Many legal departments already outsource e-discovery and other litigation support functions. An outside provider can scale service levels as needed, and establish measurable criteria so that performance goals are met.

Balancing efficiency and effectiveness requires identifying high-value activities that actively support business success, redefining the role of internal resources and leveraging complementary external service providers. Establishing business oriented benchmarks helps GCs understand what kind of work is being performed and how much effort is undertaken, and it enables demonstration of the department’s positive impact on overall business performance.

Many companies use arbitration clauses in their contracts. One of the primary reasons is the desire to avoid class actions. Another is the understanding that arbitration can be less expensive, more efficient and quicker than litigating.

However, until businesses are involved in a dispute, they may not realize that the boilerplate arbitration provision in their contracts will not necessarily meet their business goals. In this article, the writers suggest some changes that can better achieve them.

Consider adding a provision that requires claims to be submitted individually, rather than as a class. This is a small change that could make a very big impact if a company finds itself in a dispute.

It should be noted that the U.S. Supreme Court recently granted certiorari in cases that will address a split among the circuits on the issue of whether the National Labor Relations Act prohibits class action waivers in employment arbitration agreements.

A contractual statute of limitation to the arbitration provision may be a good idea. Alternatively, incorporate a particular state’s statute of limitation.

Most companies veer away from providing details in their arbitration provision, but one area where detail may prove useful is establishing the parameters for discovery.

If confidentiality is important to you, include a provision that requires confidentiality of the proceedings and resulting award. The scope of the arbitration provision itself may need to be updated.

Consider if an alternative to “all or nothing” better suits your business.

The Magazine The six-time yearly publication, with strategies, best practices and analysis written by expert practitioners within the legal profession, offers an excellent branding opportunity to 15,000 print and 80,000 digital subscribers.

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 2017 today’s gener al counsel

E-Discovery

The E-Discovery Imperative

By Steve Wilson

A

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s far back as 2013, the average American office worker was said to be producing roughly 1.8 million megabytes of data per year.

A conservative estimate suggests 44 zettabytes of data will be produced annually in the next three years. With over a billion emails sent every day, manually sorting and categorizing data is simply not feasible. That means electronic discovery solutions have become a must for law departments.

Nonetheless, organizations remain slow to take full advantage of them. The horror stories go back years, and they persist. In 2005, financial giant Morgan Stanley was accused of mishandling emails and other digital documents in a high profile case against billionaire investor Ronald Perelman. Last March, a Volkswagen CIO was brought to court because he failed to properly preserve

other countries, including Singapore and Canada, elevating the standards for how attorneys handle electronically stored information (ESI).

The question of investment in technology assisted review isn’t just a compliance issue. It’s also a matter of efficiency and costs, as it reduces the amount of time and resources spent on a discovery project. One study determined that approximately 40 years ago, to analyze six million documents with manual discovery processes would cost law departments upwards of $2.2 million. Today, using e-discovery software, teams can review millions of files for less than sixfigures. Moreover, they can do it faster, as features such as predictive coding use human guidance to “teach” computers how to identify relevance. TAR software also reduces the labor spent on tasks like manual redaction and annotating

relevant files, while a machine, through statistical sampling, can consistently produce reliable results, with fewer people needed to do it.

Nonetheless, recognition of the benefits and value of e-discovery has lagged.

A report from Kroll found that 124 out of 193 law schools surveyed offered no e-discovery curriculum, and that just a little over a third of the schools even offered a course or seminar on e-discovery.

Among legal teams that do employ e-discovery solutions, many are using outdated software or tools that fail to measure up to what rules now require.

Competency of attorneys with regard to the technology remains an issue. In a recent study from Exterro, more than two thirds of judges surveyed thought attorneys did not have sufficient subject matter knowledge to effectively counsel on e-discovery matters.

The human eye tires of reading and cross referencing thousands of documents. Computers don’t.

– and intentionally destroyed – digital evidence related to what became the car company’s diesel emissions scandal. In July of last year, the telephone headset company Plantronics was sanctioned $3 million for spoliation after a senior vice president knowingly deleted as many as 90,000 emails in an antitrust case.

Recent amendments to the Federal Rules of Civil Procedure are another impetus to adopt e-discovery. Addressing issues like document preservation, they make it difficult to claim ignorance if proper e-discovery technology is not applied, and they give judges the ability to take action when relevant data is replaced or destroyed, with punishments for noncompliance. We also find many

of voluminous documents, thereby allowing legal teams to spend more time strengthening their case.

Discovery can include reviewing and analyzing chat logs, social media activity, text messages and more. Equipped with the right e-discovery strategies, litigators can successfully identify and review ESI across multiple devices, from smartphones and tablets to gadgets enabled by the Internet of Things.

As compared to linear case document analysis, e-discovery software can reduce the risk of invalid results. The human eye tires of reading and cross referencing thousands of documents. Computers don’t. It is human error that’s largely to blame for inconsistent analyses of

While changes to the Federal Rules have resulted in fewer sanctions findings (and elimination of the harshest sanctions where there was no intent to withhold information), law departments still have a responsibility to stay on top of the technology, and must do so to avoid severe consequences, including dismissals, adverse jury instructions and financial penalties.

As courts continue to emphasize the role of ESI in all matters, law department leaders will need to collaborate with their IT and operations colleagues on the successful application of e-discovery methodologies.

One of the biggest concerns keeping smaller organizations from investing in

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E-Discovery

e-discovery capability is the perceived cost, even though over time these solutions will decrease discovery expenses.

This is a particular concern for smaller departments. As a result, given the capital expenditures associated with hosting solutions in-house, smaller law departments increasingly are turning to cloud based applications. Cloud based e-discovery software increases employee productivity, at the same time it reduces the burden placed on internal IT departments. Providers of this technology usually offer flexible pricing based on usage, thus reducing a major barrier to adoption for smaller firms.

Cloud based e-discovery software also delivers business and IT benefits for law departments, including simplified implementation and the end of the recurring need for hardware updates.

A 2016 pricing comparison study from Catalyst found that, over a three-year period, cloud software saved a hypothetical e-discovery client 36 percent compared to a client that used an inhouse platform.

As we generate more information across this vast technology ecosystem, the role of digital evidence in the legal process will only increase. Ignoring ediscovery, or choosing to remain with outdated methods, will have expensive consequences and seriously compromise the ability of attorneys to perform their legal duty. â–

Steve Wilson, vice president at Accusoft, has more than 20 years experience in software and app development. swilson@ accusoft.com.

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apr / may 2017 today’s gener al counsel

E-Discovery

How Insourcing E-Discovery Affects Law Departments and Firms

By Nishad Shevde

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nsourcing of legal services is not just a trend. It has become a major shift in the legal market. Seventy-seven percent of those surveyed in Exterro’s 2016 In-House Legal Benchmarking Report stated that half or more of their organization’s legal services (legal holds, document review, data collection/ processing, depositions and matter intake) were conducted internally. The services that are, for the most part, still being outsourced take place at the tail end of the discovery process: document review, document production, and search/collection/processing. Moreover, 76 percent expect to perform more legal services in-house in the next two years. The major reason, according to the survey, is the expense of law firm/ service provider services.

In the 2016 Law Firm Benchmarking Report, 79 percent of those surveyed said that clients have higher expectations (i.e. they expect more services for lower fees), and in the past two years

54 percent noted an increase in clients doing more work in-house. making it defensible

In-house legal teams are struggling with how to insource more of the legal process in a defensible manner. (In the report, “ensuring my process is defensible” was cited as the number one challenge for legal teams as they managed legal projects.) Not surprisingly, as more legal services are insourced, more pressure is put on internal team members. Old tactics for managing legal matters may no longer be viable. Forty-eight percent reported managing their legal process with spreadsheets and 56 percent use email. Forty-six percent say attorneys are still the primary project managers for matters.

In response, some law firms are trying to change in order to meet these heightened client expectations. Compared to five years ago, 39 percent of those surveyed report an increase in

alternative pricing agreements to stay competitive and offer more reliable and consistent pricing. One respondent explained that “clients are not accepting hourly fees without a cap anymore; so, a combination of hourly fees with caps and/or fixed fees are becoming usual.”

Alternative pricing agreements have put pressure on firms to be leaner, with 73 percent of law firms ranking completing tasks efficiently as their biggest legal project management challenge.

Legal project management software is specifically designed to help orchestrate legal project tasks and activities, such as e-discovery, matter intake and witness deposition. Its value is becoming better understood by many in-house legal departments, because traditional project management practices may not be effective with an increased workload, especially in view of the fact that defensibility is a top challenge for many legal departments.

To meet this challenge, legal teams

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E-Discovery

need to adopt practices that improve productivity and create transparency across their legal operations. Ninetythree percent of respondents believe having consistent, formal processes for multiple stages of a matter will give them the foundation for completing legal tasks more efficiently.

means more training, more personnel, executive buy-in to change the business model, and ultimately incorporating new legal project management software to help manage and orchestrate this chaotic process.

LAW FIRMS SLOWER TO ADAPT

The desire to bring e-discovery in house has always been there for corporations, but a number of factors made that difficult. Now, as the industry is solving more and more of these problems, more in-house adoption of e-discovery solutions and response programs is becoming possible.

Historically e-discovery responses, particularly from an ESI management perspective, have required the use of multiple software solutions, often requiring significant and expensive hardware and

On the law firm side, however, legal project management is still a relatively new idea. According to the survey results, only 24 percent use legal project management software, and another 31 percent are considering using it within the next one or two years. With little dedicated help from IT to navigate e-discovery issues, partners are juggling project management duties (coordinating schedules, developing case strategies, meeting court deadlines), along

INSOURCING BECOMING EASIER FOR DEPARTMENTS

Traditional project management practices may no longer be effective with an increased workload. with overseeing associates and trying to generate new business for the firm.

It’s a situation that leads to potential cost overruns.

Furthermore, firms are, for the most part, not tracking their employees’ productivity outside of billable hours. (Only 25 percent said they track employee productivity.) Even though some are taking strides to become more efficient by leveraging more advanced project management tools, the adoption and use of these tools is still lacking.

To stay competitive and stop losing business to less expensive, more flexible competitors or in-house legal department insourcing, law firms need to adopt practices that improve productivity and empower faster and less expensive outcomes.

The trends discussed above all point to one thing. Whether you’re a company wanting to move more of the legal process in-house or a law firm hoping to stay competitive as client expectations change, you must start by investing more in the legal project management process. That

deep technical understanding. This meant that in-house practitioners required technical resources to execute on the process, had to suffer downtime resulting from multiple hand-offs between solutions, and had to ask internally for big budgets to acquire the technology and personnel to manage the process.

The transition we’re seeing toward in-house adoption is driven by major improvements in enterprise e-discovery software. It is now possible to acquire an end-to-end platform that doesn’t require deep technical skill, thus eliminating data hand-offs that lead to errors and slow response times. The math of implementing the in-house solution is starting to make sense.

Another major development that has helped push organizations to taking on more e-discovery in-house is the adoption of the cloud. Organizations are moving their data in the cloud, and software providers are developing native-cloud e-discovery platforms. This eliminates many of the traditional security concerns around hosting sensitive

data (although the traditional approach of mass-collection and outsourced processing actually left organizations more exposed, not less) and it solves the hardware problem associated with bringing a software solution in-house.

Now total cost of ownership is significantly lower, and up-front spend is reduced dramatically.

KEY TAKEAWAYS

The desire for corporate legal teams to move things in-house is being driven by the expense of law firm/service provider services, but defensibility remains a key concern.

Law firms are struggling to complete tasks efficiently, finding that ad hoc, manual processes combined with basic tools (emails, spreadsheets) don’t give the necessary foundation to meet clients’ elevated expectations, which include alternative fee agreements. Law firms need to set up processes to meet those expectations in order to maintain revenue growth and stay competitive.

Both in-house legal departments and law firms are now looking to orchestrate their legal operations by using project management principles and software for heightened efficiency and defensibility, for more transparent data transfers and communication between stakeholders, and better data management and security – all while cutting costs across the board. ■

Nishad Shevde is Director of Strategic Operations at Exterro. He heads product strategy for Exterro’s Information Governance and E‑Discovery Data Management offerings and serves as an external and internal subject matter expert. He has built sustainable discovery response programs for large corporations and managed stand‑alone matters in the financial services and pharmaceutical industries. nishad.shevde@exterro.com

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apr / may 2017 today’s gener al counsel

Intellectual Property

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Extraterritoriality and the Lanham Act

By Prateek Shah and Katharine Wagner

T

he Supreme Court’s decision to grant certiorari in Lee v. Tam has put trademark law back into the spotlight. But while a decision in that case may change what can be registered as a mark, two recent decisions by the Fourth and Ninth Circuits on issues of extraterritoriality are equally intriguing, and may have an even greater impact on Lanham Act litigation. These two cases are striking because of the contrasting extraterritoriality issues raised, as well

as their potential impact on future litigation, especially in the area of proving economic and reputational harm or an impact on commerce.

In Belmora v. Bayer, the alleged wrongdoing occurred within the United States, but the trademark in question was a foreign trademark that had never been used or registered in the United States.

In Trader Joe’s v. Hallatt, the brand in question was a domestic brand, but the alleged wrongdoing occurred mostly, if

not wholly in Canada. In both cases, the Fourth and Ninth Circuits overruled the respective district courts and found that the Lanham Act covered at least some of the plaintiffs’ causes of action.

BELMORA V. BAYER

In March of 2016, the Fourth Circuit vacated the district court’s dismissal of Bayer’s unfair competition claims of false association and false advertising, and held that Bayer was not required to use

today’s gener al counsel apr / may 2017

Intellectual Property Bayer’s Flanax to Mexican citizens and Mexican Americans in border areas.

For example, it claimed Belmora created similar packaging in in terms of “color scheme, font size, and typeface” to Bayer’s Flanax, and made claims that its product had been used “for generations” and was “highly recognized” among Latinos.

The district court’s dismissal of Bayer’s unfair competition claims was based on the court’s interpretation that the Lanham Act does not allow an

of Congress against unfair competition.

The court considered that Belmora’s claims that its product has been used for many years, was “highly recognized” and “top selling,” and its alleged efforts to deceive distributors and vendors by claiming that “Flanax is now made in the U.S.” and “acts as a powerful attraction for Latinos”could reasonably have led to lost sales for Bayer.

The court thus concluded that Bayer’s pleadings satisfied the zone of interest requirement, that Bayer’s lost sales

The Fourth Circuit found that Section 43(a) does not require that the plaintiff possess or has used a trademark in U.S. commerce to sue.

or register its trademark in the U.S. to pursue unfair competition claims under Section 43(a) of the Lanham Act. Bayer’s allegations against Belmora stemmed from Belmora’s activities marketing and selling naproxen sodium pain relievers under the Flanax brand in the United States.

Bayer had been selling naproxen sodium pain relievers under the Flanax brand in Mexico since 1976 but had never registered or used the brand in the United States. Belmora began selling Flanax-branded naproxen sodium pain relievers in the U.S. in 2004 and registered the mark in 2005. Bayer claimed that Belmora “invested heavily” in promoting Flanax to be the same as

owner of a foreign mark that is neither registered nor used in U.S. commerce to claim priority rights over the party with a mark that has been registered and used in commerce in the United States.

However, the Fourth Circuit found that, in sharp contrast to Section 32 of the Lanham Act (related to infringement), Section 43(a) does not require that the plaintiff possess or has used a trademark in U.S. commerce to sue.

Having concluded that Bayer was not barred from making a claim, the Fourth Circuit determined that the proper inquiry regarding whether Bayer’s claims could be pursued was based on the two “background principles” set forth by the Supreme Court in Lexmark International. v. Static Control Components.

Specifically, the Fourth Circuit evaluated whether (a) Bayer’s claim fell within the “zone of interests” protected by the Lanham Act and (b) whether Bayer pleaded injuries that were proximately caused by violations of the statute.

In evaluating whether Bayer’s claim satisfied the zone of interest principle, the Fourth Circuit considered two purposes of the Lanham Act: Making actionable the deceptive and misleading use of marks in commerce within the control of Congress, and protecting persons engaged in commerce within the control

could reasonably be a result of Belmora’s actions and that Bayer had also met the proximate cause requirement. The district court’s judgment was vacated, and the case was remanded for further proceedings consistent with the opinion.

Among the key remaining hurdles for Bayer to prevail is to prove that Belmora’s deception caused Bayer to lose sales. Belmora chose to appeal the Fourth Circuit’s decision to the Supreme Court, but the Supreme Court declined to hear the case in February 2017, so it will proceed in district court pursuant to the Fourth Circuit’s remand.

TRADER JOE’S V. piRATE JOE’S

In August 2016, the Ninth Circuit reversed a district court’s dismissal of a trademark infringement and unfair competition case under the Lanham Act in Trader Joe’s v. Hallatt. The district court had dismissed the Trader Joe’s claims based on a finding that federal courts lacked subject-matter jurisdiction, as the alleged wrongdoing occurred in Canada. The appeals court decision was based on a finding “that the extraterritorial reach of the Lanham Act raises a question relating to the merits of a trademark claim, not to federal courts’ subject-matter jurisdiction.” continued on page 25

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apr / may 2017 today’s gener al counsel

Cybersecurity

The Life Cycle of a Data Breach

By Martha Coakley, Christopher Hart and Emily Nash

A

data breach is a complex business crisis with a discernable life cycle. Thinking through that cycle – preparation, management, compliance and litigation – can put you on stronger footing to handle that crisis and its risks. Below we offer some insights we and our firm have gained in helping numerous companies through a data breach.

PREPARE

To avoid the worst outcomes of a data breach, identify and prepare for them. A data breach can expose businesses to:

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• • • •

Security and information vulnerability.

Business continuity disruption.

Reputational damage.

Risk of government investigation and enforcement.

• Risk of private litigation.

The fact that breaches are common should offer little comfort. A breach can be an existential crisis for an unprepared business, and even in the best of circumstances, it can be both expensive and disruptive.

What can a business do to prepare and mitigate possible harm? The most important preparation is “cultural.”

Treat data security as an integral part of your company’s risk profile, and build your governance and management structures to account for that risk.

As a practical matter, this means developing written information security policies and data breach plans; developing robust lines of reporting; creating a business continuity plan; training employees; auditing security systems regularly; and having a data breach team at the ready. The team typically should include a compliance and legal expert, a forensic investigator and a public relations professional.

Do not think of a data breach merely as an information technology issue that you can wait to deal with

until it happens. Under-appreciating the risks in this way will guarantee you future trouble.

MANAGE THE CRISIS

When a data breach does occur, how do you handle it?

First, don’t panic. Following this rule is easier if you have already created policies, identified a team, and thought through your action plan ahead of time.

Even if you have not taken these important preparatory steps, remember that at the moment you discover a breach, you likely don’t have enough information to know its scope and what obligations

the benefit of privileged attorney-client communications.

Third, investigate. This is where the forensic investigator comes in. It can be difficult, if not impossible, to know what the next compliance steps are without knowing what information was affected, how many people were affected, where they reside, and whether the danger has been contained.

Usually the IT department will not be the right entity to handle such an investigation. Not only would a breach investigation take away resources from day-to-day business needs, most IT departments will simply not have the

Your first two calls should be to outside counsel and a forensic investigator.

might arise. Take a step back and ascertain what you know and don’t know in order to clarify the next steps.

Second, contact your team. Your first two calls should be to outside counsel and a forensic investigator. Outside counsel can provide you with expertise in managing compliance questions and navigating issues that might arise with third parties. Forensic investigators provide crucial assistance in identifying the source and scope of a breach.

Whom should you call first? Outside counsel is likely your best bet, especially if you have not identified a data breach team prior to an incident. Counsel will be able to assist you in immediately thinking about and avoiding potential liability. Just as important, counsel will provide you with one thing you will not necessarily have in talking with others:

requisite tools or experience to be able to conduct a comprehensive investigation. Moreover, having a third party investigate and report can be important if, in a later investigation or litigation, the reasonableness of your company’s actions is called into question.

Fourth, notify. Many state breach notification laws share the same features: If certain personal confidential information is compromised, then the affected individuals in that state need to be notified.

In some cases, notification must also be sent to a state agency (usually the attorney general). But there are significant differences among states, such as what information is protected, whether notification is necessary regardless of harm, and notification timing. Sometimes it must be sent within a few days of a breach. These

TODAY’S GENER AL COUNSEL APR / MAY 2017

Cybersecurity

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complications are compounded if the data at issue is personal health information. That may trigger different, and sometimes competing, obligations. You might also want to contact law enforcement, even if it is not required.

Even if a cybersecurity event does not trigger a specific state notification law, it may nevertheless be prudent to notify affected individuals. Doing so can prevent having your business subject to an enforcement action by a federal agency – primarily the Federal Trade Commission – which has broad power

to bring actions against companies that it believes have engaged in an unfair or deceptive commercial practice.

Notification must be done promptly, reasonably, and with sufficient information in hand to make the notification effective and eliminate the need for follow-up or amended notification.

Moreover, depending on the scope of the breach, you and your outside counsel should be prepared to answer follow-up questions from government law enforcement or investigative agencies. That is something that could happen days, weeks

or even months after notifications have been delivered.

Fifth, resolve the breach. This may seem obvious, but it’s a crucial step.

You cannot delay notification (unless law enforcement instructs you to) in order to fully resolve a breach, but resolving the breach before sending notifications can potentially reduce your liability later.

Sixth, audit. When the crisis has passed, audit your policies and data breach plan.

apr / may 2017 today’s gener al counsel

Cybersecurity

Consider what you need to change in your plan, your employee training, and you third party contracts. Learn from what went well and from what went wrong, in order to prepare for the next crisis.

DIG IN FOR LITIGATION

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The life cycle of a data breach does not end with fulfilling compliance obligations. It can extend to litigation, which will play out depending in part on the plaintiff and the court.

The key issue is harm. Private plaintiffs can have a difficult time getting over Article III standing requirements in federal court, which requires an actual injury. While a cybersecurity incident in which personal confidential information is compromised can trigger onerous notification requirements, unauthorized access by itself is not necessarily equivalent to injury. A plaintiff whose credit card information was hacked, but who experienced no identity theft and wasn’t forced to do anything beyond calling a credit card company for a replacement will probably not be able to claim standing in federal court.

In state court, barring a private right of action in a data breach statute, this plaintiff would likely fare no better. The plaintiff might have standing, but not be able to state a claim without a compensable injury. In this respect, promptly notifying consumers of a breach and offering those who are affected free credit monitoring can prevent injury and potentially stave off litigation.

Government actors, however, are not as constrained as private plaintiffs. The FTC may bring actions relating to data breaches under its general enforcement powers. The FTC Act allows the agency to enforce the prohibition against “unfair or deceptive acts or practices in or affecting commerce.” State attorneys general have similar enforcement authority (and data breach statutes give them additional authority).

In the case of the FTC, an important Third Circuit decision in 2015, Federal Trade Commission v. Wyndham Worldwide Corp., reasoned that the FTC Act “expressly contemplates the possibility that conduct can be unfair before actual

injury occurs.” So while plaintiffs unable to prove actual injury might be stymied in court, the same is not true for the FTC or other governmental agencies.

Actions leading to or flowing from a data breach could be “unfair” even without an actual injury.

Experienced counsel is necessary to handle motion practice, discovery, trial, and an appeal. But the possibility of a successful defense will depend in large part on the reasonableness of your company’s actions prior to and during the data breach. A business that has a data breach plan, follows that plan, trains its employees, complies with notification laws promptly, offers credit monitoring to affected individuals, and conducts an audit will be in a much stronger position to defend itself than one that does some, or none, of these things.

ON THE HORIZON

Many states are updating their data breach statutes and considering new regulations. California last year expanded its definition of personal confidential information. New York is considering comprehensive cybersecurity regulations for the financial sector.

Some state attorney general offices, such as Ohio’s, are viewing businesses less as targets of investigation and liability, and more like cooperators against bad actors. Indeed, businesses experiencing data breaches are often the victim of criminal attacks.

Much remains to be seen concerning the scope of federal regulation, given the uncertainty regarding the new administration and its deregulation agenda. It did appear toward the end of the Obama administration that agencies such as the Consumer Financial Protection Bureau and the SEC were poised to become more engaged in cybersecurity enforcement, but that can’t be assumed at this point. Additionally, an important case pending at the time of this writing in the Eleventh Circuit – LabMD v. Federal Trade Commission – could put limitations on the FTC’s enforcement power in cybersecurity.

In private litigation, we can expect federal and state courts to work out questions of standing and injury, with

plaintiffs continuing to use novel theories to advance their claims. Whatever the future brings, preparing for a data breach, carefully managing compliance, and being ready for litigation all remain critically important. ■

Former Massachusetts Attorney General

Martha Coakley

is a partner in Foley Hoag’s Administrative Law Department. Her practice is focused on government and internal investigations, litigation, and data privacy and security. She has experience in civil and criminal litigation in state and federal courts, including the U.S. Supreme Court. mcoakley@foleyhoag.com

Christopher Hart is counsel at Foley Hoag, with a practice centered on civil commercial and business litigation, data privacy and cybersecurity, and the representation of foreign sovereigns in U.S. courts and international tribunals.

As a litigator, he has been representing Fortune 500 companies, start-ups, individuals, and sovereign nations for over a decade. He is a member of the firm’s Cyberincident Response Team. chart@foleyhoag.com

Emily Nash is an associate at Foley Hoag, in the firm’s Litigation Department.

Her practice includes a variety of general litigation and labor and employment matters. enash@foleyhoag.com

today’s gener al counsel apr / may 2017

Intellectual Property Lanham Act

continued from page 21 Trader Joe’s is a U.S. grocery chain known for selling reasonably priced, high quality private label products from “distinctive, South Pacific-themed stores.”

Eighty percent of the products sold are Trader Joe-branded products, and the

Co., which found that the Lanham Act’s “use in commerce” element and broad definition of commerce clearly indicate congress’s intent that the Act apply extraterritorially.

Next, the Ninth Circuit evaluated the limits, if any, imposed on the Lanham Act’s extraterritorial application using the three-pronged test from the

mimicking “Trader Joe’s trade dress.”

It dismissed Hallatt’s motion for reconsideration for the use of the word “mimic” in its original opinion.

Both cases are now back with the respective district courts, which means that the legal battles are far from over.

However, the reasoning expressed by the appeals courts in these cases indicates

In Trader Joe’s v. Hallatt, the Ninth Circuit reversed a district court’s dismissal of a trademark infringement and unfair competition case under the Lanham Act. company does not license others to sell its products.

Michael Hallatt, a Canadian citizen with lawful permanent resident status in the United States, is accused of purchasing products from Trader Joe’s and reselling them at “highly inflated prices” at his Canadian store, Transilvania Trading, which was later renamed Pirate Joe’s.

Trader Joe’s alleges that Hallatt uses its intellectual property to solicit business for Pirate Joe’s, including advertising wares with Trader Joe’s trademarks, operating a website accessible from the United States, displaying an exterior sign at Pirate Joe’s that uses a font similar to the trademarked Trader Joe’s insignia, and designing the Pirate Joe’s store to mimic Trader Joe’s trade dress. Trader Joe’s also alleges that Hallatt does not adhere to proper quality control standards for transporting and storing perishable foods or recall practices.

In its ruling, the Ninth Circuit explained that the extraterritorial applicability of a statute must be determined pursuant to Supreme Court precedent in RJR Nabisco v. European Community.

Specifically, courts must first determine “whether the statute gives a clear, affirmative indication that it applies extraterritorially,” and if so, must then “consider the limits Congress has (or has not) imposed on the statute’s foreign application.”

With respect to the first requirement, the court referenced the Supreme Court’s ruling in Steele v. Bulova Watch

Supreme Court’s decision in Timberlane Lumber v. Bank of America National Trust & Savings Ass’n. Under this approach, the Lanham Act applies extraterritorially if “(1) the alleged violations … create some effect on American foreign commerce; (2) the effect [is] sufficiently great to present a cognizable injury to the plaintiffs under the Lanham Act; and (3) the interests of and links to American foreign commerce [are] sufficiently strong in relation to those of other nations to justify an assertion of extraterritorial authority.”

The Ninth Circuit found that the first two prongs of Timberlane are upheld, as Trader Joe’s could suffer reputational harm from association with foodborne illness resulting from poor storage, Pirate Joe’s high prices and/or Pirate Joe’s lower quality customer service. Hallatt’s activities sourcing his goods from the United States also weighed in favor of applying the Lanham Act to his conduct.

In respect to the third prong, the Ninth Circuit considered seven factors and found that although some factors favored Hallatt’s argument, most favored Trader Joe’s.

Accordingly, the Ninth Circuit ruled that extraterritoriality of the Lanham Act is applicable and remanded the case to district court for proceedings beyond the pleadings phase. It also reiterated its finding that it was uncontested that the defendant designed a store to “mimic a Trader Joe’s store” and described defendant’s actions as

that proving economic and reputational harm will be key elements required for plaintiffs to prevail under such claims.

Demonstrating such harm can be challenging and may require the retention of experts to introduce survey evidence, brand valuations and other sophisticated analyses. ■

Prateek Shah is a director in The Claro Group office in Austin, Texas. He has provided damages analyses and litigation support services on cases involving a variety of issues, including intellectual property, securities, valuation, bankruptcy and antitrust. pshah@theclarogroup.com

Katharine Wagner is a consultant at The Claro Group’s office in Austin.

Working in litigation support, she has calculated damages for matters relating to intellectual property, bankruptcy, labor disputes, insurance, securities, valuations and other issues. kwagner@theclarogroup.com

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APR / MAY 2017 TODAY’S GENER AL COUNSEL

Compliance

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Improve Compliance Programs to Avoid Government Investigations

By Robb Adkins and Staci Yablon

I

t seems almost daily that some enforcement authority or regulatory body announces a major fine, installation of an outside monitor or filing of charges against a company. These investigations result in significant expenditure and distractions, often for years and amounting to millions of dollars in legal fees and other costs associated

with investigations and compliance enhancements, not to mention the cost of any resolution with the government.

It is clear that employee misconduct is a significant factor in many of these cases and a major cost driver, because of the legal fees associated with investigating the conduct and, in cases where there is government involvement and

enforcement, the fines and other measures that are imposed.

A key question for in-house counsel is how to avoid these expenses in the first place. The easy answer is to ensure that company employees and company agents always abide by U.S. laws. However, it is not realistic to expect continuous, self-motivated compliance from all

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employees, particularly in a large company with a global presence. Companies instead should consider a few practical and attainable measures that can help reduce noncompliance and lessen the likelihood of resulting investigations and expenses.

An investigation, as discussed here, refers to a process run by in-house counsel, in-house compliance staff, and/ or outside counsel, to address potential violations of law or other issues that arise and require follow-up. An investigation may be conducted independent of government enforcement regulators or it may be conducted at the request of regulators.

As a general principal, companies

can save money if they establish a robust compliance program, follow up on potential issues as they arise, and implement a culture of compliance wherever the company operates. That’s easy to state, but how do you take these common sense protocols and maximize their effectiveness?

First, the company should ensure it’s a “living” compliance program, one that is aligned with the actual business of the company, and that addresses it and doesn’t simply remain on paper. A company with a 50-page compliance policy that outlines every potential violation of U.S. law is likely no better off, and often worse off, than a company with a short, succinct and easy to follow

policy that outlines its major risk areas.

That latter type of document is more likely to be understood and internalized by non-lawyer employees, especially in cases where it is translated into other languages and applied in a variety of cultural contexts.

Sometimes when we review a company’s compliance program, clients will proudly tell us they are confident the program is working well because they’ve not heard about any issues as a result of carrying it out. This is a misunderstanding. A successful compliance program should be garnering complaints and flagging issues that require followup. This shows that employees are in fact internalizing and implementing the

apr / may 2017 today’s gener al counsel

Compliance

policy. Keep in mind this is one of the first things government authorities will look at in assessing whether a compliance policy is effective or just a binder gathering dust.

A simple and clear policy, one that’s easily understood even in translation – along with auditing and a written record of any issues that arise and how they are remediated – is the best way to prevent compliance issues, and to end up with the best report card to show authorities if that becomes necessary.

TRAINING

Employees, agents and management must first of all understand the laws that impact them. This means, for example, that employees of a U.S.-based public company, wherever they are located, must be educated on the FCPA. The fact that an employee operates in, say, Turkey

in facilitation payments in the context of the FCPA. But these same companies’ operations in the United Kingdom would be prohibited from making these payments under the UK Bribery Act. THE TOP-DOWN CULTURE

Establishing the “culture of compliance” is difficult but essential. Management and key officials need to demonstrate by deed that they value compliance. This might mean that management attends and participates in compliance-related training, or that management sends out email blasts reminding employees of the latest compliance lesson. It could also mean that management continues to remind employees they should be comfortable raising concerns, because they will not be risking retaliation.

When potential issues are brought to management’s attention, it’s important

It’s not realistic to expect continuous, 28

self-motivated compliance from all employees. is no defense to a potential FCPA investigation led by the SEC or DOJ. Relevant, native language training is important, along with in-person training and the kind of messaging from senior management that helps set the tone and establish that elusive but important “firm culture” that supports compliance. Companies should at least ensure that training materials reflecting current issues and legal requirements are distributed regularly to employees, and that there is confirmation of review and receipt.

An effective compliance program must also address compliance with potentially applicable laws outside the United States. Many large corporate investigations today are multinational in scope, with non-U.S. authorities either acting on their own or in concert with authorities from other countries. Again, looking at the FCPA as an example, investigations are typically cross-border.

Keep in mind that local law and U.S. law may differ. U.S. law, for example, allows companies to participate

they be taken seriously. If employees feel that they work for a company with an emphasis on compliance, they will be encouraged to act in accordance with the laws and to recognize when their actions and those of others fail in that regard.

PERIODIC AUDITS

After setting up a compliance program, a company must ensure it is periodically audited and reviewed for changes in regulations and enforcement trends. The proliferation of foreign anticorruption laws, and more vigorous enforcement of existing laws, has caught some companies unprepared. Written policy and training should periodically be scrubbed and updated to address actual risk, as determined by the company’s profile and current enforcement trends.

Sometimes the emphasis on compliance is not enough. Issues arise and an internal investigation is required.

Companies should ensure that adequate resources, both funds and personnel, are devoted to the investigation, and that the

issue is fully examined and addressed.

This is an investment that will help avoid the potentially staggering costs associated with a major government enforcement action.

Proactively investigating a potential issue, and raising it to management and/ or the board of directors if significant enough, is almost always better than waiting for a regulatory body to require an investigation. Conducting an investigation before regulators are involved allows a company to remain in control, with privilege protection, and to gain an understanding of the facts internally and decide upon the most appropriate action – as opposed to responding in crisis mode to an often overly-broad government inquiry by outsiders. ■

Robb Adkins is a partner in the San Francisco office of Winston & Strawn.

His practice is focused on white collar and internal investigations, complex civil litigation, financial regulation, Foreign Corrupt Practices Act issues and securities litigation. Prior to joining Winston, he served as the Executive Director of the DOJ’s Financial Fraud Enforcement Task Force. radkins@winston.com

Staci Yablon is of counsel in Winston & Strawn’s New York office.

She focuses her practice on white collar criminal defense, corporate internal investigations, compliance monitoring and the provision of anti-corruption advice in connection with mergers and acquisitions. Her clients include banks, broker-dealers, funds, and insurance companies in compliance matters, enforcement defense and remediation. syablon@winston.com

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TODAY’S GENER AL COUNSEL APR / MAY 2017

Compliance

The Regulatory Challenge of Autonomous Vehicles

By Roy Keidar

R

ecently I was reminded of the story about “the great horse manure crisis” of 1894. Around the turn of the 20th century, there were about 50,000 horses serving as the main form of transportation in the great cities of London and New York. Needless to say, they were producing a lot of horse manure. The problem was so bad that by the mid-1890’s the Times of London ran a piece estimating that within the next half-century, the great metropolis would be buried beneath nine feet of manure. This projection was the catalyst for the first international urban planning conference held in 1898 in New York. Unfortunately the delegates, unable to break out of a mindset used to horsedrawn carriages could not conceive of any feasible alternatives, and the conference was adjourned early.

By 1912, the manure problem was long gone, not as a result of policy change, but because of technological innovation. Electrification and the internal combustion engine provided new, manure-free ways to transport goods and people.

In the

wake of this breakthrough, policymakers and regulators were only too happy to quickly embrace these new automobiles and usher in a new era of transportation.

It was this story that I had in mind when considering some of the challenges regulators face today when trying to develop the future legal regime for driverless, or “autonomous,” vehicles (AV). One of the most important technological innovations of the last few decades, they have rapidly gone from science fiction to imminent reality. In recent months we’ve witnessed enormous strides in this field, especially from relative newcomers to the industry.

Tesla, after testing on open road in California, has closed a deal for the sale 200 fully self-driving autonomous models to be added to Dubai’s taxi limousine fleet in 2017. Uber, utilizing a broad definition of Pittsburgh’s existing regulatory framework, has made a bid to turn the city into an experimental ground for autonomous taxis, including planning for an ambitious short-range “air” or flying autonomous taxi. Otto has conducted testing of autonomous trucks, with the potential to disrupt the commercial delivery industry. Meanwhile, tech giants including Google and Baidu are working to position themselves as major players alongside behemoths like General Motors, Volvo, and Ford – which has announced a $1 billion investment in an artificial intelligence company to produce the software necessary for next generation self-driving models.

What separates the AV industry from other technological advancements is that it is locked up in regulation. Never mind total authorization for fully autonomous vehicles to take the streets: Even a semiautomated car may not drive a single yard without regulatory approval. Public safety, rightfully so, is the foremost concern. This means that even remarkable

technological achievements, bankrolled by investments from major players, is not enough. To drive the AV industry forward it is essential for the progress to be backed by the creation of an appropriate legal structure that aligns with the new emerging technological, economic and social reality.

It is first of all vital to develop a clearer understanding of the decisionmaking algorithms at the heart of AV

Human beings, and regulators in particular, have far less tolerance for computer errors that cost lives than they do for mistakes made by mere humans. technology. Artificial intelligence will be making life and death decisions. Indeed, AV manufacturers invest no small portion of time and effort in assuring the public that autonomous vehicles are quicker, smarter, more experienced and will eventually be safer than human drivers. Initial testing results do show potential for dramatic reduction of car accidents overall. But human beings, and regulators in particular, have far less tolerance for computer errors that cost lives than they do for mistakes made by mere humans. We acknowledge the fact that people can do wrong (and may receive punishment) for the consequences of split second decisions.

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We are less understanding when mistakes arise from a bug in the code or lack of oversight during the quality assurance process. The upshot is that a high level of confidence in the reliability of the underlying technology must be reached before the regulator will feel comfortable enough to give the stamp of approval.

Another legal issue relates to tort liability in car accidents. This generally

well as with the authorities, to calculate the most safe and resourceful method of transportation. Rapid, ongoing and secure communication infrastructure is essential for the operation of the AV industry. That means cybersecurity will be a central concern.

At this point it’s fair to say that the United States is leading the race, both in terms of technological advancements and

When it comes to devising new regulation for emerging technologies, knowing the law and its reasoning is vital, but not enough. As the great horse manure crisis of 1894 illustrates, it isn’t enough just to get policymakers together in a room. Regulators will need to imagine a detailed vision of the future in order to construct a legal regime that provides adequate solutions to a reality that has

With no human driver in the front seat, new designs may allow for increased safety and comfort for passengers and create room for business and pleasure during transportation.

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entails the concept of driver negligence.

But as cars become more autonomous, the question of driver negligence starts to become a moot point. Thus the legal structure will have to be reviewed, paving the way for a new regime that possibly holds the manufacturer and other service providers chiefly liable for damage caused to people or property in AVrelated accidents.

Furthermore, the growing trend of the “sharing economy” in tandem with autonomous vehicles could point to the end of private automobile ownership.

Instead of individual consumers, the primary customer base would shift to corporations operating large fleets of vehicles. Essentially, there would be no economic justification for owning a vehicle that is not in use 95 percent of the time and requires an expensive parking space.

Vehicle design itself will likely evolve correspondingly. With no human driver in the front seat, new designs may allow for increased safety and comfort for passengers and create room for business and pleasure during transportation.

The matter of infrastructure is as important as the regulatory environment.

With no human involvement, vehicles will be able to communicate directly among themselves and traffic signs, as

new legislation. The recent U.S. Department of Transportation AV policy, for example, provides a significant advance for state legislators and the AV industry.

There are signs that, with a green light from the feds, states including California and Michigan could move ahead with driverless car regulation.

Other countries are also attempting to establish leadership in this arena.

The Israeli government authorized a multiyear plan to allocate funding to boost the already vibrant Israeli smartmobility ecosystem. The Israeli Minister of Transportation, in a press briefing, outlined a vision of autonomous vehicles operating on Israeli streets by 2020, turning Israel into one of the first countries to allow for the full operation of AVs. A government authority named “Israeli Fuel Choices and Smart Mobility” in the Prime Minister’s Office was appointed with the responsibility to advance this field.

Singapore meanwhile has launched its first operational taxi service run by NuTonomy, an AV software startup.

Singapore’s famously good weather, great infrastructure, obedient drivers and the geographical characteristic of being a landlocked island, have turned it into an ideal laboratory for the introduction of AVs.

yet to mature. An uncharted future often creates shortsightedness and a tendency to get distracted by immediate and minute problems, instead of focusing on the bigger picture. When it comes to the AV industry, regulators will need to be no less creative than their technological counterparts. ■

Roy Keidar is special counsel at the Israeli firm Yigal Arnon & Co. He has a diverse background in policy, law and technology, with legal expertise in the fields of international law, security and emerging technologies. He has served as the legal advisor for the Israeli National Security Council at the Prime Minister’s Office. royk@arnon.co.il

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apr / may 20 17 today’s gener al counsel

work pl ace issues

Strategies for Paid Sick Leave Compliance By sarah J. gorajski

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n the past several years, the number of state, county and local paid sick leave laws has exploded. In 2012, there were just five nationwide. By the beginning of 2017, state and local lawmakers had passed more than 40 of them. With no federal law expected in the near future, the number of paid sick leave mandates will continue to increase sharply, creating a compliance challenge for companies with employees located in multiple states.

WHAT DO THEY REQUIRE?

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All paid sick leave laws require employers to provide employees with job-protected paid leave to care for themselves and their family members.

Eligible employees must be allowed to take the time off regardless of the burden it places on the business or on other employees, and employers may not discriminate or retaliate against employees for exercising their rights under the laws.

sarah J. gorajski focuses her practice on representing and advising local, regional and national employers in employment and labor matters. Her areas of expertise include representation of employers in federal and state discrimination, harassment, and retaliation claims arising under Title VII, the Americans with Disabilities Act, the Family and Medical Leave Act and The Minnesota Human Rights Act. sgorajski@littler.com

Most paid sick leave laws also require employers to provide paid leave to employees working in the applicable jurisdiction regardless of where the employer is located. With a few exceptions, they do not exclude part-time or temporary employees. Thus, many employees who have not traditionally received benefits now may be entitled to paid leave. jURIsDIcTIOns VARY

The paid sick leave laws have their differences, which can be significant.

• Reason for use: Paid sick leave may be used for employee’s and their family members’ health care needs.

Most jurisdictions also permit them to be used for absences related to domestic violence, sexual assault, or stalking. But as the number of these laws has increased, we find additional permissible uses in some jurisdictions.

Some now allow paid leave for public health emergencies and other school or work closures. Emeryville, in California, even permits employees to use paid leave to care for a service dog.

today’s gener al counsel apr / may 20 17

• Definition of “family member”: The definition of covered “family member” varies, and may include child, parent, spouse, domestic partner, civil union partner, grandparent, grandchild, sibling, or other designated person. Some jurisdictions have even expanded coverage to individuals who are in the “equivalent of a family relationship,” regardless of blood or legal relationship.

ing option if your organization already provides generous paid leave. However, it’s generally more costly. Policy supplements are still recommended in places like Seattle that do not expressly allow employers to limit employees’ annual accrual of paid sick leave.

To avoid creating a separate policy for each jurisdiction, a good option for many employers is to implement a base policy that applies to most employees,

tected leave than required.

3. Flexible Time Off: There has been a trend for companies in certain industries to implement flexible time off policies, sometimes called “unlimited” policies. They allow employees to take as much paid time off as they would like, as long as they meet performance and business requirements. A flexible time off policy tends to work best with

Most paid sick leave laws require employers to provide paid leave to employees working in the applicable jurisdiction regardless of where the employer is located.

• Amount of leave and use: Requirements vary regarding the accrual rate, accrual, usage and carryover caps, waiting periods for use, and increments at which leave may be used. Some jurisdictions permit employers to cap the amount of time an employee accrues and uses in a year. Others do not restrict yearly accrual or usage, but instead permit employers to cap employees’ overall sick leave balances.

• Other requirements: Requirements also differ with respect to the amount of notice employers may require; the circumstances under which employers may require certification; employer record keeping, posting and notice obligations; and the pay rate of the leave.

STRATEGIES FOR COMPLIANCE

Although paid sick leave law compliance can seem daunting, employers have several basic options: 1. Universal Policy v. Supplements: Employers frustrated with the administrative burden involved with multijurisdictional compliance may consider a universal sick leave policy, incorporating the most generous requirements of each applicable law. This can be an appeal-

but then address unique requirements (such as Emeryville’s service dog provision or Seattle’s lack of an accrual cap) in a separate supplement.

2. Paid Time Off (PTO) v. Sick Leave: Next, consider whether to satisfy sick leave requirements with a PTO policy – a single bank of time that employees can use for any purpose – as opposed to a sick leave policy. Industry norms often drive this decision. If your competitors offer PTO, you may need to offer it to attract and retain talent.

PTO programs tend to be easier to administer because they do not involve tracking multiple leaves. And because PTO programs generally provide more paid leave than sick leave policies, the PTO policy may already be in compliance when new paid sick leave laws are enacted.

PTO programs, however, may not be the right fit for all organizations. These policies can be more costly than sick leave policies. Some states, like California, require the payout of unused and accrued PTO upon termination. PTO policies also may not be the best option when leave abuse is a significant concern. Unless employers track the amount of PTO used for sick leave purposes, employees could end up with more pro-

high-level executives, where concerns about leave abuse are low. However, these policies may create issues under paid sick leave laws. Companies must still comply with record keeping and notice requirements, which will be a challenge if sick time is not tracked.

Additionally, employers may be restricted in their ability to manage an employee who repeatedly calls in “sick,” if sick-related absences are not tracked.

One strategy for addressing this issue is to implement a sick leave policy that runs concurrently with the flexible time off policy. Employees may take as much time off as their schedules and business needs permit, but their job-protected leave is limited. Finally, employers may choose to implement different policies for different groups of employees. The option that works best for your organization will depend on your company culture, employee population, geographic locations and business needs. ■

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APR / MAY 20 17 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

Antitrust Implications of Wage and Benefit Surveys

By Jeffery M. Cross

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n several occasions over 40 years of practicing antitrust law, I have counseled clients regarding the exchange of wage and benefit information. Such an exchange between competitors is not necessarily an antitrust violation. Indeed, the Supreme Court has noted that the exchange of information can be pro-competitive.

However, in certain circumstances, it can lead to antitrust liability.

In October 2016, the DOJ and the FTC issued a document entitled “Antitrust Guidance for Human Resource Professionals.” This document addresses whether the exchange of wage and benefit information is an antitrust violation.

I would like to review the principles behind this Guidance.

The Guidance makes clear that the agencies consider that firms competing to retain employees are competitors in the employment marketplace regardless of whether they make the same products or provide the same services. If HR personnel explicitly agree to fix compensation or other terms of employment, they have violated the antitrust laws.

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.

Included in such agreements are socalled “anti-poaching” agreements, where firms agree not to solicit or hire each other’s employees. If such agreements are without plausible pro-competitive justifications they could be criminal violations of the antitrust laws, exposing HR executives to imprisonment and fines, and the company to fines.

Even without an explicit agreement to fix wages or benefits, an exchange of information could lead to antitrust

liability. First, an exchange of wage and benefit information could be circumstantial evidence of an agreement to fix compensation. Second, an agreement to exchange information could be deemed a violation of the antitrust laws if the effect is anti-competitive.

The Guidance refers to a 1994 civil case that the DOJ’s Antitrust Division brought against hospitals and trade associations regarding the exchange of wage information for registered nurses. One of

today’s gener al counsel apr / may 20 17

the trade associations was an association of hospital HR professionals. The complaint alleged that the HR professionals exchanged current and prospective nurse salary information through annual surveys. The complaint also alleged that the HR professionals talked to each other on the telephone and at meetings of the trade associations. The outcome of the case was a consent decree imposing onerous requirements on the defendants.

The Guidance also refers to the agencies’ joint statement regarding the healthcare industry and antitrust.

That statement creates a safe harbor from government enforcement for the exchange of information. This safe harbor requires that a neutral third

party survey is always better than a direct exchange between competitors.

Second, a survey prepared by a third party should be designed so that a participant’s data will be kept confidential from the other participants. Third, there is rarely a plausible pro-competitive justification to exchange prospective information.

Fourth, the concept of “historical” information is relative. If the industry generally budgets salary increases only on an annual basis, then the data exchanged should be over a year old. On the other hand, if certain benefits change daily or weekly, then the three-month guidance of the healthcare statements may not be necessary.

ment or private plaintiffs challenging an information exchange to establish an anti-competitive effect.

From time to time, an HR professional will pick up the telephone to ask a competitor about wages, benefits, or even pricing being charged for products or services. Such exchanges of information are again not necessarily a violation of the antitrust laws. Very early in my career, I was involved in an antitrust case in the corrugated shipping container industry that revolved around such calls.

The criminal defendants that went to trial were acquitted. When such calls happen, I counsel my clients to make a contemporaneous memo of what transpired and then make another contem-

An exchange of information through a neutral third-party survey is always better than a direct exchange between competitors.

party manage the exchange; that the exchange involves information that is at least three months old; that the information is aggregated so that recipients cannot identify the information as coming from any individual provider; that there are at least five providers reporting data upon which each statistic is based; and that no provider’s data may represent more than 25 percent, on a weighted basis, of the reported statistic.

These safe-harbor criteria are designed to prevent individual companies that exchange data from explicitly or implicitly reaching agreement. The agencies have held that such criteria apply to industries beyond healthcare.

The healthcare statement notes that a company’s failure to meet the criteria does not necessarily mean that there has been an antitrust violation. In that regard, in counseling clients, I make several key points. First, an exchange of information through a neutral third-

Fifth, the number of data points used in any aggregation should be based on the fundamental principle that the survey should not allow a participant to determine the data for an individual company.

Except in unique circumstances, most antitrust challenges to the exchange of information are brought under the Rule of Reason. This approach weighs the anti-competitive effects against the pro-competitive benefits. In this regard, I counsel clients that are third parties, who are conducting industry surveys and disseminating data to the participating competitors, to emphasize the procompetitive benefits of such surveys. For example, surveys of wage and benefits data allow companies to make a more informed independent decision as to the resources necessary to compete for talent.

In addition, I counsel clients to be very cautious about exchanging information in concentrated markets. Such a market structure makes it easier for the govern-

poraneous memo documenting that the decision to offer a particular wage was based upon many independent factors.

The exchange of information, including wages and benefits by HR professionals, can be pro-competitive.

However, care must be taken to ensure that such an exchange does not become an antitrust violation. The new Antitrust Guidance for Human Resource Professionals is a valuable resource to help prevent such violations from occurring. ■

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Communica y t r tion a P sP ird h riv T r i

d ge le

Ke ep Yo u

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By Lillia . Hardy nS

TODAY’S GENER AL COUNSEL APR/MAY 2017

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n times of crisis, corporations increasingly rely on forensic consultants, external accountants, PR firms and other third parties to navigate the potential minefields presented by a global bribery investigation, a data security incident, an accounting scandal or other investigation that might attract public scrutiny. Given their scope and the sophisticated issues raised in these investigations, turning to non-lawyer experts to help inform legal strategy can be essential.

The extent to which communications with these third-parties are privileged can significantly shape the course of an investigation and litigation that may follow. Below we examine the circumstances under which communications with third-parties may be protected from disclosure and suggest some steps you can take to maximize this protection.

Be clear about the purpose of your communications with consultants. The “primary purpose” test is key to protecting attorney-client privilege.

The attorney-client privilege generally protects disclosure of confidential communication between attorney and client if it is for the purpose of obtaining or providing legal advice. The privilege protects not only advice rendered by an attorney, but also information provided to counsel that facilitates sound legal advice.

Although it’s not the case in some foreign jurisdictions, in the United States the privilege applies equally to the work of in-house and outside counsel. However, because in-house attorneys are more likely to have responsibilities for business matters that do not involve the provision of legal advice, there is a greater risk that communications with in-house counsel will be deemed not privileged. Courts typically look to the “primary purpose” of a particular communication to determine whether the privilege applies.

In a 2014 decision in In re Kellogg Brown & Root, Inc., the D.C. Circuit Court of Appeals recognized that a single communication can serve multiple purposes. Thus, the primary purpose test “boils down to whether obtaining or providing legal advice was one of the significant purposes of the attorney-client communication.”

The Kellogg court found that the privilege applied to communications made in the course of an internal investigation of alleged violations of the False Claims Act because a significant purpose of the investigation was to obtain legal advice, even if the investigation was also conducted pursuant to a company compliance program required by statute, regulation or other company policies.

Document when a third party serves as a “translator” for counsel or the “functional equivalent” of an employee of the client.

Any time an otherwise privileged attorney-client communication is disclosed to a party outside the corporation, there is a danger that this disclosure could waive the privilege. However, courts have found that the attorney-client privilege may extend to third-party consultants or contractors in two circumstances. First, the privilege may apply where a third-party agent provides services to counsel necessary for effective representation of the client’s interests.

This has been found to be the case when a third-party evaluates information and provides it to the lawyer in a more understandable format, in a sense translating information about which the attorney lacks expertise into understandable terms for the attorney’s use. Courts have relied on this reasoning to find that accountants, forensic consultants, investment bankers, appraisers, public relations consultants, insurance brokers and others are serving as privileged agents when the facts supported such a finding.

A separate line of cases supports claims of privilege when a contractor or consultant is so integrated in the company that he or she becomes the “functional equivalent” of an employee. However, traditional consultants who provide services to numerous clients and are not regularly working on a particular company’s worksite are unlikely to be deemed the “functional equivalent” of an employee.

The fact that a lawyer is not a direct sender or recipient of a confidential communication may weigh against, but not automatically defeat, a claim of privilege. Communications between non-lawyers relating to the collection of factual material – even material such as financial analyses that may also be collected in the course of regular business affairs – may be protected if the corporation can document that the materials were prepared to inform counsel about facts necessary to provide legal advice.

By extension, communication between a nonlawyer corporate employee and a non-lawyer outside the corporation who is either the “functional equivalent” of an employee or an agent for privilege purposes could also be privileged. However, the further removed such a communication is from the lawyer’s provision of legal advice, the greater the risk that the communication will not be protected.

Thus, counsel who need the services of external consultants in order to render legal advice should continued on page 43

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Legal Competence and the Role of Technological Expertise B Y J U L I A B R IC K E L L

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echnological developments continue to change the way we do business. The application of technology to personal data, for example, is transforming the competitive process. Political pronouncements of 140 characters are shaping public dialog, and perhaps beliefs. The sophistication of cyber-criminals threatens to undermine the democracy in which we live.

For lawyers, technological competence is under increasing scrutiny.

As of now, 26 states have adopted some version of the 2013 ABA Model Rule 1.1, the commentary for which says lawyers need to be aware of “the changes in the law and its practice, including the benefits and risks associated with relevant technology.�

The scope of technologies a lawyer may and advise on security measures. A few law firms encounter suggests that outside expertise may specialize in this, employing lawyers who had be required. Within a specific substantive area of prior careers as technology and security profespractice, the lawyer can often rely on the client to sionals and who attend sophisticated training to explain the technology it is developing, manustay current, but most firms need outside help. facturing, or licensing, and how that may affect The California Attorney General’s 2016 advice on contracts, licenses, regulatory compliData Breach Report clarifies what’s required. It ance or intellectual property protection. But for takes the position that unless an organization is the litigator, the potentially relevant technology implementing the applicable CIS Top 20 Security includes the client’s data store and the disparate Controls, it is not meeting reasonable security platforms in which it resides. Implementing standards for protection of personal information. effective preservation and collection plans when And for lawyers inside and out, ethics rules manneeded often calls upon technology and processes date that the lawyer maintains the confidentiality well beyond the expertise of counsel. Likewise of client information (ABA Model Rule 1.6). for efficiently sorting through the client’s data, That, in turn, necessitates reasonable security. determining if opposing counsel has identified the important data sources and information, and for SMALL ENTITY, BIG LIABILITY Lest it seem that an entity could be too small to using technologies to understand juror viewpoints attract attention, consider the case of Millard or present information in court. v. Doran, which was brought in New York in For those with a broader purview – like the April 2016 to recover money lost when the general counsel – the inquiry extends even furMillards made a nearly $2 million real estate ther, since the technology the client deploys or down payment to a scammer. That person had uses and the data it acquires likely present risks hacked into the unsecured AOL email account to the enterprise and warrant legal guidance. of the solo practitioner representing the Millards, The data the client downloads, collects, had read about the deal, and set up the scam. or creates may be subject to federal, state, or Not aware of a breach? Consider Shore v. international law or regulation, or be governed Johnson & Bell, LTD, filed in federal court in by contract. How and by whom is it transmitted, Illinois in April of 2016. Plaintiffs alleged that accessed, used, or stored? How is it protected, the mere existence of law firm security vulnermonitored, deleted? Is the enterprise aware of abilities, even in the absence of a breach, put its responsibilities, and acting on them? The client data at risk and conemployee who downloads a stituted negligence and thus software application without realizing that “click to accept” “Acquire the skills, malpractice.

For those who seek safety in creates a contract is apt to be the cloud, technical expertise is similarly unaware of its security hire those that again critical. Fully understandrisks, the locations in which it ing the implications of cloud stores data, or to whom it sends have them, or contracts, including the impact a copy. on security responsibilities, The need for outside experdecline the matter.” requires in-depth knowledge of tise is clouded by the seduction cloud operations. Legal experof downloadable apps that suggest we can do it ourselves, tise is enough to decipher the with a tap on the screen. Law school and years warranty and limitation of liability clauses in public cloud contracts – which usually disclaim of practice provide a beguiling impression that lawyers are the experts. But for both in-house liability for data breach – but expertise is needed and outside counsel, rules of professional conto secure access points, access devices, downduct call upon lawyers to recognize when it is loaded data and much more. Also, note that the ABA duties to communicate and supervise the necessary to enlist outside help. work of non-lawyers apply.

Law firms themselves are increasingly the tarUsing technology to improve productivity gets of cybersecurity attacks, given their tempting stores of confidential information and relative lack also requires expertise, especially in litigation, and lack of it may have ethical implications. of security expertise. Unless a lawyer’s workday From chain of custody to retrieval and producincludes firewall and router configuration, antition of the intended information, choosing, malware software deployment, penetration tests, using and explaining the impact of litigation etc., the firm needs a security specialist to assess

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Julia Brickell is executive managing director and general counsel of H5. Prior to joining H5, she was associate general counsel of Altria Client Services and vice president and deputy general counsel of Philip Morris USA. She is on the board of Lawyers for Civil Justice and serves on the faculty of Columbia University’s Executive Master of Science in Technology Management. jbrickell@h5.com

technologies requires specialized knowledge that is Implementing security protocols requires extensive knowledge of available technical choices not taught in law school. For example, document and configuration capabilities. review technologies vary greatly in what they do Ask to see a risk-prioritized action plan. well, and results vary according to the expertise Uncover technology and data-oriented policies which with they are deployed. Courts have tired and procedures, and learn what they mean and of litigators who are ignorant of their clients’ data if they address current realities. Determine how sources, and they likely will soon tire of those who use technology ineptly, or not at all, to sort closely they are followed. Assess the training and auditing that should underlie an effective complithrough it – and if courts don’t, clients should. ance and security program.

Competence in the use of technology-assisted Take a close look at technologies used to review involves a combination of methodology meet legal obligations, including those used for and statistical skills, linguistic skills, and comdiscovery. Talk to the CIO, IT, legal, and the puter science and technology skills that are not business. Read and ask others acquired by lawyers simply what competencies might be because they’ve used a tool Courts have tired required to maximize the value repeatedly, or bought an of the technology for the cliexpensive license. To benefit of litigators who ent. Assess the users. Are they the client, meet the obligation trained in the workings of the to communicate and conform technology or just in its use? to ABA rules of competence, are ignorant of Are they trained in the field the candor, and fairness, the lawyer is responsible for acquiring – or their clients’ data technology seeks to address?

Can they measure the efficacy of hiring – the knowledge to astheir results, including what they sess strengths and weakness of sources. missed? available technology, measure Whether it is collection and efficacy in implementation, and technology-assisted review tools for litigation or defend the chosen approach.

Addressing the technologically deficient lawyer, logging and alerting tools for network security, expertise improves results, and a competent couna formal opinion promulgated in 2015 by The sel will understand how the results measure up.

State Bar of California Standing Committee on Assessing expertise is difficult. Find those with Professional Responsibility and Conduct delindeep background in the underlying activity, not eates a hypothetical parade of horribles. It sugjust those who can use a technology. Interview gests that for e-discovery “the duty of competence purported experts. Numerous state bar associamay require a higher level of technical knowledge and ability” depending on the discovery issues and tions have issued materials, and courts have issued guidelines. The ABA has created resources, such as data. Its advice is to acquire the skills, hire those The ABA Cybersecurity Handbook, which identithat have them, or decline the matter. fies technology-related security issues and suggests THE WAY FORWARD best practices for addressing them.

Acquiring humility and honing awareness are Keep in mind, however, that what is written the first steps. Ensure that inside and outside for consumption by lawyers is usually intended counsel have enough access to business clients to to build awareness, but doesn’t necessarily build understand the business technologies on which expertise. The Cybersecurity Handbook (like the they advise. Take note of the data and technolCalifornia Standing Committee, with its “acquire ogy environment. At many entities, information or hire” admonition) includes the recommendagovernance initiatives have documented data tion that “[i]f a lawyer is not competent to decide sources, movement, and the hardware and softwhether use of a particular technology allows ware that it touches. reasonable measures to protect client confidenUnderstand the scope of the content and tiality, the ethics rules require that the lawyer applicable regulatory schemes, and interview must get help, even if that means hiring an expert data owners as needed. Use an expert to underinformation technology consultant to advise stand security and vulnerabilities in the environthe lawyer.” ment. To offset complacency (or prepare for Bottom line: Technological expertise can be client audits), hire an outside technical or legal hired rather than acquired. The mark of compeconsultant to measure the environment against tence for the lawyer often lies in knowing when known standards and assess internal know-how. and how to engage it. ■

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Privileged Communications continued from page 39

engage such consultants directly, document confidentiality obligations, and explicitly state that the third party’s assistance in understanding complex information is required in order for counsel to provide legal advice to his or her client. By doing so, counsel will help: (1) demonstrate that related communications with the consultant meet the “primary purpose” test required for privilege protection, and (2) establish that the third-party was serving as an agent for privilege purposes and therefore disclosure to the third party does not waive the privilege.

Attorney work-product protection also turns on purpose and can apply to documents created by third parties.

Counsel leading an investigation should be careful not to conflate their analysis of the protections provided by the work product doctrine with the attorney-client privilege. The work product doctrine generally protects documents prepared in anticipation of litigation. The motivation to prepare the document rather than the identity of the drafter dictates whether this protection applies.

For instance, investigative reports drafted by non-lawyers but made to aid in litigation may be protected by the work-product doctrine. Such documents need not have been created exclusively in anticipation of litigation. But documents that were created in the regular course of business and that would have been created in essentially the same form absent the potential of litigation are not protected by the work-product doctrine.

Work product protection is not absolute. Production of factual work product may be required upon a showing of “substantial need” and “undue hardship.” However, work product that reveals mental processes – plans, strategies, tactics and impressions of an attorney or other representative of the client – receive nearly absolute protection.

Corporations under government investigation will often wish to cooperate with prosecutors by disclosing the facts learned through an internal investigation. The extent to which such disclosure waives work product protections can be minimized by providing such information orally rather than in writing, and referencing only non-privileged source documents that are not work product.

Facts learned from employee interviews that are not otherwise established by other source documents should be disclosed without reference

to any particular witness, witness interview or other documents created during the course of the investigation. In addition, it is essential that counsel make it clear that all disclosures are confidential, not subject to disclosure under the Freedom of Information Act, and are not intended to waive the attorney-client or work product protections.

Observe best practices.

Both the attorney-client privilege and attorney work product doctrines can protect documents drafted by third-party consultants under certain circumstances. Counsel should take the following steps to ensure the most expansive application of these protections.

• Ensure that counsel, preferably outside counsel, not only lead but essentially run any investigation, dictating and monitoring the process.

• Make it clear that any documents produced during the course of an investigation are being created at the direction of legal counsel with the clearly stated purpose of providing legal advice to the company concerning compliance with the law and/or in anticipation of litigation.

• Any memoranda documenting interviews of corporate employees should reflect counsel’s impressions of the information and not merely transcribe the information provided by the employees.

• Make sure counsel, preferably outside counsel, directly engage and correspond with any nonlawyer consultants or accountants whose work will inform counsel’s legal advice. Engagement letters should document the fact that the consultants are working under counsel’s direction in order to facilitate counsel’s provision of legal advice and document confidentiality obligations.

Followed rigorously, these practices can maximize the possibility that communications with non-lawyer consultants and others will fall under the attorney-client privilege. ■

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Lillian S. Hardy is a partner in the Investigations, White Collar & Fraud practice at Hogan Lovells. Her practice focuses on government investigations and parallel civil litigation for clients in industries including technology, life sciences, aerospace and defense, financial services, consumer products, retail and education. lillian.hardy@ hoganlovells.com

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General Counsel and the headquarters lease

By Eric Allon general counsel is often asked to spearhead a company’s efforts in connection with a headquarters lease. However, because most general counsel focus on matters other than leasing, there are numerous traps for the unwary that must be avoided to make the headquarters lease successful. Here are some key issues to keep in mind: • Planning the timing for the move.

• Forming a multi‑disciplinary team.

• Creating criteria, and locating the best space and landlord for the company.

• Negotiating the key terms in the letter of intent and the lease.

• Making sure the key construction bench‑ marks are met for landlord’s and tenant’s build‑out and occupancy of the new space, and departure from the existing space.

timinG A move to a new headquarters must dovetail with the expiration of the existing lease, giving the company time to transition between the two locations before the holdover provisions of the existing lease apply. Many holdover provisions not only provide for double rents, but also make

today’s gener al counsel apr/may 2017

the tenant liable for consequential damages that may occur – for example, if the existing landlord signs a new lease with another party for the company’s space.

Accordingly, a company should begin the process of choosing a new headquarters several years in advance and consider several options, including staying in the same space. Recently,

cities. Once narrowed to the Boston area, several locations were considered both for the temporary and final headquarters. Final decisions on both were partly based on proximity to the airport as well as South Station, the Mass Turnpike and Interstate 93, along with important infrastruc‑ ture improvements promised by the Governor’s Office and the City of Boston.

a company should begin the process of choosing a new headquarters several years in advance and consider several options, including staying in the same space. a major downtown tenant in Boston told the existing landlord that it was leaving before it had properly considered the cost of moving to a prospective space. When the company real‑ ized that it was more cost‑effective to stay in the existing space, the landlord was able to drive a very hard bargain in relation to both financial and other terms of the new lease.

Team At the earliest stage, the general counsel needs to select and meet with the team to set goals and priorities, with the CFO included to advise regarding the budget for the new headquarters.

The team should also include the head of human resources and the company’s real estate/ property manager, a commercial lease attorney and a broker (either with a space consulting group as part of the brokerage firm or with access to a respected group of consultants).

The internal team will decide generally the locations that will work for the company and its employees, including whether the company needs to be visible and easily accessible to multiple means of transportation to make commutes rea‑ sonable. Whether the company needs lab space as part of its headquarters is also a critical issue.

Because there are tax and insurance issues that arise during lease negotiations, it is important to alert the accountant and insurance agent as well as a tax attorney that a new lease is being considered.

LocaTing The RighT Space and LandLoRd At this stage in the process the broker, who understands the company’s criteria, plays a key role in locating a variety of options. In the case of General Electric, the options included several

Sophisticated lawyers and brokers will pay attention to each and every detail of the move, in‑ cluding the track record of the landlord/developer to timely fulfill the tenant’s requirements.

SiTe SeLecTion and negoTiaTionS Once several sites are selected as possibilities to fulfill a company’s requirements, a broker will request a proposal from the prospective land‑ lords. These requests generally cover such matters as the financial terms, landlord’s work, tenant improvement allowance, extension rights, expan‑ sion rights, assignment, subletting and parking.

Additional matters to be considered include any amenities that the company deems critical to its operation, such as a health club facility, a cafeteria, or in some cases a daycare facility that is always available for its employees.

General counsel often consult with the out‑ side leasing counsel to review proposals and to propose inclusion of other legal considerations, including legal issues surrounding a proposed sublease from a ground tenant or a lease from a condominium unit owner. For example, a major suburban tenant recently failed to properly ad‑ dress parking concerns in a lease with a condo‑ minium unit owner where the parking was in the common area of the condominium and controlled by the condominium association. This left the tenant without a remedy when serious parking problems developed.

A headquarters lease is a major undertaking.

The responsibility of the general counsel to properly oversee and coordinate the transaction is critical to the success of the new headquarters, and its ability to meet the company’s goals for the future. ■

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Eric Allon is a partner at Bernkopf Goodman LLP. His principal practice areas are real estate law and business law, with particular emphasis on commercial leasing, the acquisition, management and sale of properties, financing transactions, commercial loan workouts and residential and commercial development. eallon@bg‑llp.com

Major Issues in Real Estate Leases

BY AMOL PACHNANDA 46

T

he role of an organization’s Office of General Counsel in the negotiation of a lease can vary widely. In an organization that has various offices, the OGC may have standard operating procedures for control, quality and uniformity in the leases. In this type of organization, OGC may be involved throughout the whole process – interviewing commercial brokers, negotiating the brokerage agreement, and negotiating the letter of intent and the lease.

If an organization has few leases, OGC may take a more hands-off approach by leaving the day-to-day management of the process to the organization’s real estate person.

Both approaches can work, and in each it’s incumbent upon general counsel to have a full understanding of the major issues involved in a lease. This article will identify those issues, and offer suggestions and negotiating strategies from the tenant’s point of view.

Keep in mind, though, that leasing is an art and not a science, and that various factors, such as negotiating leverage and the marketplace, will impact whether or not a tenant prevails on a given point. (This article addresses office leases only. Retail and warehouse leases, though similar, have additional issues that merit independent discussion.)

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Delivery of the Premises. The actual delivery date of the premises is important, especially if the tenant is nearing

the end of its existing lease. The lease should provide for an anticipated delivery date, and the landlord should provide prior notice to the tenant of the date of substantial completion. If the landlord misses the anticipated delivery date, then the rent should be abated. Initially, the rent may be abated one day for each day of delay. Thereafter, the abatement should be increased to two or three days for each day of delay.

The tenant should negotiate for an eventual termination right after a certain number of months following the anticipated delivery date. However, the additional abatements of free rent that the tenant may have accumulated because of late delivery are of no value if the tenant terminates the lease. Therefore, the tenant should negotiate a liquidated damages amount in the event of termination.

In a situation where the tenant is up against the expiration of the existing lease, tenant should ask landlord to “turn-key” the premises, thereby shifting the burden of late delivery to the landlord.

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The “SNDA.” The subordination, non-disturbance and attornment (formal acknowledgment of transfer) agreement provides that: (i) tenant subordinates its lease to the lender’s mortgage; (ii) landlord agrees that tenant’s occupancy of the premises will not be disturbed if the tenant is not in default under the lease at the time that the lender succeeds to the landlord’s interest under the lease; and (iii) the tenant agrees to attorn to the lender as if it were the original landlord under the lease. The SNDA is meant to preserve the “original business deal” that the tenant negotiated with the original landlord.

Invariably the lender will try to renegotiate the deal by limiting its obligations while still expecting the tenant to pay the full rent under the lease. For example, lenders will refuse to pay the allowance that the tenant negotiated in the lease.

In such a case, the tenant may consider asking the landlord to deposit

with the lender an amount equal to the allowance so that the tenant’s original bargain is preserved.

If the tenant does not receive an SNDA, then the lender has the right to terminate the lease if it succeeds to the landlord’s interest. For larger deals, this is an unreasonable risk.

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Landlord’s Services/Amenities. The tenant should require that the landlord operate and maintain the building to a standard that is comparable to other similar buildings in a geographic area, and to the extent possible, the tenant should insist that a schedule is attached to the lease, establishing the baseline for certain services.

The most common schedules are janitorial specifications; security specifications; and heating, ventilation and air-conditioning specifications. If during the term of the lease there are issues with respect to the level and scope of such services, then the parties will be able to resolve them by reverting to the attached schedules. With respect to janitorial specifications, tenant may consider negotiating for the right to require landlord to change the janitorial services provider if the level and/or scope of services falls below the baseline threshold.

In some situations, tenants should require that the landlord provide that at least half the elevators in an elevator bank will be operational during normal business hours, and that some lower ratio will be operational outside of normal business hours.

If the building provides amenities, such as a conference or fitness center, then the tenant may continued on page 51

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becoming a third party witness when our two best suppliers just announced their merger. Or perhaps your two biggest competitors announced a merger that you fear will lead to your extinction. Is there anything you can do to stop the calamity?

You could complain to the federal antitrust agencies – but participating in the merger review process might not end up as cost-free as it first appears.

Here’s what you need to know about the merger review process, how third parties fit into it, and what to consider immediately after that announcement.

hsr basics

To determine if a particular merger is good or bad for competition, the antitrust enforcers – at the federal level, they are the Federal Trade Commission and the Department of Justice Antitrust Division – need information about the merging parties and the relevant industries.

For most large mergers, that information comes through a Hart-Scott-Rodino Act (HSR) filing.

HSR requires the parties to a merger to submit certain basic information and then wait for approval before closing the deal. Most mergers are approved after this initial submission. If the reviewing agency thinks it needs more information, it makes a “second request” for information.

That usually takes months for the parties to complete. If the agency still has concerns at the end of that process, it can sue to block the merger.

Throughout this process, the reviewing agency will reach out to third parties – customers and competitors, among others – for relevant information. Third parties can also proactively contact the agency and provide relevant information.

If a merger has been announced, any company in that industry should ask itself three questions to be prepared to respond to enforcer requests for information.

• Are we the witness the government really wants? Because the agency is most interested in the merger’s potential effect on competition and customer welfare, the agency will be most

competitors or suppliers merge b y st e v e n j . c e r n a k interested in the views of customers. Information from competitors will not be rejected out of hand but could be discounted as coming from an entity fearful of a stronger merged competitor. Even the opinions of customers will be tested, both by the agency and any court, so be prepared to support any statements you make. • Do we have the type of evidence the government wants to hear? The agency wants evidence that will help them predict the transaction’s effect on competition, not just on you, so you need to be prepared to explain why your fears about the transaction can be generalized to other customers. The agency will be looking for facts that will help them make that prediction. So, in addition to expressing your opinion, be prepared to answer questions like the following: What products or services do the merging parties provide?

Are there substitutes? Who are the current or potential competitors? If the newly merged entity tried to raise prices, what would your

reaction be? Do you see any efficiencies or other benefits to customers from the merger? • Are we prepared to go wherever these inquiries lead? In almost all of these types of investigations with third parties, the agency will request a simple, informal, phone inter-

the agency wants evidence that will help them predict the transaction's effect on competition, not just on you. view with some employee who knows the parties and their offerings, someone like the right purchasing or sales executive. These calls usually last no more than an hour and require employees to do little more than collect their thoughts and keep a few basic facts in mind.

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apr/may 2017 today’s gener al counsel

So the value of the right executive’s hour might seem like a small price to pay to get a glimpse of the investigation.

While that calculation is correct in most circumstances, the price can be much higher in unusual cases. While the agencies have done a good job of keeping these informal interviews secret, the merging parties might correctly guess the interviewees and request a summary of the discussion with the agency. Sometimes the initial phone call from the agency can lead to more calls or requests for documents and data. In the rare cases when the matter goes to trial and the third party agrees to testify, then all the expensive (in terms of money, time and attention) prices of litigation must be paid by the third party.

when the agency calls

Once the company receives that call from the agency, there are four steps it should take to ensure the best outcome for the company.

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Steve Cernak is of counsel to Schiff Hardin LLP. He is an experienced antitrust attorney and offers counsel on matters, such as negotiating joint venture agreements and providing advice on price programs. He has helped both targets and complaining parties in dealings with state and federal consumer protection agencies. scernak@schiffhardin. com

• Ensure this third party request does not turn into a first party investigation. If it is not obvious from the agency’s request, the company should obtain assurances that it is not a target of the investigation at this time.

Then the company should review its files to assure itself that the agency will see no reason to change its mind. Was the third party considering a similar merger? Were recent purchase negotiations with one or both of the merging parties more acrimonious than normal? Did the merging parties just give the company a great deal to garner support for the merger?

• Collect the facts, formulate the story and evaluate the agency’s reaction to it. The company should gather the answers to the typical questions asked by the agency and be prepared to provide them free of company or industry jargon. Given those factual responses and any opinions the company might offer, a prediction of whether the agency will see the third party as a potential witness should be possible. If the company sees plenty of competition for the merging parties after the merger, for instance, the chances of the third party being a witness for the agency are very small.

• Think strategically about the matter. Sometimes a company executive is anxious to respond to an agency request in order to assist – or hinder – the merging parties. Some just want to be involved in a seemingly important investigation of the industry. Such personal

or parochial concerns might not fully justify the costs to both the witness and the company of getting deeply involved in a controversy.

From the perspective of the company, however, there might be a benefit from time and attention being spent on the matter. The company needs to balance these potential benefits and risks.

the merging parties might correctly guess the interviewees and request a summary of the discussion with the agency.

• Assist the witness during “testimony.” Even if the decision is made to conduct just an informal interview, the company should set up the ground rules for the call and assure that they are followed. Any requests from the merging parties for a report on the call with the agency or other assistance must be evaluated given the company’s strategic goals. If the interview leads to document production or sworn testimony, the same care must be taken as when the company is involved in litigation.

Being a third party witness in a merger investigation allows a company to be a “good corporate citizen” and play a small role in its industry’s development. However, all the costs and benefits should be considered before deciding what role is in the company’s best interests. ■

today’s gener al counsel apr/may 2017

Real Estate Lease

insist that the landlord make such amenities available during the entire term of the lease.

that landlord may suffer vis-à-vis the next tenant – for example, additional free-rent or other payments for late delivery. Tenant should ask for a 30-day grace period before it becomes liable for such damages.

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continued from page 47

Tenant Improvement Allowance. If the landlord is to provide an improvement allowance, the tenant needs to make sure it actually receives it. The tenant may consider negotiating for the right to receive the entire allowance up-front.

Generally, landlords will agree to make periodic disbursements, but sometimes they don’t pay it.

Options. Options come in various shapes and sizes. For example, the tenant may increase its presence in the building by way of a musttake expansion option, or a right of first offer.

Alternatively, tenant may reduce its presence in the building by exercising a partial termination option.

Usually, the general counsel’s biggest concern is whether the lease can be assigned to a successor without the landlord’s consent.

The tenant should have the right to offset the unpaid allowance against the rent, with interest.

In certain circumstances, the tenant may ask the landlord to either provide a parent guaranty or a letter of credit to backstop the landlord’s obligation to pay the allowance.

Having a full bag of options is a time-tested strategy to grow or shrink the footprint as needs arise. This approach is preferable to the approach tenants too often take – lease more space and pay more rent than they need, and never grow into the space.

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End of Term Removal and Restoration Obligation. Tenant should not agree to surrender the premises in the condition that it was delivered. Additionally, the tenant should only be obligated to remove atypical office installations, such as convenience stairs, kitchen, executive restroom and dumb-waiters.

The tenant, when it seeks approval for alterations, should require notification as to whether those alterations will need to be removed at the end of the term. Finding out 30 days before the lease expires that certain alterations need to be removed may put the tenant in a bind, especially if the decommission budget did not anticipate such a cost.

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Holdover Rent. Construction delays at the new premises can force a tenant to holdover [in the old location]. To mitigate the damages resulting from a holdover, tenant should insist that holdover rent be calculated on a per-diem basis instead of monthly. So, if the tenant holds over for 15 days, it is only liable for 15 days of rent and not the full month.

Some leases may provide that, in the event of a holdover, the tenant is liable for any damages

Assignment/Subletting in Connection with Corporate Transactions. Usually, the general counsel’s biggest concern is whether the lease can be assigned to a successor without the landlord’s consent.

The lease should provide that corporate and related party transactions do not require the landlord’s approval. All that is required is notice to landlord. Landlords will insist on a net worth test for the new entity. Such a test is not unreasonable and tenants routinely agree to it. However, tenants may inquire why the test is appropriate since the original tenant remains on the hook for the lease obligations.

The above list of major issues is not meant to be the list to end all lists. Different situations call for negotiating different provisions. The tenant’s real estate expert, along with real estate counsel, will have to identify the particular major issues in the transaction. Whether or not the tenant succeeds on any particular issue depends on a variety of factors, including the marketplace, creditworthiness, negotiating leverage, and expertise of real estate counsel. ■

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Amol Pachnanda is a member of the Real Estate Group at Ingram Yuzek Gainen Carroll & Bertolotti, with a focus on commercial real estate law and finance transactions. He concentrates his practice on representing landlords and tenants in their leasing of space and in the acquisition, disposition and financing of commercial and multifamily properties. apachnanda@ ingramllp.com

Sustainability Accounting Standards as the New GAAP

By TRicia Dunlap

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magine the CEO of a U.S. corporation refusing to disclose any information about his company’s financial performance. Instead, he tells investors he won’t “wet-nurse” them, and they will have to “wade in and get stuck” because that’s the way men are “educated.”

As outlandish as that sounds, in 1899 that’s essentially what Henry Havemeyer, president of the American Sugar Refining Company, said to a congressional committee by way of justifying his refusal to disclose any financial information to American Sugar’s 11,000 investors. One hundred years ago, Havemeyer’s perspective was perfectly acceptable. Almost no corporations issued financial reports, and when they did the data were usually fantasy.

Much as Havemeyer dismissed financial reporting in his day, you might dismiss the idea of including non-financial business risks and opportunities in your reporting. But just as financial reporting in 2014 looks nothing like it did a hundred years ago, recent shifts in nonfinancial (“sustainability”) reporting have changed the corporate landscape. The introduction of new quantitative metrics keyed to the Supreme Court’s definition of “materiality” proposes to change how corporations are

valued, and as a result alter their marketplace value and access to capital.

In 2012, the Sustainability Accounting Standards Board (SASB) began a process to set sustainability reporting metrics that were unlike earlier iterations. The SASB metrics track five kinds of non-financial capital – human, environmental, social, business model and innovation, and leadership and governance. SASB standards are evidence-based, auditable, industry-specific, potentially material, and designed to allow investors to compare one company’s performance with that of its competitors.

Investors may now access better data, and CEOs and CFOs may sleep better, knowing that Sarbanes-Oxley certification is backed by a more thorough and objective materiality analysis. And corporate leaders who face criticism for reporting sustainability issues may now defend their decision by pointing to SASB standards.

HOW WE GOT HE R E It took the 1929 stock market crash, fueled in part by misleading financial reports that inflated corporate value, to alter the face of the laissezfaire capitalism of Havemeyer and his peers.

In 1934, Congress created the Securities and

today’s gener al counsel apr/may 2017

Exchange Commission and mandated reporting for publicly traded companies.

Neither Congress nor the SEC, however, established accounting standards. As a result, for the next 40 years, in court and in the halls of Congress, some corporations fought efforts by the Investment Bankers Association, the New York Stock Exchange and the American Institute of Accountants to standardize financial reporting practices. Even 30 years after the creation of the SEC, without accounting standards in place, U.S. capital markets did not have reliable information on corporate financial performance.

In 1973, the Financial Accounting Foundation formed the Financial Accounting Standards Board (FASB) – one of the “most important organizations you’ve never heard of,” according to FASB Vice President Robert Stewart. Recognizing that investors benefit from “the expertise and resources that the private sector could offer to the process of setting accounting standards,” the SEC blessed FASB’s standards as “generally accepted.” Thus, since 1973 publicly traded U.S. corporations have reported financial performance using FASB’s “Generally Accepted Accounting Principles,” or GAAP, and our understanding of corporate performance has been significantly altered.

Almost immediately, however, a small chorus of voices began arguing that financial metrics alone do not accurately reflect corporate value.

Over the last four decades, that chorus has only grown louder.

In 1989, the Coalition for Environmentally Responsible Economies (CERES) published its “Valdez Principles,” advocating for environmental disclosures. The Global Reporting Initiative (GRI) grew out of that effort, and today it is the most widely-adopted framework for voluntary corporate sustainability analysis and disclosure. The GRI framework, however is neither industry-specific nor tied to the legal definition of materiality. GRI standards consider a broad stakeholder community and are not pointed to the “reasonable investor” so familiar to U.S. securities lawyers. In addition, its standards do not take into account that different industries face distinct risks and opportunities related to their unique practices. Thus, while GRI disclosures may be appropriate on a voluntary annual report, they are not useful in the materiality analysis necessary for preparation of SEC filings.

Since GRI’s emergence in the late 1990’s, examples of non-financial reporting have proliferated and it’s become a cluttered landscape.

Aside from GRI, you’ve likely heard of the Carbon Disclosure Project (CDP), which represents 767 mostly institutional investors holding over $100 trillion in market assets. Because its roots are in the environmental movement, when you hear “sustainability” you quite likely think “green” or perhaps even “left-wing environmental activists.”

Today, however, sustainability measures are applied to a broad spectrum of corporate operations and issues that feed into corporate value, including supply chain vulnerabilities, brand and reputation value, human rights, intellectual property, cybersecurity, and management of regulatory environments. None of these are financial issues in a direct sense, yet performance on any of them can affect corporate value. Investors want to know what companies are doing to manage these risks and opportunities, and that’s why demands for sustainability disclosures have grown louder.

Some may dismiss sustainability reporting as a mere PR gimmick, or feel they are bombarded with sustainability questionnaires and become impatient with their sometimes subjective nature. This view is not necessarily wrong, as the quality of voluntary reports varies widely. Like the information in pre-GAAP financial reporting, some of the data is not always useful, and continued on page 57

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How to Maximize Your Business Interruption Insurance Recovery

BY CHRISTOPHER C. LOEBER

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ach year nearly one in five companies suffers a catastrophic event that disrupts operations. Although some of these events are the result of natural disasters, the vast majority are “man-made,� including such things as explosions, fires, machinery breakdowns, defective materials, as well as faulty manufacturing and flawed design. But no matter what the cause, catastrophic events lead to two general categories of loss: physical property damage, and business interruption (BI). Both are covered by first-party property policies.

This article focuses on the latter. Business interruption losses are less obvious, more complicated and often exponentially larger than their physical damage counterparts. Last year alone in the United States, the average BI claim exceeded $2 million and business interruption losses collectively totaled more than $7 billion.

Despite the frequency and size of the BI losses, many sophisticated companies fail to fully protect themselves. Some obtain sub-par BI

coverage, others misunderstand and misapply the otherwise adequate coverage they do have, and still others fail to take the simple step of including insurance professionals on their crisis management team. Whatever the reason, the good news is it’s correctable. With a little knowledge and preparation, companies can go a long way toward maximizing their insurance recovery in the wake of a large-scale loss.

The following scenario underscores the issue at hand. It illustrates the insurance-related dangers that lurk within even a seemingly logical and comprehensive response to a catastrophic event.

A sudden large explosion rocks a Company X manufacturing facility. No one is injured, but the blast and ensuing fire cause physical damage to the plant and its operations.

Company X immediately activates its crisis management protocols. The emergency response team jumps into action, accounts for all employees and stabilizes the scene.

TODAY’S GENER AL COUNSEL APR/MAY 2017

At the same time, media relations personnel prepare and release a statement, in an effort to reassure shareholders, customers, vendors and the general public that everything is under control. That statement minimizes the overall impact of the event. Company X then instructs its insurance broker to describe the event to the first party property carrier and put that carrier on notice of a claim. After notice is given, the triage continues and the company relegates the insurance claim to the “worry about it later” pile, in favor of more pressing needs. Then, after the initial dust settles, the company hires outside providers to repair and/or replace all damaged property. At the same time, it directs its internal accounting/bookkeeping departments to track, tally and present the carrier with the financial impact of the catastrophic event – i.e., the business interruption loss.

At first blush, this response appears reasonable. In reality, however, this set of facts embodies at least five basic pitfalls that could seriously undermine the company’s subsequent BI insurance claim.

Pitfall # 1: Failure to include an insurance coverage lawyer on the crisis management team.

The hypothetical did not specify whether the Company X crisis management team included coverage counsel, but in realty most crisis management teams do not. This often overlooked essential is a common thread that informs all the other pitfalls. Keep in mind that when it comes to insurance policies, the devil is in the details.

For that reason, it is essential for corporate policyholders to understand their coverage before they need it. By including a coverage lawyer on its crisis management team, a company can ensure that there is someone who understands the available coverage and how to maximize it. Without that input, in the immediate aftermath of an event a company can easily take steps that severely and negatively impact its subsequent BI claim.

Pitfall # 2: Issuing a press release that directly undercuts the insurance claim.

Press releases are a common and effective means of quelling fears following a catastrophic loss.

Unfortunately, even sophisticated companies can fail to realize the lasting and potentially negative impact a press release can have on a subsequent BI claim. Press releases by design seek to minimize the impact of a given event and reassure that everything is under control. The problem is

that early-stage statements can affect subsequent insurance claims. If a press release minimizes the impact of an insurable event, a carrier that is subsequently asked to pay the loss will cite the press release as evidence that the loss “wasn’t so bad after all.” Bottom line is that press releases are discoverable. Coverage counsel with a seat at the emergency-response table can help craft a press release that will immediately reassure the necessary parties without compromising the anticipated BI claim.

Pitfall # 3: Failure to understand that communication with the company’s insurance broker isn’t privileged.

Insurance brokers are a valuable resource when it comes to complex insurance claims. In most cases, brokers are familiar with the company’s operations, understand the policy, and know the process for commencing and perfecting a BI claim. Consequently, it is no surprise that most companies rely heavily on their brokers in responding to a catastrophic loss. What is surprising is the number of sophisticated companies that fail to realize that communications with their insurance brokers are not protected.

Every phase of a complex insurance claim is important, but none more than the days and weeks following a catastrophic event. Information flows at a furious pace, as the “who, what, when,

Even sophisticated companies may fail to realize the lasting and potentially negative impact a press release can have on a subsequent business interruption claim. where, why and how” of the event takes shape.

In that rush to understand and address the crisis, it is not unusual for early reports, comments and assessments to be incomplete or entirely incorrect, and therein lies the danger. Because privilege does not attach to a company’s communications with its insurance broker, any information shared with a broker – even if it’s later shown to be inaccurate or incomplete – becomes discoverable in a subsequent insurance dispute. That can have a disastrous effect on the ultimate BI recovery.

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To paraphrase the Miranda warning: Anything you say can and will be used against you in a coverage dispute. Thus, while insurance brokers should be included on the emergency response team, all event and claim-related documents and information must be filtered through coverage counsel.

Pitfall # 4: Failure to make the carrier aware of the third party providers.

It is unusual for first party property policies to mandate the use of a specific contractor in the wake of a catastrophic loss. But every policy does place upon the policyholder the dual obligation to mitigate damage and cooperate with the issuing carrier. In the light of these twin duties, it is best to keep the carrier apprised of all contractors retained to assist in remediating the physical damage. This information can be communicated directly to the carriers or through any adjuster appointed on the carrier’s behalf.

Even where not required, providing such information serves to neutralize later efforts by the carrier to use “surprise” as a basis for reducing the payment of a claim. Although such attempted coverage defenses are more likely to be raised in response to the physical damage component of a given loss, it is possible that a carrier could also raise them in an effort to reduce the BI portion of a claim.

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Christopher Loeber is a Partner in Lowenstein Sandler LLP’s Insurance Recovery Group. Formerly a defense attorney for multinational insurance carriers, he now represents corporate policyholders in connection with catastrophic losses. He also works with policyholders and their insurance brokers in negotiations during the policy purchase and renewal stages.

He frequently writes and lectures on insurance coverage and litigation topics. cloeber@lowenstein. com

Pitfall # 5: Failure to retain a specialized forensic accountant.

Internal accountants and bookkeepers are excellent resources to provide important assistance following a large-scale BI loss. But in most instances these internal personnel lack familiarity with first party property insurance policies. As a result, they do not understand the scope of available coverage, nor the techniques for maximizing it. When it comes to catastrophic events, a great deal of time and specialized expertise is required to identify, tabulate and document the covered aspects of the BI loss. That’s where forensic accountants come in. Simply put, failure to retain forensic accounting experts from the outset virtually guarantees that insurance money will be left on the table.

Boiled to its essence, the moral of this story is that having the right experts on your crisis management team can make all the difference.

The next and perhaps more important question is: “How to pay for it?”

In the face of a catastrophic event, the last thing any company needs is the added expense of

specialized accountants and lawyers to prepare and pursue a BI claim. But that’s an expense that can be avoided. With the right preparation, your company can engage the necessary experts with little or no out-of-pocket cost. There are two simple reasons for this.

First, insurance carriers are generally willing to add “Claim Preparation Expense” provisions to their first party property policies. These are coverage extensions intended to cover the policy-

Failure to retain forensic accounting experts from the outset virtually guarantees that insurance money will be left on the table. holder’s costs in developing and presenting a given property and/or BI claim. The claim preparation coverage is subject to sublimits, and it almost always excludes fees paid to public adjusters and attorneys. But it does not exclude the work done by forensic accountants. In fact, forensic accounting fees are among those expenses that these coverage extensions are designed to reimburse.

In short, if properly negotiated at the time of inception/renewal, your first party property policy could provide full coverage for specialized forensic accounting assistance in the event of a BI loss.

The second way to limit out-of-pocket cost is to retain an insurance recovery lawyer willing to pursue your BI claim on the basis of an alternative fee arrangement. AFAs are becoming more and more prevalent across the legal landscape, and they often work well in connection with large-scale claims. Although each case is different, sophisticated insurance coverage lawyers can frequently tailor AFAs to fit the specific needs of a complicated BI loss.

When it comes to maximizing business interruption recoveries for catastrophic events, even simple mistakes can cost millions. The good news is that a little preparation goes a very long way.

For that reason alone, today’s general counsel are well-advised to plan ahead, and to always keep a sharp eye on their BI. ■

today’s gener al counsel apr/may 2017

Sustainability Standards continued from page 53

much like during the early decades of financial reporting, the first 30 years of sustainability reporting has generated confusion as well as enlightenment.

briefs, which set forth the evidence supporting the standards.

It has finished this process for eleven economic sectors. Within each sector are distinct industries with standards tailored to that industry’s unique needs. (For example, the Financials sector distinguishes commercial banks from insurance companies).

THIS GENERATION’S GAAP? The emergence of the Sustainability Accounting Standards Board in 2012 changed the status quo, because for the first time it laid out evidence-based, objective, potentially material, and industry-specific standards to guide an analysis.

Though FASB and SASB are not affiliated, the SASB process is modeled on that of the FASB and its success. Both organizations are private, non-profit corporations. They also share a mission of educating investors and ensuring that capital markets are informed by material information, produced according to rigorous disclosure standards, and designed to allow markets to accurately price corporate

MORE THOROUGH MATERIALITY ANALYSIS SASB’s goal is to provide a more thorough analysis of material information, so that disclosure to investors enables more informed decision-making.

It’s too soon to know if the goal has been met, although a recent study by SASB found that 38 percent of companies already include information on SASB disclosure topics in their SEC filings.

Like FASB, SASB will fine tune its standards as additional evidence comes to light. If your industry’s standards are already in place, you need to understand them, and independently determine the degree to which each is material to your company’s performance. As with financial issues, the decision regarding whether or which non-financial inforSASB intends to guide reporting of mation is material lies with each company’s leaders and their legal counsel. sustainability issues on SEC filings so You may already be measuring the issues that SASB identifies as material for the market can factor sustainability your sector, but the SASB process may turn up material risks or opportunities into corporate value. that are not yet on your company’s radar. Or SASB’s quantitative metrics may provide a new method of tracking issues value. SASB intends to guide reporting of susalready of concern. A company needs to know if tainability issues on SEC filings, so the market these data gaps exist and determine whether they can factor sustainability into corporate value. matter, because they may impact its ability to see Thus we may be on the cusp of another and respond to challenges or opportunities.

“GAAP-moment.” Forty years ago, when FASB Just as it currently does with its GAAP-driven launched GAAP, 83 percent of corporate assets analysis of financial issues, a company can priwere tangible and easily valued. Today, 80 pervately review and evaluate the degree to which cent of assets are intangible, and value can be difSASB standards apply to its operations. Underficult to assess. On that fact basis, plus additional standing the shifting landscape will prepare the concerns over dwindling or degraded natural company to report material information, or to resources, climate risks, growing interest in social be ready with credible explanations for why it responsibility and demands for greater transparis not reporting if investors ask. For those who ency, it appears that the market is adopting a represent investor interests, SASB standards may different understanding of corporate value. enhance their ability to accurately evaluate and SASB sets standards by researching each communicate corporate value. industry’s unique issues; soliciting input from At some point, one of your competitors may individual industry working groups, investors, use SASB metrics in its materiality analysis, and and other stakeholders; drafting provisional disclose its sustainability performance on its SEC standards supported by quantitative metrics; and filings. That may have already happened. Or persoliciting public comment. SASB also provides haps your company will lead. Regardless, it’s clearly access to its materiality standards and industry time to understand this changing landscape. ■

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Tricia A. Dunlap is the founder of Dunlap Law PLC, a business law firm focused on sustainability and climate risks to business and investments. She focuses her practice on trademarks, copyrights, licensing and sustainability, and serves with the Sustainability Accounting Standards Board as a subject matter expert. Formerly she was an attorney with McGuireWoods LLP, and general counsel and CFO of Christensen Global Strategies. tdunlap@ dunlaplawplc.com

APR/MAY 2017 TODAY’S GENER AL COUNSEL

Best Practices and Priorities for GCs

BY NANCY JESSEN

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s members of the leadership team, general counsel must look for ways to protect the company’s legal and business interests, while still managing costs and maintaining legal department efficiency.

While this goal is valuable in its own right, the company is best served when efficiency is considered alongside effectiveness. Executing on shortterm cost efficiencies can set the stage for long-term effectiveness. Without an eye towards increasing the department’s impact on the business, efforts to decrease spend through reduced headcount and better deals with outside counsel may result in reduced service levels to the business, with remaining internal employees working even harder to accomplish the same tasks.

Instead, business minded GCs are designing their internal teams to be highly tuned to the strategic direction of the business and provide the legal services that directly contribute to success. Rethinking the legal department’s role in its entirety begins with identifying and prioritizing tasks that are most connected to the company’s growth, financial health, market position and customer satisfaction.

Changing how the department delivers legal services requires a deliberate effort to answer key questions: (1) how can we instill a business oriented mindset and customer focus to increase the effectiveness of the department’s services? And (2), are the skills, experience and investments needed to create efficiency gains more readily available outside the department?

Striking the right balance between effectiveness and efficiency can provide greater career development opportunity and employee satisfaction, at the same time it creates savings that impact the bottom line and provides self-funding for future investments.

Here are some strategies that can be adapted to various industries and department sizes: Portfolio vs. Individual Tasklevel Focus. This involves redirecting some of the legal department’s time away from tactical, day-to-day work, thereby providing a benefit that can be measured in financial terms. Consider, for example, that lawyers often review many contracts. The tactical approach is to look at each contract individually and treat each one as a separate task. A more strategic approach is to analyze contracts as a portfolio, to understand which clauses typically delay negotiations, and to recommend language changes to make the process more customercentered with fewer review cycles. The result is accelerated speed to market, increasing customer satisfaction and reduced time from sale to revenue.

Outcome-Based Decisions. The legal department can increase its value by systematically analyzing negative outcomes – such as fines, settlements, and judgments – to provide a fact base to inform business decisions. For continued on page 63

today’s gener al counsel apr/may 2017

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Ten Ways to Improve Your Arbitration Clause By

Dawn M. Johnson and Abby L. Risner

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ore and more companies are including arbitration clauses in their consumer, business and other contracts. One of the primary reasons appears to be the desire to avoid class actions. Another is the view that arbitration can be less expensive, more efficient and quicker than litigating a dispute in court.

However, once they are involved in a dispute, businesses realize that the boilerplate arbitration provision in their contracts does not provide the detail that freedom of contract allows. Many are nothing more than a recycled, short paragraph directing the parties to arbitrate their disputes.

This can lead to problematic results.

Arbitration is a creature of contract, so parties can generally agree to whatever procedures they want to govern a dispute. If a specific issue

today’s gener al counsel apr/may 2017

is not addressed in the arbitration provision, it likely will be decided by the administering service’s rules, or by the arbitrator. All too often this realization comes too late, in the midst of arbitration or when a party determines it wants to appeal an arbitrator’s decision.

Maybe your spring cleaning this year should include refreshing your arbitration clause, to help you better achieve your business goals.

With that in mind, here are ten things to consider.

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The Class Action Waiver In the wake of Supreme Court decisions enforcing waivers of class actions in arbitration provisions, there is a stronger preference for including them.

These waivers preclude a contracting party from bringing claims in arbitration as a class. Even in the arbitration context, classes bring added risk, complication and exposure. Consider adding a simple provision requiring claims to be submitted individually, rather than as a class.

This is a small change that could make a very big impact if you end up in a dispute.

Depending on applicable state laws, you will want to add this clause: The parties agree that any claims against the other will only be in their individual capacity and not as a class action, class arbitration, consolidation, or any other proceeding in a representative, class or private attorney general capacity.

It should be noted that in January of this year, the Supreme Court granted certiorari in cases that will address a circuit split on the issue of whether the National Labor Relations

Act prohibits class action waivers in employment arbitration agreements.

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Statutes of Limitation Did you know that in many states, statutes of limitation are not applicable in arbitration?

That means your business runs the risk of being perpetually exposed to claims.

To address this risk, consider incorporating a contractual version of a statute of limitation to the arbitration provision (or choice of law provision). Alternatively – especially if the state does not allow contractual limitations – incorporate a state’s statute of limitation, in wording such as “[State]’s statutes of limitation apply to any claims brought in arbitration.” What is good for the goose is good for the gander, so make sure you evaluate the application of the incorporated statute of limitation to not only potential claims from the other party, but to your potential claims as well.

The concern about statutes of limitation not being applied in arbitration is so great that a few years ago, the state of Washington adopted legislation to specifically provide that they apply in arbitration.

3

Discovery Most companies veer away from providing too much detail in their arbitration provision.

But one area where that detail may prove useful, in managing both expense and length of arbitration, is establishing the parameters for discovery. Depending on your selected service, you may not be allotted any discovery, or the scope of discovery may be determined by the arbitrator in accordance with the arbitration service rules. Here are a few issues to consider addressing in the arbitration provision itself: • Do the potential disputes under that contract justify full discovery?

• Do you want to limit the number and hours of depositions or written discovery requests?

• Do you want to narrow the scope of electronic discovery?

• Do you want to consider alternative rules limiting discovery, such as providing limits on depositions, document requests and electronic discovery?

4

Location of Hearing Some arbitration provisions do not specify location. If that’s the case, the rules of the arbitration may provide the factors to consider for hearing locale, and you could end up in a

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location that you don’t want. Consider specifying the location of your choice, whether it be your headquarters city or where most of your witnesses are located, so you do not have to incur travel expenses.

Dawn M. Johnson is an officer, head of the Franchising and Distribution industry group and co-leader of the appellate practice at Greensfelder, Hemker & Gale, P.C. dmj@greensfelder.com

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7 Abby L. Risner is an officer at Greensfelder, Hemker & Gale, P.C. She focuses her practice in complex commercial litigation, energy and class actions, as well as franchising and distribution law. alr@greensfelder.com

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Scope of Arbitration Provision The scope of the arbitration provision itself may need to be updated. There are endless alSelection of Arbitration Service ternatives. Some provisions require arbitration Many arbitration provisions are silent on the in lieu of court only if at least one party elects issue. If you do not currently identify a service, arbitration when filing consider whether you a claim. Other proviprefer the rules and Consider adding a simple sions reserve some services offered by a issues for courts. particular service to provision requiring claims to You may also want eliminate this potential to review your providispute. If you already sion to ensure that have selected a service, be submitted individually, it covers any postconsider updating termination claims, which arbitration serrather than as a class. and that it controls vice to use and confirm arbitration provisions that there are arbitrain collateral agreements. Competing arbitration tors available through your identified service in provisions in multiple contracts between the your industry and preferred location. Note that same parties could unintentionally put you back some arbitration services allow the selection of in court. Also, an arbitration provision in an arbitrators not connected with that service. expired contract may not be enforceable.

Appeal Procedure Explicit Consent Provisions and OptThis provision is often overlooked. Because out options For Consumer Contracts the right to appeal an arbitration outcome in Some states prohibit arbitration provisions in court is limited, you should consider allowing consumer contracts entirely, but many states the parties a right to appeal to the arbitration allow them. In those states, what can you do to service. You can specify the extent of the appelincrease the likelihood that an arbitration provilate process, such as whether briefs are submitsion will be enforceable in a consumer contract? ted and oral argument allowed, and the permisFirst and foremost, make the provision clear: Use sible basis for overturning an arbitration award. large, all caps, bold font. Explain in simple terms Although many people prefer the finality of that the consumer is agreeing to arbitration and arbitration because of the limits on appeal, for giving up the right to go to court. Some contracts some business disputes you may want to ensure even make a full disclosure, in bold, up front in there is the right to appeal. the contract, such as “Note this contract contains Costs If Party Cannot Pay Its Share an arbitration clause.” Requiring a consumer Consider including a provision that addresses to expressly confirm consent to the arbitration what happens if a party cannot pay the arbitraprovision, and even allowing for the consumer tion service fees, such as a fee for the dismissal of to opt-out, will reduce the chance that the proclaims. The AAA allows specific actions relating vision will be found unconscionable and thus to non-payment, including limiting or precluding unenforceable. the ability to assert or pursue claims. However, Arbitration is a good option for many conthe AAA will not limit a party’s ability to defend tracts, but it is important to add specific terms claims. to the provision. When it comes to arbitration, one size does not fit all, so consider which of Confidentiality these improvements may better suit the needs of People often assume that arbitration proceed- your business and the relationship governed by ings are confidential because the process is “prithe contract. Of course, the applicability of these vate.” However, that does not mean a party can’t suggestions may vary depending on particular reveal the existence and details of the proceeding. state and industry laws, such as franchise laws Also, some arbitration awards are published. If in some states that void attempts to deprive a confidentiality is important to you, you should litigant of court, or require a specific location. ■

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include a provision that requires confidentiality of the proceedings and resulting award (if permitted in your industry).

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today’s gener al counsel apr/may 2017

Priorities for GC

continued from page 59 example, an automobile manufacturer may consider sourcing some parts from overseas to lower production costs and boost short term profitability.

As part of that decision, the GC can provide data to senior management about historical litigation outcomes, to demonstrate the potential for undermined profits and diminished shareholder value if the parts fail to perform and litigation ensues.

Revenue Protection. Contracting can be a source of inefficiency and revenue leakage, given the complexity of contractual agreements and the hundreds of active agreements that can be in place at any given time. Once the contract is negotiated and signed, typically the law department considers its involvement complete, unless the business has a question or a dispute arises.

However, as a steward of the company’s overall performance, the law department can play a crucial role in protecting revenue by systematically tracking and sending notifications of pending obligations. While strategically important, the process is itself somewhat tactical. This suggests it might be more efficient to outsource it to a qualified third party that has the tools and processes needed to manage and capture knowledge about the parties and obligations, set up digital alerts to notify obligation owners of impending due dates, and automate renewals to ensure price increase clauses are implemented. In this scenario, the legal department would not only save the organization time and money, but also help to recapture potentially lost revenue.

Intellectual Property Management. Intellectual property can be another major source of revenue leakage for corporations, particularly when it comes to enforcement. Shifting day-to-day management to an external provider allows the internal legal team to focus on identifying potential IP revenue opportunities or strategic acquisitions.

A competent third party should have technologies to monitor the portfolio for infringement, upcoming renewals or weaknesses that need to be addressed, and to provide detailed reports on individual claim issues, as well as assist with drafting applications.

Litigation Support. Many legal departments already outsource e-discovery, document review and other litigation support functions. This alone, however, does not guarantee efficiency gain or cost savings. Most service providers

promise rock bottom, per unit pricing up-front, knowing that they will make up the difference through high data volumes and add on services on the backend.

Instead of putting out RFPs for every individual legal matter, GCs and litigation leadership should consider establishing a long term strategic engagement with one or two providers that are willing to align with the company’s business objectives and are open to flexible pricing models.

With a provider on retainer, it is possible to scale service levels up or down as needed; accelerate the e-discovery process to make critical legal decisions more quickly; and establish measurable criteria so that performance goals and service levels are being met. Over time, the service provider should become more of a strategic partner that understands the legal department’s needs and culture.

AN ONGOING PROCESS

In order to preempt year-over-year questions about the legal department budget and justification of head count, some general counsel are redefining the department into a small, high performing team with focus on strategically impactful work, backed by a range of service providers in addition to traditional law firms. This approach allows the department to maximize its value contribution, and attract and reward top legal talent.

Whether the goal is dramatic headcount reduction or something more moderate, to work toward this end requires a structured process: 1. Identify high value activities that actively support business success.

2. Redefine the role of internal resources and leverage complementary external service providers.

3. Measure the business impact of legal services to demonstrate value contribution.

Establishing business oriented benchmarks helps GCs understand what work is being performed and where effort is being concentrated.

More important, it provides a way to demonstrate the department’s positive impact on the overall business. ■

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Nancy Jessen, Sr. Vice President of Legal Business Solutions at UnitedLex, has provided strategic and operational consulting services to the legal industry for more than 25 years. She served as the practice leader for Huron Consulting’s Law Department Management group and previously provided legal consulting at Arthur Andersen and Altman Weil. nancy.jessen@ unitedlex.com

apr / may 20 17 today’s gener al counsel

B A C K PA G E F R O N T B U R N E R

Legalized Weed is Still Dangerous

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By Mechelle Zarou

under the federal Controlled Substances Act as a Schedule I substance, states have taken the matter into their own hands by legalizing the use of marijuana for both medicinal and recreational purposes. Following the 2016 election, the score remains strongly in favor of medical marijuana, with 28 states and the District of Columbia having passed some form of legislation authorizing the use of the marijuana plant.

While marijuana remains unlaWful

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An additional 15 states have passed laws authorizing only the use of oil extracted from marijuana, known as “cannabidiol” (CBD) for medicinal purposes. Eight states have also passed laws legalizing the recreational use of marijuana, with most states enacting a regulatory scheme similar to that of alcohol.

So where does this leave the General Counsel whose company operates in several states? And what impact does this decriminalization trend have on the company’s employees, who may or may not be using marijuana?

Below are some guidelines:

• Remember that employers regularly prohibit the presence of lawful substances/devices – tobacco, cell phones, cameras, etc. – and marijuana is no different.

Most state laws are either silent on this issue or specifically allow employers to prohibit the use or possession of marijuana in the workplace.

• Companies that want to prohibit medical marijuana should update their drug testing policies so they refer to “unauthorized substances” rather than “illegal substances.” It is best to specifically list the prohibited substances and include marijuana.

Mechelle Zarou is a partner at Shumaker, Loop & Kendrick. She serves as the Immigration and Labor & Employment Practice co-administrator. mzarou@slk-law.com

• If an employer wants to permit medical marijuana, it can be regulated under the prescription drug portion of the company’s drug testing policy, which governs prescription drugs taken by those in safety-sensitive positions. Under most such policies, the employee would have to notify the employer of such use in advance, present a doctor’s prescription/recommendation or registration card, and confirm usage in accordance with the physician’s instructions.

• Most state medical marijuana laws contain special provisions permitting employers to continue enforcing drug-free workplace policies that prohibit employees from testing positive for marijuana metabolites. Courts that have faced this issue have upheld the right of employers to enforce such policies despite state medical and recreational marijuana laws.

• The few states that have enacted job protections for employees who have a medical marijuana card also permit discharge when employees show evidence of impairment.

• The best defense in any state where marijuana is legalized is to train supervisors to recognize impairment sufficient to provide “reasonable suspicion” for a drug test. Such training ferrets out impaired workers (regardless of the reason for the impairment) and enhances safety by preventing accidents.

• Reasonable suspicion training should also include training on how to address an impaired employee – e.g., report suspicions immediately to a manager or safety director, drive the employee to the laboratory facility for drug testing immediately, do not allow impaired employees to drive themselves home.

• Reasonable suspicion training should also focus on non-visual factors, such as smells and sounds. A checklist is very helpful. A supervisor can review the list to determine if the employee fits any of the criteria.

• Hiring, disciplinary and discharge decisions related to legalized marijuana should be reviewed with employment law counsel, since the EEOC has recently prosecuted such cases on a theory of disability discrimination – alleging that the refusal to hire/discharge was due to the underlying disability rather than the positive drug test documenting marijuana use. As always, documentation is key to defending against such actions. ■

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