Today's General Counsel (Formerly Executive Counsel), V8 N1, February/March 2011 by Today's General Counsel

l. igita el . d / / : http vecouns ti execu info ABLE L I A AV OW N

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february / march 2011 Volume 8 / number 1

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SECURITIES

CLASS ACTIONS:

• TRENDS • PITFALLS • THE STATE OF THE DEBATE

Supreme Court Could Recalibrate IP Portfolios Making Corporate Social Responsibility Systemic

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L IGITA D R OU ITION: ED

When European Data Privacy Meets U.S. Discovery

canada /cross-border

• Canadian Corruption Laws • Robust M&A

intellectual property

the strange phenomenon of “genericide” governance

Federalization and D&O Exposure human resources

After the Facebook Firing e-discovery

Outsource or In-House? • The eeOC’s Class aCTiOns • Key Dna PaTenT Case befOre The feDeral CirCuiT

• The DODD-franK bOunTy PrOvisiOns

• iP Primer fOr energy sTarT-uPs

Editor’s Desk Drug violence and immigration disputes garner more than their share of attention for our southern border, but as Divya Balji’s summary of recent U.S.-Canadian transactions illustrates, there are fireworks of a more positive variety to the north. Canada weathered the economic storm better than we did, its dollar has strengthened relative to ours, and that country’s Superintendent of Financial Institutions recently removed restrictions on Canadian banks that had been instituted due to the financial crisis. The banks are now free to pursue large acquisitions, and some of them are flush enough to begin expanding their operations into the United States. In December, Toronto-Dominion Bank acquired Chrysler Financial Services, and Bank of Montreal purchased Wisconsin lender Marshall & Ilsley Corporation. Major firms on both sides of the border worked on the deals, including Osler Hoskin & Harcourt, Sullivan & Cromwell, Godfrey & Kahn and Watchtell, Lipton, Rosen & Katz. Target Corp. announced that it will open its first Canadian stores in 2013. Next issue we will continue our detailed coverage of this lucrative and growing cross-border niche. Robert Surrette and Eligio Pimentel write about cases currently before the Supreme Court that will impact intellectual property strategies. One of them concerns the burden of proof for questions of patent invalidity. According to the authors, the way it is decided will directly affect the role and value of IP in today’s economy and could well diminish the value of companies’ portfolios. Meanwhile, the Federal Circuit, the nation’s highest IP appeals court, is wrestling with the question of whether DNA, when isolated, can be patented. The Southern District of New York said no. The appeal has drawn no fewer than ten amicus briefs arguing for reversal from industry players and trade groups, as well as the Department of Justice. Christopher Loh and Amy Fuetterer look at those briefs, and possible outcomes of a case that will have major implications for the biotechnology and pharmaceutical industries. David Felice and Sean Bellew consider the affect of what they characterize as continuing federal intrusions into corporate governance, as federal courts are increasingly being asked to adjudicate state law governance claims. This can become vexing when statutes of limitation are at issue. Directors and officers who were counting on Delaware’s three year statute could find themselves governed by the laws of their state of incorporation, which in some cases are shorter. Governance will take center stage in our next issue, when we interview one of the national experts in this area, Prof. Joseph Grundfest, former SEC commissioner and head of the Stanford Law School Class Action Clearing House. We have articles lined up from experts who both agree and disagree with Grundfest’s generally defendant-oriented views.

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

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information or retrieval system, without the written permission of the publisher. Articles published in Executive Counsel are not to be construed as legal or professional advice, nor unless otherwise stated are they necessarily the views of the writer’s firm or clients. Executive Counsel Magazine (ISSN 1932-9024) is published six times per year by Nienhouse Media, Inc., 640 Park Avenue, Hinsdale, IL 60521-4644 Printed by Worldcolor | Copyright © 2010 Nienhouse Media, Inc. Email submissions to editor@executivecounsel.info or go to our website www.executivecounsel.info for more information.

EXECUTIVE CoUnsEl f e b r u a ry/ m a r c h 2011

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16 Intellectual Property MARKETInG sUCCEss CoMPRoMIsED BRAnD

Julia Matheson and Marcus Luepke silly bandz went viral. 20 Canada/Cross-Border BRIBEs, BEnEFITs, oR BUsInEss DEVEloPMEnT?

Mark Morrison and Michael Dixon itâ&#x20AC;&#x2122;s a thin line in canada. CRoss-BoRDER M&A UPDATE: sTRonG CAnADIAn Doll AR MEAns MoRE oUTBoUnD DEAls

Divya Balji Post-downturn restrictions on canadian banks lifted. 24 Governance FEDERAlIZATIon InCREAsEs D&o EXPosURE

Publ isher

roberT nienhouse

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Con t ribu t ing edi tor s and Wri t er s Sarah A. Altschuller Divya Balji Sean J. Bellew Sarah Brown Michael Dixon Damon E. Dunn Craig Earnshaw David Felice Amy Fuetterer Jennifer Gokenbach Christopher Loh Marcus Luepke

Julia Matheson Steve Moore Mark Morrison Fernando Parra Eligio C. Pimentel Mark S. Radke Bob Rohlf Peter Selvin Gare A. Smith Steven G. Spears Robert A. Surrette Peter V. B. Unger

David Felice and Sean J. Bellew Delaware statute of limitation may not apply. 26 E-Discovery In-HoUsE oR oUTsoURCE FoR InFoRMATIon HosTInG?

Fernando Parra grill the consultants. 31 Human Resources FACEBooK FIRInG GARnERs An nlRB CoMPl AInT

Damon E. Dunn

Govern Intellec Propert Internation Human Resour

Polices and actions both need close examination.

63 Who Says Pungent excerpts from congressional hearings, commissions and official reports.

EXECUTIVE CoUnsEl f e b r u a ry/ m a r c h 2011

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42 MAKInG CoRPoRATE soCIAl REsPonsIBIlITY sYsTEMIC

Sarah A. Altschuller and Gare A. Smith getting csr into the Dna. 34 InsURAnCE CoVERAGE FoR CoMPUTER RElATED lossEs

46 DoDD-FRAnK BoUnTY PRoVIsIons CoUlD BE EXPloITED

51 E-DIsCoVERY HEADInG In HoUsE

58 InTERnATIonAl DATA PRIVACY AnD MoBIlE ElECTRonIC DIsCoVERY

1101011001010010101001001101010010110 Sarah Brown and Bob Rohlf 1010010101101100101011010010101001001

Craig Earnshaw

Peter S. Selvin

Mark Radke

you might be cyber-liable.

Perverse incentives?

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To avoid sending data across borders.

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42 38 VAlUE oF IP PoRTFolIos AT sTAKE

49 EEoC FoCUsInG on ClAss ACTIons

Robert A. Surrette and Eligio C. Pimentel

Steve Moore and Jennifer Gokenbach

supreme court might change the patent landscape.

Pattern and practice under scrutiny.

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EXECUTIVE CoUnsEl f e b r u a ry/ m a r c h 2011

54 MAjoR DnA PATEnT CAsE BEFoRE THE FEDERAl CIRCUIT

61 An IP PRIMER FoR EnERGY sTART-UPs

Christopher Loh and Amy Fuetterer

lessons tried and true about the patent system.

Steven G. Spears

if you isolate Dna, can you patent it?

The magazine for The general counsel, ceo & cfo

Executive Summaries P. 16 MARKETInG sUCCEss CoMPRoMIsED BRAnD by Julia matheson and marcus luepke finnegan, henderson, farabow, garrett & Dunner

P. 20 BRIBEs, BEnEFITs oR BUsInEss DEVEloPMEnT? by mark morrison and michael Dixon blake, cassels & graydon

P. 22 CRoss-BoRDER M&A UPDATE: sTRonG CAnADIAn DollAR MEAns MoRE oUTBoUnD DEAls by Divya balji mergermarket

Within months of introduction of the first Silly Bandz branded wristbands for children in 2008, competing products with similar names arrived on the market. Consumers adopted the name Silly Bandz to identify the product category, not just the originator. By 2010 these colorful rubber wristbands were the top-selling toy among school children in the United States. Faced with a new product category without a name, the audience was unaware or uninterested in the fact that Silly Bandz was a protectable brand name. While the originators of Silly Bandz deserve credit for the product’s success, they also share in the responsibility for the public appropriation of the trademark. With its nod to rubber bands and adoption of the widely used term “silly” for a children’s product, the mark all but invited the public to seize on the term as the product category name (not unlike “Escalator” and “Thermos,” the authors note). Complicating matters was the success of the product as a direct result of viral marketing. The high speed of internet and blog-based communication increased the risk that improper generic use of the brand name would spread quickly and affect larger circles of the public. While traditional marketing channels offer brand owners time to recognize and take steps to counter trademark misuse, social media is not so forgiving. Viral marketing makes it nearly impossible for a brand owner to reverse third-party misuse of its trademark once the mark has been “offered” for generic adoption the blogosphere.

Companies doing business in Canada should be aware that the U.S. Foreign Corrupt Practices Act is in certain respects narrower than prohibitions in the Canadian Criminal Code. For example, providing an official with a benefit, even without return expectations, can be an offense in Canada. Furthermore, the definitions of “official” and “benefit” under the Canadian Criminal Code are relatively broad. While enforcement has been less vigorous in Canada than in the United States, conviction for a Canadian anticorruption offense can carry significant penalties. The Canadian Criminal Code creates offenses that criminalize providing bribes to officials, the receipt of such bribes by officials, and even the appearance of such acts. One section applies to both private and public entities, and criminalizes “secret commissions” to a principal’s agent. It does not require a quid pro quo arrangement; it seeks to preserve the appearance of integrity and not just integrity itself. This section penalizes the simple provision of a benefit to a government employee or official with no strings attached, though that benefit must be conferred in respect to the dealings the accused had with the government. The level of transparency and openness of the gift giving is an important consideration. The term “official” is used broadly enough to include employees of state and municipal governments, Crown Corporations and employees of Native American tribes. The author suggests creating a Canada-Pacific code of conduct or an addendum to general corporate policies to provide direction.

As the U.S. economy continues to work out of the downturn, Canada is seeing interest from U.S. buyers. At the same time, as the Canadian dollar gets stronger and fluctuates around parity, Canadian companies could go bargain hunting in the United States. More than 50 percent of M&A deals in Canada in 2010 had North American buyers and sellers. In terms of value, over 40 percent came from North American bidders and targets. Toronto-Dominion Bank announced the acquisition of Chrysler Financial Services for USD $6.3 billion in December. Toronto-Dominion worked with Simpson Thacher & Bartlett for this transaction. Schulte Roth & Zabel advised Chrysler. Also in December, Bank of Montreal purchased the largest lender in Wisconsin, Marshall & Ilsley Corporation, for USD $4.1 billion. Osler Hoskin & Harcourt and Sullivan & Cromwell advised BMO. Godfrey & Kahn and Watchtell, Lipton, Rosen & Katz advised Marshall & Ilsley. The consumer sector saw several transactions in 2010 and could see more in 2011. In September of 2010, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), removed restrictions placed on Canadian banks in the wake of the financial crisis. Canadian banks now can increase dividends, make share buybacks and pursue larger acquisitions. Banks that are sitting on cash could look to expand their geographical footprint in the United States.

EXECUTIVE CoUnsEl f e b r u a ry/ m a r c h 2011

The magazine for The general counsel, ceo & cfo

Executive Summaries P. 24 FEDERAlIZATIon InCREAsEs D&o EXPosURE by David felice and sean J. bellew ballard spahr

Executive Summaries

Federal intrusions into corporate governance, traditionally a matter of state law, means federal courts are increasingly asked to adjudicate state law governance claims. The internal affairs doctrine requires that the law of the state of incorporation determine issues relating to the relationships inter se of the corporation, its directors, officers, and shareholders. Case precedent remains unsettled as to whether the internal affairs doctrine mandates application of the incorporating state’s statute of limitations, and whether the doctrine applies to the full range of litigation claims. Executive Summaries Uncertainly enters the equation when stockholder plaintiffs sue a thirdparty derivatively on behalf of the corporation, or if the corporation pursues non-fiduciaries for damages. Once federal courts abandon reliance on the internal affairs doctrine, the board loses the peace of mind that flows from applying a single state’s laws to a given dispute. While directors and officers once could count on the three-year statute of limitations for corporate governance claims under Delaware law, for example, now federal courts will undertake an analysis of the most appropriate statute of limitations to apply to a plaintiff’s state law claims. Those claims may be subjected to a four-year statute of limitations if their corporate headquarters are in California, or a two-year statute of limitations if their headquarters are in Pennsylvania. Companies should plan for legal exposure. With potentially longer periods of uncertainty, policies and procedures should be tailored to comply with potential discovery obligations.

EXECUTIVE CoUnsEl f e b r u a ry/ m a r c h 2011

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Executive Summaries P. 31 FACEBooK FIRInG GARnERs An nlRB CoMPl AInT by Damon e. Dunn funkhouser Vegosen liebman & Dunn

P. 34 InsURAnCE CoVERAGE FoR CoMPUTER-RElATED lossEs by Peter s. selvin loeb & loeb llP

The author discusses a basic decision companies need to make regarding storage and management of electronic information: whether to outsource the process or host the data in-house. The entire process, he says, should involve legal, HR, accounting and IT. Begin by delineating what needs to be retained for each of the three major drivers: litigation, regulatory compliance and ongoing business needs. The author considers advantages and disadvantages of each of the two options. External hosting likely will bring to bear highly experienced professionals and obviate the need for major capital investment, for example, but on the downside will result in ongoing fees and significant costs should a change in vendor or “platform” become necessary. Advantages of in-house hosting include more control and potential to customize the system, while disadvantages include hardware and personnel costs and potential liability should data integrity issues arise. The decision will depend on individual company needs. The easiest way to get up to speed is through potential vendor partners. Among the author’s specific suggestions: Meet with vendors on both sides of the issue, as well as end-users within the company. Scrutinize potential vendors with regard to financial stability as well as staffing and technical competence. Make inquiries beyond the vendors’ suggested references, beware of “scope creep” and negotiate for a waiver of training costs. In the end, “seal the deal with ink.”

Many companies have enacted social media policies (re Facebook, Twitter, LinkedIn, etc.) that limit what employees can say regarding the company and co-workers. It now appears that disciplining an employee for violating such policies, and in some cases just implementing them, may attract “unwanted attention” from the National Labor Relations Board, the author writes. Keep in mind, he warns, that contrary to widely-held belief, the National Labor Relations Act protects most employees, whether or not they are unionized, and it safeguards among other things their right to organize. In the well-publicized “Facebook firing” case, the NLRB filed a complaint against a medical services company after it fired an employee who had criticized a supervisor on her Facebook page. The speech was construed as part of “concerted activity” in a labor relations context and therefore protected. However, in the Sears Holdings case, the NLRB ruled that prohibitions were allowed because they were rendered as part of a broad policy that referenced non-work related issues, like drugs and racial or religious disparagement. The Facebook firing matter was recently settled, with the defendant company agreeing to change its policy. There still are no clear guidelines. For now, the author says “employers should tread carefully before disciplining an employee for social media policy violations.” Specifically, he suggests: No policies in response to union organizing activities, a preamble that explains goals and scope, “breathing space” for federally protected speech and activities, and an “even-handed application of discipline.”

The author describes how various kinds of computer-related losses might or might not be covered by two major categories of insurance: traditional products, such as comprehensive general liability (CGL) polices, and newly available “cypber-liability” policies. In determining whether loss of computer data is covered under a traditional first- party policy, a key issue is whether the incident is construed as direct loss or damage to property. Courts have split on the issue, so jurisdiction and policy details become important considerations. For third-party (or liability) coverage, the author cites cases that have gone both ways. A data consultant who lost a data tape was covered, while a software vendor whose product caused loss of data was not. In one case, coverage was found where an insured party’s advertising infringed a competitor’s intellectual property rights. In 2001, the standard CGL insurance form was revised to exclude electronic data from the definition of covered property. In 2004 the insurance industry introduced new forms of coverage that specifically addressed “data liability.” However, it’s important to bear in mind that many policies still in effect are not bound by these forms. New policies now exist that specifically address risks related to information technology. Companies evaluating these products should consider such issues as coverage limits, exclusions and what specifically will trigger business interruption coverage. Even if electronic data is excluded from the definition of “property,” verify coverage for loss of use of computer hardware.

EXECUTIVE CoUnsEl f e b r u a ry/ m a r c h 2011

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Executive Summaries

P. 26 In-HoUsE oR oUTsoURCE FoR InFoRMATIon HosTInG? by fernando Parra scarab consulting

Executive Summaries P. 38 VAlUE oF IP PoRTFolIos AT sTAKE by robert a. surrette and eligio c. Pimentel mcandrews, held & malloy

Executive Summaries

The Supreme Court recently agreed to decide three cases that will impact both the economic value of existing patents and strategic decisions about where ongoing IP investment, including R&D, should be made. In Microsoft v. i4i the Supreme Court will decide whether “clear and convincing” is the appropriate burden of proof for questions of patent invalidity. The result will directly affect not only the value of issued and pending patents, but also business expectations on the role and value of IP in today’s economy. The strength of patents could be diminished because examiners could be left to find the invalidating prior art needle in the irrelevant prior art haystack. In Stanford v. Roche, the issue is whether the Bayh-Dole Act framework preempts inventor contracts with third parties regarding ownership of patent rights when research is federally funded. If the Supreme Court rules that the Bayh-Dole Act does not control questions of patent ownership, due diligence conducted by companies acquiring patents may need to include an analysis of company-inventor contracts. Global-Tech v. SEB concerns the level of intent required for inducing infringemen. Global-Tech argues the standard should be be “purposeful, culpable expression and conduct” encouraging infringement, while SEB argues that the “deliberate indifference” standard should be affirmed. The ruling will affect litigation and licensing-based monetization efforts. It also may require a company to evaluate pending patent applications to determine whether additional resources should be allocated for continued prosecution. 11

EXECUTIVE CoUnsEl f e b r u a ry/ m a r c h 2011

Executive Summaries P. 46 DoDD-FRAnK BoUnT Y PRoVIsIons CoUlD BE EXPloITED by mark s. radke and Peter V. b. unger arent fox

P. 49 EEoC FoCUsInG on Cl Ass ACTIons by steve moore and Jennifer gokenbach ogletree, Deakins, nash, smoak & stewart, P.c.

Companies are now subject to demands from a wide range of stakeholders, including employees, shareholders and the public, and they face a variety of related risks that include lawsuits, negative publicity, boycotts, as well as targeted legislation and regulation. Consequently, many companies have adopted what they call a corporate social responsibility (CSR) program. However, many of these programs miss the point, according to the authors, and as a result they fail both in terms of social responsibility and managing legal and “reputational” risk. Companies, especially those that operate internationally, need to adopt CSR programs that are integral to their operations, not overlays or add-ons that take the form of “sustainability officers” or occasional philanthropy. CSR, the authors write, “is about the core business functions of a company, and about being responsive to the ever-increasing demands of company stakeholders that companies be held accountable for the social and environmental impacts of their operations.” Some stake holder demands have taken the form of legal requirements and the expectation of a relatively new kind of due diligence. The U.N.’s Special Representative has urged companies to carry out “human rights due diligence,” and The European Parliament has recently adopted a resolution calling for a CSR clause in all European Union trade agreements. It would require companies to identify and prevent “violations of human and environmental rights, corruption or tax evasion, including in their subsidiaries and supply chains.”

Section 922 of the the Dodd-Frank Wall Street Reform Act authorizes the SEC to pay a reward for providing information that leads to successful enforcement actions. This creates an incentive for whistleblowers to bypass internal reporting systems, which in turn has the potential to undermine the internal controls corporations established in response to the Sarbanes-Oxley Act. The SEC rule proposal implementing Section 922 would treat an employee as a whistleblower as of the date that employee reports the information internally, as long as the employee provides the same information to the SEC within 90 days. This is intended to ensure that employees can report information internally without jeopardizing a possible award. Nonetheless, the proposed rule seems to contemplate whistleblower complaints going directly to the SEC. The authors would like to see the SEC adopt two safeguards that the IRS has for its whistleblower program. The “one-bite” rule specifies that the whistleblower must disclose all information about the company in the first instance. The government may not ask the whistleblower to go back in to the company to gather more information. The IRS also prevents certain individuals with direct fiduciary obligations from collecting a bounty on alleged violations learned in the course of their work. The authors believe these proposals may not go far enough, in that they do not prevent co-conspirators whose conduct is actionable, but who are determined to be less than “substantially” responsible for the entity’s wrongdoing, from getting a reward.

The Equal Employment Opportunity Commission (EEOC) has announced its renewed commitment to combat systemic discrimination by seeking relief on a class basis and initiating an increased number of large-scale enforcement actions. This type of class litigation, known as pattern and practice, threatens employers with significant risk and exposure. In pattern or practice cases, the EEOC generally files claims under two theories. In cases involving unintentional discrimination, the allegation is that a neutral policy has had a disparate impact on minorities or women. In intentional discrimination cases, the EEOC alleges that discrimination was so pervasive against a group of minorities or women that it became standard operating procedure. In advancing these theories, the EEOC relies heavily on statistical evidence in challenging employers’ hiring, promotion, compensation, layoff or discipline practices. The EEOC has recently suffered setbacks in its aggressive prosecution of these cases, but employers are wise to watch for early indicators of class exposure, such as numerous EEOC charges with the same or similar allegations. Employers also should ensure careful and thoughtful responses to requests for information issued by the EEOC, in order to avoid expanding the scope of the investigation ,when possible, and to document any failures by the EEOC to follow its own statutory requirements to preserve all defenses should a large scale enforcement action be filed.

EXECUTIVE CoUnsEl f e b r u a ry/ m a r c h 2011

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Executive Summaries

P. 42 MAKInG CoRPoRATE soCIAl REsPonsIBIlIT Y sYsTEMIC by sarah a. altschuller and gare a. smith foley hoag

Executive Summaries P. 54 MAJoR DnA PATEnT CAsE BEFoRE THE FEDERAl CIRCUIT by christopher loh and amy fuetterer fitzpatrick, cella, harper & scinto

P. 58 InTERnATIonAl DATA PRIVACY AnD MoBIlE ElECTRonIC DIsCoVERY by craig earnshaw fTi Technology consulting

According to to the authors’ analysis, e-discovery management has been moving in-house for several years. Corporate expenditures on e-discovery are falling, in part because companies that take the process in-house can control costs more closely. The authors predict that 2011 will see a rapid acceleration of this trend, although they acknowledge there are barriers. The range of legal expertise offered by outside counsel normally includes at least some experience in managing the e-discovery process. Historically, the general counsel’s office has lacked this expertise, and lack of communication between the general counsel’s office and IT departments has frustrated many inhouse initiatives. But software to manage the process in-house has become available, many legal departments have developed expertise, and tools for managing the process have matured. The convergence of these trends positions the general counsel to be the play-caller on managing the ediscovery process. Increasing importance of social media is one more factor that points to in-house e-discovery management, the authors suggest, because the general counsel is in a better position to know the corporation’s social media profile than outside counsel. In 2010, corporations began to designate a lead e-discovery attorney and project manager. “Legal project management,” the authors say, “will join the legal lexicon as a legitimate skill set and practice, and it will prove itself both in terms of cost containment and success in litigation.”

The Southern District of New York has ruled that DNA isolated from human genes is not patentable. That ruling was appealed to the Federal Circuit, and attracted ten amicus briefs arguing for its reversal. The Federal Circuit’s decision likely will have significant implications for the biotechnology and pharmaceutical industries, which are increasingly relying on DNA technology to develop new drugs and therapies. This article discusses the issues raised in the amicus briefs, which in turn may shed light on how the Federal Circuit will decide the appeal. While the amici agree that the district court erred in holding isolated DNA unpatentable, they disagree on the nature and extent of the error. The Federal Circuit faces a number of issues. It could base a decision on whether or not isolated DNA is manmade; whether or not isolated DNA is a “purified” product of nature; whether or not the district court properly applied precedent in finding isolated DNA not “markedly different” from naturally occurring genes; whether or not Congress intended for DNA to be patentable; and whether or not policy considerations favor patents for isolated DNA. If the Federal Circuit agrees that isolated DNA is a patentable, manmade invention rather than a product of nature, it need not address the other issues. “Regardless of the precise contours of the Federal Circuit’s eventual decision,” the authors write, “the issues raised in the amicus briefs make clear that the decision likely will have significant implications for the biotechnology and pharmaceutical industries.”

“International privacy laws and restrictions on cross-border data mobility can make it difficult for lawyers to conduct electronic document searches and reviews outside the jurisdictions in which data resides,” the author says. “Advances in electronic discovery mean that mobile solutions can now take the technology to the data rather than the other way around.” The author posits a typical scenario where a U.S. company is investigating a potential Foreign Corrupt Practices Act violation by employees in an overseas subsidiary, and an ediscovery service provide gathers, analyzes and preserves the data, then takes it to a “review environment.” If there are numerous facility locations, moving the data will risk violating the strictly enforced European privacy laws, which mandate significant penalties. One solution, the author says, is to take the technology to the documents and conduct the investigation “in situ.” This may involve setting up a server on-site or using “hand-luggage-sized mobile solutions that are configured in a conference room.” In addition to avoiding legal risks, this strategy allows for a faster and less intrusive investigation. Mobile electronic discovery solutions are not “silver bullets,” the author says. “Rather they can be an effective means of reducing data down to the most relevant documents for review.” They are especially useful “where discretion is crucial to avoid employees being alerted to an investigation inadvertently and where sensitive data needs to remain secure.”

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Executive Summaries

P. 51 E-DIsCoVERY HEADInG In-HoUsE by sarah brown and bob rohlf exterro, inc

Executive Summaries

The author presents a brief history of the patent system and discusses how alternative energy companies might use it. He contends that recent Supreme Court decisions and pending legislation are addressing the problems presented by non-practicing entities and the litigation they threaten, and that the system remains useful in the fundamental way it was designed to function, by offering a limited term of exclusivity in return for innovation. A well-designed patenting program starts at the beginning of the innovation process, with research scientists who understand the importance of good record keeping and early disclosure of innovations that might be patent-worthy. If no in-house patent department exists, patent applications can be prepared by outside counsel for fees ranging from $5,000-$20,000, depending on the complexity of the invention. An energy technology company must keep its eye on other companies’ patent filings. They might reveal that another company was first to realize an innovation that it has been working on, thus creating a “blocking patent” to commercialization. Under such circumstances, the company either will have to design around the patent or obtain a license. Innovations in the energy arena may arise from joint ventures or joint research projects. Care must be taken when creating these ventures to address ownership of patents. The ownership question, the authors says, can lead to “a messy and fact-intensive dispute if it’s not clearly addressed in the documents establishing the joint research project.” 15

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Intellectual Property

Marketing Success Compromised Brand Trademark in the Age of Social Media by Julia matheson and marcus luepke

of introduction of the first Silly Bandz branded wristbands for children in 2008, competing products with similar names (Character Bandz, Logo Bandz, Zany Bandz) in similar packaging, arrived on the market. within months

Consumers adopted the name Silly Bandz to identify the product category, and not just the product originator. By 2010 these colorful theme- shaped rubber wristbands were the top-selling toy among school children in the United States. This phenomenon presents the brand owner with a two-fold challenge: how to best protect the product concept against competitors, and how to guard the product name against the detrimental effects of consumer misuse. Faced with a new product category without an existing name, the targeted audi16

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ence quickly adopted the brand name to identify all such products. They were unaware or simply uninterested in the fact that Silly Bandz, owned by BCP Imports, was a protectable brand name. Under the most basic tenet of trademark law, a generic term that identifies a category of product, rather than a specific product source, is not entitled to trademark protection. Thus, no one could ever successfully claim trademark rights for the term APPLE for apples, for two reasons: First, even with advertising and consumer education, the public would never recognize the term

as a trademark for a particular source of apples, rather than the product category itself. Second, trademark law will not permit a monopoly on a term that competitors need to use in order to identify their own products. Even the most savvy marketers find themselves falling victim to the loss of a whimsical trademark when the public starts using the term generically to identify their product category. Unique and original trademarks can lose their protectable status when public misuse becomes the norm, and social media and easy internet communication have facilitated trademark misuse. Escalator and Thermos are two examples of original coined marks that once indicated a certain manufacturer, but have come to describe a product cat-

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egory. The owners of Xerox and Kleenex are in a constant and expensive battle to educate and re-educate consumers that these terms are proprietary trademarks, not simply the generic names for copy machines and tissues. New products that don’t fall into existing product categories face a higher risk of becoming victims of “genericide.” If not provided with a simple name for a new product category, consumers typically choose the easiest way to identify that new category – the brand name itself. BRAnD WEnT VIRAl

Even the most savvy marketers find themselves falling victim to the loss of a whimsical trademark when the public starts using the term generically to identify their product category. mark as its brand. With its nod to “rubber bands” and adoption of the widely used term “Silly” for a children’s product, the mark all but invited the public to seize on the term as the product category name. Complicating matters was the unanticipated and possibly unforeseeable success of the product, a direct result of viral marketing. The high speed of internet and blog-based communication about the bands increased the risk that improper generic use of the brand name 18

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TIMInG Is KEY

Did the Silly Bandz creators wait too long to protect and enforce their trademark? Although the product was launched in the United States in November 2008, no trademark application was filed until nearly a year later in September 2009. Another year passed before the first public enforcement activities in October 2010, when the brand owner filed suit against a large retailer (WalMart) and an online distributor to stop alleged infringements of its Silly Bandz trademark, its trade dress rights in the packaging, and its copyright registrations in several of the specific rubberband shapes. While BCP may ultimately prevail in its individual actions against these particular defendants, its enforcement efforts may come too late to reverse the widespread public genericism of the mark. Despite a federal trademark registration, the extensive misuse of the mark by the public in blogs, in trade publications, in social media, and by online retailers and competitors in the marketplace, may undermine that trademark registration’s ultimate evidentiary value. Unique packaging can be a critical factor in helping a product stand out from the crowd. Like a traditional trademark, a product’s packaging (i.e. trade dress) can enjoy protection against copycats (i.e. confusingly similar trade

dress) if it is sufficiently unique or original to be recognized by consumers as a source identifier. The common beer bottle will never enjoy such protection. But the Tiffany robins egg-blue box and white ribbon, and the original Coke bottle, certainly do. Silly Bandz chose to package its products in what it asserts is unique and original “pillow-shaped packaging,” featuring a clear plastic pillow-shaped package with a rectangular label on top. But is that package really as unique as BCP claims in its suit against WalMart? A review of the larger marketplace suggests that pillow-shaped packages are in widespread common use for a variety of products, including ear plugs, hair accessories and inexpensive jewelry. The package offers retailers the ability to stack packaging without product damage, consumers the chance to view the product without opening it, and kids the chance to open and reuse the package without destroying or discarding it. And, despite BCP’s claim of exclusivity, store shelves show that its competitors quickly adopted and are widely using the identical style of packaging for their competing brands. Do these facts suggest that this allegedly unique packaging is, in fact, not only not unique, but functional and unprotectable? That issue will be left to the Ohio district court to decide. Creators of runaway best-selling products like Silly Bandz face a difficult challenge in deciding how much and how soon to invest in the protection of their intellectual property rights. The expense seems unnecessary when, at initial launch, it’s not clear that a product will meet with success. Once a product is successful, practicalities may suggest that its ultimate life span will be so short that the expenses of enforcement are not justified. The danger is that once the product has proven successful enough to warrant further activities it may already be too late to save a brand compromised by extensive third-party use. So far, the originators of the Silly Bandz brand have shown enormous creativity in identifying the purpose of their products (“Collect ‘em, Trade ‘em,

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Intellectual Property

Social media and internet marketing helped Silly Bandz gain wide appeal throughout the United States without a single advertisement or TV spot. As of August, 2010, BCP’s Silly Bandz products were available in over 8,000 stores across the United States and Canada and enjoyed sales estimated at $200 million per year. While the originators of Silly Bandz deserve credit for the product’s success, they also share in the responsibility for the public appropriation of the trade-

would spread quickly and affect larger and larger circles of the public. The same factors which make viral marketing so appealing (speed, reach, cost) make vulnerable trademarks more vulnerable. While traditional marketing channels offered brand owners time to recognize and take steps to counter trademark misuse, social media is not so forgiving. Viral marketing makes it nearly impossible for a brand owner to reverse third-party misuse of its trademark once the mark has been “offered” for generic adoption in the blogosphere. The reach and nature of viral communications necessarily shortens the time frame within which a mark can be misused.

Wear ‘em”), the direction for their marketing efforts and future lines for expansion. They have extended the product’s shelf life with constant releases of new collections of shapes, adding glow-in-

New products that don’t fall into existing product categories face a higher risk of becoming victims of “genericide.”

Intellectual Property

the-dark and scented versions, creating adhesive bandages, earrings, and necklaces, and getting licenses from major celebrities and animated characters. They’ve launched smaller finger-sized bands and offered Silly Bandz t-shirts, and recently they expanded their efforts to Europe and other international markets. Will all these efforts be enough to save the Silly Bandz name from extinction? It remains to be seen.

julia anne matheson,

a partner at Finnegan, Henderson, Farabow, Garrett & Dunner, focuses on trademark, unfair competition, and internet-related issues including international portfolio management, counseling and clearance, opposition and cancellation proceedings, licensing, due diligence, domain name disputes and litigation and enforcement matters. She is a frequent speaker and author on trademark issues. julia.matheson@finnegan.com marcus luepke, of counsel

at Finnegan, Henderson, Farabow, Garrett & Dunner, is an international trademark attorney whose practice focuses on trademark clearance and prosecution, and on counseling clients in managing and enforcing international trademark portfolios. marcus.luepke@finnegan.com 19

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Canada/Cross-Border

Bribes, Benefits, or Business Development? Canadian Corruption Laws by mark morrison and michael Dixon

a robust anti - corrup tion

program is essential for U.S. companies conducting business abroad. This is particularly true in light of the significant fines and penalties imposed under the Foreign Corrupt Practices Act (FCPA) over the last several years. It would be a mistake, however, to focus solely upon compliance with the FCPA. The potential impact of anti-corruption legislation in other countries must be considered as well. Companies carrying on business in Canada should be aware that the FCPA is in certain respects narrower than prohibitions in the Canadian Criminal Code. For example, providing an official with a benefit, even without return expectations, can be an offence in Canada. Furthermore, the broad definitions 20

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of “official” and “benefit” under the Canadian Criminal Code cast a wide net for the unwary. Enforcement has been less vigorous in Canada than in the United States, but conviction for a Canadian anti-corruption offence can carry significant penalties. With these things in mind, this article outlines key anti-corruption compliance considerations for companies carrying on business in Canada.

NO QUID PRO QUO REQUIRED

The Canadian Criminal Code creates offences that criminalize providing bribes to officials, the receipt of such bribes by officials, or the appearance of these acts. These provisions are aimed at overt forms of corruption and require a quid pro quo arrangement. The Supreme Court of Canada has confirmed, for example, that section 121(1)(a) does not make it illegal to provide a benefit, per se. The benefit only becomes illegal when it is provided in consideration for an act or omission by a government official. Section 426 of the Criminal Code is similar, but has a broader application in that it applies to both private and public entities, and criminalizes “secret commissions” to a principal’s agent. However, section 121(1)(b) – un-

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like the FCPA or the Criminal Code sections listed above – does not require a quid pro quo arrangement and seeks to preserve the appearance of integrity rather than integrity itself. Indeed, this section penalizes the simple provision of a benefit to a government employee or official with no strings attached, though that benefit must be conferred in respect to the dealing the accused had with the government.

Canada/Cross-Border

Corporate compliance programs for companies that conduct business in Canada should not only focus on the FCPA, but also on Canada’s domestic anticorruption offences. The elements are therefore that the accused had dealings with the government, conferred an advantage or benefit on an official of the government with which those dealings took place, and did so without the written consent of the head of the relevant branch of government. Penalties for anti-corruption offences in Canada include: • Unlimited fines for corporations. • Up to five years imprisonment for individuals. • Forfeiture of any proceeds – not just profits – obtained by the illegal act. • Debarment from contracting with the government. onE lAVIsH MEAl

In light of the breadth of section 121(1) (b) and its criminalization of the mere provision of benefits to government officials, a key consideration for those conducting business in Canada is, what constitutes a benefit? In Canada, the law does not delineate a specific dollar amount over which courtesies would be considered a benefit. However, the Supreme Court of Canada has held that a benefit must 21

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constitute a “material or tangible gain” before criminal liability would be imposed. The case law suggests that helping an official obtain goods at a reduced price, tickets to sporting events, a onesided pattern of paying for meals or even one lavish meal, providing free home renovations or payment for travel, may all constitute a material or tangible gain sufficient to trigger the application of the Criminal Code. Trivial social courtesies, on the other hand, such as a cup of coffee, are unlikely to constitute the provision of a benefit under the government corruption offences. However, the provision of any larger gratuity technically risks sanction under the Criminal Code. In general, the level of transparency and openness of the gift giving is a particularly important consideration in determining whether an offence has occurred. Some of the charges listed above provide a full defence in circumstances where the company has obtained written pre-approval for the benefit from the head of the branch of government with which they deal. Even for charges where pre-approval does not constitute a complete defence, prosecution for an anti-corruption offence is unlikely where there has first been full-disclosure and preapproval. Many Canadian anti-corruption offences require that the recipient of the benefit be an official. That would include employees and officials of the provincial and federal governments, as well as municipalities if they are acting as agents of the federal or provincial Crown. Employees of government-owned or controlled corporations, referred to as “Crown Corporations” in Canada, may also be considered government employees or officials when acting as agents of the federal or provincial Crown. The term official is even broader under Section 122 of the Criminal Code and has been held to extend broadly enough to include employees of Native American bands as “officials.” sTRATEGIEs FoR CoMPlIAnCE

When determining how best to ensure

corporate compliance with anti-corruption legislation in Canada, a number of strategic points should be considered. • Appearances are paramount, so be aware of the sensitivities inherent in dealing with government. Appreciate maintaining the appearance of integrity as well as actual integrity. • Create a Canada-specific code of conduct or an addendum to general corporate policies that provides direction on how to deal with Canadian government officials. Effective training and enforcement of this policy are vital. So is appropriate leadership and corporate oversight, especially of marketing activities. An established protocol for monitoring business development and client entertainment expenses is particularly important. • Where abstinence from entertaining government clients is not feasible, written pre-approval from the head of the relevant government department should be obtained. Any written request for approval should include particularization of the event, its purpose, the proposed attendees, and details of any benefits to be provided. • Where written preapproval is not practical, careful consideration should be given to whether the business development activity should be undertaken. Considerations should include: • The nature and size of the proposed benefit. • The circumstances in which it

In Canada, the law does not delineate a specific dollar amount over which courtesies would be considered a benefit. is being provided and, in particular, whether it is being done in an open and transparent manner. • The past history of dealings with the recipient and, particularly, past provision of benefits. • The recipient’s own gifts and gratuities policies.

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• The current business relation-

is a partner in the Calgary office of Blake, Cassels & Graydon LLP. He practices in the litigation group with a focus on white-collar crime, anti-corruption, insurance, competition, commercial litigation, class actions and product liability. mark.morrison@blakes.com mark morrison

is an associate in the litigation group in the Calgary office of Blake, Cassels & Graydon LLP. His practice involves all aspects of corporate/ commercial litigation with a focus on criminal law, oil and gas law, regulatory law, insurance law, and commercial disputes. Michael has acted in proceedings before the Provincial Court of Alberta and Court of Queen’s Bench. michael.dixon@blakes.com michael dixon

EXECUTIVE CoUnsEl f e b r u a ry/ m a r c h 2011

Strong Canadian Dollar Means More Outbound Deals

by Divya balji

As the U.S. economy continues to work its way out of the downturn, Canada is seeing more interest from U.S. strategic and financial buyers. At the same time, as the Canadian dollar gets stronger and fluctuates around parity, Canadian companies could go bargain hunting in the United States. For 2010, there were 468 M&A deals in Canada with an aggregate value of USD $78.5 billion, according to mergermarket’s Canadian M&A round-up for 2010. More than 50 percent of deals had North American buyers and sellers. In terms of value, more than 40 percent came from North American bidders and targets. Blake, Cassels & Graydon LLP topped Canada’s legal advisor list in terms of value, with 78 deals valued at USD $73.3 billion. Stikeman Elliott took the lead in deal volume, having advised on 81 deals valued at USD $62.8 billion. The financial services sector closed with a bang in 2010, when TorontoDominion Bank announced the acquisition of Chrysler Financial Services for USD $6.3 billion in December. “This acquisition will allow TD to take its auto finance business to a new level and gives us access to a North American platform,” said Ed Clark, Group President and CEO of TorontoDominion, in a press release. TorontoDominion worked with Simpson Thacher & Bartlett for this transaction. Schulte Roth & Zabel advised Chrysler. December saw another big transaction in the financial services sector, when Bank of Montreal purchased the largest lender in Wisconsin, Marshall & Ilsley Corporation, for USD $4.1 billion. This acquisition will allow BMO to strengthen its North American business, and it will align well with BMO’s retail, commercial, and asset/wealth management businesses in the United States, according to Bill Downe, BMO’s President and CEO. Osler Hoskin & Harcourt and Sullivan & Cromwell advised BMO. Godfrey & Kahn and Watchtell, Lipton,

Rosen & Katz advised Marshall & Ilsley. The consumer sector saw several transactions in 2010 and could see more in 2011. In September of 2010, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), removed restrictions placed on Canadian banks in the wake of the financial crisis. Canadian banks can now increase dividends, make share buybacks and pursue larger acquisitions. Banks that are sitting on cash could look to expand their geographical footprint in the United States and elsewhere. Jump-starting the retail sector this year was the announcement that Target Corporation, the second largest retailer in the United States, has agreed to acquire the leasehold interests in up to 220 sites currently operated by Zellers, a subsidiary of Hudson’s Bay Company. The price will be CAD $1.825 billion. This transaction will allow Target to open its first stores in Canada, beginning in 2013. Other U.S. retailers could soon look north, where consumer spending has been better than in the United States. Stikeman Elliott represented Zellers in this transaction. Osler, Hoskin & Harcourt advised Target. “Available capital will drive U.S.Canada M&A activity,” said Michael Gans, Partner at Blake, Cassels & Graydon LLP. “There are lots of opportunities to access capital coming out of the United States. Canadian companies that are looking at expanding into the United States continue to make acquisitions. This reflects an economic imbalance. Canada is performing well and the U.S. continues to struggle.”

divya balji joined merger-

market, 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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Canada/Cross-Border

ship with the recipient, particularly his or her role and decision-making authority in the proposed or ongoing business. • Appearances to the public at large. It also needs to be understood that anything more than the proverbial cup of coffee, without written pre-approval, puts your organization at risk of at least a technical breach. For minor items, such as a birthday cake, isolated business lunches, or occasional inexpensive promotional items, there may be a technical breach, though the practical risks of prosecution would be slim. Remember that appearances are paramount in all dealings with Canadian government personnel. Be aware of the need to ensure both actual integrity and the appearance of integrity. Above all, when establishing corporate compliance programs for companies that conduct business in Canada, the focus should not only be on the FCPA, but also on Canada’s domestic anti-corruption offences.

cross-border m & a update

Governance

Federalization Increases D&O Exposure by David felice and sean J. bellew

facing governance claims may no longer be able to take comfort in the certainty of a statute of limitations based on the law of the incorporating state. Recent federal statutory and regulatory intrusions into the traditional state law domain of corporate governance means federal courts are being asked to adjudicate state directors and officers

law corporate governance claims. The issue is often which state’s laws apply. Because certain proxy materials are subject to federal scrutiny, there is nothing to keep litigation-friendly pension fund managers from raising purely state-law claims in a federal proceeding. Thus, there is no certainty about when a corporation can finally close the chapter on a board action or an event. Federal courts will undertake an 24

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analysis of the most appropriate statute of limitations to apply to the plaintiff’s state law claims. Instead of Delaware’s three-year statute of limitations for corporate governance claims, they may be subjected to a four-year statute of limitations if their corporate headquarters are in California, or a two-year statute of limitations if their headquarters are in Pennsylvania. These developing issues will have

significant practical effects on policies and practices. There are savings to be reaped, and potential exposures that must be addressed. THE InTERnAl AFFAIRs DoCTRInE

When a federal court exercises supplemental jurisdiction over state law corporate governance claims, it is generally accepted that it will look to a state statute of limitations as it applies to the state law claims. The internal affairs doctrine requires that the law of the state of incorporation determines issues relating to the relationships inter se of the corporation, its directors, officers, and shareholders. Case precedent remains unsettled as to whether the internal affairs doctrine mandates application of the incorporating state’s statute of limitations,

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Governance

and whether the doctrine applies to the full range of corporate litigation claims. There is no question that election of directors, declaration of a dividend and indemnification are all internal corporate affairs. Uncertainty enters the equation when stockholder plaintiffs sue a thirdparty derivatively on behalf of the corporation, or if the corporation pursues non-fiduciaries for damages. In fact, there are an increasing number of federal court decisions suggesting that the quintessential breach of fiduciary duty claim is not subject to the internal affairs doctrine, and therefore subject to the forum state’s conflict of law analysis. The approach that delivers predictability and discourages forum-shopping by plaintiffs is to apply the internal affairs doctrine when assessing the applicable statute of limitations. Once federal courts abandon reliance on the internal affairs doctrine, the board losses the peace of mind and predictability that flows from applying a single state’s laws to a given dispute. RECEnT DECIsIons FosTER UnCERTAInTY

Recent federal court treatment of this topic has ranged from recognizing the application of the internal affairs doctrine and applying the statute of limitations of the incorporating state, to shortening or lengthening the statute of limitations based on a corporation’s headquarters or the locale of the alleged unlawful act or actors. When a state law claim implicates the internal affairs of the corporation – including breach of fiduciary duty claims that benefit the corporation – the court will apply the statute of limitations of the incorporating state. More often than not, this involves the application of Delaware law, but this is being eroded by federal courts that are called upon to adjudicate state law corporate governance claims on the basis of diversity or supplemental jurisdiction. A federal court in California was asked to assess the timeliness of claims brought by the corporation’s special litigation committee against two for25

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mer officers for breach of the fiduciary duty of loyalty, and aiding and abetting a breach of fiduciary duty. The claims were in addition to the predicate claims under the Exchange Act that formed the basis of the federal court’s jurisdiction. The plaintiff corporation was a Delaware entity with its headquarters located in California. The court chose to disregard the California statute that codified the internal affairs doctrine, holding that the

The approach that delivers predictability and discourages forum-shopping by plaintiffs is to apply the internal affairs doctrine when assessing the applicable statute of limitations. doctrine did not mandate that Delaware law applies to torts claims brought against individuals who are not fiduciaries of the corporation. Based on this reasoning, the court’s analysis concluded that California law should apply to state law claims against the two former officers. California law recognizes a four-year statute of limitations for breach of fiduciary duty claims. Accordingly, the corporation was entitled to pursue claims against its former officers in spite of the fact that the claims were time-barred under Delaware’s three-year statute of limitations. Obviously, this decision may catch future decision makers off-guard. BAnKRUPTCY CAsEs

This scenario also plays out in bankruptcy courts where disgruntled creditors or the court-appointed trustee file an adversary complaint against former board members for decisions made while the corporation was in the zone of insolvency. Directors are loathe to think that they might be called upon to answer to creditors for decisions made four years ago, decisions that may or may not have pushed the company into

further financial distress, but that may be the case. That scenario played out in a bankruptcy matter pending in the Delaware Bankruptcy Court. A Chapter 7 trustee brought an adversary proceeding against the debtor corporation’s sole director for fraudulent and preferential transfers and breaches of fiduciary duty. The debtor corporation was a Texas corporation, with a mailing address in Texas. The Delaware Bankruptcy Court concluded that a claim for breach of fiduciary duty involved the internal affairs doctrine. Based on this conclusion, the court held that Texas law was applicable. As a result, the court applied Texas’s four-year statute of limitations for breach of fiduciary duties, and the director was held to answer for conduct that would have been too remote in time to form the basis for a claim under Delaware law. In another Delaware case, this time in federal district court, the court found that breach of fiduciary duty claims brought by a stockholder against the sole director of a Delaware corporation were susceptible to Pennsylvania’s two-year statute of limitations because the corporation’s headquarters were located in Pennsylvania and the director worked in Pennsylvania. In reaching its decision, the Delaware federal court concluded that the internal affairs doctrine was not applicable in determining the statute of limitations because the issue of statute of limitation is procedural and not substantive for conflict of law purposes. The Delaware Court of Chancery has not been called upon to squarely address this issue, presumably because most parties are content litigating Delaware cases applying Delaware law. BoTToM lInE EFFECTs

Courts will continue to grapple with the interplay between the internal affairs doctrine, the corporation’s state of incorporation and the location of its headquarters. In the interim, company executives and boards must plan for legal exposure. That planning process (Governance continued on page 29)

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E-Discovery

In-house or Outsource for Information Hosting? by fernando Parra

to be faced with daunting amounts of data residing in unstructured formats, and the volume of data is growing at a frightening rate. We have seen our clients’ data storage needs grow by approximately 800 percent over the past three years.

on them, hosting solutions managed by robust software offer several advantages. This article will focus on (1) understanding hosting options, (2) pros and cons of internal and external hosting, (3) criteria for selecting an outsourced solution and (4) tips on negotiating the best deal.

The need to host documents may arise while handling a specific legal matter, where the need is for rapid search and review of electronic records, or it may arise in the context of ongoing business, where the need is to rapidly index, find and use electronic records. Either building or outsourcing a system, including the software to manage records in an electronic format, inevitably will be challenging, stressful and time-consuming. First steps in the pro-

HosTInG oPTIons

it is common for corporations

EXECUTIVE CoUnsEl f e b r u a ry/ m a r c h 2011

cess should include a solid planning session, budget approval, and buy-in from legal, HR, accounting and IT. To avoid duplicate efforts, those carrying out the project should take advantage of any planning that has taken place previously. Today “network share drives,” or “public drives,” are common. We know them as the alphabet drives (usually designated P or S drives). Although file shares are simple to setup, they are a nightmare to manage. In lieu of relying

The “hosting environment” is the physical environment from which hosting services are offered. Typically, hosting environments are in a data center housing the needed equipment – software and hardware – including servers, routers, and their cabinets. In most cases the equipment would be rack mounted and connected through one or more local area networks (LANs.) Security is administered via lay-

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ers of hardware and software configurations that can allow users and groups to interact with documents stored on the servers. The first step is to decide exactly what should and should not be hosted, since there are high costs to store and manage electronic documents. Records retention policies dictate what types of documents should be kept, but generally documents in three major categories should be stored and managed. (1) For a litigation need. This means documents that are under a litigation hold due to pending legal action. (2) For a regulatory need. This consists of regulatory business compliance documents, state, federal, or local. (3) For a business need. This refers to documents that are needed for an ongoing business purpose. This is a category that is essentially self -determined. RUn YoUR oWn oR soURCE IT oUT?

EXECUTIVE CoUnsEl f e b r u a ry/ m a r c h 2011

In-HoUsE, PRo AnD Cons

The major impediment to implementing an in-house solution is likely to be Human Resources, but the advantages make it worth considering. The pros include: • The environment will be under your control.

Meet several providers on both sides of the issue, and bounce ideas off them. • Your document retention policy

is enforced. • Security is under your parameters and control. • After the initial investment, there will be no on-going monthly costs. • Workload and priorities can be set internally. • There will be the potential to reduce some litigation-related costs. The corporation, for example, can require outside counsel to use its hosting platform. • Internal solutions can be significantly customized to fit the company’s business needs, in contrast to the outsourced solution that has to meet the needs of many clients. The in-house hosting option of course has some cons, as well. They include:

• Bringing your hosting in-house requires a significant capital investment and red tape to get budget approvals and support from IT. • New hardware (servers and storage), software and bandwidth will require significant IT support, as well as dedicated software support. • Significant human resources will be needed to ensure connectivity, help desk support, project management, database administration, data load, data analysis, training and backup. • You need to be prepared for maintenance activities, such as validating backups, performing technical service patches and planning for system upgrades. • Liability will also be brought inhouse. You need to maintain chain of custody. You are solely responsible for maintaining data integrity. • “Scaling the environment” will also be your responsibility. Additional capital investment should be planned for growth needs which may require such additional items as servers and software licenses. • Department costs may be difficult to allocate back to individual department budgets.

AGGREGATE ConsUlTAnTs’ EXPERTIsE

Deciding between an in-house or an outsourced solution will depend on your individual company needs. The easiest way to get up to speed is through your potential vendor partners. Meet providers on both sides of the issue, and bounce ideas off them. Let them know you are considering several different options and be specific about any issues you have with their products and services. You may find they come back to the table with alternative solutions. In my experience, there always will be one or two potential partners that, in terms of resources and experience, stand out from the crowd as true consultants. Use them as to help develop your plans. In the investigation process, you will need to determine what your end goal is. For instance, are you going to implement an enterprise solution, or

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E-Discovery

With this issue covered, you need to decide whether to host within or outside of the corporate firewall. All options should be investigated, and don’t rule out a a hybrid solution. Here are some major reasons to consider outsourcing: • No large-scale capital expenditures are required. • Scaling, support and expertise are the vendor’s responsibility. • You gain project management and consultation, database administration and workflow analysis from professionals who are familiar with all facets of document retention. • There will be concurrent global access for multiple users, firms and organizations, as needed. • You will have a party-neutral environment with solid security and permission setups. • It is easier to bill your clients for services provided by a third-party solution. • Hosting allows law firms to focus purely on practicing law, while allowing companies to focus on their areas of expertise. • You are not locked into just one solution. You can use best-of-breed technology.

Of course there are arguments against outsourcing, as well. They include the following: • There will be permanent monthly fees, or fees lasting through the life of a matter. • There could be costs associated with migrating data if you need to switch vendors or change platforms. • Workloads and priorities are usually set as first-in/first-out, from the vendor’s perspective. • What is important to you may not be important to the vendor. Change management will be out of your control (although you may have some influence on development).

will this be a project-based solution? Will the solution be more of a document management tool, or should it meet the needs of the legal department for litigation support? Again, determine who will be the ultimate decision maker, because that person will need to support you along the way and should be on the same page regarding the technology under discussion, the end goal and the purpose. Determine who will write the check, and where you are in the budget cycle so that you can set proper expectations. Do not forget the end clients. You will need to decide which role a final user will have in the product solution. Will they take part in the decision? This is critical in any implementation and will help smooth the rollout process. Develop selection criteria with users, stakeholders, and decision makers, so all are clear on the requirements. E-Discovery

THE RFP

Take advantage of online resources for creating an RFI or RFP. A solid RFP process should include crucial selection criteria. These include company background, financial stability, merger/acquisition status, material pending lawsuits, insurance, expertise of staff, turn-over rate, hours of availability, cost, infrastructure, scalability/capacity, and adequacy of financial resources that would be needed to increase capacity. Find out about the facilities locations, physical access and security, disaster recovery plans, litigation chain-of-custody procedures, use of subcontractors and outsourcing, use of overflow vendors, and enforcement of document retention policies. Most importantly, ask for references and call them. Talk to clients that have implemented similar solutions, and be thorough in your questions. Go beyond the provided references and see if you can identify other users of their solution and make your own phone calls. This single step can save you much grief. Remember, this step involves a significant expenditure of time and money, so it should not be taken lightly. 29

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MInD THE EXTRA CHARGEs

(Governance continued from page 25)

In the end, you will get what you pay for. Be prepared to manage risks. What if a hard deadline is missed? What if the budget overflows? Beware of “scope creep.” Are those additional modules really needed, or are they just wanted? Who has authority to approve them? A good deal will include service level requirements, technical support response time expectations, and penalties for non-performance of service level requirements. Success of software will most likely be measured by utilization and satisfaction of the end users, so you will want to make sure that training costs are waived whenever possible. (You will have to ask.)End users will need to know how to use the tool, and you need all the human resources you can spare, so make sure that the provider is throwing in plenty of training. It is to their benefit as well. Lastly, seal the deal with ink, not handshakes. Understand this is not an easy process, and there is going to be a lot of work and cost involved. Pick the vendor that offers the best value and not the best price. Whether to outsource or bring the data in-house should be recognized as a significant decision with important implications. Review all your options, rely on the advice of professionals and colleagues who have experience with the process, and then get the necessary buy-in. Careful planning, negotiation and execution will help you determine whether insourcing or outsourcing is best for your organization.

includes determining how long the threat of litigation will remain following a disputed corporate action. In addition, if it’s possible that a company will benefit by emerging from the shadow of a controversial corporate act sooner rather than later, business models can be adjusted and reserves released. However, if a company might be exposed to a longer period of legal uncertainty, it is essential that its policies and procedures be appropriately tailored to comply with the potential discovery obligations that are part of any litigation. This includes reviewing document retention policy and litigation hold procedures to make certain that they cover a sufficient amount of information for an appropriate period of time.

is managing partner for Scarab Consulting, where he is responsible for complex e-discovery project management. He has more than 16 years experience as a software consultant with law firms and corporate legal departments, including management of complex projects across multiple states, locations and counsels; government contracts; and operations, for the company’s western region. fparra@consultscarab.com. fernando parra

david a. felice

is an associate in Ballard Spahr’s Litigation Department and a member of the Complex Commercial Litigation, Labor and Employment, and the Securities Litigation groups. He represents clients in commercial litigation before the U.S. District Court for the District of Delaware and the Delaware Superior Court. He also has experience in the Delaware Court of Chancery in a variety of matters governed by Delaware corporate law. feliced@ballardspahr.com sean j. bellew

is a partner in Ballard Spahr’s Litigation Department. He is a trial lawyer and serves as lead counsel on complex corporate and commercial litigation. He represents Delaware corporations and corporations doing business in Delaware in cases involving corporate control, corporate governance, statutory and contractual disputes, fiduciary duties, antitrust, and securities litigation. bellews@ballardspahr.com zachary sager, a third year

law student interning with Ballard Spahr, helped research this article.

Human Resources

Facebook Firing Garners an NLRB Complaint by Damon e. Dunn

can businesses enact,

let alone enforce, policies barring employees from using social media sites to bash their employers, bosses and coworkers? Facebook, Twitter, and LinkedIn have become household names and, along with other social media, an increasingly popular compliment to email. Business can

use social media to reach a significant portion of their customer base (or target audience) and bolster their public image. On the flipside, employees can use these same social networks to disparage their employer and harm their company’s reputation. 31

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Anticipating the surging popularity of social media, many firms implemented social media policies to curtail employees’ online speech at home as well as on the job. Such policies often include provisions prohibiting employees from disparaging the company or co-workers.

Now it appears that not only disciplining an employee for violating the social media policy, but also merely implementing such a policy has the potential to attract unwanted attention from the National Labor Relations Board. The NLRB recently made headlines by filing a complaint against American Medical Response of Connecticut, Inc. (American Medical) over enforcement of American Medical’s social media policy. The company fired an employee who, from her home computer, had criticized her supervisor on her Facebook page by describing him as, among other things, a “17” (the company’s jargon for a psychiatric patient).

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The ensuing media coverage of what became known as the “Facebook firing” sparked concern that employees can now claim immunity from the consequences of disparaging their employer, supervisors and co-workers on social media sites. Whether the American Medical employee’s online posting was simply a personal gripe or a concerted activity protected by the NLRA was hotly contested. THE nlRB CoMPlAInT

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A Facebook account does not protect libels, advocating sabotage or leaking trade secrets. It does protect speech that constitutes a “concerted activity” covered by the National Labor Relations Act. depicting the company in any way over the internet without permission. Both policies interfered with longstanding legal protections that allow workers to discuss wages, hours and working conditions with co-workers, the board said. In light of this decision, employers should review their internet or social media policies and understand what measures they can take to control the appropriate use of social media without running afoul of the NLRA. PRoTECTIons EXTEnD To All WoRKERs

A widely held misconception among employers (especially private employers) is

that the NLRA applies only to unionized workplaces. In fact the NLRA protects most employees, whether or not they are unionized, and it safeguards among other things their right to organize. Particularly relevant to the Facebook Firing is that the NLRA forbids employers from interfering with or restraining employees’ right to discuss with co-workers the terms and conditions of their employment. Of course, unlike informal discussions among employees in the company break room, the potential audience for social media commentary is limitless. Simple griping about one’s personal circumstances on the job generally does not constitute a protected activity. Rather, to invoke the protections of the NLRA, the activity must be “concerted.” Such activity generally involves two or more employees acting together in an attempt to improve working conditions. Whether a union is present or even considered is irrelevant. The NLRA prohibits all employers from interfering, restraining, or coercing employees from exercising their rights to engage in concerted activities. It also prohibits employers from creating policies or taking actions that have the “chilling” effect of discouraging employees from engaging in protected activities. An employer’s policy can have a chilling effect on employees if: (1) it explicitly restricts concerted activities, (2) employees would reasonably construe the language to prohibit concerted activities, (3) it was promulgated in response to concerted activities or (4) it has been applied to restrict or discipline employees who have engaged in concerted activities. Consequently, improperly written policies that impart this chilling effect can run afoul of the NLRA. What is worse, such policies might land an employer in litigation before they are ever enforced. DEATH KnEll FoR soCIAl MEDIA PolICIEs?

American Medical’s internet and blogging policy included provisions commonly found in social media policies: It prohibited employees from disparag-

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Human Resources

In the Facebook firing case, the NLRB not only contended that American Medical engaged in an unfair employment practice by firing the employee for her disparaging comments, but also that the company’s internet policy had a “chilling” effect on the employees’ right to engage in concerted activity. The NLRB’s complaint against American Medical included a challenge to the enactment of broad social media policies, regardless of whether a workforce is unionized. The complaint turned on longstanding federal protections for employees engaged in “concerted activity” to improve their working conditions. The employee originally posted a disparaging remark about her supervisor on her personal Facebook page, but then co-workers responded to the post and added supportive comments. The favorable response in turn prompted the employee to post additional disparaging remarks. Ultimately, American Medical fired the employee for violating the company’s internet policy. The NLRB’s complaint took the view that these employees were engaged in mutual support concerning their conditions of employment. It is not clear whether the NLRB would have proceeded had no other employee responded, or if the employee’s remarks were insulting but unrelated to an identifiable employment dispute. The NLRB complaint alleged that, before the employee posted remarks on her Facebook page, she had requested and was denied union assistance in responding to a complaint lodged against her by a customer of American Medical. This additional context may

explain why the NLRB contended the Facebook postings constituted “concerted activity” protected under the NLRA, so that the firing constituted an unfair labor practice. Finally, the NLRB claimed American Medical’s social media policy is itself unlawful because it prohibits employees from making disparaging remarks against the company or supervisors and prohibits employees from referencing the company in any way without company permission. The NLRB claimed these prohibitions interfere with the employees’ right to engage in concerted activity and violate the NLRA. The case was settled in February. Under the settlement, American Medical Response agreed to change its blogging and internet policy barring workers from disparaging the company or its supervisors. It also will revise another policy that prohibited employees from

ing the company and required company permission for referencing the company. The NLRB claimed these provisions are too broad and chill employees’ rights to discuss their working conditions, whether around the water cooler or online. Despite the settlement, there may not be a definitive answer on the pro-

The NLRA protects most employees, whether or not they are unionized, and it safeguards among other things their right to organize.

Human Resources

priety of restrictive internet policies. For example, the NLRB recently reviewed the social media policy at Sears Holdings, the parent company of Sears and Kmart retail stores. The NLRB wanted to determine whether or not it had a chilling effect, because at the time Sears employees were discussing workrelated matters and a union organizing campaign online, via Yahoo! Groups. Like American Medical’s policy, Sears’ social media policy prohibited employees from, among other things, disparaging the company’s or its competitor’s “products, services, executive leadership, employees, strategy, and business prospects.” Yet, the NLRB found that the Sears Holdings’ policy passed muster and did not constitute an unfair labor practice. In comparing the NLRB responses to Sears and American Medical, it appears that it is sending mixed messages. Both policies are broad and restrict an employee’s ability to disparage the employer. With respect to the Sears’ policy, however, the NLRB noted that the disparagement prohibition was just one of many. In addition to the anti-disparagement rule, Sears also prohibited online activities involving disclosure of confidential or proprietary information, explicit sexual references, references to 33

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illegal drugs, obscenity or profanity, and disparagement of any race, religion, gender, sexual orientation, disability or national origin. None of these communications would be considered protected. The NLRB found that the policy contained “sufficient examples and explanation of purpose for a reasonable employee to understand that it prohibits the online sharing of confidential intellectual property or egregiously inappropriate language and not Section 7 protected complaints about the employer or working conditions.” The NLRB also observed that the preamble to the policy explained that its purpose was to “protect the Employer and its employees” and not “restrict the flow of useful information.” Thus, it appears the NLRB may view a no-disparagement rule, standing alone, as having a chilling effect on protected concerted activity, but it may approve a policy accompanied by context sufficient to assure employees their federal rights would be respected. The NLRB’s complaint against American Medical may indicate a shift in its analysis or may be explained by the employer’s decision to enforce its policy. No Sears employee had been disciplined for posting comments online, whereas the American Medical employee posted on Facebook after a denial of union representation. It does suggest the agency may be taking a more expansive view of the types of activities protected under Section 7, and may be seeking to limit an employer’s ability to control employees’ online activities. The Sears employees were using an online group chat room to discuss a union organizing campaign – textbook concerted activity – but the American Medical employee used her Facebook page to insult her supervisor. The NLRB complaint essentially converted anti-disparagement clauses in social media policies into an unfair labor practice. TIPs To ConsIDER

To aid employers in determining when employee online activity loses protected status, the NLRB posted -- on its

Facebook page -- a four point test to determine when Facebook comments lose protected concerted activity status. It considers: (1) the place of the discussion; (2) the subject matter of the discussion; (3) the nature of the employee’s outburst; and (4) whether the outburst was, in any way, provoked by an employer’s unfair labor practice. These factors, together with the NLRB’s comments regarding Sears’ social media policy, indicate that an appropriately drafted social media policy need not violate the NLRA, depending upon how and when it is enforced. To that end, some common sense guidance for social media policies would include: • Do not implement policies in response to union organizing activities. • Include a preamble to explain the policy’s goals and intended scope.

Under the settlement, American Medical Response agreed to change its blogging and internet policy barring workers from disparaging the company or its supervisors. • Allow breathing space for federally protected speech and activities. • Apply discipline evenhandedly. Social media policies can curb antisocial behavior and remind employees of the adverse ramifications for unguarded speech over the internet, but employers must consider whether the NLRB would approve of their policies, particularly in the context of an employment dispute

damon e. dunn is a mem-

ber of the Chicago-based law firm Funkhouser Vegosen Liebman & Dunn. He counsels clients on both traditional and online media issues. ddunn@fvldlaw.com.

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By Peter s. selvin

income. • A departing employee sabotages your company’s computer systems, erasing computer files and databases necessary for business operations. • An email sent by one of your employees is infected with a virus and causes damage to the recipient’s computer system. • A blast email sent to advertise your company’s products or services contains an infringement of a competitor’s intellectual property. One question posed by each of these scenarios is whether your company can recoup its losses, either from its traditional insurance policies or from any of the new “cyber-liability” policies which may now be available in the marketplace. This article explores two related issues. First, how may traditional insurance products, such as comprehensive general liability (CGL) and business interruption policies, re35

EXECUTIVE CoUnsEl f e B r u a ry/M a r C h 2011

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spond to these kinds of losses? Second, what are the the benefits and drawbacks of the newly available “cyberliability” policies? With regard to traditional policies, at the outset it is important to understand that insurance policies are either “first-party” or “third-party.” First-party policies (like property and business interruption coverage) insure property or business income from a variety of risks. Under these policies, the carrier is obligated to reimburse its insured directly for a covered loss. Third party insurance, in contrast, is liability insurance. This insurance comes into play when a third party asserts a claim, or files a lawsuit, against the insured. In these circumstances, a carrier is often obliged to defend its insured in the lawsuit and pay any damages which may be awarded to the claimant. TRADITIonAl FIRsT-PARTY PolICIEs

Where an insured suffers a loss of computer data as a result of a covered cause of loss, a key issue will often be whether the loss of such data constitutes “direct physical loss of or

• A company was insured under a property damage policy against certain business interruption and service interruption losses. As a result of a power outage, the company’s computer systems were rendered inoperable. The company made a claim under its policy, and it was denied. The court ruled in favor of the policyholder, holding that “physical damage” is not restricted to the physical destruction or harm of computer circuitry, but also includes loss of access, loss of use and loss of functionality. • The operator of a medical clinic was insured under an “All Risks” property insurance policy that included business interruption coverage. As a result of a hurricane and consequent electrical and telephone outages, the clinic’s computer system became corrupted, resulting in a loss of data. Although the carrier denied the operator’s claim, the court granted summary judgment to the operator, holding that the corruption of the policyholder’s computer constituted a “direct physical loss of or damage to property” within the meaning of the policy. • An employment agency had a business insurance policy that, in addition to traditional coverages, provided that the carrier would reimburse the agency for lost information stored “on electronic or magnetic data.” The agency’s computer system malfunctioned as a result of a hacker having injected a virus into the system. The carrier denied the claim, but the court held for the policyholder, finding that the personal property losses sustained by the policyholder were “physical” as a matter of law. Importantly, courts in other jurisdictions have reached different results. This split in appellate authority means that insureds need to scrutinize their policy forms and understand the applicable law in the jurisdiction where they conduct business.

THIRD PARTY CoVERAGE

damage to property” within the meaning of traditional property or business interruption policies. The courts have split on this issue. Some have found that the destruction or impairment of electronic data is sufficient to constitute “direct physical loss of or damage to property,” while others have not. This split means that coverage under traditional first-party policies for the loss of computer data may depend on the jurisdiction involved and the particular insurance form that is used. Examples of instances where coverage was found under traditional first-party policies for the loss of computer data include these: 36

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Third-party coverage comes into play where a third party asserts a claim or sues the insured for some act or omission. In this regard, there are two potential sources of coverage for cyber-liability risks under a CGL policy. Under CGL “Coverage A,” a carrier may be obligated to defend and indemnify its insured in the event that its insured’s act or omission caused a third party to suffer “property damage.” Under “Coverage B,” a carrier may be obligated to defend and indemnify its insured in the event that its insured’s act or omission has caused “personal or advertising injury.” The reported cases describe instances in which each of these sources of coverage have been triggered where cyberinjury has been alleged. In the property damage context, the following cases stand out: • A data processing consultant was sued by a customer who had entrusted a computer tape containing electronic data to the consultant. The consultant lost the tape and the customer sued the consultant for damages. In the ensuing insurance coverage litigation, the court held that the consultant’s liability carrier was obligated to defend the consultant The Magazine for The general Counsel, Ceo & Cfo

in the litigation because the loss of the tape fit within the policy definition of property damage. • A computer repair company performed service on a customer’s computer that was brought in for repair. According to the customer’s complaint, the repair company’s work caused data on the computer to be deleted or compromised. The court

damage coverage under Coverage A. In 2004 the ISO also introduced an Electronic Data Liability endorsement and an Electronic Data Liability Coverage form. The evident purpose of these innovations was to eliminate any possible ambiguity in the CGL form concerning whether or not electronic data would be treated as “tangible property” for liability coverage purposes. Despite these innovations, there are CGL policies still in force that do not adhere to the ISO forms. In addition, even these recent changes would not negate liability coverage where the insured’s acts or omissions caused a loss of use of a third party’s computer hardware. Thus, for example, where an insured’s email inadvertently transmits a virus and disables the recipient’s computer network (thereby causing a loss of use of the third party’s computer hardware), coverage could still be possible even under the new CGL forms. THE nEW CYBER-lIABIlITY PolICIEs

found for the policyholder, the repair company, holding that its commercial liability policy provided coverage for liability arising from the loss of data stored on a computer hard drive. • A software company distributed an upgrade of its internet browser to its customer base. Certain of its customers claimed that installation of the new software altered their existing software, disrupted their network connections and caused a loss of data. The software company tendered those claims to its liability carrier who denied the claim. The court upheld the denial, holding that the underlying complaints involved software problems and that computer software and lost data were not “tangible property.” As noted above, so-called “Coverage B” of the traditional CGL policy covers “personal and advertising injury.” In connection with coverage, CGL policies typically identify the particular “offenses” that will trigger coverage. Depending on the form used, these offenses may include trademark infringement, trade dress infringement, copyright infringement, invasion of privacy, libel, slander and defamation. A key battleground in this area is often whether there is a causal relationship between the particular offense and the insured’s “advertising” activities. Thus, coverage will not ordinarily be found under Coverage B unless the “offenses” arises from the insured’s advertising activities and is causally related to those activities. Nevertheless, coverage under “personal and advertising injury” has been found where, for example, a company’s electronic communications that are part of its advertising activities infringe a competitor’s intellectual property rights. InsURAnCE InDUsTRY REsPonsE

Starting in 2001, the Insurance Services Office (the ISO) revised its CGL form to expressly exclude electronic data from the definition of “tangible property” for purposes of property 37

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There are now several new insurance products that are designed to address specific risks arising from the use of information technology in business. The following are some of the issues that a prospective policyholder should keep in mind when evaluating those new products: • Coverage limits. As these policies are evolving products with relatively new claims history, their coverage limits may be lower than those typically available for D&O and other liability policies. • Exclusions. Some first-party policies contain so-called “dishonesty” exclusions that might bar coverage where, for example, an employee or other insider engages in conduct that compromises or destroys electronic data. • Form of insurance. Data loss policies generally either provide first-party or third-party coverage, but not both. Companies need to assess whether coverage for both forms of loss would be appropriate. • Trigger for business interruption coverage. Attention should be paid to whether, for business interruption coverage to kick in, the insured’s entire business operations must experience a complete shutdown. • Finally, coverage for loss of use of computer hardware. Even if electronic data is excluded from the definition of “property” under one of the new policy forms, it is important to verify that there will still be coverage for loss of use of computer hardware.

peter s. selvin

is a partner in the Los Angeles office of Loeb & Loeb LLP. His practice focuses on complex commercial, financial and corporate disputes; insurance coverage and bad faith litigation; and international litigation and arbitration. pselvin@loeb.com The Magazine for The general Counsel, Ceo & Cfo

Value of IP Portfolios at Stake Pending Supreme Court Decisions Crucial By robert a. surrette and eligio C. Pimentel

Even minor shifts in the underlying legal assumptions regarding the viability of patents, their ownership and their enforceability will significantly affect IP investments. For instance, research and development expenditures that made rational business sense at the time of investment may no longer seem appropriate after changes in the patent law are considered. 39

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The Federal Circuit has continued to try to clarify patent law, but the most significant influence comes from the Supreme Court, which has taken an increased interest in the last few years. In particular, the Supreme Court recently agreed to decide three cases that are likely to impact the economic value of patents: Microsoft v. i4i; Stanford v. Roche; and Global-Tech v. SEB. In Microsoft v. i4i, the Supreme Court will decide whether “clear and convincing” is the appropriate burden of proof for questions of patent invalidity during litigation. In Roche, the issue is whether the Bayh-Dole Act framework pre-empts inventor contracts with third parties regarding ownership of patent rights. Finally, in Global-Tech, the Court must decide whether induced infringement requires “deliberate indifference” of a known patent risk, or “purposeful, culpable expression and The Magazine for The general Counsel, Ceo & Cfo

conduct” encouraging infringement. The Supreme Court’s rulings in each of these cases will potentially affect the economic value of patent IP assets. ClEAR AnD ConVInCInG oR PREPonDERAnCE oF EVIDEnCE?

In November 2010, the Supreme Court agreed to hear arguments in Microsoft v. i4i. The asserted patent relates to a system for editing documents containing markup languages

The Supreme Court’s rulings in each of these cases could significantly affect the economic value of patent IP assets. such as HTML or XML. At trial, Microsoft argued that the patent was invalid because i4i had sold an embodiment of the invention (called the S4) in the United States more than one year prior to the patent application date. Under U.S. patent law, this sale would create a time-bar to the grant of a patent. Notably, the S4 on-sale prior art was never disclosed to the U.S. Patent and Trademark Office. At the jury instruction conference, Microsoft argued that the jury should assess validity based on a “preponderance of the evidence” standard, not the “clear and convincing evidence” standard, because the PTO never considered the asserted S4 on-sale prior art. The trial judge rejected Microsoft’s proposed instruction, and the jury returned a $200 million verdict that was later enhanced by $40 million for willful infringement. A permanent injunction against Microsoft was also entered. Microsoft appealed to the Federal Circuit, which affirmed the trial judge’s ruling that the “clear and convincing evidence” standard is the correct standard for assessing invalidity. Microsoft then appealed to the Supreme Court. In its petition for a writ of certiorari, Microsoft first pointed to the Supreme Court’s recent KSR v. Teleflex case, which stated that the rationale for the presumption of patent validity “seems much diminished” when the asserted prior art was never considered by PTO. Microsoft also pointed to pre-1982 regional circuit appellate court decisions, which it argued had rejected a heightened standard of proof where the asserted prior art was never before the PTO. The issue is whether the court of appeals erred in holding that Microsoft’s invalidity defense must be proved by “clear and convincing evidence” when the invalidity argument is based on evidence not specifically considered by the PTO. The Supreme Court’s answer to this question will directly affect not only the value of issued and pending patents, but also business expectations on the role and value of IP in today’s economy. The Supreme Court could affirm the Federal Circuit’s ruling that patent invalidity at trial must be assessed under a “clear and convincing evidence” standard (regard40

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less of whether the PTO ever considered the asserted prior art), which would maintain the status quo. Alternatively, it could rule that the appropriate burden of proof is “preponderance of the evidence,” but only if the PTO did not consider the prior art. This would raise several issues. For example, in the context of patent prosecution, would this rule result in patent examiners being “buried” with every conceivable prior art reference that might remotely bear on patentability to ensure that the higher “clear and convincing” evidence standard applies in any subsequent litigation? If so, the strength of patents could arguably be diminished despite this wealth of prior art because examiners would be left to find the invalidating prior art “needle” in the irrelevant prior art haystack. This counterintuitive outcome is certainly undesirable. Moreover, in the context of litigation, there is great potential for jury confusion if such a rule were to be adopted. Juries presumably would be instructed on different standards of proof, depending on whether or not the examiner considered the asserted prior art. In this situation, while on-sale prior art not considered by the examiner would be subject to the new “preponderance of the evidence” standard for proving invalidity, prior art patents or publications (which examiners do consider) would be subject to the “clear and convincing” evidence standard. These different burdens of proof could easily lead to juror confusion and incorrect verdicts invalidating patents. Finally, the Supreme Court could adopt a bright-line test where invalidity is analyzed at trial solely under the “preponderance of the evidence” standard, regardless of whether the PTO considered the asserted prior art. This ruling would likely have the most significant economic impact on existing patent portfolios, because the validity of all issued patents could be more easily attacked, and more easily invalidated patents are surely worth less. PATEnT RIGHTs WHEn REsEARCH Is FEDERAllY FUnDED

In November 2010, the Supreme Court agreed to hear arguments in Stanford v. Roche, a case that turns on the issue of patent ownership. In this case, the Supreme Court must decide whether an inventor that works for a federally funded contractor (e.g., a research university, like Stanford) can defeat the contractor’s right to title under the Bayh-Dole Act by assigning its rights in an alleged invention to a third party. Dr. Mark Holodniy (a named inventor on one of the asserted patents) first signed Stanford’s assignment contract, which stated merely that he “agree[d] to assign” inventions. Subsequently, during a visit to Cetus (a Roche predecessor company), Holodniy signed an agreement stating that “I will assign and do hereby assign” inventions. On the contracts, Holodniy promised to assign rights to Stanford, but actually assigned rights to Cetus. Roche (the successor to Cetus in the assignment agreement) argued during litigation that Stanford lacked standing as a result of Holodniy’s actual assignment to Cetus. Stanford responded by arguing that the legislative framework set forth in the The Magazine for The general Counsel, Ceo & Cfo

Bayh-Dole Act exclusively controlled the question of patent ownership and that, therefore, no rights transferred to Cetus or Roche. On appeal, the Federal Circuit agreed with Roche, ruling that the Bayh-Dole Act was not designed to void inventor contracts simply because research received federal funding. As in the Microsoft v. i4i case, the Supreme Court’s ruling in this case could significantly impact the value of patent assets. That’s because the issue of patent ownership is a critical threshold question when it comes to monetizing patent assets. A patent is worthless if the seller has no legal ownership rights. If the Supreme Court rules that the Bayh-Dole Act does not control questions of patent ownership for all inventions receiving federal funding, the due diligence conducted by companies in connection with the acquisition of patent assets may need to include not only an analysis of companyinventor contracts, but also an investigation and analysis of

Examiners would be left to find the invalidating prior art “needle” in the irrelevant prior art haystack. This counterintuitive outcome is certainly undesirable. all third-party contracts into which the inventor may have entered. Moreover, the value of current license agreements where the licensed technology was developed using federal funds also could be called into question. lEVEl oF InTEnT

In October 2010, the Supreme Court agreed to decide, in the Global-Tech v. SEB case, the level of intent required for inducing infringement. The specific question Global-Tech raised in its petition was as follows: Whether the legal standard for the “state of mind” element of a claim for actively inducing infringement under 35 U.S.C. § 271(b) is “deliberate indifference of a known risk” that an infringement may occur or, instead, “purposeful, culpable expression and conduct” to encourage an infringement. Notably, while § 271(b) plainly states that “[w]hoever actively induces infringement of a patent shall be liable as an infringer,” courts have struggled for years to define the level of intent that is sufficient to satisfy the requirements of this plain text. Global-Tech argues that the level of intent required for inducement of patent infringement should be “purposeful, culpable expression and conduct” encouraging infringement. That is, the alleged infringer must have the “purpose” of causing infringement. In support, Global-Tech cites the Supreme Court’s Grokster decision, which (in the copyright context) 41

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premised liability under the inducement rule on “purposeful, culpable expression and conduct,” and argued by analogy that the same standard should apply to liability for induced patent infringement. Moreover, Global-Tech argues that because the Federal Circuit’s “deliberate indifference of a known risk” standard does not specify the degree of risk, it encompasses even minimal risks of infringement. Consequently, this standard would – inappropriately – be lower than knowledge, recklessness, and/or negligence. Conversely, SEB argues that the Federal Circuit’s “deliberate indifference” standard is practical, well grounded in precedent and should be affirmed. According to SEB, under Federal Circuit precedent, inducement to infringe a patent occurs when the infringer “knew or should have known his actions would induce actual infringements,” and that “knowledge of the patent” is a necessary included element of proof. SEB then argues that in this case, the Federal Circuit simply established the “deliberate indifference” test for the lesserincluded “knowledge of the patent” element in order to close a loophole that would allow a party that purposefully ignores a known risk of patent infringement to escape liability. The SEB case, like i4i and Roche, has the potential to alter materially the value of patent assets. The Supreme Court’s ruling will clarify the circumstances in which a party can be found to have induced patent infringement – a significant consideration because a patent is of little value if it cannot be enforced meaningfully against competitors. The Court’s ruling will not only affect litigation and licensing-based monetization efforts, but may also require a company to evaluate pending patent applications to determine whether additional resources should be allocated for continued prosecution. Intellectual property continues to be a vital part of successful business strategies. With hundreds of billions of dollars of IP assets at stake, clarity in the area of IP law, particularly patent law, is essential to sound decision-making. Legal clarity fosters increased investment in innovation by providing predictability and ensuring rational investment decisions. The three patent cases currently pending before the Supreme Court could dramatically affect the value of patent portfolios. robert a. surrette

is a shareholder with McAndrews, Held & Malloy, Ltd. He focuses his practice on the resolution of intellectual property and technology-related disputes with an emphasis on patent, trade secret, trademark, and trade dress litigation. bsurrette@mcandrews-ip.com eligio c . pimentel

is a shareholder with McAndrews, Held & Malloy, Ltd. His practice is focused on patent litigation and technology disputes, as well as IP counseling. epimentel@mcandrews-ip.com The Magazine for The general Counsel, Ceo & Cfo

Making Corporate Social Responsibility Systemic By sarah a. altschuller and gare a. smith

Consider the following three questions: • Does your company have a corporate social responsibility (CSR) program? • Does your CSR program manage risk for your company? • Is it integral to the company's approach to risk management? In response to the first two questions, many corporate leaders are likely to 43

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answer “Yes.” Many companies have adopted some form of CSR program, and many corporate executives recognize that CSR plays a role in managing both legal and reputational risks. Unfortunately, despite a general understanding of the beneficial role that CSR can play in addressing risk, many companies are unable to provide an affirmative response to the third question. This is a problem, especially for multinational companies operating in diverse global environments, because it leaves them exposed to unnecessary risk. A CSR program should be built into management standards and accountability mechanisms. It should be part of the company’s overall business strategy, as understood and carried out by all managers, not just the few people with “CSR” or “Sustainability” on their business cards. A strong CSR program can reduce the risk of lawsuits, divestment actions and boycotts. It also can mitigate the The Magazine for The general Counsel, Ceo & Cfo

risks of negative news stories and other communications that have the potential to create long-term damage to a company’s reputation with key stakeholders. Companies are subject to the demands of a wide variety of stakeholders, including employees, shareholders, jointventure partners, consumers, and the communities impacted by corporate operations. Increasingly, these stakeholders are advocating that companies manage the social and environmental impacts of their operations. GooD DEEDs arE noT EnoUGH

Many companies have responded to these pressures by adopting CSR programs that too often are just that – “programs.” They are not integrated into the overall management of the company’s operation and relatively few personnel are held accountable for implementing CSR initiatives. Often, they are limited to philanthropic commitments, a few high-level policies, occasional public reporting, and a set of environmental

Corporate social responsibility is about how companies are managed, not about the ways in which they choose to allocate certain profits through acts of philanthropy. and labor standards that are applied inconsistently across the company. This approach leaves a company with little capacity to develop strategic and comprehensive responses to stakeholder concerns. Failure to understand the demands of stakeholders can be costly. For a large multinational, stakeholder opposition can lead to project delays or cancellations, additional conditions or costs associated with financing or insurance, and diverted staff time. When these costs are quantified across a company’s operations, the total can be surprisingly large. In his April 2010 report to the U.N. Human Rights Council, John Ruggie, the U.N. Special Representative on Business and Human Rights, reported that in his consultations with international extractive sector companies, he found that costly project delays often were the result of “stakeholder-related risks.” He noted that one company may have experienced a $6.5 billion “value erosion” as the result of such non-technical risks. There are significant risks for companies that claim to have embraced CSR and then, to demonstrate the degree of their commitment, simply point to glossy reports reflecting anecdotes and philanthropic initiatives. These companies fail to develop the internal policies and mechanisms necessary to ensure that the correct people, in the right functional areas, are held accountable for following specific environ44

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mental and social standards. References to good deeds do not mitigate against the risks associated with lack of internal commitment and oversight. Ultimately, CSR is about how companies are managed, not about the ways in which they choose to allocate certain profits through acts of philanthropy. CSR is about the core business functions of a company, and about being responsive to the ever-increasing demands of company stakeholders that companies be held accountable for the social and environmental impacts of their operations. The expectations of those stakeholders are expressed in forums ranging from traditional and social media and shareholder resolutions, to legislation and regulation, to disruptive protests. CSR is, at its core, a strategic response to the changing nature of those expectations. Stakeholders increasingly expect companies to abide by a wide range of standards. Failure to respond to these expectations is risky, and companies should regularly assess them through a variety of channels. Proposed shareholder resolutions, comments on social media channels, and community feedback through grievance mechanisms all provide important means for companies to assess stakeholder concerns. In particular, management personnel should consider the concerns that are raised by stakeholders with regard to a company’s social and environmental performance. Not all stakeholder concerns require a response in the form of a change in policies and procedures. Corporate managers are in the best position to make determinations about corporate policies. Collectively, however, stakeholder concerns provide, at a minimum, valuable intelligence about how a company’s operations are perceived, and they should be thoughtfully and deliberately reviewed. The adequacy of a company’s policies, standards, and internal accountability mechanisms should be assessed regularly, as should policies and procedures on stakeholder engagement. Corporate stakeholders are raising concerns regarding an array of issues, ranging from corporate environmental performance to the impacts of company operations on indigenous communities. A significant focus of our practice is helping clients understand and respond to stakeholder concerns about the impact of corporate operations on human rights. Increasingly, companies are being held accountable to human rights standards established in international law. sHarEHolDEr rEsolUTIons

As one example of how stakeholders are raising concerns about human rights, during the 2010 proxy season investors filed resolutions with a number of companies, including Caterpillar, Hewlett-Packard, Motorola, and KBR, asking for the adoption of comprehensive human rights policies and assessment mechanisms. The resolutions filed with Motorola and Hewlett-Packard urged these companies to develop policies sufficient to provide assurance that their “products and services are not used in human rights violations.” The resolution filed with KBR asked the company to report on the extent to which its The Magazine for The general Counsel, Ceo & Cfo

“contractors and suppliers are implementing human rights policies in their operations, including monitoring, training, [and] addressing issues of non-compliance[.]” Such resolutions are likely to increase in the coming years. Notably, in October 2009, the SEC issued a legal bulletin (Staff Legal Bulletin No. 14E) that reversed an earlier determination that had allowed companies to exclude shareholder resolutions requesting information on the financial risks associated with environment, human rights, and other social issues. Shareholder resolutions provide an occasion for thoughtful internal and external dialogue about shareholder concerns. Early engagement on these issues can be critical, because when stakeholders perceive that companies are failing to address human rights concerns, it can lead to litigation or regulation. For example, stakeholder advocacy has recently resulted in two legislative provisions that impose obligations on companies to assess the impacts of their operations on human rights: • Section 1502 of the new Dodd-Frank financial reform legislation requires companies using minerals originating in the Democratic Republic of Congo or adjoining countries to report on their due diligence regarding the source and chain of custody of those minerals. This provision, meant to address concerns that the purchase of “conflict minerals” is fueling conflict in the DRC, is expected to impact companies in a variety of industries, ranging from consumer electronics and automobiles to jewelry and medical devices. • The California Transparency in Supply Chains Act of 2010 requires retailers and manufacturers operating in California to disclose their efforts, if any, to “evaluate and address” the risks of human trafficking and slavery in their product supply chains. nEW TErraIn For DUE DIlIGEnCE

Both of these provisions create some new expectations with regard to due diligence. Raise the topic of due diligence in a room of corporate lawyers and you might expect that the conversation would turn to mergers and acquisitions or environmental site assessments. Increasingly, however, companies are being asked to apply due diligence strategies and systems to identify the human rights concerns that may be associated with their existing, or potential, operations. Such developments in the law present challenges for companies, especially those that have not already engaged in an assessment of the human rights impacts of their operations. It is important to recognize that many fundamental principles of international human rights law are already reflected in national law and regulation on safety, the environment, working conditions, anti-discrimination, and civil and political rights. With this understanding, corporate managers need not see stakeholder demands, or legislative requirements, regarding a company’s human rights performance as raising entirely new concerns. Demonstrating compliance with existing laws is a significant step in assuring stakeholders of a company’s human rights performance. 45

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That said, in some contexts, stakeholders may be concerned about operations in a country with a relatively poor human rights records, where local laws may not be consistent with international law standards, or may not be enforced. Companies considering investments or operations in such countries are well-advised to consider the legal and reputational risks of their operations and to develop responses to those concerns.

CSR should be part of the company’s overall business strategy, as understood and carried out by all managers, not just the few people with “CSR” or “Sustainability” on their business cards. Companies also are being asked to consider issues deep within their supply chains, and to demonstrate that they are making efforts to ensure that their sourcing practices do not lead to human rights abuses. The legislative provisions and shareholder resolutions cited above are consistent with recent recommendations from the U.N. Special Representative for Business and Human Rights, urging companies to carry out “human rights due diligence”. As framed by the Special Representative, human rights due diligence involves the implementation of policies, assessment mechanisms, internal oversight and control systems to identify, prevent, and address the actual and potential adverse human rights impacts associated with a company’s operations. Such mechanisms go well beyond the limited nature of the discretionary programs that continue to represent the approach of many companies to CSR. The Special Representative’s framework on business and human rights is already influencing the policies and laws of a number of countries and multilateral institutions. For instance, the Organization for Economic Co-operation and Development (OECD) has cited to his framework in its Terms of Reference for the ongoing revision of its Guidelines for Multinational Enterprises. A number of countries, ranging from the United Kingdom to South Africa, have recently cited the framework in undertaking their own policy assessments, and The European Parliament recently adopted a resolution that calls for a CSR clause in all European Union trade agreements. It would require companies to conduct due diligence to identify and prevent “violations of human and environmental rights, corruption or tax evasion, including in their subsidiaries and supply chains.” (Csr Programs continued on page 48) The Magazine for The general Counsel, Ceo & Cfo

Dodd-Frank Bounty Provisions Could be Exploited Are Whistleblower Provisions at Odds with Sarbanes-Oxley? By Mark s. radke and Peter V. B. unger

On November 3, 2010, the Securities and Exchange Commission announced proposed rules that have the potential to significantly impact the role of internal corporate compliance programs. The proposed rules implement the whistleblower provisions in Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 46

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Section 922 of Dodd-Frank authorizes the SEC to pay rewards to individuals who provide the SEC with original information that leads to successful SEC enforcement actions and certain related government actions. The Act requires the SEC to pay eligible whistleblowers “bounties” of 10-to-30 percent of monetary sanctions obtained by the government, as long as total sanctions exceed $1 million. This bounty provision creates a strong incentive for whistleblowers to bypass a corporation’s internal reporting system and bring claims directly to the SEC. Accordingly, the bounty provision has the potential to undermine the internal controls corporations have established in response to the Sarbanes-Oxley Act of 2002. Currently these internal corporate whistleblower programs serve as a front line defense to ferret out potential corporate wrongdoing. The Magazine for The general Counsel, Ceo & Cfo

Both before and after the SEC announced its proposed rules, numerous commenters encouraged the SEC to implement Section 922 in a manner consistent with Sarbanes-Oxley, by among other things requiring that a whistleblower first report his concerns to the company.

• •People who learn about violations through a company’s internal compliance program or who are in positions of responsibility for an entity, and expected to take appropriate steps to respond to the violation. lIMITED EXClUsIons

InTErnal CoMPlIanCE ProGraMs

The SEC rule proposal would only treat an employee as a whistleblower as of the date that employee reports the information internally as long as the employee provides the same information to the SEC within 90 days. This is intended to ensure that employees can report information internally first without losing their “place in line” for a possible award from the SEC. The proposal also purportedly permits the SEC to consider higher percentage awards for whistleblowers who first report their information through effective company compliance programs. However, the proposed rule still seems to contemplate all whistleblower complaints going directly to the SEC, which may be impractical and frustrate the prior congressional intent of the Sarbanes-Oxley internal control provisions. The SEC also purportedly seeks to ensure that individuals with certain legal obligations, such as lawyers, auditors, and internal compliance personnel, cannot use their positions to “front run” internal programs and reap benefits under Section 922. The proposal does this by excluding the following individuals from consideration for whistleblower awards: ••People who have a pre-existing legal or contractual duty to report their information. ••Attorneys who attempt to use information obtained from client engagements to make whistleblower claims for themselves (unless disclosure of the information is permitted under SEC rules or state bar rules).

The “bounty” provision creates a strong incentive for whistleblowers to bypass a company’s internal reporting system and bring claims directly to the SEC, potentially undermining internal controls established in response to Sarbanes-Oxley. ••Independent public accountants who obtain information through an engagement required under the securities laws. ••Foreign government officials. 47

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Unfortunately, senior management and internal legal and audit personnel are not excluded in the proposal. The IRS adopted two important safeguards for its whistleblower program, the program upon which the Dodd-Frank

Consider modification to the employment agreements of senior management and legal and compliance personnel, to make express their fiduciary duty to report potential securities law violations up the chain, at the company. whistleblower provisions were based. First, it established a “one-bite” rule, under which the whistleblower must disclose all information about the company in the first instance. The government may not, under this one-bite rule, ask the whistleblower to go back in to the public company to seek and gather more information. No second bite prevents the risk of the whistleblower becoming an agent of the government, and the potential negative evidentiary consequences that may attach. (Someone could argue that the information gathered by the improperly deputized whistleblower/agent is “fruit of the poisonous tree.”) In addition, the IRS prevents certain individuals with direct fiduciary obligations from collecting a bounty on alleged violations learned in the course of their work. This “no-bite” rule prevents a whistleblower bounty from being paid to those who have a direct fiduciary duty. If adopted by the SEC, such a rule would not preclude such individuals from going to the SEC as a whistleblower. However it would restrict bounty payments to them for simply doing their jobs. In our opinion, senior management and internal legal and audit personnel should not be able to receive whistleblower rewards. Finally, the proposal clarifies that the SEC will not pay awards to individuals who are directly responsible for the securities law violations they report. Specifically, as proposed, the SEC will not pay culpable whistleblowers awards that are based upon either the monetary sanctions that such people themselves pay in the resulting SEC action, or on sanctions paid by entities whose liability is based substantially on conThe Magazine for The general Counsel, Ceo & Cfo

duct that the whistleblower directed, planned, or initiated. We believe that this proposal may not go far enough, in that it does not prevent co-conspirators whose conduct is actionable, but who are determined to be less than “substantially” responsible for the entity’s wrongdoing, from getting a reward. WHAT’s nEXT

Under Dodd-Frank, the SEC is required to adopt final regulations implementing Section 922 by no later than April 21, 2011. However, the SEC has announced that it intends to adopt final rules before that date. In the interim, public companies would be well advised to do the following: • •Examine their anti-retaliation policies (to assure whistleblowers are protected to the extent Dodd-Frank requires). • •Examine and modify the charters of their audit committees, disclosure committees, and governance for risk management committees, to provide expedited, confidential access for any whistleblower complaint (to enable the company to act more expeditiously if necessary). • •Consider modification to the employment agreements of senior management and legal and compliance personnel, to make express their fiduciary duty to report potential securities law violations up the chain, at the company. As drafted, the SEC proposals appear to compromise Sarbanes-Oxley’s well-established internal control procedures. Hopefully, the SEC’s final rules will address this concern and also adopt the IRS’s well reasoned safeguards for protecting the integrity of their whistleblower program.

(CsR Programs continued from page 45)

These developments present both opportunities and challenges to companies. Compliance will not be simple. It is frequently hard to identify consistently reliable sources of information regarding, for example, the source of specific

Companies are being asked to consider issues -- including human rights issues -- deep within their supply chains. minerals or the veracity of supplier assurances regarding the status of certain workers. What is clear is that these new expectations and requirements reflect a desire on the part of corporate stakeholders to ensure that corporate commitments to human rights go beyond short policy statements. Stakeholders increasingly expect companies to demonstrate that they have systems in place to evaluate, avoid, and mitigate the adverse impacts of their activities on human rights. As companies assess this new environment, there is a major opportunity to adopt policies and procedures that are both responsive to stakeholder concerns and more effective at managing legal and reputational risks.

sarah a. altschuller

is a partner in the litigation group at Arent Fox. His practice focuses on defending corporations and individuals in SEC enforcement proceedings and counseling on compliance and corporate governance issues. Prior to joining Arent Fox, he was the Chief of Staff to SEC Chairman Harvey Pitt. He also has served as an attorney in the SEC Division of Enforcement. radke.mark@arentfox.com mark radke

is a partner in the litigation group at Arent Fox. He defends clients in governmental investigations, including actions before the SEC, DOJ, Congress, FINRA (former NASD/NYSE) and state securities regulators. He also conducts and defends internal investigations and independent reviews, defends securities litigation and advises on compliance, crisis management and corporate governance. He also handles FCPA matters, including compliance advice and due diligence of potential agents or business partners worldwide. He previously served as an attorney in the SEC Division of Enforcement. unger.peter@arentfox.com peter unger

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is an associate at Foley Hoag and a member of the firm’s Corporate Social Responsibility practice. She advises a wide range of multinational companies regarding the development and implementation of CSR strategies, policies, and procedures. She also conducts site-level human rights and labor rights impact assessments, as well as due diligence efforts. saltschuller@foleyhoag.com gare a. smith

is a partner at Foley Hoag and founder of the firm’s corporate social responsibility and risk management practice. He advises corporations and nations on legal and reputational aspects of globalization and crisis management and on resolving conflicts with governments, the media, unions, communities, and non-governmental organizations. He is a former Foreign Policy Advisor and Counsel to Senator Edward M. Kennedy and former Principal Deputy Assistant Secretary in the State Department’s Bureau of Democracy, Human Rights and Labor, under President Clinton. He also served as U.S. representative to the International Labor Organization, the U.N. Human Rights Commission, and the U.N. Working Group on Indigenous Peoples. gsmith@foleyhoag.com The magazine for The general counsel, ceo & cfo

EEOC FOCusIng On Class aCTIOns By steve Moore and Jennifer gokenbach

In the past few years, there has been a spate of EEOC enforcement actions seeking relief on behalf of numerous applicants or employees. It has hit companies across many industries: major grocery store chains, restaurants, retail clothing establishments, hotels, construction companies and car manufacturers. This past year, with an increased budget and additional investigative 49

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resources, the Equal Employment Opportunity Commission (EEOC) announced its renewed commitment, through at least FY2012, to combat systemic discrimination by seeking relief on a class basis and filing an increased number of large-scale enforcement actions. In a typical employment discrimination class action, the named plaintiff is required to comply with the certification requirements of Rule 23, including “numerosity,” commonality, typicality, and adequacy of representation. Many filings are weeded out because class certification is denied. However, the EEOC is not required to comply with this rule and can easily advance class claims in federal court. The type of class action the EEOC generally files is known as “pattern and practice” litigation. It poses great risk to employers. In pattern or practice cases, the EEOC files claims under The Magazine for The general Counsel, Ceo & Cfo

two theories. In cases involving unintentional discrimination, it alleges a neutral policy or practice has had a disparate impact on minorities or women. In intentional discrimination cases, it alleges that discrimination was so pervasive against a particular group of minorities or women that it became the company’s standard operating procedure. In advancing these theories, the EEOC relies heavily on statistical evidence in challenging employers’ hiring, promotion, compensation, layoff, or discipline practices.

notice to the employer of class claims; whether it conducted an investigation under a class basis; and whether it violated its own statutory duty to negotiate in good faith during the mandatory conciliation phase of the case. The statutory obligations of the EEOC to investigate, determine reasonable cause and conciliate ensure that an employer is fully notified of the violations being alleged, and that it has the opportunity to resolve violations through

sUE FIRsT, AsK lATER

The District Court for the northern District of Iowa dismissed a sexual harassment/ hostile work environment case filed by the EEOC and awarded the company over $4 million in attorneys’ fees.

Recently the EEOC has suffered some setbacks to its aggressive prosecution of these cases. For example, on October 26, 2010, in EEOC v. Bloomberg L.P., the District Court for the Southern District of New York dismissed retaliation claims in a gender (pregnancy) discrimination lawsuit filed by the EEOC on behalf of a nationwide class of women. The Bloomberg court held that dismissal of these claims was appropriate in light of the EEOC’s failure to reasonably and flexibly participate in conciliation efforts, calling the EEOC’s approach to conciliation “a weapon to force settlement.” The court went on to state that “[t]he EEOC consistently stonewalled in the face of ‘plainly reasonable’ requests from Bloomberg to obtain more information about the [retaliation] claims to formulate a proposal,” particularly as it faced the EEOC’s demands for over $41 million in settlement funds. Likewise, on September 20, 2010, in EEOC v. Cintas Corp., the District Court for the Eastern District of Michigan dismissed a gender discrimination action filed by the EEOC on behalf of a class of female employees. The Cintas court held that the EEOC’s litigation strategy of “sue first, ask questions later” proved fatal to its claims, since it failed to engage in the integrated, multistep enforcement procedure required by statute to exhaust administrative remedies. Similarly, on February 9, 2010, in EEOC v. CRST Van Expedited, Inc., the District Court for the Northern District of Iowa dismissed a sexual harassment/hostile work environment case filed by the EEOC on behalf of a class of women. It awarded CRST over $4 million in attorneys’ fees, finding the EEOC’s prosecution of the case to be frivolous, unreasonable and without foundation. Again referring to the EEOC litigation strategy of “sue first, ask questions later,” the court found that the EEOC did not investigate or attempt to conciliate the individual claims in the case as required by statute. As exemplified by the CRST case above, in pattern and practice litigation the defense costs alone can be staggering. It is imperative for employers to understand the nuances involved in the EEOC’s handling and prosecution of such cases. DEAlInG WITH THE EEoC

Employers should be vigilant in determining whether the EEOC has followed its own administrative requirements before it files suit. For example, some courts have analyzed whether the EEOC, during the administrative phase of the case, gave fair 50

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conciliation and voluntary compliance. However, the EEOC often pursues aggressive litigation strategies at odds with its statutory obligations, and this leaves jurisdictional defenses available to employers, as in Cintas and CRST. With the EEOC’s renewed focus and efforts toward prosecuting pattern and practice cases, employers would be wise to engage experienced counsel to help watch for early indicators of class exposure, such as numerous EEOC charges with the same or similar allegations. Employers should provide careful and thoughtful responses to requests for information issued by the EEOC, to avoid expanding the scope of the investigation and to document any failures by the EEOC to follow statutory requirements.

steven w. moore, managing shareholder at the

Denver office of Ogletree, Deakins, Nash, Smoak & Stewart, represents management in labor and employment disputes, including discrimination, retaliation, harassment, wrongful discharge, breach of contract, noncompete, trade secret and wage and hour cases. steven.moore@ogletreedeakins.com jennifer l . gokenbach

is of counsel at the Denver office of Ogletree, Deakins, Nash, Smoak & Stewart. Her practice focuses on managementside trial work and counseling on a wide range of employment law issues, including cases involving claims of discrimination, harassment, wrongful termination, wage claims, retaliation, breach of restrictive covenants, trade secrets violations and breach of duty of loyalty. jennifer.gokenbach@ogletreedeakins.com The Magazine for The general Counsel, Ceo & Cfo

E-Discovery Heading In-House Collaboration, New Tools, Facilitate Management by sarah brown and bob rohlf

E-discovery became more sophisticated in 2010. The explosion of electronically stored information (ESI) continued, but the practice of managing e-discovery made considerable progress. Cloud-based legal solutions became widely available, and social media discovery entered the legal arena. Case law further clarified such issues as proportionality, spoliation 51

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and general judicial expectations for documents production. The pace of change wonâ&#x20AC;&#x2122;t slow in 2011. The industry will grapple with evolving standards, and the demands placed on vendors will increase as the enterprise seeks to bring greater consistency and predictability to e-discovery. an EsTablIshEd TrEnd

E-discovery management has been moving in-house for several years. Corporate expenditures on e-discovery are falling, in part because the enterprise is bringing it to where it can control costs more closely, often using software that marries workflow and data management. The question is not if, but when, e-discovery tasks will be managed primarily from the general counselâ&#x20AC;&#x2122;s office. 2011 will be a watershed year for this transition. By some estimates, corporations that experience ongoThe magazine for The general counsel, ceo & cfo

ing litigation can realize direct e-discovery cost savings of as much as 75 percent by managing the process in-house. At the very least, in-house management promises greater control and tracking of e-discovery expenditures, and smoother process management overall. The control and cost-saving benefits are persuasive, and more corporations will adopt this strategy in 2011. The barriers to bringing the process in-house are welldocumented. The range of legal expertise offered by outside counsel normally includes at least some experience in managing the often overwhelming e-discovery process. Historically, the general counsel’s office has lacked this expertise. Lack of communication between the general counsel’s office and IT departments frustrated many in-house initiatives. Software solutions designed to manage the process inhouse have become available, but general counsel have been slow to adopt them. The IT department is usually way ahead technologically, but its focus is on e-mail storage and not implications for litigation. However, time, experience and case law have clarified the e-discovery process. Many in-house legal departments now possess considerable e-discovery knowledge. Meanwhile, tools for managing all elements of the process have matured. The convergence of these trends positions the general counsel to be the play-caller on managing the e-discovery process. While outside counsel will continue to play a critical role, particularly with small to mid-sized companies, the maturation of the discovery process has made the task manageable from within. We’ll see more alternative and flat fee-based billing by outside counsel as the respective roles are clarified in the next year. Last year, we predicted the commoditization of legal hold. That has happened in many organizations, thanks largely to software that automates large portions of this vexing process. The rapid evolution of software designed to manage the various phases of discovery has contributed greatly to moving the capability in-house. Today software plays a central role in delivering control over complex e-discovery projects to legal teams. Technology that marries data and project management seamlessly will allow legal teams to bring more e-discovery in house in the next year. Where once inside counsel reassigned much of this process management to outside counsel who billed hourly, now software owned by the company handles much of the process. CoMMon sEnsE ManaGEMEnT

In 2010, legal project management gained traction. The Electronic Discovery Reference Model (EDRM) project management working group made strides, and sales of software solutions that facilitate e-discovery project management surged. In 2011, this will continue and reach a tipping point, resulting in widely accepted project management standards reaching into the next decade. In 2010, corporations began to designate a lead e-discovery attorney and project manager to oversee the discovery 52

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phases, a trend we forecast last year. This practice will accelerate in 2011. These attorneys, in-house for large enterprises and of counsel for smaller companies, will synthesize and tailor project management approaches to specifically address chal-

Technology that seamlessly marries data and project management will allow legal teams to bring more e-discovery in-house in the next year. lenges faced in litigation. Following the structure and guidelines of the revised EDRM, they will have a strategy for each step in the process. “Legal project management” will join the legal lexicon as a legitimate skill set and practice, and it will prove itself both in terms of cost containment and success in litigation. These project leaders will learn to master the language of IT and will increasingly look to software solutions to expedite the process. The benefits of these emerging e-discovery process management tools are becoming increasingly clear to corporate leaders. In fact, solutions like Fusion that knit together discrete EDRM tools and IT infrastructure systems with workflow deliver better control over what once seemed an impossibly complex sea of data. Even as the universe of potentially discoverable ESI continues its inevitable growth in 2011, it will be less daunting as corporations deploy technology to further master the process. The e-discovery team leaders will be technology-savvy and use tools to their employer’s advantage. Software solutions now exist to address every major pain point in the discovery process, and as these tools become more sophisticated and inter-operable, anxiety levels within the general counsel’s office over e-discovery risk exposure will drop. ThE CloUd

“To the cloud!” has been on every technology pundit’s lips. Cloud-based legal systems promised to replace traditional systems as the solution of choice. In 2011, the excitement will die down as it becomes apparent that cloud, like hosted and enterprise solutions, is just one more delivery model option available to legal technology clients. Each has its advantages and weaknesses. Those vendors who can quickly scale between delivery models will thrive. Those that choose to focus exclusively on cloud models will not fare as well. The cloud certainly has its appeal from a storage capacity standpoint. It can free up space on servers, a benefit prized by IT. Unlike hosted storage, which makes the enterprise dependent upon the stability of the host, the cloud isn’t goThe magazine for The general counsel, ceo & cfo

ing anywhere. And while lawyers will continue to have their doubts about the cloud’s security in 2011, recent case law and ethics opinions at the state level appear to be supportive of cloud-based storage, as long as the vendor offering the service can be shown to be taking reasonable security measures. That’s why corporations will seek out software solutions that promise tight cloud-based security and scalability. These tools will be tested to ensure that they can map and track cloud-based data as well as data stored on clients’ servers. soCIal MEdIa dIsCoVErY

Discoverable social media data is real, and it’s on the increase. Tweeting, posting, liking and friending are here to stay, and they are happening on company time. In many cases, social media is incorporated into day-today corporate tasks, especially in the marketing and sales realms. One recent survey reported that 13 percent of companies involved in litigation were required to produce social media data during discovery. Smart attorneys will deepen their knowledge of social media discovery in the next year. The trend toward bringing e-discovery in-house may, in fact, enhance the general counsel’s ability to manage the corporation’s discoverable social media. The general counsel is in a better position to know the corporation’s social media profile than is outside counsel. But prudent management of relevant social media will only happen if the corporation has in place a reasonable and (more or less) enforceable social media policy. In 2011, many more corporations will address this issue. While social media guideline templates exist, they must be customized to fit a particular corporate culture and address specific litigation profile concerns. The general counsel should assume a leadership role in creating the social media guidelines for the corporation. These guidelines must anticipate an order to produce documents. This cannot be emphasized enough. We believe that a corporation’s ability to demonstrate to the courts that it has thoughtful and realistic social media guidelines in place will be increasingly put to the test, as courts seek to determine whether corporations are making a good faith effort to include social media communications as potentially discoverable. dEParTMEnTs TEaM To bUIld ProGraMs

Legal and IT teams have been working well together at many enterprises, and the much-vaunted division between IT and legal teams will continue to narrow next year. In particular, they will find common ground in building data maps and information management programs that are useful for e-discovery projects and usable by both IT and legal teams. When both parties grasp the opportunities beyond discovery represented by strategic ESI management for discovery, the “Aha!” moment occurs and the true partnership begins. IT, often preoccupied by e-mail storage concerns, realizes that data management for litigation readiness has implications for storage beyond legal’s focus. Legal gains insight into 53

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advantages in other realms (control of intellectual property, internal security) by way of the astute management of ESI accomplished through IT’s expertise with software. We predict specific initiatives in 2011 to address the appalling dearth of educational resources regarding e-discovery. It is time that those charged with educating and training lawyers and technologists have their own “Aha!” moment and cross-train these budding professionals in the nuances of the discovery process in the electronic era. We anticipate a new collaboration between inside and outside counsel. As the in-house process management tran-

The social media are being incorporated into day-to-day corporate tasks, especially in the marketing and sales realms. One recent survey reported that 13 percent of companies involved in litigation were required to produce social media data during discovery. sition accelerates, we expect to see stronger partnerships between in-house and outside counsel teams developing in 2011, as they realize that together they can drive real results for both firms and corporations. Outside counsel who perceive this trend and embrace the concept of a true, cost-effective partnership with in-house counsel will have an advantage in this rapidly evolving practice area.

is corporate communications manager at Exterro, Inc. She is a board member of the Legal Governance, Risk and Compliance Center for Innovation, and an active member of the group Women in E-Discovery. sarah.brown@exterro.com sarah brown

is director of e-discovery strategies at Exterro, Inc.. He is a member of the Oregon State Bar, and he has managed business process improvement projects in a number of national and regional companies representing the transportation, energy, manufacturing, electronics, foods and leisure sectors. bob.rohlf@exterro.com bob rohlf

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Major DNA Patent Case Before the Feder al Circuit A Myriad of Amicus Briefs by Christopher loh and amy fuetterer

On March 29, 2010, the Southern District of New York ruled that DNA isolated from human genes was not patentable. That controversial ruling was appealed to the Feder al Circuit, and in November and December of 2010 it attr acted no fewer than ten amicus briefs arguing for its reversal. 54

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The Federal Circuitâ&#x20AC;&#x2122;s eventual decision in the appeal likely will have significant implications for the biotechnology and pharmaceutical industries, which are increasingly relying on DNA technology to develop new drugs and therapies. This article discusses the issues raised in the amicus briefs, which in turn may shed light on how the Federal Circuit will decide the appeal. THE DISTRICT COURT DECISION

On May 12, 2009, the Association for Molecular Pathology and various public health groups sued the Patent and Trademark Office and Myriad Genetics in the Southern District of New York, to challenge the validity of Myriadâ&#x20AC;&#x2122;s patents claiming DNA isolated from BRCA 1 and BRCA 2 genes. Mutations in those genes predispose patients to developing breast and ovarian cancer. The Magazine for The general Counsel, Ceo & Cfo

Genes are sequences of DNA units, or “nucleotides,” that carry information for making proteins. When it comes time for a cell to make a protein, the information in the gene is copied from DNA onto another molecule called mRNA. The mRNA is then read by cellular mechanisms to make the needed protein. Mutations in genes such as the BRCA genes can alter these processes and lead to illnesses such as cancer. The patents in the Myriad suit claim (i) DNA isolated from the naturally occurring BRCA genes, and having the same nucleotide sequences as those genes and (ii) cDNA, which is DNA synthesized in the laboratory by reverse-copying mRNA. On August 26, 2009, the plaintiffs moved for summary judgment, asking the district court to find Myriad’s patents invalid. The district court granted the motion on March 29, 2010, holding that the patents did not cover patentable subject matter pursuant to § 101 of the Patent Act as interpreted by Supreme Court precedent. Such precedent excludes from the ambit of patent protection “products of nature” – as opposed to “man-made” inventions. In reaching that decision, the district court first defined the patent term “isolated DNA” to mean “a segment of DNA nucleotides existing separate from other cellular components normally associated with native DNA, including proteins and other DNA sequences comprising the remainder of the genome, and includes both DNA originating from a cell as well as DNA synthesized through chemical or heterologous biological means.” By that definition, the district court emphasized the biological, information-carrying function of DNA over its chemical characteristics. The district court also included in its definition “synthesized” DNA such as cDNA. With that definition in hand, the district court analogized isolated DNA to purified products of nature (cellulose, dyes, tungsten) for which courts previously had denied patent protection, noting that purification alone was insufficient to render products of nature patentable. The district court next distinguished DNA from other patentable chemicals, focusing again on its information-carrying function and noting that “the information encoded in DNA is not information about its own molecular structure incidental to its biological function ... DNA, and in particular the ordering of its nucleotides therefore serves as the physical embodiment of laws of nature – those that define the construction of the human body.” Finally, the district court found that the chemical differences between Myriad’s isolated DNA and naturally occurring BRCA genes were insufficient to rendered them “markedly different” from each other in terms of the information they carried. THE AMICUS BRIEFS

Myriad appealed the decision to the Federal Circuit on June 16, 2010. In November and December, ten other parties filed amicus briefs with the Federal Circuit: • • Department of Justice (DOJ). • • Genetic Alliance. 55

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• • Biotechnology Industry Organization and Association of University Technology Managers (BIO/AUTM). • • American Intellectual Property Law Association (AIPLA). • • Intellectual Property Owners Association (IPO). • • Christopher M. Holman and Robert Cook-Deegan. • • Gilead Sciences and Biogenerator (Gilead). • • Alnylam Pharmaceuticals (Alnylam). • • Rosetta Genomics and George Mason University (Rosetta). • • University of New Hampshire Law School (UNH). While the amici agree that the district court erred in holding isolated DNA unpatentable, they disagree on the nature and extent of the error. • • Issue 1: Whether “isolated DNA” is man-made. DOJ seeks reversal of the district court decision only with regard to cDNA. It argues that molecules “engineered by humans, including cDNAs, vectors, recombinant plasmids, chimeric proteins, and similar fruits of the manipulation of genetic

The district court analogized isolated DNA to purified products of nature (cellulose, dyes, tungsten) for which courts previously had denied patent protection, noting that purification alone was insufficient to render products of nature patentable. material will almost invariably be patent-eligible subject matter.” Except for cDNA, however, DOJ maintains that the district court correctly held isolated DNA to be an unpatentable product of nature. Although DOJ acknowledges that laboratory processes used “to select and extract a naturally occurring segment of DNA” may be patentable, the product of those processes – isolated DNA itself – “remains, in structure and function, what it was in the human body.” The other amici disagree. They characterize both cDNA and isolated DNA as man-made, emphasizing the chemical differences between isolated DNA and naturally occurring genes. AIPLA, for example, argues that the act of excising DNA from its natural location in human chromosomes alters its structure, noting that the excised DNA segments are “much smaller and do not have the same three-dimensional structural and chemical complexity of the larger genomic DNA.” BIO/AUTM asserts that “at no point in the process of protein production – or at any other point in an organism’s natural life – are genes excised or uncoupled from the rest The Magazine for The general Counsel, Ceo & Cfo

of the chromosome.” If the Federal Circuit agrees that isolated DNA is a patentable, man-made invention rather than a product of nature, it need not address the other issues on appeal. Alternately, the Federal Circuit could hold that whether isolated DNA is man-made remains an unresolved issue of fact and remand that issue to the district court for further consideration. • • Issue 2: Whether “purified” products of nature are patentable. Several amici argue that, even if isolated DNA is a product of nature, it nevertheless is patentable because it possesses features not shared by naturally occurring genes. Such arguments rely upon a line of decisions upholding the patentability of certain purified substances on the ground that they have uses and characteristics not shared with the products of nature from which they were derived. Those substances include drugs purified from animal glands, vitamins purified from fungal cultures, and flavoring purified from strawberries. If the Federal Circuit classifies isolated DNA as a product of nature, its focus likely will be whether “isolation” – by

sever al amici argue that, even if isolated DNA is a product of nature, it is patentable because it possesses features not shared by natur ally occurring genes. analogy to “purification” – is sufficient to transform DNA into an article with new uses and characteristics. On this issue, the amici again disagree. DOJ argues that “isolated genomic DNA is not rendered patentable on the theory that it is pure.” Although DOJ admits purification “can in some cases transform a natural substance into a new compound sufficiently different in kind from its natural ancestry to cross the threshold of section 101,” it distinguishes isolated DNA on the grounds that such DNA is not sufficiently “transformed” from its natural form. According to DOJ, “‘the claimed isolated DNA retains...the identical nucleotide sequence found in native DNA,’ thereby rendering it valuable for medical and diagnostic and therapeutic applications.” The other amici assert that it is precisely those medical, diagnostic and therapeutic applications that render isolated DNA patentable over naturally occurring genes. BIO/AUTM and Rosetta argue that the act of isolating DNA imparts new uses and characteristics upon such isolated DNA, including its use in developing new drugs, genetically modifying organisms, treating patients through gene therapy and – as used by Myriad itself – diagnosing a patient’s predisposition to breast and ovarian cancer. In view of those new uses and charac56

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teristics, the amici argue that isolated DNA should be held patentable as a purified and transformed product of nature. One potential obstacle to that argument is Funk Bros. v. Kalo, a 1948 Supreme Court decision holding that a mixture of bacteria that helped plants grow was not patentable because the bacteria in the mixture merely “serve the ends nature originally provided and act quite independently of any effort of the patentee.” The amici distinguish Funk Bros. on the ground that Myriad’s isolated DNA serves a different purpose than the naturally occurring BRCA genes: diagnosing a patient’s susceptibility to cancer. In view of Funk Bros., the Federal Circuit may need to address or remand the collateral issue of whether isolated DNA “serves the ends nature originally provided.” • • Issue 3: Whether the district court erroneously applied precedent. In holding Myriad’s patents invalid, the district court relied upon the landmark 1980 Supreme Court decision Diamond v. Chakrabarty – which upheld the patentability of a genetically modified bacterium used to break down oil spills – to assert that an invention derived from a product of nature must be “markedly different” from its natural form to be patentable. The district court used that standard in rejecting Myriad’s argument that the chemical differences between isolated DNA and naturally occurring genes render them “markedly different.” The district court instead focused on the “essential characteristic” shared by both isolated DNA and naturally occurring genes – their information-carrying function – to conclude that isolated DNA is not “markedly different” from naturally occurring genes. Gilead, AIPLA and UNH take issue with the district court’s use of the term “markedly different.” Gilead argues that the district court misconstrued the import of the term in Chakrabarty, asserting that the Supreme Court used that language not to promulgate a new patentability standard, but to distinguish Funk Bros. on the ground that Chakrabarty (unlike Funk Bros.) had produced a bacterium “with markedly different characteristics from any found in nature.” Gilead contends that the “markedly different” language describes a “sufficient condition for a substance to be manmade,” but that the standard for patentability under § 101 is whether there exists sufficient human intervention to render an invention “man-made.” By contrast, AIPLA and UNH do not dispute that Chakrabarty imposes the condition that an invention must be “markedly different” from its natural form to be patentable. Instead, they challenge the district court’s application of that condition. AIPLA contends that the district court’s application was too narrow because it ignored the chemical differences between isolated DNA and naturally occurring genes and instead focused on a “shared essential characteristic” between the two. AIPLA asserts that “[n]o legal basis exists for arbitrarily and categorically excluding such DNAderived inventions from the scope of § 101 on the ground that they share a characteristic with the native, naturally occurring DNA.” The magazine for The general counsel, ceo & cfo

AIPLA further asserts that such exclusion would be untenable, since biotechnology inventions unavoidably share “essential characteristics” with the products of nature from which they are derived. UNH contends that the district court’s application of the “markedly different” condition was too broad because it led the district court to conclude that “a physical embodiment of the laws of nature” – a description applicable not just to DNA, but to any invention that works by the laws of physics or chemistry – is unpatentable. UNH) argues there is no precedent for such exclusion under § 101, and it urges the Federal

The claim that patents of isolated DNA impede scientific collabor ation, according to some amici, can be addressed by other means than categorically denying patent protection. Circuit to follow the guidance of Chakrabarty not to create exceptions to patentability unless set forth in the Patent Act. • • Issue 4: Whether Congress intended DNA to be patentable. The intent of Congress in drafting the Patent Act may be an important factor in the Federal Circuit’s decision, as it was for the Supreme Court in Chakrabarty. On that subject, Gilead makes the argument that the intent of Congress was to ensure that “any useful subject matter ‘made-by-man’... satisfies the statutory requirement of §101.” Genetic Alliance argues that “Congress has acted specifically to facilitate patents involving isolated DNA molecules” and marshals supporting evidence from the Patent Act itself. Genetic Alliance asserts that provisions of the Act are based upon Congress’s understanding that isolated DNA is patentable, and argues that “holding that isolated DNA molecules are not patentable would render portions of [those provisions] meaningless.” In view of such arguments, the Federal Circuit may need to address whether Congress intended isolated DNA to be patentable, and whether the district court interpreted § 101 consistently with Congressional intent. • • Issue 5: Whether public policy favors patenting DNA. Several amici raise policy arguments in favor of patenting isolated DNA. Rosetta comments on the “astronomical costs and inherent large risks associated with ... going from laboratory to market” with DNA-based therapies, and warn that such therapies may not reach the public absent patent protection to offset the costs and risks of their development. IPO cautions that a ban on isolated DNA patents would discourage research not only on human genes, but on genes from other 57

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organisms, noting the thousands of patents claiming useful plant, bacterial and viral DNA, while BIO/AUTM provides examples of isolated DNA patents that have contributed to advances in drugs and vaccines, genetic testing, agriculture, and industrial and environmental biotechnology. Some amici advance the idea that the criticisms of isolated DNA patents – that they impede collaboration within the scientific community and limit public access to new technology – can be addressed by means other than categorically denying patent protection for isolated DNA. Those amici note that isolated DNA patents can still be attacked and invalidated as anticipated by, or obvious in view of, prior work in the field. Genetic Alliance further notes that, for any government-funded DNA inventions, the government can exercise its “march-in rights” and force a patentee to license its invention as necessary to safeguard public health and safety. Finally, Alnylam argues that holding isolated DNA unpatentable would go against the international Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), under which “the United States promised to grant ‘patent rights enjoyable without discrimination as to...the field of technology.’” Alnylam notes the role of the United States as an advocate of uniform global standards for patent protection, and contends that excluding isolated DNA from patent protection in the United States would undermine that goal. The Federal Circuit faces a number of issues in deciding the appeal. It could base a decision on whether or not isolated DNA is man-made; whether or not isolated DNA is a “purified” product of nature; whether or not the district court properly applied precedent in finding isolated DNA not “markedly different” from naturally occurring genes; whether or not Congress intended for DNA to be patentable; and whether or not policy considerations favor patents for isolated DNA. Regardless of the precise contours of the Federal Circuit’s eventual decision, the issues raised in the amicus briefs make clear that the decision likely will have significant implications for the biotechnology and pharmaceutical industries.

is a partner at Fitzpatrick, Cella, Harper & Scinto. He practices general intellectual property law, with an emphasis on biotechnology and Hatch-Waxman pharmaceutical patent litigation. He has litigated patent cases involving diverse technologies, and has significant experience in drafting licensing agreements, preparing noninfringement and freedom-to-operate opinions, and advising clients on complex intellectual property transactions. cloh@fchs.com christopher loh

is an associate at Fitzpatrick, Cella, Harper & Scinto. She practices intellectual property law with an emphasis on complex patent and Hatch Waxman litigation in the pharmaceutical, biotechnology and chemical arts. afuetterer@fchs.com amy fuetterer

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International Data Privacy and Mobile Electronic Discovery by craig earnshaw

International privacy laws and restrictions on cross-border data mobility can make it difficult for lawyers to conduct electronic document searches and reviews outside the jurisdictions in which data resides. Advances in electronic discovery mean that mobile solutions can now take the technology to the data rather than the other way around. Take a typical investigation into a potential violation of the U.S. Foreign Corrupt Practices Act (FCPA). A whistleblower's letter alleges that employees working for the Italian subsidiary of a U.S. publicly listed corporation are paying bribes 59

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to a local government official to win a lucrative infrastructure construction contract. To establish the substance of the claim, electronically stored information (ESI) contained within the email accounts of the implicated employees is investigated. In the usual process, an electronic discovery service provider, working on behalf of the companyâ&#x20AC;&#x2122;s appointed law firm and typically based within the United States, conducts the investigation. In this instance, the firm sends an electronic evidence specialist to Italy to handle the forensic preservation of ESI from computers, email accounts and areas of the corporate network used by the Italian subsidiary employees. The ESI is collected on site, taken to a forensic laboratory or data center, whittled down and loaded into a review environment. Now the data can be searched, reviewed and flagged as evidence from any country in the world. That approach is all well and good when the ESI resides in the same jurisdiction as the data center and the forensic specialist. But what if an organization is thought to be involved in a cartel, implicating multiple offices in other jurisdictions? And what if such actions breech European data protection laws and other legislation designed to protect personal information? The magazine for The general counsel, ceo & cfo

THE CosT oF ConTRAVEnTIon

Organizations should tread very carefully. The costs of breeching data privacy rules in some jurisdictions can be significant and there has been an increase in the frequency of such cases. In Europe, data protection authorities have levied multimillion dollar fines on corporations for failing to appropriately protect personal information. Remedies are not only financial. Breeches of the so-called “French Blocking Statue,” which is designed to prevent the international transfer of documents, can result in jail sentences. In the United States, during the first quarter of 2010, the Department of Justice and the Securities and Exchange Commission initiated or resolved 37 investigations into breeches of the Foreign Corrupt Practices Act, compared with just nine in the first quarter of 2009. Fines and penalties are rising too. Between 2002 and 2006, the average fine per incident was $5 million. This jumped to $45 million between 2007 and 2009. Companies are subject to further risk by virtue of the fact that FCPA investigations by their very nature involve documents that reside in multiple international jurisdictions. Companies, therefore, must be very mindful of differences in data privacy laws, and ensure that they adapt their document collection and review procedures accordingly. Other restrictions, such as banking secrecy or healthcare information protection legislation, can also complicate multinational litigation and investigations, by requiring that ESI be processed and reviewed within the jurisdiction in which it originally resides. THE MoBIlE solUTIon

Given the complex challenges in moving data between jurisdictions, a technical solution that circumvents the need for data to cross borders can greatly facilitate multinational document review. By taking the technology to the documents rather than the documents to the technology, investigations can be undertaken rapidly and with minimal interruption to day-today business activities. Lawyers and investigators can review sifted and relevant documents as they are uncovered and in real time. The completion of high-pressure investigations in days rather than in weeks or months can be critical in regulatory and certain litigation scenarios. Technical solutions developed by electronic evidence specialists for collecting, processing and reviewing documents on site range from installing servers at the company’s data center or IT hub, to the use of discrete hand-luggage-sized mobile solutions that are configured in a conference room for the duration of the investigation. These solutions are proving effective in multiple scenarios. Primarily, they enable investigations to be carried out in situ, without violating data privacy laws or other legislation. They support internal investigations, as well as facilitating discovery obligations in multinational litigation. In addition, regulatory and cartel investigations by bodies such as the European Commission, the U.S. DOJ or the German Cartel Office, the transfer of non-relevant data to a data center in the UK or the United States for analysis may not be an 60

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option. In such instances, mobile solutions can save valuable time when a company is under pressure to locate documents to support a leniency application filing. Mobile solutions are especially useful where discretion is crucial to avoid employees being alerted to an investigation inadvertently and where sensitive data needs to remain secure. By their very nature, mobile solutions are highly flexible and can be deployed on site at short notice, in client or counsel’s offices or in a serviced office within the jurisdiction. Just like the large data-center format, these solutions take ESI and perform operations to cull what could be millions of documents down to the ones that matter the most. This process facilitates the defensible preservation, culling and review of documents on site, using advanced technology to enable these key processes: 1. De-duplication. Reduces data sets by identifying and eliminating multiple instances of identical documents or emails so that a single copy is retained. 2. Near de-duplication. Identifies and removes all but the last message in a thread of emails. 3. Concept clustering. Brings together conceptually similar documents to enable faster review. 4. Keyword searching. Locates documents that include certain keywords or combinations of keywords. These can be combined with date ranges and specific senders or recipients of emails for more targeted identification. 5. Language identification: Identifies the languages in which a document is written to enable routing to the appropriate foreign-language speaking reviewer. Mobile electronic discovery solutions are not silver bullets that purport to resolve all data protection issues. Rather, they can be an effective means of reducing data down to the most relevant documents for review. Without portable electronic discovery technology, many investigations may come down to two simple choices where a corporation doesn’t have the in-house capability to assist: to transfer all collected ESI out of a jurisdiction (and run the risk of contravening data protection laws) or to transfer none at all. Mobile technologies sit between these extremes, enabling all materials that are not business documents or personal emails to be filtered out, for the remaining documents to be de-duplicated and searched for keywords and date ranges, and even fully reviewed within the four walls of the corporation in a foreign jurisdiction.

craig earnshaw is a managing director in the FTI Technology segment. Based in London, he manages the Electronic Evidence Consulting, Document Analytics and Data Processing subsegments within the UK. Since 1997, he has worked solely in the electronic evidence field, in areas such as forensic computing, electronic disclosure, internet investigations and electronic evidence. In 2006, he founded FTI’s Technology Consulting segment in Europe. craig.earnshaw@fticonsulting.com

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An IP Primer for Energy Start-Ups By Steven G. Spears

Whether and how new ideas complete the journey to becoming new products and services depends on how innovators are rewarded for their work. Will patent policy facilitate the development of a sustainable energy infrastructure, or will it stifle the effort? How can the pat61

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ent system be utilized by an energy technology company that is investing or considering investment in energy innovation program? Those who contend that the patent system hinders innovation will point to the wave of lawsuits by so-called “patent trolls,” and their alleged impact on a company’s ability to launch a new product. Those contending that the patent system will facilitate innovation point to its its historical role in doing so. The U.S. Constitution says that Congress shall have the power to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” The first patent acts were passed in 1790 and 1793. Thomas Jefferson administered the patent system under the 1790 act, and he was the author of the 1793 act. Ever since, The MaGazine for The General CounSel , Ceo & Cfo

the courts and Congress have wrestled with such fundamental questions as what types of inventions are worthy of patent protection and what constitutes an abuse of the system. Skeptics would say that the law has been fickle in its treatment of patents. Proponents would say that the law has been flexible in order to adapt to changing times. We can see this dynamic today. There has been a substantial increase in patent suits by entities that do not practice their inventions, but the Supreme Court has responded with decisions making the non-obviousness requirement for patents more stringent. This has made obtaining an injunction in a patent case more difficult and expanded the breadth of the so-called “patent exhaustion” doctrine, which provides a defense to patent infringement lawsuits. Congress has also been working on patent reform legislation that will address certain damages, venue and defensive issues. Historically, the term of exclusivity afforded by the patent system has been the strongest motivating factor driving innovation. The same will be true in the alternative energy field, where innovation will require substantial expenditures of capital. A well-designed patenting program starts at the beginning of the innovation process, with research scientists who understand the importance of good record keeping and early disclosure of innovations that might potentially be patentworthy. If no in-house patent department exists, patent applications can generally be prepared by outside counsel for fees ranging from $5,000 to $20,000 depending on the complexity of the invention. The United States Patent and Trademark

Once issued, the patent is treated under law as if it were personal property. Office currently has a long backlog, so prosecuting an application to issuance may take a few years. Also consider filing the application internationally, in countries that might be the source of additional economic benefits. Once issued, the patent is treated under law as if it were personal property. The patent holder can either practice in the area of the patented technology exclusively for a period of time (20 years from filing), or it can license that right to others. Depending on the breadth of the invention, this can be very valuable. For example, the period of exclusivity afforded by pharmaceutical patents can sometimes be valued at multiple billions of dollars. In addition to being diligent in pursuing its own inventions, an energy technology company must keep its eye on other companies’ patent filings. This serves two functions. First, a purpose of the patent system is to reward the early disclosure of inventions so that others can benefit. Monitoring the patent filings of others might reveal that another company has solved a significant problem that you have encountered, 62

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or one that you did not know existed. In such circumstances, there could be a great benefit to licensing that technology. More significantly, the patent filings may reveal that another company was first to realize an innovation that you have been working on, thus creating a “blocking patent”

Monitoring the patent filings of others might reveal that another company has solved a significant problem that you have encountered. which stands between you and commercialization. Under such circumstances, you will either have to design around the patent or obtain a license. Failing in either respect could lead to a lawsuit for patent infringement. Your commercialized product or method would be subject to an injunction, and you could be subject to a large damage award. Finally, many innovations in the energy arena arise from joint ventures or joint research projects. Be careful when creating these ventures to address ownership of patents. The patent laws provide that an inventor has an ownership interest in any resulting patent, and inventorship is judged based upon who made a material contribution to the conception of the claimed invention. This can lead to a messy and fact-intensive dispute if it’s not clearly addressed in the documents establishing the joint research project. In any joint research project, it is therefore best to spell out in advance who will have ownership of resulting patents within a particular field, and who will have license rights under those patents. The patent system has been an engine of innovation since the nation’s inception, and it will remain so for the coming period of alternative energy technology development. Companies practicing in this area are well-advised to utilize all that it has to offer. steven g. spears

is a partner in the law firm of McDermott Will & Emery, based in the firm’s Houston office. Focusing on patent and trade secret litigation involving the chemical, biotechnology and petrochemical industries, he has participated in all aspects of patent litigation, including jury trials and appeals before the Federal Circuit. He also counsels clients on intellectual property enforcement, freedom to operate and licensing issues. sspears@mwe.com The MaGazine for The General CounSel , Ceo & Cfo

Who Says? COMMITTEE HEARINGS , COMMISSIONS AND OFFICIAL REPORTS

[ a ] surprising number of concerns have been raised in the last couple of months in the midst of the worst housing crisis since the great Depression that question whether the common legal procedures that have been used to transfer residential mortgage loans into rmbs trusts were in fact legally valid ... [o]ur membership is confi dent that these methods of transfer are sound and based on a well-established body of law governing the multi-trillion dollar secondary mortgage market.

for more than $20 billion in excess health care costs, more than $35 billion in societal costs, and more than 8 million additional hospital days.

andrew t . pavia , mD, Professor and chief of the Division of Pediatric infectious Diseases at the university of utah, chair of iDsa’s Pandemic infl uenza Task force, and member of the national biodefense science board, for the infectious Diseases society of america (iDsa). 3

tom deutsch , executive Director, american securitization

[ t ] he total regulatory burden on small fi rms is larger

forum. 1

than ever, with the smallest businesses, those with fewer than 20 employees, paying $10,585 per employee on average to comply with federal regulations. The regulatory burden is 36 percent greater in these small fi rms than in their large counterparts, creating a staggering competitive disadvantage.

affidavits and assignments of mortgage fi led in mortgage foreclosure cases are, for the most part, worthless ... i have never taken a deposition of an affi ant, or read or reviewed a deposition taken by another lawyer, in more than 7 years of this practice, where the affi davit itself was wholly truthful. in the gmac deposition that has made national news, for example, possibly the only fully truthful statement in the entire document was the name of the affi ant herself.

james a . kowalski , jr . , law offi ces of James a. Kowalski,

Jr., Jacksonville, fl. 2

nearly 2 million health careassociated infections (hais) and 90,000 hai-related deaths occur annually in the u.s. most of these infections and deaths involve antimicrobial-resistant bacteria ... a recent study indicated that annually in the u.s. antimicrobial-resistant infections are responsible

cdc reports that

EXECUTIVE CoUnsEl f e b r u a ry/m a r c h 2011

dr . winslow sargeant , chief counsel for advocacy, u.s. small business administration. 4

spyware programs may log your keystrokes, capture your email and instant messaging traffi c, or harvest your sensitive personal information such as passwords and login iDs, or credit card details. The compromised data is then sent on to someone else. Depending upon their intention, they may use the information however they wish ... in some cases, simply visiting a Web site can result in an automatic install of unwanted software. This technique is known as “drive-by downloading.” joseph pasQua , Vice President of research, symantec

corporation. 5 The magazine for The general counsel, ceo & cfo

consumers have a keen and important interest in

safeguarding their privacy, but they also want information about products and services and they want access to content at a reasonable price that is possible only with advertiser support. Privacy policy should reflect both of these objectives. as fTc chairman Jon leibowitz has observed, targeted online ads are typically “good for consumers, who don’t have to waste their time slogging through pitches for products they would never buy; good for advertisers, who efficiently reach their customers; and good for the internet, where online advertising helps support the free content everyone enjoys and expects…" joan gillman , executive Vice President and President,

media sales, Time Warner cable. 6 nearly one - third of families with someone under 65

with cancer (30%) have had trouble paying for basic nec- essities or other bills, and 23% have been contacted by a collection agency. about one in five (21%) has used up all or most of their savings ... as a result of costs, one in three individuals under age 65 diagnosed with cancer (34%) has delayed needed health care in the past 12 months… stephen finan , american cancer society cancer action

network. 7 in the mid - 1990 s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore. This decision was driven by securitization .... To avoid paying county recording fees, mortgage bankers formed a plan to create one shell company that would pretend to own all the mortgages in the country – that way, the mortgage bankers would never have to record assignments since the same company would always “own” all the mortgages. They incorporated the shell company in Delaware and called it mortgage electronic registration systems, inc. ... now about 60 percent of the nation’s residential mortgages are recorded in the name of mers, inc. rather than the bank, trust, or company that actually has a meaningful economic interest in the

1 before the house committee on the Judiciary, “foreclosed Justice: causes and effects of the foreclosure crisis,” Dec 2, 2010. 2 before the house committee on the Judiciary, “foreclosed Justice: causes and effects of the foreclosure crisis,” December 2, 2010. 3 before the senate appropriations subcommittee on labor, health and human services, education and related agencies, “Defending against Public health Threats,” september 29, 2010. 4 before the senate committee on small business and

repayment of the debt. for the first time in the nation’s history, there is no longer an authoritative, public record of who owns land in each county ...

christopher l . peterson , associate Dean for academic affairs and Professor of law, university of utah, s.J. Quinney college of law. 8 the grave , indeed fatal, design error in social networking services like facebook isn’t that Johnny can see billy’s data. it’s that the service operator has uncontrolled access to everybody’s data, regardless of the so-called “privacy settings.” facebook holds and controls more data about the daily lives and social interactions of half a billion people than 20th-century totalitarian governments ever managed to collect about the people they surveilled. eben moglen , Ph.D., legal advisor, Diaspora*, Professor of

law, columbia university, founding Director, software freedom law center. 9 sixty - two percent of bankruptcies in 2007 had a

medical cause, but almost 70 percent of those bankrupts were insured at the time of the bankruptcy… a family whose policy limits coverage to $250 a day for hospital care may not realize that this would not cover 10 percent of the average per diem cost of hospitalization in the united states.

timothy stoltzfus jost , Professor, Washington and lee university school of law and a consumer representative to the national association of insurance commissioners. 10

of research studies and data show that the use of a mobile telephone while driving, whether hand-held or hands-free, is equivalent to driving under the influence of alcohol at the threshold of the legal limit of .08 percent blood alcohol concentration.

a mounting number

jacqueline s . gillan , Vice President, advocates for

highway and auto safety. 11

entrepreneurship, “next steps for main street: reducing the regulatory and administrative burdens on america’s small businesses,” november 18, 2010.

7 before the senate committee on commerce, science and Transportation, “are mini-med Policies really health insurance?” December 1, 2010.

10 before the senate committee on commerce, science and Transportation, “are mini-med Policies really health insurance?” December 1, 2010.

before the house committee on energy and commerce, subcommittee on commerce, Trade, and consumer Protection, “‘Do-notTrack’ legislation: is now the right Time?” December 2, 2010.

8 before the house committee on the Judiciary, “foreclosed Justice: causes and effects of the foreclosure crisis,” December 2, 2010.

11 before the senate committee on commerce, science and Transportation, subcommittee on consumer Protection, Product safety, and insurance, “nhTsa oversight: an examination of the highway safety Provisions of safeTea-lu,” september 28, 2010.

before the house committee on energy and commerce, subcommittee on commerce, Trade and consumer Protection, “‘Do-notTrack” legislation: is now the right Time? December 2, 2010.

EXECUTIVE CoUnsEl f e b r u a ry/m a r c h 2011

before the house committee on energy and commerce, subcommittee on commerce, Trade and consumer Protection, “‘Do-notTrack” legislation: is now the right Time?” December 2, 2010.

The magazine for The general counsel, ceo & cfo