Today's General Counsel (Formerly Executive Counsel), V8 N5, October/November 2011 by Today's General Counsel

OCT/ NOV 2011 VOLUME 8 / NUMBER 5 E X ECUTI V ECOUNSEL.INFO

T H E

M A G A Z I N E

F O R

T H E

G E N E R A L

C O U N S E L ,

C E O

C F O

INTELLECTUAL PROPERT Y

Patent Practice

The Art of Drafting Patent Applications E-Discovery Malpractice Internal Investigations One Step at a Time HUMAN RESOURCES

Blind-Sided by GINA

CANADA AND CROSS-BORDER M&A EXECUTIVE COMPENSATION

How to field “Say-on-Pay”

AT&T V. CONCEPCION POINT-COUNTER POINT

Whose Ox was Gored?

Averting Class Actions PRIVACY, LIABILIT Y, CYBERSMEARS

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oct/ Nov 2011 E X ECUTIVE COUNSEL

Editor’s Desk

As Mark Girtz and Robert Daniel point out in this issue of Executive Counsel, businesses creating new web solutions and smartphone applications are being formed and funded rapidly. Consolidation of the industry is already occurring, despite the fact it doesn’t even have a catchy name yet. It’s too early to predict a reincarnated dot-com boom, but the sector is one of the few bright spots in the economy. Girtz and Daniel warn about regulatory matters affecting these businesses, but that challenge is minor compared to the patent maze that financially-strapped inventors have to navigate. The inventors had hopes that the Patent Reform Act signed into law in September would come to grips with the system’s failings. That didn’t happen. The only significant reform is the creation of a post-grant review process, a new avenue to challenge bad patents by presenting evidence of invalidity. There’s nothing wrong with that in concept, but inventors who don’t spend a good portion of their working life monitoring the Patent Office can’t make use of it. The law does give the Patent Office the authority to set its own fees, which may allow it to hire more examiners to address a huge backlog of applications. However, Congress retained the authority to appropriate the money as it sees fit after an amendment to give the Patent Office full control over the fees failed on a close vote. The change from first-to-invent to first-to-file was a disappointment for entrepreneurs, but not unexpected. The worst failing of the new law is its refusal to come to grips with the problem of trolls, which are already targeting iphone app and web-based business developers. Nor did the law do anything to limit patent damages by aligning them with the actual value of a patented invention. One remaining constant, no matter how the law gets changed, is the fact that writing patent applications is a complex

undertaking—or, as John S. Pratt writes in this issue, an art. Congratulations to Executive Counsel Editorial Advisory Board member Timothy J. Malloy, who has been designated a Fellow of the Litigation Counsel of America (LCA), a trial lawyer honorary society composed of fewer than one-half of one percent of American lawyers. And finally, welcome to our two new Editorial Advisory Board members, labor and employment expert Peter Bulmer from Jackson Lewis; and Jonathan Sack from Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer P.C., whose expertise includes internal investigations, the subject of his article in this issue.

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

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DiscoverySolutions Attorney Advertising. Wilmer Cutler Pickering Hale and Dorr llp is a Delaware limited liability partnership. Our United Kingdom offices are operated under a separate Delaware limited liability partnership of solicitors and registered foreign lawyers regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/code-of-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK offices. In Beijing, we are registered to operate as a Foreign Law Firm Representative Office. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000; 1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. This material is for general informational purposes only and does not represent our legal advice as to any particular set of facts; nor does it represent any undertaking to keep recipients advised of all relevant legal developments. Prior results do not guarantee a similar outcome. © 2011 Wilmer Cutler Pickering Hale and Dorr llp

OCT/ NOV 2011 E X ECUTIVE COUNSEL

Features

EXECUTIVE COMPENSATION

36 37

WHAT’S THE TAKEAWAY ON THE 2011 SAY-ON-PAY VOTES?

Deborah Lifshey and Dana Etra Not much to say for most shareholders.

CORPORATIONS CAN BENEFIT FROM FAA RULING ON PRIVATE AIRCRAFT John Hoover Tax treatment and disclosure could be affected.

Greg Kunkle FCC approval required for users of common communications systems.

OLD ISSUES SUPERCHARGED IN NEW MEDIA

Scott L. Nelson Nickel-diming no longer deterred.

A BLOW TO CLASS-ACTION LAWYERS, NOT CONSUMERS

MERGERS, ACQUISITIONS AND BUYER’S LIABILITY IN THE INFORMATION AGE

Charles G. Miller Consumer protections remain; in terrorem effect blunted.

COMBATING FALSE INFORMATION ON THE INTERNET Julian H. Wright, Jr. Many options besides litigation.

POINT-COUNTERPOINT: WHAT WILL BE THE RESULT OF AT&T V. CONCEPCION? FOR CONSUMERS, A RAW DEAL

FCC REGS AN OFTEN OVERLOOKED REQUIREMENT IN M&A

PRIVACY REGULATIONS AFFECT INTERNET AND SOCIAL MEDIA BUSINESSES Mark Girtz and Robert Daniel Acquirers beware.

Andrew B. Serwin and G. Tyler Parramore Now a major area for due diligence.

OUT-OF-COURT SETTLEMENT PROGRAMS AVERT CLASS ACTIONS

Neal Marder, Christian Dodd and Andrew Koehler Make plaintiffs whole before they sue.

OCT/ NOV 2011 E X ECUTIVE COUNSEL

Departments Editor’s Desk Executive Summaries

2 10

INTELLEC TUAL PROPERT Y

18 | DRAFTING PATENT APPLICATIONS IS AN ART John S. Pratt Even trolls need well-written patents.

E-DISCOVERY

28 | E-DISCOVERY MALPRACTICE AND HOW TO AVOID IT Kelly D. Kubacki Supervision of contract professionals is a duty.

GOVERNANCE

22 | HOW TO CONDUCT INTERNAL INVESTIGATIONS Jonathan S. Sack Mid-course corrections may be required.

HUMAN RESOURCES

24 | DON’T BE BLIND-SIDED BY GINA Patricia Nemeth and Terry W. Bonnette The Genetic Information Nondiscrimination Act has a wide reach.

30 | GOOGLE PLUS RAISES NEW LIABILITY QUESTIONS Joshua Kubicki Overlapping friendship circles could be problematic.

CANADA / CROSS-BORDER

33 | CANADIAN PRIVATE EQUITY VOLUME GROWS Frank Arnone and Jamie S. Koumanakos Stable banks and strong currency drive deals.

35 | U.S. TECH SECTOR LOOKS NORTH By Divya Balji M&A with Canada still robust.

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Editor-in-ChiEf Robert Nienhouse

PubliSher Julie Duffy

MaNagiNg eDiTOr David Rubenstein

execuTive eDiTOr Bruce Rubenstein

MaNagiNg DirecTOr, execuTive cOuNSel iNSTiTuTe Neil Signore

arT DirecTiON & PhOTO illuSTraTiON MPower Ideation, LLC

buSiNeSS MaNager Amy Ceisel

DirecTOr Of circulaTiON Carol Spach

Contributing Editors and WritErs

Frank Arnone Divya Balji Terry W. Bonnette Robert Daniel Christian Dodd Dana Etra Mark Girtz John Hoover Andrew Koehler Jamie S. Koumanakos Kelly D. Kubacki

Joshua Kubicki Gregory Kunkle Deborah Lifshey Neal Marder Charles G. Miller Scott L. Nelson Patricia Nemeth John S. Pratt Jonathan S. Sack Andrew Serwin Julian H. Wright, Jr.

Editorial advisory board Dennis Block GREENBERG TRAuRiG, LLP

Thomas Brunner Wiley Rein

Timothy malloy mCandReWs, Held & malloy

Jean mcCreary

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James Christie Blake Cassels & GRaydon

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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, with out the written permission of the publisher. Articles published in Executive Counsel are not to be construed as legal or professional advice, nor unless otherwise stated are they necessarily the views of a writer’s firm or its clients. Executive Counsel (ISSN 1932-9024) is published six times per year by Nienhouse Media, Inc., 640 Park Avenue, Hinsdale, IL 60521-4644 Image source: iStockphoto | 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 offices.

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OC T/ NOV 2011 E X ECUTIV E COUNSEL

Executive Summaries INTELLEC TUAL PROPERT Y

GOVERNANCE

HUMAN RESOURCES

PAGE 18

PAGE 22

PAGE 24

DRAFTING PATENT APPLICATIONS IS AN ART

HOW TO CONDUCT INTERNAL INVESTIGATIONS

DON’T BE BLIND-SIDED BY GINA

By John S. Pratt Kilpatrick Townsend and Stockton LLP

By Jonathan S. Sack Abramowitz, Grand, Iason, Anello & Bohrer, P.C.

By Patricia Nemeth and Terry W. Bonnette Nemeth Burwell P.C.

Almost all litigated patents are the subject of genuine disputes about their scope, validity or both. Patent applications for entities that claim technology for use are usually narrow. Broad applications are drafted for entities that only hope to extract royalties. Ambiguity often works to the non-practicing entity’s advantage. Uncertainty and the specter of litigation drives practicing entities to accept licenses forced upon them by trolls, but strong patents are rarely litigated. They are avoided or licensed. The optimum approach in patent drafting is not the same for every client or every situation. Patent counsel looking for drafting tips study court rulings that construe claims and rule on validity, but litigated patents often are poorly written in ways that are more comprehensive than any lessons derived from court decisions can address. Therefore, it is not necessarily the case that avoiding the problems and mistakes identified in patent litigation will result in the strongest, most valuable patents. According to the author, a thorough understanding of the invention, the industry within which the client intends to do business, the relevant prior art and the client’s business objectives are all necessary in order to accurately describe the subject matter an application should protect. Always, he suggests, use caution when describing how and why an invention works. Sometimes the inventor does not fully understand, or misunderstands, how it functions. Usually it’s necessary to describe only how to practice the invention, not why it works.

Informing a senior executive that the company has a “problem” and needs to do an investigation can be a major challenge for an in-house counsel. The attorney and the executive both know that an investigation is likely to be distracting, expensive and divisive, and that it can have serious consequences. However, in the vast majority of cases the problems raised will be manageable. An investigation is not an all-or-nothing proposition, where the company either declines to look into an issue or else does an extensive probe of its business. Investigations can be tailored to specific issues and then, if necessary, shifted or widened in response to the facts gathered. Investigations must be reliable and credible to all constituencies – directors, senior management, shareholders, independent auditors and government agencies. Keep in mind the conclusions and recommendations need to be convincing to a skeptical observer. When the issues involve senior management, an independent board committee should oversee the investigation. However, when alleged wrongdoing by mid and lower-level employees is the issue, senior management can oversee the investigation and report the results to the board or a board committee. The integrity of the investigation is paramount, so the client must be independent and free from the influence of wrongdoers. It should be noted that protection of the privilege can be a challenge in international investigations, because foreign jurisdictions – notably, including the European Union – often do not treat discussions between company employees and in-house counsel as privileged.

If your company requires medical certification in support of a medical leave of absence or accommodation under the ADA, if you require employees to take a pre-employment physical or if you offer wellness programs, then you may be violating the Genetic Information Nondiscrimination Act (GINA) without realizing it. GINA, in language modeled after Title VII of the Civil Rights Act of 1964, prohibits discrimination on the basis of genetic information in health insurance and employment. In November 2010, the Equal Employment Opportunity Commission issued its final regulations, interpreting and enforcing GINA. They include broad definitions of genetic information coupled with sweeping limitations and prohibitions on the collection, retention, and dissemination of not just genetic information, but medical information of all kinds. GINA defines “genetic information” to include information about a person’s genetic tests or the genetic tests of family members; about a manifestation of disease/disorder in family members; about a request for/receipt of genetic services; or the genetic information of a fetus carried by an individual (or legally held embryo). The term family member is defined to include dependents “as the result of marriage, birth, adoption, or placement for adoption,” and extends to first, second, third, and fourth degree relatives. “If you don’t know what the doctor is doing and asking during those physicals, find out,” the authors suggest. “What you don’t know can hurt you. Review your wellness programs, and be alert to any incentives being offered to participate.”

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OC T/ NOV 2011 E X ECUTIV E COUNSEL

Executive Summaries E-DISCOVERY

CANADA /CROSS-BORDER

PAGE 28

PAGE 30

PAGE 33

E-DISCOVERY MALPRACTICE AND HOW TO AVOID IT

GOOGLE PLUS RAISES NEW LIABILITY QUESTIONS

CANADIAN PRIVATE EQUITY VOLUME GROWS

By Kelly D. Kubacki Kroll Ontrack

By Joshua Kubicki Applied Discovery (a division of LexisNexis)

By Frank Arnone and Jamie S. Koumanakos

Google Plus is a site that has already reached more over 25 million users sharing more than one billion items daily “by invitation only.” By allowing users to create circles of friends, separating work colleagues from friends or family, Google Plus invites users to share more than they would on other social networks. Employees can become comfortable sharing private information with their friends, knowing their colleagues won’t see it. However, this information could become discoverable in a lawsuit. Users are not ensured a right to privacy for anything posted on a third-party, semipublic, “free” social media platform. As more case law develops around social media, user privacy likely will diminish even further, and social media data likely will become a focus of corporate legal disputes. Meantime, as the volume of searchable, discoverable data grows, the cost to pull that data can become staggering. The author suggests establishing a clear social media policy, with training updated and re-administered frequently. When a new platform like Google Plus enters the arena, update the policy and clearly communicate policy changes with employees. Implement a strategy to preserve social media evidence. Few companies collect and retain data created by employees on behalf of the brand. This can be dangerous. It is much cheaper to have that data ready, rather than scrambling once a request is made by the courts. Preparing your company and your employees is the best way to ensure compliance if a legal dispute occurs.

Coming off the global economic downturn, Canadian private equity transactions have reportedly increased in 2010 and Q1 of 2011, roughly returning to 2006 activity levels. There were approximately 300 announced deals. The pace of capital commitments in Canadian funds has also picked up recently. Institutional investors continue to take a targeted approach, investing capital with established general partners that have strong track records and with funds that focus on industries of strategic importance for limited partners’ portfolios. Overall, Canadian fund raising reportedly increased to C$4.3 billion in 2010 and $525 million in Q1 of 2011. That compares to $3.9 billion and $260 million in the prior year’s periods. Canadian pension plans lead Canadian private equity dealmakers. Virtually all of the major plans announced transactions in 2010 and Q1 of 2011. The current strength of the Canadian dollar relative to the U.S. dollar, the Euro and Pound Sterling has spurred pension plans to look for investments internationally. Several have led or contributed to some of the largest global private equity transactions of 2010. In addition to traditional LBO sectors in manufacturing, retail and energy-related industries, recent hot areas for Canadian private equity dealmakers, both domestically and internationally, have been infrastructure and green technology. The authors expect private equity funds to continue to take advantage of amendments to the Income Tax Act implemented in 2010. Those amendments have significantly liberalized tax laws applicable to foreign buyers of Canadian businesses.

What may have been the first lawsuit alleging e-discovery malpractice was filed earlier this year in a California court, when J-M Manufacturing Company Inc. sued the law firm of McDermott Will & Emery. The complaint alleged that the firm failed to supervise contract attorneys during the review process and that as a result privileged documents were produced. The complaint claims the firm’s conduct was “fraudulent,” “malicious” and “oppressive.” The lawsuit targeted McDermott Will’s work during a whistleblower lawsuit. Company data was routed to a third party service provider, but then went through McDermott attorneys before being reviewed and produced. The complaint alleges that there was “limited spotchecking of the contract attorneys’ work,” that the review process was flawed, and that approximately 3,900 privileged documents were inadvertently produced. Typically, the author notes, when firms are targeted for e-discovery missteps it is for their own alleged failures, and sanctions are the result. “However, this complaint addresses a different issue,” she writes, “the interplay between ‘outside help’ and the corporate client.” This case, according to the author, underscores the need for corporate clients to vet and continually monitor their outside law firm and/or contract staffing attorney from the beginning and for the duration of a project. To do this successfully, she says, corporate counsel need to stay updated on e-discovery issues, make use of available technology, and stay involved and informed whenever they outsource e-discovery work to a law firm or service provider.

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Executive Summaries E XECUTIVE COMPENSATION

PAGE 35

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U.S. TECH SECTOR LOOKS NORTH

WHAT’S THE TAKEAWAY ON THE 2011 SAY-ON-PAY VOTES?

By Divya Balji mergermarket

By Deborah Lifshey and Dana Etra Pearl Meyer & Partners

CORPORATIONS CAN BENEFIT FROM FAA RULING ON PRIVATE AIRCRAFT

Despite U.S. debt ceiling problems and the European financial crisis, U.S.-Canada cross-border M&A activity continued at a steady pace, but without the quarter-overquarter growth of 2010. Volatility in the marketplace is making it difficult to appropriately value M&A transactions. Private equity firms are actively partaking in deals to exit old investments and enter new ones, but competition from strategic buyers and the new uncertainty in debt capital markets has delayed many such transactions as the fourth quarter of 2011 begins. The financial services sector stood out with mega-deals like acquisitionhungry TD Bank Group’s USD 7.57bn purchase of MBNA’s credit card business from Bank of America in August, and the completion of Bank of Montreal’s (BMO) CAD 4.1bn purchase of Marshall & Ilsley (M&I) in July. Another sector that saw multiple U.S.Canada cross-border M&A transactions was technology. Major U.S. companies are looking to add mobile and internet capabilities by acquiring smaller companies located north of the border. Google acquired Toronto-based software developer PushLife for USD 25m in April. Google worked with the law firm Osler, Hoskin & Harcourt LLP, and PushLife worked with McCarthy Tetrault LLP on the deal. With more Canadian startups looking for additional capital to grow their businesses, major U.S. technology companies could look to invest in new software and applications through acquisitions in Canada. Outbound deals should continue to outpace inbound deals due to the strong Canadian dollar and relative strength of the Canadian economy.

As public companies conclude the inaugural proxy season under new SEC requirements to conduct say-on-pay and say-on-frequency votes, the authors consider what 2011 voting results reveal about how to achieve favorable voting outcomes. Among the key findings are that despite widespread anticipation that numerous companies would fail SOP votes, upwards of 98 percent received majority shareholder support of their pay programs. Concerns over the link between pay and performance were the primary factors in most failed votes. None of the 37 companies with failed votes were targeted by governance critics for poor pay practices. The most criticized companies generally had successful votes on pay. Voting recommendations from major proxy advisory services such as Institutional Shareholder Services played a major role. The background of these developments is the Dodd-Frank Wall Street Reform and Consumer Protection Act. It mandates that, starting in the 2011 proxy season, almost all public companies are required to hold an advisory SOP vote at least once every three years, asking shareholder approval of compensation programs for named executive officers. At least once every six years a separate vote must be conducted asking shareholders whether such SOP votes should be conducted every one, two or three years. Looking forward to 2012, the authors say that enhanced disclosure and ongoing communication with shareholders is critical. They note that increased communication with shareholders was a deciding factor among companies that received negative ISS recommendations in 2011 but still managed successful SOP votes.

By John Hoover Dow Lohnes PLLC

A new “Interpretation” issued by the Federal Aviation Administration addresses personal use of company aircraft by executives. The so-called Nichols Interpretation, the author writes, will under certain conditions allow companies to make a reimbursement arrangement under which they can reduce securities law disclosures, potentially deduct the costs of executives’ personal flights, and address possible concerns of stakeholders such as creditors, stockholders, and other employees. The background to this change is that the FAA has different rules for entities that provide air transportation for compensation or hire than it does for those flying their own private aircraft. The FAA determined that a company’s control over a high-level employee’s schedule and its ability to recall the employee at any time can bring many personal flights within the scope of company business. This means the company can accept reimbursement for those flights and continue to be subject to FAA’s less strict rules for private aircraft. The logic of the Interpretation is that for certain key employees, company control of their schedule is maintained even when the flight is for personal matters. Key executives, for example, presumably are subject to recall from a vacation. Flights for purposes where recall would be implausible – for a funeral or wedding, for example – would not qualify. The FAA requires companies to prepare a list of executives whose position with the company requires them “to routinely change travel plans within a short time period,” and it discourages a long list.

e-DISCOVERY PROJECTS GETTING AWAY FROM YOU? POINT-COUNTERPOINT: WHAT WILL BE THE RESULT OF AT&T V. CONCEPCION? PAGE 42

FOR CONSUMERS, A RAW DEAL By Scott L. Nelson Public Citizen Litigation Group

The Concepcion case was not about whether contracts can require consumers to arbitrate, according to the author, because the Federal Arbitration Act generally makes arbitration clauses in contracts enforceable. The issue was whether consumers can also be forced to give up their right to pursue claims in a class action. A class action creates the possibility of a pool of damages large enough to provide compensation for class members, pay their lawyers and deter future misconduct. In Concepcion, it was claimed that AT&T Mobility overcharged thousands of customers $30 each, for a total of millions of dollars. But no single customer would find it worthwhile to go to the trouble and expense of litigating or arbitrating individually over $30. Each customer had to accept AT&T’s form contract, which required arbitration and said no customer could pursue a claim as part of a class. The plaintiffs thought they had a way around that problem because California courts, applying a contract-law principle called “unconscionability,” had held that a class-action ban is unenforceable when a class action is the only practicable means of pursuing a claim. But the Supreme Court didn’t see the case that way. Its decision means a consumer contract with an arbitration clause prohibiting class actions will likely be enforced, even if individual arbitration is impractical because of the small amount of each claimant’s damages and the lack of incentive for lawyers to take the case.

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OC T/ NOV 2011 E X ECUTIV E COUNSEL

Executive Summaries POINT-COUNTERPOINT: WHAT WILL BE THE RESULT OF AT&T V. CONCEPCION?

PAGE 46

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MERGERS, ACQUISITIONS AND BUYER’S LIABILITY IN THE INFORMATION AGE

OUT-OF-COURT SETTLEMENT PROGRAMS CAN AVERT A CLASS ACTION

By Charles G. Miller Bartko, Zankel, Tarrant & Miller

By Andrew B. Serwin and G. Tyler Parramore Foley & Lardner LLP

By Neal Marder, Christian Dodd and Andrew Koehler Winston & Strawn LLP

The issue before the Court in AT&T Mobility LLC v. Concepcion was whether a class-action waiver provision in a consumer arbitration agreement could be enforced, notwithstanding that the California Supreme Court, in Discover Bank v. Superior Court, had ruled that such a provision was unconscionable in consumer cases involving relatively small sums of money, since it acted as exculpatory. The California court reasoned that it was unlikely any lawyer would take the case of one consumer where the recovery would be very small. Thus the defendant would likely get away with wrongdoing. Critics of the Concepcion decision chalk it up to a pro-business, anticonsumer shift in the Supreme Court. The decision, according to the author, more accurately should be described as a reaction against class actions that force businesses to settle in order to avoid the prospect of huge damage awards, which result in the class lawyers (and not the individual consumers) reaping a windfall. Concepcion held that a finding of unconscionability alone was not enough to prevent enforcement of the arbitration provision. To do that, the court must also determine whether the challenged provision was incompatible with arbitration. The Court also noted that statistics proved that class action arbitrations could take much longer than the normal bilateral arbitration, making it an inefficient way to resolve disputes. The Concepcion case will now require courts, both state and federal, to examine the underpinnings of any unconscionability ruling.

Information is now a crucial component of many business models. That means buyers of a business need to be aware of the privacy liability issues that can arise from an acquisition, particularly those relating to wrongful acts committed by the seller prior to or immediately following an acquisition. The potential for liability is to some degree a function of how the transaction is structured. When acquiring a business through a stock purchase or merger, a purchaser generally assumes all debts and liabilities of the seller or predecessor company. A purchaser of only the underlying assets of a seller generally is not responsible for the seller’s liabilities, but “successor liability” may be imposed in certain circumstances – for example where a court finds that the transaction is part of a fraudulent attempt to avoid liability. The treatment of Foreign Corrupt Practices Act violations in the M&A context provides guidance on how the government might treat analogous violations of federal privacy laws. Extensive due diligence and disclosure are the key determinants. To avoid liability the authors suggest that acquirers educate themselves on the regulatory regimes that apply to the target. They should conduct rigorous preclosing due diligence, looking for potential violations and ensuring that violations are voluntarily disclosed to the appropriate authorities. They also should ensure that data can be legally transferred by reviewing applicable privacy policies, and they should continue due diligence post-closing by promptly setting up internal controls and compliance programs.

In seeking to certify a class in federal court, the plaintiff bears the burden of establishing numerosity, commonality, typicality and adequacy of representation. Where damages are sought, plaintiff must further demonstrate that common questions of law or fact predominate over issues affecting plaintiffs individually, and that a class action is superior to other methods for the fair and efficient adjudication of the controversy. To defeat certification, defendants try to develop evidence that the claims of the class representatives are not typical of those of the putative class, that class representatives cannot be trusted to protect the interests of the class or that issues individual to the class representatives predominate over issues in common with the class. Where a finding of liability appears probable, a defendant may want to focus on the “superiority” element. Specifically, defendants might put into place an outof-court program that resolves the claims of putative class members. A number of federal district courts have denied class certification by finding that such outof-court programs are superior to class action litigation for resolving the putative class members’ claims. The remedy offered must be substantially equivalent to what putative class members could expect to recover through litigation. This typically entails offering a purchase price refund or voluntary recall, coupled with a free replacement product. The authors list several other characteristics of programs that courts find superior and make the point that such programs are cost effective if used judiciously.

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A BLOW TO CLASS-ACTION LAWYERS, NOT CONSUMERS

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OC T/ NOV 2011

Executive Summaries

OLD ISSUES SUPERCHARGED IN NEW MEDIA PAGE 54

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FCC REGS AN OFTEN OVERLOOKED REQUIREMENT IN M&A

COMBATING FALSE INFORMATION ON THE INTERNET

PRIVACY REGULATIONS AFFECT INTERNET AND SOCIAL MEDIA BUSINESSES

By Greg Kunkle Keller and Heckman LLP

By Julian H. Wright, Jr. Robinson Bradshaw & Hinson

By Mark Girtz and Robert Daniel Munsch Hardt Kopf & Harr, P.C

The Communications Act of 1934 provides that no FCC wireless license may be assigned or transferred, either voluntarily or by transfer of control of the license-holding entity, without prior consent by the FCC. Such licenses are commonly held for internal communications purposes by companies in all industries. Airlines, manufacturers, utilities, oil and natural gas, mining, and transportation sectors are all heavy users of FCC wireless licenses. A company may hold licenses for voice and data mobile communications, systems automation, telemetering, and other purposes. Although the radio systems associated with these licenses often perform missioncritical roles, the fact that their operation is governed by FCC requirements is often overlooked during a merger or asset sale. FCC licensing compliance, according to the author, should be on the list of due diligence items in every transaction. A few years ago, the FCC adopted a Forfeiture Order against Enserch Corporation, a natural gas company that merged with Texas Utilities Company without obtaining FCC consent. The FCC forwarded a letter to Enserch advising the company of its filing obligations. Apparently that letter was overlooked. The penalty was $150,000. The required FCC application process is not particularly burdensome. The critical step is ensuring that the presence of FCC licenses and the need for FCC consent is identified during due diligence. The required FCC form consists primarily of contact information and a list of the licenses to be assigned/transferred. A brief description of the transaction may be required.

Negative commentary about a company on the internet can fall into at least three categories. A disgruntled employee or customer can post an isolated complaint somewhere on the web. This is sometimes referred to as a “cybergripe.” An individual or a group can coordinate a pattern of negative information on multiple websites. This is known as a “cybersmear.” Finally, an individual or group can go so far as to set up a special purpose website, launching a “cyberattack.” Litigation may not be the best option in most situations. Have a policy and stick with it, the author says. It should cover when and how your company may respond to false information with positive and true information. Publicly-traded companies must be careful in this area. They likely would need to issue press releases and make sure that any information posted on the web also has been posted properly through other channels, to comply with obligations under the securities laws. Most ISPs have provisions in their service agreements that prohibit the posting of false information. A letter to the ISP, and a cease-and-desist letter when you are able to learn the poster’s identity should be part of any strategy. If the problem is damaging enough litigation should be an option. Your company’s reputation for vigilance on the internet, and for being willing to go to court to defend itself when needed, may be the best long-term deterrent against people spreading false information.

New business models are being created by the popularity of text-messaging, social-networking and location-aware services, and the increasing integration of these services into smartphone and tablet applications, These technologies offer businesses effective ways to reach their target audience. Entrepreneurs, as well as private equity and venture capital groups have taken notice. Consolidation of this emerging industry is beginning and will increase rapidly over the next decade. These new services can pose fastchanging privacy and safety concerns. Chief among these is the protection of privacy of children, but there is growing momentum to expand the scope of privacy protections. Any company interested in buying or investing in a business providing these services should be aware of developments in federal regulation and perform appropriate diligence to evaluate compliance. Currently, the Children’s Online Privacy Protection Act (COPPA) is one of the most restrictive privacy-protection regulations. It affects the collection and use of personally identifiable information of children age 12 and under. In September 2011 the FTC released some proposed changes to COPPA. They include the proposed expansion of the definition of “personal information” to include IP addresses, customer numbers held in cookies and geolocation information. The Telephone Consumer Protection Act (TCPA) imposes certain restrictions on the use of telephone equipment. Taking measures to become informed about regulations and ensure compliance will reduce liabilities, prevent distraction from the development of the business and prevent raising a red-flag to future investors.

oct/ nov 2011 E X ECUTIVE COUNSEL

Intellectual Property

Drafting Patent Applications is an Art By John S. Pratt

s the U.S. Supreme Court said almost 120 years ago, patents are “one of the most difficult legal instruments to draw with accuracy.” There are many helpful sources of advice about good patent application writing practice, but most of it omits two important threshold considerations: What sort of patent is being sought – i.e., what

does the client hope to accomplish? – and what was the context in which the source of the advice developed. Patenting efforts can be categorized along a continuum. At one end are applications for utility patents filed by practicing entities that disclose and claim technology developed for use or sale. These patents attempt to prevent

competitors from practicing or selling the same technology. In some cases they try to keep competitors from selling competitive technology. Narrow design patents also fall at this end of the continuum. At the other end are the applications and patents of visionaries (or opportunists, it’s a matter of perspective) who neither practice the technology they seek

Intellectual Property to patent, nor aspire to do so. Instead, they are engaged in a fishing expedition, acquiring tools for extracting royalties from any business that uses or sells what their broad patents will cover. Virtually all patents contain claims of different scope. Theoretically a patent can have claims at both ends of the continuum, but that rarely happens. Patents are supposed to describe the invention, and the process of making and using it, in clear terms that enable any person skilled in the art to make and use it. In the real world, the most important readers may not be such people. Rather, they are judges, jurors, prospective investors, competitors and potential licensees. The drafter needs to contemplate all readers, and write with at least the most important ones in mind. Almost all litigated patents are the subject of genuine dispute about scope and validity, or both. Good patent counsel seeking to draft excellent applications and obtain the best patents possible, study court rulings that construe claims and rule on their validity. Recommended practices for drafting and prosecuting applications are extensively informed by

drafting will not be the same for every client or in every situation. For instance, courts construing patent claims often rely on statements in the patent specification about the nature of the invention. Those cases lead some commentators to counsel against saying anything about “the invention,” or anything very specific at all in the specification. This fear of statements limiting claim interpretation motivates omission of discussions of the prior art and summaries of the invention. That may be appropriate for a fishing expedition (unsure what we may catch, so we cast the net broadly), but not for a practicing entity that is seeking a competitive advantage instead of a ticket to court. That entity may be better served by a patent that clearly and unambiguously describes the technology, and draws clear lines in the claims. Just as “chance favors only a prepared mind,” clarity and certainty will favor a practicing entity that understands its business, knows how its technology works and wants to keep others from copying its products. A narrow patent that provides little to argue about may be far more valuable than a vague,

Broad patent claims are not necessarily best. Narrower, less ambiguous claims may better serve the owner’s overall business interests. those cases, as they should be. However, drafting patents solely by reference to patent litigation opinions is like going to a hospital to learn how to be healthy from the patients. Strong patents – those least subject to validity challenges and having the clearest scope – are rarely litigated. They are avoided or licensed. Litigated patents are often poorly written in ways that are more comprehensive than any lessons derived from court decisions can address. Therefore, it is not necessarily the case that avoiding the problems and mistakes identified in patent litigation will result in the strongest, most valuable patents. Moreover, the best approach in patent

broad patent that can be the subject of years of litigation. By contrast, ambiguity will often be to the non-practicing entity’s advantage. It is uncertainty and the specter of lengthy litigation that drives practicing entities to accept licenses forced upon them by trolls. Vague language in a patent specification is purportedly justified by the desire to avoid the courts’ reliance on what was said. It is hoped that this will limit claims, particularly in situations not yet within the client’s contemplation. Open-ended language can also be motivated by opportunism, where the objective is the creation of a toll booth to block the users of the new technology. Sometimes, however, such

language masks uncertainty about the nature of the invention, the content of the prior art or the client’s objectives. YOU MUST UNDERSTAND THE INVENTION TO DESCRIBE IT Thorough understanding of the invention, the industry within which the client aims to do business, relevant prior art and the client’s business objectives facilitates confident description of the subject matter an application should protect. Obvious as that is, it often proves difficult. Always use caution when describing how and why an invention works. Sometimes the inventor does not fully understand, or misunderstands, how it functions. Usually you have to describe only how to practice the invention, not why it works. One of the challenging little things in patent application drafting is selecting a shorthand reference for the subject matter. “The present invention” or “the invention” were popular solutions historically. The first term sounds archaic now, and both are avoided these days out of fear that a particular description or referenced attribute of “the invention” will be interpreted by a court as always required, or in an otherwise limiting manner. Frustratingly vague modern alternatives include “embodiments of the invention,” “an embodiment,” and “consistent with embodiments of the present invention.” Consider instead including a definition of the terms and a simple explanation of intent that will make it hard for a fair court to construe a limitation from an isolated phrase. For example: The terms ‘invention,’ ‘the invention,’ ‘this invention’ and ‘the present invention’ used in this patent are intended to refer broadly to all of the subject matter of this patent and the patent claims below. Statements containing these terms should not be understood to limit the subject matter described herein or to limit the meaning or scope of

oct/ nov 2011 E X ECUTIVE COUNSEL

Intellectual Property the patent claims below. Furthermore, this patent does not seek to describe or limit the subject matter covered by the claims in any particular part, paragraph, statement or drawing of the application. The subject matter should be understood by reference to the entire specification, all drawings and each claim.

There appears to be no good reason for using the phrase “preferred embodiment” in a patent application. The only arguably relevant legal requirement is the statutory requirement that the application “shall set forth the best mode contemplated by the inventor of carrying out his invention.” However, the best mode need not be identified as such in the application, so the terms “preferred embodiment” or preferred anything should not be used. Where reference to “embodiments” is desirable in pursuit of breadth or other reasons, every reference need not be freefloating and un-tethered to any structure within the patent specification. A description of “an embodiment” should be followed by a description of “another embodiment” or “a second embodiment,” in turn followed by a description of “yet another embodiment,” or of “a third embodiment.” Description of “an embodiment” should not be followed by a second equally vague statement describing “an embodiment.” Patent applications need rhetorical scaffolding on which the reader can climb (or at least crawl) through the document. Patent applications written with mindless avoidance of “bad” patent language generate a soup of free-floating fragments that swirl about the hapless reader until he gives up and drowns. PRIOR ART Current patent-drafting commentators usually reject the Manual of Patent Examining Procedure’s directive that an application contain a “background of the invention” and the long-standing practice of describing the prior art.

It is not necessarily a mistake to describe the prior art and its deficiencies, but don’t overreach. Don’t describe deficiencies of the prior art that the invention does not address. Make clear that every version of the invention does not address or solve all problems of the prior art unless it actually does. You should not characterize the contents of specific patents or other references. Then you cannot be accused of mis-characterization. Include a description of the prior art or its deficiencies only where you have a reason for doing so. For example, the significance of new carpet tiles that did not look out of place regardless of the direction they faced would have been very hard to describe in U.S. Patent No. 6,908,656 without describing the appearance of prior art carpet tiles that did not exhibit this property. On the other hand, in a 2006 decision, the Federal Circuit, the court for patent appeals, observed that “[a] patent need not teach, and preferably omits, what is well known in the art.” Thus, there are two good reasons you need to know the prior art to draft a patent application. First, unless you know it, you cannot determine what the client has invented or how to claim it. Second, you need to know what the prior art teaches in order to know what you can leave out of the specification of the patent application. BREADTH If you are guiding a fishing expedition, vague language should not be your only net. If you want to achieve breadth, say so. Give as many examples of alternatives as you can reasonably identify. The likelihood that they will come to be practiced is probably higher than the likelihood that intentional vagueness will net an as yet unknown fish. Avoid casual absolutes. Say “must,” “always,” “never,” “impossible,” only where you are sure there is no room for less absolute possibilities. Strive to cover sub-optimal, inefficient, less-than-perfect competitive activity. A satellite radio network distribution system I claimed

in a patent application specified an error–correction element that achieved a needed quantum of gain. Our client’s competitor could not determine the code needed for the error–correction system and simply employed a larger diameter dish antenna to achieve the needed gain. Fortunately, we found that out in time to file a continuation application with claims leaving out the error–correction functionality. The lesson: the competitor may not be a particularly successful copier or may settle for less than optimum results, and the inventor may consider the element the copier omits to be the crowning jewel of the invention. If you do not have to so limit all of the patent claims, don’t. When pressing the inventor for alternatives, in particular for alternative applications for the invention, maintain healthy skepticism. Historically the most valuable applications of many significant technologies have not been foreseen. Some famous inventions preceded identification of any use. The laser was an invention looking for an application, but today its importance in communications, computing and medicine is staggering. Most new technologies have been utilized in ways their inventors did not foresee. Patent attorneys must try to describe an invention comprehensively and to contemplate all eventualities. Contemplation is easy. Comprehension is hard, and may not always be possible, but an honest effort will usually yield good results. ■

John Pratt is a partner at Kilpatrick Townsend and Stockton LLP. He founded the firm’s Atlanta patent prosecution practice, chairs the firm’s intellectual property practice and practices primarily in the patent area, including patent prosecution, litigation and licensing. He was involved in drafting the Georgia Trade Secrets Act of 1990. jpratt@kilpatricktownsend.com

OCT/ NOV 2011 E X ECUTIVE COUNSEL

Governance

How to Conduct Internal Investigations By Jonathan S. Sack

ne of the toughest things many in-house counsel will ever have to do is take that walk into a senior executive’s office to say that the company has a “problem” and needs to do an investigation. The attorney and the executive both know that an investigation is likely to be distracting and expensive, and it may well be divisive and have serious consequences for the company. However, in the vast majority of cases the problems raised are manageable, or they turn out not to be problems at all. Under those circumstances investigations can be turned into opportunities. It’s crucial to keep two points in mind at the outset, one relating to means, the other to ends. With regard to means, an investigation is not an all-or-nothing proposition, where the company either declines to look into an issue or does an extensive archeological dig of its business. Investigations can be tailored to specific issues, and if necessary shifted or widened in response to the facts gathered. As to ends, an investigation must above all be reliable and credible to all the constituencies that will be interested. Those include directors, senior management, shareholders, independent auditors

should be conducted by in-house or outside counsel, because the facts gathered by counsel and the resulting conclusions usually are protected by attorney-client privilege and the work product doctrine. Conversely, if business people or internal auditors (or even compliance officials) conduct the investigation, the privilege will not apply, unless it is clear that they are working under the supervision of attorneys for the purpose of providing legal advice. It should be noted that protection of the privilege can be a challenge in international investigations, because foreign jurisdictions, including the European Union, often do not treat discussions between company employees and in-house counsel as privileged. With regard to the scope of an investigation, issues raised about a specific transaction or relationship may have broader implications – if the issues turn out to be genuine and serious, and if the conduct is persistent and widespread. This does not mean an investigation must be wide-ranging and intrusive at the start. To take one example, the question of the

and government agencies. This means that the conclusions and recommendations of the investigation need to be convincing to a skeptical observer. These goals of an investigation – focus and discipline on the one hand, credibility and reliability on the other – reinforce each other. What follows is a discussion of how to achieve them, beginning with the question of how an issue may first arise, how that afThe conclusions and recommendations fects the scope of the investigation, need to be convincing to a skeptical observer. and how choices about who the scope of an investigation will arise when client should be and who should conduct allegations of corruption – for example, in the investigation will advance the integrity the FCPA context – must be addressed. If of the investigation. one relationship in a single country may First, some terminology. What is an have been corrupt, can the investigation internal investigation? focus safely on that relationship, or must It’s an investigation that is conducted similar relationships be investigated? by a company about its own conduct, be Usually an internal investigation should it a specific event or transaction or, more be targeted and not become a company-wide generally, its policies and practices. This is in contrast to an external investigation, inquiry at the outset. As a practical matter, the initial scope of an investigation will dewhich is conducted by a government pend on the specificity of the allegations that agency, such as a state attorney general trigger it. If the allegations are vague, shapor the Department of Justice. ing the initial inquiry will be a challenge. An internal investigation ordinarily

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2011

Governance

Once the matter to be examined is clarified, unless a widespread problem is suspected, it’s reasonable for a company to begin an investigation by targeting the specific conduct that is the subject of the initial allegation. As the investigation progresses, the company should make a careful judgment as to whether and how much to broaden the inquiry. It may be appropriate to keep the scope narrow if the problem is discrete, but if it’s thought likely to appear elsewhere it may be necessary to widen the investigation. There are a variety of ways that a company can learn of an issue warranting investigation. Regular compliance efforts or internal audits are almost certainly the best route. Another way is through an employee seeking advice from in-house counsel. An issue can also be raised by an employee communicating directly to a supervisor or in-house counsel, or indirectly and perhaps anonymously through an internal hotline or other means of reporting legal compliance issues. In the latter instance, involving an actual or potential whistleblower, response and investigation have become increasingly thorny and challenging issues. Laws against retaliation make it more complicated to take personnel actions, even very reasonable ones, during an investigation. In addition, new whistleblower bounty rules under the Dodd-Frank law risk establishing adversity between the company and the source of information. A company may realize it needs to do an internal investigation only after it learns that a government investigation has already begun. This situation can put constraints on the internal investigation. The government may seek to limit whom the company can interview, and individuals may be less likely to provide information if they fear prosecution. As a practical matter, counsel may find it difficult to conduct an investigation while defending the company. What’s critical is that counsel investigate the facts both to support the defense and to guide senior management. The scope of the internal investigation may be the same as or broader than the

government investigation. The company’s primary consideration should be the company’s defense, and the investigation should be tailored to enhance, not hinder, that defense. If a news story raises an issue, a company should consider the report’s credibility and the likelihood of a follow-on government investigation. If that is deemed likely, then the observations above are operative. If it’s unlikely, the company may reasonably begin with a specifically tailored and targeted inquiry and assess how to proceed as the investigation progresses. Whatever the source of the information, the overriding principle remains the same: Clearly define the issue or issues to be addressed at the outset so that the company can learn the right facts in a timely manner and act accordingly, knowing that as new facts emerge, the issues to be examined may change. Who is the client? Depending on the circumstances, the possibilities include company management, a committee of the board of directors (such as the audit committee or a special committee formed to oversee the investigation), or the board of directors as a whole. Generally, who will be the controller of the investigation – that is, who the client is – will depend on whether the issues being reviewed encompass actions of senior management or are confined to mid and lower-level employees. When the issues involve senior management, to ensure the integrity of the investigation it should be overseen by a board committee that has independence from management. However, when alleged wrongdoing by mid and lower-level employees is the issue, senior management can oversee the investigation and report the results of the investigation to the board or to a board committee. The integrity of the investigation is paramount, so the client must be independent and free from the influence of wrongdoers. Is outside counsel necessary? Not necessarily. Often it makes sense for in-house lawyers to undertake an initial inquiry, taking care to protect privilege, in order to assess the problem and gather the basic facts. At that point, the company can

determine whether to retain outside counsel. If the company then decides it does need outside counsel, it will know enough about the matter to select counsel with the specific expertise required. When the initial inquiry points to the need for broader investigation by outside counsel, the question becomes whether to retain the company’s regular corporate counsel or engage independent counsel. Although regular corporate counsel generally has more extensive knowledge of a company’s business, it has become common for companies to retain counsel without prior ties to the company or its management for important investigations. This is especially true when the investigation may touch directly or indirectly on the conduct of senior management, and when the results of the investigation are likely to be disclosed in some forum outside the company. Remember that the eventual contours of an investigation cannot be determined at the outset. A good internal investigator ordinarily begins with a discrete and carefully defined issue, or issues, and adapts and shapes the investigation as the facts develop. In some cases it will remain narrowly circumscribed, while in others it will widen, sometimes substantially, when facts emerge. In either event, rigor about the subject and scope of an investigation will promote the integrity of the findings. ■

Jonathan S. Sack is a principal of Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C. in New York City. His practice focuses on the representation of companies and individuals in criminal and civil matters, and in internal investigations. He formerly was the chief of the Criminal Division of the U.S. Attorney’s Office for the Eastern District of New York. jsack@maglaw.com Attorney Kefira R. Wilderman assisted in the preparation of this article.

oct/ nov 2011 E X ECUTIVE COUNSEL

Human Resources

Don’t be Blind-Sided by GINA The Surprisingly Wide Reach of the Genetic Information Nondiscrimination Act By Patricia Nemeth and Terry W. Bonnette

from retaliating against someone for exerMany employers were surprised by ost employers do not collect cising his/her rights under GINA. the reach of the new regulations. EmDNA samples from their emGINA broadly defines “genetic inforployers who never considered discrimiployees. So why are so many mation” to include information about nating on the basis of genetic informaemployers finding themselves out of coma person’s genetic tests or the genetic tion had to review their existing policies pliance with the new EEOC regulations tests of family members; about a manito make sure they were not violating the regarding genetic discrimination? festation of disease/disorder in family new regulations. The fact is if your company requires members; about a request for/receipt of medical certification in support of a genetic services; or the genetic informaGINA’S REACH medical leave of absence or a requested tion of a fetus carried by an individual GINA covers employers with more than accommodation under the ADA, if you (or legally held embryo). fifteen employees and, in language modrequire employees to take a pre-employThe term “family member” is broadly eled after Title VII of the Civil Rights Act ment physical, or if you offer wellness defined to include dependent “as the result of 1964, makes it unlawful for employprograms, then you may be violating the of marriage, birth, adoption, or placement ers to “fail to hire or refuse to hire, or to Genetic Information Nondiscrimination for adoption,” and it extends to first, secdischarge, any employee, or otherwise Act (GINA) without realizing it. ond, third, and fourth degree relatives. discriminate against any employee with GINA, signed into law by President It remains unclear why the inclurespect to compensation, terms, condiBush in May of 2008, received little atsion of spouses and adopted relatives tention from employers. The law prohib- tions, or privileges of employment, beis necessary to protect genetic informacause of genetic information with respect its discrimination on the basis of genetic tion, but what is clear is that information in both the health the law purposely extends insurance and employment If the physician takes a family medical to remote relations, includsettings. However, there was ing those of both the “greatlittle evidence that employers history as part of a pre-employment great” and “first-cousin-oncewere actually discriminating on the basis of genetic inforphysical, the employer is impermissibly removed” varieties. Generally, the new regumation, and because GINA lations prohibit employers seemed to lack a meaningful requesting genetic information. from requesting, requiring, or purpose, many employers purchasing genetic informawere left wondering what, if tion of an individual or family member to the employee; or to limit, segregate, anything, they would be required to do or classify the employees of the employer of the individual. “Requesting” includes to comply with it. conducting internet searches of covered in any way that would deprive or tend Then, in November 2010, the Equal information, actively listening to third to deprive any employee of employment Employment Opportunity Commission party conversations, searching personal opportunities or otherwise adversely issued its final regulations, interpreting items and asking leading or probing queseffect the status of the employee because and enforcing GINA. These regulations, tions about health. of genetic information with respect to which became effective in January of Employers may still be surprised that the employee.” 2011, include broad definitions of genetic under the new regulations, they may be Furthermore, GINA says that an information coupled with sweeping limirequesting confidential genetic informatations and prohibitions on the collection, employer cannot “request, require, or tion without knowing it. The EEOC takes purchase genetic information with respect retention, and dissemination of not just the position that company doctors, and genetic information, but medical informa- to an employee or family member of the even private physicians who are hired by employee.” Employers are also prohibited tion of all kinds.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2011

Human Resources

oct/ nov 2011 E X ECUTIVE COUNSEL

Human Resources

employers to conduct pre-employment physical examinations, are acting on behalf of the employer. Therefore, if the physician takes a family medical history as part of a pre-employment physical, the employer is impermissibly requesting genetic information. The EEOC explains that family medical history is unrelated to the question of whether or not an employee currently has the ability to perform the

• Information learned in casual conversation, received in unsolicited communication, or obtained through social media platforms that the employer is authorized to use. As a general rule, casual conversations about an employee’s general health would not violate GINA. An employer does not violate GINA by asking an employee, “How are you, today?” Likewise, an employer does not

The law extends to remote relations, including those of both the “great-great” and “first-cousin-once-removed” varieties.

essential functions of the job, and the physician should limit the examination to that determination. Even where the employer does not specifically authorize the physician to take a family medical history, and never actually sees the family medical history, the EEOC seems to take the position that the employer may be liable for a GINA violation. THE EXCEPTIONS GINA does recognize six exceptions through which an employer might obtain genetic information without violating GINA. 1. GINA is not violated through the inadvertent acquisition of information. Information obtained through any of the following means may be inadvertent, but only if proper procedures were followed in obtaining the information. • A legal request for accommodation under the ADA or similar state law. • A request for Family and Medical Leave Act (FMLA) certification for the employee’s own health condition or certification to return to work. • A request for non-FMLA or ADA qualifying leaves, if the request does not otherwise violate the ADA. • Information accidentally overheard from one person talking to others.

violate GINA when a manager walks through the lunch room and just happens to overhear one employee tell another employee that her mother has been diagnosed with diabetes. However, the line becomes less clear if the employer’s agent begins to ask probing follow up questions, such as, “Does diabetes run in your family?” Where genetic information is inad-

2. GINA is not violated by way of genetic information collected for use in a wellness program, but only if: • It is received on a voluntary basis and the program neither requires the individual to provide it nor penalizes those who choose not to. • The provision of the information is preceded by a written authorization describing the type of genetic information obtained, the reasons for it, and the restrictions on disclosure of the information. • Access to any identifiable genetic information collected is limited to the individual receiving genetic services and the licensed practitioner providing those services. • The wellness program discloses the genetic information to the employer only in aggregate terms that do not disclose individual identities. Thus, incentivized programs generally run a greater risk of violating GINA than non-incentivized programs. However, given the new GINA regulations, as well as previous HIPAA regulations, employers offering wellness programs should monitor compliance closely.

The EEOC has prepared a model warning that employers can include in order to preserve the inadvertent acquisition defense. vertently acquired through the collection of medical information in support of the employee’s own FMLA leave or a requested ADA accommodation, an employer will not violate GINA if the employer directs the person not to provide genetic information, but it is provided anyway. The EEOC has prepared a model warning that employers can include in order to preserve the inadvertent acquisition defense. Note that this warning is not included on the standard FMLA Medical Certification prepared by the Department of Labor, but it is available at 29 CFR § 1635.8(b)(1)(i)(A).

3. GINA is not violated by information gained in a legal request for information in support of an FMLA covered leave to care for a family member with a serious medical condition. Interestingly, while information gained in support of leave for an employee’s own health condition is considered inadvertent and may require inclusion of the warning statement to preserve the defense, information obtained in support of leave to care for a family member with a serious health condition is an absolute exception to the Act and does not seem to require the same warning notice.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2011

Human Resources Nevertheless, employers wishing to be ultra-conservative in their approach to compliance may consider providing the warning whenever collecting medical information about an employee or an employee’s family member. 4. GINA is not violated by way of information learned through commercial or publicly available sources. However, medical databases, court records or research databases available only on a restricted basis are not considered publicly available. Neither are limitedaccess social media sites.

information of their employees in order to monitor for sample contamination. CONFIDENTIALITY REQUIREMENTS Employers have long been used to separating an employee’s medical file from the personnel file, and they may be tempted to store any genetic information in the medical file. Surprisingly, however, GINA also requires that genetic information, if it’s maintained at all, also be separate from an employee’s medical file. Employers are not required to search through all personnel and medical files to remove genetic information that may

language. The same warning language also should be sent to the doctor performing pre-employment physicals. If you don’t know what the doctor is doing and asking during those physicals, find out. What you don’t know can hurt you. Review your wellness programs, and be alert to any incentives being offered to participate. Finally, GINA requires that the employer provide notice of rights. Check your notice posters to make sure they have been updated to include GINA. Also, check your handbooks and EEO statements. Make sure that genetic information has been added to the list of protected classifications. ■

If you don’t know what the doctor is asking during pre-employment physicals, find out. This exception is not available to employers who purposefully avail themselves of publicly available sources for the purpose of collecting genetic information. Employers are also prohibited from applying the publicly available exception to media sources in which it is likely the employer will uncover genetic information. For example, an employer could not go to GeneticDiseases-R-Us.com to see if any of its employees are registered users, even if that (wholly hypothetical) website were open to the general public. 5. GINA is not violated by the collection of information to monitor for an employee’s exposure to toxins – but only if such monitoring is conducted in compliance with state and federal regulations, and otherwise meets the exception’s specific compliance requirements. 6. GINA Is not violated if the employer is in the business of conducting DNA analysis for law enforcement or human remains identification purposes, and the employer requires genetic information concerning its employees in order to monitor for quality control. Essentially, employers such as crime labs or medical labs may need genetic

already be there. Information stored before November 21, 2009, can remain in either the personnel or medical file so long as it is not used or disclosed. Employers are prohibited from disclosing genetic information obtained in any manner (other than information from commercial or public sources, which is not considered confidential), with narrow exceptions. Employers may disclose confidential genetic information only to the person to whom the information applies (provided a written request is made); to an occupational health researcher; to comply with a court order; to government officials investigating compliance with GINA; to the extent required by FMLA or similar state law; and to federal, state, or local health officials in conjunction with a contagious disease/disorder that presents an imminent harm of death or life threatening illness. The GINA regulations are new, and there is little or no case law to provide guidance beyond the regulations themselves. However, employers can begin to review their policies and procedures for compliance. Initially, they can make sure their leave and accommodation-related documents contain the required warning

Patricia Nemeth is a partner at Nemeth Burwell, P.C. She specializes in labor and employment issues as litigator, consultant, and negotiator in a wide variety of industries and government entities. Her areas of expertise include reductions in force/ layoffs and rehiring after layoffs; religious, ethnic, and gender discrimination; workplace harassment; wrongful discharge; union organizing activities; and multi-party lawsuits. pnemeth@nemethburwell.com

Terry Bonnette is an associate at Nemeth Burwell, P.C. He has counseled clients with respect to a range of contract compliance and regulatory compliance labor and employment issues. He has also represented clients in litigation before state and federal courts, administrative agencies, and arbitrators. tbonnette@nemethburwell.com

OCT/ NOV 2011 E X ECUTIVE COUNSEL

E-Discovery

E-discovery Malpractice and How to Avoid It By Kelly D. Kubacki

hat appears to be the first ever lawsuit alleging e-discovery malpractice was filed on June 2, 2011, in the Superior Court of California, County of Los Angeles. J-M Manufacturing Company Inc. sued the law firm of McDermott Will & Emery, along with “DOES 1 through 100,” alleging the firm failed to supervise contract attorneys during the review process, resulting in the production of privileged documents. The complaint claims the firm’s conduct was “fraudulent,” “malicious” and “oppressive.” The matter was subsequently removed to federal court and is ongoing. This case highlights an important and little-discussed issue in e-discovery and demonstrates the need for smart document review planning, oversight and process. The legal action followed McDermott’s work during a whistleblower

lawsuit in which the government filed a document request. According to the complaint, there were roughly 160 custodians that possessed electronically stored information (ESI) that was “likely” responsive to the government’s request. The data was copied and routed to a third party service provider, after which McDermott conducted document review and produced responsive information.

marked responsive to make privilege determinations at the government’s request. The complaint alleges that “limited spot-checking of the contract attorneys’ work” was conducted, but there was no thorough review process. The result was the production of roughly 250,000 documents that went to the government. After this second production, JMManufacturing replaced McDermott with

The complaint alleges that “limited spot-checking of the contract attorneys’ work” was conducted, but there was no thorough review process. Following the first production of documents, the government notified McDermott that numerous privileged documents were included and returned the document set. McDermott then used a second keyword list to filter through documents

another firm, Sheppard Mullin Richter & Hampton LLP. Soon after, the counsel for the opposing party in the underlying litigation notified Sheppard that privileged documents had been produced and refused to return the documents alleging

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2011

E-Discovery

JM-Manufacturing waived privilege because two rounds of privilege review were conducted before production. JM-Manufacturing speculates in the complaint that approximately 3,900 privileged documents were inadvertently produced. This complaint highlights an intriguing question within the electronic discovery world: Can law firms be held liable for malpractice based on e-discovery work performed by others? Typically, we read cases where law firms were negligent, grossly negligent or willful in behavior that results in e-discovery missteps and suffer sanctions as a result. However, this complaint addresses a different issue: the interplay between “outside help” and the corporate client. Service providers, consultants and/or contract document reviewers are largely unavoidable in modern litigation, especially in large matters that involve complex ESI. Therefore it’s important for corporate clients to vet their outside help and work closely with their service provider, law firm and/or contract attorney staffing agency at the onset of a project. If the corporate client chooses to use a staffing provider only, it must look for one that recruits attorney reviewers specifically for the task of performing document review and specializes in managing review teams in a way that results in an efficient and consistent process. The chosen partner should be able to work closely with client legal teams to establish a defensible quality-assurance process, one that produces all relevant documents but at the same time ensures that privileged documents are appropriately identified and withheld. If the corporation chooses to use a law firm to either conduct the review entirely or lead the outsourcing efforts, it should make sure the law firm is exercising adequate supervision and providing thorough training to the document review team. Model Rule of Professional Conduct 1.1 establishes a duty of competent representation – and that includes competence in locating, reviewing and producing ESI in litigation. In situations such as the one that

spawned the JM-McDermott Will litigation, this duty certainly extends to contract review attorneys, but it also travels up the ladder to outside counsel. They also have a duty to supervise subordinates and ensure compliance with ethical obligations. Clients who ensure their outside

that was alleged to be lacking in the J-M Manufacturing-McDermott Will matter. This case also demonstrates the importance of sampling as a way to validate what you have (and equally important, do not have), thus strengthening the defensibility of the process. Sampling is the

Clients who ensure their outside counsel is properly and actively supervising document review teams will be far more likely to avoid e-discovery mishaps and the costly litigation that can result. counsel is properly and actively supervising document review teams will be far more likely to avoid e-discovery mishaps and the costly litigation that can result. Senior attorneys cannot rely on supervision alone to prevent mistakes. Some competence and knowledge about e-discovery is essential, and education in this area is now available through a variety of programs that tap industry experts and organizations. Corporate practitioners should research and vet a variety of these program offerings to determine what is right for them. Advanced technology for navigating the e-discovery process is also available to corporations. In the J-M ManufacturingMcDermott Will suit, use of early data assessment (EDA) technology could have addressed the large data set and custodian base. EDA narrows the scope of relevant data early on. It also aids fact-finding, reduces the number of key custodians, tests key search terms and identifies critical case arguments. Automated review technology would have reduced both the number of documents to review and the time required to do it, as well as the need to rely on contract reviewers. This technology allows the firm to leverage the expertise of experienced attorneys whose input might have led to a process that was more defensible than what is alleged in the J-M Manufacturing complaint. It also increases the accuracy and consistency of category decisions, allowing for a continuous quality control process, something

key to measuring, monitoring, controlling and correcting potential errors in categorization, and is useful in any review to validate results. Although the final outcome and the lessons to be drawn from this case are not yet known, clearly it highlights the increasing importance of proper document review, and how that is becoming more difficult as data volumes continue to increase exponentially. Education, advanced technology and thorough vetting are three key components of a policy that will address these issues – and help protect the organization from e-discovery gone wrong. Above all, companies should keep in mind that when outsourcing e-discovery work to a law firm and/or a service provider, they need to stay informed and stay involved. ■

Kelly D. Kubacki is an attorney on the thought leadership and industry relations team at Kroll Ontrack. She tracks evolving common and statutory law in the areas of corporate information management, electronic discovery and computer forensics, and she designs and implements educational programming for attorneys, litigation support and IT professionals. KKubacki@krollontrack.com

OCT/ NOV 2011 E X ECUTIVE COUNSEL

E-Discovery

Google Plus Raises New Liability Questions By Joshua Kubicki

acebook, Twitter and LinkedIn have become powerful marketing tools, allowing companies to engage with millions of potential clients or customers. But as the boundaries between personal and professional interaction blur, the question of “personal privacy” vs. “company policy” is inevitably encountered. Google Plus is a site that has already reached more than 25 million users sharing over one billion items a day “by invitation only.” The Google Plus “circle” system promises to complicate matters even more. By allowing users to create circles of friends, separating work colleagues from personal friends or family, Google Plus is inviting users to share more than they would on other social networks. For company executives and general counsel, the perceived privacy of this arrangement could create a hazard. Employees, for example, might be more

diminish even further. Social media platdata should be privileged, it all becomes form providers will be forced to hand part of an ever-growing body of potential data over to the courts, bringing millions evidence. According to Gartner research, of posts into the public eye. by the end of 2013, more than half of all There is currently little legal precedent companies will be asked to produce this for social media cases, with most settled evidence in litigation. out of court. But with Of course, you don’t want to comits increasing popularpletely limit your employees’ access to As more case law develops around ity, it is only a matter of social media. Doing so would create a time before social media huge missed opportunity in terms of social media, user privacy will likely data will be a primary business promotion and networking. So diminish even further. focus, if not the direct how can your company find the right cause, of corporate legal balance between participating in social comfortable sharing private informadisputes. When this occurs, all corporate media and self-preservation? tion with their friends, knowing their social media data – and possibly that The first step is to discuss the situcolleagues won’t see the picture or post. of employees as well – will need to be ation with key stakeholders and settle But that information becomes part of the turned over. As the body of discoverable data in the event of mountain of searchable How can your company find the right a lawsuit. Employees may think they are and discoverable data only posting to specific circles on Google grows, the cost to pull balance between participating in social Plus, to only their friends on Facebook, that data can become or protecting their tweets on Twitter, but staggering. media and self-preservation? in the fine print of Terms of Service, users According to some are not ensured a right to privacy for any- recent estimates, interthing posted on a third-party, semi-public, net users send a staggering 13,800,000 on a well-defined social media policy. “free” social media platform. messages, 5,700,000 status updates and Depending upon the size and nature of As more case law develops around 30,000,000 comments every hour. Withyour organization, you will need to desocial media, user privacy will likely out some compelling reason why this termine what type of policy is best suited

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oct/ nov 2011 E X ECUTIVE COUNSEL

E-Discovery

for your employees. “Closed” policies tightly restrict employee access to social media through site blocks, but often miss an opportunity to allow their employees to engage with the public or their peers positively. Free access, on the other hand, often creates huge liability traps. The best social media policy is worthless if the employees don’t understand and abide by it. Take the time to train

social media policy and goals. Because social media sites and habits change frequently, training should be updated and re-administered frequently. When a new platform like Google Plus enters the arena, update the policy and address any changes with employees immediately. Finally, devise a strategy to collect, monitor and preserve social media evidence to comply with applicable laws

is to scramble after a request is made by the courts. As Google Plus grows to join the social media elite, have a plan ready to handle another deluge of potentially discoverable data. Preparing both your company and your employees is the best way to ensure you are in compliance if a legal dispute occurs. It can save you time, money and headaches. ■

Joshua Kubicki is

In the fine print of Terms of Service, users are not ensured a right to privacy for anything posted on a third-party, semi-public “free” social media platform.

employees on your policy, the platforms in question, and on their appropriate use. Usage policies may vary by department – with marketing, for example, having a more open policy than administration. But overall, training should encompass a theme that ties it back to the company’s

and regulations. Astonishingly, while social media is included in the rules of legal discovery, very few companies collect and retain social media data created by employees on behalf of the brand. This can be dangerous. It is much cheaper to have that data ready than it

Senior Director for Legal & Corporate Practices at Applied Discovery, a division of LexisNexis. He is a lawyer licensed in the District of Columbia and an expert in legal project management, legal services unbundling and the overall integration of business and technology with legal practice and process. joshua.kubicki@applieddiscovery.com

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THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2011

Canada/Cross–Border

Canadian Private Equity Volume Grows Strong Banking Sector, Aggressive Institutional Investors By Frank Arnone and Jamie S. Koumanakos

aralleling the global trend, Canadian private equity deal-making volume has grown recently, with published reports indicating the first substantial increase in transaction activity since the 2007 peak. Coming off the global economic downturn in 2008 and 2009, Canadian private equity transactions have reportedly increased in 2010 and Q1 of 2011, roughly returning to 2006 activity levels. There were approximately 300 announced deals. Active private equity sponsors have recently included, among others, Apax Partners, Birch Hill Equity Partners, the Carlyle Group, Onex Partners, Sun Capital Partners and Tricor Pacific Capital. Sponsors continue to see Canada as an attractive environment in which to get deals done due to the relative strength of its economy and the stability of its banking system. The pace of capital commitments in Canadian funds has also improved recently. Institutional investors continue

to take a targeted approach, investing capital with established general partners that have strong track records and with funds that focus on industries of strategic importance for limited partners’ portfolios. Overall, Canadian fund raising reportedly increased to C$4.3 billion in 2010 and C$525 million in Q1 of 2011. That compares to C$3.9 billion and C$260 million in the prior year’s periods. Canadian successes included Birch Hill Equity Partners IV LP, Catalyst Fund Limited Partnership III and Clairvest Equity Partners IV LP. All closed with above-target fund raising in 2010. Reflecting the transaction volume uptick, there have been a number of notable private equity transactions in Canada, including the C$894 million agreement of Canada Pension Plan Investment Board (CPPIB) to acquire an additional stake in 407 International, and TPG Capital’s C$850 million acquisition of the property information business of MDA Corporation. Those were the two largest disclosed M&A transactions in Canada in 2010. In addition, ING Summit Industrial Fund LP was acquired by Alberta Investment Management Corporation and KingSett Capital Inc. for C$2 billion, and British Columbia Investment Management Corporation (BCIMC) acquired Parkbridge Lifestyle Communities Inc. for C$787 million. More recently, Q1 of 2011 saw Onex Corporation’s announced US$878 million sale of Emergency Medical Services Corporation to Clayton, Dublier & Rice LLC, Apax Partners’ C$745 million

agreement to purchase the online print and media business of Trader Corporation and Berkshire Partners LLC and OMERS’ announced acquisition of Husky Injection Molding Systems Ltd. from Onex Corp for C$2.1 billion. PENSION PLANS LOOKING TO INVEST Canadian pension plans have continued to lead Canadian private equity dealmakers. In 2010 and Q1 of 2011 transactions were announced by virtually all of the major plans, including, among others, Public Sector Pension Investment Board (PSPIB), Teachers Private Capital (TPC) and OMERS Private Equity. Interestingly, investments have been focused on co-investments with sponsors, and direct and co-sponsored buyouts. The current strength of the Canadian dollar relative to the U.S. dollar, the Euro and Pound Sterling, has spurred pension plans to look for investments internationally. Several have led or contributed to some of the largest global private equity transactions of 2010. Recent examples include the £2.1 billion bid by OMERS and TPG for United Kingdom-based HS1; TPC’s agreement to purchase MAP Airports’ interest in the Brussels and Copenhagen airports; the announced US$3.4 billion acquisition by Apax Partners, OMERS and TPC of High Speed 1 from London & Continental Railways Ltd.; and the AXA SA, Caisse de Depot and Clayton Dubilier & Rice LLC acquisition of Spie SA (France) for US$3 billion. TRENDS With a more robust M&A market and improved access to deal financing, there

oct/ nov 2011 E X ECUTIVE COUNSEL

Canada/Cross–Border are a number of trends that we believe will continue to have an impact on the Canadian private equity landscape for the remainder of the year and into 2012:

• Steady Deal Volume and Focus on the Middle Market. Private equity funds are expected to continue to be in acquisitive mode as the investment periods of 2006 and 2007 vintage funds begin to expire, and general partners continue to look for ways to put their committed capital to work. We expect mid-market LBO’s to continue to dominate the Canadian market, after having accounted for the majority of all buyout deal value and volume in 2010 and Q1 of 2011. • Hot Sectors. In addition to traditional LBO sectors in manufacturing, retail and energy-related industries, recent hot areas for Canadian private equity dealmakers, both domestically and internationally, have been infrastructure and green technology. Recent changes liberalizing foreign ownership restrictions on Canadian telecom satellites have also opened the door to foreign acquisitions, and garnered a significant amount of private equity interest. • Follow-On Acquisitions and Optimization of Portfolios. We expect that general partners will continue to devote substantial time to optimizing returns for existing investments, including by pursuing attractive follow-on acquisition opportunities in order to ready portfolio companies for sale. We also expect sponsors to focus on increasing investment performance, including by undertaking dividend recapitalization transactions that were prevalent in 2010. • Sponsor-to-Sponsor Deals to Continue. With fierce competition for quality targets, we expect LBO funds to continue to acquire solid portfolio companies from other private equity firms, with sponsors appreciating the upside of a company that has undergone strategic and financial improvements through private equity ownership. • Continued Competition from Strategics. Strategic buyers have continued to

provide strong competition for targets, reportedly accounting for 92 percent of all Canadian M&A transaction volume in 2010. We expect this activity to continue. Strategics with available cash reserves and investment grade ratings are actively looking for deals, and demonstrating a willingness to aggressively bid against private equity funds in competitive auctions. Some sponsors are avoiding broad auction processes for fear of overpaying. • Activist Shareholders. The need for private equity and other acquirers to negotiate simultaneously with both the board of a target and its key security holders has been underscored recently. Institutional shareholders have become increasingly willing to voice their displeasure with directors and management in response to under-performance in the capital markets. Canadian laws are relatively liberal in respect to permitting shareholders to call special meetings and seek to replace directors. We expect challenges to board decisions by shareholders to continue. • Favorable Cross-Border Tax Changes. We expect private equity funds to continue to take advantage of amendments to the Income Tax Act implemented in 2010, which have significantly liberalized tax laws applicable to foreign buyers of Canadian businesses. Positive tax changes have resulted in non-resident investors no longer being subject to the invasive “section 116” tax, withholding and compliance burdens applicable to equity dispositions (except where the equity constitutes a real property interest), the elimination of the need for “blocker” entities in many crossborder acquisition structures, and the removal of withholding tax on arm’s length and certain non-arm’s length cross-border interest payments. • Foreign Investment Under Scrutiny. The Canadian government’s 2010 decision to block BHP Billiton’s proposed US$39 billion acquisition of PotashCorp represented only the second time (and first in the resource sector) that a

foreign acquisition has been rejected under the Investment Canada Act. The deal was blocked despite unparalleled proposed commitments from BHP to both Canada and Saskatchewan. The action has raised questions as to whether the government of Canada has become protectionist. The Canadian government has promised increased guidance for future foreign investments and a review of the Investment Canada Act. While we expect that future reviews will proceed as they have in the past, foreign acquisitions involving strategic resources, national security, state-owned enterprises and sovereign wealth funds, or which are particularly large and unsolicited, are likely to receive heightened scrutiny. ■

Frank Arnone is a partner in the Securities Group and co-chair of the Private Equity Group at Blake, Cassels & Graydon LLP. His practice emphasizes domestic and cross-border mergers and acquisitions and corporate finance. He also provides advice on securities law, stock exchange compliance and corporate matters to a wide variety of issuer, underwriter and private equity clients. frank.arnone@blakes.com

Jamie Koumanakos is a partner at Blake, Cassels & Graydon LLP, based in New York. He practices corporate and commercial law, with a focus on domestic and cross-border mergers and acquisitions, and on private equity fund investments and co-investments. He serves as a liaison for the firm’s U.S. clients and provides advice to U.S. clients conducting business in Canada. jamie.koumanakos@blakes.com

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2011

Canada/Cross–Border

U.S. Tech Sector Looks North By Divya Balji

n the midst of market turmoil and volatility, the U.S. debt ceiling problems and the European financial crisis, cross-border US/Canada M&A activity continued steady. Several sectors stood out, with substantial deal values and volumes. Mid-market M&A activity remained strong. “Through August 2011, cross-border activity has continued at consistent and relatively robust levels compared to the

Volatility in the marketplace is making it difficult to appropriately value M&A transactions. last few years, although not maintaining the steady quarter-over-quarter growth we saw in 2010,” said Michael Gans, of Blake, Cassels & Graydon LLP. Volatility in the marketplace is making it difficult to appropriately value M&A transactions, which makes deal-makers cautious. Previously loosened purse strings have been tightened with the spreads on available debt widening. Cash remains the dominant form of consideration, as vendors seek to avoid the volatility of the equity markets. Private equity firms are actively partaking in deals to exit old investments and enter new ones, but competition from strategic buyers and the new uncertainty in debt capital markets has delayed many such transactions as the fourth quarter of 2011 begins. Notable deals for this year include Berkshire Partners LLC and OMERS Private Equity’s acquisition of Husky Injection Molding Systems from Onex for CAD 2.1bn, and Apax Partners’ CAD 745m purchase of Trader Corporation from Yellow Media, in March. Berkshire

Partners worked with McCarthy Tetrault LLP and Weil Gotshal & Manges LLP. Onex worked with Fried Frank Harris Shriver & Jacobson LLP. Husky worked with Jones Day. Apax worked with Goodmans LLP and Simpson Thacher & Bartlett LLP, and Yellow Media worked with Ropes & Gray LLP and Stikeman Elliott LLP. The financial services sector stood out with mega deals like acquisition-hungry TD Bank Group’s USD 7.57bn purchase of MBNA’s credit card business from Bank of America in August, and the completion of Bank of Montreal’s (BMO) CAD 4.1bn purchase of Marshall & Ilsley (M&I) in July. As one observer has noted, due to the ongoing financial crisis as well as fallout from the U.S. Dodd-Frank Act, the financial services sector stands out as an opportunity for Canadian institutions to grow, diversify or re-deploy capital. Another sector that saw multiple US/ Canada cross border M&A transactions was technology. Major U.S. companies

Major U.S. companies are looking to add mobile and internet capabilities by acquiring smaller Canadian companies. are looking to add mobile and internet capabilities by acquiring smaller companies located north of the border. Google acquired Toronto-based software developer PushLife for USD 25m in April. Google worked with the law firm Osler, Hoskin & Harcourt LLP, and PushLife worked with McCarthy Tetrault LLP on the deal. With more Canadian startups looking for additional capital to grow their businesses, major U.S. technology companies

could look to invest in new software and applications through acquisitions in Canada, industry analysts said. Outbound deals should continue to outpace inbound deals as the strong Canadian dollar and relative strength of the Canadian economy encourages Canadian businesses to take advantage of perceived opportunities in the rest of the world. Canadian companies and pension funds will continue to search internationally for investment and growth opportunities due to the limited size of the Canadian economy, the need to diversify their portfolios and the relative scarcity of good opportunities in Canada. ■

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

OCT/ NOV 2011 E X ECUTIV E COUNSEL

What’s the Takeaway on the 2011 Say-On-Pay Vo V Votes? te By Deborah Lifshey and Dana Etra As public companies conclude the inaugur al proxy season under new SEC requirements to conduct say-on-pay (SOP) and say-on-frequency (SOF) votes, it is worthwhile to analyze what the 2011 voting results reveal about how to achieve favor able voting outcomes in the upcoming proxy season. Among the key findings:

• Despite widespread anticipation that numerous companies would fail SOP votes, upwards of 98 percent received majority shareholder support of their pay programs. • Concerns over the link between pay and performance were the primary factor in most failed votes. • None of the 37 companies with failed votes were previously targeted by governance critics for poor pay practices, while the most criticized companies generally had successful votes on pay. • Voting recommendations from major proxy advisory services such as Institutional Shareholder Services (ISS) played a major role in outcomes. • Shareholders may file lawsuits against companies that fail their SOP votes, but they will face substantial legal hurdles. The background of these developments is the Dodd-Frank Wall Street Reform and Consumer Protection Act. It mandates that, starting in the 2011 proxy season, almost all public companies are required to hold an advisory SOP vote at least once every three years, asking shareholder approval of compensation programs for named executive officers. Additionally, at least once every six years a separate advisory vote must be conducted asking shareholders whether such SOP votes should be conducted every one, two or three years.

SOF VOTING RESULTS In 2011, many boards spent nearly as much time and effort discussing the frequency of SOP votes as the SOP votes themselves. Early in the proxy season, about 60 percent of companies recommended triennial votes, arguing that an annual vote would focus shareholders too much on short-term performance and leave little time for companies to respond to the advisory votes. However, recommendations shifted when Institutional Shareholder Services (ISS) and many other large institutional shareholders endorsed annual SOP votes on the grounds that they would provide the most consistent and clear communication channel for shareholders to express their views on executive pay.

continued on page 38

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2011

Corporations Can Benefit from FAA Ruling on Private Aircraft By John Hoover

he Federal Aviation Administration recently issued an “Interpretation” that, if certain conditions are met, has the result of allowing companies to accept reimbursements from executives for costs incurred in using the company’s aircraft for personal flights. This arrangement is advantageous to the company because it can potentially reduce the related securities law disclosures, provide tax benefits to the company, and address possible concerns of stakeholders such as creditors, stockholders, and other employees. The new Interpretation (known as the “Nichols Interpretation,” after Mike Nichols, the executive with National Business Aviation Association to whom it was officially addressed) revises a 1993 Interpretation that generally had prohibited an executive from reimbursing the company for the costs of these flights. The background to this change is that the FAA has different rules for entities that provide air transportation for compensation or hire than it does for those that are flying on their own private aircraft. The effect of the Nichols Interpretation is to allow companies to accept reimbursement from executive employees for travel on private company aircraft without being required by the FAA to obtain an FAA certificate to operate as an airline or a charter

company – which in either case would entail being subject to stricter FAA rules. In the Nichols Interpretation, issued in December of 2010, the FAA essentially determined that a company’s control over a high-level employee’s schedule and the company’s ability to recall the employee at any time can bring personal flights within the scope of the company’s business, thereby permitting the company to accept reimbursements for the employee’s personal use of the company plane and continue to be subject only to the FAA’s less strict rules for private aircraft. Thus the Nichols Interpretation permits companies to accept reimbursements from certain executives for a pro rata share of the cost of certain nonbusiness flights – but only if two conditions are met. continued on page 40

oct/ nov 2011 E X ECUTIVE COUNSEL

Standard (GICS) group, and the total compensation of the CEO as reported in the summary compensation table is in ISS’s view By March, it was clear that shareholders were favoring annot aligned with the total shareholder return over time. ISS may nual SOF votes, regardless of the triennial recommendations also recommend against SOP if a company engages in what it made by many company managements. By September, annual considers “problematic” pay practices. votes were being recommended by management at 52 percent In the wake of receiving a negative ISS voting recommendaof companies. According to filed results, shareholders were tion, the most common approach taken by companies was direct voting in favor of an annual vote at 76 percent of companies. outreach to shareholders. This included face-to-face meetings The chart below illustrates management recommendations vs. with, and targeted telephone campaigns to, key shareholders, in voting outcome: which senior executives explained Table 1: Man ageme n t S O F Rec o m m en d atio n vs . S h a r e h old e r Vot e s compensation decisions. Among 93 companies that opted to file Board Recommendation additional soliciting materials that Average Annual Biennial Triennial No Recommendation enhanced or updated their earlier Support executive compensation disclosures, Level % Supporting % Supporting % Supporting % Supporting 88 percent rebutted ISS methodoloAnnual 87% 63% 47% 45% gies, including its peer group selecBiennial 42% 1% 2% 5% tion, the period over which pay-forTriennial 51% 10% 9% 24% performance was analyzed and its Abstain 2% 2% 2% 8% option valuation methodology. Several large companies responded by making critical changes to their pay practices, including SOP VOTING RESULTS Disney (which amended employment agreements to eliminate It was anticipated that a fairly significant number of companies golden parachute tax gross-ups and passed SOP by 77 percent), would fail their SOP votes, given the extensive criticism and and Lockheed Martin and GE (each of which added perfornegative media coverage of executive compensation programs mance requirements for previous equity grants, and subsequentleading up to the first votes. In fact, the results have been ly passed SOP by 66 percent and 78 percent respectively). overwhelmingly positive: only 37, or 1.3 percent of the 2,926 While a negative shareholder vote in 2011 does not porcompanies that filed SOP vote results by September 16 failed to tend failure the following year, shareholders who express their get majority approval. concerns will clearly be looking for meaningful changes that Among the companies obtaining majority support, 68.7 peraddress the linkage between pay and performance. The three cent had more than 90 percent shareholder approval and 92.6 companies with failed SOP votes in 2010 (Key-Corp., Motorola percent received more than 70 percent support. Overall, the rate and Occidental Petroleum) each got more than 85 percent of shareholder approval of those companies with passed SOP shareholder support in 2011, after making significant changes votes was over 90 percent. to their pay programs. For example, Occidental reduced award Notably, none of the 37 companies with failed SOP votes opportunities and amended its peer group. were on the radar of governance experts for having poor pay Several companies with failed votes in 2011 have already taken practices, while those companies that had the most criticized similar steps. Helix Energy Solutions is adding performance metrics pay practices passed their SOP votes by wide margins. There to its cash bonus program, while Umpqua Holdings added perforseems to be no correlation between the voting results and either mance conditions to its restricted stock awards. company size or industry. The energy, consumer discretionary continued from page 36

and industrial sectors generated the most failures, but the difference is not statistically significant enough to conclude that any particular industry pay practice was the cause. Pay-for-performance issues were the primary driver in most failed votes. The voting recommendations issued by ISS had a measurable impact on company results. ISS recommended against SOP at approximately 11 percent of companies, of which about 11 percent failed to get majority shareholder support. Among the companies with unfavorable ISS recommendations that did get majority shareholder support, the margins of success were considerably lower than at companies that garnered favorable ISS recommendations. Every company that received a positive recommendation from ISS had a successful SOP vote. ISS cited a disconnect between pay and performance in approximately 75 percent of its negative voting recommendations. Under ISS methodology, this disconnect is generally triggered when both one-year and three-year total shareholder return are in the bottom half of the company’s Global Industry Classification

POTENTIAL FOR LITIGATION As of August, shareholder derivative lawsuits had been filed against the directors and executive officers (and, in some cases, their outside compensation consultants) at seven companies with failed SOP. That number is likely to increase, given the normal time lag in the legal filings, but such cases will face substantial hurdles. The Dodd-Frank Act specifically states that a SOP vote “may not be construed” to “create or imply any change to the fiduciary duties of such issuer or board of directors” or to “create or imply any additional fiduciary duties for such issuer or board of directors.” Generally, the courts’ business judgment rule protects decisions by directors considered to have been made on an informed basis, in good faith, and that are not in their personal interest. Whether these suits become routine following unsuccessful SOP votes will depend on the outcome of this year’s cases. While majority support technically constitutes a passing

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2011

Table 2: Co m pa n i e s Fa il i n g to O b ta i n M a jo r i t y S u pp o r t o n S O P i n 2 0 11 ( by h i gh e s t “ag a i n s t ” vot e s ) Company

% Votes Against

Revenue ($M)

Helix Energy Solutions Group Inc

67.94%

$1,199.84

MDC Holdings Inc

65.11%

$958.66

63.74%

$218.84

61.85%

$558.06

Cadiz Inc

61.65%

$1.02

Pico Holdings Inc

60.97%

$32.17

60.72%

$1,681.62

Energy

60.57%

$14,340.00

Utilities

60.55%

$263.42

59.15%

$8,409.60

Cincinnati Bell Inc

58.53%

$1,377.00

Nutri System Inc

58.03%

$509.52

Ameron International Corp

57.67%

$503.26

Nabors Industries Ltd.

57.27%

$4,174.63

Energy

Penn Virginia Corp

55.98%

$253.79

Energy

Intersil Corp

55.77%

$822.40

Shuffle Master Inc

55.40%

$201.30

Hercules Offshore, Inc.

55.38%

$657.48

55.38%

$1,015.70

55.37%

$10,220.80

Masco Corp

55.22%

$7,592.00

Industrials

Navigant Consulting Inc

55.13%

$703.66

Industrials

NVR Inc

54.70%

$3,057.37

54.22%

$384.96

Financials

53.94%

$18,982.00

Materials

Beazer Homes

53.77%

$1,009.84

Consumer Discretionary

Jacobs Engineering Group, Inc

53.73%

$9,941.41

Industrials

Curtiss Wright Corp

52.66%

$1,893.13

Industrials

Dex One Corp

51.99%

$2,202.45

Blackbaud Inc

51.96%

$327.09

Cutera Inc

51.90%

$53.27

Premiere Global Services Inc

51.34%

$441.75

Talbots Inc

51.04%

$1,213.06

Stewart Information Services Corp

50.88%

$1,666.79

Financials

Tutor Perini Corp

50.82%

$3,199.21

Industrials

Hewlett Packard Co

50.77%

$126,033.00

Kilroy Realty Corp

50.70%

$302.94

Monolithic Power Systems Inc Umpqua Holdings Corporation

Superior Energy Services Inc Constellation Energy Group Inc Cogent Communications Group Inc Stanley Black & Decker, Inc.

Janus Capital Group Inc Weatherford International Ltd

BioMed Realty Trust Inc Freeport McMoran Copper & Gold Inc

Industry Energy Consumer Discretionary Information Technology Financials Utilities Financials

Telecommunication Services Consumer Discretionary Telecommunication Services Consumer Discretionary Industrials

Information Technology Consumer Discretionary Energy Financials Energy

Consumer Discretionary

Consumer Discretionary Information Technology

SOP vote, directors should focus on attempting to garner more than such a minimal level of support. Governance experts and pundits generally believe that companies that receive less than 75-80 percent SOP support remain at risk of failing SOP

None of the 37 companies with failed say-on-pay votes were on the radar of governance experts for having poor pay practices. in 2012, due to year-over-year changes in the institutional shareholder base and possible increased activism when advocates and shareholders have more time to analyze the proxies and programs in the second year of SOP. Here are a few themes and recommendations, looking forward to 2012: • Enhanced disclosure is critical. The proxy’s Compensation Discussion and Analysis must be clearly written and persuasive. Most companies now include executive summary sections, strong SOP supporting statements and, most importantly, a cogent explanation of the relationship between company pay and performance (which will shortly become a requirement under Dodd-Frank). • Shareholder engagement depends on early, frequent and ongoing communication. Shareholders will be analyzing how companies react post-SOP, particularly at those that received low shareholder support. The Board should determine who will speak on behalf of the company and to whom, and develop a twoway dialogue to solicit shareholders’ views on pay programs. Increased communication with shareholders was a deciding factor among some of the companies that received negative ISS recommendations in 2011 but managed successful SOP votes. • Monitor changing ISS positions. ISS revamps its policy guide at the end of each year. Companies should understand the changes and their implications, be very familiar with their ISS Report and ISS Governance Risk Indicators score, and try to eliminate any problematic pay practices.

Deborah Lifshey is a managing director in the New York office of independent compensation consultancy Pearl Meyer & Partners. She specializes in advising clients on compensation matters from a legal perspective, including securities disclosure, taxation, and corporate governance issues, as well as contract negotiations and reasonableness opinion letters. deborah.lifshey@ pearlmeyer.com

Health Care Telecommunication Services Consumer Discretionary

Information Technology Financials

Smaller companies should ramp up: Although companies with public float of less than $75 million are exempt from SOP and SOF in 2013, they should be examining their compensation programs now. Since those companies are subject to reduced disclosure requirements and are not even required to produce a CD&A, it will be even more important for them to provide supporting statements in their SOP proposals, explaining their rationales. ■

Dana Etra is an analyst in the Boston office of Pearl Meyer & Partners. dana.etra@ pearlmeyer.com

oct/ nov 2011 E X ECUTIVE COUNSEL

continued from page 37

First, the company’s board of directors needs to maintain a list of executives “whose position with the company requires him or her to routinely change travel plans within a short time period.” Companies preparing such a list should consider assembling information supporting the contention that each listed executive’s travel plans have in fact been changed by the company in the past. The FAA discourages companies from listing a large number of executives. Second, the company must document that it determined that the flights were for the purpose of “routine personal travel such as vacations.” In this context, a personal flight would be routine personal travel if it were subject to change on short notice for compelling business reasons at the company’s direction. While the Interpretation discusses the company’s ability to recall the executive as part of its rationale, it is not necessary to show that the executive was actually subject to recall while on the trip. It is only necessary that the trip be subject to change at the company’s direction on short notice. In contrast, a flight would not meet this routine personal classification if it is unlikely that the company would require the executive to reschedule the flight, even for compelling business reasons (i.e., the wedding or funeral of a close family member or to have urgent medical treatment.) Here are some of the key points regarding the new Interpretation:

to deduct the costs of the flight. The overall tax benefit may be relatively modest, since the executive paying the reimbursement for a personal flight typically would not be entitled to deduct that payment. • Record-Keeping Confusion. The term “routine personal” travel is likely to cause confusion for the individuals responsible for keeping flight records, because the tax rules use that same term with respect to the classification of flights as entertainment or nonentertainment. The FAA considers vacations to be “routine personal” travel for purpose of the Interpretation, while the IRS considers vacations to be entertainment activities and not routine personal travel. • Alternative of Time Sharing. Companies have long been able to accept reimbursements in limited amounts for executives’ personal flights under “time sharing” agreements. Under a time sharing agreement, a company may accept reimbursements from an executive for two times the cost of fuel plus certain enumerated costs, such as landing fees. Accordingly, time sharing agreements may allow reimbursement of enough costs to significantly reduce or eliminate securities law disclosures, but a time sharing agreement ordinarily will not permit a company to accept the fair market charter rates needed to potentially enable a company to deduct the cost of executives’ vacation flights. In contrast, the reimbursements permitted under the Nichols Interpretation are limited only by the costs of the flights, which often exceed fair market charter rates during the first 5 years of ownership when the aircraft is being depreciated. The FAA’s Nichols Interpretation provides relief to companies that permit personal use of their planes by executives. In the past, companies were generally permitted to accept reimbursements only in limited amounts under time sharing agreements. However, the Nichols Interpretation provides companies a reimbursement arrangement under which they can reduce securities law disclosures, potentially deduct the costs of executives’ personal flights, and address possible concerns of stakeholders such as creditors, stockholders, and other employees. ■

By accepting reimbursements from executives for personal travel, companies can reduce the amount of such unreimbursed incremental costs subject to disclosure.

John Hoover is senior counsel at Dow Lohnes PLLC, in Washington D.C. He has wide experience in federal and state tax planning and compliance matters involving tax-exempt organizations, individuals, corporations, partnerships, estates, trusts and other entities. He has also worked extensively in tax matters relating to like-kind exchanges, deferred compensation, aircraft, and political and lobbying expenditures. jhoover@ dowlohnes.com

• Reduced Securities Law Disclosures. Public companies generally must disclose the unreimbursed incremental costs of certain top executives’ personal flights on the company plane. By accepting reimbursements from executives for personal travel, companies can reduce the amounts of such unreimbursed incremental costs that are subject to disclosure. • Company Tax Benefits. Companies are generally prohibited from deducting costs associated with executives’ use of the company plane for vacation travel. However, if an executive pays the company a fair market charter rate for the flight, then the company may be able

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OCT/ NOV 2011 E X ECUTIVE COUNSEL

What Will be the Result In a class action, a large group of people who have been injured in the same way by the same unlawful conduct pursue claims together. The final outcome is binding on all class members, unless they have opted out. If the class wins (or settles), the recovery is distributed among the members of the class. If the class loses, no class member can later bring the same claim against the defendant. Class actions are a staple in consumer cases because such cases often involve wrongful conduct that impacted a lot of customers, affected them all in the same way, and injured individual class members enough to sting but not enough to make it worth suing individu-

For Consumers, a Raw Deal

ally. The Concepcion case, for example, involved a

BY SCOTT L. NELSON

find it worthwhile to go to the trouble and expense of

claim that AT&T Mobility overcharged thousands of customers $30 each. If that claim was true, AT&T Mobility netted millions in ill-gotten gains. But no single customer would litigating or arbitrating individually over $30, let alone

Does the U.S. Supreme Court’s decision in AT&T Mo-

find a lawyer willing to take the case. A class action in a

bility v. Concepcion, which enables companies to pro-

case like Concepcion creates the possibility of a pool of

hibit customers from bringing class actions, hurt con-

damages large enough to provide compensation for class

sumers? Only if you think companies shouldn’t be able

members, pay their lawyers and deter future misconduct

to use form contracts to unilaterally excuse themselves

by depriving the defendant of the fruits of wrongdoing.

from liability for wrongdoing that injures consumers. If

There was one big problem in Concepcion: Each

you think consumers are better off not having effective

customer, to receive cell-phone service, had to accept

remedies to compensate them for injuries and deter

AT&T Mobility’s form contract, which required arbi-

companies from committing fraud, overcharging, sell-

tration of all claims and said no customer could pursue

ing defective products and engaging in other common

a claim as part of a class. The plaintiffs had a way

marketplace rip-offs, you’ll love Concepcion.

around that problem because California courts, apply-

This case was not about whether contracts can re-

ing a contract-law principle called “unconscionability,”

quire consumers to arbitrate. That was already a given

had held that a class-action ban is unenforceable when

because the Federal Arbitration Act generally makes

a class action is the only practicable means of pursuing

arbitration clauses in contracts enforceable. The issue

a claim. That rule fit the claims in Concepcion to a T.

in Concepcion was whether, as part of an arbitration clause, consumers can also be forced to give up their right to pursue claims collectively, in a class action.

In addition, the Federal Arbitration Act allows states to apply normal contract-law principles (such as continued on page 44

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2011

of AT&T v. Concepcion? A common definition is that a challenged provision must “shock the conscience,” whatever that means. ) The California Supreme Court had reasoned in Discover Bank that it was unlikely any lawyer would take on the case of one consumer where the recovery would be very small, and thus the defendant would likely get away with the wrongdoing for which it was charged. Critics of the Concepcion decision chalk it up to a pro-business and anti-consumer shift in the Supreme Court, as evidenced recently by the Court’s decision in Dukes v. Wal-Mart, which reversed a nationwide class-action certification. The decision more accurately should be described as a reaction against the in ter-

A Blow to ClassAction Lawyers, Not Consumers

rorem effect of class actions that force businesses to

The Supreme Court Reinforced Neutrality of the Federal Arbitration Act

number of provisions that benefitted individual consum-

BY C H A RL ES G. M IL L ER

settle in order to avoid the prospect of huge damage awards, which result in the class lawyers – not the individual consumers – reaping a windfall. In the end, each consumer receives a small amount, and the Court’s decision in Concepcion does not change that. The Concepcion arbitration agreement did contain a ers if they decided to arbitrate or sue individually. AT&T would have to pay a penalty if the consumer recovered more than the company offered in settlement. It would bear the costs of arbitration of non-frivolous claims and could not recover its attorneys’ fees. Smaller claims could be heard by telephone. The consumer could choose to go to small

On April 27, 2011, the U.S. Supreme Court issued its

claims court rather than arbitration. The arbitration had to

5-4 decision in AT&T Mobility LLC v. Concepcion.

take place in the county where the consumer was billed.

The issue before the Court was whether a class-action

If the decision had gone the other way, the likely

waiver provision in a consumer arbitration agreement

result is that businesses would have to factor in this

could be enforced, notwithstanding that the California

potential cost in the cost of their product, ultimately

Supreme Court in a 2005 decision, Discover Bank v.

hurting the consumer. (In fact, some large credit card

Superior Court, had ruled that such a provision was

companies, before Concepcion, offered consumers

unconscionable in consumer cases involving relatively

a choice when presenting a class-action arbitration

small sums of money, since it acted as exculpatory.

waiver provision: if they chose not to accept it, they

(The doctrine of unconscionability in and of itself has

would pay a higher interest rate.)

no precise definition, giving the courts great leeway.

continued on page 45

oct/ nov 2011 E X ECUTIV E COUNSEL

continued from page 42

than the company’s last settlement offer. But as the

unconscionability) to determine whether an arbi-

dissenting justices explained, those features (which

tration clause is enforceable, as long as they don’t

no consumer had ever succeeded in obtaining)

discriminate against arbitration. California’s rule

were window-dressing because the company could

didn’t discriminate against arbitration. It applied

always avoid them by offering to pay the face value

to any contract that banned class actions, whether

of the claim of any consumer who actually went

or not it had an arbitration clause.

to the trouble of initiating an arbitration (in the

But the Supreme Court didn’t see it that way.

Concepcion’s case, remember, that would be $30).

Concepcion says class claims and arbitration are

Very few consumers will go to that trouble just to

inherently incompatible, because arbitrations are

receive such a nominal amount, and even fewer

The Concepcion case involved a claim that AT&T Mobility overcharged thousands of customers $30 each. If that claim was true, AT&T Mobility netted millions in ill-gotten gains.

Scott L. Nelson

posedly “consumer-friendly” provisions, and the Concepcion case doesn’t directly say they have to be present before a class-action ban will be enforced. Whether lower courts will limit Concepcion to class-action bans in arbitration clauses that contain

to cases with large groups of claimants. According

such pretenses of fairness remains to be seen. Other fans of Concepcion claim consumers prefer

does “discriminate” against arbitration and thus

arbitration because when companies allow them to

conflicts with the Federal Arbitration Act.

opt out of arbitration clauses they usually don’t do it.

What does the decision mean in practice? Es-

In fact, very few arbitration clauses give consumers

sentially, that a consumer contract with an arbitra-

the option not to accept, unless they are willing to

tion clause prohibiting class actions will likely be

take their business elsewhere and can find another

enforced even if individual arbitration is impracti-

company that doesn’t require arbitration. Even in the

cal because of the small amount of each claimants’

few instances where companies allow consumers to

damages and the lack of incentive for lawyers to

opt out of arbitration, most consumers don’t under-

take the case. Concepcion already is being applied

stand its significance until it’s too late.

to dismiss class actions, often without regard to

is an attorney at the Public Citizen Litigation Group in Washington D.C., where he has practiced since August 2001. Previously he was a partner at Miller, Cassidy, Larroca & Lewin. In private practice and at Public Citizen, his work has centered on civil litigation and civil and criminal appellate practice, including practice before the U.S. Supreme Court. snelson@citizen.org

Besides, most arbitration clauses with classaction bans don’t even have these kinds of sup-

supposed to be fast and informal and are unsuited to Concepcion, a rule prohibiting class-action bans

lawyers will be available to help them.

Finally, in cases where individual arbitration re-

whether claims can be effectively pursued in indi-

ally is beneficial to consumers and companies alike,

vidual arbitrations.

they can always agree to it after a dispute arises.

That means companies can pretty much exempt themselves from liability for large-scale frauds and other improper actions just by including an arbi-

But up-front class-action bans apply even when no rational consumer would make that choice. The bottom line: Companies know that if they

tration clause with a class-action ban in their form

can enforce contracts banning class actions, few if

contracts. Existing contracts can be modified to

any consumers will individually arbitrate claims

include such clauses by sending customers a bill-

arising from large-scale wrongs that cost a lot of

stuffer telling them they accept the change if they

people tens, hundreds or even thousands of dollars.

continue their relationship with the company (by,

Without class actions, those wrongs will go unrem-

for example, making a single credit-card charge or

edied. Unless you think companies will generously

a single cell-phone call).

rebate the benefits of their immunity from liability

Some defenders of Concepcion say the arbitra-

for wrongdoing to customers through lower prices

tion clause in that case had “consumer-friendly”

(increasingly unlikely as the cell-phone, credit-card

features, including payment of a bonus and at-

and other industries steadily get more concentrat-

torney fees if a consumer won more in arbitration

ed), that can only be bad for consumers. ■

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2011

continued from page 43

arbitration provisions need not be enforced on

In truth, the decision in Concepcion rests on

the recognized grounds that apply to all contracts,

prior decisions of the Court affirming the primacy

such as fraud in the inducement, duress, or un-

of the Federal Arbitration Act (FAA), which was

conscionability. If a party was able to convince a

enacted to overcome state hostility to arbitration

court that such grounds existed, the court nor-

agreements and insure that arbitration agree-

mally would not enforce the arbitration provisions

ments would be treated like any other contract.

pertaining to those grounds.

The Concepcion decision should not be viewed as

Concepcion held that a finding of unconsciona-

anti-consumer. It is not aimed at consumers, or even

bility alone was not enough to prevent enforcement

businesses for that matter, but focuses on whether a

of the arbitration provision. In order to do that,

The decision should be described as a reaction against the in terrorem effect of class actions that force businesses to settle and result in the class lawyers, not the individual consumers, reaping a windfall. judicial decision runs afoul of the FAA, which has

the court must also make a determination as to

long been interpreted as superceding state legislative

whether the challenged provision was incompatible

or judicial decisions that prevent arbitration agree-

with arbitration. The Court viewed class-action

ments from being enforced according to their terms.

waivers as the equivalent of mandating class-action

Those terms could favor consumers or businesses.

arbitration and looked to whether class actions

While many consumer contracts may be contracts of adhesion (offered on a “take it or leave it”

The FAA’s main purpose was to enforce the

basis by a party in a superior bargaining position),

agreement of the parties as written, which meant

that does not mean they are not entitled to enforce-

to enforce the class-action waiver clause, absent

ment. Adhesion contracts are regularly enforced so

grounds that exist at common law or equity not to

long as their terms are clearly set out, parties are

do so. The other purpose of the FAA was to encour-

not surprised, and the contracts do not contravene

age streamlined proceedings and expeditious results.

the reasonable expectation of the parties.

The majority justices determined that imposing

The FAA requires that arbitration agreements

class-action procedures to arbitration would result

contained in adhesion contracts be enforced, un-

in a higher degree of formality and complexity,

less there is a valid reason under state law not to.

would require specialists in class-action matters to

Until the decision in Concepcion, most legal

act as arbitrators , and yet subject the defendant

observers thought that even though prior Supreme

to increased risk due to the inherent informality

Court decisions had made it clear that arbitration

of arbitration proceedings, which are difficult to

agreements governed by the FAA were to be en-

challenge and virtually non-appealable. The Court

forced according to their terms, a determination of

also noted that statistics proved that class-action ar-

unconscionability would block any effort to enforce

bitrations could take much longer than the normal

an arbitration provision containing – for example –

bilateral arbitration, making it an inefficient way to

a class-action waiver provision. This is because the

resolve disputes.

FAA, while mandating enforcement of arbitration

The Concepcion case will now require courts,

agreements according to their terms, contained a

both state and federal, to examine the underpin-

“savings clause,” which allowed arbitration agree-

nings of any unconscionability ruling to add the ad-

ments not to be enforced on “grounds as exist at

ditional test, if an arbitration provision is involved,

law or in equity for the revocation of any contract.”

of whether the provision sought to be enforced is

There were numerous cases thus holding that

were compatible with the FAA’s objectives.

compatible or incompatible with arbitration. ■

Charles G. Miller is a shareholder and director of the firm at Bartko, Zankel, Tarrant & Miller in San Francisco, where he specializes in complex litigation and class actions. He was one of the lawyers involved in the case that resulted in the 1984 U.S. Supreme Court Southland Corp. v. Keating decision, which established the primacy of the Federal Arbitration Act and was a turning point in the use of arbitration in U.S. contract law. cmiller@bztm.com

Oct/ NOv 2011 E X ECUTIVE COUNSEL

Mergers, Acquisitions and Buyer’s Liability in the Information Age By Andrew B. Serwin and G. Tyler Parramore

Information is now a crucial component of many business models. That means buyers of a business need to be aware of the numerous privacy liability issues that can arise from an acquisition, particularly those relating to wrongful acts committed by the seller prior to or immediately following an acquisition.

on how the government might treat analogous violations of federal privacy laws. Depending on circumstances, the government may or may not bring charges against purchasing corporations for the FCPA violations committed by a recently acquired subsidiary. Extensive due diligence and disclosure have emerged as the key determinants. It’s true that sometimes adequate pre-closing due diligence is impossible. In 2008, the DOJ published an opinion sought by U.S.-based Halliburton Co., in connection with its attempted acquisition of a United Kingdom-based company, where Halliburton was un-

The potential for liability is to some degree a

able to conduct full FCPA due diligence prior to closing.

function of how the transaction is structured. When

This resulted in a 180-day post-closing “grace

acquiring a business through a stock purchase or

period” when the DOJ would not bring an enforce-

merger, a purchaser generally assumes all debts and

ment action against Halliburton for disclosed post-

liabilities of the seller or predecessor company. In

acquisition conduct, provided that Halliburton took

contrast, a purchaser of only the underlying assets

certain measures, including: (1) providing the DOJ

of a seller generally is not responsible for the seller’s

with a detailed post-acquisition work plan to correct

liabilities. However, “successor liability” may be im-

violations, (2) disclosing to the DOJ violations within

posed on an asset purchaser in certain circumstances,

180 days of closing, (3) ceasing and remediating any

for example where a court finds that the transaction

violating conduct within 180 days of closing or as

is part of a fraudulent attempt to avoid liability.

soon as possible, and in any event not later than one year after closing.

FCPA AS PROTOTYPE

The DOJ opinion release indicates that the gov-

Even in transactions where a purchaser assumes the

ernment is willing to accept the realities of business

seller’s liabilities, the government can decide against

acquisitions. However, the government also has

an enforcement action. Specifically, this may happen

shown its intolerance for violations in cases marked

when the government wishes to reward corporations

by inadequate due diligence and questionable post-

that conduct rigorous pre-acquisition due diligence,

closing decisions. In 2009, Halliburton (in an unre-

then voluntarily disclose violations and take steps to

lated case) paid a combined $579 million in penalties

correct problems.

on behalf of itself and its former subsidiary KBR, Inc.

The treatment of Foreign Corrupt Practices Act violations in the M&A context provides guidance

for alleged FCPA violations. While an alleged bribery scheme was underway

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2011

when Halliburton acquired M.W. Kellogg, the SEC believed that a number of actions and inactions by Halliburton opened the door to liability for the acts of its new subsidiary, acts about which it apparently had no knowledge. The SEC believed that Halliburton conducted inadequate pre and post-acquisition due diligence, failed to test the characterization of contracts entered into by its subsidiaries and continued utilizing suspicious agents to procure contracts, despite numerous red flags. In this case, the SEC brought and settled charges against Halliburton for violations relating to books and records and internal controls. Additionally, DOJ brought and settled a criminal action under the FCPA. The FCPA cases and related DOJ opinion releases suggest several patterns with respect to liability of an acquirer for violations by

There may be a

a predecessor company. First, buyers are not

grace period

likely to be held liable for

during which

of a predecessor com-

the buyer will not

pany if they promptly

be prosecuted for

program to prevent bad

post-acquisition

disclose pre-acquisition

conduct when it is in the process of cleaning house.

pre-acquisition conduct

implement a compliance post-acquisition conduct, conduct discovered, and cooperate with any government investigation. Second, the government will not allow M&A activity to extinguish liability of a

deception under Section 5 of the FTC Act. In addition to its Section 5 authority, the FTC enforces various sector-

companyâ&#x20AC;&#x2122;s FCPA violations. Third, there may be

specific privacy statutes. These include the Gramm-Leach Bliley Act of 1999,

a grace period during which the buyer will not be

protecting consumer financial data; the Childrenâ&#x20AC;&#x2122;s Online Privacy Protection

prosecuted for post-acquisition conduct when it is

Act, which protects information about children; CAN-SPAM, involving un-

in the process of cleaning house.

solicited electronic messages; and the TCPA, involving telemarketing calls.

NAVIGATING PRIVACY LAWS

laws. For example, 46 states, the District of Columbia and Puerto Rico have

The Federal Trade Commission has recently

enacted laws that require public disclosure of data security breaches, and a

expanded its efforts to protect consumer pri-

number of states regulate the collection of social security numbers.

Companies also must comply with a broad spectrum of state data security

vacy, through enforcement and other initiatives, by way of its authority to police unfairness and

In addition, M&A buyers are required to account for the actual transfer of information in the transaction. A recent consent decree, which requires

Oct/ NOv 2011 E X ECUTIVE COUNSEL

opt-in consent for certain changes to privacy

as the transaction structure. In acquisitions

practices, also may impact the ability of compa-

structured as a stock purchase, where there is

nies to transfer information if consumers have

a “bad-acting target” and a “good-acting” pur-

not been made aware of the potential transfer.

chaser, the government may elect not to seek

Also, in certain cases, the FTC has simply at-

enforcement of violations that are beyond the

tempted to block the transfer of information in

control of a purchaser that takes appropriate

an acquisition.

remedial steps. However in a merger, where some of the target’s owners become owners of

preventive measures

the surviving entity of the purchaser, the gov-

In order to avoid liability for the bad acts and

ernment may take the position that because

violations of a seller, acquirers should consider the

of this continuity of ownership, the surviving

following recommendations:

company should lose the benefit of any poten-

• They should educate themselves on the regula-

Andrew B. Serwin

tory regimes that apply to the target. With regard

is the founding chair of the Privacy, Security & Information Management Practice and a partner in the San Diego/Del Mar and Washington D.C. offices of Foley & Lardner LLP. His practice includes privacy and information security, including privacy and consumer protection matters. serwin@foley.com

to privacy issues, this means gaining a general

G. Tyler Parramore is an associate in the Business Law Department of Foley & Lardner LLP, practicing in the firm’s Jacksonville and Tampa, Florida offices. He handles a variety of corporate, commercial and public finance transactions, including advising buyers and sellers in M&A transactions. tparramore@foley.com

tial “clean hands” argument. • Acquirers should ensure that data can be legally transferred by reviewing applicable

understanding of the target’s data-gathering practices, as well as industry-specific regulations and state-specific privacy and data collection statutes, such as those

Buyers likely will not be held liable for pre-acquisition conduct if they promptly implement a compliance program to prevent bad post-acquisition conduct, disclose any pre-acquisition conduct discovered, and cooperate with

referenced above. • Acquirers should

any government investigation.

consider conducting rigorous pre-closing due diligence, looking spe-

privacy policies. If post-acquisition changes

cifically for potential violations and to ensure

to privacy policies are contemplated, acquir-

that any violations are voluntarily disclosed

ers must confirm they are permitted and de-

to the appropriate authorities. When viola-

termine whether opt-in, or opt-out, consent is

tions are discovered, the company can draft

required. If this cannot be done, an acquirer

specific indemnifications into the transaction

may find itself unable to use the data, or be

documents and choose a transaction structure,

required to segregate the data into a separate

such as an asset purchase, that unambiguously

database that is subject to the prior policies.

carves out certain liabilities. However, with

• Finally, acquirers should continue due

regard to the latter, asset purchasers need to

diligence post-closing and promptly set up

understand the successor liability exceptions

internal controls and compliance programs to

to the general non-liability rule to see if they

discover and correct ongoing violations, and

apply. Requiring the seller to carry post-closing

to prevent future violations. Such programs

insurance relating to pre-closing liabilities,

can include training, risk assessments and

requiring the seller to maintain its corporate

critical examination of actual practices in

existence following closing, and avoiding conti-

light of policies.

nuity of ownership can all help avoid triggering buyer liability. • Acquirers should also keep in mind the potential negative implications of merger

To the extent that an internal control plan is implemented, a company must consistently abide by it, or it will risk being charged with a violation. ■

Out-of-Court Settlement Programs Can Avert a Class Action They Must be Superior

By Neal Marder, Christian Dodd and Andrew Koehler

uring the normal course of business, events may ensue that potentially have a negative impact on large numbers of individuals, typically customers. A product line with a design or manufacturing defect that renders it potentially dangerous might elude quality control and find its way into the stream of commerce. A software glitch might lead to systematic overbilling of customers who are billed on a periodic basis, with the overcharges accruing for months before the problem is noticed. Often, companies respond to these circumstances by taking steps to rectify the problem as soon as it is brought to their attention. Recalls are implemented, replacement products are offered, refunds are issued. Nevertheless, if a sufficient number of people have been impacted, it is almost guaranteed that the company will be hit with one or more class action lawsuits seeking significant damages. In defending against such suits, companies should consider a strategy of quickly implementing an out-of-court settlement program. By doing so, the company might persuade the court that the class should not be certified because a superior alternative to class action litigation is available. A BETTER METHOD In seeking to certify a class in federal court, the plaintiff bears the burden of establishing: (1) numerosity, (2) commonality, (3) typicality and (4) adequacy of representation. Where damages are sought, plaintiff must further demonstrate that common questions of law or fact predominate over issues affecting plaintiffs individually, and that a class action is superior to other methods for the fair and efficient adjudication of the controversy. To defeat certification, defendants often try to develop evidence demonstrating that the claims of the class representatives are not typical of those of the putative class, that class representatives cannot be trusted to adequately protect the interests of absent class members, or that factual and legal issues that apply only to the class representatives predominate over issues they have in common with the class. Where a finding of liability appears probable, a defendant may want to focus on the superiority element. Specifically, defendants might put into place a private, out-of-court program – at the outset of litigation, or even before it begins – that sufficiently addresses and resolves the claims of putative class members. A number of federal district courts have denied class certification by finding that such out-of-court programs are superior to class action litigation for resolving the putative class members’ claims. In a groundbreaking decision several decades ago, a United States district court refused to certify a class action where a defendant broker who unknowingly had sold unregistered securities to investors offered to refund the purchase price of the stock when its trading was suspended. While most investors accepted the refund, a few declined and instead filed a class action lawsuit. The

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2011

court rejected the request to certify the class, finding that a class action would not be superior to the out-of–court refund program. The court acknowledged that the superiority requirement of the federal class action procedural rules did not explicitly contemplate a non-judicial alternative to a class action. Nonetheless it concluded that certifying a class under the circumstances would create a lawsuit where none previously existed, as the majority of putative class members had already accepted the defendant’s out-of-court remedy. According to the court, creation of such a lawsuit would run counter to the policy favoring the efficient utilization of court resources. More recently, several district courts have addressed the issue and largely reached the same conclusion. While there has been one exception (Eastern District of Louisiana), the majority of district courts have concluded that a properly designed and administered, private, out-of-court settlement program can be superior to class action litigation. Taken collectively, these cases demonstrate that district courts will exercise their discretion to deny certification where an out-of-court settlement program implemented before commencement of the class action lawsuit, or shortly thereafter, is a fair and efficient alternative. THE NECESSARY ELEMENTS An examination of the cases reveals that settlement programs deemed superior to class action litigation typically have the following characteristics: • The remedy offered through the out-of-court settlement program is substantially equivalent to what putative class members could expect to recover through the class action suit. This typically entails offering a purchase price refund or voluntary recall coupled with a free replacement product. If putative class members stand to gain an appreciably greater amount by litigating their claims, the court may find the class action superior. • The settlement program is sufficiently publicized to satisfy the court that potential class members have notice of its availability. • The settlement program is implemented shortly after the circumstances that engender the prospect of a class action suit and is an efficient mechanism for putative class members to obtain relief. It does not appear that the settlement program needs to be in place before the class action lawsuit is filed – at least one court has denied certification where the program was implemented after commencement of the class action litigation. However, the sooner the settlement program is implemented, the more likely a defendant will be able to present significant evidence of its effectiveness. Where it can be demonstrated that an existing program offers potential class members fair and efficient redress, a court will be less inclined to find a class action is superior or necessary. COSTLY BUT COST-EFFECTIVE It may require extensive resources to implement a program that

Oct/ NOv 2011 E X ECUTIVE COUNSEL

meets these criteria. Accordingly, the strategy to defeat class certification, or perhaps head off the filing altogether, is likely to include implementation of such a program only in limited circumstances. However, where it appears that the class representatives would have a strong case on liability and solid arguments that the requisites for class certification (other

class certification motion, finding that the defendant’s out-of-court settlement program was superior to class action litigation. Applying a literal interpretation of the Federal Rules of Civil Procedure 23(b)(3), the Seventh Circuit rejected the notion that a settlement program administered by the defendant, as opposed to the court, was a superior form of adjudicating the controversy.

The sooner the settlement program is implemented, the more likely a defendant will be able to present

Christian Dodd is an associate at Winston & Strawn, in the firm’s Los Angeles office. cdodd@winston.com

significant evidence of its effectiveness.

Neal Marder is a partner at Winston & Strawn LLP, chair of the firm’s litigation group in Los Angeles and firm-wide chair of the firm’s National Class Action practice. He concentrates his practice on complex business and commercial litigation, white collar, securities, internal investigations and antitrust, with an emphasis on the defense of class actions. nmarder@winston.com

than superiority) are met, the costs of putting such a program in place may well be justified. By quickly offering customers a fair out-of-court remedy, goodwill with customers might be restored and negative publicity surrounding the lawsuit minimized. Also, once the program is in place, a defendant might preemptively move to deny class certification on the grounds that the class action cannot be shown to be superior to the remedy offered by the program. A favorable ruling on a preemptive certification motion likely would lead to an early settlement with the class representatives, which in turn might forestall protracted, disruptive and costly discovery. Therefore, while implementing a superior out-of-court settlement program may entail significant costs, in some cases doing so will be a less costly alternative than litigating the class action suit. Finally, it bears mentioning that while the district courts are largely in accord that out-of-court settlement programs can be found superior to class action litigation, a recent decision by the United States Court of Appeals for the Seventh Circuit has added an interesting twist to this potential strategy for defeating class certification. The Northern District of Illinois Court had denied a named plaintiff’s

Nonetheless, the Seventh Circuit upheld the denial of the plaintiff’s class certification motion, concluding that a class representative “who proposes that high transaction costs (notice and attorneys’ fees) be incurred at the class members’ expense to obtain a refund that already is on offer is not adequately protecting the class members’ interests.” Accordingly, the court could have (and should have) denied class certification based on lack of an adequate class representative. Importantly, the Seventh Circuit’s reasoning suggests that any class representative who sought to certify a class when class members could obtain an equivalent remedy through an out-of-court program would be found to inadequately represent the interests of the class. Therefore, while this decision by the Seventh Circuit suggests that an out-of-court settlement program may not be deemed a “superior” method to adjudicate the controversy, the decision further suggests that such a program may nonetheless demonstrate that a class should not be certified. Consequently, defendants who rely on an out-of-court settlement program when challenging class certification should consider both arguments: a class action is not superior and a class representative who seeks to certify a class when equivalent out-of-court relief is available will not adequately represent the interests of the class. ■

Andrew Koehler is an associate at Winston & Strawn, in the firm’s Los Angeles office. akoehler@winston.com

OCT/ NOV 2011 E X ECUTIV E COUNSEL

FCC Regs an Often Overlooked Requirement in M&A BY GREG KUNKLE You have spent the last few months negotiating your client s asset sale, the agreement has been signed, the closing documents are in hand and payment is coming through the wire.

But wait! If you forgot to get the Federal Communications Commission’s blessing for the transaction, your client soon may be responding to a federal investigation and a possible fine. “The FCC?” you might ask. “But my client is not a communications company. What does the FCC have to do with it?” The answer is: More than you might think. Section 310(d) of the Communications Act of 1934 provides that no FCC wireless license may be assigned or transferred, either voluntarily or by transfer of control of the license-holding entity, without prior consent by the FCC. The application of this requirement to telecommunications service providers is obvious. But FCC licenses are commonly held for internal communications purposes by companies in all industries. Airlines, manufacturers, utilities, oil and natural gas, mining, and transportation sectors are all heavy users of FCC wireless licenses. A company may hold dozens, hundreds or even thousands of FCC wireless licenses used for voice and data mobile communications, systems automation, telemetering and other purposes. Although the radio systems associated with these licenses often perform mission-critical roles, their existence – and the fact that their operation is governed by federal regulatory requirements – is often overlooked during a merger or asset sale. FCC licensing compliance should be on your list of due diligence items in every transaction. A recent case illustrates regulatory pitfalls. A few years ago, the FCC issued a Forfeiture Order against Enserch Corporation, a large natural gas company that had merged with Texas Utilities Company without obtaining FCC consent, despite the fact that the company held a number of FCC licenses to support its day-to-day operations. The Forfeiture Order carried a financial penalty of $150,000 (reduced from a proposed fine of $510,000). In handing down the penalty, the FCC quoted an attorney for Texas Utilities Company as stating that “those responsible for the transaction failed to focus on the fact that Enserch held

FCC licenses and that, consequently, the transfer of control of Enserch would also require prior FCC consent.” This is a common mistake, one seen in a large number of FCC enforcement cases. THE FCC REQUIREMENTS The steps necessary to comply with the FCC’s requirements depend on the nature of the transaction. Generally, an application for the assignment of licenses would be required for a sale of assets or merger in which the FCC licenses will be assigned from the original license-holding entity to a different entity as a result of the transaction. Obtaining the FCC’s consent to a transfer of control of the license-holding entity would also be required if the licensee will remain essentially the same corporation, but with a change in control (e.g., as a result of a stock purchase). These requirements also apply in the case of non-substantial transactions that the FCC considers to be pro forma – for example, if an FCC license is assigned by one whollyowned subsidiary of a parent corporation to another wholly-owned subsidiary of the same parent. Another common example involves a corporate restructuring that changes the chain of ownership between the license-holding entity and the ultimate parent corporation. Each of these requires prior FCC consent The FCC application is not burdensome. The critical step is ensuring that the presence of FCC licenses and the need for FCC consent are identified during due diligence. In such cases

FCC licenses are commonly held for internal communications purposes by companies in all industries.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2011

Oct/ NOv 2011 E X ECUTIV E COUNSEL

the parties typically find the application process fairly straightforward. It becomes more burdensome in the case of entities, such as cellular companies, that are using wireless licenses to provide common carrier communications services.

The critical step is ensuring that the presence of FCC licenses and the need for FCC consent are identified during due diligence.

Greg Kunkle is a partner in the Washington D.C. office of Keller and Heckman LLP. He practices in the area of telecommunications, assisting corporate clients and trade associations with legal and regulatory matters, including those before the Federal Communications Commission. kunkle@khlaw.com

The required FCC form consists primarily of contact information and a list of the licenses to be assigned/transferred. In some instances, a brief description of the transaction may be required. A key basic qualification question asks whether the proposed assignee/transferee or other party associated with the transaction has been convicted of a felony in state or federal court. This information is transmitted to the FCC electronically. In most transactions these items are not problematic. After the FCC has processed the application and consented, the parties may consummate the underlying transaction on their own schedule. Closing must take place within 180 days of the release of the Public Notice of the FCC’s consent, unless the Commission grants an extension. The primary purpose underlying this requirement is to remove stale consents from the books, and the FCC routinely grants extensions if closing is delayed. Although the FCC is not involved in setting a closing date, the Commission’s rules do require – post-closing – that the Assignee/Transferee submit a notification with the exact date that the transaction was consummated. The Notification must be submitted within 30 days of the closing of the underlying transaction. It is the submission of the Notification of Consummation that allows the agency to take final action on a license assignment and issue authorizations in the name of the acquiring entity. One common misconception is that the FCC only requires parties to submit an application once closing has occurred. In fact, the Commission repeatedly has emphasized that parties “must wait for the FCC to grant the application prior to closing or consummating the transaction.” This often elicits concern that relatively insignificant FCC issues will delay the larger transaction, but as long as necessary applications are filed in a timely manner the FCC will generally work to ensure that consent is issued promptly, without impact

to the larger transaction. In some instances, FCC consent can be obtained in one business day. Nevertheless, we typically recommend that our clients look to file the required FCC applications no less than 45 days prior to the anticipated closing date. A chief exception to the prior-consent requirement applies in the case of involuntary transactions. For example, the death or legal disability of a member of a partnership or person in control of a licensee may be considered a transfer of control by the FCC. In those instances, an Application for an Involuntary Transfer must be filed within 30 days after such death or legal disability. The FCC also considers bankruptcy of a licensee to be an involuntary transfer-of-control event, requiring an application to be filed within 30 days of the date the entity files for bankruptcy. TRANSACTIONS WITHOUT PRIOR APPROVAL According to an FCC Fact Sheet released in September of 2000, if a company has already consummated an underlying transaction and subsequently discovers that the parties did not obtain prior approval, the Commission advises filing the appropriate applications as soon as possible. The FCC also states that licensees should request Special Temporary Authority in order to be allowed to operate the stations pending action on the applications. Further, the Commission “strongly encourages parties that may have violated these provisions [of the Act] to disclose voluntarily their transgressions to the Commission as early as possible.” The Commission notes that voluntary disclosure is a factor considered in determining appropriate enforcement action to be taken, if any. Whether to make such a voluntary disclosure to the Commission, however, and the form and content of such disclosure, should be determined on a case-by-case basis, with the advice of counsel familiar with the FCC’s rules and enforcement process. In the Texas Utilities Company/Enserch transaction referenced earlier, the FCC forwarded a letter to Enserch advising the company of its filing obligations. Apparently that letter was overlooked, because the reader did not appreciate that the FCC had any role to play in the company’s business. In a response during the FCC’s investigation, Enserch stated, “To someone who understood the FCC rules regarding transfers of control, the FCC letter would have prompted an immediate response.” Make sure you or your clients don’t make the same mistake. ■

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OCT/ NOV 2011 E X ECUTIV E COUNSEL

Combating False Information on the Internet BY JULIAN H. WRIGHT, JR. The internet allows people to easily share information and opinions about businesses – maybe yours – that can be true, false, positive or negative. 58

Negative internet commentary about a company can fall into at least three categories. A disgruntled employee or customer can post a complaint or opinion somewhere on the web as an isolated “cybergripe.” An individual or a group, maybe a competitor, can coordinate posting of a pattern of negative information on multiple websites in a “cybersmear.” An individual or group with a special grudge or a nefarious scheme can post a large number of statements, or go so far as to set up a special purpose website (www. thiscompanysux.com) and launch a cyberattack against your company. The potential damage ratchets up through the categories of gripe, smear, and outright attack. What can a business do to protect itself, or repair its reputation, if it is tarnished by false statements on the internet? Litigation may not be the best option. Companies can and should take a variety of other steps before resorting to the courts.

PERILS OF LITIGATION Typically, if someone makes false and damaging statements about another person or a company, the injured party can sue for libel (for printed material) or slander (for spoken words). Suing for either form of defamation presents many hurdles. Truth is always an absolute defense against a claim of defamation. Proving that an amount of monetary damages resulted from a particular statement, article, or story can be difficult. Mere opinions usually are not actionable. The First Amendment provides protections for freedom of speech and freedom of the press that can come into play in the defense of persons who make or publish arguably false statements. “Public figures” – such as a company that works hard to market itself to the public – must show that a defendant made false statements intentionally and with malice in order to make a defamation case. Despite all these hurdles, successful actions can be brought for defamation, and individuals and companies regularly bring such actions. But it can be time-consuming and expensive. Even a successful plaintiff rarely recovers attorneys’ fees. Entities that want to sue over defamation in cyberspace face additional hurdles. Primarily, it continued on page 60

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2011

Privacy Regulations Affect Internet and Social Media Businesses By Mark Girtz and Robert Daniel

New business models are being created by the popularity of text-messaging, social-networking and locationaware services, and the increasing integration of these services into smartphone and tablet applications, internet â&#x20AC;&#x153;virtual worldsâ&#x20AC;? and games, as well as shopping and coupon sites. These technologies provide new ways to reach consumers through personal contacts, the places (real or virtual) that they visit, and by way of communication channels previously not widely used for commercial purposes. These technologies are in high continued on page 62 demand and offer businesses effective ways to reach their target audience.

oct/ nov 2011 E X ECUTIVE COUNSEL

continued from page 58

can be difficult to figure out whom to sue. The internet often provides a cloak of anonymity that allows people to adopt a pseudonym and sign up for an e-mail address with little or no verification. Your company may learn that “GeorgeoftheJungle” with a Yahoo or Gmail e-mail address trashes your company’s services on a variety of internet message boards, but it is useless to sue a cartoon character or an e-mail address. Learning George’s real name and contact information may

deceptive trade practices that affect commerce. Defamation in cyberspace almost certainly affects commerce, and in some jurisdictions these statutes could provide powerful weapons to seek punitive damages and the payment of attorneys’ fees. For publicly traded companies, false information on the internet can affect share prices, and the securities laws can punish entities that distribute false information that manipulates the stock market. Depending on the sophistication of the cyberattack, a company may find its own

WHEn yOu dIScOvER fAlSE InfORmATIOn, yOu SHOuld HAvE A pOlIcy THAT SpEllS OuT HOW yOuR cOmpAny WIll RESpOnd And STIck WITH IT.

Julian Wright is a partner with Robinson Bradshaw & Hinson and co-chair of the firm’s employment and labor practice group. His practice focuses on business litigation, securities disputes and employment law, including discrimination, harassment, trade secrets, wrongful termination and ERISA matters. jwright@rbh.com

be possible, but litigation against an internet service provider (ISP) to get the information you need may prove to be expensive and time-consuming. While a person defamed in a newspaper or on television can sue the relatively deep pockets of a publisher or a broadcasting corporation, an entity that is defamed on the internet likely cannot sue the ISP that enabled defamatory postings to get into cyberspace. As part of a public policy of encouraging internet innovation, the Communications Decency Act of 1996 bars suits against online service providers for posting third-party remarks, even when those remarks are false or damaging. If the wronged company wants monetary damages to offset a loss, it likely will be looking to the limited pockets of an individual who posted the defamatory material. An injunction stopping an individual’s negative posts about a company can be a legal victory, but that victory can be Pyrrhic if other internet posters besides the one enjoined keep posting the same kinds of false statements and attacks. The law, however, provides other causes of action besides libel and slander that companies harmed by false statements on the internet may pursue. Some states recognize other tort claims, from business disparagement to interference with contract or prospective business relationships. Some states have codified actions for unfair and

materials – annual reports, web materials, photos – being used against it. Such materials may be protected by copyright or trademark laws, and those laws may provide additional legal weapons to use against the attacker. When the person attacking your company is a disgruntled former employee, he or she may try to publish sensitive or competitive data. Trade secret laws may protect that kind of information and provide an effective means to secure an injunction, and bring a claim for damages.

OTHER STRATEGIES What weapons other than litigation a company wields will depend on the facts, as well as a particular state’s legal climate, the company’s risk tolerance and its budget. At a minimum, companies need to be vigilant and have internal policies that minimize the chance of cyberattacks from sources over which it can exercise control. Initially, a company should be informed about what is being said about it on the internet. Take steps to own or lock up web sites or domains that utilize your company’s name, even in part. Have an employee or independent service monitor the internet for references to your company, good or bad, fact or rumor. With the assistance of legal counsel and your own IT department, develop an internal policy

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2011

that covers what your employees can and should say about your company on the internet, and what they should do if they come across information about your company on the internet. Solid confidentiality and non-disparagement provisions in employment contracts provide a strong disincentive for any current or former employees to spread false information in cyberspace. Consider putting confidentiality or non-disparagement terms, or at minimum a warning and “chance- to-cure” protocol, in agreements with customers to prevent them from trashing your company on the internet. When you discover false information, you should have a policy that spells out how your company will respond, and stick with it. For example, it should include when and how the company may respond with something positive and true. Will the company post its own messages on a particular message board or website to counter negative information already there? If so, will it do so anonymously, or will it clearly identify itself and state exactly what it is doing? Publicly traded companies must be careful in this area. They likely would need to issue press releases and make sure that any information posted on the web also has been posted properly through other channels to comply with obligations under the securities laws. Responses might need to be cleared with legal counsel, and they will require attention from public relations experts. Any information posted must be accurate, to minimize the chances of a lawsuit. While true information may be effective in crowding out false information, it also may be the proverbial first swing at a tar baby that only ensnares your company in another round of cyber squabbling. Although you might not be able to sue the ISP that has posted false information, your company or its lawyers probably want to write and inform the ISP that it is posting false information and outline what you expect them to do about it. Most ISPs have provisions in their service agreements that prohibit the posting of false information, and most do not want their own reputations tarnished by a perception that they spread false or misleading information. The ISP does have the power to take down false postings, and it has the most leverage with the poster. A letter to the ISP, and a cease-and-desist letter when you are able to learn the poster’s identity, should be part of any strategy. Such letters should be sent with the expectation that they may be posted on the internet in an attempt to paint the company as a “cyberbully.” Nevertheless, once posted such a letter can serve the dual purpose of warning the poster to stop and presenting the company’s side of the story. Finally, if attempts to resolve the problem short of litigation prove futile and the problem is damaging enough to require resolution, litigation is an option. Your company’s reputation for vigilance on the internet, and for being willing to go to court to defend itself when needed, may be the best long-term deterrent against the spread of false information. ■

An entity thAt is defAmed on the internet

likely cAnnot sue the isP thAt enAbled

defAmAtory Postings

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oct/ nov 2011 E X ECUTIV E COUNSEL

continued from page 59

Entrepreneurs, as well as private equity and venture capital groups have taken notice. Businesses creating new web solutions or smartphone

at children” for purposes of COPPA. Other factors include empirical evidence of the site’s audience. Generally, COPPA requires that operators of websites directed at children post a privacy policy

Businesses creating new web solutions or smartphone applications that implement social networking and emerging communication methods are being formed and funded in great numbers. applications that implement social networking and emerging communication methods are being formed and funded in great numbers. Consolidation of this industry will likely increase rapidly over the next decade. All these new services pose rapidly evolving privacy and safety concerns. Chief among them is the protection of children’s privacy, and there is momentum to expand that protection for children, and bring it to other consumers, as well. Any company or business providing these services should be aware of developments in applicable federal regulation and perform appropriate diligence to evaluate the business’s compliance. These regulations have detailed requirements, and carefully-crafted exceptions may be applicable to the particular technology implementation of some businesses.

Collecting and Using Personal Information

Mark A. Girtz is a shareholder at Munsch Hardt Kopf & Harr, P.C and business development coordinator of the firm’s corporate & securities group. He advises clients on a wide variety of corporate, business, technology and securities matters. mgirtz@munsch.com

Currently, the Children’s Online Privacy Protection Act (COPPA) is one of the most restrictive privacyprotection regulations. It addresses the collection and use of personally identifiable information about children 12 and under. However, the Federal Trade Commission has released a proposed privacy framework that would expand privacy protections to everyone, and on September 15, 2011, the FTC released some proposed changes to COPPA. They include the proposed expansion of the definition of “personal information” to include IP addresses, customer numbers held in cookies, and geolocation information. COPPA currently applies to a broad range of websites and uses of collected information, and to any site determined to be directed at children under 13. The FTC may consider a website that includes advertisements directed at children or that has animated characters to be a website “directed

describing practices regarding children’s personal information, provide direct notice to parents and obtain verifiable parental consent, and also allow parents to give a kind of limited consent and review any collected information about their child. This year, the FTC announced a $3 million civil penalty to settle an enforcement action gainst Playdom, Inc., an operator of a number of online “virtual worlds.” The company was charged with collecting and disclosing children’s personal information without parental consent. Playdom is an example of consolidaton in the industry. It became a subsidiary of Disney Enterprises, Inc., itself a subsidiary of The Walt Disney Company in 2010. Operators of similar business should take notice and are well-advised to evaluate their practices for compliance. Acquirers of or investors in companies with websites that may be directed at children should request detailed COPPA-compliance procedures, as well as indemnifications for COPPA violations. Acquirers should also either implement strategies to maintain COPPA compliance after the acquisition or retain key management to ensure it. Companies operating such websites should also consider engaging experts or one of the organizations approved as COPPA “safe-harbors.”

Communicating with Consumers Federal regulations also apply when contacting existing and potential customers. The Telephone Consumer Protection Act (TCPA) imposes certain restrictions on the use of telephone equipment, among them prohibitions applicable to calls made to wireless devices. Under TCPA, it is unlawful to make any call (other than a call made with the prior express consent of the called party) using any automatic telephone dialing system or pre-recorded

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2011

voice to any telephone number assigned to a cellular telephone service. Note there is no requirement that the call be a commercial or telemarketing call in order to trigger regulation under the statute. Rather, the statute prohibits any such calls to cell phones without the recipient’s consent. Several courts have accepted an interpretation of a “call” under TCPA to include a text message, citing FCC comments. These courts have also broadly interpreted “automatic telephone dialing system” to include any system which has even the capacity to make random calls. Therefore, a business that plans to implement automatic text messaging as part of, for example, a new smartphone application or website should consider the applicability of TCPA to its service and, if necessary, obtain prior express consent from the recipient. Currently, written consent is required under TCPA only for text message recipients on the national “Do-Not-Call” list. In January 2010, the Federal Communications Commission (the agency that enforces TCPA) issued a Notice of Proposed Rulemaking that, if adopted, would require prior written consent regardless of the recipient’s DNC list status. In addition to the potential for federal enforcement, a private right of action is provided under TCPA, and a number of class action lawsuits have been filed against companies alleged to be engaging in messaging in violation of TCPA. Acquirers or investors in companies potentially engaging in such practices should investigate both TCPA compliance and any pending litigation against the target. Recorded audio messages are also subject to

This year the FTC announced a $3 million civil penalty levied in settlement of charges against Playdom, Inc. federal regulation, and the Telemarketing Sales Rule (TSR) specifically regulates telemarketing calls. Telemarketers are no longer permitted to call a consumer based solely on an existing business relationship. The TSR also prohibits telemarketing calls that deliver a pre-recorded message unless the seller has obtained

from the recipient of the call an express, written agreement. “Telemarketing” is defined as “a plan, program or campaign which is conducted to induce the purchase of goods or services.” The FTC has said that the TSR does not apply to strictly informational calls (such as those from

The Telemarketing Sales Rule prohibits telemarketing calls that deliver a pre-recorded message unless the seller has obtained from the recipient an express, written agreement. an airline notifying consumers about a cancelled flight). The FTC staff concluded in one case that a proposed message announcing temporary free access to a subscription service, when followed by other communications delivered via other channels that would provide consumers with purchase information, was not purely informational and therefore within the TSR definition of telemarketing. The FTC’s comments indicate that the informational exception to the pre-recorded call prohibition call must provide information related to a good or service purchased in a prior transaction and may not contain language intended to induce additional purchases. For purposes of TCPA and the TSR, where written consent is required, companies can obtain consent via the methods described in the Electronic Signatures in Global and National Commerce Act (E-SIGN). E-SIGN includes email. The TSR imposes certain requirements on such agreements. Existing regulations affect the business practices of a host of emerging businesses, but often these regulations are not considered carefully when getting a new venture off the ground. Becoming informed at the outset about applicable regulations and ensuring compliance will help to reduce liabilities, prevent distraction from the core mission of the business and, if and when future investors or buyers enter the picture, avoid raising a red-flag. The restrictions may represent as much opportunity as they do limitation. Applications that can demonstrate compliance with these regulations should see more demand for their products’ capabilities. ■

Robert S. Daniel is an associate at Munsch Hardt Kopf & Harr, P.C . He represents companies in general corporate matters, including mergers, acquisitions and commercial transactions. rdaniel@munsch.com

Oct/ NOv 2011 E X ECUTIVE COUNSEL

LEGAL NOTICE U.S. Postal Service Statement of Ownership, Management and Circulation (Requester Publications Only)

1. 2. 3. 4. 5. 6. 7.

8. 9.

10. 11. 12. 13. 14. 15.

Publication Title: Executive Counsel Publication No. 1932-9024 Filing Date: September 30, 2011 Issue Frequency: 6X/year No. of Issues Published Annually: 6 Annual Subscription Price: Free to qualified subscribers/All other $199 Complete Mailing Address of Known Office of Publication: 640 Park Ave., Hinsdale, IL 60521 (DuPage County) Contact Person: Robert Nienhouse Telephone: (630) 655-3202 Complete Mailing Address of Headquarters or General Business Office of Publisher: 640 Park Ave., Hinsdale, IL 60521 (DuPage County) Full Names and Complete Mailing Addresses of Publisher, Editor and Managing Editor: Publisher: Julie Duffy, 13 Rose Ave., Marblehead, MA 01945 Editor: Bruce Rubenstein, 2615 Park Ave., Minneapolis, MN 55407 Managing Editor: David Rubenstein, 1602 Selby Ave., St. Paul, MN 55104 Owner: Nienhouse Media, Inc., 640 Park Ave., Hinsdale, IL 60521 Known bondholders, mortgages and other security holders owning or holding 1% or more of total amount of bonds, mortgages or other securities: None. Tax Status: For completion by nonprofit organizations authorized to mail at special rates: Not applicable. Publication Title: Executive Counsel Issue date for circulation data below: August/September 2011 Extent and nature of circulation: Average No. Copies Each Issue During Preceding 12 Months

Actual No. Copies of Single Issue Published Nearest to Filing Date

26,920

25,572

14,205

14,208

2. In-county paid/requested mail sub scription stated on form 3541 (include direct written request from recipient, telemarketing & internet requests from recipient, paid subscriptions including nominal rate subscriptions, advertiserâ&#x20AC;&#x2122;s proof copies, and exchange copies)

3. Sales through dealers and carriers, street vendors, counter sales, and other paid or requested distribution

Total number of copies printed (net press run)

Paid and/or requested circulation 1. Outside county paid/requested mail sub scriptions stated on form 3541 (include direct written request from recipient, tele marketing & internet requests from recipient, paid subscriptions including nominal rate subscriptions, advertiserâ&#x20AC;&#x2122;s proof copies, and exchange copies)

Total paid and/or requested circulation [sum of 15b. (1), (2), (3), and (4)]

14,205

14,208

1. Nonrequested copies stated on PS Form 3541 (include sample copies, requests over 3 years old, requests induced by a premium, bulk sales and requests including Association requests names obtained from business directories, lists and other sources)

10,159

10,204

2. Nonrequested copies distributed through the USPS by other classes of mail (e.g. First Class mail, nonrequestor copies mailed in excess of 10% limit mailed at Standard Mail or Package Svcs Rates)

3. Nonrequested copies distributed outside the mail (include pickup stands, trade shows, showrooms & other sources)

4. Requested copies distributed by other mail classes through the USPS

Total nonrequested distribution (sum of 15d (1), (2), and (3)

10,159

10,204

Total distribution (sum of 15c & 15e)

24,364

24,412

Copies not distributed

2,556

1,160

Total (sum of 15g and g)

26,920

25,572

Percent Paid and/or Requested Circulation (15c/15f x100)

58.3%

58.2%

I certify that all information furnished on this form is true and complete. I understand that anyone who furnishes false or misleading information on this form or who omits material or information requested on the form may be subject to criminal sanctions (including fines and imprisonment) and/or civil sanctions (including civil penalties). Robert Nienhouse Editor-in-Chief

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