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Deciding When and How to Litigate Patent Infringement
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Editor’s Desk This issue of Executive Counsel features some advice executives aren’t used to getting from their attorneys: Think twice before you spend money on legal services. Kelly Phair McCarthy and Keith G. Askoff note that protecting a brand via trade and service marks is a boundless task in theory, so protection needs to be measured against cost. They have some suggestions about how to assess specific needs and deal with them within budget. Michael Rader offers the same type of advice about a far more expensive undertaking, patent infringement litigation. That should be music to the ears of many CFOs and general counsel who are used to staring into the bottomless pit of intellectual property litigation. Rader admits that some companies are best-served by aggressively asserting its patents against all perceived infringers, but says the opposite approach, transferring the fight from the court to the marketplace via cross-licensing deals, might well work better for others. He advocates uniformity in approach so a portfolio of cases can be managed in accordance with overall business strategy, and keeping the litigation team lean except in the most complex cases. Those are examples of how the legal profession is adopting to a recession that began in 2008, and seems to be hanging on despite predictions of recovery. Another area of legal services might be said to be a latter day manifestation of something further back in economic history, the industrial revolution, in which human labor, in this case skilled and very high-priced labor, is being replaced by a machine. The labor is discovery and the machine is a computer. As Christopher Wall and Lisa A. Spinelli write, discovery now largely involves the exchange of electronically stored information, and often comprises the bulk of litigation costs. Electronic discovery has spawned a brand new industry, and the development of countless software programs designed to produce information efficiently and avoid the massive sanctions that courts have imposed if they think it is being withheld or, worse yet, erased. Wall and Spinelli write about how a task once undertaken by outside attorneys chosen and supervised by in-house counsel has evolved into three-pronged undertaking involving specialized consultants and the company’s IT as well as its legal department. They advocate for more legal department involvement and better communication between legal and IT in what can be a budget-saving or a budget-busting endeavor. In our next issue we will have a look at lobbying, an industry that seems to thrive whether times are good or bad, and has recently gone global.
Bob Nienhouse, Editor-In-Chief Editor@executivecounsel.info
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What I know: I know more about manufacturing OSB structural panels than you might imagine. I know that my outside counsel must know more about manufacturing OSB structural panels than you might imagine. I know I physically can’t practice law in every state where we conduct business, or I would. I know SEC football. I know my two dogs own my house; I simply pay the mortgage. I know I have to have confidence my outside counsel will represent my company’s interests as aggressively as I would. I know that I can count on Bradley Arant Boult Cummings to do just that. That’s what I know. Laura E. PrOctOr aSSOcIatE GEnEraL cOunSEL OvEr LItIGatIOn LOuISIana-PacIfIc cOrPOratIOn
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TRAVEL SECURITY HOLES AND HOW TO PLUG THEM Robert D. Brownstone Hold your tongue and encrypt your data.
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TRANSFERRING PERSONAL INFORMATION IN BANKRUPTCY James M. Kunick and Michael J. Goldstein Privacy policies survive the process.
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STATE AGs EXTENDING THEIR REACH Bernard Nash, Divonne Smoyer & Milton A. Marquis The new regulators.
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KEEPING THE COMPANY’S NOSE CLEAN AFTER MATRIXX Robert K. Kry A Supreme Court case addresses materiality; questions remain.
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POST-EMPLOYMENT RESTRICTIVE COVENANTS FARE BEST WITH “CHOICE OF FORUM” By Jeffrey S. Boxer and Emily Milligan Some states will ignore a choice of law clause.
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THE NEXT BIG THING IS TINY Jean H. McCreary Agencies are developing nanotech regs.
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PROTECTING YOUR BUDGET WHILE PROTECTING YOUR BRAND Kelly Phair McCarthy and Keith G. Askoff Many jurisdictions, fi nite budgets.
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M&A IN CANADIAN OIL AND GAS John H. Kousinioris and L. Alan Rautenberg More transactions as debt markets recover.
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INTELLECTUAL PROPERTY
HUMAN RESOURCES
Deciding When and How to Litigate Patent Infringement
Weed in the Workplace
Michael N. Rader When to say “don’t go there.”
Louis L. Chodoff and Michelle M. McGeogh Disabled or just stoned?
26 E-DISCOVERY
Early Case Assessment is Defensible, Strategic and Smart Christopher Wall and Lisa A. Spinelli Mitigate costs, reduce volume of data.
22 GOVERNANCE
Government and Shareholder Oversight Bring New Challenges Brett Baker and Krystle Gomez Regulations, inquiries and potential liability.
28 CANADA / CROSS-BORDER
Choosing a Winning Brand Name in Canada By Keltie Sim Make or break for a product launch.
31 CROSS-BORDER M&A UPDATE:
Mega Mining Deals for Q1 2011 Divya Balji Iron and gold lead the way.
54 WHO SAYS Excerpts from Congressional hearings, commissions and official reports.
Image source: iStockphoto All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information or retrieval system, without the written permission of the publisher. Articles published in Executive Counsel are not to be construed as legal or professional advice. Executive Counsel Magazine (ISSN 1932-9024) is published six times per year by Nienhouse Media, Inc., 640 Park Avenue, Hinsdale, IL 60521-4644 Printed by Quad Graphics | Copyright © 2011 Nienhouse Media, Inc. Email submissions to editor@executivecounsel.info or go to our website www.executivecounsel.info for more information. POSTMASTER Send address changes to: Executive Counsel, 640 Park Avenue, Hinsdale, IL 60521-4644 Periodical postage paid at Hinsdale, Illinois and additional mailing offi ces.
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Executive Summaries Page 14
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Deciding When and How to Litigate Patent Infringement
Weed in the Workplace
Government and Shareholder Oversight Bring New Challenges
By Michael N. Rader Wolf, Greenfield
By Louis L. Chodoff and Michelle M. McGeogh Ballard Spahr LLP
Deciding whether or not to litigate a patent infringement case should be an orderly process “subject to the same rigorous evaluation process as any other multi-million dollar business decision,” the author says. An overall strategy, established in advance, should reflect a thoughtful analysis of the company’s strengths, weaknesses and the market that it’s in. In some cases a blanket approach will make sense. For example, a startup company in a market with low entry barriers might decide to assert its patents aggressively against all perceived infringers. More commonly, a case-by-case evaluation is warranted. The strength of the legal case needs to weighed against the potential damage of the infringement. If, for example, the infringing product is positioned in a different market segment or price point, a lawsuit may not be justified economically, whereas if it would be serious competition, litigation may be warranted even with a lukewarm legal case. Keep in mind that infringement lawsuits often can prove to be the beginning of a business discussion. For a defendant, important strategic questions sometimes can be answered early with nothing more than a phone call to the plaintiff or its counsel, and a simple question: “What do you hope to achieve through this lawsuit?” In litigation, the author advises, keep the team lean, two or at most three lawyers, except in the largest and most complex cases. Identify the legal arguments and trial themes that will win the case, and pursue them.
State laws allowing use of marijuana for medical purposes can cause problems for employers. Questions arise when such laws interact with other statutes such as federal law making use or possession of marijuana illegal, the Americans With Disabilities Act and the Drug-Free Workplace Act. Discharging a person who uses marijuana medically can result in costly litigation. Fifteen states and the District of Columbia have laws legalizing medical marijuana. Bills that would legalize medical marijuana use have been recently considered, or are being considered, in Alabama, Connecticut, Delaware, Idaho, Illinois, Iowa, Kansas, Maryland, Massachusetts, Mississippi, New Hampshire, New York, Oklahoma and West Virginia. State laws vary greatly. Many simply protect authorized users of medical marijuana from prosecution under state criminal laws that prohibit possession, manufacture or distribution of controlled substances and are silent on the employer-employee relationship. Some states including Arizona, Colorado, Hawaii, Michigan, Montana, New Jersey, New Mexico and Vermont address the effect of medical marijuana on the workplace, but in a limited fashion. New Jersey and Montana say that the law does not require an employer to accommodate the medical use of marijuana in the workplace. Arizona’s statute expressly prohibits employment discrimination based on medical marijuana use, but does not cover an employee who “used, possessed or was impaired by marijuana” at work. The authors provide a hypothetical and a list of tips on what employers can do to limit liability involving employees who use medical marijuana.
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By Brett Baker and Krystle Gomez Troutman Sanders LLP For executives, fallout from the economic turmoil of the past three years includes new regulations, new responsibilities and greater potential for personal liability. Shareholders are demanding increased transparency and oversight. Meanwhile more familiar and traditional challenges, like the need to maintain employee morale while turning a profit, persist. With this as background, the authors identify three important trends that executives need to be aware of. First, legislators and regulators are aggressively pursuing financial reform and consumer protection, largely by way of the Dodd-Frank legislation. For companies and their executives, this translates into a major compliance issue. Second, there is an increased potential for personal liability, complicated by the fact that D&O insurance coverage generally is becoming more circumscribed. The third trend is increased shareholder activism. One example cited by the authors is a campaign by CALPERS (the California Public Employees’ Retirement System) at some top companies, requiring shareholder support for board decisions. This trend, however, is balanced to some extent by some recent Delaware Court of Chancery and California Court of Appeals decisions that the authors characterize as supporting “traditional notions of accepted business practice.” The authors detail several of these decisions and their implications. For example, in In re Dollar Thrifty Shareholder Litigation, the Delaware Court of Chancery “reinforced precedent that a board is not required to sell the company whenever a high market premium is available. Instead, the board is allowed to focus on the fundamental long-term value of the company.”
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Early Case Assessment is Defensible, Strategic and Smart
Choosing A Winning Brand Name in Canada
Mega Mining Deals for Q1 2011
By Christopher Wall and Lisa A. Spinelli Kroll Ontrack
By Keltie Sim Smart & Biggar
Discovery, which now involves primarily electronically stored information (ESI), often accounts for the bulk of litigation costs. “In assessing a case and facing mountains of data,” the authors write, “with deadlines to meet and with limited time and resources, counsel must determine what to preserve, how to preserve it, for how long, and how to effectively identify relevant or potentially relevant documents.” The authors make the case that Early Case Assessment (ECA), a process on which their firm consults, is an effective way to address these problems. ECA involves early winnowing of data and subsequent reduction in review costs, as well as a better understanding of strengths and weaknesses of the case. It is a systematic and defensible process that “provides transparency for the benefit of opposing counsel, making it easier for both parties to work together and collaborate on the selection of search terms,” the authors write. Among findings of a Kroll Ontrack survey are that 29 percent of companies currently employ ECA, and that IT personnel are more aware of it than the lawyers. The authors advocate lawyer involvement in the selection of a product, noting that ECA is a strategic as well as a technical process, and that legal expertise is required to gauge the usefulness of particular features and how they might be integrated into case strategy. Companies need to consider at the outset whether to opt for a hosted product or buy a product and install it.
Selecting, clearing and developing a brand name are important components of a new product launch. Some risk is inherent, with a cease-and-desist or injunction among the worst case scenarios, but risks can be systematically minimized, and the effort is likely to be worth the cost. A brand typically will be more valuable if ties into existing brands or product lines. So-called “descriptive” brands, i.e. those that convey an understanding of the nature of the product, are generally considered “weak” because they are more likely to already have been chosen by others, and thus more likely to generate complaints or be difficult to protect in a future infringement case. The Canadian Trade-marks Act prohibits marks that are “clearly descriptive,” although after a long period of use a descriptive mark can gain protection. A strong mark, legally speaking, is one that has no meaning in relation to the product or service. These marks can become very valuable if over time they become associated with a product, as occurred for example with Kodak and Honda. In general there is tension between the desire of marketing professionals to choose descriptive brand names and the desire of trade-mark professionals to steer away from them. A compromise is when a brand name is “suggestive” rather than “clearly descriptive.” Registration of the brand name in the Canadian Trade-Marks Office is not required, but it’s useful because it provides some protection and leverage in the event of a dispute.
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By Divya Balji mergermarket
A relatively strong Canadian dollar spurred acquisitions of U.S. companies by Canadian companies in the first quarter of 2011. More than half of the 82 announced deals that took place in Canada were U.S.-Canadian. “Canadian companies are apt to be looking to the U.S. for their next acquisition opportunity,” said Charles Knight, Partner, National Leader M&A Transaction Services at Deloitte Canada. “There are many more growth opportunities in the U.S. relative to the Canadian marketplace.” The traditional problem for Canadian companies is that the Canadian market is smaller than the U.S. market and they need to go global to seek opportunities, Knight explained. The mining sector stood out with multi-billion dollar deals, e.g. the CAD 4.9bn purchase of Consolidated Thompson Iron Mines by Cliffs Natural Resources, a deal now approved by Investment Canada. Fraser Milner Casgrain LLP is Consolidated’s legal advisor. Cassels Brock Blackwell LLP is acting as legal advisor to the transaction committee for Consolidated. Jones Day and Blake, Cassels & Graydon LLP are acting as legal counsel to Cliffs. California-based Capital Gold also saw a USD 363m hostile takeover bid from Timmins Gold of Vancouver, following a friendly merger announcement with Gammon Gold of Toronto, valued at USD 324m. For the rest of 2011, expect more of the same – mega-deals coming from sectors like mining, financial services and consumer, and mid-market deals from less active sectors like TMT (telecom, media and technology), real estate, business services, and industrials and chemicals.
EXECUTIVE COUNSEL JUNE/JULy 2011
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Travel Security Holes and How to Plug Them
Transferring Personal Information in Bankruptcy
State AGs Extending Their Reach
By Robert D. Brownstone Fenwick & West LLP
By James M. Kunick and Michael J. Goldstein Much Shelist
By Bernard Nash, Divonne Smoyer and Milton A. Marquis Dickstein Shapiro LLP
A frequent traveler who advises clients and colleagues on information security and data leakage, the author has devised a series of routines to guard against disclosure of client confidences and private information while traveling. He notes that the problems caused by loose-lips are multiplied by cellphone use, especially in view of the loud tone of voice employed by people who use them on buses, trains and planes. He refers to “Amtrak Bob” and “Acela Jim,” lawyers who famously shot their mouths off in public and embarrassed their firms and themselves by disclosing confidential information in the process. He says that travelers should be especially careful when using laptops on planes. He suggests renaming folders and documents that bear client names before boarding, and encrypting laptops, as well as other portable devices. Not only is the data protected if they are encrypted, but in case they are lost or stolen the duty to give notice of breach is excused. Upon return to the United States from overseas, the contents of a laptop or other digital devices are subject to inspection at the discretion of Customs officials. The author advises using a loaner laptop that has no confidential data, doing sensitive work via a virtual private network connection, and wiping the hard drive before the flight home. He notes that it is much more dangerous to lose a stray electronic document somewhere “virtual” than to leave a piece of paper in a physical location.
Businesses generally collect personal information under the terms of privacy policies that make promises about how it will be protected and to what extent it will be shared. These policies govern the treatment of the information, not only in the context of day-to-day business operations but also in respect to a sale of the assets of the business. The FTC has taken the position that transferring personally identifiable information in violation of an applicable privacy policy, even when it is part of a more comprehensive sale of the assets of a business, can constitute an unfair or deceptive trade practice under the Federal Trade Commission Act. Such transfers may also violate applicable state consumer protection laws. In the bankruptcy context, the U.S. Bankruptcy Code expressly limits a bankruptcy trustee’s ability to transfer personally identifiable information in a manner that is inconsistent with the debtor’s privacy policy, unless one of the following conditions is met: The transaction is consistent with the privacy policy (for example, there is a carve-out that allows the information to be sold); or following the appointment of a consumer privacy ombudsman, proper notice and a hearing, the court finds that no showing was made that the transfer would violate applicable law and approves the transaction. The authors provide a case in point, the bankruptcy of a magazine where the trustee’s proposed sale of private information along with other assets was not allowed.
Over the past two decades state attorneys general have evolved into key regulators who pursue legal and policy matters that have nationwide implications. Although AGs historically have been concerned about consumer protection on the local level, increasingly they are shifting their focus more broadly to investigate business practices outside the borders of their states and well outside traditional consumer protection matters. Congress has encouraged AGs to tackle issues of nationwide concern by including AG enforcement provisions in a number of new federal laws. In recent years AGs have delved into public health, privacy, climate change, and consumer finance matters, including credit card fees and mortgage foreclosure and principal write-downs. Many companies do not fully appreciate their exposure to state AGs, believing that they are outside their jurisdiction. Airlines, among others, have faced AG-led opposition to mergers. AG investigations have generated some of the largest monetary settlements in history and have brought about pervasive changes in the practices of many businesses. The combination of the use of private counsel, the power of pooling resources into a multistate action, and the application of the common law tort of public nuisance has become a model for AG activism. Some AGs have brought litigation based on perceived failures of federal regulation. Others have sued to challenge such regulation. The authors cite numerous examples of successful litigation by AGs, and they provide a check list of policies a company can follow to minimize their exposure.
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THE MAGAZINE FOR THE GENERAL COUNSEL, CEO & CFO
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Keeping the Company’s Nose Clean After Matrixx
Post-Employment Restrictive Covenants Fare Best with “Choice of Forum”
By Robert K. Kry MoloLamken LLP
The standard for “materiality” under the federal securities laws was addressed in a Supreme Court decision earlier this year. In Matrixx Initiatives, Inc. v. Siracusano, the Court undercut what had been considered a clear materiality standard, at least with regard to so-called adverse event reporting in the pharmaceutical industry. Such reports needed to be statistically significant in order to rise to the level of being “material.” The Court in Matrixx, taking note of some compelling evidence regarding problems with a zinc nasal-spray cold remedy, said the lack of statistically significant evidence does not necessarily preclude a finding of materiality. The materiality standard is important because the Securities Exchange Act makes it unlawful to misrepresent or omit a “material fact” if doing so will result in a misleading statement. The Matrixx decision upheld a Ninth Circuit decision overruling a district court’s dismissal of a securities class action targeting Matrix. The Court said that in a 10-Q statement and in some public communications, the company may have been culpable in failing to refer to the adverse information it had received.The decision did not say that statistically significant evidence is irrelevant, only that it is not necessarily dispositive and that the question is “fact-specific.” This decision will make it harder for companies to get securities cases dismissed and “all the more important for counsel to err on the side of caution in advising a client about its disclosure obligations,” the author writes.
By Jeffrey S. Boxer and Emily Milligan Carter Ledyard & Milburn LLP A company that wants to maximize its chances of being able to enforce a postemployment restriction on competition or solicitation should include a choice of forum clause in the covenant. “A choice of law clause alone is rarely enough to save a restrictive covenant in a jurisdiction where enforcement is disfavored,” the authors write. “Courts in states that are more skeptical of restrictive covenants often insist on applying their own law to the enforcement of those covenants as a matter of fundamental policy regardless of the parties’ choice of law clause, even if the parties’ choice is rational and reasonable.” An example they give is a New Yorkbased company that has employees in California and that has included a New York choice of law provision in its restrictive covenants with its California employees. Ligation to enforce the restrictive covenant in a California court likely would run up against California public policy disfavoring such covenants, and the court would ignore the choice of law provision. Similar results are likely in Texas and Georgia, among other states. A company that wants to maximize the likelihood that its restrictive covenants will be enforced should determine which of the states in which it operates has the most favorable law for enforcing restrictive covenants. It should review operations to determine whether that state has a reasonable relationship to the employees covered by the covenants, and if necessary take steps to enhance that relationship.
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Executive Summaries Page 51
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The Next Big Thing is Tiny
Protecting Your Budget While Protecting Your Brand
M&A in Canadian Oil and Gas
By Jean H. McCreary Nixon Peabody LLP
By Kelly Phair McCarthy Sideman & Bancroft and Keith G. Askoff Varian Medical Systems, Inc.
By John H. Kousinioris and L. Alan Rautenberg Bennett Jones LLP
Nanotech-enabled consumer products will achieve a $2.6 trillion world market by 2015. Such growth has raised the specter of product and employee exposure claims, similar to the mesothelioma litigation associated with asbestos. Consumer groups and the media are voicing concerns about nano-material. These are fueled by some studies using mice, indicating that carbon nano-tubes may be carcinogenic. However, extrapolating data from mice to humans is iffy, and there is also evidence that nano-materials are not “bioavailable” to cause damage in target organs when incorporated into end-user products. Until federal regulators can decide whether a new regulatory framework is needed, most are applying existing regulatory programs, often using nano-specific guidelines. The EPA defines “nano-scale materials” as having at least one external dimension measuring less than 100 nanometers. A nanometer is one billionth of a meter, or about 1/1000th of the width of a human hair. Consumers have access to a growing range of products containing nano-materials – bacteria-fighting foot odor resistant socks, wrinkle-minimizing eye creams, stain-resistant clothing, anti-microbial baby pacifiers and electronics, and building materials. The lack of a settled scientific definition has challenged government development of regulatory programs. Establishing a threshold based on size makes it easy for the regulated community to know what is subject to regulation, but factors such as bio-persistence or shape may affect potential risk. The many benign applications of the technology and its economic potential, makes blanket regulation on the basis of size alone problematic.
Protecting company brands is theoretically a boundless task, so the degree of protection sought needs to be measured against cost. The authors posit two scenarios that illustrate the range of contingencies. In the first, the job is to pare a trademark folio that has become bloated due to factors like rebranding, changes in the product line or acquisitions. In scenario two, the job is deciding how to protect new brands, or to protect old brands whose protection has been neglected. To avoid the extremes of expensive over-protection or potentially dangerous under-protection, the authors suggest starting with a preliminary review of the basics. Their primer briefly addresses trademarks and service marks, the concept of first-tofile vs. first-to-use and international treaties. The next step is to review various company-specific factors. These include the nature of the business (consumer, as opposed to business-to-business, for example), the sophistication of the customer (e.g. the likelihood the customer will be confused by near-copycats), and the location and characteristics of the company’s major markets. The next step is projecting a likely future profile of the company, as well as its markets. The final and probably the most problematic consideration is risk, and the degree of risk the company is willing to assume. The authors suggest a “programmatic” approach, with an initial review followed by scheduled re-evaluations involving both attorneys and business people. “Scenarios vary,” the authors conclude, “but the object is the same: sufficient protection at a reasonable cost.”
The Canadian oil and gas sector, centered in the Western Canadian Sedimentary Basin, is competitive and highly fragmented. It has significant M&A activity. Alberta has approximately 175 billion barrels of proven synthetic oil reserves in its oil sands and an additional four billion barrels of conventional crude oil reserves, making Canadian oil reserves second only to Saudi Arabia. Canada is also the third largest producer of natural gas in the world with reserves in excess of 50 trillion cubic feet, excluding coal bed methane, which is estimated to represent up to a further 500 trillion cubic feet in Alberta alone. The aggregate size and volume of M&A transactions in Canada increased by approximately 20 percent in 2010 over 2009, with aggregate transaction values exceeding $150 billion. The oil and gas sector was the most active in deal volume and value, with over 1,000 transactions. Most notable was the significant increase in cross-border M&A activity between Canada and the United States in 2010, which surpassed $40 billion in value in over 200 transactions. The authors expect the rebound in Canadian M&A activity to continue and strengthen as a result of the recovery in debt markets, the renewed search by capital pools for acquisition opportunities and the strengthening demand for Canadian resources and commodities. This article outlines recent trends in dealmaking, and provides a summary of how deals are usually structured, with an emphasis on cross-border differences.
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I N T EL L EC TU A L PROPERTY
Deciding When and How to Litigate Patent Infringement By Michael N. Rader
T
he decision on whether to litigate a patent infringement case should be subject to the same rigorous evaluation process as any other multi-million dollar business decision. Established procedures should be agreed upon in advance and followed uniformly so that a portfolio of cases (whether offensive, defensive, or both) can be managed in accordance with overall business strategy. In some situations the procedures can be very simple: Always litigate, or strive never to litigate. Alternatively, a nuanced case-by-case analysis can be made, so long as case-specific decisions are made in a uniform manner that furthers business goals. An example of a blanket approach is a company that aggressively asserts its patents against all perceived infringers. This kind of strategy can make sense for a startup company in a market that presents low barriers to entry. The credible threat of patent litigation may be the only thing preventing the startup from being overrun by larger and better-funded competitors that have the ability to quickly enter the space and squeeze out the original innovator. Other companies choose never to assert their patents, instead utilizing their IP portfolios as a defensive buffer by making those portfolios available for “barter� in sweeping crosslicensing deals with competitors. This more conservative strategy is often employed by companies operating in crowded, heavily-patented fields. The
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cross-licensing model recognizes that in such fields, it is inevitable that major participants will end up utilizing technology patented by another party. Cross-licensing enables an industry to transfer the fight from the courts into the marketplace, where companies compete on features, service, price or other factors, rather than patents. What about companies that find themselves on the receiving end of patent lawsuits? Some pay to settle patent cases early, at least those casesthat have any merit. They believe that doing so saves money in the long run, since early settlements often (though not always) are available for considerably less than the cost of litigation. Other companies take a different view, declining to settle even when doing so would be cheap, and instead force patent plaintiffs to take
their cases all the way to trial. These companies believe that an uncompromising strategy discourages plaintiffs and decreases the number of lawsuits filed against them. Such blanket approaches to either filing or defending patent litigation involve decision-making standards that are straightforward and easy to apply. They require little evaluation of how to handle a particular case. Relatively few companies, though, take such a blanket approach. Most do their evaluations on a case-by-case basis, with each potential or actual patent infringement action reviewed individually. That review hopefully occurs against the backdrop of an overall business strategy within which patent litigation is just one component. There are numerous considerations that go into deciding whether to file a patent infringement lawsuit. Most important, how strong is the case? Winning a patent infringement case is not easy. To prevail, a patent-holder must not only establish infringement, but overcome numerous defenses that may be available to the defendant. The first point, the
in t el l e ct ual p r o p e rt y
need to establish infringement, seems obvious, but it must be emphasized: Having a patent does not guarantee a finding of infringement. The claims of the patent may be narrower than business executives realize, and they may be subject to design-arounds that avoid infringement. Likewise, just having a patent does not mean that patent is valid. Indeed, as of the writing of this article, the Supreme Court is reconsidering (and will potentially lower) the burden of proof for finding a patent invalid under certain circumstances. A patent can be found invalid on multiple grounds. For example, that someone else invented the technology first, or that the patent specification provides insufficient detail to support a proprietary claim to the invention, or based on other technical defects. Other equitable defenses also are routinely pled by infringement defendants. These include inequitable conduct, laches and estoppel. A careful pre-suit investigation – including infringement claim charts, a prior art search, a review of the parties’ prior commercial activities and contacts, and interviews of key witnesses, like the inventors – will help flesh out the strengths and weaknesses of the case and the overall likelihood of success. Because most cases settle, the likelihood of success often is not ultimately tested. But the terms of settlement are dictated largely by the merits, and therefore it is critical to know these details before filing suit for the additional reason that they will be raised by the defendant in an ensuing settlement negotiation. When deciding whether to sue, another critical piece of information is the availability of remedies. What remedy or combination of remedies is desirable and achievable with respect to the infringer’s product?
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inte l l ec t u a l pr o p e rt y
Examples might be a preliminary injunction at the beginning of the case, a permanent injunction at the end of the case, past damages, or an ongoing future royalty. Each of these remedies presents unique legal issues that must be evaluated separately, in addition to the merits of the patent infringement and validity issues. For example, a preliminary injunction is available only if the case is strong on the merits and the patentee will be “irreparably harmed” by the defendant’s
One need also consider whether or not the infringer is likely to be able to grow and do more damage in the future, such that immediate corrective action has significant value, and whether the infringing product may be likely to fail for reasons unrelated to your patented technology (e.g., wrong price point, poor marketing, or poor execution). The damage the infringing product is doing and is likely to do in the future should be weighed against the
Although inherently antagonistic, the filing of a patent infringement lawsuit is often the beginning of a business discussion, with the advantage that the patent-holder starts from a position of strength. ongoing sales. Preliminary injunctions rarely issue in patent cases. If damages are the goal, what measure of damages will be available? The patent-holder may be able to recover profits it has lost due to the infringement, but proving those can be difficult. The alternative remedy, a reasonable royalty, tends to be lower than lost profits, but it is easier to prove. A third important consideration is the relationship of the parties and products in question. For a patent holder, it is worthwhile to candidly assess the extent to which the infringing product adversely affects its business. Strong emotional first reactions to the introduction of a new product by a competitor don’t necessarily reflect the true extent of the competition. The value of filing a patent infringement lawsuit will vary depending on whether the infringer’s product and yours are aimed at the same or different market segments, and whether they are priced or otherwise positioned differently.
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cost of litigation and the uncertainties involved, based on the strength of the case. Often, filing suit will be the right decision even if the merits evaluation is lukewarm, because the competitive product is doing significant damage. In other cases, filing suit is the wrong strategy no matter how strong the merits evaluation is, because the commercial impact of the product is small compared to the expense and distraction of litigation. A serious attempt, however crude, should be made to quantify these factors. Sophisticated companies track the success or failure of their predictions on these issues, and learn over time to improve their evaluation of the importance of potential patent infringement lawsuits. Don’t forget that patent infringement lawsuits can be used for purposes unrelated to securing an injunction or damages. Although inherently antagonistic, the filing of a patent infringement lawsuit is often the begin-
ning of a business discussion, with the advantage that the patent-holder starts from a position of strength. In lieu of an injunction or damages, a patent case can be settled by establishing a business relationship, such as a distribution arrangement or a technical collaboration. Be careful, however, because litigation is emotional. Some companies (particularly less sophisticated ones) on the receiving end of a patent lawsuit may not be inclined to such a resolution. Furthermore, they may decide to fight the case rather than settle on any terms that the plaintiff would find acceptable. Whatever the true goal, every case should be filed with the understanding that trial is a real possibility and with a commitment to that end. What about the reverse scenario, in which your company is sued for patent infringement? Should you litigate or try to settle the case quickly? Many of the same considerations discussed above apply in reverse. How strong are the defenses to the plaintiff’s allegations? How much is at stake? What is the likelihood of an injunction? What is the patent-holder’s goal in the first place? To many clients’ surprise, some of these questions can be answered with reasonable accuracy based on nothing more than a phone call to the plaintiff or its counsel after being notified of the lawsuit. The simple question, “What do you hope to achieve through this lawsuit?” often yields a candid response that can help you position your company for quick resolution on acceptable terms. Alternative strategies also should be included in the equation. For example, for patents that are susceptible to validity challenges, reexamination before the Patent Office is often an effective alternative to litigation. Many courts will stay litigation activity pending the outcome
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i nte lle ctual property
of re-examination proceedings, if the reexamination is filed and prosecuted quickly enough. Even the credible threat of reexamination can change the settlement dynamic in a favorable way when dealing with an otherwise aggressive patent-holder. Additionally, when deciding whether to sue or how to respond after being sued for patent infringement, it is important to consider ways to reduce the litigation cost in order to make the process more beneficial (or, at least, less detrimental) to the company. The best way to reduce the cost of patent litigation is to treat it like any other part of your business: Subject it to reasonable constraints that are consistent with the overall goal of the case. For example, keep the litigation team very lean, two or at most three
lawyers, except in the largest and most complex cases. Identify, from the outset and with specificity, your paths to victory – in other words, the legal arguments and trial themes that will win the case. Pursue those relentlessly. Employing outside lawyers to chase down leads that do not relate to how you plan to win is a luxury that most companies can’t afford. Stay involved in making decisions. Constant telephone or in-person (not just email) communication with outside counsel is guaranteed to reduce legal fees. Controlling cost will help leverage the value of patent litigation to further business goals in cases that might otherwise have been prohibitively expensive to pursue or defend. Finally, develop an internal procedure for tracking all of your patent
infringement litigation and determining how it matches up against your overall business strategy. Have the big picture at hand at all times. That will help you decide whether you should settle or fight, and how to fight, the next time a patent case appears on the horizon. ■
Michael RadeR
is a shareholder and co-chair of the ip litigation group at Wolf, Greenfield, the largest ip-only firm based in new england. mrader@wolfgreenfield.com
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HU MA N RE SOURCES
Weed in the Workplace Employment Law Nightmare
By Louis L. Chodoff and Michelle M. McGeogh
I
magine you are a human resources professional employed by a manufacturer of steel products. How might you respond to the following situation? Your company hired Joe the drill press operator to work on a temporary basis. Joe is a great employee, so you are considering hiring him fulltime. He knows that an offer may be coming, so you are not surprised when he knocks on your office door. But you are not prepared for the bomb Joe drops.
Many state statutes do not address whether an employer would be permitted to discipline an employee who is under the influence of medical marijuana at work. He tells you that he knows he is being considered for a full-time position and is very excited about the opportunity. However, he also knows that he would have to pass a drug test, and he will fail. Tears well up as Joe the drill press operator describes his medical history – years of anxiety, panic attacks, nausea, vomiting, stomach cramps that severely
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limit his ability to eat, fruitless efforts to ameliorate the pain with prescription drugs — then the use of marijuana to treat his condition. The good news for him is it worked wonders. The bad news for you is that you walked into an employment law bummer. Is the use of medical marijuana allowed? What employment laws are implicated? What about the requirements of the Drug-Free Workplace Act? Should you fire Joe? PATCHWORK OF LEGISLATION Marijuana is classified as a Schedule I drug under the federal Controlled Substances Act. It is illegal to manufacture, distribute or possess Schedule I drugs. Therefore, marijuana use, even for medical purposes, is illegal under federal law. However, 16 states and the District of Columbia have laws legalizing medical marijuana. These states are Alaska, Arizona, California, Colorado, Delaware, Hawaii, Maine, Michigan, Montana, Nevada, New Jersey, New Mexico, Oregon, Rhode Island, Vermont and Washington. Other states have laws that are favorable toward medical marijuana, but do not legalize it. (For example, defendants charged with possession in Maryland can introduce evidence of medical necessity as a mitigat-
ing factor for court consideration.) Bills that would legalize medical marijuana use have been recently considered, or are being considered, in Alabama, Connecticut, Idaho, Illinois, Iowa, Kansas, Maryland, Massachusetts, Mississippi, New Hampshire, New York, Oklahoma and West Virginia. These laws vary greatly. Many simply protect authorized users of medical marijuana from prosecution under state criminal laws that prohibit possession, manufacture or distribution of controlled substances and are silent on the employer/employee relationship. Some states including Arizona, Colorado, Hawaii, Michigan, Montana, New Jersey, New Mexico and Vermont address the effect of medical marijuana on the workplace in a limited fashion. For example, New Jersey and Montana law provides that nothing in the law “shall be construed to require ... an employer to accommodate the medical use of marijuana in any workplace.” Arizona’s statute expressly prohibits employment discrimination based on medical marijuana use, but the protection does not cover an applicant or employee who “used, possessed or was impaired by marijuana”
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H UMAN RESOURCES
at work or during work hours. None of these statutes permit medical marijuana use in the workplace or schools. In addition, many state statutes do not specifically address whether an employer would be permitted to discipline an employee who is under the influence of medical marijuana at work or who has requested intermittent leave to use medical marijuana. It is expected that states will begin to consider adopting laws that address employment issues in more detail. In California a bill has been introduced that would “declare it unlawful for any employer to discriminate against a person in hiring, termination, or any term or condition of employment or otherwise penalize a person, if the discrimination is based upon the person’s status as a qualified patient or a positive drug test for marijuana, except as specified.” OTHER STATUTES Employers must consider a variety of laws when faced with a situation like Joe the drill press operator’s marijuana use. An employee in his position may attempt to assert a cause of action under the Americans With Disabilities Act or a state law equivalent, if terminated for using legalized medical marijuana. Generally, to state an ADA claim, a plaintiff must demonstrate: Disability according to the ADA definition; qualification to perform the essential functions of the job, with or without reasonable accommodation; and discrimination because of the disability. However, the ADA provides that protection does not apply to persons who are currently engaged in the “illegal use of drugs,” defined as “the use of drugs, the possession or distribution of which is unlawful under the Controlled Substances Act . . .” Thus, arguably, the ADA allows employers to terminate employees
who use drugs illegally, even if the employee is disabled. If an employer decides to fire a marijuana user, the employer should be sure that the decision is based on impermissible drug use, not the employee’s underlying disability, or the perception thereof. Courts have upheld this approach. In 2008 the California Supreme Court held that state law does not require employers to accommodate illegal-drug use, even medical marijuana, as it dismissed an employee’s complaint that his employer had failed to accommodate his disability when it terminated him after a failed drug screening. FAMILY MEDICAL LEAVE The Family Medical Leave Act (FMLA) permits an eligible employee to take leave for his or her own serious health condition or to care for a family member with a serious health condition. Under the FMLA, employees may take large blocks of leave, up to 12 weeks, or, under some circumstances, much smaller blocks, an hour or less. An employee that qualifies for medical marijuana use under state law is not automatically entitled to FMLA protection. The individual’s or family member’s underlying condition prompting the use may or may not meet the FMLA definition of serious heath condition – an impairment that makes an employee unable to perform his or her job functions. Generally, a serious health condition is an illness, injury, or physical or mental condition that involves either in-patient care or continued treatment by a health care provider. There is scant court guidance on the interplay of medical marijuana laws and the FMLA. Employers should prepare to update
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TIPS FOR EMPLOYERS What can employers do to limit liability involving employees who use medical marijuana? A few tips follow: • This area of the law is changing rapidly. Regularly review and revise relevant policies. • Use caution when asking a job candidate questions about drug use in an interview or on an application. Do not ask whether a candidate has been treated for drug dependency. Such a question could violate the ADA. Never ask a candidate if he/she is taking prescription medications. • Do not complete drug testing until the applicant has an employment offer conditioned on successful test completion. Handle pre-employment testing without regard to disability, race, gender, etc. Use of a pre-employment test may violate the law if the test negatively affects members of a protected class. • There may be good reason to want to terminate or discipline an employee for marijuana use. Studies have shown that marijuana can impair shortterm memory and cause a decline in attention, motor skills and reaction time. Having an employee who is impaired by medical marijuana may make employers susceptible to negligent hiring or supervision claims.
EXECUTIVE COUNSEL JUNE/JULy 2011
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leave policies as courts begin to consider medical marijuana implications for FMLA leave. Federal employers or employers who receive federal funding must com-
after he tested positive for marijuana. The Court dismissed the case, finding that nothing in Michigan’s medical marijuana law regulated employment rights. Rather, the statute was merely
Employers should prepare to update leave policies as courts consider medical marijuana implications for FMLA leave. ply with the Drug-Free Workplace Act. It provides that they notify each employee of the prohibition against using controlled substances, including marijuana. Failure to comply can result in grant termination and exclusion from future grants for up to five years. To account for Drug-Free Workplace requirements, states may enact more limited laws allowing medical marijuana use. For example, Maine’s law provides that an employer may take action against an employee who uses otherwise legal medical marijuana if employment of the user would violate federal law or cause an employer to lose federal funding. Common law wrongful termination or discharge claims might be alleged when a medical marijuana user is fired. Generally, an employer may terminate an at-will employee for any reason. However, an employer may not terminate an employee for a reason that violates a fundamental public policy of the state. An employee discharged for medical marijuana use may attempt to assert a cause of action against an employer for wrongful discharge, alleging that if state law supports medical marijuana use, being discharged for such use violates public policy. So far, courts have rejected these types of claims. In a Michigan case, Casias v. Wal-Mart Stores, Inc., plaintiff argued that he was wrongfully terminated from his job at Wal-Mart
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designed to protect medical marijuana users from state criminal prosecution. The case has been appealed to the U.S. Court of Appeals. In Ross v. RagingWire Telecommunications, Inc., the California Supreme Court held that because the California Compassionate Use Act does not speak to employment law, and nothing in the Act’s text or history indicates voters intended to articulate a policy concerning marijuana in the employment context, an employee’s discharge did not violate public policy. JOE IS UNEMPLOYED The facts presented in our hypothetical are based largely on a case from Oregon — Emerald Steel Fabricators v. Bureau of Labor and Industries. An employee who told his supervisor he used medical marijuana sued after he was terminated. The employee used medical marijuana one to three times daily, but not at work. His work was generally satisfactory, but one week after telling his employer he used marijuana for medicinal purposes, he was discharged. Oregon’s medical marijuana statute generally authorizes persons holding an identification card to use marijuana for medical purposes, and exempts them from state criminal liability for possessing marijuana provided certain conditions are met. The employee filed a complaint with the Bureau of Labor and Industries.
The Bureau investigated, then filed a lawsuit alleging that the discharge violated Oregon law, which prohibits discrimination against a qualified person because of a disability and requires an employer to reasonably accommodate an employee’s disability. The Court found no violation of Oregon law, reasoning that the antidiscrimination protections do not apply to an employee engaged in the use of illegal drugs. Because marijuana is illegal under federal law, the employer did not have to accommodate the employee. The good news is that the employer won. However, the employer still had to spend years defending its actions, undoubtedly incurring significant defense costs. ■
Louis L. Chodoff
is a partner in the Litigation Department and a member of the Labor and Employment Group at Ballard Spahr LLP. He deals with such issues as harassment, discrimination, wage and hour, whistleblower, wrongful discharge, and restrictive covenant disputes. chodoffl@ballardspahr.com
MiCheLLe M. McGeoGh
is an associate in the Litigation Department and a member of the Labor and Employment Group and the Distressed Real Estate Initiative at Ballard Spahr LLP. She concentrates her practice on private sector employment law on behalf of management, in matters related to Title VII, the Fair Labor Standards Act, the Americans with Disabilities Act and state law equivalents. mcgeoghm@ballardspahr.com
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G o v e rna nc e
Government and Shareholder Oversight Bring New Challenges By Brett Baker and Krystle Gomez
F
allout from the “Great Recession” includes an unprecedented wave of new federal regulations and new responsibilities for company executives, and with it the potential for individual liability. Regulators want increased disclosure. Investors are calling for growth. Shareholder activism is on the rise. At the same time, internal issues such as problems generated by mergers and employee morale as the result of layoffs continue to find their way on to the table. To address and balance all these demands, executives need to build teams that are flexible, innovative and competent.
ment of Justice and the SEC are revisiting the Foreign Corrupt Practices Act, and the IRS is refocusing its efforts on tax compliance. While companies have always dealt with new laws and their implementation, there never has been a time in which reform called for such sudden and detailed disclosures regarding companies and their executives. Shareholders can now scrutinize the companies in which they invest. This means companies need to have a plan for systematic compliance with the new requirements and allocate sufficient resources to implement it. Experts need to be retained and
While companies have always dealt with new laws and their implementation, there never has been a time in which reform called for such sudden and detailed disclosures regarding companies and their executives. There are three significant trends that executives need to be aware of. First, legislators and regulators are aggressively pursuing financial reform and consumer protection. Over the next 18 months, the SEC and other regulatory bodies are likely to implement more than 500 rules, conduct 60 studies, and issue 90 reports in support of the Dodd-Frank Act. With each final rule there will be additional layers of responsibility for executives. Additionally, the Depart-
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employees need to be trained. This is costly, but companies need to bear in mind that not doing it could be far more costly in terms of penalties and damaged reputation. The second trend that executives need to understand is the increasing potential for personal liability arising from government regulations, with new and unprecedented risks associated with daily actions and decisions. Litigating these matters, should it become necessary, will be costly.
At the same time, most director D&O coverage is undergoing changes. Many policies do not cover prelawsuit proceedings. Executives are often unaware of how a colleague’s settlement can affect others covered under the same umbrella. In one example, executives at Stanford Financial Group were retroactively denied coverage when a colleague pled guilty to criminal charges, triggering a coverage exclusion. A slight revision of the insurance policy language requiring exclusions to become effective upon final judgment of all parties (instead of mid-litigation) would have saved the executives from a multi-million dollar personal expense. The third trend is a notable increase in shareholder activism. In 2010, organizations such as the California Public Employees’ Retirement System (CALPERS) encouraged shareholder activism. CALPERS campaigned for 58 of the top companies in the United States to adopt voting standards requiring directors’ decisions be supported by a shareholder majority. Also reinforcing shareholders requests for a seat at the table, Institutional Shareholder Services (ISS) revised a policy in 2011 to recommend “against/withhold” votes on the election of directors where the board failed to implement majority-supported shareholder proposals that had been approved by a majority of the outstanding shares either in the most recent year, or the most recent year and one of the two previous years.
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GOVERN AN CE
As they confront increased investor activism, executives have gotten some ammunition in the past few months by way of several court decisions which have endorsed traditional notions of accepted business practice. Courts have approved a board’s decision to use or not use defensive measures, and the notion that the value of a company should not be based on the highest available premium. For example, in February the Delaware Court of Chancery held, in Air Products & Chemicals Inc. v. Airgas, Inc., that a poison pill can be employed against unsolicited, structurally non-coercive, all-cash tender offers. This case provides some important guidelines for directors and officers who are focusing on the long-term management of the company and who want to maintain the status-quo. The court highlighted some of the more significant actions taken by the Airgas Board (after it received an offer that it deemed inadequate) to serve as guidance for other executives handling similar situations: First, it was noted that the board was comprised of a majority of independent directors. Second, it relied on the advice of legal and financial advisers, even soliciting a third financial opinion to confirm the conclusion of the first two advisers. Third, and perhaps most surprising, was the court’s analysis that the board correctly interpreted the sole threat to the corporate enterprise as that of an inadequate price. While the court seemed hesitant, it nevertheless confirmed that if a board, in good faith, believes a hostile offer reflects an inadequate price, it may properly employ a poison pill as a proportionate defensive response. The three factors noted by the court allowed Airgas to meet the first prong of the enhanced scrutiny standard, in that they showed that directors had “reasonable grounds for believing
that a danger to corporate policy and effectiveness existed.” In order to meet the second prong of the standard, the board proved that the poison pill was not coercive or preclusive by taking three simple measures: (1) it did not offer a management-sponsored alternative, (2) it relied on precedent that stated a poison pill and other defense tactics, specifically the staggered board utilized by the company, is not considered preclusive in Delaware, and (3) it noted that its actions did not preclude any future bidder from overcoming the defensive measures where the sole threat of an inadequate price was not present. Airgas demonstrates that the “power to defeat an inadequate hostile offer ultimately lies with the board of directors.” Another recent important decision comes from the California Court of ( Appeals, in Monty v. Leis (February, 2011). The court concluded that there is no requirement for a board to include a “fiduciary out” defensive measure in a merger agreement, which would allow the board to negotiate and consider more competitive offers, when the company is faced with a significant financial need to raise capital. The Delaware and California court rulings both defer to the board’s corporate governance decisions when the board is well informed. In another case,
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in January 2011, the Delaware Court of Chancery supported the decision of an independent board in John Q. Hammons Hotels Shareholder Litigation. This decision provides guidance for a board faced with a thirdparty acquisition of a controlled company. Of significant importance is the court’s application of a higher standard of review to the transaction when there was no breach of a fiduciary duty, and its approval for a controlling shareholder (who, in this instance, was also a director) to receive compensation different than the minority public. The court scrutinized the transaction under the
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“entire fairness standard,” out of concern for the allegedly deficient process allowing the controlling shareholder to use “control to divert merger consideration disproportionately to himself.” Upon finding no such evidence, the court noted that it could have followed precedent and used the deferential business judgment rule, but Hammons is now leading case law on the actions a board should implement to meet the higher standard of review. First, the board used an independent special committee, which had “extensive experience” and proved the merger negotiations were “thorough, deliberate, and negotiated at arm’s length” over an extended period.
The court held that if a board in good faith deter-
the public minority shareholders, no doubt a reflection of the $24 bid (a substantial 300 percent premium over the stock price), the court has held that a significant premium is not required. In In re Dollar Thrifty Shareholder Litigation, where the consideration for a proposed merger represented a 5.5 percent premium over the then current market price, the Delaware Court of Chancery reinforced precedent that a board is not required to sell the company whenever a high market premium is available. Instead, the board is allowed to focus on the fundamental long-term value of the company. Awareness of corporate and legal trends will help executives understand what actions they are allowed to take and the roles they are required to assume when fulfilling their fiduciary duties. Failure to take note of these trends can result in personal liability. ■
mines that a hostile offer reflects an inadequate price, it may properly employ a poison pill. Second, the controlling shareholder “did not participate in the approval of the merger as a director, did not participate in the Special Committee process, was not on both sides of the transaction, did not make an offer for the company, and did not divert merger consideration away from the minority stockholders.” The court found the board, by implementing these simple steps, showed its independence, and it was satisfied that all directors, including the controlling shareholder, did not breach their duty to the minority shareholders. While the Hammons transaction was overwhelmingly favored by
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June/July 2011 EXECUTIVE COUNSEL
Brett r. Baker is a
partner in the new york office of Troutman Sanders llP. His practice is focused on mergers and acquisitions, business ventures, corporate governance and general corporate matters. Brett.Baker@troutmansanders.com
krystle Gomez is
an associate in the new york office of Troutman Sanders llP. Her practice is focused on mergers and acquisitions, corporate securities laws and corporate governance. krystle.Gomez@troutmansanders.com
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Early Case Assessment is Defensible, Strategic and Smart By Christopher Wall and Lisa A. Spinelli
D
iscovery, which now largely involves the exchange of electronically stored information (ESI), often comprises the bulk of litigation costs. Electronic discovery can be expensive, often unpredictably so, and controlling the costs of electronic discovery (particularly data preservation and collection) has become a major focus of attention for litigators. In the past decade, new technologies have increased the volume and types of discoverable data, challenging companies and their law firms to keep up with regulatory, investigatory and litigation requirements while still managing costs.
Parties can defensibly narrow the scope of potentially relevant data prior to electronic discovery processing and before incurring the costs of expensive attorney review of that data. Data management has become a daunting and at times even a risky endeavor, with the number of reported court cases specifically addressing electronic discovery issues increasing exponentially between 2000 and 2010. Many of these cases involved sanctions.
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JUNE/JULy 2011 EXECUTIVE COUNSEL
In assessing a case and facing mountains of data, with deadlines to meet and with limited time and resources, counsel must determine what to preserve, how to preserve it, for how long, and how to effectively identify relevant or potentially relevant documents. The process of Early Case Assessment (ECA) provides counsel with an effective way to address these problems. ECA has gained momentum since the 2006 amendments to the Federal Rules of Civil Procedure, which direct parties to discuss electronic discovery as part of their meet-and-confer discoveryplanning conference under Rule 26(f). Through ECA, counsel can systematically survey the ESI landscape and thereby mitigate costs, reduce the volume of data and mitigate the risk of errors even before discovery formally begins. Addressing discovery-related challenges as early as possible enables better results by targeting the specific problem areas of preservation, retention and determination of search parameters. With ECA, parties can defensibly narrow the scope of potentially relevant data prior to electronic discovery processing and before incurring the substantial costs of attorney review of that data. Analyzing and evaluating the data through ECA allows counsel to get an early look at data and reduce its volume by eliminating (or substituting) custodians. This is accomplished by identifying relevant keywords, phrases, date ranges and data types. The process also allows counsel to determine strengths and weaknesses in the case, test proposed
search terms, increase the defensibility of ultimate productions, and even consider early case resolution based on the early data results. There are three primary ways that ECA technology helps to lower costs: It reduces time, volume and mistakes. It speeds the analytic process by organizing the data into a searchable, sortable and easily viewable format. That cuts down on the amount of time attorneys actually need to look at documents. Second, it helps reduce the volume of data by eliminating obviously nonresponsive documents. A big challenge is knowing at the earliest phase what to preserve and what not to preserve, since it is often difficult to know what will be relevant in the upcoming litigation. In the earliest stages, as the issues are still congealing, counsel should take a measured approach in conducting ECA, eliminating only data that is clearly irrelevant, since lifting the legal hold from non-responsive data allows it to be disposed of according to a data retention plan. Taking steps to eliminate clearly irrelevant data can significantly reduce the volume of data that must be retained and preserved. It will also reduce the volume of data sent through the costly and time consuming process of attorney document review. Third, ECA technology can increase defensibility by way of “data analytics,� which can validate the quality of search terms and assess whether all relevant custodians have
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e -discovery
been identified and accounted for. This provides transparency for the benefit of opposing counsel, making it easier for both parties to work together and collaborate on the selection of search terms. ECA reports, such as keyword hit rates and data “dictionary lists,” also help avoid wrong turns in legal strategy. In addition to getting an early glimpse into the relative quantity and nature of responsive documents, counsel can answer the “who, what and when” questions involved in early case assessment: Who authored the documents? What were they about? When they were created? With this information, counsel can be far more cost-effective in directing the course of litigation. Simply put, early case assessment provides valuable opportunities for savings, in terms of both time and money, while enabling defensible decisions regarding preservation, retention and search parameters. ADOPTING THE PROCESS Since ECA is such an effective tool, one would assume that it has been accepted as a standard part of almost any matter involving electronic discovery. However, that’s not the case. According to Kroll Ontrack’s Fourth Annual ESI Trends Report (which looked at the year 2010), almost three fourths of companies in the United States either have never conducted (37 percent) or are not aware of having conducted (34 percent) ECA on any litigation matter. The report also found that in-house legal is far less likely than IT to know whether ECA technology has been deployed: According to the report, 43 percent of legal departments did not know whether their company had the technology in place, compared with 27 percent of IT departments. Not only is there an apparent lack of investment in ECA
technology among U.S. companies, but legal departments seem less involved in its acquisition, and they may not even know about it when it is there. Currently only 29 percent of companies leverage ECA technology. One reason may be that some attorneys shy away from its implementation, classifying it as a job for IT. However, given the fact that ECA is not just a technology, but is also a strategic process, legal departments cede the responsibility for it to IT at their peril. The legal department clearly should be involved in deciding which technology to use and how to use it. Legal has the necessary expertise, which IT may lack, to select and use reporting features, analytics features, and search functionality, all of which help inform case strategy. In selecting ECA technology, cost efficiencies certainly should play an important role. Beyond that, various tools offer different features, some more important than others. Potential users should consider, first and foremost, that the tool be robust enough to handle large volumes of data, both for searching and reporting. If counsel has to defend a keyword selection, the tool should be able at a minimum to export those data analytics to a report that is easy to read and to share. Speed and ease of use are other important considerations. Nor matter how good the technology is, however, the people conducting the analysis component of ECA are likely the most critical part of the process. Before implementation, it may be advantageous to consult with ECA experts who have both legal and IT background. Among other issues, counsel and IT should work together to determine whether to invest in a third-party hosted ECA solution – which may be simpler and less expensive in the long run – or to purchase and install ECA technology, which may require regular
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updates and support from the company’s own personnel. Effective ECA can bring a high return on investment. It can reduce costs by maintaining oversight of an investigative or discovery process, whether outside counsel has been engaged or not. Moreover, at the same time it gives companies greater control over their legal spend, effective ECA can create a more accurate and defensible end product, thus making less likely the costs associated with haphazard, less transparent, and even sanctionable discovery. It’s a proven antidote for the mushrooming volume of data that companies today need to address. ■
Chris Wall
is a manager at Kroll Ontrack’s Legal Technologies consulting group, which consults with corporate attorneys and litigation support staff about information management, discovery and computer forensics issues in civil and criminal litigation, as well as regulatory matters. He has expertise in case law pertaining to electronic discovery and the use of electronic evidence in legal proceedings. cwall@krollontrack.com
lisa spinelli
is client relationship manager for Kroll Ontrack in New york and New Jersey. She advises corporations on all facets of information management and legal technology, from litigation preparedness and electronic discovery to incident response and computer forensics investigations. lspinelli@krollontrack.com
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CA N A DA /C ROSS–B O R D ER
Choosing a Winning Brand Name in Canada By Keltie Sim
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aunching a new product or service can involve an enormous upfront investment, taking time and effort from all parts of a business. The research department, product development team and marketing group, among others, may spend many hours on the project. An external marketing organization may be retained, at significant cost. Legal considerations may come into play to negotiate required licenses or approvals. All this expense and effort may be for naught if there is not adequate consideration of a key issue that will fundamentally impact the degree to
the withdrawal of the product or service from the market, and an order of damages and costs. Less immediate but no less damaging is a situation where the product is launched without incident, but is later followed into the market by a host of infringers that erode brand profitability but can’t be stopped because the brand name can’t be protected. In the best case scenario, your launch is followed by great success and high demand for your product. The brand is identified with the company immediately upon
Certain considerations will come into play in any brand selection. Of course, there will be an interest in choosing a brand name that is appropriate in terms of your existing brand reputation and cachet. Tying the new brand into existing brands or product lines is an important consideration that will add to the value of the brand name that is ultimately chosen. One factor in brand selection that can lead to later difficulties is the desire of marketing professionals to develop a brand name the gives the consumer an understanding of the nature of the product – or what the seller
Registration of the brand name in the Canadian Trade-Marks Office is not a requirement, but it provides protection across the country regardless of the geographic area of use, along with useful presumptions of entitlement in the event of a dispute. which the new product or service will be recognized and appeal to consumers. This is the selection, clearance and development of a strong and appropriate brand name. The selection of a brand name can make or break not only a product launch, but also the product’s longterm viability. The worst case scenario could be the immediate receipt of a cease and desist letter, followed by the service of a Statement of Claim, a court-ordered injunction forcing
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launch and is suitably protected, so that any infringing activities can be dealt with in a straightforward and decisive manner. You cannot guarantee the success scenario, because entering the marketplace has inherent risks, and it’s always possible there will be complaints or opposition to various aspects of any new brand. Oppositions or lawsuits can be initiated despite the best precautions. But there definitely are steps you can take to minimize risk.
hopes the consumer will understand to be the nature of the product. For trade-mark professionals, a brand name (used interchangeably with the word “trade-mark”) that provides information regarding the nature of the product is considered to be a “descriptive” trade-mark. An example of this would be SLIMMING JEANS, since it clearly conveys that the product is a pair of jeans that is designed to have a slimming effect on the person who wears them.
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CANAd A/ CRO SS–b ORdER
A descriptive mark is considered to be “weak,” which has implications that can have a long-term impact on a business. A weak trade-mark is more likely to have been chosen by others already, thus increasing the likelihood of confusion among brands by consumers and complaints from other brand owners. It is also more difficult to protect a weak brand or trade-mark from infringement. Under Canadian law, where a trade-mark is descriptive, small differences will suffice to distinguish between marks. Moreover, the Canadian Trade-marks Act
prohibits the registration of marks that are “clearly descriptive,” thus shutting descriptive marks out of the benefits of registration. The obstacles to protecting a descriptive trade-mark make logical sense. If it were permissible obtain exclusive rights to use words that are ordinarily used by everyone to describe products and services, it would soon be impossible for a new business to describe its product or service in ordinary language. For example, if you cannot use the words “slimming jeans” to describe a characteristic of the jeans that you are selling, it may be
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difficult to find other words to provide an accurate description. Similarly, if you cannot use the words “cover girl” to describe a model who has frequently appeared on magazine covers because a cosmetic company has the exclusive use of those words, this could be considered an unwarranted restriction on the use of ordinary English words. A weak or descriptive mark is capable of becoming a strong mark, but the path is not easy. Through a long period of use (usually at least five years) a mark can gain “distinctiveness,” or “secondary” meaning as indicating
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CANA d A / C R OSS– b O R dE R
a particular source of the product or service. For example, the SLIMMING JEANS product may be the subject of a long-term, nation-wide advertising campaign and garner multi-million dollar sales over the course of several years, such that when they see the brand name, consumers know that the product has come from a particular source. A real-life example is the trademark ALWAYS FRESH of the popular Tim Horton’s coffee shop chain in Canada. It clearly describes a characteristic of the products, but has become closely associated with the Tim Horton’s chain through widespread use and advertising. Such marks are capable of protection and even registration in Canada, provided that sufficient evidence of notoriety can be produced. Conversely, a mark that is considered to be “strong,” at least in the legal sense, from the outset is one that is “distinctive” or has no meaning in relation to the product or service. For example, the coined word UFLIX for use in association with a line of clothing is a strong mark that can be registered, assuming that it does not conflict with other pre-existing brand names. While at first glance, a coined or non-descriptive word may seem like a less attractive choice, it can become closely associated with a product or service, given sufficient time and effort directed toward marketing. The public did not associate the word KODAK with the field of photography at the time that it was chosen as a brand name, but clearly the situation changed. A similar process has occurred with other famous brands, such as PEPSI, GUESS and HONDA. The tension between the desire of marketing professionals to choose descriptive brand names and the desire of trade-mark professionals
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to steer businesses away from descriptive brand names is ongoing. A compromise position may involve searching for a brand name that is “suggestive” rather than “clearly descriptive,” thus opening the door to the availability of registration without the requirement of proving
Marks Office is not a requirement, but it provides protection across the country regardless of the geographic area of use, along with useful presumptions of entitlement in the event of a dispute. A winning brand name is a key factor in both the short and long term
The Canadian Trade-marks Act prohibits the registration of marks that are “clearly descriptive,” thus shutting descriptive marks out of the benefits of registration. secondary meaning. For example, a mark such as MIX AND MATCH may provide a suggestion when used in association with clothing, but is not necessarily clearly descriptive of a characteristic of the clothing. Choosing a strong, distinctive and non-descriptive mark remains the best alternative for maximizing the scope and degree of protection that will be available in the long term. A brand name like 7 FOR ALL OF MANKIND is a bold gamble, since it is unusual and suggests no immediate connection with clothing to those unfamiliar with the brand. However it is a strong mark, one that provides clear and immediate recognition of a single source of products to its target consumer group, to whom the brand has become well-known. Once chosen, a winning brand name should be diligently promoted and protected. Searching for conflicting brand names already in use or registered in Canada is essential, and then maintaining a watch for infringers is crucial. Registration of the brand name in the Canadian Trade-
success of a new product or service. Although the up-front cost of choosing and protecting the name can be considerable – not just in the financial sense but also in terms of time, resources and effort required to educate and promote the characteristics of a strong name – the result will be well worth the investment. ■
Keltie Sim
is a partner in the Toronto office of Smart & biggar, Canada’s largest firm practicing exclusively in intellectual property and technology law. Her practice is focused on the domestic and international clearance, prosecution, portfolio management, acquisition and licensing of trademarks. She also practices in copyrights, providing legal information and opinions, negotiating agreements and obtaining registrations. She has acted on behalf of clients based in Canada and internationally within a wide variety of industries. krsim@smart-biggar.ca
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canad a/ cro ss–b order
Mega-Mining Deals for Q1 2011 By Divya Balji
A
stronger Canadian dollar and weaker valuations in the United States are prompting Canadian companies to look south for acquisitions. For Q1 2011, Canada saw 82 announced M&A deals, excluding lapsed and withdrawn bids, with a value of about USD 22.7bn, according to mergermarket data. More than half came from Canada/US cross-border deals. The top ten in terms of deal size came from the mining, energy and utilities sectors, with some real estate and telecommunications, media and technology (TMT) action.
“Canadian companies are more apt to be looking to the United States for their next acquisition opportunity,” said Charles Knight, partner, national leader M&A Transaction Services at Deloitte Canada. “There are many more growth opportunities in the United States relative to the Canadian marketplace.” The traditional problem for Canadian companies is that the Canadian market is smaller than the U.S. market, and companies need to go global to seek opportunities, Knight explained. “The U.S. is still Canada’s number one choice,” he added. The mining sector stood out with
multi-billion dollar deals. One example is the CAD 4.9bn purchase of Consolidated Thompson Iron Mines by Cliffs Natural Resources, which has now been approved by Investment Canada. Fraser Milner Casgrain LLP is Consolidated’s legal advisor. Cassels Brock Blackwell LLP is acting as legal advisor to the transaction committee for Consolidated. Jones Day and Blake, Cassels & Graydon LLP are acting as legal counsel to Cliffs. On a smaller scale, California-based Capital Gold also saw a USD 363m hostile takeover bid from Timmins Gold of Vancouver, following a friendly merger announcement with Gammon Gold of Toronto, which was valued at USD 324m. Capital Gold is working with the law firms Ballard Spahr Andrews & Ingersoll LLP and Ellenoff Grossman & Schole LLP on the Timmins offer, and with Macleod Dixon LLP and Ellenoff Grossman & Schole LLP on the Gammon offer. Timmins has retained Shearman & Sterling LLP and Gammon has retained Kirkland & Ellis LLP and Fasken Martineau. Private equity firms and pension funds are also exiting their vintage investments from several years ago, which is spawning some U.S./Canada cross-border activity. “Private equity firms have a time horizon and they need to dispose of their investments,” Knight explained. “They have been somewhat quiet, and now they need to react.” Some deals that stood out include Saputo of Quebec’s USD 271m purchase of Fairmont Cheese Holdings, which was sold by Chicago’s GTCR Golder Rauner LLC. Fairmont worked with Kirkland & Ellis LLP on this deal.
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Another deal which piqued the interest of industry experts was the USD 200m purchase of Tharco Holdings by Boise Inc. from private equity firm Tricor Pacific Capital. K&L Gates worked with Boise, and Winston & Strawn LLP worked with Tricor. While 2010 saw a plethora of financial services deals, Q1 2011 did not see as much activity in this sector. Debt and capital markets have opened up, which will allow companies to use debt to finance future acquisitions. The mid-market sector saw a good mix of TMT, industrials and chemicals, business services, consumers, financial services. For the rest of 2011, industry experts are expecting more of the same -- mega-deals coming from sectors like mining, financial services and consumer, mid-market deals from less active sectors like TMT, real estate, business services and industrials and chemicals. ■
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.
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Travel Security Holes and How to Plug Them By Robert D. Brownstone
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oud voices, loose lips, wandering eyes, lost portable devices and aggressive Customs officers are among the many things that can compromise the confidentiality or privacy of information during a trip. As a frequent traveler who also advises clients and colleagues on information security and data leakage, I am hyper-sensitive about these matters. Over time, I have devised a series of routines to guard against disclosures of client confidences and identities, my law firm’s proprietary secrets, and private information relating to me and my family. Hopefully, whatever your walk of life, you will find these tips instructive. As soon as you leave your office or home, security measures should kick in. The first rule of thumb is one I learned from the former prosecutors with whom I practiced law, back in the pre-smartphone 1980s, in New York City. They taught me to never mention names of com-
It is much more dangerous to lose a stray electronic document somewhere virtual than to leave a piece of paper in a physical location. panies or individuals involved in any way in a confidential matter on which I was working when out in public. I distinctly remember one of my mentors, Bill Purcell (a former Manhattan D.A.), reminding me to be careful each time we got into a cab to go to court or a deposition. “Who knows who will hop into that taxi next and strike up a conversation with our cabbie,” he’d say. Then we would transition into “code name” mode. If we had to talk about a case, we would refer to key players as “Mr. C” or “Ms. M” and omit as many atmospheric and factual details as possible. The loose-lips syndrome seem to have been exacerbated by cell phones, even more so by the apparently requisite loud tone of voice employed by people who use cell phones on buses, trains and planes. In the recent annals of loud law firm partners, there are now such widely-recognized characters as “Amtrak Bob” and “Acela Jim,” each of whom chatted noisily on a crowded train about a highly confidential personnel situation involving his respective firm. According to news reports, Bob disclosed imminent layoffs that were not yet ready to be divulged, and Jim called a partner at another firm and recited the terms of an offer to entice him to jump ship and join his firm. Although the information-technology half of my persona wants to keep bashing lawyers, attorneys are not the only negligent ones in this regard. Haven’t we all experienced multiple occasions in an airport gate area or on a plane itself when we hear a salesperson or an IT administrator revealing names, numbers, troubleshooting steps and other confidential details? The perceived need to talk to someone that very instant often trumps the risk of damage that could ensue from revealing a trade secret or the identity of a company with which one is negotiating.
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In addition to big voices, wandering eyes are a factor, especially on long monotonous flights. Every task undertaken and every bit of information possessed on behalf of a customer or client warrants protection. Travelers should be especially careful about identifying customers or exposing other confidential information when typing on laptops in planes. Before I go to the airport, I rename laptop folders and documents that bear client names. If I plan to edit a document that mentions a client name throughout, I run a Ctrl+H search and replace. It only takes another few clicks to undo those file-rename and search-and-replace temporary changes when the trip is over. Laptops (and, whenever possible, other portable devices), once encrypted, provide two major benefits. First, in case the machine is lost or stolen, whoever has it will not be able to extract any data. As a result, confidential as well as private information is protected. Second, anti-identity theft statutes typically exempt encrypted lost or stolen personally identifiable information from triggering the duty to give notice of breach. Thus, those who take precautions are spared the monetary costs and the PR-hit that inevitably flow from a notice of breach. But even if encryption protects files from getting into other hands, one’s work has been for naught if he or she didn’t back-up a document to another location. After each flight a best practice is to make sure to copy new or newly edited documents back to the firm’s network. Our IT Director trained me years ago that the hard drive of a portable computer or device is like cash, but central storage on a network is like a credit card. The former, if lost or stolen, is lost for good. The latter is recoverable even if one copy is lost or corrupted. Along those same lines, go paperless as much as possible. Consider taking a portable scanner and scanning all paper documents, receipts. The scanner I use is about the same bulk as a three-hole puncher, and only needs a USB cable to attach to my laptop. Because I find keeping track of physical objects increasingly distracting, I don’t want to worry that I might have dropped – or left in the hotel room – a receipt, some notes or a prospective client’s business card. Once
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scanned and saved to my work network, each such item is safe, secure and backed up. Assuming one has been careful en route, what of the urge to surf the web on a big screen during down time at a hotel lobby or café computer? If you do check e-mail over a browser on a public computer, presumably
since forgotten – the names I stumbled upon. But the impact of that experience brought home to me how much more dangerous it is to lose a stray electronic document somewhere virtual than to leave a piece of paper in a physical location. In the twenty-first century, inevitable human error can have much
The perceived need to talk to someone that very instant often trumps the risk of damage that could ensue from revealing a trade secret or the identity of a company.
RobeRt D. bRownstone
is technology and e-discovery counsel and co-chair of the electronic information management group at Fenwick & West LLP. He is an advisor, presenter and writer on law-and-technology issues, including privacy and information security. He teaches electronic discovery at the University of San Francisco School of Law and at Santa Clara University School of Law. rbrownstone@ fenwick.com
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you are not logging into a work email system via, for example, Outlook Web Access. If, however, you feel you must check work mail (or a personal webmail account inbox) in this fashion, then at least make sure not to save the login/password or to download any confidential files. On one cross-country trip I checked my personal webmail on a hotel PC. Once I had deleted the browser history and then closed the browsing window, I happened to notice something on the desktop, called “[REDACTED FIRST AND LAST NAME]_Severance.doc”. As soon as I hovered on that Microsoft Word file’s icon, a yellow rectangular bubble appeared, displaying the company name and the first name of the original “Author” of the document – or of its parent or (great-) grandparent document (according to some studies, 90 percent of electronic documents are created by editing a pre-existing document). By right-clicking on the icon and then glancing at the “Properties” of the document, I was readily able to ascertain the original “Title” of the document. That Title reflected a different first and last name than the individual who was apparently about to be terminated via the current iteration of the document. Without even opening the file, basic metadata allowed me to learn a fair amount of confidential information that was not meant to become public. I deleted the file and then emptied the recycle bin, such that only a computer forensics expert would have been able to resurrect the document from that machine. I have never disclosed – and have long
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broader ramifications due to the many layers of information available in an electronic file. Under current Fourth Amendment law, upon return to the United States from overseas, the contents of anyone’s laptop or other digital devices are subject to warrantless inspection at the discretion of Customs officials. No particularized suspicion of wrongdoing is required. Some courts have even ruled that a password and/or encryption/decryption key must be disclosed upon request. So, what is a business traveler do? A multi-pronged workaround could be: • Use a loaner laptop that houses neither a full set of company-provided computer programs nor any confidential files/data. • Throughout the overseas trip, only do sensitive work over the internet via a virtual private network (VPN) connection. • Store no newly created or modified confidential files on the local hard drive. • Before the flight home, run an application such as powerful freeware tool CCleaner to “wipe” the hard drive. Whether at home or on the road, be circumspect about information you store on a portable computer or device. When in doubt, leave the information in secure central storage from which you can access it remotely in a location-independent fashion. In general, remember the wisdom of the old “Hill Street Blues” desk sergeant, Phil Esterhaus, who urged his minions: “Let’s be careful out there.” ■
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Tr a n s fer r i n g
Personally
Identifiable Information in Bankruptcy By James M. Kunick and Michael J. Goldstein
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hen thinking about buying or selling the assets of a business that has an online presence – assets that might include subscriber
lists, user profiles or other personally identifiable information – keep one rule firmly in mind: Beware the seller’s privacy policy! Consider XY magazine (actual name) and its recent bankruptcy proceedings. In this case, Federal Trade Commission scrutiny of the debtor’s proposed sale of subscriber information, combined with the bankruptcy court’s rejection of portions of the settlement agreement relating to the transfer, highlight the pitfalls of trying to buy or sell business assets that include personally identifiable information. This is particularly true in the context of bankruptcy. Businesses generally collect personal information from subscribers, customers and other individuals under the terms of privacy policies that make certain promises about how the information will be protected and to what extent it will be shared. These privacy policies govern the treatment of the information not only in the context of day-to-day business operations, but also in respect to a sale of the assets of the business. The FTC has taken the position that transferring personally identifiable information in violation of an applicable privacy policy, even when the sale is part of a more comprehensive sale of the assets of a business, can constitute an unfair or deceptive trade practice under the Federal Trade Commission Act. Such transfers may also violate applicable state consumer protection laws. In the bankruptcy context, the U.S. Bankruptcy Code expressly limits a bankruptcy trustee’s ability to transfer personally identifiable information in a manner that is inconsistent with the debtor’s privacy policy. Section 363(b)(1) of the Bankruptcy Code provides that if a debtor discloses a privacy policy that prohibits the transfer of personally identifiable information to unaffiliated persons in connection with offering a product or service, and if the privacy policy is in effect on the date the bankruptcy case commences, the bankruptcy trustee may not sell or lease the information unless one of the following two conditions is met: The transaction is consistent with the privacy policy (e.g., there is a carve-out that allows the information to be sold), or following the appointment of a consumer privacy ombudsman, proper notice and a hearing, the court finds that no showing was made that the transfer would violate applicable law and approves the transaction.
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CASE STUDY: XY MAGAZINE The now-defunct XY magazine and its companion website, XY.com, targeted a young gay male subscriber base. The final issue of the magazine was published in 2007, and the website closed in 2009. During the time they were in operation, both the magazine and the website collected a substantial amount of personal information from subscribers, while touting a restrictive privacy policy. For example, the sign-up confirmation page on XY.com urged subscribers to “note our amazing privacy policy. We never give your info to anybody.” Similar statements appeared elsewhere on the website, and XY also made representations regarding the anonymity of its subscribers in connection with distributing the magazine. When XY entered bankruptcy in 2010, the bankruptcy trustee proposed to transfer subscribers’ personal information to a third
Compliance with a seller’s privacy policy is required even where a prospective buyer will be using the information for the same purpose as the seller. party. This proposed transfer drew the attention of the FTC’s Bureau of Consumer Protection, which sent a letter to proposed transferees advising them that any sale, transfer or use of the information “raises serious privacy issues” and could violate the FTC Act’s prohibition against unfair or deceptive acts or practices. According to the FTC, because of XY’s “simple, explicit, and clear” privacy policy under which “subscribers and members were told that their personal information would not be sold, shared, or given away to anybody,” the sale or transfer of the data could constitute an unfair or deceptive trade practice by the debtor. The FTC noted that a third-party transferee’s receipt of
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the personal information with knowledge of the privacy policy violation could also violate the FTC Act. Ultimately, the bankruptcy court rejected portions of the settlement agreement that provided for the transfer of the subscribers’ personally identifiable information. The court ordered that all such information be destroyed (with the exception of a very limited set of data relating to unfulfilled orders for back is-
the transfer of personal information to a new owner of a business might be permissible if the new owner agreed to use the information only in accordance with the original privacy policy, and consistent with the original purpose for which the information was provided. A similar notion has been applied by at least one bankruptcy court. In a ruling in the Velocity Express Corporation bankruptcy proceedings, issued on November 3, 2009, the United
Personal information should generally be collected under a policy that allows transfers to third parties. sues of the magazine). Although the court did not articulate the basis for this ruling, it likely reached this result based on Section 363(b)(1) of the Bankruptcy Code, as described above. AVOIDING THE PITFALLS When buying or selling business assets that include personal information, businesses should always consider whether the sale of the information or the buyer’s proposed use of the information will violate the privacy policy under which the information was collected. By reviewing the applicable privacy policies, businesses can avoid violating the FTC Act or analogous state laws. In the bankruptcy context, these precautions will allow a potential buyer or seller to avoid wasting time and money pursuing transfers of personal information that are unlikely to be allowed by the court under the Bankruptcy Code. Compliance with a seller’s privacy policy is required even where a prospective buyer will be using the information for the same purpose as the seller. In considering the proposed transfer of XY subscriber information, the FTC concluded that the transfer could constitute an unfair or deceptive trade practice under the FTC Act. The bankruptcy court stopped the transfer, even though the prospective transferees represented to the court that they wanted possession of the data in order to resume operating the magazine and/or website. As the FTC explained, the continued use of XY subscribers’ personal information, even by the existing owner, would not necessarily be consistent with the purpose for which the information was provided, given the closure of the magazine and website and subsequent passage of time. The FTC did suggest that
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States Bankruptcy Court for the District of Delaware allowed the transfer of assets that included personally identifiable information without appointing a consumer privacy ombudsman because the purchaser agreed to adhere to any privacy policies applicable to the debtor. Businesses should always draft privacy policies with an eye toward the future. For many businesses, the most significant restrictions on their ability to transfer personal information collected from customers and subscribers are those contained in the privacy policy under which the information was collected. While collecting information under a restrictive privacy policy may make subscribers and customers feel more comfortable, it also makes it more difficult to sell the information and related parts of the business down the road. Unless there is a compelling business reason to provide a more restrictive privacy policy, personal information should generally be collected under a policy that allows transfers to third parties. Even where a more restrictive privacy policy is appropriate, the policy should expressly allow for the transfer of personal information in appropriate circumstances, such as in connection with the sale of other assets of the business or where the original privacy policy will govern the activities of the transferee. In order to avoid costly legal challenges and to facilitate the transfer of business assets that include personally identifiable information, businesses should pay careful attention to privacy policies. It pays to think ahead when drafting privacy policies and to be diligent when reviewing them for a proposed purchase or sale of assets – particularly in the bankruptcy context. ■
JaMes M. KunicK
is a partner in the Chicago-based law firm Much Shelist, where he chairs the intellectual property & technology group. He has nearly two decades of experience representing regional and multinational clients in a broad range of intellectual property, information technology and corporate transactions. jkunick@ muchshelist.com.
Michael J. Goldstein
is an associate at Much Shelist, in the intellectual property & technology group. He concentrates his practice in technology transactions, outsourcing and intellectual property matters. mgoldstein@ muchshelist.com.
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State AGs Extending Their Reach By Bernard Nash, Divonne Smoyer and Milton A. Marquis State Attorneys General have emerged as the new regulators. Even if a business is compliant with federal laws and regulations or operates in only one or a few states, it still may face substantial legal exposure to state AGs. Yet, few companies appreciate the risks. This article provides guidance on how to anticipate and mitigate exposure to AGs. Over the past two decades, state attorneys general have evolved from public officials charged with defending their states in litigation and counseling state agencies to cops on the beat who pursue legal and policy matters that have nationwide implications. Although AGs historically have been concerned about consumer protection on the local level, they increasingly are shifting their focus more broadly to investigate business practices beyond the borders of their states and well outside traditional consumer protection matters. Congress has encouraged them to tackle issues of nationwide concern by including AG enforcement provisions in a number of new federal laws. State AGs have extended their reach in three principal ways. First, in recent years they have delved into new substantive areas of the law, such as public health, privacy, and climate change, and into consumer finance matters, including credit card fees, and mortgage foreclosure and mortgage principal write-downs. AGs have also used a multi-faceted approach to advocate for their agenda, both on a legal level by using novel theories of liability and on a policy level, by lobbying Congress and federal agencies and filing amici briefs with the U.S. Supreme Court. To augment their resources and their reach, they also have used new tools such as multi-state investigations and private counsel, thereby pooling their resources – and multiplying the legal, political, and public relations risks to businesses. Many companies do not fully appreciate their exposure to AGs, believing that they are outside their jurisdiction. AG investigations have generated some of the largest monetary settlements in history and have brought about extensive changes in the practices of many businesses. Airlines, among others, have faced AGled opposition to proposed mergers, while retailers of all sizes have been investigated for data breaches, and pharmaceutical companies have been sued for how they market and charge for their products.
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Bernard nash
is a partner at Dickstein Shapiro LLP and head of the firm’s State Attorneys General Practice. He represents clients in complex state and federal legal and policy matters. nashb@ dicksteinshapiro.com
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After the recent financial crisis, AGs tar- mation Technology for Economic and Clinigeted mortgage lenders, entities involved in cal Health Act of 2009. mortgage-backed securities, energy companies, student lenders, for-profit educational ACTIVISM BEGAN WITH TOBACCO institutions and insurance companies, among Many trace the current expansive role of others. AGs are no longer satisfied with mini- state AGs to the tobacco litigation of the midmal financial relief; today, settlements are rou- 1990s, when 46 AGs jointly settled with the tinely in the tens and hundreds of millions, tobacco industry, garnering an unprecedented and injunctive provisions are often both struc- $368 billion payment. The combination of the tural and highly regulatory. use of private counsel, the power of pooling State AGs are politicians, policymakers, resources into a multi-state action, and the counselors and litigators. In all but a few states application of the common law tort of public they are popularly elected and are officehold- nuisance – a doctrine typically applied to the ers in their own right. They are their own boss. obstruction of public highways or waterways They view themselves primarily as law en- or offenses against public morals – was seen as forcement officials and are the chief legal offi- a model to be replicated. cers of their states, yet most also are frequently In addition to using public nuisance as a involved in state and federal policy initiatives. theory of recovery, AGs have expanded their Many strive for higher political office. litigation focus to recover losses the state inMost AGs and their staffs maintain an open curred as a third party payor, and have typicaldoor policy, enabling and encouraging candid ly done so in the form of a multi-state action. discussions. Communication, negotiation, and A multi-state investigation can pose significant litigation with AGs, however, require a skill set challenges to a defendant, as the AGs have the distinct from that needed in commercial litiga- benefit of pooled resources while the defention, litigation against the federal government, Attorney General investigations have or lobbying state leggenerated some of the largest monetary islatures. The growing reach of AGs means that settlements in history. in-house counsel, as well as their government relations counterparts, dant has the burden of multiplied risk and poneed to know individual AGs and understand tential inconsistent outcomes. State AGs using multi-state actions have their styles, concerns and motivations, both generally and with respect to the specific mat- obtained numerous settlements with pharmaceutical companies for recovery of Medters of importance to the business. In their role as protectors of state consum- icaid reimbursements made as the result of ers and residents, AGs have expanded their deceptive off-label marketing practices or reach from traditional enforcement actions deception associated with drug pricing. Nobased on state consumer protection laws to tably, 32 states and the District of Columbia litigation based on a variety of new legal theo- reached a $62 million settlement with Eli ries, such as public nuisance and “state as pay- Lilly over allegations that it engaged in deor.” In doing so, many have used the tools of ceptive marketing of the anti-psychotic drug private counsel, multi-state investigations and Zyprexa, failed to warn health care providconventional business litigation. ers of side effects, and committed consumer AGs also are lobbying for enforcement protection violations, resulting in significant authority over certain federal laws. That au- costs to state Medicaid agencies. Ten states declined to join that settlement thority recently has been granted by Congress with respect to the enforcement of financial and have sued Lilly, seeking damages in some services laws under the 2010 Dodd-Frank cases of more than $100 million for prescripWall Street Reform and Consumer Protection tions improperly paid for by state Medicaid Act, consumer protection laws under the programs. Consumer Product Safety Improvement Act AG’s use of contingency fee counsel has of 2008, and HIPAA data protection and no- been controversial, and efforts have been made tification obligations under the Health Infor- to regulate its use. Although this arrangement
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generally has not been prohibited, several states have passed legislation or ethics rules imposing conditions on the government’s use and selection of contingency fee counsel, in order to enhance transparency regarding the terms of the retainer, and have imposed caps on fees. Despite several amici briefs from various trade organizations, in January 2011 the U. S. Supreme Court declined to review the California Supreme Court ruling in County of Santa Clara County v. Superior Court. The California court permitted cities and counties to retain private counsel on a contingency fee basis for public nuisance litigation against lead paint defendants. AGs AND THE ENVIRONMENT AGs have also been active in the area of environmental pollution. In the 2007 landmark case Massachusetts v. US Environmental Protection Agency, twelve AGs obtained a Supreme Court ruling that – because states have a stake in the health and welfare of their citizens and because of the economic impact of climate change on state-owned resources – states possess standing to sue the federal government over its regulation of greenhouse gases causing climate change. Since then, AGs have filed separate suits against the EPA to require it to create federal greenhouse emissions standards and to compel the EPA to approve California’s petition under the federal Clean Air Act to adopt emissions standards for automobiles that are substantially higher than current federal standards. State AGs also have petitioned for specific regulations for the emissions of ships, aircraft and farm, industrial, and construction equipment. Currently, the Supreme Court is reviewing the Second Circuit’s decision in Connecticut v. American Electric Power Co., which allowed eight states, the City of New York, and three land trusts to bring public nuisance claims against electric utility companies to seek abatement of emissions from their plants. If the litigation proceeds, industries could face a wave of public nuisance litigation by AGs and plaintiffs’ attorneys for alleged contributions to climate change and other alleged environmental harms. Ironically, while the American Electric Power litigation was brought by eight state
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AGs, 23 state AGs filed amici briefs asking the Supreme Court to overturn the Second Circuit’s decision. Additionally, although some AGs have brought litigation based on the perceived failures of federal regulation, other states have sued to challenge the EPA’s regulation of traditional air and property pollution as being unfair and overreaching. For example, in February 2008, a coalition of 17 AGs successfully sued the EPA and obtained the withdrawal of the EPA’s recently instituted guidelines for regulating air pollutants typically emitted from coal power plants. FINANCIAL SERVICES AGs have pursued financial services industry business practices, ranging from insurance bid-rigging to mortgage lending. Many have pointed to former New York AG Elliot Spitzer as an example, because of the sizable settlements he obtained after investigations into such market abuses as late trading and market timing by investment banks. In the mortgage industry, state AGs currently are pursuing a variety of participants involved in the foreclosure, underwriting, and appraisal process. In the Fall of 2010, all 50 state AGs, as well as state bank and mortgage regulators, joined a multi-state effort to address “robo-signing” and other procedural defects contained in documents submitted in foreclosure proceedings. Negotiations are underway regarding a penalty demand of $20 billion, business practice reforms, mortgage principal write-downs and other potential remedies. The enactment of the Dodd-Frank Act, which established a new Consumer Financial Protection Bureau, has enhanced state AG enforcement power. The Chief of Enforcement of the CFPB, Richard Cordray, is the immediate past AG of Ohio. Of particular concern for national banks, Dodd-Frank changed preemption law. In many instances, AGs now can enforce their own state laws as well as the regulations promulgated by CFPB. In addition, Dodd-Frank allows AGs to enforce a general prohibition against unfair, deceptive, and abusive acts and practices against non-banks and state-chartered financial institutions under their jurisdiction. Some state AGs have been active in extending their reach even beyond the public nuisance, environmental and financial services cases, into such areas as:
divonne smoyer
is a partner at Dickstein Shapiro LLP‘s State Attorneys General Practice, where she represents clients in connection with state government investigations and data breach, data privacy and information security compliance issues. smoyerd@ dicksteinshapiro.com
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• Antitrust Enforcement. Most states have enacted state antitrust statutes modeled after the Sherman Antitrust Act, as well as some type of unfair trade practices or consumer protection law, which AGs enforce. In addition to pursuing state antitrust claims, AGs may pursue antitrust actions under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which permits AGs to sue in federal court on behalf of their citizens for violations of federal antitrust law. AGs have been involved in
Google’s collection of private data by its “Street View” of cars that is transmitted over insecure wireless networks. Recently, 42 AGs entered into a $12.25 million settlement with TJX as a result of a massive data breach that exposed more than 94 million transaction records WORKING WITH AGs Corporate compliance programs need to take into account that state AGs’ authority is now reaching into virtually every industry, and that
Some AGs have brought litigation based on the perceived failures of federal regulation, while others have sued to challenge regulation of traditional air and property pollution. some of the most high-profile antitrust cases, including the 2001 suit brought by 20 AGs against Microsoft for the allegedly unlawful monopoly it maintained for its Internet Explorer web browser. State AGs also have been involved with merger enforcement, both independently, via multi-state actions, and jointly with federal agencies. State AGs have often required significant divestitures as part of settlements in the cases they litigate.
milton a. marquis
is a partner at Dickstein Shapiro LLP, in the firm’s State Attorneys General Practice. He represents clients in connection with both state and federal antitrust and public policy matters. marquism@ dicksteinshapiro.com The authors thank Ann-Marie Luciano, an associate at Dickstein Shapiro, for her contributions to this article.
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• Public Health and Obesity. For example, in 2009, the Connecticut AG initiated an investigation into the food industry’s “Smart Choices Program,” which labeled certain processed foods as healthy. Shortly thereafter, the FDA initiated its own investigation, resulting in the food companies abandoning the program. Most recently, in December 2010, The Dannon Company, Inc. agreed to a multistate settlement with 39 AGs and the FTC regarding Dannon’s advertising of the alleged health benefits of Activia and DanActive yogurt products. • Data Breach and Data Privacy. In the absence of a comprehensive data protection and notice law at the federal level, AGs have become aggressive in enforcing their states’ data breach notification and data privacy laws. For example, a coalition of 40 AGs currently is investigating
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AG deputies and assistants – often career government employees with their own set of concerns – often have broad discretion to pursue cases with limited oversight. Because practically no area is off-limits, companies must anticipate AG action and have relationships with the AGs directly or through other means in order to predict where AGs are going next. In doing so, companies should endeavor to: • Develop a strategy to build positive relationships with AGs. In-house counsel and government relations personnel should actively get to know, understand and relate to AGs and their concerns. • Deliver a positive message that is tailored to the particular state at issue so that an AG associates the company with the public good it provides the state. • Take early action by anticipating the next new area of AG focus. Far too often, companies are reactive and reach out to AGs only after they have become a target. Should an investigation arise, communicate with the AG with sensitivity and respect for his or her concerns, outline constructive steps taken by the company to address the concerns, and express a willingness to compromise and modify practices to reach a mutually satisfactory conclusion. Take advantage of the AGs’ broad enforcement discretion, as they often are open to solutions that might be novel or even impossible in the context of traditional litigation. ■
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Keeping the Company’s Nose Clean after Matrixx Materiality Elucidated, Somewhat By RoBeRt K. KRy
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ustice Potter Stewart came up with the Supreme Court’s most memorable test for obscenity under the First Amendment: “I know it when I see it.” Easy enough to remember, but not terribly helpful for those trying to figure out what’s legal and what’s not. Unfortunately, the Supreme Court’s recent decision in Matrixx Initiatives, Inc. v. Siracusano offers just about as much guidance in a field closer to home for most corporate executives and counsel – the standard for materiality under the federal securities laws. Section 10(b) of the Securities Exchange Act, as implemented by the SEC’s Rule 10b5, makes it unlawful to “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” Violations can lead not only to SEC enforcement actions or criminal charges, but also to private securities class actions that are costly and time-consuming to defend. The scope of that prohibition is thus a critical issue whenever a company communicates with its investors. One key limitation is the word “material.” Only sufficiently important facts implicate the rule’s restrictions. A company that claims it’s
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not in serious merger negotiations when it actually is probably has misstated a material fact; a company that says one of its executives earned a bachelor’s degree in economics many years ago when in fact he left after three years probably has not. Materiality is relevant, moreover, to a host of other disclosure obligations under the securities laws, as it must be. Without some threshold standard, companies would have little choice but to bury investors in trivia, undermining rather than advancing the securities laws’ goals. Of course, the term “material” is hardly self-defining. Just how important does a fact have to be? In a pair of cases decided in the 1970s and ‘80s, the Supreme Court held that an omission is “material” if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Unfortunately, that standard is just about as vague as the term itself. Some courts tried to provide a degree of predictability, at least in discrete areas where materiality issues recur. One such area is adverse event reports in the pharmaceutical industry. Sometimes, a consumer will report having a bad experience after taking a drug, which may or may not be a reaction to the
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drug and may or may not reflect a broader problem. Does a drug company omit a “material” fact if it fails to mention such reports in a public statement otherwise touting the drug’s safety or financial prospects? On an intuitive level, it depends: If only one person reported a particular reaction, it could just be a coincidence. If many people reported the same reaction, there might be something wrong. But where do you draw the line? To answer that question, some courts looked to principles of statistics. Adverse event reports, they held, are not material unless they are sufficiently numerous to be “statistically significant.” There is no need to delve into the details of what “statistically significant” means here, but suffice it to say that it is a well-understood, quantifiable concept from the field of statistics that means something happened often enough to think it wasn’t just a fluke. A statistical-significance test does not eliminate all judgment. But, compared to asking whether a certain number of adverse event reports would have “significantly altered the ‘total mix’ of information,” it is far more objective and predictable. CURE FOR THE COMMON COLD? The Supreme Court handed a major setback to those efforts to clarify the law in Matrixx
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Initiatives, Inc. v. Siracusano, decided earlier this year. The facts, as alleged in the complaint, were as follows. Matrixx Initiatives, Inc., sold Zicam Cold Remedy, a nasal spray or gel made with zinc gluconate. That product accounted for 70 percent of its sales. Between 1999 and 2003, Matrixx received reports from three doctors that at least a dozen patients had suffered “anosmia” – loss of the sense of smell – after using Zicam. One patient experienced severe A company that claims it’s not burning in his nose, in serious merger negotiations followed immediately when it actually is probably by loss of smell. The doctors also has misstated a material fact. told Matrixx about previous studies that A company that says one of its had linked another executives earned a bachelor’s zinc compound – zinc degree in economics many years sulfate – to anosmia. Two of the doctors ago when in fact he left after presented their find- three years probably has not. ings at a meeting of the American Rhinologic Society, and one appeared on Good Morning America. Eventually, hundreds of product liability suits were filed. The Food and Drug Administration sent the company a warning letter, and Matrixx withdrew the product from the market. The case before the Supreme Court was
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not a product liability suit by former Zicam users. Instead, it was a class action by purchasers of Matrixx stock who claimed the company’s public communications about those developments had been false or misleading. Despite learning about the potential link between Zicam and anosmia from the three doctors, for example, Matrixx publicly
would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” The Court recognized that this bar must not be set too low, lest management “bury the shareholders in an avalanche of trivial information.” It held, however, that materiality is an “inherently fact-specific finding”, not
Without some threshold standard for materiality, companies would have little choice but to bury investors in trivia, undermining rather than advancing the goals of the securities laws.
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 a broad array of subject areas, including constitutional law, business litigation, securities fraud, criminal law and intellectual property. rkry@mololamken.com
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stated that it was “poised for growth in the upcoming cough and cold season” and had “very strong momentum.” Matrixx also filed a 10-Q that noted the potential risks of product liability claims in the abstract, but did not disclose that it had, in fact, been sued. Finally, after the media began reporting on the link between Zicam and anosmia, Matrixx put out a press release saying it believed the claims were “completely unfounded and misleading.” The class action alleged those statements were all false or misleading in light of what Matrixx actually knew about the anosmia risks, and that they artificially inflated or maintained the company’s stock price. When the Good Morning America story ran, the company’s stock price plunged 23.8 percent, causing millions of dollars in shareholder losses. Matrixx successfully convinced the district court to dismiss the suit. A dozen consumers losing their sense of smell, the court ruled, was not “statistically significant,” and thus failure to mention those incidents could not have been “material.” The Ninth Circuit, however, reversed, holding that the absence of statistical significance did not preclude a finding of materiality. Because that decision conflicted with rulings of other courts, the Supreme Court granted review. And, as if to drive home its point that statistics can’t predict everything, it unanimously affirmed the Ninth Circuit’s decision. THE COURT’S SMELL TEST The Supreme Court agreed with the Ninth Circuit that absence of statistical significance does not always preclude a finding of materiality. It reiterated that an omission is material when there is a “substantial likelihood that the disclosure of the omitted fact
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susceptible to bright-line rules. Matrixx’s proposed statistical-significance test, the Court held, would artificially exclude relevant information because statistical significance is not the only reliable indicator of causation. The Court noted that medical experts and the Food and Drug Administration consider multiple factors in assessing whether a drug caused a reaction, even in the absence of statistically significant data. For example, they may consider “biologic plausibility” – whether there is a good biological explanation The Supreme for how the drug Court agreed might have caused a with the Ninth reaction – as well as the circumstances of Circuit that particular adverse absence of events, such as how soon after drug use statistical they occurred. significance Statistically sigdoes not always nificant data, the Court observed, are preclude a not always availfinding of able, especially where a particumateriality. lar adverse event is rare. And the fact that medical professionals and regulators nonetheless routinely take actions on the basis of other indications of causation suggests that reasonable investors would consider those other factors material as well. The Court disclaimed any rule that pharmaceutical manufacturers must always disclose adverse events. And it made clear it was not holding that statistical significance is irrelevant, “only that it is not dispositive of every case.”
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Matrixx’s case, however, did not involve just a “handful of anecdotal reports.” Rather, it involved reports from three medical professionals and researchers about more than ten patients who had lost their sense of smell after using Zicam. It involved findings presented at a national medical conference. It involved evidence of a strong temporal relationship in the case of the one patient, who lost his sense of smell immediately after using Zicam and experiencing a burning sensation. And it involved prior studies showing a link between another zinc-based compound and loss of smell. “Viewing the allegations of the complaint as a whole,” the Court held, “the complaint alleges facts suggesting a significant risk to the commercial viability of Matrixx’s leading product.” A NARROW RULING Under Matrixx, a company can be sued for securities fraud even where the omitted facts were not statistically significant. But while the Supreme Court made clear what materiality isn’t, it offered little concrete guidance on what materiality is. And that is bad news for corporate counsel trying to steer their companies clear of trouble.
While the Supreme Court made clear what materiality isn’t, it offered little concrete guidance on what materiality is. The Court said that materiality is an “inherently fact-specific finding.” Those words should send a shudder down the spine of anyone trying to advise a client on its disclosure obligations. “Inherently fact-specific findings” are the opposite of generally applicable legal rules that one could rely on to give sound legal advice. They make outcomes harder to predict when a company winds up in litigation. And they make it harder to win dismissal of a suit as a matter of law in the early stages of litigation. Matrixx’s narrow ruling – that the absence of statistical significance is not always fatal – is also likely to be overread by many plain-
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tiffs, and perhaps even some courts, to mean that the absence of statistical significance is never fatal. That would be unfortunate. Dispensing with statistical significance arguably makes sense in a case like Matrixx, where much of the compelling evidence, such as the published studies linking other zinc-based compounds to anosmia, was simply not statistical in nature.
But there will be many other cases where the evidence of materiality is more quantitative, and there is no good reason not to apply a statistical significance requirement in those cases. The Court suggested as much when it made clear it was holding only that statistical significance “is not dispositive of every case.” Unfortunately, the Court offered no guidance as to what those cases are. A suggestion that statistical significance is still required in some cases is not much help in advising a client unless you know whether your client’s case is one of them. Given the questions left open by the Court, it is all the more important for counsel to err on the side of caution in advising a client about its disclosure obligations. Perhaps in a future case the Court will provide more concrete guidance to corporate counsel about how to keep their clients out of trouble. But Matrixx itself said more about the perils of sticking zinc up your nose than it did about how to avoid a securities class action. ■
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Post-Employment Restrictive Covenants Fare Best with “Choice of Forum” States May Ignore a Choice of Law Clause By Jeffrey S. Boxer and Emily Milligan
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our ability to enforce a post-employment restriction on competition or solicitation can turn on where you seek to enforce the restriction. True, ensuring that a court applies the appropriate law can make the difference between an enforceable covenant and a worthless covenant, particularly for employers with operations in more than one state. But a choice of law clause alone is rarely enough to save a restrictive covenant in a jurisdiction where enforcement is disfavored. In contrast, a choice of forum clause often can make the difference. Many employment contracts and restrictive covenants include choice of law clauses specifying the state whose law should be applied to the contract. Indeed, most courts enforce choice of law clauses unless (a) the chosen state has no substantial relationship to the parties and there is no other Courts in states that are more reasonable basis for choosing that state’s law skeptical of restrictive covenants or (b) application of the law of the chosen state would violate a fundamental policy of often insist on applying their the forum state. own law to the enforcement of However, courts in states that are more skeptical of restrictive covenants often insist on ap- those covenants as a matter of plying their own law to the enforcement of those fundamental policy regardless of covenants as a matter of fundamental policy regardless of the parties’ choice of law clause, even the partiesʼ choice of law clause. if the parties’ choice is rational and reasonable. For example, a New York-based company with employees in California could include a New York choice of law provision in its restrictive covenants with its California employees in an effort to avoid California law and its strict policy precluding enforcement of restrictive covenants. New York has a substantial relationship to the parties since the employer is based in New York. This relationship is enhanced
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Employers, particularly those with employees in more than one state, can follow some simple steps to maximize the likelihood that the enforceability of their restrictive covenants will be decided under the desired law.
Jeff Boxer
is a partner at Carter Ledyard & Milburn LLP in New York. He is a member of the firm’s litigation department and its employment practice group, which focuses on restrictive covenants and the protection of trade secrets.
emily milligan, counsel in Carter Ledyard & Milburn’s New York office, is a commercial litigator focusing on restrictive covenants and the protection of trade secrets.
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of law clause selecting the forum state’s law), and that the employee will have an opportunity to argue the choice of law issue before the court in the chosen forum. Thus courts – including courts that have refused to enforce choice of law provisions in restrictive covenants – have enforced mandatory forum selection clauses in employment agreements with restrictive covenants, at times requiring employees to litigate disputes relating to the enforcement of restrictive covenants in a distant forum that is of greater convenience to their former employer. Employers, particularly those with employees in more than one state, can follow some simple steps to maximize the likelihood that the enforceability of their restrictive covenants will be decided under the desired law.
if the employees in California have other connections to New York, such as reporting to New York-based management, traveling to New York for business or training, or being in regular communication with customers or colleagues in New York. In litigation to enforce the restrictive covenant, however, a California court likely will ignore the choice of law provision, because applying New • First, the employer can determine which York law to a restrictive covenant in California of the states in which it operates has the violates a fundamental public policy of Califormost favorable law for enforcing restricnia. Courts in states like Texas and Georgia also tive covenants. are unlikely to enforce choice of law clauses se• Second, the employer can review its oplecting the law of a different state. As a result, erations to determine whether that state the courts that are most likely to strike down has a reasonable relationship to the emyour restrictive covenant are the courts that are ployees covered by restrictive covenants. least likely to enforce a choice of law clause. A New York based company with employees in The inability of a California could include a New York choice of law choice of law clause alone to ensure the provision in its restrictive covenants with its Calidesired outcome highfornia employees as a way to avoid California law lights the importance of a choice of forum and its strict policy against restrictive covenants. clause. Forum selection clauses are prima facie valid in most courts • Third, the employer can take steps to and generally will be set aside only if the clause enhance the relationship between the is unreasonable because it is the result of fraud company and its employees and the or overreaching, would result in serious inconchosen state. venience to a party or would violate a strong • Fourth, the employer can include manpublic policy of the local forum if enforced. datory, exclusive choice of forum and While courts in states that typically do not choice of law clauses selecting the choenforce restrictive covenants have refused to sen jurisdiction in its restrictive covenforce choice of law clauses selecting the law enants with its employees. of another state because they violate a fundamental policy of the forum state, courts in Including a reasonable choice of forum those same states have enforced mandatory clause may not guarantee a particular outchoice of forum clauses requiring that disputes come, but it will enhance the likelihood that regarding restrictive covenants be resolved in litigation regarding restrictive covenants will another state. Those courts have reasoned that take place in the desired forum using the dethe selection of a different forum does not nec- sired law. It will result in more consistency, essarily require the application of that forum’s and it will improve the chances of enforcing law (even if the contract also contains a choice restrictive covenants. ■
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the next big thing is tiny Regulation of nanotech By Jean H. McCreary
nanotech-enabled consumer products will achieve a $2.6 trillion world market by 2015. Such growth has raised the specter of product and employee exposure (“nano-tort”) claims, similar to the mesothelioma litigation associated with asbestos. THE MAGAZINE FOR THE GENERAL COUNSEL, CEO & CFO
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Consumer groups and the media already are voicing concerns about nano-material, fueled by some studies on mice indicating that carbon nano-tubes may be carcinogenic. Extrapolating data from mice to humans is iffy, however, and there also is evidence that na-
In February 2011, the World Health Organization announced that it will develop guidelines to protect workers from potential risks posted by nano-materials.
Jean H. McCreary,
is a partner at Nixon Peabody LLP and a member of the Executive Counsel Editorial Advisory Board. She practices in environmental law, with a focus on regulatory compliance and enforcement, hazardous waste site remediation, and environmental aspects of complex mergers and acquisitions, real estate transfers and leases, and assetbased lending. JMcCreary@ nixonpeabody.com
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no-materials are not “bioavailable” to cause damage in target organs when incorporated into end-user products. The EPA defines nano-scale materials as those having at least one external dimension measuring less than 100 nanometers. A nanometer is one billionth of a meter or about 1/1000th of the width of a human hair. Consumers have access to a growing range of products containing nano-materials, including bacteria-fighting foot-odor resistant socks, wrinkle-minimizing eye creams, stain-resistant clothing, anti-microbial baby pacifiers, and electronics and building materials. The lack of a settled scientific definition has challenged government development of regulatory programs. Establishing a threshold based on size makes it easy for the regulated community to know what is subject to regulation, but factors such as bio-persistence or shape may affect potential risk. The many benign applications of the technology and its economic potential make blanket regulation on the basis of size alone problematic. Until federal regulators can decide whether a new regulatory framework is needed, they are generally applying existing regulatory programs, often using nano-specific guidelines. MANY FEDERAL STATUTES INVOLVED The Occupational Safety and Health Act of 1970 is the primary national framework for protection of workers from work-related illness and injury. It has no formal regulatory mandates related to nano, but in 2004 the National Institute for Occupational Safety and Health (NIOSH) initiated a multi-stakeholder “National Nanotechnology Partnership” to study implications in the work place. In 2009, NIOSH published guidelines for prudent controls to prevent worker exposures, and in 2010
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it produced a technical bulletin addressing exposure to carbon nanotubes in the workplace (establishing a recommended exposure limit). The guidelines specify engineering controls for respiratory protection and a methodology for developing a risk management program to identify potential workplace hazards. The NIOSH principles define best practices to reduce dermal, ingestion and inhalation exposures. They are based on over 170 peerreviewed studies on health effects of exposure to nano-materials. Under the Atomic Energy act of 1954, the U.S. Department of Energy developed a guidance protocol incorporating safety and health procedures for nanotechnology into DOE’s programs. This includes training workers, conducting exposure assessments, instituting air monitoring programs, offering baseline medical evaluations, controlling potential exposures using risk-based approaches, and documenting procedures for managing wastes. The Toxic Substances Control Act broadly regulates manufacturing, processing and use of chemicals and mixtures that may pose an “unreasonable risk” or “cause serious health effects.” If EPA has sufficient information to make a reasoned evaluation of health and environmental effects, including a balancing of risks and benefits, it may delay or prohibit the manufacture of a product. EPA also has determined that two forms of nano-materials constitute “new chemicals” (not just smaller versions of chemicals on the existing inventory) that may present a risk of serious health effects unless protective measures are utilized during manufacturing and processing. EPA finalized a Significant New Use Rule on May 6, 2011. It requires manufacturers using single-walled and multi-walled carbon nano-tubes to notify EPA at least 90 days before any new use not already approved by EPA, so it may evaluate and if necessary prohibit the intended use, or limit it through administrative consent orders. Under a 2008 policy, EPA already presumes that each carbon nano-tube is a different new chemical subject to the agency’s review. Buyers of products incorporating single or multiwalled carbon nano-tubes should ask the seller for certification that their intended use is not a significant new use. Some uses may be exempted (such as when it has been encapsulated within plastic) while others may trigger the notification
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requirement. EPA is also intending to require entities to monitor and submit data on health and environmental effects of nano-substances. The Federal Insecticide, Fungicide and Rodenticide Act regulates the use and sale of pesticides, and EPA monitors nano-based pesticide products (often containing silver nanoparticles). It has fined a company more than $200,000 for selling a mouse and keyboard with a “nano-shield” coating because the seller made claims regarding its antibacterial capabilities, and it has regulated a silver-iongenerating washing machine as a pesticide. EPA was petitioned by non-governmental groups to take enforcement action regarding more than 200 nano-silver products being sold without approval. FDA has robust regulations for medicine and medical technologies, but less stringent regulations for cosmetics, food and dietary supplements incorporating nano-materials. FDA deems nanotechnology as falling within the general duty of manufacturers to ensure that their
The Massachusetts Office of Technical Assistance recently issued a guidance document establishing considerations for the safe development of products containing nano-materials. It contains thoughtful recommendations for good management practices that take into account the fact that the engineering, size and surface area of nano-materials can alter their reactivity and create other characteristics that are not fully understood. The Massachusetts document stresses the importance of communicating about the commitment to safety and fostering awareness regarding steps being taken when working with such materials. Consensus-standards organizations, such as the International Organization for Standardization, the American Society for Testing and Materials, the American Society of Mechanical Engineers and American National Standards Institute are formulating guidelines on the safe handling, use, and disposal of nano-materials by workers and consumers. None have been finalized. Industry-sponsored voluntary initiatives have also proliferated in recent years. One is a collaboration between the Environmental Defense Fund and DuPont, called the Nano Risk Framework. It proposes a systematic process for identifying, managing and reducing potential risks of nano-materials through their lifecycle. The Responsible Nano Code is a multi-party collaboration that establishes a high-level set of principles and operating practices to guide
EPA has determined that two forms of nano-materials constitute “new chemicals” that may present a risk of serious health effects. products are safe. It does not investigate unless reports indicate that a product is unsafe. It maintains a voluntary disclosure list for consumer products, but it has no mandated notification requirement applicable to manufacturers. In 2010, the Government Accountability Office recommended that EPA issue regulations, and it confirmed EPA’s authority under the Clean Air Act, Clean Water Act and Superfund Law to regulate nano-materials as “pollutants” when emitted to the air, waters and soils. These laws are not well-suited to nanoscale particle sizes. They pose enforcement challenges in the absence of technologies for measuring the size or risk of these materials. President Obama’s 2011 budget continues $1.8 billion for this initiative, of which $117 million is devoted to studying the possible health implications of this technology. States have not adopted a comprehensive regulatory approach. California issued a “call for information,” asking in-state nanotechnology companies to share the analytical techniques they use to evaluate potential health and environmental exposures, and toxicity, with the California Department of Toxic Substances.
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industry. Another initiative is EPA’s Nano-scale Materials Stewardship Program, a voluntary effort to collect data from chemical firms to assist with development of a meaningful regulatory process. The Woodrow Wilson International Center for Scholars issued an excellent evaluation of these efforts. (www.nanotechproject.org/publications/archive/voluntary). In December 2010, the National Nanotechnology Initiative and the White House Office of Science and Technology Policy published their Strategic Plan (http://strategy.nano.gov), along with an excellent summary of regional, state and local initiatives. In February 2011, the World Health Organization announced that it will develop guidelines to protect workers from potential risks posed by nano-materials. This document is expected to incorporate elements of risk assessment and workplace safety controls. Many companies involved in the manufacturing, import or processing of nano-materials are prudently following voluntary worker safety best practices. These include carefully assessing potential risks throughout the production life cycle; instituting worker safety engineering controls and procedures; collecting health and environmental data (including data relating to transportation of shipments and nanobearing waste streams); performing worker health surveillance; and evaluating spill preventions. Some companies are establishing protocols for all of the above and then evaluating their effectiveness. Doing so creates confidence among the work force that appropriate precautions are being implemented until the potential exposure levels – about which they are being bombarded by the media – are more fully understood. ■
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Who Says? COMMITTEE HEARINGS, COMMISSIONS AND OFFICIAL REPORTS
ACCORDING TO a 2006 National Geographic Society survey of Americans aged 18 to 24, less than four in ten can identify Iraq on a map of the Middle East; one-third of young Americans cannot calculate time-zone differences; even after Hurricane Katrina, two-thirds cannot find Louisiana on a U.S. map; almost one-third think that the United States has between 1 and 2 billion citizens; and two in ten, amazingly, cannot point to the Pacific Ocean on a world map. Susan Marlow, Smart Data Strategies, Inc.1
ABOUT 40 PERCENT of all mainline Class I carrier track is dark territory, areas where there are no electronic signals to control the location, speed, and direction of trains, monitor the integrity of the rail, or verify the positon of switches. In dark territory a misaligned switch virtually guarantees a rail accident and only luck determines the scope of the resultant disaster. Dark territory also aggravates the ‘single key problem.’ Most railroad mainline switches can be opened by the same switch key. When a switch is opened or misaligned in dark territory, there are no electronic means for detection. Railroad switch keys can be purchased on the internet for less than $1.00 ... Rick Inclima, Director of Safety for the Brotherhood of Maintenance of Way Employees Division/Teamsters4
PERHAPS you have not thought about securitization this way, but securitization is a kind of “discount window” for corporations to cash in their receivables at some blended rate, which can be expressed as the weighted average interest cost of the transaction in which the receivables are being refinanced. Each notch on the scale corresponds to a level of asset impairment: AAA signifies impairment in only a very slight degree (when we worked at Moody’s, the numerical meaning was an average 0.06 BP [basis point] loss of yield on the security), whereas AA signifies slightly more, A even more, etc., in exponential increments going down the scale to single-C. Effectively, the rating agencies are setting the levels of risk and leverage of the financial system. That is a ridiculous situation. It is analogous to leaving the decision of how large an inch or a meter should be to the individual tailor. Government policy-makers should be making this decision, not rating agencies. Ann Elaine Rutledge, Founding Principal, R&R Consulting2
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THE IDEA of climate adjustment assistance has revived at the UN an old idea from the 1970s – what was called then the “New International Economic Order.” The premise of the New International Economic Order, as explained at the time by West Germany’s Chancellor Willy Brandt, was that there needed to be “a large scale transfer of resources to developing countries.” This was back in the heyday of post-colonial Western guilt, and it came to an abrupt end in the 1980s when President Reagan forcefully repudiated it at a UN summit in, coincidentally, Cancun. Steven F. Hayward, F. K. Weyerhaeuser Fellow American Enterprise Institute [representing his own views, and “not necessarily” those of the AEI.]6
AIR TRAFFIC CONTROLLERS have inadvertently fallen asleep or deliberately napped while in-shift ... Is this a moral failing on the part of a few air traffic controllers or does it indicate a systemic problem in the organizing, staffing, and scheduling of air traffic control operations? I believe it is a systemic problem ... In the early morning
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of August 27, 2006, Comair Flight 5191 crashed on takeoff from Lexington, Kentucky killing 49 of the 50 people on board. The crash occurred at a time when the sole air traffic controller on duty was working the last shift of a 2-2-1 series of shifts consisting of two evening shifts, two day shifts, and finally one night shift. ... The air traffic controller then had the regulationmandated 8-9 hours off duty before going back on duty in the late evening for the night shift. He managed only 2-3 hours of “not real good” sleep in the late afternoon. He then remained awake through the evening. His sleep was truncated because the bulk of his sleep opportunity fell in the early to mid-evening, the so-called ‘forbidden zone’ for sleep. With respect to the relationship between sleep and circadian physiology, the controller took the maximum possible advantage of the sleep opportunity he was given. He went back on duty at 11:30 PM with his shift projected to end at 7:30 AM. Comair 5191 crashed at 6:06 AM as the captain, the first officer, and the air traffic controller failed to detect that the plane was on the wrong runway, a runway much too short for successful takeoff. Gregory Belenky, M.D., Research Professor and Director, Sleep and Performance Research Center, Washington State University, Spokane; 29-year U.S. army veteran, developing systems to manage sleep and sustain performance in military operations7
WE SUppOrT this committee’s efforts to redress the problems with derivatives we experienced during the financial crisis in 2008. I want to assure you that FMC and other end users were not and are not engaging in risky speculative derivatives transactions from which some of that turmoil arose ... End users do not contribute to systemic risk because their use of derivatives constitutes prudent, risk mitigating hedging of their underlying business ... To illustrate, FMC sells
agricultural chemicals to farmers who need them at planting time, but want to defer payment until harvest time. FMC agrees with the farmer that he can pay in bushels of soybeans when he harvests his crop ... . FMC then enters into a customized derivative with one of our banks that exactly matches the amount and timing of the future delivery of soybeans. ... Customized OTC derivatives allow us to expand sales and provide added value to our customers, while reducing our risk. By forcing end users to post cash margin, the regulators will take the balanced structure I’ ve just described and impose a new risk. Thomas C. Deas, Jr., Vice President & Treasurer, FMC Corporation, and President of the National Association of Corporate Treasurers; FMC and NACT are part of the Coalition for Derivatives End-Users8
[T]hE hEarT of a corporate social responsibility campaign is the right to speak on matters of public concern and to petition government for the redress of grievances ... Corporate social responsibility campaigns are thus within the First Amendment’s protections of freedom of association and the right to petition government for the redress of grievances, as well as freedom of verbal and written speech, including the dissemination of handbills and other written texts, the use of hand gestures, picketing, the display of placards and banners, symbolic conduct, and the expenditure of money to support or oppose political candidates and issues. The Court’s recent and strong protection for the First Amendment rights of companies [Citizens United, Boy Scouts of America v. Dale, and United States v. Stevens] is based on a longstanding belief that in a democratic society with a market economy, the best protection for both liberty of conscience and robust economic growth lies in the electorate, consumers, and citizens having access to a full range of information on which to base their political, social and economic choices ... Each of these decisions strikes some as wrong as a matter of policy and constitutional interpretation, but for the moment they are the law. Catherine L. Fisk, Chancellor’s Professor of Law, University of California, Irvine9
1. Before the House Committee on Education and the Workforce, “Reviving our Economy: The Role of Higher Education in Job Growth and Development,” April 21, 2011 2. Before the Senate Committee on Banking, Housing, and Urban Affairs, “The State of the Securitization Markets,” May 18, 2011 4. Before the House Committee on Transportation and Infrastructure, Subcommittee on Railroads, Pipelines, and Hazardous Materials, “Railroad and Hazardous Materials Transportation Programs: Reforms and Improvements to Reduce Regulatory Burdens,” April 7, 2011. 6. Before the House Committee on Foreign Affairs, Subcommittee on Oversight and Investigations, “UN Climate Talks and Power Politics: It’s Not about the Temperature,” May 25, 2011 7. Before the Senate Committee on Commerce, Science and Transportation, Subcommittee on Aviation Operations, Safety and Security, “Air Traffic Control Safety Oversight,” May 24, 2011 8. Before the Senate Committee on Banking, Housing, and Urban Affairs, “Building the New Derivatives Regulatory Framework: Oversight of Title VII of the Dodd-Frank Act,” April 12, 2011 9. Before the House Committee on Education and the Workforce, Subcommittee on Health, Employment, Labor and Pensions, “Corporate Campaigns and the NLRB: The Impact of Union Pressure on Job Creation,” May 26, 2011
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Protecting Your Budget While Protecting Your Brand By Kelly Phair McCarthy and Keith G. Askoff
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stablishing the right amount of protection for your brand is difficult, often akin to chasing a moving target. Just when a company achieves a level of protection comfortable for its current size and presence, it launches a new product, changes its logo, confronts a new competitor or discovers an enterprising counterfeiter. When it comes to the appropriate level of protection and the amount to spend on it, lawyers like to say, much to the frustration of their clients, “It depends.” In truth, it does depend, and a number of factors need to be evaluated. In this article, we review two common scenarios and then analyze how some of those factors apply. In the first scenario, your job is managing a company’s trademark portfolio, and you are faced with paring down what has become an unwieldy group of trademarks. This could be due to the rebranding of a product line, changes in products or markets over time, the sale of a division, or acquisition of a new line of business. In many cases, simple lack of attention has caused the portfolio to grow without company supervision. Outside counsel usually is not consulted about such a project until the portfolio has gotten so far out of control that it’s become a noticeable chunk of the legal department’s budget. If your job is to get costs under control but still keep the brand intact, where do you start? In scenario two, you are presented with the task of deciding how to protect either new brands or old brands where protection has been neglected. This scenario is most common in small companies, where growth has been faster than anticipated. But it is also quite common in larger, older companies, where budgets have been tight and brand protection was not traditionally a priority. Now, for whatever reason, there is some money in the budget to protect the brand – but don’t spend too much. How do you help your company take the next step?
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Kelly PhAir McCArthy
is a partner at Sideman & Bancroft. She represents businesses and individuals in commercial, corporate and intellectual property transactions, with a focus on brand protection issues and trademark and copyright portfolio management. Her clients include public and private companies, both domestic and international, ranging from emerging regional companies to global industry leaders. kmccarthy@ sideman.com
Keith G. AsKoff
is vice president and associate general counsel, Varian Medical Systems, Inc. keith.askoff@ varian.com
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THE BASICS Companies often overspend because the decision-maker fears leaving something out and wants to cover all the bases, lest there be finger pointing when something that should have been protected wasn’t. The opposite is also true: companies can underspend because the decision maker, lacking all the facts, may unwittingly take risks that have potentially disastrous consequences. Reviewing the basics can help you avoid swinging to either side of the spectrum. Trademarks and Service Marks: These are words, phrases, symbols or designs that indicate the source of the goods or the service. In most jurisdictions, trademark applicants must specify the “international class” of goods or services for which protection is sought. In some cases, multiple classes may be advisable. First-to-File v. First-to-Use: In the United States and some other jurisdictions, rights to a trademark do not accrue until a party actually uses the trademark in commerce. While a company can file an application to get the process started, the USPTO won’t grant registration until that time. In most other countries, use is not required for registration. Accordingly, if a particular jurisdiction is important for a company’s business activities, being the first to file an application may avoid problems down the line and serve to head off an enterprising competitor or “squatter.” Filing Treaties: The Madrid Protocol is an international agreement that allows companies in member states to file a single trademark application in the home country and have that application automatically filed in other member countries. If a company’s core markets include the European Union, a Community Trademark application may be the most cost effective way to achieve protection in that jurisdiction. If a company’s goal is to grow its portfolio and its protection, using these tools can help mitigate some costs during the process. Keeping these basics in mind, a number of factors should be reviewed to determine the right move. Someone with intimate knowledge of the company and its markets needs to evaluate these factors, and also decide if there are others to consider. Walking through the following analysis with outside counsel can help identify the most important issues. First, consider the nature of the business you are in. Consumer products tend to require
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large-scale and often worldwide trademark filing initiatives to protect a brand and keep it ahead of the competition in consumer recognition. This is in contrast to companies that are selling business-to-business or in niche markets, and may not be concerned with attaining household-name status. Second, consider who your customers are. Are they particularly sophisticated, or are you looking for the man on the street? A greater degree of sophistication reduces the risk that your customer will be confused as to source. Third, where are you doing business? While the internet allows even tiny shops to do business globally, you still need to ask what, realistically, are your key markets. And, are there markets where you are seeing counterfeit products? Next, what are your key product or service offerings, and what products or services are of lesser importance in terms of revenue or strategic value? Finally, what does your portfolio look like now? Ask whether there is obvious dead weight – or, conversely, whether there are clear gaps in protection, in terms of product type or geography. PROGNOSIS After determining the current lay of the land, try to envision the future. Understanding where your company is heading helps you decide where to cut and where to add. Do you have products that are on a meteoric rise and will require new registrations, or something new in development that will replace your current offerings? This indicates that you can hold off growing the portfolio in relation to the old products and begin taking steps to protect the replacement. Are there up and coming companies that will be competing with your established brand so that you need to step up marketing efforts to remain on top? Will you be opening branches on the ground or online to target new geographic markets, and are those locations firstto-file jurisdictions? Do you anticipate more knock-offs or counterfeits of your product? (If you are seeing counterfeiting now and your products maintain their popularity, the answer to this question will be a resounding “yes.”) Temper optimism with realism, and ambitious growth goals with realistic predictions about how the company will be doing business in five or ten years.
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RISK Even after all these considerations and projections, unless you have minimal trademark needs or an unlimited budget, you will need to get comfortable with some level of risk. For example, a U.S. trademark alone may be enough. Sometimes just having a stake in the ground is enough to stave off imitators, regardless of the geographical scope of the legal protection. Often this is the case where one or more of the following factors are present: The product is sold to sophisticated consumers who could not be fooled by a product name; the sales
participation by the relevant businesspeople. Bear in mind that marks weeded out of the portfolio do not need to be affirmatively abandoned. Rather, instruct counsel not to spend time on them and simply forward any actions or notices. In this way the mark will not really go abandoned until such time as some required action is not taken. This effectively provides a grace period after a decision to let the mark go. This programmatic approach can be used for new products for which the value of large scale registration is uncertain, but potentially large. Budgets often aren’t so constrained as
Before slashing and burning or building and spending, reviewing the basics can help you avoid swinging to either side of the spectrum. process involves significant vendor-customer interaction; or potential competitors would have no interest in being seen as a copycat. However, you should consider whether there are parties that could exploit your chosen name if they were allowed to do so. For example, third party service or parts suppliers may be able to profit from using your product’s name, and possibly damage your goodwill, as well. If this seems plausible, consider filing in jurisdictions where such players are active. In cases where you must file broadly, there are ways to get reasonable protection while avoiding excessive costs. Even if you face competitors in almost every jurisdiction in the world, you may not need to register worldwide. For example, if you sell throughout Asia, would a competitor invest in marketing a product with a name similar to yours if you have protection in China, Japan, Taiwan and Korea? If not, then it probably isn’t worth registering in other Asian markets. Some large portfolios may be susceptible to cuts that will have no appreciable effect on protection. If you have a family of names with a component (i.e. an element that is arbitrary and/or well known by relevant consumers) that is used together with descriptive or suggestive components or letters (such as “Super” or “XL”) registering only the strong component is usually enough. There also are programmatic ways to save money on the portfolio. Review and purge once, then docket subsequent occasional reviews, with
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to prevent filing for trademark registrations. Rather, it is the cumulative effect of trademarks filed over the years that strains the budget. Thus, when launching a new product, a U.S. application can be filed, followed by an international application under the Madrid Protocol. Then regular review of the product and its markets can be undertaken. If the product succeeds as hoped and the rights prove valuable, you are protected. If not, you can begin weeding out as soon as it becomes apparent that certain rights aren’t worth their cost. REALITY CHECK Decisions about building or reducing a portfolio, and about what to protect and where, should be made with the company’s culture and resources in mind. For example, if the worst case result of failing to register in a given jurisdiction is minor activity that would not pose a threat to the brand, there’s not much value in a registration. Factors such as the company’s capacity for monitoring such activity, and its willingness to litigate, also should be considered. Portfolio review methods need to be evaluated in light of the company’s culture. Trademark costs, particularly when multiple classes of goods are chosen in multiple geographies, tend to grow almost exponentially over time. If your strategy requires regular review, and that review does not occur, you can find yourself virtually strangled with costs very quickly.
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OUTSIDE COUNSEL’S ROLE Outside counsel can be invaluable or be a frustrating roadblock. A good advisory attorney should be comfortable learning the client’s risk tolerance and providing advice within those parameters. A company does not need to be
A company does not need to be told that the only way to minimize risk is to file everything, in every country. told that the only way to minimize risk is to file everything, in every country. Most companies know trademark litigation can be a lengthy and costly endeavor, but budget realities rarely allow a company to take the most thorough approach, and a balance must be struck. Outside counsel should walk the client through the data points above and provide thoughtful advice on how to proceed in the client’s unique business environment. If you feel like you are battling your outside counsel
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at every step, or that counsel is not willing or able to assess the lay of the land through the eyes of the company, then it may be time to look for new help. TAKE ACTION In the scenarios outlined above, two companies face two different problems. The first needs to figure out how to cut down a portfolio that has taken on a life of its own. The second is looking to augment its brand protection. The first company would need to recognize, at the outset, that the company name is an important brand to protect. After those registrations are safe, it would need to look at what remains, such as tag lines created long ago, logos the company no longer uses, perhaps even registrations relating to products no longer being sold. Out of that list, the company would need to identify registrations that can be let go in order to make room for new products and initiatives. In some ways the second company has an easier time. Spending money to build is often more palatable than saving money by cutting assets. One approach would be to utilize filing treaties to maximize the number of applications filed with each dollar and attain a global brand presence quickly. By starting with the most important trademarks, like the company name and key product names, the number of applications filed at one time can be minimized. Later, other trademarks can be identified as line items on future budgets. Scenarios vary, but the object is the same: sufficient protection at a reasonable cost. ■
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M&A in Canadian Oil and Gas Tips and Trends By John H. Kousinioris and L. Alan Rautenberg
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Deal Terms With the continuing adoption of various he Canadian oil and gas sector is competitive and highly fragmented, with small, intermediate and large players active primarily in the Western Canadian Sedimentary Basin. The sector has traditionally had, and continues
U.S. practices in Canadian transactions, Canadian and U.S. deal terms have many similarities. Nevertheless, there remain marked differences within the North American marketplace for
to have, significant M&A activity, with domestic and
negotiated M&A transactions, and these
foreign intermediate and larger players acquiring smaller
should be recognized in the context of
players. Smaller companies often acquire non-core assets from larger
cross-border transactions. The following
players to rationalize their asset portfolios.
should be highlighted:
Alberta has approximately 175 billion barrels of proven synthetic oil reserves in its oil sands and an additional four billion barrels of con-
•
far less frequently in Canadian
ventional crude oil reserves, making Canadian oil reserves second only to Saudi Arabia. Canada is also the third largest producer of natural
transactions. •
Canadian oil reserves are second only to Saudi Arabia.
•
sources has been of continuing interest to for-
The survival period for representations and warranties is
500 trillion cubic feet in Alberta alone. The abundance of Canadian natural re-
Canadian transactions involve far fewer earnouts.
gas in the world with reserves in excess of 50 trillion cubic feet, excluding coal bed methane, which is estimated to represent up to a further
“Go-shop” provisions appear
typically longer in Canada. •
Caps on indemnity claims are much higher in Canada, with almost
eign investors, traditionally from the United
half of Canadian transactions
States, but more recently from Asia, and has re-
limiting indemnity claims to the full
sulted in significant M&A activity in the sector.
“purchase price” of the transaction.
The aggregate size and volume of M&A transactions in Canada in-
•
escrow or holdback components
creased by approximately 20 percent in 2010 over 2009, with aggregate transaction values exceeding $150 billion. The oil and gas sector was the most active in deal volume and value, with over 1,000 transactions. Most notable was the significant increase in cross-border M&A activity between Canada and the United States in 2010, which surpassed $40 billion in value over 200 transactions. We expect the rebound in Canadian M&A activity to continue and
Canadian transactions contain much less frequently.
•
In Canada, provisions relating to “sandbagging” (statements for which the buyer can seek indemnification as a breach of warranties, notwithstanding prior knowledge of breach) are found
strengthen this year as a result of the recovery in debt markets, the
less frequently and are more likely
renewed search by capital pools for acquisition opportunities and the
to be anti-sandbagging in nature
strengthening demand for Canadian resources and commodities.
rather than pro-sandbagging. The reverse is more likely to be the case in the United States.
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TRANSACTION STRUCTURING Business acquisitions in Canada are typically completed by purchasing the voting securities of a business entity or by purchasing its assets. The acquisition structure depends largely on factors such as whether the shares of the target entity are listed on a stock exchange, on Canadian corporate and tax requirements, the nature of the consideration offered by the acquirer and whether the approach is friendly or hostile. Public business acquisitions must comply with a variety of corporate and securities regulatory requirements. They typically employ a take-over bid or plan of arrangement to complete the acquisition, with plans of arrangement being more common. Private business acquisitions require less regulatory compliance and can usually be completed by way of a share or asset purchase agreement with the target’s shareholders or the target itself. A plan of arrangement is a court-sanctioned corporate reorganization procedure that allows a company to reorganize, combine with another company (or companies) or otherwise effect fundamental changes to its capital structure. This acquisition method is frequently used for friendly M&A transactions because it is flexible, facilitates complex multi-step transactions, avoids the application of the more prescriptive take-over bid rules, permits the transacting parties to avoid second-stage transactions to eliminate residual shareholder interests and allows for more conditional financing. Additionally a court-approved arrangement may provide a section 3(a)(10) exemption for the issuance of share consideration under U.S. securities laws, thus avoiding material SEC review of a registration statement. Once negotiated by the bidder and the target, a plan of arrangement is submitted to the target’s security holders for approval. Following approval it is submitted to the court for approval and subsequent implementation. A plan of arrangement typically requires approval by two-thirds of the votes cast at a special meeting of security holders. It binds all security holders once approved. TAKEOVERS A take-over bid is the Canadian equivalent of the U.S. “tender offer.” It is defined by a bright-
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line test as an offer to acquire outstanding voting or equity securities of a class that would bring the holdings of the bidder (and its joint actors) to 20 percent or more of the securities of the class. A bidder is required to deliver a take-over bid circular (containing the terms and conditions of the offer and certain other required disclosures) to the target shareholders and holders of convertible securities. A take-over bid must remain open for at least 35 calendar days, and no securities may be taken up by the bidder until the end of that period. All shareholders must be offered identical consideration, and collateral agreements are generally prohibited. Adequate (i.e., clear and unequivocal) arrangements must be in place before a takeover bid is commenced to ensure that the bidder has the necessary funds available to pay for all the securities subject to the take-over bid. This requirement does not preclude conditions to the bidder’s financing, but the bidder must reasonably believe it to be unlikely that the conditions to its financing cannot be met. This requirement does not apply to a plan of arrangement. Exchangeable shares are often used in cross-border share exchange transactions. A foreign acquirer will establish a Canadian subsidiary that will, at the option of the target shareholders, either deliver shares of the foreign acquirer, or issue shares that are exchangeable for the shares of the foreign acquirer. Exchangeable shares are designed to be the functional and economic equivalent of the shares of the foreign acquirer, mirroring their voting, dividend and return of capital rights. They also provide for the eventual exchange of the exchangeable shares for the shares of the foreign acquirer, including after a sunset date. The exchangeable share structure addresses the lack of a tax deferral for Canadian-to-foreign share transactions and allows shareholders of a Canadian target company to defer tax until they exercise the exchange right inherent in the exchangeable shares. TRENDS Over the past few years, we have noted a number of trends in the Canadian oil and gas sector that have impacted, and we expect will continue to impact, M&A activity:
John Kousinioris,
is a partner at Bennett Jones LLP. Co-chair of the firm’s corporate commercial department, he focuses his practice on securities law, mergers and acquisitions and commercial transactions. His experience includes public and private offerings of equity, near equity and debt securities, particularly in the energy sector. kousiniorisj@ bennettjones.com
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• Risk-sharing. Rather than focusing on the control associated with owning high-percentage working interests in oil and gas properties and becoming operators, industry participants have begun to focus on risk-sharing, particularly for large projects with multiyear development horizons and high capital requirements. This has led to an increasing number of projects, including exploration and development programs, being structured as partnerships and/or joint ventures, as well as the sale of significant minority interests to industry partners. • Technology. The oil and gas business has never before been as focused on proprietary technology. Traditionally, the rights to the resource were all that really mattered. Today, one must also have access to the specialized technology required to exploit the resource, resulting in an increasing interest in
Asia, and developing infrastructure to facilitate exports to those markets, including LNG export terminals. OPEN FOR BUSINESS Notwithstanding the Government of Canada’s recent decision not to approve BHP Billiton’s proposed U.S.$39 billion unsolicited bid for PotashCorp, we believe that Canada remains open for foreign investment. Only three acquisitions have been rejected by the Government in over 20 years of foreign investment review. Foreign investment review thresholds under the Investment Canada Act continue to rise. The review and approval threshold for foreign acquisitions is presently C$312 million, based on the book value of the target’s assets, subject to certain exceptions. We anticipate that the review threshold will increase in the future. A C$1.0 billion threshold had been proposed to be implemented by 2015, based on the “enterprise value” of the business being acquired. The calling of an election has pre-empted the implementation of those changes. Canada currently provides favorable income tax rates in comparison to the United States. Canadian vendors tend to prefer share sale transactions to asset sale transactions because of the favorable tax treatment accorded capital gains, whether realized by an individual or corporate vendor. Although the general design of the Canadian tax system is similar to that of most industrialized countries, including the United States, Canadian tax law tends to a formalistic approach in comparison to the U.S. substancebased approach. This can provide greater certainty with respect to the tax consequences of a Canadian M&A transaction, and the ability to take advantage of creative structuring alternatives, such as exchangeable shares. It also requires careful attention to meeting the formalities imposed by Canadian tax law. ■
Business acquisitions in Canada are typically completed by purchasing the voting securities of a business entity or by purchasing its assets. technology-driven joint ventures, increased spending on research and development and renewed interest in the enhanced exploitation of oil fields using technologies such as horizontal drilling and multi-stage fracturing. • New Markets. Oil and gas companies are increasingly focusing on market and price strategies and alternative markets. For Canadian natural gas producers, this is primarily a consequence of the significant increase in U.S. domestic production from shale gas. Canadian oil and gas producers are also recognizing the inherent risk of being tied solely to the U.S. market, and they are focusing on new markets for oil and natural gas exports, primarily in
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JUNE/JULy 2011 EXECUTIVE COUNSEL
alan rauTenBerG,
is a partner at Bennett Jones LLP. He advises on tax issues relating to domestic and crossborder mergers and acquisitions, public market debt and equity transactions and corporate reorganizations. He has particular experience with mergers and acquisitions in the energy and natural resources sector. rautenberga@ bennettjones.com
THE MAGAZINE FOR THE GENERAL COUNSEL, CEO & CFO
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An Altegrity Company
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Trust the best. We’ll do the rest. With 25 years of commitment to clients and leadership in service, technology Ontrack andInview people, Ontrack Inview | R.5 GUIrecognized Sheet | Collapsed 1 | R.5 GUI Sheet | Collapsed 2 Kroll Ontrack has the ability to prove our value over other providers. xx
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I’m Kevin, Senior Systems Engineer at Kroll Ontrack. Count on me for the best e-discovery tools and technology to drive down the total cost of litigation.
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Enhanced User Experience
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ew | R.5 GUI Sheet | Navigation
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