Today's General Counsel (Formerly Executive Counsel), V8 N4, August/September 2011

AUG/ SEPT 2011 VOLUME 8 / NUMBER 4 E X ECUTI V ECOUNSEL.INFO

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INTELLECTUAL PROPERT Y:

Overload at the USPTO Managing IP on a Budget China’s Patent Surge Pushing Back Against Counterfeit Goods Antitrust and M&A The Globalization of the “Corporate Campaign”

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aug/ sept 2011 E X ECUTIV E COUNSEL

Editor’s Desk

Patent reform is on a list of very modest proposals to get the economy moving suggested by President Obama in August. A bill passed by the House will be taken up by the Senate soon, but the mere fact that the President mentioned patent reform means the odds are against anything substantial coming out of the present Congress.

That’s unfortunate, because the U.S. patent system is broken, and few initiatives the federal government could undertake would have as direct an economic affect as fixing it. Entrepreneurship and innovation are recognized as the engines of our economy. A rational method of acquiring useful, valid patents would energize both, but according to critics of the pending legislation, it contains provisions – a change from a first-to-invent to a first-to-file system, a complicated procedure for post-grant review – that would stifle innovation, not foster it. Nor does it address the problems posed by “patent trolls,” companies that produce nothing except lawsuits for infringement, or the many questions that remain about business method and other patents that seem, to critics like the Electronic Frontier Foundation, to protect procedures and thought processes, instead of something tangible.

The United States Patent and Trademark Office supports itself by collecting fees to grant and maintain patents. In a rational world those fees would augment a generous budget allocation by Congress, in order to assure economic growth. Instead the Office is required to send a percentage of the fees it collects to the U.S. Treasury. Its collections dropped along with everything else when the economy tanked in 2008, and as Michael Gzybowski and Bradley L. Smith point out in their article in this issue of Executive Counsel, a federal budget deal put together in April included a five percent cut for the USPTO, meaning the agency must turn over

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approximately $100 million more annually to the general fund.

The results are predictable: a large and growing backlog of filings, and rapid turnover among overworked examiners, with the most experienced leaving first. Gysbowski and Smith suggest that Congress stop diverting USPTO fees in order to fund unrelated government spending. That would be a good first step, but nothing more, toward reforming the patent system.

Two other closely related IP issues, counterfeit consumer goods and so-called gray goods, also get a close look in this issue.

According to Gaspare J. Bono and Stephen M. Chippendale, the U.S. system does work well in one key area – and the price is right. They explain how a copyright on a product’s design or packaging can be a uniquely effective weapon against gray goods.

Finally, in a special section on confronting the lucrative market in counterfeit goods, back-to-back articles detail complimentary approaches to this multi-billion dollar problem: working with federal authorities, and working within organized industry groups.

It turns out that fighting counterfeits is one area where – provided some basic cautions are observed – co-operation among big players most likely will not get unwanted attention from antitrust regulators.

Bob Nienhouse, Editor-In-Chief Editor@executivecounsel.info

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AUG/ SEPT 2011 E X ECUTIV E COUNSEL

Features

PUSHING BACK AGAINST COUNTERFEIT GOODS

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WORKING WITH THE FEDS

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ANTITRUST LAWS DON’T PRECLUDE COOPERATING AGAINST COUNTERFEITERS

Alison Conlon and Brian Lewis Stepped up enforcement, seizures, information sharing.

Wayne Mack Industry solutions for an industrywide problem.

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LAWS REGULATING POLITICAL ACTIVITY GO GLOBAL Elliot S. Berke and William Farah EU and UK enacting strict lobbying rules.

SELLING A BUSINESS Wallace E. Brockhoff and Kristen V. Toner Assemble a team, rehearse a buyer’s due diligence.

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RECENT ANTITRUST GUIDELINES AND THEIR EFFECT ON M&A

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CALIFORNIA OPENS THE FLOODGATES

By Daniel E. Hemli & Jacqueline R. Java Make your case before it becomes a case.

Craig Bertschi and Kathryn Ederle Class actions lawsuits follow credit card decision.

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AUG/ SEPT 2011 E X ECUTIV E COUNSEL

Departments Editor’s Desk Executive Summaries

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23 INTELLEC TUAL PROPERT Y

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16 | Managing IP On a Budget

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Herbert D. Hart III Align legal strategy with business goals.

20 | Budget Diversion, Lack of Experienced Examiners, Hobble the USPTO Michael Gzybowski and Bradley L. Smith False economy and a costly bottleneck.

GOVERNANCE

28 | U.S. Changing to Looser Accounting Standards Michael W. Stocker and Craig Martin International guides can make winners out of losers.

HUMAN RESOURCES

30 Corporate Campaigns Go Global |

23 | IP Rights on Chinese Agenda Esther H. Lim and Erik R. Puknys Big red patent machine.

26 | A $35 Copyright Can Prevent Millions in Unauthorized Imports Gaspare J. Bono and Stephen M. Chippendale Design registration foils gray market.

AN EXECUTIVE COUNSEL SPECIAL REPORT

40 | E-discovery Pain Points and Pitfalls Attorneys exchange e-discovery experiences.

CANADA / CROSS-BORDER

36 | Canadian Capital Markets Lure Small Companies

Michael Lotito and Kara Preedy Unions are pressuring multinationals to adopt EU standards.

Ryan M. Filson and Rajeev Dewan Simpler requirements, savvy investors.

E-DISCOVERY

38 | Overseas Problems Slow U.S.-Canada Deals

33 | A Primer on Metadata H. Hunter Twiford III and John T. Rouse Parsing out the “scrubbing” conundrum.

Divya Balji Middle market saves a slow fi rst half.

Editor-in-ChiEf Robert Nienhouse

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MaNagiNg eDiTOr David Rubenstein

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Daniel E. Hemli Jacqueline R. Java Brian Lewis Esther Lim Michael Lotito Wayne Mack Craig Martin Kara Preedy Erik Puknys John T. Rouse Bradley L. Smith Michael W. Stocker Kristen V. Toner H. Hunter Twiford III

eDiTOrial aDviSOry bOarD Dennis Block CADWALADER, WICKERSHAM & TAFT

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aug/ sept 2011 E X ECUTIV E COUNSEL

Executive Summaries Page 16

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Managing IP on a Budget

Budget Diversion, Lack of Experienced Examiners, Hobble UsPto

IP Rights on Chinese Agenda

By Herbert D. Hart III McAndrews, Held & Malloy, Ltd.

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Corporate intellectual property law departments are feeling the budget crunch. All manner of cost-management efforts have been put to the test – flat fee, capped-fee, discounted rate, reverse auction, partial contingency – with varying degrees of success.

Most departments focus primarily on finding the lowest price, but the author says a search for genuine value is a better approach. He advocates a clear identification of business goals as a precursor to setting standards for the IP function. With goals and objectives defined, the task of engaging and working with outside counsel while staying within budget is clarified.

When choosing an attorney, focus primarily on the nature of the problem. Has the company been sued? Is the company developing a new technology platform that needs protecting with a strong patent portfolio? Is a freedom-to-operate investigation needed? To get maximum value, choose outside counsel with the expertise that most closely aligns with those specific challenges.

If possible, identify key markets in which protection would have the most value.

When outside counsel has been selected, clearly explain the business objectives of the engagement and what the company will view as a win.

Prevailing in a lawsuit or building a patent portfolio may be futile if the result doesn’t advance a specific business objective.

The author provides a check list of questions to answer before deciding to patent an invention. Treating all inventions as equal, he argues, is an approach that can eviscerate a company’s patent position.

By Michael Gzybowski and Bradley L. Smith Brinks Hofer Gilson & Lione

The backlog of patent applications at the U.S. Patent and Trademark Office is getting worse. Average pendency, the time from application to patent issuance, has increased from about 25 months before 2003 to about 35 months. More than an issue for companies and inventors, this represents “innovations trapped in this agency that otherwise could be creating jobs,” says USPTO director David Kappos.

According to the authors, one of whom is a former USPTO patent examiner, the backlog problem is the result of a lack of experienced examiners and the fact that Congress has diverted fees the USPTO collects to cover government spending elsewhere.

The fact there has been an increase in the number of examiners hasn’t improved matters because experienced examiners are leaving.

A GAO study in 2007 found that almost a third of examiners leave the office within a year of being hired, and 70 percent leave within five years. The same study noted that it takes four to six years for an examiner to become fully proficient. Compounding the problem, as an economy measure many new hires are being allowed to work from home, effectively limiting their contact with the experienced people who remain.

“There are no easy solutions to the problems of staffing and pendency, but clearly the USPTO must revive its examiner corps,” the authors conclude. “A necessary first step is for Congress to stop diverting USPTO fees in order to fund unrelated government spending.”

By Esther H. Lim and Erik R. Puknys Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

Meetings involving top government and private-sector leaders from China and California were part of a trade mission to the Shanghai region led by then-governor Arnold Schwarzenegger of California. The authors attended the meetings and write that the Chinese delegation made intellectual property rights the dominant topic. China has been trying to shed its reputation as an intellectual property outlaw and to recast itself as a hotbed for innovation in the 21st century.

In 2010, China’s patent filings under the Patent Cooperation Treaty (PCT), a vehicle for protecting inventions on a global scale, increased 56 percent, by far the largest rate of any country. Locally, new patent applications filed by Chinese companies in SIPO, the Chinese patent office, exceeded the one million mark.

IP has become a key part of China’s growth and its increasingly competitive standing. (It just surpassed Japan as the second largest economy in the world.) Many outsiders are shocked to learn that in China more than 30,000 civil IP cases were filed in 2009 alone. Most related to copyrights and trademarks, but there were also significant numbers of patent, technology contract, and unfair competition cases.

The authors briefly discuss some intellectual property issues that companies doing business in China should pay attention to, among them the importance of early patent filing.

They note that China is a first-to-file venu. They also advise planning to avoid patent infringement suits early, at the market research and productdevelopment stage.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

Executive Summaries

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A $35 Copyright Can Prevent Millions in Unauthorized Imports

U.S. Changing to Looser Accounting Standards

Corporate Campaigns Globalize

By Gaspare J. Bono and Stephen M. Chippendale McKenna Long & Aldridge LLP

By Michael W. Stocker and Craig Martin Labaton Sucharow

By Michael Lotito Jackson Lewis LLP and Kara Preedy Pusch Wahlig Legal

The “gray market” is made up of branded products that are manufactured to be sold abroad but which end up in the United States through unauthorized channels. They can include everything from Montblanc pens to Hyundai heavy construction machines.

Gray products are often obsolete or damaged and therefore can pose risks to customers and harm brand integrity.

Compounding the problem, gray goods often lack warranties and support, which can hurt the consumer and threaten a company’s reputation. Accordingly, brand owners must actively protect their distribution channels.

The U.S. Copyright Act protects “original works of authorship fixed in any tangible medium of expression.” Virtually all gray goods include copyrightable designs and package artwork, and if a design is protected by copyright then the product bearing the design receives the same protection. Consequently, copyrights can be a powerful weapon against gray market activity.

A California Federal Court case involving Omega, S.A. and Costco set some important precedents. In light of the case, brand owners should recognize that copyrighted logos and packaging artwork are effective weapons to prevent international supply chain leakage. It isn’t even necessary to register a copyright, because one comes into existence upon creation of the copyrighted material. Nonetheless, registration with the U.S. Copyright Office is the best practice because it confers the rights to file suit for statutory damages and injunctive relief, to recover attorney fees and to record the registration with U.S. Customs for additional protection against importation of infringing copies.

The coming shift from U.S. accounting rules to international guidelines will likely decrease financial transparency.

The SEC has statutory authority to establish accounting rules for publicly traded companies. However, it has delegated this responsibility to the Financial Accounting Standards Board (FASB), and currently the FASB is responsible for establishing the accounting rules that govern the preparation and presentation of financial statements.

International Financial Reporting Standards (IFRS) are the accounting standards used almost everywhere except the United States. These standards are issued by the International Accounting Standards Board, a rule-making body based in London. The IFRS are principle-based rules that focus only on reporting the economic substance of transactions and rely heavily on management judgment. As a result, IFRS rules generally provide considerably less guidance than the Generally Accepted Accounting Principles (GAAP) that the United States relies on. Furthermore – unlike the FASB, which is funded through mandatory contributions from publicly-listed companies – IASB is dependent on contributions from the central banks and other international organizations, as well as companies and organizations in the United States, including the Big Four accounting firms. This funding structure has left the IASB especially vulnerable to political pressure.

Despite these concerns, the SEC has been moving rapidly towards adopting IASB standards by way of a process called convergence, which is intended to reduce the differences between GAAP and IFRS. The SEC envisions that ultimately U.S. issuers, by complying with GAAP, could represent that they are also IFRS compliant.

Hoping to unionize U.S. subsidiaries of global companies, organized labor has been calling attention to differences between European and U.S. labor laws. European laws are more workerfriendly, and organized labor is pressuring the corporate parent to follow its home country’s labor laws when operating in the United States.

As part of this global approach to organizing, the authors write, labor unions have borrowed strategies from the “corporate campaigns” initiated by U.S. labor unions to secure employer neutrality agreements, in which the employer agrees not to utilize its full rights under the law to communicate freely with employees. The corporate campaign has roots in the activist movements of the 1960s. It goes beyond traditional union organizing tactics and aggressively uses the press, television, the internet and other media to attack the reputation and motives of the companies it targets.

Critics of U.S. labor law say the United States should ratify the International Labor Organization (ILO) conventions addressing freedom of association, which includes the right to organize and bargain collectively.

The authors advise companies to know about the strategies unions are likely to use; identify the unions that are most likely to target them; understand the nature of a corporate campaign, as well as the union’s ultimate goals; comply with wage and hour laws and regulations, health and safety standards (including state laws), and fair employment practice laws; define themselves positively to constituents; and emphasize positive messaging about the company rather than attacks on the union.

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aug/ sept 2011 E X ECUTIV E COUNSEL

Executive Summaries Page 33

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A Primer on Metadata

Canadian Capital Markets Lure Small Companies

Overseas Problems Slow U.S.-Canada Deals

By Ryan M. Filson and Rajeev Dewan WeirFoulds LLP

By Divya Balji Mergermarket

This article provides an overview of why a U.S. company should consider listing on the TSX exchanges, as well as the various options available for taking a company public in Canada.

With over 3,600 listed companies, the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSX V) rank second among the world’s stock exchanges. Currently, there are approximately 160 U.S. companies listed on the TSX exchanges.

Recently the TSX and TSX V have emerged as the leading exchanges in the world for clean-tech companies.

An increasing number of U.S. cleantech companies are exploring the Canadian capital markets because they are too small for listing on the Nasdaq.

The TSX is the senior exchange.

It has listing standards for well established businesses and management teams with experience in public markets. The TSX V has adopted standards which are tailored towards emerging companies or smaller financing. A U.S. company could initially list on the TSX V, then graduate to the TSX once it has reached its business milestones. A streamlined regulatory protocol fosters this process. Thirty percent of clean tech companies that initially listed on the TSX V have successfully graduated to the TSX. The costs associated with going public in Canada tend to be less than in the United States. Investors in Canada are interested in small and mid-cap companies. Twenty-five international brokers are trading members of the exchanges, including Goldman Sachs, JP Morgan, Citigroup and Merrill Lynch.

Despite a strong Canadian dollar and looser lending by banks, U.S.Canadian cross border activity was not as robust as financial industry experts hoped in the first half of 2011, the author writes. Some sectors stood out, and the middle market remains attractive for crossborder deals.

As of the end of May, more than 80 Canada-U.S. cross-border M&A deals had been announced, excluding lapsed and withdrawn bids. The biggest deals involved energy, mining and utilities, construction and the consumer sector. The credit crisis in Europe, the slowdown in the Chinese economy and the crisis in the Middle East have combined to dampen activity.

Some U.S. companies wanting to expand their footprint in Canada have looked to acquisitions instead of growth. The recently announced sale of Capital Power Income L.P. to Atlantic Power for CAD $1.1 billion will give Atlantic a larger and more diversified portfolio of contracted power generation assets in both the United States and Canada. Goodmans LLP was lead legal counsel for Atlantic Power and Fraser Milner Casgrain LLP and Norton Rose LLP acted as legal counsels to Capital Power.

The mega-deal in financial services was the sale of RBC’s U.S. regional retail banking operations to PNC Financial Services Group for USD $3.45 billion.

The middle market should remain strong for M&A deals between the United States and Canada, and it will be the driver for deals. Canadian companies could look south and oversees to acquire undervalued assets.

By H. Hunter Twiford III and John T. Rouse McGlinchey Stafford PLLC

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Under the 2006 amendments to the Federal Rules of Civil Procedure, producing files in the format in which they were originally created – their “native format” – becomes crucial in the context of litigation or potential litigation. It’s in the native format where a file’s metadata resides.

Metadata is information that describes how, when and by whom a data set or document was collected, created, accessed, modified and how it is formatted. Invisible to most practitioners, metadata can be accessed, and in litigation it can make or break a case by providing the electronic equivalent of a detailed paper trail.

Strategies for handling metadata are complicated by the fact there are two contexts in which the issue can arise and the appropriate treatment is different for each. In the discovery context, electronic information normally must be produced with the metadata intact. But, the authors write, in the day-to-day transmission of corporate information “counsel should consider attorney-client privilege in all communications, and when appropriate they should ‘scrub’ metadata from documents sent to opposing counsel to avoid potential liability for disclosure.”

Failure to do so with documents created or revised by an attorney prior to transmission outside the company or law firm may raise ethical considerations and could be grounds for a malpractice claim.

Only when the distinction between these two scenarios is understood will it become clear when it is appropriate to remove metadata and when it is illadvised and sanctionable to do so.

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Working With the Feds to Stop Counterfeiters

Antitrust Laws Don’t Preclude Cooperating Against Counterfeiters

Laws Regulating Political Activity Go Global

By Alison Conlon and Brian Lewis Barnes & Thornburg LLP

By Wayne Mack Duane Morris LLP

By Elliot S. Berke and William Farah McGuireWoods LLP

Counterfeiting affects many industries and products, and the counterfeiters can divert enough sales to impact the bottom line. As demonstrated in the automotive, pharmaceutical, electrical and electronics industries, counterfeit products also can have health and safety implications for valued customers.

More broadly, counterfeiting threatens the growth of the American economy.

The federal government has taken a number of steps to improve intellectual property enforcement. They include passing the Prioritizing Resources and Organization for Intellectual Property Act of 2008, which increased civil and criminal penalties for trademark, patent and copyright infringement. It is important for companies to partner with the federal government to stop counterfeiting. While some companies balk at the concept of raising their profile with government agencies, in the counterfeiting realm there are tremendous benefits to an alliance.

The Lanham Act is a powerful tool under which claims can be brought in federal court for trademark infringement. It forbids using the counterfeit of a registered mark on labels or packaging, and it imposes strict liability on the sellers of counterfeit goods even if the seller claims not to have known that it was dealing in counterfeit goods.

The Lanham Act affords numerous remedies. Companies can recover compensatory and statutory damages, obtain a permanent injunction against the counterfeiter and distributors of the counterfeit product, and, in some instances, treble damages and attorneys’ fees.

One way that parties may resolve Lanham Act claims is through a consent order between parties.

The counterfeit goods problem must in part be addressed on “the supply side,” which in this context primarily means China, the author says.

However, local protectionism, spotty interest by officials and the fact that counterfeits often originate by way of decentralized small production units make enforcement by Chinese authorities unreliable. Therefore the best strategy for addressing counterfeiting in China is for companies to retain their own investigators and then lobby Chinese law-enforcement officials to take action.

This would be daunting for a single brand owner, but it’s feasible if industry players join together and pool intelligence and resources. Like lobbying and engaging in certain kinds of litigation, this type of activity is not precluded by the antitrust laws, according to the author. “Combating counterfeiting is clearly a pro-competitive activity,” he writes. “By joining together to combat counterfeiting and protect intellectual property rights, competitors promote free and fair competition – and that’s consistent with the underlying purpose of the antitrust laws.”

Nonetheless companies engaged in group anti-counterfeiting work need to take certain precautions, including a careful delineation of activities to be pursued, formalized protocols and careful record-keeping.

Similarly, the author writes, on the “demand side,” industry-wide action is the best strategy and one that is not precluded by antitrust laws. Industry groups are advised to work together in such areas as PR campaigns and by way of implementing uniform authentication technologies, such as bar codes, security labels and holograms.

The potential to run afoul of laws regulating the influence of money on political decisions in foreign jurisdictions is greater than ever. Both the UK and the EU have enacted strict new laws, and the U.S. Foreign Corrupt Practices Act can ensnare domestic companies that bribe public officials anywhere in the world.

The DOJ recently pursued prosecution under the Foreign Agents Registration Act (FARA), a World War II-era law requiring agents of foreign principals to register with the Justice Department. Lobbying is not the only activity requiring FARA registration.

The DOJ obtained a FARA guilty plea from a former Congressman who hadn’t registered as a representative of a foreign NGO that allegedly paid him for trying to get its name removed from a list of organizations that support terrorists.

President Obama condemned the Citizens United decision in last year’s State of the Union Address, alleging that it would “open the floodgates for special interests, including foreign corporations, to spend without limit in our elections.”

Arguments continue over this controversial ruling, which allowed corporations and labor unions to pay for both issue and express candidate advocacy.

As multi-national businesses contend with proposed reforms in both the EU and the United States, they need to understand the legal and reputational issues that are at stake. The best way to deter scrutiny by law enforcement agencies is to adopt a sound internal compliance program that monitors political and lobbying activity.

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aug/ sept 2011 E X ECUTIV E COUNSEL

Executive Summaries Page 52

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Selling a Business

Recent Antitrust Guidelines and Their Effect On M&A

California Opens the Floodgates

By Wallace E. Brockhoff and Kristen V. Toner Lathrop & Gage LLP

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The authors describe the process of selling a business and provide tips for making it easier. Early in the process, the seller should assemble a team consisting of an investment banker, an accountant and a transactional attorney. If possible, the seller should do its own due diligence before making information available to potential buyers. “Put yourself in the shoes of a prospective buyer,” the authors write, “and think about the issues that you would want resolved if you were buying the business.”

To facilitate the process, the authors suggest a “virtual data room,” which allows multiple parties to access the same information, and also logs access.

Available information should provide details regarding operations, current and past financial statements, contracts and agreements of all kinds, as well as details about intellectual property.

Whatever they post, sellers should expect to be prodded for more information and, the authors warn, should not take it personally.

Sellers should work with legal counsel to prepare non-disclosure, nonsolicitation and confidentiality agreements for potential buyers, with their investment banker to develop marketing strategy and materials, and with legal advisors and accountants to structure the transaction.

Once a prospective buyer is selected, documentation becomes the focus. Key provisions of a purchase or merger agreement include the form and amount of consideration, the working capital adjustment, the amount of escrow or holdback, representations and warranties, disclosure schedules, indemnification obligations and survival periods, covenants, closing conditions and termination provisions.

By Daniel E. Hemli and Jacqueline R. Java Bracewell & Giuliani LLP

Antitrust issues can play a significant role in M&A transactions, affecting timing, deal terms, and in some cases preventing a deal from going forward. With that in mind, the authors advise parties to an active or potential M&A transaction to become familiar with the Horizontal Merger Guidelines issued last year by the Federal Trade Commission and DOJ’s Antitrust Division.

The new guidelines, according to the authors, are an improvement over the previous iteration, which didn’t take into account that enforcement has become more “open-ended,” with the possibility for more challenges, but also allowing for more flexibility and negotiated remedies. Now it’s more important than ever for companies to perform their own antitrust analysis and marshaling of evidence at an early stage of the deal process, and to plan for longer reviews.

Vertical mergers, generally easier to justify on the grounds of public interest, are being scrutinized more than previously, but in these cases the administration often has been willing to negotiate settlements.

Firms should not wait for a specific transaction to materialize before paying attention to antitrust issues, the authors advise. They should routinely avoid creating documents that convey misleading impressions, and that would increase the likelihood of an antitrust investigation or challenge.

The authors also address significant changes to the Hart-Scott-Rodino (HSR) reporting requirements for M&A transactions exceeding certain size thresholds.

They note that challenges to deals that already have been consummated have become more common.

By Craig Bertschi and Kathryn Ederle Kilpatrick Townsend & Stockton LLP

A California Supreme Court decision interpreting the Song-Beverly Credit Card Act of 1971 was handed down in February. The decision, in the Pineda case, has led to numerous class action lawsuits against major retailers.

The Song-Beverly Act prohibits merchants from requesting and recording a customer’s “personal identification information” during a credit card transaction. The California courts had previously held that zip codes are not personal identification information for purposes of the Act. In reliance on these decisions, many merchants routinely asked for zip codes in connection with point of purchase credit card transactions.

In Pineda, the California Supreme Court reversed lower courts and held that a customer’s zip code is personal identification information. The court applied its decision retroactively.

Thus, every merchant in California who has requested zip code information in reliance on established legal precedent is now at risk of being sued in a class action and subject to enormous damages. There are exceptions, but they are narrow. Plaintiffs can recover statutory damages up to $1,000 per violation, ie., for each transaction, as well as attorneys’ fees and costs.

There are other states that have statutes similar to the Song-Beverly Act. In most of these states, the statutes are drafted in a way that will preclude a spate of class action litigation. However, retailers operating in California need to immediately reassess their policies and procedures to insure that they are compliant with the Act as currently construed.

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aug/ sept 2011 E X ECUTIV E COUNSEL

Intellectual Property

Managing IP on a Budget

By Herbert D. Hart III

E

16

veryone has to do more with less these days, and that includes corporate intellectual property law departments. Yet covering all the bases while tightly managing costs can be daunting.

All manner of cost-management efforts have been put to the test – flat fee, capped-fee, discounted rate, reverse auction, partial contingency – with varying degrees of success. Most departments focus primarily on finding the lowest possible price.

But does finding the lowest cost provider pay real dividends in making the most of intellectual property legal resources? Or is a search for genuine value a better approach? And how would one do that?

FOCUSING ON FUNDAMENTALS Before launching an effort to more efficiently and inexpensively achieve the company’s legal goals, it’s best to identify those goals by answering such questions as: What is our mission as an intellectual property law department? What is our business objective? Addressing these questions leads to another: How

It can be a serious error to allow budget constraints to create a hiatus in filing patent applications on the company’s core technologies. will we know when we’ve succeeded? In other words, a clear identification of the business objective serves as a signpost of goal achievement.

For example, winning a lawsuit may be a success from an advocate’s view-

point, yet that win may not meet the company’s underlying business objectives.

Indeed it may deplete the company’s limited resources, while leaving important issues unresolved.

Similarly, filing a target number of patent applications during a particular calendar period, or at the lowest possible cost per application, also may appear to be a success. It might be successful in terms of metrics, yet amount to an utter failure if the resulting patent estate doesn’t conform to the company’s key markets and areas of research interest.

With goals and objectives defined, the task of engaging and working with outside counsel while staying within budget can be tackled.

CHOOSING COUNSEL WISELY In choosing counsel, many approaches have been used. Will an extensive RFP program help you zero in on the right counsel? Probably not. Specific goals are easily lost in pages of unrelated information.

Will a reverse bidding process get you the most bang for the buck? Unless your problem can be solved with commodity legal services, then certainly not.

Will limiting the field to large wellknown national firms maximize the likelihood that a match can be achieved?

Again, probably not. That may appear to be the most risk-averse course, but it’s less likely to lead you to the firm best suited to handle your problem in the most cost-effective and goalfocused way.

Approach choosing a firm – or, more importantly, an attorney – with primary focus on the nature of the problem you’re facing. Has the company been sued? Is there a new technology platform in development that needs protection by a strong patent portfolio? Is a freedomto-operate investigation needed? Does an imminent acquisition or divestiture require a solid due diligence investiga-

tion? Has one of the company’s patents become involved in a patent interference proceeding or an inter partes reexamination proceeding?

You’ll make the best use of your budget by carefully seeking outside counsel

Treating all inventions as equals is another approach that can eviscerate a company’s patent position. with the expertise that most closely aligns with those specific challenges.

You may indeed need a top IP trial lawyer if you take a case to trial. Often, however, company objectives are better reached by settling litigation under favorable terms, resolving the dispute in a less expensive or more specialized forum, or avoiding it altogether. Matching the lawyer to the goal can help prevent devoting precious resources to a solution that doesn’t make sense in relation to the goal.

Getting the right match involves finding the right skill set. You need counsel who can bring a broad-based and creative approach to achieving the company’s objectives. At the same time, your counsel should be able to apply specialized expertise to particular problems. Frequently, taking the time to identify these skills pays big dividends in risk management and cost savings.

DEFINE YOUR OBJECTIVES Once you’ve settled on outside counsel, it’s critical to communicate the business objectives of the engagement.

Take the time to learn from the business managers what the company’s true objectives are, then communicate them to outside counsel. Explain what the

Intellectual Property e-DISCOVERY PROJECTS GETTING AWAY FROM YOU? company sees as a win. Winning a lawsuit or building a patent portfolio may be futile efforts if neither advances a specific business objective.

Make your expectations for activities and time expenditures clear. Explain what you do and don’t want done, rather than leaving outside counsel to guess.

Keep outside counsel up to date on any changes in objectives, particularly changes in priorities. Reconnecting regularly with your business client is key to that effort. Keeping tabs on evolving goals and strategies will allow you and your outside counsel to maintain focus on the business goals of the engagement, and avoid squandering money and manpower on side issues. You will achieve more efficient utilization of resources and a more focused outcome.

It’s fine to have detailed outside counsel guidelines, which typically address administrative issues as well as company policies on attendance at depositions, hearings and trial. These kinds of guidelines, however, are no substitute for clear and open communications about the business goals that are the substance of the engagement.

Decide on a management approach based on your unique situation. Is it realistic for your in-house team to manage the day-to-day details of the engagement? Or is it more practical given your resources to set a general framework and let outside counsel manage the issues, with regular consultations?

Whichever management approach you choose, you’ll get the best results by creating an atmosphere of trust, confidence and teamwork, one that conveys that you have confidence in your outside counsel’s judgment and abilities. Better results and an easier working relationship will flow from clearly communicating your approach.

PROTECT KEY TECHNOLOGIES It is a challenge to protect the fruits of the company’s R&D effort when budgets are lean, but it’s not impossible. In some measure, the solution lies in knowing what not to do.

17

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AUG/ SEP 2011 E X ECUTIV E COUNSEL

Intellectual Property you chose not to commercialize, but would be worthy competitors of those you do commercialize? If so, obtaining patents may well provide some competitive breathing room in the marketplace.

• Will investors or potential investors consider the patent a valuable asset?

18

It can be a serious error to allow budget constraints to create a hiatus in filing patent applications on the company’s core technologies. The results will be not only a weakened portfolio, but a window of opportunity for competitors. That’s particularly true in a first-inventor-to-file system, since there no longer will be the opportunity to backstop the company’s position by relying on research records showing prior invention.

Losing exclusivity can create an opportunity for competitors to gain a blocking or dominating position that could drastically change the company’s position in the field. A company that once dominated a technology with a strong portfolio may find itself in a defensive position, even one that requires taking a license from an arch-competitor.

Treating all inventions as equal is another approach that can eviscerate a company’s patent position. Make choices before filing. Try to pick winners and

focus available resources on them.

Reverse bidding the per-application cost of new patent filings can appear to be a cost-saving measure, but you need to ask if you can really afford to have the company’s best technology protected by a patent portfolio built on bargain specifications and claims. The answer should be self-evident. Instead, channel available resources based on importance, devoting more to welldrafted patents that can form a solid basis for protecting an important product or market.

In determining which inventions are worth protecting, ask questions like these: • Will you use the invention commercially? Patents covering these inventions are typically the most valuable.

• Will you be able to license a patent to others? Getting patents for the purpose of licensing is ordinarily useful only if your company has an established licensing program and sufficient infrastructure to manage a licensed portfolio.

• Will a patent help you competitively?

Have you developed inventions that

In general, filing patent applications on as many inventions as meet your company’s criteria for importance is advisable. But when considering patent applications outside your home country, more isn’t necessarily better, especially when resources are limited.

Undertaking a large number of foreign filings can result in quickly mounting costs, not only up-front filing fees but a steady outflow for annuities and other maintenance costs into the future.

Deciding where to file can be challenging in a global marketplace. The key is to make the best use of your limited resources. If you can, identify certain key markets in which protection would have the most value.

It is definitely a challenge to build and defend the company’s intellectual property position under budget constraints.

But keeping focused on business goals, making wise choices and maintaining open communications can allow you to meet that challenge. ■

Herbert D. Hart III is a shareholder at McAndrews, Held & Malloy Ltd. in Chicago. He maintains a full-service intellectual property practice, with special emphasis on life science technologies and contested proceedings in the U.S. Patent and Trademark Office. hhart@mcandrews-ip.com

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Aug/ sept 2011

proFessional announcements This year our clients have said

... and that’s just for the first six months of 2011.

McKool Smith is synonymous with success in high stakes trials.

This year, we have secured more than $1 BILLION in courtroom verdicts, judgments, and settlements, which proves what our clients already know: When it comes to litigation, McKool Smith delivers.

Most National Law Journal “Top 100 Verdicts” Won more “Top 100 Verdicts” over the last 5 years than any other law firm.

“Law Firm of the Year” Recognized by client Lennox International following successful defense in nationwide consumer class action.

April 2011 “Patent Case of the Year” Received Managing Intellectual Property magazine’s top honors for our victory in i4i v. Microsoft.

March 2011 “Midsize Hot List” Only firm in U.S. listed three consecutive years by The National Law Journal.

July 2011 Licensing and Settlement Agreements Negotiated licensing and settlement agreements generating hundreds of millions of dollars.

January - June 2011 U.S. Supreme Court Upholds $290 Million Judgment i4i Ltd. Partnership v. Microsoft June 2011 $345 Million Verdict Versata Software Inc., et al. v. SAP America Inc., et al.

May 2011 $20 Million Jury Verdict Affirmed City of San Antonio, Texas, et al. v. Hotels.com, L.P., et al.

July 2011

For inFormation on announcements or e-announcements please contact Julie DuFFy at 781-631-0671 or by email: JDuFFy@executivecounsel.inFo

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AUG/ SEPT 2011 E X ECUTIV E COUNSEL

Intellectual Property

Budget Diversion, Lack of Experienced Examiners, Hobble the USPTO Innovators Pay the Price

By Michael Gzybowski and Bradley L. Smith

20

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

Intellectual Property

T

he ever-increasing backlog of patent applications is getting attention from inventors, the patent bar, and the U.S. Patent and Trademark Office (USPTO) itself.

Prior to 2003, average pendency (time from application filing date to patent being granted) never exceeded about 25 months. Today, pendency has risen to approximately 35 months, and it continues to increase. Recent action by Congress is likely to exacerbate the problem, at

absent radical changes in our patent laws, there is little chance the rate of patent filings will decrease significantly. Filings have nearly tripled since 1990, and the trend remains solidly up, in part because in an increasingly global economy, the U.S. market is highly coveted.

To address the flood of applications the USPTO has hired thousands of new patent examiners. Since 2003, the number has increased from about 4,000 to nearly 7,000, but the backlog continues to grow.

The backlog “represents innovations trapped in this agency that otherwise could be creating jobs,” said USPTO Director David Kappos. least in the short term, and the long term outlook is no better.

Seven years ago, when the backlog of applications was only about half the current level, the head of the USPTO stated that if the backlog ballooned further the effect on innovation would be chilling.

The backlog got worse, and the prediction proved accurate. These delays weigh heavily on the U.S. economy and business, because innovation drives economic growth.

As USPTO Director David Kappos has accurately observed, the backlog “represents innovations trapped in this agency that otherwise could be creating jobs.”

The backlog is simple mathematics.

Applications are being filed faster than dispositions are being generated, and

Meanwhile the new examiners create a host of new problems. The USPTO’s new facility in Virginia is at full capacity with just over 4000 examiners, so the patent office has allowed experienced examiners to work from home. This means that with fewer experienced examiners physically present, many new examiners lack access to mentors, and the training program is compromised.

The problem is not lack of money.

Unlike other federal agencies, the patent office supports itself. Indeed, it collects more in user fees than Congress allows it to spend. Essentially, Congress imposes excessive fees on innovators to support its appetite for higher government spending elsewhere.

U . S . Pat e n t P e n d e n c y 600,000

40 35

500,000

30 400,000

25

300,000

20 15

200,000 Utility Patent applications Filed Pendency (months)

100,000 0

10 5 0

‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 SOUrce: www.USPTO.gOv/PaTenTS/STaTS/inDex.jSP

This diversion of fees has grown worse since the April, 2011, budget deal between Congress and the Administration, ostensibly to avoid a government shutdown. As part of that arrangement, the USPTO’s budget was cut by nearly five percent, meaning that agency must turn over an additional $100 million of the fees it collects from innovators to the U.S. Treasury.

That $100 million claw-back has forced USPTO chief David Kappos to suspend new hiring, eliminate overtime, stop non-mandatory examiner training, and postpone opening any regional patent examination offices. These measures will almost certainly lead to further delays in examination and disposition of patent applications.

Longer term, USPTO itself has conceded that it cannot hire its way out of the backlog and pendency problems, so in addition to hiring additional examiners it has developed a number

The departure of experienced examiners has a huge effect on efficiency. of pilot programs. At least one of these programs, a new “Track One” expedited patent examination initiative, was suspended before it was even launched as a result of the April budget deal. To date, the results of other new USPTO programs intended to reduce application pendency are inconclusive.

One significant factor affecting pendency and examination quality appears to be examiner attrition. Consider that since the year 2000 the number of examiners has risen faster than the number of applications, and the number of applications filed per examiner has declined significantly. Nonetheless, since 2006, the backlog of applications per examiner has only moderated slightly.

This is because the USPTO is losing its most experienced examiners.

In a comprehensive study in 2007, the U.S. Government Accountability Office

21

aug/ sept 2011 E X ECUTIV E COUNSEL

Intellectual Property

examiner efficiency Number of examiners 1990-2000 estimated using data separately provided to the authors by USPTO.

7000

220 Utility, plant and reissue examiners (left scale) Utility applications filed per examiner (right scale) Utility backlog per examiner (right scale)

5000

170

3000

120

1000

70 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10

SOUrCe: www.USPTO.GOv/PATenTS/STATS/Index.jSP

22

(GAO) concluded that 33 percent of new In 1981, U.S. News and World Report examiners leave the USPTO within one stated, “The U.S. patent process is so year of being hired, and nearly 70 percent sluggish, outdated and undependable of examiners leave within five years. that it is contributing to the decline of Other turnover statistics paint a grim innovation in America.” That prompted picture. On average, the USPTO loses the USPTO to implement a successful six examiners for every ten it hires. In user fee program, hire more examiners some years, hiring has not kept up with and train its new examiners to clear the examiner departures. Even this statistic backlog. The mantra was “19 [months] understates the problem, as presumably by ‘89,” with USPTO funding being tied it is the most experienced examiners to a reduction in pendency. who are leaving.

One of the authors of this article was The GAO study reported that examinan examiner in the 1980s and can attest ers require four to six years of on-the-job that morale was relatively good and experience before they become fully profi- nearly everyone at the USPTO was dedicient in conducting cated to reducing Unlike other federal patent application pendency. By 1989, reviews. The departhe USPTO had agencies, the patent ture of experienced succeeded in reducexaminers thus has ing patent pendency office supports itself, but to 18 months and a huge effect on efficiency. Actually, was widely credited Congress has diverted as being the fastest the shift to a newer, less experienced and most economifees from innovators to cal issuer of patents examining corps has had little effect in the world. support government on pendency but Those glory has substantially days are past and spending elsewhere. impacted the qualthe worst is likely ity of examination. ahead. An increasIt is distressingly common to hear ing number of examiners who were patent practitioners complain of newer hired and trained after 1981, and who examiners struggling at times to under- were responsible for successfully reducstand and apply anything more than ing the pendency in 1989, are or soon the most fundamental patent concepts will be eligible for early retirement. The and principles. examiners refer to this group as the

“core” group, or simply “old examiners” – those who spent twenty-plus years in the USPTO as examiners and have by far the most experience. As the core group retires there will be even fewer mentors available, and likely more problems with morale as the younger more inexperienced examiners struggle to address the growing backlog.

There are no easy solutions to the problems of staffing and pendency, but clearly the USPTO must revive its examiner corps. A necessary first step is for Congress to stop diverting USPTO fees in order to fund unrelated government spending. ■

Michael Gzybowski is counsel in the Ann Arbor office of Brinks Hofer Gilson & Lione.

He concentrates his practice on preparing and prosecuting U.S. patents and obtaining foreign patents. He also provides patent litigation support, counsels on patentability, infringement and validity issues, and prepares and evaluates licensing agreements. His more than 20 years of experience includes work as a patent examiner at the U.S. Patent and Trademark Office. mgzybowski@brinkshofer.com

Bradley L. Smith is a shareholder in the Ann Arbor office of Brinks Hofer Gilson & Lione and chair of the firm’s Trade Secrets Practice Group.

He focuses his practice on IP litigation, including patent and copyright infringement. His litigation experience encompasses a variety of industries, including software, electronics, automotive manufacturing, pharmaceuticals and financial services. bsmith@brinkshofer.com

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO AUG/ SEPT 2011

Intellectual Property

IP Rights on Chinese Agenda

By Esther H. Lim and Erik R. Puknys munity, it came as no surprise at all. For years China has been trying to shed its reputation as an intellectual property outlaw and to recast itself as a hotbed for innovation in the 21st century. In this respect, China joins a long line of

China has joined a long line of countries – including the United States – that were notorious for intellectual property violations until they recognized that strong IP protection was necessary to protect domestic innovation and encourage foreign investment.

W

e recently participated in a series of meetings involving top government and private-sector leaders from China and California. The meetings were part of a trade mission to the Shanghai region being led by then-governor Arnold Schwarzenegger of California. The mission’s purpose was to increase cooperation between these two regions whose technological innovations drive so much of their countries’ economies.

One of the most striking aspects of the meetings was the surprise expressed

by first-time visitors to China that the Chinese delegation made intellectual property rights the dominant topic.

After all, China has consistently been the target of criticism from the United States, especially Hollywood, for intellectual property violations. In fact the Chinese delegation was not only open to discussing intellectual property rights, but affirmatively raised proposals for expanding and enforcing them.

To those of us who have long worked with China’s intellectual property com-

countries – including the United States – that were notorious for intellectual property violations until they recognized that strong IP protection was necessary to protect domestic innovation and encourage foreign investment.

SHARP GROWTH IN PATENT FILINGS Perhaps there is no better indicator of China’s efforts to transform its reputation than its patenting activity. In just one year, China climbed from the sixth to the fourth largest patent filer in the world under the Patent Cooperation Treaty (PCT), a vehicle for protecting inventions globally. In 2010, China’s PCT filings increased 56 percent, by far the largest rate

23

aug/ sept 2011 E X ECUTIV E COUNSEL

Intellectual Property of any country. Locally, new patent applications filed by Chinese companies in SIPO, the Chinese patent office, exceeded the one million mark.

Growth in patent filings in China shows little sign of abating. According to SIPO Commissioner Tian Lipu, “by the end of the 12th Five Year Plan (20112015), invention applications received by SIPO every year are expected to double over the current number.”

IP has become a key part of China’s growth and its increasingly competitive standing among world economies. (China just surpassed Japan as the county with the second largest economy in the world.)

Many are shocked to learn that more than 30,000 civil IP cases were filed in 2009 alone. Most cases relate to copyrights and trademarks, but there are also significant numbers of patent, technology contract, and unfair competition cases.

24

PATENT CONSIDERATIONS IN CHINA With China’s IP assets growing at unprecedented speed, companies doing business there should consider a number of basic IP strategies: • File Early. Companies doing business in China can no longer ignore procuring IP rights in China. Chinese courts are becoming friendlier to foreign patent owners, so it’s making more

Having Chinese patents that can be asserted in a counter-suit will improve prospects of avoiding an adverse judgment. sense for foreign companies to obtain Chinese patents to protect their investments in research and development.

Moreover, as the applications of Chinese companies mature into patents, foreign companies will become more vulnerable to charges of infringement. A robust patent portfolio is one

of the best defenses against aggressive patent owners in any country, so having Chinese patents that can be asserted in a counter-suit will improve

ment of intellectual property.

• Avoid Infringement. As important as it is to build your own IP assets, it is equally critical to avoid infringement

China has climbed from the sixth to the fourth largest patent filer in the world. prospects of avoiding an adverse judgment. Since China is a first-to-file country, which rewards early filers, companies doing business in China would be well advised to file an application before a competitor stakes out a claim to the invention.

• Focus on Quality. Not all patents are created equal. In the early stages of the development of a company or an industry, there may be emphasis on quantity over quality of patents. Even during a period of dramatic patentfiling increase, however, it is important to keep focused on quality. A patent that is not valid, or so narrow that it does not cover a competitor’s product, may become worthless. Thus, it is important to think strategically about the invention and how to achieve strong patent protection that withstands future challenges. Focus on quality to build an effective IP war chest.

• Prevent IP Loss. One can lose valuable intellectual property for several reasons. Filing too late is certainly one of them. A weak application is another. That might mean providing insufficient disclosure, or it could mean improperly claiming too little or too much.

Another reason is inaction or lack of employee oversight. Implementing sound IP procedures to maintain confidentiality of company information, including R&D information, and securing proper ownership to ensuing IP rights, are critical in developing and maintaining a valuable IP portfolio.

Preventing IP loss cannot be overemphasized in a country like China, where R&D investment continues to rise and the focus on technological advancement gives rise to fast develop-

of the intellectual property of others.

Planning should start at the earliest stages of market research and product planning.

As the pace of IP development in China escalates, so does the importance of early, strong IP protection for those doing business there. It’s become a necessity for those who want to fully participate in the explosive growth of China’s increasingly sophisticated economy. ■

Esther H. Lim is the founding managing partner of Finnegan’s Shanghai office. Her patent practice include litigation, prosecution, licensing, opinions, due diligence investigations and portfolio management. She has represented many international companies from Asia, Europe, and the United States. esther.lim@finnegan.com

Erik R. Puknys is the managing partner for Finnegan’s Palo Alto office. He represents clients in federal district and appellate courts nationwide and before the U.S. International Trade Commission (ITC), and has litigated intellectual property disputes in a wide range of technologies. He is a frequent lecturer at conferences on patent and trade secret law. erik.puknys@finnegan.com

Working together magnifies the impact and value of individual ideas and efforts.

When you’re serious about intellectual property law‌

As one of the largest firms in the United States dedicated exclusively to intellectual property, Brinks has grown and evolved with the companies and technologies that shape the way we live and work. With 150 attorneys, most with technical or scientific degrees, Brinks has the insight and skill to partner with your company on its next generation of intellectual property challenges.

866.222.0112 usebrinks.com

AUG/ SEPT 2011 E X ECUTIV E COUNSEL

Intellectual Property

A $35 Copyright Can Prevent Millions in Unauthorized Imports

By Gaspare J. Bono and Stephen M. Chippendale

26

T

he so-called “black market” consists of counterfeit goods, whereas the “gray market” is made up of branded products manufactured to be sold in foreign countries that end up in the United States through unauthorized channels. Fueled by the internet and globalization, the gray market has expanded to cover all kinds of products.

Court cases have involved everything from Montblanc pens to Hyundai heavy construction machines. This unauthorized economy has grown at an alarming rate.

When a brand owner loses control of its supply chain, it loses not only profits but the ability to control the diverted products. Gray products are often obsolete or damaged and therefore can

pose risks to customers and harm brand integrity. Compounding the problem, gray goods often lack warranties and support, which can hurt the consumer and threaten a company’s reputation. For all

But trademark law is an imperfect solution, because it seeks to avoid customer confusion by preventing the importation of goods “materially different” from domestic ones. Therefore, to protect their

If a design such as a logo is protected by copyright, then the product bearing the design receives the same protection. these reasons, brand owners must actively protect their distribution channels.

Traditionally, manufacturers – especially of high-end consumer goods – have relied on trademarks to reduce the flow of goods to the gray market.

U.S. market from identical or near-identical gray goods, brand owners should consider copyright law.

The U.S. Copyright Act protects “original works of authorship fixed in any tangible medium of expression.”

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO AUG/ SEPT 2011

Intellectual Property Virtually all gray goods include copyrightable designs and package artwork.

And, if a design such as a logo is protected by copyright, then the product bearing the design receives the same protection.

Consequently, copyrights can be a powerful weapon against gray market activity.

Consider, for example, Omega, S.A. The luxury watch maker registered a tiny globe design with the U.S. Copyright Office a few years go and began placing the copyrighted design on the underside of its Swiss-made Seamasters. Omega sold some Seamasters to an authorized distributor in South America, and this distributor resold the watches to a third party who then imported them into the U.S. without Omega’s consent. This importer sold the watches at a substantial discount to Costco, Inc., enabling the retailer to market them for $700 below the suggested retail price. To stop these sales, Omega sued Costco for copyright infringement in California federal court.

international supply chain leakage. So efOmega’s case turned on the first-sale ficient, in fact, it is not even necessary to doctrine, which generally provides that register a copyright, because one comes a copyright owner can control only the into existence upon creation of the copyfirst sale of a copyrighted work. In 1998, the Supreme Court held that this doctrine righted material. Nonetheless, registration with the U.S. Copyright Office is the best prevented a copyright owner from taking practice because it legal action against confers the rights to “round-trip” imporTrademark law is an file suit for statutation, which occurs tory damages and when a product is imperfect solution injunctive relief; to made in the United recover attorney States, sold abroad because it seeks to fees incurred in and then resurfaces in this country. avoid customer confusion the case; and to record the registraLeft unsettled by tion with the U.S. the Supreme Court by preventing the Customs Service was the ability of a for additional copyright owner to importation of goods protection against prevent the importhe importation of tation of copy“materially different” infringing copies. righted goods made Copyright and sold abroad from domestic ones. registration is easily – such as Omega’s done and the filing fee is as low as $35.

Seamasters.

The Supreme Court has made it perhaps Costco based its defense on the arguthe most cost-effective way for a brand ment that, by selling the watches to a owner to protect its U.S. market from a South American distributor, Omega had flood of its own goods made abroad and extinguished its right to control future not authorized for sale in this country. ■ distribution of the watches. Omega responded that U.S. law does not apply outside of this country. Therefore, a Gaspare foreign sale of foreign-made goods did J. Bono is not qualify as a “first sale” under the a partner at McKenna Copyright Act. Long & AlThe Ninth Circuit Court of Appeals dridge LLP, sided with the copyright owner, holding co-chair of the that the first-sale doctrine did not prevent firm’s Global Omega from blocking Costco’s sales of Patent Litigathe Seamasters. On December 13, 2010, tion Group and a member of the firm’s the Supreme Court let this ruling stand.

Antitrust and Unfair Competition Group.

As a result, non-U.S. manufacturers have gbono@mckennalong.com a new weapon to protect their U.S. market Stephen M. from gray products. However, because Chippendale the Supreme Court justices split 4-4 (with is a partner Justice Kagan abstaining), the case did not in McKenna set nationwide precedent. At least for now, Long & therefore, Omega’s copyright strategy is Aldridge’s best pursued by filing suit in California or Antitrust another western state in the Ninth Circuit. and Unfair In light of the Omega case, brand Competiowners should recognize that copyrighted tion Group, and a member of the firm’s logos and packaging artwork are an Global Patent Litigation Group. schippendale@mckennalong.com effective and efficient way to prevent

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aug/ sept 2011 E X ECUTIV E COUNSEL

Governance

U.S. Changing to Looser Accounting Standards Convergence Means Less Transparency

By Michael W. Stocker and Craig Martin

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S. investors are about to face a new threat to their peace of mind: dramatically changing accounting standards. Barring a sudden change of course at the Securities and Exchange Commission, an upcoming shift from U.S. accounting rules to international guidelines will likely decrease financial transparency.

Most rules governing accounting under traditional U.S. standards are embodied in the Generally Accepted Accounting

Principles, or GAAP. They are a set of accounting principles developed over seventy-five years in response to changes in the economy, business and products.

Although the SEC is vested with the statutory authority for establishing accounting rules for publicly traded companies. It delegated this responsibility to the Financial Accounting Standards Board, or FASB. FASB is responsible for establishing the specific accounting rules that govern the preparation

and presentation of financial statements, including for publicly traded companies.

International Financial Reporting Standards (IFRS), on the other hand, are the accounting standards used in almost every region of the world except the United States. IFRS are issued by the International Accounting Standards Board (IASB), a rule-making body based in London that is responsible for preparing and issuing specific standards under IFRS.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

Governance

In contrast to the very detailed rules set out in GAAP, IFRS is a principles-based system that focuses only on reporting the economic substance of transactions, and relies heavily on management judgment.

As a result, IFRS rules generally provide considerably less guidance than GAAP. IFRS consists of about 2,000 pages of standards and interpretations, compared to 30,000 for GAAP. In instances where a transaction fails to fall neatly into a specific standard or application, IFRS gives management considerable latitude in deciding how information should be reported.

Moreover, unlike the FASB, which is funded through mandatory contributions from publicly listed companies, IASB is largely dependent on contributions from donors, such as the central banks and other international organizations, as well as individual companies and organizations in the United States, including the Big Four accounting firms. This funding structure has left the IASB especially vulnerable to political pressure. Indeed, in 2010, Michel Barnier, the EU’s internal market commissioner, suggested that IASB funding should be dependent on the IASB’s willingness to

IFRS is a principles-based system that focuses only on reporting the economic substance of transactions, and relies heavily on management judgment. make changes to its governance suggested by the European Commission.

This vulnerability to political pressure was apparent in the recent financial crisis, when the IASB quickly acceded to European Commission demands for an immediate rule change enabling European banks to reclassify securities to avoid write-downs in their value, and consequently avoid billions of dollars in impairment charges. But for these rule changes, the European banks would likely

have violated capital requirements.

In fact, the rule change enabled many bank managers to distort the economic reality of their financial performance during the third quarter of 2008. Reclassification allowed Deutsche Bank to convert

years. During this transitional period, the FASB would work to eliminate differences between GAAP and IFRS, and then endorse and incorporate individual IFRS rules into GAAP. However, as part of this approach, FASB would still retain the

Reclassification allowed Deutsche Bank to convert loss into a profit for the third quarter of 2008, driving up Deutsche Bank shares by 19 percent. loss into a profit for the third quarter of 2008, driving up Deutsche Bank shares by 19 percent. Even Sir David Tweedie, the former head of the IASB, conceded that rule change, driven by pressure from the European Commission, had compromised the IASB’s independence.

Despite these concerns, the SEC has been moving rapidly towards adopting IASB standards through a process called convergence, a process to reduce the differences between GAAP and IFRS. This shift began in 2007, when the SEC began to permit foreign issuers to file, with the Commission, IFRS financial statements without a reconciliation to GAAP. Convergence began to move more rapidly when, on November 14, 2008, the SEC published a “roadmap” that set out specific milestones that if achieved could lead to the adoption of IFRS by all U.S. issuers. The roadmap included seven milestones – issues that needed to be addressed before the United States would adopt IFRS. Among other things, the SEC required improvements in IFRS accounting, and in the accountability and funding of the IASB. The latter was a tacit reference to the IASB’s vulnerability to political pressure. The roadmap also established a proposed timeline whereby certain issuers would phase in mandatory use of IFRS between 2014 and 2016.

In a May 2011 staff paper, the SEC has left itself some room to avoid wholesale incorporation of IFRS into GAAP, thereby keeping U.S. public companies under more familiar standards. Under this proposal, the IFRS would replace GAAP over a period of five to seven

authority to modify or add to individual IFRS rules being incorporated into GAAP. According to the staff paper, the SEC envisions that ultimately U.S. issuers, by complying with GAAP, could represent that they are also IFRS compliant. Comments on the framework are due to the SEC by July 31, 2011.

Whatever course the SEC ultimately pursues, U.S. investors with an eye to the future will need to follow the convergence process closely. Globalization, at least in the case of accounting standards, may make the world a riskier place for U.S. markets. ■

Michael W. Stocker is a partner at the law firm Labaton Sucharow, where he represents institutional investors in securities and corporate governance matters. He writes regularly on issues of importance to individual and institutional investors. mstocker@labaton.com

Craig Martin is an associate at Labaton Sucharow and a CPA. He specializes in securities fraud cases involving complex accounting and financial fraud, as well as cases against auditors. cmartin@labaton.com

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AUG/ SEPT 2011 E X ECUTIV E COUNSEL

Human Resources

Corporate Campaigns Globalize

By Michael Lotito and Kara Preedy

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aced with declining membership in the United States and hoping to unionize U.S. subsidiaries of global companies, organized labor is calling attention to the differences between European and U.S. labor laws.

European laws are more worker-friendly, and organized labor is pressuring the corporate parent to follow its home country’s labor laws when operating in the United States.

As part of this global approach to union organizing, labor unions have borrowed strategies from the “corporate campaigns” initiated by U.S. labor unions to secure, among other things, employer neutrality agreements, in which the employer agrees not to utilize its full rights under the law to communicate freely with employees.

The tactic goes beyond traditional union organizing tactics and aggressively uses the press, television, the internet and other media to attack the reputation and motives of the companies it targets.

To better understand why unions have turned to international corporate campaign strategies, one must first understand the dynamics of labor relations in the United States and the key differences between U.S. and European Union

labor law. The purpose of this article is to provide that background, help in-house counsel understand unions’ international initiatives and offer recommendations on what in-house counsel can do for a European parent or its U.S. subsidiary to address labor organizing pressure.

ORIGINS OF THE STRATEGY Union membership in the United States is at a 70-year low.

According to the U.S. Department of Labor, the union membership rate in 2010 was just under 12 percent. That’s down from an historic high of 35 percent in the 1950s. In the early 1980s, unions still represented over 20 percent of the American workforce. The numbers are even more striking when we look only at the private sector, where unions represent less than seven percent of the workforce.

Labor unions have been working hard but without success to get Congress to enact more pro-union labor laws. Unions also have waged aggressive corporate campaigns against companies they set out to unionize.

The corporate campaign has roots in the activist movements of the 1960s.

The tactic goes beyond traditional union organizing tactics and aggressively uses the press, television, the internet and other media to attack the reputation and motives of the companies it targets.

The principal concept is to organize the employer, rather than its employees. As a United Food and Commercial Workers official said in the early 1990s, “Employees are complex and unpredictable.

Employers are simple and predictable.

Organize employers, not employees.”

Here are the hallmarks of a corporate campaign: • Publicity and online activity criticizing the company’s treatment of employees, publicizing examples of harassment and criticizing the company’s role as a corporate citizen.

• Legal proceedings before government regulators, employment-discrimination and class-action lawsuits in state and federal courts, and shareholderderivative suits.

• Alliances with religious leaders, consumer groups, environmental advocacy organizations and government agencies, with the common goal of targeting the company and putting pressure on shareholders, corporate boards, investors, customers, creditors, and service providers/suppliers to use their influence on labor’s behalf.

• Traditional labor union methods, such as demonstrations, pickets and boycotts.

To quote AFL-CIO President Richard Trumka, “[G]lobal companies begat global problems for workers – global problems begat the need for global unions – and if global unions want to truly match the might and power of global corporations we have to undertake global research and global campaigns.”

The effect of this strategy is that U.S. companies are being pressured to voluntarily relinquish certain rights.

DIFFERENCES BETWEEN U.S. AND EUROPE While the European employer-union relationship is largely a partnership, the relationship is more adversarial in the United States. At the same time, a much higher percentage of European workers – on average 24 percent – are union members.

Critics of U.S. labor law say the United States should ratify the International Labor Organization (ILO) conventions addressing freedom of association, including Convention No. 87 of 1948 (Freedom of Association and Protection of the Right to Organize Convention) and Convention No. 98 (Right to Organize and Collective Bargaining Convention, 1949). Both Conventions have been ratified by EU member countries and incorporated into their national laws, although some of the (non-binding) ILO recommendations are more far-reaching than the member states’ national courts’ interpretations of freedom of association.

The differences between U.S. law and ILO Conventions are significant. The National Labor Relations Act gives U.S.

workers the right to organize, bargain collectively, and engage in other concerted activities. Labor unions, however, gain the right to represent employees only if “designated or selected” by employees. Under Article 2 of ILO Convention No. 87, however, employees have the “right to establish and… to join organizations of their own choosing without previous authorization.”

Once an American labor union is designated or selected by employees, the union becomes the exclusive bargaining representative of all the employees in the bargaining unit. In

While the European employer-union relationship is largely a partnership, the relationship is more

31

adversarial in the U.S. many European countries, however, employees may be represented proportionally by more than one labor union, and multiple collective bargaining agreements are possible in the same bargaining unit.

In the United States, supervisors and managers are not covered under the NLRA. They do not have the right to form and be represented by a labor union. ILO Convention 87, on the other hand, refers to “[w]orkers…without distinction whatsoever” having the right to establish and join unions, although top executives are usually excluded.

Finally, U.S. law allows the permanent replacement of workers striking over wages and working conditions. The ILO Committee on Freedom of Association, however, has found this practice incompatible with freedom of association.

Global unions and organizations, such as Human Rights Watch, have seized upon these legal distinctions to severely criticize U.S. employers.

“Your problems have a legal precedent.”

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aug/ sept 2011 E X ECUTIV E COUNSEL

Human Resources

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INTERNATIONAL CORPORATE CAMPAIGN STRATEGIES International corporate campaign strategies are similar to those used by unions domestically in the United States. The major difference is that unions have more leverage when they can subject a company to global pressure. Transnational union alliances also have additional legal recourse through complaints filed with the ILO’s Committee on Freedom of Association, as well as under the Organization for Economic Cooperation and Development’s (OECD) Guidelines for Multinationals.

Other common tactics employed in international corporate campaigns include publicity, online activity, international boycotts, pressure on corporate boards, and alliances with NGOs and other third parties.

Global union federations sometimes seek employer agreement to voluntary codes of conduct or International Framework Agreements (IFA) that incorporate ILO provisions.

Once the multinational company signs an IFA, its U.S. entity may be criticized for activities that are legal under the NLRA but do not conform to the IFA, such as expressing views about union representation.

A number of companies already have experienced international corporate campaign pressure in the form of lawsuits, strikes or union coalitions across various countries. In a recent move, the United Auto Workers (UAW), which was trying to organize U.S. auto plants owned by European parent companies, called on the business community to “demonstrate their openness to change by agreeing to the framework established” in a set of principles that includes pledges to refrain from coercion, intimidation and threats to workers from either side.

Another provision calls for both union and management to avoid promising better wages or benefits based on a worker’s vote for or against the UAW. The Wall Street Journal reported that UAW President Bob King hinted that if the companies don’t agree to a set of rules being promoted by the union to ensure what it calls free and fair union elections,… “the fight could turn nasty—and global.”

Any response to national or global

threats posed by a union’s organizing campaign must be tailored to a company’s own culture, labor relations history, and business interests. U.S. entities also must keep in mind that if they want the support of a foreign parent, they may have to act in accordance

respond lawfully to organizing efforts.

• Communicate: Define yourself positively to your many constituents before the union defines you negatively. Consider positive messaging about the company rather than attacks on the union.

If U.S. entities want the support of a foreign parent, they may have to act in accordance with certain international standards even if U.S. law offers them greater latitude. with certain international standards, even if U.S. law offers them greater latitude.

The best advice is the simplest: Commit to maintaining a workplace marked by individual respect and dignity, one that is free of discrimination or harassment of any kind. This may help avoid union troubles altogether.

When facing a corporate campaign, however, being a “good employer” may not be enough. Even compliance with national labor and employment laws, including the NLRA, may be insufficient to ward off a union’s demands for neutrality or a card check. More is needed. Though each company is unique, the following tools should be part of your plan: • Inform senior leadership: They should fully understand the nature of a corporate campaign, as well as the union’s ultimate goals.

• Conduct a vulnerability assessment: Know as much as possible about the strategies unions are likely to use against your company. Know the unions that are most likely to target your company.

• Ensure legal compliance: Ensure compliance with statutory obligations, such as wage-and-hour laws and regulations, health and safety standards (including state laws), fair employment practice laws and other enactments.

• Educate: Managers and supervisors should be informed and trained on how to maintain an issue-free environment. They should understand how to

A global conglomerate with operations in the United States must maintain a dual perspective: The foreign parent company may have other or additional interests, pressure points, and key players to involve.

It also may need special information, as well as a legal and cultural “translation,” to assess the relevance of a corporate campaign to its U.S. operations. ■

Michael J. Lotito, a partner at Jackson Lewis LLP, is an authority on the development of labor and employment law strategies for the workplace. He has counseled a number of multinational companies that seek to avoid workplace disputes consistent with the organization’s fundamental business objectives.

LotitoM@jacksonlewis.com

Dr. Kara Preedy, a partner at Pusch Wahlig Legal in Berlin, represents companies on matters concerning national, international and European labor law, the design and implementation of compensation systems and all aspects of employment law. preedy@pwlegal.net

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO AUG/ SEPT 2011

E-Discovery

A Primer on Metadata To Scrub or not to Scrub?

By H. Hunter Twiford III and John T. Rouse

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NO

E U SID E R

nder the 2006 amendments to the Federal Rules of Civil Procedure, there is a strong emphasis on a party’s ability to produce and review files in their “native format,” which is the associated file structure defined by the original application creating the file.

For example, Microsoft Word documents are created as .doc files in their native format, but a printed or scanned version – a .pdf or .tiff image – is no longer in the native format. The concept may be somewhat new territory for many attorneys, but some familiarity with it is important, since it’s in the native format where the metadata is found.

The simple definition of metadata is “information about information.” When a computer document is created, the program being employed automatically generates certain information, such as who created the document, when it was created, how long the user worked on it, the number of words, who has edited the document, when it was last edited, and more. This information is called metadata.

A more precise definition is provided by The Sedona Conference, a legal think tank.

It defines metadata, in part, as “information about a particular data set or document which describes how, when and by whom it was collected, created, accessed, modified and how it is formatted.”

Metadata is contained in most documents created on a computer, embedded

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aug/ sept 2011 E X ECUTIV E COUNSEL

E-Discovery

in the file. It’s invisible to most users, but someone who is technologically proficient can “mine” metadata to discover what could be a gold mine of useful information. The file containing the specific metadata, an OLE (“Object Linking and Embedding”) file, “travels” with the document wherever it goes (in native format), and generally contains such information as the user’s name/initials, the company name, the computer name, the server name, previous authors and revisers, the number of revisions or versions, hidden text, comments and other file properties and summary information.

Metadata might appear relatively harmless, but in the litigation context amidst a vast collection of documents, it can potentially provide the smoking gun. Metadata, in

In the discovery context the courts may require 34

production of ESI with metadata intact, while in the communications sphere metadata is usually removed. an expert’s hands, can provide the electronic equivalent of a paper trail, identifying each person that laid hands on a particular document and what that person did to it.

A witness, for example, might testify that a document was created and sent on a particular date, or that he or she was the only person who worked on that particular document, while the metadata might reveal another story – including the document’s true origin and its editing history. This could well provide opposing counsel opposite with powerful crossexamination ammunition.

In litigation, concerns regarding metadata primarily arise in one of two contexts: in electronic discovery, and in communications with opposing counsel and/or the client. Neither time nor space

permit recounting the horror stories related to inadvertent production of documents containing metadata, but it is worth noting that in the discovery context, the courts will ordinarily require, upon request of the opposing party, production of ESI with metadata intact. On the other hand, in the communications sphere metadata is usually removed.

Thus, there is an important distinction to be drawn between day-to-day transmission of electronically stored information in the corporate setting, both internally and externally, and its production in the litigation context. In the former, in-house and outside counsel should consider attorneyclient privilege in all communications, and when appropriate they should “scrub” metadata from documents sent to opposing counsel to avoid potential liability for disclosure. Failure to remove metadata from documents created or revised by an attorney prior to transmission outside his/ her company or law firm is a fertile source of future attorney malpractice claims, and may raise ethical considerations.

Conversely, scrubbing metadata from documents produced in litigation, particularly when there is a request to produce it and it’s potentially relevant, may be a violation of the Federal Rules. According to some court decisions it exposes both the offending company and its attorneys to potentially severe sanctions.

Once the distinction between communications and litigation ESI is appreciated, the issues are more easily parsed. Many companies and lawyers use automatic “scrubbing” programs to eliminate metadata from electronic documents sent from their offices. In fact, some commentators posit that it may constitute malpractice not to routinely scrub metadata.

Whichever method of controlling metadata is chosen, there should be a standard scrubbing procedure throughout the organization. In-house attorneys and staff should be trained on the standard protocol, and the process should be automated to the extent possible to avoid the inadvertent transmission of unscrubbed documents.

Although e-discovery is still relatively new, rapidly-developing law requires

in-house counsel and outside litigation counsel to be familiar with the concept of e-discovery and ESI production, as well as the company’s internal systems, practices and procedures. Discussions with IT management and familiarity with the technology platforms and protocols are critically important. The trend among the courts is to place the burden of ensuring compliance with litigation holds and discovery orders on the company producing the ESI, and its attorneys. Sanctions and penalties for failing to comply can be substantial. In some cases, they have reached six and even seven-figures.

Corporate counsel need to become familiar with the basics of e-discovery.

In particular they may need to talk to IT staff regarding metadata, to make sure any concerns are adequately addressed before litigation arises, and that they know when they need to bring expert ESI consultants or e-discovery counsel on board. Advance preparation will make the pain and expense of ESI battles far more manageable. ■

H. Hunter Twiford III is a partner and head of the Class Action and the Mississippi Commercial Litigation sections at McGlinchey Stafford PLLC, in the firm’s Jackson, Mississippi office. He is co-founder and co-editor-in-chief of the CAFA Law Blog, which is focused on the Class Action Fairness Act of 2005. He is a frequent writer and national lecturer on CAFA and other class action issues. htwiford@mcglinchey.com

John T. Rouse is a senior associate in the Commercial Litigation section of McGlinchey Stafford, in its Jackson, Mississippi office. jrouse@mcglinchey.com

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AUG/ SEPT 2011 E X ECUTIV E COUNSEL

Canada/Cross–Border

Welcome to Canada

Canadian Capital Markets Lure Small and Mid-cap Clean-Tech

By Ryan M. Filson and Rajeev Dewan

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ith more than 3,600 listed companies, the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSX V) rank second among the world’s stock exchanges. In recent years they have emerged as the world’s leading exchanges for listing clean-tech companies. In 2010, clean-tech companies raised over Cdn$1.3 billion on both the TSX and the TSX V. An increasing number of U.S. cleantech companies are exploring the Canadian capital markets because they are too small for listing on the Nasdaq.

For example in December, 2010, Global Water Resource Corp., a Phoenix-based water resource management company, raised approximately $65 million through an initial public offering on the TSX. Currently, there are approximately 160 U.S. companies listed on the TSX exchanges. International clean-tech companies are also gravitating towards the exchanges.

In 2009, China Wind Power International Corp. listed on the TSX V. In 2011, Nesscap Energy Inc. (a South Korean based clean-tech company) listed on the TSX V. This article provides an overview of

why a U.S. company should consider listing on the TSX exchanges, and the various options available for taking a company public in Canada.

THE TWO EXCHANGES The TSX is the senior exchange. It has listing standards for well established businesses and management teams with experience in public markets. The TSX V is the junior exchange. It has adopted listing standards which are tailored towards emerging companies or smaller financings,

companies that initially listed on the TSX V have successfully graduated to the TSX. The TSX exchanges currently list approximately 130 clean-tech companies, with an aggregate market capitalization of approximately Cdn$19 billion. One of the main reasons there are so many cleantech listings is the abundance of entrepreneurial capital in Canada. The traditional strength of the exchanges has been gas and fuel exploration companies, which has resulted in a pool of investment bankers and investors who understand energy.

The exchanges are leveraging their traditional strengths in listing gas and exploration companies.

As a result, there is a pool of investment bankers and investors who understand renewable energy. and it has more flexible listing standards.

A U.S. company could initially list on the TSX V, then graduate to the senior TSX once it has reached its business milestones.

A streamlined regulatory protocol fosters this process. Thirty percent of clean-tech

In March 2010, the TSX launched the S&P/TSX Clean Technology Index. It measures the performance of listed companies that generate over 50 percent of their revenue from products or services focused on eliminating negative ecological impacts,

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

Canada/Cross–Border

while utilizing natural resources productively and responsibly.

BENEFITS OF LISTING The costs associated with going public in Canada tend to be less than those in the United States. Legal, audit and accounting costs on a small offering range between Cdn$200,000 and $500,000. Larger, more complex offerings cost up to $1,000,000.

The lower costs are attributable in large part to the differences between the regulatory environment in Canada and the United States, differences that also translate into lower ongoing compliance costs. For example, under Canadian securities law, the obligations of auditors are not as stringent as requirements under Sarbanes-Oxley.

Investors in Canada are notably interested in small and mid-cap companies, and analysts cover them comprehensively.

Approximately 86 percent of companies listed on the TSX V have a market capitalization of Cdn$50 million or less. About 31percent have a market capitalization between $50 million and $250 million.

In 2010, there were more than 100 financings completed by clean-tech companies listed on both exchanges, with more than 3.5 billion shares trading. That represented approximately $7.3 billion in value.

Twenty-five international brokers are trading members of the exchanges, including, Goldman Sachs, JP Morgan, Citigroup and Merrill Lynch. Collectively they account for 40 percent of daily trades.

The process for going public in Canada is similar to the U.S. process. Typically it takes three to six months. It may be quicker to file and get a prospectus finalized with Canadian regulators in comparison with the SEC. (This process can sometimes be completed within 60 days.) It also may be quicker for a U.S. company to list on the TSX or the TSX V by way of a qualifying transaction or a reverse-takeover (both discussed below), because a prospectus is generally not required.

There is no requirement for a U.S. company to establish a Canadian office. However, foreign companies often designate a party resident in Canada to manage investor relations.

OPTIONS FOR GOING PUBLIC One option is a traditional IPO, similar to an IPO in the U.S. market. The process includes preparing and clearing a prospectus with the applicable Canadian regulators, undertaking the requisite due diligence and conducting a road show.

Corporate structure and jurisdiction of incorporation are important considerations for a U.S. company considering an IPO in Canada. These structuring choices are often driven by a thorough analysis of U.S. securities and tax law in light of an IPO in Canada.

The reverse-takeover, or backdoor option, permits a private U.S. company to immediately obtain a listing by taking over an existing listed company. These transactions are generally achieved either by way of statutory amalgamation or through a share exchange between the target listing company and the private company.

Irrespective of how the transaction is executed, the successor company formed as a result would need to meet the listing standards of either the TSX or the TSX V. An information circular is required for review by either exchange, and shareholder approval is required.

The Capital Pool Company Program (CPC) was created by the TSX V to allow seasoned directors and officers with no commercial operations to raise capital in order to acquire an operating business.

This program consists of two-phases: creating and capitalizing a CPC through a prospectus filed and reviewed by Canadian securities regulators, and identifying at closing a qualifying transaction with an operating business that meets the listing standards, within a two year time-line.

The qualifying transaction is usually accompanied by concurrent financing conditional on closing. The CPC is subject to several requirements, including a minimum number of public shareholders and a limit on the amount of capital which it can initially raise.

Some of the key advantages of the CPC are that it provides an alternative route to accessing capital for a company that is not ready for a traditional IPO; it doesn’t entail the risk of an IPO; and a

qualifying transaction can be completed quickly in comparison to an IPO because a filing statement or information circular is required to be filed and reviewed by the TSX V in lieu of a prospectus.

Since the establishment of the CPC more than 2,000 capital pool companies have been established, and approximately 80 percent of them have completed qualifying transactions. The CPC has been successfully utilized by a number of clean-tech companies to go public in Canada.

U.S. clean-tech companies considering their financing options should consider the TSX or the TSX V as a viable alternative to other public and private options, given the clear leadership that these exchanges have demonstrated. ■

Ryan M. Filson is a partner at WeirFoulds LLP. He has a diverse business law practice with an emphasis on domestic and cross-border merger and acquisition transactions, equity and debt financings and related regulatory matters. He represents buyers and sellers in acquisitions and divestitures in the Canadian market, and he advises on Canadian issues in international transactions. rfilson@weirfoulds.com

Rajeev Dewan is a senior associate at WeirFoulds LLP. He is a corporate finance lawyer with a wide range of international regulatory and transactional experience relating to capital markets.

His practice is focused on advising highgrowth companies on securities, financing and transactions matters. Previously he worked in the UK and Middle East, and was a Senior Listings Manager at the Toronto Stock Exchange. rdewan@weirfoulds.com

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aug/ sept 2011 E X ECUTIV E COUNSEL

Canada/Cross–Border

Overseas Problems Slow U.S-Canada Deals

By Divya Balji

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38

espite a strong Canadian dollar and looser lending by banks, U.S.-Canadian cross-border activity was not as robust as financial industry experts had hoped in the first half of 2011. Some sectors did stand out, and the middle market remains good for cross-border deals. As of the end of May, there were more than 80 Canada-U.S. cross-border M&A deals announced, excluding lapsed and withdrawn bids, according to mergermarket data. Within this time frame the top ten deals in dollar terms came from energy, mining and utilities; real estate; construction; and the consumer sector.

“The credit crisis in Europe, the slowdown in the Chinese economy and the crisis in the Middle East have dampened activity,” said Michael Gans, Partner at Blake, Cassels & Graydon LLP.

“The credit crisis in Europe, the slowdown in the Chinese economy and the crisis in the Middle East have dampened activity.”

However, the strong Canadian dollar has pushed some cross-border deals, according to Gans. As examples, he pointed to the purchase by Montreal-based Alimentation Couche-Tard of 322 retail convenience store sites in the Western United States from ExxonMobil for an undisclosed amount, and to the acquisition of Clement Pappas & Co. by Lassonde Industries for USD $390 million.

Dechert LLP acted as legal counsel to Clement Pappas & Co and Squire, Sanders & Dempsey LLP acted as legal counsel to Lassonde.

Some sectors logged multi-billion dollar deals. The year 2011 kicked off with the CAD $4.9 billion purchase of Consolidated Thompson Iron Mines by Cliffs Natural Resources. That deal closed in mid May. Fraser Milner Casgrain LLP is Consolidated’s legal advisor. and Cassels Brock Blackwell LLP is acting as legal advisor to the transaction committee for Consolidated. Jones Day and Blake, Cassels & Graydon LLP are acting as legal counsel to Cliffs.

The mega-deal in financial services was the recent sale of RBC’s U.S. regional retail banking operations to PNC Financial Services Group for USD $3.45 billion.

Some U.S. companies that want to expand their footprint in Canada have looked to acquisitions instead of growth.

The recently announced sale of Capital Power Income L.P. to Atlantic Power for CAD $1.1 billion will give Atlantic a larger and more diversified portfolio of contracted power generation assets in both the United States and Canada.

Goodmans LLP was lead legal counsel for Atlantic Power, and Fraser Milner Casgrain LLP and Norton Rose LLP acted as legal counsels to Capital Power.

The middle market should remain

strong for M&A deals between the United States and Canada, and it will be the driver for cross-border deals within North America. As the Canadian dollar continues to remain strong, Canadian companies could look south and oversees to acquire undervalued assets. ■

Divya Balji joined mergermarket, an independent mergers and acquisitions intelligence service, in June 2007 as a financial reporter and became Canada bureau chief in August 2009. She oversees the company’s M&A coverage in Canada, with a specific focus on energy and mining. Prior to working with mergermarket, she completed her degree in Economics & Mathematics at the University of Toronto.

Divya.Balji@mergermarket.com

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AUG/ SEPT 2011 E X ECUTIV E COUNSEL

Pain Points and Pitfalls of E-discovery Explored At Executive Counsel Institute “Exchanges” what extent the opposing party and the court will be satisfied with the use of such technology.”

40

T

he audience set the agenda at the three Executive Counsel Institute E-discovery conferences held so far this year, in San Francisco, New York and Chicago.

Two more conferences are scheduled; in Houston September 22-23, and in Los Angeles, December 5-6.

The conferences are organized as “exchanges.”

Seating is arranged to facilitate maximum give and take, a format that participants agree is a big improvement on the usual top-down CLE seminar.

The attendees kick off the proceedings by identifying “pain points” – E-discovery issues that concern them most. Here are some of them:

ARTIFICIAL INTELLIGENCE AND E-DISCOVERY: WHERE DO THE ATTORNEYS FIT IN? HOW ARE JUDGES GOING TO DEAL WITH THIS? “Computer technology has reached the point that predictive coding of large data sets is possible,” according to Browning Marean, senior counsel at DLA Piper and co-chair of all five Executive Counsel Institute E-discovery conferences in 2011. “The challenge for attorneys is to become comfortable with the technology as a substitute for personally examining every document. Given the adverAttendees Maryrose Maness, sarial nature of litigation, there Warner Music Group; Kirsten will always be a question as to Hotchkiss, Wyndham Worldwide

ARCHIVING POLICIES: WHO OWNS THE DECISION TO ARCHIVE? E-discovery has brought records retention issues to the fore. Creating an appropriate archiving policy that meets regulatory requirements is a big task, even in the absence of litigation. Add litigation to the mix, and the challenge of what to archive becomes acute.

HOW CAN LITIGANTS AVOID OR DEAL SUCCESSFULLY WITH THE PITFALLS OF INTERNATIONAL DISCOVERY? International litigation is one downside of globalization. Litigators in the United States are accustomed to broad discovery, but when the information is located outside our borders, privacy concerns, statutory impediments and possible criminal sanctions become issues. In fact the very technologies that facilitate E-discovery – cloud computing, online storage – can make it difficult to say where bits of information actually are. This in turn raises the question of which nation’s laws apply.

HOW CAN WE ACHIEVE BALANCE BETWEEN TEACHING YOUNG ATTORNEYS E-DISCOVERY, AND TRAINING THEM AS LITIGATORS? Most law schools do not address the issues of electronic discovery in any meaningful way, so new attorneys are ignorant about the topic. This presents significant training challenges for the legal profession. It also presents opportunities for graduates who learn E-discovery, because they can quickly become a critical member of any litigation team. That said, the monotonous task of examining written documents for legal issues used to be how young attorneys learned what was relevant in litigation.

No systematic substitute for such experience has yet been developed.

WHAT DO WE HAVE TO DO AS A LARGE DATA PRODUCER TO PROVE WHAT WE DID WAS DEFENSIBLE? “The complexities of electronic discovery require that parties keep close track of the decisions and actions they take in litigation,” says Marean. “They might be called into question months after the fact, so the need for a detailed audit trail becomes especially important.”

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

Spoliation of ESI Risks Criminal Prosecution

by Robert D. Brownstone, Esq.

A

prime topic for discussion at the Executive Counsel E-discovery exchanges continues to be the interaction among various Electronic Discovery process stakeholders. Effective collaboration is needed among individuals and groups – the client organization’s business side and legal department; the law firm retained as outside litigation counsel; the technology/processing bureau or vendor; and the reviewers’ bureau or vendor.

As those parties play out their roles throughout a lawsuit or other legal proceeding, their efforts are fraught with potential pitfalls. When it comes to electronically stored information (ESI) in lawsuits, the yin and yang consist of striving to win the case on the merits by effectively conducting factual investigation to put one’s side in the best position to succeed; and not lose the case before reaching the merits because of an ethical, projectmanagement or technological lapse in the E-discovery process.

The latter can be a result, direct or indirect, of a judicial finding that preservation and/or production efforts have been so deficient that Richard Cohen, RenewData; Courtney Robbins and Lindsay Kassof, Elizabeth Arden illegal destruction (“spoliation”) has occurred. While most jurisdictions require intentional, malicious conduct as the basis for a penalty, in others, reckless or negligent conduct could be enough.

Spoliation sanctions in a civil lawsuit can include: a default judgment against a defendant; dismissal of some or all of Plaintiff’s claims; huge monetary penalties; reimbursement of some of the other side’s legal fees and/or costs; a jury instruction that tells the jurors they can or must presume that the contents of all ESI that wasn’t preserved must have been harmful to the party who deleted or disposed of it; a mistrial; and exclusion of evidence at trial.

Participants at the Chicago program

Even scarier, individuals can be the targets. Jail time for civil contempt was contemplated for a CEO in the Victor Stanley v. Creative Pipe case, in U.S. District Court for the Southern District of California. In another case, involving Qualcomm, the same court referred counsel to the State Bar for an ethics investigation.

Criminal prosecution is a distinct possibility if ESI is destroyed to impede or obstruct a governmental agency inquiry or investigation.

As discussed at prior Executive Counsel exchanges, the above parade of horribles mandates not Charley Otto, ZyLAB; Jimmy Huynh, Citi only a legally compliant E-discovery process, but also a disciplined memorialization to provide defensibility. Increasingly, judges have required litigants to demonstrate the E-discovery steps they took and chose not to take – and why.

Carolyn Mariani, Warner Music Group; Those with experience Linda Sharp, ZL Technologies in E-discovery deem the most potent recipe for success to include effective projectmanagement, transparent budgeting/costs-estimates, ongoing written communication between point people, and an appropriate melding of search tools and brain-power. Absent these factors, finger-pointing can ensue, and key players’ mutual expectations can become muddied and unmanageable.

The consensus at recent briefings seemed to be that E-discovery “best practices” are not set in stone. They evolve over time, as stakeholders get together and discuss how to develop a better way.

Don’t put your head in the sand and shy away from this unique 21st Century challenge. Please join the dynamic discussion at the next exchanges, to be held in Houston, September 22-23, and Los Angeles, December 5-6. www.executivecounselinstitute.com Robert D. Brownstone, Esq. is a partner at Fenwick & West LLP, and the firm’s Technology & E-discovery Counsel and Electronic-Information-Management Group Co-Chair. Brownstone co-chaired the Executive Counsel Institute’s eDiscovery conference in San Francisco last March, and will co-chair again Los Angeles in December.

41

aug/ sept 2011 E X ECUTIV E COUNSEL

Pushing Back The problem is growing, due largely to the manufacture of these products in China, India, North Korea and other countries where labor costs are extremely low. Some economists believe that the production of counterfeit goods comprises

42

eight percent of China’s gross domestic product.

Counterfeiting is never a victimless crime.

Counterfeiters can divert enough sales to impact the bottom line, but they also can damage your company in less measurable but equally significant ways, such as diminishing your reputation, brand strength and good will. Confusion in the marketplace may make consumers less convinced of your commitment to quality and less likely to purchase your product. And, as

Working With the Feds

demonstrated in the automotive, pharmaceutical, electrical, electronics industries, counterfeit

By Alison Conlon and Brian Lewis

products can have health and safety implications

O

for your valued customers. ne might think of fake Louis Vuitton bags or

More broadly, counterfeiting threatens the

Rolex watches when someone mentions coun-

growth of the American economy. As President

terfeit goods, but counterfeiting exists in many

Obama stated at the Export-Import Bank’s An-

industries and products. It can have dramatic consequenc-

nual Conference last year: “We’re going to ag-

es for a company’s bottom line, its tangible and intangible

gressively protect our intellectual property. Our

assets, and the safety of its customers. Counterfeit circuit

single greatest asset is the innovation and the

breakers may be in American homes, counterfeit parts

ingenuity and creativity of the American people.

may be in our cars, counterfeit toothpaste may be on our

It is essential to our prosperity and it will only

toothbrushes, and counterfeit pharmaceutical products

become more so in this century. But it’s only a

may be in our medicine cabinets.

continued on page 44

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

against Counterfeit goods antitrust LaWs don’t PreCLude CooPerating against Counterfeiters

By Wayne Mack

T

rademark counterfeiting is rampant, and it costs businesses billions of dollars each year. Fueled by the dramatic rise in e-commerce, counterfeiting

has spread from fake handbags and watches to virtually every type of product imaginable, including prescription medication, automotive and aircraft parts, cell phones and other electronic products, electrical components, software, cigarettes, wine, movies, music, sporting goods, apparel and even food products.

Identifying the root of the problem is simple. Fighting it is challenging. The vast majority of counterfeit products are manufactured in China, where local protectionism can make enforcement difficult. The manufacturing process is often decentralized, with the fake product produced in stages by small teams in back-street shops and houses, specifically in Guangdong and Fujian provinces in southern China. Once manufactured, the counterfeit products are sold to retail and secondary-market distributors in wholesale markets throughout China.

After the counterfeit goods reach distributors, they are routinely marketed and sold through rogue internet websites and auction sites that consumers frequent in search of bargains.

The internet is a haven for counterfeit goods because it allows

faceless transactions in which the buyer cannot physically examine the product prior to the sale. It also allows counterfeiters to run their operations from China in relative anonymity, and at very low cost.

A recent study of 100 websites selling counterfeit goods found that these sites draw more than 53 billion visits per year – an average of nine visits for every man, woman and child in the world.

Any product manufacturer that ignores the harm to its business from brand thieves does so at its own peril. industrY-Wide soLutions In order to combat counterfeiting, brand owners must address both the supply and demand sides of the economic equation. On the supply side, enforcement in China, where the counterfeit product in all likelihood originates, is key.

Unfortunately, counterfeiting is not considered a serious crime in many parts of China, and brand owners cannot depend on government officials to investigate and prosecute counterfeiters. Instead, it is often necessary to retain investigators to uncover evidence identifying the counterfeiter, and then lobby Chinese law-enforcement officials to raid, arrest, convict and sentence the counterfeiters.

For a single brand owner, the prospect of organizing and financing an effective enforcement continued on page 46

43

aug/ sept 2011 E X ECUTIV E COUNSEL

continued from page 42 competitive advantage if our companies know

tremendous benefits to forging an alliance.

that someone else can’t just steal that idea and

on the Principal Register of the Patent & Trade-

duplicate it with cheaper inputs and labor.”

mark Office, you can record your trademark with

In addition, if your trademark is registered

CBP. That enables CBP to seize imports of your GOVERNMENT ACTION

counterfeited products and notify you when the

The federal government has taken a number of

counterfeits have been detained.

steps to improve intellectual property enforcement in the last few years. They include passing

STEPS COMPANIES CAN TAKE

the Prioritizing Resources and Organization for

While government alliances are important, your

Intellectual Property Act of 2008, which increased civil and criminal penalties for trademark, patent and copyright infringement. This law also established a new executive office, the Intellectual Property Enforcement Coordi-

44

company need not

Government-approved

federal government

seizures can enhance a

for anti-counterfeiting

Lanham Act case and

Act is a powerful tool

initiatives. The Lanham under which you can

allow you to obtain

bring a claim in federal

valuable discovery.

infringement.

nator, which is tasked

court for trademark The Lanham Act forbids using a coun-

with coordinating the development of a strategic

terfeit of a registered mark on labels or packaging

plan against counterfeiting and infringement.

intended for use in commerce. It imposes strict

Federal government intellectual property sei-

liability on the sellers of counterfeit goods. Under

zures have increased in the last two years. In fis-

the Lanham Act, even if a seller claims not to have

cal year 2010, the U.S. Customs & Border Patrol

known that it was dealing in counterfeit goods, it

(CBP) and Immigration & Customs Enforcement

may be found liable.

Homeland Security Investigations made more

The Lanham Act affords numerous remedies.

than 19,000 intellectual property seizures. The

Key among these remedies is the opportunity to

value of the infringing goods was calculated to be

petition the court to order seizure of counterfeit

$188.1 million.

products without prior notice to the counter-

The estimated value of the goods if they had

Alison Conlon is a partner in the Chicago office of Barnes & Thornburg and a member of the firm’s litigation department.

She focuses on commercial disputes, toxic tort cases, professional malpractice issues and other matters for companies, municipalities and individuals. alison.conlon@ btlaw.com.

rely solely on the

feiter. Counterfeiters often move, hide or destroy

been genuine was computed to be $1.4 billion.

counterfeit products when there is the whiff of a

That compares to more than $2 billion in fis-

potential investigation. This type of seizure has

cal 2009. The federal government attributes the

the element of surprise, which maximizes the

decrease in the value of the seized goods to an in-

potential for success.

crease in high-volume, low-value express consignment/mail and consolidated shipment seizures.

It is important for companies to partner with

The proposed seizure must be approved by the U.S. Attorney’s Office and executed by a federal, state or local law enforcement officer.

the federal government to stop counterfeiting. This

The seizure can include all counterfeit goods

includes providing government officials with infor-

and marks that are discovered, the means of

mation and concerns about potential counterfeit-

making the counterfeits, and records and com-

ing of your products. While some companies balk

puters relating to the counterfeits. Among the

at the concept of raising their profile with govern-

benefits of seizure is that it provides immedi-

ment agencies, in the counterfeiting realm there are

ate relief, has an element of surprise, prevents

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

the destruction and hiding of evidence, and

trademark infringement, and in some instances

involves law enforcement early.

recover treble damages and attorneys’ fees.

A company must have hard evidence of the

One creative way Lanham Act claims may be

presence of counterfeits before seeking such a

resolved is through a consent order between the

seizure. If none are found, the company is subject

parties. Such orders can help further a company’s

to liability for wrongful seizure. Other downsides

anti-counterfeiting initiative by keeping counter-

include the requirement of posting a bond before

feiters away from their products, sales channels

the seizure, and a restriction against publicity.

and customers.

But if appropriately sought and executed, seizures can help keep your Lanham Act litigation shorter

Consent orders can:

and more cost-effective, and allow you to garner

• Bar the counterfeiter from the manufacture and

valuable discovery that often leads to additional targets in an anti-counterfeiting campaign.

Another available remedy in Lanham Act litigation is preliminary injunctive relief. This

sale of counterfeits.

• Bar the unauthorized sale of authentic products.

• Implement a recall administered by the Consumer Product Safety Commission.

enables a company to force early inspections of

• Include substantial money damages or settlement.

premises to find counterfeit goods and develop

• Identify and shut down the source, the import-

evidence to break up counterfeiting networks.

ers and the distributors of counterfeits.

A preliminary injunction requires the company to show likelihood of success on the merits, no

Consent orders and companion litigation send

adequate remedy at law, irreparable harm, and

a strong message to counterfeiters that your com-

that the public interest is served.

pany has a zero tolerance policy, and that it will

Other useful tools in Lanham Act litigation

take aggressive steps to monitor its sales channels

include subpoenas for the production of documents by entities and individuals that are discovered to be in the supply chain of counterfeit products.

One counterfeiter’s records usually lead to the records of another, and then another, helping the company to root out participants in a counterfeiting network.

The Lanham

and pursue any party

While some companies balk at the concept of raising their profile with government agencies, in the counterfeiting realm there are tremendous benefits to forging an alliance.

Act also provides

that infringes on its trademark rights.

In sum, there are a number of steps your company can take to protect your brand and your bottom line from counterfeiters. You should share information with relevant federal authorities to both help and benefit from their anti-counterfeiting efforts. By dedicating resources

for various kind of damages. A company that

to track, collect and use information about

prevails can recover compensatory and statutory

potential counterfeiting of your products, your

damages, obtain a permanent injunction against

company can lay the groundwork for bringing

the counterfeiter and distributors of the coun-

claims under the Lanham Act, and avail itself of

terfeit product, recover other damages caused by

its unique remedies. ■

Brian Lewis is a partner in the Chicago office of Barnes & Thornburg and a member of the firm’s litigation department.

His practice focuses on complex commercial litigation matters, arbitrations, internal investigations, and white collar criminal matters for national and multinational clients across the industrial, chemical, electrical, manufacturing, automotive, and retail industries. brian.lewis@ btlaw.com

45

aug/ sept 2011 E X ECUTIV E COUNSEL

Put simply, counterfeiting is an industry-wide

continued from page 43 program in China can be daunting. Brand thieves

problem that requires industry solutions. Industry

target entire industries, and raids of counterfeiters

members need to work together to prevail against

in China frequently turn up many types of coun-

counterfeiting, rather than independently wage a

terfeit products at a single factory or workshop.

series of expensive and uncoordinated efforts.

Industry members therefore need to respond

At present, there are very few industry-specific

jointly to see that these criminals are identi-

groups that are jointly pursuing enforcement

fied and prosecuted. A strong campaign can

action in China or that have adopted authentica-

be waged against counterfeiters if a group of

tion technology as an industry standard. Typically

brand owners in an industry share intelligence,

leadership and organization are lacking. Moreover,

financial and other resources, while develop-

competing brand owners are often reluctant to

ing a comprehensive strategy to investigate and

work together or to share resources. They need to

petition governmental officials to prosecute

keep in mind that counterfeiting is a real problem,

brand thieves.

and the enemy is not another legitimate competi-

Nonetheless, as long as consumers continue to

tor, but the brand thieves who are attacking the

buy counterfeit products, counterfeiters will be

entire industry and competing unfairly by illegally

there to make them. Therefore, on the demand

misappropriating intellectual property rights.

side, brand owners need to educate consumers about counterfeiting.

Many companies do that on their web site,

46

ANTITRUST PROTOCOLS Antitrust violations are a concern. Any time

with information that helps consumers distinguish

that competitors meet or discuss pursuing any

authentic products from fakes. In addition, some

activity collectively, antitrust considerations

companies use various forms of overt, covert and

need to be addressed. However, it’s important

forensic authentication technology, such as bar-

to keep in mind that while the antitrust laws

codes, security labels and holograms.

prohibit competitors from engaging in price-

The internet is a haven for counterfeit goods because it allows faceless transactions in which the buyer cannot physically examine the product prior to the sale.

fixing and other forms of anti-competitive activity, many other forms of joint conduct are permissible. Lobbying and pursuing litigation, for example, are immune from antitrust liability. Similarly, competitors are permitted to collaborate in ways that enhance efficiency and are beneficial for consumers.

Combating counterfeiting is clearly a procompetitive activity. In a free-market economy, the amount that a firm invests in innovation depends on the perceived rewards from its invest-

Unfortunately the anti-counterfeiting message can

ment. Typically the investment is greater when

be inconsistent, and the wide variety of authentica-

the perceived rewards are higher. If brand owners

tion devices within an industry can add to consumer

lose because of illicit uncompensated use of their

confusion. Here too a unified industry-wide effort

creations and trade names, it reduces their incen-

is far more effective. Many more consumers can be

tive to innovate.

reached when industry members combine resources

As a result they are likely to make fewer tech-

to launch a unified public relations campaign, and

nological advances, competition is likely to be

consumers are far more likely to recognize and ac-

reduced, and consumers may face fewer choices

cept an authentication technology if it’s adopted by a

and higher prices. Restricting the unauthorized

group of brand owners as an industry standard.

use of inventions and trade names helps guarantee

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

that inventors receive a return on their efforts.

restrictions, territorial or customer allocations, and

It promotes innovation and gives consumers and

group boycotts.

firms access to inventions that otherwise might never have seen the light of day.

Still, even trade associations that are orga-

In addition, members should not share sensitive information, including information about each other’s past, present or future

nized for legitimate purposes can become fertile

prices; terms and conditions of sale; business or

ground for antitrust violations. Government

marketing plans; sales or capacity information;

regulators have made clear that competitors

production; technology; prices from suppliers;

working together in activities that promote

or sales practices. The group’s focus should be

consumer protection must follow appropriate antitrust protocols.

Consequently, to minimize antitrust risk, an industry group organized to combat counterfeiting should have an up-to-date, written antitrust compliance policy, and it should be systematically distributed to group members. All group meetings should follow a strict written agenda

Competitors are permitted to collaborate in ways that enhance effciency and are beneficial for consumers

that members can review in advance with legal counsel to identify potential issues of concern.

to protect intellectual property rights in order

To prevent discussion of inappropriate matters,

to benefit competition and promote innovation,

legal counsel should be present at all meet-

not on reducing competition and increasing

ings and participate in all discussions between

profits for its members.

competitors. It is also vital to record and retain

47

The group should document and describe in writing all of the ways it benefits its members and

An industry group orga-

consumers by providing education and training, and by monitoring legislative and judicial

nized to combat counter-

developments, setting professional standards and

feiting should have an up-

lobbying and advocating for public policies that

to-date, written antitrust compliance policy that is

codes of ethics, conducting industry research, and affect members. Finally, the group should take action only where there is a good-faith belief that counterfeiting is taking place.

Provided these antitrust protocols are adopted and followed, industry members can and should

systematically distributed

collaborate to investigate and prosecute coun-

to group members.

public relations campaigns to educate consum-

terfeiters, shut down rogue websites, finance ers, adopt and promote industry standards that will assist consumers in recognizing counterfeit

accurate and complete minutes of meetings, and

goods, and provide training to customs and

those minutes should indicate that the antitrust

other government officials.

compliance policy was reviewed and followed.

Certain topics may, per se, be suggestive of

By joining together to combat counterfeiting and protect intellectual property rights, competi-

unlawful agreement, and these topics should be

tors promote free and fair competition – and that

off-limits to the industry group. Specifically, there

is consistent with the underlying purpose of the

should be no discussion of price-fixing, output

antitrust laws. ■

Wayne A. Mack is a partner at Duane Morris LLP and co-head of the Commercial, Securities and Antitrust division of the firm’s Trial Practice Group.

He counsels manufacturers, suppliers, distributors and trade associations regarding antitrust aspects of product distribution and pricing, joint ventures, competitor collaboration, and other types of transactions. He also serves as counsel to the U.S. Golf Manufacturers Anti-Counterfeiting Working Group. wamack@ duanemorris.com

AUG/ SEPT 2011 E X ECUTIV E COUNSEL

48

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO AUG/ SEPT 2011

L AWS REGUL ATING POL ITICAL ACTIVITY GO GL BAL

BY EL L IOT S . BER K E A N D W I L L I A M FA R A H U.S. House Speaker Tip O’Neill famously quipped that “all politics is local,” but today the laws and regulations that govern the political process are increasingly extra-territorial. When multi-national businesses interface with the political world, they must do so with the understanding that politics is a regulated industry, and their actions have multi-jurisdictional legal implications.

The European Parliament continues to strengthen lobbying transparency rules as it strives to contain a recent “cash for favors” imbroglio involving several of its members. The scandal erupted when a news outlet released video clips alleging that three Parliament members accepted cash for legislative favors.

Proposals that have cleared the first hurdle for enactment would create a joint lobbying registry and require disclosure of lobbyist meetings prior to votes.

The European Commission has also approved new rules to strengthen a code of conduct for retired EU executive body members. This came after several recently retired commissioners took high-paying jobs in sectors they previously oversaw.

49

aug/ sept 2011 E X ECUTIV E COUNSEL

An American Bar Association task force recent-

The petitioners contend in their suit that the ban

ment of U.S. lobbying laws. While emphasizing

on foreign contributions, with its threat of civil or

the merits and rights associated with the lobbying

criminal penalties, amounts to an arbitrary and irra-

profession, the task force also proposed reforms to

tional violation of their First Amendment rights.

promote disclosure and bolster accountability. It

Elliot Berke is a

50

partner in the Washington D.C. office of McGuireWoods and co-chair of the firm’s Political Law Group.

He represents clients before congressional ethics and oversight committees, the Federal Election Commission, DOJ and federal and state departments and agencies. Previously, as counsel to the Office of the Speaker and general counsel to the Office of the House Majority Leader, he advised on ethics and compliance issues.

eberke@mcguire woods.com

Administration has maintained a Bush Admin-

to be the nexus between legislative advocacy and

istration commitment to make violations of the

political fundraising by special interests.

Foreign Corrupt Practices Act (FCPA) a Jus-

This tension was on center stage during last

tice Department priority. The anti-bribery law

year’s State of the Union address, when President

makes it a crime – irrespective of where the act

Obama condemned the Supreme Court’s decision

occurs – to use interstate or foreign commerce

The uk is implemenTing a disTincTly briTish version of anTi-corrupTion legislaTion, The uk bribery acT. in Citizens United. The President alleged that

to further an offer or payment of anything of

Citizens United would “open the floodgates for

value to a foreign official, political party, or

special interests, including foreign corporations,

political candidate in order to obtain or retain

to spend without limit in our elections.”

business. The Justice Department announced criminal penalties in FCPA-related cases in any

pay for messages for both issue advocacy and ex-

single 12-month period, ever. Those penalties

press advocacy. It does not allow direct campaign

amounted to well over $1 billion.

Champions and critics of Citizens United

wfarah@mcguire woods.com

in November that it had imposed the most

and labor unions to use general treasury funds to

contributions to candidates.

partner at McGuireWoods in the Washington D.C. office and co-chair of the firm’s Political Law Group.

He represents clients on campaign finance, anticorruption, lobbying and government ethics laws. His practice includes conducting internal investigations and helping clients design political law compliance programs. He is a professorial lecturer of law at The George Washington University School of Law.

On the enforcement front, the Obama

reserved its strongest criticism for what it deemed

This landmark decision allowed corporations

William Farah is a

supporting them. Temporary residents are not.

ly released its report on the propriety and enforce-

The administration has also brought prosecutions under the Foreign Agents Registration Act

continue to argue over the president’s comment

(FARA), a little utilized World War II-era law

and how the law should treat foreign corpora-

requiring agents of foreign principals to register

tions with U.S. subsidiaries participating in the

with the Justice Department. Contrary to popu-

political process. While this question was raised

lar misconception, it’s not just lobbying activity

during oral arguments, the court did not ad-

that triggers a FARA registration requirement.

dress it in its majority opinion. At this point, U.S.

Public relations work, or even setting up a bank

subsidiaries of foreign corporations that decide to

account in the United States for the purpose of

engage in the political process should do so with

influencing elections abroad, may do so as well.

the understanding that such conduct may bring

Just last year, the infamous 12 Russian spies

future legal challenge.

arrested by the Justice Department were charged

Citizens United has already led to a challenge

under FARA, rather than under the Espionage

of the longstanding prohibition contributions by

Act, which would have been a much more dif-

foreign nationals. (Two temporary U.S. residents

ficult charge to prove.

brought the case in the DC courts.) Under the law,

The DOJ also obtained a guilty plea from

permanent residents holding green cards are allowed

former Congressman Bill Siljander for violating

to contribute to campaigns and make expenditures

FARA. He had failed to register as a representative

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

of a Khartoum-based NGO that allegedly paid

Penalties under the Act will include a maximum

him for his efforts to have its name removed from

of 10 years’ imprisonment and the potential for

a list of terror-supporting organizations.

an unlimited fine.

The United Kingdom is implementing a similar but distinctly British version of anti-corruption

As multi-national businesses contend with the extraterritorial application of these laws and

The adminisTraTion has broughT prosecuTions under a liTTle uTilized World War ii-era laW called The foreign agenTs regisTraTion acT, or fara. legislation, the UK Bribery Act. After agreeing to

proposed lobbying and enforcement reforms in

delay its implementation, due to pressure from

both the EU and the United States, they need to

the business community, the UK’s Justice Min-

understand the legal and reputational issues that

istry recently finalized its guidance as to how to

are at stake. Companies shouldn’t be discouraged

comply with this far-reaching legislation. The Act

from participation in the political process, but

has almost universal jurisdiction, opening the

in order to head off scrutiny by various enforce-

door for the prosecution of an individual or com-

ment agencies, they need to adopt sound internal

pany even associated with a UK-based business,

compliance programs to monitor political and

irrespective of where the alleged crime occurred.

lobbying activity.

■

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AUG/ SEPT 2011 E X ECUTIV E COUNSEL

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THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO AUG/ SEPT 2011

Selling a Business

By Wallace E. Brockhoff and Kristen V. Toner

C

ashing in on years of hard work and selling a business can be daunting. This article summarizes the sales process and provides some tips for preparing a company for sale and ensuring that the most net

proceeds possible are retained.

Once you decide to consider a sale, the time is right to form your team of professional advisors. It should include: • An investment banker to facilitate the marketing of the business, help you determine the appropriate price, find a buyer that fits your goals and negotiate the financial aspects of the transaction.

• An accountant, to help structure the transaction in a way that will provide the most favorable tax consequences and advise on other accounting issues.

• An experienced transactional attorney, to help navigate the diligence process, draft the transaction documents, advise on structure and negotiate the legal terms of the

Put yourself in the shoes of a prospective buyer and think

transaction.

A good team should

about the issues that you

work smoothly togeth-

would want resolved if you

company, and it should

were buying the business.

expertise. It also should

er, as well as with your have industry or market have a fee structure

that fits the company and the likely value of the transaction. Although this is probably a once or twice in a lifetime process for you, keep in mind that your advisors do this every day. They can focus on the details of the transaction so that you can continue to run your business effectively during what sometimes is a lengthy sale process.

53

aug/ sept 2011 E X ECUTIV E COUNSEL

LOOKING AT YOUR OWN ENTERPRISE

prepares you for obtaining the consents as soon

If you have the time and resources, conducting

as an agreement is executed.

an informal arms-length diligence review before

If there is real estate involved in your business,

providing diligence information to a buyer can

arrange for a Phase I or other environmental study,

be extremely helpful. As you conduct this review,

and order surveys and title reports. This can take

List and detail all patents, copyrights and trademarks. Collect all software licenses and analyze them for anti-assignment or change-in-control provisions.

time, and a prospective buyer will almost certainly require them before agreeing to a transaction.

If these studies or reports uncover issues, work with your legal counsel if possible to resolve them before beginning the sale process.

Intellectual property is an important aspect of many businesses that too often is taken for granted until the buyer’s diligence team starts examining it

54

put yourself in the shoes of a prospective buyer

with a critical eye. List and detail all patents, copy-

and think about the issues that you would want

rights and trademarks. Collect all software licenses

resolved if you were buying the business.

and analyze them for anti-assignment or change-

Although this takes a fair amount of time and

in-control provisions. Review your employment

money, it can greatly reduce headaches and further

agreements and make sure that employees who

effort as you progress through the sale process,

create protectable work have assigned all rights in

and it can help maximize the sale price. Prospec-

that work to your business. If they haven’t done

tive buyers will dissect every piece of information

so, work with your attorney to prepare an agree-

that you provide and probably will ask for items

ment to address this issue.

that you never imagined they would want. Collect-

You also should perform or order a UCC

ing and reviewing all necessary documents before

financing statement search to determine what

the sale process begins enables you to identify and

liens have been perfected against your business.

correct issues and determine missing documents or

Prepare to explain to prospective buyers any

information up front. Also, your organizing and

that are uncovered. Release any liens that are

compiling diligence information in a logical man-

no longer valid. To make your business more

ner should expedite the buyer’s review.

attractive to buyers, you also may want to make

Begin by compiling financial information, such as the previous three years’ profit-and-loss state-

any necessary cosmetic updates or repairs to your facilities and equipment.

ments, balance sheets, and tax returns, as well as the current profit-and-loss statement and balance

MARKETING

sheet. Review your corporate records and minute

After conducting the internal diligence review,

books to make sure they are complete and up to

you need to make the information available to

date. Verify that all outstanding ownership inter-

prospective buyers. A secure website accessible

ests in your business have been validly issued, and

to third parties (a “virtual dataroom”) is the

fill any gaps in your minute book.

preferred method, as it allows multiple parties to

Compile and analyze all material contracts,

Wallace E. Brockhoff is a partner at Lathrop & Gage LLP. He specializes in mergers & acquisitions, corporate and securities law.

Wbrockhoff@ lathrop gage.com

access the same information simultaneously, and it

including leases and financing documents.

generates a secure and auditable record of which

Look for issues that a prospective buyer will be

individuals have viewed which documents during

concerned about, such as change-in-control or

the diligence process.

anti-assignment provisions. Identifying such pro-

There are a number of virtual data room

visions in advance will allow you to determine

providers. Evaluate a few, and try to determine the

how many third party consents you will need.

most user-friendly website at the best price. Popu-

Knowing this in advance is helpful, because it

lating and organizing the virtual data room will

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

take time, but the internal diligence review you’ve

intent that sets forth the key terms of the transac-

already conducted should expedite the process.

tion, to ensure that before proceeding further the

One benefit of a virtual data room is that it enables you to easily track what information has

parties agree on the most important elements of the transaction.

been provided to prospective buyers. This can be important if, after closing, the buyer claims you

DOCUMENTING THE DEAL

failed to disclose an issue, when in fact the infor-

At this point the transaction documents become

mation is posted in the data room.

the central focus. They will consist of a purchase

If you would rather not use a virtual data

or merger agreement, and usually a number of

room, you can provide the diligence information

ancillary documents, such as an escrow agree-

to prospective buyers in other formats, such as

ment, real estate lease, and employment agree-

hard copies or discs.

ments. Sometimes the documents are drafted in

When you are ready to provide prospective

advance and provided to prospective buyers to

buyers with the diligence information, ensure that

revise and submit as a markup with their bid.

it will be kept confidential by working with your

Other times, the documents are not drafted until

legal advisor to develop a non-disclosure agree-

a buyer is selected.

ment. It should include strict non-solicitation and

Some key provisions of the purchase or merger

confidentiality provisions, in order to prevent

agreement are the form and amount of consider-

prospective buyers from attempting to hire away

ation, the working capital adjustment, the amount

your key employees.

of escrow or holdback, representations and war-

After you make the diligence information avail-

ranties, disclosure schedules, indemnification ob-

able, you may receive requests for elaboration or

ligations and survival periods, covenants, closing

additional information. This can be frustrating for

conditions and termination provisions. Your legal

some sellers, who may feel their business manage-

advisors will guide you through these provisions

ment is being questioned.

and help you understand their implications.

You should be working with your investment

Your goal as a seller is to minimize the amount

banker to develop marketing materials at the

of escrow or holdback and limit the indemnifica-

same time you are doing your internal diligence

tion obligations and survival periods, with a core

review. These materials may include a confiden-

goal of keeping as much of your purchase price

tial memorandum setting forth various details

as possible. You will need to carefully review the

about your business. The investment banker

representations, warranties and the disclosure

can help you determine the best way to market,

schedules with your key executives to insure they

whether through a bid process or by targeting

are accurate and complete.

one or two strategic buyers. During this time you

You also will need to pay close attention to

also should collaborate with your legal advisors

the covenants related to the time period between

and accountants to determine how to structure

signing and closing. These provisions often limit

the transaction, to ensure you keep as much of

what sellers can do before closing, but you want

the sales proceeds as possible.

to be sure you can continue to run your business

Hopefully you will have a number of offers to choose from. Try to determine if your buyer will

Kristen V. Toner is an associate at Lathrop & Gage LLP. She specializes in mergers & acquisitions, corporate and securities law.

Ktoner@lathropgage. com

effectively during this period.

As a seller, you need to be patient, set real-

be a good cultural fit for the company, in addi-

istic expectations and not become discouraged

tion to offering a competitive price and having

by all the poking and prodding at your com-

the financial wherewithal to complete the trans-

pany by prospective buyers. Once the transac-

action. Once a prospective buyer is selected and

tion closes, you can breathe a sigh of relief and

before drafting the transaction documents, you

enjoy the proceeds. Let your advisors arrange

may want to enter into a term sheet or letter of

the closing dinner.

â–

55

aug/ sept 2011 E X ECUTIV E COUNSEL

Recent Antitrust Guidelines and Their Effect on M&A

By Daniel E. Hemli & Jacqueline R. Java

A 56

ntitrust issues can play a significant and sometimes critical role in M&A transactions. Government antitrust enforcement can impact the timing of deals, lead to negotiated remedies that result in the buyer acquiring less than it bargained for, and in some cases threaten the viability of the transaction itself.

A recent surge in announced M&A deals includes some (such as the proposed sale of T-Mobile USA by Deutsche Telekom to AT&T) that are attracting intense antitrust scrutiny. It’s clear that potential buyers and sellers need to be aware of recent trends in antitrust merger law and policy, so they can better anticipate and address possible hurdles.

The FTC and DOJ are to be commended for replacing the outdated 1992 Guidelines, but the new version is not beyond criticism. It includes more emphasis on economic theories and tests, some of which are not yet widely accepted by the antitrust community or the courts. The new version also abandons specificity in a number of respects, and at times it reads more like a shopping list of possible competitive problems than a true analytical framework.

This may be explained to some extent by the New Horizontal Merger Guidelines Challenges to sophisticated and nuanced In August of last year, the two federal antitrust agencies – the U.S. Department of Justice, Antitrust Division, and the Federal consummated approach that characterizes much of merger analyTrade Commission – issued new Horizontal Merger Guidelines. These replaced the prior version, published almost two mergers, while sis today. In any case, this more open-ended decades ago, in 1992. approach affords the The Guidelines outline how DOJ and the FTC evaluate the not a new antitrust agencies greater likely competitive effects of mergers involving actual or potential competitors and determine whether to challenge those mergers. development, flexibility in their review, and it paves the way for They are meant to be used as an analytical and predictive tool not only by the antitrust authorities, but also by businesses, their have in recent more merger investigations – possibly resulting advisers, and the courts.

With the exception of a new section on “efficiencies” added in years occurred in more challenges, or more demands for such 1997, the 1992 Guidelines had remained unchanged since their original publication, and their utility diminished over time as U.S. with increasing remedies as divestitures.

For firms contemplatmerger enforcement evolved. The 2010 Guidelines purport to more ing mergers, acquisitions accurately reflect the federal government’s enforcement approach frequency. and joint ventures, the new towards horizontal mergers and provide greater transparency. guidelines have some notable practical They largely achieve those goals, clarifying parts of the agencies’ methodimplications. It’s more important than ologies, explaining several new analytical concepts and providing illustrative ever to perform an antitrust analysis examples. They also elaborate on potential non-price effects of mergers, such as early in the deal process as possible, as impact on innovation and product variety, and they address important related issues, such as how the agencies treat acquisitions of minority interests and certainly well before signing occurs.

For transactions that could involve a in competing firms.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO AUG/ SEPT 2011

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aug/ sept 2011 E X ECUTIV E COUNSEL

58

Daniel E. Hemli is a partner in the New York office of Bracewell & Giuliani and head of the firm’s antitrust practice. He advises clients on antitrust issues relating to mergers, acquisitions and joint ventures, and advocacy before federal, state and foreign antitrust authorities. He also counsels on a range of antitrust matters arising from day-to-day operations, including designing and implementing antitrust compliance programs. daniel.hemli@ bgllp.com

Other amendments call for more details regardgenuine competitive issue, this means there may ing the HSR filer’s corporate structure, including need to be more extensive upfront work marshaling additional information about “associates” – that relevant facts and evidence. The enhanced focus on is, entities that are commonly managed with the data-driven analyses, even at the early stages of a acquiring party. This is particularly significant for merger investigation, underscores the importance of businesses with complex collecting relevant data early. partnership structures, such Firms considering poIt’s more important than as many private equity tentially antitrust-sensitive transactions also should ever to perform an antitrust firms, hedge funds and master limited partnerships. take into account the posThe additional informasibility for longer antitrust analysis as early in the deal tion and documents manreviews when they plan deal dated by the HSR changes timelines, and they should process as possible. likely will, at least in some consult with counsel regardtransactions, assist the antitrust agencies’ analyses ing strategies for expediting the review process. and perhaps even expedite the review process in certain cases. However, this comes come at the exNew Hsr Filing requirements pense of increased burden and cost for companies.

In July of this year, the FTC and DOJ announced Some of the new requirements will have a particusignificant changes to the Hart-Scott-Rodino larly significant impact on first-time filers, a point (HSR) mandatory reporting requirements for the agencies acknowledge.

M&A transactions exceeding certain size threshAll of this means that parties to HSR-reportable olds. The antitrust agencies first issued proposed transactions will need to incorporate into their amendments in August of 2010, and they received overall deal timelines and budgets the likelihood comments from multiple parties. that, at least in some instances, HSR filing prepaParties to HSR-reportable transactions have a ration will become longer and more expensive. legal obligation to submit Notification and Report Forms to both the FTC, which administers the Challenges To Consummated Mergers HSR pre-merger notification program, and the The HSR law performs important public policy DOJ, thereby triggering a waiting period during functions by enabling the antitrust agencies to learn which the agencies review the transaction for poof M&A transactions in their incipience, challenge tential competitive issues and determine whether some mergers and prevent harm to competition and to seek an injunction.

For this reason, HSR-reportable transactions may consumers. Every year, however, thousands of mergers, acquisitions and joint ventures take place outnot be consummated until the expiration or termiside of the HSR framework, either because they fall nation of the waiting period. The agencies’ stated purpose for the recent changes was to streamline the below the relevant size thresholds or because they come within one of the various HSR exemptions.

HSR Form and capture new information that will While most non-HSR reportable transactions do help the agencies conduct their initial review of a not raise serious competitive concerns, the mere fact proposed transaction’s competitive impact. that a transaction does not trigger HSR does not imThe HSR Form itself requires the submission munize it from scrutiny, either by the government or of information and data regarding the transaction private litigants. The antitrust authorities have legal and the parties, together with various documents. jurisdiction to review and challenge such transacFor example, the parties must file internal documents discussing the impact of the proposed trans- tions even after they have been consummated.

No transaction, and no market, is too small action on competition.

Some of the recent changes do indeed simplify the for government examination. Indeed, it can be easier to prove competitive harm in cases involvHSR Form, and are welcome and long overdue. ing consummated deals, because there may be Others, however, require additional information direct evidence of actual price increases post-closand documents, and that will increase the burden ing, or some other observable effect on competifor most filers. The new rules require a broader tion in the relevant market. Most government document search, collection and review exercise challenges in these situations seek complete or prior to filing, and as a result time needed for docunear complete divestiture of acquired operations, ment gathering and review likely will increase.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

effectively unwinding the transaction.

Challenges to consummated mergers, while not a new development, have in recent years occurred with increasing frequency. So far in 2011, the DOJ and FTC have challenged consummated deals in industries as diverse as healthcare (an FTC challenge to ProMedica Health System’s acquisition of St. Luke’s Hospital in Lucas County, Ohio) and chicken growing services (a DOJ suit against the George’s Inc. acquisition of the Tyson Foods Harrisonburg, Virginia, chicken processing complex).

It’s important to bear in mind that, as a practical matter, most consummated merger cases arise out of complaints, typically from disgruntled customers, about anti-competitive post-closing conduct by the merged entity. In any case, firms considering transactions in highly concentrated industries, no matter how small and whether or not they are HSR reportable, should proceed with caution.

Vertical Theories, Creative Remedies Distinct from horizontal integration between competitors, some combinations involve vertical integration. This is where the transacting parties have businesses at different levels of the supply chain, for example when a manufacturer is acquiring a distributor or retailer.

Horizontal mergers typically present more straightforward antitrust concerns because a competitor is eliminated from the marketplace, thereby reducing consumer choice. Vertical mergers, by contrast, are generally viewed more favorably under the antitrust laws because they often generate valuable efficiencies, and the potential harms to competition, if any, are less direct and obvious.

Nevertheless, there appears to be a heightened interest in such transactions by the present administration, as evidenced in speeches by senior antitrust officials. As the same time, the administration has shown a greater willingness to accept creative and in some cases complex settlements to address these kinds of concerns and let the transaction proceed.

Such settlements have involved a variety of features that typically fall under the category of “conduct remedies.” They include restrictions on the permitted behavior of the merged firm, licensing arrangements, information firewalls, mechanisms for ongoing government oversight for extended periods (often 10 years or longer), and detailed dispute resolution procedures for handling complaints regarding the merged firm’s conduct.

In a speech given last year, the current DOJ assistant attorney general, Christine Varney,

characterized these types of settlements as vigorous antitrust enforcement, but “with a scalpel rather than a sledgehammer.” Subsequently, in June of this year, DOJ issued an updated version of its policy guide to merger remedies. It is more favorable to conduct remedies than the previous (2004) version, especially for vertical mergers.

The year 2011 already has seen several high-profile examples of this trend. These include Google’s $700 million acquisition of ITA Software, a leading producer of airfare pricing and shopping systems, and Comcast’s multi-billion dollar media joint venture with NBC Universal. Both transactions, which were entirely or primarily vertical, underwent lengthy government antitrust reviews and were found to raise antitrust concerns, but ultimately were cleared after the parties agreed to settlements involving some of the aforementioned features.

But firms should be aware that the fact that the other party to a proposed transaction is not a head-to-head competitor does not guarantee there will be no an antitrust problem. That said, where the competitive issue is vertical, the agencies have shown they are willing to entertain remedies short of full asset divestitures.

Firms are well advised not to wait for a specific transaction to materialize before paying attention to antitrust issues. For example, they should keep in mind that company documents, whether prepared in connection with a particular deal or in the ordinary course of business, can play a key role in the antitrust review of transactions and have a dramatic impact on the agencies’ assessment of a transaction’s likely competitive effects.

Jacqueline R. Java is a counsel at Bracewell & Giuliani, based in the Washington, D.C. office. She advises clients involved in transactions and dayto-day operations that raise antitrust issues regarding interactions among competitors, the formation of joint ventures, distribution and pricing policies and programs, information exchanges, and allegations of price fixing, market allocation, and other anticompetitive practices. jackie.java@bgllp.com

Companies should take basic precautions to minimize the creation of documents that convey misleading and inaccurate impressions and that could increase the likelihood of an antitrust investigation or challenge.

Companies therefore should be sensitive to the implications that the content and phrasing of business documents, including emails, may have for proposed transactions. They should take basic precautions to avoid creating documents that convey misleading and inaccurate impressions and that would increase the likelihood of an antitrust investigation or challenge. Ensuring company personnel are educated regarding these matters can help avoid complications in the future. ■

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AUG/ SEPT 2011 E X ECUTIV E COUNSEL

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THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO AUG/ SEPT 2011

CAL I F OPE ORN N I FLO S TH A ODG E AT E S Sup rem e Co BY urt CR AIG Dec ision BE RT App SC HI lies AN Retr D K oact AT HR ively YN ED ER

LE

61

VIEW OUR CURRENT ISSUE ONLINE

http://digital.executivecounsel.info

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2011

O

ver the years, lawyers and business

While these damages are small in the context of

people have come to expect that the

a single plaintiff case, defendants’ exposure can

California courts will issue decisions

be staggering in a class action lawsuit. For large

that favor plaintiffs, and make it more difficult

retailers, who process thousands of credit card

and expensive to do business in the Golden State.

transactions every day, the damages could be eas-

But a recent decision by the California Supreme

ily exceed $100 million.

Court interpreting the Song-Beverly Credit Card

In the Pineda case, the plaintiff brought a

Act of 1971 is remarkably anti-business, even by

class action lawsuit under the Song-Beverly Act.

California standards. The decision in the Pineda

The plaintiff alleged that she was asked for her

case, which was handed down in February, has

zip code while making a credit card purchase at

generated an avalanche of litigation, including

a national retailer. Believing that the informa-

over 100 class action lawsuits against major

tion was required to compete the transaction, the

retailers in three months.

plaintiff provided her zip code to the cashier, who

The Song-Beverly Act prohibits merchants from

recorded it electronically.

requesting and recording a customer’s “personal

Following precedent established by the

identification informa-

California Court of

tion” during a credit

Appeals, the trial court

card transaction. It

The decision has generated

defines personal identification information as “information concerning the cardholder, other than information set forth on the credit

dismissed the plaintiff’s case, holding that zip

an avalanche of litigation, including over 100 class action lawsuits.

card, and including,

Despite the broad language of the law, Cali-

identification information for the purposes of the law. This decision was affirmed on appeal.

However, in a

but not limited to, the cardholder’s address and telephone number.”

reversal of the lower courts, the California Supreme Court held that a customer’s zip code is personal identification

fornia courts had held for years that consumers’

information and therefore merchants violate

zip codes are not personal identification infor-

Song-Beverly each time they request and record a

mation for purposes of the law. In reliance on

customer’s zip code during a credit card trans-

these decisions, many merchants routinely asked

action. To make matters worse, the California

consumers to provide them with zip code infor-

Supreme Court held that its decision applied

mation in connection with point of purchase

retroactively. Thus, every merchant in California

credit card transactions.

who has requested zip code information in reli-

Merchants certainly had no incentive to

ance on established legal precedent is now at risk

violate this law, because penalties for violations

of being sued in a class action lawsuit and subject

are harsh. Plaintiffs can recover statutory dam-

to enormous damages.

ages of up to $1,000 per violation, i.e. for each transaction, as well as attorneys’ fees and costs.

63

codes were not personal

Predictably, the decision has resulted in a deluge of class actions. Since the Pineda case was

Craig Bertschi is a partner at Kilpatrick Townsend & Stockton LLP. His practice focuses on the defense of consumer class actions and disputes arising out of complex business transactions, including mergers and acquisitions, earn-out agreements, business valuations, factoring arrangements, partnership dissolutions and corporate governance disputes.

Cbertschi@kilpatrick townsend.com

aug/ sept 2011 E X ECUTIV E COUNSEL

decided on February 10, 2011, more than 100

Pennsylvania), the statutes do not specifically pro-

class action lawsuits have been filed against mer-

vide for a “private right of action,” as opposed

chants doing business in California. Merchants

to Song-Beverly, which expressly permits private

who have been sued include Target, Old Navy,

litigants to recover for a violation. In another

Macy’s, Tiffany & Co., The Container Store, Ra-

state (Rhode Island), the statute may only allow

dio Shack, Victoria’s

private litigants to

Secret, J.C. Penney,

seek injunctive relief.

Nordstrom, Kohl’s, T.J. Maxx and Bed Bath and Beyond.

More suits are being filed daily.

If there is any good news for retailers, it is that the Song-Beverly Act is a state statute only applicable to point

Retailers operating in California need to immediately reassess their policies and procedures to insure that they are compliant with the Song-Beverly Credit Card Act as currently construed.

of purchase credit

64

associate at Kilpatrick Townsend & Stockton LLP Her practice is focused on complex business litigation.

Kederle@kilpatrick townsend.com

litigants may still attempt to recover for violations under these statutes, but it may prove more difficult than in California.

In four states (Georgia, Maryland, Minnesota and Nevada) and in

card transactions in California. There also are

the District of Columbia, the statutes expressly

a few exceptions that retailers can use to limit

identify the information that merchants are

their liability. For example, the law’s prohibition

prohibited from collecting – typically addresses

on the collection of personal identification infor-

and telephone numbers – and do not appear to

mation does not apply if the merchant is contrac-

prevent the collection of a consumer’s zip code.

tually or legally obligated to collect and record

Nevertheless, as courts in these states have not

zip code information to complete the credit card

yet ruled on this issue, it is possible that these

transaction, or if the information is necessary for

statutes will be interpreted to prohibit the collec-

a special purpose related to the credit card trans-

tion of zip codes.

action, such as shipping, installation or delivery.

Four states – Kansas, Massachusetts, Oregon

Furthermore, one federal court in California has

and Wisconsin – appear to be at the highest risk

held that it does not apply to online transactions.

of experiencing litigation similar to litigation

The California Supreme Court has not yet ad-

in California.

dressed that issue.

Kathryn Ederle is an

Creative private

Thus, while it appears unlikely that litigation

There are at least 15 other states that have

spawned by the Pineda case will spread to many

statutes similar to Song-Beverly. Although these

other states, retailers operating in California and

statutes are largely untested, some of them are

in the states at the highest risk of similar litiga-

different enough from the California law to make

tion need to immediately reassess their policies

it unlikely that they would generate an outbreak

and procedures to insure that they are compliant

of class actions. For example, in five of the states

with the Song-Beverly Credit Card Act of 1971,

(Delaware, New Jersey, New York, Ohio and

as it is currently construed. ■

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