AUG/SEPT 2015 VOLUME 1 2 / NUMBER 4 TODAYSGENER ALCOUNSEL.COM
LITIGATION SURGE THE COMING WAVE OF CYBER BREACH LAWSUITS
APPEALS: Your Chances and How to Improve Them Appellate Counsel’s Role At Trial Level
Crackdown On Confidentiality Agreements Shareholder and Director Litigation Cure for Whistleblowing: The “Speak-Up Culture”
Fraud in Supply Chains
“General Jurisdiction” as Political Football
Are You Ready For a Government Raid?
Future of Legal Services: Look to the UK
Questions Before Bankruptcy
Breaking the “Collect Everything” Habit
Taxing “Remote Sales”
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to eDiscovery eDiscovery It is time to put an end to Honorable Practitioners Practitioners of of the the Law, Law, words: “eDiscovery” “eDiscovery” is is aa stain stain on on our ourlegal legalsystem. system.ItItdrives drivesup upcost costand andrisk. risk.ItItisis We will not mince words: reactive. It destroys bandwidth. bandwidth. ItIt ends ends careers. careers. ItIt clogs clogsthe thepipes pipesof ofjustice. justice.ItItobscures obscuresthe thetruth. truth.And Anditit vendors, to to whom whom you you write write blank blankchecks. checks. pads the pockets of vendors, it has has been been weaponized weaponized to to drive driveopposing opposingparties partiesinto intosubmission. submission.eDiscovery eDiscoveryisisaa It is so expensive that it charges by by the the gig gig and and by by the the page. page. ItIt forces forcesswift swiftsettlements, settlements,delays delaysjustice, justice,cheats cheatsclients clients black box that charges and enrages judges. our justice justice system system deserve deserve better better Clients, citizens, and our As electronic data volumes volumes multiply, multiply, the the eDiscovery eDiscovery problem problemworsens. worsens.But Butas asthe thedata datalandscape landscapechanges changes dramatically, the proprietors proprietors and and pushers pushers of of eDiscovery eDiscoveryremain remainthe thesame, same,seeking seekingto toﬁﬁxxnew newproblems problems with the same old solutions and a fresh coat of paint. solutions and a fresh coat of paint. Join us in sweeping away away the the waste waste and and ineﬃ ineﬃciency ciency The day has arrived to move move beyond beyond this this arrested arrested regime. regime.The Theprocess processof ofdiscovery discoveryisn’t isn’teasy, easy,but butitit should be simple. It should allow for the free ﬂ ow of information from one party to another -and should allow for the free ﬂow of information from one party to another -- anditit should, as ordained by by law law and and for for the the good good of of all, all, be bejust, just,speedy, speedy,and andinexpensive. inexpensive. Our profession must embrace embrace technology technology that that provides providesthe thesecurity, security,economy, economy,transparency transparencyand andaccess access that a vibrant democracy democracy deserves. deserves. Honorable practitioners, practitioners, we we are are putting putting an an end end to to “eDiscovery.” “eDiscovery.” We We urge urge you you to to join join us. us. Andy Andy Wilson Wilson CEO, Logikcull CEO, Logikcull
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aug/ sept 2015 toDay’s gEnEr al counsEl
Predictions of “waves” of litigation are nothing new, and in this issue of Today’s General Counsel Kenneth Rashbaum sounds such a warning, about lawsuits spawned by cyberbreaches. He advises reviewing all insurance coverage applicable to information security litigation. He lists the recent major breaches with which we’re familiar – Target, United Health, Sony – but notes that the mega-lawsuits that follow major information thefts are in some ways easier to cope with than smaller, less-common claims, that rest on counterintuitive legal theories. These may not be covered by insurance, and can overwhelm a law department’s resources. Today’s General Counsel Columnist Mark Cohen writes about developments on the British legal scene, among them alternative business structures for law firms that enable them to engage in inter-disciplinary practice with, among others, e-discovery and cybersecurity experts. He says the UK is in the vanguard of innovation in legal service delivery, and the changes happening there will likely proliferate around the world. Cristin Traylor writes about some changes that are beginning to take shape in the United States. She points out that something called global de-duplication in e-discovery is now the industry standard, and failure to de-duplicate may constitute abuse of the discovery process. “Threading” in respect to email strings is also becoming universally accepted, and Traylor advises becoming acquainted with that procedure sooner rather than later. She cites two examples of rules, one already adopted by the ABA, another proposed by the California bar, that require litigators to either be competent in such technologies, hire someone who is, or decline representation. According to the California rule, “lack of competence in e-discovery issues may lead to an ethical
violation of an attorney’s duty of confidentiality.” Given that trend, it can’t be long before law firms change their structure to include expertise that preempts declined representations, and obviates tech-based violations. Two articles in this issue discuss the role of appeals attorneys. Karen Bray and David Axelrad note that appellate lawyers are often aware of issues currently percolating in the appellate courts, and this knowledge can be useful in creating a record at trial level for presenting an appeal. Jason Steed uses statistics to answer common questions about appeals and your chance of success if you file one.
Bob Nienhouse, Editor-In-Chief bnienhouse@TodaysGC.com
AUG/ SEPT 2015 TODAY’S GENER AL COUNSEL
NEW INTEREST IN EMPOWERING STATES TO TAX REMOTE SALES
ARE YOU READY FOR A GOVERNMENT RAID?
TIPS FOR SUCCESSFUL SECOND REQUEST PRODUCTION
FRAUD IN SUPPLY CHAINS
QUESTIONS FOR COMPANIES CONSIDERING BANKRUPTCY
“GENERAL JURISDICTION” BECOMES POLITICAL FOOTBALL IN NY
Clark Calhoun Revenue gap is spurring legislation.
Edmund W. Searby Don’t obstruct, but protect your rights.
Joseph G. Krauss and Brian Ansley Practical suggestions for working with the agency.
Mark Pearson and Larry Kivett The biggest losses involve employees.
Frances A. Smith Chapter 11 is flawed, but can still work
Jamie Levitt and Steven Rappoport The question of where a corporation resides won’t go away.
IMPACT OF SHAREHOLDER AND DIRECTOR LITIGATION ON THE COMPANY Richard M. Mitchell Fiduciary responsibilities mean potential litigation.
Steve Melnick Why and how to make it easy to report.
YOUR CHANCES ON APPEAL AND HOW TO IMPROVE THEM Jason P. Steed What the numbers say, and how to move then in your favor.
THE ANTITRUST LITIGATOR Confidentiality of Sensitive Information in a Merger Jeffery M. Cross Protections change when a merger is challenged.
APPELLATE COUNSEL CAN HAVE KEY ROLE AT TRIAL Karen M. Bray and David M. Axelrad It can focus the issues, and it sends a message.
WORKPLACE ISSUES Speak-Up Culture Reduces Whistleblower Risk
THE LEGAL MARKETPLACE To See Future of Legal Services Look to UK Mark A. Cohen Hybrid law fi rms and IPOs.
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aug/ sept 2015 toDay’s gener al counsel
Departments Editor’s Desk
intELLEc tuaL propErt y
20 Statistics Show IPRs Favor Patent Challenges Ray Mandra and Corinne Atton The numbers tell the story, and bring calls for reform.
22 Do You Know Where Your Company’s Data Is?
28 Threading Is the New Global DeDuplication
Jason Straight A risk-based approach, with careful attention to third party contracts.
Cristin K. Traylor Luddites beware of ethical violations.
26 Litigation Wave Coming Kenneth N. Rashbaum Unusual claims and insurance gaps.
30 Break the “Collect Everything” Mind Set Brad Harris Start with a smaller subset.
L abor & EmpLoymEnt
32 Hidden Risks in Confidentiality Agreements Tim Garrett Common provisions may run afoul of whistleblower regs.
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AUG/ SEPT 2015 TODAY’S GENER AL COUNSEL
Executive Summaries INTELLEC TUAL PROPERT Y
Statistics Show IPRs Favor Patent Challenges
Do You Know Where Your Company’s Data Is?
Litigation Wave Coming
By Raymond Mandra and Corinne Atton Fitzpatrick, Cella, Harper & Scinto LLP
By Jason Straight UnitedLex
The America Invents Act of 2012 introduced Inter Partes review as a new way to challenge the validity of patents before the USPTO. Statistics show that more than 3,000 IPR petitions have been filed since the Act was signed into law, and to date, 1,200 of these challenges have been instituted. The survival rate of challenged claims is low. The PTO found 61 percent unpatentable, and the patent owner cancelled or disclaimed another 13 percent. As of April 6, 2015, 74 percent of challenged claims did not survive. This has prompted calls for reform, and those calls are gaining traction. Three bills have been introduced in Congress. Post-grant Opposition proceedings challenging patents issued by the European Patent Office have been available for 35 years, and the statistics are telling. Of the approximately five percent of issued patents that are challenged in European Opposition proceedings, 31 percent are revoked, 31 percent upheld, and the validity of the remaining 38 percent is upheld but with amended claims. The PTO has announced that it is considering allowing motions to amend as of right, and limiting the burden on patent owners to prove patentability only over the prior art of record, as is the case before the European Patent Office. If these changes come, whether by PTO action or legislative reform, they will shift the odds away from challengers. Whether this will fully redress the currently perceived imbalance remains to be seen.
Headlines about massive data breaches at major corporations have become commonplace. What’s striking about these high-profile hacks is that many of the affected companies were spending millions on cybersecurity measures when the breach occurred. They had gone to great lengths to prepare for the worst, only to have it happen anyway. Target, Bank of America and AT&T have all suffered serious breaches that originated with a third-party service provider. No matter how robust the defenses protecting your own network are, if your data resides with a third party, protection will depend on their technology, processes and employees. Legal departments should collaborate with their chief information security officers and security teams to drive internal policy and draft strong third-party vendor contracts. The information security team must be able to access third-party infrastructure and employee practices. Policies and strict enforcement of secure third-party vendor relationships should apply not only to the vendors themselves, but also to your own employees and their interactions with the vendors. Regulation of the practices required to protect sensitive data are increasingly stringent, and the legal profession is acknowledging technological competence as an ethical obligation that applies to anyone practicing law. The standard of care with regard to the protection of private information is rising, and ignorance is no longer an acceptable defense in the wake of a poorly managed cyberattack. Boards have begun to take notice, in part because the members are potentially liable as individuals.
By Kenneth N. Rashbaum Barton LLP
General counsel, chief information officers and chief financial officers are advised to prepare for a coming litigation wave, in part by reviewing all insurance coverage applicable to information security litigation. They should also familiarize themselves with their organizations’ information systems and safeguards, if for no other reason than to understand the competence of outside litigation counsel to defend cyber breach litigation. It’s the smaller and less-common claims that, if they come in large numbers, can overwhelm a law department’s resources. Some legal theories they rest on are counter-intuitive, and others may not be covered by applicable CGL, General Liability, Errors and Omissions or Cyber Risk insurance. That means additional coverage or endorsements to existing policies are worth considering. The most effective way to reduce the risk of litigation arising from data breaches is for the organization to take steps to reduce the risk of the breach itself, including by way of security patch updating, malware monitoring and detection and periodic security analyses. Risk mitigation should include assuring that security policies and procedures are documented, current, and meet regulatory, statutory and industry standards. Know the organization’s information systems and how they store and transfer information protected by statutes and regulations, and, in the case of multinational organizations, by the laws of jurisdictions in which the company does business. Also, vet outside counsel for their knowledge and experience with regard to cybersecurity and related litigation.
TODAY’S GENER AL COUNSEL AUG/ SEPT 2015
Executive Summaries E-DISCOVERY
L ABOR & EMPLOYMENT
Threading Is the New Global De-Duplication
Break the “Collect Everything” Mind Set
Hidden Risks in Confidentiality Requirements
By Cristin K. Traylor McGuire Woods LLP
By Brad Harris Zapproved
By Tim Garrett Bass, Berry & Sims PLC
Global de-duplication has become the industry standard in e-discovery. With the amount of data generated and processed these days, the failure to deduplicate globally may even constitute a discovery abuse. Another tool, email “threading,” has been in use for some time, but now it too is becoming the industry standard. The trend is to review and produce only the most inclusive email string. Ediscovery platforms accomplish this by processing emails with threading tools that identify the most recent strings, and exclude all the smaller pieces. If an email branches off into a separate thread, then the technology will include that thread for review. However, if an email has an attachment and subsequent replies omit that attachment, then the original email with the attachment would also be included for review. Counsel who object to the technology because they do not understand how it works risk an ethical violation. Recently revised comment 8 to ABA Model Rule 1 requires competence in technology. California has gone further by issuing a Proposed Formal Opinion regarding e-discovery, which says that lack of competence in e-discovery issues “may lead to an ethical violation of an attorney’s duty of confidentiality.” In the near future, email threading will be as much of an industry standard as global de-duplication. When this occurs, counsel will no longer need to discuss the production of inclusive threads. Counsel should prepare for this development by learning how to use the technology.
A 2014 IDC report notes that the digital universe – the data created and copied annually – is doubling in size every two years. This presents challenges for IT and legal professionals, as companies try to preserve, collect, process and review information. Moreover, ESI is increasingly showing up in locations outside corporate control, including employee-chosen cloud repositories, as well as employees’ personal mobile devices, which have become commonplace in today’s BYOD workplace. The approach of many corporations is driven by fear of spoliation and sanctions. That has led to a “collect everything and sort it out later” mind set. Unfortunately, what seems like the safe approach is actually more risky. Collecting “everything” is too costly, and increasingly difficult to do. Worse, it can lull corporations into a false sense of security. Defensible weeding of data requires investment in information governance and BYOD policies. Companies must educate employees on guidelines for their employee-owned devices. Legal holds are the foundation of sound preservation practices. With defensible and intelligent processes, corporations are able to demonstrate “good faith” in their preservation efforts, and are thereby in a better position to negotiate favorable terms when scoping discovery in the meet-and-confer. It’s time to break the “collect everything” mind set. The combination of fear and litigious gamesmanship between parties is driving up costs and does not meet the goal of FRCP rule 1, “…to secure the just, speedy and inexpensive determination of every action and proceeding.”
Recently the SEC fined Houston-based KBR, Inc. $130,000 for requiring some of its employees to sign confidentiality agreements that potentially prevented them from blowing the whistle on illegal activity, in violation of Rule 21F-17 of Dodd-Frank. Although this is the first enforcement action by the SEC under this rule, it’s not likely the last. Though the Commission was unaware of any instance in which a KBR employee was in fact prevented from communicating with the SEC about potential securities law violations, it found the agreement too restrictive because it “potentially discouraged” such reporting by requiring employees to first check with the legal department or risk possible termination. The SEC’s action is one example of the increasing scrutiny government agencies have been giving to employer confidentiality agreements. Another involves the EEOC. It recently appeared to be challenging its own prior position that allowed a general release of claims in separation agreements provided that there are carve-out provisions telling the employee of his or her right to file a charge with the EEOC, or to participate in an investigation. Confidentiality provisions should be reviewed in employee handbooks/codes of conduct, in practices for internal investigations and in severance agreements. Look for policies that prohibit disclosure of undefined employee confidential information. Also, establish an alert-hotline for anonymous complaints or concerns. This serves to highlight the company’s commitment to learning about and investigating potentially unlawful activity.
AUG/ SEPT 2015 TODAY’S GENER AL COUNSEL
Executive Summaries FEATURES
New Interest in Empowering States to Tax Remote Sales
Is Your Company Ready for a Government Raid?
Tips for Successful Second Request Production
By Clark R. Calhoun Alston & Bird LLP
By Edmund W. Searby Baker & Hostetler LLP
By Joseph G. Krauss Hogan Lovells and Brian Ansley Consultant
Under the Supreme Court’s 1992 decision in Quill v. North Dakota, a retailer is not required to collect sales taxes or use-taxes on sales to residents of a state in which the retailer has no “physical presence.” With the explosion in internet commerce since Quill was issued, states have faced significant losses from tax revenue. In response, states have enacted “click-through nexus” legislation and other bills that push the limits of Quill. In a recent decision concerning a procedural tax issue, Supreme Court Justice Anthony Kennedy – who provided a key vote in favor of Quill – suggested that states should “find an appropriate case” to allow the federal courts to reconsider Quill. States and state commentators have responded in a variety of ways. The acting Connecticut Commissioner of Revenue Services argued that Quill’s physical-presence standard is an “outdated artifact.” He suggested that states should begin “pushing the envelope of economic nexus.” At least two proposals are currently circulating in the House: the Marketplace Fairness Act (a version of which was passed by the Senate in 2013) and the Remote Transactions Parity Act. Closely following each state’s pronouncements will allow your business to react to legislative or administrative changes that can affect tax obligations. As interest in the issue rises, it is increasingly important to follow the proposals coming from Washington, so your business is ready to mobilize lobbyists for or against a legislative proposal and/or implement any changes that Congress enacts.
Respected corporations often see a government search warrant as a disaster that happens to hardened wrongdoers, but the circumstances leading to a search warrant may be beyond the control of well-intentioned corporations. Because the possibility is real and mistakes have a lasting impact, more corporations are planning for the possibility of a search warrant, beyond just having a telephone list of outside counsel qualified to take the first call or a general check list in a file. The plan can include immediate actions to take upon the arrival of agents, how to properly interact with agents during the search, how to address efforts to conduct interviews of employees, and other actions to take or not during the search and immediately after the agents depart. The plan should designate a Responsible Employee whose task is to interface with agents and coordinate internal communications. Effective planning also should include educating employees about their rights and obligations during a search. Employees can be taught how to protect basic rights without crossing the line to obstruction. They can choose whether or not to be interviewed, but if they agree to it they must tell the truth. Plans designate officers and counsel who will decide on a press strategy and messaging to interested parties, such as employees, shareholders and lenders. Advance planning can avoid the damaging mistakes made during the stress of a raid, and it can mitigate the disruption and collateral harm that result from it.
If a proposed merger or acquisition raises competitive issues, reviewing agencies will issue a request for additional information about the company’s products or services, the market in which it operates, and more. Second Requests are typically broad in scope and could impose a significant burden and delay on a transaction. A wellplanned response can result in substantial cost savings and potentially increase the likelihood of approval of the deal. One of the first steps an organization should take is to secure proper legal and other support that will be needed for the agency review. Retain outside counsel who have experience with similar reviews by the agency, and a discovery provider that has successfully handled a large number of Second Requests from the same agency. Support your counsel in efforts to prepare before the agency inquiry begins. Counsel should be familiar with the business rationale for the transaction, as well as the general nature of competition in the industry, in order to be able craft a clear argument supporting the benefits of the transaction and to identify potential challenges. Establish an amicable relationship with the reviewing agency, including staff. While the staff does not make the ultimate decisions, their recommendations heavily influence the decisionmakers. If possible, it can be helpful to strategically stage the production – for example, by reviewing and producing documents from priority custodians first, so that the agency has the opportunity to see the most critical information early.
TODAY’S GENER AL COUNSEL AUG/ SEPT 2015
Executive Summaries FEATURES PAGE 48
Fraud in Supply Chains
Questions for Companies Considering Bankruptcy
“General Jurisdiction” Becomes Political Football in NY
By Frances A. Smith Shackelford, Melton, McKinley & Norton LLP
By Jamie Levitt and Steve Rappoport Morrison & Foerster
The U.S. Bankruptcy Code, enacted in 1978, was not designed to handle today’s complex financial markets, credit and derivative products and corporate structures. Still, bankruptcy can be an effective tool for solving seemingly intractable business problems. In a Chapter 11, the debtor’s management retains control of the company, but business decisions outside the ordinary course of operations must have court approval. In addition, the U.S. Trustee oversees the case and has standing to file motions and otherwise participate. Common concerns of management include the public nature of a Chapter 11 case and the enhanced oversight by the court, the U.S. Trustee, creditors and other involved parties. Given sufficient resources to fund a restructuring, Chapter 11 can be an excellent tool for solving certain problems. For example, if the company is burdened by numerous leases or mortgages for low-performing retail outlets, bankruptcy offers a procedure to assume and assign or reject leases with a statutory cap on damages. Timing is crucial. A 2013 study suggests that Chapter 11 business filings are “influenced by rational calculations pertaining to debt obligations, cash flow and the availability of credit.” Related questions include timing of defaults under credit agreements, due dates for rent under leases, potential avoidance actions and availability of unencumbered cash. The author provides a list of questions concerning credit, tax liabilities and the availability of funds that general counsel working with restructuring counsel should consider in determining a course of action.
For decades, plaintiffs have been able to allege that defendants were subject to general personal jurisdiction in New York because the defendants maintained offices or transacted business in New York. This long-accepted understanding of the law changed in January 2014, when the Supreme Court handed down its opinion in Daimler AG v. Bauman. In Daimler, the Court held that general personal jurisdiction exists over a corporation only if the corporation may be “fairly regarded as at home” in the forum state. Today it is apparent that “doing business” as a basis for finding general jurisdiction is dead. Nonetheless, it may soon return. The New York State Senate Standing Committee on the Judiciary has approved a bill that would require foreign companies to submit to the jurisdiction of New York courts as a condition of doing business in the state. A similar bill was passed by the New York State Assembly in May. New York’s Office of Courts Administration supports the legislation as a means of increasing corporate litigation in New York courts and making it easier for New Yorkers to sue foreign corporations. However, the New York City Bar Association opposes Albany’s proposals. It says they probably violate the Commerce Clause, and that they ignore the fact that governments can’t require the waiver of constitutional rights in exchange for a government benefit – in this case, registration to do business – where the benefit is wholly unrelated to the right.
By Mark Pearson and Larry Kivett Deloitte Financial Advisory Services LLP
While more than one-quarter of respondents to a recent Deloitte poll said they experienced supply chain fraud, waste or abuse in the past year, about the same number said they had no program in place to prevent and detect risks. Not enough is being done from a compliance perspective. Employees were identified as the top source of supply chain fraud risk by 23 percent of poll respondents, before vendors (17 percent) and other third parties (20 percent). While fraud is more likely to occur with third parties, losses are typically larger when employees are involved. The collusion tends to be more financially damaging because employees can use insider knowledge to help conceal their schemes. Businesses are turning to data to manage vulnerabilities that may be present in their supply chains. With the introduction of advanced analytics they can gain insight into identified instances of fraud, and manage risk in advance with the help of a myriad of indicators. GCs should team with their CIOs or Chief Information Security Officers to coordinate efforts using fraud detection/prevention tools. A clear understanding of the existing data system will enable development of useful analytical queries. Steering management away from narrow cost/benefit analyses when gauging the merits of a fraud prevention program can serve GCs well. Make the case for enterprise risk mitigation and other non-quantifiable benefits associated with added transparency. These include lower employee turnover, higher morale and improved efficiency and productivity.
aug/ sept 2015 today’S gEnEr al counSEl
Executive Summaries features Page 58
Impact of Shareholder and Director Litigation on the Company
Appellate Counsel Can Have Key Role at Trial
Your Chances on Appeal and How to Improve Them
By Karen M. Bray and David M. Axelrad Horvitz & Levy LLP
By Jason P. Steed Bell Nunnally & Martin LLP
The role of appellate counsel in the trial process has evolved over the last 10 to 15 years. Sophisticated trial attorneys and litigants increasingly recognize that appellate counsel can provide invaluable assistance before it is time to file a notice of appeal, and their advice can make the difference between winning and losing or help to limit the amount of an adverse judgment. Appellate lawyers are often aware of legal issues currently percolating in the appellate courts, subjects on which there is a dispute among the appellate courts, or relevant cases pending in the state or U.S. Supreme Court. This knowledge can be useful in identifying potential legal issues and creating a record for presenting them on appeal. At the post-trial stage, an appellate lawyer continues to play a crucial role by participating in post judgment settlement negotiations, which may lead to a favorable resolution that avoids an appeal. As appellate counsel’s role at the trial level continues to expand, whether to involve appellate counsel in the early stages of litigation will become an increasingly important consideration for in-house counsel and their clients wishing to position their case for the best possible result. While clients may initially be reluctant to pay to add another lawyer to the trial team, doing so could prove to be more cost-effective in the long run, as it increases the odds of achieving a better result at trial or a positive ruling on appeal.
The author uses statistics to answer common questions about appeals, and he makes the case for involving an appeals lawyer, even at the trial level. The D.C. Circuit hears oral argument in more than 50 percent of its cases. Most of the other circuits hear oral argument around 20 percent of the time, with a few circuits approaching 30 percent. However, the chance of oral argument in a civil case are much higher than these numbers suggest. Most appeals are decided within three months of submission. The D.C. Circuit is the fastest to render decisions. The Fourth and Eighth Circuits were almost as fast as D.C. The Second Circuit was the slowest. The chances of winning depends on the details of each case, but the Fifth Circuit affirmed the lower court decision in nearly 58 percent of all cases brought on appeal. It also affirmed “in part” the decisions in another 6.1 percent of all cases. Nearly 28 percent of cases were dismissed without a ruling, usually due to a procedural flaw. That means looking at it one way, in 2014 appellants in the Fifth Circuit failed nearly 92 percent of the time, but the author illustrates how this actually translates to a 14.5 percent success rate. Two recent studies support the notion that the presence of experienced appellate counsel will improve your chances of winning on appeal. Data showed that appellees in particular “appeared to enjoy some advantage in preserving trial court victories” when they hired an appellate attorney.
By Richard M. Mitchell Maddin, Hauser, Roth & Heller P.C.
Shareholders, particularly those holding majority interests, have fiduciary responsibilities to the company as well as to minority shareholders. Additionally, these shareholders are often directors, officers, and employees of the company. Each of these roles comes with its own set of responsibilities, and potential litigation. Officers and directors, in particular, have fiduciary duties of loyalty and care and an obligation to maximize the wealth of their shareholders. A primary defense to allegations that these duties have been breached is the business judgment rule. Generally, this rule protects against hindsight evaluations when good faith decisions lead to bad outcomes. Minority shareholder oppression claims are a substantial avenue of litigation, mergers and acquisitions in particular now that the economy has improved. Non-competition agreements also may be an issue. They are generally enforceable where they are reasonable in duration and geographic area and protect legitimate business interests. One of the most effective mechanisms for protecting the company is a clear understanding of shareholder agreements and other organizational documents. Most state statutes allow such documents to contain provisions for management of the business and conduct of its affairs, while limiting or regulating powers of directors or shareholders. Overall, a significant preventative measure against litigation and the impact of unnecessary costs is understanding rights and duties of shareholders, directors and officers. Even more important is ensuring that those involved examine their own activities so that they are behaving ethically.
e-discovery Reaching the next LeveL
Evolving technology is putting sophisticated tools—and greater control—into the hands of the corporate legal department. SponSorEd SupplEmEnt to today’S GEnEral CounSEl
ILLUSTRATION BY ROY SCOTT
E-Discovery Becomes Accessible
TECHNOLOGY IS CREATING NEW DISCOVERY CHALLENGES, BUT IT IS ALSO PROVIDING SOLUTIONS
or legal departments, e-discovery technologies have been instrumental in tackling some significant discovery challenges. But those challenges keep changing—and growing. Today, companies have to contend with larger and larger volumes of data, and that data is becoming more complex. Increasingly, corporate information involves unstructured data, such as email, social media, and images. The emerging importance of the Internet of Things and machine-created data promises to bring entirely new types of data into the mix. And larger issues, such as cybersecurity, make it critical that e-discovery becomes an integral part of an overall information governance strategy. “As the volume and variety of electronically stored information increases, it becomes more difficult and more costly to identify potentially responsive evidence,” Stephanie Giammarco, a partner at BDO Consulting, noted in a recent press release. “Corporate counsel are looking for ways to decrease data volumes, increase efficiencies, and reduce costs to adjust to this Big Data landscape.” While technology is creating new discovery challenges, it is also providing solutions. E-discovery tools have evolved significantly in recent years. Today, techniques such as technology-assisted review, automation, and analytics are enabling
legal teams to gather and analyze tremendous amounts of data with greater speed and accuracy. Just as important, e-discovery tools have also become increasingly user-friendly and cost-effective, making it more and more feasible for legal departments to handle key aspects of discovery in-house. “That means easier to use, faster, and cheaper,” says Sarah Thompson, senior product manager at the Zapproved e-discovery solutions company. The goal for many is “essentially to make legaltechnology solutions more accessible to more corporations,” she adds. And that in turn means that legal departments can take more control in the effort to reduce e-discovery costs and risks.
Empowering the Legal Team Not too long ago, e-discovery technology was largely a “black box,” says Roxanna Friedrich, director of client services at Nuix, an e-discovery solutions provider. “All the data went in and was processed, and then it all came out and had to be reviewed.” This approach typically required specialized expertise, and there were no opportunities to work with the data in an iterative manner. “So there wasn’t an ability to use analytics technology early in the process to determine what story the data
tells and how to use it,” she says. Since then, tools have evolved to be easier to use and more flexible. Some offer features such as intuitive user interfaces or the ability to visualize data-related information. “You have insight into when data was created using a timeline, or looking at a map to see where data resides in your organization,” says Friedrich. She adds that technology can also provide legal teams with templated workflows to help ensure that processes comply with best practices and are “efficient, repeatable, and defensible.” Today’s e-discovery tools are also helping legal departments cope with the burgeoning amounts of unstructured data being created by corporations. Getting at this information is not simple, but it can be done. Nuix, for example, offers a solution that uses parallel processing technology to index data—be it email, documents, images, etc.—and prepare it for analysis. Legal departments also need to consider outdated information that has essentially been stranded. “Companies are not only creating more volume, they are also creating new and different types of data,” says Friedrich. “Adding to the risk and cost are data sources that are difficult or impossible to access—legacy email archives, for example, that have been pushed aside because they are no longer
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e-discovery viable. The Nuix software examines this data by bypassing the traditional archiving software and entering the archive at the binary level at several points, making it possible to process it quickly. Increasingly, discovery efforts need to encompass information from a mobile and often far-flung workforce operating out of remote offices, from their homes or on the road. Traditionally, says Zapproved’s Thompson, “you would have to send a hard drive from the remote location or do a screen share with a custodian” to get this data. However, some collection tools now make it possible to gather such information remotely, without user intervention. “All we need is an Internet connection; you don’t need to
involve IT,” she says. Typically, she adds, it is possible to download 10 gigabytes from a remote drive in minutes—all of which “keeps people from having to travel and saves money.”
Tackling the Cost Question As one might expect, many of today’s solutions are also focused on keeping costs down—which is, of course, a key point for corporate legal departments and a critical issue with e-discovery. Often, this means streamlining the front end of the process. Nuix’s Friedrich says that her company’s tools let legal teams perform a preliminary “light data scan so they can go in and analyze the types of information in
E-Discovery: More to Come Corporate legal departments are seeing a number of discovery-related challenges—including the increasing volume of work involved. In recent research from BDO Consulting, nearly half of the surveyed in-house legal professionals said that “understanding the universe of potentially responsive evidence early in the case” was critical. Looking ahead, the number one challenge they cited was “managing mobile and social networking data,” followed by cost control, coping with new regulations, and automating processes. Often, legal departments are looking to technology to help. Gartner estimates that the enterprise e-discovery software marketplace was $1.8 billion worldwide in 2014. And in a recent survey by BDO Consulting, about one-fourth of respondents said they have started using e-discovery tools in the past year. But the statistics also suggest that the use of e-discovery technology is far from routine. In research from the Norton Rose Fulbright law firm, nearly one-third of corporate counsel said that they rely entirely on self-preservation of data, and a majority of those employing technology-assisted review use it for less than half their matters. The BDO Consulting research found that only 5.4 percent identify their organization as an “early adopter” when it comes to its willingness to adopt new tools and technologies, and just 16.2 percent use data visualization techniques in e-discovery As one BDO Consulting executive noted, “While many companies are using technology to identify and collect potentially responsive information, the full potential of new and emerging tools is not yet being realized. We expect the next few years will show further adoption of advanced tools and techniques.” And in-house attorneys seem to agree, with 43.2 percent predicting that their e-discovery spend will increase within the next year.
a particular data set without getting into individual documents. This allows legal teams to perform early case assessment and determine what kind of information they have, who is creating this information, and where it resides.” As a result, less data makes it downstream in the discovery process where the vast majority of e-discovery costs are incurred. On another front, evolving technology is enabling legal departments to reduce costs by getting out from under owning their own systems. Zapproved, for example, provides e-discovery software as a service, via the cloud, making it easy to arm legal teams with sophisticated tools. The cloud-based approach requires no investment in acquiring or maintaining technology while providing high levels of flexibility to meet changing needs. “By leveraging cloud technology, you can scale up or down based on demand,” says Thompson. “You can spin up a server in a minute. And you can provide more computing power than you’d have with a traditional [in-house] installation of technology.” This approach also opens the door to innovative pricing models, such as subscriptions for different tiers or levels of service, with the ability to buy more capacity as needed. As a result, legal departments can work with relatively predictable costs and largely avoid the problem of having e-discovery expenses spiral up unexpectedly. Overall, the ability to put increasingly sophisticated discovery tools into the hands of the legal department can not only help cut costs—it can also help ensure quality results and reduce risk. With the traditional cost of e-discovery, corporations are “sometimes doing the least amount possible, because that’s what they can afford,” says Thompson. “So, when it comes to a legal hold or a collection or even combing through data, things may not be forensically sound and defensible. Having cost-effective platforms that can be used by anyone, without specialized training, makes these tools more accessible—and that ties into more corporations having the tools to mitigate risk.”
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AUG/ SEPT 2015 TODAY’S GENER AL COUNSEL
Statistics Show IPRs Favor Patent Challenges Reform Afoot By Raymond Mandra and Corinne Atton
hen the America Invents Act was signed into law in 2012, it introduced inter partes review as a new way to challenge the validity (patentability) of patents before the U.S. Patent and Trademark Office. IPR has proven to be remarkably popular. Statistics released by the PTO in June 2015 show that more than 3,000 IPR petitions have been filed since the AIA was signed into law, and to date, 1,200 of these challenges have been instituted. Overwhelmingly, these challenges have attacked electrical/ computer patents (63 percent), followed by mechanical/business methods (24 percent), biotechnology / pharmaceutical patents (eight percent) and chemical (five percent). As of April 6, 2015, the PTO had issued final written decisions on 348 IPR petitions (including joined petitions), which challenged 5,114 patent claims within 290 patents (authors’ own data). The survival rate of these challenged claims is low. The PTO found 61 percent unpatentable, and the patent owner cancelled or disclaimed another 13 percent. In other words, in the IPR challenges that were instituted, proceeded to trial, and for which the PTO issued a final written decision (as of April 6, 2015), 74 percent of challenged claims did not survive.
PATENT REFORM MAY BE ON THE HORIZON
This low survival rate has prompted calls for reform, and those calls are gaining traction. Three bills have been introduced over the last six months: the Innovation Act (H.R. 9); the Support Technology and Research for Our Nation’s Growth Patents (STRONG) Act (S. 632); and the Protecting American Talent and Entrepreneurship (PATENT) Act (S. 1137). Each of these bills proposes reforms to the rules applicable to IPR. Chief among these are calls to impose the district court presumption of validity of issued claims; to amend the burden of proof on challengers from the preponderance of the evidence to the district court standard of clear and convincing evidence; to amend the claim construc-
tion standard from the PTO broadest reasonable interpretation standard to the district court Phillips standard (ordinary and customary meaning); and calls to make it easier for patent owners to amend challenged claims during IPR by allowing motions to amend as of right, and by shifting the burden of proof from the patent owner to the challenger. Any person who is not the owner of a patent can petition the PTO Patent Trial and Appeal Board seeking inter partes review of an issued patent, on the grounds that the claimed inventions were anticipated (known in the art) and/or were obvious as of the effective filing date of the patent. Petitions can be filed starting nine months after patent issuance (provided no post grant review, another new AIA procedure, is pending),
Intellectual Property and challenges can only be made on the basis of patents or printed publications. The PTAB will institute IPR if the challenger shows that there is a reasonable likelihood of success in relation to at least one of the challenged claims. The IPR will generally proceed to trial and to a final written decision within 12 months. A final written decision is then appealable to the Court of Appeals for the Federal Circuit. IPR Vs COURT CHALLENGEs
There are a number of significant procedural differences between IPR challenges and challenges in the district court. Issued patents are not entitled to a presumption of validity before the PTAB, and a challenger in IPR need only show that a challenged claim is unpatentable by a preponderance of the evidence. In district court, issued patents are presumed valid, and defendants must show that challenged claims are invalid by clear and convincing evidence. This means that at least in theory, it is easier to invalidate claims before the PTAB. Other significant differences are the claim construction standard and the ability to amend claims during IPR. In district court, the Phillips standard applies to claim construction. This provides that terms used in patent claims should be given the ordinary and customary meaning that a person of ordinary skill in the art would have given them at the time of the invention, considering the content of the patent as a whole and, where appropriate, extrinsic evidence such as testimony from experts. In IPR, in comparison, claim terms are given their broadest reasonable construction in light of the patent specification. We will discuss these issues in more detail below. COMPARIsON WITH EPO PROCEEDINGs
Turning first to the non-existence of the presumption of validity in IPR, and the lower burden of proof-issues which the STRONG and PATENT Acts address: In IPR both of these factors weigh against patent owners. Post-grant opposition procedures in Europe make an interesting comparison. continued on page 25
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aug/ sept 2015 today’s gener al Counsel
Do You Know Where Your Company’s Data Is? New Approaches to Information Governance and Cybersecurity By Jason Straight
ybersecurity has finally reached the top tier of perceived enterprise risks. Headlines about massive data breaches at major corporations have become commonplace. What’s especially striking about these high-profile hacks is that many of the affected companies were already spending millions on cybersecurity measures when the breach occurred. They had gone to great lengths to prepare for the worst, only to have it happen anyway. Two notorious examples demonstrate that significant spending to beef up perimeter defense and malware
detection is no longer sufficient to mitigate risk. At JPMorgan Chase, an annual allocation of $250 million for cybersecurity didn’t prevent what was likely the largest intrusion of an American bank ever, last summer. It compromised information for 76 million households and seven million small businesses, and went undetected for two months. More recently, the federal government announced a breach affecting the Office of Personnel Management (OPM), exposing personal information for what early reports said was four million people, with later reports
raising the estimate to more than 20 million. Despite OPM’s presumed deployment of cutting edge intrusion protection technology, the attackers were reportedly able to operate undetected for several months. a widening gap
The lengthy periods during which the JPMorgan and OPM breaches went unnoticed shines a spotlight on one of the primary reasons security strategies focused on perimeter defense fail: The gap between offense and defense continues to grow, despite ramped up spending on increasingly sophisticated
today’s gener al Counsel aug/ sept 2015
cybersecurity technology. Today it seldom takes more than a few days for an attacker to compromise an asset, while it often takes the target months to discover a breach. That widening gap accounts for the both increasing severity of attacks and the increasing costs associated with them. It also explains why many large companies now find themselves in a state of continuous incident response, as alerts are sounded and security experts are called in to investigate and contain the damage. The security industry is aware of the trend, and is beginning to shift its focus, with more emphasis on activities like collaboration across the organization, behavioral monitoring, identifying tiers of risk and establishing multiple layers of threat analytics. They are also improving anomaly detection techniques and accelerating incident response to emerging threats. Forward-thinking companies now assume that defenses will fail, and they are shifting some of their attention and resources to determining how they should respond to attacks, and minimize the damage. THE THIRD-PARTY THREAT
There is also growing awareness of the threat from third-party exposures. Target, Bank of America and AT&T have all suffered serious breaches that originated with a third-party service provider. No matter how robust the perimeter defenses protecting your own network are, if your data resides with a third party, your level of protection will depend on their technology, their internal processes and the vetting and training of their employees. At the same time, if something goes wrong you will ultimately be responsible. When you own the data, the liability belongs to you. You can outsource the management of data, but no matter what your contract with a vendor says, you will not be able to outsource liability if something goes wrong, as the fallout from the Target breach has made clear. The bottom line is that the company failed to properly oversee
the vendors and processes that were supposed to protect its data, and it’s suffering the consequences. Legal departments should collaborate with their chief information security officers and security teams to drive policy, facilitate enforcement and draft strong third-party vendor contracts that ensure all third-parties are thoroughly vetted. The information security team must be able to access third-party infrastructure and employee practices, and actionable incident response and disaster recovery plans need to be in place. Policies and strict enforcement of secure third-party vendor relationships should apply not only to the vendors themselves, but also to your own employees and their interactions with the third-party vendors. It is not uncommon for third-party services to be implemented with little or no legal or IT oversight. For example, decisions regarding how a vendor will access a corporate network, what data sources they will be able to see and how vendor activity will be monitored are often left to individual departments or not considered at all. That’s bad practice. Information security must have oversight of how such services will be carried out and how data will be accessed or stored. A BOARD-LEVEL PROBLEM
Who bears ultimate responsibility for protecting a corporation’s data? The CIO? The CISO? Legal? The answer is “all of the above,” and in addition, the board. Cybersecurity is no longer an IT problem or security problem or a legal problem. It’s a threat that can put the entire business at risk. That’s why the full boards of some major enterprises are beginning to take responsibility for reviewing risk management practices. Among key board concerns, cybersecurity now occupies a position right next to credit risk, liquidity risk and operational risk. The Target matter, with shareholder suits in the works and disclosure obligations under scrutiny, has made it clear that there is mounting pressure to hold boards accountable.
Boards that have elevated cybersecurity to a highest-level concern are overseeing cyber risk management in three primary ways: They are learning about the problem, ensuring there is sufficient expertise at hand to provide needed advice, and inspecting plans and status of company cybersecurity programs by conducting regular reviews: • Learning. Boards are making cybersecurity a regular topic of conversation, reviewing internal incidents and keeping informed about external incidents and developments. In this way they become aware of threat vectors most likely to create risks at their company. They are also keeping tabs on changes in the legal and regulatory landscape. • Ensuring expertise. Boards are taking responsibility for ensuring they have access to sound advice from technical experts. In many cases, that will require hiring outside consultants. It will also involve making sure experienced outside counsel and forensic firms are engaged and prepared to respond immediately to an attack. Boards are also taking a leadership role in emphasizing awareness throughout the organization and fostering a culture of security. Insurance and other risk transfer mechanisms are often part of the conversation as well. • Inspecting cybersecurity programs. Boards are carefully and regularly reviewing roles and responsibilities with regard to privacy and security. They are, for example, ensuring that senior management is fostering a culture where cybersecurity is a top priority. They are also reviewing the company’s risk management framework and reviewing roles in its incident response plan, with particular attention to disclosures and notifications. A RISK-BASED APPROACH
Innovative companies will emphasize a practical security plan that addresses specific risks aggressively, but also respects budget and business constraints.
AUG/ SEPT 2015 TODAY’S GENER AL COUNSEL
To implement a risk-based approach to cybersecurity, here are some simple, critical questions to ask: • What data assets should we be trying to protect? • What are the most likely threats to those critical assets? • How vulnerable are we to those specific threats right now? • How can we best allocate our security budget to maximize protection against the highest-priority threats and minimize enterprise risk?
A risk-based approach identifies tiers of risk and prioritizes efforts accordingly. For example, a company that is doing business with 20 law firms need not apply the same level of due diligence to every firm. A firm engaged to negotiate commercial real estate leases is unlikely to present the same degree of risk to the organization as would a firm regularly engaged to do IP litigation and acquisition work.
For firms with access to substantial volumes of sensitive information, assessments and inspections will need to account for, among other things, where data is stored and exactly how it is protected, what data retention policies the firm has and who is responsible for enforcing them, what formal plans and processes are in place should a breach be detected, how they will determine who gets notified and how they will document the steps taken in response. The legal profession has lagged behind their corporate client base in its recognition of technology-created risks. Yet the law is abundantly clear about the duty to respect the confidentiality of information. Regulation of the practices required to protect sensitive data are increasingly stringent, and the profession is finally acknowledging technological competence as an ethical obligation that applies to anyone practicing law. The “standard of care” with regard to the protection of private
information is rising, and ignorance is no longer an acceptable defense in the wake of a poorly managed cyberattack. Boards have begun to take notice. Let’s hope that legal departments and law firms follow suit. ■
Jason Straight is senior vice president and chief privacy officer at UnitedLex. He has more than a decade of experience assisting clients in managing information security risks, data breach incidents, data privacy obligations and complex electronic discovery. He began his career as an attorney at Fried, Frank, Harris, Shriver & Jacobsen in New York. He is a Certified Information Privacy Professional (CIPP) and a frequent speaker and author. firstname.lastname@example.org
TO D AY S G E N E R A L C O U N S E L . C O M
TODAY’S GENER AL COUNSEL AUG/ SEPT 2015
Intellectual Property Patent Challenges continued from page 21
Post-grant Opposition proceedings challenging the patentability of patents issued by the European Patent Office have been available for 35 years. European Opposition proceedings are in some respects more aligned with Post Grant Review than IPR. (Challenges can only be filed within a nine-month window immediately following the mention of the grant of a European Patent; the grounds on which patents can be challenged, like PGR, extend beyond novelty and obviousness.) But as in IPR, there is no presumption of validity before the EPO, and the burden of proof is the balance of probabilities standard, which is broadly similar to the preponderance of the evidence standard before the PTO. A big difference between IPR and European Opposition proceedings is the claim construction standard and the ability to amend challenged claims. This strikes at the heart of the perceived imbalance in the United States against patent owners, and is tackled head-on in the Innovation, STRONG, and PATENT Acts. As to claim construction, the general EPO rule is to construe claim terms using their normal and customary meaning in the relevant art. In other words, the EPO uses an arguably narrower standard than that employed in IPR. As to claim amendments, the EPO is far more open to amendments than the PTAB. In European Oppositions, there is no official limit on the number of claim amendments a patent owner can propose, and provided that amendments satisfy the substantive law provisions of the EPC (including that the subject matter is new and not obvious) and that they do not add new matter or broaden the scope of protection, they are generally allowed. Perhaps because of these differences, the statistics following European Opposition are telling. Of the approximately five percent of issued patents that are challenged in European Opposition proceedings, 31 percent are revoked, the patentability/validity of 31 percent is upheld, and the patentability/ validity of the remaining 38 percent is upheld but with amended claims.
In contrast, during IPR, a patent owner needs the permission of the PTAB to file a motion to amend, and generally only one motion can be filed. Proposed amendments must not add new matter and must not enlarge the scope of the claims. However, the sting is that the patent owner bears the burden of showing (by the preponderance of the evidence) that the proposed amended claim is patentable, not only over the prior art of record, but also over all other relevant prior art that he/she is aware of. This burden, and the expansive comparison to all prior art, sets a high procedural bar. It is therefore not surprising that motions to amend were filed in only 23 percent of the 317 IPR petitions on which there was a final written decision as of April 6, 2015, seeking the amendment of a collective 442 claims (nine percent of the total number in issue). What is more surprising is that the PTAB only granted permission to amend 22 of these claims across three IPRs. The statistics following European Opposition are telling in comparion. Of the approximately five percent of issued patents that are challenged in European Opposition proceedings, 31 percent are revoked, the patentability/validity of 31 percent is upheld, and the patentability/ validity of the remaining 38 percent is upheld, but with amended claims. The Innovation, STRONG and PATENT Acts all propose making the Phillips claim construction standard mandatory in IPR. The STRONG and PATENT Acts go further, proposing that the burden of proof should be shifted to the IPR petitioner to show by a preponderance of the evidence that a proposed amended claim is unpatentable. A direct comparison with IPR and European statistics is problematic, not least because there is no institution decision before the EPO – if an Opposition is admissible, the EPO will review the challenge on the merits – and IPRs challenge particular claims, whereas European Oppositions challenge whole patents and statistics are not maintained on individual claims. However, an indicative comparison shows that approximately the same number of patents is knocked out in their entirety in final
written decisions issued in IPR and European Opposition (27 percent versus 31 percent, per the authors’ data). The difference is in the number of patents in which all issued claims were challenged and in which all claims survived: Eleven percent (31 out of 290 patents) in IPR, versus 31 percent in European Opposition; and the number of patents that are upheld with amended claims, one percent in IPR versus 38 percent in European Opposition. In March 2015, the PTO announced that it is considering allowing motions to amend as of right, and limiting the burden on patent owners to prove patentability only over the prior art of record (as is the case before the EPO). If these changes come to fruition, whether by PTO action or legislative reform, they will at least partly shift the odds away from challengers. Whether this will fully redress the currently perceived imbalance remains to be seen. ■
Raymond Mandra is a partner at Fitzpatrick, Cella, Harper & Scinto LLP in New York and chair of the firm’s Biotechnology Practice Group. He focuses his practice on patent counseling, contentious proceedings before the U.S. Patent and Trademark Office, application writing, prosecution, litigation, licensing and due diligence, primarily involving the chemical, food, pharmaceutical and biotechnological sciences. email@example.com
Corinne Atton is an associate at Fitzpatrick, Cella, Harper & Scinto LLP in New York. Her practice focuses on pharmaceuticals, biotechnology and medical devices, with an emphasis on litigation under the Hatch-Waxman Act. firstname.lastname@example.org
aug/ sept 2015 today’s gener al Counsel
Litigation Wave Coming Cybersecurity Breaches Are the Trigger By Kenneth N. Rashbaum
ybersecurity has spawned many cottage industries, such as security firms and “white-hat” hackers to test system vulnerabilities and now it may reinvigorate the litigation industry, which has been somewhat moribund since the Great Recession. Myriad legal theories could apply to a breach claim, and these will be discussed below. General counsel, chief information officers and chief financial officers would be well advised to prepare for the coming litigation wave and review all insurance coverage applicable to information security litigation. They’ll need every dime of it. They will also need to familiarize themselves with their organizations’ information systems and safeguards, if for no other reason than to understand the competency of outside litigation counsel to defend these matters and to understand the services and value counsel will provide in defending cyber breach litigation. Media outlets have reported on the largest cases that have arisen from breaches: class actions against Target; shareholder derivative litigation and the pending action brought by the Federal Trade Commission involving Wyndham Worldwide Corporation; litigation brought by employees of Sony Pictures with regard to the cyber attack that led to disclosures of their personal information; and class actions
involving loss of healthcare information against United Healthcare, Sutter Health and many others. But the degree of difficulty in defending against these “dreadnought” (very large battleships, for those not of a nautical bent) matters is not great. It’s the small-boat, less-common claims that, when they appear in large numbers, can overwhelm a law department’s resources and slip through defenses to get to the organization’s coffers. Knowing about these risks can prepare the law department for them, and preparation is crucial because some of the legal theories they rest on are counter-intuitive, and others may not be covered by applicable Commercial General Liability, Errors and Omissions or Cyber Risk Insurance. That means additional coverage or endorsements to existing policies may be worth considering. 1. Negligence: Like new wine in old bottles, negligence theory underlies much of current cyber litigation because of that hoary standard, duty of care. Many cyber attacks and breaches are the result of employee negligence.
Negligent acts of employees can include clicking on “phishing” attachments that allow malware into the system, failures of the IT department or its subcontractors to update the latest security patches, or inadvertently taking down security controls during system maintenance. Occasionally, these acts also allow the system’s computers to be used by the malware developers as part of a botnet, which then invades other systems. The primary organizations and/or their third-party subcontractors may be liable in negligence for failure to utilize known and reasonable security practices and/or failing to follow accepted information security standards of care. And, given the increasingly interconnected nature of information systems, jurisdiction cannot be presumed, since the harm may occur anywhere the plaintiff has an internet connection. These claims may reach beyond traditional insurance coverage under Commercial General Liability or Errors and Omissions policies because these policies often have explicit exclusions for cyber incidents. Even if there is coverage for such events in states
today’s gener al Counsel aug/ sept 2015
without tort damages caps (and even in some with caps that apply only, say, to personal injury matters), recovery in tort may be unlimited. 2. Statutory Violations: Certain states, like Massachusetts, mandate safeguards of certain categories of personally identifiable information, and also provide for a cause of action in the event of a breach that results from the lack of those controls. Federal information security regulations may comprise a standard of care actionable in state court, whether or not the regulation itself provides for a private right of action. For example, the Supreme Court of Connecticut held in Byrne v. Avery Ctr. for Obstetrics and Gynecology that, while the regulations under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) do not permit a private right of action, HIPAA may serve as a standard of care metric in privacy actions brought under state law. 3. Shareholder Derivative Litigation: Did the board act appropriately when faced with a demand from a shareholder to investigate cyber defenses or an actual breach? Before counsel jump to the conclusion that the directors are insulated from liability, law department attorneys should read the decision of the U.S. District Court for New Jersey in the 2014 case of Palkon v. Holmes. The court in Palkon dismissed derivative claims arising from a breach by Wyndham of credit card and personal information of thousands of hotel guests on the ground of the Business Judgment Rule, but the court took great pains to outline the steps the board took in investigating the claims, and that’s what entitled the directors to the benefit of that rule. Read another way, the opinion is significant for its establishment of metrics by which a board’s conduct will be measured to determine if defenses under the Business Judgement Rule will be available. 4. Computer Fraud and Abuse Act: This federal statute provides for criminal liability and a civil right of action where
someone accesses a computer or information system used in interstate commerce without authorization. To consider an example cited above, if an organization’s systems have been attacked because of a failure to maintain appropriate and current controls, and the system is then incorporated into a botnet that hacks into a second organization, is the first organization liable under this statute for permitting and/or facilitating unauthorized access to the second organization’s systems? There is little case law on such causes of action, but there may be sufficient factual questions, if pleaded with specificity, to allow the plaintiff to survive a dispositive motion. If such a motion were denied, one cannot tell how a court and/or jury would view the first organization’s lack of attention to information security that allowed the breach of the second organization. 5. Federal False Claims Act and Whistleblower Claims: Organizations that contract with U.S. government agencies must agree to certain standards and make certain representations. Often, chief among those representations are statements that the organization will maintain safeguards over personally identifiable or other protected data of the agency and/ or citizens under the agency’s jurisdiction. Failure to maintain those controls may result in a False Claims action if a cyber attack results, in that the claims of information security would, in the agency’s eyes, have turned out to be false. If an employee advises the government of the lack of appropriate controls and the government obtains a recovery in a False Claims action, the employee whistleblower may recover a share, which can amount to millions of dollars. The most effective way to mitigate litigation risks from data breaches is for the organization to take all practicable steps to reduce the risk of a data breach, including security patch updating, malware monitoring and detection and periodic security analyses. These actions are not beyond the purview of the law department, which in most organizations has at least some responsibility for regulatory and statutory
compliance. Risk mitigation steps that are more familiar to in-house counsel should comprise the following: • Assure that security policies and procedures are documented, current, and meet regulatory, statutory and industry standards. • Become familiar with the organization’s information systems and how they store and transfer information protected by statutes, regulations and, in the case of multinational organizations, the laws of jurisdictions in which the company does business. • Vet outside counsel for their knowledge and experience of cyber security issues that arise in litigation. Great litigators will not be of much assistance in 2015 if they are techno-phobic or stuck on Windows 97 or Word Perfect (not an uncommon phenomenon among litigators). • Consider retention of outside consultancies and outside counsel specifically to assist in preparing the law department and outside counsel for cyber litigation. Consider getting assistance from the chief information officer or chief information security officer both in defending the organization and to act as a “translation layer” between internal resources and primary counsel. Right now there is a wave of cyber litigation, but departments don’t need not be swamped by it. Preparation can at least allow them to ride the wave without significant damage. ■
Kenneth N. Rashbaum is a partner at Barton, LLP, in New York, and he heads the firm’s Privacy and Cyber Security Practice. He is also an Adjunct Professor of Law at Maurice A. Deane School of Law at Hofstra University and a co-chair of the International Litigation Committee of the Section of International Law of the American Bar Association. email@example.com
AUG/ SEPT 20 15 TODAY’S GENER AL COUNSEL
Threading is the New Global De-Duplication By Cristin K. Traylor
long time ago in the e-discovery world, sometime pre-2006, the generally accepted practice was to de-duplicate documents within each custodian’s files. For example, if Custodian A had two copies of the same document in his files and Custodian B had one copy of that same document, parties would produce only one of the copies from Custodian A’s files but still produce the copy from Custodian B’s files. The problem with this approach was threefold:
It led to inconsistencies in how lawyers treated the documents for responsiveness and privilege.
It took more time and money to review the same documents repeatedly, convert them to TIFF format, and number them for production.
It took more time and money for the receiving party to review the productions and prepare for trial. Parties rarely agreed to global deduplication, but then they frequently complained of receiving a “data dump” of duplicate documents from the other side. Everyone in the field eventually recognized the inefficiencies in producing duplicate documents, and thus global de-duplication was born. At first, global de-duplication was a new phenomenon that parties needed to discuss and agree upon before implementing. An offshoot of this novel de-duplication method was that parties started populating a field called “All Custodians” or “Duplicate Custodians.” This field includes the names of the custodians who also had the document in their files but from whom it is
not being produced. Although attorneys feared losing the ability to source documents to specific custodians, this field alleviated those concerns. Today, global de-duplication has become the industry standard. Few discussions regarding global duplication still occur with opposing counsel. Most attorneys include a sentence in their production specifications that allows it if the Duplicate Custodian field is populated. With the amount of data generated and processed these days, the failure to de-duplicate globally may even constitute a discovery abuse. EMAIL THREADING
Although email threading has existed as a review tool for quite a while, the new trend is to review and produce only the most inclusive email string. E-discovery platforms accomplish this by processing emails with threading tools such as
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Equivio or Relativity Structured Analytics. This technology identifies the most recent strings and excludes all the smaller pieces that make up that larger string. If an email branches off into a separate thread, then the technology will include that thread for review as well. However, if an email has an attachment and subsequent replies omit that attachment, then the original email with the attachment would also be included for review. Relativity Structured Analytics can also identify “email duplicate spares,” which are essentially duplicate emails that do not share the same de-duplication value, or hash value, which is a unique identifier based on a document’s content and attributes. Variations in de-duplication values between the same emails can occur when the documents are processed with different tools or different versions of the same software, when there are extra blank spaces in the document, when the date/time sent or received is off, or when the email addresses are rendered differently. As with other discovery plans, parties that intend to produce only the most inclusive strings should notify opposing counsel of their intent. Unfortunately, although The Sedona Conference’s Cooperation Proclamation and the Federal Rule of Civil Procedure 37 both promote cooperation in e-discovery, contentious parties may still object to using this technology. However, there is no basis to object except to inconvenience opposing counsel. Counsel who object to the technology because they do not understand how it works risk an ethical violation. Recently revised comment eight to ABA Model Rule 1 requires competence in technology. California has gone further by issuing a Proposed Formal Opinion regarding e-discovery: “Attorney competence related to litigation generally requires, among other things, and at a minimum, a basic understanding of, and facility with, issues relating to e-discovery, including the discovery of electronically stored information (‘ESI’). On a case-by-case basis, the duty of competence may require a higher
level of technical knowledge and ability, depending on the e-discovery issues involved in a matter, and the nature of the ESI. Competency may require even a highly experienced attorney to seek assistance in some litigation matters involving ESI. An attorney lacking the required competence for e-discovery issues has three options: (1) acquire sufficient learning and skill before performance is required; (2) associate with or consult technical consultants or competent counsel; or (3) decline the client representation. Lack of competence in e-discovery issues also may lead to an ethical violation of an attorney’s duty of confidentiality.” If California’s proposed opinion becomes final, competency on e-discovery issues, including threading technology, would be required. Many other states are likely to follow suit. Thus, instead of objecting, counsel who cannot grasp how e-mail threading works should reach out to attorneys or consultants proficient in e-discovery to gain the comprehension necessary to sign off on producing only the most inclusive strings. EMAIL THREADING BENEFITS
Email threading offers even greater benefits than global de-duplication. With this tool, parties can review fewer documents yet still produce the same amount of substantive content. In addition to the cost savings in processing, review and production, email threading improves review consistency, as human reviewers may code email chains differently. Additionally, even if a party objects to producing only inclusive emails, you can organize batches of documents by threads so reviewers advance through the chain chronologically from the beginning of the thread. The entire thread will be contained in one batch and be reviewed by the same person, minimizing inconsistency. Reviewers will also have the complete context of the chain, allowing them to fully understand the conversation. Further, threading will help reviewers identify privileged documents, especially when it is unclear
in the earlier parts of a chain that the correspondents are preparing a request for legal advice. If you review the whole chain, you are less likely to miss the big picture, privilege or otherwise. Regardless of whether you are producing only inclusive chains or all chains, threading is a useful quality control tool. You can search for all privileged documents and include the entire email thread to check for missed privileged calls. Similarly, you can analyze responsiveness or other coding fields. Consistency is the name of the game, and threading is another way to achieve that goal. Threading can be even more valuable in internal investigations. Search terms or keywords are often ineffective where custodians may have used unknown code words or phrases, specialized jargon, shorthand, or abbreviations. Threading reduces the data set for review without relying on search terms that may not yield the targeted documents. In the near future, email threading will be as much of an industry standard as global de-duplication. When this occurs, counsel will no longer need to discuss the production of inclusive threads. Counsel should prepare for this development by learning how to use the technology to maximize its benefits. ■
Cristin Traylor is counsel in the Richmond office of McGuireWoods, where she advises corporate clients on the preservation, collection, review and production of electronic and paper documents, and the establishment of records management and information governance policies. Overseeing the firm’s E-Discovery Review Center, she handles all aspects of document discovery, using analytics, technology-assisted review, computer forensics and cutting-edge software to manage e-discovery reviews. firstname.lastname@example.org
aug/ sept 20 15 toDay’s gEnEr al counsEl
Break the “Collect Everything” Mind Set By Brad Harris
lectronically stored information has been flourishing in all the usual locations: company servers, computers and company-issued employee laptops. A 2014 IDC report says the digital universe is doubling in size every two years, and that by 2020 the size of the digital universe – all the data that’s created and copied annually – will reach 44 zettabytes, or 44 trillion gigabytes. Moreover, now ESI is being created and stored in numerous locations outside of corporate control, including employee-chosen cloud repositories like Dropbox, Box and iCloud, and employees’ personal mobile devices, such as tablets or smartphones, which are common in today’s bring-your-own-device (BYOD) workplace. Gartner predicts that by 2017 half of all employers will require their employees to bring their own devices to work. This explosion of data and proliferation of locations is contributing to all kinds of challenges for corporate IT and legal professionals, as companies try to preserve, collect, process and review information. Complicating collection and preservation is the fact that many corporations have been slow to implement BYOD policies to guide employees on acceptable use and clarify responsibilities with regard to business data on employee-owned devices. According to a 2014 survey by Software Advice, 39 percent of employees who use their own devices for work say their company does not have policies to guide usage and lacks data security measures or corporate access to ESI in the event of litigation. Additionally, over half of respondents acknowledge transferring company files to their own devices. That
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means corporations may not have access in order to preserve potentially responsive data on employee devices, which could limit their ability to meet preservation requests. Because corporate data is now more dispersed and frequently mingled with employees’ personal data, access to that data is difficult and the cost of discovery is going up accordingly. Clearly, current approaches to corporate e-discovery are unsustainable, leaving corporations to look for defensible and affordable ways to deal with this burgeoning problem. The current approach of many corporations is driven by fear of harsh consequences that could result from the inadvertent omission of custodians or other sources of information. That fear of spoliation and sanctions has led many corporations to rely on a “collect everything, and sort it out later” mind set. Unfortunately, what may seem like the safe approach is actually more risky, at the same time that it’s costly and increasingly difficult. Worse, it can lull corporations into a false sense of security. Organizations that attempt to “collect to preserve” all mailbox contents on a server, for example, may feel they are taking a prudent approach. However, they fail to take into account the mountains of potentially responsive data located elsewhere, including text messages, the data in cloudbased repositories, smartphone data, conversations on social media and other emerging sources. Corporate legal teams are left culling through way too much data, and at too high a cost. A BETTER WAY
Here are four critical steps for corporate counsel to take in order to break the “collect everything” mind set and establish a defensible, sustainable and affordable e-discovery practice.
• Step One: Invest in Information Governance and BYOD Policies. Defensibly weeding the growing
fields of data requires corporations to invest in information governance and BYOD policies. Before an organization can dispose of information, it must thoroughly understand the data landscape so it can determine which data still has business value. Companies must also create BYOD usage policies that provide employees with clear guidelines regarding their personally-owned devices, to ensure that the corporate data is accessible for preservation. Information governance policies help organizations identify the business data that is key for records, analysis and regulatory compliance, or for meeting preservation obligations. It can also help companies understand how information is being created, used and stored. When information governance is coupled with intelligent preservation practices that clearly specify the scope of the legal hold (see next step) – to include custodians, data locations, and dates – organizations have better information about where the data resides and can avoid inadvertent spoliation.
• Step Two: Put a Reliable and Defensible Preservation Process in Place. Legal holds are the foundation of a sound preservation practice. With defensible and intelligent processes, corporations are able to demonstrate “good faith” in their preservation efforts, and are therefore in a better position to negotiate favorable terms (such as rolling productions of only the most likely custodians) when scoping discovery in the meet-and-confer. Intelligent preservation has three important components: 1. A preservation plan: It should specify how to recognize the trigger, how to define the scope of a hold, how to communicate the need to preserve, and when to release the hold. Organizations with a detailed preservation plan can minimize cost through efficiency, while mitigating risk with a timely and reasonable response to preservation duty.
2. Process integrity: Establish a clear audit trail. Tracking responses, following up with delinquent custodians and sending routine reminders are all crucial to ensure that nothing falls through the cracks and the preservation process is defensible. 3. A culture of compliance: To help ensure employee buy-in and enable the organization to preserve more efficiently and effectively, companies should invest in regular training in effective preservation response.
• Step Three: Cooperate. Negotiating a fair and reasonable scope of discovery is critical for keeping costs low and mitigating risk, and cooperation is crucial to effective negotiations. Cooperation starts by a demonstration of good faith and having a defensible data preservation plan. Despite the adversarial nature of the justice system, corporate lawyers have begun to recognize that cooperation during meet-and-confer sessions can be an intelligent strategy that saves money and enhances their company’s reputation before the court. When parties cooperate, there is generally greater flexibility in what, how and when ESI is collected. When parties can demonstrate they are meeting their duty to preserve, they are in a better position to negotiate a more proportional scope of discovery. If parties are able to demonstrate sound preservation practices, then courts will have confidence that the data is broadly preserved. They are then more likely to support a request that advocates starting collection efforts with a limited scope of the most likely custodians and data types, and then expands if further discovery is necessary. • Step Four: Collect Only What You Need, When You Need It. This the main idea behind intelligent collection, or “collect-to-produce.” It means collections should be targeted continued on page 45
AUG/SEPT 2015 TODAY’S GENER AL COUNSEL
Labor & Employment
Hidden Risks in Confidentiality Requirements By Tim Garrett
he SEC has joined other government agencies in cracking down on what employers prohibit in confidentiality agreements. On April 1 of this year, the SEC fined Houstonbased technology and engineering firm KBR, Inc. $130,000 for requiring some of its employees to sign confidentiality agreements that potentially prevented them from blowing the whistle on illegal activity, in violation of Rule 21F-17 under the Dodd-Frank Act. Although this is the first enforcement action by the SEC under Rule 21F-17, it’s likely not the last. The SEC has stated that it intends to “vigorously enforce this provision,” and has already issued document requests to a number of companies, seeking copies of their severance agreements, codes of conduct, executive employment agreements and standard confidentiality agreements. This should serve as a reminder about the hidden risks of confidentiality provisions in company documents. Rule 21F-17 was enacted by the SEC in response to the Dodd-Frank Act, which required the SEC to establish a whistleblower program. The rule prohibits employers from taking any action that would impede an employee from “directly communicating with the Commission staff about a possible securities law violation.” The prohibited action would include seeking to enforce or threatening to enforce a confidentiality agreement with respect to such communications. THE KBR ENFORCEMENT ACTION
KBR, Inc. had a practice of requiring employees to sign a confidentiality agreement whenever the employee served as a witness to an internal company investigation. This was a part of the company’s longstanding internal compliance program, which it had developed prior to Dodd-Frank. The
program was designed to encourage employees to contact the legal department concerning any potentially illegal or unethical conduct by KBR or its employees. KBR would then conduct an internal investigation into any employee complaints or allegations, and often that would include interviewing employees. The confidential agreement, intended to protect the integrity of the company’s investigation, read as follows: “I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.” Though the Commission was unaware of any instance where either a KBR
employee was in fact prevented from communicating directly with the SEC about potential securities law violations, or where KBR took action to enforce the confidentiality agreement or otherwise prevent communications with the SEC, the Commission nonetheless found that KBR’s confidentiality agreement was too restrictive because it “potentially discouraged” reporting violations to the SEC. By requiring employees to first check with the legal department or risk possible termination, the provision unlawfully interfered with the purpose of Rule 21F17, which is to “encourage individuals to report to the Commission.” To remedy the violation, the SEC required KBR to pay a $130,000 fine and to amend its confidentiality statement. The SEC also required KBR to contact every employee who signed a confidentiality agreement to notify them that the agreement does not prohibit
TODAY’S GENER AL COUNSEL AUG/ SEPT 2015
Labor & Employment them from contacting the government regarding a possible violation of federal law or regulation. OTHER AGENCIES
The SEC’s rigorous enforcement action is an example of the increasingly intense scrutiny government agencies have been giving to employer confidentiality agreements. The Equal Employment Opportunity Commission, for example, recently appeared to be challenging its own prior position allowing a general release of claims in separation agreements, provided that there are carve-out provisions telling the employee of his or her right to file a charge with the EEOC or participate in an EEOC investigation. In Equal Employment Opportunity Commission v. CVS Pharmacy, Inc., the EEOC claimed that the CVS standard separation agreement violated Title VII. CVS claimed that it was merely following prior practice and guidance of the EEOC. The Commission took the position that CVS’s agreement contained provisions that potentially “chilled” an employee’s right to file a charge with the EEOC or to cooperate with administrative investigations. The action was dismissed on other grounds, but employers should know that the EEOC’s action promises a new look at such language in a severance agreement. The Office of Inspector General has also subjected employer confidentiality agreements to increased review. The OIG recently conducted an evaluation of the confidentiality policies of 30 major federal contractors. It found that at least 13 may be in violation of the Federal Acquisition Regulations for requiring employees (as KBR did) to notify the company if they are contacted by the government, before cooperating. The OIG has advised the companies to re-evaluate their policies in light of the report and the SEC’s action. Perhaps the agency most critical of confidentiality agreements has been the National Labor Relations Board, which has long held that employers violate the National Labor Relations Act when they require employees to comply with policies that they might reasonably construe as “chilling” their right to engage in protected concerted activity,
such as the right to discuss their terms and conditions of employment. An administrative law judge recently applied this policy to invalidate several overly broad confidential information policies maintained by Macy’s Inc. For example, Macy’s had prohibited employees from divulging “information about employees which if known outside the Company could harm the Company or its . . . employees.” Although the ALJ did not find that the policies had in fact prohibited employees from discussing the terms and conditions of their employment, the ALJ nonetheless found the provision violated the employee’s rights to protected concerted activity, namely the right to discuss the terms and conditions of employment, under the National Labor Relations Act. Macy’s had included a saving clause explaining that its policies were not intended to interfere with employees’ protected right, but it was found insufficient. While the prohibitions on employee conduct were very specific, the saving clause was merely generic and thus failed to adequately explain to employees the substance of their rights. These precedents point up some important takeaways for employers: • Seemingly innocuous or previously compliant confidentiality provisions may no longer be acceptable. • Seemingly innocuous confidentiality provisions could be seen by governmental agencies as having the unintended consequence of “chilling” protected activity or whistleblowing. • Employers shouldn’t learn of potentially offending conduct in the midst of some investigation or union organizing campaign. Instead, they should take steps now to review their confidentiality provisions. agreements and other policy documents. Specifically, employers should review confidentiality provisions in employee handbooks/codes of conduct, severance agreements, and practices for internal investigations. There are a number of specifics to watch for. They include any policies that prohibit disclosure of undefined
employee confidential information without explaining that the policy is really addressing personal identifying data. Such broad policies can be viewed as prohibiting employees from talking about wages or working conditions, which is protected activity. Also, watch for policies that broadly prohibit employees from disclosing information about the employer without explaining that the policy is really addressing proprietary business information. A broad policy without that explanation could be viewed as prohibiting employees from communicating about working conditions or engaging in other potentially lawful activity, such as participation in an investigation with a government agency. In severance agreements, there must be provisions that expressly allow an employee to file a charge of discrimination or to participate in an EEOC or other governmental agency investigation. Be aware that provisions that require employees to first contact company management before discussing any company information with “outside parties” could be viewed as chilling whistleblower activity. One more tip: Have an alert hotline for anonymous complaints or concerns. This highlights the company’s commitment to learning about and investigating potentially unlawful activity. ■
Tim Garrett is a partner in the Labor & Employment group at Bass, Berry & Sims, PLC in Nashville. His work has ranged from defending a major university during a wage-and-hour collective action involving thousands of employees, to the successful defense of a major healthcare provider in a gender discrimination/retaliation case. email@example.com Bass, Berry & Sims associate Dustin Carlton assisted in writing this article.
AUG/ SEPT 2015 TODAY’S GENER AL COUNSEL
WORK PL ACES ISSUES
Speak-Up Culture Reduces Whistleblower Risk By Stephen Melnick
histleblowing has long been a hot topic in Washington. However, recent trends suggest a new focus on encouraging and rewarding employees to bring their allegations directly to agencies instead of blowing the whistle internally. In support of this, the government has stepped up anti-retaliation enforcement and is even issuing fines for facially neutral policies and agreements, based on the perception that they may squelch whistleblowing. At the same time, the plaintiff bar is becoming increasingly active in this field. This push for external whistleblowing has its roots in the passage of the Dodd-Frank Act, in 2010. Under Dodd-Frank, the SEC is empowered to issue a ten to 30 percent “bounty” to any whistleblower who provides a tip that leads to a recovery of $1 million or more. Since its inception in 2011, the SEC’s aptly-named Office of the Whistleblower has awarded almost $50 million in bounties, including an award of $30 million to a single whistleblower. The number of tips fielded by the SEC
Stephen Melnick is a shareholder at Littler Mendelson. He counsels and represents employers on a broad range of employment laws. He has drafted appellate briefs for the U.S. Supreme Court, the U.S. Court of Appeals for the First Circuit and the Fourth Circuit, and the Massachusetts Supreme Judicial Court. firstname.lastname@example.org
is growing by 20 percent a year, with more than 11,000 received since the program started. Needless to say, given the amount of money being handed out, more and more plaintiff attorneys are entering this area and enthusiastically advertising for clients. (Just type “whistleblower” in a search engine and count the law firm ads that pop up.) Federal agencies are also putting more effort into enforcing anti-retaliation statutes. OSHA, which investigates 22 different whistleblower laws (including the Sarbanes-Oxley Act of 2002), requested a 29 percent increase in its budget for the coming fiscal year. It also issued a memorandum in April of 2015, pressing its investigators to find probable cause in more cases.
Not to be outdone, the SEC has gotten into the anti-retaliation game as well. In June, 2014, it ordered a hedge fund to pay $2.2 million to settle allegations that the fund had retaliated against an employee who reported “potentially illegal activity.” (I would argue that the Commission’s authority to bring retaliation claims is shaky at best, as it is based not on a statutory grant, but rather the SEC’s own rules.) The SEC has gone on the offensive, as well. In April of this year, it levied a $130,000 penalty against a company for having “improperly restrictive language in confidentiality agreements,” although there was no evidence that the agreements ever dissuaded anyone from speaking out. The SEC issued the fine and ordered the company to modify
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its agreements, based only on what the agency found was “the potential to stifle the whistleblowing process.” This was not a one-off. The SEC has said it will continue to look for other companies with “potentially stifling” confidentiality policies or agreements. In light of this, we have been advising clients to review company policies, non-disclosure agreements, and even releases and employee handbooks, to ensure that the confidentiality provisions would not be deemed over-broad by a government agency. Luckily, not everything coming out of Washington about whistleblowers is doom, gloom, fines and million-dollar payouts. The Whistleblower Protection Advisory Committee (WPAC) – a group of academics, government officials, and representatives of labor and management charged with advising the Secretary of Labor on all things whistleblower – recently published a set of best practices: six well-defined recommendations for protecting whistleblowers and preventing and addressing retaliation. They are currently under consideration by the Assistant Secretary of Labor, for formal adoption by the Department. In my view, the centerpiece of the best practices is what the WPAC calls “the Speak Up Culture.” This refers to a corporate culture that goes beyond simply setting up internal channels and promulgating anti-retaliation policies. Rather, a speak-up culture proactively encourages and embraces employee reports of problems or concerns, promptly evaluates the reports, and effectively resolves the issues, while protecting the reporters from retaliation. Why would a company want to encourage its employees to blow the whistle? Simply put, with whistleblowing becoming the norm, I believe the best option is for employees to report internally, so that issues can be remedied cost-effectively and with minimal legal and public relations risks, before an agency or outside attorney gets involved. According to the most recent National Business Ethics Survey (conducted by the Ethics Research Center), 92 percent of the time, a whistleblower’s first report is not external, but within
the company. The point of a speak-up culture is to get that number up to 100 percent so that all employees feel they can and should talk to someone internally before reporting outside the company. Once someone makes an internal report, the company should take all appropriate steps to investigate and remedy the concern, so the person will have no need to make a second, external report – or if they do, the company will be in the best position to respond to any government inquiry or attorney demand letter.
The WPAC next recommends a retaliation response system, with multiple avenues for employees to report potential retaliation, including outside the chain of command, hotlines, and anonymous reporting options. All claims of retaliation should be taken seriously, investigated promptly, and if retaliation is found it should be corrected. This may be helpful in reducing damages exposure. As OSHA’s recently updated Whistleblower Investigations Manual states, punitive damages “may not
Since its inception in 2011, the SEC’s aptly-named Office of the Whistleblower has awarded almost $50 million in bounties Finally, the company should make sure employees who report issues are treated fairly and protected from retaliation, not just because it is the right thing to do, but also because it will encourage others to come forward with concerns in the future. The WPAC’s list of best practices offers concrete insights on how to foster this speak-up culture and protect employees from retaliation. They begin with commitment by leadership. From the C-Suite on down, management should understand the importance of internal reporting, and know its obligations both under the law and under company policies. Managers should also be held accountable for how they respond to internal complaints and the degree to which they support company policies. The WPAC best practices stress training about whistleblowing and retaliation prevention. Employees at all levels should understand how to raise issues, as well as their rights under the laws and what constitutes retaliation. Notably, the vast majority of internal whistleblowing goes first to the employee’s supervisor, so all managers should know how to recognize when an employee is raising an issue, how to respond, and how to pass it along to the appropriate personnel for further review.
be appropriate if the respondent had a clear-cut policy against retaliation which was subsequently used to mitigate the retaliatory act.” When a speak-up culture is put in place, one will expect (and even hope for) a short-term increase in reports and complaints. After this initial surge, though, the WPAC recommends continual monitoring to ensure that whistleblowing and anti-retaliation policies are working as intended. Last but not least, the WPAC recommends independent auditing of the whistleblowing program. Anonymous employee surveys and confidential employee interviews can reveal employee attitudes about whistleblowing and perceived retaliation. A high-level manager, such as a chief compliance officer, should be in charge of overseeing the program and implementing corrections and improvements. A company cannot stop, hinder, or even remotely discourage an employee from blowing the whistle. What a company can do is promote a culture in which employees feel comfortable raising complaints internally, rather than going to a government agency or a private lawyer. In my opinion, WPAC’s best practices offer an excellent roadmap for reaching this goal. ■
aug/ sept 2015 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
Confidentiality of Sensitive Information in a Merger By Jeffery M. cross
question my clients frequently ask is whether competitively sensitive documents and information will be kept confidential by the government in a merger review, or by the court in a merger challenge. The question comes from clients who are merging parties, but also from non-parties to a merger who were interviewed by the government during its investigation, or who are recipients or potential recipients of subpoenas by the parties or the government. The answer is that generally such information will be kept confidential, but there are nuances that depend on the stage of the merger proceeding and the identity of the party. For the merging parties, the confidentiality of the review process, pursuant to the Hart-Scott-Rodino Act, is protected by the Act itself. This confidentiality extends to the HSR notification and report form, and any information or documentary material filed with the DOJ or FTC pursuant to the Act. These provisions specifically exempt such materials from disclosure under the Freedom of Information Act. The antitrust agencies take the position
Jeffery cross, is a columnist for Today’s General Counsel and a member of the Editorial Advisory Board. He is a partner in the Litigation Practice Group at Freeborn & Peters LLP and a member of the firm’s Antitrust and Trade Regulation Group. email@example.com
that even the fact of filing an HSR notification and report form is confidential unless the parties have already publicly disclosed their filing. During the government’s investigation of the merger, the agency involved may contact competitors and customers and seek competitively sensitive information. The agency may require the production of such information pursuant to a civil investigative demand, a form of compulsory process. Confidential information may also be provided voluntarily to the agency. Sometimes the third party may also agree to provide a declaration to the government regarding the merger. There are specific statutory provisions that protect the confidentiality
of materials produced in response to compulsory process or submitted voluntarily. Under certain circumstances, these provisions permit the agency to share information with state attorneys general also investigating a merger. However, the state officers must agree to maintain confidentiality. The protections relating to confidentiality change once an agency commences litigation to challenge the merger. The recent challenge by the FTC of the merger between Sysco and U.S. Foods illustrates some of the issues in such a setting. Sysco and U.S. Foods publicly announced their intention to merge in December of 2013. The FTC conducted a lengthy investigation that included obtain-
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ing confidential information from the parties, but also from more than 90 customers and competitors. In February 2015, the FTC filed a complaint and motion for a preliminary injunction in the federal district court in Washington. Attached were 92 declarations by various declarants, including customers and competitors. The complaint, motion, and declarations were filed under seal, with only heavily redacted versions made available to the public. The case was assigned to Judge Amit Mehta. A hearing on the motion for a preliminary injunction began in May, 2015. Early in the district court proceedings, Judge Mehta entered a protective order that allowed the parties, as well as third parties, to designate documents and testimony as confidential. Such a designation prohibited public access to such materials. Included in the definition of this designation was “commercially sensitive information.” The protective order followed the template included in the FTC’s Administrative Rules. However, Judge Mehta added a paragraph that provided for a $250,000 fine to be assessed for a violation of the protective order. The paragraph also noted that any fine was personal to the individual found to have violated the order, and reimbursement could not be sought from the individual’s company or client. Finally, the addition indicated that if the individual violating the protective order was an attorney the court might recommend to the appropriate disciplinary authority that the attorney be sanctioned, suspended, or disbarred. One of the early issues to arise in the case was whether in-house counsel for the merging parties would have access to the competitively sensitive information from third parties. Judge Mehta identified the issue as whether these counsel were in a position to advise his or her clients as to competitive decision-making. He defined competitive decision-making as decisions the client would make regarding pricing, marketing, or design issues when that client
had seen how a competitor had made those same decisions. Judge Mehta concluded that the general counsel of Sysco was too close to Sysco’s competitive decisionmaking. He found that membership on the Sysco executive team brought him well within the orbit of Sysco’s decision-making activities. In addition, Judge Mehta found that the general counsel was chiefly responsible for Sysco’s mergers and acquisitions, which involved evaluation of competitors as potential acquisition
laration to the FTC, counsel for Sysco and U.S. Foods should be allowed to probe that declaration. Of course, the deposition and any exhibits could be designated as confidential under the protective order. Just prior to the preliminary injunction hearing, Sysco and U.S. Foods designated certain third-party documents and depositions as evidence it wished to introduce in open court. Judge Mehta established a streamlined procedure for counsel for the third parties to request confiden-
The protections relating to confidentiality change once an agency commences litigation to challenge the merger. targets. The judge concluded that there was the risk of inadvertent use or disclosure of a competitor’s confidential information when the lawyer’s responsibilities included evaluating competitors for potential acquisitions. Consequently, Judge Mehta declined to permit Sysco’s general counsel to have access to competitively sensitive information produced by third parties. For the in-house counsel that were granted access, Judge Mehta required that the confidential information be accessible only through a secure electronic data room or document review platform, or in person at the offices of their outside counsel. For the electronic data room or document review platform, the in-house attorneys would be required to use individual login identifications and passwords. Another issue that arose involved a third-party competitor that had provided a declaration to the FTC. This competitor moved for a protective order barring Sysco and U.S. Foods from questioning its president about competitively sensitive information at his deposition. Judge Mehta declined to bar such questioning on the ground that, if the president provided a dec-
tial in-camera treatment, and multiple parties moved to have their information so protected. Although there is a strong presumption that the public should have full access to judicial proceedings, including the evidence that forms the basis of a court’s decisions, there are certain well-established exceptions to this presumption. One of those exceptions is the protection of a party’s interest in confidential, commercial information, such as a trade secret, where there is sufficient threat of irreparable harm to a party’s competitive posture. Courts have refused to permit the court’s files to serve as sources of business information that might harm a litigant’s or a third party’s competitive standing. In keeping with this established exception to open access, Judge Mehta did in fact close his courtroom to the public during portions of the preliminary injunction hearing. In addition, a significant amount of evidence was kept confidential, subject to only in camera review by the court. This case serves as a good example of the kind of protections and exceptions available to parties and third parties to a merger when their confidential information is required for review. ■
aug/ sept 2015 today’s gener al counsel
THE lEgal mark E Tpl acE
To See Future of Legal Services Look to UK By Mark a. cohen
he signs are legion that the Legal Services Act of 2007 (LSA) – which didn’t take effect until October, 2011– is having a major impact on the UK legal market and beyond. Scores of firms have secured licensure as “Alternative Business Structures” (ABS), enabling them to raise capital as well as share profits with non-lawyers, engage in interdisciplinary practice, and confer equity upon non-lawyers, who are increasingly becoming key contributors. The LSA has spawned a more client-centric approach to the delivery of legal services that extends from High Street (retail) firms to the “Magic Circle.” Above all, the prolif-
Mark a. cohen is the CEO of Legalmosaic, a consultancy to service providers, consumers, investors, educators and new entrants into the legal vertical. Prior to founding Legalmosaic, he was co-founder of Clearspire, a legal service provider whose disruptive, proprietary IT platform and reengineered legal model garnered international acclaim. This followed his founding of Qualitas, an early entrant into legal process outsourcing. Earlier in his career, he was a civil trial lawyer. Currently he is an Adjunct Professor of Law at Georgetown Law Center and a frequent blogger and public speaker. firstname.lastname@example.org
eration of new models and heightened competition has rendered legal service providers subject to the same expectations of efficiency, transparency, and value as other businesses. The repercussions of the LSA are being felt far beyond the UK domestic market. We’ve previously looked at forays of white-shoe law firm Cahill Gordon and IT/document powerhouse LegalZoom into ABS licensure (the former through its UK LLP). But the migration to the UK and the lure of operating in its re-regulated ABS environment has cast a far wider net than these two prominent U.S. providers. Three of the Big Four accounting firms now have ABS licenses, and firms from
around the globe, including Australian-based Slaters, the first law firm in the world to launch an IPO (2007 in Australia), are operating there too. The UK legal marketplace is cutting edge, in part because of the LSA, but also due to London’s emergence as the economic capital not only of the UK but also, arguably, the world. Is it any wonder that the UK has established itself as the epicenter of innovation in the legal marketplace as well as base camp for the globalization of legal services? Three recent developments – involving the Magic Circle, a mid-sized, provincial firm, and the retail segment – underscore the dynamism of the UK market and its influence on the wave
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of globalization sweeping across the legal vertical. Let’s briefly examine each and weigh its impact on the legal industry. TA-TA TO LOCKSTEP IN THE MAGIC CIRCLE
“The Magic Circle” is a term used to describe five leading law firms headquartered in the UK, as well as four or five leading London-based commercial barristers’ chambers. The moniker has come to be synonymous with the UK’s corporate legal elite in terms of prestige, profit-per-partner, and client rosters. Its sway is not limited to the UK. Four Magic Circle members ranked in the top ten of all firms globally based on revenues. Historically, these firms have had a “lockstep” compensation model for partners, wherein one’s points increased with years of service. Though the Magic Circle’s U.S. counterpart, the larger AmLaw 100, had largely abandoned lockstep during the past couple decades (with a few exceptions among its most elite ranks), the Brits clung to their “the firm first” approach. But that has changed recently. Though member firms Allen & Overy, Clifford Chance, and Linklaters have not abandoned lockstep, they have all recently adopted some form of “bonus pool” that enables them to reward those who make exceptional contributions to the firm (read: exceptional rainmakers) beyond the upper end of the lockstep formula. And this includes coveted laterals. What’s the big deal? It’s another example of a changing legal landscape and additional evidence that the UK stalwarts are fortifying themselves with ammunition they deem necessary to expand aggressively to new markets where they can now compete more successfully for “superstars.” And make no mistake about the global aspirations of Magic Circle firms, a large percentage of whose billings derive from crossborder and multi-border litigation and transactions. The Magic Circle firms are clearly focused on the globalization of legal services, as well as leveraging their global brands and favorable regulatory environment.
IPO IN THE MIDDLE-MARKET
Gateley, a Birmingham-based firm of about 450 lawyers, just launched a successful IPO on the London Stock Exchange. The firm raised approximately $45 million in its first day of trading, driving the share price about 15 percent above the placing price. The firm, which has revenues in the $80 million range, now has a market cap of approximately $160 million. (All fig-
IT integration, to this struggling segment of the market. What does this portend? It suggests that legal practices, like medical ones before them, will be rolled up, streamlined, made more profitable, and likely packaged for sale or IPO. What’s clear is that at all segments of the market, moves are being made to improve the efficiency of legal delivery, and to scale it. In the case of the retail segment,
The repercussions of the Legal Services Act are being felt far beyond the UK domestic market. ures here are converted from pounds.) It plans to deploy the new infusion of capital to hire top lateral talent, acquire additional practice groups, and provide flexibility to tap into advantageous growth opportunities. Is this a big deal? Well, consider that Slater’s, which went public in 2007, now has a market cap in excess of $2 billion. Now imagine what the Magic Circle firms would be valued at with their global brands, multibillion dollar revenues, blue chip client bases, and top tier talent – and the capital they could raise to fuel global expansion. Could their recent decision to supplant lockstep to retain superstars with a premium, and lure new talent that same way, be a precursor to even bolder steps such as going public? Stay tuned. A ROLLUP IN RETAIL
The action is happening in the retail segment of the UK legal market as well. Metamorph has secured backing from legal business consultancy Assure Law and has announced that it intends to stage what amounts to a rollup of 60 High Street firms during the next five years. Metamorph will secure ABS licensure and expects that it will be able to reap solid returns by injecting streamlined operations, including consolidation of back-office operations and enhanced
such scaling might be nationwide, but in the corporate segment globalization is clearly the end game. The UK legal market provides a view into law’s future. While ABS structures, IPO’s and rollups may be anathema to some legal purists, they are clearly a part of today’s global legal landscape. Whether they align the interests of the various stakeholders in the legal ecosystem (law students/the academy; legal providers; and legal consumers) and provide better outcomes for each remains to be seen. But one thing is certain: The UK is in the vanguard of innovation in legal delivery and will likely serve as the headquarters from which that change will proliferate around the globe. ■
New INterest IN empowerINg states to tax remote sales By Clark r. Calhoun
nder the U.S. Supreme Court’s 1992 decision in Quill v. North Dakota, a retailer is not required to collect sales taxes and use-taxes on sales to residents of a state in which the retailer has no “physical presence.” That decision was an interpretation of the dormant Commerce Clause, which has long been held to impose implicit limits on the states’ authority to pass laws which affect interstate commerce. With the explosion of sales via the internet since Quill was issued, states have faced significant losses from tax revenue that goes uncollected when individuals and businesses make purchases from out-of-state retailers, primarily over the internet, and then fail to satisfy their corresponding use tax obligations. In response, states have demonstrated willingness to take aggressive measures to try to coerce remote retailers to collect taxes on their sales into states in which they have no presence, by enacting “click-through nexus” legislation and other bills that push the limits of Quill. States have been testing the boundaries of Quill in earnest for several years, but it remains the law of the land. Recent developments, however, suggest that Quill’s days may be numbered. In a Supreme Court decision issued this spring, Justice Anthony Kennedy contended that Quill was based on tenuous reasoning, and that it’s “now inflicting extreme harm and unfairness on the States.” The states should “find an appropriate case” to allow the federal courts to reconsider Quill, he suggested. Justice Kennedy’s clarion call appears to be all that states needed to hear, and recent actions indicate that states have been emboldened to challenge the viability of Quill. This article examines what the states might do to bring the issue to the fore – and what businesses should be doing to defend against and prepare for such changes. The viability of Quill did come before the Supreme Court indirectly this spring. In Direct
Marketing Association (DMA) v. Brohl, a retail trade association challenged the notice and reporting requirements that Colorado had imposed on remote retailers. The case was ultimately appealed to the Supreme Court on a procedural issue, rather than the substantive question of whether Quill barred Colorado from imposing the notice and reporting requirements. (Interestingly, discovery in the case revealed that Colorado intended to make the requirements so onerous that remote retailers would simply agree to begin collecting tax from Colorado customers rather than comply.) In its DMA decision, in March, the Supreme Court unanimously held for the taxpayer on the procedural question, thus bypassing an opportunity to use it as a vehicle to reexamine Quill. Nevertheless, while the Court’s majority opinion did not directly address Quill, Justice Kennedy concurred specifically to criticize Quill (a decision for which he had provided a key vote in favor), and to emphasize the great harm that Quill now wreaks on state tax coffers. He then put the issue of Quill’s continuing vitality on the table by writing that it should be reversed unless “a powerful showing can be made that its rationale is still correct,” and he added that the legal system should find “an appropriate case” to reconsider Quill. Judging by the states’ responses, it is clear that they were listening and appear more than ready to give Justice Kennedy an appropriate case. STATES AND CONGRESS RESPOND States, and state commentators, have responded in a variety of ways to Justice Kennedy’s request. In a provocative op-ed published in the Journal of Multistate Taxation and Incentives, the acting Connecticut Commissioner of Revenue Services argued that Quill’s physical-presence standard is an “outdated artifact” which has created an
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unfair and untenable situation among remote retailers, brick-and-mortar retailers and the states. He also pointedly called out Congress for its “deafening silence” in enacting corrective legislation that would replace Quill’s physical presence standard with a more modern threshold governing states’ ability to impose collection obligations on remote retailers (for example, a per-state annual sales threshold). He then suggested that the states should take matters into their own hands and begin acting as if Quill is no longer good law by “pushing the envelope of economic nexus.” The past Commissioner of the Illinois Department of Revenue authored an article for State Tax Notes in which he similarly argued that states must accept Justice Kennedy’s invitation. He suggested that states can posture their challenges by passing new laws that expressly impose collection obligations based on a “reasonable sales threshold” – that is, an economic nexus. He also highlighted that the Supreme Court in Quill was influenced, at least in part, by concerns that upholding a lower standard might encourage states to retroactively apply their laws to remote sellers, and suggested that states should avoid those concerns by enacting expressly prospective new laws. A legislator in Washington state has taken the commissioners’ articles to heart and has proposed legislation to replace Quill with a more expansive standard for remote retailers’ tax collection obligations. Specifically, the bill (H.B. 2224) would impose tax collection obligations on any seller that uses a payment processor with substantial nexus within the state. It would also impose direct tax collection obligations on any “marketplace facilitator” that serves as a marketplace for other sellers. The bill goes even further, in that it would specifically impose a tax collection obligation on any seller with “economic nexus” within the State of Washington. It would effectively ignore the physical presence standard of Quill, and replace it with a “minimum-sales” threshold. The other important player in this cast is Congress, and only Congress has the power to set forth a uniform rule governing the issue nationwide. At least two serious proposals are currently in circulation in the House: the Marketplace Fairness Act (a version of which was passed by the Senate in 2013), and the Remote Transactions Parity Act. Both proposals would replace Quill’s physical presence standard with a specified sales threshold, and both proposals would impose a number of “simplification” requirements on states as a condition of authorizing them to impose collection obligations on remote retailers. For example, in order to utilize the collection author-
ity provided by either proposal, a state would have to provide for a uniform state and local tax base, and a state would be required to administer all state and local taxes through a single administrative body (in contrast, for example, with states like Alabama and Colorado that allow counties and cities to utilize “home rule” powers to administer their taxes separately from the state). While nothing is certain when it comes to Congress’s ability to pass a law, there is little doubt that the attention brought to the issue by Justice Kennedy’s concurrence in DMA has increased the pressure to act. QUILL MIGHT BE HISTORY The state of affairs in this arena is curious. In the wake of a unanimous decision from the Supreme Court in which the Court’s majority bypassed an opportunity to reverse (or at least comment on) Quill, a consensus has emerged that Quill is in trouble. Though Justice Kennedy’s concurrence was not joined by any other Justices, his thoughts appear to have marked an inflection point in the debate surrounding states’ ability to impose collection obligations on remote retailers. Thus, if your business is not closely tracking its physical contacts for nexus purposes – measured by the situs of property and the travel of employees and other representatives – it is past time to start. Moreover, that basic step is no longer sufficient. Given states’ increasing aggressiveness in this area, it is now essential that businesses not only closely monitor their own contacts, but also track the extent to which each state continues to acknowledge Quill as a limitation on the state’s ability to impose collection obligations on remote retailers. Closely following each state’s pronouncements will allow your business to react quickly to legislative or administrative changes that can affect your business’s tax obligations in a state – and, significantly, whether your business should be collecting tax from customers located in a particular state. Finally, as interest in the issue rises in Congress, it is increasingly important to follow the conversation and proposals coming from Washington, D.C., so that your business is ready to mobilize lobbyists for or against a legislative proposal, and/or implement any changes that Congress enacts. While many commentators and practitioners, including this author, have for years remained skeptical about the appetite of Congress to pass meaningful legislation in this arena, recent developments appear to have made such legislation more likely. ■
Clark Calhoun is a partner in the State and Local Tax group at Alston & Bird LLP. He is based in Los Angeles, after spending the first eight years of his career at the firm’s office in Atlanta. clark.calhoun@ alston.com
Is Your CompanY readY for a Government raId? By Edmund W. SEarBy
espected corporations often see a government search warrant as an unlikely disaster visited only upon hardened wrongdoers. The disconcerting reality is that even respected corporations get raided, both in the United States and abroad, and the circumstances leading to a search warrant may be beyond the control of even well-intentioned corporations. Third parties, including agents and competitors, can bring the unexpected.
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For example, if you sell a part to a distributor who resells it to an embargoed nation, if you pay a foreign agent who in turn bribes a foreign official, or if you follow a price increase which originated with a covert meeting between your two principal competitors, you risk a visit from the badges and guns. Ignorance of the underlying wrongdoing and not having agreed to commit it may ultimately spare you adverse penalties, but not the ordeal of the search and seizure. Furthermore, with growing incentives for whistleblowers to report wrongdoing, real or contrived, the odds of getting raided have only increased. Senior government officials have publicly emphasized the availability of search warrants as a tool for investigating white collar offenses, such as health care fraud and foreign bribery. While we hope that prosecutors will show restraint, the incentives to get a search warrant, as opposed to simply serving a subpoena for documents, are real. Prosecutors may have concerns, real or exaggerated, that a subpoena will result in the spoliation of incriminating evidence. Search warrants also present the opportunity to get information that would not have been obtained by less intrusive means. In the shock of an unannounced search, agents can interview intimidated employees without defense lawyers getting in the way. Search warrants also open up the potential to discover unknown violations while searching for what is specified in the warrant. For corporations subject to a search warrant, the impact can be severe. Search warrants disrupt normal business operations, often at highly inopportune times. Documents needed to run a business may go out the door. The event often attracts media reporters, and camera crews shooting videos of agents in raid jackets hauling boxes of documents out of corporate headquarters. In the fallout from news of the raid, lenders, investors, customers, landlords and even other regulators may lose confidence, bringing more problems. Employees, particularly those that go through the shock of being onsite during the execution of the search warrant, often suffer a loss in morale. And there is always the chance that missteps during a search warrant can prejudice the outcome of an investigation. Because the possibility is real and mistakes can have a lasting impact, more corporations are planning for the possibility of a search warrant. This planning can go beyond having
a telephone list of outside counsel qualified to take the first call or a general check list lodged in a file. Some companies now create a written search warrant response plan that details immediate actions to take upon the arrival of agents, how to properly interact
WIth advanCed traInInG, emploYees Can be tauGht hoW to proteCt basIC rIGhts WIthout CrossInG the lIne Into obstruCtIon. with agents during the search, how to address efforts to conduct unscheduled interviews of employees, and other actions to take and not take during the search and immediately after the agents depart. More specifically, search warrant response plans typically address the following issues: 1. Responsible Employees. The plan should designate a Responsible Employee whose task is to interface with agents and coordinate internal communications. Alternates should also be designated, in case the assigned employee is not on site at the time of the search. The Responsible Employee asks the agents for identification and a copy of the search warrant, makes the first call to counsel and takes other actions (in part outlined below). Advance designation ensures that receptionists and security know whom to call when the agents enter, and it gives specific employees ownership of critical tasks. Many plans also designate non-essential employees who can simply leave for the day if their place of employment is subject to a search warrant. 2. Counsel. Because contacting counsel as soon as possible is an essential first step, basic planning requires identifying both in-house and outside counsel qualified for this representation. Selecting experienced outside counsel in advance will also allow for their assistance in developing the search warrant response plan and educating employees as to the specifics. 3. Communications Rooms. Some plans will establish in advance a room where the responsible
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employees can meet and have access to multiple phone lines and internet. The room is located away from corporate records and other areas where agents are likely to restrict activity. Some may see such an advance setup as more than necessary, but companies, particularly those
IGNORANCE OF THE UNDERLYING WRONGDOING AND NOT HAVING AGREED TO COMMIT IT MAY ULTIMATELY SPARE YOU ADVERSE PENALTIES, BUT NOT THE ORDEAL OF THE SEARCH AND SEIZURE. with large physical plants or dispersed operations, should at least consider where responsible employees will go and how they will communicate if their offices are taken over by agents.
4. Appropriate Employee Conduct During the Search. Effective planning should include educating employees about their rights and obligations during a search. It is far easier to do this in advance than it is to do it on the spot, with federal agents looming over an employee who is being interviewed. With advanced training, employees can be taught how to protect basic rights without crossing the line into obstruction. Such training can be conveniently added to a compliance program on other topics, and in our experience it does get audience attention. Basic points to cover in employee education include the following:
Edmund W. Searby, a partner at Baker & Hostetler LLP, focuses on white collar criminal defense. He is a former federal prosecutor with the Department of Justice and the Office of the Independent Counsel. esearby@bakerlaw. com
• Interviews. Employees can choose whether or not to be interviewed, but if they agree to be interviewed, they must tell the truth. They have the right to have counsel present, and to consult counsel before deciding whether to be interviewed. • No Obstruction. Employees should not try to hide, delete, destroy or remove documents. Employees should also not tell other employees to refuse to speak with agents. Even if they believe that the agents are exceeding their authority, they cannot try to interfere with the agents efforts to search and seize, but they should call the issue to the attention
of the Responsible Employee or counsel at the location of the search. • No Consent. No employee should sign any documents to consent to the search or to the expansion of the search. That issue, again, should be referred to the Responsible Employee. • No Media Contact. No employee should speak to the media unless specifically authorized to do so under the search warrant response plan. Additional in-depth training should be provided to designated Responsible Employees regarding their right to monitor the search, and to protest if the agents exceed the scope of the warrant or seize attorney-client privileged materials. The Responsible Employees should also be trained to take notes on the conduct and statements of agents, be instructed not to sign any consent to expand the scope of the search and to request a copy of the inventory when the search is concluded. Responsibility will logically shift to designated counsel once they arrive, but advance training of the Responsible Employee can be critical for the time before the lawyers arrive. 5. The Aftermath. Effective plans cover the immediate steps to take after the agents leave. These include the collection of all notes made regarding the conduct of the search and any material provided by the agents (such as the warrant, inventory or business cards), interviews of the Responsible Employee and all employees who were interviewed or otherwise interacted with agents, and the issuance of an immediate document preservation order to stop all routine document destruction. Because a search warrant is often the first notice that a company is under investigation, these actions often transition into an internal investigation as to what may be at issue. Plans also commonly designate officers and counsel who will decide on a press strategy and messaging to interested parties, such as employees, shareholders and lenders. In sum, this article is not intended to provide an exhaustive list of do’s and don’ts in the event of a search, but rather to give an appreciation of why more and more companies are preparing for such a crisis and what such preparation should entail. Advance planning can avoid the damaging mistakes made during the stress of a raid, and it can mitigate the disruption and collateral harm that can result from it. ■
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Breaking the Mind Set continued from page 31
– that is, limited to as few custodians, data sources and data types as necessary to support the issues in dispute. But a targeted collection approach is possible only if a corporation has effective information governance policies, intelligent preservation processes, and is willing to cooperate. While there are times when it is necessary to “collect to preserve” (i.e., in the case of a known bad actor, or when dealing with transient data), that should not be the norm for most civil litigation. Corporations should save the collect-everything tactic for ESI that is truly at risk of spoliation. A more effective approach to collections is to start with a smaller subset of the total data universe. Leverage the legal team and employees in the know for insights, so that collections can be targeted to the most logical places, and to the custodians and data types likely to hold responsive data. This approach enables organizations to focus on the merits of the case, get through the resolution of disputes more quickly and significantly reduce litigation costs.
U.S. District Judge Lee Rosenthal from the Southern District of Texas foreshadowed the problem that courts face in her Rimkus v. Cammarata opinion from February 2010. “Spoliation of evidence - particularly of electronically stored information - has assumed a level of importance in litigation that raises grave concerns,” she said. “Spoliation allegations and sanctions motions distract from the merits of a case, add costs to discovery, and delay resolution. The frequency of spoliation allegations may lead to decisions about preservation based more on fear of potential future sanctions than on reasonable need for information.” Risk is high in a digital universe where data is created, cloned and widely dispersed. The key to reducing that risk and the associated costs of e-discovery is to tie the preservation and collections processes tightly together. From a foundation of solid preservation practices, companies can bring reasonable and sustainable approaches to collections, ensuring that they defensibly respond to litigation, while reducing costs. ■
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BREAKING THE HABIT
With the emergence of new userfriendly technologies that enable anyone to do defensible and forensically sound collections, with a full audit track and preservation of all metadata, corporations can be more targeted in their ESI collections process. They can actually collect-toproduce for discovery on their own, reducing the total amount of data that will ultimately be processed and reviewed. It’s time to break the “collect everything” mind set. The combination of fear and litigious gamesmanship between parties is driving up costs and does not meet the goal of FRCP rule 1, “to secure the just, speedy and inexpensive determination of every action and proceeding.”
Brad Harris is vice president of products at Zapproved. His more more than 30 years experience in the high technology and enterprise software sectors includes assisting Fortune 1000 companies with enhancing their ediscovery preparedness. He is an author and frequent speaker on data preservation and e-discovery issues, and has held senior management positions at HewlettPackard, Tektronix and Merant. email@example.com
Tips for successful second requesT producTion By Joseph G. Krauss and Brian ansley 46
Your organization has reached an agreement to merge with or acquire another company. Senior leadership and shareholders are eager to close the deal, and there are business reasons to complete the transaction as soon as possible. But first, assuming the proposed transaction meets the threshold requirements, the Hart-Scott-Rodino Act requires government review by the Department of Justice or Federal Trade Commission to confirm that it does not violate the antitrust laws.
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If the proposed business combination raises competitive issues, the reviewing agency will issue a request for additional information (a Second Request) about the company’s products or services, the market in which the company operates, and more. Second Requests are typically quite broad in scope and could impose a significant burden and delay on any transaction. Depending on the size of the merger, the sheer volume of responsive data can create challenges. Without a strategically planned response, there can be lengthy delays, unnecessarily extensive productions, higher costs and possibly court challenges. A well-planned response can result in substantial costs savings, and potentially increase the likelihood of approval of the deal. Below, we offer several practical suggestions for working with the agency and completing the production in a timely and successful manner.
tial challenges, counsel should be familiar with the business rationale for the transaction, as well as the general nature of competition in the industry. This includes being familiar with commonly requested categories of documents, such as strategic plans. When counsel have an early understanding of both the benefits and potential competitive concerns of the transaction, they can begin to develop responses to likely agency inquiries and a strategy to narrow and limit the scope of any potential Second Request. It can be useful to involve your discovery provider at this point to aid counsel in their evaluation. For example, if the provider has analytics capabilities, a skilled analytics team can use those tools to identify “hot” documents and narrow the likely issues. That’s information that can also be useful in early conversations with the agency staff about the scope of the review, and in developing a strategy for responding to the Second Request when it arrives.
1) Retain an experienced law firm and discovery provider. One of the first steps an organization should take is to secure proper legal and other support that will be needed for the agency review. That means retaining outside counsel who have experience with similar reviews by the agency and are respected by the agency, as well as a discovery provider that has successfully handled a large number of Second Requests from the same agency. You should have confidence that the provider can meet the deadlines and complete productions in a well-documented, defensible and cost-effective manner. Consider a provider with a skilled analytics team that can help with strategy and use analytical tools to expedite the review process. Most organizations retain counsel very early in the process, but they often wait until receipt of the Second Request to think about the appropriate discovery provider. However, given the tight deadlines, it can be useful to secure the discovery provider well before the Second Request is received. At a minimum, it is wise to have screened and selected a provider and put them on notice of a potential Second Request as early as possible, so they will be able to get to work as soon as necessary. Some discovery providers can be of assistance gleaning useful information for strategy decisions.
3) Begin collection early. Begin identifying and collecting potentially responsive documents as soon as is reasonable. That means before receiving the Second Request, if you expect one will come. It should be fairly obvious what the agency is likely to request, but the FTC’s model request is a good place to start. Because Second Requests are often quite broad (“any and all documents”), collection can be quite time-consuming and may run into obstacles. Experienced counsel can often obtain significant modifications to the Second Request that can narrow its scope. The identification of all relevant sources of data pertaining to the request is critical to support suggested modifications, and to ensure a thorough collection. For example, email often resides in a number of different locations, and there may be salesrelated data sources, shared drives and database systems to search. That means organizations that have a roadmap to the locations of potentially responsive information have an advantage. When the legal department, IT and business users are involved in the identification process early, the collection will be much faster and the likelihood that something is missed will be reduced. Processing, culling and reviewing the collected documents will take long enough. Early and complete collection allows more time for those follow-on processes. The discovery provider can perform the collection for a seamless transition to the culling and review processes, but if the organization has in-house collection capabilities, there is even less excuse for delaying collection. continued on page 57
2) Be prepared. Support your counsel in efforts to prepare before the agency inquiry begins. In order to be able craft a clear argument supporting the benefits of the transaction and identify poten-
Joe Krauss is a partner in the Washington D.C. office of Hogan Lovells. His practice emphasizes merger and acquisition counseling and litigation in all industries, before federal, state and foreign antitrust authorities. Prior to joining Hogan Lovells, he served 11 years at the FTC in a variety of capacities. joseph.krauss@ hoganlovells.com
FRAUD IN SUPPLY CHAINS EMPLOYEES ARE THE BIGGEST RISK By Mark Pearson and Larry Kivett
hile more than one-quarter of respondents to a recent Deloitte poll admitted experiencing supply chain fraud, waste or abuse in the past 12 months, about the same number said they had no program currently in place to prevent and detect those risks. Not enough is being done from a compliance perspective. Global supply chains are complex and often span multiple legal and regulatory jurisdictions. While many organizations focus their attention on external vendors and other third parties as sources of risk, often the most common and damaging forms of fraud happen much closer to home, in the form of employee collusion or other supply chain related frauds committed by employees. Today, general counsel as well as in-house compliance and ethics teams (often comprised of current GCs and future GCs in the legal department) have access to a variety of tools and resources to develop effective supply chain antifraud programs and controls. As GCs are often tasked with identifying and dealing with enterprise-level risk, they are likely to have the organizational clout and ability to mitigate reputation and litigation
risks, while reducing the risk of fraudulent employee behavior. COLLUSION STILL MOST DAMAGING Employees were identified as the top source of supply chain fraud risk by 23 percent of our poll respondents, before vendors (17 percent) and other third parties, defined as subcontractors and their vendors (20 percent). With businesses aggressively seeking to break into new markets, globalization has increased the prevalence of supply chain fraud. While the frequency of fraud is greater when third parties are involved, fraud losses are typically larger when employees are involved. Collusion tends to be more financially damaging over time, in part, because employees can use insider knowledge about weak controls and cultural influence to help conceal their schemes. When we ask executives whether they think their employees may be perpetrating fraud, they often respond along the lines of â€œnot here, because we hire good people.â€? Others point to pre-employment background checks as proof they hire good people. However, reliance on one-time background checks for employees in key procurement and other fiduciary roles can be a mistake. GCs can help ensure that confidence
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in employees is renewed from time-to-time by verifying trust with additional measures, including regular and recurring background checks, annual conflict-of-interest certifications, fraud/ anti-corruption awareness training, and the promotion of ethics hotline reporting mechanisms for employees to use in case they have concerns about inappropriate activity. Staying vigilant about traditional red flags for fraud does remain important. Indications include employees living beyond their means, exhibiting an unusually close relationship with a third-party suppler, or seeking to dominate the decision-making process on supplier selection. These risks can be amplified when the individual’s role in daily operations is such that it places that person in a good position to leverage transactions to his or her own benefit. LEVERAGING ANALYTICS Beyond hotlines for employees, vendors, clients and members of the public to report potential instances of fraud, abuse or waste, there are new analytics tools that can help companies more effectively address the risk of supply chain collusion and investigate suspected internal fraud. Businesses of all sizes are turning to their accumulated data to manage their supply chain vulnerabilities. With advanced analytics, not only can they gain greater insight into identified instances of fraud, they can also, with the help of a myriad of indicators, proactively manage and mitigate risks. Leveraging data analytics, vast amounts
Some Warning Signs for Supply Chain Fraud, Waste and Abuse • Bidding or procurement processes that are not robust or independent. • Lack of sufficient clarity in third-party invoice details. • Poor or strained relationships with certain third parties. • Infrequent or non-existent “right-to-audit” assessments of supplier and licensee practices. • Little to no oversight into proper administration of agreements with third parties. • Use of third party agreements that are sole-sourced without a clear explanation, or are constructed as cost-plus agreements without clear definitions of cost and other relevant terms.
of data can be analyzed to identify “rare event signals” in – depending on the industry – contract details, labor rates, overtime charges or materials purchases. Incongruities in transaction data might include changes in how procurement is executed, unexpected updates to vendor master lists or small irregularities in bidding processes. Sometimes false positives are detected. No matter the sophistication of antifraud controls, stress testing of compliance processes helps ensure that findings have a high degree of accuracy. Technology used to detect supply chain fraud is only as valuable as the investigator who follows up on the right results and feeds relevant information back into the analytics system to reduce future false positives. To successfully implement a supply chain fraud detection and prevention program using analytics, GCs should team with their Chief Information Officers or Chief Information Security Officers to coordinate efforts. A good understanding of the existing data system will enable development of useful queries. At the heart of every analytics program is the identification of a core set of available queries and data to set benchmarks of “normal data,” which can then be used to identify rare events. Simple processes can minimize risks over time while helping risk managers demonstrate to management, shareholders and regulators that fundamental steps are being taken to prevent and detect fraud, waste, and abuse. GCs are often asked to quantify the loss that companies face from supply chain fraud so that non-attorney constituents can better evaluate the benefits of investing in a comprehensive antifraud program. However, not all impacts are easily quantified. Supply chain fraud can affect such things as reputational and litigation risk, long-term business risk and frayed third party relationships. As a result, calculating ROI for a successful supply chain fraud management program can be challenging. Steering management away from quantitative cost/benefit analyses when gauging the merits of a supply chain fraud prevention program can serve GCs well. Making the case for enterprise risk mitigation and other nonquantifiable benefits associated with added transparency (e.g. less employee turnover, higher morale, and improved efficiency and productivity) is key. Waiting until a highperforming employee or respected manager steals dollars flowing through the supply chain before implementing a basic supply chain antifraud program isn’t good enough. ■
Mark Pearson is a Deloitte Advisory principal in Deloitte Financial Advisory Services LLP and a leader of the Supply Chain Forensics market offering. He has experience conducting and managing a variety of fraud, forensic accounting and other disputerelated engagements. marpearson@ deloitte.com
Larry Kivett is a Deloitte Advisory partner in Deloitte Financial Advisory Services LLP and a leader of the Supply Chain Forensics market offering. He has experience leading investigations into issues involving accounting improprieties, employee defalcations, vendor kickbacks, and FCPA related issues. firstname.lastname@example.org
Questions For Companies Considering Bankruptcy By Frances A. Smith
recent report from a commission of the American Bankruptcy Institute stated that the U.S. Bankruptcy Code, enacted in 1978, was not designed to handle today’s complex financial markets, credit and derivative products, and corporate structures. It also said that Chapter 11 reorganizations have become too expensive, especially for small and medium-sized companies, and that companies are either liquidating or shutting down without trying to reorganize under the Bankruptcy Code, or they are waiting until it’s too late to avail themselves of federal bankruptcy laws. In other words, the institution dedicated to serving bankruptcy professionals stopped just short of saying that American business has outgrown or moved away from bankruptcy. Yet for all its expense and byzantine workings the Institute recommended reforming the Chapter 11 process. Bankruptcy can still be an effective tool for solving seemingly intractable business conundrums.
HUMBLE BEGINNINGS It’s been roughly 37 years since the Bankruptcy Code was enacted and a single business reorganization chapter – the current Chapter 11 – was formed. According to Congress, the purpose of a business reorganization under Chapter 11 was to “restructure a business’s finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for shareholders,” at the same time it recognized that difficult decisions would need to be made regarding the allocation of the losses of an unsuccessful business and how the value of the bankrupt estate would be divided among creditors and shareholders. After piecemeal amendments over several years, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was enacted and became effective in October 2005. BAPCPA implemented broad changes in both consumer and business bankruptcy provisions.
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The Institute’s report notes that even with those revisions, the Bankruptcy Code was not well-geared to handle company rehabilitations in the 21st Century. Recent data appears to validate those concerns. An analysis of federal bankruptcy filings shows a downward trend in Chapter 11 business bankruptcy filings from 2010 to 2014. Nationwide, from 2010 to 2014 the number of bankruptcy fillings dropped by 47 percent. The concerns voiced by the ABI Commission are the same as those facing general counsels advising their companies on the alternatives available for dealing with a distressed company. Should the company file a Chapter 11 reorganization, a Chapter 11 liquidation, or a Chapter 7 liquidation? Should the company avoid federal bankruptcy laws and seek an out-of-court restructuring of its debts? Should the company unwind under state dissolution laws? Or should it simply shut its doors? In a Chapter 7, the company stops all operations and goes out of business. A trustee is appointed to gather assets, liquidate them, and distribute the proceeds to creditors and investors. Management has no control over the process. In a Chapter 11 filing, the debtor’s management retains control of the company to run the day-to-day operations, but business decisions outside the ordinary course of operations must have court approval. In addition, the U.S. Trustee oversees the case and has standing to file motions and otherwise participate. The bankruptcy process can take significant time and resources from management at the same time those managers are trying to run and revitalize the business. As the Commission stated, “Companies do not undertake a Chapter 11 filing lightly.” Before deciding to file a Chapter 11 petition, the company must confirm it is eligible and if the federal bankruptcy laws provide the tools and remedies needed to restructure and emerge from bankruptcy. Before filing, it is wise to have a strategy for getting the company out of the bankruptcy. Common concerns of management include the public nature of a Chapter 11 case and the enhanced oversight by the court, the U.S. Trustee, creditors and other involved parties. Combined, these can distract from running the business. Other challenges are the cost of bankruptcy, uncertainty and delays, and the concern that there may be insufficient company value to support the reorganization and carry it through to completion. If the company has sufficient resources to fund a restructuring or can obtain and pay for financing, then Chapter 11 can be a great tool
for solving certain problems. For example, if the company is burdened by numerous leases or mortgages for low-performing retail outlets, as was the case for RadioShack, bankruptcy offers a procedure to assume and assign or reject leases with a statutory cap on damages, provided that the company can move quickly to determine which leases it wants to assume or reject and do so within the time constraints in the Bankruptcy Code. In addition, the Bankruptcy Code provides for the sale of debtor property free and clear of lien under certain circumstances, making the distressed assets very attractive to buyers. Also, if a company is burdened by heavy debt and labor issues but has sufficient cash to fund a bankruptcy case, as did American Airlines and its parent corporation, AMR Corp., then bankruptcy provides the tools to restructure debt and renegotiate labor contracts. BANKRUPTCY ELIGIBILITY The first question that general counsel must ask when contemplating a bankruptcy or outof-court restructuring or liquidation is if the company is eligible. Under the Bankruptcy Code, only a person that resides or has a domicile, a place of business or property in the United States or a municipality, may file a bankruptcy under Title 11. The definition of a person includes an individual, partnership or corporation and, in limited circumstances, a governmental unit. The term “corporation” also includes an association having a power or privilege that a private corporation, but not an individual or a partnership, possesses; a joint-stock company; certain partnership associations (but not a limited partnership); an unincorporated company or association; or a business trust. Not-for-profit corporations such as churches or dioceses also are included. Limited liability companies generally are included as corporations, but that may depend upon filing jurisdiction and the operating agreement of the LLC. In the case DB Capital Holdings, LLC, the U.S. Bankruptcy Appellate Panel of the 10th Circuit has held that if LLC members agree among themselves and provide in the LLC agreement that the company’s filing of a bankruptcy case is prohibited, then the provision is enforceable and not against public policy. When considering filing a Chapter 7 or Chapter 11 for an LLC, general counsel will need to review the operating agreement to determine if it allows for the filing. Timing is crucial. A January 2013 study published by Pratt’s Journal of Bankruptcy Law suggests that Chapter 11 business filings are
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“influenced by rational calculations pertaining to debt obligations, cash flow and the availability of credit.” Related questions to be asked include those related to timing of defaults under credit agreements, tax liability, due dates for rent under leases, potential avoidance actions and availability of unencumbered cash. ASKING THE RIGHT QUESTIONS General counsel working with restructuring counsel should consider the following questions in determining a course of action. (A more expansive list of questions can be found in the Williams on Bankruptcy Series, Volume 3, Bankruptcy Practice Handbook § 14:30, Second Edition.) Regarding management issues: • Is there, or has there been, a significant dispute among senior management, controlling shareholders, or members of the board of directors or managers other than the usual differences of opinion in operating a business? Disputes among senior management can contribute to the company’s financial decline and hinder a restructure or orderly dismissal. Deadlock of management may require the appointment of a trustee.
Credit Issues: • Who are the major lenders to the company? • Have any loans been declared due or accelerated in maturity? • Has any property been foreclosed or repossessed or is any in danger of being so? • Have any lis pendes been recorded against the company’s real estate? • Has there been any levy or garnishment by a creditor on any bank accounts?
Frances A. Smith is a partner at the Dallas office of Shackelford, Melton, McKinley & Norton, LLP, where she assists companies across the country in resolving debt issues, both in and out of bankruptcy court. fsmith@ shackelfordlaw.net
Tax Liabilities: • Are tax reports due to the government up to date? • Is there any unpaid tax liability? • What kind of taxes are owed? • Are there any past-due ad valorem or property taxes? • Are there any past-due payroll taxes? • Has there been levy or garnishment by a taxing authority? On the tax liability topic, officers (and in some circumstances, directors) might be personally liable for the trust portion of unpaid Federal Insurance Contributions Act (FICA) and withholding taxes. If there is personal liability for an
individual connected with the debtor-company, then that person should be counseled as to the implications of the tax liability in the event the company does not pay the taxes, and he or she must be advised to seek separate counsel. The Availability of Funds: • Does the company have any undrawn amounts on any lines of credit? • Are there any unencumbered assets? • Any assets with substantial equity? • Is there a tender offer outstanding for the company’s stock? • Are there any offers to purchase significant company assets? • Is there any interest in lenders making a loan to the company? • Would present shareholders be willing to contribute additional sums or cash equivalents to receive new equity in a reorganized company? These asset-related questions may lead to potential fund sources from which the company may finance an out-of-court restructuring with creditors or provide a new value contribution in bankruptcy that allows shareholders to retain ownership in the restructured business without violating the absolute priority rule. Regarding Avoidance Actions (from Westlaw Business Workouts Manual § 4:89, Thomson Reuters, 2015): • Has the company made substantial payments that may be avoidable under the Bankruptcy Code or state law? • Has the company made transfers of property that may be deemed voidable under the Bankruptcy Code? • Does any creditor or group of creditors have a strong incentive to want a bankruptcy filing to use the avoidance powers of the Bankruptcy Code against other creditors? • Does any creditor or group of creditors want more time to pass before a bankruptcy filing is made in order to escape potential liability by the passage of time? These are just a few of the questions general counsel should keep in mind when first deciding the wisdom of a bankruptcy filing, out-of-court restructuring or liquidation. With careful consideration and sound legal guidance from an experienced restructuring professional, general counsel can help their companies make the best decisions possible when dire financial straits arise. As is often the case, the best answers spring from the best questions. ■
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“GENERAL JURISDICTION” BECOMES POLITICAL FOOTBALL IN NY BY JAMIE LEVITT AND STEVE RAPPOPORT
or many decades, plaintiffs TODAY IT IS APPARENT THAT “DOING have been able to allege that defendants were BUSINESS” AS A BASIS FOR FINDING GENsubject to general personal jurisdiction in New York simply because the defendants main- ERAL JURISDICTION IS DEAD. NONETHEtained offices or transacted business LESS, IT MAY SOON RETURN. in New York. As Judge Cardozo wrote in Tauza v. Susquehanna Coal Daimler AG v. Bauman. In Daimler, the Court Co. in 1917, if a corporation is here “not occaheld that general personal jurisdiction exists sionally or casually, but with a fair measure over a corporation only if the corporation may of permanence and continuity, then, whether be “fairly regarded as at home” in the forum its business is interstate or local, it is within state. The Court stated that with respect to a the jurisdiction of our courts.” corporation “the place of incorporation and This long-accepted understanding of the law principal place of business are ‘paradig[m] . . . suddenly changed in January of 2014, when bases for general jurisdiction.’” the Supreme Court handed down its opinion in
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A brief period of uncertainty as to how Daimler would be applied followed, but today it is apparent that “doing business” as a basis for finding general jurisdiction is dead. Nonetheless, it may soon return. Daimler involved claims by residents of Argentina against the German car maker over alleged actions by Daimler’s Argentinian subsidiary during Argentina’s so-called “Dirty War.” Plaintiffs alleged general personal jurisdiction over Daimler in California based on the California contacts of Daimler’s American subsidiary. The Supreme Court, however, rejected the argument that a corporation’s “substantial, continuous, and systematic course of business” within a forum provides a basis for general personal jurisdiction. The Court allowed that in an “exceptional case” a corporation’s contacts could be so systematic and continuous as to render the corporation “at home” in the forum state, but the Court cited only one such “exceptional case,” involving a Philippine company that temporarily shifted corporate operations to Ohio during World War II. Reactions following Daimler were varied. The late professor David Siegel wrote in January 2014 that “a truckload of cases on personal jurisdiction goes careening into the abyss under [Daimler].” Professor Tanya J. Monestier, writing in the Hastings Law Journal, suggested that Daimler “may even spell the end of nationwide class actions against multiple defendants filed anywhere other than the states (if any) in which all corporate defendants are at home.” And George Bundy Smith and Thomas J. Hall, writing in the New York Law Journal in October 2014, observed that the Court had “provided no precise formulation” for what constituted an “exceptional case” where corporate presence would suffice to allege general personal jurisdiction, meaning “future cases” would have to test for such exceptions. Initially, courts tended to view Daimler’s application with uncertainty. In April of 2014, Justice Marcy Friedman stated that Daimler “calls into question the validity of the doing business doctrine.” And in September 2014, the Second Circuit concluded, in Gucci America v. Bank of China, that Daimler “expressly cast doubt on previous Supreme Court and New York Court of Appeals cases that permitted general jurisdiction on the basis that a foreign corporation was doing business through a local branch office in the forum.”
Still, even as Gucci intimated that doing business jurisdiction likely was finished, the question remained as to when a corporation is at home and what qualifies as an “exceptional case.” In assessing the number of branches that the Bank of China had in the United States relative to its branches elsewhere in China and the world, Gucci suggested that a threshold might exist for “exceptional case[s].” Despite the initial uncertainty, now both federal and state courts have become almost rote in their application of Daimler. For instance, in New York one of the First Department’s recent cases, D&R Global Selections, S.L. v. Pineiro, opines simply that since the defendant, a Spanish wine importer “neither is incorporated in New York State nor has its principal place of business here, New York courts may not exercise jurisdiction over it under CPLR 301.” Indeed, of the 196 cases that we found where courts decided a motion to dismiss for lack of general personal jurisdiction after Daimler, in 192 cases courts dismissed where defendants neither were incorporated in nor had their principal place of business in the forum state. We found 23 such cases dealing with motions to dismiss for lack of general personal jurisdiction under New York law, and every case declined to find general personal jurisdiction absent the “paradigm bases” of general jurisdiction articulated in Daimler. In probably the most notable post-Daimler outlier, In re Hellas Telecommunications (Luxembourg) II SCA, Judge Martin Glenn found Deutsche Bank to be subject to general personal jurisdiction in New York because its New York office is a “hub of core banking operations” that “physically spans over 1.6 million square feet of space, for which [DB] pays some $67 million annually in rent, pursuant to a 15-year lease.” Judge Glenn’s decision appears to be based on Deutsche Bank’s “continuous and systematic” contacts with the forum alone – precisely the reasoning disapproved by Daimler. The other three dissenting cases, one from federal court in Florida and two from state courts in California and Illinois, also simply recite the defendant’s contacts with the forum state as the basis for finding the corporation “at home” without finding that those contacts were any more “exceptional” than the contacts ascribed to Daimler through its American subsidiary. The overwhelming definitiveness with
Jamie Levitt is a is a partner at Morrison & Foerster and head of the Litigation Department in New York. Her practice involves all aspects of complex commercial litigation and arbitration, with an emphasis on securities litigation. She has represented public companies and their officers and directors in securities fraud actions, shareholder derivative suits and SEC and other regulatory investigations, and she also handles corporate internal investigations. As a trial lawyer, she represents and counsels companies in commercial as well as IP disputes in a broad range of industries. email@example.com
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which Daimler has been applied to foreclose general personal jurisdiction naturally has opened new battle lines centered on consent to jurisdiction based on registering to do business in the forum state. Recently, in the case
themselves of the New York courts – where the benefit is wholly unrelated to the right. The proposed legislation probably also violates the Commerce Clause, as the Supreme Court previously has indicated that condi-
The overwhelming definiTiveness wiTh which daimler has been applied To foreclose general personal jurisdicTion has opened new baTTle lines cenTered on consenT To jurisdicTion based on regisTering To do business in The forum sTaTe.
Steve Rappoport is an associate in the Litigation Department in Morrison & Foerster’s New York office. He focuses on securities litigation, financial services litigation and other general commercial litigation. He has litigated in both federal and state courts, and has represented clients in a number of state and federal regulatory matters. srappoport@ mofo.com
of a Spanish bank that was sued in New York federal court over funds held abroad, Judge Alvin Hellerstein held that the bank had consented to jurisdiction by registering with the New York Department of Financial Services. On the other hand, a New York state court rejected this approach for an Israeli bank, finding that the statute was limited to banking transactions that concerned the bank’s New York branch. Still other courts have held that consent requirements do not comport with Daimler, as they “would expose companies with a national presence . . . to suit all over the country.” Legislators have now also leaped into the consent fray. The New York State Senate Standing Committee on the Judiciary, after only 90 seconds of debate, approved a bill that would require foreign companies to submit to the jurisdiction of New York courts as a condition of doing business in the state. The proposed law would permit plaintiffs to bring claims “for all actions against such corporation,” regardless of where the underlying alleged conduct or injury took place. A similar bill was passed by the New York State Assembly in May. New York’s Office of Courts Administration (“OCA”) supports the legislation as a means of increasing corporate litigation in New York courts and making it easier for New Yorkers to sue foreign corporations. But, as the New York City Bar Association made clear in a report opposing Albany’s proposals, the OCA’s position ignores that governments cannot require the waiver of constitutional rights in exchange for a benefit from the government – here, registration to do business, which in turn permits corporations to avail
tioning the right to do business in a state on consent to general personal jurisdiction is an undue burden on interstate commerce. The proposed legislation also will increase the cost of doing business in New York, which could lead to fewer corporations registering to do business or situating offices and employees within the state. As it is, corporations already try to steer clear of so-called “judicial hellholes” – “unfair and unbalanced” jurisdictions, as ranked by the American Tort Reform Association – and nothing in the proposed legislation is likely to improve New York’s already poor standing in this regard. Furthermore, the proposed legislation could harm those it was meant to help, because, by discouraging foreign corporations from registering to do business in New York, it would make it harder for New York residents to effect service on them. The purported justifications for the legislative end-run around Daimler are hard to square with the proposed legislation’s reality. New York’s courts already are underfunded and overburdened, and the cost of doing business in New York is already sky high. The proposed legislation in no way ameliorates these pressures. How this battle shakes out is anyone’s guess. “Doing business” jurisdiction may be dead, but the effort to resurrect it has just begun. ■
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Second Request Production continued from page 47
4) Cooperate with the agency. Establish an open and amicable relationship with the reviewing agency, including its staff. While the staff does not make the ultimate decisions, their recommendations heavily influence those who do. Remember, this is not an adversarial proceeding. It is an opportunity to help the agency understand the appropriateness of the transaction and give its approval. Uncooperative conduct can only delay the process, and it will likely lead to additional work for all parties. It may ultimately lead to an impasse with many undesirable results – increased expense or an agency complaint, for example. 5) Seek agreement on a narrow, focused approach. A good relationship with the staff facilitates early discussions about the benefits and potential competitive issues in the proposed transaction. These discussions, bolstered by the information discussed above, can result in agreement on a narrower focus for the review, which is to everyone’s advantage. It can make it easier to communicate the potential benefits of the deal and address concerns or substantive problems. From a practical perspective, agreement on a narrower focus is also likely to mean a narrower Second Request, specifically based on the agency’s concerns. Responding to a tailored request can significantly reduce the timing and cost of document production. The necessary collection may not be as broad and there will be fewer potentially responsive documents requiring review, as compared to the collection and review required in responding to an “any and all” request. From the agency’s perspective, it will obtain the information it needs to make an informed decision without the burden of reviewing a large amount of extraneous data. 6) Work out a timetable and strategy. Because time is short, it is important to have a plan for meeting deadlines. Counsel can work out a timetable with the agency staff that includes turnaround time for negotiations and the production of responsive materials, as well as deadlines for staff recommendations to management and timing for providing information. It is also important for counsel and the discovery provider to work together to develop a strategy for how to do the reviews, and a timetable for production. Decisions about workflow can make a difference when there is a lot of data to be reviewed. Often, it’s helpful to utilize data
analytics to identify non-relevant data, thereby reducing the population of documents needing review. While predictive coding is the most commonly discussed analytic tool, there are a variety of others that can streamline the review. A discovery provider with a skilled analytics team can help counsel develop a plan for using analytics for Second Request response. An experienced
Producing documents in stages on a rolling basis is beneficial to all Parties. analytics team will also increase the agency staff’s confidence that the process has maximized the production of the most relevant material. Additionally, agreement on a project timeline with dates for productions and completion will help counsel and the discovery provider manage their work. 7) Produce as you go. Finally, it is not a good idea to save the entire document production until the last minute. A better course is to produce documents to the agency as they are ready. A “document dump” not only creates a lot of work for agency staff members who have their own deadlines, but it can also obscure information they need to see. Therefore, producing documents in stages on a rolling basis is beneficial to all parties. If possible, strategically stage the production. Review and produce documents from priority custodians first, for example, so that the agency has the opportunity to see the most critical information early. That might even lead to early approval of the deal - we have seen it happen! Second Requests require effort from a lot of people in a short time. But with advance planning, a strategic partnership among clients, experienced counsel, a knowledgeable discovery provider and a cooperative relationship with the reviewing agency, the process can run smoothly and enhance the likelihood of approval of the transaction. ■
Brian Ansley specializes in discovery consulting related to litigation and government investigations, including data collection, e-discovery processing, online hosting, document review, and production services, supporting both corporations and law firms.
Impact of Shareholder and Director Litigation on the Company By Richard M. Mitchell
hareholders, particularly those holding majority interests, have fiduciary responsibilities to the company, as well as to minority shareholders. Additionally, these shareholders are often directors, officers, and employees of the company. Each of these roles comes with its own set of responsibilities and potential pitfalls. To manage all this effectively and avoid claims of wrongdoing, it is necessary to understand these duties and where the litigation traps lie. It is also critical to understand the potential remedies, to protect the interests of both the company and those running it against charges that these duties have been breached.
POTENTIAL ORIGINS OF LITIGATION There is truth to the adage that anyone can sue anybody, although doing so frivolously has its own negative consequences. In any case, litigation is costly, regardless of the allegations. How prepared you are dictates the overall cost when suit is filed. Litigants usually look at the cost issue in terms of hard dollars paid in fees and other related expenses. This ignores the opportunity cost involved. Shareholders, officers and directors do not make their living sitting in a courtroom or deposition. When they are spending time in these activities, they are not maximizing the value of the business. Failure to implement adequate safeguards to protect against protracted claims can have a significant effect on company performance. Significant verdicts or settlements can have a substantial effect on the bottom line. Litigation comes from a variety of directions. Officers and directors, in particular, have fiduciary duties of loyalty and care. It has long been understood they also have an obligation to maximize the wealth of their shareholders. One of the primary defenses to allegations that these duties have been breached is the business judgment rule. Generally, this rule protects against hindsight evaluations when good faith decisions lead to bad outcomes. It is designed, in part, to preclude the chilling effect of imposing liability for risk taking, premised on after-the-fact evaluation of results. As the Delaware Chancery Court said in a 2009 case (In Re City Group Inc. Shareholder Derivative Litigation), â€œ[B]usiness decision-makers must operate in the real world, with imperfect information, limited
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resources and uncertain future. To impose liability on directors for making a ‘wrong’ business decision would cripple their ability to earn returns for investors by taking business risks.” Other Delaware courts have reached similar conclusions over a period of time. In Smith v Van Gorkom (1975), the court wrote “the business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors.” The applicability of this rule has come under fire in the wake of the most recent financial crisis. For example, In Re City Group, Inc. Shareholder Derivative Litigation involved allegations by shareholders that directors failed to adequately protect the corporation from exposure to the sub-prime lending market. The court, in part, agreed. This principle has also come into question in other courts with respect to claims of excessive risk taking. Some cases have challenged the applicability of the rule to claims against directors and officers brought by the FDIC. Officers and directors also have a duty to disclose interests they have in material contracts or transactions with the corporation. Michigan is typical in requiring disclosure of any material interest of a person who is a party to a current or proposed material contract or transaction with the corporation. This can be a problem when officers, directors or shareholders sit on multiple boards. They have independent duties in respect to each board. As discussed below, this also can be an issue with respect to director’s and officer’s insurance policies. Minority shareholder oppression claims are another substantial avenue of litigation. These claims often arise because minority shareholders are not in control of the major decisions of the company. Michigan law holds that a shareholder may bring an action against “those in control of the corporation” for activities that “are illegal, fraudulent, or willfully unfair and oppressive to the corporation or to the shareholder.” Mergers and acquisitions are also frequent areas of litigation, particularly now that the economy has improved. This litigation often depends on the size of the transaction. Larger transactions are more likely to generate some litigation. Non-competition agreements may be an issue. Officers, directors and shareholders often require that key employees execute these agreements to preclude their working in a competitive business for a period of time after their employment ends. These types of agreements are generally enforceable where they are reasonable in duration and geographic area, while protecting the employer’s legitimate business interests. Controversy may arise when a key employee ignores their restrictions and begins working for a competitor.
The matter is often decided when the former employer seeks an injunction to prevent such competition. The court may decide the issue based upon the briefs the parties file, or may conduct an evidentiary hearing at which the principal players testify. PROTECTING THE COMPANY One of the most effective mechanisms for protecting the company is a clear understanding of the shareholder agreements and other organizational documents. Most state statutes allow such documents to contain provisions for management of the business and conduct of its affairs while limiting or regulating powers of directors or shareholders. Shareholders and directors must have a clear understanding of these documents and avoid breaching these mandates. It is also critical to know the rights of company employees. Shareholders, officers and directors may all be employees of the company. Moreover, those individuals may expose the company to unnecessary costs and lost opportunity by failing to realize the rights of those who work for them. Express employment contracts may be at issue. Additionally, a variety of federal civil rights statutes protect employees, even when they are at will. It is important to note that a potential claimant seeking to take advantage of these statutes must exhaust the available administrative remedies by seeking redress through a federal agency, such as the Equal Employment Opportunity Commission. As bad as a claim by a private litigant might be, the situation is worse when the federal government decides to go after the company. Most states have similar laws that can be enforced by state courts. Directors and Officers insurance policies often provide coverage for litigation claims. As with any other contract, it is important to understand the terms of the D&O policy. Complications can arise regarding directors and officers sitting on boards of multiple entities, including non-profit corporations. Additionally, while these policies will often cover defense costs, they may do so on a reimbursement basis requiring the entity to pay those sums up front. Generally, however, they will provide both defense coverage and indemnity for loss resulting from numerous activities performed in operation of the company. Overall, a significant preventative measure against the impact of unnecessary costs is understanding the rights and duties of shareholders, directors and officers. Even more important is ensuring that the individuals involved examine their own activities so that they are behaving ethically. The cost of failing to do so can be substantial. ■
Rick Mitchell is a shareholder at the Southfield, Mich.based firm Maddin, Hauser, Roth & Heller, P.C. He is a member of the firm’s Defense and Insurance Coverage Practice Group rmitchell@ maddinhauser.com
AppellAte Counsel CAn HAve Key Role At tRiAl By Karen M. Bray and David M. Axelrad
he role of appellate counsel in the trial process has evolved over the last 10 to 15 years. Sophisticated trial attorneys and litigants increasingly recognize that appellate counsel can provide invaluable assistance well before it is time to file a notice of appeal, that their advice can make the difference between winning and losing, or that it can help to limit the amount of an adverse judgment. This is particularly true in cases involving complex issues or that implicate evolving legal principles, or that have significant potential exposure.
TODAY’S GENER AL COUNSEL AUG/ SEPT 2015
Advantages of involving appellate counsel at the trial court level include: • Appellate lawyers are often aware of legal issues currently percolating in the appellate courts, subjects on which there is a dispute among the appellate courts, or relevant cases pending in the state or U.S. Supreme Court. This knowledge can be useful in helping the trial team identify potential legal issues and create a record for presenting them on appeal. • Appellate counsel’s fresh perspective enhances the trial team’s ability to identify, analyze and research issues. Unburdened by knowledge of case history, appellate counsel can help trial counsel focus the case on the key issues and narrow the evidence to eliminate anything that has become extraneous as the case progresses. Viewing the case from this perspective, appellate counsel can provide a frank evaluation of the potential outcome of a trial and possible appeal, as well as advice and guidance with respect to settlement strategy, timing and options. • Appellate counsel’s expertise in research and writing enables them to assist a busy trial team in drafting motions in limine, special jury instructions, verdict forms, non-suit motions and motions for directed verdict. • Appellate counsel can anchor the all-important task of preserving the best possible trial court record for appeal, providing advice on memorializing events such as unreported sidebars, in-chambers conferences, visual presentation of demonstrative evidence by expert witnesses and excerpts of videotaped deposition testimony. Similarly, appellate counsel can assist by ensuring that the record includes objections to trial court rulings, offers of proof following adverse evidentiary rulings, objections to jury instructions and the verdict form, and a discussion of any problems concerning a jury’s verdict that must be raised before a jury is discharged. • Appellate counsel can provide an extra pair of eyes and ears and another legal mind, which can be useful during trial. They can conduct on-the-spot electronic research and email it to the trial lawyers sitting a few feet away at counsel table. Detailed, written daily reports outlining the day’s events, analyzing how the trial is progressing, and identifying any appellate issues that have arisen can be beneficial to trial counsel and the client, particularly if a client is assessing settlement options during trial.
• Involving appellate counsel sends a clear message to opposing counsel that the client is rigorously protecting its rights and that the case will not end in the event of an adverse verdict/judgment. This may be helpful settlement leverage. At the post-trial stage, an appellate lawyer continues to play a crucial role in in the trial court by: • Helping to ensure compliance with the critical procedures and deadlines that must be followed once a verdict has been returned or judgment entered, including the procedures for obtaining a stay of enforcement pending appeal. • Advising on whether it is necessary or worthwhile to file post-trial motions, and in the case of a bench trial advising on proposals concerning trial court findings. • Providing essential cost-benefit analysis and risk assessment regarding the merits of going forward with an appeal, evaluating the strengths and weaknesses of a case from an appellate perspective. • Alerting the client when a case creates risks of an adverse appellate opinion that might affect other similar cases, and as a result might call for an alternative resolution of the case. • Participating in post-judgment settlement negotiations which may lead to a favorable resolution that avoids the expense and delay of an appeal. Some trial counsel may feel apprehensive about the potential involvement of an appellate attorney during trial. However, an appellate lawyer’s role is not to second-guess the trial lawyer’s strategic decisions, but rather to work as part of the trial team to obtain the best possible outcome for the client. Working together, trial and appellate attorneys can effectively represent their clients and significantly increase the odds of achieving favorable results for those clients. As appellate counsel’s role at the trial level continues to expand, whether to involve appellate counsel in the early stages of litigation will become an increasingly important consideration for in-house counsel and their clients wishing to position their case for the best possible result. While clients may initially be reluctant to pay to add another lawyer to the trial team, doing so could prove to be more cost-effective in the long run, as it increases the odds of achieving a better result at trial or a positive ruling on appeal. ■
Karen M. Bray is a partner at Horvitz & Levy LLP, focusing solely on appellate litigation. She also has extensive experience consulting with trial counsel to preserve issues for appeal. She has assisted trial counsel with summary judgment motions, motions in limine, jury instructions, trial briefs, verdict forms, and post-trial motions. kbray@ horvitzlevy.com
David M. Axelrad is a partner at Horvitz & Levy LLP, where he focuses exclusively in appellate litigation. A California State Bar Certified Appellate Specialist, he has handled hundreds of civil appeals in state and federal courts, including numerous cases in the California Supreme Court. He is the editor of Appellate Practice in Federal and State Courts (Law Journal Press, 2011). daxelrad@ horvitzlevy.com
YourChanCes ChanCeson on Your appealand andhow howto to appeal Improvethem them Improve ByJaJas se te eed By s oo n nP.P.st d
today’s gener al counsel aug/ sept 2015
ill we get oral argument? How long will it take for the court to decide? What are our chances of winning? These are common questions when a decision goes up on appeal, and they’re hard questions to answer. But the federal judicial system provides some data that we can use to talk about answers to these questions – a statistical ballpark to play in, so to speak. So let’s toss around some numbers. Regarding the first question, keep in mind the D.C. Circuit hears oral argument in more than 50 percent of its cases. Most other circuits hear oral argument around 20 percent of the time, with a few circuits approaching 30 percent. At first these numbers might not sound encouraging, but you have to consider a few important factors. First, most federal appeals arise in criminal cases, where oral argument is much less frequently granted. So, if a court hears argument in 20 percent of its cases, and more than half of its cases are criminal, then the rate of oral argument in the court’s civil cases is likely much higher than 20 percent. Second, the court won’t grant oral argument if the issues are simple enough to be decided on the briefs, and most appeals involve relatively simple issues. So, if a court hears argument in 20 percent of all its cases, and most of its cases are criminal or simple in nature – where the rate of oral argument is very low – then the rate of oral argument for complicated civil cases could be as high as 70–80 percent. This means if you have a complicated civil appeal and you ask for oral argument, you’ll probably get it. And if you’re the appellant you should definitely ask for it. You need every opportunity you can get to convince the appellate court to reverse what the lower court did. Plus, it’s also true that reversal rates are higher in cases that hear oral argument than in cases that don’t. Does this mean appellees should avoid oral argument? Not necessarily. I recently heard a Fifth Circuit judge say that oral argument is the best opportunity an appellee has to respond to the appellant’s reply brief. It is a chance to resolve any remaining concerns the judges might have about the decision you’re trying to defend. It’s bad enough to have a victory overturned on appeal; it’s even worse if it’s overturned after you declined the opportunity for oral argument. Yes, there are times when you should tell the court that oral argument isn’t necessary, but in most cases you want it. And, again, if your case
is complicated, you’ll probably get it – unless you’re in the Third Circuit, which hears argument in only about 8 percent of all its cases. If you’re in the Third Circuit, make sure you’ve got strong briefing. HOW LONG BEFORE A DECISION? The hard truth is that we don’t know. The federal courts of appeals are not obligated to decide cases on any timetable. And – unlike the Supreme Court, which decides only 70–80 cases per term – the courts of appeals don’t have discretion to deny review, so each circuit must dispose of hundreds and even thousands of appeals every year. Despite this heavy caseload, most appeals are relatively straightforward and are decided within three months of submission. (A case is “submitted” at the completion of briefing, or at the completion of oral argument if argument was granted.) According to uscourts.gov, the D.C. Circuit is the fastest. From 2012 through 2013, the D.C. Circuit had just one case that remained pending for longer than three months. The Fourth and Eighth Circuits were almost as fast as D.C. In flat numbers, the Second Circuit was the slowest from 2012–2013, with 294 cases pending for more than three months, and 74 cases pending for more than a year. The Seventh, Ninth, and Tenth Circuits were also slower, each having over 100 cases pending more than three months. Bottom line: if your case is even mildly complicated, and you’re not in one of the fastest circuits, then the conservative answer to “how long will this take” is six months to a year after submission. So sit back and wait – and just be thankful you’re not one of my clients whose case has been pending in the Texas Supreme Court since 2011. YOUR CHANCES OF WINNING Obviously, this depends heavily on the details of each case, and a host of other factors that are sometimes beyond anyone’s control. But the Fifth Circuit provides some interesting numbers. In 2014, it affirmed the lower court decision in nearly 58 percent of all cases brought on appeal. And it affirmed “in part” the decisions in another 6.1 percent of all cases. Moreover, nearly 28 percent of all cases were dismissed without a ruling, usually due to a procedural flaw. So, looking at it one way: in 2014, appellants in the Fifth Circuit failed nearly 92 percent of the time.
aug/ sept 2015 today’s gener al counsel
Jason P. Steed is a former English professor with a J.D. from the University of Texas. He practices at Bell Nunnally & Martin LLP, in Dallas, and has represented clients in appellate courts across nationwide, including the Supreme Court of Texas, the Supreme Court of California and the U.S. Supreme Court. jsteed@ bellnunnally.com
Does this mean it’s a waste of time to appeal? No. Remember that 28 percent of those appeals were dismissed, usually due to a procedural flaw (e.g., the appeal was untimely) – meaning, in some cases, the appeal might have been successful if it had been handled correctly. Also, we can recharacterize those cases where the decision was affirmed “in part” as cases where the decision was vacated, reversed, or remanded “in part.” And, 8.4 percent of all appeals resulted in outright vacatur, reversal, or remand. Thus, looking from another angle: In 2014, appellants in the Fifth Circuit succeeded about 14.5 percent of the time, and might have succeeded more had they avoided procedural errors. Moreover, a large number (28 percent) of the appeals filed in the Fifth Circuit are filed by prisoners, many of whom are appealing pro se. If we include successive habeas petitions, criminal appeals, and mandamus petitions, we’re talking about 69.5 percent of the Fifth Circuit’s docket where reversal rates are very low. So it’s reasonable to assume that the reversal rate in the remaining 30.5 percent of the Court’s docket – i.e., the kinds of appeals that most businesses and individuals are involved in – is significantly higher than 14.5 percent. As an educated guess, we can say it’s around 25 percent. This means a generic civil appellant has roughly a 1-in-4 chance of turning things around on appeal, and a generic civil appellee has roughly a 1-in-4 chance of watching some part of its victory get overturned. As always, these odds might get better or worse depending on the strength of the arguments. Which brings us to the most important question of all: How can you improve your chances on appeal? Having strong arguments is the best way to win. So how do you make sure your appeal is as strong as it can get? For starters: hire an appellate attorney. Sooner, rather than later. It’s important to understand that the trial is mostly about facts, whereas the appeal is mostly about law. Your trial lawyer is busy thinking about facts – depositions, expert reports, affidavits, key documents – and about trial strategy, which involves dealing with opposing counsel, dealing with the trial judge and possibly dealing with a jury. Trial lawyers don’t have much time to think about an appeal until it’s time for the appeal, when it might be too late. With an appellate lawyer on the team, you’ll have someone to focus on the law, to shape your arguments at every stage so they’ll be as strong as they can be for the appeal.
This includes preserving error. But it runs much deeper than that. For example, your appellate lawyer might know that legal argument X will be more persuasive to the court of appeals – even though argument Y is more obvious and more interesting to the trial judge. Your trial lawyer, understandably, will want to argue Y in the trial court. But your appellate lawyer will ensure that argument X is teed up for later. This is why appellate judges like appellate lawyers. At a recent conference, a group of Fifth Circuit judges agreed that they prefer to see appellate specialists on the briefs and at oral argument, because it means they can count on the arguments to be helpful. Too often, said one judge, trial lawyers will make arguments that are better suited for the trial court. And that isn’t helpful to the court of appeals. Several justices on the U.S. Supreme Court have similarly expressed a preference for seeing appellate lawyers on the briefs and before the Court. Appellate practice is so different from trial practice that Justice Kagan said it’s sometimes “as if [trial lawyers] are arguing with one hand tied behind their back.” Justice Sotomayor even suggested it’s malpractice for a trial lawyer to argue an appeal when appellate specialists are available. Two recent studies support the notion that the presence of experienced appellate counsel will improve your chances of winning on appeal. The authors of one recent study (“‘Too Many Notes’? An Empirical Study of Advocacy in Federal Appeals”) conducted in the Ninth Circuit, noted that “sophisticated business clients now anticipate the need for appeal and want to have the best appellate practitioners on retainer.” Their data showed that appellees in particular “appeared to enjoy some advantage in preserving trial court victories” when they hired an appellate attorney. Another study, from Reuters in late 2014 (“The Echo Chamber”) similarly showed that cert petitions to the Supreme Court are more likely to be granted when an experienced Supreme Court practitioner is involved. This is, of course, an essential step for appellants hoping to reverse a decision by the court of appeals. (The Supreme Court reverses about 70–75 percent of the decisions on which it grants certiorari.) All this is to say that, while it’s hard to estimate your chances on appeal, it’s nearly certain your chances will be better if you have a good appellate lawyer. Just ask the judges. ■
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