Today's General Counsel (Formerly Executive Counsel), V9 N1, February/March 2012

FEB / MAR 2012 VOLUME 9 / NUMBER 1 E X ECUTI V ECOUNSEL.INFO

T H E

M A G A Z I N E

F O R

T H E

G E N E R A L

C O U N S E L ,

C E O

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C F O

E -DISCOVERY

The E-Discovery

Puzzle

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Feb / Mar 2012 E X ECUTIV E COUNSEL

Editor’s Desk

In a few short years the term e-discovery has evolved from a neologism to a redundancy. There is no other form of discovery, at least not in high ticket civil litigation.

Call it one more on the long list of post industrial-age tasks that could not possibly be automated, but were. The transformation has been so complete that e-discovery is probably one factor contributing to the recent spate of lawsuits targeting law schools for allegedly misrepresenting the employment prospects of their graduates. The laborious and time intensive process of document analysis that once characterized discovery, and the employment and training opportunities it provided, are an artifact of the past. It seems certain that tech-savvy young law students who can serve as the interface between technology and litigation strategies will become prize recruits as the e-discovery industry evolves.

In this issue of Executive Counsel, Kurt Jensen predicts a renewed focus on the role of people in the e-discovery process, as a maturing industry brings the intelligent application of human expertise and judgment to the fore to insure defensible outcomes. Taking a close look at methodology, Warwick Sharp discusses relevance ranking, in which a knowledgeable attorney repeatedly ranks small sets of documents, each time interacting with the software, so the software effectively learns to apply the attorney’s judgment to the larger set, resulting in a method that can handle millions of documents daily.

Outsourcing has probably cost more jobs in the legal profession than e-discovery, but as James Paine points out in his article about the effect of the declining U.S. dollar, the pendulum is swinging. The cost of providing outsourced services has dramatical-

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ly increased relative to the dollar, and the overwhelming proportion of outsourcing contracts are multi-year and dollar denominated. Offshore service providers are looking for ways to charge for activities that were previously included in the base charge, and relocating centers in lower-cost and often higher risk locales. Failure to manage the outsourced relationship effectively can result in erosion of the savings used to justify the initial outsourcing. Maybe it is time to bring it back home.

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

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FEB / MAR 2012 E X ECUTIV E COUNSEL

Features

44

TRIAL TACTICS IN INTERNATIONAL ARBITRATIONS

50

CRISIS MANAGEMENT SHOULD PRECEDE THE CRISIS

54

EURO-CRISIS BRINGS ENDEMIC PROBLEMS TO THE SURFACE

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DECLINING DOLLAR IMPACTS OUTSOURCING

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LOCAL JURISDICTION OVER FOREIGN COMPANIES

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SETTLEMENT NEGOTIATIONS MAY NOT BE CONFIDENTIAL

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Jan M. Conlin and Thomas C. Mahlum Different forum, similar strategies.

Micho Spring What you can do now.

Nina Mitz “Brussels” marginalized.

James Paine Narrowing margins cause price creep.

Martin V. Totaro and Robert K. Kry Knotty globalization issue gets partial clarification by Supreme Court.

Timothy J. Malloy, Sandra A. Frantzen and Jesse T. Dyer Rule 408 is no guarantee.

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What I know: I know I expect people who work with me to STEP UP. I know activity without results is failure.

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I know there is always something new to learn about life and health insurance and annuities.

I know that quality of outside counsel representation is important, but that a close working relationship with that outside counsel is vital.

I know that when I’m working with Bradley Arant Boult Cummings, I feel like its only client.

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FEB / MAR 2012 E X ECUTIV E COUNSEL

Departments Editor’s Desk Executive Summaries

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HUMAN RESOURCES

36 | Accommodating Religion in the Workplace is a Balancing Act

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By Anna M. Dailey and Brian J. Moore Accommodations cut both ways.

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E-DISCOVERY

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18 | The 7th Circuit Pilot Program and How it Could Affect E-discovery Practice Jennifer Liebman Coyne and Vanita Banks Early and informal information exchange.

22 | Preventing an E-discovery Cost Cascade Matthew Nelson Savings compounded with early targeting.

38 | The NLRA Applies to NonUnion Businesses

INTELLEC TUAL PROPERT Y

By Jane Lewis Volk and Tony J. Thompson Concerted activity protected.

24 E-Discovery Trends to Watch in 2012 Kurt Jensen Continuous process, not an event.

Gina A. Hough A checklist for corporate counsel.

32 | New Patent Law Challenges Legal Departments Ken Sheets What fi rst-to-fi le will bring.

34 | Friendly Fire from the Sec William Mower and Shauro Bagchi Wide net, unforeseen consequences.

26 | Relevance Ranking is the Key to Early Case Assessment Warwick Sharp Software that learns.

40 | Monetizing Canadian Patents Noel Courage Cashing in is easier north of the border.

42 | Capital Migrating to Canada Taher Kameli Red carpet for foreign investors.

43 | Canadian Real Estate Firms Eye U.S. Properties Divya Balji Multi-billion dollar mining deals.

30 | IP and Information Technology Asset Management

GOVERNANCE |

CANADA / CROSS-BORDER

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MaNagiNg eDiTOr David Rubenstein

execuTive eDiTOr Bruce Rubenstein

MaNagiNg DirecTOr, execuTive cOuNSel iNSTiTuTe Neil Signore

arT DirecTiON & PhOTO illuSTraTiON MPower Ideation, LLC

buSiNeSS MaNager Amy Ceisel

DirecTOr Of circulaTiON Carol Spach

Contributing Editors and WritErs

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Shauro Bagchi Divya Balji Vanita Banks Jan M. Conlin Noel Courage Jennifer Liebman Coyne Anna M. Dailey Jesse T. Dyer Sandra A. Frantzen Gina A. Hough Kurt Jensen Taher Kameli

Robert K. Kry Thomas C. Mahlum Timothy J. Malloy Nina Mitz Brian J. Moore William Mower Matthew Nelson James Paine Warwick Sharp Ken Sheets Micho Spring Martin V. Totaro

Editorial advisory board Dennis Block GReeNBeRG TRAuRiG, LLP

Thomas Brunner Wiley Rein

Timothy malloy mc andReWs, Held & malloy

Jean mcCreary

JACKSON LeWiS

nixon peaBody

James Christie Blake Cassels & GRaydon

steven molo mololamken

adam Cohen

Thurston moore

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HunTon & Williams

Thomas Frederick WinsTon & sTRaWn

Jamie Gorelick WilmeRHale

Robert Haig Jean Hanson

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FEB / MAR 2012 E X ECUTIV E COUNSEL

Executive Summaries E-DISCOVERY PAGE 18

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The 7Th Circuit Pilot Program and How it Could Affect E-Discovery Practice

Preventing an E-Discovery Cost Cascade

E-Discovery Trends to Watch in 2012

By Matthew Nelson Symantec

By Kurt Jensen Daegis

Outmoded data collection technology usually results in one of two undesirable outcomes: too much data is collected, or too little. Too little runs the risk of failing to produce required information and consequent additional litigation and/or sanction costs. Producing too much data may reduce those risks to near zero, but, in what the author refers to as a domino effect, typically results in significantly increased costs later in the process when attorneys do their more intensive review.

The author says that currently available “next-generation” technology can avoid both pitfalls. He then briefly reviews the processes and limitations in three traditional collection tools. Manual forensic tools are time-consuming and disruptive, and they typically produce too much information. Networkbased forensic collection tools are slow, complicated, and they require continual maintenance and upgrades. “Indexeverything” network-based collection tools, sometimes called enterprise search technologies, create a searchable data base in advance of a search over an organization’s entire environment.

However, the search can take months or even years and is never complete, and thus is both costly and risky.

According to the author, nextgeneration technology solves all these problems by using search indices already created by commonly used business applications. This enables rapid targeted information collection at the point of file creation, thus reducing both the number of irrelevant files collected and later downstream costs of close examination. The author advises checking customer references and analyst reports and testing technology on site before making large purchases.

The amount of information that is electronically stored will continue its explosive growth in 2012. In response, litigants and the courts will look for innovative ways to reduce costs while still effectively managing litigation and regulatory matters.

The author expects pricing models to come under increasing scrutiny, with clients demanding solutions that preserve the intellectual capital generated in previous matters and meet stringent defensibility standards. Decisions made in one matter will be leveraged in subsequent matters, thus reducing the total number of documents reviewed, and creating consistency and defensibility. Serial litigants will look to repositories and master databases that enable preservation of privilege determinations and responsive documents.

The author predicts that Judges Grimm, Scheindlin and others will take an aggressive stance on how electronic documents are used in the courtroom and on the scope of e-discovery demands that can be placed on litigants and subpoenaed non-parties.

There also will be renewed focus on the role of people in the e-discovery process. Clients will look for hybrid solutions that take into consideration both the intelligent application of technology to create consistency and transparency of process, and human expertise and judgment to ensure defensibility. The author expects law departments to explore new ways of inventorying their ESI, in order to build greater predictability. Data analytics combined with “defensible deletion” will become a way of mitigating risk and achieving more accurate budgeting and planning, resource allocation and general business decision-making.

By Jennifer Liebman Coyne Applied Discovery and Vanita Banks Allstate Insurance Company

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In 2009, the Seventh Circuit’s Electronic Discovery Pilot Program was created by a committee of judges, attorneys, academics and consultants, with a goal of improving e-discovery-related procedures and reducing their cost. Now in the second of three projected phases, the program is likely to change the practice nation-wide, according to the authors. Practitioners and executives are advised to understand its basics.

The committee recognized that generic demands for all ESI, issued at the outset of a case, were a basic part of the problem, setting the stage for an adversarial proceeding from then on. They formulated eleven principles intended to promote early informal exchange regarding how e-discovery was to be handled. The principles address such issues as preservation; cooperation and proportionality; early case assessment; and the important of judges, attorneys and parties becoming educated on e-discovery issues.

One principle details the categories of electronically stored information, like deleted, fragmented and temporary files, that generally should not be discoverable. Another addresses how data can be made as useful as possible to the opposing party, while making the requesting party responsible for the costs.

After the principles were applied in 93 cases, a survey of judges and attorneys who participated found overwhelming approval by judges and mixed responses for attorneys.

The authors suggest that in anticipation of the program’s likely effect, companies analyze their own IT systems; designate an e-discovery liaison in case of litigation; and carefully frame a retention policy.

FEB / MAR 2012 E X ECUTIV E COUNSEL

Executive Summaries E-DISCOVERY

12

INTELLEC TUAL PROPERT Y

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Relevance Ranking is the Key to Early Case Assessment

IP and Information Technology Asset Management

New Patent Law Challenges Legal Departments

By Warwick Sharp Equivio

By Gina A. Hough Bryan Cave LLP

By Ken Sheets CPA Global

This article considers the question of what is the best technology for doing Early Case Assessment (ECA), which is briefly defined by the author as the process of analyzing a subset of case-related information in order to determine whether to pursue the case. The author also addresses the question of whether it makes more sense to purchase or subscribe to ECA software.

The central challenge in ECA, the author says, is to identify the highest value materials as expeditiously as possible so the most informed decisions can be made. Keyword matching, formerly the default strategy, produces a flood of irrelevant documents and misses relevant ones, while failing to prioritize what it does produce.

Other techniques include “sentiment detection,” which looks for apparently emotion-laden communications, and social network analysis, which give weight to who the communicators are and how they relate to each other.

Both techniques, while useful, have serious shortcomings.

Relevance ranking is an important recent advance. A knowledgeable attorney repeatedly ranks small sets of documents, each time interacting with the software, so the software effectively “learns” to apply the attorney’s judgment to the larger set.

What may be a two-day development process, the authors says, results in a method that will handle millions of documents daily.

In cases where the decision is to litigate, ECA can facilitate setting an appropriate e-discovery budget, and properly done it can either avert or justify millions of dollars in legal costs.

All companies need to update and protect their intellectual property assets at regular intervals, especially those companies that have recently undergone mergers or made acquisitions. Mergers and acquisitions raise IP challenges that begin during negotiation, with valuation of the target company’s assets. This requires careful planning regarding the post-merger fate of brands, trademarks, patents and proprietary information.

Brand protection is especially important when a merger is on the horizon.

The author provides a checklist for managing IP and IT assets. They include a system to protect patents through defensive and offensive patent prosecution; policies and procedures for protecting trade secrets, including information security management and controls; a written code of business conduct that all employees are required to sign; a copyright registration program for key works; and a brand strategy and trademark clearing, searching and maintenance program.

Included in IT protection are legal risk analyses to review the CTO’s or CIO’s licenses for IP ownership; an open source compliance program to avoid copyright infringement claims and breach of contract; and rigorous procurement controls, including a software license management protocol to track license usage and reallocation mechanisms to avoid both over and under-licensing and to ensure cost recovery. The author also provides a checklist that addresses brand protection in cyberspace, covering such things as social media and privacy policies, and metadata management.

The author notes that many technology providers insist that their standard form agreements are “nonnegotiable.” Don’t buy that, she says.

The America Invents Act, passed in 2011, represents the most significant reform of U.S. patent law since 1952, and it will dramatically reshape the way companies handle their patents.

The American Invents Act overhauls the U.S. patent system, exchanging it for a more streamlined and global standard. Companies may end up spending unnecessary money on filing fees unless they understand the reform and its new procedures.

Perhaps the most meaningful change is the switch from first-toinvent patent-rights law to a first-tofile system for patents filed on or after March 16, 2013. The result will probably be a significant increase in the number of provisional applications that are filed immediately after receiving invention disclosures, in order to definitively preserve rights. According to some observers, the new law will generate a decline in the number of infringement lawsuits.

The new law also codifies an interpretation of the rules that will nearly end the practice of naming multiple defendants in infringement lawsuits.

It will be impermissible to join several defendants into a single lawsuit based solely on allegations that each has infringed the same patent, which is a common practice today.

While the implications of this revision are yet to be determined, there is sure to be a shift in the traditional role of litigation support. Companies may want to build out their internal legal team to handle patent infringement activity or enlist knowledgeable partners to better prepare for a new way of handling litigation.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

Executive Summaries

governance

human resources

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Friendly Fire from the SEC

Accommodating Religion in the Workplace is a Balancing Act

The NlRA Applies to Non-Union Businesses

By Anna M. Dailey and Brian J. Moore Dinsmore & Shohl LLP

By Jane Lewis Volk and Tony J. Thompson Meyer, Unkovic & Scott

Religious issues in the workplace often involve conflicting values and claims.

Legally, both the federal Civil Rights Act and state anti-discrimination laws come into play. This article focuses on the federal law, which bars discrimination against employees on the basis of their religion by way of adverse employment actions, harassment, or the failure to reasonably accommodate an employee’s religious beliefs.

Discrimination occurs when employers take adverse action against an employee or potential employee based on the person’s religious beliefs, practices or observances, or lack thereof. The writers detail the forms of religious harassment barred by federal law. They note federal law also bars tolerating an environment where harassment occurs.

An employer can require employees to participate in workplace activity that conflicts with their religious beliefs if the employer can demonstrate that the accommodation would be an undue hardship. Similarly, employees who do not wish to participate in prayer should be able to opt out – unless the employer can show that excluding them would create an undue hardship. The general principle is that employers must accommodate an employee whose religious beliefs, practices, or observances conflict with a work requirement, unless the accommodation would cause an undue hardship.

The first practical step in addressing the religion in the workplace issue is to establish a policy that makes clear that religious discrimination and harassment are prohibited and explains how to request an accommodation for a religious practice that conflicts with work.

Many people equate “labor” with unions, and they assume that the National Labor Relations Act (NLRA) and the National Labor Relations Board (NLRB) do not apply to a non-union enterprise. But in fact the NLRA protects the rights of employees, union or non-union, in businesses whose operations “affect commerce.”

That encompasses most employers.

The protected rights include the right to engage in “concerted” activities that address conditions of employment. In actual practice, according to the authors, employers are most likely to interfere with concerted activity in three situations.

The first involves confidentiality policies that could be interpreted as interfering with the employees’ right to discuss their wages or other terms of employment with their fellow employees. The second is when union organizing activity begins.

The third is when social media policies are introduced or enforced. Social media activity that relates in any way to terms and conditions of work may be protected.

A new NLRB rule (on hold as this article went to press) would require most private-sector employers to post a notice informing their employees of their NLRA rights, which include the right to organize or join a union, bargain collectively, discuss wages and benefits with co-workers, or to choose not to do any of those activities. In some work settings the notice would need to be posted on the internet and/or in the language most employees speak if that language is not English.

By William Mower and Shauro Bagchi Maslon Edelman Borman & Brand, LLP

In November of 2011, the SEC approved new rules imposing additional listing and disclosure requirements for companies seeking to go public through a reverse merger transaction.

In a reverse merger, a private company merges into an existing exchangetraded public shell company with the public company surviving the merger.

The new SEC rules prohibit a reverse merger company from listing its shares on any of the three major U.S. stock exchanges until the company (1) has completed a pre-listing “seasoning” period by trading its shares in the U.S. over-the-counter market or on another regulated U.S. or foreign exchange for at least one year following the reverse merger, and (2) has timely filed all required reports with the SEC (at least one full fiscal year of periodic reports, including a Form 10-K with audited historical financial statements).

The SEC approved these rules in response to widespread allegations of fraud by foreign reverse merger companies, leading to concerns that such companies’ financial statements cannot be relied upon. In fact, more than 25 percent of all securities fraud class action lawsuits filed during the first half of 2011 involved Chinese reverse merger companies.

At minimum, according to the authors, the new rules are too broad.

If certain foreign issuers present the greatest threat to investors due to shoddy accounting practices and meager financial disclosures, the SEC should have tailored the rules to apply only to foreign issuers seeking to consummate reverse merger transactions.

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FEB / MAR 2012 E X ECUTIV E COUNSEL

Executive Summaries CANADA /CROSS-BORDER

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Monetizing Canadian Patents

Capital Migrating to Canada

By Noel Courage Bereskin & Parr LLP

By Taher Kameli Kameli & Associates P.C.

Canadian Real Estate Firms Eye U.S. Properties

Canadian patents are relatively cheap to procure. Costs can be deferred by delaying the request for patent examination for five years, but expedited examination is readily available if an applicant needs a patent because it is being harmed by infringement or loss of potential investors/licensees.

The “anticipated profits” approach has been used in Canadian Federal Court to estimate a reasonable royalty. Using this method, the hypothetical licensee determines its anticipated net profits arising from the sale of the patented invention and then pays a portion of those profits to the patent owner.

If litigation is initiated, it will be much cheaper to go through to a trial in Canada than in the United States.

Usually there is less document production. The pace of patent litigation is slower than in the United States, with the fastest Canadian trials typically proceeding a couple of years after the lawsuit begins. Canada is not a hot spot for non-practicing entity (patent troll) lawsuits due to the smaller market size and damage awards. There are no U.S.-style triple damages for willful infringement. Punitive damages are rare and not usually significant.

Canadian patents, trade secrets, and competition rules are not in lockstep with the United States.

Canada does not have trade secret statutes. Trade secrets can still be licensed as property and are effectively protected through common law court decisions. Canadian patent monetization strategy should be considered separately where there is an opportunity to increase profit by taking advantage of unique aspects of the Canadian legal landscape.

The federal EB-5 program was created to entice foreign investors to open businesses in the United States.

When it is utilized, the United States receives an economic boost and the investors receive a green card, allowing conditional residency for individuals investing between $500,000 and $1 million in a new commercial enterprise.

Similarly, the Canada Immigrant Investor Program, offers business people the opportunity to migrate to Canada with their families. Investors are required to make a CD$800,000 investment, managed by Citizenship and Immigration Canada (CIC) and guaranteed by the Canadian provinces. The program is used to create jobs and help provincial economies grow. The CIC returns the investment, without interest, five years and two months after payment. The program is so popular that it is currently closed until July 1 of this year, due to the number of applications.

While the EB-5 program provides temporary, conditional U.S. residency, the Canada IIP provides unconditional residency to the investor and his/her family.

Many U.S. officials are ignorant of the EB-5 program, even though it was established over 20 years ago, while Canada is active in its Immigrant Investor Program, using it to fund projects throughout the country.

The United States should take a cue from Canada, the authors says.

The EB-5 program has a similar ability to have a significant positive impact on the United States. The problem is that government officials have not been properly educated about it.

By Divya Balji mergermarket

U.S.-Canada M&A activity maintained strong numbers in 2011, with over 180 announced deals as of the end of November. The energy, mining and utilities sectors led with, about 30 deals in total. There were more than 40 mid-market deals with consumer, manufacturing and industrials sector participation.

The robust Canadian economy enticed Canadian companies to make acquisitions to expand their business lines. For much of the year the Canadian dollar was either on par or stronger than the U.S. dollar, which had Canadian companies looking south.

Increased demand for iron ore from China led to the CAD 4.9 billion acquisition of Ontario-based Consolidated Thompson Mines by Ohio-based Cliffs Natural Resources. This deal allowed Cliffs to enter a working relationship with Wuhan Iron and Steel, a Chinese state-owned steel maker, which agreed to acquire most of the iron ore produced from Consolidated’s only mine in Labrador.

Other multi-billion dollar deals include Newmont Mining’s purchase of Fronteer Gold for CAD 2.3 billion, Atlantic Power Corporation’s acquisition of Capital Power Income L.P. (CPILP) for CAD 1.1 billion, Brookfield Asset Management’s ten percent stake purchase in General Growth Properties from Fairholme Capital for USD 1.7 billion, and Enbridge’s acquisition of a 50 percent stake in Seaway Crude Pipeline Company for USD 1.15 billion.

Industry experts are expecting an increase in mid-market deals in 2012.

However, a weaker Canadian dollar could stall deals until later in the year, as companies wait for parity.

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Executive Summaries

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Trial Tactics in International Arbitrations

Crisis Management Should Precede the Crisis

Euro-Crisis Brings Endemic Problems to the Surface

By Jan M. Conlin and Thomas C. Mahlum Robins, Kaplan, Miller & Ciresi L.L.P

By Micho Spring Weber Shandwick

By Nina Mitz FTI Strategic Communications / FD International

International arbitrations are unique proceedings that can make successful advocacy a challenge. But by implementing tactics trial lawyers use to achieve courtroom success, parties can mitigate some of the challenges presented by the forum and use those procedures to their advantage.

Much of the pre-hearing exchange of information in international arbitration is conducted through formal documents prepared by attorneys. Parties exchange statements of claim and defense supported by substantiating materials.

Further discovery is usually limited to the dispute’s most relevant documents.

Depositions are rarely allowed.

Instead, the direct testimony of witnesses is usually prepared in written statements that parties exchange and submit to the arbitrator. Because very little direct examination of witnesses generally takes place at the final evidentiary hearing, international arbitration witness statements are highly-detailed documents that can run hundreds of pages.

Counsel at international arbitrations conduct their cross-examinations without knowing exactly how a witness will answer a particular question. In order to keep witnesses in line, questions during cross-examinations should be carefully mapped to the submissions and key evidence. Counsel should identify critical admissions needed from witness and develop back-up plans for getting them.

The global business community believes in international arbitration. The privacy and the finality of its outcomes have come to outweigh the challenges posed by its procedural requirements.

Companies can enhance the benefits of international arbitration by applying, or engaging counsel who apply courtroom tactics that help trial lawyers win in conventional litigation.

In a communications environment increasingly driven by social media, the traditional conflict between corporate communicators and lawyers during corporate crises has abated, with both camps embracing the idea that preparation is crucial and the most important decisions about handling crises should be made before crises occur.

Citing Weber Shandwick survey research, the author says that attorneys and communicators also realize that a broad strata of employees, from bloggers and sales people to C-suite executives, are now de facto actors in a typical corporate crisis. Preparation therefore needs to pervade the entire corporate structure, with relationships established and procedures nailed down in advance. Because the precise nature of crises can’t be anticipated, companies need to establish an organizational “architecture,” with flexible procedures that can adapt to any crisis.

Some companies prepare by setting up so-called devil’s advocate panels, where personnel from different parts of a company consider, for example, potential problems with a new product launch and how they might be addressed.

The writer suggests that personnel be encouraged to report crises in their incipient stages. This sometimes involves reversing a traditional corporate mind set, where reporting a potential problem to the C-suite is seen as a sign of weakness.

Attorneys and communicators need to work together, with attorneys taking into account the importance of reputation and the free flow of information, as well as potential liability. Details will vary, but the relationship should be established in advance.

Both the EU and the eurozone (the countries that have adopted the Euro) remain decentralized and weak, the author says, and the constituent national governments continue to maintain their individual prerogatives.

At the same time, they remain acutely aware of the their own regional history and the potential dangers of extreme nationalism.

Both tendencies are at work, but in recent years France and Germany have in fact been making the key decisions while the influence of “super-nationalism,” centered in Brussels, has taken a back seat. One consequence, according to the author, is that U.S. companies doing business in Europe should keep in mind that a presence is Brussels is not sufficient to influence EU policy.

Meanwhile, weakness of the European centralized institutions and the disconnect between their ostensible power and the de facto power of national governments has contributed to “euro-skepticism.”

The European Central Bank for its part has followed the conservative German Bundesbank model, with dampening inflation as opposed to fighting recession and “stagflation” its prime objective.

Recent polls show that most EU citizens don’t want the eurozone to collapse, but they do want it to be better managed. It’s not clear, however, that the European institutions will prove capable of reform, allowing the ECB to play a greater role in solving the current crisis. What is clear, the author says, is that the United States and the entire world economy have a stake in the success of single European currency.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO FEB / MAR 2012

Executive Summaries

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Declining Dollar Impacts Outsourcing Market

Local Jurisdiction Over Foreign Companies

Settlement Negotiations May Not Be Confidential

By James Paine Kilpatrick Townsend & Stockton LLP

By Martin V. Totaro and Robert K. Kry MoloLamken LLP

By Timothy J. Malloy, Sandra A. Frantzen, Jesse T. Dyer McAndrews, Held & Malloy

Recent changes in the global economy, the Federal Reserve’s loose monetary policy and historically high U.S. deficits have contributed to a rapid decline in value of the U.S. dollar. This decline is impacting the outsourcing market due to the overwhelming proportion of multi-year U.S. dollar denominated contracts. Profit margins on contracts are compressed because the cost of providing outsourced services (e.g., human capital, equipment, facilities and other resources) has dramatically increased relative to the dollar.

The narrowing margins are driving a number of important developments in the outsourcing marketplace, and customers should keep these in mind. Service providers are contractually shifting the risk of exchange rate fluctuations to customers by insisting on inflation and exchange rate adjustments in new transactions and in renewals of existing contracts. Customers are seeing additional fees, various kinds of change orders, a decrease in the number of individuals assigned to provide services, the use of less experienced and less expensive personnel, a shift to higher risk and lower cost geographies and a movement toward shared platforms and service centers.

Customers should be familiar with the protections that exist under their outsourcing contracts and should make sure that the governance team knows what every contract requires of the service provider and what types of requests could lead to additional charges. Where existing protections are not enough, key terms of existing contracts may be open to renegotiation, especially if the customer can offer the potential of new work.

Two Supreme Court decisions from last term could have a large impact on the business community. Both involved the scope of personal jurisdiction over foreign companies – that is, when a foreign company can be sued in a particular forum chosen by the plaintiff.

Goodyear Dunlop Tires Operations, S.A. v. Brown addressed whether a foreign company whose products wind up in the forum state may be sued on claims unrelated to those products. J. McIntyre Machinery, Ltd. v. Nicastro addressed whether such a company may be sued on claims related to the products when the company itself was never present in the forum state.

Courts distinguish between general jurisdiction, when a company’s contacts with the state are so “continuous and systematic” that it may be sued there regardless of the nature of the claim, and specific jurisdiction, which allows states to adjudicate cases related to specific contacts. The Goodyear decision concerned general jurisdiction, while McIntyre concerned specific jurisdiction.

A unanimous decision in Goodyear provides clear guidance. A state may exercise general jurisdiction over a foreign company, or U.S. company based in another state, only in narrow circumstances. The fact that a company’s products ended up in a given state is not enough to subject the company to general jurisdiction With no majority opinion in McIntyre, its implications are unclear.

Companies need to assume they might be subject to specific jurisdiction in a state if enough of their products end up there.

During lawsuit settlement negotiations, parties often have candid and what they consider off-the-record discussions, sometimes under the mistaken impression that these discussions cannot be used against them in court under Rule 408 of the Federal Rules of Evidence. While the Rule does limit the admissibility of settlement communications, it is replete with exceptions.

If a party can articulate some purpose for offering the evidence other than to impeach the opposing party or to prove liability for, invalidity of, or amount of the claim, then those communications may be admissible. This means that parties sometimes find that settlement communications become the basis for future litigation.

While it is possible to navigate the minefields of Rule 408, one may avoid the problem entirely in certain circumstances by crafting a mutually agreeable, exception-free confidentiality agreement before engaging in settlement discussions at all. Parties can agree that the discussions will not and cannot be used for any purpose other than settlement. They can also carve out exceptions where the discussions can be used (e.g., to prove fraud or breach of the agreement). Such agreements allow fruitful and open settlement discussions while eliminating the concern that the communications may later become evidence.

In the now notorious dispute between Mark Zuckerburg and the Winklevoss twins, Zuckerburg evoked a pre-settlement confidentiality agreement after the Winklevosses tried to introduce evidence from settlement discussions to prove their securities fraud claims. As discussed in Facebook v. ConnectU, Zuckerberg prevailed.

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Feb / Mar 2012 E X ECUTIV E COUNSEL

E-Discovery

The 7th Circuit Pilot Program and How it Could Affect E-Discovery Practice

By Jennifer Liebman Coyne and Vanita Banks

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n May of 2009, a group of judges, attorneys, academics, and consultants came together to address the escalating disputes over the costs and burdens associated with e-discovery.

Under the leadership of Chief District Judge James Holderman and Magistrate Judge Nan Nolan of the United States District Court for the Northern

District of Illinois, the committee created the Seventh Circuit’s Electronic Discovery Pilot Program.

The purpose of this program is “to develop, implement, evaluate, and improve pretrial litigation procedures that would provide fairness and justice to all parties while seeking to reduce the cost and burden of electronic discovery

consistent with Rule 1 of the Federal Rules of Civil Procedure.” The committee recognized that e-discovery problems often begin when parties issue generic demands for all electronic data to be preserved regardless of relevance at the beginning of a case, setting an adversarial stage for the remainder of the litigation.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

E-Discovery

The Pilot Program has completed its Phase One and is now in Phase Two of three projected phases. What’s clear at this point is that this program is

standard of the Federal Rules of Civil Procedure in creating a discovery plan and ensure that requests for production and responses to those requests

or have access to someone who is.

Principle 2.03 addresses preservation letters. Though it does not require parties to send these letters, the committee noted in a report that when The committee recognized that e-discovery problems often parties issue preservation letters, their begin when parties at the outset issue generic demands for all demands “often provide nothelectronic data to be preserved regardless of relevance, setting ing but a generic laundry list of the an adversarial stage for the remainder of the litigation. kinds of computer systems and data storage devices that exist in the world likely to change e-discovery not only in are “reasonably targeted, clear, and as today,” and this prevents “the meaningspecific as practicable.” the Seventh Circuit, but nation-wide. ful exchange of information.”

For that reason practitioners and any Principle 2.04 describes the proper executives who may need to address e• Early Case Assessment Principles. scope of preservation, instructing discovery issues in the future might find Principle 2.01 takes Rule 26(f) of the it worthwhile to understand its basics counsel to take reasonable steps to FRCP to a new level. Like Rule 26(f), preserve relevant and discoverable ESI. and what it attempts to do. it covers the duty to meet and confer It also addresses “discovery on discovand to identify potential disputes early ery,” which often veers into potentially THE PRINCIPLES in discovery. However, Principle 2.01 irrelevant and privileged activities. It In September of 2009, the committee specifically requires parties to discuss adopted eleven “Principles Relating to encourages parties to cooperate and the following issues: “(1) the identificainformally exchange information about the Discovery of Electronically Stored tion of relevant and discoverable ESI their procedures to preserve and collect Information.” The goal was “to incen... (2) the scope of discoverable ESI to information through the meet-andtivize early and informal information be preserved by the parties; (3) the forconfer process. exchange between counsel on commats for preservation and production monly encountered issues relating to It also describes categories of ESI of ESI; (4) the potential for conductthat are generally not discoverable and evidence preservation and discovery, ing discovery in phases or stages as a that, if they were, could significantly both paper and electronic, as required method for reducing costs and burden; raise the cost of discovery. This includes

by Federal Rule of Civil Procedure and (5) the procedures for handling deleted or fragmented data on hard 26(f)(2).” inadvertent production of privileged drives, temporary data and internet To meet this goal, the Principles information and other privilege waiver offer guidance on three key areas of files, certain metadata fields that are issues under Rule 502 of the Federal concern in e-discovery: General Prinfrequently updated automatically, and Rules of Evidence.” “other forms of ESI whose preservaciples, including preservation, cooperPrinciple 2.01 directs counsel to tion requires extraordinary affirmative ation, and proportionality; Early Case learn how their clients store and measures that are not utilized in the Assessment Principles, which outline collect data. It also raises the stakes ordinary course of business.” the issues parties should consider at for parties: If they cannot resolve a the outset of litigation; and Educadispute initially, they must raise the Finally, in addressing disputes that tion Provisions, which inform judges, arise about a party’s preservation efissue with the judge at the Rule 16(b) lawyers, and parties of the need to forts, Principle 2.04 directs counsel conference or as soon as possible afto meet and confer, and if the dispute familiarize themselves with e-discovery terward. Finally, it gives the court the remains unresolved, to bring the issue fundamentals. power to require squabbling parties promptly to the court. to engage in further discussions or to Principle 2.05 requires parties • General Principles. Principle 1.02 focus- impose sanctions. es on the need for attorneys to cooperate Principle 2.02 directs parties to to discuss the ways they intend to identify ESI for production at the and reminds counsel that cooperation in appoint a knowledgeable liaison in discovery does not diminish their zealous the event of a dispute. The liaison will Rule 26(f) conference or as soon as representation of a client. It links parties’ meet, confer, and attend hearings on possible thereafter. Parties should be prepared to discuss any plans to use failure to cooperate during discovery to the party’s behalf. The liaison must advanced technology to cull data, such the escalating cost of litigation. be knowledgeable about the party’s Principle 1.03 suggests that pare-discovery efforts, electronic systems as de-duplication, filtering, keyword ties should apply the proportionality and the technical aspects of e-discovery, searching and concept clustering.

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E-Discovery

Principle 2.06 focuses on the format for producing ESI. It directs parties to discuss format at the Rule 26(f) conference and, if the parties cannot agree, to promptly approach the court.

It also addresses making stored data as useful as possible to the opposing party.

However, it does not require parties to make hard copy documents or to make

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attorneys registered in the Seventh Circuit’s e-filing system.

IMPLICATIONS

Regardless of whether your business faces litigation in the Seventh Circuit, the Pilot Program may affect you. The Principles may serve as a model for the Discovery Subcommittee of the Judicial Conference Regardless of whether your business of the United States’ Civil Rules Advisory faces litigation in the Seventh Circuit, Committee, which is considering changes to the Federal Rules the Pilot Program may affect you. of Civil Procedure.

Since any amendinitially non-searchable ESI searchable. ments likely will not be effective for Finally, Principle 2.06 makes the some time, courts may look to the requesting party responsible for the Principles for guidance or introduce cost of creating a copy of requested similar programs to bridge the gap information, while designating the cost between the FRCP and practice. Two of upgrading data to make it searchable such programs are already in place, a subject of discussion. in the Western District of Pennsylvania and the Southern District of New • Education Provisions. Principles 3.01 York. Therefore, you may want to and 3.02 encourage judges and counsel develop a litigation preparedness plan to educate themselves on the fundawith the Principles in mind. mentals of e-discovery.

As part of your plan, you or someone you appoint should become intimately acquainted with your comIMPLEMENTATION AND SURVEY pany’s current and past IT systems.

RESPONSES From October 2009 to March 2010, Survey users to understand how they 13 judges implemented the Principles create and keep their data. Draft a in 93 cases. In April of 2010, the data map that inventories information committee surveyed the judges and stored in servers, computers, smartattorneys who participated in these phones, the cloud, and elsewhere. cases. The judges’ responses were Next, designate someone to serve overwhelmingly positive. They agreed as an e-discovery liaison in the event that the Principles helped counsel of litigation. Depending on your resolve e-discovery disputes without company’s size and complexity, you judicial intervention. may choose liaisons from multiple However, attorney responses were departments, or you may appoint an mixed. About 38 percent believed the experienced expert from an e-discovPrinciples improved their ability to ery provider. resolve e-discovery disputes without the Follow your records retention policy court’s help, but 61 percent said they so that your company does not become had little to no effect. a digital landfill, creating a reposiThe committee attributed the tory that could exponentially increase lawyers’ noncommittal responses to collection and review costs. If your the limited duration of Phase One company does not have a policy, draft and decided to extend Phase Two for one. It should define what a document an additional year to gather more is (to include all electronic records, not comprehensive results. Phase Two just e-mail), establish rules for compliexpands the pilot to Indiana and ance with applicable laws and provide Wisconsin and will survey the 30,000 an enforcement mechanism.

Finally, remember that the duty to preserve ESI attaches as soon as you know or reasonably should know of pending or threatened litigation. Be proactive. Before your company is sued, draft a sample litigation hold. Set employees’ expectations for what will occur when the hold is in place, and develop a process for reminding employees in writing of the hold status.

With these measures in place, you will be able to hit the ground running when litigation arises and be prepared to cooperate and resolve disputes early, thereby significantly reducing the costs and burdens of e-discovery. ■

Jennifer Liebman Coyne is an attorney and the global alliances manager at Applied Discovery.

She counsels corporations and their in-house and outside legal teams on discovery matters, including records management and preservation obligations, data gathering techniques, chain of custody, document review strategies and production of data to outside parties. jennifer.coyne@applieddiscovery.com

Vanita Banks is Corporate Counsel with Allstate Insurance Company, where she is a member of the Government Relations Public Policy Division. She specializes in complex insurance, employment and class action law and litigation, and she has extensive experience in labor and employment law and developing corporate policy for electronic communications and commerce. She is a founding member of the Allstate Law & Regulation Department Diversity Committee and a past president of the National Bar Association. vbanks@allstate.com

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FEB / MAR 2012 E X ECUTIV E COUNSEL

E-Discovery

Preventing an E-Discovery Cost Cascade

By Matthew Nelson

T

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his article discusses how using outdated data collection technology may be blowing your e-discovery budget, and how modern collection technology can help avoid a costly downstream domino effect you may not even know exists.

Traditional e-discovery technology generally required organizations to choose between collecting too much electronically stored information, in order to minimize the risk of overlooking relevant data, or too little, in an effort to minimize downstream processing and review costs. With data volumes rapidly increasing and discovery sanctions becoming more common, companies can only hope for better technology so they can avoid having to choose between the lesser of these two evils.

The good news is that a new generation of data collection technology is able to do this. To understand what to expect from this technology, it is important to first understand traditional technologies and how they have evolved.

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Manual Forensic Collection Tools: The “Over-Collection” Problem.

Many organizations continue to use off-the-shelf forensic collection tools to make copies of files for each new matter because they feel this is the safest data collection approach. It is safe, but collecting data using manual forensic tools normally requires a specialist to

physically connect a collection device to each relevant desktop, laptop and server, in order to collect or “copy” files for every new matter.

This process is time consuming and disruptive for employees whose data is collected. Moreover, in order to minimize the risk of files being lost or deleted and to avoid having to revisit and recollect data from the same sources repeatedly if the issues in the case change or expand, it tends to collect far more data than necessary.

The result is an expensive domino effect, including high-cost downstream data processing and filtering and, finally, even costlier attorney document review.

Although off-the-shelf forensic collection tools are useful in trade secret theft or other cases where there may be a need to recover deleted files or track a computer user’s history, those situations are rare. Manual collection tools should be used sparingly.

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Network-Based Forensic Collection Tools: Slow and Complicated. In response to the demand for more automated collection, providers of manual forensic collection tools were among the first to offer new tools to enable network-based data collection.

However, these tools continue to suffer from both technical and proprietary limitations, and that has impeded their adoption. Some of them, for example,

require the installation of software “agents” on laptops and desktops before data can be collected. Installing, upgrading, and maintaining these agents is often a significant burden for IT departments, especially in organizations with hundreds or thousands of employees. But it’s a necessary burden, because failure to keep these systems properly maintained creates a serious risk of insufficient data collection, and ultimately sanctions.

These tools also suffer from a lack of user-friendliness and search flexibility. For example, non-technical users who cannot write simple programming language, known as scripts, may need to hire or train additional staff before they can use them.

These tools scan every file contained in every application in order to conduct each new search, a process that is painstakingly slow. Depending on the size of the environment being searched, it could take days or even weeks. The time required to use this type of technology often makes it impractical in the real world of e-discovery and its pressing deadlines.

3

“Index-Everything” NetworkBased Collection Tools: Risky and Costly. Various kinds of networkbased collection tools have evolved to address some of the challenges of forensic collection. However, the risk, time, and cost of managing these tools

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

E-Discovery

has diminished their value, and many organizations have concluded that the network-based collection tools they purchased to automate their collection process have under-delivered.

These tools can be described as “index-everything” solutions, often referred to as “enterprise search” technologies. Index-everything tools attempt to address the shortcomings of earlier technologies by creating a searchable index of all the organization’s files. The idea is that a resource in the IT department can leverage a centralized technology solution to simultaneously search across all data sources, custodians, and file types from a single application, in order to identify and collect ESI every time there is a new matter.

Theoretically, the index-everything approach minimizes the risk, time, and expense of traditional forensic collection approaches because leveraging

unwittingly make false representations to the court and opposing parties about the comprehensiveness of their data collection and production, resulting in sanctions and penalties.

NEXT GENERATION TECHNOLOGY

Next generation collection technology introduces targeted approaches that solve many of the familiar time, cost, and inefficiency issues. Instead of forcing organizations to create a massive data index before searching and collecting ESI, the best new technology uses federated search capability, which allows organizations to target searches of key data sources by leveraging an application’s native index.

This enables faster and more costeffective data collection by optimizing major investments that most organizations have already made in business-critical solutions like Microsoft Exchange,

The number of irrelevant files that are collected can be drastically reduced at the beginning of cases, thus significantly reducing downstream processing and attorney review costs. an index makes searching faster and collection easier. However, the reality is that these solutions tend to result in serious technical challenges and are laden with hidden risks and costs.

Notably, creating a searchable index across an organization’s entire environment could take months or years, and it may never be complete because employees constantly create, modify, and delete files. This means many complex systems must continually be indexed to ensure search accuracy. Combine these challenges with implementation and management problems and it is easy to understand why so many organizations are not able to deploy these solutions as advertised, even after months or years of hard work.

These technical challenges can create major problems for lawyers, who may assume the company’s environment has been comprehensively searched, only to find out the searches were incomplete.

In the worst case scenario, lawyers

Microsoft SharePoint, and Enterprise Vault. Rather than investing in new search and collection solutions to create new indices, next generation tools can simply search the native indices already created by these systems. The ability to search and collect data quickly without spending months creating and maintaining indices is critical, since deadlines for producing ESI are often short and the cost of creating new indices is high.

The best next generation collection tools should enable targeted collection by file type, date range, custodian, and keywords at the point of collection rather than after collection. This means that the number of irrelevant files can be drastically reduced at the beginning of cases. The result is significantly reduced downstream processing and attorney review costs. Savings can be in the thousands or even millions of dollars for a single case, simply because less data is collected and then sent to

outside vendors and counsel for processing and review.

Sophisticated next generation collection tools also reduce the complexity that has hounded earlier tools. They do not, for example, rely on agents to search laptops and desktops. Similarly, instead of requiring users to craft complex scripts to search for potentially relevant ESI, next generation technology should come with a user-friendly interface that enables users to simultaneously search and collect data across multiple data sources with a few mouse clicks. Simplifying the process of crafting search terms reduces the burden on strained IT resources, at the same time it empowers end users to quickly find important data on their own, so cases can be resolved earlier.

The ability to quickly hold, identify, collect, filter, analyze and review ESI within the same system is becoming the holy grail of e-discovery for many organizations, because they want to avoid the investment as well as the risk associated with purchasing and supporting multiple point solutions. Next generation collection tools are one part of a complete integrated e-discovery approach. Organizations that prefer a modular approach are advised to make sure the modules they purchase today can be seamlessly integrated with modules they may purchase in the future, as they migrate toward a beginning-toend approach.

In any case, before making large purchases, savvy consumers should check customer references and independent analyst reports, and then test the technology within their own organization’s environment. ■

Matthew Nelson is E-discovery Counsel at Symantec.

He helps organizations address challenges related to e-discovery, compliance and records management.

Matt_Nelson@symantec.com

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Feb / Mar 2012 E X ECUTIV E COUNSEL

E-Discovery

E-discovery Trends to Watch in 2012

By Kurt Jensen view and privilege waivers. We expect to see Judges Grimm, Scheindlin and others continue to take an aggressive stance on how, when and where electronic documents are to be used in the courtroom, and on the scope of ediscovery demands that can be placed on litigants and subpoenaed nonparties. Additionally, as e-discovery technology and services continue to evolve and improve, we anticipate that judges will set an increasingly exacting standard for defensibility.

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nalysts agree that the amount of electronically stored information is sure to continue its explosive growth. In response, litigants and the courts will look for innovative ways to reduce costs while still effectively and defensibly managing litigation and regulatory matters. Specifically, we expect to see changes in the way enterprises and law firms approach the e-discovery process itself, from collection and processing to review and production. At the same time, pricing models will come

under increasing scrutiny, with clients demanding solutions that are more costeffective, that preserve the intellectual capital generated in previous matters and meet increasingly stringent defensibility standards.

Specifically, here is what we see happening in e-discovery in 2012: • The bench will raise the bar on compliance. Rulings will continue to raise standards on best practices for disclosure, reasonable document re-

• Increased emphasis on leveraging knowledge gained in prior reviews.

With both the volume and the variety of data sources expanding, law firms and companies will seek new ways to leverage and re-purpose the intellectual capital generated by attorney review across multiple matters. Serial litigants will look to repositories and master databases that enable the preservation of privilege determinations and responsive documents. Using this model, review decisions made in one matter will be leveraged in subsequent matters, thus reducing the total number of documents reviewed and creating a wideranging consistency and defensibility. • Regulatory authorities will take notice.

Regulatory and legislative authorities will place renewed emphasis on consistent rules and standards for e-discovery.

FRE 502, which now limits the repercussions of inadvertent disclosures in Federal Court, and FRCP 45, which sets forth rules for non-party subpoenas of electronically stored information, are

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

E-Discovery

harbingers of an increasing focus by federal and state legislators on the codification of the e-discovery process.

• Pricing models will change. In this era of data deluge, the e-discovery industry’s standard per-gigabyte pricing model is becoming increasingly untenable. In 2012, client discontent will force the market’s hand. To remain competitive, e-discovery vendors will begin shaking up the stagnant pricing model with alternative fee arrangements and flexible pricing structures.

• Continued uncertainty about the cloud and social media. Companies, law firms and the courts will find themselves on shaky ground, as Facebook pages and offshore cloud servers are brought into litigation. With the law in this area unsettled, enterprises will need to take defensible steps to preserve the security and integrity of this kind of electronic data. This will include setting up protocols for allowing or prohibiting access

to social networks, to help to ensure that social data is collectable. Understanding where data will physically reside before choosing a cloud vendor will allow enterprises to anticipate the potential implications of cross-border global data transfers.

ESI, in order to build greater predictability into the process. Data analytics combined with “defensible deletion” will become a way of mitigating risk and achieving more accurate budgeting and planning, resource allocation and general business decision-making.

• Renewed focus on the human element.

The pendulum will swing, and we will see a renewed focus on the role of people in the e-discovery process. Hybrid solutions that take into consideration both the intelligent application of technology to automate and create consistency and transparency of process and human expertise, and judgment to ensure defensibility, will prove to be winning models. Enterprises will try to strike a balance between predicting and controlling costs, and reducing risks.

If we learned anything in 2011, it’s that e-discovery is no longer seen as a single circumscribed event. Building a strong foundation for both current and subsequent matters will be at the core of many changes that we will see in 2012. ■

• Increasing emphasis on predictability. With maturing e-discovery technology, enterprises will explore new ways of taking inventory of all their

Kurt Jensen is co-founder and executive vice president of Daegis, which provides e-discovery software and services to corporate and law firm clients. kjensen@daegis.com

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FEB / MAR 2012 E X ECUTIV E COUNSEL

E-Discovery

Relevance Ranking is the Key to Early Case Assessment

By Warwick Sharp

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ecember 1, 2006 will go down as a watershed in not one, but two high-profile professions. On that date, both the U.S. legal community and the enterprise IT community were fundamentally changed as the federal government published its amendments to the Federal Rules of Civil Procedure, codifying the rules for e-discovery as applied in U.S. civil litigation.

Five years later, e-discovery has turned into a billion-dollar industry, and it now represents perhaps the biggest procedural challenge facing litigants and their legal representatives. Ediscovery costs continues to grow rapidly, fueled by the ballooning volume of digital content of all kinds generated in the course of doing business.

Corporate America has been heavily impacted by e-discovery mandates.

Many companies, especially those in notably litigious industries, have been

compelled to dramatically increase their volume of stored documents.

Consequently, the steps in e-discovery – pre-processing, processing, analysis, review and production – have become hugely expensive, and the costs continue to go up.

To help stem this tide, a practice known as Early Case Assessment (ECA) has emerged. Simply put, ECA is the process of analyzing a subset of case-related information in order to determine whether to pursue the case.

ECA attempts to assess the potential risks and costs of the case, taking into account the strengths and weaknesses of the corporation’s position and the potential scope of litigation review that would be involved. With this assessment in hand, the corporation can decide whether or not to continue down the litigation track.

Through an early decision to settle,

the corporation can avoid the hugely expensive costs of e-discovery and document review that litigation involves. According to some estimates, 70 percent of a total litigation budget can be consumed in e-discovery.

ECA can not only help determine exposure relative to a matter, but it can facilitate setting an appropriate e-discovery budget should the client choose to pursue the lawsuit. Thus, properly done, ECA can either avert or justify millions of dollars in legal costs.

ECA CHALLENGES

A whole new class of service providers and solution vendors has sprung up, all claiming to “own” the new ECA space, and numerous theories and approaches have been advanced about how ECA should be performed. All agree that technology is key. The question is, which technology is most effective?

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO FEB / MAR 2012

E-Discovery

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Traditionally, legal teams have been taught that an exhaustive reading of all relevant documents is mandatory, but obviously in the age of multi-petabyte data stores that’s no longer feasible. The central challenge in ECA, therefore, is to identify the highest value materials as expeditiously as possible, so the most informed decisions can be made.

Opinions differ on the best methodology for doing this. Because communication now takes so many forms and the most revealing documents are not necessarily obvious, a wide range of search, clustering, classification and analytical solutions have been proposed.

Keyword matching has been the default strategy. As applied to ECA, keyword matching begins with a list of terms compiled by the lead attorneys. A search is performed once the broad categorization of documents has been identified based on date

ranges, data sources, etc., and system files, duplicates and other superfluous documents have been removed.

Such a search is only as good as its keywords, and somewhat paradoxically keywords tend to be both over and under-inclusive. Since keywords ignore context, keyword searches often flood an ECA team with irrelevant documents. On the other hand, studies have shown that keywords regularly miss up to 80 percent of documents relevant to a matter.

No less important, keyword searches don’t prioritize results. Documents are either “in” or “out.” For legal teams that are constrained by deadlines or manpower, and for which a large body of material remains after sifting, the lack of prioritization can render their ECA exercise ineffective.

Keyword matching may be the most widely-used strategy in the first wave

of ECA, but it is by no means the only one. Some strategies are advanced as primary search techniques in their own right, while others are intended to be applied in combination with more conventional strategies to isolate vital, even “smoking gun” documents.

Sentiment detection and analysis looks for instances in which emotional words enter routine business communications – the thinking being that matters of potential culpability typically generate more spirited and intense exchanges.

Social network analysis looks at who and how people are relating to each other. The technique flags communiques that are outside the realm of normal workaday interaction – for example, a salesperson who is repeatedly emailing a security staff member.

Such techniques, while helpful, still may not root out the most essential

Feb / Mar 2012 E X ECUTIV E COUNSEL

E-Discovery

elements in a case. The information that legal teams are looking for is not necessarily in communications where sentiments are expressed, and it does in fact often reside in exchanges between people who communicate often.

There are, however, new ECA technologies that seek to leverage the most astute and intuitive resource available: the skilled and informed attorney.

A NEW APPROACH

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Relevance ranking has emerged as a way to make sense of the huge volumes of content encountered during ECA. As its name indicates, this process evaluates and prioritizes documents according to their degree of relevance to the case. Because relevance ranking “grades” documents, placing the most pertinent documents first, it allows counsel to review the most applicable documents in rank order, a key prerequisite of effective ECA. A major advantage of relevance ranking is that it amplifies and automates the judgments of lead attorneys, rather than attempting to replace them. The technology “learns” to parse documents in an iterative process that feeds off the lawyer. By continuously interacting with the technology during the learning phase, attorneys can be assured that their critical knowledge is leveraged accurately and to the fullest extent possible.

Furthermore, the fidelity of relevance ranking to a designated legal team’s collective judgment provides valuable justification in court, should future challenges to the team’s ECA process arise.

In relevance ranking, specialized software identifies a test set of perhaps 50 documents that an attorney close to the case reviews and codes according to relevance. This process is repeated multiple times, each time with a different set of test documents. With each repetition the software learns more from the expert and its accuracy score is improved, until a threshold of competence is achieved.

This process may take a couple of days. At that point the application is turned loose to perform its automated

evaluations on the entire document set.

In a short period of time – and at a rate of several million documents per day – the collection is thoroughly evaluated and ranked. Formal relevance scores are calculated for each document, with the highest rankings given to those files that must be reviewed first.

Relevance ranking allows practitioners of ECA to make the best use of available human assets, since senior attorneys can examine the most important documents while associates tackle the mid-ranked pile. Those materials with the lowest scores are set aside, although they remain available should changes in the proceedings require a re-evaluation.

This document hierarchy is one of the key drivers of value for attorneys who use relevance ranking.

Despite the advantages of relevance ranking, some attorneys still hold to the notion that ECA sorting technology can never replace the combination of keyword matching and formal human review. To test this belief, two formal studies have been undertaken, one using the 2008 TREC (Text Retrieval Conference) data and another by Equivio and Epiq Systems. In both cases, results proved the efficacy of relevance ranking.

In the Equivio/Epiq study, automated relevance sorting was a 91.4 percent match to a document set produced by a human review team.

Moreover, an independent human “oracle,” retained to judge a sampling of documents in which the automated vs. manual approaches differed, found that the automated alternative was correct in 77 percent of the cases.

organization, retaining on-premises software can create maximum ROI. Gartner, Inc., a leading information technology research and advisory company, recommends that IT departments in companies with five or more $1 million-plus cases per year should budget at least $500,000 for software services and one full-time equivalent employee. Such users have reported a very short payback period – in the order of three to six months – for ediscovery software investments.

For those with more restricted budgets, the on-demand Software-asa-Service (SaaS) model may be a better solution. The real question, once monetary issues have been resolved, is likely to be where your e-discovery budget should be invested. ECA technology has been shown to provide excellent return because it can prevent a client or legal team from going down the track of expensive litigation in cases where cost or risk are not justified. As a strategic investment, ECA technology is clearly near or at the top of the list.

PROPORTIONATE AND EFFECTIVE

As ECA continues to mature as a practice for managing the complexity of e-discovery, both its definitions and its strategies will evolve. Whatever protocols emerge as best practices, relevance ranking is a technology that both IT departments and legal teams ought to consider. Its ability to extend the intellectual reach of senior attorneys, combined with its demonstrable advantages as a proportionate and effective application of resources, makes it a preferred choice for the needs of Early Case Assessment. ■

IMPLEMENTATION ALTERNATIVES

While no technology can be the complete and unique solution, relevance ranking is quickly gaining traction in the ECA arena. For many, the question is not whether to adopt relevance ranking technology (or any other ECA analytical software), but rather whether to buy or subscribe to it.

It’s important to remember that good ECA technology is complex. If you can justify the cost within your

Warwick Sharp is a cofounder and vice president of marketing and business development at Equivio, a provider of analytical solutions for e-discovery. warwick.sharp@equivio.com

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We invite you to explore our website, contact us with questions, and get involved in the eDiscovery community today.

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Feb / Mar 2012 E X ECUTIV E COUNSEL

Intellectual Property

IP and Information Technology Asset Management

By Gina A. Hough

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ll companies need to review, update and protect their intellectual property assets at regular intervals. The need for such a program has become particularly acute in the past few years, as some of the nation’s largest and most well-established

companies go under or take on new life through mergers and acquisitions.

From an IP perspective, many of these companies are starting from scratch, with new names, logos, computer systems and personnel responsible for managing and protecting their assets.

For others, a merger or acquisition creates enormous challenges stemming from integration demands.

Couple these changes with a proliferation of new infrastructure technology and the explosion of social media use, and companies face significant

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

Intellectual Property exposure in legal and other risk areas.

Now is the time for counsel to devote time and energy to preserving and maximizing assets, as well as taking appropriate compliance measures. The following checklist can help you determine whether you are off to a good start.

ASSET PROTECTION

All assets produced in the course of doing business must be protected and managed wisely, including software, analytical models, new products and new processing technologies. Ensure that the following are established:

from technology providers must be maintained in your agreements.

Many technology providers will insist that their standard form agreements are non-negotiable. Do not buy that.

You are the customer.

• Rigorous procurement controls are established, including a software license management protocol to track license usage (including “metering”) and reallocation mechanisms to avoid both over and under-licensing and to ensure cost recovery.

• An open source compliance program is in place to avoid copyright

Mergers and acquisitions raise IP challenges that begin during the negotiation phase with valuation of the target company’s assets.

• A system to protect patents through defensive and offensive patent prosecution.

• Policies and procedures for the protection of trade secrets, including information security management and controls.

• A written code of business conduct that all employees are required to sign. It should include employee invention disclosure and assignments as well as copyright assignments, non-disclosure provisions and (selectively) non-compete provisions.

• A copyright registration program for your key works.

• A brand strategy and trademark clearing, searching and maintenance program.

INFORMATION TECHNOLOGY

Today, every company creates unique systems architecture to serve its needs.

Counsel, whether in-house or outside, need to ensure that: • Legal risk analyses are undertaken to review the CTO’s or CIO’s licenses for IP ownership. As architecture shifts, the proper “licensing-in” rights

infringement claims and breach of contract. This should include controlling the “licensing-out” of modified open source libraries.

• An open source audit has been conducted.

INTELLECTUAL PROPERTY IN M&A

Mergers and acquisitions raise IP challenges that begin during the negotiation phase with valuation of the target company’s assets. Careful planning regarding the post-merger fate of brands, trademarks, patents and proprietary information is required.

When a merger is on the horizon or in execution, brand protection becomes more important than ever. The following steps are critical: • Pre-merger, undertake a thorough valuation of the target company’s IP assets and liabilities, e.g., trademark or patent infringement lawsuits.

• Consider the IP implications of asset-based versus stock-based purchases. Asset-based transactions require a more rigorous record of IP assets that will be transferred.

• Assess, adopt and to the extent necessary revamp the acquired company’s

trademark searches, trademark enforcement activities and licensee quality control measures.

• If you are acquiring high value intellectual property, assess whether the combined value of the merged companies’ IP assets may trigger antitrust enforcement and what measures may be necessary to mollify regulators.

BRAND PROTECTION IN CYBERSPACE

• Do you have policies regarding social media? Are you monitoring employee use and minding corporate use as you would any advertising tool?

• Are your privacy policies and procedures executed in keeping with federal, state and local laws?

• Are you mindful that your web site terms and conditions must be impeccable?

• Have you addressed metadata management throughout its entire life cycle? Critical data is the lifeblood of your company. If you cannot tag it, you cannot use it, and you will lose it.

Best practices in IT and IP legal support are evolving as fast as the technology and innovation that keep your company competitive. These issues require consistent and careful management, as critical losses can take place without notice. Don’t be caught off guard. ■

Gina Hough is Of Counsel at Bryan Cave LLP. She advises and represents clients in the identification, development, acquisition, transfer, protection, exploitation and monetization of intellectual property and technology. Previously she was vice president and deputy general counsel at Fannie Mae, where she served as IP chief. gina.hough@bryancave.com

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Feb / Mar 2012 E X ECUTIV E COUNSEL

Intellectual Property

American Invents Act Will Challenge Legal Departments

By Ken Sheets

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lthough it has been on the books for more than six months, Corporate America is still coming to terms with the implications of the America Invents Act. That’s not surprising, given that it represents the most significant reform of U.S. patent law since 1952 and will dramatically reshape the way companies handle their patents.

The America Invents Act overhauls the U.S. system, replacing it with a more streamlined, global standard and generating a great deal of controversy and debate. Much has been written by both supporters and opponents about its implications for business and the patent system in general, and for good reason. Companies may end up spending money on filing fees unnecessarily if they don’t understand some new procedures.

More broadly, the law has implications for the future of invention, the U.S. economy and global competition.

Perhaps the most meaningful change is the switch from first-to-invent patent rights – previously unique to the United States – to a first-to-file system, for patents filed on or after March 16, 2013.

Gone are the days that proof of

invention implies patent security. Instead, we can now expect a significant increase in the number of provisional applications filed immediately after receiving invention disclosures, in order to definitively preserve rights as a firstfiled application. This represents a dramatic shift in U.S. patent law and will likely cause a rush to file an application as soon as an invention is complete.

INFRINGEMENT AFFECTED

By eliminating the difficult to prove and often ambiguous first-to-invent stipulation, some say The America Invents Act will generate a decline in the number of infringement lawsuits. It codifies an interpretation of the rules that will nearly end the practice of naming multiple defendants in infringement lawsuits. It will be impermissible to join several defendants into a single lawsuit based solely on allegations that each has infringed the same patent, a common practice today.

While implications of this are yet to be determined, there is sure to be a shift in the traditional role of litigation support. Companies may want to build out their internal legal team to handle patent infringement activity or

enlist knowledgeable litigation support service partners to better prepare for a new way of handling litigation.

Because of the law’s clear incentive to file patents immediately after

The America Invents Act overhauls the U.S. system in exchange for a more streamlined, global standard. an invention disclosure is received, companies may revise filing strategies to procure more comprehensive disclosures that can be converted quickly into provisional patent applications. On the other hand, while the law may create a race to the patent office for provisionals, budget restraints among most legal departments should limit the overall number of non-provisional filings.

Until the law is tested by the courts many of its terms will be open to

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

Intellectual Property interpretation, but when faced with changes in patent practice, patent attorneys typically err on the side of caution. This could well result in more work on all aspects of filing, including searching, drafting the specification and figures, and administrative tasks associated with electronic filing.

To ensure that their in-house and outside teams are prepared to handle more patent filings, companies should assess their current filing procedures and if prudent consult with outside counsel and/or third party IP service providers to support in-house efforts. Regardless of whom a company employs to manage patent work, a clear understanding of the new laws is crucial to save money and avoid risk.

For example, a facet of the law that has gained little attention thus far is the significant increase in application fees for filing on paper as opposed to electronically. Anyone who is not currently filing electronically now has a sizeable financial incentive to do so.

Patent advisors who are aware of the subtleties of the new laws will be able to avoid such unnecessary fees.

PRIOR ART

The expected glut of provisional patent filings means that applicants must be more diligent about filing comprehensive provisional applications and conducting thorough prior art searches before the one-year deadline for converting provisionals to formal non-provisional applications. A prior art search, also referred to as a novelty search, allows inventors to determine if their invention is truly unique before committing the resources necessary to obtain a patent. Without it, patent applicants are at risk of losing money by filing for patents that have already been filed.

With so many more patents being filed under the new laws, the cost of running into clear prior art issues after filing is multiplied. Therefore, filing fees are an important expense to monitor under the new patent laws.

Timeliness is crucial under the new first-to-file system, and applicants

who are eager to find out whether an invention can be patented have a method for guaranteeing an expedited decision, granted they are willing to pay an additional application fee. The fast-track patent prosecution program, dubbed the “Track 1” program, will accelerate examination for a fee of $2,400 per patent for small entities and $4,800 for larger businesses.

This program addresses the fact that

standards. During a recent survey of in-house lawyers, 50 percent of applicants agreed that the increasing pace of innovation has significantly impacted their work. The global scope of the legislation is likely to add an extra burden to already overextended legal teams, particularly in smaller IP departments. However, a knowledgeable search partner with access to a worldwide patent database can

The global scope of the legislation is likely to add an extra burden to already overextended legal teams, particularly in smaller IP departments. some patent applicants are seriously harmed by delays in prosecution, while others would opt for additional delay if it allows them to also defer cash outlays for prosecution and maintenance costs.

Track 1 is an important option to consider if a patent is time-sensitive.

However, given the additional cost, applicants should be especially cognizant of the value of a carefully conducted prior art search. Otherwise, these applicants risk spending the four-fold increase in filing fees in vain.

GLOBAL IMPLICATIONS

Much of what the Act does aligns U.S. patent law more closely with global standards. One important example pertains specifically to prior art search.

The American Invents Act removes the requirements of “in this country” prior art limitations. It also allows evidence of prior “use in commerce” of an invention by another individual anywhere in the world more than one year prior to the filing date (or prior to a first public use) to invalidate a patent. These updates make search a global exercise.

Art developed anywhere in the world is potentially a prior art conflict.

Many legal departments are already overwhelmed by the existing demands of managing multiple patents, even with the previous U.S.-only

minimize financial risk and simplify the daunting search process.

The pace of innovation has increased rapidly over the past several years, and the trend is quickening.

With so many inventions being developed daily, companies must understand how to surpass their competition without wreaking havoc on budgets. Innovation can be expensive, particularly when a multitude of patents are being filed, but by partnering with trustworthy patent advisors businesses can cope with new patent legislation while avoiding excess risk and expense in the process. ■

Ken Sheets joined CPA Global in December 2006 as Group Intellectual Property Manager. He is responsible for protecting the company’s service and technical innovations through procurement and leveraging of intellectual property. Before joining CPA Global, he practiced at a boutique intellectual property law firm in the Washington D.C. area. ksheets@cpaglobal.com

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Feb / Mar 2012 E X ECUTIV E COUNSEL

Governance

Friendly Fire From the SEC

By William Mower and Shauro Bagchi

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n November, 2011, the SEC approved new rules imposing additional listing and disclosure requirements for companies seeking to go public through a reverse merger transaction. In doing so the SEC unfortunately, while hitting some of its intended targets, seems to have hit many “friendly” targets as well.

In a reverse merger, a private company merges into an existing exchange-traded public shell company, with the public company surviving the merger. The reverse merger is another method for private companies to access public capital markets without enduring the disclosure burdens, time delays, and attendant costs of a formal initial public offering.

LONG SEASONING PERIOD

The new SEC rules prohibit a reverse merger company from listing its shares on any of the three major U.S. stock exchanges until the company has: (1) completed a pre-listing “seasoning” period by trading its shares in the U.S. over-thecounter market, or on another regulated U.S. or foreign exchange, for at least one year following the reverse merger, (2) timely filed all required reports with

the SEC. That means at least one full fiscal year of periodic reports, including a Form 10-K with audited historical financial statements.

The company also must maintain the requisite minimum exchange share price, as set forth by each exchange, in the OTC market for at least 30 of the 60 trading days immediately prior to submitting its listing application.

These new requirements, however, would not apply to a reverse merger company’s listing application if the listing is in connection with a public offering of

The SEC approved these rules in response to widespread allegations of fraudulent behavior by foreign reverse merger companies, leading to concerns that such companies’ financial statements cannot be relied upon. More than 25 percent of all securities fraud class action lawsuits filed during the first half of 2011 involved Chinese reverse merger companies.

Though the SEC’s intention of protecting the American investor from unscrupulous foreign issuers is laudable, the unfortunate effect of the new rules

The SEC approved these rules in response to widespread allegations of fraudulent behavior by foreign reverse merger companies. securities managed by a licensed investment bank resulting in proceeds to the company of at least $40 million, or if the reverse merger occurred five or more years before the company applied to list, so that at least four annual reports on Form 10-K (with audited financials) have been filed by the company.

will be to stifle capital formation and prevent, or at least discourage, many deserving companies from accessing public markets. Moreover, the seasoning requirement may have the effect of demoting issuers to OTC exchanges that are far less regulated than the three largest U.S. exchanges. Much of the

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

Governance

fraud and lack of disclosure the SEC is most concerned about may still be present, but on exchanges that impose far fewer regulatory demands.

At minimum, the new rules are too broad. If certain foreign issuers present the greatest threat to investors due to shoddy accounting practices and meager financial disclosures, the SEC should have tailored the rules to apply

liquidity, transparency and perception of quality accorded to companies listed on the major U.S. exchanges.

A likely effect of the new SEC rules is an increased participation in OTC markets by potential reverse merger companies. OTC exchanges generally impose far fewer regulatory burdens on listed companies than the three largest exchanges. Stocks quoted on the OTC

The new SEC reverse merger rules may serve to introduce opaque foreign issuers into under-regulated and riskier OTC markets. only to foreign issuers seeking to consummate reverse merger transactions.

EFFECT ON CAPITAL FORMATION

The immediate impact of the new SEC rules is that private companies, whether foreign or domestic, will be hindered from quickly accessing U.S. capital markets. Given economic circumstances, this seems a bad time to further restrict access to capital.

The $40 million public offering requirement has created the most concern in the reverse merger community, especially from smaller companies and the investment banking firms that service such companies. Historically, some of the most promising growth companies have attracted underwriters to conduct public offerings in the range of $20 to $30 million. The new SEC rules, however, prevent access to such capital, as these smaller companies will be relegated to OTC exchanges where such $20-30 million transactions may be impossible to accomplish.

Because of the changes to the capital markets during the last decade, many smaller investment banks have closed shop, merged, or been relegated to minimize their corporate finance activity. That has blocked access to capital for the kind of visionaries and entrepreneurs that made the economy thrive in the past. This rule only adds more weight to the anchor weighing these smaller banks down. The new SEC rules will also deprive many small and mid-size private companies of the

Bulletin Board must comply with some SEC reporting requirements, but certain OTC stocks have no reporting requirements. The new SEC reverse merger rules may serve to introduce opaque foreign issuers into under-regulated and riskier OTC markets, instead of exposing these companies and their securities to more vibrant trading markets under the watchful eye of regulators and institutional investors.

The seasoning requirement of the new reverse merger rules may constitute a regulatory faux pas. The SEC Release states that “such annual report must contain audited financial statements for a full fiscal year following the filing of all required information about the reverse merger transaction.” This rule may effectively impose up to a two-year seasoning requirement in practice.

Assume for example that a reverse merger company that operates on a calendar fiscal year closes a reverse merger transaction and files its “super” Form 8-K on January 2, 2012. The first full fiscal year after filing that information will be fiscal year 2013. This means that the company will have to “season” through all of 2012 and 2013, until filing its Form 10-K for 2013 in March 2014. As a result, this issuer will generally not be able to apply to list on any of the three exchanges until a full two years and two months after closing its reverse merger transaction.

In practice, even a one-year seasoning period will likely have a severe chilling effect on going-public

transactions. As a primary matter, the time between “doing the deal” and having a vibrant trading market for those shares is sufficiently long to dissuade issuers and their investment banks from pursuing a reverse merger transaction. Moreover, even if a reverse merger is pursued, the inability to access the main stock exchanges will likely result in a reduction in what investors will pay in connection with such a transaction. That is of course if, given the present state of the capital markets, any investment bank is willing to underwrite the deal in the first place.

The SEC’s reverse merger rules create “friendly fire” by making it much more difficult for U.S. based small and mid-size companies to access capital while at the same time it fails to solve the problems presented by fraudulent foreign issuers. ■

Bill Mower is a partner with Maslon Edelman Borman & Brand LLP. He represents clients in connection with the sale or acquisition of businesses and mergers, including management buy-outs. He counsels public companies regarding securities law compliance and general corporate matters, and he has represented issuers and underwriters in connection with public and private securities offerings, secondary offerings and alternative offerings. bill.mower@maslon.com

Shauro Bagchi is an attorney with Maslon Edelman Borman & Brand, LLP. He focuses his practice primarily on mergers and acquisitions, securities offerings, general commercial contract drafting, and business counseling. shauro.bagchi@maslon.com

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Feb / Mar 2012 E X ECUTIV E COUNSEL

Human Resources

Accommodating Religion in the Workplace is a Balancing Act

By Anna M. Dailey and Brian J. Moore

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ork-related meetings sometimes include a meal and begin with an invocation.

Usually this involves a brief prayer of thanks. Many job sites, especially those with a measure of risk, will end a safety meeting with a brief prayer to keep all workers safe during their shift.

Just as there are persons who would be dismayed to have such practices ended, there are those who object to being asked to participate.

We are protective of our religious beliefs, or lack thereof. Thus, it should come as no surprise that religion in the workplace is a very sensitive subject. It is also an area that is addressed legally, under the federal Civil Rights Act, as well as by state anti-discrimination laws. This article focuses on federal law, and specifically on the careful balancing act required of an employer when evaluating religious issues in the workplace.

The federal Civil Rights Act prohibits an employer from discriminating against employees on the basis of their religion by way of adverse employment actions, harassment, or the failure to reasonably accommodate religious beliefs. Employers discriminate if they take adverse action against an employee or potential employee based on the person’s religious beliefs, practices or observances, or lack thereof.

An employer cannot refuse to hire an applicant because the applicant does not share the employer’s religious beliefs.

Nor can an employer hire someone of a particular faith because that faith is preferred by the employer. An employer cannot refuse to hire applicants because they need reasonable accommodations for their religious beliefs. Nor can employers subject applicants of a particular faith (or outside some particular faith) to stricter security or background proce-

dures, or make them perform more onerous job tasks than other employees.

Similarly, an employer cannot discipline or discharge employees because of their religious beliefs, or otherwise discriminate with regard to other terms, conditions and privileges of employment (such as wages and benefits).

Nor can employers take actions based upon the discriminatory preferences of coworkers or customers.

In short, an employer violates the Civil Rights Act when its actions coerce an employee to abandon, alter, or adopt a particular religious practice as a condition of receiving a job benefit or avoiding an adverse job action.

A company policy should make clear that religious discrimination and harassment are prohibited and specify how to request an accommodation for a religious practice that conflicts with work.

An employer does not, however, engage in coercion when it requires an employee to participate in a workplace activity that conflicts with the employee’s sincerely held religious belief – if the employer can demonstrate that to accommodate an employee’s request to be excused would be an undue hardship.

Also under federal law, it constitutes illegal religious harassment for an employer to create or tolerate an environment where employees are: (1)

required or coerced to abandon, alter, or adopt a religious practice as a condition of employment or (2) subjected to unwelcome statements or conduct based upon religion that is so severe or pervasive that the individual being harassed reasonably finds the work environment to be hostile or abusive.

An employer “creates or tolerates” such an environment, which becomes the basis for the employer’s liability, when it either directs the conduct, or when it knows, or should know, that the conduct was occurring.

This second form of harassment, also referred to as hostile work environment harassment, may take the form of either verbal or physical harassment, or the imposing of unwelcome religious views or practices on an employee.

In order to prove a claim of hostile work environment based on religious beliefs, or lack of them, an employee must show that the harassment was: (1) based on his or her religious beliefs, (2) unwelcome, (3) sufficiently severe or pervasive to alter the conditions of employment by creating an intimidating, hostile or offensive work environment and (4) that there is a basis for employer liability.

How does an employer balance the competing interests of those who exercise a right to pray or proselytize about their faith at work and the right of those who are offended by such conduct?

While prayer may be a constitutionally-permissible practice of free speech, it nevertheless carries the risk of creating tensions among employees who do not share the same beliefs and, if taken too far, may be used as evidence of religious harassment or discrimination.

Thus employees who do not wish to participate in prayer should be given the opportunity to be excluded from

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

Human Resources

doing so, unless the employer can show that excluding them would create an undue hardship – for example, having to excuse people for a 20-second prayer before going underground or starting a risky procedure.

In sum, while allowing brief prayers in the workplace is not per se discriminatory, it does require balancing a number of factors: the right to free expression of religion; the need to reasonably accommodate differing religious views; the requirement to ensure a workplace without discriminatory action against someone expressing a religious view; and the requirement to avoid creating a hostile work environment.

Once on notice, employers are required to reasonably accommodate an employee whose religious beliefs, practices or observances conflict with a work requirement, unless the accommodation would cause an undue hardship.

Employers are not expected to understand the beliefs and practices of all religions. Employees therefore are obligated to make employers aware of the religious belief or practice at issue and any need for accommodation.

Employees need not, however, use any particular “magic words” when making a request for religious accommodation.

They must simply provide enough information to make the employer aware of the conflict between the individual’s religious practice and work.

Employees are protected whether the religion or practice in question is mainstream or non-traditional, and even if the

belief or practice is not recognized by an organized religion. Religious observances or practices may include, among other things, praying, dietary restrictions, and refraining from work on particular days.

Note, however, that when one of these practices is followed for purely secular reasons, the employer is under no obligation to grant a request for accommodation.

Religious beliefs must be “sincerely held” in order to be protected, but questioning the sincerity of an employee’s beliefs generally is risky. The Equal Employment Opportunity Commission has provided guidance. The question may be raised when (1) when the employee has behaved inconsistently with the professed belief, (2) when the benefit being sought is particularly desirable for secular reasons, (3) when the timing of the request renders it suspect and (4) when the request follows the same request for secular reasons.

The first step in protecting your workforce and your company is to establish a clear policy. It should make clear that religious discrimination and harassment are prohibited and explain how to request an accommodation for a religious practice that conflicts with work. Most employers include EEOC language that covers religious discrimination. If an employer receives a religious harassment complaint, it should investigate promptly and thoroughly.

Notably, many employers have a well-crafted sexual harassment policy, including how to report alleged sexual

harassment, but fail to address other forms of illegal harassment, including religious harassment. An anti-harassment policy should address all forms of illegal harassment and encourage reporting of alleged violations.

Religious harassment is unique, however, in that resolving a complaint is likely to require the employer to balance competing rights of all employees. If it is found that harassment has occurred, appropriate discipline should be administered and efforts made to determine if the problem is more widespread. If it is, further investigation will be necessary, policies may need to be clarified, and refresher training will likely be needed. ■

Anna M. Dailey is a partner in the Labor & Employment Department of Dinsmore & Shohl LLP, in the firm’s Charleston, WV office. She represents management in labor and employment issues, including disputes, union issues and compliance. She has represented employers in more than a dozen state and federal jury trials. anna.dailey@dinsmore.com

Brian J. Moore is a partner in the Labor & Employment Department of Dinsmore & Shohl LLP, practicing in the firm’s Charleston, WV office. He represents employers in a wide array of labor and employment disputes, including discrimination, sexual harassment, wage and hour, unemployment and unfair labor practice. brian.moore@dinsmore.com

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Feb / Mar 2012 E X ECUTIV E COUNSEL

Human Resources

The NLRA Applies to Non-Union Businesses

By Jane Lewis Volk and Tony J. Thompson

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ost people, including executives and human resource professionals, equate the term “labor” with unions. Moreover, when the National Labor Relations Act (NLRA) and the National Labor Relations Board (NLRB) pop up in the news, it generally involves

a union matter. So it’s natural for the executives of businesses that don’t have unionized work forces to believe that the NLRA and NLRB do not apply to them.

Nothing could be further from the truth. Parts of the NLRA do apply to virtually all for-profit and nonprofit

entities with employees – at least those whose operations “affect commerce,” a definition broad enough to encompass the vast majority of employers.

The NLRA protects the right of all employees to engage in concerted activity involving discussion of the terms and conditions of their em-

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

Human Resources ployment among themselves and to approach their employer with their concerns. The law reads: “It is hereby declared to be the policy of the United States… [to protect] the exercise by workers of full freedom of association, self-organization, and designation of representatives of their own choosing, for the purpose of ne-

reinstatement and back pay.

(2) When union organizing is occurring. If union organizing activity begins at your workplace, great care must be taken to ensure the lawfulness of the employer’s actions and statements.

(3) When social media policies are introduced or enforced. Social media activity may be protected if it

In the real world of the workplace, employers typically interfere with employee rights to protected concerted activity in three situations. One has emerged only recently as an area of contention. gotiating the terms and conditions of their employment or other mutual aid or protection.” Those discussions and the presenting of group complaints to the employer are seen as fundamental to the right to organize and choose a bargaining representative.

In other words, the NLRA does not just regulate the relations between unions and employers. It gives all employees rights to protected concerted activity, even employees of non-unionized operations.

In the real world of the workplace, employers typically interfere with employee rights to protected concerted activity in three situations. Two of them have been around for a long time, while the third has emerged only recently as an area of contention. They are: (1) When confidentiality policies are introduced or enforced. Confidentiality policies that could be interpreted as interfering with the employees’ right to discuss their wages or other terms and conditions of employment with their fellow employees may be unlawful. An employer that seeks to enforce a confidentiality clause that arguably prohibits employee discussion of their wages or other terms of conditions risks running afoul of the NLRA. Firing employees under such policies may result in an order of

involves, or seeks to prompt, discussion among employees concerning the terms and conditions of their employment. Policies that chill that right may be unlawful. Actions an employer takes against employees based on a social media policy also may be unlawful, as we can see from a recent case in which the NLRB found unlawful the firing of five employees who had been complaining on Facebook about their workplace.

A number of recent rules and proposed rules would expand the NLRB’s reach. For example, a new NLRB rule (on hold as this article went to press) would require most private-sector employers to post a notice informing their employees of their NLRA rights. The new requirement will apply to nearly all private employers, except those in agriculture, railroads, airlines or those businesses which are too small to reasonably affect interstate commerce.

The new notice will advise employees of their rights to: • Organize a union or join or assist in a union.

• Bargain collectively with the employer through their representative.

• Discuss wages and benefits and other terms and conditions of their employment with their co-workers.

• Choose not to do any of these activities, including joining or remaining a member of a union.

The notice will need to be posted in a conspicuous place in the workplace, in the same location where other employment posters are displayed.

Employers will also need to post it on an intranet or internet site, if that method is typically used by the employer to communicate with the employees.

Where 20 percent or more of the workforce is not proficient in English, the employer will need to post a notice in the languages that the employees speak.

Failure to comply with the posting requirement could result in a finding of an unfair labor practice and the extension of the six-month statute of limitations for filing other unfair labor practice charges.

Thus, even if a company has neither social media policy, a confidentiality policies, nor a workforce interested in unionizing, it can still run into trouble with the NLRB if it doesn’t post the proper notice of employee rights. ■

Jane Lewis Volk, cochair of the Employment Law Group at Meyer, Unkovic & Scott, has more than 35 years experience advising clients regarding employment discrimination, employment contracts and labor-management relations. jlv@muslaw.com

Tony J. Thompson, an associate at Meyer, Unkovic & Scott, has represented a range of clients in employment and contract disputes, and business litigation. tjt@muslaw.com

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FEB / MAR 2012 E X ECUTIV E COUNSEL

Canada/Cross–Border

Monetizing Canadian Patents

By Noel Courage

P

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atent owners want to get a return on their investment, but it is often easier to get a patent than to make money with it. This article suggests strategies to generate income from the Canadian patents in your portfolio.

U.S. patents are used as a comparison, since they are a familiar benchmark. The advice in this article is for companies acquiring or selling Canadian patents. It is also for companies looking to generate more income by licensing or litigating their patent portfolio.

In many industries, Canadian patents provide a supplemental option to effectively block goods before they cross into the United States. Canadian patents are relatively cheap to procure.

Costs can be deferred by delaying the request for patent examination for five years, but expedited examination is readily available if an applicant needs a patent quickly because it is being harmed by infringement or loss of potential investors/licensees.

There are also streamlined examination processes. For example, once U.S. patent claims are allowed or issued there is a process called the “patent prosecution highway” that facilitates Canadian patent examination by allowing the Canadian Patent Office to consider the U.S. Patent Office examination results.

The attributes of a Canadian patent are similar to those of the U.S. patent: a 20-year base patent term, and the right to prevent others from making, using or selling the invention. Both countries are in the midst of some controversy over whether certain specialized inventions, such as business methods and diagnostics, are patentable subject matter. It pays to consult a patent attorney if there

are questions about patentability of a technology you wish to commercialize.

VALUATION

Often companies conduct detailed market analysis and comparisons to similar benchmark transactions in the industry to arrive at valuation. One way to help set a royalty for a Canadian patent license is to consider past adversarial situations in which a court has determined royalties in the context of infringement. A patent owner is entitled to reasonable compensation for the time period from patent application publication to patent issuance.

This reasonable compensation would typically be akin to a reasonable royalty. The assessment is done on a case-by-case basis, based on an arm’slength negotiation between two parties, as if the infringer had sought a license.

This process starts with a determination of the licensee’s anticipated profit percentage from sale of the patented invention. Various business factors that tend to increase or decrease the royalty within that range are then considered. These might include significance of the invention over prior technology; commercial risk

taken on by the licensee in launching the product; territorial limitations on selling; demand for the product; whether competition from other products would gradually diminish the value of the license; and compensation for R&D. We will use 30 percent as a hypothetical adjusted number. Multiply the anticipated profit (20 percent) by the royalty rate (30 percent), to arrive at the reasonable royalty rate – six percent of net sales in our scenario. Consider if any final small adjustments are reasonable in view of other factors, e.g. increasing the royalty a percentage point or two based on anticipated increased market penetration. (The above numbers are those used for determining reasonable royalty in a recent Canadian Federal Court case involving farm machinery.)

Knowing the court’s bottom line on royalties helps you avoid leaving money on the table in your licensing negotiations. The potential for income also affects market value if buying or selling a patent.

ENFORCEMENT THROUGH LITIGATION

After a patent issues there is risk for potential infringers, and this creates

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

Canada/Cross–Border

a strong incentive for them to take a license. Patent infringement damages may be assessed based on all the patent owner’s losses resulting from the infringement. Damages are compensatory, to restore the patent owner to where it would otherwise have been without the infringement.

Damages are typically much more costly than a royalty-based standard because they may be based on the profit the patentee would have received if it had made each of the infringing sales.

Where the patentee has not lost sales, the infringer will generally have to pay a reasonable royalty, based on the royalty if the infringer had taken a license.

There are no U.S.-style triple damages for willful infringement. Punitive damages are rare and seldom significant. Canada does have a special remedy called “accounting of profits,” which may be elected as an alternative to damages. This remedy entitles the patentee to receive an infringer’s profits, irrespective of the damages suffered by the patentee. Knowing your entitlements in an infringement situation will help to settle the license terms.

Litigation is generally a last option for patent owners. If litigation is initiated, it will be much cheaper to go through to a trial in Canada than the United States. Document production is usually smaller, and discovery is not as wide-ranging in Canada. Often there are fewer legal issues in play.

For example, Canada does not have a doctrine of inequitable conduct (fraud) to invalidate patents for misleading statements or omissions about prior art made by the applicant.

The pace of patent litigation is slower than in the United State, with the fastest Canadian trials typically proceeding a couple of years after the lawsuit begins. Canada is not a hot spot for non-practicing entity (patent troll) lawsuits due to the smaller market size and damage awards.

Licensing terms and business practices in Canada and the United States are similar. One quirk is that a coowner of a Canadian patent must get consent of the other co-owner before licensing the patent. No consent is re-

quired prior to an outright assignment of a co-ownership interest. The purpose is to prevent one co-owner from issuing multiple licenses on its own initiative and diluting the other owner’s rights.

There is no such rule for U.S. patents.

COMPETITION ISSUES

There tends to be less competition (antitrust) law scrutiny in Canada.

Therefore, a licensor may consider whether it can take a less conservative approach on license terms in Canada. If so, it would be good to consider a separate license agreement for the Canadian territory, choosing Canadian law as the applicable law governing those commercial activities.

Both the Canadian and U.S. governments see intellectual property and competition law as complimentary.

Mere exercise or licensing of an IP right will not attract government review. The usual licensing terms (royalties) that are legal in the United States are typically legal in Canada from a competition point of view. Compulsory licensing is rare in both countries.

Both countries have a doctrine of first sale – it’s called exhaustion of patent rights in Canada – that generally permits a purchaser of a patented item to use and resell it freely. Licenses and similar agreements may allow some controls on use and resale in both countries, though this is a complex issue.

Competition law hot spots in both countries include tied selling, controlling resale price (price maintenance), refusal to supply and certain types of market restrictions. Avoid license requirements that could be considered a requirement or coercion toward a minimum resale price. Licensees can set their own price without consequence from the licensor.

The Canadian Competition Bureau has typically been less aggressive in reviewing and commenting on emerging competition issues than its U.S. counterparts. These issues include patent pooling, digital rights management agreements, and reverse payment (payfor-delay) agreements between brand and generic companies. The Competition Bureau has not taken a position

against these types of agreements, and it is recognized that they can be structured in a way that furthers competition.

TRADE SECRETS

Trade secrets are sometimes licensed in addition to patents for a particular technology. Unlike most U.S. states, Canada does not have trade secret statutes. Trade secrets can still be licensed as property, much as they can in the United States.

Trade secrets are effectively protected in Canada through common law court decisions. For example, in one case, a departing employee misappropriated a drug production process from the inventing company to a competitor company. It had taken several years and millions of dollars to develop the process. The inventing company obtained court orders allowing inspection of the competitor premises and property.

The court also awarded compensatory damages, an injunction, and an order to transfer ownership of the competitor company’s patents filed on the inventing company’s process. Some additional U.S. statutory trade secret remedies will not be available in Canada, such as double or triple damages for willful trade secret misappropriation.

Canadian patents, trade secrets, and competition rules are not lockstep with those in the United States. Canadian patent monetization strategy should be considered separately where there is an opportunity to increase profit by taking advantage of unique aspects of the Canadian legal landscape. ■

Noel Courage is a partner at Bereskin & Parr LLP, an intellectual property law firm in Toronto, and a registered Canadian and U.S. patent agent. His practice focuses on the patenting and licensing of inventions and on helping universities and companies commercialize their inventions internationally. ncourage@bereskinparr.com

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Feb / Mar 2012 E X ECUTIV E COUNSEL

Canada/Cross–Border

Capital Migrating to Canada Red Tape Driving Funds Away From U.S.

By Taher Kameli

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C

ontinued economic uncertainty in the United States has left all major cities scrambling for funds to pay for things like teacher salaries and infrastructure repair. However, even as officials scramble to save vital services, a program that could help solve our economic woes remains underused.

The federal EB-5 program was created in 1990 to entice foreign investors to open businesses in the United States.

When it’s used, the country receives an economic boost, and the investors receive a green card, allowing conditional residency for individuals investing between $500,000 and $1 million in a new commercial enterprise.

To qualify, the enterprise must directly employ 10 U.S. citizens or authorized immigrants full-time. The investor must be involved in the business, either directly through day-to-day managerial tasks or indirectly through policy formation. The minimum investment amount varies based on the geographical area (otherwise known as the “Regional

Center”) and whether or not that area is a “Targeted Employment Area.” A TEA rating is given by the state to areas where the unemployment rate is at least 150 percent of the national average.

Similarly, Canada features the Canada Immigrant Investor Program, offering experienced business people the opportunity to migrate to Canada with their families. Investors are required to have a minimum net worth of CD$1,600,000, legally obtained.

They make a CD$800,000 investment, managed by Citizenship and Immigration Canada (CIC) and guaranteed by the Canadian provinces. The funds are used to create jobs and help provincial economies grow. The CIC returns the investment, without interest, five years and two months after payment. The program is so popular that it is currently closed until July 1, 2012, due to the number of applications.

Hence, while the EB-5 program provides temporary, conditional U.S. residency based on the ability of the

investment to create jobs, the Canada IIP provides unconditional residency to the investor and his or her family.

Furthermore, many U.S. officials are not very well-versed in the EB-5 program and its revenue-making possibilities, even though it was established more than 20 years ago.

Canada, on the other hand, is active in its Immigrant Investor Program, using it to boost the economy and fund projects throughout the country.

The U.S. should take a cue from Canada’s successful implementation of its program. The EB-5 program has the potential to have a similar significant positive effect. The problem lies not in our program, but in the fact that most law makers and government officials have not been properly educated on EB-5, and they don’t give it the attention it deserves.

Foreign investors are drawn to government-backed and supported programs. If more U.S. government officials could come out in public support of the program and make it more attractive to investors, EB-5 could have a large and positive impact on our economy. ■

Taher Kameli is founding partner of Kameli & Associates, P.C. The firm has an office in Dubai and an extensive referral basis throughout the Middle East. He is the executived director of Chicagoland Foreign Investment Group, a private company designated by the U.S. government to promote immigration through investment.

Tkameli@kameli.com

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

Canada/Cross–Border

Canadian Real Estate Firms Eye U.S. Properties

By Divya Balji

T

he year 2011 began with the expectation that M&A activity would stay hot as companies put the credit crunch behind them. But the European debt crisis and warnings of a slowdown in China created instability and volatility in capital markets, affecting the share price of many companies.

U.S.-Canada M&A activity maintained strong numbers with over 180 announced deals as of the end of November, according to Mergermarket data. The energy, mining and utilities sectors led, with about 30 deals in total.

There were more than 40 mid-market

A weaker Canadian dollar could stall deals until later in the year, as companies wait for parity. deals with consumer, manufacturing and industrials sector participation.

For much of the year the Canadian dollar was either on par or stronger than the U.S. dollar, which led Canadian companies to look south, and the robust Canadian economy enticed Canadian companies to make acquisitions to expand their business lines.

Increased demand for iron ore from China led to the CAD 4.9 billion acquisition of Ontario-based Consolidated Thompson Mines by Ohio-based Cliffs Natural Resources. This deal allowed Cliffs to enter a working relationship with the Chinese state-owned steel maker Wuhan Iron and Steel, which agreed to acquire most of the iron ore produced from Consolidated’s only mine in Labrador. McCarthy Tetrault LLP, Fraser Milner Casgrain LLP, and Cassels Brock & Blackwell LLP worked

with Consolidated. Blake, Cassels & Graydon LLP and Norton Rose worked with Cliffs on the transaction.

Other multi-billion dollar deals include Newmont Mining’s purchase of Fronteer Gold for CAD 2.3 billion, Atlantic Power Corporation’s acquisition of Capital Power Income L.P. (CPILP) for CAD 1.1 billion, Brookfield Asset Management’s ten percent stake purchase in General Growth Properties from Fairholme Capital for USD 1.7 billion and Enbridge’s acquisition of a 50 percent stake in Seaway Crude Pipeline Company for USD 1.15 billion.

Fronteer worked with Davies Ward Phillips & Vineberg LLP, Newmont with Goodmans LLP and Wachtell, Lipton, Rosen & Katz LLP for the acquisition. CPILP worked with Fraser Milner Casgrain LLP, Norton Rose and K&L Gates. Atlantic Power retained Goodmans LLP, Goodwin Procter LLP and Leonard Street & Deinard. Brookfield retained Torys LLP and Wilkie Farr & Gallagher LLP. General Growth worked with Weil Gotshal & Manges LLP. Fairholme Capital worked with Blake, Cassels & Graydon LLP and Sullivan & Cromwell LLP. Canadian real estate players with access to capital seem to be tiring of high prices in Canada and have been acquiring commercial properties across the border, where owners are cashstrapped and valuations are lower.

RioCan Real Estate Investment Trust acquired Northwoods Crossing for USD 24 million, and Vancouver-based private equity firm Second City Capital Partners acquired an office tower in Florida for USD 17million.

As we move further into 2012,

industry experts are expecting an increase in mid-market deals. Canadian companies will be looking to the United States in order to expand their footprint. “A potentially weaker economy in the U.S. could lead to even more favorable valuations, and allow Canadian companies to expand on the cheap,” one industry analyst said.

However, a weaker Canadian dollar could stall deals until later in the year, as companies wait for parity or a strong Canadian dollar in order to take advantage of price points. ■

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

Divya.Balji@mergermarket.com

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Trial Tactics in International Arbitrations Proceedings are Fast-Paced and Compressed

44

omas C. Mahlum

By Jan M. Conlin and Th

easoned trial lawyers plan the timing and tactics of courtroom litigation around known procedural sign-posts. Depositions, discovery, motion practice and evidentiary hearings all serve to influence the flow of evidence and witness examination at trial.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO FEB / MAR 2012

International arbitrations are different. Most international arbitrations of commercial disputes will involve restricted discovery, compressed proceedings and heavy reliance on prepared witness statements. International arbitrations are unique proceedings that can make successful advocacy a challenge. But by implementing tactics trial lawyers use to achieve courtroom success, parties can not only mitigate some of the challenges presented by the forum, but they can use those procedures to their advantage through the art of persuasion.

PROCEDURES AND HEARINGS Globalization has reached businesses of every size. More players and larger, more complex international transactions have led to more transnational business disputes and, along with them, increasing use of international arbitrations as a means of resolution. In the last ten years, the busiest international arbitration centers report that filings of international arbitrations have almost doubled.

International arbitration’s advantages explain its growing popularity. It offers a private, International arbitrations neutral forum that provides a final outcome are unique proceedings that is generally easily enforceable, while also that can make successful allowing parties the flexibility to pre-determine important procedural details. However, influadvocacy a challenge. enced by U.S.-style litigation practices, international arbitrations have become increasingly lengthy and expensive. To fight rising costs and complexity, the international arbitration community has pushed back and some arbitral centers have enacted guidelines discouraging American-style discovery procedures. Thus, even if parties have agreed to broader inquiry, depending on the arbitrator, they may find themselves limited to the procedures of the international arbitration forum they selected.

Though individual rules differ, various centers that provide international arbitration, like the International Chamber of Commerce (ICC) in Paris and New York’s American Arbitration Association’s International Centre for Dispute Resolution (AAA/ICDR), share International arbitrations many of the same core procedural requirements.

Much of the pre-hearing exchange of informaare fast paced, and the tion is conducted through formal writings prepared final hearing of complex by attorneys. Parties exchange statements of claim and defense, supported by copies of substantiating commercial disputes can documents. Further discovery is usually limited to be over in as little as the dispute’s most relevant documents. Depositions are rarely allowed. Instead, the direct testimony three or four days. of witnesses is usually pre-prepared in a written

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Feb / Mar 2012 E X ECUTIV E COUNSEL

witness statement that parties exchange and submit to the arbitrator before the hearing. Because very little direct examination of witnesses generally takes place at the final evidentiary hearing, international arbitration witness statements are highly-detailed, affidavit-like documents that can run hundreds of pages and include multiple exhibits and attachments.

The restrictions placed on direct examination of witnesses mean that the final hearing typically involves attorneys’ opening statements, cross-ex-

outlines of specific questions and supporting rules of evidence. Many develop independent back-up plans for the most important issues.

Before trial begins, counsel assemble various evidentiary pieces and decide which witness will tell each part of their client’s overall story, relying on the answers to questions developed in discovery to guide the process.

International arbitrations require this same level of preparedness, but at a much earlier stage in the proceedings. In crafting their own

To fight rising costs and complexity, some arbitral centers have enacted guidelines discouraging American-style discovery procedures. amination of witnesses and a closing argument.

International arbitration demands a significant level of professionalism from its arbitrator, and arbitrators generally arrive at the final hearing having thoroughly reviewed the parties’ submissions and witness statements. As a result, international arbitrations are fast-paced and the final hearing of complex commercial disputes can be over in as little as three or four days.

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COURTROOM STRATEGIES

Jan M. Conlin, a partner at Robins, Kaplan, Miller & Ciresi L.L.P., chairs the firm’s business litigation practice. She serves as trial counsel for business clients involved in both traditional litigation and international arbitration. jmconlin@rkmc.com

International arbitration’s truncated discovery and hearing procedures bear little resemblance to traditional courtroom litigation. By the time a traditional litigation heads to court, extensive discovery has usually taken place. The parties will have exchanged documents and electronic data and had the opportunity to see how the witnesses respond under direct and cross examination. Trial counsel can use critical discovery admissions to shape the outlines of opening and closing statements, and the contours of the litigation as whole.

Though this process significantly differs from what happens during international arbitration, understanding and implementing the essential tenets of good courtroom litigation practice can help participants in international arbitration proceedings gain an upper hand.

Trial teams spend weeks in advance preparing for battle. All critical evidence receives multiple reviews and analysis. Trial counsel identify potentially problematic evidence and craft counter-arguments to their opponent’s anticipated objections, sometimes creating

witness statements, counsel need to focus on case themes and key components prior to the creation and drafting of the statement. Witness statements should be shaped with an understanding of key factual case elements as well as a vision as to how the witnesses’ testimony plays into the overall case narrative. Witness statements should also anticipate and address likely areas of cross-examination and, when possible, reveal the other side’s critical weaknesses.

Counsel need to dissect their opponent’s witness statements and supporting exhibits and attachments in preparation for cross-examination. Going astray in the questioning is a constant risk. Counsel at international arbitrations conduct their cross-examinations without the benefit of prior face-to-face engagement and without knowing exactly how a witness will answer a particular question. In order to keep witnesses in line, questions during crossexaminations should be carefully mapped to the submissions and key evidence. Counsel should identify critical admissions needed from witnesses and develop back-up plans in order to get them. Witnesses realize when they are being examined by well-prepared, relentless counsel.

This difference can define case outcome.

Trial attorneys succeed or fail based on their ability to think on their feet. Each day of trial brings the possibility of an unexpected objection, motion, or adverse ruling. Mastering the courtroom means mastering the flexibility needed to anticipate and respond to the changes that accompany trial.

Counsel participating in international

ABA International members come from more than 90 countries, and include private practitioners from across the globe as well as in-house counsel, academics and lawyers in the public sector.

REGISTRATION IS NOW OPEN Our Spring Meeting 2012 is shaping up to be our largest ever with over 1,500 attendees expected. Participate in over 70 cutting-edge CLE programs, twice daily networking breaks and evening receptions at some of the most exclusive venues New York City has to offer.

PROGRAMMING HIGHLIGHTS INCLUDE: • Witness/Participant in Legal History: A Conversation with Ben Ferencz • Update of the Implementation of Key Dodd-Frank and EU Financial Market and Bank Reforms • Managing Through Crisis: Corporate Counsel’s Perspective • Think Before You Tweet – What Everyone Should Know About Social Media • Wither Wall Street? – The Impact of Technology and Globalization on International Financial Markets • The New York Advantage: The Creation of Special New York Court Dockets to Streamline and Resolve International Disputes

For more information or to register, please visit

ambar.org/ILspring2012

Feb / Mar 2012 E X ECUTIV E COUNSEL

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arbitration proceedings need that same facility.

Counsel conducting witness cross-examination must match their exacting preparation with an ability to adapt their questioning to the responses received. Counsel also need to remain flexible regarding closing statements until all witnesses have testified.

Traditional litigation’s broad discovery parameters mean that what actually gets produced at trial represents a strategically developed synthesis of a much larger body of evidence.

Transforming what can be millions of pages of evidence and testimony into a refined, cohesive evidentiary submission requires focused dedication to a compelling theme.

Arbitrators generally arrive at the final hearing well-informed, and they may already have developed a sense of their view of the dispute.

Remaining focused on key themes and evidentiary points deepens a pre-existing positive impression and, perhaps more important, can serve as the basis for convincing an arbitrator that an initial contrary determination deserves reconsideration.

In jury trials, jurors watch the lawyers and the manner in which they conduct themselves. If the jury concludes that a lawyer has said, done or argued something that lacks credibility, it may impute the resulting lack of trustworthiness or believability to the client and the client’s claims.

Arbitrators make similar determinations.

Counsel in international arbitrations should remember that each interaction with an arbitrator is an opportunity to build credibility, and that cultivating credibility early in the proceeding has greater importance in international arbitration proceedings. With the use of witness statements instead of direct examinations, witnesses get little time to establish their own believability. To build and maintain credibility, counsel need to consider the reasonableness of positions taken in written submissions, including witness statements, as well in any pre-hearing interactions or disputes requiring arbitrator input.

Counsel who work to enter the final hearing with an established reservoir of credibility enhance the panel’s view of their client and gain a strategic advantage for cross-examination.

UNDERSTAND CULTURAL QUIRKS Trial lawyers spend a lot of time getting to know the jury. Jury consultants, mock-trials, and research into the likely and ideal make-

up of the jury have become staples of pre-trial preparation. Trial lawyers strive to understand the cultural sensitivities (and biases) of their prospective jury pool and make sure to address them in the selection of evidence and the preparation of witnesses.

Counsel in international arbitrations should consider adopting a similar approach to the cultural differences inherent in an international arbitration. Arbitrators may be selected from multiple foreign countries, as well as the United States. Participants in each country’s legal system brings with them unique and often ingrained cultural assumptions that may influence outcome.

Some legal systems focus on the professional designation of witnesses or participants. Certain titleholders may be considered more credible.

Some systems restrict or change professional designations based on gender, and those differences may be applied within the arbitration itself.

Counsel in international arbitration can not assume that the level of sophistication needed to resolve the dispute necessarily informs all the views of the arbitrator. Instead, counsel will want to consider lessons learned in the jury trial arena, and educate themselves on the specific cultural differences and sensitivities that may arise in their particular proceeding.

The global business community believes in international arbitration. The privacy and

Thomas C. Mahlum is a partner at Robins, Kaplan, Miller & Ciresi L.L.P. His business litigation experience includes multiple trials and international arbitrations. tcmahlum@rkmc.com

Because very little direct examination of witnesses generally takes place at the final evidentiary hearing, international arbitration witness statements are highlydetailed, affidavit-like documents that can run hundreds of pages and include multiple exhibits and attachments. finality of its outcomes have come to outweigh the challenges posed by its procedural requirements. Companies can enhance the benefits international arbitration offers by applying, or engaging counsel who apply, courtroom tactics that help trial lawyers win cases. ■

Feb / Mar 2012 E X ECUTIV E COUNSEL

Crisis Management Should Precede the Crisis

By Micho Spring

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THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

Communications officers and attorneys have traditionally eyed each other warily during times of crisis. The communicators usually want their leaders to speak directly to stakeholders, to acknowledge blame and to discuss corrective steps, the better to end the matter as quickly as possible. The lawyers, on the other hand, are apt to be more cautious, worried that too much talk might trigger liability or compromise legal positions.

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Many companies relegate this preparation But in a 24/7 communications environment to the communications function, overlooking increasingly driven by social media, the time the fact that in an age when communication is for such conflict has vanished, and the tension instant and pervasive, it cannot be confined to between communicators and lawyers is easing. one suite of offices. Preparation must pervade Communicators understand the damage legal an entire corporate structure. Companies need a liability can inflict on a company. Just as imporcorporate culture of anticipation. Many compatant, attorneys have become acutely aware that a company in crisis must also protect its reputa- nies think they have one, but few actually do.

A culture of anticipation is not about plantion, and that strategic and well-executed comning every crisis. The very essence of a crisis munications plays a major role in that effort.

Both have come to understand that once a crisis is that its details cannot be entirely foreseen.

Instead, it is about establishing structures that is under way, there is no time for turf battles or can adapt and stretch to fit any crisis. philosophical disputes.

Crisis plans that attempt to establish They have discovered something else as exactly what steps to take and what prowell: Working together after a crisis strikes is cedures to follow, and especially those that insufficient. The most important choices made are specifically tailored to explicit negative by communicators and attorneys happen – or events, tend to be unavailing because the deshould happen – before a crisis strikes. tails of most crises aren’t known in advance.

These are among the findings of a survey What crisis recently plans must do undertaken is build a crisis

by Weber Relationships must be established, procearchitecture. It Shandwick.

We spoke dures worked out, scenarios anticipated and should delineate which with battleexecutives will tested comtrust established before crises occur. be involved, munications what their executives roles will be and how they will communiand attorneys from major corporations and law cate with each other and the public. Focusfirms to explore how they manage their repuing on roles rather than details makes crisis tation during crises. These professionals have plans more adaptable. Equally important, it come to understand that everyone in a modern helps break down the walls between corpocorporation is a communicator, from the salesrate functions that otherwise would tend to person conducting transactions and the spokesthicken during crises. person blogging online to the executive making To the extent that crises can be anticipated, decisions in the C-suite. crisis teams should be thoroughly educated One key finding of our research is that prepabout how to play them out. Many companies aration, as much or more than reaction, will do this through “devil’s advocate panels” in define how a company is perceived in the aftermath of crisis. That means relationships must be which experts from different parts of a company are convened to consider, for example, established, procedures worked out, scenarios all the implications of a new product launch anticipated and trust established before crises occur. Indeed, the toughest reputation challeng- and devise solutions to potential challenges.

A culture of anticipation also includes estabes virtually always begin as surprise. One crisis lishing an architecture that more quickly brings veteran told us that companies typically fail to issues to the surface. Calling the C-suite with prepare for crises “partly because of how they are structured, and partly because of human na- news of a potential problem used to be seen as a sign of weakness. Today the most devastatture, where people tend to say ‘what happened ing scenario is for the C-suite to be blindsided to the other guy won’t happen to me.’”

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

by a media call indicating a crisis is about to break, or finding out that it’s already underway by reading a tweet or Facebook post.

Corporate structures must encourage the entire organization, and executives in particular, to quickly find problems and A culture of anticipation is about establishing bring them to the surface.

Many CEOs do this by structures that can stretch and adapt to fit making reputation protection a priority at the highest the contours of any crisis. levels of the corporation.

Executives who know they are accountable for reputation management tend to see it as their job to uncover and address problems before they explode.

Companies with a culture of anticipation also understand that the purview of “legal” has expanded beyond just liability. Now the most crisis-seasoned legal counsels see their job as protecting broader company interests.

“Legal issues are clearly important, but not the ones that necessarily should rule the day,” says one former legal counsel and law firm partner.

That is not to say legal counsel no longer need to be concerned about potential liability. The point is that they should anticipate the reactions of multiple audiences, rather than just those of regulators and potential plaintiffs. Often, the overall interest of a company is to facilitate the flow of information, even if doing so enhances the risk of liability.

During a crisis, the worst step any corporation can take is to lock down and cease communicating, but that is what many attorneys are trained to advise. The result tends to be tension between communicators and counsel. That is precisely why relationships must be built, tradeoffs assessed and priorities balanced before crises begin.

“The middle of a crisis is not the time to make friends,” one chief communications officer explained. “You have to have lots of interaction before a crisis hits, and then you’ll have a partnership based on mutual understanding of what counts and who is influential in each world.” If the first time legal counsel works with the communications team is during the hectic first days of crisis, the necessary trust and cooperation between them will not have been built.

The best structured corporations understand that the job of the chief communications officer (CCO) is not merely to push information out at random, nor is the job of legal counsels to shut down that valve entirely.

Instead, CCOs and legal counsel should cooperate to tell a complete and accurate story within the boundaries of legal propriety. To do that, they must establish a partnership before crises strike. That partnership lies at the center of effective crisis management.

Neither CCOs nor legal counsel can anticipate every crisis scenario.

But they can anticipate that crises will occur, and they can anticipate how they will respond. Above all, they can anticipate that whatever the specific contours of a crisis may be, they will need to work together to promote a common goal: protecting a company’s reputation in real time. ■

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Micho Spring leads the Global Corporate Practice as well as the New England region for Weber Shandwick.

She counsels corporate clients on communications in support of their business strategies, reputations and responses to public policy challenges.

She has worked with clients in a wide range of industries and issues, including CEO succession, mergers and acquisitions, litigation and regulatory matters, and corporate responsibility. mspring@ webershandwick.com

54

Euro-crisis Brings Endemic Problems to the Surface Is There Any “There” There?

By Nina Mitz

T

he eurozone’s decentralized structure cannot be compared to the constitutionally established federalism of the United States. The two are very different unions from a structural, fiscal, monetary and a political point of view.

As a key adviser to President Sarkozy put it recently, what we have today is a “Europe of Governments.”

Structurally, the EU is a decentralized confederation with

national governments – particularly those of the big EU countries – jealously maintaining their national prerogatives and vividly remembering and wanting to avoid what can transpire when one country is tempted to dominate the rest of Europe.

The EU was designed from the outset as a compromise between inter-governmentalism, with a decision-making European Council that brings together the Chiefs of States and Councils of Ministers, and supra-nationalism as incarnated

by European institutions, primarily the European Commission (the executive body of the European Union), the Parliament and the European Central Bank (ECB).

The weakening of the Commission over the past few is cannot show a deficit. Thus it cannot support any growth years became obvious during the recent economic crisis. incentive schemes at an EU level. The need to boost the Key decisions have been made by France and Germany, European budget has been the subject of discussion for many and then agreed to or opposed by other countries. The years, but without progress. Today the need for economic battlefield, although seemstimulus puts this crucial issue ingly located in Brussels, has into the limelight. moved to the governments From a monetary point of Key decisions on the Euro-crisis and state departments of each view, the ECB has followed of those countries. the conservative model of the have been made by France and The Commission did not German Bundesbank, with play its real role as an influthe prime objective being to Germany and then agreed to or ential third party for a variety fight inflation. Germany’s of reasons related to the fact scarred memory of preopposed by other countries. that European policy leaders WWII inflation has prevailed, purposely did not want to be despite the fact stagflation or outshone in terms of influence or as crisis managers. Perhaps, recession is the more plausible threat. if the Commission had been able to play its role, many flaws From a political standpoint, anxieties about the lack of and delays might have been avoided. Strong EU leadership democratic legitimacy of the European Commission and the was needed but seemed to be missing. weaknesses of Europe as a global player loom just below the The de facto intra-governmental approach to European surface for many EU citizens, feeding the notion of euroscepdecision-making should be taken into account by American ticism. Yet, it is important not to underestimate the strong corporations doing business in the European market because sentiment in favor of the Euro currency among eurozone it means that a presence in Brussels is not sufficient to influcitizens. With the sovereign debt crisis embroiling the Contience EU policy. Although the Commission has a decisive role nent, recent polls show that support of the Euro has declined in financial regulation, competition and trade matters, EU far less than support of the ECB. There was 28 percent policy approval is still in the hands of national governments. support to the ECB in 2008 and just two percent support Yet, for political reasons, it is unfortunately easier for policy in the autumn of 2011. And despite the crisis, almost half leaders to pretend that a technocratic institution such as the the eurozone citizens polled said they wanted the Euro to Commission is responsible for issuing unpopular decisions. survive. The main reason the EU was formed – to keep peace The lack of courage manifest in this disconnect has contribby curbing nationalistic tendencies – remains present in most uted to the rise in “euro-skepticism.” minds. EU citizens do not want a collapse of the eurozone.

From a fiscal point of view, the eurozone does not have They want it to be better managed. a budget worth mentioning, and the EU’s budget such as it It is often said that European policy leaders were not

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Feb / Mar 2012 E X ECUTIV E COUNSEL

56

How right he was. At that time however, the sufficiently aware of the eurozone’s flaws, or that they did not try to reform it. Of course, no eurozone included only 17 countries. No one anticipated the current financial turmoil. Gerone expected the current traumatic crisis, but they did understand that there would be a need many was not the leading economy in Europe because it was still trying to absorb the costs for coordination of economic policies, strucof integrating East Germany. France, according tural reforms domestically and a reform of the to the Financial Times, was considered to be international financial architecture. the “engine of Europe.” Deficits numbers were In 1998, when the Eurogroup was promoted improving for the first time in many years, and by the French Government as an informal body we were aiming at full employment. allowing all EU countries that shared the same The lack of coordination of the eurozone’s currency to have their finance ministers meet economies was nevertheless already becoming a monthly to share, in a restricted format, commajor concern. The actors knew that a politimon concerns regarding economic policy, the cal effort was needed both country by country objective was to create a forum where future and across Europe. It was not conceivable to coordination of economic policies could be discussed and hopefully implemented. (The ECB continue using the same old tools and processes while the borders of the EU and the eurozone was invited to attend those meetings, but it was were enlarging. not part of the group.) Unfortunately, the EuroNow that the crisis has hit us, indeed a new group remained informal and for various rearapport de force is beginning to appear. It is sons never managed to achieve economic policy still unclear whether it is going to reinforce the coordination. Although governments continued European instituto pay lip service to it, tions and allow many refused to make structural reforms. In The de facto intra-governmental enough reform of the ECB for it play each country, domestic politics prevailed. Risk approach to European decision- a greater role in solving the crisis, management failed. or if instead it will Shortly after the making should be taken into reinforce the intraAsian financial crisis in 1998, one French account by American corpora- governmental process, with a finance minister I worked with, Domitions doing business in Europe few core countries calling the shots in nique Strauss-Kahn, the eurozone. advocated strongly to because it means that a The point is improve the internathat there has tional financial archipresence in Brussels is not been no lack of tecture. He highlighted sufficient to influence EU policy. insight, but rather the deceptive perfora lack of political mance of the rating will to strengthen agencies, which were the European institutions’ leadership and not able to provide early warnings but instead adapt their processes to rapidly evolving downgraded countries in crisis after the turmoil conditions. Conflicting views and an unclear had begun, thereby contributing to acceleravision on the future of Europe have prevailed, tion of the damage. His call was appreciated leaving the project at a standstill for too long. but nothing happened, until the subprime crisis If the eurozone survives this crisis, let us took everyone by surprise. hope that it will have served as a catalyst for Another French finance minister I worked with, Laurent Fabius, told me in 2000, long before a “new Europe.” The United States and the entire world economy have a stake in the sucthe beginning of the financial crisis, that there is cess of single European currency. Meanwhile going to be “a crisis in Europe. Then there will U.S.-based corporations shouldn’t overestibe a new rapport de force and we shall have to mate the influence of Brussels. ■ reconstruct everything from then onwards.”

Nina Mitz, is president and CEO of FTI’s Strategic Communications practice in Paris and a partner of FD International. Formerly she was international communications adviser and spokesperson for three Economy, Finance and Industry Ministers in France: Dominique StraussKahn, Christian Sautter and Laurent Fabius.

She is currently honorary president of the International French Press Center and special adviser to the Institute for Sustainable Development and International Relations. She was made “Chevalier de la Légion d’Honneur” in 2009.

Nina.mitz@fticonsulting.com

Declining Dollar Impacts Outsourcing Market

By James Paine

The value of the U.S. dollar has declined rapidly relative to local currencies in most geographic locations from which outsourced services are provided. Contributing factors include changes in the global economy, the Federal Reserve’s loose monetary policy and historically high U.S. deficits. This decline is impacting the outsourcing market, due to the overwhelming proportion of multiyear U.S. dollar denominated contracts.

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Feb / Mar 2012 E X ECUTIV E COUNSEL

Specifically, it is compressing the profit margins on con-

Service providers are looking at ways to increase price and

tracts because the cost of providing outsourced services (e.g.,

profitability on existing contracts. Customers are seeing

human capital, equipment, facilities and other resources)

additional fees, including change orders, a decrease in the

has dramatically increased relative to the corresponding U.S.

number of individuals assigned to provide services, the use

dollar-denominated revenues.

of less experienced and less expensive personnel, a shift to

The narrowing margins are driving a number of important developments in the outsourcing marketplace, and customers of outsourced services should keep them in mind.

higher risk and lower cost geographies, and a movement toward shared platforms and service centers.

When the value of the dollar was high relative to local

As currencies in Asia, Eastern Europe and other geographies

currencies, service providers were able to profit, provide

from which outsourced services are provided gain against the

excellent service, and still save the customer money. Now

U.S. dollar, service providers are finding that the local cost

that relationships between customers and service providers are under stress, customers should be on the

To guard against “price creep,” customers should require a detailed description of services in their contracts.

lookout for the following activities, each of which can cause “price creep” or adversely impact quality of services.

• Change Orders. Service providers are aggressively trying to sell “add on” services and charge for activities that were previ-

58

of providing outsourced services are consuming an increas-

ously included in the base charge. If a customer fails to

ing share of dollars received from customers. While many

manage the outsourced relationship effectively, these ef-

service providers employ sophisticated hedging mechanisms

forts can result in unnecessary services and erosion of the

to protect against currency risk, hedging can only reduce, not

savings used to justify the initial outsourcing. To guard

eliminate, the risk that continued deterioration of the dollar

against price creep, customers should require a detailed

could eat away their margins.

and results-driven description of services in their con-

As a result, service providers are contractually shifting

tracts, allocate sufficient resources to manage the contract

the risk of exchange rate fluctuations to their customers by

and monitor performance, and attempt to contractually

insisting on inflation and exchange rate adjustments in new

bind the scope of activities that qualify as “new services”

transactions and renewals of existing contracts.

that require the payment of additional fees.

Many service providers are also seeking higher prices in

• Service Quality. In some cases, pressure on service provid-

new transactions and renewals of existing contracts. As a

ers to maintain profit margins has resulted in an audit of the

result of the price pressure on service providers, the pro-

profitability and potential of customer accounts, with reallo-

jected cost savings on new transactions is rapidly decreas-

cation of resources among accounts based on profitability.

ing. This is causing a significant chill in the outsourcing

Thus, after years of good service, a customer may find the

market and a noticeable decline in the number and size of

service provider is devoting less in the way of personnel and

new transactions.

equipment to its project, and quality may suffer. Unless there

The decline in value of the dollar has resulted in an

are clear contractual commitments regarding the quality of

erosion of the size and profitability of the existing contract

service, number and qualifications of personnel, software

backlog of many service providers. They are finding that

and equipment, customers are at risk that the provider may

their volume of pending transactions has diminished sig-

allocate the fewest and least expensive resources required to

nificantly, at the same time the profitability of their existing

meet their contractual commitments.

contract backlog has diminished.

The erosion in the backlog of transactions is contributing to a number of other developments in the marketplace.

• High Risk Locales. As wages rise in many of the traditional outsourcing geographies, service providers are locating service centers in new lower-cost locales.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO Feb / Mar 2012

In many cases this exposes customers to political instability, regulatory issues, security issues and cultural problems. Customers should be aware of these risks and protect against them by requiring contractual control over the designation of geographies from which the services are provided.

• Abandonment. In some extreme cases, service providers have elected to abandon the contract to avoid the obligation to provide services at a loss.

Many customers do not elect to address the issue of abandonment in their contract, either because they do not foresee it or they believe it would constitute willful misconduct, which is often excluded from both the direct damages cap and consequential damages exclusion.

However, in some states, abandonment of the contract is not considered willful misconduct and would not be excluded unless it is specifically addressed.

Consequently, customers should require that their contracts prohibit the actual, threatened or constructive abandonment by the service provider, allow the customer to obtain an uncontested injunction compelling specific performance in the event of an abandonment and exclude damages resulting from an abandonment from the direct damages cap and consequential damages exclusion.

Prospective customers who understand how the decline of the U.S. dollar impacts the service provider’s bottom line can negotiate for terms

James Paine is a partner at Kilpatrick Townsend & Stockton LLP. His practices is focused on strategic outsourcing, systems integration, joint venture shared services, ERP licensing and support, telecommunications and e-commerce arrangements. Prior to joining the firm, he was the primary counsel for information technology and data security matters at The Home Depot.

Jpaine@ kilpatricktownsend. com

and conditions that protect them from the risks associated with a falling dollar and the service provider’s drive to maintain its profit margin. These terms and conditions include clear statements of services, the specification of strong service levels, favorable change control

Existing customers should meet the service provider’s enhanced focus on profitability with an increased focus on value.

processes and rights to approve changes in location, personnel and resources.

Existing customers should meet the service provider’s enhanced focus on profitability with an increased focus on value. Customers should be familiar with the protections that exist under their outsourcing contract and should make sure that the governance team knows what the contract requires of the service provider (both in terms of the scope of services and minimum performance standards) and what types of requests could lead to additional charges.

Where existing protections are not enough, key terms of existing contracts may be open to renegotiation – especially if the customer can offer the potential of new work for the service provider’s ailing pipeline. ■

59

Local Jurisdiction over Foreign Companies Partial ClariďŹ cation from Two Supreme Court Decisions

By Martin V. Totaro and Robert K. Kry

60

S

upreme Court decisions often have a large impact on the business community without receiving much press, especially when the case involves a technical or procedural issue, so it comes as no surprise that two of the most important cases from last term received relatively little publicity.

Both involved the scope of personal jurisdiction over foreign

companies – that is, when a foreign company can be sued in a particular forum chosen by the plaintiff.

In Goodyear Dunlop Tires Operations, S.A. v. Brown, the Court addressed whether a foreign company whose products wind up in the forum state may be sued on claims unrelated to those products. In J. McIntyre Machinery, Ltd. v. Nicastro, the Court addressed whether

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO FEB / MAR 2012

such a company may be sued on claims related to the products, when the company itself was never present in the forum state.

Those two issues could affect virtually any corporation – including both foreign companies sued in the United States and U.S. companies sued in states other than where they are headquartered or incorporated – and they should be on the radar of corporate executives and counsel alike.

PERSONAL JURISDICTION OVERVIEW

The Due Process Clause of the U.S. Constitution prohibits a court from adjudicating claims against an out-ofstate defendant unless it has personal jurisdiction over the defendant.

In these cases, the Court distinguishes between two types of personal jurisdiction, general and specific. There is general jurisdiction when a company’s contacts with the state are so “continuous and systematic” that the company may be sued there regardless of the nature of the claim. Specific jurisdiction requires less extensive contacts with the forum state, but it allows the court to adjudicate controversies relating only to those contacts.

The Goodyear decision concerned general jurisdiction, while McIntyre concerned specific jurisdiction.

In Goodyear, two young soccer players from North Carolina were riding a bus on the way to a French airport, about to board a plane home, when their bus overturned and they were killed. The boys’ parents sued Goodyear USA and three of its subsidiaries for wrongful death in North Carolina state court, alleging that the crash was caused by a defective Goodyear tire manufactured and sold by the subsidiaries.

The state court exercised jurisdiction over Goodyear USA, which had plants in North Carolina and was registered to do business there, and regularly engaged in commercial activity there. The plaintiffs also argued that the subsidiaries could be sued in North Carolina because a small percentage of their tires ended up in

North Carolina, although they did not include the type of tire involved in the bus crash.

Goodyear USA did not contest personal jurisdiction, but the subsidiaries did. The state court acknowledged that the subsidiaries were not subject to specific jurisdiction in North Carolina because the parents’ claims were not connected to any activities by the subsidiaries there. A variety of factors, moreover, weighed against general jurisdiction: (1) The subsidiaries were not registered to do business in North Carolina; (2) the subsidiaries had no place of business, employees, or bank accounts in North Carolina; (3) the subsidiaries did not design, manufacture, or advertise their products in North Carolina; (4) the subsidiaries did not sell or ship tires to North Carolina; and (5) the subsidiaries did not solicit business in North Carolina.

The state court nonetheless concluded that it had general jurisdiction because the subsidiaries had placed their tires in the “stream of commerce,” and some of those tires ended up in North Carolina.

The Supreme Court unanimously rejected that theory. Typically, it noted,

claims unrelated to those products.

Goodyear’s subsidiary had sold tires that ended up in the United States, but the plaintiffs’ claims had nothing to do with those tires. The Court accordingly reversed the state-court judgment.

In McIntyre, an employee of a scrap-metal company was injured in New Jersey while operating a metalshearing machine. The employee filed a product liability suit in New Jersey state court against the machine’s English manufacturer. The plaintiff argued that the manufacturer was subject to specific jurisdiction for multiple reasons. The company used a distributor to sell its machines in the United States. Company officials attended annual conventions in the United States to advertise its machines (although the conventions took place in states other than New Jersey).

Finally, although the English manufacturer neither advertised in New Jersey nor sent its products there, a small number of the machines—including the machine that injured the plaintiff— ended up in the state.

The state court concluded that it had jurisdiction. The court applied its interpretation of the stream-of-commerce theory and held that jurisdiction

A foreign company will not be subject to general jurisdiction simply because it placed products in a stream of commerce that ended up in the state.

courts invoke the “stream of commerce” in asserting specific jurisdiction over a defendant that placed a product in the stream of commerce that eventually caused harm inside the forum state. But that theory could not support general jurisdiction over

was proper because the English manufacturer knew or should have known that “its products are distributed through a nationwide distribution system that might lead to those products being sold in any of the fifty states.”

Six members of the Supreme Court

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Feb / Mar 2012 E X ECUTIV E COUNSEL

Martin V. Totaro is

62

an associate at MoloLamken LLP. He practices in all aspects of appellate litigation in the federal courts of appeals and the U.S. Supreme Court, and at the trial level with motions practice and issue analysis. He has represented business associations, individual criminal defendants, veterans, as well as corporations in a variety of industries. mtotaro@ mololamken.com

rejected that theory, but they were unable to agree on a rationale.

Justice Kennedy, Chief Justice Roberts, and Justices Scalia and Thomas concluded that the defendant could not be sued in New Jersey because it had not engaged in any activities in New Jersey that revealed “an intent to invoke or benefit from the protection of its laws.”

The defendant’s marketing and sales efforts, for example, were directed at the United States generally rather than New Jersey specifically.

The defendant had no office in New Jersey. It paid no taxes there. It did not advertise there. And it never sent any employees there. As a result, the plurality concluded, the company could not be subject to personal jurisdiction in the state.

Justice Breyer, in an opinion joined by Justice Alito, concurred in the judgment on narrower grounds. Justice Breyer agreed with the plurality that the mere fact that the plaintiff was injured in the forum state is insufficient. But he did not agree that a defendant must have direct contact with the forum state to subject itself to specific jurisdiction. He did not elaborate on what a company might do short of targeting the forum that would establish specific jurisdiction. He did, however, pose several hypotheticals – such as a company that sold products on the internet and shipped them to a forum state using an intermediary like Amazon. com – that he left to be resolved in future cases.

THE TAKEAWAY

The Supreme Court’s unanimous decision in Goodyear provides the business community with clear guidance. A state may exercise general jurisdiction over a foreign company, or a U.S. company based in another state, only in the narrowest of circumstances. A foreign company will not be subject to general jurisdiction simply because it placed products in a stream of commerce that ended up in the state.

For all the certainty provided by Goodyear, however, the Supreme Court’s fractured decision in McIntyre leaves the rules governing specific jurisdiction unpredictable.

If the plurality in McIntyre had been a majority, those rules would be much clearer. To be subject to jurisdiction, a defendant would have to carry on activities in, or engage in conduct purposefully directed at, the forum state. It would make no difference that a defendant’s products eventually made their way into that state through the stream of commerce.

Because the Court lacked a majority opinion, however, companies must operate in a shadow of uncertainty with regard to specific jurisdiction. There is no bright-line rule that allows a company to know when it is subject to specific jurisdiction based on its sales in a particular state.

Rather, a company must face national or regional marketplaces knowing that it might be subject to jurisdiction in a state if enough of its products end up there.

Just where that tipping point is remains unclear. As Justice Breyer noted, there are numerous types of transactions involving a wide range of products sold to a wide range of consumers that McIntyre left unaddressed.

Does specific jurisdiction exist in the customer’s home state if the customer purchases a product over the internet from his home computer? What if the transaction is mediated by a third party like Amazon.com? And what if the company markets its products through pop-up advertisements?

McIntyre left those and many other questions unresolved. Until the Court revisits the issue, companies will have little guidance about whether products they place in the stream of commerce could subject them to jurisdiction wherever they wind up. ■

Robert K. Kry is a partner at MoloLamken LLP. His practice focuses on appellate litigation and assisting clients with motions practice and issue analysis at the trial level. He represents clients before the United States Supreme Court, the federal courts of appeals, and other federal and state courts in variety of subject areas, including constitutional law, business litigation, securities fraud, criminal law and intellectual property. rkry@ mololamken.com

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO FEB / MAR 2012

Settlement Negotiations May Not be Conf idential

Many Exceptions to Rule 408

By Timothy J. Malloy, Sandra A. Frantzen and Jesse T. Dyer

63

T

he most popular way to end a lawsuit is through settlement. In fact, less than two percent of all civil cases filed in federal courts ever reach trial. During settlement negotiations, parties often have candid and seemingly off-the-record discussions about the issues – sometimes under the mistaken impression that these discussions are protected and cannot be used against them in court, under Rule 408 of the Federal Rules of Evidence.

Rule 408 prohibits the use of evidence of “a compromise or an offer to compromise,” including conduct or statements made in compromise negotiations, when offered “to prove liability for, invalidity of, or amount of a claim that was disputed as to validity or amount,” or “to impeach through a prior inconsistent statement or contradiction.”

While the Rule certainly limits the admissibility of settlement communications, the law is replete with exceptions. This means that parties sometimes find that settlement communications thought confidential become the basis for future disputes.

A QUESTION OF PURPOSE Courts favor settlements because they reduce costs, conserve judicial resources and allow parties to avoid the uncertainties of

litigation. It is in this context that we find rules of evidence that create a type of privilege surrounding certain settlement communications, prohibiting the admission of such evidence in later lawsuits. The reasons underlying Rule 408 are straightforward.

However, Rule 408 is not an absolute ban on settlement evidence. Indeed, the exceptions sometimes seem to overshadow the ban. If a party can articulate some purpose for offering the evidence of the settlement or negotiations other than to impeach the opposing party, or to prove liability for, invalidity of, or amount of the claim, then those communications may be admissible.

For example, in Bradbury v. Phillips Petroleum, landowners alleged that a petroleum corporation and its contractor were wrongfully drilling on their land. The landowners tried to introduce evidence of prior settlement agreements between the corporation and other landowners who raised similar allegations. The landowners argued that the settlement evidence was admissible because they intended to use it for purposes other than those prohibited by the Rule, including to demonstrate a course of reckless conduct, to prove that the conduct was intentional, and show the relationship between the corporation and its contractor.

Feb / Mar 2012 E X ECUTIV E COUNSEL

Timothy J. Malloy is a founding partner and board chairman at McAndrews Held & Malloy. He has been involved in numerous multi-million dollar verdicts, awards, and settlements as lead trial counsel. tmalloy@ mcandrews-ip.com

64

While the Tenth Circuit determined that Rule 408 applied to the prior settlements (even stating that, “when the issue is doubtful, the better practice is to exclude evidence of compromises or compromise offers”), the court nonetheless found that Rule 408 does not exclude compromise evidence in all situations, and does not require exclusion when offered for other purposes, including those articulated by the landowners.

In Rhoades v. Avon Products, the Ninth Circuit found that settlement discussions could be admitted as jurisdictional evidence. There, the plaintiff filed a declaratory judgment action seeking a declaration that it was not infringing the defendant’s trademark. During pre-lawsuit settlement discussions, the defendant sent the plaintiff a letter alleging trademark infringement and threatening to sue. The letter stated that it was, “for settlement purposes only and shall not be admissible for any purpose in any legal proceeding.”

PRE-SETTLEMENT CONFIDENTIALITY AGREEMENTS Most parties entering settlement discussions want to settle. To that end, parties want to speak freely without concern that their statements, actions and decisions will later be used against them in court. While it is possible to navigate through the minefields of Rule 408, one may avoid the problem entirely in certain circumstances by crafting a mutually agreeable, exception-free confidentiality agreement before engaging in settlement discussions. Parties can agree that the settlement discussions will not and cannot be used for any purpose other than settlement.

They can also carve out exceptions where the discussions can be used (e.g., to prove fraud or breach of the agreement). Such agreements allow fruitful and open settlement discussions while eliminating the concern that the communications may later become evidence.

In the now notorious dispute between Mark Zuckerburg and the Winklevoss twins, Zuckerburg evoked a pre-settlement confidentiality agreement after the Winklevosses tried to introduce evidence from settlement discussions to prove their securities fraud claims.

As discussed in Facebook v. ConnectU, before settlement negotiations the parties signed a confidentiality agreement providing that all statements “made during the course of mediation or in mediator follow-up thereafter at any time prior to complete settlement of this matter are privileged settlement discussions ... and are non-discoverable and inadmissible for any purpose including in any legal proceeding ... No aspect of the mediation shall be relied upon or introduced as evidence in any arbitral, judicial, or other proceeding.”

After the settlement agreement was signed, the Winklevosses claimed that they were misled about the value of Facebook’s stock during the discussions. While the communications could have been admissible despite Rule 408, the Ninth Circuit held that the pre-settlement confidentiality agreement precluded their introduction. Because the Winklevosses could not present evidence that they were misled, the appeals court determined that the securities fraud claim must fail and affirmed the district court’s decision to enforce the settlement agreement.

Settlements often make good business sense, but require uninhibited, off-the-record discussions. Thus, the next time your company is facing settlement discussions, consider whether it would be worthwhile to supplement the rules of evidence with a pre-settlement confidentiality agreement tailored to the matter at hand. Otherwise, what is said in confidence may not be confidential. ■

Sandra A. Frantzen is a shareholder at McAndrews Held & Malloy. She focuses on patent and trademark litigation at both trial and appellate levels. sfrantzen@ mcandrews-ip.com

Jesse T. Dyer is a student at DePaul College of Law. He will be joining McAndrews Held & Malloy as an attorney in the fall. jdyer@ mcandrews-ip.com

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